It has been an intense couple of days on the front of Greek negotiations, with leaks from both sides. Beyond the noise, here are some key points to watch over the next week.









Redemptions postponed

Greece needs to repay about 1.5bn to the IMF in June, distributed as follows: 5 June: about 300 million Euros on the 5th, 335 million Euros on the 12th, 558 milllion Euros on the 16th and 335 million Euros on the 19th.

Greece announced yesterday that it had decided to bundle all of these payments into a single tranche to be redeemed at the end of the month. As some commentators have pointed out, this turns Greece into “the new Zambia” – Zambia was the last country to ask for this, in the 1980s – but it also buys some time for the negotiations to stretch over another week. Negotiation will most likely be centred around the points of contention included in the two different proposals (one from the creditors and one from Greece) that have been leaked in recent days to the press and that are reviewed below.

Different proposals

The latest creditors’ proposal was leaked and published by a Greek paper (here), while the Greek counter-proposal was published by a German paper (here). There are some important elements on which numbers have been put on paper, and these are likely to be the catalyst for the negotiations during next week.

Primary surplus targets: this has been a bone of contention since the beginning of the negotiations. The second programme targeted a primary surplus of 3% of GDP in 2015 and 4.5% in 2016. The economic situation has deteriorated to the point that creditors now expect Greece to run a deficit of about -⅔% of GDP at unchanged policies. The leaked creditor proposal offers a target of 1% in 2015, 2% in 2016, 3% in 2017 and 3.5% in 2018 and beyond and ask that Greece introduces a supplementary budget for 2015 to meet the new target. The Greek counter-proposal asks for 0.6% in 2015, 1.5% in 2016, 2.5% in 2017 and 3.5% from 2018 onwards. Based on these documents, there appears to have been a significant convergence from the creditors towards the Greek position. In fact, the 1% offered by the creditors now would be below the 1.5% that Varoufakis unsuccessfully bargained for during the first Eurogroup meeting he attended. Both sides see 3.5% from 2018 on, so the matter is more about how the adjustment will be distributed over this and the next two years.

this has been a bone of contention since the beginning of the negotiations. The second programme targeted a primary surplus of 3% of GDP in 2015 and 4.5% in 2016. The economic situation has deteriorated to the point that creditors now expect Greece to run a deficit of about -⅔% of GDP at unchanged policies. The leaked creditor proposal offers a target of 1% in 2015, 2% in 2016, 3% in 2017 and 3.5% in 2018 and beyond and ask that Greece introduces a supplementary budget for 2015 to meet the new target. The Greek counter-proposal asks for 0.6% in 2015, 1.5% in 2016, 2.5% in 2017 and 3.5% from 2018 onwards. Based on these documents, there appears to have been a significant convergence from the creditors towards the Greek position. In fact, the 1% offered by the creditors now would be below the 1.5% that Varoufakis unsuccessfully bargained for during the first Eurogroup meeting he attended. Both sides see 3.5% from 2018 on, so the matter is more about how the adjustment will be distributed over this and the next two years. VAT reform: this is another contentious issue that is closely linked to estimates of the fiscal gap, and therefore to the primary surplus negotiations. The current Greek VAT system includes 3 rates (6.5%, 13%, 23%). Creditors are asking to move to a 2-rates system, with the two rates being 23% and 11%. The expected revenue increase from this change would amount to 1 percentage point of GDP, i.e. 1.8 bn euro. The Greek proposal keeps the three rates and envisages a reduction of the lower and medium rates, to 6% and 11% respectively. On this issue the difference in views seems quite significant, as the Greek proposal goes in the opposite direction of the creditors’ one. However, at the end of May the Greek newspaper To Vima had reported a significantly different idea from the Greek side. At that time, the Greek government was reportedly envisaging three rates at 7%, 14% and 22% and it was estimating that this reform would generate about 800 million euros. This suggests that the Greek government had in fact previously considered increasing rates. The significant U-turn may signal the fact that the government realised the internal political constraints on this issue are harder than initially thought (which would not give many reasons for optimism).

this is another contentious issue that is closely linked to estimates of the fiscal gap, and therefore to the primary surplus negotiations. The current Greek VAT system includes 3 rates (6.5%, 13%, 23%). Creditors are asking to move to a 2-rates system, with the two rates being 23% and 11%. The expected revenue increase from this change would amount to 1 percentage point of GDP, i.e. 1.8 bn euro. The Greek proposal keeps the three rates and envisages a reduction of the lower and medium rates, to 6% and 11% respectively. On this issue the difference in views seems quite significant, as the Greek proposal goes in the opposite direction of the creditors’ one. However, at the end of May the Greek newspaper To Vima had reported a significantly different idea from the Greek side. At that time, the Greek government was reportedly envisaging three rates at 7%, 14% and 22% and it was estimating that this reform would generate about 800 million euros. This suggests that the Greek government had in fact previously considered increasing rates. The significant U-turn may signal the fact that the government realised the internal political constraints on this issue are harder than initially thought (which would not give many reasons for optimism). Solidarity contribution and corporate tax : absent any increase in the VAT rates and therefore any additional revenues from that source, the Greek proposal envisages an extraordinary levy on large corporate profits (which would yield 1 billion in 2015), a solidarity contribution (yielding about 220/250 million in 2015 and 2016), a television advertising tax (100 million in 2015 and 2016), other measures on television licences and stations (340 million in 2015), luxury tax (30 million in 2015 and 2016) and other tax revenues (expected 120 million in 2015 and 90 million in 2016).

: absent any increase in the VAT rates and therefore any additional revenues from that source, the Greek proposal envisages an extraordinary levy on large corporate profits (which would yield 1 billion in 2015), a solidarity contribution (yielding about 220/250 million in 2015 and 2016), a television advertising tax (100 million in 2015 and 2016), other measures on television licences and stations (340 million in 2015), luxury tax (30 million in 2015 and 2016) and other tax revenues (expected 120 million in 2015 and 90 million in 2016). Privatisation: creditors’ offer include a target of 22 billion by 2022. The original target in the second programme was of 22 billion but by 2020, so the new proposal would stretch it over two more years. Yearly targets are still not set in the document. Greece has a very detailed table that totals at about 16 billion from now until 2020, with the bulk of revenues coming in from 2020 onwards. The Greek proposal envisages privatisation revenues of 3.2 billion for 2015-2016 and 2.1 billion for 2017-2019. As a comparison, the original second programme had a more ambitious schedule expecting 5.6 bn in 2015-2016 and 5.9 bn in 2017-2019.

creditors’ offer include a target of 22 billion by 2022. The original target in the second programme was of 22 billion but by 2020, so the new proposal would stretch it over two more years. Yearly targets are still not set in the document. Greece has a very detailed table that totals at about 16 billion from now until 2020, with the bulk of revenues coming in from 2020 onwards. The Greek proposal envisages privatisation revenues of 3.2 billion for 2015-2016 and 2.1 billion for 2017-2019. As a comparison, the original second programme had a more ambitious schedule expecting 5.6 bn in 2015-2016 and 5.9 bn in 2017-2019. Pension reform : remains a red line for both sides. The creditors ask for “further immediate steps to improve the pension system, that are expected to yield around 1 percent of GDP in savings annually in 2016-17, including significantly tightening early retirements rule, increasing health contribution for pensioners, and phasing out the non-pension solidarity grant”. By September 2015, Greece should also “legislate further to establish a closer link between contributions and benefits and integrate funds”. The Greek proposal includes a gradual phase out of early retirements over 2016/2025 and consolidation of social security funds into three, but still keeps in the suspension of the “zero-deficit clause”.

: remains a red line for both sides. The creditors ask for “further immediate steps to improve the pension system, that are expected to yield around 1 percent of GDP in savings annually in 2016-17, including significantly tightening early retirements rule, increasing health contribution for pensioners, and phasing out the non-pension solidarity grant”. By September 2015, Greece should also “legislate further to establish a closer link between contributions and benefits and integrate funds”. The Greek proposal includes a gradual phase out of early retirements over 2016/2025 and consolidation of social security funds into three, but still keeps in the suspension of the “zero-deficit clause”. Labour market reforms: are probably the most red among the red lines at the moment. The creditors are asking for a Greek commitment that “important reforms under the programme […] will not be reversed”, and in particular that “no changes to the current collective bargaining framework will be made prior to end-2015 and any changes to the legislative framework will only be adopted in agreement with the EC/ECB/IMF”. Greek documents state that “the Greek government will reinstate collective bargaining procedures, similar to existing arrangements in other EU countries […]” and gradually increase the minimum wage level and salaries for workers in the private sector until the end of 2016 back to the 2010 level (later they should be “freely negotiated within the context of collective bargaining”).

Restructuring plans

So, to sum up. Greek negotiations will continue next week, after Greece asked to bundle all June IMF payments at the end of the month. In the meantime, a common ground between Greece and its creditors is not yet in sight. The primary surplus issue is where positions seem to have converged the most, with the creditors moving significantly closer to the Greek position. On VAT, the Greek government appears to have taken a U-turn compared to the proposals rumoured last month and positions on pensions and labour market remain still very far apart, with no immediate solution obvious from the documents.

Options are starting to look scarce, even to the most resourceful Ulysses.

The negotiations over next week will be further complicated by the fact that the Greek proposal includes a section on the restructuring of its debt vis-à-vis the creditors. The details of the plan have been clarified in another leaked paper, which was published by the FT this morning. Many of the restructuring elements had been hinted at or heard before, during these months of negotiations: the plan would include (i) a buyback of the debt owed to the ECB with a ESM loan; (ii) IMF partial buyback with SMP profits; (iii) additional re profiling of the Greek Loan Facility; (iv) splitting EFSF loans in two and substitute half with a perpetuity.

None of these seems to be politically acceptable at the moment: the IMF has previously appeared to be in favour of debt relief, provided it is done on the EU side of Greek debt; the GLF and EFSF terms have already been eased substantially and the perpetuity idea looks hardly digestible in Berlin; ECB president Mario Draghi said yesterday that the ECB expects timely and full repayment of the SMP; and political support for the ECB/ESM swap idea looks elusive. Given the postponement of the IMF payments, the hard deadline becomes the redemption of debt due to the ECB in July. But for the agreement to be signed off nationally and money to be disbursed on time, a deal should be reached sooner. Time is running out, and options are starting to look scarce, even to the most resourceful Ulysses.