Greece has agreed with EU, IMF and ECB inspectors on a value-added tax cut, a German coalition source said today, a move aimed at winning opposition support for more austerity and avoiding a debt default.
Increasingly urgent talks between the EU-IMF bailout troika and the Athens authorities come as the country faces a multibillion-euro funding shortfall as early as next month and a longer-term cash crunch next year in view of its exclusion from private debt markets.
To secure any new loan package, sources say the country may have to offer collateral and accept external supervision over tax collection and its stalled €50 billion privatisation programme.
The initiative is hampered by the lack of an advanced land registry in the country, leading to legal uncertainty over the ownership of many public assets.
Such conditions would go much further than anything laid down in the original Greek rescue, agreed little more than a year ago, or in the subsequent rescues of Ireland and Portugal.
Sources close to the talks said the Greek stance was markedly different to that encountered by the troika in Ireland. "They have a different attitude. It's not like the current Irish Government. The Greeks, they tell you whatever you want to hear and then they go home."
International lenders are demanding a broad political consensus to ensure that Greece keeps tackling its huge budget deficit for years to come, whichever party is in power.
"They have agreed on it," the source said in Berlin, confirming Athens newspaper reports that the "troika" team, which is scrutinising Greek finances, had backed the VAT cut.
Germany is a major contributor to European Union bailouts but public opinion there is hostile to providing further rescue funding for the Greek economy.
Ratings agency Fitch questioned whether Athens would meet another demand by the lenders for a rapid and large privatisation programme, and also cut its rating for Cyprus as the island's banks are exposed to Greek debt.
Under pressure from the EU and IMF, Socialist prime minister George Papandreou is seeking support from the conservative New Democracy party. But yesterday its leader Antonis Samaras demanded tax cuts as the price for a deal with the government.
"You want to raise taxes and reach consensus with us, who have set reducing taxes as a priority? Don't even think about it," said Mr Samaras, leader of the conservative New Democracy party, said.
"Lower tax rates are the key to starting the engine of the Greek economy. If you raise taxes, there will be no room for consensus or for renegotiation," he added.
"If we do everything else but don't lower taxes, we won't be able to give the economy the needed jump-start. This memorandum is like Sisyphus's punishment: no matter how much you push the boulder up the hill, it will roll back down."
The talks in Athens take place against the backdrop of continued tension between member states and the European Central Bank (ECB) over the bank's resistance to voluntary measures in which Greek bondholders would be asked to ease the immediate burden of their debt.
The bank, which believes any Greek default on its obligations could trigger a cascade of turmoil in the euro zone, has for weeks held the line that there is no room for manoeuvre on that policy.
The doubt over the outlook for the country sent yields on its 10- year bonds 0.05 percentage points higher to 16.46 per cent and the yield on its two-year notes 0.9 percentage points higher to 25.43 per cent.
In view of Greece's uncertain financing outlook over the next 12 months, the IMF is known to be threatening to refuse to release its €3 billion portion of the €12 billion due next month. However, European officials have some confidence that this money will eventually be released.
Uncertainty also surrounds the extent to which Germany, the Netherlands and Finland – which have been resisting the notion of a new loan package for Greece – would back an additional aid plan next year in which it might receive as much as €65 billion.
Informed sources said an imminent troika review is set to conclude that Greece is not meeting the conditions required to release some €12 billion due next month under its bailout, raising questions over the country's immediate funding needs.
The troika wants the Greek government and opposition to agree on a fixed timetable for the execution of stringent policy measures in return for this aid, but consensus has proved elusive. This presents a difficulty for the troika because it needs to ensure the execution of the bailout programme if sceptical creditor governments are to give their blessing to the release of the next tranche of aid.
Additional reporting - Reuters
