## 1. Illustrative Scenario—Higher Reform Payoffs

## Source details

**Canonical URL:** [1. Illustrative Scenario—Higher Reform Payoffs](https://www.imf.org/-/media/files/publications/cr/2019/1grcea2019002.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1grcea2019002.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1grcea2019002.pdf.json)

---

### Context and recent developments
- Greece suffered an output fall of about 25 percent and income remains short of its pre-accession level.
- Large productivity and competitiveness gaps persist tied to unaddressed structural weaknesses, weak social consensus on essential reforms, and crisis legacies of high NPLs, over-indebted borrowers, and high public debt.
- Following program exit in August 2018, policy reversals raised risks of falling further behind; the new government signaled priorities: lower taxes, a better business environment, a more flexible labor market, and higher investment.
- Key recent macro and sectoral indicators:
  - Real GDP growth: 2017 1.5 percent; 2018 1.9 percent; 2019Q1 0.2 percent q/q s.a.; 2019Q2 0.8 percent q/q s.a.
  - Unemployment: fell to 16.9 percent (s.a.) in July 2019 from 19.1 percent a year earlier; structural unemployment estimated at 13 percent (end-2018) and output gap negative 4 to 6 percent of GDP for 2018 (standard methods).
  - Inflation: 12-month average headline HCPI 0.7 percent in September 2019; core inflation 1 percent.
  - Current account (2018 accrual basis): deficit widened to 3.5 percent of GDP; current account gap estimated at -3 percent of GDP corresponding to a 10 percent REER overvaluation.
  - Fiscal: 2018 primary balance 4.2 percent of GDP (above Greece’s 3.5 percent commitment); State primary balance Jan–Aug 2019: primary balance 1.5 percent of GDP vs 0.6 percent in Jan–Aug 2018.
  - Sovereign liquidity: government liquidity buffer €32 billion (17 percent of GDP) (preliminary as of end-September).
  - Banking sector (2019Q2): NPE ratio 44 percent; provisioning coverage 48 percent; common equity ratio 15 percent since end-2018 (13 percent fully-loaded); credit growth adjusted for write-offs remains negative overall; lending to top corporates picked up to 2.9 percent (y/y) in August 2019.

### Outlook (staff baseline)
- Growth projections:
  - 2019: real GDP growth expected 1.8 percent.
  - 2020: 2.3 percent.
  - Medium term: potential rate just under 1 percent; staff baseline projects 0.9 percent average growth in LT.
  - Output gap expected to close by 2023; structural unemployment around 13 percent.
- Inflation and external balance:
  - Inflation expected to rise gradually to 1.8 percent.
  - Current account deficit projected to increase to around 4 percent of GDP by 2023.
- Public debt and financing:
  - Public debt-to-GDP projected to trend down over the next decade but at higher levels than in March 2019 PPM Report due to lower nominal GDP and primary surplus paths during 2019–25.
  - GFNs-to-GDP path on average slightly lower than March 2019 DSA due to active liability management and lower sovereign borrowing costs.
  - Staff view: debt sustainability is not assured under a realistic set of macro-fiscal assumptions.
- Risks:
  - Near-term risks tilted to the downside; medium-term risks more balanced.
  - External risks: rising protectionism (around one-third of exports to non-EU countries), weaker global growth, cooling German economy, abrupt Brexit could substantially reduce exports.
  - Domestic risks: policy reversals, failure to implement reforms, further deterioration of bank balance sheets.
  - Upside risks: positive market reactions and early realization of pro-growth, investment-driven objectives.

### Illustrative alternative scenario assumptions (Higher Reform Payoffs)
- Aim: explore payoffs from faster and more ambitious reforms to approach authorities’ forecasts (around 3 percent short term; above 1.5 percent long term).
- Labor, pension, and other reforms:
  - Convergence toward a higher LFP rate of around 80 percent (in line with German and Nordic rates).
  - Lower structural unemployment rate of around 10 percent.
  - Labor supply decline due to unfavorable demographics slows from an average of -0.4 percent to around -0.2 percent.
- TFP and structural reforms:
  - Further structural reforms assumed to raise projected TFP growth rate by 25 percent.
- Investment response:
  - Convergence of GFCF to GDP ratio from current low of 11 percent to a higher medium-term level of 17 percent (compared to around 15 percent under baseline).
- Fiscal assumption:
  - Fiscal path remains unchanged; revenue gains from higher growth would be used to finance policies supporting social inclusion and growth.

### Outcomes under the alternative scenario (percent and levels preserved)
- Short-term growth accelerates to 3 percent.
- Medium-term growth moderates to 1.4 percent (about ½ percentage point higher than baseline).
- Higher growth improves debt dynamics by 4 pps at the end of the forecast period.
- Comparative table (percent or units as in source):
  - Labor contribution: Baseline -0.4 ; Alternative -0.2
  - TFP growth: Baseline 0.8 ; Alternative 1.0
  - Investment/GDP (ratio) 1/: Baseline 14.9 ; Alternative 17.1
  - Real growth rate: Baseline 0.9 ; Alternative 1.4
  - Structural unemployment: Baseline 12.9 ; Alternative 10.2
  - Labor force participation: Baseline 75 ; Alternative 80
  - 1/ GFCF in constant 2010 prices.

### Key policy implications (from illustrative scenario and staff analysis)
- Implement faster and more ambitious structural reforms to:
  - Raise labor force participation toward around 80 percent.
  - Reduce structural unemployment toward around 10 percent.
  - Increase TFP growth (assumed +25 percent in illustrative scenario).
  - Boost investment to raise GFCF/GDP toward 17 percent.
- Maintain commitment to Enhanced Surveillance (ES) fiscal and structural policy commitments to preserve market confidence and favorable financing conditions.
- Carefully sequence pro-growth tax cuts and fiscal loosening to avoid undermining medium-term debt sustainability; preserve credibility with European partners.
- Strengthen bank balance sheets to support credit growth:
  - Continue NPE reductions via sales, securitization, and write-offs while progressing on liquidations and strengthening provisioning.
  - Monitor capital ratios under fully-loaded IFRS 9 transitional arrangements.
- Mitigate external risks via diversification of export markets and policies to enhance competitiveness and productivity.
- Use higher growth-generated revenues to finance inclusion-enhancing and growth-supporting policies while improving debt dynamics.

*International Monetary Fund — Greece: 1. Illustrative Scenario—Higher Reform Payoffs (sections and figures as provided).*

---

### A. Fiscal Policy mix and recommendations

### Recent developments and fiscal stance
- The 2019 primary surplus projected to exceed Greece’s 3.5 percent of GDP commitment to European partners—though by considerably less than in previous years.
- Staff projects primary surplus to fall to about 3 percent of GDP in 2020 under current policies and to about 2 percent of GDP over the medium term due to expenditure mix changes and fading EU transfers.
- Expansionary measures enacted in May 2019 amounted to 0.8 percent of GDP in 2019.
- State primary balance Jan–Aug 2019: primary balance 1.5 percent of GDP vs 0.6 percent Jan–Aug 2018 (difference 0.9 percentage points); Net revenue 17.5 vs 16.8 (difference 0.7); Taxes 16.1 vs 16.5 (difference -0.3); Primary Expenditure 16.0 vs 16.2 (difference -0.3).

### Fiscal policy recommendations and actions prioritized by staff
- Tax policy:
  - Prioritize direct tax rate cuts (contingent on fiscal space) and avoid new tax expenditures (e.g., VAT exemptions for construction).
  - Combine planned PIT rate reductions with tax base broadening, including lowering the PIT tax-free threshold.
  - Support the proposed large CIT rate cut (4 percentage points) in 2020 and gradual reduction of unemployment insurance contributions.
- Tax collection and compliance:
  - End decades of ‘temporary’ ad hoc installment schemes; enhance permanent installment scheme with capacity-to-pay assessment and stronger enforcement.
  - Improve out-of-court (OCW) mechanism and complete delayed IAPR HR reforms.
  - Increase minimum qualifying electronic payment expenses for PIT: current levels of 10 to 20 percent to 30 percent; nominal ceiling of €20,000; difference between minimum and actual qualified expenses taxed at 22 percent.
- Expenditure policy and efficiency:
  - Reorient expenditure toward high quality investment and social spending (Social Solidarity Income, child and housing benefits, health, education, ALMPs).
  - End pension bonuses and align pension benefits of existing retirees with the new benefit formula.
  - Improve fiscal data consistency (cash vs accrual).
- Fiscal stance and coordination:
  - Seek consensus with European partners on a lower primary balance target given large output gap and unmet spending needs.
  - Consider a smoothing mechanism (e.g., expenditure rule) to allow temporary symmetric deviations from the primary balance target in case of cyclical or one-off shocks.
- PFM and arrears:
  - Improve budget planning and implementation, strengthen public investment framework, integrate risk management into the budget cycle.
  - Address structural causes of arrears and manage contingent buffers in line ministries.

---

### B. Banking sector clean-up and financial stability

### Diagnosis and recent developments
- Banking system remains a misfiring engine of growth and source of fiscal and financial stability risks despite past injections.
- Key indicators and facts:
  - NPEs remain the highest in Europe; NPE ratio as of 2019Q2: 44 percent.
  - Provisioning coverage as of 2019Q2: 48 percent.
  - Common equity ratio 15 percent since end-2018; would drop to 13 percent on a fully-loaded basis.
  - ELA fully repaid in March 2019.
  - Two systemic banks placed 10-year Tier 2 bonds in June/July 2019 at yields 9.75 and 8.25 percent.
  - Banks announced NPE reduction targets (agreed with the SSM): bring NPE stock down to €29 billion by end-2021, from €82 billion at end-2018.
  - Authorities received DGCOMP state-aid approval for the ‘Hercules’ state-supported NPE securitization guarantee scheme.
  - Authorities expect reductions to be funded through internal capital generation; BoG noted internal capital could recover if NPE reduction accelerates.

### Staff recommendations to accelerate reforms (enumerated)
- Faster reduction of NPEs:
  - Aim to bring Greece close to EA norms by end-2021; include hive-off strategies, internal capital (including DTC conversion if appropriate) or one/both state-supported schemes.
  - Subject alternative approaches to ex ante comprehensive and dynamic cost-benefit analyses; press for DGCOMP state-aid approval as needed.
- Build and clean up capital:
  - Additional capital likely needed to fund NPE reduction targets, comply with SSM provisioning calendar, and finance internal investments.
  - Reduce share of DTCs to total capital; emphasize market-based private initiatives while acknowledging some public support may be needed.
- Contain bank-sovereign nexus:
  - Clear called (but unpaid) state guarantees on bank loans to head off reputational damage and adverse implications for risk-weighting.
  - Staff recommended against relaxing ECB-mandated sovereign exposure ceilings.
- Promote meaningful debt restructuring and payment discipline:
  - Overhaul personal insolvency framework, eliminate PRP as a financial policy objective, create more credible foreclosure threat, limit length of installment schemes, faster reduction of household insolvency backlog.
- Strengthen bank internal governance and profitability:
  - Improve loan pricing, business decisions, asset-liability management, target more ambitious core profitability via operating income (fee-generating business, digital products) and cost-cutting.
- Adopt comprehensive, coordinated strategy:
  - Package measures with appropriate sequencing and stakeholder coordination; include forward-looking analysis of bank business sustainability, possible fiscal costs, and long-term impact on profitability and securitization exposures.
  - A credible strategy would enhance investor and depositor confidence, important following CFM liberalization.

### Pace and outlook
- At current pace, recovery of banks’ lending support for investment and growth will take many years.
- Even more aggressive NPE reduction targets could leave Greek banks as outliers vis-à-vis EU peers.
- Policy options for supporting banks under stress constrained by limited capital and bail-in-able buffers, and by state-aid and EA-wide rules.

---

### C. Structural reforms, labor market, and competitiveness

### Structural diagnosis and priorities
- Much of the needed structural transformation remains unfinished: economy dominated by SMEs in a rigid business climate; product market deregulation has largely not taken root.
- Staff priority areas:
  - Streamline business licensing and simplify regulatory procedures.
  - Create more dynamic markets: address entry/exit constraints, strengthen HCC capacity, tackle behavioral/institutional barriers.
  - Open closed professions and steadfastly implement sectoral measures.
  - Reform SOEs and network industries: governance and pricing in PPC, remove roadblocks to private sector involvement in EGNATIA and DEPA, gear state divestment toward improving service and removing price distortions.

### Labor market: diagnosis and staff-supported reforms
- Recent performance:
  - Labor market improving gradually but quality of recovery weak; structural unemployment estimated 13 percent end-2018.
  - MW increased nearly 11 percent (February 2019) to €650 monthly and €29 daily; abolition of subminimum wage for <25 implies effective increase of 27.2 percent for that group.
- Staff recommendations:
  - Restore 2011–13 collective bargaining reforms and support limiting unilateral arbitration while providing firm-level flexibility (targeted opt-outs).
  - Simplify MW framework through a single statutory MW (ending seniority premia) while retaining provisions to encourage youth employment.
  - Accelerate ALMP pilot to scale up employability and skills-matching, expand vocational training, boost female labor force participation (e.g., dependent care).
  - Support government’s planned ex-post assessment of 2019 MW-setting process ahead of 2020 round.

---

### D. External sector assessment and vulnerabilities

### External position and assessments
- External position in 2018 weaker than consistent with medium-term fundamentals; CA deficit widened in 2018 to 3.5 percent of GDP (accrual basis).
- NIIP: -142 percent of GDP in 2018; staff projects NIIP broadly flat in the medium term under baseline.
- REER assessment: staff bases on EBA CA model — mid-point CA gap of -3 percent and semi-elasticity 0.3 imply REER overvaluation of 10 percent.
- Policy priority: accelerate reforms to improve competitiveness and employment conditions; labor and product market reforms critical.

### Financing and flows
- Financial account dominated by official financing flows historically; net FDI inflows increased since 2016.
- CFMs fully removed effective September 1, 2019, increasing urgency on banking sector reforms to normalize financial conditions and sentiment.

---

### E. Debt Sustainability Analysis (Annex III) — baseline, assumptions, and stress tests

### Baseline and key figures (preserved exact projections and metrics)
- Baseline macro assumptions:
  - Real growth: average 2.1 percent in 2019-2020 declining to 0.9 percent by end projection period; specific path: 2019 1.8; 2020 2.3; 2021 2.0; 2022 1.4; 2023–2028 0.9.
  - Inflation: 0.7 percent average in 2019-2020; 1.8 percent going forward.
  - Primary balance (percent of GDP, baseline): 2019 3.2; 2020 2.1; 2021 1.8; 2022 1.8; 2023 2.0; 2024 2.1; thereafter variable.
  - Effective interest rate on total public debt assumed to increase from under 2 percent currently to 2.4 percent by end of projection period.
- Debt projections and financing:
  - Baseline: debt-to-GDP projected to decline from about 185 percent of GDP in 2018 to about 145 percent of GDP in 2028.
  - Baseline GFNs-to-GDP average 7.9 percent over 2019-2028 (about 0.3 percentage point lower than March 2019 DSA).
  - Nominal GDP under updated baseline about 3 percent lower by 2028 than March 2019 DSA; explains about 2½ percentage points of the 10½ percentage point deterioration in debt-to-GDP by 2028 relative to March 2019 DSA.
  - Cash buffer: State government cash buffer about €32 billion at end-September 2019; broader general government deposits at commercial banks about €40 billion.
  - Staff expects drawdown about €19 billion of deposits over 2019-2024 (including €15.7 billion provided through ESM loans requiring approval); total deposits immediately available to the State projected to decline to about €11 billion by end-2024.
  - Projected market issuances: (i) €5-7 billion in 2020-2022, and (ii) €9-10 billion in 2023-2024.
- Realism and staff view:
  - Median forecast errors for past staff forecasts: real growth -3.1 percent (percentile rank 1 percent), primary balance -0.7 percent (percentile rank 29 percent), inflation -0.8 percent (percentile rank 24 percent).
  - Staff view: public debt sustainability is not assured under a realistic set of macro-fiscal assumptions.

### Stress test scenarios and impacts (selected outcomes preserved)
- Real GDP growth shock: growth reduced to -1.7 percent on average in 2020 and 2021; debt-to-GDP increases to 192 percent in 2021 (25 percentage points higher than baseline).
- Primary balance shock: lower cash primary balance by about 2 percent of GDP on average in 2020-2022 would raise debt-to-GDP by about 11 percentage points relative to baseline by 2024; GFNs on average 3 percent of GDP higher in 2020-2028 and would breach 15 percent threshold in 2028.
- Real interest rate shock: raises effective interest rates by about 400 basis points a year on average over 2020–2028; impact moderate because only small portion of debt subject to rate variations.
- Combined macro-fiscal shock: would keep debt-to-GDP about 180-190 percent throughout projection period; GFNs-to-GDP would breach 15 percent medium-term threshold as early as 2025 and the 20 percent long-term threshold by 2028.
- Contingent liability shock (2019-2024): materialization of fiscal and financial risks about 7 percent of 2019 GDP plus T-bill rollover risk 2.5 percent and banking sector support costs 2.4 percent would raise debt-to-GDP to about 203 percent by 2022; GFNs-to-GDP above 15 percent in 2022 and 2025-2027 and breach 20 percent by 2028.

---

### F. Governance, AML/CFT, statistics, and inclusion

### AML/CFT, judiciary, and statistics
- FATF assessment (adopted September 2019) concludes Greece’s AML/CFT regime effective in several areas; remaining weaknesses include prosecution of ML and confiscation and controls over non-financial sector.
- Greece mobilized AML/CFT framework to fight tax evasion; tax authorities prioritized FIU cases.
- Judicial reforms underway but processes extremely time-consuming; need to enhance protection of property and contract enforcement and complete cadaster/property registration.
- ELSTAT capacity and data quality improved; staff recommends protecting ELSTAT’s independence and respecting the 2012 “Commitment on Confidence in Statistics.”

### Inclusive growth and spending composition (Annex V)
- Inclusive growth indicator methodology (Bloch and Fournier 2018; Fournier and Johansson 2016) shows:
  - Investment: growth effect 2.8; inequality-inclusive growth effect 2.5.
  - Family and children: growth effect 1.7; inequality-inclusive growth effect 3.3.
  - Old-age and survivor pensions: growth effect -0.9; inequality-inclusive growth effect -1.0.
- Findings:
  - Greece’s spending mix fell sharply during the crisis, low point 2012; partial temporary improvement 2012–2013; by 2017 persistent gap vs EA average due to higher pension spending and lower targeted social protection and investment.

---

*International Monetary Fund — Greece: 1. Illustrative Scenario—Higher Reform Payoffs and related sections (1grcea2019002).*

### 1. Illustrative Scenario—Higher Reform Payoffs ___________________________________________________ 9

### 1. Illustrative Scenario—Higher Reform Payoffs

### Context
- Greece suffered an output fall of about 25 percent and income remains short of its pre-accession level.
- Large productivity and competitiveness gaps persist, tied to unaddressed structural weaknesses, weak social consensus on essential reforms, and crisis legacies of high NPLs, over-indebted borrowers, and high public debt.
- Following program exit in August 2018, policy reversals over the last year raised risks of falling further behind: important reforms were delayed, canceled, or reversed (Annex I).
- The new government signaled priorities: lower taxes, a better business environment, a more flexible labor market, and higher investment, including rebooting stalled privatization projects.
- Greece reaffirmed commitment to meet fiscal and structural policy commitments under the ‘Enhanced Surveillance’ (ES) framework, while signaling desire to amend fiscal commitments if policies generate higher growth.

### Recent Developments
- Growth:
  - 2017: 1.5 percent expansion.
  - 2018: 1.9 percent expansion.
  - 2019Q1: 0.2 percent q/q s.a.
  - 2019Q2: 0.8 percent q/q s.a.
- Labor market:
  - Unemployment rate fell to 16.9 percent (s.a.) in July 2019 from 19.1 percent a year earlier.
  - Structural unemployment remains high; output gap estimated negative ranging from 4 to 6 percent of GDP for 2018 (standard methods; Annex VI of the 2018 Article IV Staff Report).
- Inflation:
  - 12-month average headline HCPI was 0.7 percent in September 2019 (below EA average of 1 percent).
  - Core inflation picked up to 1 percent.
- Private saving remains well below EA average.
- External sector:
  - 2018 current account deficit widened to 3.5 percent of GDP (accrual basis).
  - 2018 current account gap estimated at -3 percent of GDP, corresponding to a 10 percent REER overvaluation (Annex II).
- Fiscal performance:
  - 2018 primary balance: 4.2 percent of GDP (above Greece’s 3.5 percent commitment).
  - State primary balance Jan–Aug 2019: primary balance 1.5 percent of GDP vs 0.6 percent in Jan–Aug 2018 (difference 0.9 percentage points). Net revenue 17.5 vs 16.8 (difference 0.7); Taxes 16.1 vs 16.5 (difference -0.3); Primary Expenditure 16.0 vs 16.2 (difference -0.3).
- Sovereign liquidity and market access:
  - Government liquidity buffer: €32 billion (17 percent of GDP) (preliminary figure as of end-September).
  - Ten-year sovereign bond issuances resumed in 2019; Greek 10-year spreads around 156 bps (lowest in a decade) but remain highest in the EA (around 24 bps above Italy).
  - Greece received official-sector debt relief of around €0.6 billion in May 2019.
  - Greece requested European pari passu consent to prepay about €2.7 billion of its outstanding €8.4 billion IMF loan.
- Banking sector:
  - ELA fully repaid in March 2019.
  - NPE ratio as of 2019Q2: 44 percent.
  - Provisioning coverage ratio as of 2019Q2: 48 percent.
  - Common equity ratio at 15 percent since end-2018; would drop to 13 percent on a fully-loaded basis.
  - Credit growth (adjusted for write-offs) remains negative overall; lending to top corporates picked up to 2.9 percent (y/y) in August 2019.
  - Two systemic banks placed 10-year Tier 2 bonds in June/July 2019 at 9.75 and 8.25 percent yields.

### Outlook
- Growth projections:
  - 2019: real GDP growth expected to moderate to 1.8 percent.
  - 2020: growth projected to accelerate to 2.3 percent.
  - Medium term: potential rate of just under 1 percent; staff baseline projects 0.9 percent average growth in LT.
  - Output gap expected to close by 2023; structural unemployment around 13 percent.
- Inflation and external balance:
  - Inflation expected to rise gradually to 1.8 percent.
  - Current account deficit projected to increase to around 4 percent of GDP by 2023.
- Public debt:
  - Public debt-to-GDP projected to trend down over the next decade, but at higher levels than in the March 2019 PPM Report due to lower nominal GDP and primary surplus paths during 2019–25.
  - Gross financing needs (GFNs)-to-GDP path on average slightly lower than March 2019 DSA due to active liability management and lower sovereign borrowing costs.
  - Staff view: debt sustainability is not assured under a realistic set of macro-fiscal assumptions (Annex III).
- Risks:
  - Near-term risks tilted to the downside; medium-term risks more balanced (Annex IV).
  - External risks: rising protectionism (around one-third of exports are to non-EU countries), weaker global growth, a cooling German economy, an abrupt Brexit could substantially reduce exports (especially tourism).
  - Domestic risks: policy reversals, failure to implement reforms, further deterioration of bank balance sheets could constrain credit growth, trigger deposit outflows, and require costly public interventions.
  - Upside risks: positive market reactions and early realization of pro-growth, investment-driven objectives.

### Illustrative Scenario—Higher Reform Payoffs (Box 1)
- Purpose: Explore payoffs from faster and more ambitious reforms to bring growth closer to authorities’ forecasts (around 3 percent short term; above 1.5 percent long term).
- Alternative scenario assumptions applied to a standard growth model:
  - Labor, pension, and other reforms (including labor tax cuts) increase labor supply via higher labor force participation (LFP) and lower structural unemployment (and/or reverse emigration).
    - Assume convergence toward a higher LFP rate of around 80 percent (in line with German and Nordic rates).
    - Assume lower structural unemployment rate of around 10 percent.
    - Labor supply decline due to unfavorable demographics slows from an average of -0.4 percent to around -0.2 percent.
  - Further structural reforms (improving labor market flexibility, infrastructure, business regulations) assumed to raise projected TFP growth rate by 25 percent.
  - Investment response:
    - Convergence of GFCF to GDP ratio from current low of 11 percent to a higher medium-term level of 17 percent (compared to around 15 percent under baseline).
- Outcomes under alternative scenario:
  - Short-term growth accelerates to 3 percent.
  - Medium-term growth moderates to 1.4 percent (about ½ percentage point higher than baseline).
  - Higher growth improves debt dynamics by 4 pps at the end of the forecast period.
  - Table of baseline vs alternative assumptions and outcomes (percent):
    - Labor contribution: Baseline -0.4 ; Alternative -0.2
    - TFP growth: Baseline 0.8 ; Alternative 1.0
    - Investment/GDP (ratio) 1/: Baseline 14.9 ; Alternative 17.1
    - Real growth rate: Baseline 0.9 ; Alternative 1.4
    - Structural unemployment: Baseline 12.9 ; Alternative 10.2
    - Labor force participation: Baseline 75 ; Alternative 80
    - 1/ GFCF in constant 2010 prices.
- Fiscal assumption: fiscal path remains unchanged; revenue gains from higher growth would be used to finance policies supporting social inclusion and growth.

### Policy Implications and Recommendations
- Implement faster and more ambitious structural reforms to:
  - Raise labor force participation toward around 80 percent.
  - Reduce structural unemployment toward around 10 percent.
  - Increase TFP growth (assumed +25 percent in the illustrative scenario).
  - Boost investment to raise GFCF/GDP toward 17 percent.
- Maintain commitment to ES fiscal and structural policy commitments to preserve market confidence and favorable financing conditions.
- Carefully sequence pro-growth tax cuts and fiscal loosening to avoid undermining medium-term debt sustainability; preserve credibility with European partners.
- Strengthen bank balance sheets to support credit growth:
  - Continue NPE reductions via sales, securitization, and write-offs while progressing on liquidations and strengthening provisioning.
  - Monitor capital ratios under fully-loaded IFRS 9 transitional arrangements.
- Mitigate external risks via diversification of export markets and policies to enhance competitiveness and productivity.
- Use higher growth-generated revenues to finance inclusion-enhancing and growth-supporting policies while improving debt dynamics.

*International Monetary Fund — Greece: 1. Illustrative Scenario—Higher Reform Payoffs (sections and figures as provided).*

### 13.      Greece’s prospects for improved living standards and economic convergence within

### 13.      Greece’s prospects for improved living standards and economic convergence within

### A. Strengthening the Fiscal Policy Mix

- Context and past actions
  - Greece committed during the program era to numerous fiscal, financial sector, labor, and product market policy actions, but the reform agenda remains largely unfinished.
  - The fiscal mix deteriorated during the initial stages of the crisis as authorities sought to contain a fiscal deficit that reached 15 percent of GDP in 2009.
  - Rigidities in age-related spending and the public sector wage bill initially crowded out other critical social spending and investment.
  - The government’s cancellation of the fiscally-neutral 2019 pension/social spending measures and 2020 PIT broadening/rate cut measures represent significant lost opportunities; the gap represents “lost” savings when 2019 pension reform was cancelled (cumul. 10% of GDP).

- Recent policy moves and effects
  - Measures legislated in May 2019 by Syriza included: SSC and Tax debt installments; VAT cut (food products and services, energy); 13th pension and survivor's pension; expansionary measures announced for the 2020 budget by ND included: CIT cut (from 28 to 24 percent); PIT cut (22 to 9 percent for the lower rate, 1 ppt cut for other rates); Dividends tax cut (from 10 to 5 percent); SSC cut for full-time employees by about 1%; Childbirth benefit (2000 euros for new-born); VAT suspension on new buildings for 3 years; VAT cut on baby care items and safety helmets.
  - Measures legislated in July-Aug 2019 by ND included: Property tax reduction (22% mean); New terms of the 120 installments; Increase installments of claw back/rebate; Increase the threshold of E-transactions for PIT deductions; Improve valuation of ENFIA property tax; Spending reviews of government entities; Review of GG entities revenues; Increased revenues from online betting and Airbnb; Faster processing of tax cases in administrative courts; Improvement of GG entities’ effectiveness; Expanded ad hoc tax debt installment scheme.

- Fiscal stance and projections
  - The 2019 primary surplus is projected to exceed Greece’s 3.5 percent of GDP commitment to European partners—though by considerably less than in previous years—due to stronger tax revenue collection and growth-dampening under-execution of public investment.
  - Staff projects the primary surplus to fall to about 3 percent of GDP in 2020 under current policies.
  - Over the medium term, the primary balance is projected to decline further to about 2 percent of GDP, due to a change in the expenditure mix, fading-out of one-off measures introduced in the 2020 budget, and declining EU transfers.
  - Expansionary measures enacted in May 2019 amounted to 0.8 percent of GDP in 2019.

- Key fiscal policy recommendations
  - Tax policy
    - Prioritize direct tax rate cuts (contingent on fiscal space) and avoid new tax expenditures (e.g., VAT exemptions for construction).
    - Combine planned PIT rate reductions with tax base broadening, including lowering the PIT tax-free threshold.
    - Support the proposed large CIT rate cut (4 percentage points) in 2020 and gradual reduction of unemployment insurance contributions.
  - Tax collection/compliance
    - End decades of ‘temporary’ ad hoc installment schemes that provide poorly-targeted tax and social contribution debt relief.
    - Enhance the existing permanent installment scheme with more sophisticated capacity-to-pay assessment, stronger enforcement for repeated defaulters, and better targeting of eligibility criteria.
    - Improve the out of court (OCW) mechanism for tax debts.
    - Complete delayed independent revenue administration (IAPR) HR reforms, and mobilize the AML/CFT framework.
    - The planned increase in the minimum qualifying expenses to be incurred via electronic payment for PIT purposes: current levels of 10 to 20 percent to 30 percent; nominal ceiling of the minimum expenses set at €20,000; the difference between the minimum and the actual qualified expenses will be taxed at 22 percent.
  - Expenditure policy
    - Reorient expenditure toward high quality investment and social spending: Social Solidarity Income, child and housing benefit programs, health and education, and active labor market policies (ALMPs).
    - End pension bonuses and bring pension benefits of existing retirees in line with the new benefit formula.
    - Improve fiscal data consistency and comprehensiveness (e.g., cash versus accrual discrepancies).
  - Spending efficiency and fiscal risk management
    - Improve budget planning and implementation, strengthen public investment framework, and integrate risk management into the budget cycle.
    - Address structural causes of arrears and manage contingent buffers in line ministries.
  - Fiscal stance and coordination with partners
    - Seek consensus with European partners on a lower primary balance target, given the large negative output gap and need to bring down high tax rates and address unmet spending needs.
    - Consider a smoothing mechanism (e.g., expenditure rule) to allow temporary, symmetric deviations from the primary balance target in case of cyclical or one-off shocks.

- Other factual/diagnostic points
  - VAT compliance and VAT gap concerns: VAT gap estimates show a material compliance deficit relative to peers.
  - Gross general government wage bill as a share of total general government expenditure shows Greece had high levels in recent years.
  - Authorities intend to allocate two thirds of any additional fiscal space to tax reductions and the rest to targeted social and investment spending.
  - Sources of new government arrears included State, LGs, EBFs, SSFs, Hospitals, Pensions, and Tax refunds (millions of euros time series shown).

### B. Labor Market Policy: Job Creation and Reactivation

- Recent performance and structural issues
  - Labor market conditions are improving gradually, but the quality of the recovery has been weak.
  - The 2011–13 collective bargaining (CB) and minimum wage (MW) framework reforms helped lower labor costs, improve labor market flexibility and employment recovery, and reduce external imbalances.
  - Structural unemployment is estimated at 13 percent at end-2018.
  - Job finding rates have been accelerating and youth labor market participation is growing, but structural unemployment, the share of long-term unemployed, and the rate of youth unemployment remain among the highest in the EA.
  - ALMP policies remain in the pilot stage; several years are needed to expand coverage to peer-country levels.
  - Structural rigidities driving poor employment recovery include low productivity, skills mismatch, and sluggish firm dynamics; weak implementation of non-labor reforms (product markets, business climate, financial sector) has limited a more dynamic recovery.
  - The labor market’s persistent fragility raises risks of hysteresis, poverty (including in-work), and social exclusion.

- Policy reversals and recent government actions
  - Following program exit, authorities implemented labor market policy reversals: re-imposition of pre-crisis extensions and favorability collective bargaining practices, seniority bonuses, and earlier court-mandated restoration of unilateral arbitration.
  - The MW was increased by nearly 11 percent, well above productivity gains and inconsistent with the MW-setting framework.
  - The new government’s Development Law (DL), adopted on October 24, allows firms meeting certain criteria to opt-out from sectoral agreements, refines the representativeness mechanism (including digitalization of trade union registration and industrial action representativeness), limits recourse to unilateral arbitration in line with ILO principles, and includes measures to tackle informality and encourage full-time employment.
  - Firms under financial distress, located in regions with high unemployment, start-ups or social economy firms, and non-profit enterprises are expected to be allowed to opt out of favorability clauses.

- Staff-supported reforms and recommendations
  - Greater labor market flexibility
    - Support limiting unilateral arbitration and providing more firm-level flexibility (e.g., targeted opt outs), but urge full restoration of the 2011–13 CB reforms.
    - Encourage simplifying the MW framework through a single statutory MW (ending seniority premia) while retaining provisions to encourage youth employment.
    - Recognize that labor has borne relatively more of the adjustment burden; labor reform benefits depend on meaningful progress with product market reforms (Section D).
  - Labor reactivation and inclusion
    - Accelerate the ALMP pilot to scale up employability and skills-matching, particularly for older cohorts.
    - Improve the educational system, including expansion of vocational training, to enhance worker productivity and address skill mismatches.
    - Strengthen the efficiency and scope of the social safety net to support labor market transitions.
    - Boost female labor force participation, e.g., through better access to dependent care.
  - Monitoring and assessment
    - Support the government’s planned ex-post assessment of the 2019 MW-setting process, in consultation with the World Bank, ahead of the 2020 round to improve the annual tri-partite consultation process and align future MW adjustments with economic conditions and competitiveness.
    - Work on medium-term reform plans to further improve labor market flexibility, re-skilling of the labor force, and female labor force participation.

*International Monetary Fund*

### 24.        The authorities concurred with staff recommendations to enhance labor market

### 1grcea2019002 - 24.        The authorities concurred with staff recommendations to enhance labor market

### Labor market flexibility, inclusion, and reactivation
- Authorities concurred with staff recommendations to enhance labor market flexibility, inclusion, and reactivation.
- Authorities noted swift action to lift new restrictions on dismissals.
- Further changes aim to:
  - strike a balance between strengthening competitiveness and protecting employee rights,
  - introduce a conditional opt-out clause to collective bargaining,
  - enhance union transparency,
  - align labor provisions with ILO best practices.
- Authorities agreed short-term reforms should be complemented with measures addressing structural labor market bottlenecks, including more effective ALMPs.

### Comprehensive (and accelerated) strategy to restore bank health — diagnosis and context
- Despite multiple assessments and substantial injections of state and private funds over the past decade, the banking system remains a misfiring engine of growth and source of fiscal and financial stability risks.
- Factors hindering bank clean-up: poor banking practices, weak financial sector policies, forbearance, sovereign debt restructuring, deeper-than-expected recession, changing regulatory goal posts, weak coordination among key stakeholders.
- Capital quality concerns:
  - deferred tax credits (DTCs) de facto not providing loss absorption.
- System-wide weaknesses:
  - NPEs remain the highest in Europe,
  - profitability is the lowest, limiting internal capital generation and ability to attract private investors,
  - access to unsecured funding remains limited and expensive,
  - some systemic banks are in breach of liquidity coverage ratios (despite recent improvements).

### NPEs, insolvency framework, and foreclosure mechanisms
- Restructuring of loans has lagged amid:
  - poor payment discipline,
  - an inadequate insolvency framework,
  - banks’ reluctance to offer sustainable restructuring solutions.
- OCWs and in-court restructurings: limited effectiveness and use.
- Liquidations of nonviable companies: limited.
- Underlying insolvency regime: unable to effectively address the still-significant private debt overhang due to institutional inefficiencies and, for household insolvency, poor legal design.
- E-auctions of foreclosed assets (introduced in 2017):
  - have gradually increased but do not provide a sufficiently credible ‘threat of foreclosure’ at current scale,
  - e-auction success rate is still low: third-party buyers are scarce and 85 percent of e-auctions result in bank repossessions,
  - banks claim the legal framework is abused to avoid auctions at the last minute.
- Primary residence protection (PRP):
  - has been extended multiple times since its ‘temporary’ introduction in 2010,
  - remains poorly targeted.
- Banks reported preparations for new NPE securitizations and beginning to offer more generous mortgage restructuring terms.

### Authorities’ actions, targets, and expectations
- New government priorities and actions:
  - created a new Deputy Minister position to oversee bank reform,
  - received state-aid approval from DGCOMP for the ‘Hercules’ state-supported NPE securitization guarantee scheme.
- A separate asset management company scheme involving state support (via the use of DTCs) proposed by the BoG has not gained traction within the government.
- Banks announced NPE reduction targets (agreed with the SSM): bring NPE stock down to €29 billion by end-2021, from €82 billion at end-2018.
- Prime Minister aims for even more aggressive reductions: bring NPE ratios to single digits by mid-2022.
- Authorities expect reductions to be funded through internal capital generation; BoG noted internal capital could recover if NPE reduction accelerates.
- MoF intends to expedite internal processes to clear remaining claims on state guarantees to banks, while ensuring proper procedures.
- Government is considering legislation for a unified personal insolvency framework to increase automaticity and limit filings by strategic defaulters.
- Authorities expect the elimination of CFMs to further enhance confidence of depositors, investors, and rating agencies.

### Staff recommendations to accelerate financial sector reforms (enumerated)
- Faster reduction of NPEs:
  - Staff recommended even faster NPE reduction than proposed by banks and the government, aiming to bring Greece close to EA norms by end-2021.
  - Include focus on hive-off strategies, relying on internal capital (including through DTC conversion, if appropriate) or drawing on one (or both) of the proposed state-supported schemes.
  - Subject alternative approaches to ex ante comprehensive and dynamic cost-benefit analyses, while pressing for DGCOMP state-aid approval, as needed.
- Build and clean up capital:
  - Additional capital likely needed to fund NPE reduction targets agreed with the SSM, comply with the SSM provisioning calendar, and finance necessary internal investments (e.g., in IT).
  - Urged efforts to strengthen loss-absorbing capacity of bank capital, including by reducing the share of DTCs to total capital.
  - Emphasized market-based private initiatives should take priority, though some form of public support will likely still be needed.
- Contain the bank-sovereign nexus:
  - Staff urged clearance of called (but unpaid) state guarantees on bank loans to head off reputational damage and possible adverse implications for risk-weighting of other sovereign exposures in banks.
  - Staff recommended against relaxing ECB-mandated sovereign exposure ceilings.
- Promote meaningful debt restructuring and payment discipline:
  - Overhaul the personal insolvency framework, including elimination of PRP as a financial policy objective,
  - Create a more credible foreclosure threat,
  - Limit the length of debt installment schemes to incentivize meaningful household debt restructuring,
  - Faster reduction of the household insolvency case backlog to support NPE reduction.
- Strengthen bank internal governance and profitability:
  - Stronger internal governance to improve new loan pricing, business decisions, and asset-liability management.
  - Business plans should target more ambitious core profitability, emphasizing increased operating income (e.g., fee-generating business and digital banking products and services) and cost-cutting.
- Adopt a comprehensive, coordinated strategy:
  - Package measures in a holistic strategy with appropriate sequencing and stakeholder coordination.
  - Include forward-looking analysis of bank business sustainability (including competition, low interest rates, increasing regulatory requirements), possible fiscal costs, and assessment of long-term impact on profitability and risks from difficult-to-value securitization exposures.
  - A credible strategy would enhance investor and depositor confidence, important following CFM liberalization.

### Pace and outlook for bank-supported lending recovery
- At the current pace, recovery of banks’ lending support for investment and growth will take many years.
- Even more aggressive NPE reduction targets could leave Greek banks as outliers vis-à-vis EU peers.
- Constraints in the resolution framework imply any major bank failure would be highly destabilizing.
- Policy options for supporting banks under stress are constrained by limited capital and bail-in-able buffers, and by state-aid and other EA-wide rules.

### Structural reforms to support a new growth model — diagnosis
- Much of the needed structural transformation of the Greek economy is yet to be achieved.
- Economy dominated by SMEs operating in a rigid business climate.
- Greece remains at or near the bottom among EA members in many cross-country perception surveys.
- Product market deregulation has largely not taken root, often due to missing or contradictory secondary legislation.
- Impediments to competition involve a broader set of agent rules, behaviors, and implementation capacities beyond legislation.

### Structural reforms to support a new growth model — policy priorities and concrete measures
- Authorities’ recent actions:
  - Accelerated efforts to unblock signature privatization projects (e.g., the ‘Hellenikon’ old airport),
  - Pushing business licensing deregulation,
  - Considering measures to attract more FDI by tackling spatial planning rules and the outdated land cadaster,
  - Working on boosting competition in network industries, accelerating restructuring of inefficient SOEs, preparing draft law on renewable energy,
  - Appointed new head of the Hellenic Competition Commission (HCC) to strengthen capacity to identify cartels and market power,
  - Planning to review closed professions in collaboration with KEPE,
  - Planning an export promotion strategy targeting non-price competitiveness.
- Staff support and recommendations:
  - Streamline business licensing: simplify regulatory procedures for investment, streamline classification requirements, add pending sectors to notification-only basis, modernize the tender system (ILIMS).
  - Create more dynamic markets: tackle legal and institutional constraints to firm entry/exit and labor mobility; strengthen capacity and independence of HCC to conduct market studies and address missing/contradictory legislation and deeper behavioral/institutional barriers.
  - Open closed professions: steadfast implementation of sectoral measures adopted under the OECD toolkit reform; support authorities’ planned review and development of ongoing real-time assessment capacity of current barriers to product market and closed profession liberalization.
  - Reform SOEs and network industries: support action plans to accelerate reforms in transportation and energy sectors (including governance and pricing schemes in PPC), tackle roadblocks to higher private sector involvement for roadway maintenance (EGNATIA) and gas distribution (DEPA), and gear state divestment toward improving service and removing price distortions.

### Authorities’ stance on structural transformation
- Authorities agreed re-energizing structural transformation is a priority for boosting growth.
- Pointed to swift legislation to make investment easier and efforts to reinvigorate privatization.
- Agreed product market competition needs strengthening and will take a sequenced approach to address remaining investment bottlenecks, to be articulated in a new growth strategy by the end of the year.

*Source: 1grcea2019002 - 24.        The authorities concurred with staff recommendations to enhance labor market (PDF chapter/section).*

### 35.      Greece has strengthened its AML/CFT regime in line with international standards. A

### 1grcea2019002 - 35.      Greece has strengthened its AML/CFT regime in line with international standards. A

### AML/CFT assessment and implementation
- A recent Financial Action Task Force (FATF) assessment report, adopted in September 2019, concludes that Greece’s AML/CFT regime is effective (relative to international standards) in several areas: the understanding of ML/TF risks, national co-ordination, the use of financial intelligence, investigation and prosecution of TF, and the implementation of targeted financial sanctions.
- Remaining weaknesses identified by FATF include: the prosecution of ML and confiscation, and controls over the non-financial sector.
- Greece is under a regular follow-up process.

### Use of AML/CFT framework to fight tax evasion
- Authorities have effectively mobilized their AML/CFT framework to fight tax evasion; fiscal structural reforms to improve tax compliance have been underway for several years and application of AML tools has led to seizure of tax evasion proceeds.
- Implementation of the obligation to identify and report suspicious transactions linked to tax evasion has been enhanced.
- The tax authorities have prioritized cases disseminated by the Financial Intelligence Unit in their tax audits, contributing to additional revenue collection.
- Remaining gaps and needs:
  - Further efforts are needed to improve the audit process and its quality.
  - Addressing limitations at the IAPR level (i.e., data warehouse and IT support tools, lack of data analysis expertise for ML) would allow more effective use of the AML framework in the fight against tax evasion.

### Rule of law, judiciary, and property rights
- Reforms are underway to modernize the judicial system and improve its overall effectiveness, but challenges remain.
- Current judicial processes are extremely time-consuming, causing extensive delays in decisions and enforcement.
- Needed actions highlighted in discussions:
  - Enhance efficiency and quality of the judicial system, including protection of property and enforcement of contracts.
  - Steady progress towards completion of the cadaster and property registration is needed.
  - Speed up reform of the Criminal and Criminal Procedures Codes, specifically with respect to the active bribery offence of public officials, to align it with the OECD’s Anti-Bribery Convention.
  - Improve capacity to detect and prosecute corruption cases, including by providing sufficient powers and resources to enforcement agencies.

### Anti-corruption institutional developments
- A National Transparency Authority (NTA) has been established to take over policy and coordination responsibilities of the General Secretariat Against Corruption and other five public audit entities, aiming to enhance transparency and coordination and to reinforce preventive and enforcement efforts.
- Plans are underway to revise the National Anti-Corruption Action Plan and prioritize remaining reforms.
- Authorities view the NTA as a means to eliminate fragmentation and overlaps but acknowledge further efforts are necessary to detect and prosecute corruption cases.

### Official statistics and data transparency
- The quality of official statistics continues to improve and data provision is deemed to meet the minimum adequacy for surveillance.
- Coverage and timeliness of data compilation processes have improved, making them broadly consistent with international statistical standards.
- Technical assistance from the IMF, Eurostat, and other member states has supported capacity building of the independent Hellenic Statistical Authority, ELSTAT.
- The discrepancies observed in the fiscal reports of the BoG during the past four years were eliminated recently.
- Staff recommendations:
  - Protect the gains achieved by defending the statistical agency against efforts to undermine credibility and guarantee its professional independence.
  - Firmly respect the “Commitment on Confidence in Statistics” endorsed by the government in 2012.

### Authorities’ views and commitments
- Authorities agreed on the importance of continuing to implement the AML framework to fight tax evasion and that good governance and the rule of law are essential.
- Authorities noted the positive FATF mutual evaluation report and committed to further mobilize the AML framework against tax evasion.
- The Ministry of Justice confirmed efforts are underway to speed up reforms to enhance judicial efficiency and quality, including for property and contractual rights.
- The Criminal and Criminal Procedures Codes will be promptly amended to align necessary provisions with the OECD’S Anti-Bribery Convention.

### Staff appraisal — growth outlook and vulnerabilities
- The new government prioritizes growth but faces significant legacies: high public debt, high NPLs, over-indebted borrowers, low productivity, a dearth of investment, a weak payment culture, and adverse demographics.
- Public debt-to-GDP is projected to trend down over the next decade with relatively low liquidity risks in the medium-term, though long-term sustainability is not assured under realistic macro-fiscal assumptions.
- Staff assesses there is overvaluation of the real effective exchange rate.
- Greece remains vulnerable to a range of external and domestic shocks.

### Policy priorities and recommendations
- Use political mandate and improving investor sentiment to deploy a full range of policy tools to boost socially inclusive, higher growth, including:
  - Fixing the banking sector.
  - Making fiscal policy more growth friendly.
  - Streamlining business licensing.
  - Strengthening competition.
  - Deepening labor market reforms initiated by the new government.
- Fixing the banking sector:
  - Top priority; weak banks dampen growth and pose fiscal and financial stability risks.
  - Government’s NPE reduction objectives and the ‘Hercules’ scheme could help, but a more comprehensive, ambitious, and well-coordinated strategy is needed.
  - Efforts should be primarily market-based; any public support should be subject to a dynamic cost-benefit analysis.
  - Improvements in the legal framework (more efficient judicial processes and a better insolvency regime) are needed.
  - Residential mortgage protection and ad hoc tax and social security installment schemes have been counterproductive and should be permanently phased out.
- Fiscal policy mix:
  - Rebalance to strengthen growth and social inclusion.
  - Plans to cut direct tax rates and strengthen compliance are welcome; more can be achieved by broadening the tax base through tax policy changes and enforcement.
  - Continue to strengthen the IAPR and mobilize the AML framework to combat tax evasion.
  - Relative to the rest of the EU, Greece still spends too much on pensions and the public wage bill, and too little on means-tested Social Solidarity Income, public health, and investment.
  - Accelerate public financial management reforms to improve execution of the public investment budget, enhance budget control, and strengthen fiscal risk management (including from ongoing court cases).
- Fiscal targets and spending space:
  - Reducing fiscal targets to create more space for investment and social spending would support economic and social recovery.
  - While the 2019 fiscal primary surplus is expected to be broadly in line with Greece’s fiscal commitment to European partners, it will once again depend on growth-dampening under-execution of public investment.
  - For 2020 and forward, staff recommends that the government and European partners build consensus around a meaningfully lower primary balance path, given ample economic slack and critical unmet social spending (e.g., in the health sector) and investment needs, and to accommodate spending that would create synergies with (and ease acceptance of) stepped-up structural reforms.
- Competitiveness and structural reforms:
  - Progress has been made (lifting remaining CFMs and unblocking privatization, business deregulation, and digitalization) but the economy remains over-regulated and dominated by SMEs in an unwelcoming business climate.
  - More is needed to de facto liberalize product markets and closed professions and strengthen competition.
- Labor market reforms:
  - Recent proposals are welcome (lifting new restrictions on dismissals, limiting unilateral appeals to arbitration, introducing an opt-out mechanism from collective bargaining, linking minimum wage adjustments to productivity growth) and authorities should aim for full restoration of the 2011-13 landmark labor reforms.
  - Further actions are needed to reduce non-wage costs and strengthen employment via active labor market policies and removing bottlenecks to female labor force participation.

*International Monetary Fund — Staff report excerpt*

### 49.      The second PPM Board discussion is envisaged for 2020Q2. Greece remains under the

### 1grcea2019002 - 49.      The second PPM Board discussion is envisaged for 2020Q2. Greece remains under the

### Macroeconomic developments
- Post-crisis recovery described as "underwhelming."
- Recovery led by "Record-high tourism and trade in services"; manufacturing weakly supportive; recent pick-up in construction.
- Economic sentiment improving due to higher consumer and service sector confidence.
- Employment and working hours rising, boosting disposable income growth.
- Unemployment remains high and "ample slack remains," keeping prices subdued.
- Sources cited: European Commission; ELSTAT; Eurostat; Haver Analytics; and IMF staff calculations.

### Labor market and competitiveness
- Greece’s unit labor cost (ULC) adjustment driven by lower wages and labor shedding, while peers experienced productivity gains amidst growing employment.
- Exports benefited from lower ULCs, but relative price declines were not commensurate with the relative decline in wages.
- Recent labor market decisions, including the minimum wage (MW) hike, "augment the risk of a broader-based increase in labor costs," though risk somewhat mitigated by regional trends.
- Greece still features high structural unemployment vis-à-vis peers; room for cyclical employment recovery is narrowing, increasing need for reforms to boost worker skills and productivity.
- Note: As of February 2019, the minimum wage increased by 11 percent to €650 for monthly wages and to €29 for daily wages.
- Labor statistics and indices referenced (selected):
  - Index of Wages (SA, 2016=100) series spanning 2010Q1–2019Q1.
  - Beveridge Curve indicators: vacancy rate and unemployment rate (time series indicators shown).
  - REER and ULC decompositions and export performance indices (2007 = 100).

### External sector developments
- Current account deficit widening again; deterioration of the merchandise trade balance only partially offset by rising service exports, helped by buoyant tourism receipts.
- REER (CPI-based) began appreciating in 2015 along with other EA countries; ticked down in early 2019.
- Official sector program-related financing remained dominant source of financial account inflows through 2018.
- FDI flows increased recently, driven by investment in tourism and transportation (incl. privatization), real estate purchases, and financial sector M&As.
- NIIP position stabilized: higher net foreign assets of the monetary authorities offset higher net foreign liabilities of the government and MFIs.
- Selected figures (percent of GDP and time series):
  - Travel receipts and arrivals: travel receipts (yoy percent) and total arrivals (millions; 12-month rolling sum).
  - Net direct investment: inflow/outflow/net (percent of GDP) time series.
  - Net IIP by institutional sector (percent of GDP) with 2018 annotations.
  - Real Effective Exchange Rate (CPI based; 2004=100) series for Greece and peers.
  - Composition of the Financial Account, Net (percent of GDP), 2018.

### Fiscal developments
- Primary surplus above target in 2018; expenditure compression overtook revenue as cumulative contributing factor since 2014.
- Recent revenue declines outpaced by expenditure compression.
- Intermediate consumption experienced a big drop; public investment continued to decline.
- Weak compliance and extensive exemptions contributed to a high revenue gap in direct taxes relative to EA, despite Greece’s very high labor tax wedge.
- Selected indicators (percent of GDP):
  - Primary balance and program primary balance contributions since 2014.
  - Revenue and primary expenditure (2014–2018).
  - Direct Taxes (Percent of GDP) time series.
  - Intermediate Consumption (Percent of GDP) time series.
  - Investment (Percent of GDP) time series.
  - Personal Income Tax Rates (percent, top income group) time series.

### Financial sector developments
- Non-performing exposures (NPEs) remain high; provisioning coverage is declining.
- About one-third of residential NPEs remain under legal protection (noted in grey areas of figure).
- Central bank funding "back to normal" due to deleveraging and recovery in deposits.
- Lending interest rates remain high; net credit continues to contract in most categories.
- Selected indicators:
  - Tier 1 regulatory capital, NPE ratio, provisioning coverage (2015Q1–2019Q1).
  - Drivers of MFIs' Liabilities to BoG (Billions of euros, cumulative change over preceding 12 months).
  - Central Bank Funding components: Emergency liquidity assistance; Open market operations (Billions of euros).
  - Net credit flows to private sector (percent, year-over-year) with breakdowns for private sector total, corporates, consumer loans, residential loans.
  - Deposit and lending interest rates: Greece vs. Euro area average (percent).
  - On-balance-sheet NPEs by category (Billions of euros, 2019Q2): Residential 24.8; Consumer 7.9; Business 42.6; Consumer loans 6.8; Credit cards 1.1; SMEs 18.6; Small Business & Professionals 12.8; Corporate 9.7; Shipping 1.6. Under law protection: Business 75.4; Residential 7.7; Consumer 1.8; Consumer under law protection 1.6 (note: formatting in source shows values and labels; reproduced exactly).

### Structural and competitiveness indicators
- Greece’s value-added and employment more dominated by micro firms relative to peers.
- High-growth enterprises are scarce compared to peers.
- Labor market churn is low (low job separation and job finding rates), pointing to structural rigidities and contributing to low total factor productivity.
- External adjustment estimated largely cyclical, with a substantial competitiveness gap vis-à-vis peers.
- Selected indicators and scales:
  - Enterprise by Size (percent): share of persons employed and share of value added by Micro/Small/Medium/Large (estimates for 2017 based on 2008–15 data).
  - Job separation rate and job finding rate (percent, 2017–18 average).
  - Total Factor Productivity (Index, 2010=100) series 2000–2018.
  - Competitiveness, 2018 (Scale: 0-1; 1 is the best global performer) across multiple dimensions (e.g., Starting a business, Construction permits, Getting electricity, etc.) with Greece, EA average, and Best EA performer benchmarks.
  - Share of High Growth Enterprises Measured in Employment (percent) across countries (note: HGE definition provided).

### Medium-Term Macro Framework (Table 1, 2017–24)
- Real GDP (percentage change): 2017 1.5; 2018 1.9; 2019 1.8; 2020 2.3; 2021 2.0; 2022 1.4; 2023 0.9; 2024 0.9.
- Total domestic demand: 2017 0.6; 2018 0.5; 2019 1.7; 2020 2.6; 2021 2.2; 2022 1.6; 2023 0.9; 2024 0.9.
- Private consumption: 2017 0.9; 2018 1.1; 2019 0.8; 2020 1.3; 2021 1.0; 2022 1.0; 2023 0.9; 2024 0.9.
- Public consumption: 2017 -0.4; 2018 -2.5; 2019 1.9; 2020 1.0; 2021 0.5; 2022 0.6; 2023 0.6; 2024 0.6.
- Gross fixed capital formation (percentage change): 2017 9.1; 2018 -12.2; 2019 7.8; 2020 13.0; 2021 10.9; 2022 6.0; 2023 1.0; 2024 1.0.
- Employment (percentage change): 2017 2.2; 2018 2.0; 2019 2.2; 2020 2.1; 2021 1.2; 2022 0.6; 2023 0.5; 2024 -0.2.
- Unemployment rate (percent, LFS): 2017 21.5; 2018 19.3; 2019 17.5; 2020 15.6; 2021 14.4; 2022 13.6; 2023 12.9; 2024 12.9.
- Consumer prices (HICP, period average): 2017 1.1; 2018 0.8; 2019 0.5; 2020 0.6; 2021 1.3; 2022 1.4; 2023 1.8; 2024 1.8.
- Unit labor costs: 2017 0.1; 2018 1.2; 2019 1.8; 2020 1.5; 2021 1.4; 2022 1.8; 2023 1.8; 2024 1.8.
- Current account (percent of GDP, IMF staff projections and alternative series presented): examples include Current account 2/ -2.4 (2017), -3.5 (2018), -2.8 (2019), -2.9 (2020), -3.2 (2021), -3.3 (2022), -4.0 (2023), -4.2 (2024).
- Net international investment position (percent of GDP): 2017 -143.7; 2018 -142.1; 2019 -145.8; 2020 -143.3; 2021 -141.5; 2022 -140.5; 2023 -141.0; 2024 -141.4.
- Gross external debt (percent of GDP): 2017 227.2; 2018 222.4; 2019 219.3; 2020 212.7; 2021 206.3; 2022 201.6; 2023 198.6; 2024 196.5.
- Fiscal indicators (percent of GDP):
  - Total revenues: 2017 48.4; 2018 47.8; 2019 47.7; 2020 46.8; 2021 45.8; 2022 45.3; 2023 44.9; 2024 44.4.
  - Total expenditures: 2017 47.4; 2018 46.9; 2019 47.6; 2020 47.3; 2021 46.6; 2022 46.2; 2023 46.1; 2024 45.6.
  - Primary balance: 2017 4.1; 2018 4.2; 2019 3.7; 2020 3.1; 2021 2.7; 2022 2.6; 2023 2.4; 2024 2.2.
  - Gross public debt (percent of GDP): 2017 179.3; 2018 184.9; 2019 176.5; 2020 171.4; 2021 166.3; 2022 161.0; 2023 155.6; 2024 152.0.
- Memorandum: Nominal GDP (billions of euros) 2017 180.2; 2018 184.7; 2019 189.4; 2020 195.3; 2021 202.2; 2022 208.3; 2023 213.9; 2024 219.6.

### Balance of payments summary (Table 2, 2017–24)
- Current account balance (percent of GDP, as reported): 2017 -4.3; 2018 -6.5; 2019 -5.3; 2020 -5.7; 2021 -6.4; 2022 -6.8; 2023 -8.5; 2024 -9.3.
- Balance of goods and services (percent of GDP): 2017 -1.8; 2018 -3.2; 2019 -3.1; 2020 -3.8; 2021 -4.3; 2022 -4.8; 2023 -5.1; 2024 -5.4.
- Goods balance (percent of GDP): 2017 -19.8; 2018 -22.5; 2019 -23.9; 2020 -26.2; 2021 -28.4; 2022 -29.8; 2023 -30.5; 2024 -31.4.
- Services balance (percent of GDP): 2017 18.0; 2018 19.3; 2019 20.8; 2020 22.4; 2021 24.0; 2022 24.9; 2023 25.5; 2024 26.0.
- Financial account balance (percent of GDP): 2017 5.9; 2018 16.1; 2019 -6.6; 2020 -2.4; 2021 -4.7; 2022 -4.9; 2023 -7.1; 2024 -6.6.
- Gross external debt (percent of GDP): 2017 227.2; 2018 222.4; 2019 219.3; 2020 212.7; 2021 206.3; 2022 201.6; 2023 198.6; 2024 196.5.
- Memo: Current account balance alternative series (percent of GDP) 2017 -2.4; 2018 -3.5; 2019 -2.8; 2020 -2.9; 2021 -3.2; 2022 -3.3; 2023 -4.0; 2024 -4.2.

### General government operations (Table 3, 2017–24)
- Revenue (billions of euros): 2017 87.3; 2018 88.3; 2019 90.4; 2020 91.5; 2021 92.6; 2022 94.4; 2023 96.1; 2024 97.4.
- Primary expenditure (billions of euros): 2017 79.8; 2018 80.6; 2019 83.4; 2020 85.4; 2021 87.2; 2022 88.8; 2023 90.9; 2024 92.5.
- Primary balance (billions of euros): 2017 7.5; 2018 7.7; 2019 7.0; 2020 6.1; 2021 5.4; 2022 5.5; 2023 5.1; 2024 4.9.
- Cash-basis primary balance (billions of euros): 2017 5.5; 2018 6.1; 2019 6.0; 2020 4.0; 2021 3.6; 2022 3.7; 2023 4.2; 2024 4.7.
- Interest (billions of euros): 2017 5.6; 2018 6.1; 2019 6.9; 2020 7.0; 2021 7.0; 2022 7.4; 2023 7.7; 2024 7.8.
- Overall balance (billions of euros): 2017 1.9; 2018 1.6; 2019 0.2; 2020 -0.9; 2021 -1.6; 2022 -1.9; 2023 -2.5; 2024 -2.8.
- Gross debt (billions of euros): 2017 323.1; 2018 341.4; 2019 334.4; 2020 334.8; 2021 336.3; 2022 335.4; 2023 332.8; 2024 333.8.
- Gross debt (percent of GDP): 2017 179.3; 2018 184.9; 2019 176.5; 2020 171.4; 2021 166.3; 2022 161.0; 2023 155.6; 2024 152.0.
- Total primary revenue (percent of GDP): 2017 48.5; 2018 47.8; 2019 47.7; 2020 46.8; 2021 45.8; 2022 45.3; 2023 44.9; 2024 44.4.
- Total primary expenditure (percent of GDP): 2017 44.3; 2018 43.6; 2019 44.0; 2020 43.7; 2021 43.1; 2022 42.7; 2023 42.5; 2024 42.1.

### Monetary survey (Table 4, selected items)
- Aggregated balance sheet of MFIs — Total assets (Billions of euros): 2013 517.6; 2014 501.5; 2015 550.2; 2016 494.8; 2017 427.7; 2018 402.4; June 2019 386.6.
- Claims (Loans) on non MFIs (Billions of euros): 2013 238.9; 2014 234.2; 2015 224.8; 2016 214.4; 2017 201.0; 2018 186.1; June 2019 168.3.
  - Domestic: 2013 233.8; 2014 229.7; 2015 220.3; 2016 209.9; 2017 197.5; 2018 183.1; June 2019 168.3.
  - General government: 2013 15.9; 2014 17.7; 2015 15.9; 2016 14.8; 2017 13.7; 2018 12.9; June 2019 7.1.
  - Other sectors: 2013 217.9; 2014 212.0; 2015 204.3; 2016 195.1; 2017 183.8; 2018 170.2; June 2019 161.1.
- Securities holdings (Billions of euros): 2013 94.3; 2014 102.0; 2015 113.7; 2016 121.2; 2017 103.4; 2018 105.6; June 2019 109.2.
- Total liabilities to Bank of Greece (Billions of euros): 2013 73.0; 2014 56.0; 2015 107.6; 2016 66.6; 2017 33.7; 2018 11.1; June 2019 8.6.
- Broad money (annual change percent): 2013 2.7; 2014 -0.3; 2015 -17.8; 2016 2.2; 2017 5.7; 2018 4.3; 2019 (June) 5.2.
- Credit to the private sector (annual change percent): 2013 -3.9; 2014 -3.1; 2015 -3.6; 2016 -4.5; 2017 -5.8; 2018 -7.5; 2019 (June) -9.9.
- Memorandum: Broad money index series and deposit and credit to GDP ratios provided.

### Core financial indicators (Table 5, selected)
- Regulatory capital to risk-weighted assets (percent): 2013 13.5; 2014 14.1; 2015 16.5; 2016 16.9; 2017 17.0; 2018 16.0; 2019 Mar. 15.6.
- Nonperforming loans to total gross loans (percent): 2013 31.9; 2014 33.8; 2015 36.6; 2016 36.3; 2017 45.6; 2018 42.0; 2019 Mar. 42.2.
- Bank provisions to nonperforming loans (percent): 2013 49.3; 2014 55.8; 2015 67.6; 2016 68.9; 2017 46.8; 2018 51.1; 2019 Mar. 52.1.
- Return on assets (after taxes): series includes negative values and recovery: e.g., 2016 -1.0; 2017 -2.5; 2018 0.1; 2019 Mar. -0.2/0.0/0.2 shown (source formatting).
- Liquid assets to total assets (percent): 2013 29.9; 2014 28.9; 2015 29.7; 2016 27.0; 2017 17.7; 2018 19.6; 2019 Mar. 19.7.
- Household debt to GDP (percent): 2013 64.5; 2014 63.0; 2015 62.3; 2016 60.2; 2017 57.0; 2018 52.4; 2019 Mar. 50.5.
- Residential real estate loans to total loans (percent): 2013 26.4; 2014 26.8; 2015 27.6; 2016 27.2; 2017 29.1; 2018 30.4; 2019 Mar. 30.7.

### General government financing requirements and sources (Table 6, 2018–24)
- Gross borrowing need (Billions of euros): 2018 35.9; 2019 21.5; 2020 11.2; 2021 11.2; 2022 13.5; 2023 14.0; 2024 15.1.
- Overall deficit (Billions of euros): 2018 -1.0; 2019 -0.2; 2020 1.8; 2021 2.0; 2022 2.0; 2023 1.5; 2024 0.9.
- Primary deficit (cash) (Billions of euros): 2018 -6.1; 2019 -6.0; 2020 -4.0; 2021 -3.6; 2022 -3.7; 2023 -4.2; 2024 -4.7.
- Interest payments (cash) (Billions of euros): 2018 5.0; 2019 5.8; 2020 5.8; 2021 5.6; 2022 5.7; 2023 5.7; 2024 5.6.
- Amortization (Billions of euros): 2018 18.7; 2019 29.7; 2020 12.1; 2021 11.1; 2022 16.0; 2023 18.6; 2024 16.3.
- Short-term (T-bills) amortization (Billions of euros): 2018 14.3; 2019 11.2; 2020 9.2; 2021 6.2; 2022 6.2; 2023 6.2; 2024 6.2.
- Gross financing sources equal gross borrowing need each year in projections: 2018 35.9; 2019 21.5; 2020 11.2; 2021 11.2; 2022 13.5; 2023 14.0; 2024 15.1.
- Market access decomposition for gross financing sources shown: short-term and medium/long-term components.
- Government deposits: replenishment/drawdown (Billions of euros): 2018 17.6; 2019 -6.9; 2020 -1.4; 2021 -0.1; 2022 -3.0; 2023 -6.0; 2024 -2.0.
- Memo: Preliminary figures as of end-September 2019: total general government deposits (€40 billion) consist of €31.9 billion available to state government and €8.1 billion of general government entities’ deposits in commercial banks.

### External financing requirements and sources (Table 7, 2017–24)
- Gross financing requirements (Billions of euros): 2017 160.1; 2018 120.1; 2019 106.5; 2020 105.0; 2021 101.3; 2022 104.7; 2023 112.8; 2024 117.9.
- Current account deficit contribution to gross financing requirements (Billions of euros): 2017 4.3; 2018 6.5; 2019 5.3; 2020 5.7; 2021 6.4; 2022 6.8; 2023 8.5; 2024 9.3.
- Medium and long-term debt amortization (Billions of euros): 2017 15.9; 2018 7.6; 2019 21.3; 2020 6.4; 2021 8.5; 2022 12.1; 2023 16.2; 2024 13.6.
- Short-term debt amortization (Billions of euros): 2017 139.9; 2018 106.0; 2019 79.9; 2020 92.9; 2021 86.4; 2022 85.8; 2023 88.1; 2024 95.0.
- Sources of financing (Billions of euros): 2017 151.2; 2018 99.1; 2019 114.5; 2020 102.5; 2021 100.6; 2022 103.7; 2023 112.2; 2024 116.1.
- New borrowing and debt rollover (Billions of euros): 2017 115.6; 2018 90.4; 2019 108.3; 2020 96.0; 2021 95.5; 2022 99.2; 2023 108.4; 2024 113.1.
- Program-related financing (Billions of euros): 2017 9.6; 2018 22.9; 2019 2.4; 2020 2.4; 2021 2.7; 2022 3.0; 2023 1.9; 2024 2.2.

### Indicators of Fund credit under existing payment schedule (Table 8, 2019–24)
- Amortization to the Fund (Millions of SDRs): 2019 1,704; 2020 1,704; 2021 1,704; 2022 1,587; 2023 1,112; 2024 251.
- Total Charges and Fees (Millions of SDRs): 2019 249; 2020 147; 2021 81; 2022 49; 2023 23; 2024 9.
- Total debt service (Millions of SDRs): 2019 1,953; 2020 1,851; 2021 1,785; 2022 1,636; 2023 1,135; 2024 260.
- Total debt service as percent of exports of goods and services: 2019 3.3; 2020 3.0; 2021 2.7; 2022 2.4; 2023 1.6; 2024 0.4.
- Total debt service as percent of GDP: 2019 1.3; 2020 1.2; 2021 1.1; 2022 1.0; 2023 0.7; 2024 0.1.
- Outstanding stock (Millions of SDRs): 2019 6,359; 2020 4,655; 2021 2,951; 2022 1,363; 2023 251; 2024 0.
- Percent of quota: 2019 262; 2020 192; 2021 121; 2022 56; 2023 100; 2024 (blank/zero formatting in source).
- Memorandum: Exports of goods and services (Billions of euros) series 2019 73; 2020 78; 2021 81; 2022 85; 2023 87; 2024 89. GDP (Billions of euros) series 2019 189; 2020 195; 2021 202; 2022 208; 2023 214; 2024 220. Quota (millions of SDRs) 2,428.9 (source formatting).

*Sources: IMF staff synthesis of figures and tables in the provided content.*

### Annex I. Implementation of Past IMF Recommendations

### Annex I. Implementation of Past IMF Recommendations

### Fiscal Policy: recent developments and assessment
- Staff urged a rebalancing of the fiscal policy mix and comprehensive reforms in financial, labor, and product markets to achieve higher sustainable (and more equitable) growth, address crisis legacies and vulnerabilities, and regain competitiveness within the currency union (2018 Article IV consultation and 2019 First PPM report).
- On balance, the fiscal policy mix has deteriorated between August 2018 and mid-2019 elections, with significant reversals in nearly all areas; since the elections there have been some positive adjustments on tax policy, business deregulation, and promoting labor market flexibility.
- Key policy reversals and measures taken:
  - Growth-denting expenditure compression in 2018, with some freed-up resources used for ad hoc ‘social dividends’ and a one-off payment to uniformed personnel to comply with a Constitutional Court ruling against the 2012 wage cuts.
  - December 2018: legislated pension contribution cuts for the self-employed, farmers, and professionals (some retroactive to 2017).
  - Introduction of a 50 percent subsidy on employer’s contributions to pensions for the youth.
  - Reintroduction of an ‘Easter’ (13th month) pension bonus for about 2.5 million pensioners.
  - Reinstatement of previous survivors’ pension benefit level (70 percent of the deceased’s pension instead of 50 percent) and relaxation of age-related eligibility criteria.
  - January 2019: cancellation of the May 2017 legislation to align existing retirees’ pension benefits with the unified pension formula.
  - Repeatedly extending the VAT discount on five islands (most recently in June 2019).
  - May 2019: reduction of VAT rates for food catering and food products and select non-alcoholic beverages sold in stores from 24 percent to 13 percent; reduction for energy (gas, electricity) from 13 percent to 6 percent.
  - Legislation of an “island-transport equivalent subsidy” costing over EUR 500 million cumulatively by the end of 2021; scope expanded in April 2019 to cover airport tickets and additional beneficiaries.
  - Prioritization of cuts to direct and property tax rates by the new government; maintenance of the 13th month pension bonus and no intentions to adjust benefits of existing retirees as envisaged in the 2017 pre-legislated package.
- Attempts or proposals related to fiscal flexibility and contingency:
  - No tangible progress on a smoothing mechanism: May 2019 announcement to set aside €5.5 billion from existing cash buffer to ‘cover’ lower fiscal targets through 2022 went against commitments to European partners and no proposal was officially submitted.
  - No tangible progress on a fiscal risks contingency plan: Constitutional Court removed one risk by ruling past civil servant bonus cuts constitutional; Council of State ruling on 2016 pension reforms not published in time; decision on public sector wage-grid pending. Authorities have not prepared a contingency plan beyond relying on budgetary reserves; the new government intends to explore adding a fiscal risk statement to future budgets.
- Public financial management and tax administration:
  - Some progress in upgrading the Treasury Single Account (TSA); important elements of Chart of Accounts reform delayed (full extension of general ledger to all State bank accounts and recording of commitments in the financial management information system delayed).
  - May 2019: reintroduction of ex-ante audits by the Hellenic Court of Auditors for all General Government entities (excluding Ministry of Health and OPEKEPE) but only through end-July 2019.
  - OECD TA on public investment management received but not sufficiently granular.
  - Provision enacted in 1H2019 advertising a monetary threshold for tax refund audits (EUR 10,000), compromising tax compliance.
  - Structural causes of government arrears not well identified despite two rounds of audits.
  - Pharmaceutical ‘clawback’ installments from 2016-17 increased from 24 to 48 months; new government adopted provision extending it to up to 120 months; timing of price bulletin adjustments shifted to annual from bi-annual; reference countries modified, likely slowing generic price declines.
  - Reintroduction/extension of “personal difference” top-ups to additional Ministry of Finance, Ministry of Economy, Fiscal Council, and Court of Auditors employees and subsequently to all MoE employees hired up to April 2019—compromising unified public sector wage grid.
  - May 2019: introduction of three new installment schemes for tax, social security (SSC), and municipal debt; terms further relaxed in late June 2019 and August 2019, creating risks to payment culture; mortgage debtor subsidies introduced.

### Financial sector policies: NPEs, CFMs, and bank-sector cleanup
- Staff recommended a comprehensive, coordinated approach to set ambitious NPE targets, build capital buffers, strengthen legal NPE-reduction toolkits and internal governance, and assess costs/benefits of future state support.
- Progress and setbacks:
  - Slow progress overall, with recent movement: new NPE reduction plans are more ambitious and the PM has called for further acceleration, but plans leave banks with weakened balance sheets for too long.
  - Legal reforms implemented (including e-auctions and OCW) but with shortcomings; share of failed auctions remains high.
  - The ‘Hercules’ APS scheme has progressed without a comparative cost-benefit assessment.
  - Rather than scaling back primary residence protection, a mortgage subsidization scheme was adopted in April 2019 (nominally set to expire by end-2019) that largely perpetuates and in some areas expands the legacy of the Katseli law.
  - Staff calls for a comprehensive coordinated assessment of possible state-supported NPE reduction schemes have gained traction but actions remain limited to selected components.
- Capital flow management:
  - Continue CFM liberalization in line with the agreed conditions-based roadmap from May 2017.
  - CFMs fully removed effective September 1, 2019, despite remaining gaps relative to the conditions-based liberalization roadmap.
- Assessment and policy implications:
  - Removal of CFMs increases urgency on banking sector reforms to normalize financial conditions and sentiment (e.g., reducing non-performing loans and returning deposits).
  - Need for a comprehensive cost-benefit assessment before state support and for a coordinated strategy across stakeholders.

### Structural reforms: labor markets, product markets, and privatizations
- Staff recommended more flexible labor market policies, prudent implementation of a new minimum wage framework, discontinuation of seniority premiums, reduction of non-wage costs through product and service market liberalization, and acceleration of privatizations to attract more FDI.
- Labor market developments:
  - Reversals increased risks to employment and competitiveness: September 2018 reinstatement of automatic extension of collective agreements and the favorability principle.
  - May 2019: government introduced provisions requiring employers to justify dismissals (poorly defined); this requirement was removed in August by the new government which submitted legislation to introduce opt-outs to collective bargaining, reform arbitration, and enhance representatives of industrial action.
  - Contrary to staff advice, the statutory minimum wage was increased well in excess of productivity growth.
  - Abolition of subminimum wage for employees below 25 implies an effective minimum wage increase of 27.2 percent for this category of workers; employers’ costs increased by less, 19.7 percent, due to a government-funded social contribution subsidy for the youth.
  - Seniority premiums were maintained, counter to program-era objective to move to a single minimum wage free from top-ups.
  - The originally legislated process for adjusting the minimum wage was advanced by six months (returning to the normal schedule from 2020); the expert panel overstepped envisaged duties by formulating its own assessment.
- Product and service market reforms:
  - Stalled de jure liberalization of closed professions; some key closed professions (including lawyers, notaries, and professionals in retail distribution) remain among the least liberalized in the eurozone.
  - Modernization of public works engineers’ registries delayed until July 2019 Presidential Decree.
  - New legislation restored licensing rather than notification for part of the tourism sector—setback from previous reform objectives.
  - 3-hour minimum time restriction for private vehicle services remains, reduced to half an hour for some islands during summer periods.
  - May 2019: new barriers on private car rentals introduced by setting high minimum fees; these were subsequently reduced in August by the new government.
  - No progress on adjusting manning requirements for passenger vessels to align with International Maritime Organization standards.
- Privatizations and investment climate:
  - One bright spot: recent progress on a ‘signature’ privatization project (Hellenikon) after little progress through 2018 and 2019H1.
  - New government submitted legislation to parliament to facilitate investment and reduce red tape.

### Annex II. External Sector Assessment — A. Overall Assessment
- The external position of Greece in 2018 was weaker than consistent with medium-term fundamentals and desirable policies — a deterioration from the “moderately weaker” assessment for 2017 (partly due to a historical current account revision in late 2018 affecting 2015-17).
- The current account (CA) deficit widened in 2018 mainly due to strong import growth that more than offset sound export performance (including a continued tourism boom).
- The CA deficit is expected to widen over the medium-term under staff’s baseline projections.
- Financing of deficits:
  - Expected to be financed mostly by FDI and flows from debt relief measures by European partners.
- NIIP path:
  - Staff projects the path of the large negative net international investment position (NIIP) to be broadly flat in the medium-term.

### Annex II. External Sector Assessment — B. Potential Policy Responses and Detailed Findings
- Policy priority:
  - To reduce the external position gap and large negative NIIP, accelerate reforms to improve competitiveness and employment conditions; labor and product market reforms are critical.
  - Prudent macroeconomic policies supported by better public sector governance needed to lower public debt and help reduce the large negative NIIP.
- Foreign asset and liability position:
  - Background: NIIP slightly improved in 2018, reaching minus 142 percent of GDP (from minus 144 percent of GDP in 2017) driven mainly by a reduction in central bank liabilities.
  - Official sector accounts for 74 percent of total external liabilities (with 68 percent attributed to the general government and 6 percent to the central bank).
  - Assessment: Large negative NIIP projected to stay broadly unchanged in the medium term in line with projected CA developments. Currency (largely euro-denominated) and interest rate (largely fixed) structure helps mitigate risks only to a limited extent.
  - General government external liabilities expected to gradually decline in percent of GDP over the medium-term mainly due to growth and primary fiscal surpluses and debt relief, with rising private-to-private funding filling external funding gap.
  - NIIP could deteriorate if downside risks materialize (e.g., weaker growth and higher CA deficits).
- Current account:
  - Background: CA deficit in 2018 increased by 1.1 ppt to 3.5 percent of GDP (including deferred interest payments) because of strong import growth. CA and trade deficits projected to widen in the medium-term (by about ¾ percent of GDP).
  - Assessment: Staff assesses external position in 2018 as weaker than consistent with fundamentals. Cyclically-adjusted CA balance estimated in the range of -5.2 to -5.9 percent of GDP (based on estimated negative output gap of 4 to 6 percent) and EBA norm of -2.6 percent.
    - EBA CA model indicates a CA gap of -2.6 to -3.3 percent of GDP with a mid-point estimate of -3 percent of GDP.
    - Identified policy gap amounts to 2.9 percent of GDP, largely because of an expected fiscal expansion in the medium-term.
    - Large negative residual (-5.9 percent) may reflect product and labor market distortions hindering competitiveness; staff assesses rigidities in the labor market (OECD Employment Protection Legislation index) could explain around 20 percent of the negative residual.
  - External sustainability approach yields similar medium-term CA norm of -2.1 percent of GDP needed to bring about a strong medium-term improvement in the NIIP and to stabilize it at around -70 percent of GDP (average level over 2000-2010, pre-crisis), as opposed to current level of -142 percent of GDP.
- Real exchange rate:
  - Background: ULC-based REER fell by 22.3 percent during 2007–15 helped by macro adjustment and 2012 labor market reform; REER-CPI fell by less due to offsetting increases in non-wage costs and product market rigidities. REER-CPI increased slightly in 2016-18 by 2.4 percent due in part to Greek inflation driven by tax hikes and oil prices, and rising wages. In 2018, Greece’s ULC increased by 1.1 percent but REER-ULC declined by 0.9 percent due to higher increases in ULCs among trading partners.
  - Assessment: EBA REER models indicate overvaluations of 9.5 percent (index model) and 20.8 percent (level model) in 2018. Staff considers REER models less reliable for Greece given (i) large unexplained residual (10.9 percent in index model and 22.4 percent in level model), (ii) large standard error of norm for index model, and (iii) CPI-based REER affected by non-wage costs (notably consumption tax increases in 2016 and 2017).
    - Staff bases REER assessment on EBA CA model: consistent with a mid-point CA gap of -3 percent and a semi-elasticity of 0.3, REER is assessed to be overvalued by 10 percent.
- Capital and financial accounts, flows, and policy measures:
  - Background: Financial account dominated by official financing flows. Net FDI inflows have increased since 2016 (from a low base) driven by privatizations, financial sector M&As, and recent real estate investments. As of September 2019, CFMs and payment restrictions fully lifted. Financing conditions eased with successful sovereign market access in recent years at progressively lower yields; banks and corporates issued bonds in 2017-2019 after a three-year hiatus.
  - Assessment: Removal of CFMs increases urgency on banking sector reforms to normalize financial conditions and sentiment (progress on NPLs and deposit returns). Improvement in business climate and continued structural reforms needed to promote sustainable FDI and expand external funding access.
- FX intervention and reserves:
  - Background: The euro has the status of a global reserve currency.
  - Assessment: Reserves held by the EA are typically low relative to standard metrics, but the currency is free floating.

*Source: Annex I. Implementation of Past IMF Recommendations and Annex II. External Sector Assessment (selected extracts).*

### Annex III. Debt Sustainability Analysis

### Annex III. Debt Sustainability Analysis

### Recent developments and liability management
- PDMA hedged €52.2 billion out of the total €52.9 billion GLF loans using a 20-year swap converting 3-month Euribor rates to fixed rates of 94 basis points; transaction described as broadly neutral in NPV terms. GLF loans fully mature by 2041.
- Cancellation of the ‘Titlos’ interest rate swap in February 2019: swap had a notional value of €4 billion; government issued to NBG three bonds totaling €3.3 billion maturing in 2023 (€0.3 billion), 2025 (€1 billion), and 2026 (€2.1 billion) with fixed coupon rates of 2.9, 3.3, and 3.6 percent, respectively. Effects: (i) decline of public debt by €0.7 billion, (ii) lower interest payment bill with fixed interest rate for full bond duration, (iii) return of €3.4 billion of government T-bills posted as collateral.
- Government requested European partners to waive pari passu clause to allow early repayments of IMF loans totaling SDR 2.2 billion (€2.7 billion) currently subject to 300-basis point surcharges; early repayment assumed in November 2019 would yield gross savings of around SDR 56 million (€70 million).
- PDMA actions to increase secondary market liquidity include: regular market presence, liability management operations swapping old illiquid bonds (including PSI bonds leftover from the 2017 swap totaling €4.0 billion) and part of outstanding T-bills.

### Debt profile and composition
- As of end-June 2019 (preliminary), creditor composition of general government debt (consolidated total 339.6 billions of euros): European officials 74%, Private 20% (EFSF 41%, ESM 18%, GLF 15%, IMF 3%, ANFA/SMP 3%, Gov't bonds 13%, Treasury bills 3%, Other private 4%).
- Official sector held about 80 percent of total public debt in 2018; private sector share expected to rise from 20 percent in 2018 to around 30 percent by 2028.
- Recent market placements in 2019: €10.8 billion of market debt, including three government bond issuances totaling €7.5 billion (average cost 3.1 percent, maturity 7.3 years) and €3.3 billion of bonds issued in the Titlos swap cancellation. Reopened 10-year GGB in October for €1.5 billion at a cost of 1.5 percent.

### Macro assumptions underpinning the DSA
- Growth and inflation:
  - Real growth projected to average 2.1 percent in 2019-2020, declining to 0.9 percent by end of projection period.
  - Inflation expected to increase to 0.7 percent on average in 2019-2020 and further to 1.8 percent going forward.
  - Nominal GDP under updated baseline about 3 percent lower by 2028 than in the March 2019 DSA; this explains about a quarter, or 2½ percentage points, of the overall 10½ percentage point deterioration in debt-to-GDP by 2028 compared to March 2019 DSA.
- Fiscal policy:
  - Baseline primary balance expected to be about 1 percent of GDP lower on average over 2019-2025 relative to March 2019 DSA.
  - Staff projects the primary cash balance to drop to 2.6 percent of GDP in 2019-2020 on average; decline to 1.9 percent on average in 2021-2024; and further down to 1.5 percent of GDP from 2025 onwards (unchanged from March 2019 DSA).
  - Change in accounting basis from accrual to cash for primary balance projections; cash primary balance is lower than accrual by about €8 billion (about 4 percent of 2019 GDP) cumulatively over 2019-2024.
- Arrears: remaining stock €2.4 billion as of end-2018; DSA assumes decline to €1.4 billion in 2019 and full clearance by end-2020 (compared with full clearance in 2019 in March 2019 DSA).
- Privatization revenues projected at €2.4 billion over next 10 years (non-bank asset sales only).
- Cash buffer and market borrowing:
  - State government’s cash buffer about €32 billion at end-September 2019; broader general government deposits at commercial banks about €40 billion (not immediately available to State).
  - Staff expects drawdown of about €19 billion of deposits over 2019-2024 (including €15.7 billion provided through ESM loans requiring approval).
  - Total deposits immediately available to the State projected to decline to about €11 billion by end-2024 (covering six months of GFN or entire stock of outstanding T-bills).
  - Projected market issuances: (i) €5-7 billion in 2020-2022, and (ii) €9-10 billion in 2023-2024.
- Interest rates:
  - Assumed effective interest rate on total public debt to increase from under 2 percent currently to 2.4 percent by end of projection period (versus 2.8 percent in March 2019 DSA).
  - Assumption on 4 percent floor of market rates removed in this DSA.

### Outlook and realism of baseline
- Baseline projections:
  - Debt-to-GDP projected to decline from about 185 percent of GDP in 2018 to about 145 percent of GDP in 2028.
  - Debt-to-GDP expected to be higher by about 10 percentage points by 2028 relative to March 2019 DSA.
  - GFNs-to-GDP ratio remains below 15 percent of GDP throughout projection period; average GFNs-to-GDP expected to be 7.9 percent over 2019-2028 (about 0.3 percentage point lower than in March 2019 DSA).
  - Assumes €11 billion in short-term debt (T-bills) at end-2018 will roll over at about 80 percent in 2019 and 70 percent in 2020 and in full thereafter.
- Realism:
  - Median forecast errors for past staff forecasts: real growth -3.1 percent (percentile rank 1 percent), primary balance -0.7 percent (percentile rank 29 percent), inflation -0.8 percent (percentile rank 24 percent).
  - Projected three-year change in cyclically adjusted primary balance negative with percentile rank 63 percent; three-year average CAPB level 3.9 percent of GDP with percentile rank 23 percent.
- Staff view: public debt sustainability is not assured under a realistic set of macro-fiscal assumptions.

### Public sector stress tests and scenarios (macro-fiscal and contingent liabilities)
- Macro-fiscal stress tests:
  - Real GDP growth shock: growth reduced to -1.7 percent on average in 2020 and 2021; debt-to-GDP would increase to 192 percent (25 percentage points higher than baseline) in 2021 before declining; GFNs-to-GDP remain below 15 percent until 2028 when it reaches 17 percent.
  - Primary balance shock: lower cash primary balance by about 2 percent of GDP on average in 2020-2022 (half standard deviation) would raise debt-to-GDP by about 11 percentage points relative to baseline by 2024; GFNs on average 3 percent of GDP higher in 2020-2028 and would breach 15 percent threshold in 2028.
    - In this scenario, real GDP growth would need to be higher by about 1 percentage point on average in 2020-2028 (implying a 2 percent medium-term growth rate) to eliminate GFN breaches in 2028.
    - If accrual primary balance were 3.5 percent of GDP in 2020-2022 as agreed in 2018 with European Institutions, debt-to-GDP would be about 3½ percentage points lower by 2028 and GFNs-to-GDP 1 percentage point lower on average in 2020-2028 than baseline (assuming same deposit drawdown profile).
  - Real interest rate shock: raises effective interest rates by about 400 basis points a year on average over 2020–2028; impact more moderate because only a small portion of debt subject to rate variations.
  - Combined macro-fiscal shock (all above): would keep debt-to-GDP about 180-190 percent throughout projection period; GFNs-to-GDP would breach 15 percent medium-term threshold as early as 2025 and the 20 percent long-term threshold by 2028.
- Contingent liability shock (2019-2024):
  - Assumes materialization of fiscal and financial risks about 7 percent of 2019 GDP (PPM downside), rollover risk of T-bills 2.5 percent of GDP, and potential banking sector support costs 2.4 percent of GDP.
  - Assumes real GDP growth and inflation decline to -2 percent and 0.3 percent on average in 2020-2022, and interest rates increase by about 70bps on average over same period.
  - Result: debt-to-GDP jumps to about 203 percent by 2022 before declining; GFNs-to-GDP above 15 percent in 2022 and 2025-2027 and breach 20 percent long-term threshold by 2028.

### External sector DSA: external debt, NIIP, and external risks
- Levels and recent trends:
  - External debt declined from peak of 251 percent of GDP in 2015 to 222½ percent of GDP; decline driven largely by reduction in central bank external liabilities.
  - As of end-2018, three quarters of external debt originated from the public sector.
  - NIIP at -142 percent of GDP in 2018; improved by about 2 percentage points of GDP in 2018 driven by central bank (BoG) net position improving by 23 percent of GDP compared to 2017, partially offset by weaker net positions of general government, banks, and other sectors.
- Projections:
  - External debt expected to decline to about 197 percent of GDP by 2024.
  - NIIP projected to stay broadly unchanged at about -141 percent of GDP by 2024 despite widening current account deficits.
  - External position projections weaker than March 2019 DSA where external debt and NIIP were projected to be 182 and -115 percent of GDP, respectively, by 2024.
- External sector stress tests:
  - Interest rate shock: 350-basis point increase would worsen income account and raise debt ratio by 10 percentage points above baseline by 2024.
  - Growth shock: decline in average growth by 2 percentage points raises external debt ratio by 26 percentage points above baseline at end-2024.
  - Larger current account deficits: deterioration by half standard deviation in 2020–24 raises debt ratio by 18 percentage points above baseline by 2024.
  - Combined shock (¼ standard deviation higher interest rates, lower growth, smaller current account): debt ratio remains elevated at 221 percent of GDP in 2024, 24 percentage points higher than baseline.

*Source: Annex III. Debt Sustainability Analysis (IMF staff projections and analysis).*

### Annex III. Figure 3. Greece Public DSA Risk Assessment (Baseline Scenario)

### Annex III. Figure 3. Greece Public DSA Risk Assessment (Baseline Scenario)

### Debt levels, financing needs, and market indicators (baseline projections and associated metrics)
- Nominal gross public debt: 160.0 (2008–2016), 179.3 (2017), 184.9 (2018), 176.5 (2019), 171.4 (2020), 166.3 (2021), 161.0 (2022), 155.6 (2023), 152.0 (2024), 150.0 (2025), 148.1 (2026), 146.5 (2027), 145.1 (2028) (Percent of GDP).
- Public gross financing needs: 22.2 (2008–2016), 12.0 (2017), 18.7 (2018), 11.4 (2019), 5.8 (2020), 5.6 (2021), 6.5 (2022), 6.6 (2023), 6.9 (2024), 8.5 (2025), 8.9 (2026), 7.7 (2027), 10.1 (2028) (Percent of GDP).
- Spread (bp): 156; CDS (bp): 170.
- Ratings: Moody’s B1/B1 (Foreign/Local); S&P’s BB-/BB-; Fitch BB-/BB-.
- Real GDP growth (percent): -3.3 (2008–2016), 1.5 (2017), 1.9 (2018), 1.8 (2019), 2.3 (2020), 2.0 (2021), 1.4 (2022), 0.9 (2023), 0.9 (2024), 0.9 (2025), 0.9 (2026), 0.9 (2027), 0.9 (2028).
- Inflation (GDP deflator, percent): 0.4 (2008–2016), 0.6 (2017), 0.5 (2018), 0.7 (2019), 0.7 (2020), 1.5 (2021), 1.5 (2022), 1.8 (2023), 1.8 (2024), 1.8 (2025), 1.8 (2026), 1.8 (2027), 1.8 (2028).
- Nominal GDP growth (percent): -3.0 (2008–2016), 2.1 (2017), 2.5 (2018), 2.6 (2019), 3.1 (2020), 3.5 (2021), 3.0 (2022), 2.7 (2023), 2.7 (2024), 2.7 (2025), 2.7 (2026), 2.7 (2027), 2.7 (2028).
- Effective interest rate (percent) 5/: 3.3 (2008–2016), 1.9 (2017), 1.9 (2018), 1.8 (2019), 1.8 (2020), 1.8 (2021), 1.9 (2022), 2.0 (2023), 2.0 (2024), 2.1 (2025), 2.2 (2026), 2.3 (2027), 2.4 (2028).

### Contributions to debt dynamics and identified debt-creating flows (historical and projections)
- Cumulative change in gross public sector debt: 8.7 (2008–2016), -1.8 (2017), 5.6 (2018), -8.4 (2019), -5.1 (2020), -5.1 (2021), -5.3 (2022), -5.5 (2023), -3.6 (2024), -2.0 (2025), -1.9 (2026), -1.6 (2027), -1.3 (2028); cumulative total -39.7.
- Identified debt-creating flows: 18.0 (2008–2016), -3.4 (2017), 6.2 (2018), -8.5 (2019), -5.6 (2020), -5.6 (2021), -5.8 (2022), -5.9 (2023), -4.1 (2024), -2.4 (2025), -2.3 (2026), -2.1 (2027), -1.9 (2028); cumulative total -44.2.
- Primary deficit: 2.1 (2008–2016), -3.0 (2017), -3.3 (2018), -3.2 (2019), -2.1 (2020), -1.8 (2021), -1.8 (2022), -2.0 (2023), -2.1 (2024), -1.5 (2025), -1.5 (2026), -1.5 (2027), -1.5 (2028); cumulative total -18.9.
- Primary (noninterest) revenue and grants: 44.7 (2008–2016), 48.4 (2017), 47.7 (2018), 47.8 (2019), 46.8 (2020), 45.7 (2021), 45.1 (2022), 44.7 (2023), 44.1 (2024), 43.5 (2025), 43.0 (2026), 42.4 (2027), 41.9 (2028).
- Primary (noninterest) expenditure: 46.8 (2008–2016), 45.3 (2017), 44.4 (2018), 44.7 (2019), 44.7 (2020), 43.9 (2021), 43.4 (2022), 43.4 (2023), 42.0 (2024), 42.0 (2025), 41.5 (2026), 40.9 (2027), 40.4 (2028).
- Automatic debt dynamics 7/: 10.4 (2008–2016), -1.1 (2017), -0.7 (2018), -1.2 (2019), -2.3 (2020), -2.9 (2021), -1.8 (2022), -1.1 (2023), -1.0 (2024), -0.9 (2025), -0.7 (2026), -0.6 (2027), -0.4 (2028); cumulative total -12.7.
- Interest rate/growth differential 8/: 9.9 (2008–2016), -0.4 (2017), -1.0 (2018), -1.3 (2019), -2.2 (2020), -2.8 (2021), -1.8 (2022), -1.1 (2023), -0.9 (2024), -0.9 (2025), -0.7 (2026), -0.6 (2027), -0.4 (2028); cumulative total -12.6.
  - Of which: real interest rate: 4.7 (2008–2016), 2.3 (2017), 2.4 (2018), 2.0 (2019), 1.8 (2020), 0.5 (2021), 0.6 (2022), 0.3 (2023), 0.4 (2024), 0.4 (2025), 0.5 (2026), 0.7 (2027), 0.8 (2028); cumulative total 8.0.
  - Of which: real GDP growth: 5.2 (2008–2016), -2.7 (2017), -3.4 (2018), -3.3 (2019), -4.0 (2020), -3.4 (2021), -2.3 (2022), -1.4 (2023), -1.3 (2024), -1.3 (2025), -1.2 (2026), -1.2 (2027), -1.2 (2028); cumulative total -20.7.
- Exchange rate depreciation 9/: 0.5 (2008–2016), -0.8 (2017), 0.3 (2018).
- Other identified debt-creating flows: 5.5 (2008–2016), 0.8 (2017), 10.2 (2018), -4.2 (2019), -1.3 (2020), -0.9 (2021), -2.2 (2022), -2.9 (2023), -1.0 (2024), 0.0 (2025), -0.1 (2026), 0.0 (2027), 0.0 (2028); cumulative total -12.6.
  - Net privatization proceeds: -0.2 (2008–2016), -0.7 (2017), -0.4 (2018), -0.2 (2019), -0.6 (2020), -0.2 (2021), -0.1 (2022), 0.0 (2023), 0.0 (2024), 0.0 (2025), -0.1 (2026), 0.0 (2027), 0.0 (2028); cumulative total -1.2.
  - Other liabilities (arrears clearance and cash buffer flows): 5.7 (2008–2016), 1.5 (2017), 10.6 (2018), -4.0 (2019), -0.7 (2020), -0.8 (2021), -2.1 (2022), -2.8 (2023), -0.9 (2024), 0.0 (2025), 0.0 (2026), 0.0 (2027), 0.0 (2028); cumulative total -11.4.
- Residual, including asset changes 10/: -9.4 (2008–2016), 1.6 (2017), -0.6 (2018), 0.2 (2019), 0.6 (2020), 0.5 (2021), 0.5 (2022), 0.5 (2023), 0.5 (2024), 0.4 (2025), 0.4 (2026), 0.5 (2027), 0.5 (2028); cumulative total 4.5.

### Composition of public debt, scenarios, and underlying assumptions
- Baseline scenario macro assumptions (selected):
  - Real GDP growth: 1.8 (2019), 2.3 (2020), 2.0 (2021), 1.4 (2022), 0.9 (2023–2028).
  - Inflation: 0.7 (2019–2020), 1.5 (2021), 1.8 (2023–2028).
  - Primary balance: 3.2 (2019), 2.1 (2020), 1.8 (2021), 1.8 (2022), 2.0 (2023), 2.1 (2024), 1.5 (2025), 1.5 (2026–2028).
  - Effective interest rate: 1.8 (2019–2021), 1.9 (2022), 2.0 (2023), 2.0 (2024), 2.1 (2025), 2.2 (2026), 2.3 (2027), 2.4 (2028).
- Historical scenario example (selected differences):
  - Real GDP growth: 1.8 (2019), -2.6 (2020–2028).
  - Primary balance: 3.2 (2019), -0.8 (2020–2028).
  - Effective interest rate: 1.8 (2019), 1.8–3.1 (2020–2028) rising to 3.1 by 2028.
- Constant primary balance scenario:
  - Primary balance fixed at 3.2 (2019–2028) with other baseline assumptions unchanged.
- Composition charts referenced include breakdowns:
  - By currency: local currency-denominated vs foreign currency-denominated.
  - By maturity: medium and long-term vs short-term.
  - Public Gross Financing Needs (Percent of GDP) and Gross Nominal Public Debt (Percent of GDP) trajectories shown for baseline and alternative scenarios.

### Stress tests, shock scenarios, and results (selected underlying assumptions and metrics)
- Stress test types covered: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Contingent Liability Shock; Lower Growth Scenario.
- Example baseline and shocked underlying assumptions (selected):
  - Baseline Real GDP growth: 1.8 (2019), 2.3 (2020), 2.0 (2021), 1.4 (2022), 0.9 (2023–2028).
  - Primary Balance Shock path (selected years): Primary balance 3.2 (2019), -0.1 (2020), -0.3 (2021), -0.3 (2022), 2.0 (2023), 2.1 (2024), 1.5 (2025), 1.5 (2026).
  - Real GDP Growth Shock path (selected): Real GDP growth 1.8 (2019), -1.6 (2020), -1.8 (2021), 1.4 (2022), 0.9 (2023–2028).
  - Real Interest Rate Shock: Effective interest rate rises to 2.3–3.6 under some shocks (see Combined).
  - Real Exchange Rate Shock: Inflation and GDP deflator adjustments included (specific values shown per scenario).
  - Combined Shock and Contingent Liability Shock produce larger increases in effective interest rates and deeper falls in primary balances and growth (selected values shown in scenario tables).
- Stress test output metrics tracked (figures referenced):
  - Gross Nominal Public Debt (Percent of GDP) under baseline and stress tests.
  - Gross Nominal Public Debt (Percent of Revenue) under baseline and stress tests.
  - Public Gross Financing Needs (Percent of GDP) under baseline and stress tests.
- Lower Growth Scenario (selected path):
  - Real GDP growth: 1.8 (2019), 1.3 (2020), 1.0 (2021), 0.4 (2022), -0.1 (2023–2028).
  - Inflation and primary balance follow baseline in the Lower Growth Scenario; effective interest rates remain similar to baseline.

### External debt sustainability (baseline and historical context)
- External debt (includes the stock of deferred interest): 238.8 (2014), 251.0 (2015), 246.7 (2016), 227.2 (2017), 222.4 (2018), 219.5 (2019), 212.8 (2020), 206.6 (2021), 201.7 (2022), 198.8 (2023), 196.7 (2024) (Percent of GDP).
- Change in external debt: 0.9 (2014), 12.2 (2015), -4.4 (2016), -19.5 (2017), -4.8 (2018), -2.9 (2019), -6.7 (2020), -6.2 (2021), -4.8 (2022), -2.9 (2023), -2.2 (2024) (Percent of GDP).
- Identified external debt-creating flows (4+8+9): 0.5 (2014), -0.6 (2015), 0.9 (2016), -4.4 (2017), -3.3 (2018), -4.3 (2019), -5.3 (2020), -3.2 (2021), -1.6 (2022), 1.2 (2023), 1.7 (2024) (Percent of GDP).
- Current account deficit, excluding interest payments: -1.3 (2014), -1.7 (2015), -0.5 (2016–2017), 0.6 (2018), -0.1 (2019), 0.0 (2020), 0.2 (2021), 0.2 (2022), 0.8 (2023), 1.0 (2024) (Percent of GDP).
- Exports: 32.4 (2014), 31.8 (2015), 30.8 (2016), 34.2 (2017), 37.6 (2018), 38.8 (2019), 39.6 (2020), 40.3 (2021), 40.7 (2022), 40.6 (2023), 40.4 (2024) (Percent of GDP).
- Imports: 34.6 (2014), 32.5 (2015), 31.8 (2016), 35.2 (2017), 39.4 (2018), 40.4 (2019), 41.5 (2020), 42.5 (2021), 43.1 (2022), 42.9 (2023), 42.8 (2024) (Percent of GDP).
- External debt-to-exports ratio (in percent): 737.6 (2014), 788.1 (2015), 800.1 (2016), 663.6 (2017), 590.7 (2018), 566.1 (2019), 537.5 (2020), 512.2 (2021), 495.1 (2022), 490.2 (2023), 487.2 (2024).
- Gross external financing need (in billions of US dollars) 4/: 226.0 (2014), 194.4 (2015), 183.8 (2016), 171.2 (2017), 141.8 (2018), 120.7 (2019), 117.3 (2020), 114.2 (2021), 119.0 (2022), 129.0 (2023), 135.8 (2024).
- Debt-stabilizing non-interest current account: -2.8 (2024) (Percent of GDP).

### Bound tests and historical shock comparisons
- External debt bound-test baselines and scenario averages (examples in figures):
  - Baseline external debt around 197 (percent of GDP) in recent years with scenarios showing upward responses to i-rate shock, CA shock, growth shock, and combined shock (box averages: e.g., interest rate shock baseline 197, scenario 207; CA shock baseline 197, scenario 215; combined shock baseline 197, scenario 221; growth shock baseline 197, scenario 223).
- Shocks applied include permanent one-half standard deviation shocks and permanent 1/4 standard deviation combined shocks for real interest rate, growth rate, and current account balance.

### Risk assessment, likelihood, expected impacts, and recommended policy responses (Annex IV. Risk Assessment Matrix, selected items)
- Domestic: Continued backtracking of previously implemented reforms and contingent fiscal risks
  - Likelihood: Medium.
  - Expected impact: High — slowdown in structural reforms, potential large one-off payments triggering fiscal pressures, confidence losses, erosion of competitiveness.
  - Recommended policy response:
    - Prioritize growth-friendly, socially inclusive policies consistent with long term fiscal sustainability.
    - Devise strategy to deal with large contingent fiscal shocks.
    - Allocate windfall from better growth outcomes to infrastructure, social safety net, education, and health.
- Domestic: Sharp deterioration of sentiment towards banks
  - Likelihood: Medium.
  - Expected impact: High — liquidity pressures, accelerated capital depletion, deposit outflows, reduced credit growth.
  - Recommended policy response:
    - Accelerate clean-up of banks’ and private sector balance sheets.
    - Proceed with proactive build-up of capital buffers.
    - Communicate a credible and ambitious strategy to restore bank sustainability.
    - Strengthen operational preparedness to crisis management.
- External: Weaker-than-expected growth in Europe
  - Likelihood: High.
  - Expected impact: High — reduced export and tourism demand, weaker investment, lower growth and external position.
  - Recommended policy response:
    - Seek flexibility from European partners to provide a counter-cyclical buffer to a global downturn.
    - Rebalance fiscal mix further in favor of investment.
    - Accelerate structural reforms to spur productivity and competitiveness.
- External: Sharp rise in risk premia
  - Likelihood: High.
  - Expected impact: Medium — higher sovereign/bank spreads, higher borrowing costs, credit compression, weaker growth.
  - Recommended policy response:
    - Ensure adequate fiscal rebalancing.
    - Accelerate banking sector reforms to reduce sovereign-bank nexus risks.
    - Keep on course with commitments to European partners to ensure financing.
- External: Rising protectionism and retreat from multilateralism
  - Likelihood: High.
  - Expected impact: Medium/Low — lower growth and weaker external position.
  - Recommended policy response:
    - Accelerate reforms to ensure broad-based growth and cushion risks to external demand (boost investment and private incomes).
- External: Intensification of geopolitical tensions and security risks
  - Likelihood: High.
  - Expected impact: High — socio-economic disruptions, migration pressures, lower tourism revenue, higher unemployment, budgetary pressure.
  - Recommended policy response:
    - Make use of fiscal buffers for temporary costs.
    - Push for a new system to relocate refugees across member states.
    - Generate fiscal space to address migration-related costs.
    - Consider reforms to facilitate integration of qualified workers.

*Source: IMF staff.*

### Annex V. Inclusive Growth Indicator

### Annex V. Inclusive Growth Indicator

### Methodology and weights
- Analysis follows Bloch and Fournier (2018) and Fournier and Johansson (2016).
- Indicators are based on the evolution of the government’s primary expenditure composition combined with (standardized) respective coefficient estimates obtained from:
  - long-run growth convergence regressions, and
  - inequality effect estimates.
- Note: Other primary expenditure is weighted with 0.

### Key coefficient estimates (spending-item effects)
- Subsidies
  - Growth effect: -3.0
  - Inequality reduction effect: 1.2
  - Inequality-inclusive growth effect: -1.9
- Old-age and survivor pensions
  - Growth effect: -0.9
  - Inequality reduction effect: -0.1
  - Inequality-inclusive growth effect: -1.0
- Other wages and intermediate consumption
  - Growth effect: 0.6
  - Inequality reduction effect: -1.1
  - Inequality-inclusive growth effect: -0.6
- Health
  - Growth effect: 0.2
  - Inequality reduction effect: 0.0
  - Inequality-inclusive growth effect: 0.2
- Education
  - Growth effect: 0.2
  - Inequality reduction effect: 0.0
  - Inequality-inclusive growth effect: 0.2
- Unemployment benefits
  - Growth effect: 0.2
  - Inequality reduction effect: 1.0
  - Inequality-inclusive growth effect: 1.2
- Sickness and disability
  - Growth effect: 0.8
  - Inequality reduction effect: 0.9
  - Inequality-inclusive growth effect: 1.7
- Family and children
  - Growth effect: 1.7
  - Inequality reduction effect: 1.6
  - Inequality-inclusive growth effect: 3.3
- Investment
  - Growth effect: 2.8
  - Inequality reduction effect: -0.3
  - Inequality-inclusive growth effect: 2.5

### Findings on Greece relative to the Euro Area (EA)
- Starting from a level comparable to the rest of the EA in 2003, Greece’s spending mix (inclusive growth indicator) deteriorated below the EA indicator by 2005.
- Greece’s indicator fell sharply during the crisis, reaching its low point in 2012 due to:
  - an increase in the relative importance of old-age pensions and subsidies.
- Temporary improvement occurred from 2012 to 2013 due to:
  - pension reforms and improvement of investment.
- After 2013 the indicator fell back to the 2012 level, largely due to a compression of investment spending.
- By 2017, a persistent gap between the EA average and Greece’s inclusive growth spending indicators remained, explained by:
  - Greece’s higher relative spending on pensions, and
  - Greece’s lower spending on targeted social protection and investment.

### Interpretation of spending-item roles
- Old-age pension spending and subsidies are estimated to ‘harm’ economic growth; the former has little impact on equality.
- Investment has the highest growth return but marginally worsens equality.
- Targeted social protection (e.g., family and children, sickness and disability, unemployment benefits) helps both growth and equality, with family and children showing the largest combined positive effect (inequality-inclusive growth effect: 3.3).

*Sources: Bloch and Fournier (2018); OECD; and IMF staff calculations.*

### 0.3 billion euros for the year 2023 compared to 2022 (as depicted at page 37, Table 3, line

### 1grcea2019002 - 0.3 billion euros for the year 2023 compared to 2022 (as depicted at page 37, Table 3, line

### Debt sustainability
- Notes a reported change of "0.3 billion euros for the year 2023 compared to 2022 (as depicted at page 37, Table 3, line 'interest')."
- Questions why Greek debt would be assessed as “less sustainable in the long term” when:
  - The previous Report concluded a “more sustainable” Greek public debt.
  - There has been a “massive reduction in Greek credit spreads,” projecting a far lower debt servicing cost and a far better investors’ perception regarding the Greek debt sustainability and economic growth.
- Market reaction to the recent approval by European Institutions of the Greek request for a partial early repayment of its IMF loan is described as “a credible signal of Greece’s improved debt sustainability outlook.”
- Anticipated enhancement to debt sustainability from planned pension system reforms, “as per their recent announcements.”

### Banking developments
- Acknowledges improvements to the Greek banking system while highlighting legacy issues: high proportion of NPEs, limited liquidity, and low profitability rates.
- Authorities expect the pace of ongoing banking recovery to “accelerate sharply in the near future.”
- Specific developments and figures:
  - “All capital controls have been abolished (as from September 1st, 2019).”
  - “Greek banks have eliminated their ELA exposure; and private deposits are making a steady recovery.”
  - “Over the last four quarters, the NPL stock has declined by 13.5 billion EUR, 15% on an annual basis, with reduction in 2019Q2 being the highest since 2017.”
- Hercules Asset Protection Scheme (APS):
  - In October 2019, the Greek authorities received approval from the European Commission for the “Hercules” APS, a fiscal-neutral scheme aiming at a systemic reduction of around 40% of the current NPE stock at a lower cost for bank capital ratios.
  - Hercules securitization will offer investors “a yield bearing asset at a period of negative interest rates and booming markets.”
  - Investors have reacted positively; “all Greek systemic banks are expected to join this scheme.”
  - Draft legislation relating to Hercules will soon be submitted to Parliament, expected to create “a more liquid, transparent and institutionalised secondary NPEs market that will attract a broader pool of global capital.”
- Additional reform initiatives to support banking:
  - Revising personal insolvency and bankruptcy law.
  - Simplifying the current out-of-court settlement process for commercial loans.
  - Creating a new single insolvency framework with an electronic platform, Credit Bureau, Early Warning, certified property valuators, financial experts and mediators to alleviate courts.
- Bank balance sheets are supported by “the accelerating recovery of the real estate market.”
- Authorities expect “a significant increase in the capacity of the banking system to finance the real economy,” supporting growth in the short-term through increased liquidity and in the medium-term through increased levels of investment.

### Labor market reform
- Report acknowledges improving labor market conditions but assesses the quality of recovery as “weak.”
- Authorities concur that 2011-13 reforms restored competitiveness and underpinned rising employment since 2014.
- Recent policy actions over the past three months:
  - Repealed three labor law provisions legislated earlier in 2019 that restricted labor market flexibility.
  - Introduced conditional opt-outs from sectoral collective agreements.
  - Legislated a public registry for worker and employer organizations allowing for online voting for critical decisions.
- Planned legislative and policy changes:
  - Modernising legislation on labour force termination in harmony with the Revised European Social Chapter.
  - Rationalising/simplifying procedures for overtime reporting, paid leave and others.
  - DBP 2020 includes provisions relating to childcare aiming to increase female labour market participation.
  - Further codify, simplify and modernise Labour Law to “create stability and flexibility in labour law arrangements that will increase competitiveness and foster jobs’ creation and preservation.”

### Growth enhancing measures
- Authorities endorse the necessity of growth enhancing reforms and intend to accelerate implementation.
- Past reforms during the programs’ era covered labor, products and services markets; contributed to improved international business and regulation-quality rankings and competitiveness gains.
- Exact figures cited:
  - “Substantial gains in unit labor cost-based competitiveness gains (app. 20% over 2010-2018).”
  - “However, the CPI-based counterpart figure improved only by 8%, with no further progress since 2015.”
- Recent and planned actions to boost growth:
  - Large projects unblocked: Hellenikon and the Piraeus Port extension.
  - Privatisations resumed (example: Athens International Airport).
  - Plan to restore viability of the Public Power Corporation.
  - Parliament voted an Omnibus Development Law with provisions for further liberalisation of product markets; Bank of Greece estimates medium-term growth gains “in the region of 0.5% of GDP.”
  - Authorities plan further privatisations (e.g. regional ports), profitable use of publicly owned real estate (through HCAP) and increased competition in the energy sector.
  - Commitment to decarbonisation and moving toward renewable energy; pledge “to stop using lignite for electricity production by 2028.”
- Authorities believe their reform agenda will bring “a regime change in the Greek economy, resulting into medium-term growth rates significantly higher than those envisaged by staff.”

### Transparency and governance
- Authorities agree with staff’s view that Greece has strengthened its AML/CFT regime in line with international standards.
- Emphasis on upgrading public-sector governance, transparency and institutional performance as drivers of sustainable growth.
- Legislative initiatives introduced:
  - Creation of a single Independent Transparency Authority unifying disparate auditing and oversight entities.
  - Introduction of a new institution, the Presidency of the Government, responsible for overseeing Government program implementation.
  - Provision for assessing performance of Government officials and entities based on established KPIs and metrics.
  - Creation of administrative General Secretaries to empower institutional memory.
  - An ambitious and comprehensive digitization project.
- Authorities expect these initiatives to improve transparency and institutional performance and plan to pursue further institutional reforms, including in the justice system.

### Concluding remarks
- Authorities conclude the country is “fully on track to accelerate economic recovery and regain its former position in the world economy on a sound basis.”
- Commitments:
  - “Adamantly committed to fulfill their obligations and to deliver enhanced and inclusive growth while preserving social cohesion.”
  - Seeking support from EU partners and valuing IMF cooperation and advice.
- Authorities request future IMF staff reports to offer “a more balanced assessment of past events and a higher emphasis on forward looking analysis.”

*Source: excerpt from the provided IMF content unit (1grcea2019002).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1grcea2019002.pdf_