Tsipras agrees to more austerity in exchange for debt relief

The Greek government has unveiled plans for a €13 billion austerity budget in a last-ditch attempt to secure a debt deal with its EU creditors.

The proposal sent to Brussels Thursday evening (9 July), sets out plans to save around €13bn, far more severe than the package of €8 billion of spending cuts and tax rises contained in the proposal rejected by Sunday's referendum.

It has also been submitted to the Greek parliament and is set to be debated and voted on Friday,

It contains much of what was proposed to creditors two weeks ago, including increasing the retirement age to 67, but goes further in the areas of VAT reform and pensions. The plan would also scrap Greece’s scheme of offering supplementary pensions to the poorest people by 2019, a year ahead of the 2020 deadline previously proposed.

It also includes increases to VAT aimed at generating savings worth 1 percent of GDP, and a further €300 million in cuts to defence spending over the next two years.

More controversially, the left-wing Syriza government is proposing to increase taxes on low earners if its proposals lead to ‘fiscal shortfalls’.

Should the package not raise the €13 billion target, the government will increase taxes on incomes below €12,000 from 11 percent to 15 percent, and to 35 percent on wages over €12,000.

On Sunday, Greeks voted by a decisive 61 to 39 percent margin to reject the last bailout offer put to their government by the EU and IMF. However, with a majority of Greeks, including ‘No’ voters, anxious that the country should remain in the single currency, Tsipras appears to have backed down from his promises to end austerity.

In return, Greece is hoping for a third EU bailout, featuring a three-year loan package worth €53.5bn, and for its EU creditors to restructure its debt burden which stands at 175 percent of economic output.

“With this proposal the Greek people and the Greek government, confirm their commitment to fulfilling reforms that will ensure that Greece remains a member of the eurozone, and ending the economic crisis,” said Greek prime minister Alexis Tsipras in a letter sent on Thursday to the Presidents of the European Commission and European Central Bank.

Greece’s creditors and eurozone finance ministers will now consider the new proposal on Friday ahead of a leaders’ summit on Sunday, widely billed as the last chance to prevent Greece tumbling out of the eurozone and into a messy default on its debts.

Earlier on Thursday, EU leaders traded rhetoric over whether a portion of Greece’s debt pile, widely seen as unsustainable by economists, could be restructured.

“The realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors,” European Council president Donald Tusk i, who will chair Sunday’s summit, told reporters on Thursday. “Only then will we have a win-win situation,” Tusk added.

However, German finance minister Wolfgang Schaueble, consistently hawkish on the issue, warned that “the room for manoeuvre through debt reprofiling or restructuring is very small”.

Oliver Blanchard, the IMF’s chief economist, also weighed in to the debate, a week after the Fund warned that up to 30 percent of Greece’s debt would have to be written off in order to make the overall debt burden sustainable.

In a blogpost, Blanchard commented that the economic chaos caused by two weeks of capital controls in Greece “may well imply the need for even more financing, not least in support of the banks, and for even more debt relief than in our DSA (debt sustainability analysis)”.