Greece bailout: What to expect from the latest talks

Teams of officials from the EU and the International Monetary Fund begin work in Athens on Tuesday knowing that euro zone finance ministers and the international financial markets are keen for signs of progress on the next tranche of Greece’s €86 billion bailout.

At stake is whether a deal can be struck on tax and pension reforms that would clear a big obstacle to the IMF’s becoming a full partner in the bailout.

The euro zone is racing to secure IMF involvement, which some capitals see as essential for Greece to receive its next aid and meet a €7 billion debt repayment in July. They must flesh out a tentative deal reached by euro zone finance ministers and the IMF in Brussels last week.

At that meeting, Greek finance minister Euclid Tsakalotos dropped his opposition to calls from the IMF that Athens legislate now to approve tax reforms and pension cuts. They would kick in after the bailout programme ends in 2018.

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The IMF thinking is that the measures will help ensure that Greece sticks to a euro zone target of a 3.5 per cent primary budget surplus – that is, a surplus before debt service costs. The IMF has called for a widening of the tax base and pension cuts equivalent to about 2 per cent of Greece’s GDP.

The understanding reached last week is that, of the 2 per cent of GDP sought by the IMF, about half will come from pension cuts and the other half from lowering the threshold at which people start to pay income tax.

Tax changes

The tax changes are scheduled to take effect in 2019 and the pensions changes in 2020.

Both are priorities for the IMF, which says Greece’s income tax base is dangerously narrow, with more than half of households exempt. The IMF has also warned that it is unsustainable for Greece to maintain pension entitlements that are among Europe’s most generous.

The teams will also need to reach an understanding with Greece on future labour market reforms, including plans by the Syriza government to strengthen collective wage bargaining. Privatisation and energy market reform are also on the agenda.

IMF and EU bailout monitors say the reforms will help stabilise public finances. But they will mean political pain for Syriza. The measures amount to a restructuring of the budget that will create winners and losers, as Mr Tsakalotos has acknowledged.

The Athens talks are not guaranteed to succeed. Even if they do, Syriza needs to push the agreed reforms through parliament. Having vehemently promised to resist “one euro more” of austerity than was agreed in 2015, ruling party finds itself under pressure.

To sugar the pill, Mr Tsakalotos has secured an agreement that, should Greece overperform in reaching surplus targets post-2018, any excess money can be used to stimulate the economy. Cuts to business and property taxes, as well as VAT, are all ideas under consideration.

A deal on the policy reforms would be a breakthrough in efforts to bring the IMF into the Greek programme, a step that a number of euro zone capitals, notably Berlin, see as essential to maintaining flagging parliamentary support for the bailout.

This would be far from the end of the story. The IMF says that Greece’s debt will still be unsustainable. It wants guarantees that governments will be willing to offer Greece substantial debt easing once its bailout programme ends in 2018, although this would not need to include debt write-down – an absolute red line for euro zone capitals.

Debt relief

Euro zone finance ministers warn that they have insufficient political room for manoeuvre. Any further elaboration of debt relief would have to be agreed by the ministers, probably in a late-night negotiating session.

A final piece of the puzzle is that the euro zone and the IMF must agree on how long Greece must sustain a 3.5 per cent primary surplus after 2018.

Unless a deal can be reached on the policy measures, debt relief and surplus targets, the IMF will not join the Greek programme. This threatens to shatter political support for the bailout in Germany and the Netherlands, where the fund is seen as providing vital economic credibility.

Still, Greece’s third bailout programme has already ran for nearly 18 months without IMF involvement. And despite stern warnings of parliamentary revolts if ministers try t handing over more taxpayer money without IMF involvement, such an outcome can never be entirely ruled out.

The history of the Greek crisis has shown that red lines often melt once markets heat up. But it is a choice that finance ministers are desperate not to have to make.

Copyright The Financial Times Limited 2017