Greek lawmakers were pragmatic when they took the painful decision on Sunday to approve unpopular tax increases, a new privatisation fund, and free up sale of non-performing loans in exchange for
much-needed bailout loans and debt relief.
They will hit Greeks where it hurts, with increases in value added tax by one point to 24 per cent, more tax on fuel, tobacco and internet usage.
By approving these inevitable measures shortly before a key euro zone finance ministers meeting, Athens hopes the move will help it unlock the funds it needs to pay IMF loans, ECB bonds maturing in July and increasing state arrears.
Greece’s 10-year bond yields fell 24 basis point, or 0.24 percentage point, to 7.21 percent, after lawmakers approved additional austerity measures, raising concerns among investors.
People across Greece’s political spectrum have criticised the massive bill. In their last-ditch attempt to stop approval of reforms, hundreds of demonstrators rallied outside parliament to protest against the reforms — but their efforts were in vain as the slim majority in the parliament grudgingly passed the reforms.
Making a passionate plea before a vote in parliament, Prime Minister Alexis Tsipras told lawmakers, “Greeks have already paid a lot, but this is probably the first time that the possibility of these sacrifices being the last is so evident.”
Being aware the reforms are unpopular, he appeased the angry public when he told lawmakers that each time Athens exceeds its annual primary surplus targets, the extra state revenues would go to a social solidarity fund. About €700-million would go to the fund this year, he said.
The move is economically sound as a debt restructuring will help attract investors and convince Greeks their sacrifices are starting to pay off after seven years of painful austerity measures.
By clearing the reforms, Athens has thrown the ball in the court of European leaders. It has fulfilled its obligations.
EU Economic Affairs Commissioner Pierre Moscovici on Monday hailed the new batch of Greek austerity measures as “key” to unlocking bailout funds.
Talks between Athens and its foreign creditors over the reforms have dragged on for months, mainly due to a rift between the EU and the IMF over Greece’s fiscal progress and resistance in Athens to unpopular measures.
The IMF doubts Greece will achieve a 3.5 per cent primary surplus target in 2018 or later unless it gets substantial debt relief and takes upfront measures. It has set both as conditions for its participation in the bailout. EU lenders insist the targets are feasible but euro zone paymaster Germany needs the IMF to be involved.
To break the deadlock, practical Athens has included a contingency mechanism of spending cuts, which will be activated if it is set to miss its bailout
targets. The IMF has yet to approve it.
With Athens reforms at its hand, Eurogroup meeting on Tuesday will discuss the mechanism and flesh out details on how to ease the country’s debt burden. Athens wants a concrete deal on short-term and medium debt relief.
Greek newspapers which reflect public opinion on Sunday complained that the new measures — including a top rate sales tax increase from 23 to 24 percent — did not come with a promise of debt relief from the country’s international creditors.
Public disapproval of reforms could not bail out Greece from its economic crisis. Even with a slim majority, the lawmakers got it right when they approved the reforms that may deliver.
The long-awaited move will convince creditors that Athens has started to take the initiative to pay the loans and implement structural reforms.