As reported earlier and as tipped here on Monday, markets will have to call off the party for now because the focus of the Greek debt deal negotiations has now shifted back to Brussels after all eyes had turned briefly to Athens on Tuesday following reports which indicated a deal in principle had been struck. Here’s what we said [13] less than 24 hours ago:
The IMF demands no tax hikes and pension cuts. Instead it will get almost exclusively tax hikes, amounting to 92% of the proposed measures, and just a few cuts, few of which actually impact Greek pensions. In short: the proposal is not only unsustainable, it is also unenforceable, something which the Germans - already facing a third Greek bailout - will be quick to point out.
Which is why tomorrow, after Tsipras is finished with the meeting with the Troika, he will have a new homework assignment: revise the "final final" proposal and come up with much less in tax hikes, much more in spending cuts: something which the already furious hard-line elements within Syriza will have a field day with.
And that is precisely what happened. As WSJ reports, creditors have decided [14] to stick to their “red lines” after all:
Significant divisions remain between Greece and its international creditors over measures Athens must implement before receiving desperately needed bailout aid, according to a document seen by The Wall Street Journal on Wednesday ahead of a crucial meeting of eurozone finance ministers.
Key points of disagreement are corporate taxation, the overhaul of Greece’s pension system and value-added taxes, according to the document. For instance, Greece had planned to increase corporate taxes to 29%, but in the document creditors limited increase to 28%. That may cause new budget shortfalls that need to be plugged with other measures.
The Greek government has proposed increasing pension system revenues largely by raising social-security contributions from employers and limiting early retirement.
In the document, the creditors insist on savings worth 1% of Greece’s gross domestic product by next year and also call for eliminating a supplementary payment to the poorest pensioners, known as EKAS, by the end of 2017. The
Greek proposal wanted EKAS to be phased out only between 2018 and 2020.
The creditors also continue to insist on raising funds worth 1% of GDP from VAT, up from the 0.74 proposed by Greece.
And more from MNI [15]:
One official said that the IMF disagrees with heavy taxation in businesses and the special corporate tax and wants more spending cuts in pensions and other public sector areas.
The International Monetary Fund sent its own version of a counter proposal to Greece's debt talks late Tuesday, a government official has told MNI, illustrating the growing dissent among the country's international
creditors.
The new proposal, sent to Greece late Tuesday, was deemed unacceptable by the Syrzia-led government, the official said, who used a Greek expression to suggest that receiving it was like "touching fire".
As indicated above, Athens isn't pleased with the IMF's position:
- GREECE OFF'L: IMF PROPOSAL TOTALLY UNACCEPTABLE TO GOVERNMENT
AFP confirms:
#BREAKING [16] Greece rejects counter-proposal from creditors: source
— Agence France-Presse (@AFP) June 24, 2015 [17]
Put simply, the IMF has decided that allowing Greece to wriggle from under the troika's thumb by substituting unenforceable tax hikes for actual, sustainable fiscal reform would send the wrong message to Spain and Portugal ahead of elections this fall where Podemos in Spain and the socialists in Portugal may well score decisive victories at the ballot box.
So it's back to square one — or square four, or five, or whatever square the negotiations were on when talks were still mired in an intractable stalemate last week.
Of course that means the terminal Greek bank run — which had already driven the Greek banking sector's remaining deposits to a level below the Eurosystem's total claims on Greece — will officially restart after taking a breather on Wednesday morning. Sure enough, despite reports earlier in the day that Greece had not requested an ELA increase, the ECB has now raised the limit again in anticipation of further withdrawals. Via Reuters [18]:
The European Central Bank approved the amount of emergency funding (ELA) Athens requested for its banks on Wednesday, a banking source with direct knowledge of the decision said, without disclosing what amount Greece had asked for.
"The Bank of Greece got approval for the ELA it requested. If necessary the ECB governing council will convene again in the next 24 hours," the source said.
So as we've said all along [19], the troika will get its pension cuts and VAT hike come hell, high water, or Grimbo, because that's the only way to keep the Syriza germ from spreading and it's also the only guaranteed way to ensure that any and all "radicalists" are purged from the Greek government. That is, if you thought The Left Platform was upset on Tuesday, you haven't seen anything yet, because when Tsipras comes to parliament with a deal that looks identical to what the troika put forth months ago, political upheaval will follow in short order and either Syriza will be transformed into a party that will accept Greece's fate as Germany's debt serf, or Greeks will demand a new government and a Grexit — either outcome is ultimately preferable, from the troika's perspective, to giving the rest of the EU periphery hope that austerity (or what passes for austerity in Europe) is negotiable. So, either the Greek negotiators will finally enact the "dreaded" pension cuts and VAT hike (in its originally proposed form), or else the Troika will be able to wash its hands of a Greek default and blame it all on Greek intransigence while sending a strong message to political sympathizers that they will get nothing from the institutions.
Reinforcing this point is the following from Bundesbank board member Joachim Nagel (via MNI):
Bundesbank Executive Board member Joachim Nagel said Wednesday that he opposes another debt relief for Greece at this point, arguing that such a move could encourage other EMU countries to follow the example.
A debt relief for Greece "sets the wrong incentive for other countries," Nagel said at a conference in Frankfurt. "At this stage, a second debt relief would set the wrong incentives, especially for governments that are already weak" and struggling with growing opposition to austerity.
Then again, maybe all of this is just an elaborate attempt to hide the fact that Greece's fate has already been decided by Mario Draghi, whose former employer suggested as much [20] earlier this week.
Finally, courtesy of the WSJ, here is a redline comparison of the original Greek proposal and the IMF's counter:
The five-page document, which is still a work in progress, outlines the so-called prior actions the Greek government is willing to undertake, as well as the creditor’s feedback on several overhauls through the “track changes” function. Key points of disagreement are corporate and sales taxation and the overhaul of Greece’s pension system, according to the document.
Source here [21]
