Greek Dissentions Threaten Bailout Deal

by Ulrika Lomas, Tax-News.com, Brussels

18 November 2011

Overcoming a significant first hurdle, the interim crisis government of Lucas Papademos recently won by a large majority a crucial vote of confidence in the Greek parliament, although tensions already apparent within the coalition of national unity could still jeopardize implementation of the vital fiscal reform measures needed to rescue the country from the threat of bankruptcy.

Ahead of the vote, and a clear sign of tension, leader of the conservative New Democracy party Antonis Samaras categorically refused to provide written assurances to the European Union (EU) of adherence to the painful, rigorous terms of Greece’s new international bailout deal.

Such a rigid and defiant stance could, however, severely test the patience and confidence of Greece’s partners in Europe, already at breaking point, and publicly debating Greece’s future in the eurozone.

Insisting that dealing with Greece’s problems will be “more difficult” if Greece is not a member of the eurozone, Papademos underscored that the priority is to now secure release of the next EUR8bn (USD10.8bn) tranche of international aid from the first international bailout agreement and to re-establish the confidence of inspectors from the troika (the EU, the International Monetary Fund and the European Central Bank) in order to benefit from a second EUR130bn rescue package agreed at an EU summit in Brussels at the end of October.

With Greece’s debt currently standing at EUR350bn and latest statistics revealing that, despite the government’s drastic austerity measures, the public deficit is widening, the government can ill afford to reject international aid. Unpopular emergency taxes announced in September failed to increase net fiscal revenues for the government, which actually fell by 4.1% between January and October.

Luxembourg’s Prime Minister and head of eurozone finance ministers Jean-Claude Juncker recently called for Greece’s new government to pledge its commitment in writing to the bailout deal agreed with eurozone leaders at the end of October, to secure release of the next tranche of international aid by mid-December.

Following a recent meeting in Brussels, ministers welcomed the Greek decision to form a coalition government of national unity, although warning that cross-party support for the austerity package was a precondition for disbursement of the EUR8bn loan payment.

Underlining the need for sustained cross-party consensus and assurances on the second Greek rescue programme, beyond the February elections, Juncker emphasized that a letter from the new Greek prime minister is expected shortly. The letter is to be co-signed by the main political party leaders, confirming their commitment to previously agreed conditions.

Commenting on the ultimatum at the time, European Union Economic and Monetary Affairs Commissioner Olli Rehn explained that it is now imperative that Greece rebuilds confidence, destroyed following the announcement by outgoing Greek Prime Minister George Papandreou of plans to hold a referendum on the bailout deal.

The measures unveiled at the end of September, which followed a catalogue of other increases in taxation over the last year, included plans to reduce the tax-free allowance on annual income tax from EUR8,000 currently to EUR5,000, applicable to 2011 income, and to extend the government’s proposed new property tax, initially set to expire next year, to 2014.

Together with plans to accelerate reforms and privatizations, the government also proposed increasing the tax levied on domestic fuel and introducing further cuts in public sector pensions. As part of a labour reserve programme, up to 30,000 civil servants would also face job losses this year.

The government also plans to clamp down on rampant tax evasion.

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