by Victoria Dendrinou

BRUSSELS—Significant divisions still exist between Greece and its international creditors over steps Athens must take in exchange for fresh loans, European officials say, delaying the start of critical negotiations between the two sides on restructuring the country’s mounting debt load.

Any further holdup of new funds, with government payouts already being delayed, would weigh on an economy already suffering from capital controls imposed in June.

Under the €86 billion ($93.5 billion) bailout agreement Greece’s left-wing government struck with its lenders in August, Athens was supposed to enact 48 economic policy overhauls by mid-October to unlock to some €2 billion in financial aid. More than two-thirds have been implemented, European Union officials say, but the ones that remain present big challenges for the government.

The delays in reform implementation, partly the result of national elections in September, have also pushed back the bailout schedule, which originally foresaw an additional €1 billion in financial aid being paid out by mid-November.

Divisions between Greece and its bailout supervisors—representing eurozone governments and the International Monetary Fund—persist on key issues such as the treatment of banks’ bad loans, the rules for mortgage foreclosures and how to raise enough revenue to scrap a proposed tax on private education.

Dealing with the mountain of bad loans is a major political sticking point for Athens, which wants to protect families who earn less than €35,000 a year and who own houses worth €200,000 or less from having their properties repossessed. This amount is already lower than the Greek government’s initial proposal of protection for homes worth up to €300,000.

Greece’s creditors are pushing for protection only for homes worth up to €120,000 and families with poverty-level incomes, arguing that the government’s position will encourage the nonpayment of debts and further weaken the banking system.

“We need to help the most vulnerable…but at the same time we need to create a culture of responsibility and payment,” said Pierre Moscovici, the European Union’s economics chief, during a visit to the Greek capital on Nov. 4.

At home, Athens needs the €3 billion in fresh loans to pay salaries and bills and settle domestic arrears. However, the government faces no immediate major payments to its international creditors, reducing the sense of urgency.

A milder-than-anticipated recession might also relieve the financing pressure on Greece’s government. EU economists said on Nov. 5 the Greek economy would contract 1.4% this year, substantially better than the 2.3% contraction predicted in August’s bailout agreement. That should mean lower budget shortfalls.

Pressure also eased after a health check by the European Central Bank showed on Oct. 31 that Greece’s top four lenders will need to inject up to €14.4 billion in fresh funds to strengthen their capital base, much less than the €25 billion creditors set aside for this purpose.

The capital increase must be completed by the end of the year, before new European rules kick in that will require uninsured depositors to take losses.

To get the funds for the recapitalization, Athens will have to pass a series of financial sector overhauls including improved oversight for its banks. Senior bondholders will most likely be forced to foot some of the bill.

European and Greek officials hope that enough progress will be made in coming hours to unlock the stalled aid tranche by Monday when eurozone finance ministers meet in Brussels.

Yet even if that happens, delays in implementing the agreed measures have already set back the first review of Greece’s latest bailout—an overview by creditors of Athens’ implementation record. Only once Greece has passed this review will eurozone government start talks on a long-term restructuring of the country’s official debts.

Some debt relief is critical for Greek government as it will likely be the only tangible win Prime Minister Alexis Tsipras’ Syriza party can show voters for imposing fresh rounds of tough austerity in recent months.

It is also needed to ensure IMF participation in the bailout. The fund has said it would only contribute to the new loan program if Greece’s European creditors agree to substantially reduce the country’s mounting debt load.

For the review to be completed, Athens will have to push ahead with painful additional reforms, including an overhaul of its pension system that could leave many families worse off. It will also have to submit its 2016 budget and a supplementary one for 2015—both of which will include further austerity measures, and shore up the details of an unpopular privatization fund which is supposed to generate €50 billion from the sale of state assets in coming years.

source: "The Wall Street Journal"