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The last concessions

4 June 2015 By Hugo Dixon

Athens’ creditors haven’t quite delivered an ultimatum. But the latest bout of high-stakes diplomacy has left Greece with little wiggle room if it wants to avoid a messy default that unleashes economic and political chaos.

Alexis Tsipras, the prime minister, has the chance to go through one more round of negotiations. If he plays his cards well, he can probably secure somewhat less austerity from the euro zone and the International Monetary Fund, as well as an indication that the country’s debt burden will be relieved so long as it plays ball.

Tsipras would probably struggle to keep his radical left Syriza party united. But he should still sign the best deal he can negotiate. The consequences both for him and the country of not doing so would be terrible.

Tspiras and the IMF and the euro zone have both presented new proposals this week, which have now been leaked. The two sides have certainly come closer over the past few weeks of negotiations, but they are still quite far apart. Greece will go bust in a few weeks if its creditors don’t lend it more money.

The creditors have a sensible-looking plan, but it still demands too much austerity. It presses for a primary budget surplus before interest payments of 1 percent of GDP this year and 2 percent next year. That is, at least, an improvement on the previous 3 percent and 4.5 percent.

The Greek economy, though, has deteriorated so badly in recent months that the creditors now think Athens will have a primary deficit of 0.7 percent of GDP this year if it does nothing. To hit the lower target, the government will have to cut spending and hike taxes equivalent to 1.7 percent of GDP. That would almost certainly tip the stagnant economy into recession.

Tsipras’ own plan calls for a 0.6 percent primary surplus this year and one of 1.5 percent in 2016 – levels that won’t crush the economy so much.

The creditors, though, won’t lower the fiscal target again unless Athens gives them something in return. The obvious concession is deeper structural reform. Here, unfortunately, Tsipras’ proposals are still thin.

There are some positive ideas. Greece is promising a fully independent tax authority that can crack down on evasion, which is endemic, and to gradually push up retirement ages, which are often too low.

However, Athens still wants to pay people supplementary pensions that its social security funds cannot afford and to finance this by borrowing from creditors. This is hard to justify.

Meanwhile, Tsipras’ proposals on reforming the inefficient civil service are wishy-washy and he is only lukewarm about privatisation, something which could revitalise sectors of the economy as well as raise cash to cut Greece’s mountainous debts.

If Tsipras wants a deal, he will have to swallow pretty much all the structural reforms that his creditors are proposing. These also include: liberalising various markets strangled by vested interests; simplifying the value-added tax system which is so full of holes that it is resembles a Swiss cheese; and not meddling with the banking system.

Accepting all this would put Tsipras in a good position to secure less fiscal austerity in the short run. It would also give him a good base to argue for debt relief.

The creditors are unlikely to allow that until they and Athens sit down in a few months to discuss a new long-term bailout plan, which could require them to lend the country another 50 billion euros or so.

However, Tsipras could probably get guidance now about how the debt burden could be reduced. Giving Athens both a longer interest-free holiday and another decade or so to pay back its debts seem the most sensible options.

The snag is that Tsipras isn’t negotiating well. His proposal includes a promise to maintain a primary fiscal surplus of 3.5 percent of GDP from 2019, exactly what his creditors are demanding. This is too high. He would be better to leave this open until the issue of debt relief is resolved.

If Tsipras does all this, he would admittedly be hard-pressed to keep his party united. A number of far-left members of parliament would probably rebel, leaving him to rely on the opposition to push legislation through parliament.

The prime minister’s obvious riposte would be to call a second election. He would probably win by a landslide since the Greek people want a deal and the opposition is in disarray. In the process, Tsipras could kick the rebels out of his party and govern with a more moderate parliament.

It is unclear whether Tsipras has the guts to do this. Greece and the world will know in pretty short order.


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