Photographer: Yorgos Karahalis/Bloomberg

Greece Braces for More Austerity Amid EU-IMF Quarrel About Debt

  • PM Tsipras faces parliamentary test in belt-tightening vote
  • Creditors at loggerheads over debt-relief measures needed

Greek Prime Minister Alexis Tsipras braces for yet another vote on additional austerity measures, as European creditors remain at loggerheads with the International Monetary Fund about how much debt relief the country will get for its pain.

Lawmakers in Athens are scheduled to vote Sunday evening on an omnibus bill that includes measures ranging from the taxation of diamond dust and coffee to the transfer of thousands of real estate assets from the state to a new privatization fund. The debate will test the resilience of Tsipras’s three-seat parliamentary majority, as euro-area states resist calls from the IMF to set less ambitious fiscal targets and hand Greece more generous debt relief.

Approval of the measures is one of the prior actions Greece has to fulfill to unlock the next tranche of emergency loans from the European Stability Mechanism, the currency bloc’s crisis-fighting fund. The Eurogroup of 19 finance ministers will convene Tuesday to assess the country’s compliance with its latest bailout agreement struck in the summer of 2015. A positive assessment is also a condition for the Eurogroup to ease the servicing terms for over 200 billion euros ($225 billion) of bailout loans handed to the country since 2010.

‘Fully Committed’

The Greek government is “fully committed’’ to implementing the measures in the program and has taken a “very constructive” approach in talks, which in turn should lead to a successful negotiation, Eurogroup head Jeroen Dijsselbloem said in a Bloomberg Television interview Friday. “On the basis of that confidence, we’re now entering into a discussion about debt relief,” Dijsselbloem, who is also the finance minister of the Netherlands, said from the Group of Seven meeting in Sendai, Japan.

The Washington-based IMF proposed that interest and principal payments on Greece’s European bailout loans be deferred until 2040, and that maturities on those loans will be extended to 2080, according to a document obtained by Bloomberg News. Even though European counter-proposals acknowledge that current Greek debt dynamics are unsustainable, they fall short of what the IMF wants, according to people familiar with the discussions that took place between government officials over the past week. Instead, the euro area expects Greece to maintain a budget surplus level which the IMF has said is a “far-fetched fantasy.”

Creditor Quarrel

In the quarrel between creditors, Tsipras’s government has sided with the euro area, and the measures being put to vote on Sunday assume that Greece will achieve a surplus before interest payments equal to 3.5 percent of gross domestic product by 2018. “Despite the fact the IMF has been pushing for debt relief for Greece, they are still perceived by the Greek public as austerity hawks,” Eurasia Group analyst Mujtaba Rahman said in a note to clients on May 19.

After legislating fiscal measures equal to 1.7 percent of Greek GDP last summer, coalition lawmakers are being asked to approve another 3 percent of GDP in tax hikes and pension cuts this month, as well as an additional 2 percent of GDP in contingency measures, which will only be triggered if the country misses certain budget targets. Sunday’s package includes among others:

  • An increase in the standard sales tax rate to 24 percent from 23 percent, while the bill abolishes VAT discounts for some of the nation’s islands.
  • The introduction of taxes on coffee, e-cigarettes, fixed telephony, pay TV, and hotel occupancy and the amendment of property taxes.
  • Tax increases in heating oil, gasoline, diesel, car registration, gambling, luxury goods, alcohol, and investment vehicles.

The bill also lifts restrictions on the sales of bad loans to distressed debt ventures with the exception of loans backed by primary residences. The legislation also transfers most of the country’s state-owned assets, including equity stakes in banks, public utilities and listed companies, as well as real estate holdings to an independent privatization fund. Membership in the board of the fund is subject to approval from the European Commission and the ESM.

“The impact of austerity and declining popularity of the government will be reinforced by what will likely be a more constrained economic recovery if debt relief is indeed not granted,” Eurasia’s Rahman said in his note to clients. “Greece’s large debt stock, even if largely owed to the public sector, will negatively affect confidence, investment and job creation. As such, the economy will continue to present risks to Tsipras and his fragile governing coalition.”

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