Greece: An Omnibus Bill, Another Tricky Payment

Published on April 28, 2015
SGH Insight
"Our understanding from Athens is that Tsipras, after the current round of private negotiations with Brussels, including a call that is hoped will happen on the technical level with the Euro Working Group tomorrow, will seek to prepare an Omnibus Bill to present to Parliament - literally within the next few days. "
Market Validation
(Bloomberg 4/28/15) "Greece’s government bonds rose, pushing prices on two-year notes to the highest in more than a month, as the country resumed efforts to break a deadlock with creditors amid evidence that voters want the government to compromise. The gains pushed down yields on the notes due in 2017 toward the lowest in a month."

(Bloomberg 4/29/15) "'Brussels Group' of Greek finance ministry officials, representatives of creditor institutions will convene Thursday morning to discuss progress of Greek bailout talks."

Greek Prime Minister Alexis Tsipras last night expressed hopes for striking a deal with the EU by May 9, just before the May 11 Eurogroup meeting in Brussels and a May 12 bullet payment to the IMF, without explaining exactly how that will be accomplished.

*** Our understanding from Athens is that Tsipras, after the current round of private negotiations with Brussels, including a call that is hoped will happen on the technical level with the Euro Working Group tomorrow, will seek to prepare an Omnibus Bill to present to Parliament – literally within the next few days. ***

*** This bill will contain some of the provisions of what will hopefully be an agreement with Brussels, although the key question remains how many of the most controversial fiscal measures it will also include, or whether those are punted into the second half of 2015. ***

*** On that count, while welcoming recent progress, EU officials express concerns that Tsipras’ latest push with German Chancellor Angela Merkel to seek an interim agreement and partial disbursement of funds may be an attempt to allow for those difficult decisions to be postponed. The good news, however, is that through all the acrimony some progress is apparently now finally starting to be made on negotiating those fiscal measures with the European Institutions (see section below bullets). ***

*** EU officials nevertheless caution that even under an improved atmosphere of negotiations the Tsipras administration may continue to be underestimating the time required for any political agreement to disburse additional funds to Greece – even a partial disbursement as has been repeatedly suggested by Athens will require approval of all 18 Eurozone members. And so there is a reasonable chance even with progress there may not be enough time for the disbursal of EU funds before the May 12 IMF payment, and if Greece cannot come up with funds on its own it could yet still cross over into the soft default, even if not yet a technical default, of a missed payment to the IMF. ***

As is now widely understood by markets, a missed payment to the IMF would not automatically trigger a default, as it will come with a one month grace window – if Athens cannot come up with the funds – for the EU and Greece to settle on finances assuming negotiations remain on a positive track. And while time is of the essence, the drop dead date on a legal basis for reaching a deal with Athens is not in May, but at the end of the program, on June 30.

Capital controls of course remain at some point a possibility, but they also need not necessarily be applied automatically in case of a missed payment if there is no run on banks – which again could be the case if depositors and markets remain positive about the prospects for a final resolution.

In the same breath Athens will be reminded of what is a clear hierarchy on missing payments, starting with arrears to domestic suppliers, missed pensions and wages, the IMF first, and the ECB, “unquestionably,” last.

First Steps towards a Budget Compromise

The new Greek negotiating team, under the orders of Tsipras himself and now led by Minister of International Financial Relations Euclid Tsakalotos, has nevertheless finally stepped up the pace of discussions with the European Institutions, including on the most contentious and important fiscal issues.

And behind the scenes we believe there continues to be some progress on key measures. Namely:

Pensions – We have long heard and written that one of the primary areas of focus of the creditors has been on the numerous exemptions that allow for early retirement under the Greek system, rather than on the absolute retirement age or pension rates themselves. And Tsipras has indicated some willingness to rationalize some of these expensive early retirement exemptions. But, perhaps worried over the complexity of such an undertaking, the creditors, and from what we understand the IMF in particular, have suggested Athens perhaps look at an easier, but more controversial, adjustment to supplementary pension rates. This remains an ongoing open point of negotiations, but it is being negotiated nevertheless, while Syriza publicly maintains its campaign pledges not to cut pensions.

Minimum wages – Syriza’s promise to hike minimum wages from 580 Euros back to 751 Euros was perhaps one of the other most visible campaign promises it has made to the electorate, undoing one of the hard fought achievements of the former administration of Antonis Samaras. But every promise on minimum wage hikes from Syriza since even before the elections has phrased those as occurring “over time,” meaning a phasing over years that Athens hopes will be amenable to both the electorate and creditors. For all practical purposes, with an unemployment rate of over 25%, many workers are being paid below the current minimum wage anyways.

VAT Taxes – The EU and IMF have pointed to hiking the lower VAT rate in effect on the Greek islands than on the mainland as a source of revenue, and there appears to be some progress on those negotiations as well. Athens traditionally has maintained the islands need a lower rate not just to stimulate tourism, but to subsidize the local populations of the smaller islands with lower incomes. Initial proposals from Athens were to go after the larger islands, such as Mykonos and Santorini, with a thriving black market and rampant tax evasion in nightclubs (recall the proposal to send in agents secretly wiretapped as tourists). This appears to be evolving instead into a proposal to implement a luxury tax on tourists on items over a certain amount. That there is precedent within the EU for such a levy helps, and of course taxing rich tourists is not exactly a vote killer.

Property Taxes – Abolishment of the controversial property tax passed by the Samaras government was also one of the key platforms on which Syriza ran in the elections, but as we previously wrote, this is also one of the largest revenue raising measures available to Athens. Tsipras has indicated that he will, as promised, abolish this tax, but has pledged to replace it with a new tax focused on higher priced properties that will be more progressive, but raise perhaps 1 or 1.5 billion Euros less than the broader tax passed by Samaras. Critically, there are indications now that Tsipras may agree to keep the current, broad-based system in place for one more year.

Privatizations – In a previous report we flagged some progress as well on privatizations, with Athens allowing a tiny privatization of horse betting to the gambling agency OPAP to go through as a token gesture to creditors in the last few weeks. On the more substantial issues over the privatization of ports and airports, the EU has frankly lowered its expectations dramatically, and one of the key points of negotiation on these larger ticket assets at this point appears to be over the use of any funds raised from their sale – namely whether Athens be allowed to use funds raised from the sale of state jewels to fund pensions, rather than pay down debt.

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