The latest round of negotiations between Eurogroup lenders and the Greek government, led by Prime Minister Alexis Tsipras, has taken an interesting twist, with Greece ceding ground in a number of key areas in a bid to help secure a deal ahead of next week’s ‘final’ deadline.
To his credit, Mr. Tsipras has been working around the clock to help ink a deal that will prevent a Grexit from the Eurozone, a finality nearly 80% of Greeks wish to avoid. While far from a done deal, the latest progress casts a glimmer of hope on an agreement that was just days ago given up for dead.
With details emerging in an 11th hour bid by Greece to rescue its banking system and euro prospects, it appears as though the new proposal mirrors a similar offer originally pitched by the Eurogroup back on June 26, prior to the breakdown of negotiations. The subsequent aftermath saw a Greek referendum win a convincing victory, firmly opposing additional bailout measures and austerity reforms, two attributes the latest Greek proposal has in abundance.
Indeed, Mr. Tsipras’ recent ‘NO’ campaign was built on a pillar of steadfast resistance to any pension cuts and the abolishment of island tax havens – now he will be championing these very ideals to his own parliament just one week later in an effort to avert a cataclysm.
Too Big to Fail?
Given the tumultuous state of upheaval of the Greek economy and the dissonant state of its banking system, Greece moved to secure an even larger bailout than was previously tabled prior to the referendum, now estimated at $59.4 billion (€53.5 billion).
A realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors.
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The latest retreat from brinkmanship has to be a welcome sight for both sides, given the Eurogroup’s ultimate penchant for preserving the currency union and opening the door of debt restructuring in hopes of placating an otherwise untenable crisis.
As recently as yesterday in Luxembourg, EU President Donald Trusk advocated, “A realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors. Only then will we have a win-win situation.”
Of course, a debt write down or outright relaxation is illegal under the context of EU law, and is likely to meet fierce resistance by Germany, Greece’s biggest lender. Rather, a more likely alternative is a structured backing with some means of extensions, etc., as opposed to a full relief in the conventional sense. Regardless, the decision to put the matter on the table has won the confidence of the Greek government, which undoubtedly served as a primary impetus in the latest round of Greek negotiations.
Light at the End of the Tunnel
The advent and increasingly likelihood of an agreement between the indebted nation and the Eurogroup – while far from a forgone conclusion – will go a long way in patching up relations with the International Monetary Fund (IMF), once heralded as a ‘criminal’ organization by Mr. Tsipras. However, in recent weeks, a Debt Sustainability Report released by the IMF underscored the need for debt reconstruction, having since softened Mr. Tsipras’s rancor towards the lender.
Securing a new bailout will also mean timely payments to settle loans with both the European Central Bank (ECB) and the IMF between 2015 and 2018 – beyond this window, Greece’s remaining debt will be largely left in the hands of EU institutions. While a number of hurdles still remain in the passage of an agreement, notwithstanding German opposition to any debt reconstruction, as well as Greek parliamentary resistance towards any additional austerity reforms, today marks the first time in weeks in which a finality is in sight.
Markets were upbeat on the news, with the EUR/USD jumping to 1.1121 at the time of writing. Alternatively, the relentless rise of Greek bonds has finally been stymied, with a 2-year yield now retreating to 37.21% and a 10-year yield commanding just 14.08%.