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Greek debt plan seeks to address key sticking points

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(BRUSSELS) - Greece has submitted a new debt plan aimed at resolving the row between Athens and its European and IMF creditors, addressing key sticking points that have blighted months of talks.

Greece's proposals -- which were examined in Brussels at an emergency summit of eurozone leaders on Monday -- are focused on VAT rates, early retirement measures and tax hikes, and narrowing the country's budgetary gap.

BALANCING THE BUDGET

The state of Greece's budget no longer appears to be the major stumbling block that it once was.

The new proposals from Athens seek to close a gap of almost one billion euros between the creditors' demands for savings in the 2016 budget and the last offer Greece's leftist government made, which was rejected.

Anti-austerity Athens has conceded ground on pensions and defence spending but movement on VAT is still wanted by creditors.

The European Union and International Monetary Fund want Athens to run a current account surplus for several years, arguing that it is running a deficit again -- spending more money than it receives in taxation revenues.

The key method of measuring this is the primary balance -- which is the difference between revenue and public expenditure, excluding payments of interest on debt.

The EU and IMF are now asking only for a primary surplus target this year of one percent of annual gross domestic product (GDP), followed by two percent in 2016 and three percent in 2017.

However, with Greece's economy in free fall, hitting those targets would require an immediate budget saving of at least three billion euros ($3.4 billion) and potentially more. That is unthinkable unless the economy grows strongly for a sustained period of time.

Athens wants a much lower surplus target of 0.6 percent this year that would require no extra saving, but has now budged, signalling it would accept 0.75 percent and even higher.

VAT

Creditors remain dissatisfied at Athens' plans for value added taxation which is levied on goods and services. They are still at loggerheads over the size of the increase and which sectors it will affect.

Greece is counting on a big VAT hike to hit its budget targets, and in the new proposals it has outlined further adjustments to VAT that could bring some two billion euros in additional revenue to state coffers, media reports said.

Athens would be prepared to raise the VAT on hotel stays from 6.5 percent to 13 percent, but the key issue of lifting the rate on restaurants from 13 percent to 23 percent has not yet been resolved.

At the same time Greece has maintained the 13-percent VAT rate on electricity, a "red line" for the anti-austerity government which has resisted creditors' demands to ramp this up to 23 percent, citing serious social implications.

The government has also agreed to limit the scope of its lowest VAT rate of six percent to medicines, books and theatre tickets.

More tax hikes, after five years of raising rates, have also been proposed for business profits above 500,000 euros, instead of one million as originally planned, and on incomes over 30,000 euros.

PENSIONS

Radical leftists in Athens have proposed various measures to raise another two billion euros via pension reforms.

Under the new plans, the elimination of early retirement would begin in 2016 instead of progressively. In addition, supplementary pensions above 1,000 euros will be cut.

Greece's public retirement system is running a massive deficit and the IMF especially is insistent that Athens put its books in order.

The creditors demand that Greece phase in reforms immediately that would yield up to 900 million euros in savings this year and 1.8 billion euros in 2016.

To achieve this, the creditors argue Athens must close the door to early retirement and end a raft of special benefits. IMF chief Christine Lagarde refutes the Greek accusation that these demands target the poor.

The government wants to delay the zero deficit target in the retirement system until 2017 and rules out any pension cuts for the needy, a requirement that Prime Minister Alexis Tsipras underlines repeatedly.

DEBT

Crucially, the proposal made by the creditors makes no reference to Greece's mountain of debt, which currently stands at 180 percent of GDP, nearly double the country's entire economic output over one year.

The Greek government insists the issue cannot be excluded and demands that the ECB and the EU's rescue fund, the European Stability Mechanism which holds a huge chunk of the debt, find a solution.

But forgiving Greek debt is unacceptable for eurozone governments that control the ESM, despite repeated warnings by the IMF the burden is unsustainable without it.

EXTENSION

Greek officials said they were discussing a possible extension of their existing bailout with the EU until March 2016, which would give more time to work out a long-term solution.

The extension would be the third for Greece since December and align it with the end of the IMF's own bailout agreement with Athens, which has run in tandem with the EU and ECB programme.

But an EU official said that the 7.2 billion euros still remaining in the bailout would only be enough to keep Greece out of default until the end of this year.


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