Greece
First and Second Reviews Under the Extended Arrangement Under the Extended Fund Facility, Request for Waiver of Applicability, Modification of Performance Criteria, and Rephasing of Access--Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece.

Greece’s deep recession has continued unabated, with the economy struggling to gain traction against domestic political instability and weak external conditions. Stronger internal devaluation is now under way, reflecting the interaction of labor market liberalization with the already weak labor market. Current account adjustment has accelerated, notwithstanding slow progress with structural reforms. The structural transformation of Greece’s economy continues to proceed at a slow pace, and this is making Greece’s adjustment more costly. Institutional reforms continued to disappoint during 2012, again complicating overall adjustment efforts.

Abstract

Greece’s deep recession has continued unabated, with the economy struggling to gain traction against domestic political instability and weak external conditions. Stronger internal devaluation is now under way, reflecting the interaction of labor market liberalization with the already weak labor market. Current account adjustment has accelerated, notwithstanding slow progress with structural reforms. The structural transformation of Greece’s economy continues to proceed at a slow pace, and this is making Greece’s adjustment more costly. Institutional reforms continued to disappoint during 2012, again complicating overall adjustment efforts.

Background

1. Program review discussions were delayed by two rounds of national elections, which revealed a marked shift in support for the program. At program inception, hopes were high that a greater consensus would emerge behind program policies since a grand coalition had assumed power, bringing the main opposition party into the fold. The elections represented a significant political shake-up, with the radical left party Syriza coming second, after campaigning strongly against program policies. Extremist parties also gained in popularity. Nonetheless, a new coalition emerged supporting the program. The new government, headed by PM Samaras, is supported by the conservative New Democracy (the largest party in the parliament), center-left PASOK, and the Democratic Left party.

2. Implementation of the program stalled in several areas while elections unfolded. End-September 2012 quantitative fiscal targets were mostly met, with the exception of the performance criterion and indicative target on expenditure arrears, and the performance criterion on government guarantees. Indicative targets for privatization receipts for end-September 2012 were also missed (MEFP Table 1a). The stalemate during the election period and escalating social tensions took a deeper toll on implementation of structural reforms. The structural benchmarks on reducing the tax wedge and on meeting the performance indicators for revenue administration and public financial management were not observed, while benchmarks on preparing various inputs into the fiscal adjustment strategy were only observed with considerable delay (MEFP Table 2). In the end, the discussions extended into the period for the third review.

Recent Developments

3. Greece’s deep recession has continued unabated, with the economy struggling to gain traction against domestic political instability and weak external conditions (Table 1, Figure 1). GDP contracted by 6½ percent y–on–y in the first three quarters of the year. The program had anticipated a deep contraction, as Greece continued to adjust through recessionary rather than productivity-boosting channels. However, rising uncertainty, tighter liquidity conditions (seriously aggravated by an accumulation of government arrears), and falling disposable income (due to faster-than-expected cuts in wages) have combined to accelerate the decline in domestic demand. Overall, the cumulative output decline has now reached about 19½ percent (including the impact of recently announced GDP revisions, which shaved over 1½ percent off reported growth in 2010–11).

Table 1.

Greece: Selected Economic Indicators, 2007–13

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

Based on Labor Force Survey.

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

Data for 2012 as of October.

Includes securitized or otherwise transferred loans from 2010 onward. Projections do not take into account write-offs, valuation changes, or reclassifications. Data for 2012 as of March.

Figure 1.
Figure 1.

Greece: Selected Economic Indicators, 2005–12

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

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Elstat; Eurostat; European Commission; and IMF staff calculations.
uA01fig02

Contributions to GDP

(Percent)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Elstat; and IMF staff calculations.
uA01fig03

GDP Growth

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Elstat; and IMF staff estimates and projections.

4. Stronger internal devaluation is now underway, reflecting the interaction of labor market liberalization with the already very weak labor market (Table 1, Figure 2-4).

  • Wages have begun to adjust at a much faster pace. Nominal wages in the economy declined by an average of 7½ percent y-o-y in Q2. Firm-level and individual wage agreements—both instruments which are growing in share facilitated by recently introduced institutional reforms—saw even larger declines of about 20 percent. Moreover, the most recently-signed contracts and survey indicators suggest that this trend is continuing. Greek wage changes now exceed what would simply be predicted based on cumulative GDP movements. In a very soft labor market—unemployment reached 26 percent at end-October—the far-reaching reforms implemented in late 2011 and early 2012 appear to have paved the way for needed adjustment. The ULC-based REER has now fallen by 14 percent through September from its peak in 2009.

  • Prices are also adjusting, but not as quickly as wages. Headline HICP inflation, at 0.4 percent y-on-y in November, is firmly below the euro area average. Indirect taxes, administered prices and unprocessed food and energy prices have been the main contributors to inflation during the recession. With these components stripped out, prices have been falling since 2010. The GDP deflator has already turned negative in the first three quarters of 2012 on the back of falling wages and a weaker terms-of-trade. The improvement in the CPI-based REER is a more modest 6 percent.

Figure 2.
Figure 2.

Greece: Inflation Developments, 2005–12

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Elstat; Eurostat; Haver; and IMF staff calculations.1/ Excludes food, alcohol, tobacco, and energy.
Figure 3.
Figure 3.

Greece: Competitiveness Indicators, 2005–12

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Haver; Eurostat; IMF, Direction of Trade Statistics; and IMF staff calculations.
Figure 4.
Figure 4.

Greece: Labor Market Developments, 2007–12

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Elstat; Eurostat; Haver; and IMF staff calculations.
uA01fig04

Wages

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Eurostat: and IMF staff calculations and projections.
uA01fig05

Cumulative Change in GDP and Wages, 2008–12

(Changes in logs)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Eurostat; IMF, World Economic Outlook; and IMF staff calculations and projections.
uA01fig06

Contributions to HICP Inflation

(Percent)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Bank of Greece; and IMF staff projections.
uA01fig07

REER

(2005=100)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Source: Eurostat.

5. Fiscal and external imbalances are correcting:

  • The fiscal position continues to improve via strong structural adjustment(Tables 2-4, Figure 5). The trailing 12-month cash central government primary balance was close to zero through end-October (compared to a deficit of 3 percent of GDP one year ago). State revenues have trended below program, reflecting macro headwinds and collection problems, but spending has been constrained well below program limits as the authorities confronted a lack of finance. Cash shortages did contribute to a buildup of arrears in 2012 (some ¾ percent of GDP, bringing the stock to almost 5 percent of GDP at end-October), but the accrual adjustment has also been running slightly ahead of plans. Still, some important underlying expenditure policy reforms have lagged, most notably efforts to make staff reductions more targeted (only 200 employees were placed in the labor reserve during 2012, well short of the end-2012 target of 15,000).

  • Current account adjustment has accelerated, notwithstanding slow progress with structural reforms, reflecting intensifying recessionary channels(Table 1, Figure 6). The overall magnitude of adjustment over 2008–11 has been relatively small compared to demand and output losses during this period. This suggests that slow progress in addressing structural rigidities and market distortions have restrained a shift of resources from the non-tradable to the tradable sector. Still, the trailing 12-month deficit reached 5 percent of GDP through end-September (compared with 10 percent during the same period in 2010–11). The deep recession is driving a steep contraction of imports, helping the trade balance. The overall current account also benefitted from the March 2012 debt exchange, which improved the income account balance by 1½ percent of GDP.

Table 2.

Greece: General Government: Statement of Operations (GFSM 2001, flows), 2008–11

(Millions of euros)

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Source: IMF, Government Finance Statistics.

Revenue minus expense (excluding consumption of fixed capital).

Revenue minus expense (including consumption of fixed capital).

Revenue minus expenditure.

Table 3.

Greece: Financial Balance Sheet (GFSM 2001, stocks), 2008–11

(Millions of euros)

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Source: IMF, Government Finance Statistics.
Table 4.

Greece: Modified General Government Cash Balance, 2012–16

(Billions of euros)

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Sources: Ministry of Finance; and IMF staff projections.
Figure 5.
Figure 5.

Greece: Budget Execution, 2012

(Billions of euros)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Greek authorities; and IMF staff estimates.
uA01fig08

General Government Primary Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: IMF staff estimates and projections.
Figure 6.
Figure 6.

Greece: Balance of Payments Developments, 2010–12

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Bank of Greece; and IMF staff calculations.
uA01fig09

Current Account Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Sources: Bank of Greece; and IMF staff projections.
uA01fig10
Sources: IMF, World Economic Outlook; and IMF staff calculations.

6. Pressure on the banking system has been intense, but program support has prevented a serious crisis(Table 5 and 6; Figure 7):

  • Deposits have been volatile and asset performance continues to deteriorate. Election-related uncertainty accelerated the outflow of private sector deposits to €15.9 billion in May and June 2012, and while there has been a reversal since, total private sector deposits as of end-November are still 10.6 percent lower than at the end of 2011. On the asset side, NPLs (including restructured loans) continue to rise, reaching 23.8 percent of total loans in Q1, an increase of almost 10.5 percentage points from end-2010. Preliminary Q2 data for the four largest banks shows a further rise to 24 percent. Banks have struggled with their capital adequacy ratios since the PSI exercise. Moreover, provisioning has lagged behind NPLs, with the coverage ratio declining to 41.4 percent in Q1 from 45.2 percent at end-2011.

  • Banks have responded to these pressures by increased recourse to exceptional liquidity support, deleveraging, and mergers to cut costs. As of mid-December, central bank funding amounted to €129 billion, up from €121 billion at end-2011. With the ECB having disqualified most Greek banks from accessing the monetary policy operations window (due to capital adequacy ratios below the minimum requirement), the funding comes almost entirely in the form of more expensive ELA. This increase in costs, together with falling demand for credit and tightened lending standards, has contributed to accelerated deleveraging. Private sector credit declined by almost 5 percent y-on-y in November. The system is also consolidating to lower costs. Two smaller banks were acquired by two core banks, and merger steps between two large banks, NBG and EFG, are now underway.

  • The government has supported banks eligible for public aid with bridge recapitalization and has also stepped up its resolution work. The BoG completed a strategic assessment of the banking sector in March 2012 and identified four “core” banks as viable based on regulatory criteria (regulatory ratios, asset quality and governance) and an assessment of their business fundamentals (commercial strength, profitability, risk management). In June 2012, the HFSF provided €18 billion in ‘bridge capital’ to these core banks in order to bring their CAR to 8 percent. (The private sector has retained management control, pending an opportunity to raise capital). In another step towards restructuring of the system, the largest public bank ATE was resolved in July 2012 through a P&A transaction by Piraeus Bank with upfront costs for the HFSF of €7.2 billion.

uA01fig11

Private Sector Deposits

(Billions of euros)

Citation: IMF Staff Country Reports 2013, 020; 10.5089/9781475573121.002.A001

Source: Bank of Greece.
Table 5.

Greece: Monetary Survey, 2007–12

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Sources: 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.

Projections do not take into account write-offs, valuation changes, or reclassifications.

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.

Table 6.

Greece: Core Set of Financial Soundness Indicators for Deposit-Taking Institutions, 2008–12

(Percent, unless otherwise indicated)

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Source: Bank of Greece.

Data on a consolidated basis. For end-2011 and 2012Q1, C.A.R. ratios are affected by the PSI and include only the first tranche of €18 billion HFSF recapitalization. In addittion, C.A.R. ratios are affected by the negative supervisory own funds of two banks (ATEbank and TT Hellenic Post Bank).

From 2004 in accordance with IFRS.

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

Based on revised figures from 2002 onwards.

Spread between rate on credit lines and savings deposit rate.

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