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Greece averts bankruptcy and softens austerity in last-ditch deal

Greece has secured a four-month reprieve from eurozone creditors at a last-ditch summit in Brussels, heading off imminent default and a traumatic rupture of monetary union.

The interim accord gives Greece breathing room to flesh out its economic agenda and reform plans, and effectively scraps the draconian fiscal targets imposed by the EU-IMF Troika.

The Syriza government in Athens gains bridging finance to avert a crunch as budget coffers run dry and capital flight reaches 1bn a day. Greek officials confessed privately that the country is on the brink of insolvency. It was likely to exhaust its limit on emergency liquidity from the European Central Bank as soon as Tuesday, risking a run on the banking system and a financial collapse.

The Greeks now have a stay of execution until the end of June, when the drama is likely to be repeated. Greece must repay 6.7bn to the European Central Bank in July and August, an impossible task without a fresh EU-IMF programme or something similar.

Eurogroup finance ministers have softened demands for yet further austerity, accepting that fiscal tightening should fit "economic circumstances", the core Greek condition. This is a victory for Syriza on a crucial point. "It is a balanced agreement. It will help Greece to get on its feet again," said the EU economics commissioner, Pierre Moscovici.

The text said the Greeks "reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely".

"The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions," it said.

Jeroen Dijsselbloem, the head of the Eurogroup, sweetened the bitter pill with a promise that there is "flexibility in the programme and we will make the best use of it."

Greece's finance minister, Yanis Varoufakis, said his country had defeated the "exhorbitant demands" of the Troika for more austerity, a regime he once called fiscal waterboarding. "We have averted many years of suffocating primary surpluses that would destroy our industrial base," he said.

Describing the Eurogroup statement on fiscal policy as "constructive ambiguity", he implied that Greece will henceforth work out its budget plans with the professionals at the IMF - "which holds views that I personally agree with" - rather than submitting to the creditor powers.

He insisted that Greece had won the right to determine its own reforms, and will launch these reforms as a "weapon against the deep malignancies of the Greek economy".

"We are no longer following a script given to us by external agencies. Once you have a relationship of equals, the co-operation can be a lot more fruitful," he said.

Greece will work with the various components of the EU-IMF Troika, although the term as such will be dropped. Syriza must prepare a list of reforms by Monday. The deal will be rushed through German Bundestag and other national parliaments over coming days.

The breakthrough followed five hours of "corridor diplomacy" as Mr Dijsselbloem and Christine Lagarde from the International Monetary Fund shuttled messages back and forth to the German and Greek delegations.

It came after German Chancellor Angela Merkel and French president Francois Hollande pledged to uphold the sanctity of monetary union and keep Greece anchored in the eurozone family. "Greece has to stay in the eurozone," said Mrs Merkel.

Mr Hollande said a Greek withdrawal from the euro was out of the question. "The position of France is that everything should be done - by both the Greek side and the European side - to restore the cohesion of the eurozone. There can today be no scenario of a Greek exit from the euro," he said.

The intervention of EMU's two paramount leaders - in the best tradition of Franco-German compromise - moved the decision from legalistic quibbling to a higher level of statesmanship where the strategic issues come into play.

Sony Kapoor from consultants Redefine, and a former advisor to Germany's finance ministry, said EU leaders could not allow Greece to spin out of control and destabilize the Balkans. "Everybody of political importance from the US, to the G20 powers, and Nato, have been calling Chancellor Merkel to urge restraint. Grexit would completely discredit what remains of EU foreign policy. If they can't even look after one of their own, how can they have any credibility in the world," he said.

Mrs Merkel appears to have overruled her finance minister, Wolfgang Schauble, who continued to insist through the week that Greece must comply to the letter with all Troika obligations agreed by the previous Greek government. His tough line - backed by the somewhat strained unity in the Eurogroup - did succeed in forcing concessions from the Greek side.

In a "briefing battle" afterwards, Mr Schauble said Greece had agreed to every single demand and that Mr Varoufakis was completely isolated in the Eurogroup. "The Greeks certainly will have a difficult time to explain the deal to their voters," he said.

The rhetoric is intended to assuage German public opinion and smooth the passage of the legislation through the Bundestag. The Eurogroup text is drafted in such a way that both Germany and Greece can spin it differently at home.

Mr Schauble's willingness to expel Greece from the euro is widely shared in Germany. The country's Council of Economic Experts issued a joint letter on Friday arguing that the eurozone is able to cope with the trauma of Grexit and is likely to emerge stronger in the long-run after shaking off its perennial problem child. "It could boost the credibility of the institutional framework," said the text, adding that the "catastrophic" condition of the Greek economy had nothing to do with Troika austerity policies.

The Greek side has abandoned demands for a debt write-off and shelved ideas for a bond swap to link interest payments to economic growth. Earlier threats to walk away from its bail-out loans had enraged other Club Med states that are also in distress, alienating potential allies in the greater struggle to end Europe's austerity regime. Matteo Renzi, Italy's premier, said before the meeting that his country wanted to help Greece shift the debate on growth but also warned that Syriza must not "play dirty and leave others to pay".

The Eurogroup had previously demanded that Greece comply fully with the Troika's targets for a rise in the primary budget surplus from 1.5pc of GDP in 2014, to 3pc this year, and 4.5pc next year, even though officials at the IMF and the Commission admit that it makes no economic sense. This would leave no room for Syriza to pay for its poverty programmes, and leave the economy trapped in deflation.

Mr Varoufakis told The Telegraph before the meeting that Greece had already endured a greater fiscal squeeze than any modern country in peace-time and remains stuck in depression. "There is no macro-economic argument that can be made for further fiscal tightening. The only reason for doing so is out of ideology or on punitive grounds. All we are seeking is a way to end the debt-deflation cycle," he said.

We may have to wait another four months to learn whether Greece has genuinely attained this.

[Source: By Ambrose Evans-Pritchard, The Telegraph, London, 20Feb15]

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