10 Jul 2015 09:00

Greece: An important step toward an agreement

The Greek government submitted Thursday evening, two hours before the scheduled deadline, its final proposal for reforms and savings. The proposal includes among other things tax rises, phasing out solidarity grant for pensioners and defence spending cuts. In return, Greece is asking for bailout loans of over 50 billion euros and some form of debt relief. The prospects for a settlement have definitely improved over the past 24 hours. But we have not yet crossed the finish line, comments chief economist Robert Bergqvist.

1. What are the most recent developments?

The Greek government submitted yesterday evening, two hours before the scheduled deadline, its final proposal for reforms and savings. The Troika (the European Commission, ECB and IMF) has confirmed that it has received the proposal but there are no official reactions (so far at 07.15 CEST) to the proposal from the Troika.

2. What does the new proposal suggest?

The proposal largely follows what we have seen previously from the Greek government, but some media news suggests that savings can now (at least on paper) be as much as 40 percent higher than before. The proposal includes among other things tax rises on shipping companies and scrapping tax discounts for islands, unifying VAT rates at standard 23 percent (including restaurants/catering), phasing out solidarity grant for pensioners by 2019 and defence spending cuts by 2016. In return, Greece is asking for bailout loans of over 50 billion euros and some form of debt relief.

3. Why should Greece accept the proposal?

Admittedly, reforms and savings seem to be significantly tougher than before but in exchange Greece is expected to get substantial financing support and a possible debt relief. This was not included in earlier formal discussions between Greece and the Troika (which focused on possibilities to extend existing programmes and give Greece the last tranche of 7.2 billion euro.

4. Why should the Troika [read Germany] accept Greece's proposal?

Focus is now moving from A to B, from Athens to Berlin. Greece has delivered a tough reform and saving proposal in exchange for new financial support. But the main reason is political. The Obama administration has exerted heavy political pressure on Germany to reach an agreement to avoid increasing political instability in Greece, in the region and in the world. Chancellor Merkel is under pressure to deal with a complex situation. She has previously categorically rejected a debt relief and she said yesterday that “a classic haircut is out of the question”. But tacitly she kept the door open for other forms of debt restructuring. The last week’s crisis mode among EU officials can hopefully help Merkel to get the German Bundestag’s approval for an agreement.

5. What happens now?

The Troika’s technical experts will now review Greece's proposal and prepare tomorrow's Eurogroup meeting (at 15.00 CEST) while the Greek Parliament, in two rounds, should approve the Government's proposal. On Sunday, the Eurozone’s heads of state and government will meet at 16.00 CEST and at 18.00 the remaining 9 EU leaders will join for a full scale EU council meeting.

6. Has the probability for a Grexit increased or decreased?

The prospects for a settlement have definitely improved over the past 24 hours. But we have not yet crossed the finish line. Athens and Berlin must give their go-ahead. And even before we have the signatures on an agreement it is important to highlight two things: firstly, the rescue package that Greece receives is likely to be insufficient, and secondly Greece and the euro zone's economic, financial and political challenges are far from over.