Wednesday, June 24, 2015

A Greek capitulation: Has Tsipras finally crossed Syriza's 'red lines'?

By Mehreen Khan 23 June 2015

After five months of deadlock, the chances of a bail-out extension for Greece are finally on the horizon. But what has the Greek prime minister really put on the table?

Alexis Tsipras's task is to sell a deal to his restless Left-wing party at home

The Greeks are back in Brussels.

With less than a week to go before the country's bail-out programme officially expires, the Leftist Syriza government seems to have finally tabled a list of proposals that may get the nod from its creditors.

According to leaked documents doing the rounds in Brussels on Monday night, the plans put forward by Athens constitute an "absolute" and "complete" blueprint.

Despite arriving too late to be formally rubber-stamped by the "institutions" of the European Central Bank, International Monetary Fund and the European Commission, the mood music following a leaders summit was positive.

European Council president Donald Tusk described the 11-page document as "the first real proposals in many weeks".

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In a letter addressed to Jean-Claude Juncker, the president of the European Commission, the Greeks say their measures - spending cuts and tax increases - add up to around 1.5pc of GDP in 2015 and 2.5pc in 2016.

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Janine Louloudi @janinel83

Letter from Greek PM to EC president RT @sdisponibile: Kind regards, Alexis #Grexit #Greece #EuroSummit

7:51 AM - 23 Jun 2015

Finance ministers will reconvene on Wednesday to lay the groundwork for EU leaders to look at the plans at a Council summit on Thursday.

But with Syriza MPs already voicing doubts that the deal can pass through the party's central committee, the prospect of a domestic revolt could well force another delay or father revisions.

Here's a breakdown of what Mr Tsipras has put on the table.

Tax and more tax

In total, the Greek plans amount to around €7.9bn in fiscal measures. Of that, €7.3bn is in the form of tax increases and changes to the social security contributions.

One of the most controversial areas of taxation has been VAT. Greece's creditors want the country to implement a simplified two-tier tax structure, rather than the three-level system currently in use.

The biggest concession seems to be on the series of VAT exemptions, such as those imposed on food services (restaurants, for example). These are now set to jump from the middle band of 13pc to the highest rate of 23pc.

But the Leftists have vowed, even in the latest proposals, to keep "sacred" areas such as medicine and electricity in the lower 6pc and 13pc bands respectively.

To offset this protection, special VAT privileges for Greece's myriad islands will be abolished.

These exemptions, which include the Aegean islands, have long been part of the Greek tax system and are designed to give a boost to the poorer parts of the country.

Greece's popular tourist islands will see their tax exemptions abolished

The move represents a U-turn for the Syriza government and has already met with fierce resistance by their nationalist coalition partners who take up 12 seats in the parliament.

In total, the government estimates the VAT overhauls will raise €1.36bn, or 0.76pc of GDP, next year.

Other tax hikes will focus on corporate profits over €500,000, which will be be hit by a special levy of 12pc; corporate income tax will rise from 26pc to 29pc.

The pensions problem

Pensions spending has emerged as one of the intractable red lines for the Leftist government since it was elected on an anti-austerity platform in late January.

The Troika has demanded pensions spending falls by 1pc this year, amounting to cuts of €1.8bn. The Greeks have long resisted such drastic measures, and proposed only a 0.04pc cut in spending, amounting to just €73m last week.


Monday's proposals are a significant increase on the previous plans. The government will now abolish early retirement by next year and raise the minimum retirement age gradually to 67 years old by 2025. Controversial "supplementary" pensions will also be phased out from 2018.

But Mr Tsipras has been careful not to cut the nominal value of individual pensions - a protected area which the government has long claimed will hit the poorest hardest.

Instead, there will be a radical overhaul in the nature of pensions contributions. These are reported to rise by 2pc for wage earners and 2pc for corporations into their pension pots. Pensioners will also see their healthcare contribution rise by 5pc, according to their "ability to pay" into the system.

In total, these measures are expected to generate around 0.4pc of GDP in 2015, and 1.1pc in 2016, still short of the 1pc creditors are demanding this year.

What's not in the deal?

With the Greeks seemingly conceding ground in a number of areas, one issue that remains conspicuous by its absence is the question of further debt relief.

Greece's debt mountain is set to rise to 180pc of GDP this year.


The idea of a debt swap has been central to Greek demands. Finance minister Yanis Varoufakis has laid out his plans, which include a measure to re-profile the country's debt by paying off bonds held by the European Central Bank with low-interest loans from Europe's rescue fund.

But following Monday's emergency summits, both Jean-Claude Juncker and Angela Merkel dismissed the question of debt relief as a matter for another day.

This radio silence is unlikely to go down well in Athens. Mr Tsipras needs some concession on the country's debt pile in order to effectively sell the deal to his restless parliamentarians. It has been suggested that creditors will sign off on a temporary extension with the promise of further debt relief after the summer. But verbal commitments are only likely to go so far as Syriza's radical Left factions harden against EU powers.

"Debt relief and fiscal efforts are intertwined," note analysts at Bank of America Merrill Lynch. "The magnitude of the surpluses looking ahead is dependent on how the debt service is reduced."

They add that one of the problems with carrying out austerity in the absence of debt relief, is that "you may end up with 'too much' upfront consolidation."

To hammer home that point, economists at Deutsche Bank calculate the proposals add up to a total fiscal tightening of 3pc of GDP, almost equivalent to the belt-tightening suffered by the economy at the height of its woes in 2010.

Does it really add up?

Technical teams from Greece's lenders will now spend the next few days crunching the numbers to see if the Greek proposals add up to a credible fiscal commitment to hit a proposed 1pc primary budget target this year.

Crucially, we've yet to hear much from Greece's senior lender and probably the most awkward member of its creditor bloc - the International Monetary Fund. The Fund's verdict on the path of debt sustainability is likely to be crucial to hopes of a deal being struck before the end of the month.

But even without the IMF's assent, economists have raised plenty of doubts over whether tax hikes are the best remedy for an economy which has already slipped into recession this year.

"Even a basic knowledge of economics should tell you that raising taxes when demand is shrinking is like squeezing the juice out of an already juiced lemon," says Michael Hewson of CMC Markets.

"It seems that a lot of these measures are therefore based on some very optimistic forward-looking assumptions, which in the real world are unlikely to be met."

A Greek capitulation: Has Tsipras finally crossed Syriza's 'red lines'? - Telegraph