Urgent Billions

An E.U. Lifeline for Bitterly Divided Greece

tsipras in parliament reuters
It was a fierce fight for Alexis Tsipras - this time not with the lenders, but with the Greek parliament.
  • Why it matters

    Why it matters

    Greece has embarked on the difficult path toward a third bailout, yet its prime minister is vulnerable after suffering a huge party rebellion.

  • Facts

    Facts

    • The Greek prime minister had to rely on the opposition to push austerity measures and the bailout deal through parliament.
    • The E.U. plans to use the EFSM bailout fund to extend a €7 billion loan for 3 months.
    • The ECB is meeting to discuss its current €89 billion cap on emergency lending to the Greek banking system.
  • Audio

    Audio

  • Pdf

It has been a bruising week for the young Greek prime minister, Alexis Tsipras.

After caving in at the make-or-break summit last weekend in Brussels, he had to return to the gladiatorial pit of the Greek parliament to plead for a deal he clearly didn’t believe in.

In the small hours of Thursday morning, the parliament finally passed a raft of tough measures, demanded by its lenders in order to clear the way for talks on a controversial new bailout estimated at more than €80 billion – the country’s third bailout in five years.

The vote helped unlock much-needed bridge funding from Greece’s European partners, but has also made the political situation in Greece even more unstable.

On Thursday, euro-zone finance ministers cleared the way for a €7 billion short-term financing package to keep Greece afloat until it secures a third bailout. The E.U. Commission’s president, Jean-Claude Juncker, said the emergency package should help Greece’s government pay its bills until mid-August.

The so-called Eurogroup of finance ministers from the 19 countries that make up the euro zone also gave the go-ahead for negotiations to start on Greece’s third bailout package in five years. The next step will be for parliaments in a number of euro zone countries to approve the start of talks in the coming days. Germany’s Bundestag is expected to debate the issue on Friday.

The European Central Bank did its part as well on Thursday to loosen the stranglehold on Greece’s banks, which have been closed to customers since June 29. ECB President Mario Draghi said the central bank would raise its cap on emergency loans to the banking sector by €900 million. It’s a small amount to start – the cap had for the past two weeks been held at just under €90 billion – but it is one that a Greek banking insider said should allow Greece’s banks to reopen on Monday after three weeks of shutting their doors to the public.

The moves come after a fraught night in Athens.

As thousands of demonstrators clashed with riot police on the streets of Athens, parliamentarians held a heated debate. Finally, after midnight, they held a vote, in which Mr. Tsipras won the backing of 229 of the 300 members of parliament to enter into negotiations on a third bailout.

Mr. Tsipras faced a significant rebellion from the hard left of his own Syriza party, who opposed the raft of “prior action” measures on issues such as VAT and pensions that Greece had to pass before it could even start any bailout talks.

In total, 38 members of the radical left party refused to support him.

The prime minister has now lost his coalition majority and could only pass the bill with the help of pro-European opposition parties.

“I was blackmailed, there were no good options and I chose the least bad, the MPs should recognize this and accept the same choice.”

Alexis Tsipras, Greek prime minister

One of the most scathing critics of the deal that Mr. Tsipras came back with from Brussels on Monday was Zoi Konstantopoulou, the firebrand speaker of the house. A prominent left-winger, she called the agreement “social genocide.”

Many in the party are dismayed that after pushing for a “no” vote in a referendum on July 5, Mr. Tsipras turned around and accepted what many deem to be even tougher conditions.

The former finance minister, Yanis Varoufakis, who resigned immediately after the referendum, also refused to back the deal, calling it a “new Versailles Treaty” for Greece.

Syriza was elected in January on a fiercely anti-austerity program and a bid to reduce the country’s debt burden, but it became apparent that its lenders were not prepared to extend further bailout loans unless it signed up to the tough austerity conditions attached.

Ahead of the vote, the prime minister told parliament that he didn’t agree with the terms of the deal, but that there was no alternative.

“I was blackmailed, there were no good options and I chose the least bad, the MPs should recognize this and accept the same choice,” Mr. Tsipras told lawmakers before the vote.

The fact that just ahead of the vote it emerged that the International Monetary Fund, one of the country’s three lenders along with the ECB and European Union, seriously doubted that Greece’s debt was sustainable added fuel to the fire.

Mr. Tsipras sought to turn this to his advantage, saying that the IMF’s stance was a “positive development.”

It is highly likely that the prime minister will reshuffle his cabinet, after several ministers, including Energy Minister Panagiotis Lafazanis, the head of the far-left faction in the party, did not back the government.

But even so, it is unclear how long a wounded Mr. Tsipras can limp on. He may choose to simply rely on the opposition to pass more unpopular measures, or form a new coalition with the parties, although he could also call snap elections as early as September.

“The informal coalition in Athens may be quite stable for now,” according to Holger Schmieding, chief economist of the Hamburg-based Berenberg bank. “Although Tsipras will probably continue to lose some further Syriza MPs upon implementing one bailout condition after the other,” he wrote in a note on Thursday.

Greek Hopes for Growth-01

 

“Greek society remains extremely polarized,” argued Wolfango Piccoli of Teneo Intelligence in London. “And there is no political figure in sight to unite it – in principle, Tsipras may have the best shot at this, but only if he decides to move further towards the center-left (which is still uncertain).”

While Mr. Tsipras may now have significant difficulties politically, he can at least be happy that the country has finally gotten the emergency funding it desperately needs.

The country has already failed to make more than €2 billion in payments to the IMF and next Monday another €3.5 billion is due to the European Central Bank.

The agreement hammered out at last week’s summit in Brussels was to put Greece on track to enter talks about a third bailout, worth some €86 billion. Klaus Regling, the head of the euro zone’s bailout fund, the ESM, told German broadcaster ARD on Thursday that €50 billion of the bailout will come from the fund.

The problem, for Greece, is that it will take an estimated four weeks to negotiate and ratify the full bailout. The emergency funding agreed on Thursday should help Athens plug the gap for now.

The European Commission plans to make available €7 billion in short-term loans. To do so, it plans to activate a previous bailout fund, the European Financial Stabilisation Mechanism.

The EFSM was created in 2010 to help E.U. countries that run into financial difficulties and was used to bail out Ireland and Portugal.

It was replaced in 2012 by the European Stability Mechanism, which was used for Greece’s second bailout.

Great Britain and the Czech Republic had initially resisted using the EFSM, which is funded by all 28 member states, saying that the euro zone needs to take care of its own problems. London had been given an assurance that the EFSM would not be used for any future euro-zone bailouts.

Prime Minister David Cameron told the British parliament on Wednesday: “It’s not for Britain to bail out euro-zone countries, and we wouldn’t do that,” while his finance minister, George Osborne said earlier this week that the use of the fund was a “non-starter.”

However, after talks with E.U. officials, the U.K. government backed down and agreed to allow the EFSM to be used, as long as it received a guarantee that it would be ring-fenced from any potential losses.

A euro zone official has told Handelsblatt that the German government is also demanding some sort of financial guarantee against the emergency loan.

The Greek Budget Deficit 1-01

 

In theory the U.K. could have been outvoted if there was a qualified majority of 65 percent in the E.U. to use the fund. However, that is something that European officials were keen to avoid, particularly in light of the forthcoming British referendum on E.U. membership.

Meanwhile, the European Central Bank later Thursday agreed to end its freeze on increasing emergency liquidity to the Greek banks, or ELA, which has been capped at €89 billion since the end of June.

Greek banks were shut on June 29 and capital controls were introduced after Mr. Tsipras announced a referendum on the previous bailout offer from Greece’s lenders.

Greeks can still only withdraw €60 a day from ATMs. With the additional funds from the ECB, the banks should be able to re-open on Monday.

But the €900 million is not expected to keep the banks liquid for long – the ECB will next week have to consider whether it wants to raise the ceiling yet again, a decision that will likely depend on progress on the political front. It is also still likely that tough conditions will remain in place when it comes to extending funding to the Greek banks.

The Frankfurt-based ECB president, Mario Draghi, has faced tough debates within the central bank’s governing council. Hardliners, including the German Bundesbank, have long been critical of the bank’s role in propping up Greece.

Meanwhile Andreas Dombret, a member of the board of Germany’s central bank, the Bundesbank, said bail-in rules should be introduced for Greek banks as soon as possible, meaning that the banks’ creditors and depositors could potentially be held liable for losses.

Ruth Berschens heads Handelsblatt’s Brussels office. Jan Hildebrand is deputy bureau chief in Berlin. Jan Mallien covers finance and monetary policy for Handelsblatt from Frankfurt. Siobhán Dowling is an editor with Handelsblatt Global Edition in Berlin, covering German and European politics. To contact the authors: berschens@handelsblatt.com; hildebrand@handelsblatt.com; mallien@handelsblatt.com; dowling@handelsblatt.com

This story was updated at 1700 CET on Thursday with developments from the Eurogroup and European Central Bank.

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