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Euro zone puts Greek debt relief on hold in Christmas bonus row

BRUSSELS (Reuters) - Euro zone lenders put a short-term debt relief deal for Greece on hold on Wednesday after the Athens government proposed a one-off payout to pensioners, the euro zone bailout fund ESM said.

Euro zone finance ministers agreed on Dec. 5 to grant Greece short-term debt relief that would reduce its public debt by 20 percentage points of GDP by 2060.

But three days later, Greek Prime Minister Alexis Tsipras said his government would spend 617 million euros in one-off benefits for low-income pensioners ahead of Christmas because Greece had exceeded its 2016 primary surplus target.

The Greek government has also annoyed its lenders by deciding to continue a 30 percent discount on levels of value-added tax charged on some Greek islands.

“Following recent proposals by the Greek government to spend additional fiscal resources for pensions and VAT our governing bodies have put their decisions temporarily on hold,” a spokesman for the ESM said.

“Institutions are currently assessing the impact of Greek government decisions vis-a-vis the ESM program commitments and targets. (We) will then analyze the institutions’ assessment and subsequently decide how to proceed,” the ESM spokesman said.

Greek government borrowing costs rose to one-month highs on the news.

In a defiant response to the lenders’ move, Athens said it would hold a parliamentary vote on the pension payments on Thursday in an effort to rally domestic support.

Greek pensioners, who have seen repeated cuts in their pensions during seven years of recession as part of a bailout-mandated austerity drive, have already snubbed the bonus plan as a “ruse” and plan rallies in Athens on Thursday.

The ESM had already criticized the payout proposal on Monday, but Tsipras was defiant in a speech the following day.

“When we exceed targets and revenue by sticking to the program, we will not seek anyone’s permission to give this money to those who need it most,” he said.

The International Monetary Fund, which a group of countries led by Germany hope will join the bailout program to provide greater credibility, says euro zone targets set for Greece are too ambitious and assumptions on reform implementation too optimistic.

The IMF insists that euro zone governments, which now own most of Greece’s debt, should grant it substantial debt relief by extending maturities.

Germany and other euro zone countries say a discussion on such a move can take place in 2018, once Greece completes its bailout reforms. This would also move the politically sensitive debt issue past German elections in the second half of 2017.

Tsipras is due to meet German Chancellor Angela Merkel in Berlin this week.

Additional reporting by John Geddie in London, Karolina Tagaris and Michele Kambas in Athens and Gernot Heller in Berlin; Editing by Gareth Jones