Greek debt crisis: Alexis Tsipras tells creditors what he's prepared to do to stay in the euro

New proposals for reform offer compromise, but political deadlock is likely to remain

The Greek Finance Minister, Euclid Tsakalotos, left, and his predecessor, Yanis Varoufakis, talking during a plenary session of the Greek parliament (EPA)

Greece’s government has submitted its reform proposals to its European creditors in a final bid to secure bailout funding and avoid crashing out of the single currency.

Athens has been told that it must present its list of commitments to a meeting of eurozone finance ministers on Saturday – or the leaders of the creditor powers would begin making preparations to deal with the aftermath of a “Grexit” on Sunday.

After a four-hour meeting Greece’s cabinet approved a new plan to cut pension spending and increase VAT.

Last week’s national referendum delivered a resounding rejection to the austerity demands from the creditors made at the end of June. Yet reports in the Greek media suggested the government’s new proposal would commit it to more austerity than under the previous creditors’ plan – €12bn of consolidation over two years – to fill the budget hole left by the rapidly worsening recession.

According to versions of the document leaked to the media, the Greek government would run a primary budget surplus of 1 to 3.5 per cent of GDP until 2018 as it begins the long road of paying off its massive debts.

It would also gradually scrap discounted VAT rates for Greek islands – designed to offset the higher cost of living there and to bolster the vitally important tourist trade – with a standard rate of 23 per cent and two lower rates, 13 per cent for basic food, water, hotels and energy and a 6 per cent rate for medicine, books and theatres.

Income tax could also be increased if “fiscal shortfalls” appear in the government’s finances as it pays off its enormous debts. This could see annual incomes below €12,000 (£8,600) taxed at 15 per cent instead of 11 per cent and annual incomes above €12,000 taxed at 35 per cent, up from 33 per cent.

Protesters hold European Union and Greek flags during a Pro-Euro rally in front of the parliament building in Athens (Reuters)

The retirement age for a basic pension would be increased to 67 with supplementary pensions for the poorest Greeks phased out by 2019, instead of 2020. Corporation tax would increase to 28 per cent, instead of the 29 per cent suggested in previous Greek submissions.

Commentators said the plan submitted late on Thursday looked remarkably similar to the previous one that Greek voters rejected in last weekend’s referendum.

Peter Spiegel, Brussels bureau chief for the Financial Times, tweeted: “One thing that strikes me about new Greece request: It's pretty darn close to the one 61 per cent of Greeks voted ‘OXI’ against.”

And Duncan Weldon, economics correspondent for the BBC's Newsnight, tweeted: “This looks very similar to the 26 June draft plan. The one voted down in the referendum. I have only quickly skimmed the document. But hard to see what the referendum has achieved other than lost time/economic problems.”

The plan is likely to go before the Greek parliament on Friday. Alexis Tsipras, the Prime Minister, is reported to have told colleagues: “We are ready to compromise.”

But fears are rising that Mr Tsipras’s Syriza-led coalition could implode over the fresh austerity plan.

Greece is seeking €53.5bn (£38.5bn) as part of a new bailout package, according to draft legislation submitted to parliament in the early hours of Friday.

Under the proposal, Athens would receive the loans from the eurozone bailout fund, the European Stability Mechanism, or ESM.

Panagiotis Lafazanis, the Energy Minister and leader of Syriza’s left-wing faction, was reported to have opposed the plan. “We don’t want to add to the past two failed bailouts a third bailout of tough austerity which will not give any prospects for the country” he told reporters, adding that Greece will not sign its own death warrant.

There were signs that the creditors are beginning to look more favourably on Greece’s demands for another restructuring of its national debt pile.

“The realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors. Only then will we have a win-win situation,” said the European Council President, Donald Tusk. “Otherwise, we will continue the lethargic dance we have been dancing for the past five months.”

Greek Prime Minister Alexis Tsipras (Reuters)

Even the hardline German Finance Minister, Wolfgang Schäuble, said debt relief was not out of the question. But he saw little room for manoeuvre given the apparent final deadline of Sunday to reach a deal. The International Monetary Fund and the United States have also been pushing for Greece’s debt – which is equal to around 177 per cent of its GDP – to be restructured.

Creditors will be reviewing the Greek proposals on Saturday with a meeting of eurozone finance ministers. A full summit of the 28 EU leaders is planned for Sunday. If there is no agreement, the EU leaders will discuss measures to limit the damage from a Greek collapse, including humanitarian aid.

For the owner of a busy little cafe in the heart of Athens, the potential new austerity measures from the Greek government were a big concern. The potential tax hikes would just be the end of his business, he said. “It will destroy us,” said Petros who refused to give his last name.

Jens Weidmann, the president of the Bundesbank in Germany, increased the pressure on Greece’s banking system – where depositors have been unable to withdraw more than €60 a day since last Monday – by saying that doubts about the banks’ solvency was “rising by the day”.

If Greece defaults on a €3.5bn bond repayment due to the European Central Bank on 20 July it is likely to see its financial system entirely cut off, forcing a nationalisation and the effective creation of a new national currency.