Greek PM heads back to Parliament in austerity U-turn

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Only five days after Greek voters rejected the austerity demands of Greece's creditors, Prime Minister Alexis Tsipras will go to parliamentarians to seek approval for essentially the same demands.

His effective U-turn came as the Greek banks remained closed and the economy moved to the verge of collapse, putting enormous pressure on his government to sign a deal it doesn't want or crash out of the euro zone as early as next week.

A European Union leaders' summit is to be held Sunday to determine whether Greece is to receive its third bailout – a three-year program worth €53.3-billion – or get forced out of the euro zone. The euro zone's finance ministers said they would probably give their verdict on the Greek proposal later today.

The European stock markets climbed strongly on Friday morning on the hopes that chances of a Greek exit from the euro zone – Grexit – were finally fading after months of brinkmanship. The Eurofirst 300 index, representing the 300 largest companies, was up 1.4 per cent. The euro climbed 0.75 per cent and bond yields in Italy, Spain and Portugal fell.

While Mr. Tsipras is expected to win negotiating approval for the new bailout today, he will face fierce resistance from the far left faction of his governing Syriza party, which was elected in January with a strong anti-austerity mandate.

Syriza has 149 seats in the 300-seat parliament. A couple of dozen of Syriza's far left faction are expected to vote no, as will the Communists and the neo-Nazi Golden Dawn party, which, like France's Front National, want Greece out of both the EU and the euro.

But the pro-EU, pro-euro opposition parties – New Democracy, Pasok and Potami – have more than 100 seats among them, suggesting that the vote will go fairly strongly in Mr. Tsipras's favour, with perhaps 200 vote in the Yes camp. "Greece is obviously working to secure an immediate deal, but it must be a deal that opens a window out of the current crisis," Energy Minister Panagiotis Lafazanis said on Thursday. "We don't want a third memorandum with tough austerity measures."

The vote in parliament is non-binding. If won, it will give the Greek negotiators the authority to negotiate the bailout package.

Some bank economists on Friday morning reduced the odds of Grexit – RBS said Grexit was no longer its baseline scenario – but warned that the risks are still well in place. In a note, the French bank Société Générale said "Given the lack of trust, the debate on debt relief and the arduous implementation process, a deal on Sunday remains challenging and Grexit risks remain high."

The package sent by Greece's negotiators to the EU is similar to the June 26 proposal from the creditors, which was rejected by the Greek voters in the July 5 referendum.

"There is no question that Mr. Tsipras will have rejected a bad deal in Brussels a week and a half ago to get a much worse one now," Manulife chief economist Megan Greene said in a note on Thursday night. "In addition to caving on pension reforms and VAT [value-added tax], the Greek government will now have to cross even more red lines and agree to a labor market reform and the privatization of state assets (read: fire sale) as well."

The French, Italian and American governments have been pushing for a solution to keep Greece inside the euro zone, for fear that its exit would unleash potentially severe contagion and destroy the notion that the euro is irreversible. But the final decision on the merits of the Greek proposal will be made by Germany, whose finance minister, Wolfgang Schaeuble, has signalled that he would be happy ease Greece out of the euro zone unless it designed and implemented credible reform measures.

The new Greek proposals cross several of its own "red lines."

The Greek negotiating team, led by new Finance Minister, Euclid Tsakalotos, said it would reduce Greece's pension expense by as much as 0.5 per cent of gross domestic product this year and by 1 per cent next year. The Greek government would clamp down on early retirement and make 67 the retirement age by 2022. The public sector will also get squeezed, with wages set to fall by 2019 and paid leave and travel allowances to meet EU standards.

Military spending is to fall by €200-million by 2016, most of the Greek islands will lose their reduced VAT status and corporate taxes will rise to 28 per cent from 26 per cent.

The Greek proposal did not mention debt relief, which had been demanded by Greek negotiating team. While it appears that a debt "haircut" will not be included in any new package, EU leaders and finance ministers have been holding it out as a carrot.

"A realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors," European Union President Donald Tusk said in Luxembourg on Thursday. "Only then will we have a win-win situation."