Greece Faces Two Year-Recession Amid Bailout Cuts

By Gabriele Steinhauser in Brussels and Andrea Thomas in Berlin 

        Greece faces two years of recession amid sharp budget cuts and overhauls mandated by its EUR86 billion ($95 billion) bailout agreement, European Union officials said, as Greek Prime Minister Alexis Tsipras expressed confidence that the deal would be completed.
        The country's economy is expected to shrink 2.3% this year because of the recent months of turmoil and the cuts required by the bailout, the officials said, citing the latest estimates from the institutions that have been negotiating Greece's new aid program. Next year, it is projected to contract 1.3%
        Only in 2017 is the economy predicted to return to growth, expanding an expected 2.7% that year and 3.1% in 2018.
        EU officials released the figures Wednesday after the Greek government and the bailout institutions--the European Commission, the European Central Bank and the International Monetary Fund--agreed on a 29-page document that sets out budget cuts and overhauls to be implemented over the next three years. The document, seen by The Wall Street Journal, underlines the difficult battle ahead for Athens if it wants to keep the euro as its currency and reduce its mounting debt.
        Mr. Tsipras, who has been fighting a schism in his own party over the deal, said he felt sure it would go ahead.
        "Despite the obstacles and trip-ups that some are attempting to put in our path, I am optimistic that we will reach an agreement that will bring an end to economic uncertainty," he said.
        Under the program, Greece would have to limit its primary deficit, which doesn't include interest payments, to 0.25% of gross domestic product this year. Without the new measures, Greece would have had a primary deficit of 1.5% of GDP this year, the document says.
        By 2016, it would be expected to meet a primary-surplus target of 0.5%, followed by a 1.75% primary surplus in 2017. From 2018 onward, the agreement calls for the government to produce a 3.5% primary surplus every year--something few advanced economies have been able to do.
        By the end of Thursday, the Greek Parliament is required to pass some 40 new laws, which would make it harder to retire early and easier to dismiss workers, overhaul tax collection and public wages, and liberalize the country's energy market, to name just a few examples.
        Only once that is done would eurozone finance ministers decide whether Greece could get a first slice of loans from the new bailout in time to make a EUR3.2 billion payment to the ECB on Aug. 20.
        The finance chiefs, who have to approve the bailout unanimously, are scheduled to meet Friday afternoon, a spokesman for Jeroen Dijsselbloem, the Dutch finance minister who presides over the meetings with his counterparts, said in a tweet.
        In Berlin, a spokesman for German Chancellor Angela Merkel said the bailout program was going "in the right direction." But an internal document from Germany's finance ministry, which has been seen by The Wall Street Journal, criticized the fiscal targets, which are weaker than those discussed earlier this summer, and the timing of some overhauls, saying they lagged behind what eurozone leaders agreed on last month.
        A spokesman for the ministry said that such scrutiny was part of the regular assessment process and that the issues would be discussed at the Friday meeting.
        The bailout document doesn't set out a path for lifting capital controls, which have forbidden transfers abroad and limited cash withdrawals to EUR420 a week since the end of June. One of the EU officials said that the aim was to enable businesses that are importing or exporting products to make international transfers by September or October.
        However, some restrictions on withdrawals and transfers are likely to remain in place for some time. Of the overall bailout, EUR25 billion has been set aside to recapitalize Greece's banks, hurt by deposit outflows and bad loans. The ECB and the Bank of Greece would conduct stress tests on the country's banks, with the aim of recapitalizing lenders by the end of the year, the document says.
        A big part of the legislation that Greece's Parliament has to implement this week and in the coming months is related to overhauling the country's insolvency system, both for households and businesses.
        Some Greek banks have as many as 45% of loans in arrears, one of the EU officials said, and dealing with these borrowers would be key to getting banks to lend again. However, in practice, that would lead to foreclosures on homes and businesses shutting down, creating a drag on the economy in the short-term.
        The EU officials said this bailout program, Greece's third since 2010, would distribute the impact of cuts and overhauls more evenly to protect the poorest citizens. To provide a buffer against the hit to pensions--which have sustained many Greek families amid record-high unemployment--Greece would roll out a nationwide guaranteed-minimum-income system from April, according to the document.
        What that system will look like in practice remains unclear. Pilot programs in some Greek regions currently supplement incomes to some EUR300 a month, one of the EU officials said. The bailout document says that the program would have to be fiscally neutral.
        The bailout document gives Athens more time to set up a EUR50 billion privatization fund, which was one of the key elements of the tentative rescue deal sealed by eurozone leaders last month. A task force looking at the mechanics of the fund would be created in October and issue recommendations by the end of the year. Implementation of these recommendations would start in the spring of next year.
        During a teleconference of senior officials from EU finance ministries, representatives from a number of countries--including Germany, Austria, Spain and Portugal--raised questions over the later establishment of the fund and why some of the other overhauls weren't part of the first required set of measures, a European official said.
        Stelios Bouras in Athens contributed to this article.
        Write to Gabriele Steinhauser at gabriele.steinhauser@wsj.com and Andrea Thomas at andrea.thomas@wsj.com
        (END) Dow Jones Newswires
        August 12, 2015 16:42 ET (20:42 GMT)