Front Matter

Front Matter Page

© 2012 International Monetary Fund

March 2012

IMF Country Report No. 12/57

Greece: Request for Extended Arrangement Under the Extended Fund Facility—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece.

In the context of the request for extended arrangement under the extended fund facility, the following documents have been released and are included in this package:

  • The staff report for the Request for Extended Arrangement Under the Extended Fund Facility, prepared by a staff team of the IMF, following discussions that ended on February 10, 2012, with the officials of Greece on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 9, 2012. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • A staff supplement of March 9, 2012 on the assessment of the risks to the fund and the fund’s liquidity position.

  • A Press Release summarizing the views of the Executive Board as expressed during its March 15, 2012 discussion of the staff report that completed the request.

  • A statement by the Executive Director for Greece.

The documents listed below have been or will be separately released.

  • Letter of Intent *

  • Memorandum of Economic and Financial Policies *

  • Technical Memorandum of Understanding*

  • Letter of Intent to the European Commission and the European Central Bank*

  • Memorandum of Understanding on Specific Economic Policy Conditionality*

  • *Also included in Staff Report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

Copies of this report are available to the public from

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Front Matter Page



Request for Extended Arrangement Under the Extended Fund Facility

Prepared by the European Department in Consultation with Other Departments

Approved by Reza Moghadam and Lorenzo Giorgianni

March 9, 2012

Extended Arrangement. The Greek authorities have requested a 4 year Extended Arrangement in an amount of SDR 23.7853 billion (2,158.8 percent of quota; €28 billion) with purchases equally phased and have notified the Fund of their cancellation of the existing Stand-By Arrangement. Euro area member states are expected to contribute a further €144.7 billion in 2012–14. The first Fund disbursement would amount to SDR 1.3991 billion (about €1.65 billion).

Background. Greece’s efforts to address the combined fiscal and external imbalances built up through 2009 have led to a prolonged and deepening recession (the economy contracted for a fourth year in 2011, by 6.9 percent), and extremely tight financial conditions (some 30 percent of deposits have left the banking system since program inception, due to loss of confidence in the system and dissaving). Notwithstanding this, Greece made progress under the SBA in reducing its competitiveness gap (lowering unit labor costs by 9½ percent) and has made considerable progress with structural fiscal adjustment (reducing the primary deficit by some 6 percent of GDP). However, the competitiveness gap still reaches on average 15-20 percent and closing this will continue to apply downward pressure on economic activity. Another 5½ percent of GDP in primary fiscal improvement and some percent of GDP in privatizations are needed, alongside significant debt relief, to put public debt on a sustainable trajectory. Moreover, performance under the SBA has revealed that more time will be necessary to realize structural reforms to improve the fiscal position (e.g. tax collection) and economy-wide productivity. Deep social and political tensions and mounting popular discontent with economic policies will likely lead the authorities to call elections after the approval of the arrangement.

Main elements of the program:

  • Direct measures to improve Greek competitiveness through internal devaluation. The program aims to make collective bargaining more effective, reduce the minimum wage, and lower nonwage labor costs. Measures to liberalize services will also help improve competitiveness. Earlier competiveness gains should bring forward the recovery and help preserve employment.

  • Gradual fiscal adjustment built on structural expenditure reforms and improvements in tax collection. Fiscal adjustment will be backloaded to 2013–14 to help absorb the short term deflationary impact in 2012 of the internal devaluation strategy. Some 5½ percent of GDP in credible structural expenditure measures to reach the 2014 target (a primary surplus of 4½ percent of GDP) will be defined as a condition for completing the first program review. They will tackle social transfers (among other things), but strengthen the core social safety net to protect the most vulnerable.

  • Measures to restore financial sector stability. Significant resources—€50 billion—will be set aside in the program to help banks cope with the impact of the recession and of restructuring of government debt. Private ownership will be maintained to the extent possible. The framework for bank resolution and recapitalization and for financial sector oversight will also be strengthened, to ensure effective stewardship of bank recapitalization funds.

  • A combination of private and official sector involvement to deliver enough debt relief to place debt on a trajectory to reach 120 percent of GDP by 2020. Greece is expected to close a debt exchange with private bond holders prior to the approval of the arrangement, while Euro area member states have committed to provide financing on highly concessional terms. Indeed the Euro area member states have committed to provide long-term support to Greece on adequate terms, in the event this is necessary, provided Greece continues to adhere to program policies.

Risks. The program remains subject to notable implementation risks. In general, Greece has little if any margin to absorb adverse shocks or program slippages. In the event that policy implementation takes longer or falls short, the economy takes longer to respond to labor market and supply-side reforms, or fiscal multipliers are higher (reducing the growth path), a deeper recession and a much higher debt trajectory would be the likely result. Political risks linked to the electoral calendar create additional uncertainty about policy implementation (and staff has sought political assurances to ensure continuity in policy implementation; see paragraph 50). The materialization of these risks would most likely require additional debt relief by the official sector and, short of that, lead to a sovereign default. In the absence of continued official support and access to ECB refinancing operations, a disorderly euro exit would be unavoidable, heightening risks to the Fund (see the Supplement to the Staff Report: “Greece—Assessment of the Risks to the Fund and the Fund’s Liquidity Position”). Program design—in particular the even phasing of support and tight monitoring framework—helps to reduce these risks. The euro area member states’ commitment to provide long-term support to Greece on adequate terms is also a key consideration for staff’s recommendation to approve the proposed arrangement.

Discussions. See the Fund Relations Appendix

Publication. The Greek authorities consent to the publication of the Staff Report


  • I. Introduction

  • II. The Economic Setting for the New Program

  • III. Strategy

  • IV. Discussions

    • A. The Macroeconomic Framework

    • B. Economic Policies

  • V. Financing

  • VI. Program Modalities

  • VII. Staff Appraisal

  • Tables

  • 1. Quantitative Performance Criteria

  • 2. Structural Benchmarks Under the SBA, 2010–11

  • 3. Selected Economic Indicators, 2007–12

  • 4. Monetary Survey, 2006–11

  • 5. Financial Soundness Indicators, 2005–11

  • 6. Modified General Government Cash Balance, 2012–15

  • 7. Status of Fiscal-Structural Reforms, 2012

  • 8. Status of Macro-Structural Reforms, 2012

  • 9. Medium-Term Macroeconomic Framework, 2010–20

  • 10. Summary of Balance of Payments, 2010–16

  • 11. General Government Operations, 2009–15

  • 12. Authorities’ Measures to Meet the 2012 Target

  • 13. Revenue Collection Process, 2012

  • 14. Spending Process, 2012

  • 15. Monetary Financial Institutions: Uses and Sources of Funds, 2006–16

  • 16. International Experience with Banking Crises and Recapitalizations

  • 17. Structural Reforms Ahead

  • 18. General Government Financing Requirements and Sources

  • 19. External Financing Requirements and Sources, 2010–16

  • 20. Schedule of Proposed Purchases under the Extended Arrangement, 2012–16

  • 21. Indicators of Fund Credit, 2012–26

  • Figures

  • 1. Selected Economic Indicators

  • 2. Inflation Developments

  • 3. Competitiveness Indicators

  • 4. Balance of Payments Developments

  • 5. Financial Indicators

  • 6. Money and Banking Indicators

  • 7. Budget Execution up to end–2011

  • 8. Structural Indicators

  • 9. Revised Macro Projections

  • 10. Macroprojections—International Comparison

  • 11. Labor Market Developments

  • 12. Barriers to Investment and Exports

  • Boxes

  • 1. Details of the Debt Exchange

  • 2. Potential Economic Impact of Euro Exit

  • 3. International Experience with Internal Devaluation

  • 4. The 2012–14 Fiscal Baseline

  • 5. Labor Market Reform

  • Appendices

  • I. Debt Sustainability Analysis

  • II. Fund Relations

  • Attachments

  • I. Letter of Intent

  • II. Memorandum of Economic and Financial Policies

  • III. Technical Memorandum of Understanding

  • IV. Letter of Intent to the European Commission and the European Central Bank

  • V. Memorandum of Understanding on Specific Economic Policy

Front Matter Page


Greece—Assessment of the Risks to the Fund and the Fund’s Liquidity Position

Prepared by the Finance and Strategy, Policy, and Review Departments

(In consultation with other Departments)

Approved by Andrew Tweedie and Lorenzo Giorgianni

March 9, 2012

Front Matter Page

Press Release No. 12/85


March 15, 2012

International Monetary Fund

Washington, D.C. 20431 USA

Front Matter Page

March 15, 2012

Greece: Request for Extended Arrangement Under the Extended Fund Facility: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece.
Author: International Monetary Fund