## 1. Greek Banks Exposure to Domestic Sovereign Risk ## Source details **Canonical URL:** [1. Greek Banks Exposure to Domestic Sovereign Risk](https://www.imf.org/-/media/files/publications/cr/2019/1grcea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1grcea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1grcea2019001.pdf.json) --- ### Context - Greece exited the program era last August with reduced imbalances and accelerating growth. - Chronic fiscal deficits have been eliminated and the external position has been greatly improved. - Debt relief from European partners, along with a large cash buffer, has mitigated vulnerabilities. - Recovery is broadening and unemployment is trending down. - Increase in private deposits and other bank balance sheet adjustments has allowed a gradual relaxation of capital flow management (CFM) measures. - Sovereign bond spreads have narrowed somewhat though they remain the highest in the euro area (EA). ### Recent developments and outlook - GDP growth accelerated in 2018 to an estimated 2.1 percent, up from 1.5 percent in 2017. - Key drivers in 2018: exports (helped by record-high tourist arrivals) and higher private consumption (notably in durables). - Household spending supported by declining unemployment (18.6 percent in October) and rising disposable income (3 percent y-o-y in 2018Q3). - Investment growth disappointed due to high base effects and still-weak investor sentiment. - Headline inflation averaged 0.8 percent (0.4 percent core) in 2018 y-o-y. - Real estate market recovering, especially in Athens. - Current account (CA) deficit widened to 3.4 percent of GDP in 2018. - Government exceeded 2018 primary fiscal balance target of 3.5 percent of GDP; absent the ½ percent of GDP year-end ‘social dividend’ spending, fiscal surplus would have been an estimated 4.2 percent of GDP. - Government arrears net through December were €1.4 billion. - Authorities issued a €2.5 billion 5-year sovereign bond at end-January yielding 3.6 percent. - Banking system developments and constraints: - Banking system remains short of prudential liquidity requirements. - Non-performing exposures (NPEs) were 47 percent of outstanding loans (€85 billion) at end-September. - Sales of NPEs increased; write-offs remain key drivers of NPE reduction; new NPE creation exceeds curing. - Private net credit growth was negative (down 1.1 percent in December y-o-y). - Outlook and staff projections: - Staff projects GDP growth of 2.4 percent in 2019. - Minimum wage hike of nearly 11 percent expected to support household income. - Output gap projected to close by 2024. - CA deficit forecast to narrow temporarily due to ANFA/SMP profit transfers and then widen. - Unemployment expected to gradually decline but remain in double digits. - Average inflation expected to rise to just under 2 percent over the medium term. ### Capacity to Repay the Fund - Government cash buffer estimated at about €30 billion (16 percent of GDP; 101 percent of 2019 debt service payments) as of end-2018. - Under baseline, buffer would allow government to service its debt through end-2022 without further market financing, if needed. - Authorities’ market borrowing plans and staff projections: - Government financing plan: issuance of around €7 billion of medium-to long-term bonds in 2019 and €2–5 billion a year over 2020–23. - Staff projects cash buffer decline to about €23 billion in 2019 (12 percent of GDP; 112 percent of 2020 debt service) and to about €10 billion by 2024. - IMF obligations: - Outstanding credit was SDR 7.7 billion (318 percent of quota) as of end-January 2019. - Manageable annual payments averaging SDR 1.5 billion over 2019–23 and a final SDR 0.3 billion payment in 2024. - Solvency assessment: - Staff’s medium-term public debt sustainability assessment (DSA) broadly unchanged: over a 10-year horizon, public debt declines gradually and GFN is manageable at 8 percent of GDP on average. - Staff estimate: a 100 basis points increase in sovereign securities’ yields would result in a ½ percentage point drop in CET1 ratios, on average (four major banks, fair-value exposures). ### Selected projections and key statistics (2018–24, Billion of euros unless otherwise specified) - Gross financing needs: 2018: 35.9; 2019: 16.8; 2020: 11.8; 2021: 11.8; 2022: 12.5; 2023: 15.0; 2024: 22.3 - Primary deficit (cash): 2018: -3.1; 2019: -5.7; 2020: -5.7; 2021: -6.5; 2022: -7.3; 2023: -6.2; 2024: -6.0 - Debt service (cash): 2018: 24.0; 2019: 29.6; 2020: 20.5; 2021: 20.7; 2022: 25.4; 2023: 27.2; 2024: 29.6 - Short-term principal payments (T-bills): 2018: 14.3; 2019: 11.2; 2020: 9.8; 2021: 9.8; 2022: 9.8; 2023: 9.8; 2024: 9.8 - Government deposits (replenishment/drawdown): 2018: 14.6; 2019: -7.2; 2020: -1.2; 2021: -0.6; 2022: -4.1; 2023: -5.9; 2024: -1.1 - Deposits available to state government (Memo): 2018: 30.0; 2019: 22.9; 2020: 21.7; 2021: 21.0; 2022: 17.0; 2023: 11.1; 2024: 10.0 - Deposits available to state government as % of GDP: 2018: 16.2; 2019: 11.9; 2020: 10.9; 2021: 10.2; 2022: 8.0; 2023: 5.1; 2024: 4.4 ### Risks and policy discussion — overview - Main risk drivers: - Domestic: reform fatigue and potential reversals, labor market rigidification, banking sector vulnerabilities, election-related policy uncertainty. - External: deterioration in trading partner growth, sharp tightening of global financial conditions, slowdown in global trade, rising protectionism. - Staff competitiveness assessment: Greece’s external position weaker than consistent with medium-term fundamentals and desirable policies. - Downside implications: - Realization of risks could weaken growth prospects and hinder capacity to repay the Fund. - In downside scenarios, servicing all debt obligations would depend on a strong fiscal policy response, new official sector financing, and/or debt restructuring. ### Labor market policies and risks - Recent measures: - Statutory minimum wage hike of nearly 11 percent in early 2019 (gross monthly minimum wage increased to €650 per month; daily €29). - Abolition of youth sub-minimum wage, yielding an effective 27 percent increase for this group. - Reinstatement of collective bargaining agreement (CBA) extension authority and worker ‘favorability’ principle. - Staff concerns: - Reduced labor market flexibility and rising wage pressures threaten competitiveness and growth. - If wage growth far exceeds productivity, risks to social inclusion and informalization increase. - Staff recommendations: - Pursue more flexible labor market policies; reintroduce firm-level flexibility. - Ensure transparent application and periodic assessment of CBA representativeness mechanisms. - Introduce mitigating non-wage measures: cuts to income taxes, lowering cost of financing, product market reforms. - Facilitate higher and more diversified investment; note Greek markets remain heavily regulated within the OECD. ### Authorities’ stance on labor policies - Government expects stronger wage growth to boost labor productivity via higher labor utilization and minimize adverse employment effects. - Authorities disagree with staff on the net harm from recent labor measures; but they broadly share staff’s view on other risks and the need for measures to reduce non-wage costs. ### Fiscal risks and spending pressures - Recent policy changes and quantified fiscal impacts (Millions of euros, compared to pre-legislated package): - Pension reform: -2,065 - 2019 expansionary measures (excl. child and housing benefit): 1,130 - Investment budget upscaling: 250 - Housing benefit reduced to 400 million: 200 - Reduction of SSCs for self-employed etc.: -177 - Subsidization of SSCs for young employees: -51 - Reduction of ENFIA by 10% in 2019-26: -3 - Hiring 4,500 teachers permanently: -22 - Total net change compared to prelegislated package: -998 - of which: child benefit (already reflected in Art IV baseline): 235 - Total net change compared to Art IV baseline: -763 - Identified fiscal risks: - Legal challenges to past wage and pension reforms could trigger one-off retroactive payments and forward fiscal obligations (examples: pension reform reversal could exceed 3 percent of GDP; rulings on public sector wages could add 1.4 percent of GDP one-off). - Stock of public guarantees to non-government entities is about 5½ percent of GDP. - Pre-election pledges (e.g., property tax and VAT cuts) not yet in baseline could reduce primary balance by about ½ percent of GDP starting 2021. - Staff fiscal recommendations (four priority areas): - Rebalance the fiscal policy mix: lower distortionary wage and profit tax rates; increase efficient investment and targeted social spending; implement legislated tax cuts funded by broadening the PIT base in 2020. - Develop a contingency strategy for potential fiscal shocks: preserve growth-friendly spending using buffers and/or adjust targets; explore smoothing mechanisms with European partners. - Further improve tax compliance: build/use a compliance risk matrix; accelerate revenue administration reforms; reconsider additional tax installment schemes. - Accelerate fiscal structural reforms: complete HR reforms in tax administration; address structural roots of arrears; strengthen public investment management; accounting reforms; full implementation of TSA while considering bank liquidity impact. ### Financial sector risks and recommended actions - System vulnerabilities and transmission to fiscal risks: - Greek banking system remains highly vulnerable: high NPEs; uncertain quality of performing loan book; low capital (fully-loaded); weak profitability; tight liquidity. - Banks’ total exposure to the sovereign is close to 180 percent of their combined CET1. - Stock of DTCs was over €16 billion (59 percent of significant institutions’ CET1) as of end-September 2018. - Staff urgent recommendations: - Build up capital to support NPE reduction: issue equity or non-dilutive capital instruments. - Strengthen NPE reduction toolkits: revisit primary residence protection design; reduce household insolvency court backlog; address obstacles to efficient e-auctions and out-of-court workouts (OCW); support multilateral restructurings. - Carefully assess State-support options for system-wide NPE reduction: conduct comprehensive cost-efficiency analyses, including bank and sovereign balance sheet impacts and moral hazard. - Improve banks’ viability and governance: restore organic capital generation, additional cost efficiency measures, strengthen internal governance. - Liberalize CFMs cautiously in line with the conditions-based roadmap. - Authorities’ views: - Government agreed a comprehensive approach appropriate but considered key elements already in place. - Intends to move ahead with its own ‘asset protection scheme’ (APS); BoG believes APS could be complemented by an AMC option. ### Debt sustainability, stress tests, and downside scenario - Medium-term debt sustainability appears robust under standard macro-fiscal stress tests; debt ratios still fall under temporary shocks. - GFN would remain below 15 percent of GDP through 2022; marginally higher than 15 percent in 2023. - Downside scenario key points: - If selected risks materialize and market access remains restricted, capacity to service debt could be compromised. - In the downside scenario, Fund repayment capacity would be at risk beginning from 2021 absent a strong fiscal response, new official financing, or debt restructuring. - Aggregate fiscal impact assumption: fiscal primary balance would deteriorate by about 1.3 percent of GDP on average over 2019-2024 compared to baseline. - Specific downside assumptions include retroactive pension payments of €6.4 billion split equally over 2020–21; retroactive public-sector bonus €2.6 billion in 2019; VAT cuts lowering revenues by 0.4 percent of GDP starting 2021; state guarantees calls beginning in 2019 (€2.1 billion). - Cash buffer use and financing assumptions: ESM assumed not to object to full drawdown of €30 billion buffer at end-2018; available cash buffers exhausted by end-2021 in the downside scenario. - Stress-test and scenario assumptions (selected baseline assumptions, 2019–2028): - Real GDP growth baseline: 2.4, 2.2, 1.6, 1.2, 1.2, 1.2, 1.2, 1.0 - Inflation baseline: 1.0, 1.4, 1.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance baseline: 3.5, 3.5, 3.5, 3.4, 3.0, 2.8, 2.0, 1.5 - Effective interest rate baseline: 1.8, 1.8, 1.8, 2.0, 2.1, 2.2, 2.3, 2.8 - Annex VI downside scenario financing table highlights (GG Financing Requirements and Sources, Billions of euros): - Gross borrowing need (Prel. 2018 2019 2020 2021 2022 2023 2024): 35.9 8.4 5.9 10.6 14.6 17.6 20.2 - Financing gap emerges from 2021: financing gap by year: 0.0 0.0 0.0 4.7 9.7 12.6 15.2 - Memo: Deposits of general government: 37.5 16.5 9.9 7.7 7.7 7.7 7.7; Available to state government: 30.0 9.1 2.5 0.3 0.3 0.3 0.3 ### Policy implications and recommended actions (staff appraisal) - Fiscal policy: - Maintain fiscal discipline to preserve high primary-surplus path supporting debt reduction. - Rebalance fiscal policy mix to support inclusive growth: lower tax rates, increase targeted social spending and investment, broaden PIT base. - Prepare and operationalize a fiscal risk contingency plan to address legal rulings and contingent liabilities. - Accelerate revenue administration and public financial management reforms; identify and address structural causes of arrears. - Banking sector: - Government should lead a comprehensive, well-sequenced strategy to restore bank profitability and capital and liquidity buffers, aiming to restore lending. - Assess combined impact of proposals and prudential changes on bank balance sheets before introducing State support schemes. - Strengthen NPE reduction legal toolkit and internal bank governance. - Labor market and competitiveness: - Press ahead with unfinished reform agenda: greater labor market flexibility and product-market reforms to boost productivity and lower non-wage costs. - Guide future minimum wage changes by productivity indicators and consider medium-term anchors for wage-setting. - Contingency and coordination: - Explore smoothing mechanisms with European partners for accommodating shocks. - Conduct cost-benefit analyses of State-supported NPE reduction schemes (APS, AMC, mortgage subsidy) before deployment; ensure BRRD and EU State aid compliance. *Source: Excerpt from IMF staff report (1grcea2019001) provided in the content unit.* ### 1. Greek Banks Exposure to Domestic Sovereign Risk ___________________________________________ 16 ### 1. Greek Banks Exposure to Domestic Sovereign Risk ### Context - Greece exited the program era last August with reduced imbalances and accelerating growth. - Chronic fiscal deficits have been eliminated and the external position has been greatly improved. - Debt relief from European partners, along with a large cash buffer, has mitigated vulnerabilities (see CR 18/248). - Recovery is broadening and unemployment is trending down. - Increase in private deposits and other bank balance sheet adjustments has allowed a gradual relaxation of capital flow management (CFM) measures. - Sovereign bond spreads have narrowed somewhat though they remain the highest in the euro area (EA). ### Recent developments and outlook - GDP growth accelerated in 2018 to an estimated 2.1 percent, up from 1.5 percent in 2017. - Key drivers in 2018: exports (helped by record-high tourist arrivals) and higher private consumption (notably in durables). - Household spending supported by declining unemployment (18.6 percent in October) and rising disposable income (3 percent y-o-y in 2018Q3). - Investment growth disappointed due to high base effects and still-weak investor sentiment. - Headline inflation averaged 0.8 percent (0.4 percent core) in 2018 y-o-y. - Real estate market recovering, especially in Athens. - Current account (CA) deficit widened to 3.4 percent of GDP in 2018 (partly due to methodological revisions); primary income deficit widened due to higher payments on foreign investments. - Government exceeded 2018 primary fiscal balance target of 3.5 percent of GDP; absent the ½ percent of GDP year-end ‘social dividend’ spending, fiscal surplus would have been an estimated 4.2 percent of GDP. - Government arrears net through December were €1.4 billion, above the zero-target set for the ESM program exit. - Authorities issued a €2.5 billion 5-year sovereign bond at end-January yielding 3.6 percent, sold mainly to foreign investors. - Bank liquidity improved in 2018, facilitating near-elimination of Emergency Liquidity Assistance (ELA) and further liberalization of CFM measures; however: - Banking system remains short of prudential liquidity requirements. - Non-performing exposures (NPEs) were 47 percent of outstanding loans (€85 billion) at end-September. - Sales of NPEs increased; write-offs remain key drivers of NPE reduction; new NPE creation exceeds curing. - Private net credit growth was negative (down 1.1 percent in December y-o-y). - Outlook: - Staff projects GDP growth of 2.4 percent in 2019, driven primarily by stronger consumption. - Consumption expected to reflect higher household income (helped by a nearly 11 percent hike in the statutory minimum wage) and an expansionary fiscal stance. - Over the medium term, domestic demand to continue driving growth; net export contribution expected to become neutral as higher exports are offset by higher imports. - Output gap projected to close by 2024. - CA deficit forecast to narrow temporarily due to ANFA/SMP profit transfers and then widen. - Unemployment expected to gradually decline but remain in double digits. - Average inflation expected to rise to just under 2 percent over the medium term. - Authorities’ views: - Anticipate a more robust and broad-based acceleration; project stronger external and domestic demand-driven growth over the medium term, citing the National Growth Strategy (NGS). - Bank of Greece (BoG) notes growth so far has been achieved without credit growth and investment; expects potential rebound in these to raise potential growth. - BoG points to recovery in private deposits, significant improvement in bank liquidity, and NPE management. ### Capacity to Repay the Fund - Greece’s repayment capacity is broadly adequate under staff’s baseline scenario, supported by a sizable cash buffer and low medium-term gross financing needs (GFN). - Government cash buffer estimated at about €30 billion (16 percent of GDP; 101 percent of 2019 debt service payments) as of end-2018. - Under baseline, buffer would allow government to service its debt through end-2022 without further market financing, if needed. - Authorities plan regular market borrowing and gradual depletion of cash buffer: - Government financing plan foresees issuance of around €7 billion of medium-to long-term bonds in 2019 and €2–5 billion a year over 2020–23. - Staff projects cash buffer decline to about €23 billion in 2019 (12 percent of GDP; 112 percent of 2020 debt service) and to about €10 billion by 2024 (covering six months of GFN or around 100 percent of outstanding T-bills). - IMF obligations: - Outstanding credit was SDR 7.7 billion (318 percent of quota) as of end-January 2019. - Manageable annual payments averaging SDR 1.5 billion over 2019–23 and a final SDR 0.3 billion payment in 2024. - Authorities exploring prepayment of amounts subject to surcharges (amounts above SDR 4.6 billion). - Solvency: - Staff’s medium-term public debt sustainability assessment (DSA) broadly unchanged (Annex III): over a 10-year horizon, public debt declines gradually from very high levels and GFN is manageable at 8 percent of GDP on average. - Authorities confident they will fully meet debt obligations, including to the Fund; considering early repayment to the IMF as part of liability management but will consult European official sector creditors first. - Authorities stated interest rate risks reduced due to debt relief measures and hedging operations locking in low fixed rates on a significant portion of public debt for the next decade. - Selected projections and financing table highlights (2018–24, Billion of euros unless otherwise specified): - Gross financing needs: 2018: 35.9; 2019: 16.8; 2020: 11.8; 2021: 11.8; 2022: 12.5; 2023: 15.0; 2024: 22.3 - Primary deficit (cash): 2018: -3.1; 2019: -5.7; 2020: -5.7; 2021: -6.5; 2022: -7.3; 2023: -6.2; 2024: -6.0 - Debt service (cash): 2018: 24.0; 2019: 29.6; 2020: 20.5; 2021: 20.7; 2022: 25.4; 2023: 27.2; 2024: 29.6 - Short-term principal payments (T-bills): 2018: 14.3; 2019: 11.2; 2020: 9.8; 2021: 9.8; 2022: 9.8; 2023: 9.8; 2024: 9.8 - Government deposits (replenishment/drawdown): 2018: 14.6; 2019: -7.2; 2020: -1.2; 2021: -0.6; 2022: -4.1; 2023: -5.9; 2024: -1.1 - Deposits available to state government (Memo): 2018: 30.0; 2019: 22.9; 2020: 21.7; 2021: 21.0; 2022: 17.0; 2023: 11.1; 2024: 10.0 - Deposits available to state government as % of GDP: 2018: 16.2; 2019: 11.9; 2020: 10.9; 2021: 10.2; 2022: 8.0; 2023: 5.1; 2024: 4.4 ### Risks and policy discussion - Greece faces significant domestic and external risks to growth (Annex I); realization of some or more of these risks could weaken growth prospects and hinder capacity to repay the Fund. - Progress and remaining challenges: - Significant gains in competitiveness during the program era, including convergence of labor costs toward trading partners. - Efforts to lower non-wage costs, generate investment, and boost productivity and exports remain incomplete. - Staff’s competitiveness assessment indicates Greece’s external position weaker than consistent with medium-term fundamentals and desirable policies. - Downside risks to growth have increased: - Upside factors: export momentum (notably upscale tourism), expansionary 2019 budget measures, wage hikes, and lagged effects from reforms. - Downside factors: external risks (deterioration in trading partner growth, potential sharp tightening of global financial conditions, slowdown in global trade) and domestic risks (reform fatigue, recent policy decisions, election uncertainty, banking sector risks). - Labor market concerns: - Reduced labor market flexibility and rising wage pressures threaten to reverse competitiveness gains and weaken growth prospects (Annex IV). - Government reversal of 2012 collective bargaining agreement (CBA) reforms was followed by a statutory minimum wage hike of nearly 11 percent in early 2019 (well above productivity growth). - Youth subminimum wage abolished, resulting in an effective 27 percent increase for this group (which still faces a 35 percent unemployment rate). - While these measures support near-term demand and growth, wage growth far in excess of productivity poses risks to social inclusion (formal employment) and competitiveness through cost increases. - Risks could be magnified if minimum wage hikes spread via CBAs or through compulsory arbitration for labor disputes. _International Monetary Fund_ ### 18. Staff emphasized the importance of policies to mitigate risks and facilitate higher ### 1grcea2019001 - 18. Staff emphasized the importance of policies to mitigate risks and facilitate higher ### Labor market policies and risks - Staff recommendations: - Pursue more flexible labor market policies; reintroduce firm-level flexibility to set labor market practices. - Ensure more transparent application and periodic assessment of the market representativeness mechanism in CBAs (and their impact) to address unintended adverse effects on smaller and less productive firms. - Introduce mitigating non-wage measures to boost investment, productivity, and competitiveness, including: - Cuts to income taxes (see fiscal mix discussion). - Lowering the cost of financing (see financial sector discussion). - Product market reforms to improve product choice, quality, and competition. - Facilitate higher and more diversified investment; government’s NGS steps are welcome but insufficient given Greek markets “continue to be amongst the most heavily regulated within the OECD.” - Key statistics and contextual figures: - CBA Wage Increase Decisions, 2004–09 (Percent of CBA sample): 5.9%, 75.6%, 18.5% (Lower than MW; Similar to MW; Higher than MW). - Monthly Minimum Wage Increase (Euros): chart labels include 400, 600, 800, 1000 for Pre-2012, 2012-2018, Feb-2019 categories. - Note: sub-minimum wage adopted in 2012 for workers under 25 and discontinued after February 2019. Seniority premiums of 10 percent applied to the minimum wage after three, 6, and 9 years (maximum, shown). The hourly minimum wage for blue-collar professions was also raised by 11 percent. ### Authorities’ views on labor policies - Government position: - Disagreed with staff on labor market policies; expects stronger wage growth to boost labor productivity via higher labor utilization. - Argued the minimum wage hike will help balance bargaining dynamics and domestic demand. - Expects adverse employment effects to be minimal given the low share of workers earning the minimum wage and a perceived monopsonic structure in the low-skilled job market. - Expects limited spillover effects on the rest of the wage distribution and faster productivity growth through higher labor utilization; slack to be eliminated by boosted domestic demand. - If higher wage costs cause marginal firms to reduce workforce or exit, affected workers are expected to migrate to higher value-added jobs. - Agreement with staff on other risks: - Authorities broadly shared staff’s view on other key risks, transmission channels, and policy options to mitigate risks and boost growth. - Agreed that efforts to reduce non-wage costs could help mitigate employment risks and pointed to planned reforms in tax policy, energy, and infrastructure investment management in the NGS. - Noted Hellenic Development Bank and external donors will provide financing for specific underserved market segments. - Bank of Greece (BoG) cautioned that greater export diversification would be difficult in the short run given slowing global growth, tighter financial conditions, and rising protectionism. ### Risks from fiscal policies and spending pressures - Recent policy changes and projections: - Staff projects primary surpluses to be in line with targets agreed with European partners, but recommends improving the policy mix. - Authorities cancelled the pre-legislated 2019 pension reform and scaled back/reconfigured accompanying expansionary measures. - Targeted housing benefit and planned hike in investment were scaled down or substituted by property tax cuts and a discounted pension contribution rate for the self-employed (reversing earlier unification of SSC rates). - Corporate income tax (CIT) rate reduction originally planned for 2020 will instead be gradually phased in. - Fiscal structural reform progress (mixed): - Progress: tighter cash pooling; introduction of the Treasury Single Account (TSA) moved forward with operational directives and BoG banking platform; rollout of a new Chart of Accounts in the State in 2019; action plans to combat new arrears accumulation; revenue agency (IAPR) taking steps to transition to a modern risk-based compliance management system. - Shortcomings: important HR reform in IAPR stalled; identification of structural causes of arrears making little progress. - Fiscal risks identified by staff: - Legal challenges to past wage and pension reforms could result in significant one-off retroactive payments and forward-looking fiscal obligations. Examples: - An affirmative ruling in a legal challenge to the 2012 pension reform could result in one-off net costs exceeding 3 percent of GDP. - Rulings on public sector wages could add an additional one-off payment of 1.4 percent of GDP (and smaller amounts annually). - The 2016 pension reform is also being challenged, with even larger potential fiscal consequences. - Possible realization of fiscal contingent liabilities: stock of public guarantees to non-government entities is about 5½ percent of GDP, including significant government guarantees related to bank loans (calls on some of which are pending). - Pre-election policy pledges not yet in staff baseline: further reduction of property tax and VAT rates (could reduce primary balance by about ½ percent of GDP starting from 2021); further increases in public sector hiring. - Fiscal measures and quantified impacts on overall balance in 2019 (Millions of euros, compared to pre-legislated package): - Pension reform: -2,065 - 2019 expansionary measures (excl. child and housing benefit): 1,130 - Investment budget upscaling: 250 - Housing benefit reduced to 400 million: 200 - Reduction of SSCs for self-employed etc.: -177 - Subsidization of SSCs for young employees: -51 - Reduction of ENFIA by 10% in 2019-26: -3 - Hiring 4,500 teachers permanently: -22 - Total net change compared to prelegislated package: -998 - of which: child benefit (already reflected in Art IV baseline): 235 - Total net change compared to Art IV baseline: -763 - Staff recommendations (four areas): - Rebalance the fiscal policy mix to support inclusive growth: - Lower distortionary wage and profit tax rates; increase efficient investment and targeted social spending. - Implement already legislated tax cuts (including planned personal income tax (PIT) rate reductions for low income earners) funded by broadening the PIT base in 2020. - Reallocate spending toward growth-supporting policies such as investment; tackle persistent under-execution of investment spending. - Develop a contingency strategy for potential fiscal shocks: - Preserve growth-friendly and socially inclusive expenditures by using fiscal (cash) buffers and/or adjusting fiscal targets. - Explore with European partners the possibility of accommodating shocks through a smoothing mechanism. - If contingent risks create permanent costs (e.g., reversing macro-critical past reforms), pursue targeted remedies in affected areas unless less-detrimental fiscal measures can be identified. - Carefully consider cost-effectiveness (including for debt sustainability) of any new significant contingent liability obligations, such as in the financial sector. - Further improve tax compliance: - Build and use a compliance risk matrix as part of IAPR’s tax compliance practice. - Accelerate revenue administration reforms and continue applying anti-money laundering tools. - Staff recommended reconsidering plans to introduce yet another tax and social security debt installment scheme, as it risks undermining payment culture. - Accelerate other fiscal structural reforms to improve efficiency, build fiscal space, and mitigate fiscal risks: - Priorities: (i) complete HR reforms in the tax administration; (ii) identify and address remaining structural roots of arrears; (iii) strengthen public investment management; (iv) accounting reforms to strengthen timeliness and quality of fiscal data; (v) full implementation of the TSA reform, while considering impact on bank liquidity. - Authorities’ views on fiscal risks: - Confident fiscal targets for 2019–22 would be met; pointed to good fiscal track record since 2016 and ongoing reform initiatives. - Viewed canceled 2019 pre-legislated package as ‘obsolete’ given strong fiscal performance and concerns about social fairness. - Acknowledged fiscal risks from court cases and other factors; open to broader discussions to address fiscal risks. - Prefer to cover possible impacts through contingency buffers in the budget; scope and timeline of risks uncertain. - Plan to review scope and pace of further improvements in fiscal policy mix (including 2020 tax reform) in the MTFS update and 2020 budget. - Positive toward staff recommendation to smooth effects of any large realized fiscal risks but noted need to discuss with European partners. - Expect execution of public investment budget and other spending commitments to improve with implementation of TA recommendations. ### Financial sector risks and recommended actions - System vulnerabilities and transmission to fiscal risks: - Greek banking system remains highly vulnerable: NPEs remain high; quality of performing loan book uncertain due to borrowers’ stretched balance sheets, high share of variable interest rate loans, and weak payment culture. - Under Single Supervisory Mechanism (SSM) pressure, banks aim for faster NPE reduction but constrained by low capital (fully-loaded), weak profitability, and tight liquidity. - Delays in system clean-up would slow return of lending and leave system vulnerable to materialization of risks (e.g., sharp tightening of global financial conditions), risking a negative feedback loop of declining confidence, liquidity shortages, and capital depletion. - Financial sector poses substantial fiscal risks: State significant exposure through direct ownership (significant stakes in three out of five largest banks and smaller stakes in remaining two), deposits, and contingent liabilities (including irrevocable contingent liability to cover bank losses through conversion of deferred tax credits, or ‘DTCs’). - As of end-September 2018, stock of such DTCs was over €16 billion (59 percent of significant institutions’ CET1). - Banks’ total exposure to the sovereign is close to 180 percent of their combined CET1. - Staff estimate: a 100 basis points increase in sovereign securities’ yields would result in a ½ percentage point drop in CET1 ratios, on average. - Views on policy options: - Mixed views among stakeholders on active policy stance to repair bank balance sheets. - EIs and IMF press for improvements and better take up of private sector-led NPE reduction strategies; progress slow, especially on housing loan recoverability. - Government, HFSF, and BoG proposed State-supported NPE reduction solutions, to be assessed for compatibility with EU state-aid rules. - Banks prefer a menu of options; some may move independently of proposed schemes. - Staff urgent recommendations (comprehensive, well-coordinated actions): - Build up capital to support ambitious NPE reduction targets: issuance of equity or, given lack of demand, non-dilutive capital instruments in private markets. - Strengthen existing NPE reduction toolkits to facilitate private solutions: revisit/scale back design of primary residence protection; reduce backlog of household insolvency court cases; address obstacles to efficient e-auctions and out-of-court workouts (OCW), including support for multilateral restructurings under OCW; continue efforts to improve interbank cooperation (e.g., NPL Forum). - Carefully assess options for State support of system-wide NPE reduction: if private solutions fail, assess cost-efficiency of proposals comprehensively, including impact on bank and sovereign balance sheets, growth, and moral hazard; efforts more effective within a broader plan prepared and championed by government and coordinated among European and Greek stakeholders. - Improve banks’ viability and governance: restore capacity for organic capital generation, additional cost efficiency measures, and measures to strengthen internal governance to boost resilience and prospects for new private capital. - Liberalize CFMs cautiously: continue relaxation in line with conditions-based approach described in CFM roadmap, with due analysis of financial stability risks and forward-looking assessment of bank liquidity needs. - Authorities’ views on financial sector actions: - Government agreed comprehensive, well-coordinated approach appropriate but felt key elements already in place: banks working with SSM on NPE reduction strategies; confidence e-auctions will increase; recent OCW amendments will lead to more multilateral restructurings. - Did not view coordination as a major issue; current plans (backed by NGS) seen as sufficient. - State-supported schemes could be introduced swiftly to support NPE reduction and/or address residential mortgage distress while limiting moral hazard. - Government intends to move ahead with its own ‘asset protection scheme’ (APS) at this juncture; BoG believes APS could be complemented by an AMC option to help address DTCs. *Source: Excerpt from IMF staff report (1grcea2019001) provided in the content unit.* ### 31. Medium-term debt sustainability appears to be robust under standard macro-fiscal ### Medium-term debt sustainability appears to be robust under standard macro-fiscal ### Debt sustainability findings and downside scenario - Medium-term debt sustainability appears to be robust under standard macro-fiscal stress tests (Annex III). - Temporary shocks to growth, the primary balance, and interest rates would not significantly endanger Greece’s capacity to repay the Fund. - These shocks would moderately raise the debt path, with debt ratios nevertheless still falling. - The GFN would remain below 15 percent of GDP through 2022. - GFN would be marginally higher than 15 percent of GDP in 2023, the year of a final large repayment. - If selected risks to government finances were to materialize and market access remains restricted (Annex VI), Greece’s capacity to service its debt could be compromised. - In a downside scenario, Greece’s ability to service all other debt obligations would depend on some combination of: - a strong fiscal policy response, - new official sector financing, and/or - debt restructuring. - The Fund’s long-standing de facto preferred creditor status provides safeguards to Fund resources. ### Authorities’ views - The authorities consider that the risks assumed under the downside scenario are unlikely to materialize simultaneously. - They were confident in their capacity to repay the Fund and other creditors, citing their large cash buffer. - They noted that, in the unlikely case where downside shocks in excess of the significant existing fiscal buffers indeed materialize, there would be space for a policy adjustment to ensure achievement of fiscal targets and to preserve market access in the medium term. ### Box 1 — Greek Banks’ Exposure to Domestic Sovereign Risk - Banks are subject to sovereign risk through three types of exposure: - Direct exposures, including direct credit and derivative transactions with the State as counterparty; most exposures are reported at fair value, and market volatility would therefore immediately impact banks’ profits or capital. - Contingent exposures, a significant part of which relates to deferred tax assets (DTAs) eligible for conversion into deferred tax credits (DTCs); the conversion would be triggered when banks face after-tax losses and would entail a subscription of new shares by the State. In addition, banks hold state-guaranteed loans. - Indirect exposures, including financial assets issued by the private sector with a reference interest rate linked to traded public debt instruments; information on such exposures is scarce. - Staff estimates and shock assumptions: - A 100bp increase in yields on sovereign securities would cause the CET1 ratios of the four major banks to drop by around ½ percentage point on average. - The shock is applied to exposures measured at fair value, assuming the proportions of T-Bills and Greek Government Bonds (GGBs) in the total sovereign portfolios are about 40 and 60 percent, respectively. - Assumed modified durations: T-Bills 0.3 years and GGBs 12 years. ### Staff appraisal — growth, reforms, and fiscal priorities - Growth and reforms: - The Greek economic recovery continues, but reform momentum is slowing and downside risks are rising. - Although GDP growth is expected to accelerate this year, the slowdown (and in some cases reversal) in key reform areas could hamper efforts to shift towards higher sustainable and more socially inclusive growth over the medium term. - This is occurring in a context of high crisis legacy vulnerabilities and rising external and domestic risks, not least pre-election uncertainty. - To maintain competitiveness and boost medium-term prospects, Greece should press ahead with its unfinished reform agenda. - Authorities’ growth strategy provides laudable high-level objectives; they are encouraged to further elaborate credible measures to achieve them. - Greater labor market flexibility and structural reforms in product markets are essential to boost productivity and lower non-wage costs. - These reforms are especially critical given risks to employment and competitiveness posed by the recent large minimum wage hike and the abolition of the sub-minimum wage. - Fiscal policy priorities: - Freeing up fiscal space to lower tax rates and increase targeted social spending and investment. - Preparing a fiscal risk contingency plan. - Achieving sustainably higher and more inclusive growth while meeting the fiscal targets agreed with European partners can be facilitated through budget-neutral improvements in the fiscal policy mix. - Priorities include cuts to wage and profit tax rates, funded by the planned broadening of the PIT base next year. - Rising fiscal risks from ongoing court challenges to core pension and wage reforms (and from the financial sector) call for a fiscal contingency plan. - Accelerating structural revenue and public financial management reforms, and avoiding yet another tax installment scheme, will help boost spending efficiency and tax payment culture, and mitigate risks. - It is critical to promptly identify and address the structural causes of arrears. - Banking sector and NPEs: - A more comprehensive and well-coordinated approach is needed to restore bank balance sheets and boost growth-enhancing lending. - More work is needed to assess the combined impact of various policies, proposals, prudential regulatory changes, and other developments on bank balance sheets. - The government should take a more forceful lead in bringing together key Greek and European stakeholders to conduct this broader assessment and to develop a more comprehensive, well-sequenced strategy for restoring bank profitability and capital and liquidity buffers, aiming to restore lending. - The government should press ahead with efforts to further strengthen the NPE reduction legal toolkit and avoid measures that could further erode an already weak payment culture. - Public financial support (e.g., for market-based NPE reduction schemes) seems increasingly unavoidable, but a comparative cost-benefit analysis of the various proposals is warranted before moving ahead. - Further improvements in internal bank governance are also needed. - CFM liberalization should continue in line with the conditions-based roadmap. *International Monetary Fund — Staff appraisal excerpts from the Greece country report section.* ### 37. Medium-term public debt repayment capacity remains robust, but subject to rising ### Medium-term public debt repayment capacity remains robust, but subject to rising risks amid still significant vulnerabilities ### Public debt repayment capacity and risks - Greece’s capacity to repay the Fund is adequate. - Public debt-to-GDP is projected to decline over the medium term. - Key factors supporting repayment capacity: - Return to growth. - The high primary surplus path required by European partners. - Moderate GFNs (thanks to recent debt relief). - A substantial precautionary cash buffer. - Warning: "a strong policy response and/or other measures would be required to ensure the sovereign’s repayment capacity over the medium term if significant downside risks were to materialize." ### Macroeconomic developments (high-level findings) - The economy continued to expand in 2018, driven by a record-high tourism season and more dynamic trade (including higher retail sales). - Year-end inflation declined to 2017 levels thanks to lower oil prices. - Industrial production dipped due to a sluggish electricity sector, but manufacturing and retail sales are up. - Economic sentiment recovers, mostly due to improved consumer confidence. - Selected growth and price indicators (from figures and tables): - Real GDP growth: 2017 = 1.5; 2018 = 2.1; 2019 = 2.4; 2020 = 2.2; 2021 = 1.6; 2022 = 1.2; 2023 = 1.2; 2024 = 1.2 (Table 1). - Consumer prices (HICP), period average: 2017 = 1.1; 2018 = 0.8; 2019 = 1.1; 2020 = 1.4; 2021 = 1.7; 2022 = 1.7; 2023 = 1.8; 2024 = 1.8 (Table 1). ### Labor market and wages - New full-time jobs and longer working hours are driving the employment recovery. - Unemployment (percent): 2017 = 21.5; 2018 = 19.6; 2019 = 18.5; 2020 = 17.5; 2021 = 16.2; 2022 = 15.0; 2023 = 14.3; 2024 = 13.6 (Table 1). - Employment contributions and wage dynamics: - Employment contributions to growth (Table 1): 2017 = 2.2; 2018 = 2.1; 2019 = 2.1; 2020 = 1.5; 2021 = 0.9; 2022 = 0.9; 2023 = 0.2; 2024 = 0.1. - Wages are beginning to rise, and as of February 2019 the minimum wage increased by 11 percent to €650 for monthly wages and to €29 for daily wages (Figure 2 note). - Unit labor costs are increasing, posing risks to trade competitiveness. ### External sector developments - The current account balance remains negative, with deteriorating trade in goods partially offset by rising services driven by buoyant travel receipts (tourism). - Net International Investment Position (NIIP) improved slightly in 2018, mainly due to higher other investment (net) driven by higher net assets of monetary authorities (ELA reduction; normalization of TARGET2 balances). - Selected external indicators (Table 1 & Table 2): - Current account (percent of GDP), Table 1 baseline: 2017 = -2.4; 2018 = -3.4; 2019 = -2.7; 2020 = -2.6; 2021 = -2.6; 2022 = -2.6; 2023 = -3.0; 2024 = -3.4. - Gross external debt (percent of GDP): 2017 = 224.0; 2018 = 217.7; 2019 = 208.2; 2020 = 200.8; 2021 = 194.3; 2022 = 189.2; 2023 = 184.9; 2024 = 181.8 (Table 1). - Travel receipts and arrivals supported services exports (Figure 3). ### Fiscal developments and projections - The 2018 primary surplus is projected above target despite a year-end social dividend and one-off wage refunds that drove up expenditures. - Direct State tax revenues from PIT and CIT were broadly in line with expectations; indirect State revenues overperformed, helped by a strong tourism season. - Key fiscal aggregates (Table 3, Table 6): - Primary balance (percent of GDP), Table 1: 2017 = 4.1; 2018 = 3.8; 2019 = 3.5; 2020 = 3.5; 2021 = 3.5; 2022 = 3.5; 2023 = 3.0; 2024 = 2.8. - Overall balance (percent of GDP), Table 3: 2017 = 1.8; 2018 = 0.8; 2019 = -0.3; 2020 = 0.1; 2021 = 0.2; 2022 = 0.0; 2023 = -1.1; 2024 = -1.4. - Gross debt (percent of GDP), Table 1 and Table 3: 2017 = 179.3 / 323.1 (levels differ by definition); 2018 = 183.3 / 339.9; 2019 = 174.2 / 334.2; 2020 = 167.3 / 332.4; 2021 = 160.9 / 330.6; 2022 = 153.8 / 325.1; 2023 = 147.2 / 320.7; 2024 = 143.2 / 321.2 (Tables use differing debt concepts). - General government deposits and financing (Table 6): - Gross borrowing need (billions of euros): 2018 = 35.9; 2019 = 16.8; 2020 = 11.8; 2021 = 11.8; 2022 = 12.5; 2023 = 15.0; 2024 = 22.3. - Government deposits (total general government deposits, end-2018) = €37.5 billion (Table 6 memo). ### Financial sector vulnerabilities - Non-performing exposures (NPEs) remain high, while provision coverage is declining. - Banks remain vulnerable to adverse conditions; stress tests show capital depletion risks in an adverse scenario. - Central bank funding normalized thanks to deleveraging and recovery in deposits; emergency liquidity assistance declined (Figure 5). - Credit conditions: lending interest rates remain high and credit continues to contract in most categories. - Selected banking indicators (Table 5): - Nonperforming loans to total gross loans: 2013 = 31.9; 2014 = 33.8; 2015 = 36.6; 2016 = 36.3; 2017 = 45.6; Sep-2018 = 44.1. - Bank provisions to nonperforming loans: 2013 = 49.3; 2014 = 55.8; 2015 = 67.6; 2016 = 68.9; 2017 = 46.8; Sep-2018 = 50.1. - Regulatory capital to risk-weighted assets: 2016 = 13.5; 2017 = 14.1; Sep-2018 = 16.2. ### Medium-term macro and external projections (selected figures) - Real GDP growth path (Table 1): see values listed under "Domestic economy" above (2017–24). - Balance of payments and external financing (Table 2, Table 7): - Current account balance (billions of euros, Table 2 headline): 2017 = -4.3; 2018 = -6.2; 2019 = -5.1; 2020 = -5.3; 2021 = -5.4; 2022 = -5.4; 2023 = -6.5; 2024 = -7.5. - Gross financing requirements (billions of euros, Table 7): 2017 = 158.0; 2018 = 119.6; 2019 = 103.1; 2020 = 94.0; 2021 = 92.5; 2022 = 94.1; 2023 = 99.4; 2024 = 106.3. - Program-related financing (billions of euros, Table 7): 2018 = 9.6; 2019 = 22.8; 2020 = 2.4; 2021 = 2.5; 2022 = 2.7; 2023 = 3.0; 2024 = 2.0; 2025? = 2.2 (table spans through 2024). ### Fund credit indicators and debt service to the Fund - Projected amortization to the Fund (millions of SDRs, Table 8): 2019 = 1,704; 2020 = 1,704; 2021 = 1,704; 2022 = 1,587; 2023 = 1,112; 2024 = 251. - Total debt service to the Fund (millions of SDRs, Table 8): 2019 = 1,958; 2020 = 1,872; 2021 = 1,801; 2022 = 1,647; 2023 = 1,140; 2024 = 263. - Outstanding stock of Fund credit (millions of SDRs, Table 8): 2019 = 6,359; 2020 = 4,655; 2021 = 2,951; 2022 = 1,363; 2023 = 251; 2024 = 0. - Debt service to the Fund as percent of exports of goods and services (Table 8): 2019 = 3.3; 2020 = 2.9; 2021 = 2.7; 2022 = 2.4; 2023 = 1.6; 2024 = 0.4. ### Policy implications and required actions - Continued fiscal discipline to maintain the high primary surplus path supporting debt reduction. - Maintain and manage the precautionary cash buffer. - Adopt a strong policy response and/or other measures should significant downside risks materialize to preserve sovereign repayment capacity. - Address banking sector vulnerabilities: reduce NPEs, strengthen provisioning and capital buffers, and support normalization of lending conditions to foster private-sector-led growth. *Italic: IMF staff; content based on "1grcea2019001 - 37. Medium-term public debt repayment capacity remains robust, but subject to rising" (IMF PDF chapter).* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Domestic Risks — Key Findings - Backlash against past reforms - Relative Likelihood and Transmission: High. Reform fatigue could dent the pace of structural reforms or result in back-tracking, especially given political pressures ahead of the 2019 elections. Court rulings reversing some of the past fiscal measures, could lead to a snowball effect, attracting more applicants. - Expected Impact if Realized: High. Large one-off payments may trigger liquidity pressures. Policy reversals could lead to loss of confidence and fiscal pressures and could hamper medium-term growth. - Sharp deterioration of sentiment towards banks - Relative Likelihood and Transmission: Medium. Delays in cleaning up banks’ balance sheets weigh on their profitability, undermining the recovery. Sharp deterioration of investor/depositors’ sentiment vis-à-vis banks as some of the trends crystalize or growth/fiscal underperform. - Expected Impact if Realized: High. This could trigger reemergence of liquidity pressures and accelerated capital depletion, exacerbated by the bank-sovereign nexus. Growth would weaken and ‘informality’ could increase due to heightened uncertainty. - Weaker recovery of domestic demand - Relative Likelihood and Transmission: Medium. More-adverse-than-expected impact of high primary surpluses on growth, a lower-than-expected output gap, smaller gains from fiscal and structural reforms. Delays in investments due to policy uncertainty. - Expected Impact if Realized: High. Lower growth could undermine fiscal performance, perpetuate debt and banks problems. ### Domestic Risks — Recommended Policy Responses - Backlash against past reforms - Prioritize growth-friendly, socially inclusive policies consistent with long term fiscal sustainability. - Stay on track with implementation of structural reform agenda agreed during the program period. - Devise strategy to deal with large contingent fiscal shocks. - Sharp deterioration of sentiment towards banks - Accelerate clean-up of banks’ and private sector balance sheets. - Proceed with proactive build-up of capital buffers. - Communication of a credible and ambitious strategy (aimed at restoring bank sustainability). - Relaxation of CFMs should continue in line with the conditions-based roadmap. - Weaker recovery of domestic demand - Stay on track with implementation of agreed policies; pursue a more growth friendly consolidation by tackling structural challenges on the expenditure side, lowering tax rates, and broadening tax bases. ### External Risks — Key Findings - Sharp tightening of global financial conditions - Relative Likelihood and Transmission: High. Tighter financial conditions cause higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns could be triggered by a sharper-than-expected increase in U.S. interest rates or materialization of other risks. - Expected Impact if Realized: Medium. Lower growth, liquidity pressures, and higher debt service costs for banks, non-financial corporates, and the sovereign. - Rising protectionism and retreat from multilateralism - Relative Likelihood and Transmission: High. Global imbalances and fraying consensus about the benefits of globalization lead to escalating and sustained trade actions and spreading isolationism. This threatens the global trade system, regional integration, labor mobility, as well as global and regional policy and regulatory collaboration. - Expected Impact if Realized: Medium/Low. In the short term, escalating trade tensions could increase uncertainty about growth leading to higher financial market volatility (with follow-on negative consequences for growth and investments). These policy shifts could reduce the cross-border flow of trade, hitting Greek shipping exports. ### External Risks — Recommended Policy Responses - Sharp tightening of global financial conditions - Accelerate clean-up of banks’ and private sector balance sheets. - Relaxation of CFMs should continue in line with the conditions-based roadmap. - Rising protectionism and retreat from multilateralism - Diversify exports, accelerate reforms to boost competitiveness, including prudent labor policies and productivity-enhancing reforms. *Source: Annex I. Risk Assessment Matrix — 1grcea2019001* ### Annex III. Figure 5. Greece Public DSA—Composition of Public Debt and Alternative Scenarios (Baseline Scenario) ### Annex III. Figure 5. Greece Public DSA—Composition of Public Debt and Alternative Scenarios (Baseline Scenario) ### Baseline macro-fiscal assumptions (2019–2028) - Real GDP growth: 2.4, 2.2, 1.6, 1.2, 1.2, 1.2, 1.2, 1.0 - Inflation: 1.0, 1.4, 1.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance: 3.5, 3.5, 3.5, 3.4, 3.0, 2.8, 2.0, 1.5 - Effective interest rate: 1.8, 1.8, 1.8, 2.0, 2.1, 2.2, 2.3, 2.8 ### Historical scenario assumptions (2019–2028) - Real GDP growth: 2.4, -2.6, -2.6, -2.6, -2.6, -2.6, -2.6, -2.6 - Inflation: 1.0, 1.4, 1.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance: 3.5, -0.7, -0.7, -0.7, -0.7, -0.7, -0.7, -0.7 - Effective interest rate: 1.8, 1.8, 2.0, 2.3, 2.6, 3.1, 3.7, 4.3 ### Constant primary balance scenario (2019–2028) - Real GDP growth: 2.4, 2.2, 1.6, 1.2, 1.2, 1.2, 1.2, 1.0 - Inflation: 1.0, 1.4, 1.7, 1.7, 1.8, 1.8, 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: 1.8, 1.8, 1.8, 2.0, 2.1, 2.1, 2.3, 2.6 ### Composition and trajectories (figures referenced) - Composition of public debt, public gross financing needs, currency composition, maturity profile, and gross nominal public debt are shown across historical, baseline, and constant primary balance scenarios (figures in source). *Source: IMF staff.* --- ### Annex III. Figure 6. Greece Public DSA—Stress Tests (Baseline Scenario) ### Underlying assumptions for stress tests (2019–2028) Primary Balance Shock - Real GDP growth: 2.4, 2.2, 1.6, 1.2, 1.2, 1.2, 1.2, 1.0 - Inflation: 1.0, 1.4, 1.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance: 3.5, 1.2, 1.2, 3.4, 3.0, 2.8, 2.0, 1.5 - Effective interest rate: 1.8, 1.8, 1.9, 2.1, 2.2, 2.3, 2.5, 3.0 Real GDP Growth Shock - Real GDP growth: 2.4, -1.7, -2.3, 1.2, 1.2, 1.2, 1.2, 1.0 - Inflation: 1.0, 0.4, 0.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance: 3.5, 1.3, -0.8, 3.4, 3.0, 2.8, 2.0, 1.5 - Effective interest rate: 1.8, 1.8, 1.9, 2.1, 2.2, 2.4, 2.6, 3.0 Real Interest Rate Shock - Real GDP growth: 2.4, 2.2, 1.6, 1.2, 1.2, 1.2, 1.2, 1.0 - Inflation: 1.0, 1.4, 1.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance: 3.5, 3.5, 3.5, 3.4, 3.0, 2.8, 2.0, 1.5 - Effective interest rate: 1.8, 1.8, 2.0, 2.2, 2.3, 2.5, 2.9, 3.7 Real Exchange Rate Shock - Real GDP growth: 2.4, 2.2, 1.6, 1.2, 1.2, 1.2, 1.2, 1.0 - Inflation: 1.0, 1.7, 1.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance: 3.5, 3.5, 3.5, 3.4, 3.0, 2.8, 2.0, 1.5 - Effective interest rate: 1.8, 1.8, 1.8, 2.0, 2.1, 2.1, 2.3, 2.7 Combined Shock - Real GDP growth: 2.4, -1.7, -2.3, 1.2, 1.2, 1.2, 1.2, 1.0 - Inflation: 1.0, 0.4, 0.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance: 3.5, 1.2, -0.8, 3.4, 3.0, 2.8, 2.0, 1.5 - Effective interest rate: 1.8, 1.8, 2.1, 2.4, 2.7, 3.1, 3.7, 4.4 Contingent Liability Shock - Real GDP growth: 2.4, -1.7, -2.3, 1.2, 1.2, 1.2, 1.2, 1.0 - Inflation: 1.0, 0.4, 0.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance: 3.5, 1.4, 1.1, 2.2, 2.2, 2.1, 2.0, 1.5 - Effective interest rate: 1.8, 1.8, 1.9, 2.1, 2.3, 2.5, 2.8, 3.1 Lower Growth Scenario - Real GDP growth: 2.4, 1.2, 0.6, 0.2, 0.2, 0.2, 0.2, 0.0 - Inflation: 1.0, 1.4, 1.7, 1.7, 1.8, 1.8, 1.8, 1.8 - Primary balance: 3.5, 3.5, 3.5, 3.4, 3.0, 2.8, 2.0, 1.5 - Effective interest rate: 1.8, 1.8, 1.8, 2.0, 2.1, 2.2, 2.4, 2.8 ### Stress-test outputs (figures referenced) - Macro-fiscal stress tests include baseline, primary balance shock, real GDP growth shock, real interest rate shock, real exchange rate shock, combined macro-fiscal shock, contingent liability shock, and lower growth scenario. - Charts show Gross Nominal Public Debt (Percent of GDP), Gross Nominal Public Debt (Percent of Revenue), and Public Gross Financing Needs (Percent of GDP) under each stress scenario for 2019–2027 (figures in source). *Source: IMF staff.* --- ### Annex III. Table 2. Greece External Debt Sustainability Framework (selected figures, percent of GDP unless otherwise indicated) ### Baseline external debt and flows (2014–2024) - External debt (Baseline): 237.5, 249.1, 244.4, 224.0, 217.7, 208.2, 200.8, 194.3, 189.2, 184.9, 181.8 - Change in external debt: 0.2, 11.5, -4.7, -20.3, -6.3, -9.5, -7.5, -6.5, -5.1, -4.3, -3.1 - Identified external debt-creating flows (4+8+9): 0.5, -0.6, 0.9, -4.3, -4.5, -6.2, -4.6, -3.6, -2.5, -1.3, -0.8 - Current account deficit, excluding interest payments: -1.9, -1.9, -0.6, -0.7, 1.2, 0.2, 0.3, 0.3, 0.2, 0.7, 0.8 - Deficit in balance of goods and services: 2.2, 0.6, 0.9, 1.0, 1.6, 1.6, 1.5, 1.6, 1.6, 1.5, 1.5 - Exports (in percent of GDP): 32.4, 31.8, 30.8, 34.2, 37.7, 38.5, 39.5, 40.1, 40.5, 40.6, 40.2 - Imports (in percent of GDP): 34.6, 32.5, 31.8, 35.2, 39.4, 40.1, 41.0, 41.7, 42.1, 42.0, 41.7 - Net non-debt creating capital inflows (negative): -4.5, -3.5, -2.6, -1.7, -1.6, -3.7, -3.0, -3.0, -2.8, -2.0, -2.1 ### Automatic debt dynamics decomposition (contributions, percent) - Automatic debt dynamics 1/: 6.9, 4.7, 4.0, -1.9, -4.1, -2.8, -1.9, -0.8, 0.1, 0.0, 0.4 - Contribution from nominal interest rate: 4.3, 3.4, 2.9, 3.1, 2.1, 2.4, 2.4, 2.3, 2.4, 2.3, 2.5 - Contribution from real GDP growth: -1.8, 1.3, 0.5, -3.5, -4.4, -5.2, -4.3, -3.2, -2.3, -2.3, -2.1 - Contribution from price and exchange rate changes 2/: 4.4, 0.1, 0.6, -1.5, -1.9, -2.2, -2.8, -3.3, -3.2, -3.3, -3.2 - Residual, incl. change in gross foreign assets (2-3) 3/: -0.3, 12.2, -5.6, -16.0, -1.9, -1.1, 0.0, 0.4, 0.6, 0.3, 0.9 ### External debt and exports, financing needs, and FX indicators - External debt-to-exports ratio (in percent): 733.7, 782.0, 792.7, 654.4, 576.7, 540.9, 508.4, 484.0, 466.9, 455.9, 452.6 - Gross external financing need (in billions of US dollars): 42, 26.0, 194.4, 183.8, 168.7, 141.2, 117.5, 108.5, 107.6, 110.3, 117.1, 125.3 (note: figures presented across rows in source) - Gross external financing need (in percent of GDP): 95.2, 98.8, 94.1, 82.9, 64.4, ... (figures in source) ### Key macroeconomic assumptions (historical, average, deviation; selected) - Real GDP growth (in percent): 0.7, -0.4, -0.2, 1.5, 2.1, -2.6, 3.9, 2.4, 2.2, 1.6, 1.2, 1.2 - GDP deflator in US dollars (change in percent): -1.8, -16.8, -0.5, 2.6, 5.5, -1.9, 6.7, -2.1, 2.7, 2.3, 2.4, 1.8, 1.8 - Nominal external interest rate (in percent): 1.8, 1.2, 1.2, 1.3, 1.0, 1.5, 1.3, 1.1, 1.2, 1.2, 1.3, 1.3, 1.4 - Growth of exports (US dollar terms, in percent): 5.3, -18.5, -3.9, 15.7, 18.7, 1.5, 15.0, 2.3, 7.6, 5.7, 4.6, 3.1, 1.9 - Growth of imports (US dollar terms, in percent): 3.1, -22.3, -2.8, 15.5, 20.4, -1.7, 17.1, 2.0, 7.4, 5.8, 4.5, 2.9, 2.2 - Current account balance, excluding interest payments: 1.9, 1.9, 0.6, 0.7, -1.2, -1.3, 5.0, -0.2, -0.3, -0.3, -0.2, -0.7, -0.8 - Net non-debt creating capital inflows: 4.5, 3.5, 2.6, 1.7, 1.6, 1.6, 1.7, 3.7, 3.0, 3.0, 2.8, 2.0, 2.1 ### Debt-stabilizing non-interest current account (long-run anchor) - Debt-stabilizing non-interest current account: -4.8 (value shown in table) *Notes from source:* - 1/ Derived as [i - g - r(1+g) + ea(1+i)]/(1+g+r+gr) times previous period debt stock, with i = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt. - 2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator). - 3/ For projection, line includes the impact of price and exchange rate changes. - 4/ Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. - 5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. - 6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year. --- ### Annex III. Figure 7. Greece External Debt Sustainability: Bound Tests (selected notes) - Individual shocks are permanent one-half standard deviation shocks; combined shock uses permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - Figures in boxes in source represent average projections for respective variables in baseline and scenarios; ten-year historical average is also shown. - Example box values shown in figure (selected): - Interest-rate shock: Baseline 195, Scenario 182 - Current-account shock: Baseline 201, Scenario 182 - Combined shock: Baseline 208, Scenario 182 - Growth shock: Baseline 208, Scenario 182 - Historical scenarios: values such as 294, 182 appear in figure labels. *Sources: International Monetary Fund, Country desk data, and staff estimates.* --- ### Annex IV. Labor Market Policies — Findings, impacts, and policy recommendations ### Recent policy changes (summary) - Effective February 2019, government implemented a double-digit increase in the minimum wage and abolished the youth sub-minimum wage. - Gross monthly minimum wage increased to €650 per month (an increase of 10.9 percent). - Youth wage (for employees below 25 years old) was effectively increased by 27 percent. - Seniority premiums accrued through 2012 were adjusted proportionally; no new premia will be earned going forward. - In August 2018, government reinstated authority to extend collective bargaining agreements (CBA) with a representativeness threshold of 51 percent and re-adopted the worker ‘favorability’ principle; arbitration remains binding even if one party does not consent. ### Distributional and labor-market impacts - Directly affected workers: at least 15–20 percent of employees or about 600,000 workers will be directly affected by the minimum wage (workers receiving the minimum wage, including workers under 25 years). - Historical linkage: sample of 35 CBAs signed between 2004–09 shows 75 percent of agreements were in line with and signed shortly after minimum wage negotiations. - Since August 2018, CBAs covering ten sectors were extended, binding around 200,000 workers; thirty more agreements pending. - Sectoral vulnerability: full-time employees in small firms (less than 10 employees) in accommodation, food, administrative and support services seem most vulnerable. - Informality risk: smaller firms may shift activity to the informal sector to avoid higher labor and labor-related costs. ### Fiscal and macro impacts - First-round fiscal effects likely positive due to higher revenues: minimum social security contributions of the self-employed are linked to the minimum wage and the minimum wage crosses the PIT exemption threshold. - Spending increases: 24 benefits linked to the minimum wage (such as unemployment benefits, motherhood protection, and certain subsidies). - Second-round fiscal risks: lower employment growth or migration to informal sector could reduce social contributions and PIT revenues, raise social benefits demand, reduce VAT revenues, and possibly lower CIT revenues via reduced profitability. - Public sector wages are not linked to the minimum wage, but pressure to raise salaries could rise. ### Competitiveness and productivity considerations - Prior reforms reduced unit labor costs (ULCs), boosting net exports and improving the current account. - Illustrative extreme hypothesis: if all contracts mimic the minimum wage increase and productivity is constant, ULCs in Greece would increase by about 10 percent. - Euro-area projected ULC growth in 2019: about 1.2 percent; a 10 percent ULC increase in Greece would widen the ULC differential. - Mitigating factors: new labor relations structure and productivity differentiation among sectors (tradable sectors paid above minimum wage on average are less affected). - Even partial spillover to general ULCs could reverse competitiveness gains. ### Labor market context and risks - Greek productivity: 0.3 percent average growth in H1 2018. - Unemployment remains high, especially long-term and youth unemployment; employment recovery modest. - Cyclical recovery room narrowed: lower number of vacancies with persistently-high unemployment. - Evidence: most studies conclude a negative impact of a minimum wage increase on employment, notably for youth (although one expert report cited did not find significant impact up to 10 percent increases). - Small firms and services/support sectors bear higher risk despite potential demand boost. ### Policy recommendations and mitigating measures - Priority: accelerate productivity-enhancing structural reforms and reorient labor market policies to better reflect productivity considerations. - Ongoing/implemented mitigating measures by authorities: - Subsidies for youth employers and other financial incentives for new employment. - Increased budget for active labor market policies. - Piloting a re-training program to address long-term unemployment. - NGS (National Growth Strategy) includes innovation, skills quality, and education components (noted to take time). - Near-term reforms to foster employment: - De-regulation of product markets. - Privatization. - Further investment licensing extensions. - Increase public investment in areas that reduce costs for firms (energy, infrastructure, transport). - Lower financing costs via improved bank lending prospects. - Minimum wage process suggestions: - Future minimum wage consultations should be more firmly guided by productivity increases and economic considerations. - Consider a medium-term anchor—objective indicator(s)—to guide future changes, guided by practices in other European countries. *Selected references and empirical notes from source:* - Expert report (Georgiadis et al., 2019) did not find a significant impact of a minimum wage increase on employment up to increases of 10 percent. - Other institutions (SETE, Bank of Greece) and earlier papers (Kanellopoulos, 2015; Yannelis, 2014) conclude employment is negatively elastic to the minimum wage at varying degrees. - Assessment on the Current Statutory Minimum Wage, Bank of Greece (2018) cited for informality findings. *Source: IMF staff (figures and tables as presented in the source content).* ### References ### 1grcea2019001 - References ### References - Georgiadis, A., Kaplanis, I., and Monastiriotis, V., 2019, “The Impact of Minimum Wages on Wages and Employment: Evidence from Greece,” (London: Hellenic Observatory of the European Institute, London School of Economics). - Kanellopoulos, C., 2015, “The effects of minimum wages on wages and employment”, Economic Bulletin Issue 41, 7-29 (Athens: Bank of Greece). - Yannelis, C., 2014, “The Minimum Wage and Employment Dynamics: Evidence from an Age Based Reform in Greece”, (Stanford, CA: Stanford University). ### Annex V. State Support for NPE Reduction: Guidelines for a Cost-Benefit Analysis - Purpose: Assess cost-effectiveness of alternative State-supported system-wide NPE reduction schemes as part of broader State participation/divestment strategy in banking. - Schemes discussed: - Asset Protection Scheme (APS): issuance of State guarantees on senior tranches of securitized NPE portfolios based on voluntary bank participation. - Asset Management Company (AMC): consolidate denounced NPEs of the four major banks, receive half of their DTCs, with State and banks holding junior tranches. - State subsidy scheme for mortgages: fiscal assistance to targeted group of borrowers with bank debt secured by owner-occupied residential properties. - Compliance requirement: - Use of public funds likely qualified as State aid and must comply with BRRD and EU State aid rules; calibration of parameters may be required. - Cost-effectiveness assessment criteria (must aim for prompt and sustainable clean-up): - Impact on banks’ balance sheets and income statements: - Capture gains in asset quality (level/composition/coverage of NPEs) and impact on capital adequacy (both level and quality). - If relevant, account for impact of remuneration of state intervention on banks’ income statements. - Impact on the State’s balance sheet: - Capture overall expected cost, timing and type of financial support, and any potential compensation (fees or ownership stakes). - Speed of materialization: - Fast resolution preferable for banks; State’s capacity to absorb large one-off shocks to debt/deficit may be limited; offsetting benefits from potentially higher GDP growth should be considered. - Impact on bank-sovereign nexus: - Options that do not exacerbate the bank-sovereign nexus could be prioritized. - Other qualitative considerations: - Governance of NPE resolution process. - Efficiency in cleaning borrowers’ balance sheets and boosting growth. - Potential to increase moral hazard and impact on payment discipline. - Capacity to attract investor interest. - Conflicts with existing initiatives pursued by individual banks. - Effect on system concentration. ### Annex VI. Capacity to Repay in the Downside Scenario — Overview and Key Assumptions - Core conclusion: Under the downside scenario, Greece’s capacity to repay the Fund would be at risk beginning from 2021, absent a strong fiscal policy reaction, a new financial agreement, or debt restructuring. - Aggregate fiscal impact assumption: - Fiscal primary balance (in cash terms) would deteriorate by about 1.3 percent of GDP on average over 2019-2024 compared to baseline. - Specific downside assumptions affecting fiscal path: - Courts overturn the 2012–15 pension payment cuts, triggering €6.4 billion in payments, split equally over 2020–21. - Courts overturn past cuts in public-sector bonuses, triggering: - Retroactive payment of €2.6 billion paid in full in 2019. - Restoration of the bonus beginning in 2020, permanently adding 0.2 percent of GDP to annual budget expenditure. - VAT rate cuts implemented as promised, permanently lowering VAT revenues by 0.4 percent of GDP starting in 2021. - State guarantees are paid beginning in 2019 (€2.1 billion), with a half of €1 billion called gradually over 2020–24. - Fiscal shocks partially absorbed by budget contingency reserves and spending compression totaling about €1 billion annually. - No other proactive fiscal policy response is undertaken in the scenario. - Financing and market-access assumptions: - Investor confidence hampered; government implements only one half of planned sovereign debt issuances over 2019–21 and cuts T-bill rollover in half. - ANFA/SMP profits are not returned. - No waiver of the step-up interest rate margin for part of the EFSF loans. - Cash buffer use: - ESM assumed not to object to full drawdown of State government cash buffer estimated at €30 billion at end-2018. - State keeps BoG deposits above minimum liquidity cushion of €0.3 billion. - Part of cash buffer used to support banking system through targeted deposit placement. - Timing and outcome: - Available cash buffers exhausted by end-2021. - From 2022, State would face a financing gap — interpreted as minimum size of policy adjustments (and/or other steps) needed to meet payments. - Absent responses, full payment on Greece’s debt obligations would not be possible or only possible for a limited period at unsustainably high interest rates. - Fiscal space would be reduced further if potential costs related to NPE reduction and/or negative growth effects were included. ### Annex VI. Table 1. Downside Scenario: Materialized Risks, 2019–24 (Billions of euros, unless otherwise indicated) - Items affecting primary balance by year (2019 2020 2021 2022 2023 2024): - Total items affecting primary balance: 3.7 2.9 3.7 1.5 1.6 1.6 - Retroactive pension payment for 2012-15: 3.2 3.2 - Retroactive public-sector bonus: 2.6 - Restoration of public-sector bonus: 0.5 0.5 0.5 0.5 0.5 - VAT rates cut: 0.8 0.8 0.8 0.9 - Outstanding state guarantees: 2.1 0.2 0.2 0.2 0.2 0.2 - Use of budgeted contingency reserves and spending compression: -1.0 -1.0 -1.0 - Items affecting financing by year (subset shown): - Items affecting financing totals: 10.0 2.5 - No market access: 3.5 1.0 1.0 2.6 5.2 12.5 - T-bills 50% rollover rate: 4.9 - No ANFA/SMP: 1.3 1.3 1.3 1.3 0.0 0.0 - No waiver of the step-up interest rate margin for EFSF loans: 0.3 0.2 0.2 0.2 0.0 0.0 - Memo item: Primary balance in % of GDP - Cash: 1.0 1.4 1.4 2.7 2.1 2.0 - Accrual: 1.6 2.0 1.7 2.8 2.3 2.1 - Sources: Ministry of Finance; and IMF staff projections. ### Annex VI. Table 2. Downside Scenario: GG Financing Requirements and Sources, 2018–24 (Billions of euros) - Gross borrowing need by year (Prel. 2018 2019 2020 2021 2022 2023 2024): - 35.9 8.4 5.9 10.6 14.6 17.6 20.2 - Overall deficit (cash) series: 2.0 4.1 2.8 2.8 -0.1 1.0 1.1 - Primary deficit (cash) series (partial): -3.1 -2.0 -2.8 -2.8 -5.8 -4.6 -4.4 - Amortization series: 18.9 23.6 10.0 10.3 14.8 16.7 19.1 - Short-term (T-bills) amortization: 14.3 11.2 4.9 4.9 4.9 4.9 4.9 - Other (net flows): 15.0 -19.3 -6.8 -2.4 -0.1 -0.1 -0.1 - ECB related income (SMP/ANFA): -0.3 -0.3 -0.2 -0.2 -0.1 -0.1 0.0 - Step-up interest rate margin for EFSF loans: 0.0 0.3 0.2 0.2 0.2 0.0 0.0 - Govt deposits: replenishment (+) / drawdown (-): 14.6 -21.0 -6.6 -2.2 0.0 0.0 0.0 - Gross financing sources by year: 35.9 8.4 5.9 5.9 4.9 4.9 4.9 - Market access components: - Market access total: 14.2 8.4 5.9 5.9 4.9 4.9 4.9 - Short-term (T-bills): 11.2 4.9 4.9 4.9 4.9 4.9 4.9 - Medium and long-term: 3.0 3.5 1.0 1.0 0.0 0.0 0.0 - Official financing: 21.7 0.0 0.0 0.0 0.0 0.0 0.0 - Financing gap: 0.0 0.0 0.0 4.7 9.7 12.6 15.2 - Memo items: - Deposits of general government 1/: 37.5 16.5 9.9 7.7 7.7 7.7 7.7 - Available to state government 2/: 30.0 9.1 2.5 0.3 0.3 0.3 0.3 - State government in BoG 3/: 20.3 3.7 0.3 0.3 0.3 0.3 0.3 - State government in commercial banks: 6.5 2.2 0.0 0.0 0.0 0.0 0.0 - General government entities in BoG: 3.2 3.2 2.2 0.0 0.0 0.0 0.0 - General government entities in commercial banks 4/: 7.5 7.4 7.4 7.4 7.4 7.4 7.4 - Primary deficit (accrual) series: -7.0 -3.1 -4.0 -3.4 -5.8 -4.9 -4.7 - Sources: Ministry of Finance; and IMF staff projections. - Notes (as presented): - 1/ Total general government deposits (€37.5 billion) consist of state government deposits (€26.8 billion) and general government entities' deposits (€10.7 billion) in the BOG and commercial banks as of end-December 2018. - 2/ Total deposits of general government excluding deposits of general government entities in commercial banks. - 3/ Includes the TSA and cash buffer accounts. The drawdown of the cash buffer account is subject to ESM approval. - 4/ Excludes cash balances of the Deposit and Investment Guarantee Fund (TEKE). ### Annex VI. Box 1. Fiscal Risks from Court Rulings on Past Measures — Key Figures and Risks - One-off repercussions: about €9.5 billion from retroactive payments and ¾ percent of GDP of additional annual future budget spending (as characterized in text). - Specific estimates: - Pension reform of L.4093/2012: 6.4 billion (3.3 percent of 2019 GDP). - Restoration of public sector bonuses: 2.6 billion (1.4 percent of 2019 GDP; recurring cost 0.2 percent of GDP). - Of which: uniformed personnel 0.7 billion (0.4 percent of 2019 GDP; recurring cost 0.1 percent of GDP). - Of which: public health sector 0.1 billion (0.1 percent of 2019 GDP; recurring cost 0.0 percent of GDP). - Of which: municipalities 0.3 billion (0.1 percent of 2019 GDP; recurring cost 0.0 percent of GDP). - Misc: 0.4 billion (0.2 percent of 2019 GDP; recurring cost 0.6 percent of GDP as presented). - Total: 9.4 billion; Fiscal impact: One-off/Retroactive; Recurring cost 4.9 (Percent of 2019 GDP) 0.8 (Percent of GDP). - Additional context: - In 2018, over 0.4 percent of GDP of unforeseen budget spending was triggered by a single court decision. - Ongoing court challenges could result in up to 6.4 billion in retro-active net payments for pension appeals under the 2015 Council of State ruling. - Estimates exclude potential reversals of the 2016 pension reform; full reversal could add 2-4 percent of GDP in additional annual cost in the medium term (not included in quantified totals here). - Several proposed fiscal measures not yet reflected in budget projections amount to about 0.6 percent of GDP. ### Statement by Mr. Psalidopoulos on Greece (March 6, 2019) — Authorities’ View (Selected Points) - Growth and labor market: - Real GDP growth expected to reach 2.1% in 2018 and 2.5% in 2019. - Unemployment fell from a peak of 27% in 2013 to nearly 18%. - Private non-financial sector deposits increased in 2018; ELA funding almost eliminated at end-2018. - Banking system and NPEs: - CET1 ratio at 15.6% (September 2018) for Greek banks; EBA stress tests (May 2018) did not identify capital shortfalls for four significant Greek banks. - Authorities disagree with staff assessment that “the Greek banking system remains highly vulnerable”. - NPE stock remains high; authorities highlight measures: increase in e-auctions, improvements in out-of-court workout legal framework, presentation to DG COMP of an Asset Protection Scheme, and intention to adopt a comprehensive household insolvency law. - Fiscal stance and debt: - General government primary surplus exceeded fiscal target of 3.5% of GDP in 2018. - Government introduced a fiscal package of 0.5% of GDP in the 2019 Budget. - Following Eurogroup debt relief of 22 June 2018, public debt on a sustainable path; Greece expected to meet benchmarks for gross financing needs: below 15% of GDP in the medium term and below 20% of GDP thereafter. - State liquidity sufficient to cover financing needs for at least two years even without new issuances. - Consideration of early repayment to the IMF as part of liability management strategy. - Market sentiment and issuance: - 10-year Greek government bond yield at 3.7%. - Successful 5-year, €2.5 billion bond issuance in January (four times oversubscribed). *Content summarized from the provided IMF PDF chapter/section.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1grcea2019001.pdf_