Greece and lenders finally reach deal on bailout reforms

Greece and its foreign creditors reached a deal early on Tuesday on a package of bailout-mandated reforms, Greek finance minister Euclid Tsakalotos said, paving the way for the disbursement of further rescue funds.

“There was white smoke,” Mr Tsakalotos told reporters, using a term associated with papal elections. “The negotiations for a technical deal were concluded on all issues...the way has now been paved for debt relief talks.”

Talks on the deal, which includes labour and energy reforms as well as pension cuts and tax rises, had dragged on for half a year mainly due to a rift between the EU and the International Monetary Fund over fiscal targets.

Greece now needs to legislate the new measures before euro zone finance ministers approve the disbursement of loans, money Athens needs to repay €7.5 billion in debt maturing in July.

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The next scheduled eurogroup meeting is on May 22nd, where reducing Greece’s debt will also be discussed.

As part of the reforms Athens has promised to cut pensions in 2019 and cut the tax-free threshold in 2020 to produce savings worth 2 per cent of gross domestic product. If it outperforms its targets it will be allowed to activate a set of measures offsetting the impact of the additional austerity, which includes mainly lowering taxes.

Debt relief

Following Tuesday’s agreement, the lenders are likely to decide amongst themselves on Greece’s medium-term primary surplus targets, a key element for granting further debt relief. The IMF says Greece cannot maintain high primary surpluses unless it adopts more austerity and is granted further debt relief by the EU.

In a draft document seen by Reuters, the IMF says Greece can reach a primary surplus of 2.2 per cent in 2018 and aim at 3.5 per cent annually in 2019-2021, if it implements the new measures agreed with its lenders. It suggests the primary surplus target be reduced to 1.5 per cent of GDP thereafter.

Its euro zone lenders believe Greece can sustain a 3.5 per cent GDP primary surplus target over a longer period.

The talks focused on economic overhauls including further pensions cuts, tax increases and changes to the labour market. But they stalled at times as a result of disagreements between European officials and the IMF over Greece’s economic prospects and its ability to meet budget targets.

Cutting pensions

As part of the deal announced Tuesday, Athens agreed to raise the equivalent of 2 per cent of gross domestic product by cutting pensions further in 2019, and increasing tax receipts by reducing the income threshold at which taxes must be paid.

Yielding to creditors’ demands to make the labour market more competitive, the deal also makes it easier for businesses to fire employees.

Pierre Moscovici, the European commissioner for economic and financial affairs, said in a statement that the deal was “a very positive development”.

“It is time to turn the page on this long and difficult austerity chapter for the Greek people,” he said. “With this agreement we need now to write a new story of stability, jobs and growth for Greece, and for the euro area as a whole.”

Greece’s government must now draft legislation bundling together all the measures and push it through parliament before euro zone finance ministers meet on May 22nd. – Reuters