Tsipras Survives Austerity Vote, Paving Way for Loan Tranche

  • PM Tsipras secures support for more belt-tightening measures
  • Approval of reforms was prerequisite to unlocking funds

Greek lawmakers on Sunday approved additional austerity measures required to unlock more emergency loans from the euro area, ahead of a meeting of finance ministers that will assess the country’s compliance with its bailout program and determine the scope for debt relief.

Prime Minister Alexis Tsipras secured backing for a series of measures ranging from the taxation of clothing made from crocodile skin to the sale of bad loans to distressed debt funds, after winning the support of all 153 lawmakers from the governing Syriza and Independent Greeks parties in the 300-seat chamber. Syriza lawmaker Vasiliki Katrivanou, who voted against articles of the bill setting up a new privatization fund and creating a fiscal break mechanism, said in a post on her Facebook page that she will give up her seat in parliament. A runner up from Tsipras’s party in her constituency will replace her.

QuickTake Greece's Financial Odyssey

Opposition parties voted against most of the measures in the bill and accused Tsipras of ruining the country’s economy. Kyriakos Mitsotakis, leader of the main opposition New Democracy party, said he wants a new “truth agreement” with Greece’s creditors to foresee a lower budget surplus and more structural economic overhauls that will foster growth.

Mitsotakis, whose party leads in opinion polls, said Greece can deliver a surplus before interest payments equal to 2 percent of its gross domestic product, compared with a 3.5 percent target envisaged in the euro-area backed bailout agreement. Echoing similar comments from the International Monetary Fund and the Bank of Greece, Mitsotakis said the target of 3.5 percent is unrealistic.

Approval of the measures was one of the last actions Greece needed to complete in order to unlock the next tranche of emergency loans from the European Stability Mechanism, the euro area’s crisis-fighting fund. The Eurogroup of 19 finance ministers from the single currency bloc will convene May 24 to assess Greece’s compliance with its latest bailout agreement, which was struck in mid-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.

Creditors at Loggerheads

European creditors remain at loggerheads with the IMF about how much debt relief Greece will get for its pain. Euro-area states are resisting calls from the IMF to set less ambitious fiscal targets and hand Athens more generous repayment terms on its bailout loans.

Greece needs a solution with meaningful debt relief, U.S. Treasury Secretary Jack Lew said Saturday at the Group of Seven finance chiefs meeting in Sendai, Japan.

German Chancellor Angela Merkel wants an agreement among Greece’s creditors at the May 24 meeting in Brussels and before a May 26 meeting of the Group of Seven leaders in Japan, Sueddeutsche Zeitung reported. Merkel wants German Finance Minister Wolfgang Schaeuble to push for a deal that would allow the payment of Greece’s next tranche of aid, the newspaper said.

After legislating fiscal measures equal to 1.7 percent of Greek GDP in 2015, coalition lawmakers approved another 3 percent of GDP in tax increases and pension cuts this month, as well as an additional 2 percent of GDP in contingency measures to be triggered only if the country misses certain budget targets. Sunday’s package included among other things:

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

“Today’s parliamentary process leads us to the conclusion of the bailout review and to decisions on debt,” Tsipras said before the vote.

The bill lifted 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 thousands of real estate holdings, to an independent privatization fund. Membership in the board of the fund will be subject to approval by creditor institutions.

“The Greek parliament approved significant increases in taxes and reductions in pensions, which are likely to intensify the recession, and also approved selling a large swath of state assets to partially pay for its debt,” said Nicholas Economides, professor at Stern School of Business at New York University.

The IMF and the EU are too far apart on the issue of debt relief to converge by the May 24 Eurogroup meeting, Economides said, “therefore the likely outcome is an approval of an installment of the EU part of the Greek loan with the IMF’s position to be clarified at a later time.”

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