Greek prime
minister Alexis Tsipras has capitulated to creditors’ demands, 72 hours after
walking out of talks with them and declaring a referendum.
Tsipras sent a
letter to the country’s three institutional creditors, the European Commission,
the European Central Bank and the International Monetary Fund, asking them to
extend its financial assistance programme by two years.
In return, he
accepted almost all the measures in their plan, requesting only a continued
discount of consumer tax (VAT) on Greek islands, and a delay of a few months on
the implementation of pension cuts and labour reform.
The letter,
first made public by the Financial Times, was confirmed at lunchtime on
Wednesday by the prime minister’s office.
The letter
says: “The Hellenic Republic is prepared to accept this Staff Level Agreement…
as part of an extension of the expiring EFSF programme and the new ESM Loan
Agreement, for which a request was submitted today, June 30th 2015.”
The EFSF
programme is Greece’s first loan arrangement, in which the bulk of 100bn euros
was disbursed by the newly created European Financial Stability Mechanism.
Greece wants the European Stability Mechanism to repay its debt for a two-year
period of – essentially - bankruptcy protection.
The ESM is an
intergovernmental distress fund that succeeded the EFSF and operates under the
authority of the European Commission.
Tsipras
stresses the date, because he sent the letter just within the period of the now
expired financial assistance programme.
The DSK factor
In asking for a
two-year moratorium, Tsipras is picking up an idea expressed by former IMF
director Dominique Strauss-Kahn on Sunday.
Strauss-Kahn
suggested that instead of giving the Greeks more loans they will have difficulty
repaying, they be given a two-year reprieve from debt payment to put the
economy back into growth.
Following that,
he said, they should have a significant amount of debt forgiven and a
lengthened schedule of payments for the remainder, so as to lighten the annual
load and render the debt sustainable.
"My proposal is the following: Greece should get
no more new financing from the EU or the IMF but it should get a generous
maturity extension and significant nominal debt reduction from the official
sector," he said.
"Having no access to markets and receiving no new
financing from the EU or the IMF it will have to balance its budget
alone," Strauss-Kahn said, warning that the Greeks would "need to
make tough fiscal choices but they would make them on their own".
Greek political
parties universally agree with the idea of a partial debt forgiveness and
maturity extension. The ruling Syriza leftists have also endorsed the moratorium
idea.
In uncharted water
However,
Tsipras is unlikely to be allowed back into the good graces of the Eurozone.
Addressing the
Bundestag on Wednesday, German Chancellor Angela Merkel, said she would wait
for the result of the referendum on July 5 before resuming the initiative on
any financing deal with the Greeks.
The tough
stance reflects anger
across the Eurozone over the manner in which Tsipras and his team departed
ongoing talks at the singe currency union’s forum of finance ministers, the
Eurogroup, on Saturday. Since then, there has been a war of words that has
soured Greece’s relations with the rest of Europe.
Tsipras’
government now seems unlikely to last very long. Its tactics of brinkmanship
and its uncouth language and demeanour have brought Greece’s relations with
Europe to an all-time low. Those tactics have also now made Greece the first
developed economy to fall into arrears with the International Monetary Fund; it
is set to default on payments to the European Central Bank this summer as well.
At home,
Tsipras’ refusal to strike a deal over the weekend has caused a bank run and
persuaded hardliners in the ECB to stop supplying Greek banks with liquidity.
This has triggered a closure of banks and capital controls in Greece, meaning
the Greek economy is beginning to see shortages and signs of a slowdown. If
extended, these cannot but deepen the recession Greece has posted in the first
quarter.
Now, Tsipras
has lost both the stability of a deal with Europe, and the romantic glory of a socialist
charge against the odds of capitalism. Even if he maintains the popular
mandate, his party could begin to disintegrate from within, as moderates and
diehard leftists decide they can no longer cohabit. And this may be the fall
his creditors wish to provoke by insisting on his carrying out the referendum.
A no vote means he has to manage alone; a yes vote amounts to a public censure of his
policies.
But who would
then assume management of the economy and the negotiations with creditors that
are so crucial to it? Would they make the right choices, scaling back the
crushing burden of the public sector on the private economy, and cutting early
retirement for over-entitled payrolls? And after such a Waterloo, does any
Greek government have the leverage or diplomacy to disabuse creditors of their
most punishing and recessionary views, and convince them to reschedule Greece’s
debt?
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