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29/09/2016

Hopes for Greece rise but debt relief remains sore point

Euro & Finance

Hopes for Greece rise but debt relief remains sore point

Greek Finance Minister Yanis Varoufakis and Greece's Prime Minister Alexis Tsipras at tonight's meeting of Eurozone leaders.

[European Council]

Greece’s international lenders raised hopes for a desperately needed bailout agreement this week to save Athens from default and a possible euro exit, despite failing to reach a deal at talks on Monday night (22 June).

“We will finalise the process this week,” European Commission President Jean-Claude Juncker told reporters after the meeting.

“[Greek Prime Minister] Alexis Tsipras has convinced us of Greece’s seriousness and willingness to work constructively,” said European Council President Donald Tusk, who called the emergency summit.

The Greeks submitted a new last ditch plan, scrutinised by eurozone leaders at the summit, which focused on VAT rates, early retirement measures and tax hikes, and narrowing the country’s budgetary gap.

The proposals were a bid to unlock the final €7.2 billion tranche of its international bailout, which creditors have refused to release unless Greece agrees to more austerity measures. Greek Prime Minister Alexis Tsipras was elected promising to end five years of austerity.

Without the bailout cash, Greece will be unable to meet a €1.5 billion International Monetary Fund (IMF) payment on Wednesday (30 June), and a default could send Athens crashing out of the single currency and possibly the EU.

A counter-proposal by the creditors makes no reference to Greece’s mountain of debt, which currently stands at 180% of GDP, nearly double the country’s entire economic output over one year.

But progress towards a final agreement was being made on other aspects of the deal. Tusk said officials would continue to assess the Greek proposals and work with Tsipras’ government with a view to the Eurogroup of eurozone finance ministers presenting the results to the European Council.

Even if an agreement is reached this week, the Greek parliament and all the eurozone governments will still have to approve it before the deadline of Tuesday, 30 June, warned German Chancellor Angela Merkel.

She also struck a more cautious note than Juncker and Tusk, stressing there was still a lot of work that needed to be done to save Greece from default. There is strong public resistance in Germany to more aid for Greece.

The Greek government insists the debt issue cannot be excluded and demands that the European Central Bank and the EU’s rescue fund, the European Stability Mechanism (ESM), which holds a huge chunk of the debt, find a solution.

But forgiving Greek debt is unacceptable for eurozone governments that control the ESM, despite repeat warnings by the IMF that the burden is unsustainable without it.

Asked whether debt relief was raised by leaders, Juncker said, “This is not the time to discuss this issue.”

He also said that capital controls were not discussed. Merkel separately said debt relief was not discussed because the “troika” of the EU, IMF and ECB had to make any such agreement jointly.

Bailout extension

Greek officials said they were discussing a possible extension of their existing bailout with the EU until March 2016, which would give more time to work out a long-term solution.

Merkel said at her press conference that Greece did not want a third bailout programme.

The EU’s involvement in Greece’s bailout, which was to provide €240 billion in loans in exchange for drastic austerity measures and reforms, runs out at the end of this month, but IMF support is scheduled to continue to March 2016.

An extension would be the third for Greece since December and align it with the end of the IMF’s own bailout agreement with Athens, which has run in tandem with the EU and European Central Bank (ECB) programme.

But an EU official said that the €7.2 billion still remaining in the bailout would only be enough to keep Greece out of default until the end of this year.

Greek Prime Minister Tsipras met hardline IMF chief Christine Lagarde and ECB head Mario Draghi before the leaders’ summit.

Confusion

Eurozone finance ministers earlier said there had been confusion overnight with Greece sending two sets of proposals, one late on Sunday night and another first thing Monday morning, making a final deal impossible.The Eurogroup was meeting before this evening’s summit of leaders.

>>Read: Dijsselbloem says new Greek proposals raise deal prospects

Splits between Athens and its lenders remain over pensions reform. The Greeks have proposed various measures to raise another €2 billion via pension reforms.

Under the new plans, the elimination of early retirement would begin in 2016 instead of progressively. In addition, supplementary pensions above €1,000 will be cut.

Greece’s public retirement system is running a massive deficit and the IMF especially is insistent that Athens put its books in order.

The creditors demand that Greece phase in reforms immediately that would yield up to €900 million in savings this year and €1.8 billion in 2016.

To achieve this, the creditors argue Athens must close the door to early retirement and end a raft of special benefits. IMF chief Lagarde refutes the Greek accusation that these demands target the poor.

The government wants to delay the zero deficit target in the retirement system until 2017 and rules out any pension cuts for the needy, a requirement that Tsipras underlines repeatedly.

Budget balancing

The state of Greece’s budget no longer appears to be the major stumbling block that it once was. The new proposals from Athens seek to close a gap of almost €1 billion between the creditors’ demands for savings in the 2016 budget and the last offer Greece’s leftist government made, which was rejected.

Athens has conceded ground on pensions and defence spending but movement on VAT is still wanted by creditors.

The European Union and International Monetary Fund want Athens to run a current account surplus for several years, arguing that it is running a deficit again by spending more money than it receives in taxation revenues.

The key method of measuring this is the primary balance, which is the difference between revenue and public expenditure, excluding payments of interest on debt.

The EU and IMF are now asking only for a primary surplus target this year of 1% of annual gross domestic product (GDP), followed by 2% in 2016 and 3% in 2017.

But with Greece’s economy in free fall, hitting those targets would require an immediate budget saving of at least €3 billion and potentially more. That is unthinkable unless the economy grows strongly for a sustained period of time.

Athens wants a much lower surplus target of 0.6% this year that would require no extra saving, but has now budged, signalling it would accept 0.75% and even higher.

VAT

Creditors remain dissatisfied with Athens’ plans for value added taxation which is levied on goods and services. They are still at loggerheads over the size of the increase, and which sectors it will affect.

Greece is counting on a big VAT hike to hit its budget targets, and in the new proposals it has outlined further adjustments to VAT that could bring some €2 billion in additional revenue to state coffers, media reports said.

Athens would be prepared to raise the VAT on hotel stays from 6.5% to 13%, but the main issue of lifting the rate on restaurants from 13% to 23% has not yet been resolved.

At the same time Greece has maintained the 13% VAT rate on electricity, a “red line” for the anti-austerity government which has resisted creditors’ demands to ramp this up to 23%.

The government has also agreed to limit the scope of its lowest VAT rate of 6% to medicines, books and theatre tickets.

More tax hikes, after five years of raising rates, have also been proposed for business profits above €500,000, instead of €1 million as originally planned, and on incomes over €30,000.

Background

The anti-austerity party Syriza won an overwhelming victory in the Greek elections on January 25, but nonetheless failed to obtain an absolute parliamentary majority.

The party leader Alexis Tsipras provoked mixed reactions among his EU counterparts, announcing that the "vicious cycle of austerity is over".

Reforms offered by Athens have failed to convince the Eurogroup and the country's creditors, and Greece now finds itself unable to pay its debts and in a more precarious situation than ever.

The proposals were a bid to unlock the final €7.2 billion tranche of its international bailout, which creditors have refused to release unless Greece agrees to more austerity measures. Greek Prime Minister Alexis Tsipras was elected promising to end five years of austerity.

Without the bailout cash Greece will be unable to meet a €1.5 billion International Monetary Fund (IMF) payment on Wednesday (30 June), and a default could send Athens crashing out of the single currency and possibly the EU.

European Council Donald Tusk called an emergency summit of Eurozone leaders in a bid to break the deadlock.

>>Read: Storify: LIVE: Greece edging towards default?

Timeline

  • 24 June: Eurogroup meeting
  • 25-26 June: European Council
  • 30 June: Deadline for Greece's IMF payment