The Greek government presented a raft of reform proposals to lawmakers in Athens early on Wednesday as mandated by its international creditors for a rescue package that can pave the way for 85 billion euros ($95 billion).
In return for the funds– which will be Greece’s third bailout in five years — Europe’s most indebted nation must submit to additional fiscal austerity measures and an increased debt load, as well as market-opening steps that threaten to widen a rift in the ruling Syriza party of Prime Minister Alexis Tsipras.
Here are the five most important issues to keep abreast of the evolving three-year bailout plan:
Debt vs growth
Syriza’s battle with the nation’s lenders has ravaged Greece’s economy, with gross domestic product contracting in the two most recent quarters. As a result, growth expectations had to be curtailed in the new draft accord.
Greece and the institutions representing its creditors — the European Commission, the European Stability Mechanism rescue fund, the European Central Bank and the International Monetary Fund — agreed to a budget deficit excluding interest payments of 0.25 percent of GDP this year. That’s down from an earlier goal seeking a 1 percent primary surplus.
The new draft envisions a primary surplus of 0.5 percent of GDP in 2016, 1.75 percent in 2017 and 3.5 percent in 2018. Those compare with earlier goals for a primary surplus of 2 percent in 2016 and 3 percent in 2017.
The program is based on forecasts that the Greek economy, which emerged in 2014 from a six-year recession, will contract in 2015 and 2016 before expanding in 2017.
As a result, Greece’s debt stands to rise from about 177 percent of GDP last year — second only to Japan — making more pressing a euro-area pledge in coming months to consider easier loan-repayment terms for the government in Athens. Without steps to ease the Greek debt burden, the IMF may refuse to help finance the new rescue.
How much aid will the Greek banks receive and when?
Greece’s financial firms were shuttered for three weeks until July 20 after a breakdown in rescue negotiations prompted the government to impose capital controls and close the markets.
Assuming a deal is finalized, Greek banks are due to receive 10 billion euros initially as part of a package for lenders of up to 25 billion euros. The 10 billion euro immediate payout for banks would be part of a 20 billion-euro initial disbursement to the country that would also include 7 billion euros to cover a previous rescue loan and 3.2 billion euros to make an August 20 payment to the ECB.
That would leave Greece with enough to cover its immediate financial obligations but little or nothing in the way for structural investments or social programs.
Separately, Greece and its partners are still working out a strategy for the banking industry to tackle non-performing loans.
A privatization fund with a targeted value of as much as 50 billion euros over several decades will be created. It foresees the sale or exploitation of state assets ranging from the Piraeus and Thessaloniki seaports and rail services to telecommunications businesses and real estate. Out of the total, half will be used as a guarantee for banks, 25 percent for debt needs and a quarter for investment.
Greece’s parliament is now preparing to deliberate the package of reforms agreed on with creditors. In a letter to the legislature, Tsipras said lawmakers will have to vote on the measures by Thursday so the aid can be disbursed in time to meet financial obligations.
A draft of the legislation posted on the parliament’s website contains steps to clamp down on early retirement, reform public-sector wages, changes to the tax system including increases for farmers, an overhaul of “closed professions” such as engineers and notaries and opening up energy and pharmaceuticals markets. Greece must also submit a complete strategic plan for its financial system by the end of this month.
The planned program needs the support of euro-area finance ministers, who are tentatively scheduled to meet on Friday in Brussels, and several national parliaments in the 19-country region. Those hurdles may be cleared in time for Greece to use an initial disbursement to pay the 3.2 billion euros to the ECB due on August 20. If not, the European Union can offer Greece a short-term loan to meet the payment.
Opposition to the rescue terms by a faction of Syriza, which stands for Coalition of the Radical Left, has forced Tsipras to rely on support from opposition parties in the Greek parliament. As a result, Tsipras, who became premier after January 25 general elections and has himself questioned the merits of the rescue conditions, may call snap elections in a bid to shore up his authority. A special congress of Syriza has been called for September to discuss the way forward.
The Greek recession, continued budget tightening, the debt load, a financing gap in the new rescue and a “complete lack of ownership of the measures” threaten to revive risks of Greece’s exit from the euro, according to Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam.
“Greece is far from being out of the woods,” Kounis said.