05 June 2015

Bruegel: Greece - where do we stand and what to watch

Redemptions postponed

Greece needs to repay about 1.5bn to the IMF in June, distributed as follows: 5 June: about EUR 300 mn on the 5th, EUR 335 mn on the 12th, EUR 558 mn on the 16th and EUR 335 mn on the 19th. Greece announced yesterday that it decided to bundle all this payments into a single tranche to be redeemed at the end of the month.

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Negotiation will most likely be centred around the points of contention included in the two different proposals (one from the creditors and one from Greece) that have been leaked in the past days to the press and that are reviewed below.

Different proposals

The latest creditors’ proposal was leaked and published by a Greek paper, while the Greek counter-proposal was published by a German paper . There are some important elements on which numbers have been put on paper, and these are likely to be the catalyst for the negotiations during next week.

• Primary surplus targets: this has been the bone of contention since the beginning of the negotiations. The second programme targeted a primary surplus of 3% of GDP in 2015 and 4.5% in 2016. The economic situation has deteriorated to the point that creditors now expect Greece to run a deficit of about -⅔% of GDP at unchanged policies. The leaked creditor proposal offers a target of 1% in 2015, 2% in 2016, 3% in 2017 and 3.5% in 2018 and beyond and ask that Greece introduces a supplementary budget for 2015 to meet the new target. The Greek counter-proposal asks for 0.6% in 2015, 1.5% in 2016, 2.5% in 2017 and 3.5% in 2018 onwards. [...]

• VAT reform: this is another contentious issue that is closely linked to the estimates of the fiscal gap, and therefore to the primary surplus negotiations. The current Greek VAT system includes 3 rates (6.5%, 13%, 23%). Creditors ask to move to a 2-rates system, with the two rates being 23% and 11%. The expected revenue increase from this change would amount to 1 percentage point of GDP, i.e. 1.8 bn euro. The Greek proposal keeps the three rates and envisage a reduction of the lowest and mid rates, to 6% and 11% respectively. On this issue the difference of views seems therefore quite significant, as the Greek proposal  goes in the opposite direction of the creditors' one. [...]

• Solidarity contribution and corporate tax: absent any increase in the VAT rates and therefore any additional revenues from that source, the Greek proposal envisages an extraordinary levy on large corporate profits (which would yield 1bn in 2015), a solidarity contribution (yielding about 220/250 mn in 2015 and 2016), a television advertising tax (100 mn in 2015 and 2016), other measures on television licences and station (340 mn in 2015), luxury tax (30 mn in 2015 and 2016) and other tax revenues (expected 120 mn in 2015 and 90 mn in 2016).

• Privatisation: creditors’ offer include a target of 22bn by 2022. The original target in the second programme was of 22 bn but by 2020, so the new proposal would stretch it over two more years. Yearly targets are still not set in the document. Greece has a very detailed table that totals at about 16bn from now to 2020, with the bulk of revenues coming in from 2020 onwards. The Greek proposal envisages privatisation revenues of 3.2 bn for 2015-2016 and 2.1 bn for 2017-2019. As a comparison, the original second programme had a more ambitious schedule expecting 5.6 bn in 2015-2016 and 5.9 bn in 2017-2019.

• Pension reform: remains a red line for both sides. The creditors ask for “further immediate steps to improve the pension system, that are expected to yield around 1 percent of GDP in savings annually in 2016-17, including significantly tightening early retirements rule, increasing health contribution for pensioners, and phasing out the non-pension solidarity grant”. By September 2015, Greece should also “legislate further to establish a closer link between contributions and benefits and integrate funds”. The Greek proposal includes a gradual phase out of early retirements over 2016/2025 and consolidation of social security funds into three, but still keeps in the suspension of the “zero-deficit clause”.

• Labour market reforms: are probably the most red among the red lines, at the moment. The Creditor ask for a Greek commitment that “important reforms under the programme [...] will not be reversed”, and in particular that “no changes to the current collective bargaining framework will be made prior to end-2015 and any changes to the legislative framework will only be adopted in agreement with the EC/ECB/IMF”. the Greek document state that “the Greek government will reinstate collective bargaining procedures, similar to existing arrangements in other EU countries [...]”  and gradually increase the minimum wage level and salaries for workers in the private sector until the end of 2016 back to the 2010 level (later they should be “freely negotiated within the context of collective bargaining”).

Restructuring plans

So,  to sum up. Greek negotiations will continue next week, after Greece asked to bundle all June IMF payments at the end of the month. In the meantime, the finding of a common ground between Greece and its creditors is not yet in sight. The primary surplus issue is where positions seem to have converged the most, with the creditors moving significantly closer to the Greek position. [...]

The negotiations over next week will be further complicated by the fact that the Greek proposal includes a section on the restructuring of its debt vis-à-vis the creditors. The details of the plan have been clarified in another leaked paper, which was published by the FT this morning. Many of the restructuring elements had been hinted at or heard before, during these months of negotiations: the plan would include (i) a buyback of the debt owed to the ECB with a ESM loan; (ii) IMF partial buyback with SMP profits; (iii) additional re profiling of the Greek Loan Facility; (iv) splitting EFSF loans in two and substitute half with a perpetuity.

None of these seems to be politically acceptable at the moment: IMF has previously appeared in favor of debt relief, provided it is done on the EU side of Greek debt; the GLF and EFSF terms have already been eased substantially and the perpetuity idea looks hardly digestible in Berlin; the ECB president Mario Draghi said yesterday that the ECB expects timely and full repayment of the SMP; and political support for the ECB/ESM swap idea looks elusive. Given the postponement of IMF payments, the hard deadline becomes the  redemption of debt due to the ECB in July. But for the agreement to be signed off nationally and money to be disbursed on time, a deal should be reached sooner. Time is running out, and options would start to look scarce, even to the most resourceful Ulysses.

Full article on Bruegel

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