First Review Under the Stand-By Arrangement

The recession is unfolding in line with expectations. Inflation is higher than expected from indirect tax hikes. The key challenges remain restoring fiscal sustainability, safeguarding financial sector stability, and boosting competitiveness—and hence growth and employment. Staff and authorities agreed that nominal growth will be somewhat higher than originally anticipated. The government will facilitate private investment including through the privatization program. Stronger public financial management and especially tax administration are needed to mitigate risks. Advancing tax administration reform is a crucial priority to limit risks.


The recession is unfolding in line with expectations. Inflation is higher than expected from indirect tax hikes. The key challenges remain restoring fiscal sustainability, safeguarding financial sector stability, and boosting competitiveness—and hence growth and employment. Staff and authorities agreed that nominal growth will be somewhat higher than originally anticipated. The government will facilitate private investment including through the privatization program. Stronger public financial management and especially tax administration are needed to mitigate risks. Advancing tax administration reform is a crucial priority to limit risks.

I. Recent Economic Developments

1. Macroeconomic indicators are evolving broadly in line with expectations (Figures 1 and 2).

  • The slowdown is progressing as expected, with the year-on-year contraction in GDP increasing from 2.3 percent in Q1 to 3.5 percent in Q2. The unemployment rate increased to 11.8 percent (SA) in April. Private consumption growth was somewhat more resilient early in the year than expected, offset by a weaker foreign balance, but this may well be a temporary factor (households appeared to have been using their savings cushions and some income from parallel market activity).

  • Prices ticked up faster than expected, reflecting one-off tax effects. July inflation reached 5.5 percent (year-on-year), but this is due to one-off effects from the higher-than-expected pass-through of indirect taxes to inflation. Notably, at constant taxes, inflation has fallen below the euro-area average for the first time since euro-adoption. The three-year national collective wage agreement signed in July freezes minimum wages until mid-2011 and gives increases equal to the average euro-area inflation from that point onwards.1 This contributes to moderating private sector wage growth and, hence, there is no evidence of second round effects.

  • The current account is yet contracting only gradually. Stronger domestic demand, higher oil prices, and increased payments for ship orders have kept the trade balance high up to April (Figure 3). Moreover, tourism receipts have been adversely affected by strikes and unrest, and strong price competition from Turkey and Croatia.

Figure 1.
Figure 1.

Greece: Selected Indicators, 2000–10

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

Citation: IMF Staff Country Reports 2010, 286; 10.5089/9781455206926.002.A001

Sources: National Statistical Service; Eurostat; and IMF staff calculations and estimates.
Figure 2.
Figure 2.

Greece: Labor Markets, 2001–10

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

Citation: IMF Staff Country Reports 2010, 286; 10.5089/9781455206926.002.A001

Sources: Eurostat; and IMF staff calculations.

2. Policy implementation has made a strong start. All end-June performance criteria (PCs) and all structural benchmarks were implemented (with slight delays in some cases), except for the benchmark on the completion of the actuarial report, whose implementation has been delayed by staffing and data constraints—the final report is now expected for March 2011. Important structural reforms are ahead of schedule. The indicative target on the non-accumulation of domestic arrears was not met, reflecting evidence of the buildup of accounts payable at sub-national entities, but the monitoring system for general government commitments, accounts payable, and arrears is still being developed (end-September structural benchmark), and there is an understanding that arrears should be amortized by year-end (MEFP ¶4).

  • Fiscal performance was better than anticipated, albeit some overdue payments surfaced in sub-national entities. Significant under-execution of discretionary expenditures resulted in a large margin under the state budget primary spending PC of €5.6 billion. Ordinary revenues fell slightly below the target as shortfalls in indirect taxes were offset by higher non-tax revenues, which reflect tax administration efforts to collect fines and other fees. This state-budget overperformance offset slippages in local government and the social security sector (such that the general government deficit PC was also met, but with a smaller margin).2 In July, a total of €4.4 billion of three and six-month T-bills were sold, mostly to domestic banks at an average yield of 4.4 percent.

  • In the financial sector, liquidity remains tight amidst still tepid market confidence. Despite some improvements in market sentiment (Figure 4), Greek banks have not yet regained access to wholesale markets. The downgrade of the Greek sovereign by Moody’s in June put pressure on collateral valuations, while some intermittent deposit outflows continued. However, repo-eligible assets have been boosted through government guarantees of bank bonds and the ECB’s intervention in the government bond market has helped support the value of collateral.3

  • Solvency ratios are affected by the economic downturn, as expected. NPLs have reached 8.2 percent in Q1 (from 7.7 percent in December) with corresponding increases in provisions which, along with revaluation losses in the trading book, generated a loss for the system on a consolidated basis. Preliminary indications are that NPLs continue to edge upward in Q2. Nevertheless, all banks remained above the minimum capital adequacy requirement of 8 percent.

  • Monetary conditions are gradually becoming more constrained. Funding costs do not appear to have increased substantially as banks have substituted deposits and wholesale funding with cheaper ECB repos. However, banks have started to restrict credit, particularly to households, but there is no evidence of sharply increasing lending rates (Figure 5).

  • Fiscal, banking, and structural reforms are ahead of schedule. A major pension reform was approved in July. Substantive labor market reform is also underway. A significant budget legislation reform, local government reform, and legislation governing the Financial Stability Fund have been passed, as discussed below.

Figure 3.
Figure 3.

Greece: Balance of Payments

(Billions of Euros, cumulative for beginning of the year)

Citation: IMF Staff Country Reports 2010, 286; 10.5089/9781455206926.002.A001

Sources: Bank of Greece; and IMF staff calculations.1/ Includes errors and omissions.2/ Official sector financing includes loans to government and changes in BoG (ECB) credit to the banking system.
Figure 4.
Figure 4.

Greece: Financial Indicators, 2007–10

Citation: IMF Staff Country Reports 2010, 286; 10.5089/9781455206926.002.A001

Sources: Bloomberg; and Moody’s Creditedge.
Figure 5.
Figure 5.

Greece: Money and Banking Indicators, 2005–10

Citation: IMF Staff Country Reports 2010, 286; 10.5089/9781455206926.002.A001

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

II. Policy Discussions

3. The program objectives and strategy continue to be appropriate. The key challenges remain restoring fiscal sustainability, safeguarding financial sector stability, and boosting competitiveness—and hence growth and employment. While establishing a track record of program implementation will require time, as foreseen in the program, the authorities felt that some skepticism is now gradually starting to fade. The authorities’ strong ownership and determined implementation of the program so far, in the face of some unrest, has started to deliver results. Some reforms are being implemented ahead of schedule.

4. Discussions focused on:

  • Consolidating the fiscal achievements. Fiscal consolidation is underway, and discussions focused on limiting deviations between cash and accrual outcomes and addressing risks in this regard to assure that fiscal targets continue to be met. In addition, priority is being given to advancing tax administration reform to secure revenues and enhance the fairness of adjustment.

  • Making financial sector safeguards effective. Ensuring financial stability remains crucial, with some challenges (in particular liquidity pressures) that need continued vigilance and further policy steps.

  • Formulating concrete action plans for structural reforms through 2010, in line with the MoU. The authorities and staff agreed that increased attention in reforms needs to be placed on eliciting an early supply response. Having initially focused mainly on macroeconomic stabilization and fiscal major reforms, more emphasis now needs to be placed on policies to restore real-economy flexibility and competitiveness. Limited price compression following tax increases and a slow current account adjustment are indicative of the need to boost those structural reforms that could help boost competition and supply in the short term.

A. Macroeconomic Framework

5. The macroeconomic outlook remains broadly unchanged. (LOI ¶2, and Table 3).

  • Staff and authorities agreed that nominal growth will be somewhat higher than originally anticipated. Real GDP is still heading for a 4 percent decline this year and some 2½ percent decline in 2011, unchanged from the original program, but with a composition that may reflect marginally stronger domestic and weaker foreign demand. The nominal growth outlook, however, has been revised upward because of an uptick in prices. Inflation is now expected to be peaking, with some further tax effects possible in early 2011, before slowing more decisively.

  • The authorities saw the risks to the growth outlook as being on the upside. They noted that the informal economy and unrevealed pockets of wealth act as a buffer and underpin private consumption data. Staff emphasized that those cushions are unlikely to be supportive of economic activity in a sustainable way, and that downside risks to growth could materialize, especially over the medium term given the still weak competitiveness position and external environment.

  • The external current account deficit for 2010 has been revised upward to reflect the more gradual decline in imports (excluding oil and ship orders) and weaker tourism receipts, despite a rebound in shipping revenues. Financing is expected to be higher partly due to higher private financing of ship deliveries and higher-than-expected needs for liquidity support from the ECB.

  • The public and external debt sustainability outlook are little changed. Higher nominal GDP growth implies a slightly lower public debt-to-GDP ratio, which now peaks at 144 percent of GDP in 2013 (compared to 149 percent in the May 2010 program projections). However, the new €25 billion government guarantee package for financial sector liquidity support has been added to contingent liabilities. Higher current account deficits over the medium term provide a more gradual decline in the external debt-to-GDP ratio, which now remains above 100 percent of GDP by end-2015 (Annex 2).

B. Fiscal Policy

6. Early performance was encouraging, but pressures continue to exist. The June program targets were met, and the full complement of program measures is expected to ramp up its yield in the second half of the year. However, risks exist on the revenue outlook as the economy will be contracting, and spending is not under full control in subnational entities of government. Moreover, some under-execution in state budget spending is expected to reverse (for instance, due to a bunching of interest payments, and higher military spending in H2), and clearing accounts payable in hospitals may exert further (cash) expenditure pressures. In addition, items which are not yet reflected in fiscal PCs (which are defined on a cash basis), such as called debt guarantees—are expected to reach €1.5 billion as public enterprises face difficulties in rolling over maturing liabilities.4 These claims are in the accrual ESA95 definition of the deficit but not in the cash PCs for now—causing some unexpected deviations between cash and accrual deficit targets, which need to be addressed as the program moves into 2011 so as to avoid undermining market confidence.5

7. The authorities agreed to continue under-executing spending at the state level. The authorities will limit spending (including military, domestic capital, and operating expenditures) by €4 billion below earlier program projections in the state budget by end-year, including after provisioning for increased transfers to social security funds to reduce the stock of accounts payable in hospitals. The authorities were confident that those cuts are attainable without new measures and without building up new arrears given slow execution so far in operations and investment spending (about 36 percent of the full-year appropriations was spent by June), revisions to the schedule for military spending (down by €0.9 billion), and the scope for further reducing inefficient spending.

8. Stronger public financial management and especially tax administration are needed to mitigate risks:

  • In the area of public financial management, the new Fiscal Management Law (Box 1) has passed, which is a major milestone to strengthening fiscal management and control by the Ministry of Finance vis-a-vis the general government. The implementation of the law is now starting and implies, among others, setting up commitment registries (taking inventory of stocks and flows; a structural benchmark by end-September) to improve arrears monitoring and reporting, and preparing cash flow projections with clear expenditure prioritization on the basis of which spending commitments will be released. Given the problems in the hospital sector and the time required to establish fully the commitment controls, the government has already placed accounting firms in state hospitals to improve their financial management and spending control.

  • Advancing tax administration reform is a crucial priority to limit risks of revenue shortfalls, and also to increase fairness in sharing the adjustment burden. With assistance from FAD TA, by September five specialized taskforces are expected to be put in place (on implementing new tax legislation, improving audits, boosting arrears collection, collecting large taxpayer payments, and improving tax compliance (including using presumptive taxation) and service). This will be the basis for designing and implementing an ambitious multi-year anti-tax evasion and compliance agenda (MEFP, ¶7).

9. The authorities emphasized several other reforms that are being implemented, and should limit budgetary risks going forward (MEFP, ¶9).

  • Health sector. Changing procurement procedures to reduce pharmaceutical spending by 20 percent (starting September), improving profiles and benchmarking for patients and doctors to avoid unnecessary prescriptions, and enforcing and increasing copayments for outpatient and diagnostic services to contain health spending.

  • Local governments. The recently passed Kallikratis law on local government reform will significantly reduce the number of local administrations, entities, and elected and appointed officials. While the mission saw some risks to targeted savings, the authorities assured that they will limit borrowing, reduce transfers in line with the savings targets, and control local government budgets consistent with the medium-term fiscal strategy.

  • State enterprises. As the majority of called guarantees relate to the state-owned railroad operations, the restructuring in this sector will significantly reduce fiscal risks (below). In addition, to enhance transparency, the government has published financial statements of the largest loss-making enterprises on the web (ahead of the end-September structural benchmark).

10. Preparations for the 2011 budget in line with the May program have started. In light of the new Fiscal Management Law (Box 1), this will require preparation of consolidated budgets for the social security funds, extrabudgetary funds and local governments consistent with the program targets, so as to present to parliament, for the first time, the state budget and the general government budget position. Further, the government is reviewing the savings needs for 2011 that were agreed in May, to ensure the quality of the measures, secure their yield, head start their implementation, and formulate potential contingency measures.

The Fiscal Management Law

Weak fiscal institutions, the absence of binding spending ceilings, and a lack of formal commitment controls have been at the root of the Greek fiscal deficit bias. The fiscal planning process has been only focused on the state budget (with most of the overruns occurring in other general government entities) and lacked a medium term context. Budget preparation has been divorced from macroeconomic and fiscal policies, and budget execution has lacked control on expenditure commitments. Moreover, the Ministry of Finance and Parliament have had no legal instruments to enforce budget discipline across the general government.

The Fiscal Management Law, passed in July and designed with FAD-led TA, overhauls the budget preparation, execution, and monitoring procedures to support the fiscal consolidation strategy and to enshrine fiscal discipline at the general government level. The new law introduces an annual rolling three-year fiscal and budgetary strategy for the consolidated general government; introduces top-down budgeting with medium-term expenditure ceilings for the state budget; introduces commitment controls to ensure spending is in line with budget ceilings; requires supplementary budgets for any overspending; establishes contingency reserves for unforeseen events; modernizes audits; and strengthens accountability and transparency including by creating a parliamentary budget office. Most elements of the new legislation will become effective for the preparation of the 2011 budget. Importantly, the new law extends budgeting and reporting obligations and commitments to all local governments, social security funds, and other entities.

The law also includes the principles to support fiscal consolidation after the government’s current three-year program, which specifies annual fiscal targets, expires. It does so by including the general principles and basic elements for establishing a fiscal rule that could be introduced at a later stage. These principles emphasize comprehensive coverage, medium-term focus, transparency, and credibility, among others.

11. Parliament approved a far-reaching pension reform in July (Box 2). Preliminary estimates by staff indicate that the reform would lower the projected increase in pension spending in 2010–2050 from 12.5 ppts of GDP to 2.5–4.5 ppts of GDP, with the uncertainty reflecting pending adjustments to supplementary pension plans. The authorities are now shifting towards implementation to ensure a smooth transition to the new system within the tight deadlines of the reform. A full actuarial review of the effects of the reform was delayed by a few months due to staffing constraints and voluminous data requirements. Thus, the main priorities going forward are:

  • Quantifying the impact of the reform. An actuarial review of the new pension system for the main pension funds is underway, to be completed by end-December 2010. This will be expanded to include the largest supplementary funds by end-March 2011. Allowing for EU peer review and to make adequate final parameter changes, any further adjustments to the main parameters of the system, as needed, will be completed by end-June 2011.

  • Addressing supplementary and welfare pensions. Spending for these pension plans is about 1½ percent of GDP. Many of these plans are poorly funded and likely to face financial difficulties within the next 5-10 years. The authorities intend to do a full review of these plans in 2011 with the aim to reform the system by end-March 2012.

12. Despite the good fiscal performance, budget liquidity remains tight, and this requires careful cash management. Called guarantees and other stock-flow adjustments have raised the cash needs by at least €1.5 billion. To smooth the maturity profile and improve the T-bill market, the authorities plan to start monthly T-bill auctions beginning in September (from quarterly placements). This would allow smaller and more frequent placements, and provide more options for treasury management of domestic banks (who are primary investors). The authorities have no plans to return to the T-bond market any time soon.

Pension Reform

Parliament has approved an overhaul of the pension system. The reform aims to ensure long-run sustainability of the retirement system, equalize rules across pension funds, increase labor force participation, and provide a safety net for the elderly. Key reform elements are:

  • Accrual rates/generosity: The old system has different accrual rates across pension plans. The new law includes one profile of accrual rates for all workers, bringing these down from 2–3 percent a year to a much lower range of 0.80–1.50 percent a year, depending on the years of service. This measure simplifies the pension system and reduces costs. It creates incentives to participate longer as the accrual rate is progressive with working life.

  • Calculation of pensionable earnings: The old system generally uses the top 5 years of the last 10 years of earnings as the pensionable base. The new law will use the full earnings history to calculate pensionable earnings.

  • Indexation of pensions: The old system tends to adjust pensions with wage growth. The new system caps indexation at inflation.

  • Retirement age/years of contributions: The old system often allows workers to claim full benefits before age 60. The new system sets the minimum age of retirement at 60 for all workers (men and women) by 2015; requires 40 years of contributions to receive full benefits; and reduces benefits by 6 percent a year for those who claim before age 65 without 40 years of contributions. In addition, the two anchors (60 and 65 years of age) are indexed to life expectancy going forward.

  • Arduous professions/disability verification: The old system has a list of arduous professions including about a third of the labor force. The reform requires a revision of the list in 2011 to restrict the arduous classification to less than 10 percent of the working population. The new law also sets disability verification centers, establishes a register of individuals with disabilities, and allows for random checks to individuals claiming disability benefits.

  • Simplification: the new law equalizes benefit formulas and retirement ages across all funds. Six pension funds remain: IKA (most wage and salary workers, including government employees and the military), OAEE (most self-employed workers), OGA (for the agricultural sector), ETAA (for lawyers, doctors, and engineers), ETAP-MME (journalists), and the fund of the BoG. Additionally, the new law separates pension funds from the health insurance component.

  • Compliance: Under the new law, all transactions (contributions, benefit payments) to all social security bodies will be made through the banking system. The reform also establishes a pension audit system to cross-check beneficiaries using the social security number (AMKA). The reform also sets penalties for contribution evasion and conditions for the repayment of overdue contributions.

  • Monitoring: starting 2011, the new law requires actuarial analysis of the pension system every two years; it also requires the Minister of Labor to brief the parliament on the finances of the social security system every six months.

Safeguard clause. The pension overhaul is far-reaching. The objective is to reduce the long-run increase in pension costs from 12½ ppts of GDP by 2060 under the old system to 2½ ppts of GDP under the new system. If the periodic actuarial evaluations show that the reform falls short, there is a provision in the new law that allows for a Ministerial Decision to adjust parameters of the system to achieve the final objective.

C. Financial Sector

13. There was agreement that liquidity remains the immediate challenge. Changes adopted by the ECB in the collateral valuation in the course of the summer have led, inter alia, to a decline of the value of the collateral assets submitted by Greek credit institutions. Furthermore, the amendments in the Eurosystem’s risk control framework announced on 28 July 2010 (which will enter into force on 1 January 2011) could also further reduce the after-haircut value of some of the assets submitted as collateral. Moreover, some deposit losses continue and banks have increased interest rates to slow the outflow. In this context, to preserve adequate buffers, the authorities are preparing legislation to put in place a new tranche of guarantees for bank bonds for a total amount of €25 billion (a prior action for the first review). Such guarantees will ensure that the banks maintain a sufficient lending capacity, and will allow them to better withstand possible further market turbulence. In this regard, the authorities believe that continuation by the ECB of its SMP program is a desirable backstop. Banks are also taking initiatives to improve their liquidity positions, including selling some non-core assets and reducing their cost base. They have also opened a number of programs for covered bonds and restructured current ABSs to generate additional eligible collateral from their existing balance sheet assets.

14. The Financial Stability Fund (FSF) has been formally approved to backstop capital needs. On July 13 the Parliament enacted the Financial Stability Fund Law. This independent institution will be able to invest in viable banking institutions where capital has come under pressure and a private sector solution cannot be immediately found. In such a case, a restructuring process will take place under the lead of the FSF. The projected €10 billion for the financing of the FSF remains adequate. It is anticipated that the initial tranche will be disbursed to the FSF in September 2010. Other steps needed for the FSF to become fully operational by September are on course, including the appointment of board members, hiring staff, and premises.

15. Banking supervision is being strengthened but additional efforts are needed. Reporting requirements have heightened and reporting lags are being reduced. In view of a hiring freeze, staffing has not yet been increased for on-site inspections and off-site reviews. Progress in recruitment is becoming urgent, also taking into account the recently approved law on insurance companies which transfers supervisory oversight of insurance activities to the BoG. The authorities are considering ways to use a more flexible recruitment process that does not compromise on quality and does not increase net staffing.

16. The government has commissioned an in-depth study on the strategic options for the banking sector (Box 3). In this context, the authorities will request a preliminary due diligence analysis for the financial entities in which the state has a significant stake (which will be discussed at the time of the second review). The government, in consultation with the staff of the EC, the ECB and the IMF, will formulate a program to preserve financial stability and enhance efficiency in the banking system, taking into account the outcome of these reports.

17. The authorities are also following up on the results of the July 2010 Committee of European Banking Supervisors (CEBS) stress tests. The government has reaffirmed its full support to the state-owned ATE bank which did not pass the stress tests under the most stringent scenario. Priority will be given to the implementation of a comprehensive restructuring plan (by end-September) as required for institutions that have received significant amounts of state aid. In addition, pending the outcome of the due diligence, the bank has been instructed to implement a set of interim restructuring measures under the close oversight of the BoG with a view to containing costs and risks.

18. The BoG continues to maintain close coordination with home and host country supervisors. Regular communications with regulators in Southeastern Europe regarding risk assessments and liquidity contingency plans have intensified, while participation in colleges of supervisors continues.

19. The authorities have also made good progress on their other commitments under the MEFP. In this respect, the personal insolvency law has been adopted after it was amended in line with ECB recommendations to ensure that creditor’s rights are adequately protected. The special law establishing an emergency corporate insolvency framework (facilitating the restructuring of debt) has expired and it has not been extended, a step welcomed by the banking industry.

Reforming State-controlled Banking Entities

The government still controls a significant share of the banking sector in Greece. It holds a majority (77 percent) of the capital of ATE Bank (Agricultural Bank of Greece) which has a 7.3 percent share of the system’s assets (as of end-2009), and is the controlling shareholder (33 percent of the capital) of the Hellenic Postbank which has a 4.1 percent share of the system’s assets (as of end-2009). Through their participations, the government has also control or a key influence over two smaller banks. In addition, the Consignment Deposits and Loans Fund, a non-bank government institution with €6.6 billion of assets, competes with banks for deposits and extends loans to civil servants and public entities. Finally, through share ownership by pension funds, the state also participates indirectly in the National Bank of Greece (NBG) and the government normally appoints the NBG CEO. Total market share of banks in which the state has a direct controlling share (excluding NBG) exceeds 11 percent.

Significant unresolved challenges beset state-controlled banking entities. ATE Bank has an established history of extending loans that are not repaid and are eventually written-off, triggering the need for recurrent government recapitalization. It is facing this situation again now, and was the only Greek bank that failed the most severe scenario in the July 2010 CEBS stress-test. The Consignment Fund lacks appropriate controls, and has no proper mechanism to manage the liquidity and interest rate risks associated with its banking activities. Without access to ECB facilities or the interbank market, it tends to keep deposit interest rates high, thus distorting the market, albeit to a limited extend so far due to its small size and sparse network of branches.

The government has selected a coherent and comprehensive approach to resolving these problems:

  • Fact finding by independent consultants will be completed by mid-September. The government has commissioned a strategic review of the future of the Greek banking system and the State’s involvement. In addition, a preliminary targeted due diligence will be prepared for the banks with a material size in which the government has control or significant influence. The purpose will be to assess the economic value of the entities under review.

  • A reform program, including all government interest in banking activities, will be defined after the fact finding. It will aim at preserving financial stability, by addressing pending issues in the weaker institutions, and at improving efficiency. It may include the possible sale of a significant part of the government interests in banking entities, in an open and transparent process, in line with national and EU rules, in which both domestic and international investors will have the opportunity to participate. This program approval date will be discussed at the time of the second review.

D. Structural Reform Policies and Data Reporting

20. Labor market reform is underway. Substantive legislative changes were introduced in July ahead of schedule (Box 4) to reduce labor-market distortions. These lowered employment protection restrictions and will increase the adjustment capacity of firms, ultimately boosting employment. As authorities view wage moderation as a critical component to regain competitiveness, further measures will be taken by end-September to reform collective bargaining. This will be important to ensure wage increases commensurate with productivity.

Labor Market Reform

The authorities are implementing a comprehensive labor market reform in two steps. First, legislation was adopted in July to address institutional rigidities like dismissal costs, and facilitate labor market entry. Key elements are:

  • Minimum wage. To facilitate youth entry into the labor market, the government has introduced a sub-minimum wage for newly-hired employees younger than 25—the gross wage for employers will be 84 percent of the wage level established in the National General Collective Labor Agreements (NGCLA). Employees’ take-home pay will nevertheless remain unchanged as the Manpower Services Organization will cover their social security contributions. One-year apprenticeship contracts have been introduced for workers between 15 and 18 years old, which will pay 70 percent of the minimum wage.

  • Employment protection legislation. Severance costs for white-collar workers, which traditionally have been higher than for blue-collar works, are reduced substantially through the shortening of the notification period (e.g. for an employee working 28 years or more, notification is reduced from 24 months to 6 months). As a result, the gap in severance costs between white-collar and blue-collar workers is cut by 20 percent although it is still high by European standards.

  • Collective dismissals. Firing restrictions have been relaxed for all firms subject to collective dismissal rules. For firms with more than 600 employees, the maximum number of lay-offs per month has been increased from 12 up to 30 people.

Institutional changes relating to collective bargaining and arbitration procedures will be adopted by end-September 2010, with the aim of improving the link between wages and productivity. The reform will conform with the following principles:

  • Collective bargaining. Wage levels established in the NGCLA are no longer a minimum requirement for occupational, sectoral or firm-level agreements as a result of legislation approved in May. The favourability principle will be abolished and assurances put in place to ensure that firm-level agreements will prevail over other levels of collective agreement. Finally, the automatic extension of sectoral or occupational agreements to those not represented in the negotiations will be eliminated.

  • Arbitration. In the case of differences between employers and employees over sectoral or occupational agreements, the current system only grants recourse to arbitration to labor unions, thereby making wage moderation outcomes more difficult. The arbitration system will be amended so that both employees and employers can resort to arbitration if mediation fails, without exception regarding subject or coverage. The new system will operate according to transparent objective criteria and with an independent committee of arbitrators with no government representatives.

21. Efforts are underway to increase competition and remove restrictions, including in the transport sector. There was agreement that these reforms are particularly important for an early supply response.

  • Business entry. Start-ups will be facilitated by making fully operational the general electronic commercial registry (GEMI), adequately equipping one-stop shops, and eliminating unnecessary fees (by end-December). On licensing, legislation will be adopted to simplify and accelerate the authorization (by end-December).

  • Hellenic Competition Committee (HCC). The government will amend the Greek Competition Act to strengthen the independence of the HCC through the Parliamentary approval of the HCC president and its members (by end-December). The effectiveness of the HCC will also be enhanced by enabling it to prioritize cases and to undertake policy advocacy on its own initiative, and by strengthening the appeals system.

  • Services and closed professions. The authorities will pursue an ambitious implementation of the Services Directive. To this aim, a comprehensive review of up to 160 technical occupations under the jurisdiction of the General Secretariat for Industry is being conducted, with emphasis on removing licensing obstacles and other entry barriers. A draft framework law should be ready by October 2010. Pervasive restrictions to entry in a number of important professions impose high costs on the economy. As a first step, the government will liberalize entry in the legal, pharmacy, notary, architecture, engineering, and auditing professions. This will include reducing licensing requirements, geographic restrictions and regulated tariffs (by end-December).

  • Transportation. The draft law on the revocation of cabotage—to be ratified by the Parliament shortly—will allow non-EU flagged vessels to perform cruises departing/arriving at Greek ports. Moreover, the government will approve legislation to remove restrictions and liberalize prices in road freight by end-September (Box 5).

  • Tourism and retail. The government will commission a report analyzing obstacles to development of the tourism and retailing sectors, and follow up with a time-bound action plan. As retail inefficiencies contribute significantly to inflation, an electronic price observatory has been created within the General Secretariat of Commerce to regularly evaluate price formation practices. When possible anti-competitive practices are identified, cases will be submitted to the HCC for further examination.

Road Freight Reform

Freight transport in Greece has been regulated since the 1970s, with the government setting minimum tariffs and granting licenses to haulage operators. Distortions arising from government intervention include: (1) high-price, low-quality transportation services, encouraging firms to internalize transport activities; (2) large private rents accruing to incumbents; (3) lack of incentives for investment in the sector, characterized by poor technological innovation and productivity performance; and (4) excessive fragmentation and low utilization of economies of scale, which would have prevented Greek haulers from developing a wider chain of logistics services and taking their market share on the EU transport market. No new licenses have been sold since the 1970s.

The far-reaching liberalization of road haulage, scheduled to be passed by end-September, is expected to generate substantial efficiency gains. Main elements of the reform are:

  • Elimination of quantitative licensing restrictions: The granting of licenses will be automatic upon meeting the objective criteria set by the law, namely certificates of professional qualifications, tax clearance and social security certificates, and criminal record copies.

  • Price of the licenses during the transition period: During a transition period of 2.5 years, new entrants will be required to pay an entry fee equal to the “goodwill” of existing licenses, whose value is acknowledged by the government as “an element of the right of property”. The value of the entry fee will decrease at the rate of 30 percent in 2011, and 35 percent in 2012 and 2013. After 2013 the fee shouldered by the new entrants will exclusively cover administrative costs.

  • Freedom to negotiate cargo fares: Administratively set prices for general cargo are abolished, but not for oil fuel, where the administration can still set maximum prices.

22. The government will facilitate private investment including through the privatization program (Box 6). Opening up private investment, including FDI, can generate short-term growth benefits, without burdening the budget. A number of reforms are underway:

  • Structural funds. Use of state aid to sustain inefficient companies will be gradually cut. The government will adopt legislation to tackle delays of public works. A task force has been established with authority to overcome implementation bottlenecks and ensure a timely delivery of high-quality programs.

  • Network industries. An enabling law to restructure the railway sector will be discussed in parliament by end-September and, in parallel, the government will approve a business plan with time-bound actions, including on cost-recovery tariffs, reduced payroll expenses, and closure of unprofitable lines. The government will also enable the effective liberalization of the wholesale electricity market and proceed with the rationalization of tariffs while ensuring that vulnerable groups are protected.

  • Other state-owned enterprises. Privatization as a means to boost domestic and foreign direct investments to enhance growth could be particularly important in the transportation sector—ports and regional airports are potential candidates—where Greece could consolidate its potential as a hub for Southeastern Europe. Thus, a list of privatization projects has been identified and is awaiting a fully elaborated plan to be prepared before end-December.

Public Enterprises and Privatization

SOEs are a source of fiscal risk, which the authorities are beginning to address. The ten largest loss-making SOEs had combined losses of around 0.7 percent of GDP in 2009. The bulk of these losses is concentrated in the railway sector (60 percent), the Athens public transport system (25 percent), and in the defense sector (11 percent). In addition, loss-making SOEs are a main recipient of guarantees, which are regularly called, and investment in some of these companies is also in part conducted directly through the public investment budget.

The authorities have initiated two significant SOE reforms, to be completed by end-2010:

  • A privatization program has been announced but needs further elaboration.. The program covers the telecom, utility, transportation, real estate, and gaming sectors. Privatization will be conducted mostly through concession agreements, with outright sales and IPOs playing a smaller role. For 2011, a preliminary list of privatization projects (mainly in the gaming industry and through the extension of concessions) has been identified that could yield savings exceeding €1 billion. Elaboration of a full-fledged privatization plan is expected by end-December (structural benchmark).

  • The railroad sector is being restructured. The reform aims to make the now loss-making train operator (TRAINOSE) viable and prepare for a possible combination with a strategic partner. A draft bill for the restructuring of TRAINOSE is being prepared, involving the unbundling of the operator and the infrastructure manager, limiting subsidies from the state against an assumption of debts, and reducing costs through higher tariffs, suspension of loss-making routes, and lower personnel costs.

23. The authorities are improving data quality:

  • Fiscal reporting. While below-the-line fiscal reporting for non-state entities is ready to start in September, a questionnaire has also been launched to collect above-the-line fiscal outcomes. The authorities are now working on strengthening the response rate and reporting quality to switch to above-the-line reporting by year’s end. Reconciliation for first quarter below-the-line cash data and ESA95 survey accrual data revealed limited differences for social security funds, with challenges in local government and extra-budgetary fund reporting remaining.

  • ELSTAT. The President of the newly independent Statistical Office (ELSTAT) and other members of the board of directors have been appointed. MoUs between ELSTAT and the main data providing institutions (i.e. GAO, BoG, Ministry of Interior, Ministry of Labor and Social Security, and Ministry of Health) are closed to completion. These will serve as a preparatory step for the regulations of statistical obligations (benchmark for end-December). Also, major work is underway to update the registry of public agencies, enterprises, and organizations which will help improve data coverage of the public sector.

III. Program Modalities and Safeguards Assessment

24. The attached Letter of Intent, Memorandum of Economic and Financial Policies and annexed tables, and the Technical Memorandum of Understanding (TMU) describe the authorities’ progress in implementing their economic program (LOI and MEFP ¶1–24, and MEFP Tables 12). The program’s performance criteria and structural benchmarks remain as specified in May. The TMU has been modified to improve clarity in some definitions, and increase coverage of the program’s fiscal deficit targets so that they mirror more closely the general government deficit on an ESA95 accrual basis to be applicable from 2011 onwards. No changes are proposed to the level of access or the schedule of purchases.

Table 1.

Greece: Selected Economic Indicators

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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. Data for 2010 refer to May.

Excluding unidentified measures.

Measures fully identified up to 2013.

As of May 2010.

Domestic credit growth of households and enterprises.

As of June 2010.

Table 2.

Greece: General Government Operations, 2009–15 1/

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Source: Greek authorities, and IMF staff estimates.


For 2010, measures are included in revenue and expenditure; for 2011 and beyond, they are reported separately.

25. The first safeguards assessment of the Bank of Greece (BoG) with respect to SBA approved in May 2010 was finalized on August 16, 2010. The assessment found a well established safeguards framework at the central bank. The BoG adopted the relevant guidelines and good practices promulgated by the European Central Bank, its financial statements are independently audited and the results are published. The BoG has initiated reforms to strengthen its internal audit function, and an independent audit committee is being established. The assessment recommended a few measures to further enhance the financial reporting and audit mechanisms.

IV. Staff Appraisal

26. Staff’s overall assessment is that the program has made a strong start. The end-June quantitative performance criteria have been met, led by forceful implementation of the fiscal program, and major reforms are ahead of schedule. However, important challenges and risks remain.

27. The ambitious fiscal consolidation program remains on track, but pressure points are evident. The vigorous implementation of the fiscal program—not least the determination to under-spend at the state level in order to offset shortfalls at sub-national level—is much welcome. Staff projections suggest that continued under-execution of discretionary state budget spending, by €4 billion at year-end, is necessary to ensure that the end-December targets are met. Staff shares the authorities’ assessment that this is possible, and that additional fiscal measures are not warranted at this juncture. However, such under-execution can only be a stop-gap measure until more fundamental fiscal reforms—improved expenditure control and tax administration, take hold.

28. The program’s credibility hinges critically on improving tax compliance. The government appears determined, but is likely to be fiercely tested by an entrenched and pervasive culture of tax evasion and opposition from within the tax service. Progress is bound to be gradual, but a determined pursuit of tax evaders through the presumptive tax mechanism and through the work of the task forces pursuing high-income individuals is essential. Without improved compliance, restoring fiscal sustainability will likely require additional hikes in tax rates and painful expenditure cuts in the coming years. With concerns about the fairness of the distribution of the burden of adjustment already evident, this would greatly risk the broad social and political support that is essential to the success of the program.

29. Improving expenditure controls at sub-national levels of government is another important challenge. The problems here are not unexpected considering institutional weaknesses and the extensive past recourse to guaranteeing borrowing by state enterprises. The sweeping reform of local governments now in place is likely to entail significant savings. But while a new (“golden”) rule limiting municipalities’ capital expenditure is sound, it could still allow a rise in total expenditure inconsistent with overall general government targets. The government should seek agreement with the new municipal governments to ensure that this does not happen. The strengthening of financial control and procurement in the health sector is also important. This sector is a main source of spending pressures, and efforts to improve its financial discipline must continue. As to state enterprises—for instance, the railways—a planned transfer of debt to the budget and a requirement that subsidies be included in the state budget will—by improving transparency—facilitate informed decisions about public spending. This must, however, be accompanied by reforms to ensure that these enterprises become financially sound.

30. Restoring competitiveness and boosting growth are critical to the program’s success. Competitiveness risks are highlighted by the jump in domestic inflation and tardy adjustment in the external current account. Looking forward, the focus therefore now naturally begins to shift from the immediate challenge of regaining fiscal control to the many areas of the real economy requiring deep reform. The adoption of far-reaching pension and labor market reforms ahead of schedule augurs well for the government’s determination to undertake difficult reforms. Indeed, the pension reform might be among the most ambitious undertaken by any country in one step. Substantive labor market reform is also underway. This has clearly impressed, in Greece and abroad.

31. Looking forward, priority in structural reforms should be given to those that could start an early recovery in growth, competitiveness, and employment. This points to liberalization of closed professions, deregulation, and the reduction in barriers to development of the tourism and retail sectors, where the growth potential appears to be particularly large. Consideration should also be given to strengthening the privatization program, which right now has a somewhat timid role in the government’s overall strategy. In some of these high-potential areas, resistance from entrenched vested interests is likely to be fierce; important political efforts should first and foremost be focused here. In this regard, the government’s determination to persevere with a strongly-contested reform of road haulage has sent an important signal of its determination to push ahead with reforms in other areas.

32. The liquidity situation in the banking system is tight but manageable. The ECB’s Security Market Purchase Program has contributed importantly to safeguarding the banking system’s liquidity by stabilizing prices for government bonds. Continuation of this program would be desirable as long as malfunctioning of the sovereign bond market persists. On the assumption that this program remains in place, and that the government’s guaranteeing of €25 billion of bank bonds will significantly increase repo-eligible collateral, staff believes that banks will have sufficient liquidity in the coming months.

33. Stress on banking system capital also remains manageable. The CEBS stress test confirmed that the Greek banking system is relatively well-capitalized. With the FSF now in place, the authorities have the back-stop required to deal with capital shortfalls that might emerge as the recession takes its toll on banks’ balance sheets. In this regard, staff believes that the €10 billion allocated by the authorities for the financing of the FSF remains adequate. As to state banks, due diligence is now underway. The formulation of a comprehensive strategy for these banks must be a key objective for the coming months, starting with a plan for ATE Bank—the single Greek bank which failed the stress test.

34. Overall, the program is off to an impressive start. This is fully in line with the high expectations expressed by the international community when agreeing to the extraordinary financial support package. A disappointment so far has been that, at this defining moment for Greece, the economic reforms have not had broader support from other political parties. While most of the difficult reforms still lie ahead, developments during this early phase of the program augur well for the government’s determination to press ahead. Staff fully supports the conclusion of the review.

Table 3.

Greece: Public Sector Financing Requirements and Sources

(Billion of euros, unless otherwise stated)

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Sources: Ministry of Finance; and IMF staff’s projections.

It includes bank assistance and stock-flow adjustments.

It includes stock-flow adjustments.

Table 4.

Greece: Summary of Balance of Payments, 2009–15

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Sources: Bank of Greece; and IMF staff estimates.
Table 5.

Greece: External Financing Requirements and Sources, 2008-15

(In billions of euros)

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Sources: Bank of Greece, Bloomberg, and staff estimates and projections.

Includes liabilities to Eurosystem related to TARGET.

Includes market instruments and trade credits.

Table 6.

Greece: Core Set of Financial Soundness Indicators for Deposit Taking Institutions, 2000–10


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Source: Bank of Greece.

Data on a consolidated basis.

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 7.

Greece: Access and Phasing under the Stand-By Arrangement, 2010–13

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Source: Fund staff projections.