## 1. Stress Test Results for Greek Banks

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### Context and recent macro-financial developments
- Real output is about 75 percent of its pre-crisis peak.
- Share of population at risk of poverty or social exclusion increased by 8 percentage points to 36 percent by 2013 and has remained broadly unchanged since then.
- Growth:
  - 2017 real GDP growth: 1.4 percent.
  - Q1 2018 real GDP growth: 0.8 percent Q-o-Q (seasonally adjusted).
  - HICP inflation: averaged around 1.1 percent in 2017 and decelerated to close to zero in early 2018.
- Fiscal:
  - General government primary surplus in 2017: 4.2 percent of GDP (outturn) vs SBA-AIP target 1¾ percent.
  - Revenue (outturn) 2017: 49.0 percent of GDP (SBA-AIP: 49.4 percent of GDP; difference -0.4).
    - Indirect Taxes: 17.3 percent (outturn) vs 17.5 percent (SBA-AIP), difference -0.2.
    - Social Contributions: 14.6 percent vs 14.0 percent, difference 0.6.
    - Direct Taxes: 10.2 percent vs 10.4 percent, difference -0.2.
    - Other: 7.0 percent vs 7.5 percent, difference -0.6.
  - Primary Expenditure (outturn) 2017: 44.8 percent of GDP vs SBA-AIP 47.7 percent, difference -2.9.
    - Social Benefits: 21.6 percent vs 22.4 percent, difference -0.8.
    - Compensation of Employees: 12.1 percent vs 12.5 percent, difference -0.4.
    - Other: 11.2 percent vs 12.8 percent, difference -1.6.
  - Government arrears declined to €4.2 billion as of end-April (compared to €7.3 billion in April 2017).
- Market access and liabilities:
  - July 2017: issued a €3 billion five-year bond with a 4.4 percent coupon.
  - November 2017: voluntary off-market €25.5 billion exchange of existing PSI bonds for five new benchmark issues.
  - Mid-February (post-third review): issued a €3 billion seven-year government bond yielding 3.5 percent.
  - 10-year bond yields: peaked at 4.8 percent in May 2018, declined around 50 bps to just under 4 percent after June 21 debt agreement and S&P upgrade.
- Banking sector recent metrics:
  - Non-performing exposures (NPEs) as of end-March 2018: 49 percent of total loans, with a coverage ratio of 49 percent.
  - ELA reduced to just under €10 billion (a €30 billion reduction y-o-y).
  - Issuance of new covered bonds amounting to €2 billion in end-2017—early 2018.
  - Private deposits trending up but remain slightly below early 2015 levels.
  - S&P upgraded ratings of all four major banks in early July.

### Stress test framework, outcomes, and implications
- Stress test methodology:
  - ECB stress tests (published in May) indicate resilience in the baseline scenario but significant capital depletions in the adverse scenario.
  - Methodology did not include any pass or fail threshold for capital adequacy ratio.
  - No automatic supervisory decision on recapitalizations was triggered by the stress test results at that stage.
  - SSM plans to incorporate results and other inputs in its comprehensive assessment around end-2018—early 2019; size and timeline of any shortfalls remain uncertain.
- Staff estimate of potential capital shortfall:
  - If the three banks with lower CET1 were asked to maintain capital ratios under adverse conditions in line with a capital requirement of 7.5–8.0 percent, the related capital shortfall could be in the range of €1.3–1.9 billion.
- Key stress-test CET1 outcomes (percent; starting point end-2017; baseline end-2020; adverse end-2020; depletion C - A):
  - Alpha Bank: 18.3; 20.4; 9.7; -8.6
  - Eurobank: 15.4; 16.6; 6.8; -8.7
  - NBG: 16.5; 16.6; 6.9; -9.6
  - Piraeus Bank: 14.9; 14.5; 5.9; -9.0
- Interpretation:
  - Significant CET1 depletion under the adverse scenario for major banks.
  - Uncertainty around supervisory follow-up until SSM comprehensive assessment is completed.

### Banking-sector vulnerabilities and policy priorities
- Vulnerabilities:
  - High NPE stock: 49 percent of total loans with 49 percent coverage.
  - Continued reliance in recent reductions on write-offs rather than sustainable restructurings.
  - Asset-liability management challenges and systematic ongoing breaches of liquidity requirements noted.
  - Limited prospects for internal capital generation given legacy portfolios weighing on profitability.
  - Depositor confidence risks as CFMs relax; banks may face higher refinancing costs and possible recourse to ELA.
- Key policy recommendations:
  - NPE resolution:
    - Continue efforts to reduce NPEs through sustainable restructurings, NPE sales, and enhanced foreclosure and e-auction processes rather than relying primarily on write-offs.
    - Pursue restructuring solutions that restore borrower long-term viability; accelerate NPE write-offs and sales while avoiding initiatives that create new fiscal risks.
  - Capital and accounting:
    - Strengthen bank capital buffers given limited internal generation prospects and potential additional needs from balance sheet reassessments and IFRS 9 phasing-in.
    - Reduce reliance on deferred tax assets eligible under the Greek DTC scheme (more than half of banks’ CET1).
    - Consider capital raises (including issuance of non-dilutive instruments in private markets) in the near-to-medium term.
    - Build up MREL over the medium term.
  - Liquidity and funding:
    - Address liquidity and funding risks by narrowing maturity gaps and reducing asset encumbrance.
    - Anticipate termination of ECB waiver when Greece exits its program—banks will need to secure liquidity at sustainable cost.
    - Regularly update comprehensive assessment of downside risks from potential sovereign financing cost increases.
  - Governance and supervision:
    - Bank of Greece and the SSM should increase follow-up on internal governance, internal control environment, risk management, and governance of NPL management and performance practices.
    - Effective implementation of legal reforms to facilitate NPE resolution (household and corporate insolvency frameworks, insolvency administrators, secured creditors’ position, OCW, e-auctions).
  - CFMs and depositor confidence:
    - Continue phased relaxation of CFMs in a prudent, conditions-based manner tied to banks’ liquidity and depositor confidence.
    - Monitor depositor confidence and manage the phased relaxation to prevent destabilizing outflows.

### Macro-financial outlook and risks relevant for banking stress
- Growth projections (selected):
  - 2016 Real GDP: -0.2
  - 2017 Real GDP: 1.4
  - 2018 Real GDP: 2.0 (revised down from 2.6 percent in the SBA-AIP)
  - 2019 Real GDP: 2.4
  - 2020 Real GDP: 2.2
  - 2021 Real GDP: 1.6
  - 2022 Real GDP: 1.2
  - Long-term potential real GDP growth projected around 1 percent.
  - Structural unemployment estimated about 15 percent in 2017.
- Downside risks affecting banks:
  - Domestic policy and financial sector risks:
    - Reform fatigue slowing or reversing structural reforms.
    - Sustaining high primary fiscal surpluses entails political and judicial risks; adverse court rulings (e.g., pension reform) could undermine consolidation.
    - Balance sheet reassessments and new accounting standards could require additional buffers.
  - External risks:
    - Tighter global financial conditions, increased regional risk aversion, or market skepticism about reform commitment could create refinancing risks for firms, banks, and the state.
    - Weaker Euro Area growth could lower exports and hurt confidence.
- External position and implications:
  - Staff assesses current account (CA) gap in range -2.4 to -1.4 percent, corresponding to a REER gap between 5 and 9 percent.
  - REER index and level regression models indicate overvaluations of 13 and 19 percent; CA model indicates a gap of 8 percent (CA gap -2.2 percent of GDP).
  - External sustainability suggests CA gap consistent with gradual improvement in negative NIIP over the long term, contingent on continued reforms and sufficient public debt relief.

### Debt relief, DSA implications, and interactions with bank sector risks
- Key elements of the debt relief package:
  - 10-year deferral and 10-year WAM extension of non-PSI EFSF loans; zero payments of non-PSI EFSF through 2032; WAM increased to 42.5 years.
  - €3.3 billion additional disbursement to increase state government cash buffer to about €24 billion (in addition to €11.7 billion ESM final disbursement—for total €15 billion).
  - Abolishing step-up interest rate margin on EFSF debt buy-back tranche for 2018 onwards.
  - Returning ANFA/SMP profits over 2019–2022 (around €5 billion) with caveat on use.
  - Commitment to future review (in 2032) and possible additional relief if needed.
- Public sector DSA notes and staff concerns:
  - Under staff long-run assumptions (long-run primary surplus ceiling 1.5 percent of GDP; long-run nominal GDP annual growth 2.8 percent), the debt relief package is insufficient to secure long-run debt sustainability; debt-to-GDP would begin rising around 2038 and GFN would breach 20 percent of GDP by 2038.
  - Under EIs long-run assumptions (long-run primary balance 2.2 percent of GDP; long-run nominal GDP annual growth 3 percent), the package secures a long-run downward debt path with GFN within 20 percent threshold.
  - Staff emphasizes that sustaining market access over the longer run could be difficult without further debt relief and that any additional relief should be contingent on realistic growth and primary surplus assumptions.
- DSA key numeric baselines and stress outcomes (selected):
  - Staff long-run primary surplus ceiling: 1.5 percent of GDP.
  - Staff long-run nominal GDP annual growth projection: 2.8 percent.
  - EIs long-run primary balance assumption: 2.2 percent of GDP.
  - EIs long-run nominal GDP annual growth assumption: 3 percent.
  - Initial market access rate assumed: 4.5 percent; market rate bounds: floor of 4 percent, cap of 6 percent.
  - Cash buffer target: about €24 billion; projected cash buffer of €12 billion as of end-2022.
  - External debt: 228 percent of GDP (level cited in DSA overview).
  - NIIP: minus 141 percent of GDP.
  - External debt projected to decline to 177.6 percent of GDP by 2023 (baseline series includes 2017: 227.9; 2018: 221.3; 2019: 209.7; 2020: 199.7; 2021: 190.2; 2022: 182.5; 2023: 177.6).
  - Shocks by 2023:
    - Interest rate shock (90-bps): increases debt ratio by 7 percentage points above baseline by 2023.
    - Growth shock (average growth decline by 2 percentage points): debt ratio ends in 2023 some 17 percent higher than baseline.
    - Larger current account deficits (deterioration by half standard deviation in 2019–23): raises debt ratio by 16 percentage points compared to baseline by 2023.
    - Combined shock: debt ratio reaches 198 percent of GDP in 2023, 20 percent of GDP higher than baseline.

### Monitoring, engagement, and supervisory follow-up
- SSM comprehensive assessment planned around end-2018—early 2019 will determine supervisory conclusions and potential recapitalization needs.
- Enhanced post-program monitoring (PPM) with the EIs and expected IMF PPM will involve higher frequency engagement and monitoring of specific policies relevant to banking stability.
- Recommended monitoring actions:
  - Track progress on NPE restructurings, sales, and securitizations (emphasize sustainable restructurings over write-offs).
  - Monitor bank capital composition and potential conversion risks associated with DTCs.
  - Regularly assess liquidity positions and funding access as CFMs are relaxed.
  - Coordinate fiscal and structural reforms to support growth, competitiveness, and bank asset-quality recovery.

*International Monetary Fund — 1. Stress Test Results for Greek Banks*

### 1. Stress Test Results for Greek Banks ____________________________________________________________ 22

### 1. Stress Test Results for Greek Banks

### Context
- Greece stabilized its economy and largely closed imbalances under early adjustment programs, aided by the 2012 debt restructuring and exceptional official financing, but at considerable cost.
- Real output is about 75 percent of its pre-crisis peak.
- The share of population at risk of poverty or social exclusion increased by 8 percentage points to 36 percent by 2013, and has remained broadly unchanged since then.
- As Greece exits the 2015–18 ESM program, it lags comparator countries in competitiveness and faces challenges to raise productivity, growth, and job creation.
- Key interrelated challenges identified:
  - Fiscal policy must be rebalanced to better support growth, including by reducing tax rates and strengthening social safety nets, while maintaining high primary surpluses agreed with the European Institutions (EIs).
  - Repair weak bank balance sheets, restore full confidence in the financial system, and revive growth-enhancing bank intermediation.
  - Implement substantial labor and product market reforms to boost productivity and address competitiveness gaps.
  - Enhance efficiency and governance of ineffective public sector institutions.
  - Meet strict policy commitments to secure promised European debt relief over 2019–22 and maintain policies consistent with ensuring market access.
- Political context: upcoming elections create uncertainty; Greek authorities favored building a precautionary cash buffer rather than a follow-up program. Greece will engage in ‘enhanced’ post-program monitoring (PPM) with the EIs, coordinated with the expected IMF PPM.

### Recent Developments
- Growth:
  - Growth resumed in 2017 but was weaker than expected; 2017 real GDP growth reached 1.4 percent.
  - Growth drivers in 2017: goods and services exports (including tourism) and a positive surprise in investment in Q4.
  - Private consumption remained weak; unemployment rate declined to 21.2 percent.
  - Growth accelerated in 2018: Q1 to 0.8 percent Q-o-Q (seasonally adjusted).
  - HICP inflation averaged around 1.1 percent in 2017 and decelerated to close to zero in early 2018.
- Fiscal:
  - General government primary surplus reached 4.2 percent of GDP in 2017, against the SBA-AIP target of 1¾ percent.
  - Revenue: 49.0 percent of GDP (outturn) vs SBA-AIP 49.4 percent of GDP (difference -0.4).
    - Indirect Taxes: 17.3 percent (outturn) vs 17.5 percent (SBA-AIP), difference -0.2.
    - Social Contributions: 14.6 percent vs 14.0 percent, difference 0.6.
    - Direct Taxes: 10.2 percent vs 10.4 percent, difference -0.2.
    - Other: 7.0 percent vs 7.5 percent, difference -0.6.
  - Primary Expenditure: 44.8 percent of GDP (outturn) vs 47.7 percent (SBA-AIP), difference -2.9.
    - Social Benefits: 21.6 percent vs 22.4 percent, difference -0.8.
    - Compensation of Employees: 12.1 percent vs 12.5 percent, difference -0.4.
    - Other: 11.2 percent vs 12.8 percent, difference -1.6.
  - Primary Balance: 4.2 percent (outturn) vs 1.7 percent (SBA-AIP), difference 2.5.
  - Spending compression explained the outperformance: pension spending declined due to delayed processing of claims and fewer eligible retirees; investment spending was 1 percent of GDP lower than projected due to delays in EU funding and administrative bottlenecks.
  - Government arrears declined to €4.2 billion as of end-April (compared to €7.3 billion in April 2017), aided by ESM funds.
- Market access and liabilities:
  - July 2017: issued a €3 billion five-year bond with a 4.4 percent coupon; half used for liability management.
  - November 2017: voluntary off-market €25.5 billion exchange of existing PSI bonds for five new benchmark issues; around 60 percent of participants were domestic.
  - Mid-February (post-third review): issued a €3 billion, seven-year government bond yielding 3.5 percent.
  - 10-year bond yields: peaked at 4.8 percent in May 2018, then eased; after June 21 debt agreement S&P upgraded sovereign debt and 10-year yield declined around 50 bps to just under 4 percent.
- Banking sector:
  - As of end-March 2018, Greek banks’ non-performing exposures (NPEs) were 49 percent of total loans, with a coverage ratio of 49 percent.
  - Banks met NPE reduction targets submitted to the Single Supervisory Mechanism (SSM), but targets are largely backloaded and reductions relied mostly on write-offs rather than restructurings.
  - Recent progress in NPE reduction aided by a better legal enabling environment; NPE sales commenced; number of e-auctions of foreclosed properties is rising.
  - Issuance of new covered bonds amounting to €2 billion in end-2017—early 2018.
  - Private deposits trending up but remain slightly below early 2015 levels.
  - Emergency Liquidity Assistance (ELA) reduced to just under €10 billion (a €30 billion reduction y-o-y).
  - In early July, S&P upgraded the ratings of all four major banks.
- External position:
  - 2017 external position moderately weaker than suggested by fundamentals and policies.
  - Staff assesses current account (CA) gap in range -2.4 to -1.4 percent, corresponding to a REER gap of between 5 and 9 percent.
  - REER index and level regression models indicate overvaluations of 13 and 19 percent; CA model indicates a gap of 8 percent (corresponding to a CA gap of -2.2 percent of GDP).
  - External sustainability approach suggests CA gap consistent with gradual improvement in negative NIIP over the long term, contingent on continued reforms and sufficient public debt relief.
- Debt relief:
  - At the June 21 Eurogroup meeting, European member states agreed additional debt relief and an enhanced post-program surveillance framework.
  - IMF and EIs agree relief will significantly mitigate refinancing risks and improve medium-term debt prospects, though views differ on whether it ensures long-run sustainability.

### Outlook and Risks
- Growth projections:
  - Real GDP growth revised down to 2.0 percent for the year (from 2.6 percent in the SBA-AIP).
  - Growth projected to accelerate modestly in 2019, with the output gap closing by 2023.
  - Long-term potential real GDP growth projected around 1 percent, slowed by unfavorable demographic trends.
  - Structural unemployment estimated at about 15 percent in 2017, with only gradual improvement expected over the next two decades.
- Medium-term macro framework (selected projections, contribution unless otherwise indicated):
  - 2016: Real GDP -0.2
  - 2017: Real GDP 1.4
  - 2018: Real GDP 2.0
  - 2019: Real GDP 2.4
  - 2020: Real GDP 2.2
  - 2021: Real GDP 1.6
  - 2022: Real GDP 1.2
  - Private consumption contributions (2016–2022): 0.0, 0.1, 0.4, 0.4, 0.5, 0.5, 0.5
  - Gross fixed capital formation contributions (2016–2022): 0.2, 1.1, 1.3, 1.6, 1.4, 0.9, 0.5
  - Exports of goods and services contributions (2016–2022): -0.6, 2.1, 1.5, 1.4, 1.4, 1.1, 1.1
- Downside risks (Annex VII):
  - Domestic policy and financial sector risks:
    - Reform fatigue could slow or reverse structural reforms.
    - Sustaining targeted high primary fiscal surpluses entails significant political and judicial risks.
    - A negative ruling on a constitutional court challenge to pension reform could undermine fiscal consolidation and pension viability.
    - Banks vulnerable to depositor confidence shifts as CFMs relax; ongoing balance sheet assessments and new accounting standards could require additional buffers.
    - Limited internal capital generation prospects for banks due to legacy portfolios weighing on profitability.
  - External risks:
    - Tighter global financial conditions, increased regional risk aversion (e.g., Italy-related), or market skepticism about Greece’s reform commitment could create refinancing risks for firms, banks, and the state.
    - Weaker Euro Area growth and other risks could lower exports and hurt confidence.
- Debt sustainability:
  - June Eurogroup debt relief substantially strengthens medium-term debt sustainability and mitigates refinancing risks, but maintaining improvements may be difficult under realistic assumptions on nominal growth (around 2.8 percent) and fiscal primary balances (at most 1.5 percent of GDP).
  - Staff notes sustaining market access over the longer run could be difficult without further debt relief; European partners committed to assess whether additional relief will be needed (contingent on realistic assumptions).
- Authorities’ views:
  - Authorities more optimistic on long-term growth, projecting real GDP growth in range 1.3 to 1.5 percent through TFP improvements and more optimistic demographic projections.
  - Authorities committed to meeting long-run primary balances of 2.2 percent, confident that announced debt relief will unlock market access.
  - Authorities broadly agreed with staff’s external sector assessment and emphasized external risks, while being less concerned about domestic risks.

### Policy Discussions (implications for banking sector and stress testing)
- Priority policy actions linked to stress tests and banking sector stability:
  - Continue efforts to reduce NPEs through sustainable restructurings, NPE sales, and enhanced foreclosure and e-auction processes rather than relying primarily on write-offs.
  - Strengthen bank capital buffers given limited prospects for internal capital generation and potential for additional needs from balance sheet reassessments and new accounting standards.
  - Monitor depositor confidence and manage the phased relaxation of capital flow management measures to prevent destabilizing outflows.
  - Coordinate fiscal policy rebalancing to support growth while maintaining agreed high primary surpluses to preserve debt sustainability and market access.
  - Implement structural reforms to boost competitiveness, productivity, and private investment recovery, which are central to improving banks’ asset quality and long-run external sustainability.
  - Ensure timely implementation of judicial and administrative reforms that underpin an improved lending and workout environment (legal enabling environment improvements are already aiding NPE reduction).
- Monitoring and engagement:
  - Enhanced post-program monitoring with the EIs and expected IMF PPM will involve higher frequency engagement and monitoring of specific policies, which can support continued reform implementation and provide frameworks for addressing banking vulnerabilities.

*International Monetary Fund — 1. Stress Test Results for Greek Banks*

### 15.      While much has been accomplished, most notably in strengthening the fiscal position,

### 15.      While much has been accomplished, most notably in strengthening the fiscal position,

### A. Pursuing Pro-Growth Fiscal Policy
- Greece has reached its targeted 3.5 percent of GDP primary surplus, and is projected to maintain it through 2022.
- Authorities’ MTFS projects additional fiscal policy space that, if affirmed as permanent, will be used to lower tax rates.
- Staff view: high primary surplus commitments are detrimental to growth; welcomed commitment to fully implement the 2019–20 pre-legislated fiscal rebalancing package.
- Pre-legislated package impacts:
  - In 2019, spending on well-targeted social safety nets and investment will increase by 1 percent of GDP, funded by a fiscally neutral reduction in spending on pensions (via a pension recalibration).
  - In 2020, income tax rates will be reduced by an equivalent of 1 percent of GDP, funded through a broadening of the personal income tax base—specifically a lowering of the income tax credit.
- Growth measures (percent GDP):
  - Spending Measures (Taking effect in 2019): Total 1.0
    - Housing allowance 0.3
    - Child benefit 0.1
    - School meals program 0.1
    - Reducing prescription co-payments 0.1
    - Pre-schooling and nursery units 0.1
    - ALMP / 0.1
    - Public investment / 0.1
  - Tax Measures (Taking effect in 2020): Total 1.0
    - Reduction of PIT bottom rate 0.5
    - Reduction in solidarity contribution 0.2
    - Reduction of CIT rate 0.2
    - Reduction of ENFIA 0.1
- Staff recommendations and cautions:
  - Urged caution in adopting permanent expansionary measures beyond the pre-legislated package.
  - Urged reliance on more conservative underlying revenue assumptions for the MTFS.
  - Advised adoption of more sustainable expenditure control measures to replace blunt ceilings on healthcare spending and the civil servant attrition rule.
  - Suggested further growth-enhancing (fiscally neutral) rebalancing to reduce distortions and improve targeting (examples: lowering the labor tax wedge, unifying VAT rates under a lower statutory rate, better targeting of residential electricity tariff discounts, revamping disability benefits).
  - Highlighted need for measures to be employed if fiscal risks materialize (including delaying expansionary measures) and to explore ways to build buffers for counter-cyclical policies while remaining consistent with European partners’ expectation of a 2.2 percent of GDP average primary surplus target over 2023–60.
- Staff long-run view: Greece can reasonably be expected to sustain a long-run primary surplus of no more than 1.5 percent GDP.
- Authorities’ projection of additional fiscal space: around 0.4 percent of GDP in 2019 (rising to 1.7 percent of GDP in 2022); estimate to be revisited when preparing the 2019 budget.
- Authorities’ stated priorities if space is available: reduce the tax burden in 2019 and 2020; in subsequent years allocate fiscal space equally between further reducing the tax burden and increasing social spending.
- Authorities’ long-term average primary surplus target: 2.2 percent (viewed as ambitious but feasible).

- General Government Operations, 2017–23 (ESA 2010), percent of GDP — key rows preserved exactly as in source:
  - Revenue: 2017 49.0 2018 48.7 2019 47.1 2020 46.4 2021 45.8 2022 45.0 2023 45.0
  - Indirect Taxes: 2017 17.3 2018 16.9 2019 16.5 2020 16.1 2021 15.8 2022 15.7 2023 15.5
  - Social Contributions: 2017 14.6 2018 14.3 2019 14.0 2020 14.0 2021 13.9 2022 13.7 2023 13.6
  - Direct Taxes: 2017 10.2 2018 10.0 2019 9.5 2020 9.5 2021 9.5 2022 9.6 2023 9.6
  - Other Revenue: 2017 7.0 2018 7.4 2019 7.1 2020 6.8 2021 6.5 2022 6.1 2023 6.2
  - Primary Expenditure: 2017 44.8 2018 45.1 2019 43.7 2020 42.9 2021 42.2 2022 41.5 2023 41.9
  - Social Benefits: 2017 21.6 2018 21.1 2019 19.7 2020 19.3 2021 18.9 2022 18.7 2023 18.8
  - Compensation of Employees: 2017 12.1 2018 12.8 2019 12.1 2020 12.1 2021 12.0 2022 11.8 2023 11.8
  - Intermediate Consumption: 2017 5.0 2018 4.7 2019 4.8 2020 4.7 2021 4.8 2022 4.8 2023 4.9
  - Other Expenditure: 2017 6.1 2018 6.5 2019 7.0 2020 6.8 2021 6.5 2022 6.3 2023 6.4
  - Primary Balance: 2017 4.2 2018 3.5 2019 3.5 2020 3.5 2021 3.5 2022 3.5 2023 3.0
  - Sources: Ministry of Finance, and IMF staff estimates.

- Tax administration and public financial management reforms progress and priorities:
  - Progress made: creation of a new revenue agency with considerable autonomy; improvements to automated risk analysis and audit case selection; new out-of-court debt restructuring scheme including public sector debts; legislative reforms in accounting and cash management toward a streamlined treasury system.
  - Staff highlighted need to finalize measures to strengthen revenue administration: completion of a new HR regime (position and performance based grading and promotion), upgrade major IT systems, stronger debt collection enforcement, reduction of excessive portfolio of uncollectible debts, further development of compliance risk management, modernization of audit practices.
  - Staff highlighted need to implement planned public financial management measures: multi-year sequenced reforms in cash management, chart of accounts, and accounting; measures to clear and prevent arrears; upgrading budgeting practices; improving procurement procedures.

### B. Restoring Bank Health to Support Growth
- Reforms have improved legal environment for credit and facilitated NPE resolution: improvements in household and corporate insolvency frameworks, regime of insolvency administrators, position of secured creditors; introduction of a new out-of-court workout scheme (OCW) and a new system of electronic auctions (fully replacing traditional auctions).
- NPE overhang will take time to affect bank portfolios and will continue to weigh on profitability and capital adequacy.
- Banks face asset-liability management challenges; systematic ongoing breaches of liquidity requirements noted.
- CFMs continue to be lifted in steps, most recently in June; remaining limits unlikely to be removed before 2019.
- Bank governance has improved but further work needed to meet best practice standards; constraints on credit supply persist.

- Key policy recommendations to hasten financial sector recovery:
  - More ambitious NPE reduction targets and supervisory incentives: pursue restructuring solutions that restore borrower long-term viability; accelerate NPE write-offs and sales; staff cautioned against NPE resolution initiatives that create new fiscal risks (e.g., APS with public guarantees).
  - Proactive build-up of capital buffers: reduce relative importance of deferred tax assets eligible under the Greek deferred tax credit (DTC) scheme (more than half of banks’ CET1); consider capital raises (e.g., issuance of non-dilutive instruments in private markets) in near-to-medium term; absorb phasing-in of IFRS 9 rules and build up MREL over medium term.
  - Address liquidity and funding risks: narrow maturity gaps and reduce asset encumbrance; anticipate termination of ECB waiver when Greece exits its program—banks will need to secure liquidity at sustainable cost and continue deleveraging; deposits and access to wholesale funding uncertain—banks may need to tap more expensive ELA, with higher costs impacting profitability and potentially triggering DTC conversion; authorities should regularly update comprehensive assessment of downside risks from potential sovereign financing cost increases.
  - Strengthen bank governance: Bank of Greece and the SSM should increase follow-up on internal governance, internal control environment, risk management framework, and governance of NPL management and performance practices.
  - Effective implementation of legal reforms to facilitate NPE resolution.
  - Continued liberalization of CFMs in a prudent, conditions-based manner; ensure sufficient bank liquidity while CFMs are relaxed.

- Authorities’ assessment and plans:
  - Authorities assessed banks are on track to return to long-term sustainability with new momentum to balance-sheet cleanup, aided by improved governance.
  - Pointed to stress test results showing resilience and recent significant additional provisioning to speed up NPE write-offs, sales, and securitizations.
  - Expect gradual lifting of CFMs, return of deposits, and access to wholesale funding to help curb and then eliminate ELA refinancing by end-2019.
  - Government conveyed view that credit market failures in the SME sector could be addressed through creation of a development bank drawing on non-deposit funding (e.g., EIB).

### C. Fostering Employment
- Labor market context:
  - Initial reform program period (2010–14) produced significant improvements in labor market flexibility and cost competitiveness.
  - More recent reforms modest but broadly positive.
  - Unemployment rate has declined but remains the highest in Europe due to slack, sectoral shifts (away from non-tradables), and large public-sector wage premia.
- Areas of focus from discussions:
  - Avoid negative consequences of reversing two key labor market reforms in September:
    - Reversal relates to ‘extensions’ (applying conditions of a CLA negotiated by one subgroup to all workers in sector/occupation) and ‘favorability’ (allowing workers subject to multiple CLAs to select the most favorable).
    - Staff urged reconsideration; reversal will reduce labor market flexibility and risk disconnecting wages from firm-level productivity, hurting job creation.
    - Authorities plan a new mechanism to measure representativeness to extend only representative agreements; impact depends on implementation.
  - Implement new minimum wage framework (legislated in 2013) in a prudent manner:
    - Framework effective this September; statutory minimum wage set by government after annual consultations (consultation starting February 2019).
    - Staff stressed prudent outcomes strongly connecting wages to labor productivity and recommended discontinuing seniority premiums to simplify multiple minimum wages.
  - Need further progress in active labor market policies (ALMP) and measures to boost labor force participation—focus on new entrants, long-term unemployed, and increasing female and older cohort participation given demographic trends.
- Authorities’ view:
  - Restoration of collective bargaining is critical to achieve shared prosperity and support aggregate demand.
  - Consider much unemployment cyclical and expected to dissipate as economy strengthens.
  - Reinstatement of extension and favorability expected to strengthen social partner dialogue and drive productivity increases offsetting higher wages’ employment impact.
  - Will implement legislated minimum wage framework and emphasized that workers should share benefits from future productivity increases.

*Source: IMF staff report excerpt (GREECE).*

### 26.      While product market reforms

### 26.      While product market reforms

### Product market reforms, competition, and privatization
- Productivity growth remains "well below the Eurozone average" and FDI is "low."
- The authorities have continued efforts to reduce barriers to competition, including:
  - liberalization of some closed professions;
  - reforming investment licensing.
- Implementation of approved measures has been mixed; the authorities’ new growth strategy "does not include any significant further changes (Annex II)."
- Greece’s business environment and product market restrictiveness "compare poorly to the OECD average" and "ranks well below the least restrictive country in most categories."
- Privatization progress is "overall, underwhelming," with:
  - success in securing the regional airport concession in 2017;
  - delays in the Hellenikon airport project, the sale of Hellenic Petroleum shares, and the gas distributor (DEPA).
- Staff recommendations:
  - accelerate product market liberalization, focusing on already identified reforms (further reducing barriers to competition for professional services and remaining sectors of the investment licensing reform);
  - facilitate further privatization, particularly completion of those already in the pipeline, as crucial to foster FDI.
- Authorities’ response:
  - agree with priorities but stress balancing regulatory streamlining with protection of the public interest;
  - remain committed to finalizing the investment licensing reform as expressed in their growth strategy;
  - will complete reforms for closed professions currently in the pipeline and review scope for further improvements;
  - plan to implement current privatization plans and assess prospects for monetizing remaining participation in state-owned enterprises.

### Public sector efficiency, governance, and anti-corruption
- Ongoing initiatives:
  - strategic plan to strengthen the judicial system: enhance efficiency, speed up proceedings, address functional shortcomings, introduce modern technology, increase specialization of the judiciary;
  - Anti-Corruption Action plan being implemented with EC and OECD support to promote integrity, enhance public-private cooperation on fraud and corruption, and raise awareness of the negative impact of corruption.
- Remaining weaknesses and priorities:
  - still-weak tax enforcement, inadequate internal audit/control, and corruption have facilitated tax evasion and contributed to weak public finances;
  - initial efforts on tax administration, public procurement, cash management, electronic payment systems, anti-money laundering, and public-sector staffing have helped but need completion and full implementation;
  - implement planned and adopted reforms to increase protection from liability of public officials engaged in the normal exercise of their official duties, to avoid undermining data integrity and institutional independence or perceptions thereof;
  - Anti-Corruption Action plan should be implemented with a focus on specific results and improving data collection and transparency.
- Authorities’ commitments:
  - continue to implement judiciary modernization plans and are open to initiatives to improve implementation of legislated reforms;
  - Anti-Corruption authorities implementing the National Anti-Corruption Action Plan and receptive to international recommendations;
  - continue implementing reforms to strengthen tax enforcement tools, preserve the independence of the newly formed tax authority, and strengthen cash management through closure of bank accounts towards a streamlined Treasury Single Account;
  - continue to stand by the accuracy of national statistical data and remain committed to preserve institutional independence.

### Official statistics and data integrity
- Progress since 2010:
  - quality of official statistics has "continued to improve" since ELSTAT was established in 2010;
  - coverage and timeliness of data compilation processes have improved and are consistent with international statistical standards;
  - IMF, Eurostat, and EU member states technical assistance was important.
- Remaining weaknesses:
  - significant gaps in fiscal source data;
  - continuing discrepancies in fiscal reports of the Bank of Greece.
- Staff recommendations:
  - protect gains by defending the statistical agency against efforts to undermine credibility;
  - guarantee ELSTAT's professional independence;
  - address remaining reporting shortcomings while respecting the "Commitment on Confidence in Statistics" endorsed by the government in 2012.

### Future Fund engagement and staff appraisal: growth, debt, and risks
- Post-program monitoring (PPM):
  - Greece meets the criteria for initiating PPM;
  - outstanding obligations to the Fund are expected to remain above the SDR 1.5 billion threshold "until late 2022";
  - no exceptional circumstances indicate that PPM is not warranted.
- Growth and macroeconomic context:
  - "Growth has returned to Greece," aided by macroeconomic stabilization, structural reforms, and a better external environment;
  - risks include slower trading partner growth, tighter global financial conditions, regional instability, the domestic political calendar, and reform fatigue.
- Debt relief and sustainability:
  - debt relief agreed with European partners has significantly improved debt sustainability over the medium term (extension of maturities by 10 years and other measures, plus a large cash buffer);
  - staff concern: improvement depends on "very ambitious assumptions" about GDP growth and Greece’s ability to run large primary fiscal surpluses; long-run sustainability could be difficult without further debt relief;
  - staff welcomes European partners’ undertaking to provide additional relief if needed, but stresses such relief must be contingent on realistic assumptions about Greece’s ability to sustain the real GDP growth rates envisaged by the EIs and achieve exceptionally high primary surpluses.
- Remaining legacies and reform needs:
  - high public debt, weak bank and other private sector balance sheets, CFMs, government arrears, and a large at-risk population weigh on growth prospects;
  - progress with key fiscal and market reforms has lagged; the authorities’ growth strategy contains promising elements, but assessment of gaps, continuity with current reforms, and implementation is crucial.
- Fiscal policy recommendations:
  - pursue a growth-friendly rebalancing of the fiscal mix;
  - achieving the high 2018–22 primary surplus targets agreed with the EIs will require high tax revenues and will constrain social spending and investment;
  - aim for budget-neutral improvements in the fiscal policy mix, starting with the already legislated fiscal package for 2019–20;
  - back measures with fiscal structural reforms to strengthen efficiency and implementation, to help reduce the poverty rate and economic distortions and support growth;
  - avoid delaying these reforms and be cautious about adopting permanent expansionary measures beyond those already legislated.
- Banking sector and CFMs:
  - reviving banks’ lending capacity requires tackling very high non-performing exposures (NPEs);
  - important legal reforms to reduce NPEs have been adopted and steps taken to develop a NPE secondary market, but further implementation is needed;
  - recommended actions: more ambitious NPE reduction targets, proactive build-up of capital buffers, further steps to mitigate liquidity and funding risks, and stronger bank internal governance;
  - remaining CFMs should be lifted prudently following the agreed roadmap, paced by economic and banking conditions and depositor confidence;
  - staff supports the authorities’ request for Executive Board approval for temporary retention of exchange restrictions under Article VIII, Section 2(a) since they are imposed temporarily, for balance of payments reasons, and non-discriminatory.
- Labor market and competitiveness:
  - further product and labor market reforms would boost productivity and labor force participation;
  - progress with product market reform has been uneven and slow in some areas; Greece "is still lagging other European countries in several competitiveness indicators";
  - earlier labor market reforms aided employment and competitiveness, but upcoming legislation that will reintroduce extensions and favorability of collective agreements "risks unwinding these gains";
  - Fund staff "strongly urges the authorities not to reverse these reforms";
  - any minimum wage adjustment should be prudent and in line with productivity gains to "preserve the momentum of employment recovery and avoid any erosion of competitiveness";
  - improved delivery and better targeting of active labor market policies would help reintegrate the long-term unemployed.
- Governance and institutional independence:
  - public sector efficiency and governance need further strengthening;
  - preserve independence of the statistical authority and ensure adequate protection for officials (including those in charge of statistical reports) to increase confidence in public finances and ensure data integrity.
- Overall judgment and next steps:
  - Greece has made substantial adjustments and reforms that have allowed a return to growth, but significant external and domestic risks and remaining legacies require continued reform momentum;
  - "The Managing Director recommends the initiation of post-program monitoring. The first PPM Board discussion would be envisaged by early 2019.";
  - "The next Article IV consultation with Greece is expected to be conducted on the standard 12-month cycle."

*Source: cr18248 - 26.      While product market reforms*

### Box 1. Stress Test Results for Greek Banks

### Box 1. Stress Test Results for Greek Banks

### Summary of stress test framework and implications
- Stress tests published by the ECB in May indicate resilience in the baseline scenario but significant capital depletions in the adverse scenario.
- The stress test methodology did not include any pass or fail threshold (or ‘hurdle rate’) for capital adequacy ratio.
- No automatic supervisory decision on the need for further recapitalizations was triggered by the stress test results at this stage.
- The SSM plans to incorporate these results as well as other inputs and qualitative information when determining its comprehensive assessment of Greek banks around end-2018—early 2019.
- Therefore, both the size of shortfalls, if any, and the timeline for addressing such shortfalls will remain uncertain until then.
- Staff estimates that if the three banks with lower CET1 were asked to maintain capital ratios under adverse conditions in line with a capital requirement of 7.5–8.0 percent, the related capital shortfall could be in the range of €1.3–1.9 billion.

### Key stress-test outcomes (CET1 ratios)
- Starting point (end-2017), Baseline scenario (end-2020), Adverse scenario (end-2020), Depletion (C) - (A):
  - Alpha Bank: 18.3; 20.4; 9.7; -8.6
  - Eurobank: 15.4; 16.6; 6.8; -8.7
  - NBG: 16.5; 16.6; 6.9; -9.6
  - Piraeus Bank: 14.9; 14.5; 5.9; -9.0
- CET1 (Percent) as reported by the European Central Bank.

*Source: European Central Bank (as presented in the IMF staff report).*

### Annex I. Implementation of Past IMF Recommendations

### Annex I. Implementation of Past IMF Recommendations

### Implementation summary and progress under the July 2017 SBA–AIP
- Program purpose and scope
  - SBA-AIP reform goals: stabilize the economy and provide room to build consensus for a more ambitious reform agenda.
  - The economic adjustment program included 21 Structural Benchmarks (SB) to improve fiscal sustainability, financial stability, and competitiveness.
  - SBA-AIP commitments were closely aligned with the conditionality of the 2015–2018 ESM program.

- Implementation outcomes
  - Implementation of structural reforms was mixed: satisfactory progress in the financial sector; delays in fiscal structural and labor/product market reforms.
  - Some implemented reforms were subsequently weakened (example: closed professions and public administration).
  - Timelines for SB implementation were updated with the authorities; as of end-May, 12 structural measures under the SBA-AIP remained outstanding.
  - Staff anticipated that many SBA-AIP benchmarks would be completed before end-August, though some (notably liberalization of closed professions and legal environment for HR reforms to the revenue administration agency) were not expected to be completed due to lack of understandings with the authorities.

- Quantitative performance
  - Quantitative Performance Criteria (QPC) were mostly met, frequently with a comfortable margin.
  - QPC floors on intermediate spending at end-September and end-December 2017 were missed by a small margin (0.1–0.2 percent of GDP).
  - QPCs for 2018 were revised to reflect stronger fiscal projections; fiscal developments in Q1 2018 were broadly in line with revised QPCs.

### Implementation of 2016 Article IV recommendations — key policy areas and actions

- Fiscal policy recommendations and actions
  - Recommendation: Maintain a neutral fiscal stance over the medium term with the primary balance at 1.5 percent of GDP.
  - Recommendation: Rebalance the fiscal policy mix by broadening the tax base and rationalizing pension spending to create room for tax rate cuts and targeted social assistance.
  - Recommendation: Continue fiscal structural reforms to address tax evasion and large tax debt owed to the State.
  - Authorities’ actions:
    - Authorities significantly overperformed their 2017 target of 1.75 percent of GDP, in large part due to lower-than-expected expenditure on investment and social benefits, which weighed on growth.
    - Authorities expect to meet their 2018 target, and are committed to a primary balance target of 3.5 percent of GDP during 2019–2022.
    - Authorities approved legislation to cut pensions and reduce the personal income tax credit threshold, to be implemented in 2019 and 2020, respectively. Each measure is expected to generate net fiscal savings of 1 percent of GDP, to be used to lower corporate, personal, and property tax rates and to finance new investment, ALMPs, and social protection programs consistent with medium-term primary balance targets.
    - A new independent revenue agency was established in January 2017; policy actions were taken to improve automated risk analysis and audit case selection. An out-of-court debt restructuring scheme was legislated (not yet fully implemented) for restructuring tax and social contribution debt for viable taxpayers.

- Financial sector recommendations and actions
  - Recommendation: Reduce NPLs, strengthen and implement fully the debt restructuring legal framework, and enhance supervisory tools.
  - Recommendation: Strengthen bank governance and eliminate CFMs as soon as prudently possible.
  - Authorities’ outcomes:
    - NPE targets have been broadly met but were described as unambitious and banks have relied on write-offs.
    - Important legal reforms (including launch of e-auctions and OCW) were implemented; direct impact on absolute NPE reduction has been modest.
    - Governance improvement roadmaps were developed in 2017; some important changes were implemented.
    - In May 2017, authorities adopted a roadmap for relaxation of CFMs. Several liberalization steps implemented since June 2015, but cash withdrawals and transfers abroad continue to be subject to some limits that may impede normal business activities.

- Structural reforms recommendations and actions
  - Recommendation: Preserve earlier labor market reforms that improved market flexibility and complement with additional measures for collective dismissals and industrial relations; accelerate product and service market reforms and privatizations.
  - Authorities’ outcomes:
    - Authorities legislated reinstatement of extension and favorability (to take effect at the end of the ESM program), reversing earlier labor market flexibility measures.
    - Some reforms were undertaken (e.g., removal of the requirement for pre-approval for collective dismissals) but important restrictions remain (low thresholds for collective dismissal and prohibition of defensive lockouts).
    - Product market reform is progressing but some measures (Sunday trade, building materials) have been diluted or remain to be implemented. Progress on liberalizing closed professions is uneven. Key privatization projects (example: Hellenikon) face significant challenges.

### Annex II — Assessment of the Greek Authorities’ Growth Strategy
- Strategy objectives and overall assessment
  - Objectives: move towards a more productive outward-oriented economy, higher R&D, more infrastructure investment supportive of the tradable goods sector, and a more efficient and targeted social welfare system.
  - The strategy is a high-level description and would benefit from more detailed diagnostics, explicit reform proposals, and funding plans.

- Staff observations and recommendations
  - Strategy would benefit from better diagnostics and assessment of current policies and ongoing reforms; remaining policy gaps (e.g., liberalize closed professions) are vaguely addressed or absent.
  - The strategy envisages less flexible labor market by rolling back 2011 suspension of contract extensions and favorability principles, and proposes an unspecified increase in the minimum wage — staff notes these will reduce labor market flexibility, risk disconnect between productivity and wages, and endanger jobs.
  - Unclear consistency between objectives (e.g., increase youth employment) and proposals (e.g., increase in minimum wage) given high unemployment.
  - Strategy should discuss funding plans for expanded social welfare and a shift to a more growth-friendly fiscal policy mix; current text lacks details beyond commitment to fight tax evasion.
  - Financial sector proposals focus less on bank balance sheet repair and more on measures with potential fiscal and financial risks: a hinted national asset management company, use of cooperative banks to finance SMEs, and possible public funds (new development bank) to support SMEs and social enterprises — little evidence provided of productivity benefits and potential financial/fiscal risks.

### Annex III — Progress on Relaxation of Capital Flow Management Measures (CFMs)
- Roadmap and principles
  - May 2017: authorities published a conditions-based roadmap for liberalization of CFMs (Pillar II: cash withdrawals and opening of new accounts; Pillar III: capital transfers abroad).
  - Roadmap milestones: normalization of banking sector, economic conditions, and implementation of the adjustment program; liberalization steps may be implemented gradually to consider banks’ liquidity and depositor confidence.
  - CFMs related to outflow of funds abroad envisaged to be the last abolished, due to linkage with reopening of financial markets.

- Implementation pace and recent changes
  - Recovery of activity and ESM progress allowed further relaxation but pace was slower than staff expected.
  - Since July 2017 confidence improved; banks and government accessed international capital markets repeatedly; banknotes in circulation declined while electronic payments increased substantially.
  - Banks’ liquidity remained tight; deposits and capital flows remained sensitive to confidence; risks of capital flight remained elevated.
  - In the second half of 2017 only minor CFM changes; more aggressive actions implemented in last few months: limits on cash withdrawals increased substantially, restrictions on opening new accounts eliminated, and restrictions on transfers abroad relaxed.

- Evolution of key CFM parameters (selected values preserved exactly as presented)
  - Cash withdrawals: initially €60 daily limit and a cumulative €420 weekly limit per depositor 2/.
  - New accounts/Customer IDs: initially permitted in certain cases for selected groups; later permitted for a wider set of cases /groups; eventually permitted for everyone (companies / individuals).
  - Early loan repayment: initially allowed only if made through transfer from abroad or in cash; later early repayment allowed.
  - Early redemption of time deposits: initially allowed only under specific circumstances; later allowed.
  - Transfer limits and travel transfers (selected milestones):
    - €840 bi-weekly limit per depositor → €5,000 monthly limit per depositor.
    - Transfers abroad for general purposes: Not permitted (some exceptions applied) → €1,000 monthly limit per customer, up to an aggregate monthly ceiling for all banks and sub-allocated by bank → €4,000 over two months per customer, up to an aggregate monthly ceiling for all banks and sub-allocated by bank.
    - Individuals' physical transfer of funds abroad: Not permitted (some exceptions applied). 3/ → €2,000 per person per travel abroad → €3,000 per person per travel abroad.
    - Business transfer for normal business activity: BTAC's approval 4/ / bank subcommittees' approval / bank branches' approval initially required; evolved to limits "Over €350K per customer per day" → "Over €700K per customer per day", and sub-layered limits "Up to €350K per customer per day; weekly limit per bank" → "Up to €700K per customer per day; weekly limit per bank" and "Up to €10K per customer per day; weekly limit per bank" → "Up to €40K per customer per day; weekly limit per bank".
  - Footnotes and definitions preserved as in source:
    - 1/ The table covers main elements of the framework only and does not include all applicable exceptions.
    - 2/ Restrictions set per depositor /customer are based on the definition of a Customer ID.
    - 3/ Transfers limited to €2,000 per person per travel abroad were allowed already in July 2015.
    - 4/ BTAC stands for Bank Transactions Approval Committee.

### Annex IV — External Sector Assessment

- Overall assessment
  - The external position of Greece in 2017 was moderately weaker than consistent with medium-term fundamentals and desirable policies.
  - Despite a significant output gap, current account (CA) balance remains negative. CA deficit narrowed marginally in 2017 due to strong exports (including a continued boom in the tourism sector).
  - CA is expected to remain close to balance over the medium term provided envisaged reforms to improve competitiveness materialize.
  - Net international investment position (NIIP) is expected to gradually improve but will remain large and negative for many years, reflecting large external public-sector debt.

- Potential policy responses
  - Sustained increases in productivity are required to remain competitive within the Euro Area; structural reform efforts need to continue.
  - Gradual liberalization of CFMs should continue in a prudent, conditions-based manner.

- Foreign asset and liability position and trajectory
  - Background: Greece’s NIIP has been deteriorating since 2001, reaching a historical low of minus 141 percent of GDP in 2017. The official sector accounts for around three quarters of external liabilities (with about 15 percent due to the central bank and the rest due to the general government).
  - Assessment: Large negative NIIP is due to official sector liabilities to official creditors; while extended at concessional terms, this constitutes an external vulnerability because significant gross financing needs will arise as this debt is expected to be refinanced by the private sector.
  - Projection: Given marginal CA deficits over the medium term, IIP is projected to recover due to normalization of TARGET2 imbalances.

- Current account (CA)
  - Background: CA deficit in 2017 stood at 0.8 percent of GDP, improving marginally due to strong exports; projected to narrow with CA returning to balance by 2023, supported by trade and income balance improvements.
  - Assessment:
    - Cyclically-adjusted CA balance is estimated at -3.7 percent of GDP, compared to the EBA norm of -1.6 percent.
    - Staff assesses the CA gap in the range of (-2.4; -1.4) percent with a mid-point estimate of -1.9 percent.
    - This is 0.3 percent of GDP lower than the implied EBA CA gap and reflects adjustments given large uncertainty around output gap estimates.
    - Assessment is consistent with external sustainability approach implying a CA norm of -2.2 percent of GDP, which would allow gradual reduction of NIIP over the medium term (from -141 to about -100 percent of GDP over a six-year period).
    - Overall assessment: Greece’s external position in 2017 is moderately weaker than consistent with medium-term fundamentals and desirable policies.

- Real exchange rate (REER)
  - Background:
    - HICP-deflated REER came down from its peak in 2009 by around 18.1 percent.
    - It trended up since 2015 (by 3.8 percent) on the back of rising, though still weak, inflation.
    - ULC-deflated REER fell by 36 percent from its peak in 2009 and 21 percent since the labor market reform in 2012; since 2015 it has remained broadly stable.
    - Marginal REER appreciation in 2017 reflected a spike in Greek inflation driven by tax hikes and oil prices.
  - Assessment:
    - REER index and level regression models indicate substantial overvaluation of 12.6 and 18.8 percent respectively; EBA CA model indicates a gap of 8 percent.
    - Results are driven primarily by a large residual and standard error of norm is large; given significant adjustment in unit labor costs and CPI effects from consumption tax increases in 2016 and 2017, staff believes models overestimate overvaluation.
    - On balance, consistent with staff-assessed CA gap and a semi-elasticity of 0.28, the REER gap is assessed to lie between 5 and 9 percent, with a mid-point overvaluation of 7 percent.

- Capital and financial accounts: flows and policy measures
  - Background:
    - Greece’s financial account dominated by official financing flows.
    - Net FDI inflows increased in recent years driven by privatization deals and M&A activity in the financial sector.
    - CFMs and payment restrictions remain in place but have been gradually relaxed.
    - Financing conditions eased somewhat with the Greek government accessing markets three times since July 2017; banks and corporates issued bonds in 2017 and early 2018 after a three-year hiatus.
  - Assessment:
    - CFMs should be removed based on the milestone-based roadmap and gradual normalization of financial conditions (continuing return of deposits and progress in reducing non-performing loans).
    - A steady improvement in the business climate, continued structural reforms, and reduction in uncertainty are needed to attract more FDI and expand access to external funding markets.

- FX intervention and reserves
  - Background and assessment:
    - The euro has the status of a global reserve currency.
    - Reserves held by the Euro Area are typically low relative to standard metrics, but the currency is free floating.

*Source: Annex I. Implementation of Past IMF Recommendations (cr18248).*

### Annex V. Debt Sustainability Analysis (DSA)

### Annex V. Debt Sustainability Analysis (DSA)

### Overview
- The debt relief agreed with Greece’s European partners significantly improves medium-term debt sustainability but leaves longer-term prospects uncertain.
- Extension of EFSF maturities by 10 years and other measures, combined with a large cash buffer, should reduce debt and gross financing needs (GFN) as a percent of GDP over the medium term, improving prospects for market financing access—though risks remain.
- Staff concern: the improvement can only be sustained long-term under very ambitious assumptions about GDP growth and Greece’s ability to run large primary fiscal surpluses; sustaining market access over the longer run may require further debt relief contingent on realistic assumptions.

### Debt Relief Package (Box AV-1) — key elements
- A 10-year deferral and 10-year weighted average maturity (WAM) extension of non-PSI EFSF loans, entailing zero payments of non-PSI EFSF through 2032 (the WAM has increased to 42.5 years).
- A €3.3 billion additional disbursement, aimed at mitigating refinancing risks; these funds would be used to increase the state government cash buffer to about €24 billion (and come on top of the final disbursement in the context of the ESM program of €11.7 billion—for a total of €15 billion).
- Abolishing the step-up interest rate margin on the EFSF debt buy-back tranche for 2018 onwards.
- Returning ANFA/SMP profits over 2019–2022 (around €5 billion), with the caveat that if used to finance investments rather than reduce financing needs, this measure will not be considered debt relief.
- A general commitment by European partners to a future review (in 2032) of Greece’s debt sustainability and to provide additional debt relief measures if needed, conditional on policies staying on track.

### Public Sector DSA: framework and baseline assessment
- The public sector DSA uses a Gross Financing Needs (GFN) framework because most Greek public-sector debt consists of lower interest, longer term official sector obligations and requires longer horizon analysis.
- Under the IMF’s baseline with the agreed debt relief package:
  - Debt-to-GDP trends down in the medium term and GFN remains below 15 percent of GDP in all years except 2018 (due to a larger ESM disbursement for cash buffer purposes).
  - The state government financing needs will be lowered over the next four years given agreement with the ESM to draw down a €24 billion cash buffer (reaching €12 billion as of end-2022).
  - This assessment assumes a €14 billion short-term debt (T-bills) will continue to be rolled over smoothly, and no further state-funded bank recapitalization or other state funding needs.
- Staff reservations on long-run sufficiency:
  - Staff assesses that the specific components of the debt relief package are not sufficient to secure long-run debt sustainability under staff long-run assumptions.
  - Under staff long-run assumptions, debt-to-GDP would initially fall but then begin an uninterrupted rise from around 2038; GFN would breach the 20 percent of GDP threshold by 2038 and continue rising thereafter.
  - Therefore, additional relief would be needed to secure long-run debt sustainability under staff assumptions.

### Contrasting long-term assumptions and outcomes
- IMF staff long-run assumptions and assessment:
  - Staff expects Greece can reasonably sustain a long-run primary surplus of no more than 1.5 percent of GDP and annual real GDP growth of around 1 percent.
  - Together with staff’s 1.8 percent projection of the GDP deflator growth, the nominal GDP annual long-term growth projection is 2.8 percent.
  - Under these assumptions, the debt relief package is insufficient to secure long-run debt sustainability; additional relief would be needed.
- European Institutions (EIs) long-run assumptions and assessment:
  - EIs assume Greece can maintain a long-run primary surplus of 2.2 percent of GDP (on average) and achieve long-run nominal annual GDP growth of 3 percent.
  - Under these assumptions, the agreed debt relief package secures a long-run downward debt path with GFN within the 20 percent threshold; additional relief would not be necessary.
- Staff concern: the commitment to provide additional relief if needed is conditioned on Greece adhering to a very ambitious primary surplus path, raising doubts that the commitment alone is sufficient to mitigate long-term risks.

### Key DSA numeric assumptions and parameters (selected)
- Staff long-run primary surplus ceiling: 1.5 percent of GDP.
- Staff long-run nominal GDP annual growth projection: 2.8 percent (from 1.0 percent real growth + 1.8 percent GDP deflator).
- EIs long-run primary balance assumption: 2.2 percent of GDP.
- EIs long-run nominal GDP annual growth assumption: 3 percent.
- Initial market access rate assumed: 4.5 percent.
- Market rate bounds: floor of 4 percent, cap of 6 percent.
- ESM/EFSF long-run rates revised in staff view: 3.3 percent (staff did not adopt ESM ad-hoc 3.1 percent).
- Privatization (below the line) under all scenarios (total): €5.7bn; example yearly entries in scenarios show amounts like 1.2, 1.1, 0.5, 0.1, 0.3, 0.3, 0.0 (percent/GDP formatting as in source).
- Cash buffer increase: target state government cash buffer about €24 billion; cash buffer of €12 billion as of end-2022.

### Scenarios and stress-test results (selected outcomes)
- No debt relief (IMF assumptions) scenario: debt-to-GDP would start rising from 2033 with GFN breaching the 20 percent threshold in 2033.
- Debt Relief Package (IMF baseline): debt-to-GDP declines initially, then rises from around 2038; GFN breaches 20 percent by 2038.
- Debt Relief Package (European baseline): downward long-run debt path; GFN within 20 percent threshold.
- Illustrative "high primary surplus, lower growth" scenario: higher long-term primary balance (2.2 percent of GDP) achieved at the cost of lower nominal growth (2.7 percent); under these assumptions debt and GFN initially fall but then follow an explosive path over the longer term.
- External-sector shocks and impacts by 2023:
  - Interest rate shock (90-bps): increases debt ratio by 7 percentage points above baseline by 2023.
  - Growth shock (average growth decline by 2 percentage points): debt ratio ends in 2023 some 17 percent higher than the baseline.
  - Larger current account deficits (deterioration by half standard deviation in 2019–23): raises debt ratio by 16 percentage points compared to baseline by 2023.
  - Combined shock (higher interest rates, lower growth, smaller current account): debt ratio reaches 198 percent of GDP in 2023, 20 percent of GDP higher than in the baseline.

### External Sector DSA — key facts and projections
- External debt: 228 percent of GDP.
- Net international investment position (NIIP): minus 141 percent of GDP (second weakest in Europe after Ireland).
- External debt projected to decline gradually to 178 percent of GDP in 2023, supported by growth and inflation recovery, a positive non-interest current account, higher FDI inflows, debt relief, and usage of cash buffer to reduce market financing needs.
- The weak NIIP and high external debt will continue to constrain recovery by limiting availability of external savings and requiring mobilization of domestic savings for investment.

### Risks, realism, and policy implications
- Main risks to sustainability:
  - Weaker growth, lower primary balances, and the materialization of contingent liabilities (e.g., conversion of banks’ DTCs) could undermine sustainability.
  - Political or implementation risks could undermine credibility of future relief commitments.
- Staff view on policy mix and growth:
  - Greece’s fiscal adjustment to date has been growth-unfriendly; reversing severe compression of capital and discretionary spending and reducing high tax rates requires politically difficult reforms (notably significant pension spending cuts and broadening the narrow tax base) to achieve sustained robust growth without exceptional primary surpluses.
  - Staff judges it difficult to maintain exceptionally high primary surpluses for an extended period while undertaking the required pro-growth policy changes.
- Contingency: staff welcomes the European partners’ undertaking to provide additional relief if needed, but stresses any such relief should be contingent on realistic assumptions about growth and feasible primary surplus paths.

*Source: Annex V. Debt Sustainability Analysis (DSA), IMF country report text provided.*

### Annex V. Table 2. Greece: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

### Annex V. Table 2. Greece: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

### Key headline indicators
- Debt-stabilizing primary balance: 0.1 (Percent of GDP)
- Public sector is defined as general government.
- Public debt includes the stock of deferred interest.

### Baseline and alternative scenario macro-fiscal assumptions (selected series)
Restructuring scenario (2018–2027, annual values shown as sequence)
- Real GDP growth: 2.0, 2.4, 2.2, 1.6, 1.2, 1.2, 1.2, 1.0
- Inflation: 0.9, 1.0, 1.4, 1.7, 1.7, 1.7, 1.8, 1.8
- Primary balance: 3.5, 3.5, 3.5, 3.5, 3.5, 3.0, 2.5, 1.5
- Effective interest rate: 1.7, 1.9, 1.9, 2.0, 2.1, 2.3, 2.5, 2.9

Historical scenario (2018–2027, annual values shown as sequence)
- Real GDP growth: 2.0, -2.8, -2.8, -2.8, -2.8, -2.8, -2.8, -2.8
- Inflation: 0.9, 1.0, 1.4, 1.7, 1.7, 1.7, 1.8, 1.8
- Primary balance: 3.5, -1.6, -1.6, -1.6, -1.6, -1.6, -1.6, -1.6
- Effective interest rate: 1.7, 1.9, 2.2, 2.4, 2.7, 3.1, 3.6, 4.4

Constant primary balance scenario (2018–2027)
- Real GDP growth: 2.0, 2.4, 2.2, 1.6, 1.2, 1.2, 1.2, 1.0
- Inflation: 0.9, 1.0, 1.4, 1.7, 1.7, 1.7, 1.8, 1.8
- Primary balance: 3.5, 3.5, 3.5, 3.5, 3.5, 3.5, 3.5, 3.5
- Effective interest rate: 1.7, 1.9, 1.9, 2.0, 2.1, 2.3, 2.5, 2.9

### Composition and financing indicators (figures described)
- Composition of public debt, public gross financing needs, by currency, by maturity, and gross nominal public debt (percent of GDP) are presented across 2008–2026 and 2016–2026 horizons under Restructuring, Historical, and Constant Primary Balance scenarios (figures provided in the source).

### Stress test scenarios (selected assumptions and outcomes)
- Macro-fiscal stress tests include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock, Lower Growth Scenario.
- Example scenario parameter snapshots (selected years/values shown in source figures):
  - Lower Growth Scenario: Real GDP growth path includes 2.0, 1.4, 1.2, 0.6, 0.2, 0.2, 0.2, 0.0 (percent sequence); Inflation remains around 0.9–1.8; Primary balance under this scenario retains 3.5 early then declines to 2.5 and 1.5; Effective interest rate rises toward 3.0.
- Stress tests present impacts on Gross Nominal Public Debt (Percent of GDP and Percent of Revenue) and Public Gross Financing Needs (Percent of GDP) across 2018–2026 under baseline and shocks (detailed charts in source).

### External debt sustainability (Annex V. Table 3) — baseline and projections (selected levels and rates)
- Baseline: External debt (percent of GDP) by year:
  - 2013: 237.3
  - 2014: 237.5
  - 2015: 250.4
  - 2016: 247.8
  - 2017: 227.9
  - 2018: 221.3
  - 2019: 209.7
  - 2020: 199.7
  - 2021: 190.2
  - 2022: 182.5
  - 2023: 177.6
- Debt-stabilizing non-interest current account (long-run constant balance): -4.2 (percent of GDP)
- Change in external debt (selected years): 0.3, 0.2, 12.9, -2.6, -20.0, -6.5, -11.6, -10.0, -9.5, -7.7, -4.9
- Identified external debt-creating flows (percent of GDP): 13.2, -0.2, -0.5, 1.7, -8.6, -5.3, -6.3, -5.7, -4.6, -3.7, -3.7
- Current account deficit, excluding interest payments (percent of GDP): -3.1, -2.6, -2.5, -1.3, -1.7, -1.9, -2.2, -2.3, -2.4, -2.5, -2.5
- Automatic debt dynamics (percent of GDP contribution): 19.1, 6.9, 5.4, 5.4, -2.4, -1.7, -2.5, -1.8, -0.6, 0.4, 0.3
  - Contribution from nominal interest rate: 5.1, 4.3, 2.7, 2.4, 2.5, 2.6, 2.6, 2.5, 2.5, 2.6, 2.4
  - Contribution from real GDP growth: 7.9, -1.8, 0.8, 0.6, -3.2, -4.3, -5.1, -4.3, -3.2, -2.2, -2.1
  - Contribution from price and exchange rate changes: 6.1, 4.4, 1.9, 2.4, -1.7, -2.2, -2.1, -3.0, -3.3, -3.2, -3.0
- External debt-to-exports ratio (percent): 780.4, 733.7, 837.6, 872.2, 720.6, 639.0, 594.5, 557.7, 526.2, 498.7, 481.6
- Gross external financing need (in billions of US dollars): 256.4, 214.0, 180.9, 176.1, 168.9, 135.4, 119.0, 110.8, 109.3, 111.6, 111.6
- Scenario with key variables at their historical averages (selected value): 221.3, 231.1, 246.9, 261.7, 279.2, 299.6, 17.0 (table presents a longer series)

### Key macroeconomic assumptions underlying the external DSA (selected historical and projection averages)
- Real GDP growth (percent): historical and projection sequence includes -3.2, 0.7, -0.3, -0.2, 1.4, -2.8, 3.6, 2.0, 2.4, 2.2, 1.6, 1.2, 1.2
- GDP deflator in US dollars (change in percent): 0.9, -1.8, -17.4, -1.2, 2.7, -1.4, 7.9, 7.2, 0.6, 2.6, 2.1, 2.4, 1.7
- Nominal external interest rate (percent): 2.1, 1.8, 0.9, 0.9, 1.0, 1.8, 1.6, 1.2, 1.2, 1.3, 1.3, 1.4, 1.4
- Growth of exports (US dollar terms, percent): 3.8, 5.3, -23.9, -6.3, 15.9, -0.1, 14.6, 19.8, 4.8, 6.4, 4.8, 4.9, 3.7
- Growth of imports (US dollar terms, percent): 0.1, 3.1, -28.4, -4.5, 14.9, -4.1, 14.6, 18.5, 4.4, 5.7, 4.5, 4.6, 3.8
- Current account balance, excluding interest payments (percent of GDP): 3.1, 2.6, 2.5, 1.3, 1.7, -1.9, 6.5, 1.9, 2.2, 2.3, 2.4, 2.5, 2.5
- Net non-debt creating capital inflows (percent of GDP): 2.8, 4.5, 3.4, 2.4, 4.5, 1.7, 2.1, 1.7, 1.7, 1.6, 1.6, 1.6, 1.5

### External debt bound tests and shocks (figure summary)
- Bound tests apply permanent one-half standard deviation shocks to elements such as interest rates and current account; combined and individual shocks raise external debt paths above baseline levels (figures with historical and scenario comparisons are provided).

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### Long-run growth potential and required primary balances (Annex VI highlights)
- Demographics and productivity:
  - EC projects Greece’s working age population to fall by about 35 percent between 2020 and 2060.
  - Ceteris paribus, aging would imply an average yearly decline of 1.1 percentage points in Greece’s labor force during the next four decades.
- Productivity history and implications:
  - Total factor productivity (TFP) growth over the last 47 years averaged just ¼ percent annually.
  - Assuming this historical average TFP growth going forward, labor productivity (output per worker) would grow only at about 0.4 percent in the steady state.
- Investment and medium-term: staff’s medium-term projections assume a temporary boost to GDP growth from higher investment with real GDP growth rates averaging close to 2 percent during the investment recovery; EU Funds and other investment-related support sum up to about 4 percent of GDP per year during 2018-2020.
- Long-run baseline growth calculation:
  - Combining labor productivity growth of 0.4 percent with expected growth in the number of workers of -1.1 percent implies long-term annual growth of -0.7 percent.
  - Other literature finds a baseline growth rate (before reforms) of -0.4 percent during 2024–2043 (McQuinn and Whelan (2015) cited in source).
- Reform requirements and potential gains:
  - Raising long-term growth from baseline -0.7 percent to 1 percent requires reforms to add 1.7 percentage points to growth per year for the next decades.
  - OECD (2016) estimates full implementation of a broad menu of structural reforms could raise Greece’s output by about 7.8 percent over a 10-year horizon, translating into an increase in annual growth of some 0.8 percentage points for about a decade.
  - Bourles et al. (2013) estimate a gain of about 0.9 percentage points per year.
  - Daude (2016) finds reforms focused on product markets and improving the business environment could boost growth by about 1.3 percentage points per year for a decade.
- Implementation caveats:
  - Achieving 1 percent long-term growth presumes increasing labor force participation to levels that exceed the Euro Area average and generating TFP growth rates permanently far above Greece’s historical average.
  - Structural reforms need to be more ambitious and sustained than prior efforts; many past reforms were legislated but suffered from weak implementation.
- Long-run primary balance sustainability:
  - It is difficult to sustain high primary balances over prolonged periods.
  - Greece’s conditions and outlook do not suggest that a primary balance above 1.5 percent of GDP could be sustained for a prolonged period.

*Source: IMF staff projections and analysis as presented in Annex V and Annex VI of the provided document.*

### 10.      Historically, Greece has been unable to sustain primary surpluses for prolonged

### 10.      Historically, Greece has been unable to sustain primary surpluses for prolonged

### Historical primary balance performance in Greece
- During 1945–2015, the average primary balance in Greece is a deficit of about 3 percent of GDP.
- A brief period of near-zero primary balance took place at the time of Greece’s EU accession.
- Primary surplus exceeding 1 percent of GDP was sustained for eight consecutive years (1994–2001); the average primary balance during this period was 1¾ percent of GDP.
- Primary balance reversed to a deficit of 2 percent of GDP immediately following euro adoption (2002–07).
- Primary balance widened to a deficit of 5–10 percent in 2008–09.
- From 2010 to 2015, the primary deficit averaged 1½ percent of GDP, with small surpluses of less than 1 percent of GDP recorded only in 2013 and 2015.
- 2016 recorded a primary surplus of 3.9 percent, but drivers were temporary, such as one-off revenues and/or under-execution of the budget expenditures.
- 2017 recorded a surplus of 4.2 percent, driven by lower than expected spending rather than a more sustainable mix of measures.
- Footnote: According to the SBA-AIP program definition, which, notably excludes bank recapitalization costs.

### Cross-country evidence on sustainable primary surpluses
- Sample: 90 countries, period 1945–2015.
- Only 13 cases where a primary fiscal surplus above 1.5 percent of GDP could be reached and maintained for ten or more consecutive years.
- Only three cases if the primary surplus threshold is increased to 3.5 percent of GDP.
- Only one case if resource-rich countries are also excluded.
- Ten-year averages above 3.5 percent of GDP are very rare: 7.5 percent of the cases for the full sample and 4.3 percent of the cases for developed economies in the Euro Area that are not oil or resource rich.
- Ten-year averages above 1.5 percent correspond to 12.8 percent of the cases in the latter group.

### Economic conditions associated with high primary balances
- Among EU countries, prior to entering a period of high average primary balances:
  - Real GDP growth: 2.7 percent.
  - CPI inflation: 4 percent.
  - Unemployment: 10 percent.
  - Net foreign debt: 24 percent of GDP.
- During high primary balance periods:
  - Real GDP growth: about 3.4 percent.
  - CPI inflation: about 3 percent.
  - Unemployment: about 7.2 percent.
- Implication: Sustained periods of high primary surpluses are driven by strong economic growth rather than by sizeable fiscal consolidation.

### Experience with large fiscal consolidations and reversals
- Among 55 consolidation episodes with an improvement of the primary balance of more than 10 percentage points of GDP during a five-year period:
  - The primary balance improved further for the following five years in only 20 percent of the cases.
  - In the large majority of episodes, the primary balance deteriorated after such a strong consolidation.
- Average annual change of the primary balance during the five-year period following the end of the adjustment for all 55 episodes is about -¾ percentage points of GDP.
- For countries that reached a primary balance of more than 3.5 percent of GDP at the end of the consolidation, the subsequent deterioration of the primary balance is about 1¼ percentage points of GDP.
- Reversal is also rapid following a strong adjustment under IMF-supported programs:
  - Programs that ended with very high primary balances tightened policy significantly during the program period (quartile 4).
  - Primary balances typically deteriorated rapidly the year after the program, much more so than in other programs (quartiles 1–3).
  - Following a strong improvement during the program, the primary surplus falls on average by half in about five years after the program, with the bulk of that deterioration within the first two years.

### Unemployment, demographics, and fiscal pressures
- High unemployment is associated with lower primary fiscal balances due to higher social expenditures and lower income-related revenue.
- Greece’s unemployment rate is exceptionally high—only 10 countries have had unemployment higher than 20 percent in the post-war period.
- Within the sample, the average primary balance corresponding to countries suffering double-digit unemployment rates is about zero percent of GDP.
- For double digit unemployment lasting for 10 years or longer, the average primary balance is about -½ percent of GDP.
- Long-term high unemployment implies mounting pressures on social assistance spending in Greece—such as the guaranteed minimum income.
- Demographic pressures: aging populations constrain ability to sustain large fiscal surpluses as taxpayer share declines while beneficiaries rise.
- Greece’s old-age dependency ratio is high compared to peers and is projected to be the highest in the Euro Area by 2060 (according to the latest EC’s Aging report referenced).

### Health spending and social protection implications
- During 2010–15, social health spending declined by 1 percent of GDP.
- The decline disproportionately affected the poor: out-of-pocket spending among the poorest quintile rose from 22 percent of household income in 2010 to 44 percent in 2015.
- Intermediate consumption in health declined by half relative to the average level in Europe during this period.
- The share of people reporting unmet healthcare needs increased significantly, especially among the poor.
- In 2015, Greece’s general government health expenditure stood at 4½ percent of GDP, about 1¾ percent of GDP lower than the average of EU15 countries.
- Conclusion: Health spending compressed to one of the lowest levels in the Eurozone, which is unsustainable given demographic challenges and the benchmark provided by European peers.

### Constraints from lack of independent monetary/exchange rate policy
- Countries without an independent monetary policy find it more challenging to sustain large primary fiscal surpluses as monetary and exchange rate policy tools are not available for aggregate demand management.
- Changes in primary balance larger than 10 percentage points of GDP during a period of five years are associated only with periods of monetary easing in the sample.
- Interest rates in Greece are not expected to ease over the projection horizon.

*International Monetary Fund (content from cr18248 - 10.      Historically, Greece has been unable to sustain primary surpluses for prolonged)*

### 3.      The authorities are deploying a new

### 3.      The authorities are deploying a new

### Overview of the new means‑tested system
- The authorities are deploying a new means‑tested system which aims to improve the effectiveness of the social safety net.
- Two of four planned components have already been implemented:
  - (i) the minimum income scheme (SSI) activated in 2017 which provides support to households with equivalized imputed income below €2,400 per year (thus directly addressing extreme poverty and reducing inequality);
  - (ii) a new child benefit scheme activated in 2018 that provides higher support for those with lower income.
- Two components remaining / forthcoming:
  - A housing benefit for renters and households with mortgages aiming to address the severe housing cost overburden in the first two income quintiles will take effect in 2019;
  - A new ALMP system will be implemented.
- Some other smaller targeted programs are also forthcoming.

### Findings on spending levels and adequacy
- Once fully implemented, the combined budget for the new (non-old age benefit) schemes will be about 1½ percent of GDP.
- Staff estimates that up to an additional 2½ percent of GDP in non-pension social spending would be more in line with peers.
- Even after full implementation, non-old age benefits would remain low compared to peer countries.
- Scope to further increase non-pension benefits is constrained by:
  - the still high pension spending (despite substantial reforms);
  - the high envisaged primary balance targets agreed with Greece’s European partners.

### Implementation risks and pitfalls
- The newly designed system promises to help better cushion future shocks but also creates risks, including:
  - a proliferation of untargeted benefits (example given: a new transportation benefit);
  - a risk of creating poverty traps.

*Source: cr18248 - 3.      The authorities are deploying a new*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18248.pdf_