Greece submits new plan as two sides edge closer to deal

By Mehreen Khan, and Ben Wright 10 July 2015

Greek prime minister looks to have capitulated on key measures. Here's a breakdown of the proposals Athens has submitted in its final bid for a deal

The Greek government submitted its reform proposals to Brussels late on Thursday night, amid signs that the two sides in the negotiations were moving closer towards one another.

The proposals appear to go further than the austerity demands rejected by the Greeks in last Sunday's referendum. Quick calculations show they amount to around €13bn in fiscal measures in return for what could be a three-year loan worth €50bn-70bn.

Protestors are seen through a European flag during a pro-European Union (EU) rally at Syntagma Square in Athens, Greece (Bloomberg)

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The reform plan was approved by the Greek cabinet just hours before a deadline expired at midnight on Thursday.

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The letter was signed by Alexis Tsipras, addressed to Jean Claude Juncker, Mario Draghi, and Christine Lagarde, the managing director of the International Monetary Fund. They represent the three "institutions" that were formerly known as the Troika.

Should they be accepted by Greece's creditors, the proposals will be handed on to the euro group of finance ministers on Saturday. All 19 will have to give their unanimous approval before member states parliaments from Germany to Finland vote to approve a deal.

Here's a quick digest of the Greek proposals:

Primary budget surplus

The government has agreed to hit targets of 1pc, 2pc, 3pc, and 3.5pc from 2015 to 2018.

This is in line with what has already been proposed, but they are still very ambitious, particularly as economic activity is set to have deteriorated even further while the country is under capital controls and the banking system is temporarily shut down.

As has been the case since Greece's first rescue in 2010, the government will have to continually keep meeting these austerity targets to qualify for additional tranches of cash over the next three years.

VAT

The government will abolish VAT exemption for Greek islands - the 30pc discounted rate will go, as demanded by creditors but previously fiercely resisted by the government.

The proposals say they will start with "islands with the highest incomes and which are the most popular tourist destinations" first, but poorer, more remote islands will retain their exemptions for slightly longer.

Hotels will remain in lower 13pc bracket, but restaurants will be hit by the highest 23pc bracket. Books, medicines and the theatre will remain at a super reduced 6pc rate.

Greek farmers will also have all fuel subsidies abolished, another concession demanded by creditors in previous plans.

Importantly, the proposals note that these VAT measures will be reviewed before the end of 2016, if "additional revenues are collected through tax evasion" and other improved collection measures result in higher tax income.

Higher income tax

Should any of the proposals result in "fiscal shortfalls" the government is proposing hikes on income tax for the poorest earners. This would result in:

• incomes below €12,000 taxed at 15pc (up from 11pc)
• incomes above €12,000 taxed at 35pc (up from 33pc)
• corporation tax would also be increased to 29pc from 28pc

Pensions

Athens has agreed to phase out their supplementary pensions for the poorest by December 2019, rather than 2020. There is no mention of replacing them, and importantly, the top 20pc beneficiaries will also not be protected from the cuts.

Significantly, the government has also agreed to hike the basic pensions retirement age to 67 by 2022.

Interestingly, the government also seems to have agreed to nullify previous court rulings that have deemed the 40pc cut in pensions unconstitutional. The reforms read: "authorities will adopt legislation to fully offset the fiscal effects of the implementation of court rulings on the 2012 pension reform".

Defence spending

This will be cut by €100m this year and €200m in 2016. Creditors previously demanded a €400m cut next year, but Mr Tsipras seems not to have conceded to the plans in a bid to keep his right-wing nationalist coalition partners on board/

Corporation tax:

This will be raised to 28pc, rather than 29pc first set out by Athens. Creditors have been sceptical about the government's plans to raise revenues by hitting corporate profits. It seems that an earlier Greek plan to put a special levy on profits over €500,000 have been removed all-together.

Where's the debt relief?

There are no mentions of Greece's debt sustainability in the "prior actions" report laid out above. However, a government "non-paper" sent to parliamentarians makes mention of a commitment to re-profile Greece's debt after 2022.

That is the year Greece is set to pay back deferred loans from Europe's rescue funds. This starts with a €5bn repayment in December 2022.

It has been thought that the only way Mr Tsipras will be able to convince his electorate - who voted to rejected austerity terms very similar to this plan by 61pc - should he manage to get an explicit promise that some portion of Greece's €330bn will be re-profiled or restructured.

What happens next?

If it all goes to plan, then the Greek parliament will vote through the measures tonight. Mr Tsipras will likely be relying on his opposition parties to give their assent.

Then, finance ministers will unanimously have to give their assent to the Greek proposals on Saturday. This may then lead to the cancellation of an emergency leaders summit set for Sunday.

On Monday, all eyes would turn to the national parliaments of the Eurozone. Germany, Portugal, Slovakia, Estonia, and Finland will all have to pass the loan request through their legislatures with a majority vote.

If all these hurdles are cross, Greece may then secure the release of around €3.3bn in bond profits it is owed by the ECB. This cash would help Greece pay off a maturing bond to the ECB on July 20.

Greece submits new plan as two sides edge closer to deal - Telegraph