Greek bailout moves ahead after Germany gives its backing

Greek Prime Minister Alexis Tsipras with German Chancellor Angela Merkel at a meeting in the Chanclery in Berlin in March 2015 (360b / Shutterstock)

ATHENS, Greece — Greece’s proposed bailout cleared further key hurdles Friday after German lawmakers overwhelmingly gave their backing to another financial rescue and the European Union said it would release a short-term loan to ensure Athens avoids a debt default.

The developments, along with the Greek parliament’s approval early Thursday of creditor-demanded austerity measures, contributed to a positive initial assessment from Europe’s bailout fund. In a statement, the European Stability Mechanism said it approved a “decision to grant, in principle, stability support to Greece in the form of a loan program.

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Prime Minister Alexis Tsipras, meanwhile, reshuffled his cabinet after a rebellion earlier this week in his party’s ranks over the austerity measures, replacing two ministers who voted against him and changing another eight ministers and deputy ministers.

Though the broad outlines of the Greek bailout were agreed Monday by the eurozone’s 19 leaders, the ESM’s decision formally kick-starts the process by which Greece begins negotiating the details.

The discussions, which are expected to last four weeks, will include economic targets and reforms deemed necessary in return for an anticipated 85 billion euros ($93 billion) over three years.

“This agreement offers a chance to put the Greek economy back on track,” said Jeroen Dijsselbloem, the eurozone’s top official who also chairs the ESM board. “It’s not going to be easy. We are certain to encounter problems in the years to come. But I believe we will be able to resolve them.”

In recent weeks the Greek economy, which is around a quarter smaller than it was back in 2008 following a brutal recession, has suffered a number of shocks with the country’s euro future on the line.

The hope now is that the banks, which have been shut for the past three weeks, will reopen soon — possibly as early as Monday — and that the paltry 60-euros a day withdrawal limit at ATMs will be raised.

The first big development Friday was the news that German lawmakers, in the wake of their Austrian counterparts, voted 439-119 in favor of opening detailed discussions on the bailout package. Chancellor Angela Merkel had warned them Greece would face chaos without a deal.

That was later followed by confirmation that the 28-country EU will release a loan of 7.16 billion ($7.7 billion) in short-term cash by Monday, when it has a 4.2 billion-euro debt repayment due to the European Central Bank.

The funds, which will come from a long-dormant EU program called the European Financial Stabilization Mechanism, will also help Greece clear arrears with the International Monetary Fund, and with the Bank of Greece.

The loan will be for three months and disbursed over two instalments, and comes a day after the ECB raised emergency liquidity assistance to Greek banks.

“What we’re witnessing is European solidarity in action,” said Valdis Dombrovskis, the EU Commission’s vice president for the euro.

“Politicians across 27 countries have invested their own political capital to speed through national decisions to shoulder Greece at this difficult time for the country,” he added.

Germany is likely to continue playing a key role in Greece’s future as it is the largest single bailout contributor. It has taken a hard line, insisting on stringent spending cuts, tax hikes and wide-ranging economic reforms in return.

“The principle … of responsibility and solidarity that has guided us since the beginning of the European debt crisis marks the entire result from Monday,” Merkel told the special session of Parliament. The alternative to an agreement, she added, “would not be a time-out from the euro that would be orderly … but predictable chaos.”

Merkel will have to return to Parliament to seek approval for the final deal when the negotiations are concluded.

“I know that many have doubts and concerns about whether this road will be successful, about whether Greece will have the strength to take it in the long term, and no one can brush aside these concerns,” she said. “But I am firmly convinced of one thing: we would be grossly negligent, even irresponsible, if we did not at least try.”

Bailing out Greece hasn’t been popular in Merkel’s conservative bloc and 60 of its lawmakers failed to back her Friday, with another five abstaining.

In Athens, Tsipras made changes to his government in the wake of this week’s revolt which saw nearly a quarter of the lawmakers from his radical left Syriza party vote against him.

The austerity measures, which include consumer tax increases and pension cuts, passed with a large majority thanks to the support of three pro-European opposition parties, but left his party and his government wounded ahead of another parliamentary vote on further measures next Wednesday.

Among the changes announced, Tsipras replaced Energy Minister Panagiotis Lafazanis and Alternate Finance Minister Nadia Valavani, and ousted Alternate Social Security Minister Dimitris Stratoulis, all of whom had voted against him on the austerity bill.

Valavani had announced her resignation immediately before the vote.

The bill outraged many within Syriza and its junior governing coalition partner, Independent Greeks, for insisting on the very austerity the government was elected to repeal after five years of belt-tightening demanded in return for two international bailouts. Greeks also voted to reject milder creditor reform proposals in a hastily called referendum July 5.

Tsipras has acknowledged the package he signed up to went against his election promises but insists he had no other choice, as the alternative would have seen Greece forced out of the euro — a development that most experts say would have caused massive short-term damage to the Greek economy.

Greece has relied on bailout cash for five years after it was locked out of international bond markets amid concerns over its ability to repay its debts.

Though the austerity implemented by successive governments in return for 240 billion euros worth of rescue loans reduced the annual budget deficit, Greece’s debt burden has swelled to around 180 percent of annual GDP because of the economic contraction.

Moulson reported from Berlin. John-Thor Dahlburg contributed from Brussels.