Greece debates pension and income tax reforms to unlock bailout funds

Demonstrators protest against reforms on the pension and the tax system by the Greek government in Athens, Greece on May 7, 2016.
Demonstrators protest against reforms on the pension and the tax system by the Greek government in Athens, Greece on May 7, 2016. PHOTO: EPA

ATHENS (Bloomberg) - Greek lawmakers began debating pension and income tax reforms that will be key to unlocking international aid as European creditors circulated the draft of a new proposal that would burden Athens with additional austerity measures.

The bill - part of a 5.4 billion-euro (S$8.38 billion) belt-tightening package needed to secure further aid from the euro area and the International Monetary Fund (IMF) - will be put to a vote late Sunday, one day before Greece meets with euro-area finance ministers to review the status of the bailout.

Athens submitted a last-minute amendment late Friday, targeting 200 million euros in revenue by lowering the income tax-free threshold to 8,363 euros and in breach of a "red line" of 9,100 euros.

Euro-area governments are reviewing whether to release the second installment of an 86-billion-euro bailout for Greece, six months after it was initially scheduled.

As the delay weighs on the nation's ability to meet debt payments in July, the IMF has said it would be open to disbursing a new loan that would be separate from the European bailout. However, the fund has questioned Greece's ability to post a fiscal surplus before interest payments of 3.5 per cent of gross domestic product (GDP) within two years, as stipulated under the European program.

The finance ministers won't just discuss the austerity measures attached to the latest review of Greece's bailout, but also possible debt relief initiatives, on the backdrop of persistent IMF demands for less ambitious fiscal targets to be set for Europe's most indebted state.

Greece's European creditors circulated a draft memorandum of understanding on Saturday that includes additional austerity steps in the event Athens misses certain budget targets, according to a copy of the document obtained by Bloomberg News.

The measures will equal the degree by which the targets are missed, as much as 2 per cent of GDP.

The proposal, which will be discussed in the Eurogroup meeting, seeks legislation that would automatically reduce certain expenditures and increase tax revenue.

Greek Finance Minister Euclid Tsakalotos told lawmakers on Friday that these so-called contingency measures weren't "constitutionally feasible." The government will only propose a safety mechanism and no specific contingency steps during the May 9 meeting, Tsakalotos said.

"IMF and Germany must reach common ground" and find a "sustainable solution on Greece," he said. The IMF views previous contingency steps proposed by Athens as unsatisfactory, according to Managing Director Christine Lagarde in a May 6 letter to euro-area officials. 

In her letter, Lagarde said the fund won't join a European bailout of Greece until those differences over the budget plan are resolved. The government's "subliminal message to creditors is therefore this: if you insist on contingency measures, you will end up with the collapse of my government and early elections," Eurasia analyst Mujtaba Rahman wrote in a note to clients May 6.