Greek Prime Minister Alexis Tsipras submitted a last-minute reform package, conceding to many creditor demands in a desperate bid to avert an economic collapse and stock market crash. (Source: The Wall Street Journal, July 10, 2015.)
In many ways, the deal bears a resemblance to the one rejected by Greece’s referendum. The country’s powerful creditors, known collectively as the Troika, demanded serious change in Greece’s pension and tax systems. The Troika is composed of the European Commission, the European Central Bank, and the International Monetary Fund.
Greece’s proposal agrees to a sales tax hike and cuts to early retirement benefits. The savings from pension reform will generate between 0.25% and 0.50% in 2015. By 2016, savings should have reached one percent of gross domestic product (GDP). (Source: Bloomberg, July 10, 2015.)
The sales tax hike will apply mostly to Greece’s islands, a popular destination among European vacationers. Although the tax will hurt tourism on the island, hotels will still qualify for a special 13% business tax rate, thus limiting the fallout.
After the plan was released, the European Stoxx Index and the German SAX Index jumped nearly three percent and 2.5%, respectively. Even North American markets moved on the news, with the Dow Jones Industrial Average, the S&P 500, and the NASDAQ all edging up by more than one percent.
Can Greece Avoid an Economic Collapse in 2015?
After sweeping to power on a wave of populist rhetoric, Tsipras delivered on his promise of tough negotiating with Greece’s creditors. He spurned deals that he deemed unfair and damaging to the economy. He even let Greece default on its debt obligations rather than take an unsatisfactory deal.
And when the creditors’ proposal was put to a referendum in Greece, the country overwhelmingly supported the decision of Tsipras. He was given a second mandate by his people, yet the Prime Minister chose to abandon his adversarial stance and opt for compromise. Why?
To explain the change in Mr. Tsipras’s attitude, many analysts are pointing to the size of the bailout. Earlier negotiations centered on a five-month extension of funding, but now Greece is asking for a $59.9 billion package to secure their financing for the next three years. The Mediterranean nation is also demanding debt restructuring for its existing loans, a measure they say is key to long-term fiscal sustainability.