Friday, 26 June 2015

Creditors present Greeks with a compromise

Thursday's Eurogroup, the fourth in a week, met to discuss a so-called "feasibility blueprint", submitted to ministers after morning consultations with the Greek delegation.  A copy was obtained by the Financial Times.

The Eurogroup ended inconclusively and agreed to reconvene on Saturday. Greek finance minister Yanis Varoufakis explained this as follows:

"The Eurogroup had two texts, one by institutions and a Greek one, which was a modified version of the last institutional document we received late last night. Both were discussed. The interesting thing is that quite a few colleagues disagreed with and criticised the institutional text as well as ours. So we agreed that the discussion will continue today and tomorrow with a view to convergence between the texts, but also within the Eurogroup as a whole."

Yet on Friday the two sides considered aborting the deal and going for a late November discussion instead. According to this scenario, creditors would finance the debt and Greece would finance its domestic needs.

Greece rejected the postponement idea, but the likely reason for this option is that while the ruling Syriza and creditors moved closer to each other's positions throughout the week, there have been rumblings of discontent among party insiders back home.

General secretary Tasos Koronakis was quoted as telling a convention of the Political Secretariat on Wednesday that he and many others did not agree with the compromise proposal the government submitted on Monday. At least half a dozen Syriza MPs have also openly rejected the deal under discussion.

A deal in Brussels would be pointless if Prime Minister Alexis Tsipras could not pass it at home. Even worse, it might pass with opposition support, splitting the ruling party and triggering an election. Renewed political instability in Athens is probably the last thing creditors want.

Why does much of Syriza reject the Brussels discussion as moving in the wrong direction? Because the government has shifted a great deal in its efforts to find a solution, suggesting that those efforts are in earnest.

Government spending on pensions (its biggest budget item) and income from consumer tax, or VAT (its biggest earner) were the main points of contention.

Pensions

Greece has been resisting creditors' proposal to save 1 percent of GDP, or 1.8bn euros, but it has shifted position significantly this month.

Its June 3 proposal made extremely light cuts, saving nothing this year and 71mn euros next year. These savings rose gradually to half a billion in 2021.

Given that the state will spend 16bn euros this year shoring up the pensions scheme, these proposals clearly did not present credible savings. They also preserved an unfair six-year difference in average retirement ages between the public and private sectors, narrowing it to three years in 2040.

The proposal Greece submitted on Monday suggested more rapid phasing out of early retirement in the public sector, bringing savings of 665mn this year and 1.8bn next according to documents leaked to the Wall Street Journal.

Discussions were also ongoing about how much to increase workers' pension contributions.

Thursday's Feasibility Blueprint allows the Greeks to save just 1/4 to 1/2 of a point of GDP this year, rising to one percent next year. The Greek side has already agreed to this. The phasing out of a pension subsidy for low-earners in 2019 is also a concession that should appease the Greeks.

Of course there are points that will stick in Syriza's throat. The Blueprint still wants supplementary pensions to be self-financed, not shored up by the state. This means that they will drop steeply because pension funds currently have low levels of contributions due to high unemployment. But they average 160 euros, so the amount being cut is reasonably small.

The phasing out of all early retirement excepting arduous professions and single mothers will sting Syriza's public sector voter base, where preferential treatment still exists. But the Blueprint gives Syriza until 2022 to achieve this.

This is, in effect, an invitation for Syriza to start retiring people out of the public sector on their grandfathered entitlements quickly. It is unfair to subsequent generations, but it saves public money if it slims the state by several hundred thousand, and does Syriza an enormous favour by allowing it to keep a core constituency happy. Creditors originally insisted on equal retirement rights immediately.

VAT

High unemployment and shrinking incomes mean that Greeks are paying less and less direct income tax. Last year the state brought in just eight billion euros from individuals. Indirect taxes have been raised since the beginning of the crisis to compensate. Last year VAT brought in 12.5bn, or 29 percent of all tax income.

Creditors believe Greece is losing income from poor implementation of VAT. They want Greece to target another 1 percent of GDP (1.8bn euros) in extra VAT income beginning this year.

Their proposal has been to consolidate three current tax brackets into one - the highest, 23 percent - for most goods.

The Greek position has shifted to compromise. Whereas on June 3 Greece proposed raising no more VAT revenue than forecast this year, on Monday it agreed to an extra 680mn euros this year and 1.3bn next, coming reasonably close to the target.

Thursday's Blueprint preserves the three-bracket structure, with medicine and six percent and utilities at 13 percent. These are important concessions. Drastic scaling back of national health spending has seen the government's pharmaceutical spending alone drop from 5.5bn euros a year to 2.5bn since 2010. This means more out-of-pocket spending on medicines by both insured and uninsured Greeks.

Utilities are also a sensitive area, because an estimated 300,000 households have had their power cut off. Syriza's first bill in February earmarked 200mn euros to subsidise their electricity bills, rent and food.

The sticking point for Syriza will be that it hikes hotels and restaurants by ten points to 23 percent. The hospitality industry generates an estimated fifth of Greece's GDP, and successive governments have fought hard to preserve VAT at low rates there.

Businesses

The trouble is how to make up the difference. The ruling leftists had proposed punishing businesses by raising corporate tax from 26 percent to 29 percent, and imposing a 12 percent one-off levy for companies with profits of half a billion or more.

The International Monetary Fund's Christine Lagarde rightly objected, saying that this would close many enterprises and lead to recession. She said the proposals "fall short of everything one should expect."

The Blueprint raises corporate tax to 28 percent but scraps the 12 percent levy.

However, the Greek proposals do not cut government spending or propose any growth measures. And creditors have not confirmed that Greece would receive a 35bn euro growth dividend from the European Commission - a carrot Commission President Jean-Claude Juncker has held out.

Perhaps the most troubling aspect of the Blueprint to corporate Greece is that it introduces a commitment to "increase the rate of tonnage tax and phase out special tax treatments of the shipping industry."

Shipping is Greece's flagship industry globally, responsible for an estimated 7-10 percent of Greece's GDP. But Greek shipowners are already withdrawing vessels from the Greek shipping registry because of uncompetitive mandatory salary levels and social security spending for Greek officers. Their main attraction to Greece, apart from the fact that they are Greek, is a favourable taxation regime begun in the 1950s and extended in the 1960s. Removing that could prove short-sighted and ruinous to the Greek economy over the medium term.

War of words

Wednesday's talks between Greek Prime Minister Alexis Tsipras and Christine Lagarde, head of the International Monetary Fund, Jean-Claude Juncker, European Commission president, and Mario Draghi, the European Central Bank chief, ended without agreement, as did a Eurogroup meeting.

Greek premier Alexis Tsipras spoke at the close of talks of a new proposal from creditors, which "shifts the burden onto salaried workers and pensioners in a socially unfair way." He said "the Greek side cannot agree to such a direction."

Earlier in the day he accused creditors of either not wanting a solution or "serving specific political interests" at home - a suggestion of collusion with the conservative opposition to scupper a Syriza deal.

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