ATHENS (Reuters) - Greece appears to have agreed a tax cut with its international lenders, aimed at forging a broad consensus for more austerity to avoid a debt default, but the opposition said on Tuesday this would still not win its support.
International lenders are demanding that leading Greek political parties sign up to the government’s latest austerity and reform drive to ensure that Greece keeps tackling its huge budget deficit for years to come, whoever is in power.
In Berlin, a German coalition source said European Union, IMF and ECB inspectors had struck a deal with the Socialist government on a value-added tax cut.
“They have agreed on it,” the source said, following Athens newspaper reports that the “troika” team, which is scrutinizing Greek finances, had backed a reduction in VAT rates.
Germany is a major contributor to EU bailouts although public opinion there is hostile to providing further rescue funding for the Greek economy.
Greece’s conservative opposition leader Antonis Samaras has demanded tax cuts -- including a 15 percent flat rate for corporate tax -- as the price for a deal with the government, which the EU has insisted on as a condition for more funds.
An official at his new Democracy Party said it wanted more than a VAT cut. “If correct, it is a good step but not good enough, not sufficient to restart the economy,” the official said.
“The corporate tax and personal income tax cuts we suggested would have more impact, less cost and no immediate cash flow impact,” the official said.
The VAT deal has not been officially confirmed and the timing of any cut remained unclear.
“As the negotiations are not yet over, it would be inappropriate to reveal everything I know,” said government spokesman George Petalotis. “We shouldn’t create expectations that may not be fulfilled.”
Financial daily Imerisia reported that Athens had the green light from the troika to lower the upper rate of VAT to 20 percent from 23 to get the opposition to agree on further measures to cut the budget deficit.
The lower rate applied to items such as food would fall to 10 percent from 13 percent, it said in an unsourced report.
The troika is expected to complete its mission to Athens late this week and then produce its review of the government’s progress toward meeting its deficit targets.
Its report will determine whether Athens gets the next 12 billion euro tranche in June under a 110 billion euro ($158 billion) rescue package Greece took from the European Union and International Monetary Fund a year ago.
Papandreou’s PASOK party holds a comfortable parliamentary majority. But work is underway on how to tackle a funding hole up to 2013, when the next parliamentary elections are due.
Politicians in Portugal, another bailout recipient, have already accepted similar consensus conditions.
Greece has fallen short of its deficit-reduction goals, raising the risk further IMF/EU funds will not be forthcoming and that it might default on its 327 billion euros of debt, equivalent to about 150 percent of its annual economic output.
One way to reduce the debt is to privatize state assets. But Fitch, which cut Greece’s rating by three notches last week, cast doubt on how much could be achieved.
“The scale of the challenge before the Greek authorities, including a new commitment to privatize 50 billion euros in state assets by 2015, and their ability to deliver in the face of rising implementation and political risk is increasingly in doubt,” said senior director Paul Rawkins.
Austerity is hitting Greek households hard. Retail sales by volume dived 17.5 percent year-on-year in March after a 10.6 percent drop in February, data showed on Tuesday.
Meanwhile, about 50,000 people gathered in central Athens, in a seventh consecutive day of anti-austerity protests. Banging cooking pots, protesters held a banner in front of parliament reading: “We won’t go away until the government, the troika and the debt leave.”
“We are under a regime of economic bondage,” the dean of Athens University Theodosis Pelegrinis told the crowd. Protesters also turned also out in Greece’s second city Thessaloniki.
Additional reporting by Renee Maltezou, Ingrid Melander and Harry Papachristou in Athens and Matthias Sobolewski in Berlin, writing by David Stamp; Editing by Diane Craft