Greece wins temporary reprieve as euro area backs aid extension

Greece's Prime Minister Alexis Tsipras said the deal "cancels austerity" and pledges by the previous government to cut wages, pensions and public sector employees and increase sales taxes. Photo / AP

Greek Prime Minister Alexis Tsipras won four more months to sell his policy program to creditors while keeping domestic voters on board, as euro-area finance chiefs deferred a showdown over Greece's future in the currency bloc.

Greek stocks and bonds surged on Tuesday as finance ministers approved a bailout extension after Tsipras's government pledged to revamp tax collection, consolidate pension funds and maintain sales of state-owned assets. The accord paves the way for the European Central Bank to continue support of Greek banks, while buying time for the euro area's most indebted state to convince its international creditors it will deliver.

"Cease-fire, but no peace agreement," Carsten Brzeski, chief economist at ING Diba in Frankfurt, said of the deal in an email. "The general question of how to solve the unsustainability of Greek debt has been postponed, not solved."

The agreement opens a fresh chapter in the saga of Greece and the euro area, which together - and sometimes at odds - have been battling since 2010 over preserving the currency union and keeping Greece afloat. After two bailouts pledging 240 billion euros ($272 billion) and the biggest debt restructuring in history, Greece remains short of cash and cut off from financial markets, with the threat of wider contagion ever present.

As part of Tuesday's decision, the European Commission, the ECB and the International Monetary Fund all signaled their support for Greece's commitments. Their assent gives Greece until April to refine the details and show the finance ministers how they follow through. Greece can't tap more bailout funds, including the next tranche of about 7 billion euros, unless it passes the authorities' review.

"This list is sufficiently comprehensive to be a valid starting point," European Commission Vice President Valdis Dombrovskis and Economic Commissioner Pierre Moscovici said in a letter to Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of his euro-area counterparts. "Determined and swift implementation of reform commitments will be key for a successful conclusion of the review."

Attention now turns to those national parliaments that require to give their assent to any change to the terms of euro- region bailouts. German lawmakers will vote on February 27, Michael Grosse-Broemer, the parliamentary whip for Chancellor Angela Merkel's bloc, told reporters in Berlin on Tuesday. The Finnish government said in a statement on its website that the Greek list was comprehensive enough to grant the extension.

Watch: Eurogroup chief warns Greece against reversing bailout deal

This next stage will be yet another key moment for Greece. A sizeable debt repayment is due in June, which has become the next deadline for securing follow-on financing. Tsipras's government has said it will work with the EU institutions on what kind of support arrangement comes next.

"If the past three weeks were seen as difficult, the next three to four months are going to be a major challenge, a major learning process for all parties," Jens Bastian, an independent financial analyst at Macropolis.gr and former member of the European Commission's Greek task force, said in a Bloomberg TV interview.

Tsipras faces a tough battle within the ranks of his Syriza party. Satisfying this constituency while working with euro-area counterparts like German Finance Minister Wolfgang Schaeuble will be a formidable task, Bastian said. Communicating this to a domestic audience is "where the heart of the problem will rest in the coming weeks," he said.

While Tuesday's decision won't lead to immediate new aid payments, it may give some breathing room for Greece's financial system, reeling from the departure of more than 20 billion euros in deposits since snap elections catapulted Syriza to power last month.

As uncertainty mounted over whether the bailout would expire at the end of February as scheduled, the ECB on February 4 lifted its waiver that had allowed junk-rated Greek collateral to be accepted under the central bank's rules.

The ECB is likely to wait until at least its March 5 monetary-policy meeting before it restores its waiver on collateral quality for Greek banks. The Frankfurt-based central bank has signaled it needs to be confident the extended program will succeed before making the change.

- Bloomberg