A-Greek-ment in Europe

After five months of drama and yesterday’s nail-biting negotiations that lasted for seventeen long hours, Europe finally has an ‘a-Greek-ment’. The decision secured a three year €86bn bailout programme for Greece that will help the country avoid the social, economic and political consequences of a negative outcome. But there are harsh conditions to be met. The draft agreement demanded Greece to immediately take the following steps:

• Streamline the VAT
• Broaden the tax base
• Actions on non-performing loans
• Full implementation of automatic spending cuts
• Reforms to make the pension system sustainable
• Safeguard the legal independence of its statistic office
• Reform labor market policies to align it with European best practices
• Liberalize the economy through a scaled up privatization programme (e.g. privatize the energy transmission network)

One of the newest additions to the list of reforms was the transfer €50bn of Greek assets to a new fund, 50% of which will be used for bank recapitalization, another 25% for debt repayment and remaining 25% for investments in the economy. As for Greece’s most important demand regarding reduction in country’s overall debt load is concerned, French president Francois Hollande and German chancellor Angela Merkel confirmed an eventual re-profiling of Greek debt by granting longer grace period and extending maturities, but a nominal debt haircut was completely ruled out.

Greek prime minister Alexis Tsipras now heads away from Brussels and straight into a political battle in Athens, where next few days are expected to be tensed, as the Greek parliament approves the entire set of conditions. Once passed, the third bailout package will then be approved by the national parliaments of other Eurozone countries. Also on the agenda was Greece’s urgent financing needs of around €12bn to help cover its debt repayments in July and August, while the third bailout is implemented. This means that Greece will have to get reforms through the parliament by Wednesday to access bridge financing. And hence, a national unity government (i.e. government of broad coalition consisting of all parties formed during a national emergency) is expected to be formed to push through aforementioned legislations in a tight time-frame.

The political agreement reached in Brussels means the European Central Bank (ECB) will not terminate the emergency liquidity assistance (ECB) provided to Greek banks. Athens has conveyed to the ECB that it requires an additional €2bn of emergency liquidity assistance (ELA) for the banks to open on Tuesday to provide other services, meaning that €60 withdrawal limit is expected to stay for some more time. But the ECB is yet to decide on this matter. The Greek prime minister termed bridge financing and debt re-profiling as his twin wins, but added that the package was tough on the Greece economy. However, he hoped that an agreement will help stabilize the economy after months of turbulence, and inward investments would negate the recessionary impact of austerity.

The European equity markets surged on the news of an agreement, Euro jumped and bond yield eased for Greece as well as other indebted countries like Italy, Spain and Portugal.