Greek Prime Minister Alexis Tsipras takes part at a joint session of four committees of the Parliament (Economic, Social, Public Administration and Production and Trade) at the Greek Parliament in Athens on July 10, 2015.ANDREAS SOLARO/AFP / Getty Images
Greek Prime Minister Alexis Tsipras suffered a key political defection just before the parliamentary vote that will decide whether Greece is thrown an €86-billion ($120-billion) lifeline or faces imminent economic collapse.
On Wednesday afternoon, only hours before the vote that was called to accept or reject the creditors' austerity-laden bailout terms, deputy finance minster Nadia Valavani resigned. She said it was "impossible" for her to serve a government bent on a "crushing" capitulation at the hands of Greece's creditors – the European Union, the European Central Bank and the International Monetary Fund.
Mr. Tsipras will probably win the vote in spite of the rising number of defections within his Syriza party. But the defections have exposed deep divisions within the party, which was elected in January on a anti-austerity platform, and will inevitably trigger political turmoil and possibly new elections. The defectors accuse Mr. Tsipras of a U-turn that amounts to a wholesale sellout to the creditors.
The Syriza rebels were emboldened by a report from the IMF, which has been a significant lender in Greece's previous two bailouts and is owed about €32-billion. The report, obtained by the media late on Tuesday, concluded that Greece is drowning in debt and that significant debt relief would be required to make Greece's finances sustainable.
"The dramatic deterioration in debt sustainability points to the need for deft relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM," the IMF note said, referring to the European Stability Mechanism, the bailout fund that would take the lead funding role in Greece's next bailout.
Greece's debt to gross domestic product ratio was 127 per cent at the start of the debt crisis. It is now about 180 per cent, the highest in the Western world, and is likely to reach 200 per cent within two years. IMF rules prevent it from lending to a country whose debt is considered unsustainable, preventing it from accessing the debt markets. Greece was shut out of the debt markets in 2010, triggering its first bailout, and has been able since then only to sell small amounts of short-term bonds.
If the IMF sticks to its view, it would not participate in Greece's third bailout. The EU had expected the IMF to contribute about one quarter of the new funds.
Mr. Tsipras is fighting for a Yes vote tonight as he scrambles to negotiate an emergency bridge loan that would keep the government operating, and allow it to meet debt payments, over the summer. The crucial deadline comes Monday, when Greece must redeem €3.5-billion of bonds held by the ECB. If Greece defaults, the ECB would probably declare the country and its banks insolvent and remove the emergency liquidity assistance it has been sending the Greek banks since February.
The European Financial Stability Mechanism (EFSF) has emerged as the probable source of the bridge loans. But since the rescue fund is creature of the EU, it would expose Britain and other non-euro zone members to default risk. Already, George Osborne, the British chancellor of the exchequer, has demanded that the euro zone protect the treasury from any losses if Britain is forced to contribute to the Greek bridge loan.
Syriza's Left Platform will vote against the bailout proposal delivered to Mr. Tsipras Monday morning after an all-night session among the euro zone leaders. The Left Platform, which is openly talking about the return of the drachma, argues that the deal, if approved, would push Greece into permanent recession, pushing up levels of unemployment and poverty, which are already the highest in the euro zone.
Panagiotis Lafazanis, the energy minister who leads the Left Platform, called the new bailout terms the work of "economic murderers." There are rumours that he will abandon Syriza and form an anti-bailout party.
If the vote is won by Mr. Tsipras, the parliaments of six euro zone countries, including Germany, will also hold votes on the bailout.
Until the bailout is approved by Greece and the euro zone countries, the ECB is unlikely to inject more emergency liquidity into the Greek banks, which have been closed for more than two weeks, with ATM withdrawals limited to €60 a day.
The ECB holds its regular policy meeting in Brussels on Thursday, during which ECB president Mario Draghi will be bombarded with questions about new emergency loans and a bridge loan to Greece to see it through the summer and make scheduled debt payments. Economists expect Mr. Draghi to be highly evasive on Thursday during the press conference. ING's Carsten Brzeski said "the ECB looks unlikely to give any clear answers. The experience of the last weeks suggests that the ECB will be very cautious not to run ahead of political developments."