Eurozone Finance Ministers Approve New Bailout for Greece

The deal marks an end to more than six months of turbulent negotiations between the left-wing government in Athens and its creditors, the other eurozone countries and the International Monetary Fund, that brought Europe’s currency union closer to break-up than before in its almost-six-year-old debt crisis.

“The past six months have been difficult. They have tested the patience of policy-makers and they have tested the patience of our citizens even more. Together, we have looked into the abyss. But today, I am glad to say that all sides have respected their commitments,” European Commission President Jean-Claude Juncker said late on Friday, The Wall Street Journal reported. 

But the aid deal still faces major obstacles. Large-scale defections from Syriza party lawmakers during a parliamentary vote on the agreement Friday morning indicate that Prime Minister Alexis Tsipas may soon call new elections.

That could once again delay the implementation of the austerity measures mandated by the deal as well as action by the other eurozone countries to lower Greece’s debt load.

At the same time, the steep budget cuts Greece has to implement in return for the new bailout are bound to cause more pain for its economy and citizens. The rescue program foresees a 2.3% contraction of Greece’s gross domestic product this year, followed by a 1.3% decrease next year.

The deal also expects that shareholders, junior creditors and senior bondholders in Greece’s battered banks will take losses before the lenders will be recapitalized. That will likely cause further uncertainty for a financial sector already reeling from capital controls that are unlikely to be lifted anytime soon.

“In the end how good this deal is, depends on how Greek society, the Greek state, the Greek economy, how social actors, and economic actors respond to it,” said Greek Finance Minister Euclid Tsakalotos. “Any deal is only as good as what you make of it”

To seal the deal, Greece’s third in just more than five years, its creditors first had to sort through some internal struggles, especially over the role of the International Monetary Fund.

The IMF has long held a more pessimistic view on Greece’s economy and questioned its ability to repay its debts. That is why the fund has refused to commit to new loans for Greece until other eurozone governments have taken measures to reduce that burden, expected to reach more than 200% of GDP in the coming years.

Eurozone governments, led by powerful Germany, have made the participation of the IMF a precondition for their own loans but don’t want to take such steps, including giving Greece more time to pay back loans and interest, until the fall.

To straddle that difference, the IMF and eurozone finance ministers issued statements Friday, each seemingly trying to approach the others’ expectations as far as possible.

“We look forward to working closely with Greece and its European partners in the coming months to put in place all the elements needed for me to recommend to the Fund’s Executive Board to consider further financial support for Greece,” Christine Lagarde, the IMF’s managing director, said.

Meantime, the eurozone finance ministers said: “The Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and repayment periods) aiming at ensuring that Greece’s gross financing needs remain at a sustainable level.”

But in her statement, Ms. Lagarde also warned that Greece will need “significant debt relief, well beyond what has been considered so far.”

Further hurdles to the bailout running smoothly could be set up by snap elections in Greece. Elections this fall are not certain, but government officials are privately hinting at them and many analysts expect them, because Mr. Tsipras has no stable governing majority in parliament to implement the bailout. Elections could bolster or derail Greece’s bailout, depending on their outcome.

Of the 149 lawmakers in Mr. Tsipras’s Syriza party, 49 have withheld support for the premier in at least one of the three parliamentary votes on bailout measures since Mr. Tsipras agreed with European leaders July 13 to arrange a new financial rescue.

Opposition parties that have helped the government pass the measures despite Syriza’s disarray warned Friday that Mr. Tsipras can’t assume their continued support.

If Mr. Tsipras can win a new majority with a new-look Syriza that is loyal to him and purged of antibailout dissidenters, it could ease the passage of the austerity measures and market-oriented economic overhauls that creditors want.

German Finance Minister Wolfgang Schäuble, a harsh critic of the new bailout deal, said he was encouraged that the new program had the support of opposition parties. “I believe this is an opportunity,” Mr. Schaeüble said.

But it is also possible that a new antibailout movement, comprising Syriza’s antibailout faction and possibly other left-wing forces, could win many votes —denting support for the bulk of Syriza that has stayed loyal to Mr. Tsipras and forcing him to seek a broader, and possibly less stable, new governing coalition.

Beyond a possible election, the experience of Greece’s bailouts since 2010 is that enacting tough austerity has eroded public and parliamentary support for every government that tried to comply with creditors’ will. It would be a surprise if the antiausterity Syriza movement proves more stable under the pressure of the difficult bailout effort than previous governments.

National parliaments in some eurozone countries also still need to approve the deal. Mr. Schaeüble said he expected a vote in the Germany parliament Tuesday or Wednesday and that he has already briefed leading lawmakers on the decisions.