16 Jul 2015 09:18

Greek approval of deal with creditors, what happens now?

The Greek Parliament approved the deal with the creditors. But several steps remain before Greece gets access to a third bailout package including new funding of around 85 billion euros. What happens next, is the crisis deal credible and will the banks reopen? Chief economist Robert Bergqvist comments in eight questions and answers.

1. The Greek Parliament approved the deal – is this the end of the debt crisis?

The 300-member Parliament voted 229-64 (with several abstentions) to accept the deal with Greece’s creditors. But several steps remain before the country gains access to a third bail-out package including new funding of around EUR 85 billion. The formal negotiation process will start later today (July 16), after approval by the Eurogroup finance ministers, but it can take up to one month to finalise all details.

However, much of the groundwork has already been done and there is a framework in place (the crisis agreement reached on Monday July 13). Still, the German Bundestag must give its approval to the German government not only to start negotiations, but also to accept the new bail-out package. But there is nothing today that suggests that Germany will stop the process. Finland and other small euro zone countries do not have the voting power within the European Stability Mechanism (ESM) board to stop new lending to Greece (85 per cent of voting power will be enough).

2. Is the July 13 crisis deal credible?

It is a serious problem that many observers believe that the July 13 crisis deal and the proposed bail-out package will be insufficient as a long-term debt solution for Greece. The International Monetary Fund (IMF) warns that Greece's deteriorating economic and financial situation means that public debt could rise to 200 per cent of GDP (from around 180 per cent today).

The benchmark, according to the IMF and others, is that public debt should not exceed 120 per cent. The IMF is therefore arguing that debt relief should be included in the bail-out package for Greece. A rough calculation shows that such relief may correspond to at least EUR 100 billion (EUR 10,000 per Greek), a burden that would thus be imposed on taxpayers in the other 18 euro zone countries.

3. Is the door closed for a debt restructuring?

Most people support the conclusion that Greece's debt situation is unsustainable. There is also an opening for this in the crisis deal. But there is disagreement about when, how and with what amount a debt relief should be implemented. The IMF, and the United States want a quick decision that will reduce uncertainty and restore confidence, not least in order to stabilise Greece's banking system. Germany and numerous other euro zone countries want to wait, probably because it will be easier to win political support at home for the third large rescue package for Athens as long as a debt relief is not included. But Greece will get debt restructuring sooner or later.

4. Is Sweden participating in Greece's third bail-out package?

No, not directly, but indirectly and in the short term. Greece needs EUR 7 billion euro in emergency bridge financing for loans maturing in the near term. The European Commission proposes that money should be taken from the EU-wide European Financial Stabilisation Mechanism (EFSM) and not from the euro zone's emergency fund (ESM). This means that Sweden will also be involved, together with the other 8 non-euro zone members of the EU.

In principle, this action is rather dubious, but in logical and economic terms a Swedish acceptance would be understandable. The loan would help solve an acute crisis. It may reduce growth risks for Europe, a region that receives 70-75 per cent of Swedish exports. The risk of loss for Swedish taxpayers is also small, because the euro zone countries would guarantee that the loan is paid back.

5. However, Britain is opposing participation by the whole EU in the bridge loan?

Prime Minister David Cameron accepts the EU solution because British taxpayers need not be affected if Greece does not repay the loan. However, if the European Commission chooses not to reimburse the UK, that may impact the outcome of the referendum on continued British membership of the EU (a vote that Cameron has promised before the end of 2017). This may set forces in motion that could have far-reaching political consequences for the entire EU in the coming years.

6. Grexit – time to forget it as a concept?

Relations between countries have deteriorated during the Greek debt crisis. It is serious that fewer and fewer number of people seem to believe it is possible to solve the crisis based only on the agreement negotiated last weekend. There is a recurring notion that Germany wants to set the bar so high for Greece that it simply will be forced to make the decision to abandon the euro. A Grexit that occurs under controlled conditions could open the way for Athens to obtain a debt restructuring or even a debt write-down as a kind of thank-you-and-goodbye gift from the euro zone.

 
7. What happens to the Greek government?

There are many indications that Prime Minister Alexis Tsipras must reshuffle his government, since several ministers have resigned. A positive scenario would be if Tsipras would allow new ministers who are politically independent (technocrats). The Tsipras government will remain in power, since the opposition is likely to find it difficult to agree on a vote of no confidence. However, Greece may find difficult to avoid an early election in the autumn.

8. Will the banks reopen?

Everything depends on the European Central Bank (ECB). On Thursday, July 16 the ECB is expected to make a decision to raise the ceiling of the Emergency Liquidity Assistance (ELA) it is providing to Greek banks (EUR 90 billion). There is a pent-up need for the public to withdraw money, which means that the ECB must be prepared to significantly increase its lending to Greece’s banks. Tough capital controls will remain in place for a long time.