Lack of Greek Pension, Tax Reform Seen Blocking Deal

The IMF rejects Greece’s proposals for pension reform, setting back hopes of a bailout deal.

Christine Lagarde, managing director of the International Monetary Fund, speaks with Wolfgang Schäuble and George Osborne, the finance ministers of Germany and the United Kingdom, in Washington DC, April 16
Christine Lagarde, managing director of the International Monetary Fund, speaks with Wolfgang Schäuble and George Osborne, the finance ministers of Germany and the United Kingdom, in Washington DC, April 16 (IMF/Stephen Jaffe)

Hopes of a last-minute deal to save Greece from bankruptcy started to evaporate again on Wednesday when it emerged that the Balkan nation’s creditors had rejected its latest proposals for pension and tax reform.

Another meeting of European finance ministers broke up without an agreement, deferring the matter — once again — to a European Council of government leaders that was due to reconvene on Thursday.

According to documents obtained by the Financial Times, the International Monetary Fund — which jointly administers Greece’s €240 billion bailout with the European Union — wanted Greece to raise the retirement age faster and phase out a “solidarity grant” for the poorest pensioners.

Originally, the far-left government that came to power in Athens earlier this year ruled out any pension cutbacks. Instead, it proposed to reinstall a thirteen month of pension payments, something it could not possibly afford.

When it became clear the creditors would not pay out the final €7.2 billion tranche of Greece’s bailout if it walked back on previous commitments to make the pension system more affordable, the country suggested raising the retirement age to 67 by 2036. It later proposed 2025. The IMF insists on 2022 as a deadline.

The fund also called for a quicker phasing out of the “solidarity grant” and rejected a Greek proposal to raise employer contributions to the main pension plan almost 4 percent, likely fearing that the added tax burden on companies would do little to lift Greece out of recession.

Greece returned to negative growth after it voted Syriza into office in January, a far-left party that campaigned on tearing up the bailout that has kept Greece from going bankrupt for the last five years.

The IMF previously raised doubts about Syriza’s commitment to economic reforms in February. But rather than submit more credible proposals, the party wasted the next four months haggling with its creditors over the terms of another loan and debt relief — both of which eurozone governments and the IMF consistently ruled out if Greece would not comply with the conditions of its original support program.

Pension reform is long overdue. In the years leading up to Greece’s near-default in 2010, government spending on pensions rose from 12 to 17 percent of annual economic output, reaching the highest rate in the eurozone.

Last year, the Greek Finance Ministry revealed that three out of four workers benefit from early retirement rules that allow them to stop working before they even reach the age of 61.

Greek prime minister Alexis Tsipras, who was elected on promises to end austerity, unexpectedly flew to Brussels for crisis talk on Wednesday after suggesting the creditors were negotiating in bad faith. “This curious stance may conceal one of two possibilities: either they don’t want an agreement or they are serving specific interest groups in Greece,” he told reporters.

The IMF also rejected Tsipras’ proposal for a one-off 12 percent tax on all corporate profits over €500 million that was supposed to raise €1.3 billion this year.

But the creditors backed down on their demand to include electricity in the highest, 23 percent sales tax rate and said they would allow Greece to create a new 6 percent discount sales tax for books and medicine.

Time is running out for Greece. Without the last bailout tranche, it could probably not pay off a €1.5 billion loan from the IMF by the end of the month. It may also have to default on €3.5 billion in bond redemptions that are due in the middle of July.

Tsipras’ insistence on relief from the austerity measures to which Greece’s financial support is tied has so far stopped the eurozone from finding a way to prevent one of its members from defaulting on its debt obligations for the first time.

The Greek leader is stuck between creditors who insist on liberal economic reforms and spending cuts and an inexperienced, radical party that is resistant to any compromise with institutions it blames for impoverishing the country.

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