Greece
2009 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Greece

This 2009 Article IV Consultation highlights that despite initial resilience partly explained by high wage growth and accelerated government spending in Greece, growth slowed substantially in early 2009. The main driving forces were lower investment and exports, destocking, and a decline in private consumption. Executive Directors have welcomed the extended period of strong growth through 2008, which had significantly narrowed the gap in real per-capita income with the EU-15. Directors have also emphasized the need to implement a comprehensive plan for fiscal consolidation and structural reform.

Abstract

This 2009 Article IV Consultation highlights that despite initial resilience partly explained by high wage growth and accelerated government spending in Greece, growth slowed substantially in early 2009. The main driving forces were lower investment and exports, destocking, and a decline in private consumption. Executive Directors have welcomed the extended period of strong growth through 2008, which had significantly narrowed the gap in real per-capita income with the EU-15. Directors have also emphasized the need to implement a comprehensive plan for fiscal consolidation and structural reform.

I. Context1

1. The Greek economy expanded quickly through 2008, narrowing the income gap with the euro area. Financial sector liberalization and lower interest rates after euro adoption caused a demand boom (Figure 1). Productivity catch-up, capital formation, and immigration raised supply capacity, but a positive output gap still emerged.

Figure 1.
Figure 1.

Greece--The Boom Years

(Percent)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Sources: Greek Statistical Office; European Central Bank; EU KLEMS; and Eurostat.1/ On-balance sheet data from the ECB.2/ Electrical machinery, post and communication services.3/ Market services, excluding post and telecommunications.4/ Finance and business, except real estate.5/ Personal services.

Macroeconomic Indicators (average 2000–2008)

(Percent, unless otherwise indicated)

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Source: WEO.

2. Imbalances persisted. Continued high fiscal deficits prevented the public debt from falling below 95 percent of GDP. Inflation and labor-cost growth exceeded that of trading partners and eroded competitiveness. The current account deficit was 14½ percent of GDP in 2008. The international investment position (IIP) was -75 percent of GDP at end-2008.

3. The global financial crisis weakened sentiment and sent spreads soaring, causing a financing scare. Business and consumer confidence dropped, as elsewhere. Borrowing spreads on 10-year Bunds jumped to 300 bp (the highest in the euro area) before receding to 185 bp recently, and S&P downgraded Greece to two notches from minimum ECB collateral standards. Borrowing costs in absolute terms were kept in check with Bund yields falling and by issuing at shorter terms, but effective real rates increased. Greece’s sensitivity to the financial crisis is linked to its precarious fiscal position and lack of structural progress, with higher spreads foreshadowing higher fiscal costs over the medium term.

uA01fig01

10-year Bond Yields

(percent)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Source: Bloomberg.
uA01fig02

Spread over German Bond

(basis points)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

4. A lack of political consensus hampers policy making. The center-right New Democracy party won re-election in September 2007 with a thin majority. The opposition socialist party has won the European Parliament ballot of June 7 and is asking for early elections, which could be triggered by Presidential elections in March 2010. Political cooperation is low, and demonstrations and strikes are common.

II. Cyclical Developments

5. Growth slowed to 2.9 percent in 2008 (Table 1). Domestic demand eased, led by investment, and employment fell at year-end (Figure 2). Greece’s relative resilience was partly explained by consumption, facilitated by high wage growth and moderate household and corporate indebtedness (the high debt is in the public sector). Import volumes contracted sharply, but the current account deficit still worsened with lower terms of trade and a near doubling of net factor payments since 2005.

Table 1.

Greece: Selected Economic Indicators, 2005–10

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Sources: National Statistical Service; Ministry of Economy and Finance; Bank of Greece; and IMF staff estimates.

Core prices exclude energy, food, alcohol, and tobacco.

As of March 2009.

Domestic credit growth of households and enterprises.

As of April, 2009.

As of May, 2009.

Figure 2.
Figure 2.

Greece: Selected Indicators, 2000–10

(Year-on-year percent change, unless otherwise indicated)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Sources: European Commission; National Statistical Service; and IMF staff calculations and projections.
uA01fig03

Households debt is below the euro average…

(Percent of GDP)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Source: ECB.
uA01fig04

…as is debt of non-financial corporations.

(Percent of GDP)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

6. National accounts data for Q1 2009 and high-frequency indicators suggest growth is slowing quickly. First quarter output declined by 4.8 percent qoq, saar. Industrial production, orders, and retail sales have dropped sharply, as elsewhere (Figure 3). The Baltic Dry Index, reflecting demand for the key shipping industry in Greece, declined significantly from its peak in 2008. Tourism arrivals are down.

Figure 3.
Figure 3.

Greece--Cyclical Indicators Suggest a Sharp Slowdown

(Year-on-year percent change, unless otherwise indicated)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Sources: Bank of Greece; National Statistical Service of Greece; Eurostat; Markit; and Bloomberg.

7. Nevertheless, wage growth has remained high. Wage agreements for 2008–2009 incorporated high inflation expectations, resulting in 12 percent nominal wage hikes over this period (Figure 4). With inflation declining at end-2008, real wage growth turned up, assisting household incomes. With wage growth outstripping the euro average, competitiveness further suffered and firms are now reducing overtime or cutting informal deals to lower costs. The authorities see the informal market as a buffer in Greece.

Figure 4.
Figure 4.

Greece: Labor Markets, 2001–08

(Year-on-year percent change, unless otherwise indicated)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Sources: Eurostat; and IMF staff calculations.

8. A weakening operating environment has reduced bank profits. So far, the global financial turmoil has had limited direct impact on banks because they have no legacy toxic assets or SIVs and are retail oriented. However, profitability is falling with higher funding costs, slowing activity, and asset quality erosion in Greece and Southeastern Europe (SEE). Credit growth has slowed (Figure 5). S&P and Moody’s have downgraded several Greek banks. Bank equities are down sharply year-on-year (Figure 6).

Figure 5.
Figure 5.

Greece: Money and Banking Indicators, 2005–09

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Sources: National Statistical Service; Bank of Greece; Bloomberg; ECB; and IMF staff calculations.
Figure 6.
Figure 6.

Greece: Financial Indicators, 2007–09

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Sources: Bloomberg; and Moody’s Creditedge.

9. Revenue shortfalls and rising expenditure are widening the fiscal deficit. The deficit exceeded the Maastricht limit in 2007, after exiting the EDP (Excessive Deficit Procedure) in 2006. It increased further to 5 percent of GDP in 2008 with a large structural deterioration. Entitlements and the wage bill now claim over ⅔ of spending.

10. The government has completed funding for 2009 and spreads are easing again. The debt office has been agile in placing over €50 billion (21 percent of GDP) in market borrowing in 2009, with some shortening of terms to limit costs.

Greece: General Government’s Financing Needs, 2008–10

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Sources: Bloomberg, Ministry of Finance, and staff’s calculations.

The government will issue bonds for this amount, placed directly with banks.

III. Outlook: Uncertain, but Downside Risks Remain

11. Staff projects negative growth in 2009 and 2010. Greece is feeling the downturn with some delay. Moreover, even with the staff’s weaker outlook relative to the authorities, Greece’s growth decline from peak to trough would still be milder than for the euro-area as a whole. Further decoupling from the euro area, which is experiencing a sharp recession, is unlikely. The main forces in 2009 are lower investments and exports, destocking, and a decline in private consumption as confidence and employment have dropped. Net exports are expected to contribute to growth. Staff projects some recovery in late 2010, as partner countries emerge from the recession. Inflation is projected to remain above the euro average, with unemployment reaching over 10 percent in 2010. The medium-term recovery will likely be hindered by impaired competitiveness, still large external imbalances, and the need to cut the fiscal deficit to limit risks.

Greece: Medium-Term Baseline Scenario, 2008–14

(Percentage change, unless otherwise indicated)

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Greece: Growth Forecasts

(Percent)

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uA01fig05

Greece: Real GDP Growth and PMI for Manufacturing

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

12. The current account deficit is expected to narrow. Shipping receipts (a third of exports) have dropped with lower world trade and will take time to recover. Tourism receipts (over a third of exports) are also expected to fall, with lower demand from high-income countries and increased competition from neighbors whose exchange rates are weakening. Nevertheless, with lower absorption in the short run, imports are projected to contract sharply, leading to lower trade deficits. Over the medium term, the trade deficit is expected to improve with lower outlays for ships and recovering world demand. However, the net income deficit has become structural, reflecting the large negative IIP (Figure 7, Table 2, and Annex I on External Debt Sustainability). The authorities broadly share these views.

Figure 7.
Figure 7.

Greece: External Trade and Debt Issues

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Sources: Bank of Greece; and IMF staff estimates.
Table 2.

Greece: Summary of Balance of Payments, 2008–14 1/

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Sources: Bank of Greece; and IMF staff projections.

Bank settlements basis.

13. Staff sees the balance of risks on the downside, and that sustained firmer policies are needed to address risks. Staff sees risks that domestic demand may drop further in 2010 if real wages are reset downward in the next bargaining round, or if employment were to drop faster than currently foreseen.2 Deteriorating competitiveness and high crowding-out public debt increase risks of prolonged slow growth. The large imbalances, and lack of reform consensus, could result in a change in market sentiment for Greece. Thus, the key implication of the different outlooks between staff and the authorities is that staff sees more urgency for stronger policies, which are needed to shore up confidence and to avoid a replay of the spike in spreads in an already weakened real/financial environment. If external financing weakens again, the current account deficit could unwind rapidly and growth could falter badly (Box 1).

14. The authorities’ outlook is more benign. They note that staff has underestimated growth in Greece in recent years and expect activity to be slightly positive, in part supported by infrastructure spending with EU funds and mobilizing PPPs and more buoyant tourism activity compared to staff. Moreover, they see smaller spillover effects from the global downturn because of Greece’s reliance on small and medium-size enterprises and relatively low dependence on exports. While the authorities acknowledged that some downward adjustment of their projections could not be excluded as further information on developments came in, they felt that the outlook would remain less risky than considered by staff.

Linkages and Spillovers

Greece’s open economy is linked to the rest of the world through trade and financial channels.

Inward spillovers: Greek exports are particularly vulnerable to shocks in SEE and the euro area. Exporters have expanded their activities into SEE countries, which absorbed almost a quarter of total Greek nonfuel exports at end-2008. In the global crisis, Greek exports to the region would commensurately weaken. Moreover, transportation services are subject to downside risks from sharply declining global trade. Finally, tourism receipts are vulnerable to worse-than-expected recessions in advanced economies (Germany, U.K., Italy, U.S. bring half of tourism earnings) and to increased competition from neighboring countries (e.g., Turkey and Croatia). Banks’ credit quality is likely to erode as external weakness feeds into the domestic economy, as well from direct lending to tourism and shipping.

The Greek banking sector is directly exposed to SEE. In a search for high profit margins, Greek banks have become major players in the previously fast-growing SEE countries. However, these exposures are turning into sources of pressure on banks’ balance sheets and income as local economies deteriorate and foreign exchange volatility dents the repayment ability of unhedged borrowers.

Outward spillovers: Euro-area countries hold a large part of Greece’s external debt and could be affected should problems arise in Greece. Greece’s external debt is some 147 percent of GDP, of which around 2/3rds is public sector debt. External debt is poised to grow as external imbalances remain large. Euro-area countries already hold over €200 billion of this debt.

Abrupt financial adjustment in Greece could lead to banking problems in SEE. Subsidiaries of Greek banks in SEE have high loan-to-deposit ratios (far higher than in Greece itself), hitherto relying heavily on parents’ funding. Therefore, SEE could face difficulties should the Greek (and other) banks constrain parental support in the face of liquidity or capital needs. The authorities agree that financial protectionism should be avoided, as this would also be highly damaging for Greece itself, given it’s own very large external financing need. Greek banks are participating with others in the bank coordination initiative (Vienna) to seek an orderly transition toward lower external funding dependence in SEE.

IV. Policy Discussions: Bolstering Confidence and Sustainability

15. Given high vulnerabilities in growth, public finances, and the financial sector, policies need to restore confidence and bolster sustainability. Pressures in banking and the public finances could dampen sentiment, with detrimental effects on growth. Financial supervision should remain tight and the authorities should be ready to act were systemic pressures to arise. Greece cannot postpone fiscal consolidation. Given weak political support, adjustment will need to be realistic, yet show strong commitment to improving the fiscal balance step-by-step. Structural reforms are imperative to improve competitiveness for renewed growth.

A. Preserving Financial Sector Stability

The financial system appears resilient to the slowdown but the authorities should closely monitor banks and be prepared to act if needed.

16. Greek banks have shown resilience, but also felt the effect of the crisis. Banks have been aided by a traditional business model and a large deposit base at home. Greek firm and household leverage is moderate. Nevertheless, domestic credit growth and lending in SEE are slowing due to weaker prospects, growing risk aversion, and costlier funding. Declining profitability in 2008 reflected increased provisioning and margin compression. Bank capital is adequate but declining (Tables 35)

Table 3.

Greece: Core Set of Financial Soundness Indicators for Deposit Taking Institutions, 2000–08

(Percent)

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Source: Bank of Greece.

Data on a consolidated basis. Taking into consideration the capital increase of 850 million to Emporiki Bank by its French parent group which is confirmed by the French supervisory authorities, the total Capital Adequacy Ratio becomes 9.8 percent while the Tier I ratio becomes 8.2 percent for 2008.

On an aggregate resident-based approach (i.e. commercial banks, cooperative banks and foreign branches).

From 2004 in accordance with IFRS.

Based on revised figures from 2002 onwards.

Table 4.

Greece: Encouraged Set of Financial Soundness Indicators, 2000–08

(Percent)

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Sources: Bank of Greece; and ICAP, Greek Financial Directory, 2008.

For 2000–2006, source is ‘The Greek Corporation in 2007, Industry, Trade, Services’, Hellenic Federation of Enterprises, Athens 2008. For 2007, 2008

Principal expenses not available.

On a non-consolidated basis; from 2004 in accordance with IFRS.

On an aggregate resident-based approach (i.e. commercial banks, cooperative banks, and foreign branches).

Spread between rate on credit lines and savings deposit rate.

Data on a consolidated basis.

Figures refer to volumes of securities traded and not numbers.

Table 5.

Greece: Structure of Financial System, 2000–08

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Source: Bank of Greece.

There are no specialised life insurance companies in Greece. General insurance companies offer general insurance and life insurance products.

Number of institutions (in each category) with 75 percent of total assets.

Greece: Banking Indicators

(percent)

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Source: Bank of Greece.

On a consolidated basis.

17. Staff welcomed the authorities’ proactive response to the financial crisis:

  • Bank support package. Greece was early to implement bank assistance via public capital injections, liquidity assistance, and funding guarantees, which bolstered confidence (Box 2). Staff stressed that to ensure sound lending and avoid market distortions, government’s bank involvement should remain at arm’s length. The package has not been fully used, but is best kept in place preemptively.

  • Supervision. The Bank of Greece (BoG) has intensified monitoring and contacts with banks’ managements so that additional steps (including increased provisioning and capital strengthening) are implemented to minimize risks, as appropriate.

  • Cross-border cooperation. BoG has stepped up the exchange of information with counterparts in SEE and urged banks to bring credit expansion abroad more in line with local deposit growth and funding. Staff agreed that Greek bank loan/deposit ratios in some SEE countries are too high, but noted that the correction needs to be gradual and should avoid triggering financial nationalism, while encouraging the authorities to continue developing their strong relationships with supervisors in SEE. The authorities should also conduct crisis-management exercises with SEE partners.

  • Crisis management. A new committee at BoG monitors financial stability and is implementing internal procedures for identifying signs of deterioration and providing timely information for the management of crisis.3

  • Financial Stability Report (FSR). The authorities have started publishing a FSR to inform the public about the health of the financial system. Staff recommended the issuance of a simultaneous version in English and update of the report at midyear.

Bank Support Measures Through end-May 2009

The banking package is in line with the common framework agreed by euro-area countries:

  • The limit on deposit insurance was raised from €20,000 to €100,000 per person per bank.

  • Capital injections are available up to €5 billion in preferred shares, including a buyback option after five years, dividend of 10 percent, and state representation on the board of directors with rights to veto top executives’ pay. Ordinary dividends have been restricted up to 35 percent of profits in the form of shares. So far, €4.1 billion has been subscribed, increasing system high-quality Tier-1 capital from 7.9 to 10.1 percent.

  • Liquidity assistance is providing up to €8 billion in special-issue zero-coupon government bonds eligible for ECB discounts against collateral. About €4.4 billion has been approved until now.

  • Funding guarantees up to €15 billion (for a fee and a duration up to three years) can be issued until end-2009. So far, €3 billion have been used as borrowing costs have increased with the rise in sovereign spreads.

18. Stress tests (conducted jointly by BoG and staff) suggest that the banking system has enough buffers to weather the expected downturn. The tests ascertained four banking system risks:

  • Credit risk. Nonperforming loans (NPL) have been persistently high during the upswing. Moreover, exposures to cyclically sensitive sectors—shipping, tourism, and construction—are large for some banks. Credit quality could therefore worsen in the downturn.

  • Cross-border risks. Total exposure in SEE at €53 billion (203 percent of equity) is relatively large (Figure 8). Bank portfolios could experience pressure as local economies slow and foreign exchange volatility impairs borrowers.

  • Market risk. Although trading books are relatively small, high volatility on equity, bond, and foreign exchange markets could generate losses.

  • Liquidity risk. Banks are increasingly vulnerable to reduced wholesale funding as the bunching of maturities creates rollover risk (Figure 9). Reliance on short-term ECB repos has increased to some €45 billion.

Figure 8.
Figure 8.

Greek Banks’ Exposures in Southeastern Europe

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Source: Bank of Greece; and IMF staff calculations.1/ Simple average of bank-by-bank ratio.
Figure 9.
Figure 9.

Greece: Amortization Falling Due, 2008–10

(Billions of euros)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Sources: Bloomberg; and IMF staff calculations.

Greece: Exposures and Market Shares in Emerging Europe, 2008

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Source: Bank of Greece.

The stress tests suggest that profits, capital cushions (including with the government’s assistance), and stepped-up provisioning should provide enough resources to absorb foreseen losses. Assuming simultaneous shocks, some institutions may require up to a total of €2.9 billion in new capital (1.2 percent of GDP)—a relatively moderate amount. Banks appear to have enough liquid funds, but need to prepare gradual exit strategies to reduce dependence on ECB facilities.

Stress Test Scenarios 1/

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Stress tests were conduced using data as of end-2008.

19. Nevertheless, the authorities agreed that the near-term banking outlook remains challenging, and continued vigilance is needed. The operating environment is expected to remain difficult as the world goes through the recession. Moreover, should the downturn be more prolonged and deeper than currently projected, and financial tightening return, domestic credit quality may deteriorate further than envisaged, and portfolios in SEE could face additional pressures. These risks need to be managed cautiously and the authorities should remain prepared to act if systemic pressures arise. In such case, the authorities agreed that market solutions should be sought first (e.g., merging banks). Staff stressed that if public support for individual banks were required, this should be designed to minimize government involvement with clear exit strategies.

20. The authorities stressed that the bank support package is not aimed at influencing credit allocation, either domestically or cross-border. Furthermore, they noted that Greek banks had slowed credit growth in SEE for sensible internal prudential reasons, and banks themselves indicated that they were committed to keeping their exposures in SEE, as they see further potential growth in these countries. Finally, BoG explained that it has boosted banks’ liquidity requirements. The authorities noted that conditions were improving with debt and interbank markets slowly opening up, which would, over time, allow banks to reduce reliance on ECB support.

21. Weaknesses in the insurance sector are being addressed. Insurance is underdeveloped in Greece (accounting for only 2 percent of GDP). After becoming operational in 2008, the Private Insurance Supervisory Committee intensified supervision, uncovering some instances of relatively small capital need. Corrective measures are being taken and staff urged prompt resolution of remaining issues.

22. Finally, the discussions touched upon monetary conditions, which were seen as having been broadly supportive. With the ECB setting interest rates for the average of the euro area, and Greece having run persistently higher-than-average inflation, real interest rates have been accommodative in recent years, Generally, this continued to be the case with policy rates falling and Greek inflation remaining above the average, but somewhat tighter lending standards and the increase in the sovereign benchmark spreads and downgrades were erasing some of these benefits and possibly already crowding out some private sector activity. Nevertheless, already issued Greek mortgages tend to be linked to the short-term euribor, which had fallen to record lows, imparting a cash-flow benefit on many households. Also, as noted, the liquidity assistance by the ECB (repos) had been, and will continue to be for the near term, of major assistance to Greek banks and, indirectly, to funding the sovereign. Interlocutors agreed that without these monetary accommodations, Greek financing pressures would have been considerably higher.

B. Strengthening the Fiscal Position

Operating control needs to improve, and policies should emphasize structural over one-off measures. Budgets need to aim at long-run sustainability.

Short run

23. Greece is entering the downturn with an already weak fiscal position. Failures to stick to budget plans, deficit-increasing one-off measures, expenditure slippages, and ad-hoc revenue efforts have coincided with persistent deficits above 3 percent since 2000 (Figure 10). Indeed, as monetary conditions had been accommodative, fiscal policy had not been nearly tight enough during the boom years. Social transfers have increased by over 3 percentage points of GDP, outpacing social contributions. The wage bill has also been rising. In this context, the European Commission has reinvoked the EDP for Greece, asking to reduce the deficit below 3 percent by 2010. Staff is concerned that large and growing data discrepancies (including “stock-flow adjustments”) between cash accounts and those of the SGP could harbor a worse underlying deficit than currently reported. These data shortcomings are a recurring problem in Greece, with interlocutors noting that the debt consistently rises faster than indicated by the SGP deficits reported to Eurostat. Restoring confidence requires durable consolidation and improved accounting systems that allow the authorities to respond in a timely way to slippages and the publication of more stable fiscal indicators.

Figure 10.
Figure 10.

Greece: Fiscal Indicators, 2000–09

(Percent of GDP)

Citation: IMF Staff Country Reports 2009, 244; 10.5089/9781451816327.002.A001

Sources: Ministry of Finance; and IMF staff projections based on data provided by the authorities.

24. Staff projects the headline deficit to widen and public debt to increase sharply in 2009 and 2010. With staff’s projection of economic contraction and if no further measures are taken, the general government deficit is expected to reach 6.2 percent of GDP in 2009 and 7.5 percent in 2010 (Table 6). Including the banking assistance package, public debt could rise to 109 percent of GDP in 2009 and 115 percent of GDP by 2010.4 In view of unfavorable fiscal outturn in the first quarter, staff sees the balance of risks on the downside. These projections factor in the fiscal consolidation measures implemented by the authorities through May 2009.

Table 6.

Greece: General Government Accounts, 2005–10

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Sources: Ministry of Economy and Finance; and IMF staff calculations.

25. The authorities concurred that there is no room for a fiscal stimulus. Stimulus measures have been moderate, rightly focusing on assisting vulnerable groups such as the unemployed and poor. At the same time, staff advised against subsidies to high-income groups, including for car sales, new mortgage guarantees, and cash grants to self-employed professionals, which do little for growth but further increase the debt. The authorities said that these were targeted to high-employment sectors and were temporary.

Greece: Main Fiscal Measures, 2009 1/

(Percent of GDP)

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Staff estimates.

Discretionary current spending, excluding wages and social transfers.

26. Consolidation measures taken so far could help to improve the structural primary balance by nearly 1 percent of GDP in 2009. These efforts are welcome, especially the components that are durable, such as moderating public wages (extended to pensions), cuts in discretionary spending, higher excises, and the new property tax (delayed from 2008). At the same time, staff advised against further use of one-off measures such as the tax amnesty and the one-time PIT surcharge for high-income taxpayers, noting that these could even lead to lower future tax receipts if they induce more tax avoidance. The authorities have also announced a reduction in the wage bill through attrition—replacing every two job leavers with one hire. However, there is concern that this objective could be complicated by the authorities’ plan to substitute up to 60,000 persons from unemployed to the (local) public sector. The net cost may not be high, as unemployment benefits will be transformed into employment benefits, but there are risks that some could become permanent, thus burdening the wage bill in the future. Strict implementation of this measure will be key.

27. The authorities have agreed under the EDP to reduce the deficit to 3.7 percent of GDP in 2009 and below 3 percent in 2010. They acknowledge that these objectives are difficult, especially since the starting deficit in 2008 has been increased to 5.0 percent, and because growth is likely lower than initially foreseen. Indeed, the fiscal outturn in the first quarter of 2009 was very unfavorable, which the authorities ascribe to frontloading of expenditures to cushion the downturn. The government intends to take stock in June (after the EU elections) and then formulate new measures; nevertheless, they expect more revenues than staff, given their more optimistic outlook. Under the EDP, they will present a detailed plan to the EU Commission in October 2009. Staff noted that if growth falters, trying to reach the 3.7 percent target at all costs may not be helpful if this leads to plugging holes with poor quality measures that weaken confidence. An ambitious but doable high-quality plan is better than attempting a series of ad-hoc efforts.

28. Greece needs a coherent sustained fiscal adjustment plan based on permanent measures that can be monitored closely to cement credibility. Given Greece’s high level of debt and attendant vulnerabilities, such a plan should aim at boosting confidence, which could even support growth (an expansionary fiscal contraction). Staff recommended annual adjustment of about 1½ percent of GDP in permanent measures beginning in 2010 to place public debt on a declining path. Since, on baseline, the underlying structural balance is deteriorating every year (including because of aging pressures on social transfers), this effort would still take until 2013 before Greece is well below the 3-percent Maastricht limit. Such a strategy, permitting automatic stabilizers to function around the adjustment path, would lower the debt ratio from 2012.

Greece: Fiscal Baseline Scenario, 2008–14 1/

(Percent of GDP, unless otherwise indicated)

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General government.