Request for Stand-By Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Greece


Request for Stand-By Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Greece

Context and Recent Developments

1. The Greek authorities have requested a new precautionary Stand-By Arrangement from the IMF until August 31, 2018. The new program will succeed the extended arrangement, which was cancelled in January 2016, after being off track since late 2014 (with only 5 of 16 planned reviews completed). The EFF-supported program made progress with fiscal policies that helped bring the primary surplus roughly to balance and with labor market reforms that helped close Greece’s wage competitiveness gap with trading partners. However, other structural reforms aimed at liberalizing the economy lagged, reflecting increasing reform fatigue in the face of large social costs and weak ownership, which were exacerbated by continued political uncertainty. In part because a number of reforms supported by the EFF program were reversed in early 2015, the program fell short of achieving its objectives to restore growth, fiscal sustainability, and financial stability.1 Indeed, growth has been stagnant since 2014, public debt has continued to rise, peaking at about 180 percent of GDP in 2016, and the banking sector experienced a crisis in 2015, which required the introduction of capital controls that are still in place.

2. The new arrangement will complement the program supported by the ESM. Greece secured fresh official support from the ESM amounting to up to €86 billion in August 2015. In return, the authorities halted the reform reversals and legislated an important fiscal package (e.g. VAT, pension, income tax measures), coupled with reforms to set up an autonomous revenue agency and a modern minimum income scheme to protect vulnerable groups. They also recapitalized the large banks and adopted legislation to strengthen the insolvency framework and enable a market for NPL sales and servicing (Box 1). However, broader structural reforms continued to lag. While the authorities initially achieved wide political backing for their reform agenda, support subsequently waned. To date, only two out of seven planned reviews have been completed.

3. As noted in the recently concluded 2016 Article IV Consultation Staff Report, Greece continues to face fundamental challenges:2

  • The fiscal policy mix is unsustainable. Policy is characterized by high tax rates applied to narrow bases (with exemptions relieving more than half of wage earners from paying personal income tax), by an unsustainable compression of discretionary spending, and by an unaffordable pension system (whose deficit is four times the euro area average) that limit the government’s ability to protect vulnerable groups.

  • Public sector institutions are ineffective. In particular, the authorities have been unable to enforce tax collections (collection rates relative to assessed obligations have dropped from over 70 percent in 2010 to around 46 percent by end-2016) and thus have not managed to prevent an increase in tax and social security contribution debt to about 65 percent of GDP at end-March 2017, the highest level in the euro area.3 At the same time, the government’s domestic arrears with its suppliers and unprocessed claims total over €7 billion (4 percent of GDP) at end-April 2017. These developments are reinforcing the already-weak payment culture.

  • Bank balance sheets are weak, featuring the highest non-performing loan (NPL) ratio in the euro area (49 percent at end-March 2017), low quality bank capital (over half of which is comprised of deferred tax assets) despite three rounds of recapitalizations, and a tight liquidity situation, requiring continued reliance on ELA. These weaknesses are evident in a continued lack of depositor confidence, which has required keeping capital controls in place, and in a compression of credit, which has declined for eight years in a row.

  • Obstacles to growth are pervasive, reflecting insufficient progress in opening the economy. The lack of ambitious product market reforms has hampered the price adjustment needed to restore external competitiveness within the currency union, leaving the burden of adjustment on wages, which in turn ratcheted up resistance to reforms and led to pressures to unwind key labor market measures.

4. Growth has thus remained elusive (Figure 1). GDP was flat in the last three years, while poverty and inequality have remained among the highest in the euro area.4 In 2016, a nascent recovery supported by private consumption growth sputtered in the latter part of the year, largely owing to public sector spending compression, weak export performance, and economic uncertainty due to the inability to complete the ongoing ESM review. Growth resumed modestly in the first quarter of 2017 on the back of resilient consumption and a buildup of inventories. The labor market has recovered only gradually, with a modest decline in unemployment supported by higher part-time employment growth; however, the share of long-term unemployed remains close to 60 percent of the total. Harmonized consumer prices stabilized in 2016, but increased by 1.2 percent in May 2017, driven by oil price and indirect tax increases.

Figure 1.
Figure 1.

Greece: Macroeconomic Developments

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Bank of Greece; ELSTAT; Haver Analytics; and IMF staff calculations.

Greece: Contributions to Real GDP Growth, 2013–2016

(Percent, year-on-year)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: ELSTAT; Haver Analytics; and IMF staff calculations.

5. The primary fiscal surplus, however, overperformed expectations, reaching 4.2 percent of GDP last year. The ongoing fiscal consolidation, additional spending compression beyond what had been budgeted, and several one-offs helped to produce one of the highest primary surpluses on record for Greece, well above the ESM program target of 0.5 percent of GDP. Structural measures (including due to VAT and income tax rate increases) contributed an estimated 1½ percent of GDP to the surplus, with the rest due to one-off revenues from SOE liquidations, stockpiling in anticipation of tax hikes, tax offsets related to arrears clearance with ESM funds, and, to some extent, also better-than-expected wage and profit outturns in 2015–16. The large role of temporary factors means this significant overperformance is unlikely to be sustained. Indeed, the outturns through May 2017 point to a decline in tax revenues despite legislated increases in the top VAT rate and in excise and consumption taxes (Figure 2). Other revenues also declined due to lower EU investment-related transfers, while pension spending fell due to measures that came into effect.

Figure 2.
Figure 2.

Greece: General Government Fiscal Outturn

(Percent of GDP, monthly)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: Ministry of Finance.1/ Excludes ANFA revenues and sales of non-financial assets in line with the Drosram definition.

Greece: General Government Operations (ESA 2010)

(Accrual basis, percent GDP)

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Sources: Eurostat; and IMF staff estimates.

Includes changes in inventories and acquisitions less disposals of valuables.

Includes program adjustors.

Greece: General Government Fiscal Performance

(Cash basis; percent of 2016 GDP)

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Sources: Ministry of Finance; and IMF staff calculations.

Excluding privatization and ANFA revenue.

Program Strategy

6. The new Fund-supported program will focus on policies that can help restore macroeconomic stability in the medium run, while protecting vulnerable groups. The program will be centered on fiscal reforms to improve the policy mix and facilitate a more growth-friendly and socially-inclusive budget. It will also help advance reforms to improve fiscal institutions, strengthen the legal framework to deal with NPLs, and liberalize product markets, while supporting the continuation of key collective bargaining reforms during the program period. These reforms, together with expected debt relief, should bolster confidence, restore macroeconomic stability, and facilitate Greece’s access to markets. The program seeks to create breathing space to mobilize broad political support for the deeper long-term structural reforms that are needed for Greece to modernize its economy and prosper within the euro area.

7. The arrangement will also provide a framework for Greece’s European partners to provide debt relief. Ensuring debt sustainability is essential to the success of the program and to Greece’s ability to re-access markets on sustainable terms. This will require further debt relief from Greece’s European partners, in addition to the generous relief received since 2012. Having ruled out upfront haircuts and direct fiscal transfers, European member states have recently pledged further flow relief—including interest deferrals and extension of grace and maturity periods on select European loans—to achieve agreed Gross Financing Needs (GFN) sustainability thresholds of 15 percent of GDP in the medium term and 20 percent in the long run. The delivery of such relief is conditional on Greece’s successful completion of its adjustment program in mid-2018.5 Staff believes that more relief will be required to achieve these thresholds, and additional time is needed to secure specific and credible commitments on the type and scope of debt relief measures that European partners would be willing to take to do so under staff’s DSA assumptions.

8. Staff proposes that the IMF arrangement be approved in principle only, with effectiveness conditional on receipt of debt relief assurances from Greece’s European partners, which are expected in the coming months. The approval-in-principle procedure is in line with the IMF’s established practices, although it has not been adopted recently (Annex I provides a historical perspective on this practice). In Greece’s case, the approach allows the IMF to support Greece’s policies while facilitating continued financing from the ESM—with European member states having agreed to disburse based on an approved IMF-supported program—at a time when large repayments come due, thus avoiding potentially disruptive arrears on external debt. At the same time, the procedure allows more time to help catalyze the necessary debt relief from Greece’s official creditors. In many past cases, a deadline was set after which the approval-in-principle procedure would lapse; in others, no deadline was set. In the case of Greece, staff proposes not to set a specific deadline after which the approval-in-principle procedure would lapse so as to avoid setting expectations that, if unfulfilled, could lead to market disruptions. While agreeing on debt relief will be a difficult process that may require more time than envisaged, all sides have an interest to finish it soon because failure to do so could adversely affect the economic situation in Greece, which might necessitate reopening negotiations of policies. In the meantime, staff will actively monitor implementation of the program commitments that underpin the requested arrangement, in consultation with the Greek authorities as needed. If, prior to the receipt of the necessary debt relief assurances, it becomes apparent that there are significant problems in program implementation, the basis for the approval in principle would no longer apply and there would need to be a Board discussion and a new decision taken on the terms of future Fund financial support. In any case, the approval in principle would expire at the expected end of the arrangement on August 31, 2018.

Macroeconomic Framework

9. Output is projected to rebound over the medium term. Growth is expected to reach 2.1 percent this year and 2.6 percent next year, on the back of continued resilient private consumption growth and a rebound of investment from low levels, supported by EU funds and firms’ internal cash flow.6 The approval in principle of the IMF-supported program and the completion of the second ESM program review, together with the prospect for delivery of debt relief by end-program and full and timely program implementation, are expected to support confidence and facilitate the restoration of market access and the removal of capital controls before the end of the program. In the medium run, growth is projected to slow, as the output gap closes and the drag from additional fiscal consolidation that will enter into effect in 2019–20 offsets EU-fund supported investment.7 Unemployment will remain in the double digits.

Greece: Key Economic Indicators

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Sources: ELSTAT; Bank of Greece; and IMF staff estimates.

10. Growth is expected to stabilize at around 1 percent in the long run. Rapid aging will lower Greece’s working-age population by about 30 percent during 2020–2060, which will weigh negatively on long-run growth. Capital accumulation, supported by EU funds, will boost growth for some time, but its impact will fade as the economy converges to its new long-run capital ratio. Thus, long-run growth will depend critically on Greece’s ability to improve its productivity through structural reforms. Combining the historical growth in labor productivity (0.4 percent) with expected growth in the number of workers (-0.9 percent) would imply long-term annual growth of −0.5 percent. To arrive at growth rates of 1 percent in the long run, staff assumes an increase in labor force participation to well above current euro-area levels, sustained employment gains, and an increase in TFP growth to a rate more than triple its historical average. These developments in turn rest on ambitious assumptions regarding the impact of structural reforms, considering Greece’s weak track record and the international experience (Annex II provides further details behind staff’s analysis of long-term growth prospects). This highlights the importance of continuing and deepening structural reforms after the end of the program to halt the widening of the gap between Greek and euro area real per capita GDP.8

Sources: AMECO database; European Commission 2015 Aging Report, and IMF staff estimates.

11. Inflation is expected to remain subdued, and below the ECB’s target for the euro area. Stronger demand is expected to contribute to a gradual increase in inflation in the medium run. In the long run, however, inflation is projected to stabilize at about 1.7 percent. This reflects Greece’s lower labor productivity relative to the euro area average, which, together with persistently high unemployment—expected to gradually decline but remain in the double digits until 2040—will result in relatively lower wage growth.

12. Significant downside risks weigh on the outlook. A continuation of program implementation problems could result in a suspension of debt relief with attendant effects on confidence, growth, debt sustainability, liquidity and potentially on perceptions of Grexit risk. But even if Greece’s adjustment program is implemented as planned, risks remain that staff’s medium- and long-term macroeconomic forecasts may not materialize, including due to a more-adverse-than-expected impact of high primary surpluses on growth, a lower-than-expected output gap, smaller gains from fiscal and structural reforms, or the need for more protracted efforts to stabilize the banking sector and remove capital controls. External risks related to a weaker-than-expected recovery in Europe could affect Greece’s exports and growth. On the upside, the authorities could exceed short-run fiscal targets temporarily through one-off measures or compression of spending.

Policy Discussions

A. Fiscal Policy

13. Fiscal policy will focus on rebalancing the public finances toward more growth-friendly policies in the long run. The strategy builds on important reforms already legislated and aims to support the authorities’ medium-term fiscal targets while strengthening the structure of public finances. In the short run, fiscal consolidation will proceed gradually to contain the associated negative fiscal impulse as the output gap narrows. Over the medium term, additional reforms will allow a rebalancing of the policy mix toward more growth-friendly and equitable policies with increased spending on public investment and social protection, and lower tax rates that will support jobs and growth, while still allowing for a steady reduction in debt.

14. Program targets allow for some recovery of expenditure, partially offset by gains from revenue and pension reforms, but the authorities expect significant overperformance next year. The primary surplus target for this year has been agreed at 1.8 percent of GDP, supported by previously legislated pension, VAT, and income tax reforms, which partly offset the expiration of one-offs from 2016 and a budgeted rebound of spending. Next year’s primary surplus target has been set at 2.2 percent of GDP, with additional savings from ongoing pension reforms and from newly-legislated measures that will rationalize redundant social programs. The authorities expect the 2018 surplus to reach the ESM program target of 3.5 percent of GDP owing to their more optimistic tax-revenue and pension-spending assumptions (Box 2). Should Greece fully satisfy policy commitments and achieve the fiscal targets established in the Fund arrangement but not the ESM program targets, European partners have agreed that access to ESM disbursements would continue and that ESM targets would be reviewed.

15. There was agreement that program targets should be reached without growth-detrimental measures. In view of the significant compression of discretionary spending to date, the program includes a floor on discretionary intermediate consumption spending to ensure it does not fall below last year’s level as a share of GDP.9 While some of the compression over the last decade reflects a correction of unsustainable pre-crisis spending, there is evidence that cuts have compromised the provision of public services, such as transportation and healthcare.


Change in Intermediate Consumption Spending

(Real terms, average 2014–2016 vs average 2001–2007)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Eurostat; and IMF staff calculations.

Increase in Unmet Healthcare Needs

(Percent reporting, average 2014–2015 vs average 2005–2007)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Eurostat; and IMF staff calculations.

16. Greece and its European partners have agreed on a target of 3.5 percent of GDP for 2019–22. To strengthen the credibility of this target, which is included in the authorities’ medium-term fiscal strategy (MTFS, legislated as a prior action, LOI ¶2), the authorities have legislated additional reforms (also as prior actions) that would come into effect once the output gap narrows, to minimize their impact on the recovery:

Greece: General Government Operations, 2016–21 (ESA 2010)

(Percent of GDP)

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Sources: Ministry of Finance, and IMF staff estimates.
  • A pension reform will reduce main and supplementary pensions of current retirees in line with the new benefit formula introduced by the 2016 reform.10 Average pensions are expected to fall by 12 percent, and there is an 18 percent cap on the decline in any individual pension. By constraining the savings from pension reductions at the upper end of the distribution, the cap also prevents retirees at the lower end from receiving the full increase in benefits to which they are entitled under the new formula, limiting its intended redistributive effect. Pensions will also be frozen until 2022. The reform is expected to reduce the system’s deficit by 1 percent of GDP in 2019–22 and improve intergenerational fairness. Given reversals of previous pension reforms, and recent (non-binding) negative legal opinions by the Court of Auditors and the Scientific Committee of Parliament, the authorities have provided a distributional study and a legal opinion supporting the reform.

  • A personal income tax reform will broaden the tax base by reducing the personal income tax credit by €650. This implies a reduction of the tax-free income threshold from more than 60 percent of the average worker’s compensation to 40 percent, lowering the share of wage and pension earners who are exempt from taxation from 55 to 35 percent. The reform, which is expected to yield 1 percent of GDP, is legislated to take effect in 2020. Its implementation can be advanced to 2019 if a forward-looking assessment leads Fund staff to consider it necessary to reach the agreed 3.5 percent primary surplus target in 2019. Indeed, staff expects the reform to be fully implemented in 2019.

Greece: Net Savings from Pension Reform

(Percent of GDP)

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Sources: Ministry of Finance; and IMF staff estimates.

Greece: Reduction of Main Pensions


Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Ministry of Labor; and IMF staff estimates.

Greece: Income Tax Credit

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Sources: Ministry of Finance; and IMF staff calculations.

Euro Area: Tax-Free Income Threshold

(Percent of 2016 compensation per employee)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Eurostat; Greece Ministry of Finance; and IMF staff calculations.Note: * denotes the tax-free income threshold in percent of compensation per employee after implementation of the income tax reform in Greece.

17. Important growth-enhancing and social-welfare reforms will be implemented when fiscal targets are relaxed after 2022 (LOI ¶2). Under staff’s baseline, these reforms will come into effect at the earliest in 2023. The authorities, however, expect the reforms to be implemented as soon as 2019, given their more optimistic revenue and pension spending forecasts. The package comprises revenue measures (up to 1 percent of GDP) including reductions in the income tax rate, the solidarity surcharge, and the CIT rate. To increase support for the package, the authorities, against staff’s advice, also added a modest reduction in property taxes (benefitting mostly owners of low-value properties). On the spending side, measures (up to 1 percent of GDP) are focused on targeted social programs, active labor market policies, and public investment.

18. In the long run, staff expects the primary balance to stabilize at 1½ percent of GDP, although Greece’s European partners project a more ambitious surplus. Staff’s projection is based in part on cross-country experience, which suggests that prolonged periods of high primary surpluses are rare and dependent on tailwinds from strong initial growth and low unemployment. (Annex III illustrates the cross-country experience with maintaining high primary surpluses). Greece’s own historical record is consistent with this, and the significant spending compression that has already occurred and the impact of population aging going forward likewise suggest that it will be difficult for Greece to maintain high primary surpluses indefinitely. Differences in view between Fund staff and Greece’s European partners on the long-run primary surplus remain to be resolved in the context of ongoing debt discussions.


Greece: Primary Balance, 1948–2016

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: data for 1948–87 from Mauro et. al. (2013) based on UN statistical Yearbook definitions (e.g. grants excluded from revenues), IMF WEO, and OECD; data for 1988–2016 from IMF WEO.

B. Fiscal Structural Reforms

19. Ongoing reforms focus on improving revenue and public administrations and the social safety net, but Greece will need additional time and effort to succeed in these areas (LOI ¶3). The program aims to support efforts to improve the efficiency of the new autonomous revenue agency, tighten public-employment rules, improve public financial management, and better protect vulnerable groups. These efforts are expected to help modernize the Greek public administration and restore the public’s trust in it. Technical assistance will reinforce the reform effort.

20. The authorities are taking steps to help the autonomous revenue agency address tax evasion and the large stock of tax debt. The newly legislated revenue agency will take several years to become fully effective. The program supports the early stages of the agency’s implementation, which are critical to its success. As a priority, the authorities adopted legislation (as prior actions) in several key areas:

  • Prioritizing audit cases: The legislation requires the tax administration to focus on relatively new cases, which have higher prospects for collection and can help foster tax compliance.11 Looking forward, to address the backlog of older audit cases, the authorities committed to streamline and prioritize the cases for which the statute of limitations has been extended (end-September structural benchmark, SB)12 and to upgrade the tools to identify high-risk audit cases to include information from financial institutions and the Financial Intelligence Unit (end-December SB).

  • Strengthening collection enforcement: The legislation increases the efficiency of processing prosecutor-initiated tax audit cases by improving the screening of cases and the allocation of responsibilities between the tax administration and the prosecutors.13 Looking forward, the authorities will also align auctions of immovable property with the Code of Civil Procedure (end-December 2017 SB) and amend the VAT legislation to streamline its administration, close loopholes, and reduce opportunities for fraud (end-March 2018 SB).

  • Supporting the restructuring of public claims: The newly issued circulars describe a methodology to classify tax debtors based on their financial situation. This will be instrumental in designing durable debt-restructuring solutions, including under the new out-of-court debt restructuring framework (see below).

  • Looking forward, the authorities will take additional steps to ensure that the revenue agency has adequate and qualified staff. This includes introducing a modern grading and remuneration system, which is expected to attract and retain high-skilled employees, and to subject them to performance assessments (end-December 2017 SB).


Greece: Age of Tax Debt and Collection

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: Independent Authority for Public Revenue.Note: Stock refers to the share of each age group in the total tax debt stock. Collection refers to the share of collection from each age group in the total tax debt collection in 2017Q1.

21. They also plan to further tighten employment rules for the public administration. Reforms will focus on curbing the growth of temporary contracts, which complicates the implementation of attrition rules. This is evident in the rapid increase of such contracts, which in 2016 fully offset the decline in permanent staff resulting from the application of the attrition rule.14 The authorities committed to legislate a transparent and competitive process for temporary contracts. They will also establish a ceiling to maintain their number at the 2016 level on average during the program, to remain in line with the 2017–18 general government wage bill projections (end-September SB).


Greece: Public Sector Employment, 2013–16

(Staff number, thousands)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Greek authorities; and IMF staff estimates.Note: data on temporary contracts for 2013–14 are based on interpolations as actual data are only available for 2012 and 2015–16.

22. Public financial management will continue to be strengthened.

  • Arrears clearance: Despite ESM disbursements of €3.5 billion for arrears clearance since June 2016 and the large fiscal overperformance last year, the stock of government arrears and unprocessed claims has only returned to its mid-2015 level (around €7 billion), due to the accumulation of new arrears. The authorities will contract an independent auditor to assess the arrears clearance actions to date (end-September 2017 SB) and, on this basis, overhaul the arrears-management system (end-June 2018 SB). They plan to reduce the stock of arrears at least by the amount of ESM disbursements earmarked for this purpose.

  • Cash management To facilitate the clearance of arrears with own funds and make better use of general government resources (about €10 billion), the authorities plan to centralize management of all central government entities’ accounts and other large accounts (end-October 2017 SB). They expect to complete the integration of all accounts by end-June 2018.


Greece: Arrears Clearance

(Billions of euros)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Greece Ministry of Finance; and IMF staff estimates.Note: The stock of arrears contains government spending, tax refund arrears and unprocessed pension claims.

23. The program will follow up on implementation of other ongoing reforms:

  • Welfare reform: A new guaranteed minimum-income (GMI) scheme rolled out this year is expected to improve the targeting of social assistance programs and reduce the incidence of poverty, which is among the highest in the euro area. Nonetheless, even with the GMI now in place, other social benefits remain highly fragmented, poorly targeted, and insufficient by international standards.15 The authorities plan to revamp housing, family, and disability benefits by streamlining existing programs and reallocating resources toward fewer but better-targeted programs (end-June 2018 SB). These redesigned programs will be further bolstered in 2023 as part of the authorities’ growth-enhancing package.

  • Pension reform: To ensure that the system is managed transparently and efficiently, as prior actions the authorities issued remaining implementing legislation, repealed conflicting provisions, operationalized a single pension register, merged the management of existing funds into the new single pension fund, and aligned the contribution base for the self-employed with best practice. Looking forward, efforts will focus on finalizing the recalibration of pensions in line with the new benefit formula (end-December 2017 SB) and strengthening the administration of pension claims to allow for the clearance of unprocessed pension claims (¾ percent of GDP) by 2018.

  • Property taxation: To establish a clear link between property value and tax obligations, as well as to support debt resolution, property assessment values will be aligned with market prices (end-December 2017 SB). To ensure the reform’s fiscal neutrality, revenue shortfalls will be compensated by broadening the tax base and/or adjusting tax rates.


Greece GMI: Income Level of Population in Poverty

(Percent of median income)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: “Ex-ante poverty and fiscal evaluation of a GMI in Greece”, 2015, World Bank.Note: Poverty is defined as income below 60 percent of the median income. Extreme poverty is defined as income below 40 percent of the median income. Income is net of taxes and contributions, and is adjusted for household size using the modified OECD equivalence scale.

Spending on Family and Housing Benefits

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Eurostat; “Weathering the Crisis: Reducing the Gaps in Social Protection in Greece”, 2016, World Bank; and IMF staff estimates.

C. Financial Sector Policies

24. The program will support efforts to reduce Greece’s exceptionally high NPLs (Figure 3).16 The public-sector indebtedness problem has migrated to private-sector balance sheets—as reflected in the highest NPL ratio in the euro area—and represents a major policy challenge for the authorities. The Single Supervisory Mechanism (SSM) projects that even with full reform implementation NPLs would only fall from 49 to 42 percent of total loans by end-2018. 17 Thus, the aim of the authorities’ financial sector strategy is to create the conditions for banks to reduce NPLs gradually by strengthening the legal framework (LOI ¶4). However, this strategy is subject to considerable risk, as it assumes that banks will grow out of their NPL problems.

Figure 3.
Figure 3.

Greece: Financial Sector Developments

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Bank of Greece; ELSTAT; Haver Analytics; and IMF staff calculations.1 Non-performing loans are defined as loans that are 90 days or more past due, unlikely to be repaid in full without realizing collateral, and impaired according to accounting rules, as well as loans that have been restructured for less than a year.

NPL Ratios, 2016 Q4

(Percent of total loans)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: European Banking Authority Risk Dashboard (Q4 2016).

25. Strengthening the debt-restructuring legal framework is a key element of the financial sector strategy. Efforts in this area will build on already-legislated reforms,18 with priority on legislating and implementing the following (as prior actions):

  • A new electronic auction system: The new legislation allows for and regulates e-auctions without need for physical presence of notaries. The authorities have also developed an electronic auctioning platform, to be fully operational by end-July (SB), with the first auctions expected to start in September. Adequately implemented, the new system will be key to restore the integrity of debt enforcement.

  • The insolvency-administrator profession: To support the implementation of recent insolvency reforms and reduce the backlog of personal insolvency cases (which exceeds 200,000), the authorities have legislated the conduct, supervision and sanctioning regime for insolvency administrators. Looking forward, they plan to test, train and register insolvency administrators (end-July SB).

  • A new out-of-court NPL workout framework (OCW): Given that the formal insolvency and foreclosure systems alone are likely insufficient to deal with the large NPL and overdue tax debt problem facing Greece, the authorities revamped the OCW framework to support flexible restructuring solutions of both private and public claims. The framework allows for debt write-downs to preserve viability, where possible. The new system is expected to become fully operational at end-July (SB).

  • Protection of bank and public sector officials engaged in debt restructuring: To support the implementation of the OCW law and other restructuring activities, the authorities legislated principles that representatives of banks or public creditors must follow when engaged in debt-restructuring and related activities, which also serve as a legal protection for those involved.

  • Streamlining the legal framework for NPL servicers: To reduce barriers to entry and enhance the NPL market, while maintaining protection of distressed borrowers, the authorities have aligned the regulatory and supervisory requirements for loan servicers with the complexity and risk of their business.

  • Looking forward, to facilitate the provision of credit, the position of secured creditors will need to be further strengthened Despite recent reforms of the Code of Civil Procedure, the existing system is still ineffective in supporting lending, in that it only guarantees that secured creditors will receive a fraction of the proceeds of the collateral (65 percent). Such a rule is unique in Europe, likely hindering credit provision. The authorities plan to revise the ranking of claims to afford a higher level of protection to new secured credit in line with best practices (end-September SB).


Euro Area: Insolvency Resolution

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: Doing Business 2017, World Bank (based on responses to survey).

Priority of Secured Claims over Specific Assets

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Full priority means that the creditor is entitled to receive the net proceeds of the sale of the collateral, excluding the enforcement expenses and other related costs, such as maintenance of the collateral.

26. The supervisory authorities will need to take further steps to ensure adequate bank capitalization and strengthen incentives for banks to address NPLs. Legal tools alone may be insufficient to deal with the NPL problem, in the absence of strong supervisory incentives. Thus, to safeguard the soundness of the banking sector, it will be essential for the SSM, in collaboration with BoG, to perform an updated asset-quality assessment and stress test of the Greek banks well before the end of the program. Should this exercise identify capital needs, the bank buffer in the ESM program should be utilized to ensure the stabilization of the banking system by end-program. Furthermore, the SSM will need to continuously review banks’ performance against their NPL targets, including through on-site inspections, identify deficiencies in their NPL reduction strategies, and demand remedial action if needed, which could include write-downs and disposals. An assessment of the supervisory strategy to deal with NPLs and ensure the soundness of the banking system will be the focus of the first review of the program. As to non-systemic banks, the BoG has ensured (as a prior action) that smaller banks will cover their Pillar II capital shortfalls identified under an adverse scenario in the 2015 Comprehensive Assessment. The BoG will also complete remedial actions to ensure that shortfalls at two cooperative banks are addressed (end-September SB).

27. The program also aims to normalize payment conditions including by removing exchange restrictions subject to Article VIII, section 2(a) as soon as possible, while safeguarding financial stability. Restrictions on cash withdrawals and cross-border transfers, which include exchange restrictions that are still in place,19 limit access to finance, increase costs for domestic and cross-border transactions, and continue to undermine confidence. To provide better guidance to the public on the way toward full liberalization of the restrictions, which should be achieved by end-program, the authorities have published (as a prior action) a condition-based roadmap, describing the sequence of relaxation steps that is linked to the progress in the normalization of the banking sector, economic conditions and program implementation.20 Based on the roadmap and on continuous monitoring of economic developments, depositor confidence, and banks’ liquidity situation, the authorities will take steps to eliminate controls swiftly yet prudently. Ensuring sufficient bank liquidity is critical to preserve financial stability.


Greece: Roadmap for the Relaxation of Capital Controls

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

D. Growth-Enhancing Structural Reforms

28. Progress with structural reforms has fallen far short of what is needed to allow Greece to succeed in the euro zone, but the program foresees some intensification of efforts (LOI ¶6). Given limited political and popular support for a more ambitious effort to liberalize the economy, the program focuses on incremental steps to further open product markets while preserving existing labor market reforms during the program period. If fully sustained and successful, these efforts could help build the momentum and support for the more comprehensive reforms that will be needed to prosper within the euro area.

29. The liberalization of the labor market has been secured during the program period, but is subject to risks thereafter. While the authorities have legislated (as a prior action) the preservation of the 2011 collective bargaining reforms until the end of the program, these reforms will be effectively unwound immediately after the program. This upcoming reform reversal will limit firm-level wage flexibility, damage competitiveness, and delay the much-needed improvement in investment and employment growth (Box 3). It thus would constitute a large step backward on the path to sustainable, equitable growth. Other labor-market efforts are limited: (i) the replacement of the approval process for collective dismissals with a simplified procedure without ex ante approvals (prior action) and (ii) the commitment to legislate an increase in the quorum requirement for voting on a strike (end-September SB).

30. Other reforms follow up on ongoing efforts to liberalize product and service markets. These efforts will help advance the implementation of overdue reforms from previous programs, but to lift Greece’s long term growth potential they need to be followed up by deeper and broader reforms (e.g. addressing closed professions, energy, judicial reform, broader privatizations) for which there has been limited support so far. The authorities took the following steps as prior actions:

  • Competition: Building on recent legislative actions to implement the OECD’s recommendations, the authorities legislated overdue actions on Sunday trade and the over-the-counter trade of pharmaceuticals. However, the Sunday-trade reform—which allows shops in tourist areas to open on Sunday in the touristic season—falls short of the full liberalization recommended by the OECD and practiced in most other European countries, including due to constitutional concerns. 21 Looking forward, the authorities committed to implement remaining actions in the OECD Toolkit III (covering a number of economic sectors) as an end-September SB.

  • Closed professions: Following up on legislation adopted in 2011, the authorities have committed to submit legislation to remove restrictions on the engineering profession (e.g. geographical restrictions, reserved activities, etc.). They plan to complete these actions and take further steps to liberalize other professions by end-December (SB).

  • Investment licensing: Also following up on reforms legislated in 2011, the authorities replaced the system for investment licensing in select sectors with a pilot notification system, requiring information on existing certifications and payment of fees. They are expected to complete the investment licensing reform by end-program (end-June 2018 SB).


Sunday Trading Regulation Indicator

(Scale; 1 = No restriction, 5 = No Sunday Trade)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Genakos and Danchev (2015); and IMF staff estimates.Note: Latest year available. Greece* estimates the impact of past and current liberalization efforts.

Debt Sustainability

31. Even with full implementation of agreed policies, Greece’s debt remains unsustainable (Annex IV). Staff’s DSA is based on a gross-financing needs (GFN) framework, covering the period until European loans mature. Under staff’s baseline scenario, which assumes full implementation of reforms under Greece’s adjustment program, as well as the utilization of a buffer for bank recapitalization needs in the face of high risks posed by NPLs, debt and GFN are projected to reach around 150 and 17 percent of GDP by 2030, respectively, but become explosive thereafter.22 These unsustainable dynamics reflect the need to gradually replace a large amount of concessional debt with market financing at much higher rates. They also point to the importance of a thorough assessment of the banking sector’s soundness well before the end of the program, which will be essential to better ascertain the implications for debt sustainability.


Greece: GG Debt and GFN—Baseline, 2014–2080

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: IMF staff estimates.

32. Greece thus requires further debt relief to ensure sustainability. Greece’s European partners have committed to provide relief to Greece upon the completion of its program to maintain GFN below 15 and 20 percent over the medium and long run. Such committed relief includes further extensions of the weighted-average maturity and interest deferrals on EFSF loans by up to 15 years, restoration of ANFA/SMP transfers to Greece, abolishment of the step-up margin on select EFSF loans, and fixing the interest rate on European loans at market rates (€71 billion is assumed to be fixed at rates of at most 1.9 percent). However, even when accounting for these measures, debt remains unsustainable in staff’s assessment. Thus, to provide more credibility to the debt strategy for Greece, commitments for additional debt relief measures will be required; these could include, for example, further extensions of grace, maturity, and interest deferrals on European loans. An automatic mechanism linking debt repayments to growth, to adjust relief if outcomes are better or worse than expected—relative to a realistic baseline—could help garner support for debt relief while safeguarding sustainability.


Greece: Impact of Eurogroup Measures on GFN, 2014–2080

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: IMF staff estimates.

Greece: Impact of Eurogroup Measures on GG Debt, 2014–2080

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: IMF staff estimates.


33. The arrangement is expected to play a catalytic role to mobilize official and market financing. Financing needs to cover debt servicing during the program period are estimated at €11 billion (after use of internal resources), which could be covered by the ESM envelope (out of the €86 billion approved, €54 billion remains undisbursed as of July 7, 2017). Consideration could also be given to clearing arrears and building deposit buffers using official funds, while being mindful of implications for debt sustainability.23 Use of additional internal funds—including treasury management operations as noted above—and potential access to the ECB’s PSPP could help reduce official financing needs. Thus, the Fund arrangement is expected to help mobilize other official financing while Greece implements the reforms necessary to stabilize its macroeconomic situation and access markets.

State Financing Needs and Sources (July 2017–August 2018)

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Source: IMF staff estimates.

34. The Greek authorities have requested a Stand-By Arrangement until August 31, 2018, which they intend to treat as precautionary. Staff proposes access to Fund resources in an amount equivalent to SDR 1.3 billion (55 percent of quota, €1.6 billion. The proposed amount is considered adequate to address potential short-term balance of payments needs that might arise from adverse shocks, such as a delay in the recovery of euro-area activity or tighter global liquidity conditions. The large ESM financing envelope provides a first line of defense against such shocks, and staff believes that under the baseline scenario, the authorities would not choose to draw on Fund resources while ESM resources on more concessional terms are available. Staff proposes to make the effectiveness of the arrangement, and hence the access to Fund resources, conditional on receipt of assurances on debt relief from Greece’s European partners to restore debt sustainability, as well as on the program remaining on track. Once the necessary assurances have been obtained, a separate decision of the Executive Board will be required for the arrangement, previously approved in principle, to become effective.

Program Modalities

35. The authorities have taken upfront actions to provide reassurances about their ability to implement the program. They have legislated a number of prior actions in macro-critical areas including fiscal sustainability, financial stability and competitiveness (LOI Table 1). Regarding debt relief, as noted above, effectiveness of the arrangement will be conditioned on receipt of adequate assurances from Greece’s European partners regarding the details of a strategy that can ensure debt sustainability under staffs baseline macroeconomic scenario.

Table 1.

Greece: Medium-Term Macro Framework, 2015–22

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Sources: ELSTAT; Ministry of Finance; Bank of Greece; and IMF staff estimates.

Based on Labor Force Survey.

36. Program monitoring will be guided by semiannual reviews, quarterly and continuous performance criteria, and structural benchmarks (SBs). The first and second reviews under the Stand-By Arrangement are proposed to take place on or after February 15, 2018 and August 15, 2018. Availability of Fund disbursements would remain quarterly, to better align Fund financing with the quarterly ESM program. Indeed, Fund staff will join the quarterly ESM program reviews to assess compliance with the Fund arrangement. The new program incorporates the following performance criteria: (i) a floor on the modified general government primary cash balance; (ii) a floor on the primary spending on goods and services; (iii) a ceiling on the stock of domestic arrears; (iv) ceilings on the stock of central government debt, and on new guarantees granted by the general government; and (v) a continuous ceiling on the accumulation of new external debt payment arrears by the general government. The program incorporates as an indicative target a ceiling on state budget primary expenditure. As with the prior actions, SBs focus on the macro-critical areas of fiscal sustainability, financial stability and competitiveness (LOI Table 2).

Table 2.

Greece: Summary of Balance of Payments, 2015–22

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Sources: Bank of Greece; and IMF staff estimates.

Includes debt of the monetary authority.

37. Under the baseline, the authorities have adequate capacity to repay the Fund. During the proposed program period, total debt service amounts to some 10 percent of GDP, of which around 1 percent of GDP is due to the Fund. But, as evidenced by the 2015 episode of temporary arrears to the Fund, risks to Greece’s capacity to repay the Fund remain, should program implementation run into prolonged delays or if a downside scenario materialized. Risks are mitigated by the expected support from European partners and by the limited access, which ensures that total credit outstanding would decline, even with full and timely disbursements, from 6.8 percent of GDP at end-2017 to 6.1 percent at end-2018.

38. In accordance with Fund policy, an updated safeguards assessment of the BoG should be completed by the first review under the arrangement. The previous assessment, finalized in August 2012, found that the BoG had a relatively strong safeguards framework. Since the assessment, the BoG has implemented the safeguards recommendations, including strengthening its internal audit department. The existing Memorandum of Understanding between the Ministry of Finance and the BoG defining the roles and responsibilities for servicing outstanding IMF resources will be updated by end-June, 2017. The authorities intend to treat the arrangement as precautionary. If an actual balance of payment need were to emerge, Fund resources would be deposited in the government’s account at the BOG.

39. The program is subject to high and interrelated risks:

  • Policy implementation risks: In the fiscal area, given that the cornerstone pension and income tax reforms become effective only after the end of the program and during a year when parliamentary elections are expected to occur, their implementation is subject to high risks. In the fiscal structural area, opposition to the autonomous revenue agency could jeopardize its implementation. In the financial sector, opposition to e-auctions and other debt enforcement actions, evidenced by implementation delays to date, could stop the reform momentum, and the absence of a credible strategy to address NPLs in a timely manner would have negative consequences for confidence, the long-run viability of the system, and the pace at which capital controls can be relaxed. As to other structural reforms, continued pressures from vested interests could result in a further weakening and delay of reforms.

  • Political and legal risks: The implementation risks noted above are further exacerbated by a weak implementation capacity and by lingering risks related to continued political uncertainty. Moreover, the significant potential for legal challenges further compounds risks. For example, the Court of Auditors ruling against the new pension reform, while non-binding, could form the basis for future legal challenges. Other such challenges could also emerge regarding ongoing reforms (e.g. cases lodged against the 2016 pension reform, existing and upcoming Council of State rulings related to public sector wage cuts and temporary contracts, previous constitutional challenges against reforms of Sunday trade, etc.).

The risks noted above could have serious repercussions on the materialization of staff’s growth and fiscal projections, as noted earlier. Delays in completion of program reviews could lead to a loss of confidence, with attendant negative implications for the expected recovery, the speed at which capital controls can be removed, and the delivery of expected debt relief. In this case, debt sustainability would be compromised, and Greece might not be able to address lingering challenges without continued official financing.

40. There are factors that help mitigate these risks. To mitigate implementation risks, program conditionality is frontloaded, with key reforms legislated upfront Moreover, the program features increased emphasis on follow up implementation steps through both prior actions and structural conditionality. Key reforms are also supported by technical assistance from the Fund and other institutions. As to legal risks, the authorities have provided legal opinions supporting the new reforms and assurances that they will implement equivalent reforms in case current ones are found unconstitutional. Risks to the financial system are mitigated by substantial capital buffers allocated under the ESM-supported program, which, however, require timely supervisory action to ensure they can be utilized before the ESM program expires. Finally, risks related to capacity to repay the Fund are mitigated by the low proposed access and by linking the effectiveness of the arrangement to sufficient assurances on debt relief.

Staff Appraisal

41. The Greek authorities continue to face formidable economic challenges. Four broad policy areas stand out. First, the structure of the public finances is unsustainable, unfair, and growth unfriendly, being reliant on high tax rates applied to narrow bases and on an unsustainable compression of discretionary spending, while pension spending remains un-affordably high. Second, bank NPLs and private sector debt (including to the state) remain very high, reflecting a weak payment culture and an inability to enforce collections. Third, closed professions and pervasive regulations and restrictions remain obstacles to investment, growth, and the restoration of competitiveness. Fourth, the public debt is still unsustainable despite the large debt relief already received. Fully addressing these challenges will be crucial to Greece’s ability to prosper within the euro area in the long term, but will likely require significant time.

42. Against this background, staff welcomes the authorities’ decision to rebalance the fiscal policy mix toward more growth-friendly policies. In particular, the decision to undertake additional fiscal reforms to lower the generous income tax credit and further reduce pensions in line with the benefit formula introduced with the 2016 reform is critical to the medium-term sustainability of the public finances. The reforms can help sustain the authorities’ ambitious primary surplus of 3.5 percent of GDP over a limited period. But, as soon as possible, Greece’s primary surplus target should be set at a more sustainable level of 1.5 percent of GDP. This would facilitate the urgently-needed modernization of the public sector that is indispensable for the broader modernization of the Greek economy, in particular by better targeting social assistance, stimulating public investment, and encouraging labor force participation and investment through lower tax rates.

43. Staff also welcomes the renewed efforts to strengthen fiscal institutions, while protecting vulnerable groups. Enhancing the provision of public services and preserving the fairness of the adjustment effort will ultimately depend on the ability of the government to improve tax collection and address the rising tax and social security debt. Efforts under the previous two programs have had mixed results, reflecting entrenched resistance to reform and a lack of trust in the public administration. To regain the public’s trust, the authorities need to continue to support the new revenue agency in its effort to fight tax evasion, including by providing it with adequate tools and ensuring its autonomy. Moreover, the authorities need to redouble efforts to gradually reduce the existing stock of arrears, and improve public financial management. In this regard, the dramatic surge in temporary contracts that has in effect been undoing the significant downsizing of the public-sector workforce achieved since 2010 through attrition is a matter of considerable concern. Rules for temporary contracts need to be tightened urgently.

44. Progress is being made in rehabilitating the financial sector. The newly legislated out-of-court debt-workout framework and the electronic auction system should, when fully functional, help reduce the exceptionally large level of NPLs. Still, staff is concerned that the strategy for dealing with NPLs in effect relies on the extremely optimistic assumption that banks can gradually grow-out of this problem. Such a strategy implies constraints on the financial system’s ability to provide credit to new dynamic enterprises, which could seriously hamper economic growth for years to come and could prevent the timely relaxation of capital controls. In view of this, to safeguard the soundness of the banking sector, it is critical that the supervisory authorities undertake an Asset Quality Review (AQR) and stress test before the end of the ESM program, to ensure that the resources set aside for bank rehabilitation in this program are utilized in a timely manner, if needed. An assessment of the financial sector strategy and plans in this regard will be the focus of the first review of the program supported by the arrangement.

45. Opening closed professions, modernizing regulatory regimes, and more generally liberalizing pervasive constraints and restrictions that hamper the investment climate remain Greece’s overarching challenge. Previous programs have largely failed in this respect, and policies continue to fall well short of what is needed for Greece to prosper in the euro area, some limited opening up of close professions notwithstanding. Reform shortfalls are a major reason for the disappointing supply response under previous programs, including the weak export performance so far. Moreover, while the critically important labor market reforms in 2011 have facilitated wage flexibility, ensuring a much-welcomed realignment between wages at the firm level and firms’ financial conditions, the inadequacy of accompanying product and service markets reforms meant that there has been no commensurate downward reduction in prices, causing an excessive reduction in real wages. But while staff agrees that too much of the burden has fallen on labor, it believes that the authorities are making a serious mistake by planning to reverse part of the labor market reforms, and strongly advises the authorities to reconsider their decision to do so. Instead, the authorities should focus on redoubling efforts to open-up and liberalize products and service markets.

46. Ensuring the independence and high quality of official statistics is key to the credibility of the program. Significant progress was achieved in improving the quality of Greek statistics since the establishment of the independent Hellenic Statistical Authority, in 2010. Technical assistance from the IMF, Eurostat, and other member states has been important in this regard. The authorities should protect the gains achieved so far by defending the statistical agency against any efforts to undermine its credibility, guaranteeing its professional independence, and addressing remaining shortcomings in reporting, while firmly respecting the “Commitment on Confidence in Statistics” that was endorsed by the government in 2012.

47. Even with full implementation of its policies, Greece cannot restore debt sustainability through its efforts alone and needs significant further debt relief from its European partners. Assumptions that Greece can repay its debt without additional debt relief by indefinitely maintaining unprecedentedly high primary surpluses, or that it can grow out of its debt problem, are not credible. A debt strategy anchored in more realistic assumptions needs to be discussed and agreed. Staff expects that additional assurances regarding the strategy and attendant relief needed to restore debt sustainability will be forthcoming from Greece’s European partners in the coming months.

48. In conclusion, staff believes that the authorities program addresses several key problems that need to be resolved for Greece to be able to prosper and stand on its own inside the euro area. The pension, tax reforms, and other fiscal structural reforms are critical for the public sector’s ability to support the modernization of the Greek economy. Broader reforms to open and liberalize the economy are not progressing at a speed commensurate with the formidable obstacles to sustained growth, but by providing a framework for ensuring macroeconomic stability and for delivering urgently needed debt relief the program should provide Greece the breathing space needed to garner political support for such reforms. While weak implementation capacity and lingering political uncertainty give rise to notable concerns regarding the Greek political system’s ability to carry through with the reform agenda, the pension and tax reforms are evidence of the government’s determination to tackle socially and politically difficult challenges amid considerable adjustment fatigue and resistance from vested interest interests. Overall, staff believes that the authorities’ program deserves the Fund’s endorsement and supports the authorities’ request for a precautionary Stand-By Arrangement, to be approved in principle and which will become effective once sufficient assurances on debt relief to restore debt sustainability have been received.

Key Reforms Implemented under the ESM-Supported Program

Under the ESM program, the authorities have taken important steps to reinvigorate the fiscal, financial, and structural reform agenda after the reversals began in late 2014. The key reforms legislated through May 2017, which serve as a basis for the adjustment program supported by the IMF, include the following:

  • Fiscal policies: The authorities adopted a fiscal package expected to deliver savings of 3¾ percent of GDP by 2018, supported by three key reforms (among other smaller measures). A VAT reform (yield of 0.9 percent of GDP) streamlined the number of the rates and sought to broaden the base under the statutory rate (currently 24 percent). An income tax reform (yield of 1 percent of GDP) increased and harmonized rates for wage, business, and farming income. A pension reform (yield of 1.5 percent of GDP) reduced early retirement options, eliminated the solidarity grant EKAS and non-contributory pension minima, introduced a uniform pension benefit formula for new retirees, rationalized supplementary pensions above a minimum, and started the unification of social security contributions.

  • Fiscal structural reforms: The authorities adopted legislation to establish an autonomous revenue agency insulated from political interference and with modern practices in staff recruitment, remuneration, organization and tax collection. A new social welfare program was rolled out at the beginning of 2017, providing a means-tested guaranteed minimum income (GMI) equivalent to 50 percent of the poverty threshold to about 480,000 beneficiaries.

  • Financial sector: Following an asset quality review, at end-2015, the systemic banks were recapitalized with private (€8.3 billion) and public support (€ 5.4 billion), allowing them to reach capitalization levels of 17 percent CET1, well above the regulatory minimum. In addition, the authorities revamped the Code of Civil Procedure by modernizing dispute resolution processes, allowing better enforcement of claims through new auctioning rules, and strengthening the protection of secured creditors. Insolvency reforms streamlined the insolvency process for firms and households, while a new legislative framework allowed the sale and servicing of NPLs for the first time in Greece.

  • Structural reforms The authorities implemented the recommendations of three OECD Competition Assessments (Toolkits I, II, and a part of III), except for the liberalization of Sunday trade, over-the-counter trade of pharmaceuticals, and a number of sectors under Toolkit III. Three privatization deals have been finalized (concessions for 14 regional airports, concession of the Port of Piraeus, and sale of the railway company Trainose), bringing in €1.5 billion in revenues.

Staff’s Fiscal Assumptions and Comparison with the Authorities’ Projections

Staff’s fiscal projections are more conservative than the authorities. The differences, which cumulate to close to 4 percent of GDP by 2021 (before post-program measures), are accounted for by differences in tax revenue projections (about one third of the difference between staff and government projections), spending projections (mainly pensions, also about a third), and growth assumptions and expiration of current legislation (the rest). Under staff’s baseline scenario, the income tax and pension reforms would need to be implemented simultaneously in 2019 merely to achieve the surplus target of 3.5 percent of GDP by that year. The growth enhancing package would need to be postponed until 2023, when the surplus target is reduced to 1.5 percent of GDP. In contrast, the authorities project a primary surplus (before measures) well in excess of 3.5 percent of GDP by 2022. The stronger fiscal baseline built into their MTFS would allow for the implementation of the growth-enhancing fiscal package, along with a significant amount of additional unspecified expansionary measures, as soon as 2019.

Empirical evidence and recent tax data suggest that tax revenue assumptions should remain prudent. Staff assumes unitary elasticity of PIT revenues to GDP growth, which is broadly consistent with the findings of Belinga et al. (2014) and Dudine and Jalles (2017), based on cross-country estimates. Staff’s assumption is also based on the observation that pensions and public sector wages, which are frozen in nominal terms, form more than three quarters of total taxable labor income. In addition, 2016 tax declaration data shows a growing number of taxpayers with incomes below the tax-free threshold, in line with macroeconomic evidence of employment growth at low-income levels (part-time and temporary). By contrast, the authorities project significantly higher tax revenues in the medium run, accounting for about a third of the difference between their projections and staff’s.

Demographic trends call for cautious pension spending projections. Staff’s assumptions on inflows and exits from the pension system are based on UN population aging projections (UN (2015)) for Greece (assuming a growth rate of the population over age 60 at 1.1 percent per year, and a death rate among those aged above 60 of around 3 percent during 2016–2020). Furthermore, staff assumes that 92 percent of an existing backlog of 120,000 unprocessed pension claims as of end-2016 will be cleared by 2021. This reflects the authorities’ public commitment to fast processing of pension claims and the recent introduction of electronic registries, which allows for faster processing. These assumptions imply the number of pensions, net of clearance of the unprocessed claims, will increase at around 1 percent per year. The authorities project lower inflows and higher exits from the pension system, as well as a much higher mortality rate, explaining about another third of the difference with staff’s projections.

Greece: General Government Operations, 2018–21

(Staff difference with authorities, percent of staff GDP)

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Source: IMF staff estimates.

Fiscal projections need to be anchored in credible policies and growth assumptions. The remaining differences between staff and the authorities are due to the authorities’ more optimistic assumptions on growth and the capacity for continued spending restraint in the medium-term. Notably, staff does not assume that expiring legislation (attrition rule, ceilings on healthcare expenditure) will continue to hold even after expiration and instead anchors spending using cross-country empirical evidence and Greece’s historical and peer countries’ spending patterns.

Risks Related to the Reintroduction of Sectoral Extensions of Collective Bargaining

The system prevalent before 2011 based on sectoral extensions of collective bargaining led to a large increase in unit labor costs and precluded a rapid adjustment of the labor market despite sharply rising unemployment. The 2011 reforms suspended sectoral extensions among others. A reversal of these reforms, which has recently been legislated to take effect at end-program, risks undermining Greece’s gain in competitiveness, potentially hindering the recovery, the needed firm restructuring, and the declining trend in unemployment.

Sectoral extensions of collective bargaining tend to reduce wage inequality, but at the cost of lower employment, reduced competition, and amplification of rigidities in downturns. Such extensions allow a subgroup of employers and employees to set a floor on wages for the entire sector or occupation. While extensions may help address bargaining coordination issues, this works best in countries with strong social contracts and where labor bargaining is tri-partite, with employers, unions, and government all rowing in the same direction and each internalizing costs. If this is absent, extensions can create distortions in wage formation at the firm level and make wage and working conditions less responsive to economic shocks, forcing the adjustment to rely largely on labor shedding. The literature documents these rigidities:

  • Extensions tend to result in higher wages at the lower segment of the distribution, but this comes at the expense of lower employment Hijzen and Martins (2016) found that extensions led to higher wage growth, concentrated at the bottom of the distribution (5–10 percentile), but also led to a decline in employment by 5 percent or more during the 2010–11 crisis in Portugal. Martins (2014) found that following an extension, formal employment declined by about 2 percent in Portugal, with lower hiring playing a larger role than layoffs; the impact was larger in small firms, with employment declining about 2½ percent. Magruder (2012) exploited the geographical nature of extensions in South Africa and found that extensions decrease employment in a given industry by 8–13 percent.

  • Extensions can stifle wage competition from small firms with low productivity Moll (1996) shows how the largest and most productive firms that participate in collective bargaining can reduce competition in the economy through administrative extensions applied to less productive firms. Haucaup et al. (2001) show how extensions can be used by incumbents to deter firm entrance by raising expected labor cost. Finally, Guimaraes et al. (2015) find that wage increases resulting from extensions are associated with a higher probability of firm failure.

  • Extensions increase the cost of economic downturns and amplify rigidities. Diez Catalan and Villanueva (2014) estimated that, in Spain, the extension of sectoral agreements in 2009–10 can explain a third of the increase in the probability of becoming unemployed for less skilled workers. Murtin et al. (2014) found in a sample of 15 OECD countries the tax elasticity of the unemployment rate is augmented by extensions.

  • In Greece, the system prevailing before 2011 based on sectoral extensions of collective bargaining system exacerbated economic imbalances. Unit labor costs (wages relative to productivity) increased by around 50 percent during 2000–10. An attempt to allow firms to derogate from sectoral agreements in 2010 through opt out clauses also failed to produce results. It was only after the 2011 reforms that suspended extensions and favorability (along with other elements) that ULCs and unemployment started to decline.


Greece: Unit Labor Costs, 2000–2016

(Index, 2000=100)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: IMF World Economic Outlook database.

Is the problem in Greece now too low wages relative to productivity or too high unemployment? Wages relative to productivity have declined back to pre-crisis levels, which does not suggest that wages have over-adjusted. However, Greece’s unemployment rate remains the highest among peers, even after having declined since the 2011 reforms. Unemployment appears to be the key driver of poverty in Greece, with the poverty rate for this group having risen by more than 6 percent since the onset of the crisis.


Unemployment rate, 2016


Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: IMF World Economic Outlook database.

Change in Poverty Rate, 2010–2015

(Percent of population)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: Eurostat.Note: Persons at risk of poverty are those living in a household with equivalized disposable income below 60 percent of the national median.

Greek economic conditions call for a focus on employment creation. Output declined by 25 percent since the crisis, and has been stagnating in the last few years. This suggests that there is an acute need to attract investment and support job creation. Moreover, employment is concentrated in small firms with large productivity differences. Finally, with private sector arrears to banks and the state at 130 percent of GDP, the highest among peers, there are large needs for firms to restructure and thus maintain cost flexibility.


Private Sector Arrears

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: EBA 2015 June Report; Eurostat; OECD; and IMF staff calculations.Note: 1/ Data for Greece are estimates as of first quarter of 2017 and include social security contribution debt.

Productivity of Large Relative to Small Firms, 2013

(Ratio, Manufacturing)

Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Sources: Eurostat; and IMF staff calculations.

The reintroduction of the extension principle carries significant risks. Bargaining at the firm level will likely be discouraged once the extension is reintroduced, as employees will have little incentive to engage in firm bargaining. Greece also ranks poorly on labor-employer relations, which amplifies this risk. Thus, small firms would have to accept the higher wages at the sectoral level, which would limit their possibilities to restructure and expand employment, and may even lead to their closure and layoffs. This risks undermining Greece’s ULC-based competitiveness gains achieved so far, and could halt and even reverse the declining trend in unemployment, with negative social consequences. Thus, on balance, the costs of reintroducing the extension appear to outweigh their redistributive benefits.


Cooperation in Labor-Employer Relations


Citation: IMF Staff Country Reports 2017, 229; 10.5089/9781484311219.002.A001

Source: Global Competitiveness Index, World Economic Forum.
Table 3.

Greece: General Government Operations, 2015–22 1/

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Sources: Ministry of Finance; and IMF staff estimates.

Calculations based on program definitions as outlined in the Technical Memorandum of Understanding.