Greek "Compromise" Proposal Leaked, And There May Be A Problem

Moments ago MarketNews reported that during today's "marathon governmental meeting" in which Greek PM Alexis Tsipras sat down with his party to hammer out and complete the "compromise" Greek proposal to be sent to the Troika before midnight, the prime minister told his ministers that he was "ready for compromises," suggesting he was willing to clash with the ultra-left part his party, Syriza.

So far so good, and perhaps indeed suggestive of a big step down. The problem emerges upon a closer read of the proposal, which is clearly not nearly "capitulatory" enough.

Recall that earlier today BofA' Chief European Economist Gilles Moec, accurately, said that only a "complete capitulation" by Tsipras would get Germany to agree to the Greek proposal.

However, as presented by MNI, the proposal is anything but: according to the draft

  • The 30% discount in VAT for most islands is maintained but it excludes the so called "big" islands which get the biggest percentage of tourist reservations.
  • The draft keeps the VAT for hotels to 13% but raises the Value Added Tax for the food industry to 23% which was a creditors' demand.
  • The governmental commitment to freeze early retirements remains.

The biggest surprise is once again in the biggest hurdle: pensions. Recall that as we accurately predicted two weeks ago, it was the government's unwillingness to directly cut pensions that led to the IMF refusing to even negotiate the Greek proposal.

As a further reminder, this is what IMF's chief economist Olivier Blanchard said almost a month ago on the topic:

Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners

Fast forward to today when MNI reports that "there are no pension cuts in the draft of the proposal."

And if recent experience is indicative, this likely means that the Troika will once again refuse to move on with the draft.

Tsirpas is said to make a roundabout compromise by boosting the pensioners' contribution to the health sector which is "raised from 4% to 6% which could be regarded as an indirect way of reducing pensions." Alas, it was the creditors' very explicit demand that pensions see direct cuts. And this is missing from the Greek proposal.

In an attempt to mollify Merkel, the draft goes on to mention that the collective bargaining agreement would be discussed within a year, compared with the government's pre-election announcements that the law would be passed imminently, and it also puts higher taxes to the shipping industry, higher incomers and gambling and highlights the need for a debt relief.

But the key hurdle remains: Germany no longer trusts Greek promises of a boost to revenues, i.e., speedier or more aggressive tax collections, and instead demands spending be slashed which by definition means that pensions have to see substantial and haircuts.

So far this is absent from the Greek proposal.

There is also the possibility that this is merely an MNI trial balloon to gauge market sentiment at what is currently contained in the draft, and judging by the market swoon in the past few minutes, it would indeed be seen as insufficient.

Which means that if Tsipras is serious and indeed hopes to reach a compromise, he will have to propose even more draconian austerity measures and spending cuts - recall that Germany made it very clear that any existing proposal would be far harsher than what was on the table when Tsipras called the referendum - in the next few hours before the midnight deadline which is fast approaching.

The biggest problem for Greece, it goes without saying, is that at this point Greece simply can not afford another turn of the proposal: by the time the Troika comes back with its alternative, which Greece then has to debate and respond to, it will be Sunday or even Monday. And by then both the local banking system, as well as Greece itself, will have crossed what Europe swears is the final, final deadline.

Unless, of course, this was Tsipras' intention all along.