Greece, Inspectors Agree on Lower VAT Rate

Reuters

Greece has agreed with EU, IMF and ECB inspectors on a value-added tax cut, a German coalition source said on Tuesday, a move aimed at winning opposition support for more austerity and avoiding a debt default.

International lenders are demanding a broad political consensus to ensure that Greece keeps tackling its huge budget deficit for years to come, whichever party is in power.

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"They have agreed on it," the source said in Berlin, confirming Athens newspaper reports that the "troika" team, which is scrutinising Greek finances, had backed the VAT cut.

Germany is a major contributor to European Union bailouts but public opinion there is hostile to providing further rescue funding for the Greek economy.

Ratings agency Fitch questioned whether Athens would meet another demand by the lenders for a rapid and large privatisation programme, and also cut its rating for Cyprus as the island's banks are exposed to Greek debt.

Under pressure from the EU and IMF, Socialist Prime Minister George Papandreou is seeking support from the conservative New Democracy party. But on Monday its leader Antonis Samaras demanded tax cuts as the price for a deal with the government.

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 percent 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 Finance Ministry declined to comment. "We do not comment as long as the talks with the troika are ongoing," a ministry spokeswoman said.

COMPLETING THE MISSION

The troika is expected to complete its mission to Athens late this week and then produce its review of the government's progress towards 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 last May.

Papandreou's PASOK party holds a comfortable parliamentary majority. But work is underway on how to tackle a funding hole in 2012 and 2013 and the lenders want all major parties to agree to terms as Greek elections are due the year after next.

Politicians in Portugal, another bailout recipient, have already accepted similar conditions.

New Democracy, which opposed the bailout agreed last May, wants lower taxes to help boost economic activity, arguing that the policy mix applied so far is choking the economy. On Monday Samaras called for a 15 percent flat rate of corporate tax.

Government spokesman George Petalotis poured cold water on the opposition demands, saying the government could not put its budget targets at risk.

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 privatise 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 privatise 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 on Tuesday.

Rawkins also said it was highly unlikely that Greece could resume borrowing commercially during the current EU/IMF programme, which lasts until 2013.

In a sign of regional contagion, Fitch also cut Cyprus's rating to A- from AA- on Tuesday, saying it was concerned at the high level of exposure its banks had to Greek debt and the impact that could have on the island's finances.

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.