March tax overhaul to help pull country out of crisis

Greek Finance Minister Giorgos Papaconstantinou said yesterday the tax system will be overhauled by early March to broaden the tax base, boost revenues and catch tax cheats as part of efforts to pull the country out of its worst debt crisis in decades. «We must convince (markets) that Greece is walking a different path,» Papaconstantinou told reporters. «Tax reform will be key in shoring up public finances,» he said, adding that he expects the reform to begin yielding results in 2011. Papaconstantinou visited European capitals this week telling his counterparts and investors that the Greek government will reduce this year’s 12.7 percent budget hole to 8.7 percent of gross domestic product next year. The tax reform will include a capital gains tax, higher tax rates on large incomes and property holdings and a uniform progressive tax scale for all sources of income. He said Greece had the highest percentage of uncollected value added tax revenues in the European Union and widespread tax avoidance. Meanwhile, yield spreads of 10-year Greek government paper over bunds widened to 270 basis points (bps) yesterday, up 10 bps from Thursday. The minister added he expects a rating decision from Moody’s Investors Service assessing Greek debt within weeks. A reduction in Moody’s rating following cuts from Fitch Ratings and Standard & Poor’s may jeopardize the nation’s access to European Central Bank (ECB) loans. A cut by Moody’s would mean the nation’s bonds wouldn’t be accepted by the ECB if it reverts, as planned, to its pre-crisis collateral rules in a year’s time. The ECB currently accepts bonds rated BBB- as collateral after relaxing its rules in response to the financial crisis. Goldman Sachs Group said in a report the ECB should revise its collateral rules as Moody’s currently holds a veto over Greece’s access to central bank lending. «This is a bizarre and ultimately untenable situation for the ECB,» wrote Erik Nielsen, Goldman Sachs’s chief European economist in London, in a note yesterday. «Unless we get a major improvement in the Greek fiscal outlook during the next few months, the ECB would want to rectify the situation.» ECB will not bend rules for Greece, says Papademos The European Central Bank will not change plans to tighten its collateral rules at the end of next year should Greek sovereign debt fall below the required A- standard, Vice President Lucas Papademos told Reuters yesterday. Should rating agency Moody’s downgrade Greece into B territory, as Fitch and Standard & Poor’s have already done, come the end of next year, banks would no longer be able to exchange Greek government debt for cash in ECB refinancing operations. Economists warn it could prove disastrous for banks that rely on such funding and spark a new wave of problems in the financial sector. Papademos said the ECB would not bend its rules to suit Greece’s situation. «The ECB will continue to apply its collateral framework the same way as all countries,» he told Reuters television. Asked to confirm that he meant the ECB would stick to its current plans were Greece to be below the rating threshold when the changes happen, he simply replied «yes.» (Reuters)

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