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What Are the Issues Holding up a Greece Deal?

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Greece Debt Crisis

What Are the Issues Holding up a Greece Deal?

June 24 2015, 01.58pm GMT

STOCK.com

Reports on the meeting, which took place on Monday between the eurozone finance ministers and the Greek Prime Minister, indicate what is called a narrowing of positions in political talk.

This really means that concessions have been made by one or both of the parties concerned and has raised international hopes that a deal is in the offing. In this case, the concessions were made by Greece with new proposals coming forward from Prime Minister Tsipras.

The importance of a successful conclusion to the impasse to financial markets is reflected in the fact that stock markets in Europe and the U.S. rallied after the news broke. The reality of the situation is that while the eurozone ministers described the new proposals as a “positive step in the process”, a deal could still be a long way off.

There are two main aspects to the new proposals from Greece, both of which are an attempt to come closer to the eurozone austerity demands which were totally unpalatable to the Greek electorate that swept the Syriza party, led by Alexis Tsipras, to power.

The proposals from Greece would result in a saving of 2.7 million euros or 1.51% of the Greek GDP, up from the 2 billion euros in saving offered previously. The savings for 2016, in terms of the new offer, would save 5.2 billion euros, up from the original proposal of 3.6 billion euros. These concessions by the Greeks still fall short of the demands from the eurozone ministers.

The two main areas where savings have to be effected in order to satisfy the creditors are in a reduction of the pension commitment the government of Greece has made to its citizens and the other is an increase in the value added tax rate. Both parties agree that modifications are necessary, but the sticking point is the amount that the measures will save and the time period over which they are to be implemented.

Value Added Tax

The IMF and the euro grouping want Greece to increase VAT to an across the board flat rate of 23% with exceptions for food, medicine and hotels where a figure of 11% is mooted.

The original Greek position was for a VAT rate of 6% on medication, books and theatres, 11% on newspapers, food energy, water, hotels and restaurants with all other goods and service VAT rated at 23%.

The current proposal on the table from Greece is for VAT of 6% on medicine and books, 13% on energy and basic foods with all other goods and service attracting a rate of 23%. According to the proposal, this would provide additional revenue equal to 0.38% of GDP in 2015 growing to 0.74% in 2016.

The major sticking point on the VAT proposal revolves around energy where Greece wants to up the VAT rate to only 50% of the figure demanded by the creditors. The Greek power authority has reported that unpaid electricity bills have reached 1.9 billion euros in 2015, up from the 2014 figure of 1.7 billion euros.

Pensions

Pensions present a different problem as changes here affect the actual income of retired people in an ageing population. According to a Sky News report in 1971, 11% of the Greek population was over 65 while the 2012 figure had risen to 20% of the population. The number of pensioners was further increased when the government tried to reduce the public sector wage bill by offering early retirement to civil servants.

Greece appears happy to meet the demand for the retirement age to be increased to 67 and already has measures in place to that effect and has now also offered to curb early retirement.

The Greek government wants to increase pension contributions now and phase pension cuts over a three year period starting in January 2016, in this way safeguarding vested rights, according to the Greek newspaper To Vima. The savings with this plan would be 0.37% of the GDP for 2015, increasing to 1.05% of GDP for 2016.

This still falls short of the euro group demand of savings of 0.5% of GDP for 2015, increasing to 1% for 2016. The creditors want immediate action while the Greeks want to phase the changes in which might be more palatable to the electorate.

According to the Greek deputy prime minister, the proposed measures, should they be accepted by the creditors, would still have to approved by the Greek parliament which might be a hard sell for Alexis Tsipras.

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