Greece’s Parliament Approves Austerity Measures, Casting a Glint of Light at the Tunnel’s End (7/16)     Print Email

spellmanAs anti-austerity protesters and riot police clashed outside Greece’s neoclassical parliament, legislators surprisingly voted overwhelmingly, 229-64, for the first round of reforms and government spending cuts the country’s leader had accepted in exhaustion before dawn Monday to secure a desperately needed bailout from the Eurozone, thereby averting bankruptcy and “Grexit.”

The sense of relief was palpable in Europe’s capitals that a corner had been turned in rescuing Greece and, more importantly, shoring up the euro and the European Union’s governance.  The EU’s behavior had been attacked hard for exposing the fallacies of having a common currency without “fiscal union,” which implicitly imposed a shared responsibility to save imperiled member-countries, however costly it may be, for the good of all.

"We don't believe in it, but we are forced to adopt it," Prime Minister Alexis Tsipras said in his appeal to lawmakers during the contentious debate before the vote. Greeks “can understand the difference between those who fight with their soul in battle and resist, and those who hand in their weapons and give up with no resistance,” he said.

Thirty-two members of his own Syriza party, though, voted “no,” including three of his ministers, and eight others abstained, casting doubts as to whether his control will continue.Assuredly, he will replace the three ministers whose leadership is needed to implement the reforms.  Interior minister Nikos Voutsis confirmed a cabinet reshuffle before July 22 and said elections could come in September or October.  “If it’s not September it will be on October and it will be a product of an overall insight — not just of the Syriza government — on the broader developments,” he said in a radio interview July 16.

The sweeping legislation passed includes various tax hikes on businesses and individuals, cuts in pensions, submission to oversight by the EU and the International Monetary Fund, and adherence to aggressive budget surplus targets, which means years-long austerity. As reported by the BBC, these measures include (verbatim from the BBC):[1] 

◾The ratification of the eurozone summit statement 

◾VAT changes including a top rate of 23% to take in processed food and restaurants and; a 13% rate to cover fresh food, energy bills, water and hotel stays; and a 6% rate for medicines and books

◾The abolition of the VAT discount of 30% for Greek islands

◾A corporation tax rise from 26% to 29% for small companies

◾A luxury tax rise on big cars, boats and swimming pools

◾An end to early retirement by 2022 and a retirement age increase to 67

Hours before the vote, the European Commission proposed pledging a €7 billion ($7.7 billion) bridge loan through the European Financial Stability Mechanismto help Greece repay €4.2 billion ($4.6 billion) to the European Central Bank next Monday and other pressing bills. Doing so has met with opposition from non-euro member-countries of the EU.   The United Kingdom – supported by Sweden, Denmark, and the Czech Republic – argues it should not pay for Greece’s loans.  EU negotiators are exploring ways to do so, perhaps by securing these loans with the interest earned.

Greece’s approval led the European Central Bank on July 16 to pump fresh liquidity into Greece’s banks, which have been closed for two weeks.  At the press conference, ECB President Mario Draghi raised Greece’s Emergency Liquidity Assistance limits by €900 million, a response to “several positive things that have happened.”

This amount is apparently sufficient to keep ATM machines running for the next few days but not enough to lift capital controls. “After the ELA increase,” Reuters reports, “Greek banks are likely to open only with reduced operations and cash withdrawal limits at least until a bailout package is passed and banks receive at least some of the €25 billion earmarked for recapitalization.”[2] 

Draghi staunchly defended the ECB’s efforts, underscoring its €130 billion ($141.32 billion) exposure.  “I find these observations that there wasn’t enough assistance, or that there was a bank run that was caused by the ECB, quite unwarranted, unfounded,” he said.

Observers say the bank will likely wait until its €4.25 billion ($4.7 billion) is repaid on Monday (July 20) before considering additional emergency loans to allow Greece’s banks to reopen.

Brussels is starting negotiations for Greece to secure a third bailout in five years.  On July 16, the group of Eurozone finance ministers known as the Eurogroup agreed “in principle” to a three-year bailout program “subject to completion of relevant national procedures.”  In the meantime, Eurozone creditors agreed in principle to a “bridge loan” to cover the ECB payment due Monday, the IMF debt in arrears, and another ECB payment due in August. The creditors are expected to finalize a bridge loan by July 17 as they continue negotiations on a third comprehensive bailout accord.  Draghi said he has been informed that the repayments to the ECB and the IMF will be met.  “That is off the table,” he said, implying the bridge loan will be secured in time.

Once the ECB obligation has been repaid July 20 and Greece fulfils the demands for Eurozone creditors to provide a bailout package, Draghi hinted that Greece could benefit from the ECB’s quantitative-easing scheme.  Draghi reaffirmed the ECB’s continued commitment behind QE until at least September 2016 since inflation remains weak, only 0.2 percent in June, far below the ECB target of 2 percent.  Since March, the ECB has been buying €60 billion a month in government and public agency (for example, the European Atomic Energy Community) bonds as well as asset-back securities and covered bonds.  Once the bailout program is in place, the ECB could begin buying Greek sovereign bonds through the QE program as early as August.

Meanwhile, Eurozone countries’ legislatures have been approving negotiations for a bailout package and bridge loan, most notably Finland, which has been one of the EU’s most hawkish countries towards rescuing Greece.

The contours of the €86-billion bailout package Brussels will start negotiating with Greece was forced to be reshaped following the release of an IMF memo Tuesday (July 14) reprimanding the EU for failing to offer Greece a sizeable amount of debt relief and other assistance.  At the July 16 press conference, Draghi said, "It's uncontroversial that debt relief is necessary.  The issue is what's the best form of debt relief. I think we should focus on this."

“Greece’s public debt has become highly unsustainable,” the IMF memo said.  “This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics. The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”

The package of concessions the credits and Greece signed off specifically rejects any “haircut” of debt, a position reflecting Germany’s objection to any debt relief beyond extending the maturities, in other words, the length of time to repay creditors.  With Draghi’s endorsement of debt relief, following the IMF’s strong rebuke of the bailout conditions, some combination to reduce the debt burden on Greece will likely emerge in negotiations to finalize the bailout.

[1] BBC, “Greece debt crisis: Eurozone deal laws backed by MPs.” July 16, 2015.

[2] Balazs Koranyi and John O’Donnell, “ECB raises Greek bank funding as Europe backs new loan.” Reuters, July 16, 2015.