By Ambrose Evans-Pritchard 11 July 2015
'If it comes to the drachma, Greek resorts will have to be protected by armed guards, and that is not the sort of tourism we want,' said the country's tourist chief
Greece's Left-wing Syriza government has agreed to draconian austerity terms rejected by the Greek people in a landslide referendum just five days ago, capping one of the most bizarre political episodes of modern times.
The surrender was confirmed by the Greek parliament by 251 votes to 32, with eight abstentions including several senior members of the ruling Syriza party.
Prime minister Alexis Tsipras sought to put the best face on a painful climb-down, recoiling from a traumatic fight that would have led to Greece's ejection from the euro as soon as Monday. He implicitly recognised that the strain of capital controls and economic collapse has been too much to bear.
“We are confronted with crucial decisions. We got a mandate to bring a better deal than the ultimatum that the Euro group gave us, but we weren't given a mandate to take Greece out of the Eurozone,” he said.
Hopes for a breakthrough set off euphoria across Europe's stock and bond markets, though Greece still has to face an emergency meeting of Euro group ministers on Saturday, and probably a full-dress summit of the EU's 28 leaders on Sunday.
A top Greek banker close to the talks said there is now a "90pc chance" of clinching a deal, thanks both to intervention behind the scenes by a team from the French treasury and to aggressive diplomacy by Washington.
Inflows of tourist cash means that there is still €2.75bn of liquidity available, enough to keep ATM machines stocked until Monday night. Greeks will be able to withdraw the daily allowance of €60. Pensioners will continue to draw €120 a week.
"We are preparing to open up branches for normal banking services next week. Capital controls will last for a while but not for as long as in Cyprus. The situation is very fluid but we don't think we will need a major recapitalisation of the banks," said the source.
An estimated €40bn of money stashed in "mattresses" should flow back into deposits as confidence returns. One or two of the weaker banks may need a capital boost of €10bn to €15bn, involving a potential "bail-in" of savings above the insured threshold of €100,000.
Any deal almost certainly means the European Central Bank will lift its freeze on emergency liquidity for the Greek financial system as soon as Monday, entirely changing the picture. Syriza accuses the ECB of deploying "liquidity asphyxiation" to bring a rebel democracy to its knees.
The ECB freeze has been a controversial political and legal move - given the bank's treaty obligations to uphold financial stability - and is likely to be dissected by historians for years to come.
A final deal to end the long-running saga is still not certain. The outcome depends on how much debt relief the creditor powers are willing to offer, and whether it is a contractual obligation written in stone or merely a vague promise for the future.
Yet the broad outlines are taking shape after Syriza agreed to three more years of fiscal tightening, with deep pension cuts and tax rises, and a raft of "neo-liberal" reform measures that breach almost all the party's original red lines.
Panagiotis Lafazanis, head of Syriza’s Left Platform, protested bitterly, saying it would be better for Greece to restore sovereign self-government and return to the drachma. "The most humiliating and unbearable choice is an agreement that will surrender and loot our country and subjugate our people," he said.
Party insiders did not hide their disgust, though Mr Tsipras managed to quell a full-scale mutiny. "It is a total capitulation. We never had a 'Plan B' for what to do if the European Central Banks cuts off liquidity and the creditors simply destroyed our country, which is what they are doing," said one Syriza veteran.
"We thought that when the time comes, Europe would blink, but that is not what happened. It should have been clear since April that the markets were not going to react to Grexit."
Yanis Varoufakis, the former finance minister, said he would back his successor and close friend, Euclid Tsakalotos, but only for the next two days.
Euclid Tsakalotos, Greece's finance minister
"I will reserve my judgment. I have serious doubts as to whether the creditors will really sign on the dotted line and offer substantive debt relief. My fear is that they will make all the right noises, but then fail to follow through, as in 2012," he told The Telegraph.
Mr Tsakalotos told the Greek parliament that Syriza aims to secure a swap of $27bn of Greek bonds held by the European Central Bank for longer-dated bonds at lower interest rates. "Many of Greece's debt demands are going to be accepted," he said.
The government is also pushing for an extension of maturities on €145bn of bail-out loans (EFSF) deep into the middle of the century to avoid a fresh crisis when they come due as a clump in the early 2020s.
The US, France, Italy, the International Monetary Fund and the top officials of the EU Council and Commission have all now called openly for debt relief, a crucial shift in position that clears the way for a possible accord.
Even German Chancellor Angela Merkel has opened the door to an extension of debt maturities. The difficulty is that this alone is no longer enough.
Greece has called for €53.5bn in fresh funds over the next three years. While much of this is recycled back out to cover maturing debts, the package requires a vote by the German Bundestag.
Germany alone can veto any deal since it has more than 15pc of the voting weight in the bail-out fund. An estimated 100 MPs from Mrs Merkel's Christian Democrat family have threatened to vote no.
"We have ended up with a standard bail-out package," said Costas Lapavitsas, a Syriza MP and one of five rebels calling for the nationalisation of the banks and a return to the drachma. "What has happened shows that radical change is impossible within the constraints of monetary union," he said.
Yorgos Kaminis, the mayor of Athens, said the stand-off with creditors has brought the country to its knees. "Greece faces a national catastrophe. If there is no deal, we will be obliged to go back to the drachma immediately. Our country will be totally isolated. You can't be a member of Europe if you are blackmailing the whole world," he said.
Greek industry and the tourist sector are already preparing drastic steps to defend themselves if talks collapse and the government is forced to introduce IOUs and a parallel currency.
Alexander Kaminis, head of the Greek Tourism Confederation, said he fears a breakdown of social order. "If it comes to the drachma, we'll have to take exceptional measures. We'll be looking at a situation where Greek resorts have to be protected by armed guards, and that is not the sort of tourism we want," he said.
Greece is packed with travellers at the moment but Mr Kaminis said late bookings have dropped by 30pc. "This is going to materialize in a month or two," he said
Constantine Michalos, head of the Hellenic Chambers of Commerce and a food importer, said the economy has reached near paralysis. "There is no system in place for Greek companies to transfer money about. Our life-blood has been shut off," he said.
"People are depleting their stocks. We are going to start seeing shortages of meat by the end of the week."
The network of chambers in the Greek islands reports that the local payments system is breaking down since nobody wants to accept transfers into backing accounts that could be seized at any moment. "The ferry operators are demanding cash up front to bring in fuel and supplies," he said.
"The whole is economy shifting to cash. You can't really import anything, and 40pc of Greek GDP is based on imports," said Haris Makryniotis, who helps small businesses for Endeavor Greece.
Mr Makryniotis said his group is advising an olive processor that can't import the tin its needs to make cans, and a peach producer that can no longer obtain wooden crates for transport. "Stocks were already low because financing costs were so high. These companies are both reducing a shift this week, and they will soon be facing a complete stop," he said.
"We're going to see severe shortages of basic food in Greece in less than a month," he said.
This is the ghastly reality that Alexis Tsipras faces. He promised the Greek people that he would achieve a miracle: an end to austerity and the hated Troika Memorandum, without poisoning Greece's ties to Europe and without having to give up the euro.
This was always dangerous political gambit. It has caught up with him. His only possible redemption at this point is to bring back the prize of debt relief.