| People make their way on main Syntagma square as the parliament building is seen in the background, in Athens |
Greece and its lenders resumed a long-stalled review of its bailout on Tuesday, with the government in Athens braced to commit to yet more austerity in exchange for the funds the country needs to remain solvent.
The review has dragged on for months, partly due to a rift between the European Union and the International Monetary Fund over Greece’s fiscal goals and prospects next year – when the current rescue programme expires – and beyond.
To help break the impasse, the leftist-led government last week agreed to pre-legislate economic reforms, including cuts in income tax breaks and pensions, to come into effect from the start of 2019, the year the next parliamentary elections are due.
The lenders are asking Greece to make extra savings worth 2 per cent of gross domestic product in order to meet a target of a 3.5 per cent primary surplus – which excludes debt servicing costs – that they have set for 2018 and the post-bailout period.
“The lenders’ representatives will ask for measures of 1 per cent from lowering the tax free threshold and another 1 percent from pension cuts,” an official with knowledge of the negotiations in Athens told Reuters on condition of anonymity.
The government estimates the 2016 primary surplus will exceed 2 per cent of GDP, well above the lenders’ 0.5 per cent target, after the economy unexpectedly returned to growth last year.
“Without publicly saying it, Athens wants the total (additional) measures to be worth around 1.5 per cent of GDP, after the better-than-expected surplus and better economic performance,” a second source close to the talks said.
“The institutions could discuss a gradual implementation of the pension cuts,” the second official said.
The IMF, still undecided on whether to participate in what is Greece’s third rescue package, says Athens cannot meet its targets unless it is granted further debt relief and adopts extra belt-tightening measures.
Debt relief is opposed by several of Greece’s European lenders, notably Germany.
The uncertainty has fuelled fears of a new financial crisis among investors already nervous about how a populist revival in the eurozone will impact close-fought election races in The Netherlands, France and Germany between now and the autumn.
Greece does not need more loans until the third quarter, but if bailout funds are not paid in time it will face an elevated risk of defaulting on debt repayments worth about €7.5 billion in July.