by Andrew Jay Rosenbaum
ANKARA
There is still time to work out a compromise that could save the Greek bailout, International Monetary Fund Chief Economist Olivier Blanchard said.
Writing in a blog post published early Monday morning, Blanchard claimed: "At the core of the negotiations is a simple question: ‘How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?’"
There is a trade off on conditions that creditors can make with the Greek government to achieve a compromise, Blanchard wrote, after negotiations between the Greek delegation and creditors broke off without success late Sunday night in Brussels.
Blanchard's proposals are the first public statement by Greece's creditors that there could be wriggle room on issues like value-added tax reform, and pensions.
Blanchard called for creditor demands for a high level of primary budget surplus to be reassessed.
"A lower target leads to a less-painful fiscal and economic adjustment for Greece. But it also leads to a need for more external official financing, and a commitment to more debt relief on the part of the European creditor countries.
“Just as there is a limit to what Greece can do, there is a limit to how much financing and debt relief official creditors are willing and realistically able to provide given that they have their own taxpayers to consider."
Blanchard also called for the set of economic reforms demanded by creditors to be re-evaluated.
"Greek citizens, through a democratic process, have indicated that there were some reforms they do not want. We believe that these reforms are needed, and that, absent these reforms, Greece will not be able to sustain steady growth, and the burden of debt will become even higher.
“Here again, there is a trade-off: To the extent that the pace of reform is slower, creditors will have to provide more debt relief. Here again, there is a clear limit to what they are willing to do."
On the fraught issue of pension reduction, Blanchard pointed out that pension expenditures account for over 16 percent of GDP, and transfers from the budget to the pension system are close to 10 percent of GDP.
"We believe a reduction of pension expenditures of one percent of GDP (out of 16 percent) is needed, and that it can be done while protecting the poorest pensioners."
Blanchard insisted that a "comprehensive" reform of value-added tax is required.
"We are open to alternative ways for designing both the VAT and the pension reforms, but these alternatives have to add up and deliver the required fiscal adjustment.
"We believe that, under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates."
However, Blanchard warned that each side would have to make "some tough choices".
The country's creditors — which include fellow eurozone states, the European Central Bank and the International Monetary Fund — want the country to commit to new economic reforms before they disburse the last 7.2 billion euros ($8.2 billion) left in Greece's bailout fund.
Another meeting for negotiations will take place on Thursday. If, at that time, no deal is reached, there is a strong possibility that capital controls will be imposed on the Greek financial system.
That would mean limiting access for businesses and citizens to their own bank accounts. Some observers predict that the current SYRIZA government could not survive such measures.
Prepare for Greek 'state of emergency': EU Commissioner
However the European Commission must prepare itself for a "state of emergency in Greece from July 1", an EU Commissioner has warned.
Gunther Oettinger was speaking in Berlin on Monday, where he suggested that European institutions should have contingency plans in case of a “Grexit” -- an exit by Greece from the single currency euro.
"I think that the Commission needs to work out a plan that could avert a worsening of the situation in the event that Greece leaves the eurozone, in the event of a bankruptcy," Oettinger told reporters before a meeting.
It is the first time that an EU official has stated that a “Grexit” was possible.
Oettinger also evoked the chaos that is likely to follow a Greek default if the Athens government runs out of money.
"Energy supplies, pay for police officials, medical supplies, pharmaceutical products and much more needed to be ensured,” he said.
"The EU has proven mechanisms that can help states to fulfill essential duties such as with police protection and healthcare," Oettinger added.
"The offer is still valid to hold Greece in the eurozone. But, for that to happen, Greece will have to move its positions on pensions and its general budget consolidation," Oettinger warned.
Negotiations between the Greek government and its creditors broke down on Sunday, although the International Monetary Fund issued a statement suggesting possible compromise positions for each party.
Negotiations will begin again on Thursday between the Greek delegation and the Eurogroup to try to reach a solution before the term of the Greek bailout ends on June 30.
ECB: Political agreement now needed for Greek bailout
A political agreement is now needed for a deal on the Greek bailout to be reached, European Central Bank (ECB) President Mario Draghi said in a speech Monday.
"It is up to the Eurogroup, which represents the member states and their democratically elected representatives, to decide on an agreement," Draghi said.
"The ball is now entirely in the Greek court, but we hope that the actors involved will all go the extra mile," Draghi said.
"The ECB will continue to provide emergency loans to Greek banks that are solvent and which can provide adequate collateral."
Draghi pointed out that $118 billion had been provided so far and more was to come.
The bank has decided to increase the emergency loan limit to Greece, as well, Draghi said.
With regards to the eurozone economy, Draghi said that growth was now moderate and continuous, thanks to the ECB's stimulus program.
Draghi cited the bank's projections for growth for the coming years as 1.5 percent for 2015, 1.9 percent in 2016, and 2 percent in 2017.
Inflation is projected at 0.3 percent for 2015, 1.5 percent for 2016, and 1.8 percent in 2017.
"Credit dynamics have been strengthened, although loan growth to the private sector is lagging behind economic growth," Draghi said.
"New loans to businesses are weak," Draghi said. But he pointed out that loan prices have improved, with interest rates on loans to households and businesses lower in April.
As interest rates are reset, and new credit contracts are made, improved credit conditions will reach a growing number consumers and investors, he added.
Finally, Draghi said that the architecture of the eurozone was incomplete, and that the bank was working to provide a roadmap for a consistent architecture.
"The eurozone needs a quantum leap," Draghi said.
