Greek split with creditors said to come down to catering VAT

Sales tax on catering may be the largest difference between Greece and its creditors as they negotiate rescue arrangements this week, according to two European Union officials.

The rate of value-added tax is the main sticking point to getting a deal, with Greece’s proposed target for 2016 still some way short of creditor demands, the officials said. Euro- area finance ministers will gather again in Brussels Wednesday to try to hammer out a path forward.

If any deal is to come this week — either when the finance ministers gather or at Thursday’s leaders’ summit — it will only be an agreement in principle, not a full agreement, one of the officials said. To unlock funds, Greece will need to go further and enact legislation to carry out its bailout commitments.

“Some doubt is in order” whether Prime Minister Alexis Tsipras can pass the VAT reform with his current coalition, said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics. “Further Greek concessions would seem necessary to win acceptance of the full Troika.”

Greek stocks rose as much as 3.6 percent 1:18 p.m. in Athens Tuesday after jumping 9 percent in the first trading session of the week when the government submitted new proposals addressing the areas of pensions, sales taxes and fiscal targets that had proven the chief barriers to a deal. The yield on Greece’s 10-year bonds dropped 56 basis point to 10.6 percent, the lowest in two weeks.

With the clock ticking toward a June 30 deadline both for the expiry of the European portion of Greece’s bailout and payments to the International Monetary Fund, euro-area leaders at a summit in Brussels late Monday stressed that more work needs to be done.

VAT Demands

As work on a final deal advances, Belgian Finance Minister Johan Van Overtveldt and other critics have said Greece’s offer depends too heavily on taxes.

While differences remain in several areas, creditors want Greece to raise the equivalent of 1 percent of gross domestic product more from VAT in 2016 and this could be achieved by raising sales tax on catering to a rate of 23 percent from 13 percent, the two EU officials said. Greece proposed measures that would net 0.74 percent of GDP, and raising sales taxes on catering and hotels could bridge the gap, one official said.

Greece will have to show its commitment to this by passing a law in advance of any euro-area agreement to unlock aid, the first diplomat said. Alexis Tsipras’s government proposed to maintain three VAT rates, a Greek official said by e-mail, on condition of anonymity.

Once an aid package is agreed on, it will need formal endorsement by finance ministers and the three institutions: the IMF, the European Commission and the European Central Bank. Some countries, like Germany, also require any joint bailout actions to pass a national parliament vote.

German Parliament

While Germany still insists on a package of steps that includes higher taxes, state asset sales and less generous retirement benefits, they may settle for a clear commitment by the Greek government to a measure up front to unlock aid, people familiar with Germany’s position said earlier this month.

More recently, Germany has demanded that Greek lawmakers take the first step by passing economic policy changes, according to a planning document obtained by Bloomberg.

Time is too short for a “normal parliamentary procedure” in the “last days” before Greece’s aid program expires, the German Finance Ministry said in the document. While lawmakers in Berlin can invoke a fast-track procedure, its success is likely to depend on the “quality and persuasive power” of an agreement with Greece, the paper said.