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Greece debt crisis: Here's why PM Tsipras, creditors are at odds

Cash-strapped Greece slipped deeper into financial abyss after the bailout programme it has relied on for five years expired at midnight on Tuesday and the country failed to repay a loan due to the IMF, deepening fears and anxiety over whether it will be able to remain in the Eurozone.

business Updated: Jul 01, 2015 10:21 IST
Demonstrators-take-part-in-a-protest-against-the-European-Central-Bank-in-Trafalgar-Square-London-over-Greece-s-debt-repayments-AP-Photo
Demonstrators-take-part-in-a-protest-against-the-European-Central-Bank-in-Trafalgar-Square-London-over-Greece-s-debt-repayments-AP-Photo

Cash-strapped Greece slipped deeper into financial abyss after the bailout programme it has relied on for five years expired at midnight on Tuesday and the country failed to repay a loan due to the International Monetary Fund (IMF), deepening fears and anxiety over whether it will be able to remain in the Eurozone.

With its failure to repay the roughly 1.6 billion euros ($1.8 billion) to the IMF, Greece became the first developed country to fall into arrears on payments to the fund. The last country to do so was Zimbabwe in 2001.

After Greece made a last-ditch effort to extend its bailout, Eurozone finance ministers decided in a teleconference late Tuesday night that there was no way they could reach a deal before the deadline.

Also read:Greece becomes first developed nation to default on IMF debt

Greece's Left-wing government is hoping to continue talks on a proposed new package, picking up from where the negotiations left off last week -- before an impasse prompted Greek Prime Minister Alexis Tsipras to call a referendum.

"It would be crazy to extend the programme," said Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurozone finance ministers' body known as the eurogroup. "So that cannot happen and will not happen."

http://www.hindustantimes.com/Images/popup/2015/6/Greece-8.jpg

A supporter of the 'No' vote in the upcoming referendum, holds an old 1,000 drachma bank note during a rally in the northern Greek port city of Thessaloniki. (AP Photo)

The brinkmanship that has characterised Greece's bailout negotiations with its European creditors and the IMF rose several notches over the weekend, when Tsipras announced he would put a deal proposal by creditors to a referendum on Sunday and urged a "No" vote.

The move increased fears the country could soon fall out of the euro currency bloc and Greeks rushed to pull money out of ATMs, leading the government to shutter its banks Monday and impose restrictions on banking transactions for at least a week. Greeks are now limited to ATM withdrawals of 60 euros ($67) a day and cannot send money abroad or make international payments without special permission.

Here's a look at the differences between Greece and its creditors.

Pensions

Pensions were the major sticking point in the late stages of negotiations and take up 16% of GDP in annual governmental expenditure. They also form the backbone of the country's welfare safety net.

Lenders want faster elimination of early retirement rights, across-the-board cuts in yearly expenditure and the phasing out of a top-up fund for low-earners.

The government made late concessions before the talks collapsed and is likely to follow with even deeper cuts if a new agreement is reached.

Sales Tax

Greece had an agreement to raise additional money in sales tax revenue, but disagreed on how that goal should be reached. Athens is worried that demands to slap additional tax on hotels and catering would hit its vital tourism industry, while ending tax exemptions for Greek islands would help tap money spent in busy holiday resorts but hurt others in remote island areas where goods are already expensive and state services are rudimentary.

Greece and creditors were close to an agreement on Athens' proposal to simplify existing rates to 6, 13, and 23%.

"We were very close to agreement on this. That's why we were disappointed the way the referendum was called," a European official said hours after the talks broke down.

Business Tax

Prime Minister Alexis Tsipras' left-wing government was elected on a pledge to relieve pensioners and wage-earners from austerity taxes that pushed hundreds of thousands of people into poverty. Tsipras wanted to shift the tax burden to profitable companies but was forced to extend emergency taxes, while the IMF demanded more modest business tax increased, arguing high levies would hurt chances of recovery.

In a state TV interview late on Tuesday, deputy prime minister Giannis Dragasakis conceded the government was "obliged to take more painful measures" but would keeping working to make the burden of austerity was fairer.

What else?

Creditors have a long list of other demands that include doubling proposed annual defense spending cuts to 400 million euros ($450 million) per year -- a demand the country's defense minister said this week that Greece could not accept.

Another politically sensitive demand concerns reforming labour laws that would make it easier for businesses to impose collective dismissals. The government, which wants to restore the minimum wage to pre-crisis levels, had said it had convinced creditors to delay labour reforms until the economy had recovered.

But Dragasakis on Tuesday said that the government was considering making additional concessions in six areas, including pensions and labour rules.

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