Greek ministers and the country’s bailout monitors were on Tuesday trying to strike a deal on the pension and labour market reforms needed to unlock further financial aid.
With the clock ticking down to more than €6bn in debt repayments that Athens must make in July, negotiators say an accord on the main elements of the policy package must be reached soon to stave off the risk of a crisis this summer.
Reaching the deadline without a further tranche of bailout loans would leave Greece’s economy “in such a state that all parameters of decision-making would have to be revisited”, one EU official said. It “would be extremely detrimental”.
A deal on the reform package is one of several requirements for the International Monetary Fund to join the €86bn bailout as a financial partner — a step that Germany says is pivotal if further tranches of aid are to be provided to Greece.
People involved in the Brussels talks say a decision by the IMF to join would come only after further tricky negotiations at a technical level in Athens and after politically painful concessions on debt relief for Greece by eurozone finance ministers.
Uncertainty over the bailout has led to more deposits being pulled out of Greek banks this year, with more than €2bn being withdrawn in January and February amid fears of tighter capital controls.
The wider economy has also felt the pain from a stalled injection in bailout cash. Unemployment has remained stuck at 23 per cent, the highest in the eurozone and defying a broader recovery across the bloc, while the country’s manufacturing sector has shrunk for seven consecutive months.
The Greek economy contracted 1.2 per cent in the fourth quarter of last year, the worst performance since the country was brought to the brink of default in the summer of 2015.
Athens is thought to have been stockpiling cash in an attempt to ensure it can honour the July debt payments. The government’s budget surplus swelled to €4.4bn last year, far exceeding a €2bn target set by creditors.
The surplus has been driven by cutbacks in government spending and higher tax collections — likely to set back the faltering economic recovery in the short run, warn economists.
The policy talks centre on measures that Greece must adopt now and that would enter into force after its bailout ends in 2018.
The Greek ministers’ latest mission to Brussels comes after Alexis Tsipras, the prime minister, rejected a deal reached with creditors last month following strong reaction from senior cadres of his ruling Syriza party.
The agreement called for further pension cuts to be implemented in 2019 only months before Syriza would face a general election at the end of its four-year term.
“The cost to Syriza at the polls could send the party back into single digits [in the vote] . . . It was a deal they couldn’t swallow,” said a former Syriza activist.
Reaching the deadline without a further tranche of bailout loans would leave Greece’s economy ‘in such a state that all parameters of decision-making would have to be revisited’
Tuesday’s talks in Brussels, which officials say may stretch beyond midnight, will involve a team of Greek ministers led by Euclid Tsakalotos, finance minister; Jeroen Dijsselbloem, president of the eurogroup of finance ministers; as well as EU and IMF officials.
Mr Tsakalotos is expected to press for a delay until 2020 in introducing pension cuts, while resisting creditors’ demands to commit to labour market reforms that would include allowing mass dismissals at private companies.
Confidence in a strong economic recovery this year has shrunk as a result of the delays. Forecasts by the IMF and Bank of Greece last December of 2.7 per cent growth in 2017 have revised downwards to 1.5 per cent.
The revisions assume that Greece will reach a deal during May. “If not, we’re looking at a return to recession in the first half of the year,” said a central bank official.
Euro area finance ministers will assess progress in the Greece negotiations when they meet on Friday in Malta.
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