May 9, 2010
Despite fast growth during 1997-2007, Greece did not manage to correct its fiscal and external imbalances. The global crisis found Greece with a combination of high public debt, high fiscal deficits, and persistent current account deficits. A sharp revision of 2009 fiscal data undermined market confidence and led to increasing risk premia on sovereign debt. Moreover, a steady erosion of competitiveness reflected underlying distortions of a structural nature.
To restore market confidence and the country’s credibility vis-à-vis the investors, Greece undertook corrective fiscal measures at the beginning of 2010. However, these measures failed to restore market confidence.
In this context, the authorities are requesting a three-year Stand-By Arrangement for €30 billion (SDR 26.4 billion), in parallel with bilateral financial support of €80 billion available from euro area partners. The total amount of €110 billion will cover the expected public financing gap during the program’s period. Greece has undertaken to draw on the IMF and European Commission resources in a constant ratio of 3 to 8 in each disbursement throughout the program’s period. Under this arrangement, Greece is strongly committed to implement a multi-year stabilization program to consolidate public finances, safeguard the financial system, and promote the necessary structural reforms to restore competiveness, including in the labor market.
Main Elements of the Program
The main objectives of the program are: (i) reducing the fiscal deficit to below 3 percent of GDP by 2014, with the debt-to-GDP ratio beginning to stabilize by 2013 and then declining gradually; (ii) safeguarding the stability of the financial system; and (iii) restoring the competiveness of the Greek economy through structural reforms.
The fiscal adjustment is frontloaded and all fiscal measures have been identified. The objective of fiscal consolidation will be achieved mainly through the following measures: (i) an increase of tax revenues by 4 percent of GDP by 2013, primarily through the increase of VAT rates, consumption excise taxes for fuel, alcohol, and tobacco; the broadening of the tax base; and the introduction of new taxes (e.g., a green tax); (ii) the significant reduction of expenditures (by 5.2 percent of GDP) by 2013, primarily through: abolishing the 13th and 14th salaries of civil servants and the 13th and 14th pensions both in the public and private sectors, except for those with low-salaries and low-pensions; freezing public salaries and pensions, and drastically limiting new hiring in the public sector in order to achieve a substantive reduction of civil servants (only one new civil servant will replace five retirees); and (iii) the significant reduction of the operational costs of local governments, in the context of the general administration reform.
Overall, the increase in tax revenues and the reduction in public expenditures will amount to 11 percent of GDP in 2010-13. This correction will be achieved through permanent measures, and is expected to yield primary surpluses starting in 2012.
Corrective measures in the tax, pension, and health areas are designed to ensure the sustainability of the systems. The tax reform aims at making the system more progressive by abolishing tax exemptions, fighting tax evasion, and broadening the tax base. To achieve these objectives, the following measures will be implemented: modernizing the tax administration, focusing on collecting revenues from the largest taxpayers; thoroughly enforcing and auditing high-wealth individuals and self-employed; prosecuting the worst offenders; strengthening VAT compliance; and collecting on the large stock of tax arrears. The pension reform focuses on: merging the existing pension funds into only three funds; linking contributions and benefits; increasing the normal retirement age to 65 years; and restricting early retirement.
On the health front, significant savings of resources are expected through: the introduction of a double entry accrual accounting in hospitals; the periodic publication of audited accounts; improvements in pricing and costing mechanisms; and the separation of health funds from the administration of pensions.
The program includes measures to protect the most vulnerable segments of the population. My authorities are committed to an equitable and fair distribution of the adjustment burden. The tax burden for the rich will increase, while the minimum pension and family allowances will be preserved.
Financial Sector Policies
While the Greek financial sector was able to weather the global financial crisis in 2008, the deterioration of public finances and market confidence poses new challenges. The timely increase in the maximum deposit insurance reassured depositors in 2008, and the recent provision by the government of substantial additional liquidity (€17 billion) helped banks manage tight liquidity conditions.
In the context of the program, the reinforcement of the financial system, in particular the banking sector, will be achieved through the establishment of a fully independent Financial Stability Fund (FSF). The FSF will support banks, if necessary; decisions will be made by an independent board made up of persons of recognized standing in financial markets. Furthermore, other elements of the safety net for the financial sector will be strengthened; in the context of the EU framework for cross-border bank supervision, the Bank of Greece will intensify its supervisory activity and its resources will be augmented.
On May 3rd, the European Central Bank suspended the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Euro system’s credit operations in the case of marketable debt instruments issued or guaranteed by the Greek government. This decision will provide important support to the program by helping to maintain financial stability.
Competitiveness and Structural Policies
The Greek authorities are strongly committed to a very comprehensive structural reform agenda to regain competitiveness and restore growth.
Changes in the collective bargaining processes in the private sector and the new law on labor market flexibility will improve competitiveness. The amelioration of the business climate and the curtailment of bureaucracy in licensing private enterprises will promote investment in the private sector. This will contribute to increasing jobs, including for new entrants into the labor force. Furthermore, my authorities will exercise tight control over the underground economy related to the informal labor market. Finally, Greece will undertake all necessary measures to absorb the EU structural funds through the preparation of project proposals and implementation.
The Greek Statistical System suffered for many years from chronic deficiencies, especially in the area of fiscal data.
A few days after coming to power, the new government published revised figures on public sector deficit and debt. In order to establish a credible and independent statistical system, the Parliament approved a new law that changed the legal status of the Statistical Service, formerly a section of the Ministry of Finance. The Statistical System is now a fully independent authority whose President and Board of Directors are appointed with a four-fifths majority vote by a Parliamentary Committee. The law also provides new guidelines according to international standards. Moreover, the Parliament endorsed the government’s proposal to establish an Investigation Committee to look into past misreporting episodes. The Greek authorities also asked an independent expert committee to analyze the sources of statistical deficiencies and to propose solutions. The expert committee’s report was completed last January, and corrective actions have already been taken.
To comply with its European and international commitments, Greece has already taken significant corrective measures in the past few months, and is fully committed to implement the measured indicated in the program. The strong ownership of the program on the part of the authorities is supported by the vast majority of the Greek people.