Greece’s Creditors Take Tough Line: What Will it Lead to?

Greece’s Creditors Take Tough Line: What Will it Lead to?

The government led by Alexis Tsipras has been holding talks with the International Monetary Fund, the European Commission and other international lenders since Syriza came to power this January. The debt has reached 175% of GDP. The country is on the brink of default. The negotiations have failed to bring any result so far. This week the situation has exacerbated greatly. It will inevitably lead to important changes in Europe and inside Greece. 

The total sovereign debt of the nation is 315 billion euros. Greece, fast running out of cash, likely needs some sort of help by mid-June to repay a series of IMF loans falling due. The country is believed to have enough cash to repay a €300 million ($327 million) payment due to the International Monetary Fund on Friday. But European officials say Athens probably can’t meet further IMF repayments in June totaling about €1.25 billion unless it gets fresh financing in some form. Without a large subsequent cash injection from lenders, Greece faces a debt default in late July that could ultimately push the country out of the euro. Under the circumstances staying afloat becomes a tall order. 

An important meeting took place in Berlin on June 1-2. Greece’s international creditors bridged their differences that Greece pinned hopes on. The International Monetary Fund and the European Union reached a deal. The Fund wanted to write off part of the debt. Europe (especially Germany) strongly opposed the idea. It wants no extra burden to shoulder. The International Monetary Fund ceded under Germany’s pressure. The Berlin’s tough stand on the debt issue gave rise to anti-German sentiments in Greece, especially after the meeting of creditors. 

According to informal sources, Christine Lagarde, the managing director of the Fund, allegedly said she was not absolutely sure the problem could be solved without restructuring the debt. If the government fails to give the economy a new lease on life, revamping the debt will come to the fore again. This process will not affect the «privileged» creditors, like, for instance, the International Monetary Fund. 

What is to happen next? The Greek Prime Minister goes to Brussels on Wednesday. Greece’s international creditors are poised to present the country with the outlines of a bailout deal that amounts to a take-it-or-leave-it offer, a move aimed at breaking a months-long stalemate but which risks a political backlash and even a government collapse in Athens. Tsipras is to give a reply till Friday. In case he says yes, the parties will start working on technical details to prepare the documents to be signed in the middle of the month with the first tranche to be transferred to Greece. 

The lenders are going to impose Greece a program of reforms which is actually an ultimatum. The policy conditions in the creditors’ proposal – whose details remained under wraps but include fiscal austerity, privatizations, and overhauls of pensions and labor law—could prove extremely challenging for Mr. Tsipras to accept without sparking a rebellion within his ruling coalition. In not so distant future Greece will have to reduce the budget deficit to 3, 5%. This is the price for having the troika of major lenders – The International Monetary Fund, the European Central Bank and the European Commission – unfreeze the 7, 5 billion euros tranche. 

Tsipras faces hard times. He has to choose between the bad and very bad. An agreement to comply may result in serious political woes inside the country. The Prime Minister has majority in parliament (300 seats). Syriza has 12 seats more than the opposition. Saying yes to the ultimatum may weaken its position in parliament even if the ruling coalition stays. It could prompt a snap election, or a referendum on the ways to tackle the debt problem. Some experts say a referendum is preferable. 

Syriza’s parliamentary spokesman Nikos Filis said on local television that Greece won’t accept an ultimatum from creditors, and that Greece’s government cannot sign an agreement that is incompatible with the party’s anti-austerity program. «If we are talking about an ultimatum…which isn’t within the framework of the popular mandate, it is obvious that the government cannot co-sign and accept it,» Mr. Filis said. Mr. Filis said that if 12 or more Syriza lawmakers vote against the proposed deal, wiping out the ruling coalition’s majority, then Greece should hold new elections.

At all events, if the ultimatum is accepted by Tsipras and gets parliamentary approval or the majority of yes votes at referendum, Greece will run out of money this autumn to launch a new round of hard talks and come up with an even tougher program of economic reforms. World media study possible scenarios. The situation will influence the entire Europe. 

European Commission President Jean-Claude Juncker excludes the possibility of Greece leaving the eurozone or defaulting on its debt. He declined to elaborate on the nightmare scenarios he sees potentially unfolding but warned that the failure to keep Greece afloat would «lead us to consequences that people don’t know the amplitude about».

Tags: European Union  IMF  Greece