Greece, lenders assess bailout compliance; Finance Minister says economy healthier

Wed Oct 21, 2015 11:17am EDT

ATHENS | BY RENEE MALTEZOU AND LEFTERIS PAPADIMAS

Greece and its international lenders began talks on Wednesday to test its compliance with terms of an 86 billion-euro bailout deal, as authorities said a recession this year would be milder than expected.

Athens got its third multi-billion euro lifeline from creditors this year, pulling it back from the brink of crashing out of the euro. But it needs to fix a creaking pensions system, raise taxes and plug capital gaps in its banks this year.

Team leaders from three European Union institutions and the International Monetary Fund are reviewing reforms Athens adopted on Oct. 16 and future "milestones" Greece must pass soon to be eligible for a loan payment of 3 billion euros.

The payment is part of an initial tranche of 23 billion euros. Another 10 billion has already been disbursed to Greece and 10 billion set aside to cover recapitalization of the country's four big banks.

A bill governing bank recapitalization, which sources say will be less than 20 billion euros, will be submitted to parliament "soon", Finance Minister Euclid Tsakalotos said. European Central Bank stress tests identifying the capital needs of each bank are due by Oct. 31.

SHALLOWER RECESSION

Capital buffers at Greek banks were depleted both by a run on deposits earlier this year and by an increase in non-performing loans after five years of recession and record unemployment.

However, officials now expect the economy to contract just 1.4 percent this year, compared with earlier estimates of 2.3 percent.

"The impact (from the capital controls) was not as serious as we had feared," Tsakalotos told lawmakers. "That's why the results in the third and fourth quarter of the year will be much better than we had expected."

His deputy, George Chouliarakis, went further, telling parliament the authorities may even lift capital controls in the first quarter of 2016 if the economy stabilizes, less than a year after they were imposed.

Cyprus was the first country in the history of the euro zone to impose capital controls, in March 2013. They were not fully dismantled until two years later, in April 2015.

PENSION REFORMS IN FOCUS

Fiscal and pension reforms and recapitalizes banks were on the agenda of talks with lenders, a Greek government official said, as delegations met at a central Athens hotel.

The left-wing government has passed legislation raising the retirement age, increasing healthcare contributions, scrapping most early retirement benefits, and clamping down on tax evasion.

The next phase includes taxing farmers, raising tax for private education, merging pension funds and addressing bad loans, which are blamed for weakening banks and stunting growth, since lenders cannot extend new credit.

Officials said talks would address a foreclosures framework lenders want in place for banks to handle bad loans, which now represent more than 40 percent of their loan books.

Civil servants and private-sector workers have called a nationwide strike for Nov. 12, the first signs of mass dissent since Prime Minister Alexis Tsipras's Syriza government was elected in January.

Labour Minister George Katrougalos said pension reform meant a streamlined and simplified system.

"A basic element will be a national pension for all, funded through taxation. We estimate the burden for the national pension will be 7 percent of GDP (gross domestic product); now it is 9.5 percent of GDP," he told Antenna Television.

($1 = 0.8809 euros)

(Additional reporting by Angeliki Koutantou, Writing by Michele Kambas; Editing by Larry King)