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Greece resumes its talks with the creditors

26 September 2015 / 16:09:57  GRReporter
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After the pre-election period is over, this week sees the start of the great battle between the government and the lender's institutions for the successful completion of the first review. Initially, the budget will be at the epicentre as the two sides have divergent views on it, and the creditors believe there is a need for new measures. But the overall package will be much tougher because it will include a reform of the pension system, bank recapitalisation, and structural reforms in all sectors of economy and society.

According to Kathimerini's sources, the first technical teams of the institutions will come to Athens this week to examine the progress on the financial measures. They will actually be the first bone of contention. The government says the budget is being implemented smoothly, and there has even been some over-achievement on targets. Creditors, however, worry that the adopted measures are not fully implemented, and therefore a new intervention is needed. Each side has already shaped up its own arguments:

  • Greece's economic team argues that since all the measures voted in August have been applied, it is very likely to exceed this year's budget surplus target of 0.25% of GDP. The ministry of finance believes that the primary balance will be around zero or even boast a slight surplus. Good performance on the measures might help achieve the 2016 target of a 0.5% surplus.

These estimates will be reflected in the 2016 draft budget to be lodged with parliament on 5 October. It will also include the revised estimate of this year's recession. The memorandum envisaged the economy would shrink by 2.3%, but recent developments have suggested that the slowdown might be in the order of 1% -1.5%.

Given these estimates, the government will be trying to stave off the creditors' pressure for new measures.

  • The institutions claim there are measures, which have been formally adopted but not implemented. For example, an increase in agricultural fuel tax was voted in August, but so far no decision to implement the measure has been taken. The VAT increase for the Aegean islands has not turned into reality either. There are outstanding issues in the pension sector as well.

In this context, if they were to assess whether expected revenues warrant the achievement of financial targets, the creditors would like to see the measures being applied for real. According to sources, even if all of them were duly implemented, it would have provided no certainty that the targets are achieved altogether. Let alone have them over-achieved as the Greek side maintains.

Therefore, because of time constraints, the first team visiting Athens will deal with financial issues.

The two sides have differences on yet another set of measures. The memorandum has three additional categories, which must be implemented:

1. Measures to be applied in 2016, but which have not been specified. Most important of all is the new reform of income taxation. For the time being, it is not clear what kind of changes will be attempted, but they will have to boost revenues. Reportedly, despite the lack of a written accord on this issue, the two sides have agreed that the reform should bring into the government coffers around 1% of GDP or about €1.8 billion.

Some other roughly agreed measures include:

  • increase in the rate of taxation from 13% as it is today, to 20% in 2016, and to 26% in 2017;
  • a tax on television advertising, a 30% tax on gaming machines (VLTs), increasing tax on rentals from 11% to 15% for income up to €12,000 per year, and from 33% to 35% for income over €12,000;
  • reduction of defence spending by €100 million this year and €400 million in 2016;
  • tightening the screws on heating aid so as to halve these expenses in 2016 (this will lead to savings of €200 million).

2. Measures designed to make up for losses resulting from judgments of the Supreme Administrative Court on pensions. They are estimated at €2 billion, although the government has been trying to prove they are necessary for the robustness of the pension system.

3. Measures worth 0.75% of GDP in 2017 (around €1.5 billion) and 0.25% of GDP in 2018 (about 500 million). These are unspecified measures in the memorandum supposed to be shaped into being at a later stage.

Within next week, the list of necessary actions to be taken by early November will be made to underpin the wiring of €3 billion (2 billion by mid-October and 1 billion by early November).

The list proposed by the eurozone includes almost all measures, which must be initiated by November, and are included in the memorandum. The coming days will see them finally determined, and the list will be discussed at Eurogroup on 5 October.

Within the first review, the government will have to find agreement with the creditors on a number of controversial topics:

• bank recapitalisation, settlement of bad loans, Financial Stability Fund management

• Opening of the liberal professions

• Structural reforms as per the OECD toolkit. Athens must fully implement the two toolkits, as well as prepare a third package of changes.

• privatization and the new privatization agency.

• group lay-offs and collective agreements in employment.

• completion of the pension system reform.

Tags: creditors institutions negotiations measures memorandum review
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