A successful fiscal plan for Greece that satisfies international lenders and private investors holding Greek bonds would remove a major risk to the world economy. The country has been edging near a default on its bond payments, which could have fearful consequences for world financial markets.
European officials set a Wednesday deadline for Greece’s Parliament to approve cuts and find $432 million more to trim from this year’s spending. Greece’s main political parties must agree publicly that the promised measures will be implemented. And private creditors will still need to reach a deal to take billions of dollars in losses. Only then would European Union leaders sign off on the overall package. It would be the second bailout for Greece in two years, bringing the total public bill well past $300 billion.
“After a long, tough period of negotiations, we have finally a staff-level agreement,” said Greek Finance Minister Evangelos Venizelos, on his way to an emergency, closed-door meeting in Brussels with European finance ministers and other top officials from Greece’s creditors.
But European officials said a deal was not yet complete.
“The new program provides a comprehensive blueprint for putting the public finances and economy of Greece back on a sustainable footing,” Luxembourg Prime Minister Jean-Claude Juncker, the head of the group of countries that use the euro currency, said at a late-night news conference Thursday after hours of talks. “Despite the important progress achieved over the last days, we did not yet have all the necessary elements on the table.”
German Finance Minister Wolfgang Schaeuble, representing the country that is contributing the most money to the Greek bailouts, put it more bluntly. “Greece has to implement what it has not implemented from the first program before we can decide on a second,” he said.
The IMF and European officials have become frustrated over the inability — or unwillingness — of Greece’s political leaders to follow through on promised economic reforms. In Germany in particular — Europe’s largest, richest economy, and the main contributor to any bailout — politicians appear increasingly willing to contemplate a Greek default, which would reverberate through the international financial system.
In Greece, where unemployment has spiked to 20.9 percent, and is at 48 percent among those under 25, some of the demands from the three-headed team of the International Monetary Fund, the European Union and the European Central Bank seem to Greeks more like a series of mythological challenges than attempts to improve the economy’s standing.
Terms of the agreement
Under a preliminary draft of the agreement, minimum wages, currently about $1,000 a month, would drop to $780, and even less for those under 25. Health-care spending would contract. Other social welfare payments would be cut, and 15,000 public-sector workers would be laid off by the end of the year, followed by 135,000 more by 2015.
Many of the country’s biggest state-owned companies are slated to be sold off in the next few years to raise money, open up parts of the economy previously under state control and loosen regulations on who can join certain professions, among other things.
International officials say the measures will improve Greece’s competitiveness, reduce the government’s operating costs and help get the country back on track. But they acknowledge that the measures could exacerbate the recession in the short term. Greece’s economy is forecast to shrink up to 5 percent this year, making it even more difficult to meet its debt payments.
Greek leaders have shied away from the cuts, concerned about inflicting further pain and fearful of public backlash as they head toward elections that will probably be held in April. Negotiations stretched for days before the deal was announced Thursday, as deadline after deadline passed without an agreement.
Greece’s deputy labor minister, Yiannis Koutsoukos, a Socialist, resigned Thursday to protest cuts, and protesters swarmed the streets of Athens after the deal was announced. Labor unions planned a 48-hour general strike starting Friday.
Still, many Greeks say there is no longer a choice but to accede to European demands. A March 20 deadline looms on a $19 billion debt payment, and if Greece does not secure money before then, it will default, potentially casting itself off the euro currency.
“The large majority of the Greek population realizes that if the alternative is disorderly default and exit from the euro zone, this is a terrible choice,” said Loukas Tsoukalis, the president of the Hellenic Foundation for European and Foreign Policy, a think tank.
“You prefer half-suffocation to sudden death.”
Elsewhere in Europe, leaders of other troubled countries suggested that now is the time to end the uncertainty about Greece. Italian Prime Minister Mario Monti, who was visiting Washington on Thursday, said he hoped the IMF and other European leaders could quickly complete a deal, even if it meant relaxing some of the strict conditions set for the country.
“If there is a minimum of compliance, this is a moment to turn the page and extinguish this potential Greek explosion,” Monti said in an address at the Peterson Institute for International Economics.
“Once this page is turned, the benefits will be considerable” to every country, he said, including his own, whose borrowing rates and economic performance have been damaged by the crisis.
In the coming days, the Greek Parliament will have to approve the austerity measures, and Greece will have to work out a deal with its private creditors to write off a large portion of the country’s standing debt.
Potentially easing the way for that part of the deal, European Central Bank President Mario Draghi left the door open to his institution helping to reduce Greece’s debt, a softening of a previous position that would have insisted on a full repayment of bonds that the bank bought at a discount.
Separately, the ECB kept its main interest rates unchanged. Draghi said that although the economy in the euro region was slowing, inflation remained above the bank’s two percent target.
Extensive loans to banks and other recent steps by the ECB, Draghi said, have led to “tentative signs of stabilization” in government bond and financial markets.
Schneider reported from Washington.