## Ex-Post Evaluation of the four-year exceptional access EFF with Greece (cr1744) ## Source details **Canonical URL:** [Ex-Post Evaluation of the four-year exceptional access EFF with Greece (cr1744)](https://www.imf.org/-/media/files/publications/cr/2017/cr1744.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1744.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1744.pdf.json) --- ### Background and program design - Fund committed €28 billion under the extended arrangement (SDR 23.8 billion or 2,159 percent of Greece’s quota at the time) after cancellation of the 2010–12 SBA. - EU partners committed €144.7 billion. - Private sector debt relief of €106 billion completed at program outset. - Fund disbursed SDR 10.2 billion; only five out of 16 program reviews were completed; arrangement cancelled in January 2016. - The EFF was exceptional access and required an ex-post evaluation to: - review performance against original program objectives; - discuss whether program design was appropriate; - assess whether program modalities were consistent with Fund policies. ### Program objectives, macro framework, and trade-offs - Broad objectives: restore competitiveness and growth, fiscal sustainability, and financial stability. - Fiscal target: a 7 percent of GDP fiscal adjustment, based largely on sustainable, equitable measures and a broad range of structural reforms. - Competitiveness target: reduce unit labor costs (ULC) by 15 percent. - External targets (2011–2015): exports projected to increase by 17 percent and imports to decline by 3 percent; current account deficit to decline to about 3 percent of GDP by 2015 from about 10 percent in 2011. - Growth and labor projections: - Economy projected to contract almost 5 percent in 2012. - Real GDP growth projected zero in 2013 and to increase to 2.5–3.0 percent over the medium term. - Long-run potential growth projected at 1–1½ percent. - Unemployment projected to peak at 19 percent in 2013. - Debt target: reduce public debt to 120 percent of GDP by 2020. - Required fiscal adjustment: a seven-percentage-point-of-GDP improvement in the primary fiscal balance over three years. - Program targeted primary surplus reaching 4.5 percent of GDP in 2014 and remaining at this level until 2017, then declining to 3 ½ percent over the long term. - Fiscal composition under the EFF request: - Adjustment largely relying on primary expenditure cuts (almost 8 percentage points of GDP), primarily social benefits including pensions, and wages. - Privatization proceeds projected at €46 billion during 2012–20. - Program assumed limited near-term gains from tax administration measures and unspecified unidentified measures on expenditure side. ### Implementation, political context, and timeline - Political instability: six Prime Ministers and nine Finance Ministers during the EFF; technocratic government negotiated the EFF then removed. - Program reviews: envisaged 16 quarterly reviews; only five reviews (two combined) completed with delays during March 2012–June 2014; program off track after June 2014. - Key chronology highlights: - March 2012: PSI completed and the EFF approved. - July 2013: Unemployment rate peaked at 27.9 percent. - April 2014: Successful issuance of Greek 5-year bonds. - January 2015: Syriza wins parliamentary elections; Alexis Tsipras becomes PM. - June 30–July 20, 2015: Greece accumulated overdue financial obligations to the Fund. - July 2015: Staff’s DSA concludes public debt is unsustainable; Greece clears arrears to the Fund. - August 2015: ESM program agreed. - January 2016: Greek authorities cancel the EFF. - July 2015 referendum triggered temporary bank closures, deposit withdrawal limits, and capital controls. ### Outcomes: growth, unemployment, and macro revisions - Growth underperformed expectations: - Deeper recession in 2012–13; recovery in 2014 stalled; real growth negative again in 2015. - Nominal GDP in 2013 and 2015 was about 12 percent and 20 percent below original forecasts, respectively. - Unemployment: - Non-seasonally adjusted peak of about 29 percent in 2013, declining to about 25 percent in 2015. - Explanations for underperformance: - Political turmoil and inconsistent implementation undermined confidence. - WEO downgrades for the euro area. - Program macro assumptions possibly too optimistic (e.g., fiscal multiplier assumption of 0.5 may have been too low). - Rising NPLs, creditor/debt overhang, liquidity constraints, and Grexit fears not fully factored. - Program redesign: - Substantial redesign during combined first/second reviews in early 2013 reflecting slower reform progress, weaker investment, higher fiscal multipliers, and lower growth and deflator projections. - By 2015 projected nominal GDP was 12 percent lower than envisaged in the program request. ### Fiscal adjustment achievements and composition (2012–15) - Fiscal adjustment achieved during 2012–15: 3¼ percent of GDP (fell short of program objective of 7 percent of GDP). - Primary fiscal balance: - Improved from a deficit of 3 percent of GDP in 2011 to a surplus of ½ percent of GDP in 2013. - Primary surplus fell to ¼ percent of GDP by 2015. - Privatization proceeds: €1.9 billion during the program period (~10 percent of the initial program target). - Revenue vs. expenditure composition (2011–15): - Actual revenue increase was 3 ¾ percent of GDP concentrated in ad hoc, regressive, and distortionary measures. - Primary expenditure increased slightly by ½ percent of GDP; pensions expenses rose significantly relative to GDP. - Nominal primary expenditure cuts were €14 billion (85 percent of the initial program objective). - Fiscal structural reform progress limited: - PFM: improvements in fiscal reporting and cash management; lacking staffing and payment modernization. - Revenue administration: some compliance initiatives; core operational weaknesses persisted; limited autonomy of GSPR hindered enforcement. - Pension system deficit amounted to 11 percent of GDP at end-2015. - Property valuation reform stalled; backtracking on 2013 income tax code reduced earlier gains. ### External adjustment and competitiveness - Current account turned positive by 2015, exceeding original program objective. - Adjustment drivers: - Imports declined by nearly one fifth between 2011 and 2015; exports broadly stable. - ULC-based REER declined by about 25 percent between 2011 and 2015; CPI-based REER declined by about 10 percent. - Export performance: - Exports did not exceed their 2008 peak by 2015; export market share did not improve. - Constraints: product and service market rigidities, low share of easily scalable tradables, liquidity constraints, and lack of investment. - Non-price competitiveness and business environment: Greece ranked poorly on institutional/non-price measures with limited and uneven improvements. ### Financial sector: recapitalization, NPLs, and vulnerabilities - Banking pressures from PSI exposure and Grexit fears: - Bank holdings of government debt were more than twice banks’ Tier 1 capital pre-PSI. - In 2011 customer deposits fell by 17 percent; foreign bank funding contracted by one-third. - NPLs: - NPLs doubled to 20 percent between 2010 and 2011; remained elevated through the program. - By end-2015 Greek banks suffered from fragile balance sheets with an NPL ratio of 45 percent. - Recapitalizations and capital: - Of €50 billion earmarked for recapitalization costs, half offset PSI losses and half for resolving problem banks and future credit losses. - Three rounds of recapitalization totaled some €68 billion (€85 billion including deferred tax credits). - Tier 1 capital adequacy ratio rose to about 15 percent by end-2015. - Cost-cutting and consolidation: between 2012 and 2015 banks reduced branches by one-third and staff by nearly a quarter. - Liquidity and ECB support: - ECB liquidity support peaked at about €150 billion in 2015 and declined to about €100 billion by end of the EFF in January 2016. - Remaining vulnerabilities: financial system remained fragile and poorly positioned to support expansion by end-2015. ### Debt restructuring, DSAs, and financing needs - PSI: haircut on private bond holders of €106 billion (noted as the highest amount in modern history). - Public debt declined to €305 billion (160 percent of GDP) at end-2012 from €356 billion (172 percent of GDP) at end-2011. - Despite PSI and OSI, debt remained on an unsustainable path by June–July 2015. - When on track, debt assessed as sustainable but not with high probability, conditional on sustained primary surpluses of 3.5–4.5 percent of GDP and continued European partner support. - 2015 DSA reframed sustainability around Gross Financing Needs (GFN) benchmark of 15-20 percent of GDP; achieving this would require further debt relief from European partners. - Projected privatization proceeds reduced in 2015 DSA to about €0.5 billion per year on average in the medium term from about €5 billion per year at the time of the EFF request. ### Conditionality, governance, and implementation performance - Performance on quantitative fiscal targets (QPCs) was generally strong: between March 2012 and December 2013, 79 percent of QPCs were met. - Performance on indicative targets (ITs) was weaker: 15 percent met, particularly weak on arrears and privatization. - Structural conditionality was more detailed than in comparable programs but had lower implementation rates; many structural benchmarks were delayed, converted into prior actions, or not implemented. - Governance shortcomings: close links between senior bank leaders, political parties, and large corporations were not broken; stronger “fit and proper” standards might have improved governance faster. ### Key lessons and policy recommendations - Program design and sequencing: - When political base for reforms is fragile or ownership insufficient, program design should be more conservative from the start. - Staff should resist pressures for optimistic assumptions; program design must reflect political economy constraints. - Financial sector fixes and insolvency: - Early, steadfast implementation of NPL resolution, private sector insolvency frameworks, and governance reforms is critical. - Foreclosure moratoria and flawed household insolvency design contributed to deterioration in payment culture. - Fiscal adjustment quality: - Composition of adjustment was weak—reliance on ad hoc, regressive revenue measures undermined durability and equity. - Priority: broad-based taxes, strong enforcement of tax compliance, pension reform, and targeted social safety nets. - Structural reforms and ownership: - Re-invigorate stalled reforms in product, service, and labor markets and regulated professions; secure strong ownership. - Use a more parsimonious approach to structural conditionality; focus on fewer reforms with sequencing and realistic payoffs. - Debt relief and sustainability: - Upfront commitments of debt relief consistent with a realistic medium-term primary surplus target are prerequisite for program success. - Alternative DSA approaches based on flows (GFN) may have been more suitable than fixed long-run debt targets. - Fund collaboration with monetary unions: - Formalize operational framework for Fund collaboration with monetary unions on information-sharing, reconciliation of technical analysis, division of labor on conditionality, and assurances regarding union-wide policies. - Fund policy reviews: - Review risk acceptance guidelines and exceptional access criterion on prospects for program success in light of realized high risks and arrears episode. ### Pace and limits of fiscal adjustment - Realized fiscal adjustment during 2010–13 reached 17.3 percent of GDP or 4.3 percent per year on average. - IMF (2015c) suggests fiscal adjustment of more than 5 percent of GDP within three years (or 1.7 percent per year on average) has an increasingly adverse impact on medium-term debt-to-GDP dynamics; Greece substantially exceeded such thresholds during 2010–13. - Maintaining primary surpluses of 3.5–4.5 percent of GDP over medium and long term is questionable given high structural unemployment and political constraints; more gradual adjustment would have required more financing and more upfront debt relief. ### Authorities’ views and disagreements - Authorities broadly agreed with many lessons but judged initial program targets and macro framework as "excessively optimistic" and "too ambitious." - Bank of Greece argued staff at times were "excessively pessimistic" on yields of fiscal measures and may have over-estimated recapitalization needs by about €10 billion. - Ministry of Finance prioritized revenue-based measures to reduce tax avoidance/evasion; disagreed with characterization that expenditure-to-GDP ratio required further adjustment. - Authorities emphasized the need for sufficient upfront debt relief and better sequencing of reforms; supported formalizing Fund collaboration with monetary unions. - Authorities reported the EPE was discussed during Mr. Kramarenko’s visit to Athens from "January 19 to January 20, 2017." ### Post-2015 developments, MoU and ESM measures (selected) - New ESM program: €86 billion covering August 2015 to August 2018; MoU signed 19 August 2015. - Eurogroup short-term debt measures (May–January 2017) estimated to reduce Greece’s debt-to-GDP ratio by around 20 percentage points until 2060 and net financing needs by 5 pps over that period. - Authorities reported macro improvement in 2016 with Q2 and Q3 positive growth; Greek authorities projected 2017–2018 growth "of the order of 2.5–3.0 percent" conditional on improved credit conditions and sentiment. - Banking sector: authorities expected NPL measures to "bear fruit in 2017" and to increase loan supply and restructure production. ### Final overall assessment and conclusions - Some progress achieved: significant fiscal and external adjustment early on, partial structural reforms, and Greece remained in the euro area, reducing systemic risks. - Political instability, fragile ownership, and opposition from vested interests ultimately derailed the program; growth, competitiveness, and debt sustainability were not restored. - Recommendation: Greece needs to continue unfinished structural reforms and EU partners need to provide more debt relief. - EPE conclusion: chances of success might have been greater with tempered ambition and more realistic macro assumptions, combined with more financing and upfront debt relief; staff appropriately adapted program design as risks materialized and it was appropriate to interrupt the program when commitments and financing were insufficient. *Source: EXECUTIVE SUMMARY, staff report excerpts, CONCLUSIONS AND LESSONS, Annex I, and related material (cr1744).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Background and Program Design - The Fund committed €28 billion under the extended arrangement (SDR 23.8 billion or 2,159 percent of Greece’s quota at the time), following the cancellation of the 2010–12 Stand-By Arrangement (SBA). - The program was supported by Greece’s EU partners, who committed €144.7 billion. - Significant private sector debt relief of €106 billion was completed at the outset of the program and large official debt relief was provided as well. - The Fund disbursed SDR 10.2 billion. Only five out of 16 program reviews were completed as the program went off track finally in mid-2014. The arrangement was cancelled in January 2016. - The EFF was an exceptional access arrangement and required an ex-post evaluation to (i) review performance against original program objectives; (ii) discuss whether program design was appropriate to address Greece’s challenges; and (iii) assess whether program modalities were consistent with Fund policies. ### Program Objectives and Policy Trade-offs - Broad objectives: restore competitiveness and growth, fiscal sustainability, and financial stability. - The program targeted a 7 percent of GDP fiscal adjustment, based largely on sustainable, equitable measures and a broad range of structural reforms aimed at restoring financial sector stability and supporting competitiveness and growth. - Authorities and European partners preferred an ambitious, front-loaded adjustment; staff saw merit in a more gradual adjustment process. - Staff judged the authorities’ ambitious program to be subject to very high implementation risks and substantial macro risks. ### Outcomes and Implementation - Some progress was achieved, but the program ultimately foundered in the face of adverse political developments: - During the first two years, despite frequent interruptions, significant fiscal and external adjustment was undertaken. - Some structural reforms progressed (examples: public financial management, elements of pension and labor market reforms, and select financial sector measures). - Greece remained in the euro area, contributing to a reduction in systemic risks. - Political instability after initial broad-based backing dogged and ultimately derailed the program, reflecting fragile ownership and strong opposition from vested interests. - Consequently, growth, competitiveness, and debt sustainability have not been restored. - To achieve these objectives, Greece would need to continue with unfinished structural reforms, and additional debt relief from Greece’s EU partners is required. ### Assessment of Program Ambition and Adjustments - Under difficult political circumstances, any program could have failed; however: - The program’s chances of success could have been greater if the degree of ambition in its targets and the optimism in the macro framework had been tempered from the start. - As program risks began to materialize, staff worked with the authorities and their European partners to revise initial ambitious program targets; program design and policy advice were adjusted accordingly. ### Key Lessons and Policy Recommendations - Program design and sequencing - When the political base for reforms is fragile, or insufficient ownership is apparent or likely, program design should be more conservative from the start. - Financial sector fixes and insolvency - Delays in addressing non-performing loans (NPLs), private sector insolvency frameworks, and governance issues in the banking sector weighed on the recovery; steadfast implementation of reforms in these areas should be given high priority. - Fiscal adjustment quality - Contrary to the initial program design, the quality of fiscal adjustment measures was weak; initially agreed strong measures were replaced with ad hoc measures. - Going forward, broad-based taxes, strong enforcement of tax compliance, pension reform, and development of targeted social safety nets are particularly important for making adjustment more durable and equitable. - Structural reforms and ownership - Greece needs to re-invigorate stalled structural reforms, including in the areas of product, service, and labor markets, and regulated professions, to remain a viable euro area member. Securing strong ownership is key. - Debt relief and sustainability - Upfront commitments of debt relief which deliver debt sustainability based on a realistic target for the medium-term primary fiscal surplus are a prerequisite for program success in the circumstances faced by Greece. - Fund collaboration with monetary unions - There is merit in formalizing the operational framework for Fund collaboration with monetary unions in the program context to clarify issues including information-sharing and assurances regarding union-wide policies affecting program member countries. - Fund policy discussions - Certain Fund policies would benefit from a fresh discussion, including risk acceptance guidelines and the requirements for meeting the exceptional access criterion on prospects for program success. ### Note on Statistics - The fiscal and national accounts data in the EFF request and in all reviews are based on ESA 1995 accounting standards, while outturns are reported based on ESA 2010 standards. - Where applicable, program definitions are used. Program definitions reflect a number of adjustments related to banking sector support, privatization, and ECB-related incomes, among others. - This report uses the national accounts and fiscal data that were available prior to January 13, 2017. *Source: EXECUTIVE SUMMARY (cr1744) — Ex-Post Evaluation of the four-year exceptional access EFF with Greece.* ### 2. In the wake of the euro adoption, Greece enjoyed rapid but unsustainable income ### 2. In the wake of the euro adoption, Greece enjoyed rapid but unsustainable income gains. ### Buildup of imbalances and pre-crisis dynamics - Easy financing after euro adoption in 2001 led the public sector to borrow on average 8 percent of GDP per year in 2002–09, with public debt reaching 127 percent of GDP by 2009. - Private sector external debt rose to about 175 percent of GDP by 2009. - A massive fiscal impulse of 28 percent of GDP in 2002–09 and private borrowing generated strong growth and significant real effective exchange rate appreciation. - Underlying weaknesses masked by growth: low investment, poor use of labor and capital, a large and inefficient public sector, rising banking vulnerabilities, a cumbersome judicial and legal system, and widespread informality. ### The 2010–12 SBA, sudden stop, and recession - The 2010–12 SBA had access of €30 billion (SDR 26.4 billion); SDR 17.5 billion was disbursed. - European partners committed €80 billion; €52.9 billion was disbursed. - Sudden stop in private capital inflows, collapsing confidence, sizable fiscal consolidation, and credit contraction produced a deep recession: real output declined by almost 18 percent by 2011 from the 2007 peak; unemployment approached 18 percent. - Cumulative improvement in the primary fiscal balance during 2010–11 was about 7 percentage points of GDP, but the primary fiscal balance remained in deficit (2.4 percent of GDP in 2011; later revised to 3 percent of GDP). - The overall fiscal deficit exceeded 10 percent of GDP in 2011. - Revenue-based adjustment measures included VAT rate hikes, a new property tax, and income tax base-broadening measures. Investment and discretionary expenditures bore much of the expenditure-side adjustment. - Foreclosure moratorium and debtor-friendly household insolvency reforms (the “Katseli Law”) commenced in 2010 and contributed to weakening payment culture. ### Debt restructuring and PSI/OSI - The Deauville Summit (October 2010) envisaged “adequate participation of private creditors”; the PSI was announced July 2011. - Debt exchange completed with a haircut on private sector creditors of 53 percent; PSI haircut to private bond holders amounted to €106 billion (noted as the highest amount in modern history). - Limited Official Sector Involvement (OSI) debt relief was provided in the run-up to the EFF approval. - Public debt declined to €305 billion (160 percent of GDP) at end-2012 from €356 billion (172 percent of GDP) at end-2011, reflecting PSI and OSI but only a modest immediate decline in the stock of public debt for multiple reasons (exclusions, bank holdings, attractive exchange terms, constraints on OSI, amortization payments, and nominal GDP decline). ### Policy trade-offs faced by EFF discussions - How to balance adjustment and financing: - Even with the unprecedented PSI, further significant fiscal adjustment was unavoidable. - Additional financing could ease adjustment pain but would raise the post-PSI stock of public debt. - Political constraints limited EU partners’ financing; Greece was required to adhere to the euro area common framework under the EU Stability and Growth Pact. - How to achieve external adjustment and improve competitiveness: - Options: outright currency devaluation (fast but highly disruptive, requiring euro exit) versus internal devaluation (takes time and requires comprehensive structural reforms). - How to avoid spillovers: - Timely agreement on a program was essential to avoid contagion; disorderly exit/default could destabilize vulnerable countries and possibly spread to the euro area core. ### EFF objectives and macro framework (as of EFF request) - Broad objectives: restore competitiveness and growth, fiscal sustainability, and financial stability. - Competitiveness target: reduce unit labor costs (ULC) by 15 percent via labor market reforms, supported by product and service market reforms and privatization. - External targets: exports projected to increase by 17 percent and imports to decline by 3 percent from 2011 to 2015; current account deficit projected to decline to about 3 percent of GDP by 2015 from about 10 percent in 2011. - Growth and labor market projections: - Economy projected to contract almost 5 percent in 2012. - Real GDP growth projected zero in 2013 and to increase to 2.5–3.0 percent over the medium term. - Long-run potential growth projected at 1–1½ percent. - Unemployment projected to peak at 19 percent in 2013. - Debt target: reduce public debt to 120 percent of GDP by 2020. - Required fiscal adjustment: a seven-percentage-point-of-GDP improvement in the primary fiscal balance over three years. - Program targeted primary surplus reaching 4.5 percent of GDP in 2014 and remaining at this level until 2017, then declining to 3 ½ percent over the long term. - Fiscal composition under the EFF request: - Adjustment largely relying on primary expenditure cuts (almost 8 percentage points of GDP), primarily social benefits including pensions, and wages. - Privatization proceeds projected at €46 billion during 2012–20 (unchanged from the last SBA review), expected to reduce public debt by 20 percent of GDP by 2020. - Program assumed limited near-term gains from tax administration measures; unspecified unidentified measures (expenditure side) were assumed in projections. ### Program implementation, political context, and timeline - Political instability during the program: six Prime Ministers and nine Finance Ministers during the EFF; technocratic government negotiated the EFF but was soon removed. - Program reviews: envisaged 16 quarterly reviews; only five reviews (two combined) completed with delays during March 2012–June 2014. After June 2014 the program went irretrievably off track. - Key events (chronology highlights): - March 2012: PSI completed and the EFF approved. - July 2013: Unemployment rate peaked at 27.9 percent. - April 2014: Successful issuance of Greek 5-year bonds. - January 2015: Syriza wins parliamentary elections; Alexis Tsipras becomes PM. - June 30–July 20, 2015: Greece accumulated overdue financial obligations to the Fund. - July 2015: Staff’s DSA concludes public debt is unsustainable; July 2015 Greece clears arrears to the Fund. - August 2015: European Stability Mechanism (ESM) program agreed. - January 2016: Greek authorities cancel the EFF. - July 2015 referendum: voters overwhelmingly rejected the EU bailout terms; interruption of financial and liquidity support led to temporary bank closures, deposit withdrawal limits, and capital controls. ### Program outcomes — growth, unemployment, and macro revisions - Growth underperformed program expectations: - Recession deeper than expected in 2012–13; nascent recovery in 2014 stalled; real growth negative again in 2015. - Nominal GDP in 2013 and 2015 was about 12 percent and 20 percent below original forecasts, respectively. - Unemployment: - Non-seasonally adjusted peak of about 29 percent in 2013, declining to about 25 percent in 2015 (well above program projections). - Explanations for underperformance: - Political turmoil and inconsistent program implementation undermined confidence. - WEO outlook downgrades for the euro area. - Program macro assumptions may have been too optimistic: short- and medium-term payoffs from reforms overly optimistic; fiscal multiplier assumption of 0.5 in a recession may have been too low. - Rising NPLs, creditor/debt overhang, liquidity constraints, and Grexit fears were not fully factored. - Program redesign: - Substantial redesign during combined first/second reviews in early 2013 reflecting slower reform progress, weaker investment, higher fiscal multipliers, and lower growth and deflator projections. - By 2015 projected nominal GDP was 12 percent lower than envisaged in the program request. ### Fiscal adjustment: achievements and composition (2012–15) - Fiscal adjustment achieved during 2012–15: 3¼ percent of GDP (fell short of the program objective of 7 percent of GDP). - Primary fiscal balance: - Improved from a deficit of 3 percent of GDP in 2011 to a surplus of ½ percent of GDP in 2013, exceeding the revised program target. - Primary surplus fell to ¼ percent of GDP by 2015, below initial program target of 4.5 percent and revised target of 3.5 percent. - Privatization proceeds: €1.9 billion during the program period (~10 percent of the initial program target). - Revenue vs. expenditure composition (2011–15): - Actual revenue increase was 3 ¾ percent of GDP but concentrated in ad hoc, regressive, and distortionary measures; revenue administration remained weak. - Primary expenditure increased slightly by ½ percent of GDP; pensions expenses rose significantly relative to GDP. - Nominal primary expenditure cuts were substantial (€14 billion, 85 percent of the initial program objective) but GDP contraction masked their relative magnitude. - Fiscal structural reform progress was limited: - Public Financial Management: progress in fiscal reporting, assignment of financial management responsibilities, and cash management operations including a treasury single account; lacking progress in staffing, payment modernization, and halting accrual of spending arrears. - Revenue administration: some compliance initiatives implemented but core operational weaknesses persisted; limited enforcement and compliance progress due to insufficient autonomy of the General Secretariat for Public Revenues (GSPR). - Pension reform: cuts in pension benefits and reduction in number of payments from 2012 did not contain immediate overruns; deficit of the pension system amounted to 11 percent of GDP at end-2015, the highest level in the EU. - Tax policy: the property tax ENFIA introduced but property valuation reform stalled; backtracking on the 2013 income tax code reduced earlier gains. ### External adjustment and competitiveness - External current account adjusted rapidly; by 2015 the current account balance turned positive (in balance), exceeding original program objective. - Adjustment drivers: - Imports declined by nearly one fifth between 2011 and 2015; exports remained broadly stable. - ULC-based REER declined by about 25 percent between 2011 and 2015; CPI-based REER declined by about 10 percent in the same period. - Export performance: - Exports did not exceed their 2008 peak by 2015; Greece’s export market share did not improve during the program period. - Exports underperformed despite significant labor cost adjustment; constraints included product and service market rigidities, low share of easily scalable tradables, liquidity constraints, and lack of investment. - Non-price competitiveness and business environment: - Greece ranked poorly in institutional and non-price measures; constrained entrepreneurship and export scaling. - Improvements were limited and uneven across areas (some improvement in starting a business and trading; deterioration in registering property, access to credit, and enforcing contracts). ### Structural reforms: progress and reversals - Early achievements: collective bargaining made less rigid, minimum wage setting reformed, legislation to liberalize regulated professions screened/amended; steps taken to strengthen privatization framework, reform competition barriers, improve business environment, and speed up administration of justice. - Momentum weakened due to opposition from vested interests and political backtracking: - Some aspects of labor market reform were reversed or temporarily restored to pre-program frameworks. - Product market reforms passed in legislation but not meaningfully implemented. - Administrative court backlog reduction showed gains by the 5th review, but implementation stalled thereafter. - Overall, Greece failed to catch up with other euro area countries; distance to best practice increased in key areas such as contract enforcement, insolvency resolution, and access to credit. ### Debt sustainability assessment and financing needs - Despite large PSI and OSI, debt remained on an unsustainable path by June–July 2015. - When program was on track, debt was assessed as sustainable but not with high probability, conditional on sustained primary surpluses of 3.5–4.5 percent of GDP and continued European partner support. - 2015 DSAs reframed sustainability around Gross Financing Needs (GFN) benchmark of 15-20 percent of GDP (consistent with MAC DSA) given highly concessional debt; achieving this would require further debt relief from European partners. - Projected privatization proceeds were reduced in 2015 DSA to about €0.5 billion per year on average in the medium term from about €5 billion per year at the time of the EFF request. ### Financial sector: recapitalization, NPLs, and vulnerabilities - Banks faced severe solvency and liquidity pressures from PSI exposure and Grexit fears: - Bank holdings of government debt were more than twice banks’ Tier 1 capital pre-PSI. - In 2011 customer deposits fell by 17 percent; foreign bank funding contracted by one-third. - Non-performing loans (NPLs) doubled to 20 percent between 2010 and 2011; NPLs remained elevated through the program. - Recapitalizations: - Of the €50 billion earmarked for bank recapitalization costs, half offset PSI losses and half (equivalent to 5 percent of banking system assets) was for resolving problem banks and future credit losses. - Three rounds of recapitalization totaled some €68 billion (€85 billion including deferred tax credits). - Tier 1 capital adequacy ratio rose to about 15 percent by end-2015. - Cost-cutting and consolidation: - Between 2012 and 2015 banks reduced branches by one-third and staff by nearly a quarter. - Remaining vulnerabilities: - The financial system remained fragile and poorly positioned to support economic expansion by end-2015; elevated NPLs and weak private sector balance sheets constrained credit growth and investment. ### Program lessons reflected in staff assessments - Staff views recognized exceptional risks: political challenges, optimistic macro assumptions (growth payoffs and fiscal multipliers), and the need for potential tradeoffs between less fiscal adjustment and more financing/debt relief. - By July 2015 staff concluded debt was unsustainable and flagged the tradeoff between adjustment, reforms, financing, and debt relief. *Source: IMF staff report (cr1744).* ### 2015. However, Greek banks still suffered from fragile balance sheets (an NPL ratio of 45 percent) ### cr1744 - 2015. However, Greek banks still suffered from fragile balance sheets (an NPL ratio of 45 percent) ### Banking sector vulnerabilities and recapitalization - Greek banks suffered from fragile balance sheets and extraordinary dependence on central bank funding at end-2015; an NPL ratio of 45 percent. - Bank-sovereign nexus remained a problem due to banks’ exposure to the Greek government via holdings of deferred tax credits (DTCs). - Select sources of new capital in the banking system (billions of euros): - Private Sector Capital Injection - Public Sector Capital Injection 1/ (includes €7.2 billion of resolution costs for non-core banks in 2012; €9.2 billion in 2013) - Capital from LME 2/ - Deferred Tax Credits 3/ - System Tier 1 Capital - Liability structure and liquidity: - Domestic customer deposits and central bank funding shares shown as selected liabilities (percent of total liabilities) with central bank funding peaking during crisis periods. - ECB liquidity support: - Amount of ECB liquidity support peaked at about €150 billion in 2015 and declined to about €100 billion by the end of the EFF in January 2016. - New ESM program: - A new ESM program (€86 billion) covering August 2015 to August 2018 was agreed in August 2015; the off-track EFF and ESM programs overlapped during August 2015–January 2016. ### Credit contraction, demand, and effects on growth - Private sector credit contraction: - Credit to the private sector continuously contracted since 2011 and contraction was still evident in 2015. - Contraction was particularly relevant for SMEs, which play a large role in the Greek economy. - Credit demand and supply dynamics: - Credit demand was weak during the entire duration of the program, with the temporary exception of 2014. - On the supply side, banks almost continuously tightened lending standards (with the exception of 2014), amplifying the economic contraction. - Risk of a creditless recovery: - Chances for a creditless recovery in Greece are uncertain because its economy is dominated by credit-dependent SMEs. - Indicators illustrated in Figure 18 (as presented): - Credit demand and lending standards (net percentage), credit growth (year-on-year percentage points). ### Impairment charges, stress tests, and hindsight on capital needs - Historical and projected impairment measures (billions of euros) showed large discrepancies between projected and actual impairments: - 2011 BoG 2/ (annualized unprovisioned credit losses projected by the Bank of Greece in 2012 capital needs assessment based on end-2011 data) - 2013 BoG 3/ (annualized unprovisioned credit losses projected by the Bank of Greece in 2014 stress test based on end-June 2013 data) - 2014 EBA 4/ (2014 EBA stress test's projected cumulative impairments under the adverse scenario for 2014-2016, annualized, based on end-2013 data) - Actual impairment charges by year (2009–2016) contrasted with projections. - With hindsight, program bank capital needs assessment exercises could have used more conservative estimates for the scale and severity of credit losses, reducing the need for subsequent re-capitalizations. - Certain measures on private debt restructuring and NPLs management were introduced early, but a comprehensive NPL and insolvency strategy was only adopted relatively late (during the 5th Review) and largely in reaction to poorly-designed government initiatives. - Design and timing issues: - Foreclosure moratoria were extended; authorities estimated that 20 percent of delinquent loans are strategic defaults. - The 2010 Household insolvency law operated more like moratoria for applicants than a proper personal insolvency law with a fresh start due to design flaws and institutional weaknesses—contributing to deterioration in payment culture and persistently high NPL ratios. ### Governance, conditionality, and program implementation - Governance shortcomings: - Conditionality on governance of banks and the Hellenic Financial Stability Fund (HFSF) was nominally met after the PSI, but close links between senior leaders of banks, political parties, and large corporations were not broken for political reasons. - Imposition of a stringent “fit and proper” standard for board members and management and other strict governance rules immediately after the PSI might have improved banks’ governance faster. - Performance on quantitative and structural targets: - Performance with respect to quantitative fiscal targets (QPCs) was generally strong: Between March 2012 and December 2013, 79 percent of the QPCs were met, reflecting strong performance on cash primary balance targets. - Performance with respect to indicative targets (ITs) was weaker: 15 percent of IT targets were met, particularly weak on arrears and privatization. - Structural conditionality: - Structural conditionality was more detailed in Greece vis-à-vis comparable programs and had lower implementation rates. - High number of structural conditions per review reflected weaker starting conditions and a desire to ensure substantive implementation; however, prevalence of prior actions, conversion of structural benchmarks into prior actions, frequent delays, and many non-implemented benchmarks suggested weak ownership. - Backtracking on structural measures and nominal implementation reflected lack of political consensus and strong opposition of vested interests. ### Troika collaboration, EMU reforms, and institutional constraints - Troika partner support and differing views: - Support of Greece’s European partners exceeded initial program commitments; EFSF program fully disbursed despite the EFF going off track; significant debt relief provided in the context of the OSI. - Dialogue continued during August 2015–January 2016 but there was disagreement on key DSA parameters. Compared with IMF staff, the EC had a more optimistic view on the long-term economic outlook and Greece’s capacity to sustain primary fiscal surpluses of 3.5 percent of GDP over the medium and long term. - Greece’s EU partners were concerned about moral hazard associated with upfront commitments of debt relief. - EMU institutional changes during the EFF period: - Establishment of the ESM in late 2012 strengthened firewalls. - Single Supervisory Mechanism (SSM) implemented in 2014. - Single Resolution Mechanism (SRM), based on the Bank Recovery and Resolution Directive (BRRD), became operational in 2015. - In 2012 the ECB signaled it would do “whatever it takes” to preserve the euro; facing risks of entrenched deflation and weak activity, the ECB started a quantitative easing program in early 2015—reducing systemic concerns and benefitting Greece. - Collaboration frictions: - EC staff highlighted needs for better reconciliation of technical analysis, division of labor on conditionality design and monitoring, communication strategies, and information-sharing. - Fund staff raised issues about sharing confidential supervisory information and modalities of assurances regarding euro area-wide policies affecting Fund-supported programs, intensified since establishment of the SSM in 2014. - Staff were not guaranteed sufficient confidential supervisory information on Greece, complicating reconciliation between Fund financial sector advice and EC/SSM directives and assurances. ### Program design lessons and political economy considerations - Political economy and pace of adjustment: - The ambitious 2012 reform and adjustment agenda required strong ownership across the political spectrum; political instability, falling real incomes, rising unemployment and poverty, and strong opposition from vested interests increased risks. - With hindsight, a more gradual pace of fiscal adjustment and a more focused approach to structural reforms within a longer time horizon might have had better chances of success; however, political constraints and commitments to frontloaded fiscal adjustment made such alternatives unlikely at the time. - Structural reform payoffs: - The program implicitly assumed early growth payoffs from structural reforms. Lessons: - Use more conservative estimates of growth benefits of structural reforms, including significant implementation lags. - More realistic assessment of government capacity to pursue multiple politically difficult reforms simultaneously with large fiscal consolidation. - Weak ownership cannot be entirely mitigated through detailed conditionality; focus on a smaller number of reforms with clear sequencing and supportive communication strategies to foster ownership. - Financial sector reform timing: - Delays in financial sector reforms (including private sector insolvency frameworks and NPL reduction measures) contributed to slow balance sheet repair, high NPLs, and headwinds to credit and real activity. - Fiscal adjustment realism: - IMF (2015c) argues that fiscal adjustment of more than 5 percent of GDP within three years (or 1.7 percent per year on average) has an increasingly adverse impact on medium-term debt-to-GDP dynamics. In Greece, this threshold was substantially exceeded during 2010–13 with the cyclically adjusted primary balance improving by [text ends in source]. *GREECE — INTERNATIONAL MONETARY FUND.* ### 17.3 percent of GDP or 4.3 percent per year on average, ### cr1744 - 17.3 percent of GDP or 4.3 percent per year on average, ### Pace and limits of fiscal adjustment - Realized fiscal adjustment reached 17.3 percent of GDP or 4.3 percent per year on average, which most likely contributed to a deterioration of the debt-to-GDP ratios. - Greece’s fiscal adjustment (2010–13) was well above pre-2008 large fiscal adjustments in Europe (Denmark, Sweden, Finland) that relied on exchange rate and interest rate instruments to promote export and investment growth. - The realized adjustment in the context of internal devaluation may have exceeded a “speed limit,” reducing the economy’s capacity to support a given debt burden and undermining investor confidence and social cohesion. - Determining this speed limit ex ante is very hard due to complex interactions between economic and political factors. - Historical evidence: in a sample of 55 countries over the last 200 years, there were only 15 episodes of recessions longer than 5 years, and no country sustained a primary surplus larger than 2 percent of GDP after such a period of negative growth. ### Long-term primary surplus targets and feasibility - It is questionable whether Greece could maintain primary surpluses in the range of 3.5–4.5 percent of GDP over the medium and long term as assumed under the program, especially given high structural unemployment. - The program’s objectives for the pace of fiscal adjustment and the long-term primary surplus were in a highly ambitious, virtually unprecedented range with low chances of being achieved. - A more gradual pace of fiscal adjustment and a lower long-term primary surplus target may have been justified; this would have required more financing and more upfront debt relief. ### Debt relief: scope and constraints - Larger haircuts in the PSI could have diluted PSI participation and resulted in greater losses for the domestic banking sector. - More debt relief and more financing could have only been provided by official creditors. - More debt relief under the OSI was eventually provided in January 2013 and a commitment was made to provide additional debt relief in the future if needed; this contingent relief was conditional on maintaining large primary surpluses over the medium and longer terms. ### Composition of fiscal adjustment and political economy - Deviation of the composition of fiscal adjustment from initial program assumptions reflected political economy and capacity constraints on pursuing higher-quality but more difficult reforms. - Lower-quality adjustment strategy may have negatively affected growth and social cohesion. - Significant increases in regressive taxation (e.g., VAT rate hikes) may have contributed to the decline in political support for the program. - Large increases in corporate taxes, with exemptions in place, may have undermined the growth potential of taxpaying corporations. - Tax evasion, particularly by the self-employed, contributed to shifting the burden of adjustment to the poor. - Recommendation: the Fund should insist on structural benchmarks and prior actions that would improve the composition of fiscal adjustment while ascertaining strong ownership for recommended fiscal measures. ### Alternative approaches to debt sustainability assessment - Targeting a specific long-run level of debt as a criterion for debt sustainability might not have been well-founded in Greece’s circumstances. - Analysis based on flows (gross financing needs) and the trajectory of the stock of debt, as proposed in the 2015 DSA, may have been a more suitable framework for Greece since the beginning of the EFF, when long-term concessional official debt replaced private debt. ### Program design adjustments and learning - Staff adjusted program design as implementation encountered difficulties: more realistic growth and a slower pace of fiscal adjustment were adopted at the time of the first/second reviews. - Issues of NPLs and insolvency frameworks began to be addressed from the fifth review and in staff advice after mid-2014. - Discussions of the Greek political system’s ability to deliver reforms, rationale for slowing fiscal adjustment, and reprioritization of structural reforms gained prominence after mid-2015. - Lessons from the EPE on the SBA (2010–12), concluded in June 2013 with delay, were progressively incorporated into EFF program design. ### Compliance with Fund policies: exceptional access criteria - Exceptional access required four criteria under Fund policies at the time: - Criterion 1—presence of exceptional balance of payment pressures: clearly met during the entire program period; absence of sustained market access and large capital outflows prevailed. - Criterion 2—debt sustainability with high probability: staff concluded debt was sustainable but not with high probability, invoking the systemic exemption at the time of the program request and all completed reviews; the 2015 DSA later concluded debt was unsustainable. - Criterion 3—re-accessing capital markets: Greece had no market access at the EFF request; Greece accessed markets for the first time in four years by the fifth review, but this was a fleeting respite and not sustained post-program. - Criterion 4—policy program provides reasonably strong prospects of success: staff argued authorities demonstrated ownership and policy resolve via multiple prior actions and capacity-improving technical assistance, but staff also emphasized very high implementation risks; in retrospect the bar for Criterion 4 was set too low as implementation risks materialized after each review. ### Mix of adjustment and financing during the EFF - Financing committed during the EFF period was unprecedented and required significant political effort: - €144.7 billion from the EU (actual disbursements amounting to €163.2 billion) - SDR 23.8 billion from the Fund (of which SDR 10.2 billion disbursed) - Haircut on private debt of €106 billion - ECB liquidity support of up to €150 billion - The Fund’s proposed EFF access of SDR 23.8 billion was 2,159 percent of quota at the time and was the fourth largest in the Fund’s history. - EFF would account for only 16 percent of total (post-PSI/OSI) financing needs, with 17 purchases of SDR 1.4 billion (127 percent of quota) each. - Peak access under the EFF was projected to be the highest in the Fund’s history in terms of quota and the second highest (after Iceland) in terms of GDP. - Given exceptionally high Fund exposure and implementation risks, the EFF request report could have discussed in more detail the rationale for burden sharing between the Fund and European partners. ### Capacity to repay the Fund and financial risks - Greece’s pre-EFF credit outstanding was equal to 1,592 percent of quota prior to the EFF (with SDR 17.5 billion purchased under the SBA). - Under the EFF, credit outstanding was projected to peak at 2,570 percent of quota, the highest in the Fund’s history. - Greece accumulated overdue financial obligations to the Fund of SDR 1.6 billion due on June 30 and July 13, 2015, becoming the first advanced country to be in arrears on a payment to the Fund; these were the largest overdue financial obligations from a member in the Fund’s history. - Greece’s non-payments more than doubled arrears to the Fund’s General Resource Account (GRA) at the time. - Prolonged nonpayment could have required adjusting the carrying value of credit outstanding, possibly recognizing an impairment loss and loss of Fund income. - Greece made debt service payments to other creditors while having overdue obligations to the Fund, risking undermining the Fund’s preferred creditor status; the arrears were short-lived and Greece repaid the Fund on July 20, 2015 after securing bridge financing tied to a new ESM program. - Fund resources were largely safeguarded by European partners, though the nature of such financing assurances was not well defined; European support was conditional on full program implementation and compliance with program requirements, and such contingent assurances cannot substitute for debt sustainability. *International Monetary Fund — content from cr1744* ### CONCLUSIONS AND LESSONS ### CONCLUSIONS AND LESSONS ### Program design, risks, and decision to approve the EFF - The EFF with Greece "posed exceptional challenges to the Fund." - Political consensus in late 2011 enabled an ambitious program; staff supported the authorities’ ambitious targets despite noting advantages of a more gradual fiscal adjustment. - The staff report presented an explicit assessment of downside risks, "notably those stemming from the ambitious primary surplus targets and the high indebtedness." - The Executive Board approved the EFF "fully cognizant of the risks," reflecting a high institutional risk tolerance given systemic risks to Greece and the euro area. ### Implementation, outcomes, and program derailment - Some progress in the first two years: "significant fiscal and external adjustment" and partial structural reforms (public financial management, elements of pension and labor market reforms, select financial sector measures). - Greece remained in the euro area, reducing systemic risks. - Political instability and fragile ownership ultimately "derailed" the program; in summer 2015 Greece accumulated "temporary overdue financial obligations to the Fund––the largest in the Fund’s history." - Conclusion on outcomes: "Growth, competitiveness, and debt sustainability have not been restored." - Recommendation: Greece needs to "continue with unfinished reforms and its EU partners need to provide more debt relief." ### Lessons on program ambition, assumptions, and adaptation - Any program could have failed under difficult circumstances, but chances might have been greater if targets and macro assumptions had been tempered; a less ambitious approach would have required "more financing and more debt relief from the outset." - Staff adapted program design as risks materialized: revised targets, additional financing and debt relief, re-invigoration attempts for stalled reforms. - It was appropriate to interrupt the program when evidence showed "insufficient policy commitment or financing to achieve broad program objectives." - The program relationship enabled close engagement with authorities and European partners on policy options and tradeoffs. ### Key policy lessons and recommendations - When the political base for reforms is fragile, program assumptions and design should be more conservative from the start; program design must reflect political economy constraints, pace and composition of fiscal adjustment, and macro-financial linkages on growth. - Staff should "resist understandable pressures from the authorities (and in the euro area context, their EU partners) for more optimistic assumptions." - Financial sector reforms are essential: delays in addressing NPLs, private sector insolvency frameworks, and governance issues weighed on recovery; "steadfast implementation" should be prioritized. - The composition of fiscal adjustment matters for fiscal sustainability and social cohesion; the adjustment implemented was "not socially equitable" despite staff efforts. Priority areas: enforcement of tax compliance, targeted social safety nets, and pension reform. - Structural reforms require time and strong ownership; revive reforms in product, service, and labor markets and regulated professions. Adopt "a more parsimonious approach to structural conditionality" and use conservative assumptions about growth payoffs from structural reforms. - Upfront debt relief commitments consistent with debt sustainability and "based on a realistic target for the medium-term primary fiscal surplus are a prerequisite for program success" in Greece’s circumstances. - Formalize operational framework for Fund collaboration with monetary unions covering information-sharing, reconciliation of technical analysis, division of labor on conditionality, communication strategies, assurances on union-wide policies, and financial assurances to the Fund. - Review certain Fund policies: given the high risks documented and their realization (including temporary overdue financial obligations), "there is merit in reviewing Fund risk acceptance guidelines and the exceptional access criterion on prospects for program success." ### Box 1 — EPE conclusions on the SBA (2010–12) - Better tailoring of Fund lending policies to monetary union circumstances; the EPE saw merits in an EFF for Greece and criticized overly optimistic baseline macro assumptions. - Avoiding undue delays in debt restructuring; earlier restructuring could have eased adjustment and lessened output contraction. - More attention to the political economy of adjustment; fighting tax evasion to distribute adjustment costs more equitably. - More parsimony in fiscal structural reforms; detailed conditionality cannot substitute for political ownership. - More effective risk-sharing arrangements within the euro area; shortcomings in risk sharing and crisis response were highlighted. - Timing note: the 2013 EPE was concluded 15 months after EFF approval, so its conclusions could not influence the 2012 EFF design; some lessons were nonetheless accounted for prior to publication (shift to an EFF in 2012, debt relief at EFF outset, intensification of discussions on risk-sharing). The report suggests EPEs should be concluded prior to approval of successor programs even under compressed schedules. ### Box 2 — PSI, OSI, and debt sustainability (key figures and outcomes) - PSI calibration target: bring Greece’s public debt down to 120 percent by 2020. - Under the PSI: - €197 billion of Greek government bonds were exchanged for €62 billion of new debt and €30 billion in short-term EFSF notes. - Resulted in a debt write-down of €106 billion or 52 percent of 2012 GDP, a haircut of 53.5 percent in nominal terms. - 97 percent of eligible bonds were tendered for the exchange. - Delays in PSI negotiations reduced the stock eligible for exchange; €40 billion in maturing bonds were fully repaid in the first year of the SBA, and some further €10 billion continued to be repaid in full before the exchange. - Composition of sovereign debt (as of February 2012, before exchange) included IMF €20.1, ECB/NCBs €56.7, T-bills €15.0, EU/EFSF €52.9, Bonds €205.6 (billions of euros). - To contain banking fallout, €50 billion from the program was set aside for bank recapitalization. - OSI initially narrow (GLF interest lowered from 300 bps to 150 bps; repatriation of NCB profits), later expanded: further lowering interest rates and lengthening maturities of GLF and EFSF loans; around €11 billion in EFSF funding used upfront to buy back €32 billion of new GGBs. ### Box 3 — PFM reforms (progress and shortcomings) - PFM reforms focused on budgeting and budget monitoring, spending controls, fiscal reporting, and institutional/legal framework, with extensive Fund TA. - Achievements: - Legal and institutional reforms, amendments to the Organic Budget Law, reorganization in the Ministry of Finance. - Creation of General Directorates of Financial Services (GDFS) legislated; advanced stage of implementation (expected to be completed by January 2017). - Monthly published fiscal data covering general government now comparable or better than most advanced countries. - Streamlined and automated government payment processes approaching compliance with the EU late payment directive. - Unified cash management in the Public Debt Management Agency. - Institutionalized spending review process with pilot reviews conducted. - Remaining issues: staffing and capacity of GDFS, modernization of payment processes resisted by the Hellenic Court of Auditors, coordination challenges in fiscal reporting, and difficulties halting new spending arrears. ### Box 4 — Reforms of revenue administration (milestones and gaps) - Reform objectives: overhaul tax administration, improve efficiency and enforcement, enhance collection of social security contributions; extensive Fund TA provided. - Milestones: - Creation of the General Secretariat for Public Revenues (GSPR) in end-2012. - First fixed-term (5 years) Secretary General (SG) appointment in January 2013. - Substantive reforms implemented in 2013 and first half of 2014; progress slowed from mid-2014 to early 2016 due to lack of political commitment. - Results and metrics: - Tax revenues stabilized as a percent of GDP despite contraction. - EC TAXUD study shows VAT compliance gap declined from 36 percent of potential VAT in 2011 to 28 percent in 2014, "equivalent to a net annual revenue gain of 1.3 percent of GDP." - Remaining weaknesses: poor auditing practices, weak debt recovery, growth of tax arrears, counterproductive ad-hoc amnesties, underuse of actionable suspicious transaction reports from the anti-money laundering framework. ### Box 5 — Pension reform (measures and outcomes) - Reform goals: long-run sustainability, equalize rules across funds, increase labor force participation, safety net for elderly; extensive Fund TA provided. - Implementation history: - 2010 pension law scheduled to take effect in 2015 but only partially implemented. - As fiscal pressure rose and pension expenditure neared 18 percent of GDP, focus shifted to measures yielding immediate savings. - 2012 measures: main pension benefits reduced by 12 percent above €1,300; supplementary pension benefits cut by 10 percent under €250, 15 percent over €250-300, and 20 percent above €300; supplementary pension system consolidated. - 2013: 13th and 14th payments abolished. - Other measures: raise retirement age by two years, increase health care contribution by retirees, phase-out grandfathering rules. - Some reversals occurred due to the Council of State’s verdict on unconstitutionality of progressive pension cuts. - Outcomes: - Pension spending remains at 17-18 percent of GDP, up from 14 percent at the onset of the crisis. - Pension deficits rose to 11 percent of GDP at end-2015, "by far the highest in the Euro Area." *Source: CONCLUSIONS AND LESSONS (cr1744).* ### Box 6. Tax Policy Refor ### Box 6. Tax Policy Refor ### Income Tax Law (ITL / ITC) - Reform objectives: - Codification of the ‘income tax’-related provisions scattered in the Greek legal system. - Simplification of the—often very legalistic—language. - Closing loopholes by introducing modern anti-avoidance concepts. - Broadening the tax base by eliminating personal deductions and streamlining remaining incentives. - Implementation and outcomes: - With FAD/LEG’s technical assistance, a new income tax law was drafted addressing the issues above. - In July 2013, lawmakers adopted a new ITC which incorporated many recommended provisions. - Over the last three years, successive governments have backtracked substantially on the tax policies that were introduced in the ITC in 2013. - The current ITC reversed a number of deductions and incentives, re-introduced complex legalistic language, and contains additional measures—sometimes addressing administrative shortcomings and/or perceived ‘fairness’ issues—that re-introduced new tax planning opportunities. ### Tax Procedure Code (TPC) - Purpose: - A new legal framework (Tax Procedure Code––TPC) was needed to enable the modernization of tax administration. - Implementation and outcomes: - The TPC, drafted with FAD/LEG’s technical assistance, was passed in July 2013 almost unchanged. - Since its passage, the TPC has not been influenced substantially by political interference and still forms a good legal basis for the modernization of the Greek tax administration. ### Value-Added Tax (VAT) Reform - Objectives: - Streamline the system and broaden the base. - Implementation and outcomes: - The VAT reform reduced the number of rates and thus broadened the base, but it stopped short of eliminating the intermediate rate and relied on a further hike of the top rate. - The special reduced rate applicable on the islands was removed. ### Property Tax Reform - Objectives and actions: - Began in 2013 with the aim of replacing the outdated wealth tax with a modern property tax system. - The new property tax ENFA was legislated at end-2013. - Implementation challenges: - The reform of the property valuation was stalled due to the lack of political will. ### Overall assessment - Technical assistance: - FAD/LEG provided technical assistance for the drafting of the new ITL/ITC and the TPC. - Political economy and reversals: - While legal frameworks (particularly the TPC) provided a sound basis for modernization, there has been substantial backtracking on income tax reforms enacted in July 2013, reintroducing complexity and new tax planning opportunities. - Progress summary: - VAT reform achieved some base broadening through rate consolidation and removal of island reduced rates, but retained an intermediate rate and increased reliance on the top rate. - Property tax reform produced ENFA legislation but lacked progress on valuation reform. *Source: Box 6. Tax Policy Refor, cr1744.* ### Annex I. Authorities’ Views on the EPE Report ### Annex I. Authorities’ Views on the EPE Report ### Authorities’ overall assessment - Authorities "broadly agreed with most lessons identified in the report." - They emphasized the unusual policy challenge of "engineering a sizeable fiscal adjustment and internal devaluation simultaneously in a relatively closed economy belonging to a monetary union." - Agreed principle: "the program should have a realistic macroeconomic framework and targets from the outset." - Authorities judged the initial program macroeconomic framework as "excessively optimistic" and program targets as "too ambitious." - Former authorities defended the frontloaded adjustment as necessary given "political constraints on available financing and debt relief and the need to strengthen credibility." ### Explanations for program underperformance (authorities’ views) - Main explanations cited by the authorities: - Underestimation of fiscal multipliers. - Lack of appropriate sequencing of structural reforms in the initial program design. - Underestimation of implementation challenges and negative political repercussions of recommended policies, which "ultimately undermined ownership." - Bank of Greece perspective: - Staff was "excessively pessimistic regarding expected yields of fiscal measures" at times (e.g., in 2013), which "resulted in budget over-performance, leading to an excessive fiscal tightening." - Claimed that total need for public funds for recapitalizations "had been over-estimated by the staff by about €10 billion." - Noted that three rounds of recapitalization "turned out to be necessary during the program period." - Argued that the program should have focused on "structurally adjusted fiscal targets," but acknowledged constraints from "lack of additional financing." - Stressed importance of analyzing revenue and expenditure in nominal values rather than solely as ratios to shrinking GDP and noted "a very sizeable decline in nominal primary expenditure (excluding recapitalization costs, Figure 12b) in large part through nominal reductions in wages and pensions." ### Composition of fiscal adjustment: disagreement and priorities - Authorities disagreed with the report’s analysis of composition of fiscal adjustment. - Ministry of Finance view: - While previous governments agreed adjustment should have been on the expenditure side and through permanent measures, the current government’s position is that "most of the adjustment should have occurred on account of revenue measures aimed at reducing tax avoidance and tax evasion, as well as governance improvements in tax administration." - The government believes there has been "a large compliance gap, the elimination of which should be given the utmost priority." - The expenditure-to-GDP ratio in Greece is "broadly consistent with the EU averages and does not require further adjustments," in their view. ### Financial sector measures and sequencing of reforms - Authorities "broadly agreed with the lessons from implementation of the financial sector measures under the program." - They felt "mounting problems with the insolvency frameworks and rising NPLs required earlier attention." - Bank of Greece: incidents raising questions on banks’ governance are being addressed "based on the new regulations that are consistent with the report’s recommendations." - Authorities argued the program failed to incorporate "appropriate sequencing of structural reforms" and failed to take sufficient account of "political feasibility and the capacity constraints facing the government." - Example: some product market reforms generated strong political backlash and eroded political capital. - Large number of reforms overwhelmed administrative capacity. - Bank of Greece contested that the report "downplayed progress in structural reforms," asserting implemented labor market and other reforms "contributed to reducing ULCs and improving cost competitiveness," helping explain "the nascent recovery in exports, excluding shipping." - Authorities agreed more progress was needed on "price and non-price competitiveness" and that reforms needed better tailoring to Greece’s circumstances. - On EU-level sequencing: authorities called for "stronger progress on positive integration (i.e., promoting union-wide institutions) before intensifying negative integration (i.e., reducing barriers)." ### Debt relief, financing, and institutional collaboration - Authorities agreed that "sufficient upfront debt relief and adequate financing are important pre-requisites for program success." - They stated that "a piecemeal approach to providing debt relief is counterproductive." - Bank of Greece view: there was "a missed opportunity to request higher OSI in the first half of 2014." - Authorities supported the recommendation to "formaliz[e] the operational framework for Fund collaboration with monetary unions." - They noted that "frequent disagreements among the Troika partners complicated program discussions and implementation." ### Documented interactions and timing - The EPE report was discussed with the authorities during Mr. Kramarenko’s visit to Athens from "January 19 to January 20, 2017." - Mr. Botman, the IMF’s Senior Resident Representative in Greece, participated in the discussions. - Meetings were held with Minister of Finance Tsakalotos and Bank of Greece Governor Stournaras, as well as representatives of previous Governments involved in program design and implementation. *Annex I. Authorities’ Views on the EPE Report (IMF Country Report material).* ### 3.9 pp effective July 1, 2014 ### 3.9 pp effective July 1, 2014 ### Structural conditionality: Selected actions and benchmarks - Abolish 40 charges with an annualized cost of €245 million. - Adopt 237 of the OECD recommendations to remove barriers to competition in four sectors (tourism, retail, building materials, and food processing). - Adopt legislation to open mediator’s professions to non-lawyers, repeal provision on severance pay of lawyers upon voluntary separation, and clarify the reference on the minimum wage for lawyers. - Adopt legislation to reduce minimum wage for long-term unemployed. Financial sector prior actions and benchmarks (selected) - Bank of Greece to undertake a comprehensive assessment of banks’ capital needs. (Request; PA; MT) - Ministry of Finance to complete a detailed study on how to address ATE, based on work by the commissioned external audit firms. (Request; PA; MT) - Government to enact legislation to improve the framework for resolution and recapitalization to: (i) enable the Bank of Greece to set new bank capital standards through regulation, and to use this power to establish new Core Tier 1 requirements; (ii) remove impediments to a flexible management of employment contracts in the context of bank resolutions; (iii) ensure the use of conservative asset valuations for failed banks; (iv) allow the use of contingent convertible bonds in recapitalization; (v) introduce the possibility of restrictions on HFSF voting rights; and (vi) vest resolution responsibilities in a separate department in the BoG and systemic restructuring responsibilities in the HFSF. (Request; PA; MT) - Government to enact legislation to improve the financial oversight framework: (i) establish two departments in the HFSF mandated, respectively, to manage the government's ownership of banks and interim credit institutions; (ii) revise the HFSF's governance structure to include a General Council and an Executive Board; and (iii) address HDIGF funding arrangements, and to eliminate possible conflicts of interest within the HDIGF. (Request; PA; MT) - A ministerial decree shall be issued to provide the technical details of the banks' recapitalization framework. (R1&R2; PA; MD) - Government and Bank of Greece to communicate capital needs to banks, and request that they finalize the process by end-April 2013. (R1&R2; PA; MT) - Government and Bank of Greece to finalize the design of the program for bank recapitalization and resolution and communicate this to banks. (R1&R2; PA; MT) - HFSF to take steps to strengthen governance in the financial system. (R1&R2; PA; MT) - Add 2 independent members to the HFSF General Council. (R3; PA; MT) - Complete sale of the New Hellenic Postbank and Nea Proton Bank. (R4; PA; MD) - Authorities to complete a comprehensive banking sector strategy to ensure a banking sector based on four viable core banks. (R4; PA; MT) - Adopt legislation governing the injection of public resources into banks via the HFSF. (R5; PA; MT) - Government Council for the Management of Private Debt to take steps to enhance corporate and personal debt resolution frameworks. (R5; PA; MT) Structural benchmarks: Fiscal sector (selected) - Government to adopt a budget-neutral tax reform package, including: (i) the repeal of the Code of Books and Records and its replacement by simpler legislation; (ii) the elimination of several tax exemptions and preferential regimes; (iii) simplification of the VAT and of the property tax rate structure; (iv) a more uniform tax treatment of individual capital income; and (v) a simplified personal and corporate income tax schedule. (Request; target end Jun-2012; status NM) - Government to complete the reviews of social spending programs to identify 1 percent of GDP in savings, while at the same time making proposals to strengthen core safety net programs. (Request; target end Jun-2012; status MD) - Government to complete the reviews of public administration to identify 1 percent of GDP in savings. (Request; target end Jun-2012; status MD) - Government to meet quantified quarterly performance indicators for revenue administration. (Request; target end Jun-2012; status NM) - Government to meet quantified quarterly performance indicators public financial management. (Request; target end Jun-2012; status NM) - Government to complete the strategy for strengthening social security collections. (Request; target end Sep-2012; status MD) - Government to adjust pensions, with protections for low income pensioners, and the social security contribution base, to permit a fully-funded reduction in rates (cumulatively 5 percent from January 1, 2012). (Request; target end Sep-2012; status NM) - Adopt a law establishing a new semi-autonomous tax agency specifying degree of autonomy, governance framework, accountability, and initial staffing. (R1&R2; target end Feb-2013; status NM) - Government to complete staffing plans for line Ministries and utilize these to identify redundant positions and employees, and on this basis to set quarterly targets for mandatory exits through end-2014. (R1&R2; target end Feb-2013; status NM) - Adopt a new Tax Procedures Code and simplify income tax legislation. (R1&R2; target end May-2013; status NM) - Adopt legislation on a new property tax regime. (R4; target end Sep-2013; status MD) - Approve the new organizational structure of the Revenue Administration, staffing numbers, grading system, and classification, and qualification and appointment processes of the revenue administration. (R3; target end Oct-2013; status NM) - Adopt all secondary legislation needed to implement the tax procedures code. (R4; target end Oct-2013; status NM) - Adopt legislation to reform the system of social security contributions to: (i) broaden the contribution base; (ii) simplify the contribution schedule across the various funds; (iii) shift funding away from nuisance taxes and onto contributions; and (iv) reduce contribution rates by 4 percentage points. The reforms will be fully phased in by January 1, 2015 and will be revenue neutral and preserve the actuarial balance of the various funds. (R1&R2; target end Nov-2013; status NM) - Ministry of Finance to complete a targeted audit of general government accounts payable, to verify whether any arrears remain, and to review compliance with the conditions set for clearing arrears. (R1&R2; target end Dec-2013; status NM) - Adopt legislation to integrate into ITC the taxation of collective investment vehicles as well as all income tax expenditures (eliminating inefficient or inequitable ones). (R5; target end Sep-2014; status SB) - Adopt legislation to broaden definition of tax fraud and evasion, and repeal Article 55 ¶s 1 and 2 of TPC. (R5; target end Sep-2014; status SB) - Align public sector’s non-wage benefits with EU best practices. (R5; target end Sep-2014; status SB) - Adopt VAT reform to streamline rates and simplify administration. (R5; target end Oct-2014; status SB) - Adopt wage grid reform to become effective January 1, 2015. (R5; target end Oct-2014; status SB) - Adopt amendments to the Organic Budget Law. (R5; target end Oct-2014; status SB) - Adopt pension reform package based on actuarial studies completed in September on the whole pension system including supplementary and lump-sum funds. (R5; target end Nov-2014; status SB) - Adopt revisions to the government Chart of Accounts. (R5; target end Mar-2015; status SB) Structural benchmarks: Structural reforms (selected) - Government to complete the screening and cleaning of existing legislation covering the list of professions and economic activities covered in Annex II of KEPE’s “Second Report on the Impact of Liberalizing Regulated Professions.” (Request; target end Dec-2012; status NM) - Ministry of Finance to produce a comprehensive list of nuisance taxes and levies, and eliminate them or transfer them (and the associated spending) to the central government budget. (R1&R2; target end Sep-2013; status NM) - Adopt changes to the Code of Civil Procedure. (R5; target end May-2014; status SB) - Address recommendations of the OECD study on administrative burdens. (R5; target end Jun-2014; status SB) - Adopt legislation to align framework on collective dismissals with EU best practices. (R5; target end Oct-2014; status SB) - Adopt legislative changes to bring Greece’s framework on industrial actions in line with EU best practice. (R5; target end Oct-2014; status SB) - Adopt legislation to address all identified issues in the follow-up OECD report on legislative barriers to competition in wholesale trade, manufacturing, telecommunications, and ecommerce. (R5; target end Nov-2014; status SB) - Adopt all secondary legislation on investment licensing law. (R5; target end Dec-2014; status SB) Structural benchmarks: Financial sector (selected) - A ministerial decree shall be issued to provide the technical details of the banks' recapitalization framework. (Request; target end Mar-2012; status NM) - Bank of Greece to complete a strategic assessment of banks' business plans. (Request; target end Mar-2012; status MD) - Government to reform the governance of the BoG, to provide for collegial decision-making at the level of executives (Governor and Deputy Governors) and expanded internal oversight by nonexecutives of the existing General Council, and to revise the structure and rights of BoG shareholders to eliminate possible conflicts of interest in the Bank of Greece’s public policy role. (Request; target end Dec-2012; status MT) - Hellenic Postbank to be resolved with the transfer of its good assets, all deposits and ECB/ELA financing to a core bank (via P&A), and weak assets to be left in a bad bank. (R1&R2; target end Jan-2013; status NM) - All 4 core banks to meet the capital requirements set by the Bank of Greece. (R1&R2; target end Apr-2013; status NM) - Bank of Greece will complete an additional assessment of capital needs based on end-2012 data. (Request; target end Jun-2013; status NM) - Complete resolution of all undercapitalized or insolvent non-core banks. (R1&R2; target end Jun-2013; status NM) - Complete a comprehensive banking sector strategy. (R3; target mid Jul-2013; status NM) - Banks to update their restructuring plans and submit them for validation by DG-Competition. (R3; target end Jul-2013; status MD) - Bank of Greece to complete a follow-up stress test for all banks based on end-June 2013 data, using a methodology designed in consultation with the EC, ECB, and the IMF, and to update banks’ capital needs on this basis. (R1&R2; target end Dec-2013; status MT) - Government to introduce a new Code of Conduct for banks. (R5; target end May-2014; status SB) - Government to enhance the personal and corporate insolvency framework. (R5; target end Oct-2014; status SB) ### Statement by Mr. Psalidopoulos — Executive Director (February 6, 2017): Macroeconomic assessment and projections Findings on recent performance - The Greek economy "turned a corner in 2016": Q2 and Q3 showed positive GDP growth. - Real GDP fell in Q1 2016, rose by 0.4 percent q-o-q in Q2 and 0.8 percent q-o-q in Q3. - For the first nine months of the year, growth was 0.2 percent and is estimated to reach 0.8 percent in 2016. - Economic activity in 2016 was driven by private consumption and gross fixed capital formation. - During the first nine months of 2016, real exports of goods increased by 7.6 percent, while real receipts from tourism decreased by 5.2 percent and receipts from shipping continued to decline. - Industrial Production increased 2.3 percent y-o-y in January-November 2016, driven by manufacturing production up 4.6 percent y-o-y. - Employment in the private sector recorded 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. - Economic sentiment increased to a year high in December due to improved consumer confidence and more optimistic expectations in manufacturing and construction. - Financial indicators were volatile in 2016; sovereign yields fell after the conclusion of the first review. Investor attention focused on prospects for concluding the second review. - Deflationary pressures persist but have been partially offset by indirect taxation increases; a recent increase in the special consumption tax on heating oil in October 2016 added upward pressure on HICP inflation. 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 projections: downside risks include delays in conclusion of the second review of the program, impact of increased taxation on economic activity, reform implementation slippages, refugee crisis pressures, increased uncertainty associated with forthcoming elections in several EU countries, rise of protectionism worldwide, and a slowdown in global trade. Upside risks include inclusion of Greek sovereign debt in the ECB’s quantitative easing program (QE). - Long-term rebalancing: flow imbalances have been eliminated with both the current account and fiscal balances being in equilibrium, but real GDP remains "more than a quarter lower than its pre-crisis levels." - Stock imbalances remain: unemployment is high; general government debt-to-GDP rose from 126.7 percent in 2009 to 177.4 percent at end-2015. - Private-sector indebtedness has generated significant NPLs hampering banks’ ability to support recovery through new credit; measures to deal with NPLs have been legislated. - Private consumption stands at 70 percent of GDP and investment at 11 percent of GDP; a rebalancing toward investment is required for sustainable future growth. ### Memorandum of Understanding (MoU) and debt 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. - Most structural reforms agreed have already been legislated. - Legislation on 8 and 22 May 2016 covered 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 a package of short-term debt measures to be phased in progressively and subject to ESM program conditionality to make Greece’s public debt and gross financing needs sustainable. - The ESM authorized the second tranche of €10.3 bn of ESM financial assistance. - On 23 January 2017, ESM and EFSF Boards adopted rules implementing a set of short-term debt relief measures for Greece designed to reduce interest rate risk and ease repayment profile. - 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 with better than expected revenues and encouraged conclusion of the second review. ### Fiscal policy and management (selected outcomes) - 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. - The improvement reflected mainly spending containment and, to a lesser extent, revenue over performance. - 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). ### Banking sector: NPLs and expected effects - An effective management of the high stock of non-performing loans is already underway and "will bear fruit in 2017." - Success in reducing NPLs would affect economic activity by: (a) increasing bank loan supply; and (b) restructuring production. - Decrease in NPLs would reduce banks’ financial risk and funding costs, boost capital adequacy, gradually increase loan supply, and lead to a decline in borrowing rates for businesses and households. ### Structural reforms: expected long-term benefits - Reforms implemented since 2015 are expected to boost growth potential through faster productivity and employment growth. - OECD estimate: 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 reforms in the labor market 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. *Source: IMF staff report excerpts and Statement by Mr. Psalidopoulos (February 6, 2017).* ### Conclusion ### Conclusion ### Overall assessment - The Greek economy "has the potential to move onto a new and sounder growth path." - The Greek authorities are "determined and committed to implement the current program and avoid past mistakes and backsliding." - The Greek authorities request the IMF "to take stock of what has been achieved thus far, of the restrictions and limitations stemming from a 7-year ongoing Greek crisis and to stay engaged." - The Greek authorities are "ready to proceed to the closing of the second review with the Institutions in order to sustain growth, participate in ECBs QE, lift capital controls and move toward sustainable growth." ### On the Ex Post Evaluation (EPE) of the 2012-16 program - The Greek authorities consider the EPE "short on accomplishments and long on missed opportunities." - They argue an approach distinguishing two periods—"2012-mid 2014, mid 2014-August 2015"—would provide more lessons. Major achievements of the 2010 onward programs, and especially 2012-2016: - "Unprecedented fiscal consolidation. Over the period 2013-16, the primary deficit was eliminated and, for the first time since 2001, general government primary surpluses were recorded." - "The improvement in the “structural” primary budget balance by more than 17 percentage points of potential GDP between 2009 and 2016 was more than double the one achieved in other cases under similar programs." - "A recouping of the sizeable cumulative loss in labor cost competitiveness vis-à-vis Greece’s trading partners between 2000 and 2009." - "An elimination of the external deficit, which exceeded 15 percent of GDP in 2008." - "An increase in the share of exports from 19 percent of GDP in 2009 to 32 percent today." - "A recapitalization and a restructuring of the banking system, enabling it to withstand the crisis and the flight of deposits, and ensuring that it now has adequate capital, provisions and collateral, i.e. that the necessary conditions are in place for the banking system to address the major problem of non-performing loans." - "A halting of the increase (and even a slight decrease) in the volume of non-performing loans in the second and third quarters of 2016, for the first time since 2014." - "Structural reforms, notably in the labor market, but also in the product markets and in public administration." - "A rebound of the economy in the second and third quarters of 2016, making it reasonable to anticipate a positive growth rate for the year as a whole, for the first time since 2014." Costs and explanatory factors: - Stabilization policies "inevitably came at an economic and social cost: a deepening of the recession, job and income losses." - Causes for higher-than-expected costs include "shortcomings in the design of the programs, a misjudgment of the consequences, frequent course changes due to the absence of a unifying consensus." - Consensus noted: "in August 2015, 222 out of 300 members of parliament in Greece, belonging to five different political parties, voted Yes for the implementation of the MoU 2015-18." ### Statement by the Minister of Finance Mr Euclid Tsakalotos — key observations and critiques - The economy "is currently moving from a state of prolonged economic crisis to a state of solid economic recovery." - The Government "has made significant progress to implement an ambitious and comprehensive reform programme." - "Recently agreed short-term debt relief measures will contribute significantly in reducing gross-financing needs and in making debt sustainable." - The Staff Report for the 2016 Article IV consultation is "welcomed" but "fails to do justice in several areas" and contains conclusions "not consistent with recent and well-documented empirical evidence." Specific criticisms and claims: - Reform effort: implementation "has accelerated significantly," citing consolidation of social security funds, comprehensive pension reform, establishment of an independent tax authority, product market reforms, and a wide-ranging privatisation programme. The Staff Report's claim of "slowed reform momentum" is contested. - Debt Sustainability Analysis (DSA): The DSA reduced steady-state growth "from 1.25 percent to 1 percent of GDP since the May 2016 DSA," a "second consecutive reduction" which the Minister calls an "oxymoron" given recent reforms. - Fiscal outturns: IMF staff projected "a primary fiscal deficit of -0.5 percent of GDP in 2016 raising to 1.5 percent in 2018 with the current legislated measures." Preliminary indications show "the primary surplus for 2016 will be in the territory of 2 percent of GDP." The Minister argues the analysis does not revise projected surpluses at 2018 and beyond despite "significant fiscal over-performance." - The Minister challenges three related arguments: (1) that Greece cannot sustain fiscal surpluses surpassing 1.5 percent of GDP; (2) the gap in fiscal surplus estimates between the IMF and other institutions; (3) the DSA's failure to incorporate recent fiscal performance and ability to produce surpluses. - Policy-mix critique: While agreeing "the tax base should be widened," the Minister insists this "should occur through the increase of tax compliance and not through a reduction in the tax credit." He faults comparisons in the Staff Report between Greek tax declarations and household budget survey data from other countries as "misleading" due to differing tax filing units. He notes "the number of tax returns in 2016 has been above 6 million, corresponding to a population of 10.8 million." - On pensions and transfers: the report "does not include the effects of the recent pension reform and consolidation of pension funds" and compares "completely incomparable figures" for state-transfers to pension systems across countries. - DSA assumptions characterized as "overly-pessimistic," including: reduction in long-term growth from 1.25 percent to 1 percent of GDP; decrease of steady state inflation to 1.9 percent instead of 2 percent; increase of interest rates for external financing; fiscal surpluses at 1.5 percent in the medium and long-term; and "partial incorporation of short-term debt relief measures." ### Statement by the Governor of the Bank of Greece Mr Yannis Stournaras — key observations and critiques - The Staff Report "is a useful account" and the Governor agrees Greece "has achieved an impressive fiscal and current account adjustment." - Disagreements: the report understates progress on exports and the shift of resources from non-tradable to tradable sectors; it "downplays the progress on the financial sector" and is "unduly pessimistic" on macroeconomic and fiscal projections and banks' recapitalization needs. - Fiscal numbers: "the general government primary surplus of 2016 is likely to reach 2 percent of GDP compared to a target of 0.5 percent of GDP," which calls the Fund's fiscal projections into question. - Growth projections: the Governor notes an "unexplained 0.25 percent reduction in the long term growth projection compared to the previous Article IV Report" despite better-than-expected 2016 GDP. - Total factor productivity (TFP): it is "not clear why long term TFP growth in Greece lags behind the rest of the euro area," given reform progress and catching-up opportunities. - Banking sector capital needs: the Fund assumes banks will need "a further €10 billion capital buffer" without explanation. Supervisors' assessment shows "the current CET1 ratio is 18 percent." Bank of Greece estimates indicate achieving NPL medium term targets will "further increase the CET1 ratio substantially." - The Governor concludes the Fund's long-term projections have "incorporated only substantial downside risks rather than being a baseline scenario." On the Ex-Post Evaluation of Exceptional Access under the 2012 Extended Arrangement (Governor's view) - The report "contains very useful information" and "useful conclusions and lessons" such as need for less severe financing constraints, upfront debt relief, stronger ownership, better cooperation, and fewer milestones. - However, the Governor contends the report "misses the opportunity to be fair to history" and criticizes the IMF's role during July 2012–June 2014: - (a) The IMF "pressed for more and more parametric fiscal policy (austerity) measures ignoring even its own research regarding the size of fiscal multipliers and tax buoyancy." - (b) The IMF is "partly responsible for delays in closing the 2013 review" by asking for additional measures despite fiscal over-performance. - (c) The IMF "insisted on additional recapitalization of banks," which the Governor asserts "grossly overestimated capital needs and underestimated the impact to the economy of excess bank capital." - (d) The IMF "consistently played down the progress on structural reforms, ignoring, among others, OECD’s assessments." - The Governor rejects the characterization that authorities preferred an upfront-loaded fiscal programme, arguing financing constraints and "the lack of upfront debt relief" determined fiscal targets. *Source: cr1744 - Conclusion.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1744.pdf_