## cr1740 — Chapter: “1. Recent Reforms and Implementation of Past IMF Recommendations” ## Source details **Canonical URL:** [cr1740 — Chapter: “1. Recent Reforms and Implementation of Past IMF Recommendations”](https://www.imf.org/-/media/files/publications/cr/2017/cr1740.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1740.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1740.pdf.json) --- ### Context and recent history - Greece entered the crisis with exceptionally large fiscal and external imbalances; both the primary and current account deficits declined from double digits to around balance in recent years. - Exceptional official financing totaled around €260 billion (147 percent of GDP). - Output contracted by more than 25 percent since 2008; investment down by more than 60 percent. - Political instability: seven governments over six years; only 10 out of 24 planned program reviews completed under prior Fund-supported programs. - The 2015 crisis led to temporary arrears to the IMF, capital controls in June 2015, and an ESM-supported program of up to €86 billion (49 percent of GDP) in August 2015. ### Balance sheets, competitiveness, and adjustment — major findings - Public and private balance sheets remain deeply impaired: - Public debt reached some 180 percent of GDP by end-2015. - Private sector arrears to banks and the state reached the second highest level in the euro-zone. - Competitiveness: - Insufficient product-market opening constrained price adjustment. - Exports lag peers; real-exchange-rate overvaluation of some 5-10 percent remains relative to fundamentals. ### Four key challenges - Challenge 1 — Fiscal policy mix and pensions: - Fiscal structural adjustment of around 16 percent of GDP during 2010-15. - Recent consolidation package under the ESM program expected to yield close to 4 percent of GDP in savings by 2018, heavily reliant on revenue measures (about 3 percent of GDP). - Reductions in pension spending amount to less than 1 percent of GDP (relative to a system deficit of close to 11 percent of GDP). - Pension system deficit is four times the euro-area average of 2.5 percent of GDP. - More than half of wage earners are exempt from paying personal income tax compared to the euro area average of 8 percent; taxpayers in the highest income decile pay about 60 percent of personal income tax revenue. - Challenge 2 — Tax administration and payment culture: - Private sector debt to the state reached 70 percent of GDP. - Around half of the population is in arrears to the state. - High tax rates, punitive penalties, political interference, and repeated amnesties undermined enforcement. - Challenge 3 — Banking sector and governance: - Banks required recapitalizations; capital quality weak with half of capital comprised of deferred tax assets (DTAs). - NPLs continued to rise, reaching the second highest level in the euro zone. - Governance concerns: HFSF insulation from political interference not achieved; board-eligibility tightening not fully implemented. - Challenge 4 — Structural rigidities: - Labor reforms in 2010-11 increased flexibility and reduced labor costs, but product market reforms were slow. - Burden of adjustment fell excessively on wages; poverty and inequality rose during the crisis. ### Policy and reform implications (assessment) - Fiscal: - Address structural pension imbalances and shift away from excessive reliance on high tax rates on narrow bases. - Replace ex-post across-the-board contingency cuts with structural measures enhancing sustainability and equity. - Tax administration: - Improve tax administration and enforcement; avoid amnesties and untargeted installment schemes. - Banking: - Strengthen bank capitalization quality and governance; reduce NPLs; complete reforms insulating stabilization funds and bank governance from political interference. - Structural reforms: - Deepen product market reforms, facilitate privatizations (including energy, avoiding fire sales), and improve judicial efficiency and anti-corruption efforts to support investment and export-led recovery. --- ### Macroeconomic outcomes, projections, and risks ### Macroeconomic performance and labor market - Output contracted by 0.2 percent in 2015; expected ~0.4 percent in 2016 and to accelerate to 2.7 percent in 2017 (predicated on full and timely implementation of the authorities’ adjustment program). - GDP expected to grow above potential during 2018-20, closing the output gap. - Greece’s 2020 real output and investment expected to remain below pre-crisis levels by 15 and 45 percent, respectively. - Harmonized consumer prices fell by 1.1 percent in 2015 and were stable in 2016. - Unemployment rate declined to 23 percent (seasonally adjusted) at end-October 2016 from a peak near 28 percent in 2013Q3; projected to fall to just below 19 percent by 2020. - Long-term projections: long-term growth around 1 percent; TFP projected to reach 0.9 percent in the long term; unemployment assumed to decline gradually to single digits by 2040. ### Fiscal outcomes and composition (selected exact figures) - Primary fiscal balance: small primary surplus of 0.2 percent of GDP in 2015 (ESA2010 basis, excluding bank recapitalization costs). - Consolidated General Government Accounts (Cash Basis) Jan-Nov (percent of GDP): - Total Revenue: 2015 = 37.6; 2016 = 39.5; Difference = 1.9 - Direct Taxes: 2015 = 8.7; 2016 = 9.3; Difference = 0.6 - Indirect Taxes: 2015 = 13.2; 2016 = 14.7; Difference = 1.5 - Social Contributions: 2015 = 9.9; 2016 = 10.2; Difference = 0.3 - Other Revenue: 2015 = 5.8; 2016 = 5.4; Difference = -0.4 - Primary Spending: 2015 = 34.7; 2016 = 35.9; Difference = 1.2 - Cash Primary Balance: 2015 = 2.8; 2016 = 3.6; Difference = 0.8 - Fiscal projections: - Primary fiscal balance projected close to 1 percent of GDP in 2016 and to rise to 1½ percent by 2018 (based on measures estimated to yield 3¾ percent of GDP entering gradually during 2015-18). - Staff notes net effect of measures represents an improvement of only around 1½ percent of GDP in the primary balance by 2018. - General Government Operations, 2015-18 (ESA 2010) (Percent of GDP) — selected: - Total Primary Revenue: 2015 = 47.8; 2016 = 49.3; 2017 = 47.5; 2018 = 46.3 - Total Primary Expenditure: 2015 = 47.6; 2016 = 48.4; 2017 = 46.5; 2018 = 44.8 - Primary Balance: 2015 = 0.2; 2016 = 0.9; 2017 = 1.0; 2018 = 1.5 ### Banking sector and private credit - Banks lost 27 percent of deposits in the first half of 2015 and resorted to capital controls and ELA. - Banking recapitalization in 2015: €15 billion, or 8½ percent of GDP. - CET1: from 8 percent in mid-2015 to around 18 percent at end-September 2016. - NPLs: 45 percent of total loans in 2016Q3; provisioning at 50 percent of total NPLs. - Total credit decline of 20 percent since 2010. ### Risks, scenarios, and outlook sensitivity - Main risks: slow or incomplete reform implementation, persistence of capital controls, lack of QE access, absence of a solution to debt, refugee flows, and external shocks (e.g., UK referendum). - Stylized downside scenario (no further reform implementation): - Growth: 2017 = 1.1; 2018 = 1.2; 2019 = 1.2; 2020 = 0.8; 2021 = 0.6 - Primary Balance (percent GDP) under downside scenario: 2017 = 0.5; 2018 = 0.6; 2019 = 0.4; 2020 = 0.4; 2021 = 0.4 - Such a scenario could lead to renewed liquidity squeezes and Grexit concerns absent further official support. --- ### Social protection, tax evasion, and tax-debt management ### Social protection and GMI - Social protection covers only 73 percent of the poorest 20 percent of the population in Greece (euro-area average = 87 percent). - Greece is one of two euro-area countries without last-resort poverty support to the working-age poor. - The new Guaranteed Minimum Income (GMI) scheme expected to provide income ~50 percent of the poverty threshold to vulnerable groups. - For GMI effectiveness: eliminate overlapping and poorly targeted social schemes; consider using pension savings to finance part of GMI. ### Tax evasion and tax-debt management - Artavanis et al. estimate close to half of self-employed income goes unreported; for 2009 implies €28 billion (near 12 percent of GDP) of unreported income. - Private sector debt to the state is high; large part uncollectible. - Recommendations: - Avoid amnesty schemes. - Fully operationalize an independent revenue agency insulated from political interference and adopt risk-based compliance. - Strengthen enforcement against strategic defaulters; use AML tools and information sharing. - Re-examine fines to deter nonpayment without creating unsustainable debt burdens. - Assess debtors’ viability and develop restructuring modalities integrated with bank debt; consider selective write-downs for viable borrowers and write-downs for unviable debtors after full use of liquidation and enforcement tools. --- ### NPLs, legal framework, and banking reforms ### NPL management and supervisory framework - Operationalize the insolvency and debt-enforcement framework; establish insolvency administrator profession; facilitate auctions. - Revamp out-of-court debt restructuring to allow restructuring of both private and public claims, with possibility of write-downs aligned to capacity to pay. - NPL ratio reduction implied by banks’ strategies: aggregate NPL ratio to 48, 42, and 34 percent by 2017, 2018, and 2019 respectively—staff cautions these back-loaded reductions may be inconsistent with investment and growth assumptions. - BoG and SSM should review banks’ strategies to ensure credible, ambitious, sustainable restructuring. - Liberalization of NPL sales expected to provide a market test; to date no successful sales indicating depressed market prices. ### Capitalization and governance - Upfront NPL reduction measures will be costly in capital terms given scale and legal uncertainty. - Authorities should ensure capital remains adequate over the medium term. - Bank governance reforms: - Ensure lending and restructuring decisions are commercial and free from political interference. - Reconstitute bank boards under revised eligibility criteria beyond SSM fit-and-proper standards. - Divest public ownership in banks to reputable international financial institutions over the medium term. ### Capital controls - Capital controls introduced July 18, 2015; periodically relaxed, most recently in August 2016. - Key operational rules (selected exact limits): - Weekly aggregate transfer limits for current payments: EUR 112 million for the systemic banks; EUR 480 million for the entire banking system. - Branch-level approvals: payments up to EUR 10,000 may be approved by banks’ branches. - Subcommittee approvals: payments between EUR 10,000 and 350,000 per day per customer. - BTAC approvals: payments above EUR 350,000 and interbank transactions irrespective of amount. - Cash withdrawal limit in Greece: EUR 840 every two weeks per depositor per bank. - Travelers’ cash allowance: EUR 2,000 per trip. - Students’ transfers: EUR 5,000 per quarter for living expenses abroad; EUR 8,000 if paid directly to landlord or campus dorm. - Operational impact: increased costs for international transactions due to documentation and approval requirements. - Policy guidance: remove controls as soon as feasible via a milestone-based roadmap tied to confidence, deposit return, funding normalization, and NPL progress; ensure adequate liquidity (BoG with ECB support). --- ### Competitiveness, product-market reforms, and privatization ### Competitiveness assessment - Staff: competitiveness gap requires some 5-10 percent further real exchange rate adjustment. - EBA approaches converge on modest remaining overvaluation of about 5-10 percent (subject to uncertainties from tax changes and output gap). ### Product and service market reforms - Implementation to open closed professions and remove obstacles described as "slow and uneven" due to strong vested-interest opposition. - Recommendations: - Redouble efforts to carry reforms from legislation to implementation. - Take decisive steps to privatize state assets—including in energy—while avoiding fire sales. - Use privatizations to signal "Greece is open for business" and to achieve reform synergies. ### Institutional priorities - Improve judicial system efficiency (insolvency and competition enforcement). - Intensify anti-corruption efforts; World Bank indicators show deterioration since 2013. - Promote innovation (R&D, patents, university-industry collaboration) as fiscal space allows. - Labor market: preserve gains from 2010-11 reforms and consider aligning collective-dismissals and industrial-action frameworks with EU/IO best practice (e.g., repeal restrictive pre-approval for collective dismissals; set appropriate quorum requirements for strikes). --- ### Debt sustainability, DSA findings, and debt-relief modalities ### Staff DSA headline findings (selected exact figures) - Staff baseline: - Debt projected to reach 170 percent of GDP by 2020, and 164 percent by 2022, then rise to around 275 percent of GDP by 2060. - GFN projected to cross 15 percent-of-GDP threshold by 2024 and 20 percent by 2031, reaching around 33 percent by 2040 and around 62 percent by 2060. - Staff conclusion: Greece cannot be expected to grow out of its debt problem even with full implementation of reforms. ### Objectives for debt-restructuring (GFN framework) - Maintain gross financing needs well within the 15-20 percent of GDP thresholds throughout the projection period. - Ensure debt on a sustained downward path; temporary flow relief alone insufficient. ### Restructuring measures considered (staff modalities and Eurogroup options) - Eurogroup short-term package: smooth EFSF repayment profile; diversify EFSF/ESM funding; waive step-up margin on buy-back tranche for 2017. - Staff’s more extensive restructuring modality could include: - Grace extensions until 2040 (range examples: 6 years on ESM loans to 17 and 20 years for EFSF and GLF loans). - Maturity extensions until 2070 (e.g., 30 years for GLF loans). - Interest deferrals until 2040 across GLF, EFSF, ESM loans, amortized until 2070 (including interest on interest). - Locking in interest rates on EFSF and ESM loans amounting to around €200 billion (113 percent of 2016 GDP) fixed at low levels for 30 years, not exceeding 1½ percent. - Alternative: defer EFSF interest payments to 2060 rather than 2040 to lower interest burden. ### Robustness scenarios under staff restructuring - Upside: nominal growth 3.2 percent and no additional recap needs plus staff restructuring would lower GFNs and speed debt reduction. - Downside: lower primary balance (stabilizing at 1 percent of GDP) would make debt unsustainable even under staff restructuring; would require interest on EFSF and ESM loans reduced to 0.25 for 30 years to ensure sustainability under staff criteria. ### Key DSA assumptions (selected exact figures) - Primary balance: primary surplus of 1.5 percent of GDP starting in 2018 and throughout the long-term. - Growth: starting in 2022 staff expects nominal growth of some 2.8 percent. - Bank recap buffer: around €10 billion (5½ percent of 2016 GDP). - Privatization proceeds: €3 billion (1½ percent of GDP) by 2018, rising to €5 billion (2½ percent of 2018 GDP) thereafter. - Repo operations assumed €10 billion (5½ percent of GDP) at end-2016 and €6.5 billion (3¼-3½ percent of GDP) going forward. - Market re-entry rate: initial rate of 6 percent; regression estimates between 6 and 13 percent; rate moves four basis points for each one percentage point change in debt-to-GDP (cap 6 percent, floor 4½ percent). - DSA horizon: up to 2060. --- ### External sector and convergence prospects ### External debt and NIIP (selected exact figures) - External debt rose from 97 percent of GDP in 2004 to 185 percent of GDP in 2010. - By 2015 about 60 percent of total debt accounted for by general government and 26 percent by monetary authorities. - NIIP: -135 percent of GDP. - External debt projected to decline to about 211 percent of GDP in 2022. ### Competitiveness and REER methodology outcomes (selected exact figures) - ULC-based REER depreciated by some 18 percent since 2010; CPI-based REER declined slightly less than 10 percent; adjusting for tax changes the CPI-based REER shows a decline close to 15 percent. - Current account approach: cyclically adjusted current account = -2.7 percent of GDP; current account consistent with fundamentals = -1.2 percent of GDP; closing gap implies REER adjustment about 6 percent. - Staff’s assessment: some modest remaining overvaluation of about 5-10 percent. ### Convergence prospects (Box 3 — selected exact figures) - Staff baseline long-term growth projection for Greece is 1 percent. - Under baseline, Greece’s standard of living will be only around 63 percent of the euro-area average by 2040. - Downside scenario: by 2040 Greece’s real GDP per capita would be 55 percent of the euro area level. - Upside fastest convergence: annual rate of convergence 0.8 percentage points on average would take close to half a century to match euro-area average real GDP per capita. --- ### Detailed fiscal measures, pension reform, and structural implementation (selected exact figures) ### Fiscal measures, 2015–2018 (Percent of GDP) - Total: 2015 = 0.6; 2016 = 2.0; 2017 = 3.5; 2018 = 3.8 - VAT total: 0.2, 0.7, 0.9, 0.9 - Income tax total: 0.2, 0.6, 1.0, 1.0 - Solidarity surcharge: 0.0, 0.2, 0.4, 0.6 - Pensions total: 0.2, 0.7, 1.2, 1.5 - Phasing out EKAS: 0.0, 0.0, 0.3, 0.4 - Higher health contributions of retirees: 0.1, 0.3, 0.3, 0.3 - Other parametric measures and measures yielding 0.5 percent of GDP by 2018 noted in table. ### Pension reform highlights - Curtailment of early retirement rights; single less generous benefit formula for future pensioners. - Rationalization of current pensions by reducing EKAS and auxiliary pensions above a threshold. - Contribution rates increased and harmonized. - System retains a relatively high guaranteed basic pension; low accrual rates remain. ### Structural reform implementation gaps and privatizations - Implementation in some sectors addressed OECD recommendations; restrictions maintained in pharmacy ownership, Sunday trading, legal and engineering professions. - Three privatization deals signed: regional airports, Port of Pireaus, Trainose totaling €1.5 billion (0.8 percent of GDP). - Authorities far from the €50 billion (28 percent of 2016 GDP) long-run privatization target. --- ### Statistical issues, revisions, and timeline - Official statistics quality improved since ELSTAT creation in 2010, but frequent, significant, and downward-biased revisions remain. - Over last fifteen years, annual fiscal outturns revised downward 13 out of 15 times; average fiscal revision in Greece: -2.4 percent of GDP (euro-area average ~ -0.3). - Timeline: next consultation expected to take place on a 12-month cycle. --- ### Selected exact quantitative references preserved - Public debt end-2015: some 180 percent of GDP. - Exceptional official financing: around €260 billion (147 percent of GDP). - ESM-supported program up to €86 bn (49 percent of GDP). - NPLs: 45 percent of total loans in 2016Q3; NPLs "close to 50 percent of total loans" cited elsewhere. - CET1: 8 percent (mid-2015) to around 18 percent (end-September 2016). - Banking recapitalization 2015: €15 billion, or 8½ percent of GDP. - Primary surplus projections: "around 1½ percent of GDP" in the medium and long term; staff assumes 1.5 percent of GDP from 2018 onward. - Debt and GFN by 2030 under staff baseline: "around 160 and 20 percent of GDP by 2030, respectively." - Eurogroup GFN targets: maintain GFN below "15 and 20 percent over the medium and long run." - DSA horizon: "up to 2060." - Deposit flight in H1 2015: 27 percent. - Real GDP growth: "0.8 percent in 2016" (alternative projection: around 0.4 percent). - Private consumption: "70 percent of GDP"; investment: "11 percent of GDP". - Exports share: increased from "19 percent of GDP in 2009 to 32 percent today." - General government debt: "126.7 percent" in 2009; "177.4 percent at end-2015." - MoU envisaged ESM financing: "€86 bn" over 2015-18. - Eurogroup agreed short-term package enabling second tranche: "€10.3 bn". - ESM estimated cumulative debt-to-GDP reduction from short-term measures: "around 20 percentage points (pps) until 2060"; net financing needs decrease by "5 pps in that time." *Italic: International Monetary Fund — Chapter: “1. Recent Reforms and Implementation of Past IMF Recommendations” (cr1740).* ### 1. Recent Reforms and Implementation of Past IMF Recommendations _________________________ 31 ### 1. Recent Reforms and Implementation of Past IMF Recommendations ### Context and recent history - Greece entered the crisis with exceptionally large fiscal and external imbalances; both the primary and current account deficits declined from double digits to around balance in recent years. - Exceptional official financing totaled around €260 billion (147 percent of GDP) to support adjustment and keep Greece in the euro-zone. - Output contracted by more than 25 percent since 2008; investment down by more than 60 percent; unemployment remains the highest level in the euro-zone. - Reform momentum slowed after early progress, with structural reform implementation decelerating and fiscal consolidation increasingly reliant on one-off and ad-hoc measures. - Political instability: seven governments over six years and only 10 out of 24 planned program reviews completed under prior Fund-supported programs; frequent crises contributed to policy reversals and confidence shocks. - The 2015 crisis: reforms were unwound, leading to a confidence and liquidity crisis, temporary arrears to the IMF, capital controls in June 2015, and ultimately an ESM-supported program of up to €86 billion (49 percent of GDP) in August 2015 in return for program recommitment. ### Major findings on balance sheets, competitiveness, and adjustment - Public and private balance sheets remain deeply impaired: - Public debt reached some 180 percent of GDP by end-2015, about 65 percent higher than its pre-crisis level. - Private sector arrears to banks and the state reached the second highest level in the euro-zone. - Competitiveness remains weak: - Insufficient progress in opening the economy against vested interests hindered price adjustment needed to restore competitiveness within the currency union. - Exports continue to lag peers; Greece performs poorly on structural indicators relevant for growth. - Real-exchange-rate overvaluation of some 5-10 percent remains relative to fundamentals (Annex 1). ### Four key challenges - Challenge 1: An unsustainable fiscal policy mix driven by unaffordable pensions and high tax rates on narrow bases - Greece implemented a fiscal structural adjustment of around 16 percent of GDP during 2010-15. - More than half of legislated measures were on the spending side; only about a quarter of overall adjustment targeted public sector wages and pensions. - Pension spending rose relative to GDP from 2010 to 2015 due to early retirements. - Recent consolidation package under the ESM program is expected to yield close to 4 percent of GDP in savings by 2018, heavily reliant on revenue measures (about 3 percent of GDP). - Reductions in pension spending amount to less than 1 percent of GDP (relative to a system deficit of close to 11 percent of GDP). - Greece’s automatic contingency mechanism applies ex-post across-the-board spending cuts rather than structural reforms. - Pension system deficit is four times the euro-area average of 2.5 percent of GDP. - More than half of wage earners are exempt from paying personal income tax compared to the euro area average of 8 percent. - Taxpayers in the highest income decile pay about 60 percent of personal income tax revenue; 53 percent of wage earners and 85 percent of farmers are exempt. - Distributional effects: relative poverty declined for retirees but soared for the working-age unemployed during the crisis. - Challenge 2: Ineffective tax administration, weak payment culture, and rising tax debt - Private sector debt to the state reached 70 percent of GDP, the highest level in the euro-area. - Around half of the population is in arrears to the state. - High tax rates, punitive penalties and fines, and political interference have undermined enforcement capacity. - Reliance on amnesties and untargeted installment schemes weakened incentives to pay and reduced collection rates. - Challenge 3: Weak bank balance sheets and governance - Despite three recapitalizations since 2010 and massive liquidity support from the ECB and the Bank of Greece (BoG), confidence has not returned and capital controls remain in place. - Bank capital quality is weak: half comprised of deferred tax assets (DTAs), creating potential contingent liabilities for the state. - Non-performing loans (NPLs) continued to rise, reaching the second highest level in the euro zone (just behind Cyprus). - Governance concerns persist: attempts to insulate the Hellenic Financial Stability Fund (HFSF) from political interference have not yielded results; ESM direct recapitalization was not available in 2015; recent legislation tightening eligibility for bank boards is yet to be fully implemented. - Challenge 4: Pervasive structural rigidities preventing inclusive growth - Landmark labor market reforms in 2010-11 increased flexibility and reduced labor costs, narrowing Greece’s wage-competitiveness gap. - Product market reforms were slow and met strong opposition, limiting productivity and competitiveness gains. - Burden of adjustment fell excessively on wages while prices adjusted less (even after accounting for tax hikes). - Labor market reforms helped halt rises in unemployment and poverty after 2012 by allowing firms to adjust payrolls rather than close, but poverty remains unacceptably high relative to the euro area and inequality increased during the crisis. ### Policy and reform implications (as reflected in the assessment) - Fiscal rebalancing requires addressing structural pension imbalances and shifting away from excessive reliance on high tax rates on narrow bases. - Improve tax administration and enforcement to reverse rising private sector debt to the state and restore collection rates, avoiding repeated amnesties and untargeted installment schemes. - Strengthen bank capitalization quality and governance, reduce NPLs, and complete reforms insulating stabilization funds and bank governance from political interference. - Deepen product market reforms to complement labor market flexibility, open the economy to competition, and support investment and export-led recovery. - Replace ad-hoc fiscal contingency mechanisms with structural measures that enhance long-term fiscal sustainability and equity. *International Monetary Fund — Chapter: “1. Recent Reforms and Implementation of Past IMF Recommendations”* ### 6. Macroeconomic outcomes remain weak, reflecting the lingering uncertainty about ### 6. Macroeconomic outcomes remain weak, reflecting the lingering uncertainty about ### Macroeconomic performance and labor market - Growth: - Output contracted by 0.2 percent in 2015 after small positive growth in 2014. - Output expected to have reached around 0.4 percent in 2016, and to accelerate to 2.7 percent in 2017 (projections predicated on full and timely implementation of the authorities’ adjustment program). - Output has started to recover since mid-2016, supported by net exports and efforts to clear the state’s spending and tax refund arrears with the private sector. - GDP is expected to grow above potential during 2018-20, closing the output gap. - Greece’s 2020 real output and investment are expected to remain below pre-crisis levels by 15 and 45 percent, respectively. - Prices and external sector: - Harmonized consumer prices fell by 1.1 percent in 2015 and were stable in 2016, notwithstanding recent VAT hikes. - The current account remained close to balance in 2016, with both imports and exports declining further by end-September 2016. - Labor market: - Unemployment rate declined to 23 percent (seasonally adjusted) at end-October 2016 from a peak of close to 28 percent in 2013Q3. - Wages per employee increased by 2.6 percent (y-o-y) through end-September 2016. - Unemployment projected to fall to just below 19 percent by 2020, given high structural unemployment. - Long-term projections: - Long-term growth is expected to reach around 1 percent. - Total factor productivity (TFP) projected to reach 0.9 percent in the long term. - Labor force participation assumed to improve and unemployment to decline gradually to single digits by 2040. ### Fiscal outcomes, projections, and composition - Recent fiscal performance: - Greece achieved a small primary surplus of 0.2 percent of GDP in 2015 (ESA2010 basis, excluding bank recapitalization costs). - The cumulative general government’s primary surplus (cash basis) through end-November 2016 was higher by 0.8 percentage points than a year ago. - Improvement reflects higher tax revenues from new measures entering in 2016 and relatively better macroeconomic performance, partly offset by higher cash spending related to clearing arrears to the private sector. - Consolidated General Government Accounts (Cash Basis) Jan-Nov (percent of GDP): - Total Revenue: 2015 = 37.6; 2016 = 39.5; Difference = 1.9 - Direct Taxes: 2015 = 8.7; 2016 = 9.3; Difference = 0.6 - Indirect Taxes: 2015 = 13.2; 2016 = 14.7; Difference = 1.5 - Social Contributions: 2015 = 9.9; 2016 = 10.2; Difference = 0.3 - Other Revenue: 2015 = 5.8; 2016 = 5.4; Difference = -0.4 - Primary Spending: 2015 = 34.7; 2016 = 35.9; Difference = 1.2 - Social Benefits: 2015 = 19.9; 2016 = 20.1; Difference = 0.2 - Compensation of Employees: 2015 = 8.1; 2016 = 8.1; Difference = 0.0 - Other Current Expenditure: 2015 = 4.5; 2016 = 5.6; Difference = 1.1 - Investment: 2015 = 2.2; 2016 = 2.1; Difference = -0.1 - Cash Primary Balance: 2015 = 2.8; 2016 = 3.6; Difference = 0.8 - Fiscal projections and targets: - Primary fiscal balance projected to reach close to 1 percent of GDP in 2016 and rise to 1½ percent by 2018 (predicated on full implementation of the package of measures legislated in 2015-16, estimated to yield 3¾ percent of GDP, entering into effect gradually during 2015-18). - Staff notes net effect of measures represents an improvement of only around 1½ percent of GDP in the primary balance by 2018, since some measures replace expiring measures or other one-offs. - Fiscal projections: primary surplus projected to increase by 0.7 percent of GDP in 2016 relative to 2015 on account of ongoing consolidation measures, partly offset by a recently legislated one-off bonus to retirees and expiration of one-off revenues related to bank liquidity support. - Primary surplus projected at 1 percent in 2017 and 1½ percent in 2018, assuming full financing of the rollout of the GMI in a budget-neutral way. - General Government Operations, 2015-18 (ESA 2010) (Percent of GDP) — selected lines: - Total Primary Revenue: 2015 = 47.8; 2016 = 49.3; 2017 = 47.5; 2018 = 46.3 - Total Primary Expenditure: 2015 = 47.6; 2016 = 48.4; 2017 = 46.5; 2018 = 44.8 - Primary Balance: 2015 = 0.2; 2016 = 0.9; 2017 = 1.0; 2018 = 1.5 ### Banking sector and private credit - Deposit flight and controls: - Banks lost 27 percent of deposits in the first half of 2015 and had to resort to capital controls and emergency liquidity assistance (ELA). - Since then, deposits have stabilized and banks have reduced central bank exposure. - Recapitalization and capital ratios: - The banking sector required a fresh round of recapitalization in 2015 of €15 billion, or 8½ percent of GDP. - This helped bring capital ratios from 8 percent Common Equity Tier 1 (CET1) in mid-2015 to around 18 percent at end-September 2016. - Non-performing loans and credit contraction: - NPLs reached 45 percent of total loans in 2016Q3, almost four times as high as in 2010. - Provisioning stands at 50 percent of total NPLs. - Credit continued to contract in 2016, bringing the total credit decline to 20 percent since 2010. ### Risks, scenarios, and outlook sensitivity - Main risks: - Significant downside risks remain, largely domestic, related to an insufficient or slow pace of implementation of the authorities’ reform agenda (incomplete financial and structural reforms, persistence of capital controls, lack of access to QE and absence of a solution to debt). - External risks include effects from the UK referendum on exports, FDI, and growth; intensification of refugee flows could add fiscal costs and increase political risks. - Lingering political uncertainty and specter of new elections have kept yields elevated; ECB has restored Greek banks’ eligibility for monetary policy operations but has not yet added Greece to its QE program. - Stylized downside scenario: - Under current policies with no further reform implementation, investment and TFP would be much lower, resulting in growth of only about 1 percent in the medium term and 0.3 percent in the long term. - Such a scenario could lead to renewed liquidity squeezes and, in the absence of further official support, could rekindle Grexit concerns. - Downside scenario contributions (selected): - Real GDP Growth: 2017 = 1.1; 2018 = 1.2; 2019 = 1.2; 2020 = 0.8; 2021 = 0.6 - Primary Balance (percent GDP) under downside scenario: 2017 = 0.5; 2018 = 0.6; 2019 = 0.4; 2020 = 0.4; 2021 = 0.4 - Breakdown (contributions) for 2017-2021 provided (Final Consumption, Gross Fixed Capital Formation, Foreign Balance). ### Policy discussions and recommendations - Broad policy themes agreed: - (i) Appropriateness of medium- and long-term fiscal targets and the policy mix. - (ii) Fiscal structural reforms to address tax evasion. - (iii) Financial sector reforms to repair bank and private sector balance sheets. - (iv) Growth-enhancing structural reforms. - Agreement that even with ambitious reforms, Greece will not restore sustainability without significant debt relief from European partners. - Fiscal strategy and targets: - Greece’s current fiscal strategy anchored in a medium-term primary surplus target of 3½ percent of GDP, but staff considers the policies underlying it unduly optimistic given pent-up spending demands. - Staff view: current package of fiscal reforms is expected to result in a primary surplus of around 1½ percent of GDP by 2018; this is appropriate given Greece’s track record and cyclical position. - Recommendation to avoid further pro-cyclical consolidation now; if a 3½ percent target is maintained, additional credible and high quality reforms will be required and should be implemented only once the output gap closes. - Rebalance policy mix toward growth-friendly and equitable policies: - Shift away from spending on entitlements and excessive taxation on narrow bases toward better-targeted social transfers, essential public services, and investment. - With a medium-term target of around 1.5 percent of GDP, rebalancing should be implemented as soon as possible and in a fiscally neutral manner. - If the target is higher than 1.5 percent of GDP, revenue-raising or expenditure-reducing measures should be implemented first (once the output gap closes), while growth-enhancing rebalancing measures would be postponed until fiscal space allows. - Tax reform recommendations: - Reduce marginal tax rates while broadening tax bases. - Example: aligning Greece’s personal income tax credit relative to the average wage to the euro-area average could create space to lower the marginal CIT rate by up to 10 percentage points and the PIT rates to as low as 15-20 percent, and, to the extent feasible, also the top VAT rate by up to 1 percentage point. - Lowering the tax credit while reducing PIT rates for lower incomes would make the burden more progressive. - Pension and spending rebalancing: - Rebalance spending away from pensions toward protection of vulnerable groups, health, transportation, and growth-enhancing public investment. - Consider applying the benefit formula introduced by the recent pension reform to current pensioners to reduce benefits for those with higher pensions and shorter working histories and increase benefits for some retirees with lower pensions and longer contribution periods. - Savings from rationalizing current pension spending could finance a well-designed social safety net and essential services and ensure fairer intergenerational burden-sharing. *Source: IMF staff assessment and projections as presented in the chapter.* ### 19. Social spending on welfare should be reformed as a matter of priority to ensure ### 19. Social spending on welfare should be reformed as a matter of priority to ensure ### Social protection and poverty - Social protection covers only 73 percent of the poorest 20 percent of the population in Greece, the lowest level in the euro area (the average is 87 percent). - Greece is one of two countries in the euro-area that has not provided a last resort poverty support to the working-age poor. - The new Guaranteed Minimum Income (GMI) scheme is expected to provide income equivalent to about 50 percent of the poverty threshold to vulnerable groups (in line with the euro area average) and should be fully implemented. - For the GMI to be effective and adequately financed: - Existing overlapping and poorly targeted social schemes should be eliminated. - pension savings could be used to finance part of the cost of the GMI. - A World Bank report notes the inadequacy of the pension system to stand in lieu of a well targeted social safety net; for example, only 12 percent of working-age households with children include a pensioner. ### Fiscal targets and tax policy stance - The authorities saw scope for lowering long-term fiscal targets below 3½ percent of GDP, but did not see a need to reduce pension spending or the income tax credit. - The authorities indicated a long-term primary surplus target of 2-2½ percent of GDP would be more realistic. - The authorities favored preserving a revenue-oriented consolidation to protect the middle classes and did not see the need to lower the income tax credit. - The authorities concurred on the importance of lowering the high corporate tax rate to support investment and jobs, but preferred to focus on improving tax compliance to broaden the tax base. - The authorities agreed reforming the welfare system is a priority but were not willing to consider further reductions of current pensions or a major overhaul of existing benefits to finance it; they envisaged achieving further savings through revenue over-performance, limited rationalization of existing social benefits, and a future spending review. ### Combating tax evasion - Tax evasion—especially among the self-employed and related to VAT—was a problem before the crisis and has put pressure on the budget and led to an unequal distribution of the tax burden. - Artavanis et al. estimate that close to half of self-employed income goes unreported and untaxed. For 2009, this implies €28 billion (near 12 percent of GDP) of unreported income, with significant implications for foregone revenue. - Recommendations to fight tax evasion: - Avoid amnesty schemes, which encourage moral hazard. - Fully operationalize an independent revenue agency that employs modern risk-based taxpayer compliance principles and is insulated from political interference. - Adopt a risk-based framework that prioritizes cases of new debt, large taxpayers, and high net-wealth individuals. - Strengthen use of enforcement tools against strategic defaulters, including AML tools to facilitate collection and information sharing with domestic and foreign tax authorities. ### Addressing large tax debt - The high and growing private sector debt to the state—of which a large part has become uncollectible—suggests the problem has reached endemic proportions and is hampering economic activity. - Recommendations for tax debt management: - Re-examine the system of fines to ensure deterrence without creating unsustainable tax debt burdens. - Assess tax debtors’ economic viability and develop restructuring modalities aligned with individual taxpayers’ ability to pay and integrated with a holistic framework that includes bank debt (in the context of the out-of-court debt restructuring framework). - For viable borrowers, consider selective write-downs of public claims if adequately tailored and designed to limit moral hazard. - For unviable debtors, write-downs may be needed after full use of liquidation and enforcement tools. ### Views and short-term measures - The authorities saw installment and other schemes as potentially helpful to boost revenues and considered recent efforts (including legislated revenue agency implementation and enforcement boosts) to be producing promising results. - The authorities were open to modalities of restructuring select public claims along with bank debt, while stressing the importance of minimizing moral hazard. - The authorities legislated a voluntary disclosure initiative and incentives for electronic payments. ### Banking sector viability and NPLs - Decisive action is needed to repair bank and private sector balance sheets to facilitate a return of sustainable credit growth; without reducing NPLs rapidly, banks will not be able to provide new lending to vibrant firms. - Key dimensions to tackle NPLs and incentivize debt restructuring: - Debt restructuring legal framework: - Ensure the recently legislated insolvency and debt-enforcement framework is fully operational, including establishing the insolvency administrator profession and facilitating auctions. - Revamp the out-of-court debt restructuring framework to allow restructuring of both private and public claims and provide for the possibility of debt write-downs in line with individual debtors’ capacities to pay. - Avoid across-the-board solutions that encourage moral hazard. - NPL supervisory framework: - The Bank of Greece, together with the Single Supervisory Mechanism (SSM), should fully operationalize a framework to set NPL targets and monitor banks’ strategies and performance, as done in Ireland and Cyprus. - Banks’ current strategies imply reduction in the aggregate NPL ratio to 48, 42, and 34 percent by 2017, 2018, and 2019, respectively; these back-loaded reductions may be inconsistent with ambitious investment and growth assumptions and are subject to downside risks. - The BoG and SSM should review banks’ strategies and targets to ensure they are credible and sufficiently ambitious, focusing on sustainable restructuring rather than short-term loan ever-greening and strengthening banks’ operational capacity to address NPLs. - Capitalization: - Upfront measures to reduce NPLs will likely be costly in terms of capital given the scale of the NPL problem and uncertainty about legal framework effectiveness. - The liberalization of NPL sales will provide a market test; to date there have not been successful sales, indicative of depressed market prices. - Authorities should ensure capital remains adequate over the medium term to facilitate rapid NPL reduction. ### Medium-term banking and market reforms - Policies should enable the provision of credit to the economy by channeling savings to productive uses. - Strengthen existing frameworks (e.g., credit register, real estate transactions register) and incentivize banks to adopt modern credit-risk assessment practices (e.g., credit scoring). - Private solutions should be preferred over public ones, with adequate consumer safeguards. - Bank governance must be strengthened: - Ensure lending and restructuring decisions are commercial and free from undue political interference. - Implement plans to reconstitute bank boards on the basis of revised eligibility criteria beyond SSM fit-and-proper standards to uproot linkages between banks, politicians, and vested interests. - Over the medium term, divest public ownership in banks to reputable international financial institutions to access international expertise and minimize contingent state liabilities. - Capital controls: - Capital controls introduced in June 2015 continue to hamper economic activity. - Their removal as soon as feasible is essential to support the economic recovery. - Authorities should aim to eliminate restrictions on domestic wire transfers and cash withdrawals and gradually facilitate cross-border transfers on the basis of a milestone-based roadmap tied to confidence trends, deposit return, funding normalization, and progress on NPL resolution. - The Bank of Greece, with ECB support, should ensure sufficient liquidity to cope with possible increased outflows, including by allowing slower ELA repayment. ### Authorities’ views on banking and capital controls - The authorities agreed on the need to tackle NPLs but viewed European financial rules (State Aid and BRRD) as constraining and preferred a more gradual pace of NPL reduction. - They favored automatic solutions for large numbers of small debtors given capacity constraints and considered current board selection rules overly restrictive with respect to broad expertise. - The authorities requested approval of retention of temporary exchange restrictions and intend to remove them as conditions allow; they agreed a milestone-based roadmap for liberalization could be helpful. ### Regaining competitiveness and labor market reforms - Greece requires a notable increase in productivity to become competitive within the euro-zone; without substantial acceleration in structural reforms Greece will be unable to narrow the gap in real per capita income relative to the euro area. - Preserve labor market gains and complement with additional reforms to attract investment and reduce unemployment. - Collective dismissals: - Greece ranks around average among OECD members on employment protection regarding collective dismissals, but has a much lower threshold relative to the EU Directive and a restrictive pre-approval requirement that has resulted in only two approvals for collective dismissals since the early 1980s. - The authorities should consider repealing administrative approval requirements and bringing the threshold for collective dismissals in line with the EU Directive and the European Court of Justice recommendations, while using EU funds for retraining programs. - Industrial action: - Greece’s rules on trade unions and strikes have not been reformed since the 1980s and may explain a large number of strikes. - Authorities should align industrial action frameworks with international best practice by setting appropriate quorum requirements for trade unions calling a strike and by allowing defensive lockouts by employers, preserving the right to strike while limiting costs associated with prospective strikes. *GREECE — INTERNATIONAL MONETARY FUND.* ### 31. At the same time, the implementation of product and service market reforms and ### cr1740 - 31. At the same time, the implementation of product and service market reforms and ### Product and service market reforms and privatizations - Implementation of reforms to open closed professions, remove obstacles to competition, and facilitate investment licensing has been "slow and uneven" due to "strong opposition from vested interests." - Consequences of weak implementation: - Exacerbated inequality and increased social resistance to reforms. - Constrained economic efficiency, limited benefits to consumers, and restricted potential for FDI flows. - Policy recommendations: - "Redouble efforts" to ensure full and rapid carry through of reforms from the legislative to the implementation stage. - Take "decisive steps to privatize state assets—including in the area of energy, where costs remain high due to extensive state interference—while avoiding fire sales." - Use privatizations to send a signal that “Greece is open for business,” to cement support for labor market reforms, and to achieve reform synergies. ### Institutional reforms - Three priority areas with large potential growth impact: - Improve efficiency of the judicial system, including addressing large backlogs that inhibit enforcement (e.g., insolvency and competition). - Intensify efforts to tackle corruption; Greece “continues to lag behind peers,” and recent World Bank indicators point to a deterioration since 2013 despite new legal and institutional frameworks. - Develop ways to promote innovation—spending R&D, patents, and university-industry collaboration—as fiscal space allows. - Authorities’ stance noted: - Sought to unwind previous labor market reforms and considered current pace of product market reform implementation adequate. - Argued 2011 collective bargaining reforms were not helpful and should be unwound to align more with the European social model. - Did not see the need for fundamental reform of collective dismissals and industrial action framework, citing a recent labor market review and an understanding from social partners. ### Debt sustainability and debt-relief needs - Staff DSA uses a gross financing needs (GFN) framework up to 2060, reflecting concessional, long-maturity official loans. - Staff baseline projections: - Debt projected to reach "around 160" percent of GDP by 2030. - GFN projected to reach "around 20 percent of GDP" by 2030, and become explosive thereafter. - Adverse dynamics driven by gradual replacement of concessional debt with market financing at much higher rates. - Conclusion: "Greece cannot be expected to grow out of its debt problem, even with full implementation of reforms." - Eurogroup commitment and required specificity: - Eurogroup committed to provide further debt relief—additional to prior generous flow relief—"upon the successful implementation of Greece’s adjustment program" to maintain GFN below "15 and 20 percent over the medium and long run." - For credibility, "further specificity" needed on type and scope of debt relief. - Measures needed to reduce GFN sufficiently include: ambitious extensions of grace and maturity periods, a full deferral of interest on European loans, and locking in of the interest rate on a significant amount of European loans. - If Greece’s medium term objective (MTO) is to be met over the long run, debt relief would need to be "even more extensive." - Restructuring scenario graphics referenced for GG Debt and GFN, 2014-2060 (no additional numerical detail beyond charts). ### Statistical issues - Quality of official statistics has "continued to improve" since ELSTAT creation in 2010; improvements in coverage, timeliness, and consistency with international standards. - Technical assistance from the IMF, Eurostat, and other member states has been important. - Remaining problems: - Revisions of national accounts and fiscal data are "frequent, significant, and consistently biased to the downside." - Continuing discrepancies in fiscal reporting remain. - Eurostat has validated most Greek fiscal data without reservation since 2010 but "did not validate Greece’s general government financial accounts, recently withdrawing existing data from publication." - Recommendation: Protect gains by defending ELSTAT’s credibility, guaranteeing its professional independence, addressing remaining reporting shortcomings, and respecting the "Commitment on Confidence in Statistics" endorsed by the government in 2012. ### Macroeconomic assessment and staff appraisal: progress, risks, and policy priorities - Progress: - Fiscal primary and external current account deficits have fallen from double digits to "around zero" over the last six years. - Greece achieved primary balance last year (excluding bank recapitalization costs). - Expected to attain a primary surplus of "around 1½ percent of GDP" in the medium and long term based on the fiscal package legislated in 2015-16. - Remaining vulnerabilities and long-run outlook: - Adjustment has "tested the social and political fabric" with unprecedented unemployment and poverty in the euro zone. - Sustainable growth elusive; risks "tilted firmly to the downside." - Even with ambitious reforms, unemployment is expected to "stay in the double digits until the middle of the century." - Key structural problems identified: - Vulnerable public finances: unaffordable pension spending financed by high tax rates on narrow bases and a deteriorating payment culture. - Impaired bank and private sector balance sheets. - Pervasive structural obstacles to investment and growth hampering competitiveness. - Unsustainable public debt burden despite large debt relief already received. - Fiscal policy guidance: - "Greece does not require further fiscal consolidation at this time beyond what is currently underway." - A medium-term primary surplus of "around 1½ percent of GDP" is appropriate; higher targets should be underpinned by credible reforms and implemented once the output gap closes. - Rebalance fiscal policy to bolster sustainability, growth, and equity via a budget-neutral shift: - Lower the generous income tax credit and eliminate remaining exemptions benefiting the rich. - Apply to current pensioners the new pension benefit formula introduced with recent pension reform. - Use savings to finance a more modern and comprehensive social safety net and to encourage private sector investment and employment. - Tax administration and evasion: - Pervasive evasion and an ineffective, politicized tax administration worsened fiscal fairness and collection. - Recommendations: - Refrain from untargeted installment or amnesty schemes. - Strengthen enforcement tools against those who can pay but do not. - Concentrate audits on large taxpayers and high-wealth individuals and mobilize the AML framework. - For taxpayers unable to fully pay, provide restructuring solutions based on capacity to pay. - Establish an independent revenue agency insulated from political interference. - Financial sector priorities: - Non-performing loans (NPLs) "close to 50 percent of total loans"—decisive reduction is essential. - Strengthen legal framework for debt restructuring, including out-of-court debt workouts of public and private claims. - Supervisory authorities should incentivize banks to set ambitious NPL-reduction targets and implement strategies prioritizing sustainable restructuring measures and NPL sales. - Ensure adequate bank capital to allow rapid NPL reduction, "even if costly." - Payment conditions and bank governance: - Payment restrictions and capital controls persist; authorities should relax controls "rapidly and predictably—on the basis of a milestone-based roadmap—while preserving financial stability by ensuring adequate bank liquidity, with support from the ECB." - Address governance concerns by completing board overhauls in line with new legislation in systemic and non-systemic banks. - Staff supports retention of three exchange restrictions temporarily for balance of payments reasons and non-discriminatorily. - Structural reform imperative: - "Greece needs more, not fewer, structural reforms" to be competitive inside the currency union. - Reversal of existing reforms would risk investment and job creation gains. - Authorities should "redouble their efforts to fully open up remaining closed professions, foster competition, facilitate investment and privatizations, and bring Greece’s collective-dismissals and industrial-action frameworks in line with international best practice." - Debt relief restated: - Even with full implementation of policies, Greece "cannot restore debt sustainability through its efforts alone and needs significant debt relief from its European partners." - Debt relief should be "calibrated on realistic assumptions about Greece's ability to generate sustained surpluses and long-term growth." ### Selected quantitative references preserved exactly from the source - "In Greece, only 33 to 25 percent (at the second ballot) of first level union members need to be represented in the decision to call a strike." - State Control index reference year: "State Control, 2013." - Non-performing loans: "close to 50 percent of total loans." - Primary surplus projection: "around 1½ percent of GDP" in the medium and long term. - VAT reform yield: "0.9 percent of GDP by 2018." - Income tax reform yield: "1 percent of GDP by 2018." - Debt and GFN by 2030 under staff baseline: "around 160 and 20 percent of GDP by 2030, respectively." - Eurogroup GFN targets: maintain GFN below "15 and 20 percent over the medium and long run." - DSA horizon: "up to 2060." - Timeline for next consultation: "expected to take place on a 12-month cycle." *International Monetary Fund staff report (selected excerpts).* ### 1.5 percent of GDP by 2018): The ### 1.5 percent of GDP by 2018): The ### Fiscal measures, 2015–2018 (Greece: Fiscal Measures, 2015-2018 1/) - Total: 0.6, 2.0, 3.5, 3.8 (Percent of GDP for 2015, 2016, 2017, 2018) - VAT: - VAT total: 0.2, 0.7, 0.9, 0.9 - VAT reform: 0.2, 0.6, 0.6, 0.6 - VAT increase in the top rate: 0.0, 0.1, 0.2, 0.2 - Income tax: - Income tax total: 0.2, 0.6, 1.0, 1.0 - Solidarity surcharge: 0.0, 0.2, 0.4, 0.6 - Broader base: 0.0, 0.1, 0.4, 0.2 - Rate increases (harmonized PIT rates, CIT): 0.0, 0.1, 0.2, 0.2 - Other income tax measures: 0.2, 0.1, 0.0, 0.0 - Pensions: - Pensions total: 0.2, 0.7, 1.2, 1.5 - Phasing out solidarity grant (EKAS): 0.0, 0.0, 0.3, 0.4 - Higher health contributions of retirees: 0.1, 0.3, 0.3, 0.3 - Reduced benefits in auxiliary and dividend funds: 0.0, 0.1, 0.2, 0.2 - Reform benefits of new retirees (new formula): 0.0, 0.0, 0.0, 0.2 - Curtail early retirement: 0.0, 0.0, 0.0, 0.1 - Other pension measures: 0.0, 0.1, 0.2, 0.3 - Other Parametric Measures: 0.0, 0.0, 0.0, 0.4, 0.5 (note: table shows "0.00.00.40.5" formatting) - Wage bill reform, non-wage benefits: 0.0, 0.0, 0.0, 0.1 - Reduction in subsidies: 0.0, 0.1, 0.1, 0.1 - Additional social spending: 0.0, -0.2, -0.1, -0.1 - Tax rate increases (other): 0.0, 0.1, 0.3, 0.3 Sources for the table: Ministry of Finance; and IMF staff estimates. 1/ Staff estimates of the packages of measures adopted by the authorities in 2015-16. ### Pension reform (detailed) - Reform measures implemented: - Curtailment of early retirement rights. - Introduction of a single less generous benefit formula for future pensioners. - Rationalization of current pensions by reducing the EKAS top up and auxiliary pensions above a threshold. - Contribution rates increased and harmonized, with some concessions to richer self-employed groups. - System characteristics highlighted: - The system retains a still relatively high guaranteed basic pension. - Low accrual rates remain, reducing incentives to work and contribute. ### Other fiscal measures (yield of 0.5 percent of GDP by 2018) - Measures to extend the public sector attrition rule. - Freeze of special wages. - Cuts in subsidies. - Increases in excises. - Offset: These measures have been partially offset by spending on humanitarian programs. ### Financial sector policies - NPL legal framework: - Amendments to personal and corporate insolvency. - Revamp of the Code of Civil Procedure (CCP). - Allowance for servicing and sales of NPLs. - Implementation gaps: restrictions on primary residences remain; establishment of the insolvency administrator profession has been delayed; secondary legislation remains pending. - Bank governance: - HFSF law amended to tighten the eligibility criteria for bank board members. ### Structural reforms and privatization - Fiscal institutional reforms: - A new law establishing an independent revenue agency was adopted; implementation will take time and is subject to risks. - Public sector wage grid reformed, providing only a marginal improvement. - New welfare system not yet rolled out by end-year, pending adequate fiscally-neutral financing. - Labor market reform: - Independent review of the labor market framework initiated. - Further reforms expected by end-2015 were postponed to late 2016. - Product and service markets: - Authorities addressed OECD competition assessment recommendations in some sectors (Toolkit I and a narrow set of Toolkit II). - Restrictions maintained in pharmacy ownership, Sunday trading, and the legal and engineering professions. - Action postponed in e-commerce, wholesale trade, media. - Privatization: - Three privatization deals signed: regional airports, Port of Pireaus, railway company Trainose, totaling €1.5 billion (0.8 percent of GDP). - Authorities are far from the goal of €50 billion (28 percent of 2016 GDP) in long-run privatization receipts. ### Revisions to the Greek statistics - Data revision patterns: - Greek statistical data have been subject to large and frequent revisions, complicating macroeconomic projections. - Negative real GDP growth revisions have been more frequent and larger in Greece than elsewhere in the euro-zone. - Downward revisions to annual growth outturns were made in more than one third of data releases in Greece versus less than a quarter in the rest of the euro zone during 2001-14. - Revisions were consistently biased on the downside (-0.6 percent on average versus 0.2 for the euro-area). - Since ELSTAT was established as an independent entity in 2010, the frequency of quarterly GDP growth revisions has subsided, while growth outturns became more uncertain due to the ongoing crisis. - Fiscal data revisions: - Over the last fifteen years, Greece’s annual fiscal outturns were revised downward 13 out of 15 times, with only one upward revision (in 2012) and no revision to 2014 data. - Average fiscal revision in Greece: -2.4 percent of GDP compared to close to -0.3 for the euro-area as a whole. - ESA accrual adjustments averaged 2.4 percent of GDP in Greece, almost three times the euro area average. *International Monetary Fund* ### Box 3. An Assessment of Greece’s Prospects for Convergence ### Box 3. An Assessment of Greece’s Prospects for Convergence ### Long-term baseline outlook - Since 2009, the gap between Greece’s real GDP per capita and the euro area average has increased by one quarter in relative terms. - Staff’s baseline long-term growth projection for Greece is 1 percent. - The euro-area growth is expected to average around 1.3 percent during 2022-40 (according to the 2015 EC Ageing Report). - Greece’s population is expected to shrink faster than in the euro area. - Under the baseline assumptions, the gap between Greece’s real GDP per capita and the euro area average will not close in the long-run. - As a result of the baseline projection, Greece’s standard of living will be only around 63 percent of the euro-area average by 2040 (still below the relative level in 2006 and similar to Malta’s now). ### Scenario sensitivity and downside risks - Projections are highly sensitive to assumptions; modest downside deviations of policy outcomes from projections could have dramatic consequences for convergence. - In staff’s downside scenario (see ¶11), the relative gap would rapidly widen: by 2040, Greece’s real GDP per capita would be 55 percent of the euro area level (slightly below where Portugal stands now), and the gap would continue to widen thereafter, signaling a potentially unsustainable situation. ### Upside potential and required reforms - Even in the most optimistic scenario, convergence will take substantial time. - If Greece’s GDP growth were higher on account of higher TFP growth, Greece could embark on a path toward convergence to the rest of the euro area. - In the most optimistic scenario, where Greece would move from among the lowest TFP growth rates in the euro zone to the highest, the annual rate of convergence would be 0.8 percentage points on average. - At that annual rate of convergence, it would take Greece close to half a century to match the average real GDP per capita of the euro area. - Implicit policy implication: achieving faster convergence depends on implementing a critical mass of structural reforms to increase productivity and growth. *Source: Box 3, "An Assessment of Greece’s Prospects for Convergence," cr1740.* ### 3. Tax Installment Scheme0.00.00.0 ### 3. Tax Installment Scheme0.00.00.0 ### Fiscal aggregates and cash balance (selected figures) - Transfers EU: 0.2 0.4 0.4 - Nontax revenue: 3.4 3.6 4.2 - One-off revenue: 1.2 1.5 0.4 - Revenue from concession and rights: 0.1 0.2 0.1 - Tax refunds: 3.6 3.1 3.3 - Investment budget: 4.7 4.8 4.4 - EU flows: 4.6 3.9 4.2 - Own revenues: 0.1 0.9 0.2 - Expenditure: 56.2 55.2 57.5 - Ordinary spending: 49.7 48.8 50.7 - Ordinary primary spending (includes guarantees to entities inside the general government): 44.1 43.7 46.1 - Remuneration and pensions: 18.5 18.4 18.1 - Insurance and healthcare: 14.5 14.7 15.7 - Operating and other expenditure: 5.7 5.4 5.7 - Earmarked revenue: 3.3 2.8 3.3 - Reserve: 0.0 0.0 0.4 - Guarantees to entities inside the general government: 0.4 1.6 2.1 - Guarantees to entities outside the general government: 0.1 0.0 0.2 - EFSF commitment fee: 0.1 0.2 0.1 - Spending on military procurement: 0.3 0.6 0.6 - Arrears clearance: 1.2 0.0 0.0 - Interest: 5.6 5.1 4.7 - Investment: 6.6 6.4 6.8 - Co-Financed: 5.9 5.7 6.0 - Own revenues: 0.7 0.7 0.8 - State overall balance: -5.7 -3.9 -4.8 - State primary balance: -0.2 1.2 -0.1 - General government primary cash balance (after measures): 0.6 4.4 3.2 - General government primary cash balance (excl. PIB related to EU funds, program definition): 3.2 6.2 ... - State primary spending (includes guarantees to entities inside the general government), program definition: 44.8 44.4 46.8 - Balance local governments: 0.2 0.6 0.4 - Balance social security funds: -0.5 0.4 -0.5 - Balance of extra-budgetary funds: 1.4 0.9 1.3 - Balance of state-owned enterprises (incl. guarantees): 1.0 1.4 2.0 ### Monetary and banking sector indicators (selected) - Aggregated balance sheet of MFIs: Total assets 646.1 602.5 517.6 501.2 545.7 536.3 510.0 492.9 487.0 (various period breaks shown in table) - Claims (Loans) on non MFIs: 275.9 250.1 238.9 234.2 225.6 222.3 221.7 218.3 218.5 - Domestic: 269.5 244.8 233.8 229.7 221.0 218.0 217.3 213.9 214.1 - General government: 22.3 17.4 15.9 17.7 16.7 15.5 15.6 15.4 16.2 - Other sectors: 247.2 227.5 217.9 212.0 204.3 202.5 201.7 198.6 197.9 - Broad money: 199.2 188.4 193.2 192.4 159.8 157.9 159.2 160.3 162.4 - Credit to the private sector (levels and growth): - Levels (various periods): 248.1 227.3 217.5 211.6 203.9 202.1 201.3 198.2 197.5 - Growth rates (annual percentage change): -3.1 -4.0 -3.9 -3.9 -3.6 -5.1 -3.3 -3.2 -3.1 - Memorandum items: - Capital to assets: 4.8 3.3 6.9 7.7 9.2 8.9 8.8 9.0 8.9 - Loans to customer deposits: 117.0 111.6 110.6 109.3 138.3 139.3 139.3 133.0 131.3 ### Monetary Financial Institutions (excl. BoG) projections and items - Total assets projections (2014–21): 397.8 386.0 363.8 369.7 379.7 392.7 399.9 405.6 - Deposits of non-MFIs: 186.6 140.2 143.7 161.0 169.6 180.4 186.8 192.4 - Eurosystem liquidity support (levels and shares): - Levels: 56.0 107.6 71.8 57.7 54.8 52.8 50.0 47.2 - Eurosystem liquidity support (percent of total assets): 14.1 27.9 19.7 15.6 14.4 13.4 12.5 11.6 - Memorandum: - Domestic private sector deposit growth (percent): -2.0 -22.9 2.1 12.6 5.3 6.5 3.4 2.9 - Private credit growth (percent change) 1/: -3.9 -3.6 -3.1 0.7 2.1 3.7 1.2 0.9 ### Financial soundness indicators (selected) - Regulatory capital to risk-weighted assets: 7.0 10.0 13.6 14.1 16.5 18.1 - Regulatory tier I capital to risk-weighted assets: 5.8 9.3 13.2 13.9 16.4 18.0 - Nonperforming loans to total gross loans: 16.0 24.5 31.9 33.8 36.8 37.0 - Bank provisions to nonperforming loans: 62.9 49.1 49.3 55.8 67.6 67.8 - Return on assets (after taxes): ... -1.3 -2.6 0.1 - Return on equity (after taxes): ... -14.1 -26.7 0.5 - Liquid assets to total assets: 32.3 32.1 29.9 28.9 29.7 28.5 - Household debt to GDP: 61.3 63.7 64.5 63.0 62.3 61.1 - Residential real estate loans to total loans: 22.8 25.5 26.4 26.8 27.6 27.6 - Assets (banks, billions of euros): 412.7 389.7 383.0 375.0 367.8 352.8 - Deposits (banks, billions of euros): 172.4 164.0 177.2 174.3 128.7 127.4 ### Risk Assessment Matrix — key risks, impacts, and recommended policy responses - Reform fatigue - Relative Likelihood and Transmission: High - Expected Impact of Realized: High — Unemployment remains high, while economic recovery fails to materialize; reforms stall; political pressure to reverse key fiscal and structural reforms. - Recommended Policy Response: Keep on track with implementation of reforms agreed under the ESM-supported program. - Weak recovery of domestic demand - Relative Likelihood and Transmission: High - Expected Impact of Realized: High — Debt overhang and the recent revenue-based fiscal consolidation package create a larger than expected drag on the economy. - Recommended Policy Response: Pursue a more growth friendly consolidation by tackling structural challenges on the expenditure side, lowering tax rates and broadening tax bases. - Economic fallout from political fragmentation - Relative Likelihood and Transmission: Medium/High - Expected Impact of Realized: Medium — Brexit; dislocation in the Middle East, Africa, and Europe leading to increased migrant flows; lower exports and renewed capital flight; further fiscal pressures and stress on social cohesion. - Recommended Policy Response: Diversify export destinations, and accelerate reforms to improve competitiveness. - Tighter or more volatile global financial conditions - Relative Likelihood and Transmission: Medium - Expected Impact of Realized: Medium — Investors withdraw from riskier assets; weaker confidence; renewed capital flight; lower exports. - Recommended Policy Response: Accelerate efforts to tackle the high level of NPLs and fully eliminate capital controls, but with caution in order to preserve financial stability. - Structurally weak growth in the Euro Area - Relative Likelihood and Transmission: High - Expected Impact of Realized: Medium — Weak demand and low productivity growth leading to lower potential growth; adverse impact from lower exports to Europe and weaker confidence. - Recommended Policy Response: Diversify export destinations, accelerate reforms to improve competitiveness, and rebalance spending towards vulnerable groups, health and investment—also making use of EU funds. ### External sector assessment — findings and policy implications - Recent evolution and diagnosis - After reaching deficits of up to 15 percent of GDP in 2007-08, Greece’s current account achieved balance in 2015. - The external position is somewhat weaker than the level consistent with medium-term fundamentals and desirable policy settings, suggesting the need for further exchange rate adjustment of about 5-10 percent. - The decline in external imbalances is due chiefly to lower investment, while savings remain on a downward trajectory. - Drivers of adjustment - The contraction in imports was the main driver behind the closing of the current account deficit, with goods exports and tourism contributing to a lesser degree. - Greece’s trade deficit was 0.2 percent of GDP in 2015—the lowest since it joined the Eurozone. - Improvement in goods exports is associated with higher volume of oil exports and a recent recovery in non-oil exports; services benefited from very strong tourism receipts while transportation receipts declined. - Competitiveness and exchange rate - Goods volumes have increased robustly, but export values have lagged peers due to lower prices (particularly oil) rather than volumes; Greece has been losing market share relative to peers. - Unit labor costs declined by some 5 percent since 2010, less than in Spain and Portugal; wages compressed by close to 30 percent rather than productivity gains. - ULC-based REER has depreciated by some 18 percent since 2010. CPI-based REER declined by slightly less than 10 percent; adjusting for tax changes (including a 4 percentage point increase in the statutory VAT rate) the CPI-based REER shows a decline close to 15 percent. - Methodological assessments of REER valuation (EBA approaches) - Current account approach: - Cyclically adjusted current account: -2.7 percent of GDP. - Current account consistent with fundamentals and desirable policies: -1.2 percent of GDP. - Closing the gap implies a real exchange rate adjustment of about 6 percent. - Model fit concerns: regression residual of –3.8 percent of GDP. - Real exchange rate index approach: - Suggests a REER overvaluation of some 6 percent, subject to a regression residual of broadly the same magnitude. - Real exchange rate level approach: - Suggests overvaluation of some 11 percent and a residual of about the same magnitude. - External sustainability approach: - Benchmark set at some -63 percent of GDP for net foreign assets. - Greece’s net international investment position broadly stabilized at around 135 percent of GDP in 2015, with liabilities of 274 percent of GDP mostly reflecting public external debt. - Suggests that a current account close to balance would gradually improve the international investment position to sustainable levels. - Policy recommendations - Labor and product market reforms are needed to improve competitiveness. - Shift the fiscal consolidation strategy from raising tax rates to lowering spending and broadening the tax base to support growth and savings. - Diversify export destinations and accelerate reforms to improve competitiveness. *Italic: Source — cr1740 - 3. Tax Installment Scheme0.00.00.0 (PDF chapter/section).* ### 6. Staff’s assessment is that a competitiveness gap remains, requiring some 5-10 ### 6. Staff’s assessment is that a competitiveness gap remains, requiring some 5-10 ### Competitiveness assessment - Staff’s assessment: a competitiveness gap remains, requiring some 5-10 percent in further real exchange rate adjustment. - Results of EBA methodological approaches: three of the four approaches covered in the Fund’s EBA analysis consistently point to some modest remaining over-valuation; results might overstate over-valuation given increases in consumption taxes, and to the extent that the output gap is smaller than envisaged. - Despite significant uncertainty, staff’s judgment is broadly in line with the finding that some modest overvaluation of about 5-10 percent remains. ### Current account and REER gaps (2016) - Actual Current Account: 0 - Cyclically Adjusted Current Account: -2.7 - Current Account Norm: -1.2 - Current Account Gap: -1.5 - Exchange Rate Gap (+ is overvaluation): 6.0, 5.9, 10.6, -1.7 - Note: Based on preliminary October 2016 EBA results. ### Public sector DSA — headline findings - Under staff’s baseline: - Debt projected to reach 170 percent of GDP by 2020, and 164 percent by 2022, then rise thereafter to around 275 percent of GDP by 2060. - Gross financing needs (GFN) cross the 15 percent-of-GDP threshold by 2024 and the 20 percent threshold by 2031, reaching around 33 percent by 2040 and around 62 percent of GDP by 2060. - Under the European institutions’ June 2016 DSA baseline: - Debt projected to decline to under 120 percent of GDP by 2030 and slightly over 100 percent by 2040. - GFN projected to remain under 10 percent of GDP until 2023 and under 20 percent until 2040, rising to 24 percent by 2060. - Staff conclusion: Greece’s public debt is highly unsustainable under staff’s baseline; even with full implementation of ESM program policies, public debt and financing needs become explosive in the long run without substantial debt relief. ### Objectives for a debt-restructuring solution (GFN framework) - Maintain gross financing needs well within the 15-20 percent of GDP thresholds defined in the MAC DSA for emerging-advanced economies throughout the projection period. - Ensure that debt is on a sustained downward path (temporary flow relief without a declining debt path over the projection horizon would not be consistent with sustainability). ### Debt relief and restructuring measures considered by staff - Short-term Eurogroup package (before end of ESM program) includes: - Smoothening the EFSF repayment profile under the current maximum weighted average maturity. - Using a more diversified EFSF/ESM funding strategy to reduce interest rate risk. - Waiving the step-up interest rate margin on the debt buy-back tranche of the 2nd Greek program for 2017. - Medium- and long-run measures contemplated by Eurogroup (subject to implementation and not all well-defined): - Abolishing the step-up margin for 2018 onwards. - Restoring the transfer of ANFA and SMP profits. - Partially repaying existing official loans to Greece by using unused ESM resources. - Implementing a targeted EFSF re-profiling. - Staff’s more extensive restructuring modality (to restore sustainability under staff’s baseline) could include: - Grace extensions until 2040: extension of grace periods ranging from 6 years on ESM loans to 17 and 20 years for EFSF and GLF loans, respectively. - Maturity extensions until 2070: maturity extensions of 30 years for GLF loans, up to 14 years for EFSF loans, and 10 years for ESM loans. - Interest deferrals until 2040: deferral of interest payments on all GLF, EFSF and ESM loans until 2040, amortized in equal instalments until 2070 (including interest on interest). - Abolishing step-up interest margin on the EFSF buyback tranche from 2017 onwards and returning SMP/ANFA profits during the years following the ESM program. - Locking in the interest rate on all EFSF and ESM loans: apply to loans amounting to around €200 billion, 113 percent of 2016 GDP, fixed at low levels for 30 years, not exceeding 1½ percent. - Additional option to achieve SGP compliance: defer EFSF interest payments to 2060 rather than 2040 to lower Greece’s interest burden. ### Robustness scenarios under staff’s restructuring scenario - Upside scenario: - Stronger-than-expected policies, resulting in somewhat higher nominal growth (3.2 percent) and no additional bank recapitalization needs, combined with staff’s restructuring, would lower GFNs and lead to faster reduction in debt. - Illustrates importance of structural and financial sector reforms to enhance productivity growth and strengthen the banking sector. - Downside scenario: - Weaker policies resulting in a lower primary balance (stabilizing at 1 percent of GDP) would make debt sustainability no longer ensured even under staff’s restructuring proposal; debt and GFN dynamics become unstable and rise over time. - To ensure sustainability under this downside scenario by staff’s criteria, interest on both EFSF and ESM loans would need to be reduced to 0.25 for 30 years. - Staff notes that its assumption of a primary surplus of 1.5 percent for many decades is optimistic by most metrics; the downside scenario illustrates magnitude of risks. ### Key assumptions in staff’s baseline DSA (Box 1) - Primary balance: staff assumes a primary surplus of 1.5 percent of GDP starting in 2018 and throughout the long-term. - Growth: starting in 2022 staff expects nominal growth of some 2.8 percent, reflecting lower real growth and lower inflation. - Bank recapitalization needs: a buffer of around €10 billion (5½ percent of 2016 GDP) is set aside for potential additional bank support needs. - Privatization proceeds: staff projects €3 billion (1½ percent of GDP) by 2018, rising to €5 billion (2½ percent of 2018 GDP) thereafter; staff does not expect material proceeds from bank privatization. - Additional financing needs: arrears clearance and deposit buffers to reach medium-term coverage of eight-months of forward-looking financing needs (€8 billion, 4½ percent of 2016 GDP); repo operations assumed to reach €10 billion (5½ percent of GDP) at end-2016 and €6.5 billion (3¼-3½ percent of GDP) going forward. - Official interest rates: weighted average of around 1 percent in the short run; long-run risk-free rate assumed at 3.8 percent. - Market interest rates on re-entry: Greece assumed to access markets by end-program at an initial rate of 6 percent; regression estimates range between 6 and 13 percent. Evolution: rate falls/rises by four basis points for every one percentage point decline/increase in debt-to-GDP ratio, with a cap of 6 percent and a floor of 4½ percent. ### Comparison with European institutions’ DSA assumptions (Box 2) - European baseline is significantly more optimistic due to more sanguine assumptions on primary balance, nominal growth, privatization, and bank recap needs. - Principal differences and impacts: - Primary balance: European assumption of a primary surplus target of 3½ percent of GDP reached by 2018 and maintained for a decade, declining to 3.2 percent by 2030 and converging to 1½ percent only by 2040 — key driver of divergence. - Growth: European projections of nominal GDP growth rates reaching some 3.3 percent by 2030 and staying there (about 0.5 percentage points higher than staff’s). - Privatization and bank recap needs: European institutions assume close to €15 billion (8½ percent of 2016 GDP) privatization revenues over the projection horizon, with close to €3 billion (1¾ percent of 2016 GDP) from sale of state’s stake in banks and no additional costs from future bank recap needs. - Interest rates: European institutions assume market interest rate immediately after the program around 5 percent (about 100 basis points lower risk premium than staff), and lower long-run official rates of around 3-3.3 percent from 2030 onwards. - Net effect: Under European assumptions, debt and GFN needs are significantly lower; European debt restructuring proposals fall short of what staff judges necessary under staff’s baseline. ### External sector DSA - The document proceeds to an External Sector DSA in Section II (not summarized here beyond the heading in the supplied content). *Source: IMF staff estimates and analysis as presented in the provided content.* ### 7. External debt increased prior to the crisis but has since stabilized in nominal terms. ### 7. External debt increased prior to the crisis but has since stabilized in nominal terms. ### Historical buildup and composition - Greece’s stock of external debt rose from 97 percent of GDP in 2004 to 185 percent of GDP in 2010, as external savings financed rapidly growing domestic demand and large current account deficits. - The public sector accounted for the bulk of external debt throughout the period; banks also expanded their borrowing from abroad. - Since the onset of the program in 2010, debt has remained broadly constant in nominal terms, while rising in GDP terms as activity contracted. - By 2015 the composition of liabilities shifted away from banks and towards the central bank amid deposit outflows and emergency liquidity assistance to Greek banks. - As of 2015, about 60 percent of total debt is accounted for by the general government and 26 percent by the monetary authorities. ### Relative position and macroeconomic implications - At some 250 percent of GDP, external debt remains relatively large compared with most European economies. - Greece’s net international investment position (NIIP) is -135 percent of GDP, the second weakest in Europe after Ireland. - The weak NIIP constrains available external savings and means domestic savings must be mobilized to allow more room for investment. ### Baseline projections - External debt is projected to decline gradually to about 211 percent of GDP in 2022. - This improvement is driven mostly by the projected recovery in growth and inflation and is supported by a positive non-interest current account (the overall current account is projected to remain near balance over the medium term). - Higher FDI inflows, currently low compared to peers, are identified as an important source of non-debt-creating financing. ### Stress tests and shock scenarios (impact on debt dynamics) - Interest rate shock: - A 100 bps interest rate shock would worsen the income account and result in a 2021 debt ratio 11 percentage points above the baseline. - Growth shock: - A decline in average growth by 2.3 percentage points would still see debt decline in absolute terms, but the ratio would end 2021 some 27 percent higher than the baseline. - Larger current account deficits: - Slow competitiveness improvements or a terms-of-trade shock that worsen the current account would leave the debt ratio on a downward path but 15 percentage points higher than the baseline by 2021. - Combined shock: - A combined shock involving higher interest rates, lower growth and a smaller current account would raise the debt ratio to 241 percent of GDP in 2021, 27 percent of GDP higher than in the baseline. ### Key statistics (selected) - External debt: doubled from 97 percent of GDP (2004) to 185 percent of GDP (2010). - Composition (2015): general government ~60 percent of total debt; monetary authorities ~26 percent of total debt. - External debt level noted as "some 250 percent of GDP" in the assessment. - NIIP: -135 percent of GDP (second weakest in Europe). - Projected external debt: about 211 percent of GDP in 2022. - Interest rate shock magnitude referenced: 100 bps -> 2021 debt ratio +11 percentage points vs baseline. - Growth shock magnitude referenced: -2.3 percentage points -> 2021 debt ratio +27 percent vs baseline. - Current account shock outcome: +15 percentage points vs baseline by 2021. - Combined shock outcome: debt ratio 241 percent of GDP in 2021 (27 percent of GDP higher than baseline). *Source: IMF staff estimates.* ### Annex IV. The Greek Capital Controls Framework as Applied ### Annex IV. The Greek Capital Controls Framework as Applied to Current International Transactions ### Legal and institutional basis - Framework components: - Law 4350/2015 - Legislative Acts No. 65 and 84, as amended - A number of ministerial decrees - Decisions by the Bank Transactions Approval Committee (BTAC) - Initial imposition date: July 18, 2015; measures have been periodically relaxed, most recently in August 2016. - Approval architecture: - Three-tier system: the BTAC, subcommittees at bank level, and bank branches. - Banks: do not have discretionary powers; verify consistency with legal framework and routinely approve requests subject to BTAC limits. - BTAC: exercises discretion and “does not automatically approve all bona fide transfer requests,” taking into account absolute limits and priorities such as the “public good.” ### Approval tiers, transaction thresholds, and quantitative limits - Weekly aggregate transfer limits for current payments related to normal business activities: - EUR 112 million for the systemic banks - EUR 480 million for the entire banking system - Branch-level approvals: - Payments up to EUR 10,000 may be approved by banks’ branches. - Bank subcommittee approvals: - Payments between EUR 10,000 and 350,000 per day per customer are subject to approval by the banks’ subcommittees. - BTAC approvals: - Payments above EUR 350,000 and interbank transactions irrespective of the amount must be approved by the BTAC. - Import payments: - Import payments above EUR 30,000 may not exceed 140 percent of the importer’s highest monthly amount of import payments in the 2 previous years. - Transfers abroad that are subject to discretionary BTAC approval: - Amortization of loans of moderate amounts - Income from investments including dividends and interest payments of non-financial entities to non-residents ### Personal transfers, travel, tuition, medical, and cash withdrawal rules - Tuition and medical treatment: - Tuition and the cost of medical treatment are freely transferrable to the service provider. - Students’ living expenses abroad: - Individuals may transfer EUR 5,000 per quarter for students’ living expenses abroad. - EUR 8,000 if the payment is directly to the landlord or campus dorm. - Medical treatment abroad: - For expenses related to medical treatment abroad, individuals may withdraw EUR 2,000 a month. - Travelers’ cash allowance: - Travelers can take EUR 2,000 in cash with them abroad per trip. - Monthly remittances without documentary proof: - Individuals and corporates may remit EUR 1,000 per month without documentary proof up to a monthly limit of EUR80 97million allocated by the BTAC for each bank and payment institution. - Card payments abroad and internet purchases: - Credit and debit cards can be used for payments abroad up to a weekly limit of EUR 50 million for all banks (on top of limits on cash withdrawals). - There is also a weekly limit for each bank and certain merchandise and services may not be purchased through the internet. - Cash withdrawal limit in Greece: - EUR 840 every two weeks per depositor per bank. - Cash deposits are exempt from the withdrawal limit. - Transfers from abroad: - Transfers from abroad may be re-exported in their totality or can by withdrawn up to a limit of 30% per month. ### Operational impact and costs - The capital controls framework increases the cost of current international transactions: - Approval and documentation requirements force depositors to use more expensive payment methods instead of inexpensive electronic bank transfers, resulting in a significant increase in the direct cost of international transfers. - Fees are commercially determined by the banks and not set by the authorities. - Producing and processing required documents increases expenses for both banks and their clients. ### Functional implications and exceptions - The BTAC maintains discretion to deny approvals even for bona fide requests based on absolute limits and priorities such as the “public good.” - Banks’ subcommittees and branches have specified non-discretionary roles tied to the statutory thresholds; they primarily verify legal consistency and implement BTAC-imposed limits. *Source: Annex IV. The Greek Capital Controls Framework as Applied (cr1740).* ### 0.8 percent in 2016. Economic activity is being driven by private consumption and gross ### cr1740 - 0.8 percent in 2016. Economic activity is being driven by private consumption and gross ### Economic activity and composition - Real GDP growth: "0.8 percent in 2016." - Economic activity is being driven by private consumption and gross fixed capital formation. - Private consumption stands at "70 percent of GDP." - Investment stands at "11 percent of GDP." - Real GDP is now "more than a quarter lower than its pre-crisis levels." ### External sector, trade, tourism, and openness - Real exports of goods increased by "7.6 percent" during the first nine months of 2016. - Real receipts from tourism decreased by "5.2 percent" during the first nine months of 2016. - Receipts from shipping continued to decline in the same period. - Openness has improved substantially; Greek exporters have managed to maintain, if not increase, their shares in world exports. - The share of exports increased from "19 percent of GDP in 2009 to 32 percent today." - An elimination of the external deficit, which exceeded "15 percent of GDP in 2008," has been achieved. ### Industrial production and employment - Industrial Production increased "2.3 percent y-o-y" in January-November 2016. - Manufacturing production increased "4.6 percent y-o-y" in the same period. - Employment in the private sector registered a positive cumulative net balance of "136,260 new jobs in 2016," exceeding net inflows in 2015 by "36,560 new jobs." - Dependent employment stock in the private sector registered a "5.1 percent y-o-y increase in 2016." - Flexible forms of employment accounted for "54.7 percent of new hirings" in 2016. ### Prices and inflation - Deflationary pressures are still present but recently overshadowed by indirect taxation increases. - The recent increase in the special consumption tax on heating oil in October 2016 has already added further upward pressure on HICP inflation. ### Financial indicators and investor sentiment - Financial indicators (sovereign bond yields, yields on bonds issued by non-financial corporations and share prices) were volatile during 2016 due to investor concerns about the program review process and economic prospects. - Decrease in volatility in international financial markets during July-October 2016 led to a significant decline in volatility of Greek bond and equity prices. - Sovereign yields fell after the conclusion of the first review. - Investor attention is focusing on prospects for concluding the second review. ### Banking sector and non-performing loans (NPLs) - An effective management of the high stock of non-performing loans is already underway and "will bear fruit in 2017." - Expected channels of positive impact from NPL reduction: - increasing bank loan supply; and - restructuring production. - The decrease in NPLs would reduce banks’ financial risk, lower funding costs, boost capital adequacy, increase loan supply, and lead to a decline in borrowing rates for businesses and households. - A halting of the increase (and even a slight decrease) in the volume of non-performing loans occurred in the second and third quarters of 2016, for the first time since 2014. - Measures to deal with NPLs have been legislated. ### Fiscal policy, outcomes, and management - The 2015 primary fiscal outcome (program definition) recorded a surplus of "0.25 percent of GDP," outperforming the program target of "-0.25 percent of GDP." - Available data for 2016 indicate the outcome will outperform the program’s target for a primary balance of "0.5 percent of GDP" by a large margin (the balance will be probably around "2 percent"). - IMF staff projected a primary fiscal deficit of "-0.5 percent of GDP in 2016" (noting divergence with observed outcomes). - IMF staff projections cited primary surplus rising to "1.5 percent in 2018" with current legislated measures; Greek authorities argue preliminary indications show the primary surplus for 2016 will be in the territory of "2 percent of GDP" and question keeping 2018 projections at "1.5 percent." ### Memorandum of Understanding (MoU) and debt relief measures - The MoU signed on 19 August 2015 envisages ESM financing of up to "€86 bn" over the three years 2015-18. - The MoU emphasizes four pillars: (i) restoration of fiscal sustainability; (ii) safeguarding of financial stability; (iii) implementation of structural policies to enhance competitiveness and growth; and (iv) modernization of the state and public administration. - Legislation on 8 and 22 May 2016 addressed pension and income tax reform, indirect taxation, the NPL strategy, privatizations and an automatic contingent fiscal correction mechanism. - The Eurogroup on 24 May 2016 agreed to a package of short-term debt measures, allowing the Board of Directors of the ESM to authorize the second tranche of "€10.3 bn" of ESM financial assistance. - On 23 January 2017, the ESM and EFSF Boards adopted rules implementing short-term debt relief measures. - The ESM estimated full implementation of short-term debt relief measures should lead to a cumulative reduction of Greece’s debt-to-GDP ratio of "around 20 percentage points (pps) until 2060," while net financing needs are expected to decrease by "5 pps in that time." - The Eurogroup of 26 January 2017 welcomed faster than expected recovery and strong fiscal dynamics and encouraged conclusion of the second review. ### Growth projections and risks - Greek authorities expect positive growth rates in 2017 and 2018 "of the order of 2.5–3.0 percent" supported by expected amelioration of credit conditions and economic sentiment. - Risks to the projections (downside): - delays in the conclusion of the second review of the program; - impact of increased taxation on economic activity; - reform implementation shortfalls; - renewed pressures from the refugee crisis; - increased uncertainty associated with forthcoming elections in several EU countries; - the rise of protectionism worldwide; and - a slowdown in global trade. - Upside risk: inclusion of Greek sovereign debt in the ECB’s quantitative easing program (QE). ### Longer-term rebalancing and macro stock imbalances - Flow imbalances have been eliminated with both the current account and fiscal balances being in equilibrium. - The reduction of flow imbalances has come at a high cost. - General government debt to GDP ratio: "126.7 percent" in 2009; it reached "177.4 percent at end-2015." - Indebtedness of the private sector has generated significant NPLs hampering banks’ ability to support recovery. ### Structural reforms and expected effects - Most structural reforms agreed have already been legislated. - Reforms implemented since 2015 are expected over the long term to boost growth potential through faster productivity and employment growth. - According to the OECD, reforms implemented in 2010-2016, combined with those to be implemented as part of the current program, are expected, ceteris paribus, to increase real GDP by "13 percent over the next ten years." - Bank of Greece analysis: structural labor market reforms leading to a permanent reduction of "10 percent in employers’ wage costs" are expected, over a 10-year horizon, to result in increases of "4.5 percent in real GDP," "3 percent in employment" and "4.5 percent in private investment." ### Achievements of the 2012-16 program (authorities’ view) - Unprecedented fiscal consolidation: over 2013-16 the primary deficit was eliminated and general government primary surpluses were recorded for the first time since 2001. - Improvement in the “structural” primary budget balance by "more than 17 percentage points of potential GDP between 2009 and 2016." - Recouping of cumulative loss in labor cost competitiveness vis-à-vis trading partners between 2000 and 2009. - Recapitalization and restructuring of the banking system, enabling it to withstand the crisis and flight of deposits and putting necessary conditions in place to address NPLs. - Structural reforms in labor market, product markets and public administration. - A rebound of the economy in the second and third quarters of 2016, making a positive growth rate for the year as a whole reasonable to anticipate. ### Political economy and implementation challenges - Stabilization policies incurred a high economic and social cost: deepening recession, job and income losses; cost was higher in Greece than typical estimates elsewhere. - Factors limiting program outcomes include shortcomings in program design, misjudgment of consequences, and frequent course changes due to absence of a unifying consensus. - In August 2015, "222 out of 300 members of parliament" voted Yes for implementation of the MoU 2015-18. ### Authorities’ requests and stance - Greek authorities call on the IMF to take stock of achievements and the restrictions and limitations stemming from a 7-year ongoing crisis and to stay engaged to avoid jeopardizing achievements. - Authorities are ready to proceed to the closing of the second review with the Institutions in order to sustain growth, participate in ECB’s QE, lift capital controls and move toward sustainable growth. ### Statement by the Minister of Finance Mr Euclid Tsakalotos (summarized) - The Greek economy is moving from prolonged crisis to solid recovery with first signs of robust growth, declining unemployment and increasing confidence. - The Government has made significant progress implementing an ambitious and comprehensive reform programme. - Recently agreed short-term debt relief measures will contribute significantly to reducing gross-financing needs and making debt sustainable. - The Staff Report for the 2016 Article IV consultation is welcomed but is criticized for under-representing reform effort, not adequately accounting for reforms’ effects in the Debt Sustainability Analysis (DSA), and for insufficiently revising growth and fiscal projections in light of recent fiscal over-performance. - The Minister contests the reduction in the DSA steady state growth from "1.25 percent to 1 percent of GDP" since May 2016 and argues further that projected primary surpluses for 2018 should be revised upward in light of 2015 and 2016 outcomes. *Source: cr1740 - 0.8 percent in 2016. Economic activity is being driven by private consumption and gross* ### 10.8 million, significantly less than the average household number. Similarly, the proposed ### cr1740 - 10.8 million, significantly less than the average household number. Similarly, the proposed ### Gaps in policy-mix analysis and redistribution proposals - Re-balancing proposals do not account for taxation in income from other sources or for effects on the tax wedge, which will have a negative effect on competitiveness. - Pension analysis omissions: - The report’s analysis does not include the effects of the recent pension reform and consolidation of pension funds. - Data for Greece on state-transfers to the pension system include: - the “official-statutory” contributions of the state (as part of the three-parties’ contribution scheme), - the contribution of the state as employer of public servants, - the expenditure of certain welfare benefits. - For other Member-States, state-transfers have been defined as the difference between the total amount of expenditures and contributions, resulting in completely incomparable figures. - The analysis does not adjust for the large GDP reduction and the unprecedented unemployment, which results in reduced contributions. - Conclusion: A more thorough analysis of the economic, social and distributional impact is warranted to make re-balancing proposals credible. ### Debt Sustainability Analysis (DSA) — criticized assumptions - The DSA results rely on overly-pessimistic assumptions, including: - long-term growth reduction from 1.25 percent to 1 percent of GDP despite numerous reforms, - decrease of steady state inflation to 1.9 percent instead of the 2 percent ECB target, - increase of interest rates for external financing, - fiscal surpluses at 1.5 percent in the medium and long-term, - partial incorporation of short-term debt relief measures. - Combined effect: These factors contribute to extremely negative results for debt sustainability. - Overall assessment: Recommendations in the report and assumptions in the DSA analysis are not in line with the most recent, evidence-based and pragmatic analysis of the Greek economy. ### Statement by the Governor of the Bank of Greece, Mr Yannis Stournaras — overview - Attribution: Mr Stournaras is the Governor of the Bank of Greece, since June 2014. He was Finance Minister from July 2012 until June 2014. - General view: The Staff Report for the 2016 Article IV Consultation for Greece is a useful account of developments since 2010 and acknowledges impressive fiscal and current account adjustment, but contains findings the Governor disagrees with regarding: - adjustment of components of aggregate demand (e.g., exports), - supply-side shifts from non-tradable to tradable sectors, - progress on the financial sector, - macroeconomic and fiscal projections, - future financial developments including banks’ further recapitalization needs. ### Specific fiscal and growth disagreements - Fiscal performance: - General government primary surplus of 2016 is likely to reach 2 percent of GDP compared to a target of 0.5 percent of GDP. - The Fund’s fiscal projections raise questions given the above outturn. - Growth projections: - Despite better than expected 2016 GDP outcome, the report contains an unexplained 0.25 percent reduction in the long term growth projection compared to the previous Article IV Report. - Concern: Unclear why long term TFP growth in Greece lags behind the rest of the euro area given upside from structural reforms and catching up opportunities. ### Banking sector and capital needs - The Fund assumes banks will need a further €10 billion capital buffer without explanation. - Supervisory assessment (ECB, SSM, Bank of Greece) reports current CET1 ratio is 18 percent. - Bank of Greece estimates: Achievement of NPLs medium term targets will further increase the CET1 ratio substantially. - Conclusion: The Fund’s long term projections appear to incorporate substantial downside risks rather than representing a baseline scenario. ### On the Ex-Post Evaluation of Exceptional Access under the 2012 Extended Arrangement - Positive notes: The report contains useful information, conclusions and lessons such as: - need for less severe financing constraints, - upfront debt relief measures, - stronger ownership of the programme by the authorities, - better cooperation and coordination among institutions, - a smaller number of milestones when reviewing programme implementation. - Criticism: The evaluation, in its present form, is seen as unfair to history and criticizes others while not sufficiently addressing the IMF’s role. - Governor Stournaras’ retrospective points from his tenure (Finance Minister July 2012–June 2014): - (a) The IMF pressed for more parametric fiscal policy (austerity) measures ignoring its own research on fiscal multipliers and tax buoyancy, consistently underestimating progress in reducing the primary general government deficit. - (b) The IMF is partly responsible for delays in closing the 2013 review by asking for additional parametric fiscal measures despite 2013 fiscal developments indicating a large primary surplus over-performance. - (c) The IMF insisted on additional bank recapitalization, disregarding authorities, Bank of Greece and ECB views, and it overestimated capital needs while underestimating the economic impact of excess bank capital. - (d) The IMF consistently played down progress on structural reforms, ignoring assessments such as OECD’s "Going for Growth" reports. - On programme design description: Repeated references that the authorities preferred an upfront-loaded fiscal programme are misleading; financing constraints and lack of upfront debt relief determined fiscal targets rather than authorities’ preferences. *Source: excerpt from the Staff Report and associated statements contained in the provided PDF content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1740.pdf_