Greece beats deadline, offers reform plan that yields to lender demands

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Sobered by reports that Eurozone partners were ready to let Greece fall out of the common currency club, the Greek government Thursday delivered a new package of economic reforms to its creditors that capitulated to lenders’ demands for raising taxes and the retirement age.

The leftist leadership of Prime Minister Alexis Tsipras had just two weeks ago drawn “red lines” around pensions and state workers’ salaries to shield them from deeper spending cuts demanded by the lenders, a bold rejection that was endorsed by a healthy majority of Greek voters in a referendum Sunday.

But faced with imminent collapse of the country's banking system and the specter of economic catastrophe and social unrest, the populist government was reported by Greek media to have yielded on the sticking points that led to collapse of previous talks on a new rescue plan. The proposals were delivered two hours before Thursday’s midnight deadline, the iEfimerida news site reported.

“The government is doing all that it can to reach an immediate deal and end this cycle of uncertainty,” said government spokesman Gabriel Sakellarides. “We are optimistic that a deal will be reached.”

The Tsipras Cabinet endorsed the new plan Thursday evening, reversing its earlier insistence that pensioners be spared any further hardship. The new reform package would push the retirement age to 67 and cut pensions by 15% for those who choose to retire at 62, which those with 40 years or more in government service are eligible to do.

The government also plans to withhold more tax from state salaries and pensions and to deduct a 6% healthcare premium from retirees' checks, Mega TV and other Greek media reported.

The program of spending cuts and tax increases is aimed at securing at least an additional $55 billion from the creditors to keep the economy afloat for the next two years. In exchange, the government also pledges to boost the value-added tax on restaurant bills to 23% from 13% and end the special tax exemptions for Greek island businesses. The reforms are predicted to generate at least $13.2 billion in revenue over the next two years to service the country's debt from $270 billion in two previous bailouts.

On Wednesday, the Greek government sent a letter to the European Stability Mechanism, a fund set up since the country first sought bailout funds in 2010, requesting immediate assistance because of the fragility of the banking system and a clear shortage of cash. The letter did not give specifics but said that the government would immediately begin to implement budget reforms as early as Monday.

Greece has been in an economic free fall since Tsipras last week called a snap referendum on the austerity measures demanded as a condition for new talks with the creditors on a third bailout. Banks have been closed and capital controls have been imposed for nearly two weeks, paralyzing the economy. Greeks cannot withdraw more than $66 a day from ATMs, and pensioners without ATM cards are allotted about $132 a week. Banks will remain closed through Monday, the Economy Ministry said.

Greeks rejoiced when a 61% majority in Sunday’s vote rejected more austerity measures. However, the excitement dissipated as the reality began to sink in: If the government fails to secure new rescue loans by Sunday’s European Union summit, the spigot of assistance will be turned off and banks will run out of cash.

The apparent concessions by Athens were probably aided by a growing recognition among the creditors and Eurozone colleagues that Greece’s debt, more than 175% of GDP, is unmanageable and needs to be reduced or rescheduled for payment over a longer period. There is also discussion on the lenders’ side of ensuring that interest rates remain low to prevent the debt burden from growing further.

The Greek reform plan will have “to be matched by an equally realistic proposal on debt sustainability from the creditors,” European Council President Donald Tusk said Thursday. “Only then will we have a win-win situation. Otherwise, we will continue the lethargic dance we have been dancing for the past five months.”

Meanwhile, European Commission President Jean-Claude Junker acknowledged that a scenario that sees Greece exiting the euro has been prepared in detail. A Reuters poll of economists Thursday showed that 55% of respondents expected such an exit.

After Sunday's referendum, the European Central Bank said it would not increase liquidity assistance, weakening the already struggling Greek banking system. Jens Weidmann, a German commissioner with the bank, observed in a speech Thursday that it has “no mandate to safeguard the solvency of [national] banks and governments” and that it was a wise move by the bank to cut off emergency cash infusions to Greece so that they are no longer being used to finance capital flight.

Fearful of a banking collapse, Greek depositors had been withdrawing their savings at a rate that would have exhausted the nation’s euro supply without the emergency infusions, and may still do so if an agreement between Athens and its creditors isn’t forthcoming in the next few days.

Special correspondent Tsiantar reported from Athens and Times staff writer Williams from Los Angeles.

Tsiantar is a special correspondent.

Twitter: @cjwilliamslat

Copyright © 2016, Los Angeles Times

UPDATES

4:02 p.m.: This article has been updated with additional information and background.

1:15 p.m.: This article has been updated to note that the government reform plan has been delivered to the Eurogroup and will be voted on in parliament on Friday.

11:00 a.m.: This article has been updated to include details of the Greek government's new reform proposals to creditors.

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