Over the weekend Greece’s premier, Alexis Tsipras struck a deal with European leaders for a three year bailout program. After Greece’s citizens voted, in a referendum, to reject the European Commission’s original proposal, the deal that Tsipras struck looks almost identical to the European Commission’s proposal except for a longer time horizon and more money. The referendum was a loud message that the citizens did not want further austerity measures (i.e. spending cuts, higher taxes, pension restructuring and privatization of public assets). Instead they wanted their debt restructured to allow Greece to be able to repay the debt.
The deal that Tsipras struck with the European leaders did not achieve any of those measures. If the deal is ultimately finalized, Greece gets spending cuts, higher taxes, pension restructuring and privatization of public assets. Greece’s debt was not restructured althought the door was left open for potential discussions later if Greece follows through with implementing everything that was agreed to. That is not what the Greek citizen wanted. Here are the terms of the deal (source: Bloomberg).
1) The bailout loan is $95 billion over three years. Included in this bailout is $25 billion intended to recapitalize the Greek banks.
2) Tsipras agreed to streamline the value-added tax (VAT) and broaden the tax base in order to increase revenue.
3) Greece must introduce quasi-automatic spending cuts if it deviates from its primary surplus target.
4) The government must reverse policies introduced since 2/20/2015 except for a humanitarian crisis bill.
5) Eliminate early retirement options for their pension plan and introduce a zero deficit plan for the pension system by October.
6) Adopt reforms recommended by the OECD for opening closed professions and freeing up trade restrictions.
7) Transfer Greek assets into a new 50 billion-euro asset fund that will be used to implement a scaled-up privatization program intended to raise funds to help pay off their debt.
It is important to understand that this is a tentative deal that is not completed yet. The next steps are:
1) Greece’s parliament has until this Wednesday to approve an initial set of reforms, including the tax and pension reforms discussed above. They have until 7/20/15 to pass the additional measures identified above.
2) Once Greece’s parliament passes the needed legislation, European finance ministers will hold formal talks on granting a three year bailout loan from the European Stability Mechanism.
3) All governments of the European Union must then pass legislation approving the deal.
Since this process will take a few weeks the following short-term events are in process:
1) Euro-area finance ministers will meet today to discuss a bridge loan to Greece to give them time to meet the conditions of the deal.
2) The European Central Bank will meet today to determine whether to maintain or increase their emergency funding to the Greek Central Bank. Their is no discussion of lifting capital controls, so Greek citizens will continue to be restricted in their ability to access their money from banks. There is currently no projection for when Greek banks will reopen or when capital controls will be lifted.
Greece’s citizens must be shaking their heads in dismay. They were asked to vote and tell their government what to do and yet the deal struck runs counter to the message of the vote. Since Greece’s citizens will continue to suffer the hardships created by capital controls, they are probably saying “Wait, What????”.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.