In what has been a marathon of negotiations, talks between Greece and its international lenders (European Commission, European Central Bank, European Stability Mechanism and the International Monetary Fund) resulted in a cliffhanger, as talks paused late on Tuesday without the two sides reaching an agreement over the country’s bailout review.
The lenders are set to return to Greece on 18 April, immediately after the IMF spring meetings in Washington (which representatives of both parties will attend, informally resuming talks there), to continue negotiations before a scheduled meeting of eurozone finance ministers on 22 April.
“The Greek government and the four institutions agreed there was progress,” has been the official line, as stated by Greek Finance Minister Euclid Tsakalotos.
What have been the debated issues that prevented an agreement?
The two sides didn’t seem to reach a deal on pension reforms and regulating non-performing loans. Both sides said that progress had been made but there were still gaps to bridge. The Greek side tried to dismiss concerns, with officials talking of “small details on the fiscal side of things” that need to be settled. Creditors insist on a Greek commitment to budget savings, centered on overhauls of pensions and income taxes, worth about €5.4 billion, or 3 per cent of Greece’s gross domestic product.
Greece has long been reluctant to implement such unpopular measures, but lenders also seem to disagree. The review has dragged on for months mainly due to a disagreement among the lenders over Greece’s projected fiscal shortfall by 2018 – initially seen at three per cent by the EU, one per cent by Greece and 4.5 per cent by the IMF.
During the past week, an agreement has been reached, setting the baseline at three per cent, although the EU and the IMF are still at odds on whether Athens could achieve a 3.5 per cent primary surplus (i.e. budget balance before debt service payments) in 2018. The IMF, which will decide whether to co-finance Greece’s third bailout after the review and in light of how much debt relief Greece receives, believes Athens will miss its 2018 surplus target and settle at 1.5 per cent, even if it implements measures worth three per cent of GDP.
EU institutions, on the other hand, insist that the target is feasible. According to various sources, most issues seem to remain open at the moment.
Where exactly is Greece now, in terms of deficit and projected surplus?
Current review projections show a primary deficit of 0.5 per cent this year for Greece, a surplus of 0.25 per cent in 2017 and a primary surplus of just 1.5 per cent in 2018.
According to the IMF, these figures reflect reform fatigue after five years of adjustments and social pressures in Greece due to high unemployment, which rose to 24.4 per cent in January. Projections also expect an average rate of economic growth of 1.25 per cent for the long term, lower than its previous forecast.
Was the issue of debt relief discussed?
The IMF has long been pressing on the issue, and during this round of talks insisted that Greece’s European partners grant Athens substantial debt relief, the size of which is connected to that of the bailout loan.
“Despite generous concessional official financing and further reform plans … debt dynamics are projected to remain highly unsustainable,” the IMF stated in a draft Memorandum of Financial and Economic Policies (MFEP), compiled during the review. “To restore debt sustainability, in addition to our reform efforts, decisive action by our European partners to grant further official debt relief will be essential.”
This is a win for the Greek government, which has been focusing on a possible debt relief that would allow for it to be deemed viable.
On the other hand, Greece has aimed to exclude the IMF from the program which is not a possibility now; the IMF’s inclusion is made clear in the papers.
Wait. So now there is a new memorandum?
There has been a leak of two documents, that seem to outline a new set of measures that the Greek government should implement; one of them is a draft version of a technical ‘Memorandum of Understanding’ penned by the EU, that examines the obligatory structural reforms and their deadlines. Both texts offer specifics on the policies agreed by Greece and its lenders last summer, so they are not a ‘fourth memorandum’ so much, rather a new version of the third one.
The draft of the agreement seems to suggest serious concessions on behalf of the Greek government, as it covers the vast majority of measures that were left out of the previous bailouts. According to it, the conditions for receiving the loan see to a reduction of the deficit of 2016, equivalent to 0.75 per cent of Greece’s GDP, through revenue generated by the upcoming measures. It also sets other “ambitious, yet realistic” targets, which could be met by the imposition of measures that would save the equivalent of 2.5 per cent of GDP by 2018, such as reforms to the Greek pension and tax systems, as well as the wages of public sector workers.
A special emphasis is given on revenue collection with the establishment of an independent revenue agency, contrary to the government’s previous plans for it to be supervised by the Ministry of Finance and in the context of safeguarding financial stability, the Bank of Greece will be granted additional supervisory powers over Greek banks, including the monitoring of solvency and liquidity and the assessment of their performance.
The agreement explicitly sees to readjustments of the program’s goals so as to offset the fiscal impact of the refugee issue, but it remains a question whether such major changes can be implemented amidst an already tumultuous situation.
What kind of pension reforms are suggested?
Pensions will be recalculated, introducing a national pension of €345 a month for 15 years of documented labour and contributions and €384 for 20 years. Τhe poor pensioners solidarity benefit, EKAS, will be gradually phased out, to be abolished by the end of 2019, along with any other additional subsidies. The savings from this process will be directed towards the introduction of a Guaranteed Minimum Income in June, a measure that has been advocated by various political parties in recent years.
To tackle further pension fund deficits, Greece should implement measures worth another 0.5 per cent of GDP but without including any more cuts to its main pensions which would be frozen.
The SYRIZA government has been reluctant to agree on this reform, as it does not want to hurt the country’s 2.7 million pensioners any more, having seen their monthly stipends cut 11 times since 2010.
Are wages also being reduced?
SYRIZA can officially bury its plan to reinstate minimum wages to pre-crisis levels. The draft binds the government to the legislation passed in 2013, specifically prohibiting “a return to past policy settings”. Labour issues have also entered into the agreement. A new Labour Law Code has to be implemented by the end of 2016, preceded by the government’s commitment to line up legislation on collective dismissals, strikes and bargaining with “best practice in the EU”.
Does this mean lay-offs in the public sector?
This is not clearly stated, but a new framework for the civil service is bound to be established. It includes performance assessment for public sector workers, reduction of wages and benefits and new law, regulating the way managerial positions would be open to outsider contestants.
How will the taxation system be affected?
Readjusting tax income brackets and lowering the tax-free threshold was discussed. The ‘new’ memorandum draft suggest a vast reform of personal income taxation in order to yield profits equal to one per cent of Greece’s GDP, as it will broaden the tax-paying base of wage-earners, 55 per cent of whom are now exempt from any tax.
The tax-free income threshold will be lowered to €8,812 p.a. (it currently stands at €9,545). A higher tax rate will be imposed on electricity and other utilities, while books, magazines and entertainment services will enter the middle strata of the VAT scale. ENFIA, the controversial housing tax that was introduced in 2014 will be restructured, so as to balance the loss from the coming readjustment of zone prices that aims at reflecting current market values for real estate. The farming industry will now be taxed on the sum of the farmer’s income, including subsidies, and the definition of the professional farmer will tighten for tax purposes.
What about the ‘red’ loans?
Non-performing loans, claim a large part of the draft, with lenders urging for the liberalisation of the loan market as part of measures to reduce the volume of ‘red’ loans. Athens is to amend its legislation to allow the sale of non-performing and performing bank loans by non-banks “freely and immediately”.
The according legislation should be passed before 2017 and implemented gradually; the plan is for ‘red loans’ to be personified according to each debtor’s capability to pay, assisted by a framework for handling larger debts and a plan of reductions for social security debts.
Any progress on the privatisations field?
Privatisations also take a significant part of the drafted agreement. The IMF urges the Greek government to endorse immediately a plan of privatisation of 27 assets via the Asset Development Fund (TAIPED); in addition to that, a new independent authority, supervised by the EU, is to be established, managing assets that are to go through privatisation. Among the priorities is the finalisation of a series of deals, including the airport of Hellinikon, Thessaloniki port authority and the remaining obligations on the port of Piraeus and the 14 regional airports.
Privatisation plans are to be extended to include utilities; the draft implies the selling of the electricity provider’s stocks and a five-year business plan to be implemented on the two major water providers, for Athens and Thessaloniki.
Why is the April 22 deadline important?
Prime Minister Alexis Tsipras, who has a fragile parliamentary majority, is aiming for a compromise before the eurozone finance ministers’ meeting on 22 April. He hopes that a positive review will appease the markets and coax back investors, while a debt restructuring will convince Greeks that their sacrifices are paying off after six years of belt-tightening. It will also unlock €5 billion in aid. Athens needs the money to repay €3.5 billion to the IMF and the European Central Bank in July, as well as unpaid domestic bills. The EU, on its part, is keen on resolving the issue as quickly as possible, having to cope with a huge refugee crisis, with Greece at its epicentre.
How are things expected to unfold from now on?
Given the SYRIZA government’s fragile majority, a new round of social and political turmoil should be expected. The Greek government is trying to gain time, in anticipation of events, having already stated that it will submit two bills on tax and pension reform to the parliament next week, despite the deal not having been reached yet.
“The legislation will be passed by the end of the month and there is time to make adjustments,” said the Finance Minister, Euclid Tsakalotos, in a joint statement with the Minister of Labour, Giorgos Katrougalos, suggesting that Greece, being a sovereign country, will have “the last word”, even if it needs “to listen to the opinion of the institutions”.
This turn of events apparently took creditors by surprise as neither the two ministers nor Prime Minister Alexis Tsipras had informed them of their intentions. The usual procedure is for the content of the legislation to be agreed between the government and the institutions; then eurozone finance ministers give their blessing and finally, the bill is debated and voted on in the Greek Parliament.
Analysts see this unilateral move as an attempt from the Greek side to exert pressure on the creditors to wrap up the first review of the country’s third bailout by the end of the month so as to avoid the scenario of negotiations extending into June.
Sources: Athens Live, The TOC, The Press Project, Kathimerini