Where Athens and creditors stand following Eurogroup agreement

Where Athens and creditors stand following Eurogroup agreement

 

Following Monday’s Eurogroup meeting in Brussels, several conclusions could be drawn as to what the Greek government took away and what remains to be done in terms of the review of Greece’s bailout program.

It is now clear that there was no “political agreement” to wrap up the review as the Greek government hoped. Instead, there was merely an agreement for the “quartet” to return to Athens next Monday.

If a Staff Level Agreement is reached with the “quartet”, it may be approved by a Eurogroup meeting on 20 March (at the earliest). This is the only way bailout funds could be disbursed to Greece.

According to latest information, the government is discussing with creditors the possible slashing of the income tax-free threshold and further cutting pensions – to save an additional 2.7 billion euros. These measures must be agreed upon and legislated imminently. They will take effect – most probably – in January 2019.

Reducing the tax-free threshold (to 6,000 euros from 8,600) will impact on those living on low wages and low pensions (the additional burden is estimated to be approximately 700 euros/year). Pension cuts could be as deep as 35% in some cases. In any case, they will range from 60 to 720 euros per year.

Other measures and reforms on the table include: Wrapping up a handful of major privatizations; collective bargaining, which the government wants to re-establish as an obligatory process for negotiations between employers’ groups and unions; liberalization of the energy sector; implementing OECD recommendations to boost competition; legislation aimed to control health-related spending; the out-of-court framework to settle outstanding debts and arrears; corporate governance for banks;  opening up “closed professions”; legal revisions for land uses (zoning) and the project to establish a unified, digitalized land registry; reform of the special salary scales for law enforcement and military personnel; modernizing and expanding the framework of online auctions for foreclosed property; political parties’ financing reform.

The government is attempting to “spin” the measures it is about to agree, arguing that “for every euro of tax imposed there will be a corresponding tax cut as of 2019”. However, this is conditional on 3.5% primary surplus targets being hit. Also, the IMF and the government appear to be in disagreement over the scope of potential tax breaks i.e. the Fund prefers cutting VAT from 24% to 23% or slashing corporate tax while the government wants to reduce property tax.

In order to explain yet another turnaround and agreement to take new measures to the electorate and Syriza MPs, the government is using the term “neutral fiscal balance”. Senior government officials are already laying the groundwork in order to bring fresh measures to parliament saying that the government may have to accept new measures “for the good of the country” as the protracted negotiations to conclude the review are having a negative impact on the prospects of economic recovery.

In April 2019 Eurostat will announce its report on the Greek economy for 2018. If the primary surplus posted is below the 3.5% target the “fiscal cutter” will kick in, bringing about wage and pension cuts.

As things stand, no new measures will be take effect in 2017. The IMF has, however, proposed that a few fiscal measures are implemented in 2018, such as cutting the income tax-free threshold. The issue will be discussed in coming days.

It is not yet clear if the IMF will remain in the Greek program as a lender. In order to persuade the Fund to remain in the program, European creditors may need to outline mid-term debt relief for Greece in greater detail.

Athens has almost definitely missed an opportunity to be included in the ECB quantitative easing program by 9 March when the ECB Board next meets. If there is an agreement to conclude the review at the 20 March Eurogroup (or even the 7 April Eurogroup meeting in Malta) with the IMF on board, the ECB could include Greek bonds in its scheme on 27 April./ΙΒΝΑ