Transcript of an IMF Conference Call on the Fifth Review of Greece’s EFF

June 13, 2014

Washington, D.C.
Tuesday, June 10, 2014

Poul Thomsen, Mission Chief for Greece
Rishi Goyal, Deputy Mission Chief for Greece
Ángela Gaviria, Communications Department

MS. GAVIRIA: Welcome to this conference call on the staff report of the fifth review of Greece's IMF program. The main speaker today is Poul Thomsen, who is the Mission Chief for Greece. Also here is Rishi Goyal, Deputy Mission Chief. Poul will start with some points and then we'll take your questions.

MR. THOMSEN: Good morning and thank you for joining us. As you know, we completed recently the fifth review, and the staff report is being published today. We are at a time where there is some good news as far as the economy is concerned.

As explained in the report, we are confident that the recovery is expected to start sometime this year. After six years of recession, this is, of course, an important achievement. As you also know, there are signs of Greece slowly beginning to go back to markets and attracting foreign capital. There is some good news of inflows into the banking system and also the sovereign placed bonds in the market recently. Overall, I think the situation we are, as we hoped, finding out is of a virtuous cycle taking hold.

As far as policies are concerned, the fiscal adjustment continues to be very impressive by any standard. That is a clear indication of the government's determination to do what it takes.

As you know, the fiscal primary surplus needs to get to 4.5 percent of GDP by 2016 in order to ensure sustainability of the public debt. There's still a bit to go, but the adjustment as of today has been very impressive, and I would say Greece is close to the goal post on that.

Structural reforms are the most important part of the program. They are key for the incipient recovery that we hope to see this year to turn into a robust, sustained recovery over the medium-term. There have been some short-falls in labor market reforms, but I think they are being off-set by a redoubling of efforts in other areas, particularly in the liberalization and opening up of the economy, the opening up of closed professions, and the implementation of the so-called OECD Toolkit.

The government has been very resolute and determined in moving forward in this area. This is good because it was clearly the area where reforms had been lacking over the years. So I would say there is a rebalancing of the reform effort that is much welcome.

But this is clearly where the test and challenges lie ahead. There is undoubtedly much still to be done. This is an area where there will be considerable resistance to reforms from those affected, which is to be expected. We are confident that the government is determined to move ahead.

On the banking system, we are concerned by the very high level of non-performing loans. It is good that, following the Bank of Greece’s stress tests, the banks have mobilized additional capital. We are still concerned, however, about the banks’ non-performing loans.

Let me be very clear. This is not a concern about any acute stability risk. The banking system is safe. There is enough of a backstop in the HFSF. But we do think that it is key that the regulator is very vigilant in getting banks to recognize non-performing loans, if it becomes clear that –non-performing loans are not declining quickly. This is important because there is a risk that the banks' balance sheets will be weighed down by these non-performing loans, and banks will be forced into a prolonged deleveraging that will prevent them from extending new credit to support the economic recovery. So this is certainly something we would want to keep an eye on.

Finally, on debt, let me just say upfront that this is not an issue for discussion in the context of this review. It will be discussed in the next review. As we say in the report, we have updated the debt sustainability analysis, but it is not substantially different than the one we had before, reflecting the fact that the fiscal adjustment and the macro framework are on track as expected at the fourth review. So let me stop here and take any questions that you might have.

QUESTIONER: Thank you for this conference call. It seems that non-performing loans remain an important priority for you. Your paper gives the impression that you believe that the capital needs of the banking system are about 6 billion euro more than the adverse scenario of the Bank of Greece. I would like to know if that is correct or not.

QUESTIONER: I would like to ask about the fiscal gap. When you say that additional measures are needed to close the projected gap, do you mean permanent measures when extensions expire? What kind of measures?

QUESTIONER: May I have your estimations about the fiscal gap until the end of the Greek program in 2016?

QUESTIONER: Another question about the funding gap. Is a third program for Greece needed?

QUESTIONER: One question for Mr. Thomsen, please, regarding the financing. We have seen statements from the European side that it is covered for 10 years to come. Do you think that the Greek debt is sustainable for the 10 years to come or not?

QUESTIONER: In the past you have mentioned the political turmoil and risk, and how that affects the stability of the program. Greece’s coalition government announced yesterday a cabinet reshuffling a bit to boost its popularity after losing ground at last month’s European Parliament elections. Does the choice for the minister of finance satisfy you?

QUESTIONER: I wanted to ask about the reshuffling, how you see the new Minister of Finance executing the plan that you had in mind as IMF. Thank you.

MR. THOMSEN: Let's start with the questions on the banking system. You are right that we think that the capital need might be larger than suggested by the recent Bank of Greece calculations. It depends on the banks’ ability to recover non-performing loans. That is the key issue. There is, of course, some uncertainty. How will the return to positive growth affect enterprises’ ability to resume payments on loans, so banks improve their balance sheets? We will have to see. We agree to defer a more detailed assessment on that until the SSM has conducted its European-wide test in the second half of the year. As I said, there are no acute risks. All banks are very well capitalized on the current policies, but if there was to be a more aggressive provisioning against non-performing loans, it could affect banks' capital needs.

There is absolutely no risk here, so we have agreed to defer our final assessment until the next review, when we will have the findings of the SSM. Until then, let me just say that we think there might be a bit bigger capital need, but I don't have any comments on any concrete numbers at this date.

On the fiscal measures for 2015 and 2016, we see there is a gap. As you know, the debt sustainability analysis shows that Greece needs to bring the primary balance to 4.5 percent of GDP by 2016. We are not there yet.

We agree with the government that one should avoid further across-the-board cuts in pensions and wages in order to get there. We agree with that. But this is also why we are very keen to push on the structural fiscal reforms, with improvement in tax administration, public administration reforms, and so forth. This is key to avoid painful across-the-board expenditure cuts. In this regard, we also think that it will be necessary to extend some of the expiring measures to close the gaps for 2015 and 2016, but we will wait and see. When the mission returns in the fall for the next review we will also discuss the budget for 2015, and we will have a much better view on what is required at that time. But again, we agree on the need to avoid across-the-board cuts in pensions and wages.

There were questions on funding and debt. As you will see from our projections, there is, indeed, a funding gap until the remainder of the program period over and above the committed, but unused, resources available from the IMF and the ESM. Now, here too, the situation is changing. The government has successfully placed bonds in recent months. If it continues to do so, it might be possible that any additional funding need is quite limited.

This will also depend on the outcome of the SSM analysis of the banks, and the question of whether the existing backstop in the HFSF, whether some of that money could be reallocated back into the program for budget financing. If that was the case, that would further reduce the need for more money.

So, yes, at this stage we see a funding need, but it is quite possible that there are sources for closing it, which would mean that there would not be a need for member states to approve any new money. We will have to see. It's too early to say.

On debt sustainability, as I said, I think the numbers are very clear. Debt is sustainable if the underlying assumptions in the program can be adhered to, that is, if the primary surplus can be brought to 4.5 percent of GDP, and if there are strong structural reforms that support a robust recovery and growth. In that case, debt will come down over the medium-term to the program path. Also, this takes into account the commitments of the Europeans to provide whatever support is needed to put debt on the programmed path, provided that the program is on track. So I do think we have the framework for securing debt sustainability. That requires actions on both parts, the Greek authorities and their European partners.

On politics, I don't have much to say, as usual. As a matter of principle, I do not comment on personalities. It is not for the Troika to have a view on this, but let me breach my own principle and say that I know the Minister of Finance from the past and look forward to working with him.

QUESTIONER: I would like to ask you again about the possibility of Greece to take a new loan from the European Union. If that is possible or less possible.

QUESTIONER: My question would be if you would support the use of whatever is left at the HFSF to cover the funding gap that you identified earlier?

MR. THOMSEN: On the last question, we'll have to see what the SSM comes up with in terms of financing needs, and our own experts’ view on the capital needs because we work in parallel with the SSM. If the estimate is such that they suggest that the whole buffer will not be needed, then we could support reallocating some of it. But it is really just too early to say. We need to see the result of this additional work on the balance sheets of the banks that is going to take place in the coming months.

Also, as I said, it is possible that there will be a need for new funding, but it is also possible that the financing can come from other sources such as the HFSF or from the market, if the government were to place some bonds. So we shall see. It's just unclear. I know you would like to have clarity on that now, but it is very dependent on what happens in our assessment of the banking system and its financing needs. We need to wait until we have conducted this analysis.

QUESTIONER: Do you think the extension of maturities by the euro zone countries is satisfying for the Greek public debt or should there be a haircut?

MR. THOMSEN: I certainly think that the extension of maturities that has taken place already has been much welcome. Greece has now one of the most favorable, if not the most favorable, maturity structure of any advanced country. Any further extension would of course be very welcome

At the same time, there is a framework to ensure that debt is being lowered to the programmed numbers in the context of the forthcoming review. That should happen independently of any extension of maturities.

Let me add that this does not necessarily mean a haircut. There are various ways of getting to these debt ceilings. It does not necessarily involve haircuts. How it will be achieved is something that we will discuss in the context of the next review.

QUESTIONER: I would like to ask Mr. Thomsen what is his opinion about the government talking lately about the need to cut taxes. Is this possible?

QUESTIONER: On the “other means” that could be used to lower the base of public debt, what are these means?

QUESTIONER: According to his statements, the General Secretary, Mr. Theoharis, was politically forced to quit. What is your comment about that?

QUESTIONER: I would like a comment on Mr. Stournaras and the possibility that he becomes the new governor of the Central Bank of Greece.

QUESTIONER: I just wanted to make sure that, as you said before, you would like to avoid across-the-board measures in order to cover the fiscal gap for the next years. Just to repeat it, please.

MR. THOMSEN: On the last question, yes, we support avoiding across-the-board cuts in pensions and wages. That is also why we think it is important to push forward with structural reforms, including restructuring the tax administration, improving tax collections, and and enhancing efficiency savings. These will be key to avoiding further cuts in pensions and wages across the board.

On the question on tax rates, I certainly agree that many tax rates in Greece are too high. Reducing them is a long-term objective that is very commendable. So I would strongly support that.

Now, it has to be achieved without jeopardizing the primary surplus targets. The key to that is really to focus on improving the tax administration, better collection of taxes, be sure that the well-off are paying their fair share of taxes. Once the efficiency of tax collection has been improved I think there is scope for lowering tax rates.

Again, one can achieve a reduction in debt without resorting to haircuts. For instance, last time around, there was a transfer of the so-called SMP profits. So one way of improving debt ratios is through transfers or to further lower interest rates. It does not necessarily need to involve a haircut. But again, let's not get into details here. Let's discuss this in the context of the next review.

On the personnel issues, I will stick to my policy on having no views on this. I have no comments on the departure of the General Secretary. It is not for the Fund to have views on hirings and departures.

What we will focus on is policies. We will be looking that there is no back tracking on policies, and that Greece continues to make progress in this area in line with the commitments of the MEFP.

As far as Mr. Stournaras is concerned, I have enjoyed working with him, but I have no other comments. Who should be the new governor is up to the Greek authorities to decide. Let me stop here.

MS. GAVIRIA: Thank you, Poul. We end this conference call here. Thank you all for participating.
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