Greece and its eurozone bailout lenders last week agreed an 11th-hour deal to extend the country’s 172bn euros rescue programme for four months, avoiding bankruptcy but setting up another potential stand-off in June when a 3.5bn euros debt payment comes due.

The deal was reached at a make-or-break meeting between Jeroen Dijsselbloem, the chairman of the eurozone finance ministers’ group, and key figures including Yanis Varoufakis, Greek finance minister, and Wolfgang Schäuble, his German counterpart. It leaves several important issues undecided — including what reform measures Athens must adopt to get 7.2bn euros in aid on completing the current programme. The new Greek government is to submit those measures for approval to eurozone authorities on Monday.

However, the agreement avoids what eurozone officials feared would be market turmoil if the bailout expired at the end of next week and should stem mounting deposit withdrawals from Greece’s banking sector. “[The discussion] was intense because it was about building trust between us,” said Mr Dijsselbloem.

Four-month bailout extension agreed

The decision to request an extension of the programme is a significant U-turn for Alexis Tsipras, Greek prime minister, who had promised in his election campaign to kill the existing bailout. In addition, there is no reduction of sovereign debt levels, another campaign vow. Discussions on debt restructuring are likely to be part of follow-on talks ahead of another bailout programme.

Athens promised to continue to produce a primary budget surplus, but Mr Dijsselbloem left open the possibility that the surplus target could be lowered.

“The Greek authorities commit to refrain from any rollback of measures ... that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by [bailout monitors],” the eurogroup agreement read.

Critically, Athens is committed to the ‘successful completion’ of the current bailout review. The economic reform agenda must be approved by bailout monitors, and final agreement on the measures is to be completed by April.

The deal also unexpectedly requires the eurozone’s bailout fund to take back 10.9bn euros from Greece’s bank rescue facility, a move that reflects the lack of trust between Athens and its lenders.

As the news emerged on Friday, Wall Street climbed to record highs and the euro rallied. The S&P 500 index rose 0.6 per cent to a record 2,110, while the Dow Jones hit an all-time peak of 18,144.

Published in Dawn, Economic & Business, February 23rd, 2015

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