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14Aug15

Greece secures third bailout after Germany backs down on opposition

Greece clinched a three-year bailout worth €86bn (£60bn) after parliamentarians in Athens backed the deal, and Germany backed down on its opposition to the third rescue of the bankrupt country in five years.

A meeting of eurozone finance ministers in Brussels representing the country's main creditors agreed to launch the new bailout with €26bn being disbursed next week following six months of bitter recrimination that almost saw the country, under the leftwing government of Alexis Tsipras, becoming the first to exit the single currency.

The meeting was upbeat about finalising the bailout terms after Tsipras secured approval from MPs for a huge package of legislation on Friday morning. The vote committed the indebted country to radical economic and fiscal reforms needed to secure the rescue money.

Wolfgang Schäuble, the German finance minister and critic of the proposed new deal, toned down his reservations at a meeting of his eurozone peers in Brussels several hours after the Athens vote.

German MPs will vote on the agreement on Wednesday and are expected to approve it, although Angela Merkel could face an even bigger rebellion than the 65 politicians from her coalition who last month refused to back talks on a third bailout.

Over the past week, Berlin has consistently argued against being rushed into a new bailout, preferring to award Greece a new bridging loan to pay off a debt payment of €3.2bn due to the European Central Bank next week. But the temporary loans scenario was barely mentioned by finance ministers.

"The past six months have been difficult. We have looked into the abyss," said Jean-Claude Juncker, the president of the European commission. "But today the message of today's Eurogroup is loud and clear: on this basis, Greece is and will irreversibly remain a member of the Euro area."

In an abrupt change of tone, the leaders paid tribute to Tsipras, who could only win the vote on the new bailout with the support of the opposition and by splitting his leftwing Syriza movement. It is now likely that Tsipras will call early elections and trigger a realignment of Greek politics.

Instead of questioning the merits of the draft deal struck earlier this week between Greece and its troika of creditors - the European commission, European Central Bank and the International Monetary Fund - the main problems raised on Friday concerned the issue of debt relief for Greece and whether or not the IMF would take part in the rescue. The IMF is refusing to participate in a new bailout until there is an "explicit and concrete agreement" on debt relief from Greece's eurozone creditors.

Christine Legarde, the IMF managing director, told the meeting that it hoped to take part in the bailout and that a decision would be made in October, but she could not commit.

Schäuble said IMF participation was "indispensable".

Greece needs to pay €3.7bn to its creditors next Thursday. The first €26bn will be released on Thursday morning, eurozone leaders said, although Greece would only see half of that immediately, since €10bn would be reserved in Luxembourg for Greek bank recapitalisation while a further €3bn would be disbursed over the next two months subject to Athens delivering on its pledges.

The first of the troika's quarterly reviews of Greek progress in observing the strict terms of the deal is to take place in October. Depending on the results, the eurozone will then discuss rescheduling Greek debt amid a new consensus among the IMF, the ECB and the commission that the level of debt is unsustainable.

But Jeroen Dijsselbloem, the Dutch finance minister, said Greece's debt burden - and the problems of servicing it - would not become a major problem for almost 30 years.

There is unlikely to be any direct writedown of nominal debt levels, but moves to reduce the debt could involve extending repayment schedules and lowering interest rates.

Germany is the biggest and most formidable opponent of debt relief, but is also the loudest supporter of keeping the IMF on board.

IMF involvement in the new bailout was a "precondition" for Berlin, said Schäuble. "We have to see that we can get a clear, possibly binding, commitment from the IMF ... We've always said that has to be feasible. The IMF has its own rules, but we will have to find a way."

An IMF statement supporting the new deal said it would reserve judgment on participation until October. "The IMF will make an assessment of its participation in providing any additional financing to Greece once the steps on the authorities' programme and debt relief have been taken," it said.

On Thursday the IMF's call for debt relief was bolstered further when the European commission, the European Stability Mechanism - the eurozone's bailout fund - and the ECB raised concerns about the scale of the debt burden. However, the three European institutions opposed the idea of a so-called "haircut", or reducing the size of the debt. The IMF has said a haircut might be necessary.

Alexander Stubb, the Finnish finance minister, admitted that the debt relief issue was a problem that needed to be resolved.

"We should be honest and open that there is a bit of a catch-22 to solve here," he said. "The IMF will be involved only with debt relief, and we want the IMF to be involved but we don't want debt relief. So some kind of solution will have to be found."

Speaking ahead of the parliamentary vote in Athens, the Greek prime minister urged MPs to accept the tough bailout terms. Tsipras said the rescue package was a necessary choice for the nation, saying it faced a battle to avert the threat of a bridge loan - which he called a return to "crisis without end" - that Greece may be offered instead of a full-blown bailout.

The terms for the bailout detail a radical overhaul of the Greek economy, stipulating major reforms of health, welfare, pensions and taxation systems, alongside more ambitious privatisation schemes. It also gives the troika decisive influence over reforms of the country's struggling banking sector.

[Source: By Ian Traynor in Brussels and Jon Henley in Athens, The Guardian, London, 14Aug15]
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