Greece struggles to form debt consensus

Bank of Greece Governor Yannis Stournaras gave a stark warning about the risk of Greece failing to reach an agreement with its creditors on a set of measures attached to the country’s bailout as Greek Prime Minister Alexis Tsipras reiterated his government would not succumb to “unreasonable” demands for additional pension cuts.

The EU is now much less prepared to deal with another Greek crisis, Stournaras wrote in an article published in the Kathimerini newspaper, as Europe’s most indebted state braces for negotiations with creditor institutions on a set of tough economic steps, including pension and income tax reforms.

A repeat of last year’s standoff which pushed Greece to the verge of leaving the eurozone would entail risks that the nation’s economy might not be able to withstand, the central banker said.

After months of brinkmanship which resulted in the imposition of capital controls last summer, the government of Alexis Tsipras signed a new bailout agreement with the eurozone committing Greece to economic overhauls and additional belt-tightening in exchange for emergency loans of as much as 86 billion euros (US$93.4 billion).

Greece would implement the agreement, Tsipras said in an interview with the newspaper Real News published on Saturday, but creditors should be aware that the country “won’t succumb to unreasonable and unfair demands” for more pension cuts.

Greece would reform its pension system, which is on the “brink of collapse” through “equivalent” measures targeting proceeds equal to 1 percent of the country’s GDP next year Tsipras said.

The proposals include raising mandatory employer contributions, Greek Minister of Labour, Social Insurance and Social Solidarity George Katrougalos said.

Creditors oppose an increase in compulsory contributions, as they say these create a disincentive for hiring workers and declaring incomes.

Negotiations with representatives of the European Commission, the European Central Bank (ECB) and the IMF would be “tough,” and the government is redoubling its efforts to find “diplomatic” support, Katrougalos said in an interview with newspaper To Ethnos, published on Saturday.

However, Stournaras said that escalating discussions to the level of EU leaders would be “exceptionally dangerous,” at a time of open divisions within the bloc on issues ranging from immigration to banking union.

Stalling negotiations would deepen recession, and lead to a tightening of restrictions in the movement of capital, according to Stournaras, who is also a member of the ECB’s Governing Council.

The government must implement the agreement that it negotiated last summer and parliament must back it, Stournaras said, blaming the capital shortfall of Greek lenders identified last year on prolonged wrangling between Tsipras and eurozone nations.

In addition to pension reforms, creditors are asking Greece to meet an agreed primary surplus target of 3.5 percent of GDP — excluding interest payments — by 2018.

Greece has covered 75 percent of the fiscal consolidation required to make its debt sustainable, Stournaras said.

If it was not for the “backtracking” of the first half of last year, 85 percent of the distance would have been covered by now, he said.

“Today, a new backtracking is unthinkable,” he said.

Source: Bloomberg

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