Deal between Greece and its European creditors raises questions

A deal between Greece and its European creditors Monday averted financial collapse and a rapid Greek exit from the Eurozone but raised questions about whether the government in Athens can muster the political support it needs or deliver on its promises.

Greek Prime Minister Alexis Tsipras is facing opposition at home to an agreement that obliges him to rush a package of painful economic reform measures through Parliament by the end of Wednesday in a bid to secure an international bailout worth up to $96 billion. The measures include austerity cuts, tax hikes and pension reforms that Tsipras had previously denounced.

The deal has roused anger among Greeks who say that creditors such as Germany are making humiliating demands and turning their country into a vassal state. In return for a bailout, Athens’ finances would be subject to regular inspection by outside monitors, and even some draft government bills would require lenders’ approval before they could be introduced in Parliament.

Tsipras insists that the agreement is the best he could get to save Greece’s banks from imminent collapse and to keep Athens solvent and a member of the Eurozone.

An exit from the euro would have a catastrophic effect on the Greek economy, which is already in depression after five years of deep austerity cuts. It would also be an unprecedented setback to the goal of European integration, and worsen the divisions on embarrassing display in Europe’s handling of the Greek debt crisis.

“We made the right decision for our country and our financial system,” Tsipras told reporters in Brussels after 17 hours of bruising negotiations with other Eurozone leaders. “It has been a tough battle for the last six months, and we fought until the end to keep our nation standing on its feet.”

Immediately upon his return to Athens on Monday afternoon, Tsipras huddled with his advisors to plot how to get the package of economic reforms through Parliament this week, as dictated by the agreement.

Some of the most vocal opponents are members of Tsipras’ own Syriza party, which came to power in January vowing to reject the kinds of policies he is now trying to push through. There were reports Monday that the junior party in the coalition government was also demurring from supporting the legislation.

Despite the defections, the reform measures are still considered likely to pass with the help of opposition lawmakers. But if Tsipras has to rely too heavily on their votes, he could be forced to resign as prime minister, or to form a new “national unity” government with opposition parties or to call new elections, adding to Greece’s instability and uncertainty.

Passage of the legislation would provide the impetus for cash-strapped Greece and its European partners to launch negotiations on a full bailout program, which would be Athens’ third in five years. The lender countries insist that the reform package must be approved first to remove some of their mistrust of Tsipras’ government, which they accuse of negotiating in bad faith and refusing to play by the rules.

“I think that trust can be regained if this works,” said German Chancellor Angela Merkel, whose country has been the most vocal in its criticism of Greece.

But even if Tsipras succeeds in getting the legislation passed, doubts remain over whether he will be able to implement many of the policies being demanded of him.

Besides cutting public spending and raising taxes, the government is expected to overhaul Greece’s labor market, crack down on political patronage and official corruption, and privatize various state assets, such as the electrical grid. Similar pledges by past governments have gone unfulfilled, though many critics blame unrealistic targets set by Greece’s lenders as much as recalcitrance by Athens.

“If you look at some of the reforms they’re pushing through now and some of the things they’re being asked to do, it’s very similar to what was in previous bailouts,” said Raoul Ruparel of Open Europe, a London-based think tank. ““A lot of it is … trying to do what had failed before.”

Ruparel said it was possible that there is more political will now to enact these reforms. But the cultural shift they require makes them extremely difficult.

Exasperation with Athens’ failure to honor its commitments has fueled hostility among some of its neighbors to offering Greece yet another bailout.

Many European officials are also openly fed up with Tsipras, whom they accuse of gamesmanship. He infuriated fellow Eurozone leaders late last month when he abruptly broke off talks and put their bailout terms before Greece’s voters, who heeded his call to reject them in a snap referendum.

As a result, officials from nations such as Germany and Finland appear to have entered the marathon negotiations in Brussels on Sunday with a tough line: Do as we say, or else take a “timeout,” as a leaked German briefing paper put it, from the euro, with all the disastrous effects it would have on the Greek economy.

As word of Germany’s demands trickled out, their harshness shocked many across Europe. Among the proposals was a trust fund in which Athens would be required to put up to $55 billion in state assets that could be sold off or monetized. The fund would be located offshore, perhaps in Luxembourg – meaning that some of Greece’s most valuable assets would be parked outside the country, under others’ supervision.

In the end, the fund was included in the agreement, but it is to remain in Greece.

Still, social media quickly lighted up with accusations of German vindictiveness. The hashtag #ThisIsACoup went viral. Even the German newsmagazine Der Spiegel concluded that Berlin’s agenda was one of “deliberate humiliation.”

Germany’s hard line was checked by a bloc of nations led by France, which wanted to keep Greece within the fold. They warned that ejecting Greece from the Eurozone would inflict untold damage to the reputation of the European Union and its lofty ideal of “ever closer union” on the continent.

“It is Europe that is at stake,” French President Francois Hollande said before talks began.

But some damage may already have been done. Analysts said that, by publicly suggesting Greece leave the Eurozone, Germany and its allies have undermined the euro’s credibility. If adoption of the currency is neither permanent nor irreversible, what would prevent any Eurozone country from deciding to drop out if it wanted or from getting expelled by the others?

“There are a few things out of the bag that you can’t take back now,” Ruparel said.

In a victory for Tsipras, his Eurozone counterparts agreed to some form of eventual debt relief for Athens, which Berlin has strongly resisted. Greece’s staggering public debt load now equals nearly 180% of its gross domestic product.

Merkel said that if Greece lived up to its reform commitments and the other demands of the agreement, creditor countries would discuss ways to relieve Athens’ debt burden – for example, by extending repayment schedules.

The most immediate effect of Monday’s agreement was to stave off the collapse of Greece’s financial system. Dangerously low on cash, Greek banks are being propped up by a lifeline from the European Central Bank. Had the talks in Brussels failed, the central bank would most likely have pulled the plug on that lifeline.

However, the banks remain closed, as they have been for the last two weeks, to prevent capital flight. It is unclear when they will reopen.

Twitter: @HenryHChu