A bit of Greek clarity from an act of defiance

June 5, 2015

People make their way past a stencil by street artist Flip in Athens

Greece’s decision to delay a 300-million-euro payment to the IMF today and instead try to meet all June’s payments at the end of the month was probably an act of bravado for domestic consumption but it also clarifies things.

At the end of June, Athens will have to hand 1.6 billion euros over to the Fund, a bill that looks very tough to meet without outside help. Moreover, Greece’s international bailout expires at the same moment and if no cash-for-reforms deal is done by then, the remaining money cannot be disbursed. At that point, default would surely follow.

Because euro zone parliaments would have to ratify any agreement before funds can flow, an accord must be reached soon. June 14 is the latest deadline being bandied around but a number of those have been and gone already.

Greek premier Alexis Tsipras will brief his parliament later today on the latest state of play with the country’s creditors. His Syriza party is up in arms about what Greece’s lenders are demanding.

In a sign of accelerating efforts to bridge the gap, Tsipras, Germany’s Angela Merkel and French President Francois Hollande spoke late on Thursday via conference call, according to a Greek  official. Tsipras told the two leaders that the lenders’ proposal could not be a basis for a deal. He may return to Brussels for further talks shortly.

He left Wednesday night talks with senior EU officials in Brussels saying a deal was “within sight”. But while the European Commission said progress was made, the Greek government still rejects benefit cuts and tax rises the EU and IMF want before they release fresh loans to avert bankruptcy.

Athens put forward its own blueprint which essentially involves no more austerity. Some lawmakers in the ruling party have said Tsipras could call early elections or a referendum if he had to accept a deal that crossed Syriza’s “red lines”.

There is a big gap on the required economic reforms but specifically on the level of primary budget surplus required this year, the divide is narrow – the Greeks say 0.8 percent of GDP, its lenders want 1.0 percent. That represents a concession by the EU and IMF and shows there is a deal to be done.

On how to get there, the two sides are still far apart and because the logjam has seen Greece fall back into recession and tax revenues dwindle, the actions needed in the second half of the year to deliver even that smaller surplus look tough to swallow.

Sources familiar with the creditors’ plan said it demanded a litany of painful measures that will prompt howls of outrage in the ruling Syriza party:

– reduced spending on pensions by 1 percent of gross domestic product and a promise not to reverse any legislated reforms
– 1.8 billion euros – or 1 percent of GDP – to be raised by increasing value-added tax to 11 percent for items including drugs and 23 percent for items including electricity
– scrap a benefit for low income pensioners to save 800 million euros by 2016
– a hike in healthcare contributions by Greeks and a cut in the fuel subsidy
– a commitment to privatising Grid operator ADMIE, Greece’s major ports in Piraeus and Thessaloniki, the former airport complex of Hellenikon, Greece’s biggest oil refinery Hellenic Petroleum and Greek telecoms operator OTE, some of which have been staunchly opposed by Syriza.

Eurogroup chairman Jeroen Dijsselbloem said on Thursday that the gap between Greece and its lenders had narrowed and that Athens was expected to present alternatives to the lenders’ proposals within days.

The carrot being dangled is that if Greece does meet the lenders’ demands, or at least most of them, around 10 billion euros which was earmarked for Greek bank recapitalization but never used could be handed back to keep the government going over July and August when it faces even more hefty bills.

The big European data of the day, German industrial orders, showed a higher than forecast increase of 1.4 percent in April, largely on the back of strong overseas demand. That followed a 1.1 percent increase in March. Globally, the day will be dominated by the monthly U.S. jobs report due later.

French President Francois Hollande’s ruling Socialist Party holds its annual congress for three days from Friday. Various factions will seek to impose their policy line, a tussle that could expose tensions between hardliners and Prime Minister Manual Valls, who has espoused business-friendly social democracy with Hollande’s blessing. The odds are the party overwhelmingly backs the men in charge.

Ukraine’s finance ministry and a group of its creditors will hold a teleconference to discuss progress towards reaching agreement on restructuring $20 billion of Ukrainian debt. An agreement – which looks some way off yet – should trigger disbursement to Ukraine of about $2.6 billion of fresh credit from the IMF.

Yemen’s dominant Houthis have agreed to join United Nations-backed peace talks, a day after their opponents in the exiled government confirmed their attendance. A Saudi-led coalition of Arab states has been bombing Houthi forces for more than two months in an attempt to restore President Abd-Rabbu Mansour Hadi. Around 2,000 people have been killed and half a million displaced by the fighting.

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