Greece and their International Creditors Still Seek to Strike a New Deal for Repayment

By on June 3, 2015

Greece and their International Creditors Still Seek to Strike a New Deal for Repayment


The international creditors of Greece agreed to a tough deal but made some concessions in a new proposal expected to be presented Wednesday to Greek Prime Minister Alexis Tsipras, as negotiations on the country’s bailout headed toward a showdown.


Mr. Tsipras will discuss the terms of new repayment plan with European Commission President Jean-Claude Juncker in Brussels. An agreement on overhauls and budget cuts that the left-wing government in Athens has to implement in return for sustained help from the Eurozone and the International Monetary Fund would fend off a default and an exit of Greece from the Eurozone.


Mr. Tsipras’s visit comes after Greece’s international creditors agreed Tuesday on the outlines of a bailout deal to present to Athens, a move aimed at breaking the snail pace of the current negotiations. Their proposed deal was drafted after key leaders, including German Chancellor Angela Merkel, met in the German capital of Berlin late Monday to overcome their own divisions on how to keep Greece from bankruptcy.


“We are a few days, or I could even say a few hours, away from a resolution,” France’s president, Francois Hollande, said at a conference in Paris.


See full breakdown of Greece’s Debt and Repayment plans.


The proposal calls for primary surpluses, the excess of revenues over expenditures before interest payments are made of 1% in 2015, 2% in 2016, 3% in 2017 and 3.5% in 2018, according to an official with knowledge of the proposal.


These rates are lower than the targets suggested in previous deals of 3% in 2015 and 4.5% from 2016, which has been extended until the end of June. Still, they are higher than what Athens was hoping to achieve and would force the government to make more spending cuts amid a sluggish economy, risking a major backlash from its leftwing party and voting population.


One key target of additional cuts under the proposal is Greece’s pension program, which Mr. Tsipras and his allies had promised to shield from further cutbacks. Under the plan, Greece would have to reduce pension spending as of July, delivering savings of 0.25% to 0.5% of gross domestic product this year and 1% of GDP next year.


Greece’s creditors appear to have made some concessions on planned changes to the country’s labor market. The proposal foresees no further reduction to the number of public-sector workers. Instead of immediately pushing for new laws to make it easier to fire workers, the plan calls for a consultation that would revisit the framework for collective bargaining and collective dismissals. In return, Greece has to promise not to reverse previous measures to open up its labor market.


The new proposal also calls for higher rates on value-added taxes or VAT than the ones put forward by Athens in negotiations. Greece’s VAT system, which currently has many different rates, would be simplified to just two, 11% and 23%, which would bring in higher revenues. Greece has been pushing for a system of three rates, which European officials say falls short of the extra €1.8 billion ($2 billion), or about 1% of GDP, that creditors have been asking for.


In a press conference before leaving Athens, Mr. Tsipras said his government hadn’t received the proposal, and that he is visiting Brussels to discuss a plan by the Greek side.


“I’m certain that the political leadership of Europe will do what needs to be done. It will move toward realism,” he said.


“The leaders agreed on the need to have lower primary surpluses and to find an immediate solution,” a senior Greek government official said.


The policy conditions in the creditors’ proposal could prove extremely challenging for Mr. Tsipras to accept without sparking a rebellion within his ruling coalition. Members of his Syriza party are already organizing a meeting for Thursday to discuss the deal.


Greece, fast running out of cash, likely needs some sort of help by mid-June to repay a series of International Monetary Fund loans falling due. The country is believed to have enough cash to repay a €300 million payment due to the IMF on Friday. But European officials say Athens probably can’t meet further IMF repayments in June totaling about €1.25 billion unless it gets fresh financing in some form.


Without a large subsequent cash injection from lenders, Greece faces a debt default in late July that could ultimately push the country out of the euro.

Greece’s Energy Minister Panagiotis Lafazanis, who leads Syriza’s hard-line faction told local Greek radio that the agreement between Greece’s government and its creditors “will either be compatible with the party’s program or will not exist.”

Mr. Juncker is also meeting Jeroen Dijsselbloem, the Dutch finance minister who leads meetings of the eurozone ministers, a European official said.