Tuesday 23 June 2015
Creditors view new Greek proposals on pensions and VAT as the most positive move yet in five months of wrangling
Hopes of a deal that would spare Greece from a looming debt default and possible exit from the single currency rose sharply on Monday after the country’s European partners welcomed proposals from Athens to cut its pension bill and raise extra money from VAT.
In what was seen in Brussels as the most positive development since negotiations began five months ago, the left-wing government of prime minister Alexis Tsipras showed a willingness to give ground on the two issues that have left it at odds with its creditors.
Athens’ fate may soon be determined regardless as despite no breakthrough and another wrong paper fiasco, proposals were welcomed as ‘detailed and credible’
An emergency summit of Eurozone leaders ended on Monday night with high hopes of reaching a deal within 48 hours. Chancellor Angela Merkel of Germany said Eurozone finance ministers would meet on Wednesday evening, the third time in a week, to finalise a deal to be put to a summit in Brussels on Thursday.
Jean-Claude Juncker, the president of the European commission, described the Greek offer of tax increases and spending cuts as “a major step forward”. He added: “We we will finalise the process this week.”
Share prices rose by 9% on the Athens stock market amid signs that the compromise put forward by Tsipras would form the basis of an agreement at the summit of European leaders, ahead of next Tuesday’s deadline for a €1.6bn (£1.1bn) payment to the International Monetary Fund.
The Greek government insisted that none of its red lines had been crossed, but finance ministers from Eurozone countries believe Athens has made significant concessions by agreeing to raise an additional €2.7bn in revenues this year. Brussels called the plan “detailed, credible and impressive”, and saw it as the basis for an agreement that would have further bailout funds released to Greece. “It’s the first big positive sign from the Greeks,” said one official. “It’s the most comprehensive proposal they have made.”
Jeroen Dijsselbloem, the Dutch finance minister, who chairs the group of 19 Eurozone countries, said the Greek plan was “a basis to really restart the talks again and really get a result”.
In a letter accompanying the economic plan, Tsipras said that “the requirements of the [creditor] institutions for covering the fiscal gaps for 2015-16” would be met absolutely and completely.
Officials from the European commission, the European Central Bank (ECB) and the IMF – the so-called troika – will spend the next 48 hours assessing whether Athens has now met demands from its creditors to make bigger reductions to its budget deficit this year. In the meantime, emergency funding from the ECB will allow Greek banks to stay open, amid reports that a further €1.6bn was pulled out of the banking system on Monday as the ECB threw a further lifeline to financial institutions.
In its 11-page proposal, Greece accepted that its pension system needed to be reformed, and said it would save money by increasing pension contributions, health payments by retirees and a new tax on businesses. But pension rates would be left untouched, allowing Tsipras to say that he has not crossed his red lines. Greece said higher VAT would net an additional €1.3bn in 2016.
Germany’s finance minister Wolfgang Schäuble led demands by some Euro group finance ministers at Monday’s meeting for capital controls in Greece – a curb on bank withdrawals – that would limit the exposure of European taxpayers to a possible default.
Rear-guard action from Berlin and the IMF – both of which are thought to have reservations about the Greek blueprint – could yet hold up or derail an agreement that would unlock the bailout funds that would let Athens to make a €1.6bn payment to the IMF at the end of the month.
But if finance ministers give their approval, a final deal will be signed by European leaders when they meet for a two-day summit in Brussels on Thursday. Juncker said: “My aim is a deal by the end of the week. We are working day and night for this.”
Finance ministers from the euro group of countries will meet again tomorrow to assess whether their demands have been met and to check whether the Greek budget figures add up.
Prospects of a breakthrough after months of argument prompted Greek bank shares to rise by 20%. The rally on the Athens market was mirrored at other European bourses, with shares in Germany, France and Spain all up by almost 4%.
In Athens, government officials said Tsipras would continue to press for a solution that was both comprehensive and viable. Speculation that a six- to nine-month extension was now in the offing was dismissed as ultimately unworkable.
“For it to be durable it has to be of long duration and it has to tackle the issue of our country’s unsustainable debt,” one official said.
“We are hoping that all this talk of prolonging the current [bailout] accord is just part of the other side’s negotiating tactics.”
The political opposition also warned against the perils of a short-term agreement on Monday – even if they also said an agreement was better than the alternative of no agreement and Eurozone exit. Leading figures in the world of industry and commerce – which, like the rest of the economy, has been brought to a standstill by five months of fruitless talks said merely prolonging the current bailout programme might ultimately prove devastating. An estimated 8,500 small and medium-sized businesses have closed since the start of the year.
For the second time in days, thousands of Greeks poured into Syntagma square in central Athens on Monday night to exhort the Tsipras government not to endanger Greece’s place in the Eurozone and by extension the EU. Unfurling a giant blue and white flag over the retaining wall of the Greek parliament, they chanted “Europe, Europe, we are staying in Europe.”
“Tsipras has to know that he got into power with 36% of the vote, he is not there with the support of all Greeks and he has absolutely no right whatsoever to take us out of Europe,” said Marietta Kontou, a shop owner, insisting it was outrageous that the leftist-led government had opened Greece’s membership of the euro to question at all. “Europe is where this country belongs. It is very important that we belong to the west.”
Any deal between Greece and its creditors must start with a budget surplus target. That is the difference between tax income and government spending, expressed as a proportion of Greek GDP. The more surplus money that is generated every year by tax income, the more can be used to pay down the €240bn (£172bn) that Athens owes its troika of creditors.
Alexis Tsipras is offering to achieve a 1% surplus this year, 2% next year, and 3% in 2017. It is a tall order for a country that has lost a quarter of its national income since the financial crash, has to cope with an unemployment rate of 26% and is owed €76bn in unpaid taxes.
Those creditors – the ECB, IMF and European the commission – believed Tsipras was offering insufficient cuts to meet the 1% target. The difference between both sides was worth a modest-seeming €2bn in government expenditure. The proposals lodged on Monday by Tsipras and his team after a hectic weekend of negotiations were an attempt to bridge that gap and centre on two key areas: pensions and tax.
The plan includes a restriction on early-retirement options from this year, saving €60m this year and €30m next year. The measure will accelerate a clampdown that was previously going to be phased in over several years.
An increase in pension contributions will raise €350m this year and €800m next year, while a higher health contribution from retirees will raise €135m this year and €510m in 2016.
A rise in VAT will generate €300m this year and €1.6bn in 2016.
Income tax rates remain intact, but a solidarity supplement on top of the main rate that was brought in after the crash is to rise, raising €220m this year.
Corporations are to be clobbered with a surcharge of 12% on profits above €500,000. Corporation tax also rises to 29% next year from 26%, raising €410m.