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Greece Lowers Surplus Targets in Test to Deal With Creditors

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Greece’s government has set its annual primary surplus targets to 2.5 percent of gross domestic product from 2020 to 2022, challenging an agreement with its creditors in the euro area and the International Monetary Fund that called for a primary surplus of 3.5 percent.

Greek Prime Minister Alexis Tsipras said in a news conference Tuesday that even with a lower primary surplus Greece will meet its debt obligations and to this end Greece created an escrow account transferring 5.5 billion euros ($6.15 billion) from the state’s cash reserves as a guarantee to its creditors.

The country’s contribution to debt reduction was to achieve primary surpluses of 3.5 percent every year until 2022, Finance Minister Euclid Tsakalotos explained in the news conference. “We had promised to deliver 3.5 percent of our GDP to our debt servicing, and this is what the creditors will get,’’ Tsakalotos said. This will take place either straight from the country’s surplus, or from the escrow account. Greece is due to present the plan to its creditors.

‘Very Clear’

Fiscal targets were agreed with creditors in exchange for some debt relief measures and were included to their debt sustainability analysis for Greece. “The commitment the Greek government made in the context of the ESM program and the medium-term debt relief measures is very clear: The agreed primary surplus target until 2022 is 3.5 percent of GDP,” a spokesperson from European Stability Mechanism said right after government announced its plan.

The government sounded an optimistic and confident tone in its assessment.

“The issue is a political one and there will be discussions with creditors, but it is a win-win idea,” a government official said asking not to be named in line with policy.

It’s important for Greece to stick with agreed post-program fiscal targets, European Commission Vice President Valdis Dombrovskis told Bloomberg. “We’ll need some more in depth discussions with Greek authorities on what exactly they have in mind.”

The yield on the 10-year Greek note rose by 10 basis points to 3.45 percent at 2:21 p.m. in Athens, the highest since April 10. It fell to its lowest since Sept. 2005 on April 15 at 3.27 percent as the Greek government looked to repay ahead of schedule part of the loans that the IMF granted to the country.

Tsipras also decided to proceed to further tax relief measures starting from this year as well as to implement an annual allowance to pensioners that amounts to 800 million euros. “The time has come for Greek peoples’ sacrifices to receive justice,” Tsipras said.

The premier’s term in office is due to end in September and the country is already in election mode prior to the European Parliament vote May 26. The ruling Syriza party is lagging in the polls and Tsipras hopes that the latest measures will help to reduce the gap with the main opposition New Democracy.

The package includes a reduction of the higher rate of sales tax for food to 13 percent from 24 percent and a cut in the lower band to 11 percent from 13 percent. The government also plans to abolish the solidarity tax for incomes of as much as 20,000 euros per year and lower the contributions for incomes higher than this.

The measures come ahead of the fifth confidence vote for Tsipras’s administration since he came to power in 2015. Debate for the ballot is scheduled to begin Wednesday. The vote in parliament will take place late Friday.
Source: Bloomberg

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