Tentative Greek Debt Accord Might Do Little to Revive Economy

http://www.nytimes.com/2015/08/12/business/international/greece-third-bailout-deal.html

Version 0 of 1.

ATHENS — The Greek government on Tuesday appeared to be on the verge of clinching a deal for a new international bailout worth as much as $95 billion in exchange for accepting harsh austerity terms and making sweeping changes to the way the country does business.

European officials on Tuesday cautioned that approval of the accord was far from certain. And Chancellor Angela Merkel of Germany told Prime Minister Alexis Tsipras in a phone call that Berlin was skeptical about the deal, saying talks should continue “for a few weeks,” according to a Greek government official.

Even if it becomes final, the bailout deal — agreed to in principle last month but only now drafted in extensive detail — would grant Greece billions of euros in fresh aid to avoid an imminent default but would not help revive the Greek economy, which has plunged into a deep recession.

The deal in its current form offers no relief on Greece’s staggering debt, which now exceeds €315 billion, or $345 billion, despite insistence by International Monetary Fund and Greek officials that an easing of that burden be part of any package. And the uncertainties surrounding months of bailout negotiations have further damaged the Greek economy, potentially making an eventual recovery more difficult than ever.

While Greek officials were quick to announce early Tuesday that an agreement worth up to €86 billion had been reached after a 20-hour negotiating session in an Athens hotel, European officials said that a final accord had not yet been achieved.

“What we have is a technical-level agreement,” Annika Breidthardt, a spokeswoman for the European Commission, told a daily news conference on Tuesday. “What we don’t have at the moment is a political agreement.”

Ms. Breidthardt said that the deal was worked out by representatives of the European Commission, the European Central Bank, the I.M.F. and the eurozone’s bailout fund, the European Stability Mechanism.

It was unclear whether all members of Prime Minister Alexis Tsipras’s leftist Syriza party would support the bailout plan as it moved to Parliament for a vote this week. As it is, Mr. Tsipras has hinted that he may call new elections as soon as next month, a move that could usher in another period of instability.

Any deal also needs approval from other European countries, in some cases requiring a vote by national parliaments, most notably that of Germany. The deadline is Aug. 20, when Greece needs help to make a crucial €3.2 billion payment to the European Central Bank. It remained unclear late Tuesday whether the draft accord will satisfy Germany, which several weeks ago exhorted Greece to get a deal done or risk crashing out of the euro currency union.

The German government has said numerous times since then that it would prefer to arrange a short-term loan to let Greece avoid defaulting on that payment to the European Central Bank, rather than rush through an agreement that might not prove to be durable.

At issue is whether Greece will stick to pledges to make fundamental economic changes that creditors say are needed to revive the depleted economy, including cracking down on corruption and improving tax collection. In the last few weeks, the Greek Parliament has passed more than 900 pages’ worth of new laws, containing measures like tax increases and further cuts to state spending on pensions, steps that creditors had demanded to begin discussions on the new bailout plan. Some of the measures had been promised but not put into effect by previous Greek governments.

In telephone conversations Monday and Tuesday, Mrs. Merkel told Mr. Tsipras that Germany would prefer to grant the short-term loan rather than hurry to seek approval for the broader bailout package, according to a Greek official with knowledge of the discussions, who spoke on the condition of anonymity.

“Why are you rushing?” Mrs. Merkel asked Mr. Tsipras, according to the official. Mr. Tsipras responded that talks between Greece and creditors were proceeding on the basis of the agreement struck by eurozone leaders on July 13, when both sides agreed to begin talks on a third loan program.

A spokesman for the German government confirmed that the first call had taken place but would not discuss the content. He was unable to be reached about the second call.

In a sign that other European officials were pushing back against Germany, a prominent European lawmaker late Tuesday urged Mrs. Merkel not to use “diversional tactics” to derail a deal, saying the accord reached between Greece and its creditors should be good enough for Berlin, too.

“We ask the chancellor to keep the commitment taken at the last European Council and not to bring to the table further conditions, like the full involvement of the International Monetary Fund,” said Gianni Pittella, the president of the Socialists and Democrats group at the European Parliament.

Mr. Tsipras had also spoken by phone on Monday with President François Hollande of France and the European Commission president, Claude Juncker, among others, according to the Greek official. Mr. Hollande and Mr. Juncker were “very positive” about the prospective agreement, the official said.

Still unknown is whether the board of the I.M.F. will approve the draft agreement. In recent months, the fund and its managing director, Christine Lagarde, have indicated they will not participate in a new bailout that does not include somehow relieving Greece’s debt burden, on the assumption that otherwise Athens will never be able to repay its loans.

The I.M.F. had no immediate comment on Tuesday, but indicated its position had not changed.

The draft agreement reflects the damaging dynamic that this year has gripped the Greek economy, which in 2014 had begun to recover from a nearly five-year recession.

Because of the turmoil in Greece since Mr. Tsipras took office in January, and the more recent hit to the economy after Greek banks and the stock market temporarily shut down this summer, the economy is expected to contract as much as 2.3 percent this year and 0.5 percent next year, before beginning to recover in 2017, according to documents on the draft bailout as reported by Greek news media.

“The good news is that Greece has given up its confrontational strategy and seems to be willing to collaborate with its creditors to avoid ‘Grexit,’” Peter Vanden Houte, an analyst at ING Bank, wrote in a note to clients on Tuesday. He was alluding to the prospect that Greece might be forced to leave the euro currency union if no agreement could be reached. “However,” he wrote, “the economic situation has strongly deteriorated over the last eight months.”

Athens did apparently win at least one major concession that Mr. Tsipras had been seeking since he rode to power on pledges to repeal austerity. Creditors agreed to reduce the amount of money that Greece is required to set aside in its coffers, the so-called primary surplus, which is cash left over before debt and interest payments.

Greece has long argued that the creditors’ insistence that Athens hold a large surplus was keeping money from being invested in the economy. According to the draft, Greece will be allowed this year to run a primary deficit of 0.25 percent of gross domestic product, in contrast to the 3 percent surplus that the creditors had demanded in an earlier bailout proposal.

The deal would allow Greece’s teetering banks to be shored up until end of this year with €10 billion in new capital. That means there is “no longer any risk whatsoever” that the Greek government might need to confiscate money in savers’ accounts, the Greek official said, addressing a widespread fear that had gripped the country just a few weeks ago.

Under the draft accord, Greece agreed to follow through on promises, including some that previous governments had pledged to undertake — but had not put in place — as conditions for receiving two earlier bailouts, totaling €240 billion.

The so-called prior actions that Greece must legislate, according to the Greek daily newspaper Kathimerini, include ending fuel subsidies for Greek farmers, opening all professions that are closed to competition, deregulating the energy and natural gas market, and proceeding with the privatization of major national assets like seaports, airports and the railway.

But a European official with knowledge of the discussions, who spoke only on the condition of anonymity, said the unresolved issues included a disagreement over how to handle consumer insolvencies. Greek banks have been struggling with increasing numbers of problem loans, which amount to more than a third of all outstanding bank loans. Creditors have been pushing for changes to Greek law that would make it easier for banks to foreclose on borrowers who are unable to repay their loans.

The Greek government would not agree to demands by the creditors for legislation that would allow bundles of problem loans to be sold on the open market to investors who would then have the right to pursue repayment.

The investment companies try to collect what they can from borrowers or, in some cases, repossess homes and other property. The government wants to preserve, at least through the end of this year, a law that prevents banks from foreclosing on a borrower’s primary residence.

The spending discipline required of Greece will be “quite a challenge in a country that is tired of austerity,” said Mr. Vanden Houte, the analyst. “And the complete structural overhaul of the Greek economy the creditors are imposing seems a herculean task.”