## 1grcea2020001 ## Source details **Canonical URL:** [1grcea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1grcea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1grcea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1grcea2020001.pdf.json) --- ### Executive summary — context and crisis legacies - Pandemic interrupted a modest recovery; GDP contracted by 7.9 percent in 2020H1. - Fiscal response was well-organized and mitigated impact; SSM accommodation will delay bank stress recognition. - 2019 Article IV (November 2019): public debt sustainable over the medium-term but long-term sustainability not assured under realistic macro-fiscal assumptions. - Crisis legacies: fiscal policy mix that supports neither growth nor targeted social protection; large public and private debt overhang; high dependence on tourism amid poor business climate; weak banking sector. ### Recent developments and baseline outlook - 2019 performance: - Real GDP growth: 1.9 percent in 2019 (SA Q4: -0.9 percent q/q). - SA unemployment rate: 16.4 percent at end-2019; youth unemployment: 34.7 percent. - Output gap: -4.4 percent (end-2019). - Authorities met 3.5 percent of GDP Primary Balance commitment. - Pandemic response and short-term indicators: - Early containment measures; per-capita cases and fatality rate low relative to European average. - GDP contracted by 7.9 percent 2020H1 y/y. - Unemployment: SA declined to 15.6 percent in March then climbed to 16.8 percent in August. - Current Account Deficit widened to -4 percent of GDP in 2020H1 due to tourism receipts down 87.5 percent in 2020H1. - Headline HCPI: -2.3 percent y/y in September (core: -2.6 percent y/y). - Baseline macro outlook and assumptions: - Economy expected to contract by 9.5 percent in 2020. - 2021 baseline assumes gradual lifting of travel restrictions before tourism season; tourism receipts reaching around 50 percent of their 2019 level. - Real GDP growth expected to average 5.6 percent in 2021–22. - Scarring: about 4 percent cumulative output loss over the medium term. - Long-term potential growth: 1 percent. ### Role and profile of NGEU / RRF in baseline - Baseline includes only NGEU grant portion of the RRF, assuming full absorption by 2026. - Greece to receive the highest share of grants in percent of GDP among Eurozone countries, predominantly financing new projects. - Staff spreads RRF spending through 2026; boost to medium-term growth averages about 0.6 percentage points annually. - Specific grant disbursement profile (Percent of 2020 GDP; Billions of euros referenced): - 2021: 4.7 - 2022: 3.0 - 2023: 3.0 - 2024: 3.4 - 2025: 3.4 - 2026: 1.8 - Total: 19.3 (Memo: 11.5) - Of which new spending (Percent of 2020 GDP): 3.4, 3.0, 3.0, 3.4, 3.4, 1.8; Total: 18.0 (Memo: 10.7) - Of which existing spending (Percent of 2020 GDP): 1.3, 0.0, 0.0, 0.0, 0.0, 0.0; Total: 1.3 (Memo: 0.8) - Parameters for new public spending: - Investment Multiplier: 0.8 - Consumption Multiplier: 0.3 - Investment Persistence: 0.6 - Consumption Persistence: 0.3 - Nominal GDP (2020): 168 (Billions of euros) - Note: Includes the recovery and resilience facility (€16.2 bn), ReactEU (€2.2bn), just transition, rural development and other related funds. ### Risks, scenarios, and uncertainties - Main downside risks: - Prolonged pandemic with extended containment measures and derailed tourism recovery. - Significant deterioration of bank balance sheets; new wave of NPEs if support measures and supervisory accommodation are unwound abruptly. - Contingent government liabilities from state guarantees, additional support to banks/firms, and court cases challenging reforms. - Upside scenario: - Early vaccine discovery and swift mass distribution implying quicker, stronger rebound. - Uncertainties related to NGEU: - Disbursement profile, allocation, absorption, additionality, multipliers, and persistence remain uncertain. - Authorities intend to channel NGEU loans through commercial banks and the Hellenic Development Bank, but plans not sufficiently mature to be in baseline. - European deal requires 70 percent of RRF allocations to be identified in 2021–22. ### Capacity to repay the Fund and financing metrics - Staff assessment: capacity to repay the Fund preserved under staff’s baseline (Annex II - DSA). - Outstanding Fund credit: €5.7 billion, or SDR 4.55 billion/187.5 percent of quota. - Gross Financing Needs (GFNs): - GFNs before government deposit drawdowns projected to rise to 21.7 percent of GDP in 2020. - GFNs projected to average 11.4 percent of GDP during Greece’s repayments to the Fund (through June 2024). - Cash buffer and deposits: - Government cash buffer: €29.5 billion at end-2019; or €36.5 billion including general government entities’ deposits accessible through repos. - Government has dipped into cash buffer in 2020; staff projects a net deposit drawdown up to €5 billion. ### Liquidity developments and funding execution - GGB yields widened in February then narrowed to pre-pandemic lows due to PEPP eligibility. - Five GGB issuances year-to-date totaled €12 billion; 2020 funding plan fully executed. - Contingent low-cost liquidity: - NGEU loans available up to €12.5 billion. - ESM credit line about €3-4 billion. - ECB holdings: as of end-September, ECB holdings of GGBs were 2.53 percent of total PEPP holdings (Greece capital key: 2.0117 percent). - IMF obligations and prepayment considerations: - Greece’s annual payments to the Fund average SDR 1.4 billion over 2021–23, plus final SDR 0.3 billion in 2024. - Originally planned partial prepayment in 2020 (SDR 1.6 billion) shelved after the pandemic. - Policy option: Greece could prepay remaining Fund balance to reduce interest payments (5-year GGB yields around 0.3 percent vs 1.08 percent interest on Fund credit). - Minimal payment of €0.1 billion to the Fund in 2020 because principal due this year pre-paid in 2019. ### Solvency outlook and DSA projections (baseline and stress) - Debt-to-GDP trajectory: - Projected to rise to 208 percent in 2020 (from 181 percent in 2019). - Projected to decline toward 153 percent of GDP in 2029. - GFNs and benchmark: - GFNs-to-GDP ratio (after deposit drawdowns) projected to remain below 15 percent medium-term benchmark over next 10 years (except one-off marginal breach in 2020), averaging 10 percent (vs 8 percent in 2019 AIV). - GFNs could breach 15 percent temporarily under adverse shocks. - Staff assessment: - Public debt sustainable over medium-term but downside risks increased by higher debt and GFNs; partly mitigated by EU and ECB support. - Long-term debt sustainability not assured under realistic macro-fiscal assumptions; to be revisited in next AIV cycle. - DSA macro assumptions (selected): - Real GDP growth: 2020 -9.5; 2021 5.7; 2022 5.6; long-run ~1 percent. - GDP deflator inflation: -0.8 in 2020 to 1.6 long-run. - Primary balance (cash-basis): -7.8 percent of GDP in 2020; return to surplus in 2022 and converge to 1½ percent of GDP by 2026. - Nominal gross public debt (Percent of GDP) highlights: 2019 = 180.9; 2020 = 208.2; 2021 = 199.1; 2029 = 152.9. - Public GFNs (Percent of GDP) highlights: 2019 = 13.7; 2020 = 16.5; 2021 = 13.5; 2029 = 11.1 (table series). ### Macro-fiscal stress tests — quantified shocks (selected outcomes) - Primary balance shock (lower cash primary balance by ~2 percent of GDP in 2021-2022): - Raises debt-to-GDP by about 6½ percentage points relative to baseline by 2023. - GFNs on average 1½ percent of GDP higher in 2020-29; marginal breach of 15 percent threshold in 2021. - Real GDP growth shock (reduces growth by 4 percentage points on average in 2021-2022): - Raises debt-to-GDP by about 30 percentage points relative to baseline by 2023. - GFNs on average 3½ percent of GDP higher in 2020-29; marginal breach of 15-percent threshold in 2021-22. - Persistent real interest rate shock (raises effective interest rates by ~400 basis points a year on average over 2021–29): - Raises debt-to-GDP by 7 percentage points relative to baseline by 2029. - GFNs on average 1 percent of GDP higher in 2020-29; remain below 15 percent threshold. - Combined severe macro-fiscal shock (all shocks): - Debt-to-GDP would hover above 200 percent through 2024. - GFNs-to-GDP would breach 15 percent in 2021-22 and rise close to 20 percent toward end of 10-year horizon. - Adverse (COVID-19) scenario (prolonged shock, extended measures at half 2020 levels): - Debt-to-GDP: about 216 percent in 2021; above 200 percent through 2026. - GFNs-to-GDP: 22.2 percent in 2021 and remain above 15 percent over medium-term. - Memo items (adverse scenario, selected years): - Real GDP growth (%): 2.0, 3.7, 4.1, 2.3, 2.3 (selected sequence). - Primary balance (cash, % of GDP): -9.2, 0.1, 1.3, 1.5, 1.5 (selected). - Public debt (% of GDP): 215.8, 212.5, 210.9, 208.1, 204.4 (selected). - GFNs (% of GDP): 22.2, 18.9, 16.1, 17.4, 16.1 (selected). ### Fiscal stance, measures, and near-term policy guidance - 2020 fiscal response composition: - About 5.1 percent of GDP in new spending. - 2.5 percent of GDP in foregone and deferred revenues. - 1.5 percent of GDP in loan guarantees (excluding leverage). - About half implemented as of end-July. - Fiscal projections (staff baseline and staff recommendations): - Primary deficit (accrual basis) expected for 2020: 6.8 percent of GDP (including one-off pension payments of 0.8 percent of GDP). - Primary balance expected to rebound to -1.3 percent of GDP in 2021. - Staff projects primary balance to recover to 2 percent of GDP in 2022. - Staff’s long-standing view: sustainable surplus close to 1.5 percent of GDP by 2025. - Staff recommended targeting a primary deficit of at least 2 percent of GDP in 2021 to avoid a sharp fiscal contraction and frontloading fiscal support ahead of NGEU disbursements. - Annex IV fiscal package highlights (selected): - Aggregate on-budget revenue and spending measures announced: about 7.6 percent of GDP. - Net deficit impact: about 6½ percent of GDP (roughly 1 percent of GDP financed by EU grants). - Additional liquidity support (loans and guarantees): about 1½ percent of GDP (5 percent including leverage). - Implementation status as of end-July: about half implemented. - Health spending announced increase: less than 0.2 percent of GDP (compared to EA average over ½ percent of GDP). ### Banking sector: vulnerabilities, relief measures, and reform priorities - Pre-pandemic vulnerabilities: - System-wide NPL ratio at end-2019: 35 percent. - Transitional CET1 ratio: 16.3 percent. - DTCs account for roughly 60 percent of CET1 capital of the 4 Systemic Institutions. - NPE/NPL path: - NPL stock: EUR 119.3 billion in June 2016 (48.9 percent ratio); EUR 97.4 billion in June 2018 (48.2 percent); EUR 73.6 billion in December 2019 (40.0 percent); EUR 64.5 billion in June 2020 (36.7 percent). - Relief measures and supervisory accommodation: - Loan moratoria through end-2020; about €24 billion in loans under moratoria. - Bank of Greece estimate: up to €8-10 billion of moratoriumed loans could become NPEs over next three years. - Interest payment subsidies for business loans (April-August 2020); mortgage payment subsidies for performing and non-performing mortgages during October 2020–September 2021. - Hellenic Development Bank (HDB) guarantee programs and HDB funding: leverage up to €7 billion; HDB to provide €1.9 billion working capital funding to banks. - SSM temporarily loosened capital and liquidity requirements (capital accommodation until end-2022) and allowed flexibility in classifying/provisioning for loans under moratoria and NPEs covered by public guarantees; 2020 stress tests suspended; OSIs postponed. - Hercules securitizations and AMC proposal: - Hercules allows government guarantees up to €12 billion in senior notes out of €34 billion NPE securitizations program. - Several securitizations launched under Hercules; securitizations reduce NPEs but are capital-consuming and leave residual NPEs. - BoG proposed an Asset Management Company (AMC): voluntary transfer at net book value, securitization, government guarantees to cover gap between book and market prices, compensation via super junior notes, guarantee fees, entry fees and DTC write-offs. - Staff recommendation: coordinated, fully-costed NPE clean-up strategy; assess Hercules and AMC with comprehensive cost-benefit analysis (fiscal costs, DSA ramifications, bank balance sheet impacts, state-aid rules); ensure sound AMC governance and transparency. - Capital and DTC concerns: - Securitizations trigger immediate capital losses; DTC share of CET1 likely to rise. - Suggested options: stand-alone DTC conversion, clarify DTC role in resolution, prefer private capital injections where possible. - Sequencing and unwinding: - Staff: gradual lifting of government support and supervisory accommodation; tailored solutions to distressed debtors; improve insolvency framework to promote meaningful restructuring and limit moral hazard. ### Insolvency reform (Annex VI) — key features and risks - New unified bankruptcy code effective January 1, 2021; harmonizes business and consumer regimes and incorporates European Directive on Preventive Insolvency (2019/1023). - Business insolvency: - Simplified liquidation for small businesses; court-supervised sales/liquidation for larger cases. - Preventive restructuring procedures with qualified-majority creditor agreements and limited court involvement. - Out-of-Court Workouts (OCW): standardized algorithmic solutions binding if majority of private creditors approve; allows long-term automatic reschedulings of tax debt (concern about undermining payment culture). - Risks: broad eligibility and two-month automatic stay may encourage strategic filings; incentives could produce long-term reschedulings for non-viable debtors. - Consumer insolvency: - No automatic stay for consumers (exceptions for primary residences of vulnerable debtors). - Discharge generally within three years after liquidating assets. - Primary residence: liquidation required for discharge except for certain vulnerable debtors who can use sale-and-lease-back (SLBO) options or receive subsidies. - Sale-and-Lease-Back Organization (SLBO): - Will purchase residences of vulnerable debtors at market prices (independent appraisers) and lease back to debtors; debtors eligible for housing subsidies and to buy back after 12 years under conditions. - SLBO may be eligible for state guarantees; details in secondary legislation. - Observation: Effectiveness in enabling meaningful restructurings and reducing debt overhang remains unclear; risk of moral hazard and weakened payment culture if automatic tax reschedulings and overly permissive stays persist. ### Labor market, social protection, and re-skilling priorities - Labor market stresses: - Vulnerable groups: micro and small firms, part-time and youth workers, tourism-dependent workers, women. - Tele-workability low in Accommodation/Food, Construction, Transportation, Admin./Support, Wholesale/Retail. - Policy emphasis: - Increase health care spending, reskilling programs, childcare to boost female labor participation. - Implement adopted labor policies swiftly; consider generous opt-out conditions from sectoral collective bargaining and prudent minimum wage adjustment in early 2021. - Design targeted social protection (GMI) and address SSI coverage gaps. - Use Project Preparation Facility and Strategic Project Pipeline Unit to improve public investment execution. ### Staff appraisal and policy priorities (short-, medium-, structural) - Short-term: - Maintain accommodation and make good use of fiscal space. - Avoid sharp fiscal contraction in 2021; target a primary deficit of at least 2 percent of GDP in 2021 and frontload support ahead of NGEU disbursements. - Prioritize health care spending and targeted fiscal stimulus in 2021. - Medium-term: - Rebalance fiscal mix toward reskilling, increased health spending (including intensive care capacity), and SSI coverage; continue PFM and revenue administration reforms; apply AML tools to promote tax compliance. - Gradually base support to firms and debtors on viability assessments as COVID-19 dissipates. - Structural: - Accelerate reforms that remove structural bottlenecks (digital integration, green energy, re-skilling). - Improve insolvency and preventive restructuring frameworks to provide durable solutions; design installment schemes with strict eligibility to protect payment culture. - Use NGEU funds to finance reforms that boost potential growth and improve public investment execution. - Contingency planning: - Prepare to utilize contingency buffers and increase deficit targets if downside risks materialize; keep support until pandemic controlled and recovery underway. - Staff overall view: - Swift health and economic response commendable; avoid premature withdrawal of support. - Continued EU and ECB support are important mitigants; sovereign repayment capacity adequate under baseline but could be compromised if significant downside risks materialize. ### Selected numeric indicators and tables (selected series preserved) - Real GDP (Table 1, medium-term macro framework): - 2018 = 1.9; 2019 = 1.9; 2020 = -9.5; 2021 = 5.7; 2022 = 5.6; 2023 = 3.3; 2024 = 2.3; 2025 = 1.8. - Unemployment rate, period average (percent): - 2018 = 19.3; 2019 = 17.3; 2020 = 18.9; 2021 = 17.5; 2022 = 15.9; 2023 = 14.3; 2024 = 13.1; 2025 = 12.6. - Current account (percent of GDP): - 2018 = -3.5; 2019 = -2.1; 2020 = -7.5; 2021 = -4.1; 2022 = -3.0. - Gross public debt (percent of GDP): - 2018 = 184.8; 2019 = 180.9; 2020 = 208.1; 2021 = 199.1; 2022 = 186.6; 2023 = 175.6. - Nominal GDP (billions of euros): - 2018 = 184.7; 2019 = 187.5; 2020 = 168.2; 2021 = 179.3; 2022 = 191.0. - General government operations (selected, billions of euros): - Primary balance: 2018 = 7.7; 2019 = 6.6; 2020 = -11.4; 2021 = -2.4; 2022 = 3.7. - Overall balance: 2018 = 1.6; 2019 = 1.1; 2020 = -16.5; 2021 = -7.7; 2022 = -1.8. - Gross debt: 2018 = 341.3; 2019 = 339.1; 2020 = 350.2; 2021 = 357.0; 2022 = 356.3. - Financial sector indicators (selected): - Nonperforming loans to total gross loans (percent): 2014 = 33.8; 2019 = 35.3. - Bank provisions to nonperforming loans (percent): 2019 = 46.8. - Return on assets (after taxes): 2019 = 0.1; Return on equity (after taxes): 2019 = 1.3. - Public gross financing needs (selected, Percent of GDP from Annex II Table 1): - 2009–2017 = 21.8; 2018 = 18.7; 2019 = 13.7; 2020 = 16.5; 2021 = 13.5; 2022 = 9.9; 2023 = 7.5. *IMF staff report content (1grcea2020001).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - The pandemic interrupted a modest recovery. Following Greece’s early and strict containment measures, GDP contracted by 7.9 percent in 2020H1, slightly worse than the Euro Area (EA) unweighted average excluding Luxembourg. - The fiscal response to the pandemic has been well-organized and has mitigated its impact, while Single Supervisory Mechanism (SSM) accommodation will delay the expected hit on banks, which were already vulnerable pre-COVID-19. - In the context of the 2019 Article IV Consultation (November 2019), staff assessed that Greece’s public debt is sustainable over the medium-term but its long-term public debt sustainability is not assured under a realistic set of macro-fiscal assumptions. - Crisis legacies noted: a fiscal policy mix that supports neither growth nor targeted social protection, the large public and private debt overhang, high dependence on tourism amid a poor business climate, and a weak banking sector. ### Recent developments and outlook - 2019 performance: - Real GDP growth reached 1.9 percent in 2019 (seasonally-adjusted Q4: -0.9 percent q/q). - SA unemployment rate stood at 16.4 percent at end-2019; youth unemployment was 34.7 percent. - Output gap estimated at -4.4 percent (end-2019). - Authorities achieved the 3.5 percent of GDP Primary Balance (PB) commitment to European Institutions. - Pandemic response and short-term indicators: - Authorities responded early with bans on public events, travel restrictions, and social distancing measures; per-capita cases and fatality rate remain low compared to the European average. - GDP contracted by 7.9 percent 2020H1 y/y; unemployment: SA rate declined to 15.6 percent in March then climbed to 16.8 percent in August. - CAD widened to -4 percent of GDP in 2020H1 due to tourism receipts down 87.5 percent in 2020H1. - Headline HCPI declined by 2.3 percent y/y in September (core: -2.6 percent y/y). - Baseline outlook and assumptions: - The economy is expected to contract by 9.5 percent in 2020. - For 2021, baseline assumes gradual lifting of travel restrictions prior to the tourism season with tourism receipts reaching around 50 percent of their 2019 level. - Real GDP growth is expected to average 5.6 percent in 2021–22. - Scarring effects imply about 4 percent cumulative output loss over the medium term. - Long-term potential growth remains at 1 percent. - Role of NGEU (Next Generation EU) / RRF (Recovery and Resilience Facility): - Staff’s baseline currently only includes the NGEU grant portion of the RRF, assuming full absorption by 2026. - Greece to receive the highest share of grants in percent of GDP among Eurozone countries, predominantly financing new projects. - Staff spreads RRF spending through 2026; boost to medium-term growth in staff’s baseline averages about 0.6 percentage points annually. - Specific NGEU grant disbursement profile (Percent of 2020 GDP; Billions of euros referenced): - 2021: 4.7 - 2022: 3.0 - 2023: 3.0 - 2024: 3.4 - 2025: 3.4 - 2026: 1.8 - Total: 19.3 (Memo: 11.5) - Of which new spending (Percent of 2020 GDP): 3.4, 3.0, 3.0, 3.4, 3.4, 1.8; Total: 18.0 (Memo: 10.7) - Of which existing spending (Percent of 2020 GDP): 1.3, 0.0, 0.0, 0.0, 0.0, 0.0; Total: 1.3 (Memo: 0.8) - Parameters for new public spending: - Investment Multiplier: 0.8 - Consumption Multiplier: 0.3 - Investment Persistence: 0.6 - Consumption Persistence: 0.3 - Nominal GDP (2020): 168 (Billions of euros) - Note: Includes the recovery and resilience facility (€16.2 bn), ReactEU (€2.2bn), just transition, rural development and other related funds. ### Risks and scenarios - Main risks: - Prolonged pandemic leading to extended containment measures and derailed tourism recovery. - Significant deterioration of bank balance sheets; a new wave of Non-Performing Exposures (NPEs) could emerge if government support measures and supervisory accommodation are unwound abruptly. - Contingent government liabilities could materialize from state guarantees, potential additional support to banks and firms in a downside scenario, and ongoing court cases that challenge key program reforms. - Upside scenario: - Early vaccine discovery and swift mass distribution would imply a quicker and stronger rebound. - Uncertainties related to NGEU: - Disbursement profile, allocation, absorption, additionality, multipliers, and persistence of NGEU funds remain uncertain and will not be fully known for some time. - Authorities intend to channel NGEU loans through commercial banks and the Hellenic Development Bank to the private sector, including PPPs, but plans are not sufficiently mature to be included in the baseline. - European deal requires 70 percent of RRF allocations to be identified in 2021–22 (with the rest depending on GDP outturns). ### Capacity to repay the Fund - Staff assessment: Greece’s capacity to repay the Fund is expected to be preserved under staff’s baseline (see Annex II - DSA). - Gross Financing Needs (GFNs): - GFNs before government deposit drawdowns are projected to rise to 21.7 percent of GDP in 2020. - GFNs are projected to average 11.4 percent of GDP during Greece’s repayments to the Fund (through June 2024). - Cash buffer and deposits: - The government’s cash buffer stood at €29.5 billion at end-2019; or €36.5 billion including general government entities’ deposits at commercial banks that are accessible through repos. - Government has dipped into this cash buffer to cover part of 2020 GFNs; staff projects a net deposit drawdown up to €5 billion (about one-sixth of 2020 GFNs). - Outstanding Fund credit: €5.7 billion, or SDR 4.55 billion/187.5 percent of quota. ### Key policy lines and recommendations - Use of NGEU funds: - Make effective use of the NGEU funds and prioritize supporting the recovery through targeted fiscal stimulus in 2021 as risks to medium-term debt sustainability are mitigated by unprecedented EU-wide and ECB support. - Urgency in implementing prior recommendations from the 2019 Article IV Consultation, including: - (i) Contingency planning and improving the fiscal policy mix to reduce poverty risks, backed by fiscal structural reforms: higher health spending and better targeted social support; improving public investment execution. - (ii) Strengthening bank balance sheets, on the basis of a comprehensive financial sector strategy with all options on the table. - (iii) Accelerating selected structural reforms that can be credibly implemented in the current environment to prevent scarring. - Authorities’ views: - Authorities emphasized resilience and anticipate a stronger recovery starting in 2021; they were more optimistic than staff on growth in 2020. - Authorities see lower tourism share to gross value added and a bigger impact of support measures; expect stronger rebound if public investment bottlenecks are addressed and NGEU funds fully and efficiently spent. - Bank of Greece flagged upside risks from better-than-expected trading partners’ growth and faster reform payoffs. - Authorities noted asset protection scheme, new insolvency framework, and support measures would mitigate bank balance sheet deterioration when supervisory accommodation ends; cited successful recent issuances and historically low Greek bond yields. *IMF Executive Summary, November 4, 2020.* ### 12. Liquidity pressures rose during the onset of the pandemic but normalized following ### 12. Liquidity pressures rose during the onset of the pandemic but normalized following ### Liquidity developments and funding execution - Yields on Greek Government Bonds (GGBs) widened rapidly in February but have since narrowed to pre-pandemic lows thanks to GGB’s eligibility for the ECB’s Pandemic Emergency Purchase Program (PEPP). - Five GGB issuances year-to-date totaled €12 billion, enabling the authorities’ 2020 funding plan to be fully executed and allowing the government to largely preserve its cash buffer. - Low-cost loans and credit lines available as contingent liquidity mitigants: - NGEU loans available up to €12.5 billion. - ESM credit line about €3-4 billion. - Deposit and ECB context: - This deposit drawdown is expected to have a limited impact on banking sector liquidity given banks’ enhanced access to ECB liquidity windows and would not tap into the €15.7 billion ESM cash buffer. - As of end-September, ECB holdings of GGBs were 2.53 percent of total PEPP holdings, compared to Greece’s capital key of 2.0117 percent. ### IMF obligations and prepayment considerations - Greece’s annual payments to the Fund average SDR 1.4 billion over 2021–23, plus a final SDR 0.3 billion payment in 2024. - The originally planned partial prepayment to the Fund in 2020 (covering amortizations due in 2021 of SDR 1.6 billion) was shelved after the pandemic hit. - Policy option noted: Greece could prepay in full its remaining Fund balance to reduce interest payments (5-year GGB yields are around 0.3 percent compared to 1.08 percent interest on outstanding Fund credit). - Greece has a minimal payment of €0.1 billion to the Fund in 2020 because the principal payment due this year was pre-paid in 2019. ### Solvency outlook and projections - Debt-to-GDP trajectory: - Projected to rise to 208 percent in 2020 (from 181 percent in 2019). - Projected to decline toward 153 percent of GDP in 2029. - Gross financing needs (GFNs) and benchmark: - Except for a one-off marginal breach in 2020, the GFNs-to-GDP ratio (after deposits drawdown) is projected to remain below the 15 percent of GDP medium-term benchmark in the next 10 years, averaging 10 percent (compared to 8 percent in the 2019 AIV) under staff’s baseline. - GFNs could temporarily breach the 15 percent threshold under adverse growth, primary balance, and real interest rate shocks. - Staff assessment: - Greece’s public debt remains sustainable over the medium-term, but downside risks have increased due to higher levels of debt and GFNs. - These risks are partly mitigated by temporary support from the EU and the ECB. - Staff noted that the long-term debt sustainability assessment was not assured under a realistic set of macro-fiscal assumptions in the 2019 AIV and will be revisited in the next AIV cycle. - Note on debt accounting: - The debt-to-GDP ratios cited include the stock of deferred interests on EFSF loans that are not captured in the official debt statistics. ### Fiscal stance, measures, and near-term outlook - Fiscal deterioration and response: - Primary cash deficit of 2.7 percent of GDP in the first eight months of 2020, compared to a surplus of 2.3 percent of GDP during the same period of 2019. - European flexibility included suspension of the Stability and Growth Pact and Greece’s PB target, and reallocation/frontloading of about 2.5 percent of GDP in existing EU funds to finance COVID-19 measures. - Size and composition of announced 2020 support package: - About 5.1 percent of GDP in new spending. - 2.5 percent of GDP in foregone and deferred revenues. - 1.5 percent of GDP in loan guarantees (excluding leverage). - About half of these measures had been implemented as of end-July. - Fiscal projections (staff baseline and recommendations): - Primary deficit (accrual basis) expected for 2020: 6.8 percent of GDP (including one-off pension payments of 0.8 percent of GDP related to court rulings). - Primary balance expected to rebound to -1.3 percent of GDP in 2021. - Staff projects the primary balance to recover to 2 percent of GDP in 2022. - Staff’s long-standing view: a sustainable surplus close to of 1.5 percent of GDP by 2025. - Staff recommended targeting a primary deficit of at least 2 percent of GDP in 2021 to avoid a sharp fiscal contraction, and frontloading fiscal support ahead of NGEU disbursements. - Risk factors and contingent liabilities: - Downside risks include a longer-lasting pandemic, reinstatement of containment measures, further fiscal support needs, materialization of contingent liabilities from state guarantees, potential additional support to banks and firms, unexpected losses from project ‘Hercules’, and further costs from court rulings on pension and wage reforms. - Example court ruling cost: gross cost estimated at €1.3 billion in 2020, with potential additional downside cost estimated at €1.6 billion if retroactive payments are extended. ### Authorities’ stance and policies - Authorities’ confidence: - Confident they will fully meet debt obligations, including to the Fund. - Noted market conditions have normalized under the ECB’s PEPP, enabling regular funding activities. - Emphasized maintaining a prudent cash buffer until the sovereign restores its investment-grade rating. - Will consider another partial prepayment to the IMF (in consultation with European official sector creditors given pari passu considerations) once the pandemic recedes. - Authorities’ view on growth and reforms: - Consider staff’s macro-fiscal assumptions to underestimate potential growth from transformative, green and digital high value-added investment projects, matured privatizations, and sustained private sector reforms. - Welcomed staff’s proposal to revisit long-run debt sustainability in the next Article IV consultation. - Highlighted policies to change Greece’s production model via the updated NGS and the National Recovery plan, with priorities including lowering the labor tax wedge, reforming pension and insurance systems, modernizing financial supervision and governance, boosting female labor participation, and combating climate change. - Social protection and labor market measures: - Monthly payments of €500–€800 per worker to firms, the self-employed, and freelancers following containment measures in March. - At peak, about a quarter of the labor force participated in the suspension scheme; support extended through end-October for hard-hit sectors. - Short-term work scheme (SYNERGASIA) operating since June. - €300 million directed to subsidize 100,000 full-time jobs, with added benefits for hiring from the long-term unemployed pool. - Measures include rent relief, extended housing/disability/unemployment benefits, and increased transfers for the newly-long-term unemployed. - Structural and labor market reforms: - Authorities cited modernization of labor laws and institutions, expansion of vocational training, childcare and early childhood education expansion, tackling informality, improving the energy mix, implementing the Digital Bible (smart cities, modernizing IT systems), accelerating privatization, improving governance, reforms to the justice sector, and business climate initiatives (R&D spending, simpler licensing rules, export promotion). - Staff welcomed ongoing labor market reforms and recommended generous opt-out conditions from sectoral collective bargaining agreements to enhance labor market flexibility, and a prudent minimum wage adjustment in early 2021 (postponed from June 2020). ### Policy recommendations and contingency planning - Short-term: prioritize targeted fiscal support in 2021, frontloaded ahead of NGEU disbursements, and aim for a primary deficit of at least 2 percent of GDP in 2021 to avoid premature fiscal tightening. - Medium-term: rebalance fiscal mix toward reskilling, increased health care spending (including intensive care capacity), and addressing SSI coverage gaps; continue public financial management and revenue administration reforms; apply AML tools to promote tax compliance. - Structural: use NGEU funds to finance reforms that remove structural bottlenecks (digital integration, green energy, re-skilling) and improve public investment execution via the Project Preparation Facility and Strategic Project Pipeline Unit. - Contingency planning: prepare to utilize contingency buffers and increase deficit targets to expand fiscal support if downside risks materialize, keeping support in place until the pandemic is controlled and recovery is firmly underway. - Insolvency and debt relief: ensure new insolvency code and preventive restructuring frameworks are used to provide durable solutions; design new installment schemes with strict eligibility criteria to protect payment culture. *International Monetary Fund staff report (Greece) — chapter on liquidity, solvency, risks, and policy discussion* ### 27. The authorities agreed that more fiscal support would be needed in 2021 under an ### 1grcea2020001 - 27. The authorities agreed that more fiscal support would be needed in 2021 under an ### Fiscal policy and 2021 planning - Authorities delivered "powerful and transparent fiscal support" in 2020 while maintaining fiscal prudency. - 2021 draft budget targets: - Primary deficit of 1.1 percent of GDP under a baseline growth forecast of 7.5 percent. - In an adverse scenario: primary deficit of 3 percent of GDP with growth projected at 4.5 percent; authorities favor extending certain employment support schemes. - Authorities emphasized avoiding a "fiscal cliff" and aiming for gradual consolidation. - Government concurred with staff recommendations to adjust fiscal policy mix by: - Increasing health care spending (early diagnostic). - Incentivizing female labor participation (childcare). - Enhancing the social safety net (GMI). - Authorities plan strong NGEU absorption, roll out a new project preparation facility, explore public private partnerships and private sector initiatives to on-lend NGEU funds, and set legally binding timelines for implementation agencies. ### Financial sector risks and bank resilience - Key vulnerabilities and pre-existing conditions: - NPE ratio at 36 percent (Greece’s banking sector has the highest NPE ratio in the EA). - Deferred Tax Credits (DTCs) account for roughly 60 percent of CET1 capital, raising capital quality concerns. - Liquidity and funding: - System-wide liquidity is adequate. - Private deposits increased by 6.7 percent since February (mainly by corporates). - Banks gained access to new ECB liquidity instruments. - Profitability and credit dynamics: - Profitability relies on one-off items and volatile trading income. - Net credit growth to corporates accelerated post-COVID-19, peaking in July 2020 (highest level since June 2010). - Credit to households continues to contract. - Hercules securitizations: - Several banks launched securitizations under the Hercules state-guaranteed securitization scheme. - Securitizations will significantly reduce NPEs but are capital-consuming. ### Relief measures and supervisory accommodation - Relief measures in place: - Most NPE recovery for corporate and household borrowers suspended until end-December. - Banks launched loan moratoria for household and corporate borrowers through end-2020. - Authorities granted interest payment subsidies on pre-existing business loans during March-December 2020. - Authorities will grant payment subsidies for performing and non-performing mortgages (including denounced loans) during October 2020 -September 2021. - New directed loans and loan guarantee programs targeted to corporates to support credit provision. - ECB / SSM measures: - Lifting of restrictions on Greek government securities holdings by the ECB and SSM accommodation lowered rates, compressed GGB spreads, and provided liquidity backstops via LTRO/TLTROs. - SSM is temporarily lowering capital and liquidity requirements (the former until end-2022) and allowing flexibility in classifying and provisioning for loans under moratoria and NPEs covered by public guarantees. - 2020 stress tests were suspended and on-site inspections postponed. - SSM will withdraw accommodation measures in consultations with the EBA and other stakeholders. ### Risks of abrupt unwinding and recommended sequencing - Risk profile if support measures are withdrawn abruptly: - Losses may emerge starting in 2021 H2 from squeezed net interest margins, lower real estate portfolio valuations, lower fee income, and a potential new wave of NPEs (including "strategic defaults") and provisioning. - Staff recommendations to mitigate cliff effects and resolve NPEs: - Gradual lifting of government support and supervisory accommodation; offer tailored solutions to distressed debtors to smooth pandemic impact on bank balance sheets. - Implement a coordinated and fully-costed strategy to clean up NPEs; carefully consider Hercules securitizations and the BoG-sponsored AMC with comprehensive cost-benefit analysis (including potential fiscal costs, DSA ramifications, impact on bank balance sheets and business models, and compliance with state-aid rules); ensure sound AMC corporate governance and transparency. - For banks unable to fully utilize existing tools, consider stand-alone DTC conversion to accelerate NPE reduction and finalize/amend DTC legislation to clarify their role during resolution. - Improve the insolvency framework: ensure law promotes meaningful restructuring (not long-term reschedulings), enforce tools preventing moral hazard (limited stay on enforcement measures; robust information disclosure), and tailor eligibility criteria for the envisaged "sale and lease back" scheme to avoid fiscal, governance, and moral hazard concerns. ### Authorities’ views on banking measures and insolvency reform - Authorities' assessments and planned measures: - Banking sector entered the pandemic in much better shape than at the start of previous crises; actions contributed to a significant decline in NPEs and improved bank liquidity. - Temporary mortgage-payment subsidy replaced primary residence protection; preparing a more permanent sale-and-lease back scheme to help overindebted households stay in properties. - Stand ready to extend temporary support as needed while protecting the payment culture. - Hercules securitizations progressing well; additional guarantees could be extended if needed. - Complementary initiatives: BoG proposal for an AMC, new centralized credit registry, digitalization of banking data submission to regulators (including granular credit data), and setup of a new "green" finance framework. - On the new insolvency law: - Viewed as critical to financial sector reform to allow more opportunity for businesses to restructure preemptively and quickly with limited court involvement. - For individual debtors, system allows necessary discharge of debts with safeguards to prevent moral hazard while providing vulnerable debtors social support. - Noted need for prompt secondary legislation to outline key parameters and critical importance of implementation, awareness-raising (including judges), and ongoing court reforms to increase efficiency and transparency. ### Public debt sustainability and capacity to repay under stress - Baseline and adverse scenario outcomes: - Medium-term debt sustainability remains robust under standard macro-fiscal stress tests; average GFNs would remain below 15 percent of GDP over the next 10 years (albeit with some temporary breaches) under the baseline. - Under an adverse COVID-19 scenario (assumes milder near-term growth recovery and extension of COVID-19 response measures into 2021 at half of 2020 levels; financing envelope unchanged from baseline): - Debt-to-GDP would rise to about 216 percent of GDP in 2021 and stay above 200 percent of GDP through 2026 before declining gradually in the outer years. - GFNs-to-GDP would jump to 22.2 percent in 2021 and stay above the 15 percent threshold over the medium-term. - Small financing gaps could emerge as early as 2024 as cash buffer depletes faster if prolonged shock combines with other idiosyncratic fiscal and financial sector risks. - Safeguards supporting Fund resources: Fund’s de facto preferred creditor status, Greece’s adequate cash buffer to cover outstanding Fund credit (even under the adverse scenario), and current low sovereign borrowing costs. - Continued EU and ECB pandemic support is expected under a generalized adverse Europe-wide scenario and would help close financing gaps and allow Greece to remain current on debt service. - If regional support were compromised or Greek bonds became ineligible for ECB purchases, Greece’s debt servicing capacity would be compromised, likely requiring a strong procyclical fiscal contraction and/or further financial support from European partners. - Quantitative highlights cited in the text and tables: - Real GDP growth under adverse scenario (selected years shown): 2.0, 3.7, 4.1, 2.3, 2.3 (percent). - Primary balance under adverse scenario (cash, % of GDP) (selected years): -9.2, 0.1, 1.3, 1.5, 1.5. - Public debt under adverse scenario (% of GDP) (selected years): 215.8, 212.5, 210.9, 208.1, 204.4. - GFNs under adverse scenario (% of GDP) (selected years): 22.2, 18.9, 16.1, 17.4, 16.1. - Downside scenario - materialized risks and associated euro amounts and projections are reported in the source tables (Gross borrowing needs, Overall deficit (cash), Primary deficit (cash), Amortization, Short-term (T-bills), Other, Govt deposits replenishment/drawdown, Gross financing sources, Market access, Official financing, Financing gap, and memo items on deposits and primary deficit (accrual)). - Authorities’ views on debt capacity: - Authorities expected repayment capacity to be preserved under a prolonged pandemic and cited ample cash buffer, market access, and additional regional support to cushion downside risks. ### Staff appraisal and policy stance - Staff conclusions: - Government’s swift health and economic response to the pandemic is commendable. - Policy support should not be withdrawn prematurely; short-term focus should remain on fighting the health and economic crisis and avoiding permanent damage, including by providing additional fiscal stimulus next year. - Substantial uncertainties and downside risks remain: prolonged pandemic with a permanent slump in global tourism would worsen the outlook; early vaccine distribution could boost rebound. - Contingent liabilities could materialize from state guarantees, potential additional support to banks and firms, and court cases challenging key reforms. - A new wave of NPEs could emerge if government support measures and supervisory accommodation are unwound abruptly. - Greece’s medium-term public debt repayment capacity remains adequate under the baseline, partly due to EU and ECB support and a substantial cash buffer; long-term debt sustainability assessment unchanged (not assured under a realistic set of macro-fiscal assumptions). - Sovereign repayment capacity could be compromised if significant downside risks materialize, requiring strong procyclical fiscal adjustment and/or further support from European partners. *Source: 1grcea2020001 - 27. The authorities agreed that more fiscal support would be needed in 2021 under an* ### 43. Maintaining accommodation and making good use of fiscal space should be the near- ### Maintaining accommodation and making good use of fiscal space should be the near-term priority. ### Near-term fiscal stance and priorities - Given the large output gap and to minimize the risk that the pandemic causes permanent economic damage, the authorities should avoid a sharp fiscal contraction in 2021 and target a primary deficit of at least 2 percent of GDP. - Fiscal support should be frontloaded ahead of the release of NGEU resources (expected around the middle of 2021). - The fiscal policy mix should be improved by: - Prioritizing health care spending. - Addressing coverage gaps in the SSI scheme. - Expanding opportunities for reskilling the labor force. - Public investment execution should be enhanced to boost the effectiveness of NGEU financing. - As the impact of COVID-19 dissipates over the medium-term, fiscal support to firms, debtors, and workers should increasingly be based on viability assessments. - Staff encouraged continued application of AML tools to help promote tax compliance and to ensure proper safeguards for COVID-19 emergency spending. *Source: IMF staff assessment.* ### Banking sector support, vulnerabilities, and reforms - A broad range of support measures will cushion and delay the pandemic’s impact on banks, but a comprehensive strategy to address long-standing weaknesses remains a priority. - Contributing measures: - ECB’s monetary and supervisory accommodation. - Interest and mortgage payment subsidies introduced by the Greek authorities will help support both borrowers and banks in 2020-21. - Transition of measures: - These measures should be gradually replaced by more tailored solutions to debtors in distress to help smooth the impact of the pandemic on bank balance sheets and firms. - State guarantees and securitizations: - The provision of state guarantees on bank securitizations (project Hercules) is welcome and progressing, but it is not a comprehensive solution as it leaves a significant amount of NPEs on bank balance sheets and the weak quality of bank capital unaddressed. - Asset management company proposal: - In this context, the BoG’s proposal to establish an AMC could be an important addition to the toolkit, but a comprehensive cost-benefit analysis of the proposal is needed. - Risks and needed tools: - The pandemic could add further strain to the banking sector and could undermine the improvement in firms’ balance sheets that occurred during the past decade, requiring effective tools to resolve corporate and household debt distress. - The authorities’ new bankruptcy code is a promising and timely initiative, although implementation to facilitate restructuring and minimize moral hazard will be critical to its effectiveness. *Source: IMF staff assessment.* ### 45. Progress with structural reforms is commendable and should be accelerated, especially ### 1grcea2020001 - 45. Progress with structural reforms is commendable and should be accelerated, especially ### Structural reforms and growth strategy - The goals and ambition of the NGS are described as laudable and could help boost productivity and promote innovation. - Government reform efforts highlighted: - simplification of business processes, - improvement of the business climate, - digitization reform, - improvements in the environment. - Recommendation: accelerate reforms that help foster the recovery and implement policies on paper swiftly to support recovery. ### Labor market, social risks, and inclusion - Authorities are prioritizing labor market flexibility and modernization, including encouraging female labor participation. - Key risks and vulnerabilities: - Greeks face higher risks of poverty and social exclusion than regional peers, particularly among youth. - Low-earning and tourism industry workers are less able to telework. - Low income, low skilled workers are less able to telework and therefore more vulnerable to COVID-19 disruptions. - Small firms, part-time and young workers, and the self-employed will be hit hardest by the slump in global travel. - Policy emphasis: swiftly implement adopted labor policies to start untangling rigidities such as skills mismatch and youth unemployment. - Suggested additional reforms feasible in the current environment (subject to pandemic delays): continued product market liberalization including investment licensing simplification to support faster recovery and a higher growth path. ### Short-term macroeconomic developments and indicators - Pre-pandemic: economy was cooling but employment was growing, partly due to part-time jobs. - Pandemic impact and recent trends: - High frequency indicators dipped sharply since the outbreak started, but activity has started to recover. - Unemployment gains have started to be reversed. - Growing slack, low oil prices, and tax cuts are driving deflation. - Selected indicators and notes from figures: - Economic Sentiment Indicator derived from five sectoral confidence indicators with weights: industrial (40 percent), service (30 percent), consumer (0 percent), construction (5 percent) and retail trade (5 percent). - HICP at constant tax rates measures inflation without the impact of changes in taxes on products. ### Tourism, employment risks, and teleworkability - Tourism importance: - Tourism as a Share of GDP, 2019: Greece ranks among highest in comparison chart (figure context). - Employment in Tourism Sectors: Greece shows a significant share of total employment in tourism-related activities. - Distributional impacts: - Tourism sector employment concentrated in micro and small firms, part-time positions, youth (15-24), and women — these groups face higher risk. - Administrative, transport, and sales jobs are highlighted as at-risk, underscoring the importance of re-skilling. - Teleworkability: - Tele-workability varies markedly by sector and worker characteristics; sectors with low tele-workability include Accommodation/Food, Construction, Transportation, Admin./Support, Wholesale/Retail. ### External sector developments - Current account and tourism: - The current account deficit narrowed in 2019 owing to a strong increase in tourism receipts. - Travel receipts and total arrivals have collapsed in the wake of the COVID-19 pandemic. - Exchange rates and investment: - REER (CPI-based) reversed its recent appreciation trend in 2019 along with other EA countries. - As official sector program-related financing tapered off and Greece restored market access, financial account dynamics increasingly driven by portfolio and other investment. - Continued recovery in FDI driven by investment in tourism and transportation (incl. privatization), real estate purchases, and financial sector M&As. - Net external positions: - NIIP position stabilized with higher net foreign assets of the monetary authorities offsetting higher net foreign liabilities of the government and MFIs. ### Fiscal developments and projections (selected figures) - Revenues and expenditures: - Revenues have dropped since the COVID-19 outbreak, most notably in tax revenues, followed by social security contributions and other revenues. - Spending has increased on the back of COVID-19 expenditures with significant PIB reallocation to finance COVID-19 measures. - From Table 1 (medium-term macro framework, selected series): - Real GDP: 2018 = 1.9; 2019 = 1.9; 2020 = -9.5; 2021 = 5.7; 2022 = 5.6; 2023 = 3.3; 2024 = 2.3; 2025 = 1.8. - Unemployment rate, period average (percent): 2018 = 19.3; 2019 = 17.3; 2020 = 18.9; 2021 = 17.5; 2022 = 15.9; 2023 = 14.3; 2024 = 13.1; 2025 = 12.6. - Current account (percent of GDP): 2018 = -3.5; 2019 = -2.1; 2020 = -7.5; 2021 = -4.1; 2022 = -3.0; 2023 = -3.1; 2024 = -3.2; 2025 = -3.2. - Gross public debt (percent of GDP): 2018 = 184.8; 2019 = 180.9; 2020 = 208.1; 2021 = 199.1; 2022 = 186.6; 2023 = 175.6; 2024 = 168.8; 2025 = 163.9. - Nominal GDP (billions of euros): 2018 = 184.7; 2019 = 187.5; 2020 = 168.2; 2021 = 179.3; 2022 = 191.0; 2023 = 200.5; 2024 = 208.4; 2025 = 215.9. - From Table 3 (general government operations, selected series): - Primary balance (billions of euros): 2018 = 7.7; 2019 = 6.6; 2020 = -11.4; 2021 = -2.4; 2022 = 3.7; 2023 = 3.6; 2024 = 3.5; 2025 = 3.4. - Overall balance (billions of euros): 2018 = 1.6; 2019 = 1.1; 2020 = -16.5; 2021 = -7.7; 2022 = -1.8; 2023 = -2.1; 2024 = -2.4; 2025 = -2.9. - Gross debt (billions of euros): 2018 = 341.3; 2019 = 339.1; 2020 = 350.2; 2021 = 357.0; 2022 = 356.3; 2023 = 352.0; 2024 = 351.7; 2025 = 353.8. ### Financial sector: banking sector risks and credit - Non-performing exposures and coverage: - NPEs remain high while provision coverage is low. - Non-Performing Exposures, 2020Q2 (billions of euros): Residential = 21.0; Consumer = 6.6; Business = 32.1; Consumer loans = 5.7; Credit cards = 0.9; SMEs = 13.8; Small Business & Professionals = 9.6; Corporate = 7.6; Shipping = 1.2. - About one-quarter of residential NPEs remain under legal protection by June 2020 (Residential under law protection = 7.7; Business under law protection = 59.7; Consumer under law protection = 1.6; figures in billions of euros). - Liquidity and funding: - Banks have replaced market REPOs with ECB liquidity; emergency liquidity assistance and central bank funding rose in 2020. - Private deposits continued to increase since the outbreak. - Credit and rates: - Lending interest rates remain high. - Credit to corporates has increased substantially on the back of credit guarantees and lending moratoria. - From Table 5 (core financial indicators, selected): - Nonperforming loans to total gross loans (percent): 2014 = 33.8; 2019 = 35.3. - Bank provisions to nonperforming loans (percent): 2019 = 46.8. - Return on assets (after taxes): 2019 = 0.1; Return on equity (after taxes): 2019 = 1.3. ### Financing needs and external financing (selected figures) - From Table 6 (general government financing requirements and sources, selected): - Gross borrowing need (billions of euros): 2018 = 35.9; 2019 = 20.8; 2020 = 29.8; 2021 = 23.2; 2022 = 18.9; 2023 = 15.0; 2024 = 14.9; 2025 = 16.0. - Market access (gross financing sources, billions of euros): 2018 = 14.2; 2019 = 20.8; 2020 = 28.3; 2021 = 21.0; 2022 = 18.9; 2023 = 15.0; 2024 = 14.9; 2025 = 16.0. - From Table 7 (external financing requirements and sources, selected): - Gross financing requirements (billions of euros): 2018 = 120.1; 2019 = 106.3; 2020 = 128.4; 2021 = 118.9; 2022 = 115.2; 2023 = 118.8; 2024 = 123.2; 2025 = 124.8. - Program-related financing (billions of euros): 2018 = 22.9; 2019 = 2.7; 2020 = 2.5; 2021 = 2.4; 2022 = 2.4; 2023 = 1.2; 2024 = 1.3; 2025 = 1.5. ### Key policy recommendations and priorities (as presented) - Accelerate progress with structural reforms, especially those that foster the recovery. - Swiftly implement adopted labor market policies to reduce rigidities, address skills mismatches, and lower youth unemployment. - Continue product market liberalization, including investment licensing simplification, to support a faster recovery and higher growth path. - Support digital integration and digitization reforms to improve teleworkability and resilience, particularly for low-income and tourism-sector workers. - Prioritize re-skilling programs for workers in administrative, transport, and sales occupations affected by tourism slump. *Source: IMF staff calculations and estimates (content unit: 1grcea2020001).* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Domestic Risks: key likelihoods, impacts, and recommended policies - Higher spending needs, insufficient impact of monetary and fiscal policies - Likelihood/Transmission: Medium - Expected impact if realized: High — Lower fiscal space due to higher-than-expected COVID-19 spending needs or one-off payments linked to pension rulings, use of cash buffers. Weak execution of NGEU funds results in a limited growth impact, higher financing needs, and deteriorated debt dynamics. Deteriorated public finances could hurt confidence and weigh on investment and economic activity, economic activity remains sluggish without adequate stimulus, hurting medium-term growth and convergence prospects. - Recommended policy response: - Ensure policy measures—including NGEU funds—are adequately targeted and executed efficiently towards growth-friendly, socially-inclusive policies (e.g. investment, health, education) with a view towards ensuring long-term fiscal sustainability, boosting potential growth, and increasing economic resilience. - Design a phase-out strategy from COVID-19 measures that balances macro effects with fiscal sustainability concerns. - Incorporate lessons from the COVID-19 shock and recent pension rulings into a formal strategy to deal with large contingent fiscal shocks. - Sharp deterioration of bank balance sheets - Likelihood/Transmission: High - Expected impact if realized: High — Delays in addressing already-weak private sector balance sheets undermines the recovery, further deteriorates asset quality, lowers deposit levels and weakens investor sentiment. Liquidity pressures and accelerated capital depletion exacerbated by the bank-sovereign nexus. Lower credit growth undermines growth and increases informality. - Recommended policy response: - Accelerate bank clean-up and the build-up of capital buffers. - Communicate a credible and ambitious strategy (aimed at restoring bank resilience). - Strengthen operational preparedness for crisis management. - Structural reform implementation - Likelihood/Transmission: Downside risk — Fallout from the pandemic reduces reform appetite. Upside risk — The COVID-19 crisis is seized as an opportunity for deeper, faster reforms. - Expected impact if realized: Medium - Downside: Delays in implementing pending or backtracking of previously-implemented structural reforms, social opposition to dismantling rent-extracting sectors that resist competition. Lower growth, slower convergence. - Upside: Structural reforms could support reallocation of labor and capital towards higher value-added sectors, innovation, and positive market trends, boosting consumer and investor confidence. Faster absorption of NGEU funds and channeling of NGEU loans to the private sector could cover the credit gap and boost investment. Growth above baseline, faster convergence, improved debt dynamics. - Recommended policy response: - While recognizing implementation challenges linked to the pandemic, put in place an implementation plan for the revamped National Growth Strategy, including prioritization and sequencing, diagnosis of current policies, funding plans, and identification of inter-linkages between reform sectors (e.g. financial sector reform and firm dynamics). - Engage in social dialogue amongst reform stakeholders to ensure ownership and take-up. --- ### External Risks: key likelihoods, impacts, and recommended policies - Unexpected shift of the COVID-19 outbreak - Likelihood/Transmission: High (Downside: Longer pandemic, reinstatement of containment measures. Upside: Faster recovery with effective/widely available vaccine or faster behavioral adjustment.) - Expected impact if realized: High — Repeated supply shocks, higher risk perception, repricing of risk assets, unmasking of debt-related vulnerabilities, weaker financial intermediary balance sheets, slower deleveraging and lower credit provision, trade and travel disruptions, declines in FDI flows, restricted access to global value chains. Low in upside scenario — Higher confidence, faster recovery. - Recommended policy response: - Seek continued flexibility from European partners to maintain a counter-cyclical buffer to tackle spillovers from the global downturn. - Accelerate structural reforms that increase resilience to global shocks and future pandemics, including investing in the health sector, formulating hazard mitigation strategies, and expanding active labor market policies to mitigate hysteresis risks. - Intensified geopolitical tensions - Likelihood/Transmission: High - Expected impact if realized: High — Regional tensions, disorderly migration, higher commodity prices and lower confidence. Regional tensions displace focus/spending away from the reform agenda. - Recommended policy response: - Continue engaging regional and EU partners in dialogue. - Make fiscal space available to address costs related to migration flows. - Consider reforms to facilitate integration of qualified migrant workers. - Accelerating de-globalization - Likelihood/Transmission: High - Expected impact if realized: Medium — Reshoring, less trade, lower travel displaces existing labor and hurts potential growth. - Recommended policy response: - Accelerate reforms to ensure broad-based growth and cushion risks to external demand (i.e. boost investment and private incomes). - Higher frequency and severity of natural disasters related to climate change - Likelihood/Transmission: Medium - Expected impact if realized: Medium — Disruptive and more frequent events (forest fires, drought, rising sea levels). Lower global GDP due to natural disasters, recalculation of risk and growth prospects. Trade disruptions, higher commodity prices and volatility. Lower growth, displaced population, lower quality of human capital due to health and environmental concerns. - Recommended policy response: - Implement the Just Transition to improve the energy mix, prioritize reforms that support green sectors and green employment to ensure broad-based growth and cushion risks to external demand (i.e. boost investment and private incomes). - Improve and accelerate urban planning and cadaster reforms. --- ### Annex II. Public Debt Sustainability Analysis — summary of findings and scenarios ### Recent developments and funding strategy - Authorities’ 2020 Funding Strategy aims to issue €4-8 billion medium- to long-term debt in 2020 through regular funding activities. - Greece issued its first post-crisis 15-year bonds (€2.5 billion) at a yield of 1.91 percent (spreads of 165 basis points over German bunds). - Partial prepayment of IMF credit totaling SDR 1.6 billion (about €2.7 billion) was envisaged for 2020; under the current baseline assumption this amount is to be paid back during 2021. - Sovereign spreads widened from a 10-year yield record low of 92 bps on February 14 to about 380 bps on March 18, then normalized after ECB’s PEPP announcement on March 19. - PEPP allocation to Greece (capital key 2.0117 percent) amounts to about €27 billion; ECB PEPP cumulative net purchases of GGBs stood at €13 billion at end-September 2020 (2.5 percent of total PEPP net purchases). ### Debt profile and cash buffer - Greece’s public debt is largely comprised of low interest rate, ultra-long maturity official sector debt, which lowers rollover risks but may create subordination concerns for private creditors. - State government cash buffer: about €29½ billion at end-2019, or €36½ billion including general government entities’ deposits at commercial banks accessible through repos. - Staff projects authorities would draw down up to €5 billion of their deposits in 2020, and a further €12 billion over 2022-25 (including from the €15.7 billion provided through ESM loans). - Annual market issuance projected to average around €9 billion a year between 2021-25. - NGEU loans of potentially up to €12.5 billion in total (currently not included under staff’s baseline) could reduce reliance on market debt issuances. ### Macro assumptions underpinning the DSA (staff baseline) - Growth and inflation: - The COVID-19 pandemic is expected to cause a 9½ percent contraction in real GDP in 2020. - Growth projected to recover to 5.7 percent in 2021 and 5.6 percent in 2022 before gradually converging toward long-run equilibrium of about 1 percent. - GDP deflator inflation projected to gradually increase from -0.4 percent in 2019 to long-run equilibrium of 1.6 percent. - Projected nominal GDP path is about 4 percent below the November 2019 DSA. - Fiscal policy: - On a cash-basis, the primary deficit expected to reach 7.8 percent of GDP in 2020 before returning to a surplus in 2022 and gradually converging to a long-run equilibrium level of 1½ percent of GDP by 2026. - NGEU grants are included under the baseline. - Arrears: remaining stock of arrears (€1.2 billion as of end-2019) assumed cleared in 2020–2021. - Privatization revenues projected to total €2.7 billion over the next 10 years. - Use of cash buffer and market borrowing: - State government cash buffer €29½ billion at end-2019; €36½ billion including accessible deposits. - Projected drawdowns: up to €5 billion in 2020; further €12 billion over 2022-25. - Projected net reduction in general government deposits would be just under €6 billion in 2020. - Interest rates: projection methodology maintained; effective interest rate trajectory broadly in line with November 2019 DSA. ### Outlook: baseline projections - Debt-to-GDP: - Projected to briefly rise to 208 percent of GDP in 2020 (from 181 percent of GDP in 2019) before resuming downward trend, ending at 153 percent of GDP in 2029. - This is about 8 percentage points higher than projected in the November 2019 DSA. - Gross Financing Needs (GFNs): - GFNs-to-GDP ratio (after deposit drawdowns) would remain below 15 percent of GDP over the 10-year projection period (except for a one-off marginal breach in 2020), averaging around 10 percent (compared to 8 percent in the November 2019 DSA). - Larger fiscal deficits and lower GDP levels explain most of the increase. ### Realism of baseline assumptions - Staff notes an optimism bias in past macro assumptions, particularly growth projections during crisis years; optimism bias more prominent than among peers. - Projected three-year fiscal adjustment and cyclically adjusted primary balance fall outside the top quartile of benchmarking distributions (i.e., realism tools do not suggest optimism bias in fiscal adjustment projections). ### Risks and stress tests — quantified shocks - IMF’s 10-year DSA: public debt remains sustainable over the medium-term but downside risks are important from weaker growth, lower primary balances, higher interest rates, and contingent liabilities. Macro-Fiscal Stress Test scenarios (impacts relative to baseline) - Primary balance shock: - Assumption: lower cash primary balance by about 2 percent of GDP on average in 2021-2022 (half standard deviation of past 10 years). - Impact: Raises debt-to-GDP by about 6½ percentage points relative to baseline by 2023. - GFNs: on average 1½ percent of GDP higher than baseline in 2020-29; marginal breach of 15 percent medium-term threshold in 2021. - Real GDP growth shock: - Assumption: reduces growth by 4 percentage points on average in 2021 and 2022 (one standard deviation of past 10 years). - Impact: Raises debt-to-GDP by about 30 percentage points relative to baseline by 2023. - GFNs: on average 3½ percent of GDP higher than baseline in 2020-29; marginal breach of 15-percent threshold in 2021-22. - Persistent real interest rate shock: - Assumption: raises effective interest rates by about 400 basis points a year on average over 2021–29. - Impact: Raises debt-to-GDP by 7 percentage points relative to baseline by 2029. - GFNs: on average 1 percent of GDP higher than baseline in 2020-29; remain below 15 percent medium-term threshold. - Combined severe macro-fiscal stress test (all shocks): - Impact: Debt-to-GDP would hover above 200 percent through 2024. - GFNs-to-GDP would breach the 15 percent medium-term threshold in 2021-22 and rise close to the 20 percent long-term threshold toward the end of the 10-year projection horizon. Comprehensive Fiscal Risks and Contingent Liabilities Shock Under an Adverse COVID-19 Scenario - Scenario assumptions: - Prolonged COVID-19 shock with much slower near-term growth recovery than baseline. - Government extends crisis response measures into 2021 (at half of their 2020 levels). - Some idiosyncratic fiscal and financial risks materialize. - Scenario outcomes (selected figures): - Debt-to-GDP would rise to about 216 percent of GDP in 2021 and stay above 200 percent of GDP through 2026 before declining gradually thereafter. - GFNs-to-GDP would jump to 22.2 percent in 2021 and stay above the 15 percent threshold over the medium-term. - Potential mitigants: - Access to NGEU loans (not included under baseline) could help lower government borrowing costs. - Additional regional support under a prolonged pandemic could reduce gross financing needs. - Memo items in adverse scenario (selected values shown in Annex II figure): - Real GDP growth under adverse scenario (%): 2.0 (2021), 3.7 (2022), 4.1 (2023), 2.3 (2024), 2.3 (2025) - Primary balance under adverse scenario (cash, % of GDP): -9.2 (2021), 0.1 (2022), 1.3 (2023), 1.5 (2024), 1.5 (2025) - Public debt under adverse scenario (% of GDP): 215.8 (2021), 212.5 (2022), 210.9 (2023), 208.1 (2024), 204.4 (2025) - GFNs under adverse scenario (% of GDP): 22.2 (2021), 18.9 (2022), 16.1 (2023), 17.4 (2024), 16.1 (2025) *IMF staff projections as presented in Annex I and Annex II of the source document.* ### Annex II. Figure 1. Greece Public DSA Risk Assessment (Baseline Scenario) ### Annex II. Figure 1. Greece Public DSA Risk Assessment (Baseline Scenario) ### Risk assessment heat map and indicators - Color code rule: cell highlighted green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline; yellow if exceeded under specific shock but not baseline; red if benchmark is exceeded under baseline; white if stress test is not relevant. - Gross financing needs benchmark: 20% (cell highlight rule analogous to debt burden benchmark). - Lower and upper risk-assessment benchmarks (explicit values referenced in heat map): - Bond Spread over German Bonds (Basis points): 400 and 600 - External Financing Requirement (Percent of GDP): 17 and 25 - Annual Change in Short-Term Public Debt (Percent): 1 and 1.5 - Public Debt Held by Non-Residents (Percent of total): 30 and 45 - Additional numeric thresholds shown on heat map axes (basis points and percent ranges): - Bond spread axis values: 80, 100, 120, 140, 160, 180, 200, 220, 240 - External Financing Requirement axis values: 12, 17, 25 - Notes and data specifics: - 5/ Includes liabilities to the Eurosystem related to TARGET. - 4/ An average over the last 3 months, 30-May-20 through 28-Aug-20. - 3/ The cell is highlighted green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if between benchmarks; white if unavailable or not relevant. ### Evolution of predictive densities and debt profile - Percentiles displayed for gross nominal public debt: 10th-25th, 25th-75th, 75th-90th; Baseline and Symmetric/Restricted (Asymmetric) distributions. - Restrictions on upside shocks (listed numerically in figure): - Public Debt Held by Non-Residents: 30 and 45 (percent of total) - Change in the Share of Short-Term Debt: 1 and 1.5 (percent) - Bond spreads thresholds: 400 and 600 (basis points) - External Financing Requirement thresholds: 17 and 25 (percent of GDP) - Public debt presentation by currency and maturity (axes labelled as Percent of GDP and Percent): - By Currency: Local currency-denominated and Foreign currency-denominated (Percent of GDP) - By Maturity: Medium and long-term and Short-term (Percent of GDP) ### Stress test types and scenario restrictions - Stress test categories shown: - Real Interest Rate Shock - Exchange Rate Shock - Real GDP Growth Shock - Primary Balance Shock - Contingent Liability Shock - Combined Shock - Lower Growth Scenario - Adverse (Covid) Scenario - Restrictions on shocks noted: - no restriction on the growth rate shock - no restriction on the interest rate shock - 0 is the max positive primary balance shock (percent GDP) - no restriction on the exchange rate shock - Restrictions on upside shocks listed: 30, 45, 12 (contextually linked to percentages above) ### Underlying assumptions used across scenarios (selected series, percent values preserved) - Baseline scenario (selected years 2020–2029 shown in figures and tables): - Real GDP growth: 2020 -9.5; 2021 5.7; 2022 5.6; 2023 3.3; 2024 2.3; 2025 1.9; 2026 1.5; 2029 0.9 - Inflation (GDP deflator): 2020 -0.8; 2021 0.9; 2022 0.9; 2023 1.7; 2024 1.6; 2025 1.6; 2026 1.6; 2029 1.6 - Primary balance (percent of GDP): 2020 -7.8; 2021 -1.0; 2022 1.8; 2023 1.8; 2024 1.7; 2025 1.6; 2026 1.5; 2029 1.5 - Effective interest rate (percent): 2020 1.8; 2021 1.8; 2022 1.7; 2023 1.7; 2024 1.7; 2025 1.6; 2026 1.7; 2029 2.2 - Historical scenario (selected): - Real GDP growth: 2020 -9.5; 2021 -2.0; 2022 -2.0; 2023 -2.0; 2024 -2.0; 2025 -2.0; 2026 -2.0; 2029 -2.0 - Primary balance: 2020 -7.8; 2021 -2.3; 2022 -2.3; 2023 -2.3; 2024 -2.3; 2025 -2.3; 2026 -2.3; 2029 -2.3 - Effective interest rate: 2020 1.8; 2021 1.8; 2022 1.8; 2023 1.8; 2024 1.9; 2025 2.0; 2026 2.2; 2029 3.0 - Constant primary balance scenario: - Primary balance: constant at -7.8 for 2020–2029 - Other macro assumptions mirror baseline for growth and inflation in presented table. ### Stress-test specific underlying assumptions (selected numeric trajectories) - Primary Balance Shock series (selected): Real GDP growth: -9.5, 5.7, 5.6, 3.3, 2.3, 1.9, 1.5, 0.9; Inflation: -0.8, 0.9, 0.9, 1.7, 1.6, 1.6, 1.6, 1.6; Primary balance: -7.8, -4.4, 0.4, 1.8, 1.7, 1.6, 1.5, 1.5; Effective interest rate: 1.8, 1.8, 1.7, 1.7, 1.7, 1.6, 1.7, 2.2 - Real GDP Growth Shock alternate series (selected): Real GDP growth: -9.5, 1.6, 1.5, 3.3, 2.3, 1.9, 1.5, 0.9; Inflation: -0.8, -0.1, -0.1, 1.7, 1.6, 1.6, 1.6, 1.6; Primary balance: -7.8, -3.6, -3.2, 1.8, 1.7, 1.6, 1.5, 1.5; Effective interest rate: 1.8, 1.8, 1.7, 1.8, 1.7, 1.6, 1.7, 2.2 - Real Interest Rate Shock effective interest rate path example: 1.8, 1.8, 1.9, 1.9, 2.0, 2.1, 2.2, 3.1 - Real Exchange Rate Shock inflation example: -0.8, 1.2, 0.9, 1.7, 1.6, 1.6, 1.6, 1.6 - Combined Shock effective interest rate path example: 1.8, 1.8, 1.9, 2.0, 2.2, 2.3, 2.5, 3.4 - Contingent Liability Shock selected series for 2020–2029: - Real GDP growth: -9.5, 1.6, 1.5, -0.7, 2.3, 1.9, 1.5, 0.9 - Primary balance: -7.8, -3.8, 0.1, 1.3, 1.5, 1.5, 1.5, 1.5 - Effective interest rate: 1.8, 1.8, 2.8, 2.8, 2.7, 2.5, 2.6, 2.9 - Lower Growth Scenario example: - Real GDP growth: -9.5, 4.7, 4.6, 2.3, 1.3, 0.9, 0.5, -0.1 - Effective interest rate: 1.8, 1.8, 1.7, 1.7, 1.7, 1.6, 1.7, 2.2 - Adverse (Covid) Scenario example: - Real GDP growth: -9.5, 2.0, 3.7, 4.1, 2.3, 2.3, 1.9, 1.5 - Primary balance: -7.8, -9.2, 0.1, 1.3, 1.5, 1.5, 1.5, 1.5 - Effective interest rate: 1.8, 1.8, 3.1, 3.1, 2.9, 2.7, 2.8, 2.8 ### Outcome metrics shown in stress-test charts (axes and ranges preserved) - Gross Nominal Public Debt (Percent of GDP) plotted with axes spanning 100 to 500 (selected tick values: 100, 125, 150, 175, 200, 225, 250, 300, 350, 400, 450, 500) across 2020–2028. - Gross Nominal Public Debt (Percent of Revenue) plotted with axis 0 to 30 (tick values: 0, 5, 10, 15, 20, 25, 30). - Public Gross Financing Needs (Percent of GDP) plotted for 2020–2028 with axis 0 to 30 (tick values: 0, 5, 10, 15, 20, 25, 30). ### Annex II. Table 1 — Key baseline projection highlights (selected numeric series; percent of GDP unless noted) - As of October 15, 2020 (table header). - Nominal gross public debt (Percent of GDP): - 2009–2017: 167.7 - 2018: 184.8 - 2019: 180.9 - 2020: 208.2 - 2021: 199.1 - 2022: 186.6 - 2023: 175.4 - 2024: 168.7 - 2025: 164.0 - 2026: 160.1 - 2027: 157.2 - 2028: 154.9 - 2029: 152.9 - Public gross financing needs (Percent of GDP): - 2009–2017: 21.8 - 2018: 18.7 - 2019: 13.7 - 2020: 16.5 - 2021: 13.5 - 2022: 9.9 - 2023: 7.5 - 2024: 7.2 - 2025: 7.4 - 2026: 7.4 - 2027: 8.1 - 2028: 11.1 - Memo item: 9.9 (label appears alongside spreads) - Sovereign spreads and market indicators: - Spread (bp): 141 (reported near debt table) - CDS (bp): 133 - Real GDP growth (percent): - 2009–2017: -3.1 - 2018: 1.9 - 2019: 1.9 - 2020: -9.5 - 2021: 5.7 - 2022: 5.6 - 2023: 3.3 - 2024: 2.3 - 2025: 1.9 - 2026: 1.5 - 2027: 1.1 - 2028: 0.9 - 2029: 0.9 (also shown to the right of table) - Inflation (GDP deflator, percent): - 2009–2017: -0.1 - 2018: 0.5 - 2019: -0.4 - 2020: -0.8 - 2021: 0.9 - 2022: 0.9 - 2023: 1.7 - 2024: 1.6 - 2025: 1.6 - 2026: 1.6 - 2027: 1.6 - 2028: 1.6 - 2029: 1.6 - Nominal GDP growth (percent): - 2009–2017: -3.2 - 2018: 2.5 - 2019: 1.5 - 2020: -10.3 - 2021: 6.6 - 2022: 6.5 - 2023: 5.1 - 2024: 3.9 - 2025: 3.5 - 2026: 3.2 - 2027: 2.7 - 2028: 2.5 - 2029: 2.5 - Effective interest rate (percent) 5/ (defined in footnotes as interest payments divided by previous year debt stock): - 2009–2017: 2.9 - 2018: 1.8 - 2019: 1.9 - 2020: 1.8 - 2021: 1.8 - 2022: 1.7 - 2023: 1.7 - 2024: 1.7 - 2025: 1.6 - 2026: 1.7 - 2027: 1.8 - 2028: 2.0 - 2029: 2.2 ### Contribution to changes in public debt (selected cumulative and flow items) - Cumulative Change in gross public sector debt (2009–2029 column progression): - 7.8; 5.5; -3.8; 27.2; -9.0; -12.5; -11.2; -6.8; -4.7; -3.9; -2.9; -2.3; -2.0; -28.0 (table shows cumulative and identified flows) - Identified debt-creating flows (selected by component, percent of GDP): - Primary deficit contribution examples: 3.4 (2009–2017), 0.0 (2018), 0.0 (2019), 7.8 (2020), 1.0 (2021), -1.8 (2022), -1.8 (2023), -1.7 (2024), -1.6 (2025), -1.5 (2026–2029 steady at -1.5) - Primary (noninterest) revenue and grants: 45.6 (2009–2017), 47.8 (2018), 46.8 (2019), 47.7 (2020), 49.7 (2021), 49.5 (2022), 48.6 (2023), 47.5 (2024), 46.7 (2025), 46.0 (2026), 45.3 (2027), 44.5 (2028), 43.8 (2029) - Primary (noninterest) expenditure: 49.0 (2009–2017), 47.8 (2018), 46.8 (2019), 55.5 (2020), 50.7 (2021), 47.7 (2022), 46.8 (2023), 45.8 (2024), 45.1 (2025), 44.5 (2026), 43.8 (2027), 43.0 (2028), 42.3 (2029) - Automatic debt dynamics: 10.1 (2009–2017), -0.9 (2018), 0.8 (2019), 24.0 (2020), -9.5 (2021), -8.9 (2022), -5.9 (2023), -3.7 (2024), -3.0 (2025), -2.3 (2026), -1.4 (2027), -0.8 (2028), -0.4 (2029); cumulative -11.9 - Interest rate/growth differential: 9.8 (2009–2017), -1.2 (2018), 0.7 (2019), 24.3 (2020), -9.4 (2021), -8.9 (2022), -5.9 (2023), -3.7 (2024), -3.0 (2025), -2.3 (2026), -1.4 (2027), -0.8 (2028), -0.4 (2029); cumulative -11.5 - Of which: real interest rate contributions: 4.9 (2009–2017), 2.2 (2018), 4.1 (2019), 5.1 (2020), 1.6 (2021), 1.5 (2022), 0.0 (2023), 0.1 (2024), 0.0 (2025), 0.1 (2026), 0.3 (2027), 0.6 (2028), 0.9 (2029); cumulative 10.4 - Of which: real GDP growth contributions: 4.8 (2009–2017), -3.4 (2018), -3.4 (2019), 19.2 (2020), -11.1 (2021), -10.4 (2022), -5.9 (2023), -3.9 (2024), -3.0 (2025), -2.5 (2026), -1.6 (2027), -1.3 (2028), -1.3 (2029); cumulative -21.9 - Exchange rate depreciation contribution: 0.3 (2009–2017), 0.3 (2018), 0.1 (2019) - Other identified debt-creating flows: 5.6 (2009–2017), 10.2 (2018), -1.1 (2019), -4.8 (2020), -0.7 (2021), -1.9 (2022), -3.5 (2023), -1.4 (2024), -0.2 (2025), -0.1 (2026–2028), 0.0 (2029); cumulative -12.6 - Net privatization proceeds examples: -0.2 (2009–2017), -0.4 (2018), 0.0 (2019), -0.2 (2020), -0.4 (2021), -0.6 (2022), 0.0 thereafter; cumulative -1.4 - Other liabilities (arrears clearance and cash buffer flows): 5.8 (2009–2017), 10.6 (2018), -1.1 (2019), -4.6 (2020), -0.2 (2021), -1.3 (2022), -3.5 (2023), -1.4 (2024), -0.2 (2025), -0.1 (2026), 0.0 (2027–2029); cumulative -11.2 - Residual, including asset changes (selected): -11.4 (2009–2017), -3.8 (2018), -3.6 (2019), 0.3 (2020), 0.1 (2021), 0.0 (2022), 0.1 (2023), 0.1 (2024), 0.1 (2025), 0.1 (2026), 0.0 (2027–2028), -0.1 (2029); cumulative 0.6 - Debt-stabilizing primary balance 11/ value shown as -0.4 (table footnote reference) ### Annex III — Impact of COVID-19 on Greek Non-Financial Corporate (NFC) sector (selected findings and numeric estimates) - Historical firm-sector recovery context: - ‘Zombie’ firms employed about 5 percent of labor in 2018 compared to more than 15 percent in 2013. - Sectoral concentration of vulnerabilities (sectors most at risk): construction; wholesale and retail trade; transportation; accommodation and food services. These sectors account for about 26 percent of output and 37 percent of performing bank exposures. - Firm-size and geography vulnerabilities: - Micro and SMEs, and firms based on an island, are most exposed to the COVID-19 shock. - Simulation-based projected impacts (preliminary projections, absent policy measures): - About 40 percent of workers would be employed in at-risk firms (ICR less than one), compared to 37 percent in 2012. - Share of employment (debt) sunk in at-risk firms after the COVID-19 shock would reach over 40 (60) percent compared to about 37 (52) percent at the peak of the debt crisis. - Micro and small firms would account for about three-quarters of at-risk firms after the shock; medium and large firms would hold over 80 percent of trapped ‘debt’ and ‘employment’. - Sectoral median ICRs: deterioration concentrated in wholesale and retail, manufacturing, accommodation, construction, and real estate, with estimated median ICR below one in 2020. - Share of ‘Zombie’ firms projected to increase to close to 4.5 percent of total firms (encompassing 6 percent of employment and 9 percent of debt). - Notes on definition and caveats: - Zombie firms defined as firms aged 10 years or older with ICR<1 for three consecutive years. - Firms’ liquidity shortfall also depends on cash buffers, ability to delay paying accrued expenses, and access to credit. - Risk categorization methodology (indicators and thresholds): - Profitability measured by return on equity (2018). - Liquidity measured by current ratio (current fixed assets/current liabilities). - Solvency risk measured by shareholders equity/assets. - Leverage measured by (long term debt+current liabilities)/shareholder equity. - Thresholds derived from sectoral quintiles: very high risk (20th percentile), high risk (40th), moderate (60th), low (80th), sound (100th). For leverage the percentile ranking is reversed. ### Annex IV — Fiscal policy response to COVID-19 (selected numeric highlights and measures) - Aggregate fiscal package and financing (percent of GDP): - On-budget revenue and spending measures announced: about 7.6 percent of GDP. - Net deficit impact: about 6½ percent of GDP (reflecting roughly 1 percent of GDP of measures financed by EU grants). - Additional liquidity support measures (loans and guarantees): about 1½ percent of GDP (5 percent of GDP including leverage). - Implementation status as of end-July: about half of these measures implemented. - Composition and focus of measures: - Support to households: transfers to vulnerable individuals, wage allowances, coverage of social security contributions (SSC), extension of unemployment benefits, short-term employment support, mortgage subsidies. - Support to businesses: refundable advance payments, CIT reductions, loan guarantees, interest payment subsidies, rent reductions, deferred payments of taxes and SSCs. - Health spending: new hiring, medical supplies, cash bonuses to health sector workers. - Comparison to peers and permanence risk: - Greece committed much less to off-budget state guarantees compared to peers, focusing more on on-budget measures. - Some large schemes (refundable advance payments and tax/SSC deferrals) could have a permanent impact if repayment installments fail to collect deferred obligations. - Health spending specifics: - Announced increase in health spending so far is less than 0.2 percent of GDP in Greece, compared to the EA average of over ½ percent of GDP. - Bulk of additional health spending is on new hiring and medical supplies; resources spent on testing are limited. *Source: IMF staff.* ### Annex IV. Figure 1. COVID-19 Fiscal Measures in EA ### Annex IV. Figure 1. COVID-19 Fiscal Measures in EA ### COVID-19 Measures: On- and Off-Budget (EA context) - Chart basis: Percent of GDP; 2020; as of mid-September. - Categories shown: Off-budget: guarantees; Off-budget: loans, equity injections, debt assumptions; On-budget: spending and revenue measures. - COVID-19 Measures: Revenue and Spending (Percent of GDP; 2020; as of mid-September) distinguished between: - Accelerated spending and/or deferred revenue - Additional spending and/or foregone revenue - Sources cited: National authorities; and IMF staff estimates. ### COVID-19 Health Measures in EA - Total COVID tests per 1000 people (Data as of Aug 4) — chart provided for selected jurisdictions. - Additional health spending: COVID-19 Measures: Additional Health Spending (Percent of GDP; 2020; as of mid-September). - EA average line shown across years 2021, 2022, 2023, 2024 for total size and EU financing (PIB/SURE) and deficit impact (accrual). ### Greece — Selected Fiscal Measures and Quantified Fiscal Impact (Table 1: COVID-19 Measures in Greece: Fiscal Impact 2020–2024) - Table entries (COVID-19 Measures (bn euros); 2020) — measures and their reported numbers across years and deficit impact (accrual): - Refundable advance payment: 4.0 1.0 3.0 0.0 -0.8 -0.8 -0.8 - Wage allowances and SSCs coverage: 2.8 2.8 2.3 0.1 0.0 0.0 0.0 - Reduction of advance CIT payment: 1.6 0.0 1.6 0.0 0.0 0.0 0.0 - Suspension of tax and SSC obligations/deferrals: 1.2 0.0 1.2 -0.3 -0.4 -0.1 0.0 - Short-term employment scheme: 0.2 0.2 0.2 0.1 0.0 0.0 0.0 - Extension of unemployment benefits: 0.6 0.0 0.6 0.0 0.0 0.0 0.0 - Health system support (incl. new hirings, bonus and reduction of clawback): 0.3 0.0 0.3 0.0 0.0 0.0 0.0 - On-time tax/SSC payment discount: 0.3 0.0 0.3 0.0 0.0 0.0 0.0 - Support to real estate sector: ENFIA postponement and rent reductions: 0.2 0.0 0.2 0.04 0.0 0.0 0.0 - Support to the Ministry of Rural Development and Food: 0.2 0.0 0.2 0.0 0.0 0.0 0.0 - Interest payment subsidy scheme for SMEs: 0.2 0.2 0.0 0.0 0.0 0.0 0.0 - 1st residence subsidy: 0.1 0.0 0.1 0.3 0.0 0.0 0.0 - VAT discounts to transports, tourism and hospitality sectors: 0.2 0.0 0.2 0.1 0.0 0.0 0.0 - Social tourism program of Ministry of tourism and OAED: 0.1 0.1 0.0 0.0 0.0 0.0 0.0 - New hiring subsidy program: 0.1 0.0 0.1 0.3 0.0 0.0 0.0 - SSC reduction for private sector wage earners in 2021: 0.0 0.0 0.0 0.8 0.0 0.0 0.0 - Suspension of solidarity tax in the private sector in 2021: 0.0 0.0 0.0 0.8 0.0 0.0 0.0 - Other measures (special leave, Easter and other bonuses, levy reductions, support to ministries, etc): 1.1 0.3 0.9 0.2 0.0 0.0 0.0 - On-budget measures total: 13.1 4.8 11.2 2.4 -1.2 -0.9 -0.8 - Guarantees for SMEs: 11 - Guarantees for larger enterprises: 11 - Loans TEPIX: 20.6 0.6 - Off-budget measures total: 2.6 2.6 - Total on-budget + off-budget measures: 15.7 7.4 11.2 2.4 -1.2 -0.9 -0.8 - Total on-budget + off-budget + leverages: 21.5 13.2 11.2 2.4 -1.2 -0.9 -0.8 - Note in table: Sources: GAO quantification as of end-Sep. - Footnote: 1/ The amount financed by PIB (EU grants) will not affect deficit on accrual basis, while measures financed by the SURE scheme (EU loans) will have deficit impact. ### Key takeaways from the fiscal and health measures presentation - Fiscal measures in Greece include a mix of on-budget spending/revenue measures and off-budget guarantees/loans with multiple entries quantified in bn euros across 2020–2024. - The total on-budget plus off-budget measures and leverages reported for Greece show magnitudes preserved as listed (e.g., Total on-budget + off-budget + leverages: 21.5 13.2 11.2 2.4 -1.2 -0.9 -0.8). - Health measures reporting includes total COVID tests per 1000 people (data as of Aug 4) and additional health spending as a Percent of GDP for 2020. --- ### Annex V. Financial Sector Update (Greece) ### A. Introduction — System vulnerabilities and recent context - Pre-pandemic vulnerabilities: - System-wide NPL ratio at end-2019: 35 percent (compared to 2.7 percent on average for EU banks). - Transitional CET 1 ratio: 16.3 percent (versus 15 percent for EU banks). - Deferred tax credits (DTCs) account for roughly 60 percent of CET1 capital of the 4 Systemic Institutions (SIs). - Liquidity: Improved but still among the lowest in the EU. - Profitability: Banking system profitability remains the second lowest in the EU. - Hercules securitization scheme (approved December 2019): - Allows the Greek government to guarantee up to €12 billion in senior notes out of a total €34 billion NPE securitizations program. - If fully executed, would have halved banks’ NPE stock. - Market pricing and funding: - Greek SIs have the second lowest price-to-book ratios in the EA. - Cost for long-term unsecured funding has not returned to pre-Covid-19 levels; two banks issued Tier 2 bonds in early-February that trade at substantial discounts. ### B. Near-term pandemic cushion measures and immediate impacts - Bank and policy measures in response to Covid-19: - Loan moratoria (amortization and interest payments for households; amortization for corporates) through end-2020. - SIs have granted moratoria totaling about 18 and 37 percent of performing and performing-forborne loans, respectively. - Approximately €24 billion in loans are under moratoria. - Bank of Greece (BoG) estimate: up to €8-10 billion of these loans could become NPEs over the next three years. - Borrower support measures: - Interest payment subsidies on pre-existing business loans for April-August 2020. - Mortgage payment subsidies for performing and non-performing loans for January-September 2021. - Hellenic Development Bank (HDB) loan guarantee program to leverage up to €7 billion in new lending for SMEs and large corporates. - HDB will provide funding to the banks for €1.9 billion in working capital loans. - ECB measures: - Lifted restrictions on Greek government securities enabling ECB purchases under the PEPP and allowing banks to post GGBs as collateral. - Activated interest-rate channel, reduced uncertainty, avoided losses on GGB holdings, provided liquidity backstops, and lowered funding costs via LTRO/TLTROs. - Supervisory flexibility: - SSM temporarily loosened enforcement: SIs may operate below Pillar 2 Guidance (P2G) buffer (until end-2022), the capital conservation buffer, and the liquidity coverage ratio (LCR). - Front-loading of new rules on composition of capital to meet Pillar 2 Requirement (P2R) to release capital. - Flexibility in classifying and provisioning for NPEs covered by public guarantees and Covid-19 related public moratoria. - Postponement of On-Site Inspections (OSIs) and stress tests and extension of deadlines for OSI findings. ### C. Priority 1: Accelerating NPE Reduction and Promoting Meaningful Debt Restructuring - Status of NPE strategy: - SSM suspended the 2020 NPE reduction targets and postponed submission of new NPE reduction strategies until end-March 2021. - Hercules securitizations: - Government guarantees for senior notes priced relative to the sovereign spread. - Two SIs have completed €15 billion in securitizations (of which one is under Hercules). - Two other SIs planning about €10 billion in securitizations under Hercules by end-2020. - These transactions lower NPEs substantially for several SIs but trigger immediate capital losses due to market vs book valuation differences on securitized NPEs. - Limits of Hercules: - Does not address the full stock of NPEs remaining on balance sheets or weak capital quality. - BoG proposed establishing an Asset Management Company (AMC) to further reduce NPE ratio to single digits and address the DTC issue. - Importance noted: ensure AMC does not interfere with market-based securitization schemes. ### D. Annex V. Box 1 — Bank of Greece’s AMC Proposal (summary) - Proposed AMC mechanics: - Voluntary transfer of NPEs by banks to a new public-private AMC at net book value. - AMC hires private servicers to manage NPE collections. - AMC securitizes NPE portfolios and transfers senior notes to banks (in exchange for the NPEs) and sells mezzanine and junior notes to private investors. - Greek Government guarantees the difference between net book value and market price. - Government compensation for participation via: - Super junior notes issued by the AMC; - Guarantee fees for each securitization; - A yearly ‘entry’ fee paid by banks in cash and ‘in kind’ via gradual write-off of DTCs, consistent with maturity of AMC-issued notes. - Intended outcome: permit simultaneous derecognition of NPEs and gradual disposal of DTCs. ### E. Priority 2: Building and Cleaning Up Capital - Capital concerns: - Total capital levels supported by three Tier 2 issuances and non-recurrent trading profits on Greek government securities. - DTCs constitute 60 percent of CET1 capital as of Q1 2020; this share likely to rise when securitization losses are booked and new NPEs are provisioned. - Suggested DTC policy options: - Stand-alone DTC conversion as part of aggressive NPE reduction strategy. - Improve DTC loss-absorption capacity, including in resolution context. - Prefer private capital injections over public intervention upon DTC conversion to avoid automatic nationalizations (e.g., selling subscription rights). ### F. Priority 3: Boosting Liquidity - Liquidity developments: - Marked system-wide improvement in liquidity prior to the crisis due to continued deposit growth after removal of capital controls. - During Covid-19, private sector deposits continued to increase. - All SIs increased liquidity buffers by replacing repo and LTRO funding with TLTROIII funding; the four SIs took up the full allotment of €37 billion. - ECB liquidity measures and requalification of GGBs as eligible collateral facilitated this improvement. ### G. Priority 4: Strengthening Bank Profitability and Sustainability - Profitability challenges: - Weak profitability persists; pre-tax profits pressured by impairment costs and lower interest income. - Nonrecurrent income from Greek government bond trading and operating cost cuts have supported reported profits. - Business model and governance constraints: - Four SIs have broadly similar business models in a shallow domestic market with large debt/collateral overhang and weak payment culture. - Emerging competition from Fintechs (example: cloud-based electronic payment company acquired a banking license to open a digital bank). - Reliance on securitizations may reduce banks’ customer bases because of regulatory constraints on extending new credit to borrowers whose loans have been securitized. ### H. Priority 5: Containing the Sovereign-Bank Nexus - Factors sustaining a strong sovereign-bank nexus: - Asset quality improvements rely heavily on the state-sponsored Hercules scheme; organic strategies fall short. - Central government deposits declined due to pandemic-related fiscal measures while banks’ GGB holdings increased by 25 percent during March-June 2020 after lifting sovereign exposure limits — raising exposure to GGB market volatility. - State-guaranteed loans will account for an increasing share of risk-weighted assets. - DTC-based capital will likely increase over time due to capital hits from Hercules securitizations and potential new COVID-19 related NPEs. - Profitability implications include: - Direct government support to borrowers (interest rate and mortgage installment subsidies); - State-guaranteed loan programs; - Removal of banks’ sovereign exposure limits; - Movements in sovereign CDS spreads (cost of Hercules guarantees is linked to CDS spreads at inception). - Liquidity further boosted by GGBs received in exchange for state-guaranteed senior notes through collateral swaps, in addition to ECB measures. *Source: Annex IV and Annex V, "COVID-19 Fiscal Measures in EA" and "Financial Sector Update," as provided in the source content.* ### Annex VI. Greece’s New Insolvency Law ### Annex VI. Greece’s New Insolvency Law ### Overview - The Greek authorities replaced all pre-existing insolvency and out-of-court restructuring legislation as of January 1, 2021, harmonizing the bankruptcy code for businesses and consumers and incorporating European standards. - The law aims to address longstanding weaknesses: low use of formal insolvency and out-of-court restructurings despite widespread debt distress, poor payment culture, persistent consumer debt overhang, and high NPL levels. - Uncertainty remains whether the new law will facilitate meaningful restructurings, resolve debt distress, and address payment culture issues, especially after the COVID-19 crisis. ### Business Insolvency — Key Features and Concerns - Simplified Liquidation Proceedings: - Small businesses: less court involvement and immediate liquidation of assets. - Larger cases: may be subject to going concern sale or piecemeal liquidation under court supervision. - Preventive Restructuring Procedures: - Harmonized with the European Directive on Preventive Insolvency (2019/1023). - Allows businesses to reach an agreement with a qualified majority of creditors with minimal court involvement. - Out-of-Court Workouts (OCW): - Existing OCW system is tweaked to facilitate multi-creditor restructurings. - Provides standardized restructuring solutions (based on an algorithm) that are binding on all creditors (including the tax and social security authorities) if a majority of private sector creditors approve; tailored solutions are permitted if creditors agree. - The law allows for long-term automatic reschedulings of tax debt; concern that automaticity and prolonged rescheduling could further undermine payment culture. - Stakeholder concerns: - Broad eligibility criteria for OCW may encourage strategic filings by debtors (given the two-month automatic stay). - Incentives may encourage long-term rescheduling for non-viable debtors, doing little to decisively resolve debt overhang. ### Consumer Insolvency — Key Features and Protections - No Automatic Stay: - Consumers cannot file for insolvency and receive an automatic stay on creditor enforcement actions against their property. - Exceptions exist for primary residences of vulnerable debtors. - Discharge: - Consumers may be discharged from their residual debt (generally within three years) upon liquidating their assets to pay their debts. - Primary Residence Protection: - Primary residences must also be liquidated to obtain a debt discharge, except for certain “vulnerable debtors”. - Vulnerable debtors may opt to sell the property to a private-run agency and “lease back” the home. - Particularly vulnerable debtors may receive subsidies for lease payments. ### Sale-and-Lease-Back Regime (SLBO) - Purpose: - To avoid evictions of vulnerable distressed debtors who lose ownership of their primary residence during bankruptcy procedures. - Mechanism: - A new private Sale and Lease-Back Organization (SLBO) will be created to purchase residences of vulnerable debtors at market prices as determined by independent appraisers, and to lease-back the properties so debtors can remain as tenants. - Debtors will also be eligible to receive existing housing subsidies to facilitate rent payments and to buy back the property after 12 years under certain conditions. - The SLBO may be eligible for state guarantees to secure funding from the market. - Implementation: - Details on the regime, including specific eligibility criteria for debtor participation, are expected to be spelled out in secondary legislation. ### Observations and Risks - Potential improvements are present, but: - The effectiveness of the new law in enabling meaningful restructurings and reducing debt overhang is unclear. - Automatic and long-term tax rescheduling risks further eroding payment culture. - The two-month automatic stay tied to OCW eligibility could be used strategically by debtors. - The balance of incentives may lead to prolonged rescheduling for non-viable firms rather than decisive resolution. *Source: 1grcea2020001 - Annex VI. Greece’s New Insolvency Law* ### 16.8 percent, slightly lower than 16,9 percent in August 2019 as labor force participation dropped, and ### 1grcea2020001 - 16.8 percent, slightly lower than 16,9 percent in August 2019 as labor force participation dropped, and ### Economic activity and outlook - Current employment/unemployment snapshot: "16.8 percent, slightly lower than 16,9 percent in August 2019" and "higher than pre-pandemic 15.9 percent in Q1 2020." - Jan.–Aug. 2020 sectoral impacts: - Net travel receipts: -81.7 percent - Transportation receipts: -30.4 percent - Industrial production: -3.9 percent (more resilient than anticipated) - Real exports of goods (balance of payments): +2.3 percent - Authorities' revised short-term projections: - Economic activity deterioration estimate: -8.2 percent - GDP for the year: -10.5 percent - Medium-term outlook: - GDP return to pre-pandemic crisis levels by 2022 - GDP growth from 2023 onwards at an average pace of 3 percent y-o-y to 2027 - Key upside drivers: global economic upturn, investment boom spearheaded by NGEU funds, expected robust private investment recovery supported by pro-growth structural reforms (cutting non-wage and energy costs). - Downside risk highlighted: permanent slump in global tourism (low-probability per authorities, linked to failure to find vaccine/medical treatment). ### Fiscal stance, support measures, and budget projections - Pre-pandemic fiscal strategy: primary surpluses of 3.5 percent of GDP from 2020 to 2022. - Pandemic fiscal response and outcomes: - Initial 2020 support package: 9.1 percent of GDP (7.6 percentage points in spending and revenues deferred or foregone, rest in loan guarantees) - Draft 2021 Budget projection for 2020: primary deficit of 6.2 percent of GDP (enhanced surveillance definition) - Revised estimate of fiscal support for 2020: close to 11percent of GDP (emerging needs from second wave) - European Commission autumn forecast: 2020 primary deficit of 4.5 percent of GDP (not including new support measures) - Authorities' current projection: primary deficit of 7.2 percent of GDP and growth rate of -10.5 percent (leading to revisions in final 2021 Budget) - 2021 Draft Budget and scenarios: - 2021 primary deficit target: scale down to between 1 percent and 3 percent of GDP depending on growth - Growth scenarios tied to deficit: - Baseline growth: 7.5 percent -> primary deficit toward lower end (1 percent) - Adverse growth: 4.5 percent -> primary deficit toward upper end (3 percent) - Staff recommendation: 2 percent of GDP primary deficit target to cushion fiscal contraction - Baseline 2021 budget underpinned by leaner fiscal support package: 1.3 percent of GDP - Included RRF investment spending: EUR 3.9 billion (2.4 percent of GDP) - Final 2021 Budget (accounting for second wave): fiscal support package 4.5 percent of GDP -> primary deficit 3.9 percent of GDP and growth 4.8 percent ### Financial markets, sovereign financing, and ratings - Greek government bond (GGB) yields: declining trend resumed; "yields of 10-year GGBs are currently at historical lows." - Market issuance in 2020: - October 2020: Greece raised EUR 2 billion at 1.15 percent yield by reopening the 15-year bond - Total drawn from capital markets year-to-date: about EUR 12 billion - Government cash buffer: about EUR 36,5 billion - Sovereign credit ratings: below investment grade, with stable outlook - On November 6, 2020, Moody’s upgraded Greece by one notch to Ba3 from B1 ### Banking sector, NPLs, and reform measures - Banking sector resilience: deposits continued to rise; corporate bank credit expanded; bank profitability declined as loan loss provisions rose; capital ratios remained satisfactory. - Non-performing loans (NPLs) path: - EUR 119.3 billion in June 2016 (NPL ratio 48.9 percent) - EUR 97.4 billion in June 2018 (NPL ratio 48.2 percent) - EUR 73.6 billion in December 2019 (NPL ratio 40.0 percent) - EUR 64.5 billion in June 2020 (NPL ratio 36.7 percent) - Provisional data: NPL reduction continued into H2 2020 - Hercules Asset Protection Scheme: - Provides government guarantees to banks at market terms to proceed with securitization of large stock of NPLs - Considered a major success and a systemic solution; contributed to fast NPL reduction - Authorities consider extending Hercules to address legacy and pandemic-related NPLs - Additional measures and proposals: - Payments moratoria and liquidity measures supported borrowers but may add to NPLs when lifted - Proposed reforms: credit registry bureau, Asset Management Company proposal by Bank of Greece (under government consideration) - Target: reduce NPL ratio to single-digit levels over a period of three years (complementing Hercules) ### Risks, institutional reforms, and policy recommendations - Key risks: - Pandemic resurgence and sustained slump in tourism - Scarring of business environment leading to contingent government liabilities if support measures sour - Political economy resistance to change and heightened geopolitical/ socioeconomic uncertainties - Authorities' stated policy priorities and reforms: - Rebuild fiscal space quickly while avoiding premature withdrawal of needed support - Prioritize health spending and upgrade safety nets; emphasize reskilling labor force - Strengthen bank supervision; base fiscal support to firms and households on viability assessments - Modernize insolvency framework: faster business restructuring, increased out-of-court procedures, efficient discharge of debts for individuals, protect vulnerable, guard against moral hazard, and reform judicial system - Reduce high income tax and social security contribution burden to stimulate private investment and employment - Rebalance public investment and social spending aligned with NGEU priorities toward greener, digitalized, and more inclusive economy - Promote educational reform and vocational training to upgrade skills and increase labor force participation - Transform productive forces toward private investment, competitiveness, and strong institutions to achieve resilient development - Fiscal strategy guidance: - Pursue prudent economic policies and preserve fiscal discipline given long-term debt dynamics - Rebalance fiscal mix to create space for stimulating private investment *Source: IMF staff report content (document content provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1grcea2020001.pdf_