Greece Avoids Grexit As 'Extend And Pretend' Continues
Eurozone leaders struck a conditional deal with Greece early Monday that would keep the country in the currency union, but at a steep price for a government that just days ago won a mandate from Greek citizens to stand firm.
Greece's third bailout, worth 86 billion euros ($95 billion), will require that it enact tough measures, including reforms of the pension and tax systems, budget cuts, and privatization of many of its assets. It must also be approved by the Greek parliament and some of its measures written into law by Wednesday.
"The agreement was laborious, but it has been concluded. There is no Grexit," European Commission President Jean-Claude Juncker told reporters.
The outlines agreed to Monday could take several weeks to finalize, and there are still risks that negotiations might break down. Several countries, including Germany, need parliamentary approval just to begin those talks.
Eurozone officials on Monday were discussing bridge financing that would carry Greece through its next important deadline, a July 20 repayment of about 3.5 billion euros ($3.85 billion) to the European Central Bank.
European stock markets rallied. In the U.S., the S&P 500 rose 1.1%.
Greek Prime Minister Alexis Tsipras must now convince his country's lawmakers to back a program that's far more austere than the one citizens soundly defeated in a July 5 referendum. While Greek citizens -- and some European leaders -- decried what they called a "humiliation," Tsipras said he was satisfied that he had "averted ... financial strangulation."
Referendum Backfired
That referendum, which Tsipras called with no warning to his eurozone counterparts, took them by surprise just as an agreement appeared to be in sight. Greek banks were forced to close, and will need massive recapitalization and restructuring when they do reopen.
That breach of trust -- as well as the economy's free fall since the referendum was called -- prompted creditors' tougher terms this weekend, said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics. Many eurozone countries "didn't want to pay for the damage done" by Tsipras' politics, he said.
It also meant that creditors entered negotiations with a so-called Grexit, or Greek exit, truly on the table for the first time -- a scenario that would clearly be far worse for Greece than the rest of the monetary union. "It was: sign on the dotted line or chaos," Kirkegaard said.
Kirkegaard calls himself "cautiously optimistic" that the deal will be finalized. Greece's parliament is likely to sign on, he said, and it's possible that the ruling Syriza party will split and a national unity party be formed, with Tsipras at the helm.
But bigger questions about Greece's future -- and that of the entire European project -- remain.
A "good outcome" from the past weeks' drama might be that "Greeks learn the hard way by having no banking system and their economy suffering a big shock, making believers out of the politicians, and bringing us to an inflection point," said David Kotok, chairman of Cumberland Advisors. But that would require major cultural changes.
"In my opinion, that is a very hard thing to accomplish," Kotok said. It's more likely that this deal is just another step in a long back-and-forth between the eurozone and a member that has so far refused to play by a rule book that's existed for barely two decades, Kotok said.
He calls the process "extend and pretend," and says serious questions remain about next steps, no matter what political leaders agree to. For example, it's not clear that private depositors will have any faith in the Greek banking system even if it is recapitalized. And the question of "moral hazard" among other peripheral countries will dog the ECB.
'More Economically Sensible'
But Kirkegaard thinks Tsipras actually may have done better than might be immediately apparent. The new package "is more economically sensible than previously," he said, because it puts more emphasis on long-term structural reforms that Greece desperately needs, and less on short-term fiscal targets that would be impossible to meet.
The deal does not include the debt relief Greece wanted, but commits to discussing it later.
The fact that political leaders were willing to boot one member even as the ECB has declared the euro "irreversible" may even lead to a strengthening of the union, Kirkegaard said.
Greece's third bailout, worth 86 billion euros ($95 billion), will require that it enact tough measures, including reforms of the pension and tax systems, budget cuts, and privatization of many of its assets. It must also be approved by the Greek parliament and some of its measures written into law by Wednesday.
"The agreement was laborious, but it has been concluded. There is no Grexit," European Commission President Jean-Claude Juncker told reporters.
The outlines agreed to Monday could take several weeks to finalize, and there are still risks that negotiations might break down. Several countries, including Germany, need parliamentary approval just to begin those talks.
Eurozone officials on Monday were discussing bridge financing that would carry Greece through its next important deadline, a July 20 repayment of about 3.5 billion euros ($3.85 billion) to the European Central Bank.
European stock markets rallied. In the U.S., the S&P 500 rose 1.1%.
Greek Prime Minister Alexis Tsipras must now convince his country's lawmakers to back a program that's far more austere than the one citizens soundly defeated in a July 5 referendum. While Greek citizens -- and some European leaders -- decried what they called a "humiliation," Tsipras said he was satisfied that he had "averted ... financial strangulation."
Referendum Backfired
That referendum, which Tsipras called with no warning to his eurozone counterparts, took them by surprise just as an agreement appeared to be in sight. Greek banks were forced to close, and will need massive recapitalization and restructuring when they do reopen.
That breach of trust -- as well as the economy's free fall since the referendum was called -- prompted creditors' tougher terms this weekend, said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics. Many eurozone countries "didn't want to pay for the damage done" by Tsipras' politics, he said.
It also meant that creditors entered negotiations with a so-called Grexit, or Greek exit, truly on the table for the first time -- a scenario that would clearly be far worse for Greece than the rest of the monetary union. "It was: sign on the dotted line or chaos," Kirkegaard said.
Kirkegaard calls himself "cautiously optimistic" that the deal will be finalized. Greece's parliament is likely to sign on, he said, and it's possible that the ruling Syriza party will split and a national unity party be formed, with Tsipras at the helm.
But bigger questions about Greece's future -- and that of the entire European project -- remain.
A "good outcome" from the past weeks' drama might be that "Greeks learn the hard way by having no banking system and their economy suffering a big shock, making believers out of the politicians, and bringing us to an inflection point," said David Kotok, chairman of Cumberland Advisors. But that would require major cultural changes.
"In my opinion, that is a very hard thing to accomplish," Kotok said. It's more likely that this deal is just another step in a long back-and-forth between the eurozone and a member that has so far refused to play by a rule book that's existed for barely two decades, Kotok said.
He calls the process "extend and pretend," and says serious questions remain about next steps, no matter what political leaders agree to. For example, it's not clear that private depositors will have any faith in the Greek banking system even if it is recapitalized. And the question of "moral hazard" among other peripheral countries will dog the ECB.
'More Economically Sensible'
But Kirkegaard thinks Tsipras actually may have done better than might be immediately apparent. The new package "is more economically sensible than previously," he said, because it puts more emphasis on long-term structural reforms that Greece desperately needs, and less on short-term fiscal targets that would be impossible to meet.
The deal does not include the debt relief Greece wanted, but commits to discussing it later.
The fact that political leaders were willing to boot one member even as the ECB has declared the euro "irreversible" may even lead to a strengthening of the union, Kirkegaard said.
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