Why the 'obsession' with pension cuts, asks Greek PM Tsipras

Greek Prime Minister Alexis Tsipras

Greek Prime Minister Alexis Tsipras

Greek Prime Minister Alexis Tsipras maintained his refusal to consider further pension cuts to unlock financial aid after meeting Austria’s Chancellor, who travelled to Athens seeking an eleventh-hour solution to keeping Greece in the eurozone.

Werner Faymann—one of the European leaders most sympathetic to the Greek government’s demands for an end to austerity—met with Tsipras for nearly two hours on Wednesday at the prime minister’s office in Athens.

But there was little sign of movement from Tsipras who sees further pension cuts to low earners, a core component of demands for more economic reforms from Greece’s international lenders, as a red line his leftist Syriza party will not cross.

“The margins for new cuts in pensions have been exhausted. We can’t understand the obsession of the lenders with pension cuts,” Tsipras told reporters after the meeting.

” ... If we don’t have an honourable compromise and an economically viable solution, we will take the responsibility to say no to the continuation of a catastrophic policy.”

Faymann coordinated his visit with European Commission president Jean-Claude Juncker.

It comes a day before a meeting of eurozone finance ministers, seen as possibly the last chance to stop Greece sliding into a default that would push it towards the euro exit door.

“I can’t see a solution lying before me but I see that if we are convinced we want one, we have a good chance,” the centre-left Austrian leader said.

He said he could not imagine a prosperous and peaceful future for Europe if Greece left the eurozone, and said he knew that Juncker wanted to find a compromise.

“So it is a joint task for Europe, including the eurozone, to look forward to the future together,” he said.

Negotiations to free up €7.2-billion in funding from the European Union, European Central Bank and International Monetary Fund have been deadlocked, raising fears that Greece will unable to meet a €1.6-billion payment to the IMF due on June 30.

After days of barbs and finger-pointing between Athens, Brussels and Berlin over the failure of talks at the weekend, Faymann struck a conciliatory tone, saying the two sides had to talk as equals, without “gloating or Schadenfreude”.

“I personally think it is sensible not to impose further cuts on pensions, particularly low-income pensions,” he said.

“But I think you have to offer something in exchange in negotiations,” he said.
“I have had some signs that the prime minister and the government are working on these counterproposals.”

What happens next if Greece defaults on IMF?

Greece has said it will default on a €1.6-billion debt repayment due to the International Monetary Fund on June 30 unless it receives new funds from its creditors by then, in a move that could set off a chain of events that might eventually pitch Athens out of the eurozone.

A source familiar with the debt talks said the IMF does not provide a grace period, so if it missed the payment Athens would immediately be considered to be in default to the global lender.

That would likely cause turmoil on Greek and eurozone financial markets and might hasten the pace of deposit withdrawals from Greek banks, forcing the government to impose capital controls to stop money fleeing the country.

However, a senior EU official said a non-payment to the IMF would not automatically trigger a default on eurozone government loans to Greece.

The next big question would be how long the European Central Bank was prepared to continue authorising emergency lending to Greek banks, which is secured partly on the bonds of a defaulting government.

The ECB’s policy-making governing council has been conferring weekly since February on the ceiling for emergency liquidity assistance (ELA) from the Greek central bank to commercial lenders, which has been raised incrementally to the current €83.7-billion.

The ECB might freeze or lower that ceiling, or increase the so-called “haircut” or discount it applies to collateral presented by Greek banks, both government bonds and private loans, which would presumably be deemed at greater risk.

Greece’s next major repayment hump comes in July and August, when it has to redeem bonds held by the ECB for a total value of €6.8-billion.

Even if the central bank continued limited funding for Greek banks after a government default on the IMF, the political pressure to pull the plug if Athens defaulted on the ECB would likely be overwhelming, people familiar with the situation say.

There might be calls by some eurozone creditors to suspend payment of funds from the European Union budget to Greece, although there would also likely be pressure from civil society organisations to provide humanitarian aid as the Greek economy reeled from the impact of a default.

Credit ratings agency Standard & Poor’s downgraded Greek government debt and that of four Greek banks to CCC junk level last week, reflecting the likelihood of default within 12 months in the absence of a deal between Athens and its creditors.

S&P also said the government appeared to be prioritising paying pensions and wages over debt service to official lenders.

How much longer the Greek government would be able to go on paying civil servants, pensioners and essential suppliers is not clear. The state budget is close to primary balance before debt service and the government has ordered public authorities to hand over all spare cash to the central bank.

However, tax revenue would be likely to dwindle due to the uncertainty caused by a government default.

Many suppliers say they have not been paid for months, and at some stage, the government might have to pay all or part of its payments in IOUs. This could effectively create a parallel currency if IOUs began to be exchanged for goods or euros at a discount to their face value. - Reuters

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