Fifth Review Under the Stand-By Arrangement, Rephasing and Request for Waivers of Nonobservance of Performance Criteria; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece.

The Executive Board of the IMF has completed the fifth review of Greece’s economic performance under a program supported by a three-year Stand-By Arrangement (SBA) for the country. The completion of the review enables the immediate disbursement of an amount equivalent to SDR1.9 billion, bringing total IMF disbursements under the SBA to an amount equivalent to SDR 17.5 billion. The creation of a national unity government and the endorsement of program objectives and policies by major parties is an important step.


The Executive Board of the IMF has completed the fifth review of Greece’s economic performance under a program supported by a three-year Stand-By Arrangement (SBA) for the country. The completion of the review enables the immediate disbursement of an amount equivalent to SDR1.9 billion, bringing total IMF disbursements under the SBA to an amount equivalent to SDR 17.5 billion. The creation of a national unity government and the endorsement of program objectives and policies by major parties is an important step.

I. Background

1. The review discussions took place in the context of a drawn-out process in Europe to assemble a new and adequate financing package to support Greece, and struggles in Greece to implement and assemble political support for the program. The debate in Europe has revolved around the conditions for private sector involvement (PSI), and the appropriate amount of official support. EU Summits in July and October took decisions on a path forward. Meanwhile, the Greek authorities had difficulties implementing the adjustment program over the summer, falling behind across a range of policies. Social resistance to the program continued to intensify as the economy weakened and opposition attacks on the program accelerated. In early November, after an effort to secure broader support for the program through a referendum on program policies generated a strong backlash, PM Papandreou resigned. A three-party coalition government has since been assembled, comprising PASOK, the main opposition party New Democracy, and the LAOS party. The coalition appointed a technocratic Prime Minister (Lucas Papademos, former ECB Vice President), and will remain in place until new elections, expected late in the first quarter. The leaders of the three parties have provided assurances to Fund management and staff that they are committed to the objectives and main policies of the program.

II. Recent Developments

2. Europe has been inching towards a new financing package for Greece, involving both additional official support and significant PSI:

  • In late July, European leaders agreed to maintain their financial support to countries under adjustment programs (like Greece) for as long as it takes to restore market access, provided their program is implemented. Support would be provided by the European Financial Stability Fund (EFSF) at close to its funding cost (expected to be between 4 and 4½ percent over the program period, rates that are close to historic lows) and at extended maturities (from 15 to 30 years) with a grace period of 10 years.

  • The discussions on the scale and design of PSI commenced in June. An initial proposal by the International Institute of Finance in July was seen as overly generous and failed to get sustained official sector support. It ultimately gave way to a revised late-October agreement with European leaders, centered on the following key parameters: (i) a 50 percent face value reduction in privately-held Greek bonded debt; (ii) incentives, financed by the official sector, that are capped at €30 billion; and (iii) a target to bring Greek debt-to-GDP under 120 percent of GDP by 2020. Box 1 reviews the PSI discussions and their present status in more detail.

3. Market sentiment has steadily deteriorated since the last review (Figure 1). With deeper PSI on the horizon, bond and sovereign CDS spreads have skyrocketed, with spreads on 2-year and 10-year debt over German bunds exceeding 11,350 bps and 2,600 bps, respectively, by mid-November. They declined only temporarily in the wake of the latest announcement on PSI, and have remained extremely volatile, reaching new record highs.

Figure 1.
Figure 1.

Greece: Financial Indicators

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001

Sources: Bloomberg; and Moody’s Creditedge.

4. The Greek economy has turned sharply downwards in 2011 (Table 1):

Table 1.

Greece: Selected Economic Indicators, 2006-11

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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 August.

As of November 2010.

Domestic credit growth of households and enterprises.

  • Concerning GDP growth, data revisions show that the cumulative recession by end-2010 was deeper and first quarter 2011 growth weaker than understood at the time of the fourth review. Indicators of economic activity (e.g. retail trade, construction, and industrial production) suggest that the decline of domestic demand continued unabated during the third quarter. Labor market conditions have deteriorated sharply, with unemployment reaching 16.5 percent in July 2011, underwhelming hopes for a seasonal recovery of employment during the main tourism season. While increasing tourist arrivals and merchandise exports have been encouraging, recent Euro area indicators suggest that external demand has weakened (Figure 2).

  • Headline inflation (HICP) declined to 1.4 percent in August, significantly below the Euro area average. Driven by weakness in the economy, core inflation was at zero percent (from 0.6 in July). Inflation edged back up to 2.9 percent in September/October, on account of indirect tax increases, but remained slightly below the Euro area average.

Figure 2.
Figure 2.

Greece: Selected Indicators

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

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001

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

Greece: Revised Real GDP Growth, 2006-11

(year-on-year, in percent)

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001


Headline Inflation and Inflation at Constant Taxes

(in percent)

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001

Sources: ElStat and Eurostat.
  • Competitiveness is improving through wage cuts rather than increased efficiency. Productivity measured as real GDP over employment has continued to deteriorate during the first half of the year, albeit at a slowing pace, as the fall in employment has accelerated. Total economy unit labor costs (ULC) have fallen by about 2½ percent year-on-year in 2011 (and more than 3 percent in the business sector), built on a decline in compensation per employee of about 2¼ percent and 6 percent lower employment. (Figure 3). The real effective exchange rate remained broadly unchanged year-on-year in August, owing to euro appreciation early in 2011.

  • The current account deficit continues to adjust gradually (Figure 4). The 8¼ percent decline of the deficit over the first eight months of 2011 (year-on-year, in euro terms) leaves the trailing 12 month deficit at about 10 percent of GDP, still very high considering the length and depth of the recession. The improvement has been mainly due to the deepening recession and associated sharp compression of non-oil imports, and to a lesser extent increasing travel receipts and merchandise exports. A surging oil deficit together with lower transport receipts and rising net interest payments have prevented a faster external adjustment.

Figure 3.
Figure 3.

Greece: Competitiveness Indicators

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

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001

Sources: Eurostat; Elstat; and IMF staff calculations.
Figure 4.
Figure 4.

Greece: Balance of Payments

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001

Sources: Bank of Greece; and IMF staff calculations.

5. Pressures on the banking system have multiplied, as PSI discussions have placed an unwelcome spotlight on bank solvency (Tables 2-3; Figure 5):

Table 2.

Greece: Monetary Survey, 2006–11

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Source: Bank of Greece and IMF staff estimates and projections.

As of June 2010, securitised assets are no longer derecognised from the balance sheet of banks that have adopted the International Accounting Standards. The counterpart of these assets is recorded on the liabilities side as deposit liabilities to non-euro area residents.

Holdings of securities other than shares and derivatives.

Credit to domestic non-MFI residents by domestic MFIs excluding the Bank of Greece, including securitized loans and corporate bonds.

Growth rates are calculated from differences in outstanding amounts adjusted for revaluations, exchange rate valuation differences, reclassifications and any other changes which do not arise from transactions.

Rates of change based on actual net flows (i.e. adjusted for reclassifications, valuation adjustments, and write-offs).

Rates of change based on reported end-of-period stocks.

Table 3.

Greece: Financial Soundness Indicators, 2005–11


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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).

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

Based on revised figures from 2002 onwards.

Figure 5.
Figure 5.

Greece: Money and Banking Indicators

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001

Sources: National Statistical Service; Bank of Greece; Bloomberg; ECB; and IMF staff calculations.1/ Scale: 1= tightened considerably; 2= tightened somewhat; 3=remain unchanged; 4=eased somewhat 5= eased considerably2/ 1= decreased considerably; 2= decreased somewhat; 3=remain unchanged; 4=increased somewhat; 5= increased considerably
  • Deposit losses intensified in early Q4. Deposit withdrawals have accelerated in September-November reaching €15 billion (and bringing total outflows since the beginning of the year to €32 billion, or 16½ percent of end-2010 deposits). Wholesale funding markets remain closed, and banks’ access to Eurosystem refinancing has suffered from collateral depreciation. As a result, banks have increasingly resorted to emergency liquidity assistance (ELA) provided by the Bank of Greece (BoG), with the government approving some €60 billion in guarantees to facilitate this. Total central bank exposure (including ELA by the BoG) now amounts to nearly €120 billion (or 55 percent of GDP).

  • Banks’ private loan books have further deteriorated. In all, every asset quality metric is now significantly worse than European averages. Loan impairments have accelerated, with nonperforming loans surging by 20 percent in the first half of 2011, to 12.8 percent of total loans. The stock of restructured loans increased at a similar pace, reaching 4 percent of total loans. During the same period, provisioning coverage has declined by one percentage point, to 45.3 percent (a level well below an average of 57 percent in a representative sample of large European banks). To assess credit risk, an independent qualified international advisory firm—Blackrock—has commenced a diagnostic of bank loan portfolios and will complete it by end-year.


Asset Quality


Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001

Source: FSI Indicators, IMF.
  • Banks’ heavy exposure to Greek government bonds is taking a toll on their profitability, capital, and market value. In response to the July 21 PSI agreement, banks impaired their holdings of government bonds by 16 percent on average (less than the 21 percent benchmark). This generated accounting losses of about €5 billion. To date, impairments have shaved about two percentage points off Core Tier I capital, with the system’s aggregated Core Tier I ratio declining to 8.6 percent. For two banks (majority state-owned ATE Bank and T Bank), the total regulatory capital ratio fell below the 8 percent regulatory minimum. Overall, the banking system’s combined market value of €4 billion falls well short of its reported core Tier I capital of €22 billion, as markets have been further discounting the value of banks’ remaining and still significant exposures to sovereign debt.

  • A small bank was intervened in October. Concerns about Proton bank first arose in February after evidence of connected lending came to light. After supervisors uncovered possible embezzlement and money-laundering activities in July, the BoG intervened. With the authorities concerned about fragile confidence and unwilling to risk liquidation, the bank was kept afloat by extraordinary liquidity support from the government and interbank deposits from the four largest Greek banks. In October, once the new resolution law was in place, the authorities resolved the bank by establishing a bridge bank, protecting depositors, and wiping out the financial interests of Proton’s former shareholders.

6. Private sector balance sheets remain under pressure. Asset prices continue to decline, with housing prices down by a reported 5 percent during 2011 and the equity market down by almost 50 percent to date in 2011. Total credit to the private sector declined by 1.3 percent year-on-year through August, led by a 6.6 percent fall in consumer loans. Housing loans decreased by 2.1 percent, while corporate credit growth remained marginally positive, at 0.5 percent. Lending spreads on new loans have continued to increase, in particular for corporations. While weak economic activity is dampening demand for loans, indications from both the lender and borrower sides are that the current deleveraging is mainly driven by constrained credit supply. Indeed, lack of liquidity and funding were named among the main impediments to business activity according to an October business survey by the Athens Chamber of Commerce and Industry (EBEA).

7. After the large consolidation realized during 2010, the fiscal position has taken a turn for the worse during 2011, as the recession deepened and policy implementation slipped (Table 4; Figure 6). Through end-September, the primary general government balance fell short of the program target by €280 million, or 0.1 percent of GDP. Looking at the state budget, for which more detailed information is available, the cash deficit for the overall and primary state budget balances have remained slightly larger than in 2010 (although still trending about 5 percent of GDP above Greece’s starting fiscal position, a major achievement in the recessionary environment). Back-loaded adjustment in 2011 is in part a matter of program design, but the recent weak performance also reflects revenue and spending slippages (e.g. excess hiring), delays in the approval and full implementation of some medium-term fiscal strategy (MTFS) measures (e.g. the excise increase on natural gas), as well as the authorities’ cancellation of some measures (e.g. an excise on soft drinks). The revenue shortfall in the state budget has reached some €1.7 billion (¾ percent of GDP), with a drop in VAT efficiency signaling compliance problems. Significant shortfalls in social security contributions—well beyond developments in the economy-wide wage bill—also suggest deteriorating compliance by firms (likely due to liquidity constraints). Slower execution of military procurement and investment spending has helped to temporarily contain the deterioration of the fiscal position.

Table 4.

Greece: Modified General Government Cash Balance, 2011

(in billions of Euro, cumulative)

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Source: Greek Ministry of Finance and Fund staff projections.

Including new measures.

For the personnel of the Public Power Company.

Change in net financial assets. Excludes valuation changes.

Including balances of reclassified public enterprises

Cash to accrual, coverage, and other ESA adjustments.

Figure 6.
Figure 6.

Greece: Budget Execution (up to end-September 2011)

(Millions of euro)

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001

Sources: National authorities; and IMF staff calculations.1/ Survey results. Data refer to end-September 2011 and include arrears predating 2010 (pure stock data). 2/ Hospital arrears include 0.1 billion of arrears not yet settled out of the total stock of 5.3 billion of arrears to suppliers known at end-2009. 3/ Social security arrears include 1.1 billion of arrears on lump sum payments to civil servant pensioners related to 2009 and 2010.

Overall balance - cumulative

(billion Euro)

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001


Primary balance - cumulative

(billion Euro)

Citation: IMF Staff Country Reports 2011, 351; 10.5089/9781463929817.002.A001

8. The government has had to manage in a situation of tight cash constraints, contributing to a growing arrears problem. With the delay in the fifth review disbursement, cash has been more tightly managed, by: (i) delaying the planned unwinding of the Treasury-bill stock and keeping it at its end-June level (as a result, interest rates slightly edged up); (ii) reducing transfers to non-state entities that have their own deposits; (iii) using deposits in the intermediate HFSF account for funding transfers to the HFSF dedicated account (which has not been touched); and (iv) delaying some discretionary payments (as a result, arrears have increased, and amounted at end-September to €6.5 billion, or an increase of €300 million since end-March).

9. Reforms of fiscal institutions are advancing slowly, held back by limited administrative capacity and institutional resistance:

  • In the revenue administration area, the authorities have launched a strategic plan for medium-term fiscal reforms (meeting a program structural benchmark). This will, among other things, create a central tax debt directorate and large taxpayer unit. However, while they have exceeded tax debt collection targets and have begun implementing new risk-based audits, audits of large taxpayers and high-wealth individuals have fallen behind schedule (at 62 percent of the end-September target). Reforms to remove barriers to effective tax administration (e.g. to set up an arbitration process) are also behind schedule.

  • As regards public financial management, commitment registers are slowly taking hold (with 40 percent of line ministries reporting data in September). However, the establishment of new directorates of financial services and appointment of permanent accounting officers in line ministries has been mired in significant administrative delays. Fiscal and expenditure-arrears reporting has now become a feature of the Greek reporting system, although the timeliness of data releases, their quality (particularly arrears data), and comprehensiveness (especially the lack of availability of detailed revenue and spending information for all general government entities) remain to be improved. A program structural benchmark was deemed only partially met as the authorities were unable to report consistent arrears data using commitment registers.

10. Privatization plans are advancing, but sales have been slow to materialize. Since the sale of telecom (OTE) shares in June, two concession agreements related to the sports-betting company OPAP and mobile telephone licenses have been signed, with payments expected by end year. Proceeds through end-September amounted to €390 million, well short of the anticipated €1.7 billion. The Privatization Fund has been confronting difficult market conditions, with the price of several listed public companies down by more than 50 percent since the start of the second quarter. At the same time, the appointment of advisors for the 2011-12 projects has proceeded more slowly than foreseen. Nevertheless, the full operational establishment of the Privatization Fund has been completed, including the appointments of the Board of Directors and the Council of Experts, staffing transfers, adoption of operational plans, and transfer of a first list of assets. Intermediate steps needed for the privatization program (gaming, tourism, expropriation laws, and the gold mine licenses) have also been completed on schedule.

11. Structural reforms have not yet delivered expected results, in part due to a disconnect between legislation and implementation (Table 5). Two flagship reforms—on collective bargaining and liberalizing restricted professions—have not delivered substantial results: only 10 special firm level collective agreements have been concluded, while the liberalization of regulated professions has been delayed, with further time allowed for required restrictions to be reinstated. A third reform, the fast-track investment procedure, has only recently resulted in approvals of three projects, and these still need to receive the required licenses before they can start. The slow progress is summarized in Greece’s ranking in the Doing Business Indicators, which improved by just 1 position in 2011 (from 101 to 100 out of 183). On the positive side, some new laws have been passed during the last 4 months (e.g. to strengthen the labor inspectorate, liberalize the energy market, and simplify environmental licensing procedures), and others are in process (e.g. laws to simplify export procedures and allow for better regulation). Overall, however, the delays have prevented realization of a critical mass of reforms, which is necessary to secure synergies and generate meaningful macroeconomic impacts.

Table 5.

Greece: Status of Macro-Structural Reforms

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Source: IMF staff.

III. Discussions

12. Discussions focused on recalibrating the program’s macroeconomic framework and adapting the implementation of reform and adjustment policies to an appropriate and feasible pace. Since the second review it has been clear that a reinvigoration of reforms would be needed to support program objectives. After continued slow progress with reforms for a third straight review cycle and with growing evidence of deepening macro adjustment, the authorities and IMF/EC/ECB staff all recognized that a significant revision of the outlook and some changes in the policy framework would be needed. Several overarching policy challenges defined the discussions: (i) the need to adapt the amount and pace of fiscal adjustment to reduce macro feedbacks (with new measures and timely implementation of institutional reforms needed to secure revised targets); (ii) the need to establish a more robust framework for bank support and resolution (to help manage growing pressures on banks); and (iii) the need to reinvigorate structural reforms and advance privatizations to support a faster restoration of competitiveness and promote eventual economic rebalancing through higher productivity.

The Macroeconomic Framework

13. It was agreed that developments warranted a significant revision to the growth outlook (MEFP ¶1-2) (Tables 6-7; Figure 7). The original program foresaw a growth inflection point by late 2011, which has not yet arrived. The target of the original program—adjustment through productivity-enhancing structural reforms—will clearly take longer to realize, with income and wage-price adjustment mechanisms having a large influence in the short run. Thus:

Table 6.

Greece: Medium-Term Macroeconomic Framework, 2010-16

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

Based on Labor Force Survey.

Debt and interest dynamics assume October 26 parameters are implemented.

Table 7.

Greece: Summary of Balance of Payments, 2009-16

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Sources: Bank of Greece; and IMF staff estimates.