## 1grcea2021001

## Source details

**Canonical URL:** [1grcea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1grcea2021001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2021/english/1grcea2021001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2021/english/1grcea2021001.pdf.json)

---

### Major findings and macro outlook
- Real GDP growth:
  - Projected at 3.3 percent in 2021.
  - Projected at 5.4 percent in 2022.
  - Potential growth estimated at 1 percent over the medium-term.
- Pandemic impact and scarring:
  - Permanent output loss from the pandemic (“scarring”) is projected to reach 3 percent.
  - Tourism receipts expected to reach 2019 peak levels only in 2025 (WTO conservative scenario).
- Next Generation EU (NGEU) grants (2021–26) — Text Table totals (Billions of euro):
  - 2021: 4.7
  - 2022: 3.0
  - 2023: 3.0
  - 2024: 3.4
  - 2025: 3.4
  - 2026: 1.8
  - Total % GDP lines shown: 19.3 and 11.6 (table context preserved).
- Fiscal outcomes:
  - Primary deficits of 7.5 percent of GDP (accrual basis) in 2020.
  - Primary balance (cash basis) -2.1 percent of GDP in 2021:Q1.
  - Greece received EU grant and loan financing for COVID-19-related measures totaling about 4.5 percent of GDP in 2020 (including 2.5 percent of GDP in reallocations/frontloading of existing funds).
- External sector:
  - 2020 current account (CA) deficit reached 7.4 percent of GDP (accrual basis).
  - CA gap at end-2020 estimated around -3.1 percent of GDP, corresponding to a 10.5 percent REER overvaluation.
  - Foreign direct investment (FDI) declined by 28 percent compared to its 2019 level.
- Labor and output:
  - Real GDP contracted 8.2 percent y/y in 2020.
  - Average unemployment rate (NSA) was 16.4 percent in 2020 (down from 17.3 percent in 2019); average unemployment increased slightly to 16.7 percent (NSA) as of February 2021.

### Risk assessment and uncertainty
- Baseline assumptions and principal risks:
  - Baseline assumes no further lockdowns beyond 2021:H1 and broad vaccination by end-2021.
  - Upside risk: stronger-than-anticipated recovery if 2021:Q1 rebound continues.
  - Downside risks: slower speed of grant disbursements and execution of NGEU grants; prolonged pandemic; uncertain new NPE formation.
- Annex I — Risk Assessment Matrix highlights:
  - Domestic risk — Deterioration of bank balance sheets: Relative Likelihood: High; Impact If Realized: High.
  - External risk — Unexpected shifts in the COVID-19 pandemic: Relative Likelihood: Medium; Impact If Realized: High (prolonged pandemic).
  - External risk — Sharp rise in global risk premia: Relative Likelihood: Medium; Impact If Realized: High.
- Scenario findings:
  - Debt-to-GDP range across long-term scenarios: 109 to 150 (end-point 2031 and beyond).
  - GFNs-to-GDP range across scenarios: 18 to 25.
  - Staff’s fan chart: 85 percent of simulated debt trajectories stabilize over the next 10 years.

### Policy discussions and recommendations
- Immediate priorities:
  - Mitigate the health crisis.
  - Prevent economic scarring.
  - Nurture an inclusive recovery.
- Fiscal policy guidance:
  - Staff offers qualified support for maintaining fiscal accommodation in 2022; recommended additional stimulus of about 2 percent of GDP to bridge phasing-out of temporary measures and recovery, provided stimulus is properly spent.
  - If recovery is stronger than anticipated, authorities should save fiscal overperformance as a contingency buffer.
  - Medium-term objective: improve fiscal policy mix and prepare for the “day after” NGEU funding; aim for a 3¾ percent of GDP primary surplus by end-2025 (Stability Programme target).
  - Revenue and expenditure options to create fiscal space: raise diesel taxes, PIT base-broadening, tackle VAT compliance gaps, expenditure adjustment in pensions and public wage bill, efficiency gains in public investment.
- Public financial management and safeguards:
  - COVID-19 spending mostly on-budget and subject to regular budget-execution processes and publication of pandemic-related expenditures.
  - Additional recommended safeguards: public access to procurement contracts related to COVID-19, beneficial ownership disclosure, ex-post audits, ensure CoA and TSA capture new digital and green initiatives, address staffing constraints in GAO.

### Financial sector and banking stability
- NPEs and capital:
  - NPE ratio declined to 30 percent in 2020 (national definition; highest level in the EU).
  - Systemic Institutions consolidated CET1 ratio fell to 15.1 percent (end-2020).
  - Deferred Tax Credits (DTCs) account for 59 percent of CET1 capital as of end-2020.
- Liquidity and deposits:
  - Four Systemic Institutions complied with the 100 percent Liquidity Coverage Ratio on a consolidated basis as of end-2020.
  - Deposit growth: 14.4 percent (y/y) in 2020, bringing deposits to 98 percent of GDP.
  - Net credit growth: 3.5 percent (y/y) in 2020; corporate credit +9.3 percent; household credit -2.5 percent.
- Hercules securitization and execution risks:
  - Hercules securitizations target €32 billion of NPEs; about half yet to be completed.
  - Government guarantees provision increased to €24 billion.
  - Banks project about €5 billion in fresh NPEs post-moratoria; Bank of Greece (BoG) earlier estimated about €8–10 billion.
  - Staff recommends formulating backup plans if capital raising is insufficient and seeking solutions with European partners on DTC conversion and capital quality.
- Profitability and one-off items:
  - Greek banks’ ROE: -6.5 percent in 2020 versus 2 percent average for EU banks.
  - Cost of risk: 3.1 percent in 2020 versus 0.7 percent average in the EU.
  - PDMA GGB swaps generated €1.1 billion trading income in 2020.

### Debt, financing, and debt sustainability analysis (DSA)
- Medium-term public debt projections:
  - Debt-to-GDP expected to reach 214 percent in 2021 (from 185 percent in 2019).
  - Decline thereafter to 169 percent by 2030.
- Gross financing needs (GFNs) projections:
  - Projected to fall to 21.3 percent of GDP in 2021.
  - Projected to average 13.4 percent of GDP during Greece’s repayments to the Fund (2022–24).
  - Staff’s 10-year DSA: GFNs-to-GDP ratio projected to average 12 percent over the 10-year projection period (after deposit drawdowns).
- Stress test outcomes:
  - Under standard stress tests, debt-to-GDP would increase by between 8½ and 33 percentage points over the medium-term.
  - Combined macro-fiscal stress test increases debt-to-GDP by 47 percentage points.
  - A combined severe stress test would breach GFNs benchmarks more severely; continued regional support is critical under severe shocks.
- Long-term uncertainty:
  - Uncertainty about long-term neutral rate and risk premia prevents a firm conclusion on long-term debt sustainability.
  - Scenario analysis key parameter sets (values preserved): nominal growth rate: [2.6, 2.8, 3.0]; implied real growth: [0.8, 1, 1.2]; risk premium (bps): [180, 230, 280]; risk free rate (bps): [235, 335, 385]; primary balance/GDP: [1.3, 1.5, 1.7].
  - Scenario end-point ranges: Debt-to-GDP 109 to 150; GFNs-to-GDP 18 to 25.

### External sector and competitiveness
- External position and current account:
  - 2020 CA deficit (percent of GDP): 7.4 (accrual basis).
  - Staff CA gap (end-2020): -3.1 percent of GDP (EBA model); REER overvaluation assessed at 10.5 percent.
  - Net International Investment Position (NIIP): -182 percent of GDP in 2020.
- External debt and financing:
  - Gross external debt (percent of GDP): 2019 249.0; 2020 303.9; 2021 299.0; 2022 285.6; 2026 263.0 (baseline projections).
  - External debt-to-exports ratio: 2019 629.1; 2020 976.3; projected 2026 684.9.
  - Gross external financing requirements (selected, billions USD): 2021 214.2; 2022 202.8; 2026 208.2.
- Competitiveness and productivity:
  - Greece became more competitive post-GFC, but firm-level productivity remains weak and low value-added SMEs dominate.
  - Authorities’ DSGE model: NGEU package alone increases real GDP levels by 4.3 percent by 2026; with ambitious structural reforms output increases by 6.9 percent by 2026.
  - IMF staff assessment: annual average boost to GDP growth of 0.6 percentage points from grants-focused baseline (2021–26).

### Structural, social, and labor policies
- Structural reform priorities:
  - Upgrade public investment framework to ensure NGEU funds support a job-rich, green recovery.
  - Accelerate reforms to boost productivity: education, vocational training, labor market flexibility, open closed product markets, improve network industries efficiency.
  - Implement RRP measures to encourage firm growth, SME consolidation, innovation and increased R&D.
- Social safety net and labor activation:
  - GMI narrowed poverty gap but coverage is low and fragmented; labor re-activation pillar rolled out nationally in June 2021.
  - Near-term labor measures: extend tourism suspension measures through end-June and short-term work schemes through end-September 2021 (priorities noted).
  - Recommendation: improve OAED, fully execute GMI third pillar rollout, fund childcare to encourage female labor participation.
- Governance, statistics, and transparency:
  - ELSTAT now compliant with most international standards but remaining data gaps and reputational risks; staff recommends flash national account estimates and protection of ELSTAT independence.
  - National Anti-Corruption Action Plan preparation and Commitment on Confidence in Statistics to be upheld.

### Key data points and selected projections
- Real GDP growth: 3.3 percent (2021), 5.4 percent (2022).
- Permanent output loss (“scarring”): 3 percent.
- Primary balance (PB): -7.5 percent of GDP (2020, accrual basis); -2.1 percent of GDP (2021:Q1, cash basis).
- NPE ratio: 30 percent (2020, national definition).
- Consolidated CET1 (SIs): 15.1 percent (2020).
- DTCs share of CET1 capital: 59 percent (end-2020).
- Deposits: 98 percent of GDP; deposit growth 14.4 percent (y/y) in 2020.
- Net credit growth: 3.5 percent (y/y) in 2020; corporates +9.3 percent; households -2.5 percent.
- 2020 CA deficit: 7.4 percent of GDP.
- CA gap: -3.1 percent of GDP (end-2020); REER overvaluation: 10.5 percent.
- FDI decline: 28 percent (compared to 2019).
- NGEU grants by year (Billions of euro): 2021: 4.7; 2022: 3.0; 2023: 3.0; 2024: 3.4; 2025: 3.4; 2026: 1.8.
- Medium-Term Macro Framework (selected):
  - Real GDP: 2019 1.9; 2020 -8.2; 2021 3.3; 2022 5.4; 2023 2.6; 2024 1.8; 2025 1.5; 2026 1.2.
  - Gross public debt (percent of GDP): 2019 184.9; 2020 211.2; 2021 213.8; 2022 204.1; 2026 183.6.
  - Nominal GDP (billions of euros): 2019 183.4; 2020 165.8; 2021 171.0; 2022 181.5; 2026 206.5.
- Government financing and cash buffer:
  - Government tapped bond market five times in 2020 (€12 billion total) and preserved cash buffer €31 billion at end-2020.
  - IMF-specific financing: second IMF pre-payment on March 18, 2021 totaling SDR 2.8 billion (€3.4 billion); Greece’s annual payments to the Fund will average SDR 0.6 billion over 2022–23 (plus final SDR 0.25 billion in 2024).
  - Outstanding Fund credit after prepayment remains just above SDR 1.5 billion until end-2022; Greece could prepay remaining Fund balance of SDR 1.5 billion (€1.8 billion).

*International Monetary Fund. June 23, 2021.*

### 5.4 percent in 2022. Public  debt levels are projected to decline over the medium term,

### 1grcea2021001 - 5.4 percent in 2022. Public  debt levels are projected to decline over the medium term,

### Major findings and macro outlook
- Real GDP growth:
  - Projected at 3.3 percent in 2021.
  - Projected at 5.4 percent in 2022.
  - Potential growth estimated at 1 percent over the medium-term.
- Pandemic impact and scarring:
  - Permanent output loss from the pandemic (“scarring”) is projected to reach 3 percent.
  - Tourism receipts expected to reach 2019 peak levels only in 2025 (WTO conservative scenario).
- Next Generation EU (NGEU) grants (2021–26) — Text Table totals (Billions of euro, unless otherwise indicated):
  - 2021: 4.7
  - 2022: 3.0
  - 2023: 3.0
  - 2024: 3.4
  - 2025: 3.4
  - 2026: 1.8
  - Total % GDP lines shown: 19.3 and 11.6 (table context preserved).
- Fiscal outcomes:
  - Primary deficits of 7.5 percent of GDP (accrual basis) in 2020 and 2.1 percent of annual GDP (cash basis) in 2021:Q1.
  - Greece received EU grant and loan financing for COVID-19-related measures totaling about 4.5 percent of GDP in 2020 (including 2.5 percent of GDP in reallocations/frontloading of existing funds).
- External sector:
  - 2020 current account (CA) deficit reached 7.4 percent of GDP (accrual basis).
  - CA gap at end-2020 estimated around -3.1 percent of GDP, corresponding to a 10.5 percent REER overvaluation.
  - Foreign direct investment (FDI) declined by 28 percent compared to its 2019 level.
- Financial sector and banking:
  - NPE ratio declined to 30 percent in 2020 (highest level in the EU).
  - Consolidated CET1 ratio of the Systemic Institutions fell to 15.1 percent.
  - Deferred Tax Credits (DTCs) account for 59 percent of CET1 capital as of end-2020 (context in Annex IV).
  - Deposit growth: 14.4 percent (y/y) in 2020, bringing deposits to 98 percent of GDP.
  - Net credit growth: 3.5 percent y/y in 2020; corporate credit +9.3 percent, household credit -2.5 percent.
- Liquidity and monetary:
  - Four Systemic Institutions complied for the first time with the 100 percent Liquidity Coverage Ratio on a consolidated basis as of end-2020.
- Labor market:
  - Real GDP contracted 8.2 percent y/y in 2020.
  - Average unemployment rate (NSA) was 16.4 percent in 2020 (down from 17.3 percent in 2019); average unemployment increased slightly to 16.7 percent (NSA) as of February 2021.
  - Hours worked and employment experienced substantial declines in 2020 (text charts).

### Risk assessment and uncertainty
- Baseline assumptions and risks:
  - Baseline assumes no further lockdowns beyond 2021:H1 and broad vaccination by end-2021.
  - Upside risk: stronger-than-anticipated recovery (if 2021:Q1 rebound continues).
  - Downside risk: slower speed of grant disbursements and execution of NGEU grants.
- Medium-term public debt and financing:
  - Public debt levels are projected to decline over the medium term (statement in source).
  - Gross financing needs and IMF repayment capacity remain adequate under stress, but uncertainty is too high to reach a firm conclusion on the sustainability of long-term debt.
- External imbalances and vulnerabilities:
  - Significant external imbalances and weaker external position than consistent with fundamentals at end-2020.
  - Pandemic could add further stress to already-impaired bank and corporate balance sheets.

### Policy discussions and recommendations
- Immediate priorities:
  - Mitigating the health crisis.
  - Preventing economic scarring.
  - Nurturing an inclusive recovery.
- Fiscal policy guidance:
  - With significant uncertainty about economic slack, providing further fiscal stimulus in 2022 would reduce scarring risks, but support should become more targeted and lay the foundation for a durable improvement in the fiscal policy mix over the medium term.
  - If recovery is stronger than anticipated, authorities should save any fiscal overperformance as a contingency buffer to accommodate future downside risks and potential realization of contingent liabilities.
- Banking sector and financial stability:
  - The Hercules securitization strategy could achieve a rapid reduction in banks’ Non-Performing Exposures (NPEs), but backup plans should be formulated in case capital-raising efforts by banks are insufficient and/or other execution risks materialize.
  - Authorities should work with European partners to resolve the increasingly weak quality of bank capital.
  - The non-bank financial sector should be deepened to support credit growth.
  - Effective implementation of the new Insolvency Code will be critical for meaningful debt resolution.
- Structural and social policies:
  - Address fragmentation in the social safety net.
  - Efficiently deploy NGEU resources to address gaps in green and job-rich investments.
  - Continue efforts to strengthen the business climate to raise convergence prospects in the euro zone.
  - Recent structural milestones noted: modernization of the energy market and legislation fostering renewable energy production; education bills to address youth unemployment and skills mismatch; business climate simplification; law to encourage digital governance; rollout of the GMI Third pillar.

### Key data points and policy parameters (selected)
- Real GDP growth: 3.3 percent (2021), 5.4 percent (2022).
- Permanent output loss (“scarring”): 3 percent.
- Primary balance (PB): -7.5 percent of GDP (2020, accrual basis); -2.1 percent of GDP (2021:Q1, cash basis).
- NPE ratio: 30 percent (2020).
- Consolidated CET1 (SIs): 15.1 percent (2020).
- DTCs share of CET1 capital: 59 percent (end-2020).
- Deposits: 98 percent of GDP; deposit growth 14.4 percent (y/y) in 2020.
- Net credit growth: 3.5 percent (y/y) in 2020; corporates +9.3 percent; households -2.5 percent.
- 2020 CA deficit: 7.4 percent of GDP (accrual basis).
- CA gap: -3.1 percent of GDP (end-2020); REER overvaluation: 10.5 percent.
- FDI decline: 28 percent (compared to 2019).
- NGEU grants by year (Billions of euro): 2021: 4.7; 2022: 3.0; 2023: 3.0; 2024: 3.4; 2025: 3.4; 2026: 1.8.
- Nominal GDP (2020): 166 (table context).

*International Monetary Fund. June 23, 2021.*

### 9.      Downside risks dominate (Annex I—RAM). The trajectory of the pandemic will dominate

### 9.      Downside risks dominate (Annex I—RAM). The trajectory of the pandemic will dominate

### Near-term outlook and downside risks
- The trajectory of the pandemic will dominate the outlook in the near-term.
- Prolongation of restrictions linked to COVID-19 cases into 2021:H2 would further delay the recovery and deepen the medium-term impact on real output and convergence prospects.
- Key external risks:
  - A reversal of accommodative financial conditions.
  - Lower global trade.
  - Geopolitical risks.
- Key domestic risks:
  - Uncertain extent of new NPE formation during the post-pandemic normalization, which could affect banks’ securitization plans and curb credit growth.
  - Poor absorption or execution of NGEU funds.
  - Cliff effects from a premature withdrawal of economic and financial support measures.
- Potential upside scenarios:
  - Faster vaccine delivery that allows herd immunity and economic normalization earlier.
  - Higher-than-expected tourism flows.
  - Effective channeling of NGEU loans into private investment.

### Authorities’ views on recovery and risks
- Authorities anticipated a stronger recovery in 2021 and over the medium term, supported by the Recovery and Resiliency Plan under the RRF.
- They noted their sizeable, swift, and proactive policy response resulted in a less-severe-than-anticipated contraction in 2020 and Q1:2021.
- They reported support measures preserved employment, prevented a rise in the gender employment gap, and protected part-time workers (income support did not depend on hours worked).
- Authorities stressed:
  - Effective handling of the pandemic and strong RRP ownership should accelerate structural reform implementation.
  - Effective execution of NGEU grants and loans (Greece ranked second among the EU-27 in terms of absorption rates of cohesion funds during 2014–20) and an upgraded public investment implementation framework will transform Greece’s economic model, prevent scarring, and boost growth permanently.
  - Recovery plan is cohesive, adequately costed, and backed by a government with the social mandate to execute it.
  - Broad agreement with staff on key risks to the baseline, but potential upside risks from faster vaccination, stronger tourism rebound, and greater pent-up consumption demand.
  - Consider the impact of downside risks manageable given observed resilience during the pandemic.
  - Consider the real exchange rate overvaluation to be lower and expect external imbalances to narrow over the medium term via stronger net exports, initially boosted by enhanced price competitiveness and later through improved productivity gains as reforms take hold.

### Post Financing Assessment — Debt and GFNs summary
- Debt and GFNs considerations over the medium-term are broadly unchanged from the Second PPM Consultation and Greece’s capacity to repay the Fund is preserved under the baseline and various downside scenarios (see Annex III—DSA).

### Liquidity considerations and market access
- Financing conditions remain favorable.
- After initial pandemic volatility, GGB yields normalized and reached historically low levels.
- Government tapped the bond market five times in 2020 (€12 billion total), largely preserving the government’s cash buffer (€31 billion at end-2020).
- In March 2021 the government issued its first 30-year bond since 2008.
- In early May 2021 it raised a further €3.0 billion from a five-year bond under favorable terms.
- Ratings upgrades: Moody’s upgraded Greek debt to Ba3 in November 2020; S&P raised its rating to BB in April 2021.
- IMF-specific financing:
  - A second IMF pre-payment was made on March 18, 2021 covering obligations due between March 2021 and December 2022 totaling SDR 2.8 billion (€3.4 billion).
  - Greece’s annual payments to the Fund will average SDR 0.6 billion over 2022–23 (plus a final SDR 0.25 billion payment in 2024).
  - Greece could prepay in full its remaining Fund balance of SDR 1.5 billion (€1.8 billion).
- Gross financing needs (GFNs) projections:
  - Projected to fall to 21.3 percent of GDP in 2021.
  - Projected to average 13.4 percent of GDP during Greece’s repayments to the Fund (2022–24).
- Additional safeguards: cash buffer adequacy to cover outstanding Fund credit under an adverse scenario, current low sovereign borrowing costs, and expected EU and ECB extension of pandemic support under a generalized adverse COVID-19 scenario.

### Solvency and medium-term debt projections
- Medium-term public debt levels are projected to decline:
  - Debt-to-GDP expected to reach 214 percent in 2021 (from 185 percent in 2019).
  - Decline thereafter to 169 percent by 2030.
- Downward debt trajectory in MT predicated on:
  - Negative interest-growth differential.
  - Gradual return to primary surpluses.
- Mitigants to refinancing risk: government’s large cash buffer, active liability management exercises, and ongoing EI support.
- Long-term uncertainty:
  - Uncertainty about the long-term neutral rate and risk premia prevents a definite conclusion on long-term debt sustainability.
  - Departure from staff’s previous long-term DSA (2018): while earlier analysis concluded public debt sustainability was not assured under a realistic set of macro-fiscal assumptions, current outcomes reflect significant decline in risk-free rates and sharp compression of Greek bond spreads plus Europe-wide support packages.
  - Unclear whether low rates can be maintained amid a transition from official to market funding.

### Selected financing table highlights (as reported)
- Gross financing needs (Billions of euro): 2018: 35.9; 2019: 21.6; 2020: 29.1; 2021: 32.6; 2022: 24.2; 2023: 20.2; 2024: 19.9.
- Overall deficit (Billions of euro): 2018: -1.4; 2019: -2.3; 2020: 17.1; 2021: 16.9; 2022: 6.7; 2023: 4.9; 2024: 4.0.
- Primary deficit (1/) (Billions of euro): 2018: -6.1; 2019: -7.3; 2020: 12.2; 2021: 11.9; 2022: 1.6; 2023: -0.3; 2024: -0.9.
- Amortization (Billions of euro): 2018: 18.6; 2019: 28.9; 2020: 18.8; 2021: 18.9; 2022: 20.6; 2023: 21.6; 2024: 17.6.
- Government deposits (replenishment+/drawdown-) (Billions of euro): 2018: 18.0; 2019: -3.3; 2020: -5.5; 2021: -1.5; 2022: -0.5; 2023: -6.2; 2024: -1.5.
- Gross financing sources mirror GFNs by instrument (short-term T-bills, medium and long-term borrowing, official sector).
- Memo: Total deposits of general government (Billions of euro): 2018: 38.4; 2019: 36.4; 2020: 31.0; 2021: 28.7; 2022: 27.4; 2023: 20.5; 2024: 18.2.
  - Deposits directly available to state government (3/): 2018: 30.0; 2019: 29.6; 2020: 24.5; 2021: 22.2; 2022: 20.9; 2023: 14.0; 2024: 11.7.
  - Deposits directly available to state government as % of GDP: 2018: 16.7; 2019: 16.1; 2020: 14.8; 2021: 13.0; 2022: 11.5; 2023: 7.4; 2024: 6.0.

### Capacity to repay risks and downside scenarios
- Medium-term debt and GFNs trajectories remain sustainable under a variety of downside risks.
- Temporary shocks to the primary balance (PB) and interest rates would not significantly endanger Greece’s capacity to repay the Fund because average GFNs would largely remain below 15 percent of GDP medium-term benchmark over the next 10 years despite the higher debt path.
- The GFN benchmark would be breached more severely under the growth shock, combined macro-fiscal or contingent liability shock.
- Under severe shock scenarios, Greece’s ability to service its debt depends critically on continued regional support. If access to this safety net became compromised (due to gradual withdrawal of EU-ECB support, Greek bonds becoming ineligible for ECB purchases, or a setback on NGEU funding), Greece’s debt servicing capacity could become compromised.
- Policy options under extreme adverse scenarios would most likely entail:
  - Strong procyclical fiscal contraction.
  - Further financial support from European partners.

### Authorities’ views on debt structure and sustainability
- Authorities concurred with staff’s assessment of medium-term debt sustainability.
- Emphasized favorable debt structure: long maturity, low financing needs, absence of interest rate and exchange rate risk, and near-completed re-construction of the yield curve.
- Highlighted recent rating upgrades despite the pandemic, projected negative interest-rate growth differential, return to and sustainment of viable primary surpluses, and active liability management.
- Prudent cash buffer management to be maintained until sovereign restores investment-grade rating and continued thereafter.
- Noted pandemic showed Greece can weather a severe shock: reduction in Greek yields started well ahead of the PEPP and a substantial fraction of Greece’s debt to the Fund was repaid ahead of time during the crisis.
- Authorities consider with high certainty that long-term sustainability is assured, citing:
  - Proven capacity to sustain high primary balances in recent years.
  - Expectation of significantly stronger long-run growth, owing among others to RRP implementation.
  - Transition from official to market financing will be gradual and deepen secondary market liquidity.
  - Increase in interest rates is not a foregone conclusion given uncertainty about long-term neutral rates and potential to reduce risk premia via policy reform credibility.

### Policy discussions — preventing scarring and promoting inclusive recovery
- Policy focus: prevent economic scarring and nurture an inclusive recovery by bridging the transition from lifelines to investment financed by the NGEU.
- Near-term policy priorities:
  - Prioritize health outcomes and increase healthcare capacity to hedge against variants or seasonal virus waves.
  - Remove policy support gradually once there is evidence of sustained economic activity and/or a substantial amount of RRF projects have effectively broken ground.
  - Provide a counter-cyclical buffer while private sector balance sheets are repaired.
- Medium-term fiscal sustainability objectives should not be achieved at the expense of growth, especially due to high youth unemployment after two crises.
- Government should aim to:
  i) Implement a better fiscal policy mix that addresses inter-generational concerns, including climate change.
  ii) Fund those COVID-19 measures that have a structural fiscal impact.
  iii) Prepare for the “day after” when NGEU funding is exhausted and the risk of a fiscal cliff emerges towards the end of the decade.
- Concurrent recommendation: step up structural reforms prioritizing those that encourage swift, sustainable reallocation of capital and labor to boost productivity and long-term growth.

### A. Fiscal policy discussions — background and measures
- Fiscal policy appropriately accommodative in 2021.
- Measures in 2021 included: extended wage allowances and businesses refundable advances, temporary cut in the solidarity tax and Social Security Contributions (SSC), new grants to SMEs, implemented in tandem with 2021:Q1 localized lockdowns.
- A primary deficit of 7.2 percent of GDP (accrual) is expected for 2021, mostly due to COVID-19 related measures.
- On-budget measures taken since the pandemic are among the highest in the EA, but off-budget guarantees are lower (excluding government guarantees to financial institutions on NPE securitizations — project Hercules).
- Bulk of measures focused on protecting incumbent workers and firms rather than encouraging startups and job creation.
- Measures that facilitate structural transformation amounted to less than 0.2 percent of GDP.
- About 70 percent of announced measures were frontloaded in 2021:H1 to support recovery ahead of NGEU disbursements in 2021:H2.
- Authorities tightened eligibility criteria of refundable advances and wage/SSC allowances to focus on more severely-hit firms and workers.
- Staff analysis suggests fiscal support measures prevented a major deterioration in firms’ performance in 2020 that otherwise would have been similar to that observed during 2010–15.

### Fiscal stance and medium-term plans
- Authorities target further fiscal accommodation in 2022 and gradual consolidation over the medium term.
- Excluding temporary COVID-19 measures, Stability Programme plans about 2 percent of GDP in fiscal support for 2022.
- Medium-Term Fiscal Strategy calls for gradual consolidation resulting in a 3¾ percent of GDP primary surplus by end-2025.
- Policy intentions include:
  - Broadening the tax base by combatting tax evasion, including through IAPR digitalization.
  - Lowering tax wedges (including for corporates and by extending reduction in the Solidarity Tax through 2022).
  - Stimulating electronic payments.
  - Revaluing property prices for the ENFIA tax assessment as of early 2022.

### Fiscal risks and contingent liabilities
- Once temporary measures unwind, significant contingent liabilities could materialize (not included in the baseline), stemming from:
  - New and existing guarantees.
  - Potential additional support to banks and firms (including SOEs that receive high budget transfers).
  - Non-repayment of the “refundable advance” administered by the IAPR.
  - Unexpected losses from Hercules.
- Rulings on retroactive pension and wage reforms continue to pose fiscal risks.
- Upside: faster vaccine distribution and larger-than-expected stimulus effects from RRF loans could improve the fiscal outlook.

### Progress with fiscal structural reforms
- Mixed progress:
  - New chart of accounts broadly on track.
  - Treasury Single Account (TSA) reform mostly completed.
  - Supplementary wage grid for the Independent Authority of Public Revenue (IAPR) recently adopted after long delay.
  - Implementation of new grading system and associated wage-grid will allow IAPR comprehensive HR reforms (staff appraisal, performance management, career development).
  - IAPR restructured some departments to improve audit case prioritization.
  - IMF technical assistance related to a Public Investment Management Assessment (PIMA) was postponed.
  - New unprocessed pension claims are adding to the stock of government arrears.
  - Introduction of new information management system to streamline budget execution processes over the medium-term was postponed.
  - New tax payment installment plans and business loan subsidies (“Gefyra II” scheme) alleviate pandemic-related debt distress but could potentially have adverse effects on the payment culture.

*Source: IMF staff chapter "9. Downside risks dominate (Annex I—RAM). The trajectory of the pandemic will dominate" from the provided content unit.*

### 24.      Safeguards for emergency  spending are in place. Spending related to COVID-19  is mostly

### 24.      Safeguards for emergency  spending are in place. Spending related to COVID-19  is mostly

### Safeguards, transparency, and PFM reform
- Spending related to COVID-19 is mostly on-budget and subject to regular budget-execution processes including publication of pandemic-related expenditures.
- Continued progress with ongoing public financial management reforms will contribute to ensuring that proper safeguards for transparency and accountability are in place.
- Additional measures recommended to safeguard emergency spending:
  - Allow public access to procurement contracts related to COVID-19.
  - Make available information on beneficial owners of contract recipients.
  - Conduct and publish ex-post audits of crisis-related spending.
  - Ensure Chart of Accounts (CoA) functional classification and the TSA capture new digital and green infrastructure initiatives.
  - Address staffing constraints in GAO.
  - Reduce the VAT gap, accelerate digitalization, and address root causes of recurrent arrears by establishing interfaces between government IT systems, simplifying payment procedures, and assessing the legal framework for execution of government payments.
  - Continue application of anti-money laundering tools to promote tax compliance.

### Fiscal policy discussions — priority areas and staff recommendations
- Staff offered qualified support for maintaining fiscal accommodation in 2022:
  - Recommendation: providing further stimulus of about 2 percent of GDP to bridge gaps between phasing out temporary COVID-19 measures and recovery in tourism, pent-up consumption demand, and investment funded through the NGEU.
  - Rationale: maintaining accommodation could reduce scarring risks and support the creation of jobs which is expected to lag the output recovery, provided the stimulus is properly spent.
  - Authorities’ plan: reduce the headline CIT rate by 2 percentage points; reduce advanced CIT payments to preserve corporate liquidity to avoid an effective tax rate of 50 percent in 2022 for otherwise-profitable firms.
  - Staff urged addressing coverage gaps in the GMI as support transitions from job retention towards targeted income support and worker reactivation (see Section C), and addressing unmet healthcare needs.
  - If the ongoing recovery is stronger than currently anticipated, authorities should save any fiscal overperformance as a contingency reserve for future downside risks and potential realization of pandemic-related contingent liabilities.
  - Staff recommended implementation of a data-driven approach and stepped-up enforcement of the new insolvency code to ensure only viable firms receive state-supported rescheduling options.

- Adopting a more inclusive and growth-friendly fiscal policy mix in the medium term:
  - Observation: Spending gaps compared to the EA remain large in health, education, targeted social spending, housing, childcare and unemployment benefits (Figure 7).
  - NGEU funds will provide financing through 2026, but measures to create fiscal space over the medium term are needed to sustain adequate social and investment spending.
  - Revenue mobilization and efficiency options suggested:
    - Raise diesel taxes (exception among environmental taxes).
    - Base-broadening (PIT).
    - Tackle tax compliance gaps (especially in VAT).
    - Expenditure adjustment in pensions, public wage bill, and efficiency gains in public investment, supported by IMF TA (PIMA).
  - SOEs: governance practices should be strengthened in line with OECD standards, including clear performance management and sound internal governance (internal audit and risk functions).

- Safeguarding emergency spending and accelerating fiscal structural reforms once the pandemic ends:
  - In addition to existing controls, consider public access to procurement contracts, beneficial ownership disclosure, and ex-post audits.
  - Reinvigorate public investment management to improve effectiveness of public spending (including NGEU-funded programs).
  - Ensure CoA appropriately captures digital and green initiatives; address staffing constraints in GAO.
  - Address VAT gap, accelerate digitalization, and resolve recurrent arrears to enhance counter-cyclical policy implementation.

### Key fiscal statistics and references from text and figures
- One-off expected clearance cost of backlog of state guarantees in 2020: 1.2 percent of GDP (noted in Text Figure 3 footnote).
- IMF Europe recommendation referenced: Europe-wide 3 percent stimulus during 2021–22.
- Staff view: authorities’ planned accommodation is lower than the IMF’s Europe-wide 3 percent stimulus for 2021–22 due to sizeable support already provided in 2020–21, rapid closure of the output gap, absorptive capacity constraints, and Greece’s high debt and external imbalances.

### Authorities’ views on fiscal stance
- Authorities agreed fiscal policy would remain accommodative in the aftermath of the pandemic—in line with EC guidelines—and noted the fiscal mix was improving.
- They suggested most COVID-19 measures would lapse next year, but the fiscal stance would remain expansionary following reduction in SSCs and the solidarity tax rate and the expected impact on corporate and personal income tax receipts based on previous years’ earnings.
- Authorities expect stimulus, reforms, and fiscal space from RRF grants to mitigate short-term cliff effects, increase investment, accelerate recovery, and raise potential growth.
- They expect revenue buoyancy would prevent a fiscal cliff when NGEU funding dries up.
- Authorities expect to accommodate downside risks through automatic stabilizers or targeted interventions and noted fiscal support this year consisted more of grants than loans consistent with transitioning from liquidity to equity support measures.
- On expenditure: authorities agreed on the need to strengthen the GMI and increase healthcare spending, but noted the structural fiscal impact would be modest and would not require a reduction in the income tax credit or entitlement reform according to the most recent Ageing Report projections.
- Authorities emphasized civil servant numbers remain well below pre-crisis peak; recent hirings were mostly temporary healthcare workers.

### Financial policy discussions — banking sector and NPEs
- Background observations:
  - Slow progress in restoring banking sector health prior to the pandemic reflected deep-seated institutional and policy constraints: weak core profitability, NPE market values below book valuation, and lukewarm investor interest given risk of dilution from high and rising share of DTCs in bank capital.
  - Policy reliance on financial engineering (government-backed securitizations, corporate hive-downs) to reduce NPEs without triggering DTC conversion or breaching EU state aid rules.
  - Government extended Hercules through end-2022 and doubled provision of state guarantees to €24 billion, including to deal with fresh NPEs due to COVID-19.
  - Loan moratoria and temporary interest-payment subsidies prevented a spike in new NPEs in 2020 but delayed recognition of inevitable loan losses.
  - Banks project about €5 billion in fresh NPEs given debt repayment behavior so far following the end of moratoria; the BoG earlier estimated about €8–10 billion additional NPEs.
  - About 75 percent of the €21 billion drop in NPEs is due to intra-group transfers in anticipation of securitizations in 2021–22.
  - Some banks could reach single digit ratios of NPEs already this year, while others might do so by 2022, but execution risks remain high.
  - Greek non-bank financial sector is relatively small compared to European peers and currently no substitute for bank credit.

- Policy recommendations and discussions:
  - Gradually lift government support measures to avoid sudden deterioration in bank balance sheets and maintain transparency.
    - Let mortgage and business loan subsidy programs (“Gefyra I and II”) lapse by end-2021 to allow use of the new insolvency framework to resolve firms that default on loans.
  - Support banks’ efforts to reduce NPEs and strengthen capital buffers.
    - Extension of additional government guarantees for NPE securitizations (“Hercules-II”) welcomed.
    - Formulate backup plans if fresh capital raising is insufficient and/or Hercules execution risks materialize (delays in securitizations and/or lower-than-expected collection rates).
    - Find solution with European partners for rising share of DTCs in bank capital; stand-alone DTC conversion could be considered as a last resort if it restores investor confidence.
    - Finalize a DTC law amendment that ensures DTCs are loss-absorbing in resolution.
  - Develop the non-bank financial sector to support growth:
    - Improve capital markets governance.
    - Channel NGEU loans through banks into private investment.
    - Strengthen incentives for private retirement savings to develop the non-bank financial system.
  - Allow the resolution framework to function:
    - Ensure effectiveness of enforcement proceedings and that only viable firms receive state-supported rescheduling options.
    - Note: the Insolvency Code has been implemented (corporates March 2021; households June 2021) but tools remain untested.

### Banking sector key figures and projections
- Government guarantees provision increased to €24 billion.
- Banks project about €5 billion in fresh NPEs post-moratoria; BoG earlier estimated about €8–10 billion.
- MoF considered pandemic-related loan losses would be contained around €4–5 billion (according to banks’ calculations).
- BoG estimates COVID-19 related NPEs will likely amount to €8–0 billion once support measures are fully phased out. 
- About 75 percent of the €21 billion drop in NPEs is due to intra-group transfers in anticipation of securitizations in 2021–22.

### Authorities’ views on banking
- Authorities noted rapid reduction in NPEs supported by Hercules Asset Protection Scheme and recent upgrades in banking outlook by major credit rating agencies.
- Expected positive impact on private sector debt resolution from comprehensive insolvency law reform.
- Acceleration of NPE reduction, implementation of bank business plans, and forthcoming RRF financing should increase banks’ profitability and reduce DTC conversion risk.
- BoG warned risk of conversion remains substantial in the long term as DTCs count as capital over an extended period.
- MoF considered pandemic-related loan losses manageable under Hercules (~€4–5 billion), while BoG’s upper estimate differed (see figures above).
- AMC proposal by BoG under consideration but not adopted pending analysis of upfront fiscal costs, possible conflicts with Hercules, and lengthy EU approval process.

### Welfare, labor, and structural policy observations
- Greece has made progress in social welfare policies but disparities remain and safety net is unfinished.
- 2017 GMI narrowed the poverty gap; employed and retirees experienced falling poverty incidence, while poverty increased for the unemployed.
- GMI coverage is low by European standards due to under-funding and program fragmentation; labor re-activation pillar was rolled out nationally in June 2021.
- OAED faces resource constraints and program design issues; GMI design meant it was not used to support workers during the pandemic.

*Source: IMF staff report content as provided.*

### 32.      Greece  has become more competitive, but weak firm productivity constrains growth.

### Greece has become more competitive, but weak firm productivity constrains growth.

### Competitiveness, firm structure, and productivity
- Greece became more competitive following the GFC, but gaps remain vis-à-vis trading partners in corporate governance, regulatory burden, institutional quality, and efficiency of network industries.
- Overvaluation remains an issue (see Annex II—ESA).
- The economy is dominated by low value-added SMEs that entered the pandemic with high levels of NPLs and elevated vulnerability in sectors such as accommodation and food services, increasing scarring risks.
- Some positive developments:
  - SMEs improved their balance sheets since the GFC.
  - A new breed of fast-growing, high-tech startups is emerging.
  - Prior to the pandemic there was evidence of firm expansion.
- Policy measures in the RRF plan aim to encourage firm growth, joint ventures and cooperation with larger firms, and incentives for SME mergers.
- Labor market updates:
  - Draft revision to the labor code expected to allow opt-outs to collective bargaining, reform the arbitration framework, and modernize industrial action.
  - Revision to the minimum wage (MW) is scheduled to take place by end-July 2021.

### NGEU / RRF (Greece 2.0) plan, expected impacts, and execution risks
- The RRF national plan was submitted to the EC on April 21, 2021.
- The plan’s blueprint is based on the updated National Growth Strategy and includes reforms to:
  - modernize labor market institutions to support labor reactivation and create higher value-added jobs,
  - enhance productivity and social welfare (including youth vocational training and apprenticeships),
  - encourage innovation and technology development through increased R&D (including in tertiary education) and public administration digitalization.
- Action plan execution status:
  - Progressing, albeit with delays in approving the Project Preparation Facility and the Strategic Project Pipeline Unit.
  - The government signed an agreement with the European Investment Bank (EIB) to manage €5 billion in RRF funds.
- Authorities’ model (DSGE) projections and assumptions:
  - The package alone would increase real GDP levels by 4.3 percent by 2026 while in combination with ambitious structural reforms, output would increase by 6.9 percent during the same period.
  - Private investment grows by 20 percent and employment by 4 percent, creating 180,000–200,000 jobs.
  - The model assumes convergence to European benchmarks in PMR, labor force participation, and digital skills/utilization by 2030, and reform implementation starts in 2021.
  - NGEU loans are channeled to the private sector, boosting capital stock and exports, and raising the tax/GDP ratio by 2.8 percentage points.
  - Ministry of Finance’s baseline projects an average growth rate of 4.3 percent through 2025.
  - Authorities’ baseline with and without NGEU suggest a cumulative multiplier of 1.2 of investment by the end of the projection period and of 0.9 percent on average between 2021–26.
- IMF staff assessment of impact (more conservative):
  - Staff’s baseline estimates an annual average boost to GDP growth of 0.6 percentage points driven by acceleration in investment and a recovery in exports.
  - Staff only take into account the grant portion of NGEU and assume structural reforms in train will just be sufficient to overcome demographic headwinds.
  - Staff split the COVID-19 impact into cyclical and permanent components and find NGEU funds offset only part of the permanent component, resulting in a lower level of real GDP compared to the pre-pandemic forecast (-3 percent).

### Institutional reform, governance, and statistical capacity
- The NGS emphasizes institutional change and better governance to boost growth; low investment is driven by governance and institutional barriers (regulatory burden, public administration inefficiencies, and delays and challenges in the justice system).
- Progress has been made in legislation linked to investment licensing and business regulation, but the judicial system remains a roadblock (lengthy and costly exit procedures and missing/contradictory secondary legislation).
- NGS aims to improve the justice system by re-organizing it, expanding resources, and digitalizing services (e-justice).
- Greece has stepped up efforts to fight illicit trade and protect intellectual property rights and is preparing a 2022–25 National Anti-Corruption Action Plan; the National Transparency Authority is coordinating a consultation to finalize the Action Plan by December 2021.
- Statistical capacity:
  - ELSTAT is now compliant with most international statistical standards and produced helpful indicators during the pandemic.
  - Base revision to national accounts and changes to external data methodology have reduced macro data discrepancies.
  - Remaining gaps include real estate sector series halted after the GFC, lagging national accounts timing, and cessation of flash estimates.
  - Lengthy ongoing court cases against former ELSTAT employees could dent ELSTAT’s credibility and professional independence.
  - Staff recommended providing flash national account estimates and protecting the independence and credibility of the statistical agency and its staff, upholding the “Commitment on Confidence in Statistics” (endorsed 2012).

### Policy discussions and staff recommendations
- Three policy areas discussed:
  1. Encouraging resource reallocation and strengthening the safety net to prevent scarring
     - Prioritized protecting livelihoods and productive capacity; extension of suspension measures for tourism through end-June and short-term work scheme through end-September 2021 welcomed.
     - Near-term priorities: overhauling OAED and ensuring full execution of the GMI third pillar rollout to approach regional spending levels and improve activation and employment services.
     - Improve fiscal policy mix to encourage female labor participation (particularly by funding childcare), invest in youth prospects and older worker re-skilling and activation.
     - Vocational training legislation is positive but success depends on speed of execution, quality of training, and delivery model.
     - Address SME challenges (debt resolution and access to finance) to release capital to newer viable firms; routing NGEU loans to SME lending could ease credit constraints but should accompany exit and resolution reforms and business climate improvements.
  2. Investing in a job-rich, green recovery
     - NGEU funds can support transition to more competitive, fairer, and greener growth provided public investment framework is upgraded.
     - Staff recommended upcoming labor legislation foster labor market flexibility (allow firm opt-outs to sectoral collective bargaining agreements and restrict unilateral recourse to arbitration).
     - Staff recommended a prudent minimum wage increase given the operating environment and broadly flat productivity growth since the last MW hike in 2019.
     - Staff emphasized reforms to boost worker productivity: encourage labor churn, improve education, open closed product markets and remaining closed professions, make network industries more efficient including by speeding up privatization.
     - Timely implementation of the NECP and fiscally-neutral policies encouraging energy efficiency and renewables (feebates) would help meet emission commitments and narrow the investment gap.
  3. Tackling structural bottlenecks and improving governance to attract investment
     - Staff welcome RRP objectives to foster innovation and technology acquisition; higher R&D spending is essential to increase value added.
     - Implement proper safeguards to ensure transparency and accountability of COVID-19-related emergency spending.
     - Ensure completion of the NTA’s 2022–25 action plan by end-2021 to allow swift implementation in 2022.

### Authorities’ views
- Authorities consider structural transformation paramount for recovery that permanently improves living standards.
- They highlighted significant policy support to workers and firms to prevent scarring and agreed resource reallocation is key.
- Authorities view reinforcing the GMI and reforming OAED as key to managing poverty risks and tackling unemployment.
- They expect NGEU funding and reforms to gradually reduce social welfare needs and poverty risks by boosting job quality and incomes.
- RRP’s fourth pillar focuses on improving business environment and encouraging firm scale growth and productivity by providing incentives for firm expansion and tackling financing constraints for firms of all sizes, including SMEs.
- Authorities concur that labor market flexibility along with active labor policies will be key to encouraging labor force participation and market churn; upcoming legislation emphasizes modernization and digitalization of labor market institutions, telework, reducing informality, safeguarding rights, and increasing gender equality.
- Authorities remain fully committed to protecting and respecting the independence and credibility of the statistical agency and its staff and to upholding the “Commitment on Confidence in Statistics”.

### Staff appraisal and recent macro outcomes
- The government’s response to the pandemic was swift and proactive.
- Greece entered the pandemic with an unfinished recovery but demonstrated resilience.
- The economy contracted by 8.2 percent in 2020.
- The government provided among the largest on-budget fiscal stimuli in the euro zone, which prevented a spike in corporate distress and kept workers attached to the labor market (though young and part-time workers experienced a sharp drop in employment).
- Supervisory and ECB accommodation shielded the banking sector and kept financial conditions highly supportive.

*Source: 1grcea2021001 - Greece  has become more competitive, but weak firm productivity constrains growth. (IMF).*

### 39.      The economy is expected to rebound in 2021–22. Investment through  Next Generation

### The economy is expected to rebound in 2021–22. Investment through  Next Generation

### Outlook and main drivers of the recovery
- Growth is projected at 3.3 percent this year, accelerating to 5.4 percent in 2022.
- Main drivers: NGEU grant funding, pent-up consumption funded by deposit drawdown, and tourism resumption.
- The permanent output loss from the pandemic (“scarring”) is projected to reach 3 percent, implying policy focus on facilitating both debt workouts and resource reallocation.

### Substantial uncertainties and downside risks
- Full vaccination is progressing at a rate above the European average, but a more prolonged pandemic would add significant downside risks to all sectors.
- Uncertain extent of pandemic-related Non-Performing Exposures (NPEs) could affect banks’ securitization plans and curb credit growth.
- Other risks:
  - Weaker-than-anticipated absorption of NGEU funding.
  - External risks: reversal of global accommodative financial conditions and manifestation of geopolitical risks.

### Upside scenario: full execution of the RRF plans
- Potential benefits if RRF plans are fully executed:
  - Higher investment.
  - Economies of scale from greater firm size.
  - Increased export orientation.
  - Current account deficit kept in check.
  - RRF structural reform agenda could raise productivity growth, move the country to investment grade, and anchor long-term debt sustainability.
  - Expansion of output, lower tax rates, and digitalization could widen the tax base and avoid cliff effects when NGEU funding dries up.
  - Increased lending opportunities would support interest margins.
  - Declining NPE ratios would allow banks to improve the quality of bank capital organically.
- Staff view: such a virtuous cycle is subject to significant execution risks.

### Public debt, financing needs, and IMF repayment capacity
- Public debt projection:
  - Following a spike in 2020, public debt is projected to peak in 2021 and decline gradually over the medium-term, albeit remaining at higher levels than forecast before the pandemic.
- Debt sustainability assessment:
  - Greece’s public debt remains sustainable over the medium-term, predicated on the negative interest rate-growth differential and a gradual return to primary surpluses.
  - The government’s large cash buffer and active liability management mitigate refinancing risks.
  - Greece’s ability to service its debt under a severe shock depends on continued regional support.
- Long-term uncertainty:
  - Uncertainty about the long-term neutral rate and risk premia is too high to reach a firm conclusion on long-term debt sustainability.
  - This departs from the previous long-term DSA published in 2018.
  - Downside: concerns about capacity to sustain high primary surplus targets have deepened and uncertainty about potential growth path remains.
  - Offsetting factors: significant decline in the risk-free rate and very sharp compression of Greek bond spreads, which started before the pandemic and continued following Europe-wide support packages.
  - Unclear whether such low rates can be maintained amid the transition from official to market funding.

### Fiscal stance and recommendations for 2021–22
- 2021 fiscal outcome:
  - Pandemic-related measures imply a primary deficit of around 7¼ percent of GDP in 2021, with much of the support frontloaded ahead of NGEU disbursements.
- 2022 fiscal posture:
  - Headline primary deficit for 2022 is expected to recover to 1 percent of GDP.
  - Underlying fiscal stance, excluding temporary COVID-19 measures, remains expansionary by about 2 percent of GDP.
- Staff advice:
  - Qualified support for maintaining fiscal accommodation in 2022 to reduce scarring risks and support job creation, provided stimulus is properly spent.
  - Given substantial uncertainty about economic slack and recovery strength, fiscal overperformance should be saved as a contingency reserve to hedge against future downside risks and potential contingent liabilities from the pandemic.
- Use of additional support to improve fiscal policy mix:
  - Reductions in the corporate income tax (CIT) rate and advanced CIT payments strengthen investment incentives and preserve firm liquidity.
  - Equal emphasis urged on improving the expenditure mix of the budget.
  - Near-term priorities:
    - Address gaps in the Guaranteed Minimum Income scheme; transition support from job retention towards targeted income support and worker reactivation.
    - Address unmet needs in healthcare provision.
  - Structural fiscal measures to create medium-term fiscal space:
    - Personal income tax base-broadening.
    - Tackling VAT compliance gaps.
    - Aiming for expenditure savings in less-well targeted entitlement programs (including pensions), in the public wage bill, and in State Owned Enterprises.
  - Note: concern about the number of civil servants “creeping back to pre-crisis levels.”

### Financial sector measures and NPE resolution
- Hercules securitization strategy:
  - Could achieve a rapid reduction in NPEs provided capital-raising efforts are successful.
  - The pandemic could delay normalization of bank balance sheets, requiring a proactive government approach backed by comprehensive cost-benefit analysis of all options.
  - Overarching goals: reduce financial sector risks and avoid a prolonged and muted credit-less economic recovery.
  - Staff welcomed extension of additional government guarantees for NPE securitizations (“Hercules-II”).
  - Staff suggested formulating backup plans if fresh capital raising by banks is insufficient and/or other execution risks materialize.
- Asset Management Company (AMC) and other tools:
  - Bank of Greece’s proposal to establish an AMC has been shelved.
  - Staff encouraged authorities to work with European partners to find a solution for weak quality of bank capital.
  - Amid increasing bank differentiation, stand-alone DTC conversion could be considered as a last resort if it restores investor confidence for banks unable to fully utilize existing tools.
  - Staff encourages swift finalization of a DTC law amendment to ensure that the instruments are loss-absorbing in resolution.
  - Effective implementation and use of the new Insolvency Code, including by servicers, will be critical for meaningful debt resolution.

### Structural reforms and leveraging NGEU resources
- Importance:
  - Structural reform implementation is essential to minimize scarring risks and leverage NGEU resources.
  - While reforms have progressed in a number of areas, Greece’s external position in 2020 is assessed to have remained weaker than consistent with medium-term fundamentals and desirable policies.
- Policy priorities:
  - Accelerate structural reforms that boost productivity, reduce non-wage costs, and close the investment gap.
  - Improve fiscal policy mix to support labor force participation objectives, including encouraging female labor participation (particularly by funding childcare) and investing in youth’s prospects and older worker reskilling.
  - Upgrade the public investment framework to ensure NGEU funds support transition to a job-rich, fairer, and greener growth model.
  - Upcoming labor codification should foster labor market flexibility; minimum wage adjustment should be prudent.
- Governance and transparency:
  - Continue implementing proper safeguards to ensure transparency and accountability of COVID-19-related emergency spending.
  - Protect the independence and credibility of the statistical agency and its staff, making every effort to uphold the “Commitment on Confidence in Statistics” endorsed by the government in 2012.

*International Monetary Fund staff summary of Greece economic outlook and policy recommendations.*

### 49.      It is proposed that the next Article IV consultation take place on the standard 12-

### 1grcea2021001 - 49.      It is proposed that the next Article IV consultation take place on the standard 12-

### Pre-COVID-19 developments
- Pre-pandemic growth was modest, led by trade, tourism and services, agri-business, and manufacturing.
- The primary surplus consistently exceeded its target, increasingly through expenditure compression.
- Greek banks entered the pandemic with improving but still highly impaired balance sheets.
- Greek 10-year bond yield spreads had declined to their lowest level in a decade.
- A substantial competitiveness gap remained vis-à-vis peers.
- Sources cited: Bank of Greece; Bloomberg Finance L.P.; ELSTAT; Haver Analytics; IMF, WEO database; Transparency International; World Economic Forum; IMF staff calculations.

### Health developments and COVID-19 response
- Cases and mortality in Greece are low by regional standards, but the third wave was more treacherous.
- Strict lockdowns were lifted in May 2021.
- Full vaccination is progressing well.
- Capacity constraints to deal with cases remain and unmet health needs remain higher vis-à-vis peers.
- Sources cited: Blavatnik School of Government; Bloomberg; Eurostat; Greek Authorities; Haver Analytics; Johns Hopkins University; Kalavrezou et al (IMF WP forthcoming); IMF staff calculations.

### Recent macroeconomic developments (2020–21)
- The contraction eased after 2020:Q2.
- Construction activity held up well and other sectors bottomed out in summer 2020.
- Manufacturing expectations have rebounded but lag the EA average; confidence indicators have improved.
- Industrial production is expanding, but retail sales continue to decline, reflecting constraints to domestic demand driving deflation.
- Sources cited: ELSTAT; Eurostat; Greek Authorities; Haver Analytics; IHS Markit; IMF staff calculations.

### Labor market developments
- Policy measures aimed to protect employment, yielding a steady unemployment rate.
- Hours worked fell sharply during the onset of the pandemic and have yet to recover for lower part-time workers.
- Policy measures are sustaining wage levels, driving up unit labor costs at a faster rate than productivity.
- Greece has one of the highest labor market unemployment and slack rates in the EA, and one of the lowest labor force participation rates.
- Note: As of February 2019, the minimum wage increased by 11 percent to €650 for monthly wages and to €29 for daily wages.
- Sources: ELSTAT; Eurostat; Haver Analytics; ILO; IMF staff calculations.

### Financial sector developments
- NPEs are declining amid stable capital ratios and provisioning coverage.
- About one-third of residential NPEs remain under legal protection.
- Central bank funding has normalized owing to deleveraging and the recovery in deposits.
- Lending rates are falling but remain elevated; net credit growth to firms peaked in early 2021 while consumer and housing finance remains weak.
- Sources: Bank of Greece; ELSTAT; Haver Analytics; S&P Market Global Intelligence; IMF Financial Soundness Indicators; IMF staff calculations.

### External sector developments
- The current account balance deteriorated sharply in 2020 as travel receipts collapsed due to the pandemic’s impact on tourism.
- The CPI-based REER reversed its recent appreciation in 2019, remaining broadly stable in 2020.
- With official sector program-related financing tapering off, financial account dynamics continued to be driven by portfolio and other investment.
- Net FDI remains negative.
- The sharp drop in GDP and increase in government debt accelerated the deterioration in the NIIP.
- Sources: Bank of Greece; ELSTAT; Eurostat; ECB; Haver Analytics; IMF staff calculations.

### Fiscal policy mix and public finances
- Greece has higher tax rates but lower revenues than EA peers, reflecting a narrow tax base, notably in PIT, and weak tax compliance, especially in VAT.
- High pension and public sector employment costs creeping back to pre-crisis levels crowd out health and education spending and critical social spending in childcare, housing, unemployment benefits, etc.
- SOEs continue to receive sizable state transfers.
- Sources: Center for Social and Economic Research; Deloitte; Eurostat; Greek Authorities; KPMG; OECD; IMF staff calculations.

### Non-bank financial institutions and markets
- Greece’s stock market capitalization is in the lower half of EU countries.
- Total outstanding debt securities in GRC are among the lowest in the EU; mostly issued by the central government.
- Banks account for most of Greece’s credit to NFCs; the EA is less bank dominated.
- OFI and pension and insurance funds have experienced limited growth compared to EA peers; insurance and pension funds’ assets are among the lowest in the EA.
- Sources: BIS; Bloomberg; ECB; Eurostat; Haver Analytics; IMF, WEO; IMF staff calculations.

### Small and Medium Enterprises (SMEs)
- Micro and small firms employ a majority of the Greek labor force but contribute to less than half of gross value-added.
- Prior to the pandemic, Greece had a relatively large share of firms with rapid employment growth.
- SMEs entered the pandemic with high legacy non-performing loans from the previous crisis, but balance sheets had improved in the last decade and financial vulnerability is now lower than in larger firms.
- SMEs took a substantial share of bank loans under pandemic-related moratoria, suggesting policy measures succeeded at preventing firm exits.
- Sources: ELSTAT; Bank of Greece; Bureau van Dijk Orbis; Eurostat; IMF staff calculations.

### Climate change and energy transition
- Greece’s emissions per capita converged rapidly to the EU average since the onset of the GFC.
- The highest-emission activity in production is electricity generation.
- Environmental tax hikes helped meet fiscal targets, but fossil fuels still receive subsidies while zero-low emissions vehicles receive none.
- Investments in green transportation would help meet emission targets and close technology gaps.
- Sources: European Alternative Fuels Observatory; Eurostat; European Commission; Haver Analytics; IMF staff calculations.

### Medium-Term Macro Framework, 2019–26 (selected rows — percentage change or percent of GDP as indicated)
- Real GDP: 2019 1.9; 2020 -8.2; 2021 3.3; 2022 5.4; 2023 2.6; 2024 1.8; 2025 1.5; 2026 1.2
- Total domestic demand: 2019 1.2; 2020 -2.4; 2021 1.4; 2022 3.0; 2023 2.4; 2024 2.4; 2025 1.8; 2026 1.4
- Unemployment rate, period average (percent) 1/: 2019 17.3; 2020 16.4; 2021 16.5; 2022 15.2; 2023 13.7; 2024 12.5; 2025 12.1; 2026 11.8
- Primary balance (percent of GDP): 2019 3.2; 2020 -7.5; 2021 -7.2; 2022 -1.1; 2023 0.1; 2024 0.5; 2025 1.0; 2026 1.5
- Overall balance (percent of GDP): 2019 0.2; 2020 -10.5; 2021 -10.1; 2022 -4.1; 2023 -2.9; 2024 -2.5; 2025 -2.1; 2026 -1.7
- Gross public debt (percent of GDP) 4/: 2019 184.9; 2020 211.2; 2021 213.8; 2022 204.1; 2023 197.0; 2024 192.6; 2025 188.0; 2026 183.6
- Memorandum: Nominal GDP (billions of euros): 2019 183.4; 2020 165.8; 2021 171.0; 2022 181.5; 2023 187.9; 2024 194.1; 2025 200.5; 2026 206.5
- Sources: ELSTAT; Ministry of Finance; Bank of Greece; IMF staff estimates.
- Note: 1/ Based on Labor Force Survey. 2/ Includes deferred interest payments on EFSF loans (SNA adjustment). 3/ Includes transfers related to ANFA/SMP profits (SNA adjustments). 4/ Includes the stock of deferred interest payments on EFSF loans (SNA adjustments).

### Balance of Payments and External Sector (selected aggregates, 2019–26)
- Current account balance (percent of GDP): 2019 -4.1; 2020 -12.3; 2021 -11.2; 2022 -6.3; 2023 -6.4; 2024 -6.7; 2025 -7.0; 2026 -7.1
- Balance on goods and services (percent of GDP): 2019 -1.7; 2020 -11.2; 2021 -10.5; 2022 -5.0; 2023 -3.6; 2024 -3.8; 2025 -4.1; 2026 -4.1
- Services balance (percent of GDP): 2019 21.1; 2020 7.3; 2021 9.8; 2022 16.3; 2023 18.2; 2024 18.7; 2025 19.5; 2026 20.4
- Net Direct Investment (percent of GDP, inflow minus outflow): displayed series show net negative trends with inflows and outflows; specific entries include 2019 inflow 3.9 and 2020 inflow 2.5 (billions of euros in full tables).
- Gross external debt (percent of GDP): 2019 249.0; 2020 303.9; 2021 299.0; 2022 285.6; 2023 278.9; 2024 273.0; 2025 267.7; 2026 263.0
- Sources: Bank of Greece; IMF staff estimates.

### General government operations (selected rows, 2019–26)
- Total revenues (billions of euros): 2019 88.0; 2020 83.2; 2021 85.0; 2022 89.3; 2023 92.3; 2024 94.8; 2025 96.5; 2026 98.4
- Primary expenditure (billions of euros): 2019 82.1; 2020 95.7; 2021 97.3; 2022 91.3; 2023 92.1; 2024 93.8; 2025 94.5; 2026 95.3
- Primary balance (accrual, billions of euros): 2019 5.9; 2020 -12.5; 2021 -12.2; 2022 -2.0; 2023 0.3; 2024 0.9; 2025 2.0; 2026 3.0
- Overall balance (billions of euros): 2019 0.4; 2020 -17.4; 2021 -17.2; 2022 -7.4; 2023 -5.5; 2024 -4.9; 2025 -4.2; 2026 -3.5
- Gross debt (billions of euros, general government): 2019 339.1; 2020 350.3; 2021 365.6; 2022 370.4; 2023 370.1; 2024 373.7; 2025 377.0; 2026 379.2
- Gross debt (percent of GDP, using alternative presentation excluding deferred interest): 2019 184.9; 2020 211.2; 2021 213.8; 2022 204.1; 2023 197.0; 2024 192.6; 2025 188.0; 2026 183.6
- Sources: ELSTAT; Ministry of Finance; IMF staff estimates.

### Monetary survey and banking sector aggregates (selected)
- Aggregated balance sheet of MFIs, total assets (billions of euros): Mar. 2018 427.7; 2018 402.4; 2019 419.5; 2020 520.0; 2021 530.9
- Broad money (annual percent change): 2018 5.7; 2019 4.3; 2020 4.2; 2021 12.1; Mar. 2021 12.9
- Credit to the private sector (annual percent change): 2018 -5.8; 2019 -7.5; 2020 -9.5; 2021 -8.2; Mar. 2021 -5.4
- Credit to the private sector (percent of GDP, Mar. 2021): 86.2
- Sources: Bank of Greece; IMF staff calculations.

### Financial Soundness Indicators (selected, percent)
- Regulatory capital to risk-weighted assets: 2014 14.1; 2015 16.5; 2016 16.9; 2017 17.0; 2018 16.0; 2019 17.0; 2020 16.7
- Nonperforming loans to total gross loans: 2014 33.8; 2015 36.6; 2016 36.3; 2017 45.6; 2018 42.0; 2019 36.4; 2020 27.0
- Bank provisions to nonperforming loans: 2014 55.8; 2015 67.6; 2016 68.9; 2017 46.8
- Return on assets (after taxes): ranges negative and small positives, e.g., 2014 -1.0; 2015 -2.5; 2016 0.1; 2019 0.1; 2020 -0.6
- Household debt to GDP: 2014 63.0; 2019 59.0
- Sources: Bank of Greece.

### General government financing requirements and sources (selected, billions of euros)
- Gross borrowing need: 2018 35.9; 2019 21.6; 2020 29.1; 2021 32.6; 2022 24.2; 2023 20.2; 2024 19.9; 2025 17.4; 2026 21.6
- Overall deficit (billions of euros): 2018 -1.4; 2019 -2.3; 2020 17.1; 2021 16.9; 2022 6.7; 2023 4.9; 2024 4.0; 2025 2.6; 2026 1.6
- Amortization (total, billions of euros): 2018 18.6; 2019 28.9; 2020 18.8; 2021 18.9; 2022 20.6; 2023 21.6; 2024 17.6; 2025 15.4; 2026 20.6
- Market access (gross financing sources, billions of euros): 2018 14.2; 2019 21.6; 2020 27.1; 2021 29.4; 2022 24.2; 2023 20.2; 2024 19.9; 2025 17.4; 2026 21.6
- Official financing (billions of euros): 2018 21.7; 2019 0.0; 2020 2.0; 2021 3.3; 2022 0.0; 2023 0.0; 2024 0.0; 2025 0.0; 2026 0.0
- Memo: Deposits of general government (billions of euros): 2018 38.4; 2019 36.4; 2020 31.0; 2021 28.7; 2022 27.4; 2023 20.5; 2024 18.2; 2025 16.9; 2026 15.6
- Sources: Ministry of Finance; IMF staff projections.

### External financing requirements and sources (selected, billions of euros)
- Gross financing requirements: 2019 103.2; 2020 130.3; 2021 139.6; 2022 133.4; 2023 137.6; 2024 140.9; 2025 142.2; 2026 146.4
- Current account deficit contribution to gross financing requirements (billions of euros): 2019 4.1; 2020 12.3; 2021 11.3; 2022 6.2; 2023 6.4; 2024 6.9; 2025 6.8; 2026 7.1
- Short-term debt amortization: 2019 83.0; 2020 107.5; 2021 115.6; 2022 116.4; 2023 114.1; 2024 120.4; 2025 121.7; 2026 124.2
- New borrowing and debt rollover (total): 2019 123.2; 2020 136.8; 2021 138.1; 2022 130.0; 2023 135.3; 2024 136.8; 2025 139.2; 2026 143.2
- Program-related financing (billions of euros): 2019 2.7; 2020 2.5; 2021 2.4; 2022 2.4; 2023 1.2; 2024 1.2; 2025 1.2; 2026 1.3
- Sources: Bank of Greece; IMF staff estimates.

### Indicators of Fund credit (SDR, selected)
- Outstanding stock (millions of SDR): 2020 4,554.2; 2021 1,510.0; 2022 1,363.3; 2023 251.1; 2024 0.0; 2025 0.0; 2026 0.0
- Amortization (millions of SDR): 2021 3,044.2; 2022 146.7; 2023 1,112.2; 2024 251.1; 2025 0.0; 2026 0.0
- Total charges and fees (millions of SDR): 2020 69.1; 2021 28.8; 2022 17.2; 2023 10.6; 2024 2.5; 2025 0.7; 2026 0.7
- Total debt service (millions of SDR): 2020 69.1; 2021 3,073.0; 2022 163.9; 2023 1,122.8; 2024 253.7; 2025 0.7; 2026 0.7
- Percent of quota (outstanding stock): 2020 187.5; 2021 62.2; 2022 56.1; 2023 10.3; 2024 0.0; 2025 0.0; 2026 0.0
- Memorandum: Exports of goods and services (billions of euros): 2020 51.6; 2021 60.9; 2022 69.5; 2023 73.5; 2024 75.9; 2025 78.7; 2026 81.6
- Sources: IMF staff estimates.

### Risk Assessment (note excerpt)
- The Risk Assessment Matrix (RAM) shows events that could alter the baseline path.
- Relative likelihood definitions used by staff: “low” indicates probability <10 percent, “medium” indicates probability 10–30 percent, and “high” indicates probability 30–50 percent.
- RAM reflects staff views as of time of discussions with the authorities; conjunctural shocks and scenario highlight risks over a shorter horizon (12–18 months); structural risks remain salient over a longer horizon.

*Source: IMF staff compilation from the Greece Article IV consultation materials as contained in the unit.*

### Annex I. Risk Assessment  Matrix

### Annex I. Risk Assessment Matrix

### Domestic Risks
- Higher spending needs, insufficient impact of monetary and fiscal policies. (C)  
  - Relative Likelihood: Medium  
  - Impact If Realized: High — Economic activity remains sluggish without adequate stimulus, hurting confidence.  
  - Policy Responses:
    - Adequately target policies and execute efficiently towards growth-friendly, socially-inclusive policies (e.g. health, education) to secure long-term fiscal sustainability, boost potential growth, and increase economic resilience.
    - Design a phase-out strategy from COVID-19 measures balancing macro effects with fiscal sustainability concerns.
    - Reinvigorate fiscal structural reforms to improve current and investment spending effectiveness.

- Deterioration of bank balance sheets. (C)  
  - Relative Likelihood: High  
  - Impact If Realized: High — Weak corporate performance gives rise to higher NPLs, lower profitability, and weaker capital buffers. Weaker credit growth undermines the recovery and increases informality.  
  - Policy Responses:
    - Accelerate bank clean-up and the build-up of capital buffers.
    - Gradually remove supervisory accommodation to avoid a sudden shift in banks’ balance sheets.
    - Strengthen operational preparedness for crisis management.

- Structural reform implementation. (S)  
  - Scenarios: Downside — Fallout from the pandemic reduces reform appetite. Upside — The RRF package is seized as an opportunity for deeper, faster reforms.  
  - Relative Likelihood: Low (downside) / Medium (upside)  
  - Impact If Realized: Downside — Lower growth, slower convergence. Upside — High: Growth above baseline, faster convergence, improved debt dynamics.  
  - Policy Responses:
    - Execute the National Growth Strategy; establish priorities and sequencing, funding plans, and inter-linkages between reform sectors (e.g. financial sector reform and firm dynamics).
    - Engage in dialogue amongst reform stakeholders to ensure ownership and take-up.

### External Risks
- Unexpected shifts in the COVID-19 pandemic (C).  
  - Scenarios: Prolonged pandemic — COVID-19 proves harder to eradicate requiring recurring and costly containment efforts and prompting persistent behavioral changes rendering many activities unviable. Faster containment — Pandemic is contained faster than expected.  
  - Relative Likelihood: Medium (both)  
  - Impact If Realized: Prolonged pandemic — High: Weak tourism season lowers economic activity and employment and worsens public finances. Faster containment — High: Sharp increase in tourism and rebound in external demand results in higher employment and investment and reduces deflationary pressures.  
  - Policy Responses:
    - Consider further support measures to affected groups if the pandemic and lockdown measures continue.
    - Seek continued flexibility from European partners to maintain a counter-cyclical buffer to tackle spillovers from the global downturn.
    - Implement partially completed structural reforms that increase resilience, including investing in the health sector and expanding active labor market policies to mitigate hysteresis risks.
    - Design a phase-out strategy from COVID-19 measures balancing macro effects with fiscal sustainability concerns. Accelerate structural reforms to hedge against future shocks akin to COVID-19.

- Sharp rise in global risk premia exposing financial and fiscal vulnerabilities.  
  - Relative Likelihood: Medium  
  - Impact If Realized: High — Higher sovereign/bank spreads (raising sustainability and stability risks); higher borrowing costs, further strained balance sheets and loss of market access to raise new bank capital lead to sudden credit compression. Weak external financing would lead to lower growth and less-benign debt dynamics.  
  - Policy Responses:
    - Ensure adequate fiscal rebalancing.
    - Accelerate current banking sector reforms, including steps to reduce risks from the sovereign-bank nexus to reduce exposure of banks to further market volatility.

- Intensified geopolitical tensions and security risks (C).  
  - Relative Likelihood: Medium  
  - Impact If Realized: Medium — Regional tensions displace focus/spending away from the reform agenda and hurt tourism.  
  - Policy Responses:
    - Engage partners in dialogue.
    - Make fiscal space available to address costs related to migration flows.
    - Facilitate integration of qualified migrant workers and advance structural reform to diversify the economy.

- Accelerating de-globalization.  
  - Relative Likelihood: Medium  
  - Impact If Realized: Low — Lower demand for exports of goods lowers growth and widens external imbalances, but tourism flows are expected to remain resilient.  
  - Policy Responses:
    - Pursue policies to increase competitiveness, boost productivity, and expand the domestic market, (e.g. complete the liberalization of closed professions, open up product markets).

- Higher frequency and severity of natural disasters related to climate change (S).  
  - Relative Likelihood: Medium  
  - Impact If Realized: Medium — Disruptive and more frequent events (forest fires, drought, rising sea levels) lower growth and increase risks. Trade disruptions, higher commodity prices and volatility. Displaced population, lower human capital due to health and environmental concerns.  
  - Policy Responses:
    - 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.
    - Improve and accelerate urban planning and cadaster reforms.

### External Sector Assessment (Annex II)
- Overall Assessment:
  - The external position of Greece in 2020 was weaker than that consistent with medium-term fundamentals and desirable policies—unchanged from the assessment staff made during the 2019 AIV Consultation (for year 2018).
  - The current account (CA) deficit widened sharply in 2020 due to the collapse in tourism receipts amid a global lockdown.
  - The CA deficit is expected to narrow in the medium-term as the trade balance gradually normalizes and the economy recovers from the pandemic.
  - The decline in the CA balance was mitigated by the increase in private savings, and it was financed mostly from government debt issuances and debt relief by European partners.
  - Staff projects the large negative net international investment position (NIIP) to gradually improve in the medium-term in line with falling public debt.

- Policy Recommendations to reduce external gap and large negative NIIP:
  - Accelerate structural reforms to improve competitiveness and facilitate convergence.
  - Re-prioritize reform efforts in the post-pandemic era to strengthen labor force participation (particularly for youth and females), boost productivity, facilitate private debt restructuring, reduce non-wage costs, including through reforms that reduce product market rigidities and increase competition, and accelerate the clean-up of bank balance sheets to restore financial intermediation.
  - Raising potential growth would help lower the public debt ratio and thereby the large and negative NIIP.

- Foreign Assets and Liabilities: Position and Trajectory
  - 2020 (% GDP): NIIP: -182; Gross Assets: - 159; Res. Assets: 5.9; Gross Liab.: 341; Debt Liab.: 304.
  - Background: Following the collapse in GDP and sharp widening of the twin deficits due to COVID-19, Greece’s NIIP deteriorated in 2020, to -182 percent of GDP (from -160 percent of GDP in 2019).
  - The official sector accounts for 70 percent of total external liabilities (with 54 percent attributed to the general government and 16 percent to the central bank).
  - Assessment: The large negative NIIP and the current account deficit are projected to gradually improve in the medium term as GDP and tourism recover. Currency (largely euro-denominated) and interest rate (largely fixed at low rates) structure of the NIIP helps mitigate risks. General government external liabilities are expected to gradually decline in percent of GDP over the medium-term, with rising private-to-private flows covering residual external funding needs.
  - Downside risks could deteriorate the NIIP if realized (e.g., weaker growth, more persistent fiscal deficits, subdued tourism receipts).

- Current Account: 2020 (% GDP) CA: -7.4; Cycl. Adj. CA: -9.1; EBA Norm: -2.4; EBA Gap: -6.7; COVID-19 Adj.: 3.6; Other Adj.: 0; Staff Gap: -3.1.
  - Background: Net travel balance collapsed from 8.4 percent of GDP in 2019 to 2.1 percent of GDP in 2020; CA deficit in 2020 increased to 7.4 percent of GDP (including deferred interest payments).
  - Assessment: Staff estimate Greece’s external position in 2020 was weaker than consistent with medium-term fundamentals. With the cyclically-adjusted CA balance at -9.1 percent of GDP, EBA norm of -2.4 percent, and COVID adjustor for temporary shocks (3.4 percent of GDP tourism, 0.1 percent medical goods, -0.3 percent oil, 0.4 percent household composition), the EBA CA model indicates a CA gap of -3.1 percent of GDP. Accounting for uncertainty implies a CA gap range of -2.1 to -4.1 percent of GDP. The policy gap amounts to 1.3 percent of GDP. The large negative residual (-4.5 percent) has declined compared to 2018 and may reflect remaining distortions in product and labor markets.

- REER and Competitiveness:
  - ULC-based REER (ULC-REER) fell by 22.3 percent during 2007–15.
  - REER-CPI declined marginally by 1.9 percent in 2016–20; REER-ULC declined by 3.8 percent during this period.
  - Assessment: EBA REER models indicate overvaluation range of 3.8 percent (index model) and 17.5 percent (level model) in 2020. Staff notes large unexplained residuals and model uncertainty and bases REER assessment on the EBA CA model: consistent with a CA gap of -3.1 percent and a semi-elasticity of 0.3, the REER_CPI is assessed to be overvalued by 10.5 percent.

- Capital and Financial Accounts:
  - Background: Financial account dominated by official financing flows. Net FDI inflows increased during 2016–19 (from a low base), moderated in 2020 due to the pandemic. ECB accommodation helped financing conditions ease in 2020. Greek government accessed markets regularly at progressively lower yields. Banks and corporates prefunded 2020 needs in 2019 and used ECB liquidity.
  - Assessment: Removal of CFMs in 2019 increases urgency for banking sector reforms to normalize financial conditions and sentiment, complicated by COVID-19 implications on financial stability. Improvement in business climate and continued structural reforms needed to promote sustainable FDI and access to external funding markets.

- FX Intervention and Reserves Level:
  - Background: The euro has the status of a global reserve currency.
  - Assessment: Reserves held by the EA are typically low relative to standard metrics; the currency is free floating.

### Debt Sustainability Analysis (Annex III)
- Overall Conclusion:
  - Greece’s public debt remains sustainable over the medium-term.
  - The pandemic is expected to permanently reduce the level of nominal GDP and highlights challenges of sustaining high primary surpluses, but the overall impact of the pandemic on the DSA is modest and muted by a large decline in market interest rates.
  - Uncertainty remains large due to: (i) whether reform momentum will be sufficient to close the investment gap and overcome adverse demographics; (ii) whether EU-wide fiscal rules will be achievable and compatible with growth; (iii) to what extent interest rates on Greek Government Bonds will remain low as official debt is replaced with market funding over the next four decades.
  - External debt and the negative NIIP are high and expected to decline only gradually over the medium-term provided macroeconomic shocks and policy slippages are avoided.

- Recent Developments and Funding Strategy:
  - The authorities executed their 2020 Funding Strategy (FS) under favorable market conditions. Greece tapped the bond market five times in 2020 for a total amount of €12 billion (compared to €4–8 billion envisaged), with a weighted average maturity of 11.4 years and a weighted average coupon rate of 1.7 percent. These activities helped lock in low rates and preserve a cash buffer (€31 billion at end-2020).
  - 2021 FS aims to issue around €12 billion of medium- or long-term debt in 2021; PEPP allocation to Greece based on capital key of 2.0117 percent amounts to about €37 billion. Through early-May, three bond issuances took place, including Greece’s first 30-year bond since 2008 at a coupon of 1.875 percent and a 5-year bond at a coupon of 0 percent.
  - Authorities made a second IMF pre-payment on March 18, 2021 totaling SDR 2.8 billion (about €3.4 billion). Greece’s outstanding Fund credit after this partial prepayment remains just above SDR 1.5 billion—the applicable PFA threshold—until end-2022.

- Changes to Key Macro/Financing Assumptions Since the Last DSA:
  - Growth and inflation:
    - A historical GDP revision led to a 4-percentage point increase in the 2019 debt-to-GDP ratio (from 180.9 to 184.9) compared to the second PPM DSA.
    - Real GDP contraction in 2020 is now estimated at 8.2 percent, followed by an average 4.4 percent recovery projected over 2021–22.
    - Over the medium-term, GDP growth and inflation are projected to converge towards 1 percent and 1.8 percent, respectively.
    - The GDP revision and the permanent output loss due to scarring leave projected nominal GDP by 2030 about 7 percent below that of the 2nd PPM DSA.
  - Fiscal policy:
    - Cash-basis primary deficit is estimated to have reached 7.3 percent of GDP in 2020 and is projected to decline to 7.0 percent of GDP in 2021 based on staff’s latest projections, before gradually converging to the long-run equilibrium level of 1½ percent of GDP by 2026.
  - Use of cash buffer and market borrowing:
    - Staff projects authorities would draw down the cash buffer by a total €11 billion over 2021–26 (including from the €15.7 billion provided through ESM loans).
    - Annual market issuances projected to average around €13 billion a year between 2021–26.
  - Interest rates:
    - Staff revised down slightly the baseline interest rate projections to reflect latest market developments as well as lower rates on the portion of Greece’s official debt with variable rates.

- Outlook Under the Baseline and Stress Scenarios:
  - A feasible set of policies and interest rate trajectories could deliver sustainable debt dynamics even over the long-term, but uncertainty is too large to reach a firm assessment given the factors noted above.

*Source: 1grcea2021001 - Annex I. Risk Assessment Matrix; Annex II. External Sector Assessment; Annex III. Debt Sustainability Analysis*

### 4.      Staff’s regular 10-year DSA as well as a more granular assessment indicate that

### 1grcea2021001 - 4.      Staff’s regular 10-year DSA as well as a more granular assessment indicate that

### Medium-term debt sustainability (10-year DSA)
- Staff’s regular 10-year DSA projects a firmly-downward public debt trajectory and relatively low levels of GFNs (well below the 15 percent of GDP benchmark except for 2021).
- Debt-to-GDP ratio projections:
  - 185 percent in 2019 (observed).
  - 214 percent in 2021 (projected brief rise).
  - 169 percent in 2030 (projected end of medium-term).
- The 2030 debt level is about 12 percent higher than projected in the second PPM DSA.
- GFNs-to-GDP ratio (after deposit drawdowns) is projected to average 12 percent over the 10-year projection period, compared to 9.1 percent in the second PPM DSA.
- Assumptions unchanged from the 2nd PPM DSA for arrears clearance and privatization receipts.

### Downside risk scenarios and stress-test results
- Under standard macro and fiscal stress tests (same as those applied in the 2nd PPM DSA) simulating weaker growth, lower primary balances, and higher interest rates:
  - Debt-to-GDP ratio would increase by between 8½ and 33 percentage points over the medium-term (ranges reported exactly as in source).
  - Average GFN-to-GDP ratios would increase by 2 to 4 percentage points over the medium-term.
- A combined macro-fiscal stress test (rather severe) increases:
  - Debt-to-GDP ratio by 47 percentage points.
  - Average GFNs-to-GDP ratio by 8½8 percentage points (text reports this exact figure).
- With the exception of the combined severe stress test, GFNs would mostly remain below the 15 percent of GDP benchmark and the downward debt trajectory would remain intact over the next 10 years.
- If access to regional safety nets became compromised, Greece’s debt vulnerabilities could sharply increase.
- A Comprehensive Fiscal Risks and Contingent Liabilities Shock (inherited from the 2nd PPM DSA, with slightly modified risk parameters) would lead to a debt/GFNs trajectory similar to that of the combined shock.
- A new rollover risk analysis based on the Sovereign Risk and Debt Sustainability Framework highlights that GFNs can increase sharply under a stress scenario.

### Granular assessment (Box III.1): probability and rollover risks
- Probability of debt stabilization:
  - A debt stock fan chart analysis finds 85 percent of simulated debt trajectories stabilize over the next 10 years.
  - Debt stabilization is defined as the probability the Debt Stabilizing Primary Balance (DSPB) is lower than staff’s projected primary balance in 2030 (i.e. 1.5 percent of GDP).
  - The fan chart width highlights large uncertainties reflecting Greece’s high debt level and historical debt volatility.
  - More than 80 percent of Greece’s public debt consists of official loans with ultra-low interest rates and ultra-long maturities.
- Rollover risks:
  - Greece’s debt structure (high share of foreign official debt) and current favorable market conditions allow GFNs to remain relatively low over the next decade.
  - GFNs can nevertheless increase sharply under a stress scenario and leave a residual financing need which, under current rules, could be absorbed by banks that would repo with the ECB and by drawing from the remaining cash buffer projected at 4.5 percent of GDP at end-2026.
- Overall Box III.1 conclusion: relatively high probability of Greece’s debt stabilizing, with low levels of rollover risk, supporting staff’s medium-term sustainability assessment.

### Fiscal risks and contingent liabilities (selected figures presented)
- Text table entries (Billions of euro) summarize projected fiscal risks and contingent liabilities across years 2021–2026 (as shown in source header). Specific line items and values include:
  - Fiscal Risks and Contingent Liabilities total row: 2.2, 3.1, 2.3, 1.6, 3.6, 1.3, 1.3 (values as presented in contiguous table format in source).
  - Retroactive pension payment for 2012–16: 1.6 (single-year value in table context).
  - Legal challenges to past wage reforms: 0.6, 0.3, 0.3, 0.3, 0.3 (series as shown).
  - Outstanding state guarantees (other than Hercules) 1/: 0.8, 0.8 (series as shown).
  - Unexpected losses from Hercules: 1.0, 1.0, 1.0 (series as shown).
  - Potential DTC conversion costs: 2.0, 1.5 (series as shown).
- Note: 1/ Includes guarantees provided as part of the COVID-19 policy support packages.

### Long-term debt sustainability (40-year perspective) — major uncertainties and scenario inputs
- Long-term assessment subject to larger uncertainties post-pandemic; long-term sustainability hinges on combinations of growth (g), interest rates (r), and politically feasible growth-friendly primary balance (pb).
- Illustrative debt-stabilizing effective r-g examples (exact table values preserved):
  - If debt stock is 190 percent of GDP in 2030 (75th percentile) and long-run pb is 0.5 percent of GDP, debt-stabilizing r-g = 0.26 percent.
  - If debt stock is 190 percent and pb = 1.5 percent, r-g = 0.79 percent.
  - If debt stock is 190 percent and pb = 2.5 percent, r-g = 1.32 percent.
  - If debt stock is 140 percent of GDP in 2030 (25th percentile) and pb = 0.5 percent, r-g = 0.36 percent.
  - If debt stock is 140 percent and pb = 1.5 percent, r-g = 1.07 percent.
  - If debt stock is 140 percent and pb = 2.5 percent, r-g = 1.79 percent.
- Growth (g) assumptions and uncertainty:
  - Staff expanded feasible average real growth rates to between 0.8 and 1.2 percent.
  - Deflator projected at 1.8 percent.
- Interest rate (r) considerations:
  - Staff’s risk-free rate projections underpinned by estimated long-run equilibrium real interest rate on 10-year German bunds of about 3.4 percent.
  - Risk premium anchored by Laubach rule (assuming risk premium starts to rise once debt exceeds 60 percent of GDP), yielding an average risk premium of 230 basis points over 2031–60 under the rule (compared to 280 bps in 2019, 175 bps in 2020, and 117 bps in Feb 2021).
  - This implies an average r-g of around 2.6 ppt during 2031–60 under the Laubach-rule application.
  - Staff notes uncertainty whether the Laubach “rule” remains valid in the current environment and that Greece’s large stock of official debt (€191 billion loans to the ESM/EFSF) becomes due after the 10-year projection horizon and will eventually require refinancing/replacement by shorter-maturity market-based borrowing.
- Primary balance (pb) considerations:
  - Staff’s previous analysis suggested 1.5 percent of GDP is the maximum long-run sustainable primary surplus; updated evidence suggests Greece may be able to sustain a somewhat higher primary surplus, but sustaining such levels over 40 years is deeply uncertain.
  - The current suspension of the Stability and Growth Pact and associated MTO complicates pinning down the long-run fiscal path; pre-COVID-19 MTO implied a structural surplus target of 0.25 percent of GDP and would imply an average long-term primary surplus of 2.5–2.7 percent of GDP for Greece.

### Revisiting Greece’s long-run fiscal path (Box III.2) — empirical evidence
- Historical episodes of sustained primary surpluses for Greece:
  - 1994–2001: average PB = 1¾ percent of GDP.
  - 2015–19: average PB = 3⅓ percent of GDP (recent overperformance came at expense of public investment and social protection).
- Cross-country evidence (90 countries, 1945–2019):
  - Probability of running ten-year average PBs above 1.5 percent of GDP increases in samples restricted to high-debt countries:
    - Full sample: 11.6 percent (EA advanced economies).
    - High-debt sample I (Gov Debt/GDP >60 percent): 23.7 percent (EA advanced economies).
    - High-debt sample II (Gov Debt/GDP >100 percent): 50.9 percent (EA advanced economies).
  - Achieving high average primary surpluses over four decades is rare; in the sample, no country sustained primary surpluses for 40 consecutive years, and only 11 countries achieved a 40-year average PB larger than 1.5 percent of GDP (selected examples listed in source).
- Pre-COVID-19 fiscal commitments for Greece:
  - PB target under enhanced surveillance: 3.5 percent of GDP until 2022 and an average of 2.2 percent of GDP during 2023–60.
  - Medium-term objective (MTO) under the preventive arm of the EU’s SGP: structural surplus of 0.25 percent of GDP for 2020–22.
  - Staff estimates that complying with the pre-COVID-19 MTO in the long-run would imply PB averaging 2.5–2.7 percent of GDP, which lies well beyond the range of possible long-run sustainable PBs for Greece per staff analysis.

_Italic: IMF staff projections and analysis as presented in the cited chapter._

### 7.      A scenario analysis based on the parameters outlined above confirms that Greece’s

### 7.      A scenario analysis based on the parameters outlined above confirms that Greece’s long-term debt dynamics are too uncertain to reach a firm conclusion.

### Scenario design and parameters
- A total of 12 alternative scenarios are simulated with identical medium-term (10-year) paths but different assumptions on long-term (2031 and beyond) equilibrium levels of:
  - primary balances,
  - risk premiums,
  - risk free rates,
  - nominal growth.
- Values are drawn from the staff-assessed feasible ranges discussed in the text.
- Key parameter sets (Values):
  - Nominal growth rate: [2.6, 2.8, 3.0]
  - *Implied real growth: [0.8, 1, 1.2]
  - Risk premium (bps): [180, 230, 280]
  - Risk free rate (bps): [235, 335, 385]
  - Primary balance/GDP: [1.3, 1.5, 1.7]
- Additional scenario design elements:
  - Moving the Laubach threshold (above which risk premium starts to rise) to 75 percent of GDP would reduce the baseline risk premium path by 50 basis points.
  - An alternative scenario shortens the weighted average maturity of new GGB issuances from 6½ years (reflecting a mix of maturities) in other scenarios to 5½ years.

### Key simulation results and ranges
- End-point (2031 and beyond) outcomes across scenarios:
  - Debt-to-GDP range: 109 to 150
  - GFNs-to-GDP range: 18 to 25
- The analysis is a sensitivity analysis (not a boundary test):
  - Debt and GFNs levels would be much lower under much more favorable macro-fiscal assumptions (e.g., those underpinning the DSA in Greece’s 8th Enhanced Surveillance Report).
  - Debt and GFNs would be much higher should large idiosyncratic risks materialize (including those identified in the 2nd PPM report) and lead to much less favorable macro-fiscal assumptions.

### Scenario labels and illustrative parameter combinations (as described)
- Scenario 1: prim. balance/GDP = 1.5; growth = 2.8; risk prem. = 245bps; risk-free rate = 330bps
- Scenario 2: increase primary balance/GDP to 1.7
  - Scenario 2 alt a *: increase growth to 3 (real growth from 1 to 1.2)
  - Scenario 2 alt b *: increase Laubach threshold from 60% to 75%
- Scenario 3: increase primary balance/GDP to 1.7 and g to 3
- Scenario 4: lower risk-free rate by 100bps
- Scenario 5: reduce primary balance/GDP to 1.3
  - Scenario 5 alt a †: reduce growth to 2.6 (real growth from 1 to 0.8)
  - Scenario 5 alt b †: increase avg. risk premium by 50bps to 295bps
  - Scenario 5 alt c †: increase risk-free rate by 50bps
- Scenario 6: reduce primary balance/GDP to 1.3 and growth to 2.6
- Scenario 7: shorten wgt. avg. maturity of new GGBs from 6.7y to 5.5y
- Notes on charts:
  - * Not shown in charts because their similar debt and GFNs trajectories to Scenario 2.
  - † Not shown in charts because their similar debt and GFNs trajectories to Scenario 5.

### Policy implications and downside risks
- Greece’s long-term debt sustainability hinges on:
  - long-term fiscal discipline to sustain a high level of primary surplus,
  - structural reforms to unlock long-run growth potential,
  - stable financing conditions to contain the risk-free rate and risk premium.
- Continued active debt management strategy will be critical, including possible liability management operations to reduce debt portfolio risks.
- The scenario analysis shows that the following would quickly lead to unsustainable debt dynamics over the long-term, necessitating policy adjustment and/or further financial support from European partners:
  - fiscal underperformance (due to policy choices and/or shocks),
  - growth disappointments,
  - a return to historical levels of risk-free rates,
  - stronger sensitivity of risk premiums to debt levels,
  - shortening of new debt maturities.

### External sector and NIIP (selected findings)
- Greece’s external debt rose to 304 percent of GDP in 2020, exceeding its previous peak of 253 percent of GDP in 2015.
- The increase relative to the 2019 level (249 percent of GDP) is mostly driven by:
  - a rise in the government debt-to-GDP ratio (strong denominator effect),
  - an increase in TARGET2 liabilities to help finance the large current account deficit in 2020.
- As of end-2020, 59 percent of Greece’s external debt originated from the general government.
- Greece’s NIIP was an estimated minus 182 percent of GDP in 2020, the weakest in Europe; the NIIP deteriorated by about 22 percent of GDP in 2020.
- Staff projects a gradual improvement in Greece’s external debt and NIIP in the medium term, driven by:
  - a gradual narrowing of the current account deficit as tourism receipts recover,
  - the post-pandemic recovery in GDP (notwithstanding scarring effects).
- Due to the large COVID-19 shock and its long-lasting impact, Greece’s medium-term external position is weaker than in the November 2019 DSA where external debt and NIIP were projected to decline/improve to 197 and -141 percent of GDP, respectively.

*Source: IMF staff estimates.*

### 12.      Macroeconomic shocks and policy slippages could result in adverse dynamics.

### 12.      Macroeconomic shocks and policy slippages could result in adverse dynamics.

### Interest rate, growth, and current account shock scenarios — impacts on external debt
- Interest rate shock:
  - A 30-basis point interest rate shock (on Greece’s entire external debt portfolio) would worsen the income account and raise the debt ratio by 15 ppt above the baseline by 2026.
  - This could also be interpreted as a 100 bp shock on 30 percent of Greece’s external debt portfolio.
- Growth shock:
  - A decline in average growth by 2.2 percentage points would set off a non-stabilizing debt trajectory, with the ratio 43 ppt higher at end-2026 than in the baseline.
- Larger current account deficits:
  - A deterioration in the current account (relative to baseline) by 1.9 percent of GDP over the projection years would raise the debt ratio by 20 ppt compared to the baseline by 2026.
- Combined shock:
  - Under a combined shock involving higher interest rates, lower growth, and current account balances (but to a milder degree compared to the individual shocks above), debt dynamics would be much more adverse and hardly stabilizing, with the external debt ratio remaining elevated at 296 percent of GDP in 2026, 33 ppt higher than in the baseline.
- Shock definitions:
  - Individual interest rate, growth and current account shocks correspond to ½ of the standard deviation of the historical average for the respective variable for 2022 to 2026.
  - The combined shock assumes ¼ standard deviation shocks for 2022 to 2026 for all three variables.

### Key external debt statistics and baseline projections (selected figures from Annex III. Table 2)
- Baseline: External debt (includes the stock of deferred interest):
  - 2016: 249.8
  - 2017: 232.0
  - 2018: 235.6
  - 2019: 249.0
  - 2020: 303.9
  - 2021: 299.0
  - 2022: 285.6
  - 2023: 278.9
  - 2024: 273.0
  - 2025: 267.7
  - 2026: 263.0
- Change in external debt (actual/projections):
  - 2016: -2.8
  - 2017: -17.8
  - 2018: 3.6
  - 2019: 13.4
  - 2020: 54.9
  - 2021: -4.8
  - 2022: -13.4
  - 2023: -6.7
  - 2024: -5.9
  - 2025: -5.3
  - 2026: -4.7
- Identified external debt-creating flows (4+8+9):
  - 2016: 2.5
  - 2017: -3.4
  - 2018: -1.2
  - 2019: -4.8
  - 2020: 32.7
  - 2021: -7.9
  - 2022: -16.7
  - 2023: -7.0
  - 2024: -4.7
  - 2025: -3.4
  - 2026: -2.5
- Current account deficit, excluding interest payments:
  - 2016: -0.5
  - 2017: -0.4
  - 2018: 0.5
  - 2019: -0.8
  - 2020: 4.5
  - 2021: 3.7
  - 2022: 0.7
  - 2023: 0.7
  - 2024: 0.8
  - 2025: 0.8
  - 2026: 0.7
- Automatic debt dynamics (contribution, percent of previous period debt stock):
  - 2016: 5.6
  - 2017: -1.1
  - 2018: -0.1
  - 2019: -1.8
  - 2020: 29.4
  - 2021: -6.3
  - 2022: -12.3
  - 2023: -4.5
  - 2024: -2.2
  - 2025: -1.3
  - 2026: -0.4
- Contribution from nominal interest rate:
  - 2016: 2.8
  - 2017: 3.0
  - 2018: 3.0
  - 2019: 3.1
  - 2020: 2.9
  - 2021: 2.9
  - 2022: 2.8
  - 2023: 2.7
  - 2024: 2.7
  - 2025: 2.7
  - 2026: 2.7
- Contribution from real GDP growth:
  - 2016: 1.3
  - 2017: -3.1
  - 2018: -3.4
  - 2019: -4.5
  - 2020: 22.3
  - 2021: -9.2
  - 2022: -15.1
  - 2023: -7.3
  - 2024: -4.8
  - 2025: -4.0
  - 2026: -3.0
- Contribution from price and exchange rate changes:
  - 2016: 1.5
  - 2017: -1.0
  - 2018: 0.2
  - 2019: -0.4
  - 2020: 4.2
  - 2021: 0.2
  - 2022: -2.2
  - 2023: -2.5
  - 2024: -4.1
  - 2025: -4.7
  - 2026: -4.8
- External debt-to-exports ratio (percent):
  - 2016: 800.1
  - 2017: 666.2
  - 2018: 609.0
  - 2019: 629.1
  - 2020: 976.3
  - 2021: 848.4
  - 2022: 764.4
  - 2023: 733.3
  - 2024: 718.0
  - 2025: 701.6
  - 2026: 684.9
- Gross external financing need (in billions of US dollars):
  - 2016: 196.4
  - 2017: 170.8
  - 2018: 141.7
  - 2019: 116.9
  - 2020: 146.2
  - 2021: 214.2
  - 2022: 202.8
  - 2023: 204.8
  - 2024: 205.5
  - 2025: 204.2
  - 2026: 208.2
- Projections/scenario labeling notes:
  - Individual shocks are permanent one-half standard deviation shocks.
  - Combined shock uses permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - Historical scenarios use ten-year historical averages to project five years ahead.

### External debt sustainability bound-test outcomes (selected scenario peaks)
- Baseline external debt ratio:
  - Baseline: 263 (percent of GDP, 2026)
- Interest-rate shock scenario peak:
  - i-rate shock: 278 (percent of GDP)
- Current account (CA) shock scenario peak:
  - CA shock: 283 (percent of GDP)
- Growth shock scenario peak:
  - Growth shock: 306 (percent of GDP)
- Combined shock scenario peak:
  - Combined shock: 296 (percent of GDP)
- Historical scenario peak:
  - Historical: 418 (percent of GDP)
- Non-interest current account shock (in percent of GDP) and other box figures included in staff charts show baseline and scenario averages but are presented in the source as figure annotations.

### Financial sector background — pandemic impacts on banks
- Policy and supervisory response highlights:
  - Loan moratoria (amortization and interest payments for households, amortization for corporates), mostly through end-2020.
    - Affected loans and advances peaked at €28 billion (20 percent of performing loans) in 2020 Q3.
    - Declined to €2.3 billion (about 1.5 percent of performing loans) in February (some tourism sector loans remain under moratoria).
    - As of February 2021: 50 percent of the assets that had been covered by moratoria were back to performing; 15 percent receiving government support through the “Gefyra I and II” programs; 15 percent converted to “step-up” loans; 20 percent became NPEs.
  - Interest payment subsidies on pre-existing business loans of about €400 million for 2020–21.
  - Mortgage and business loans payment subsidies through “Gefyra I and II” programs totaling roughly €650 million.
  - Hellenic Development Bank (HDB) launched a €1.8 billion loan guarantee program to leverage up to €5.5 billion in new lending.
  - HDB provided funding under “Tepix II” programs including about €600 million in state direct co-financing.
  - Fiscal cost of all on-budget financial sector measures: about €3.8 billion (2.2 percent of 2020 GDP or 12 percent of end-2020 Systemic Institutions (SIs) capital).
  - Government doubled the size of NPE securitization guarantees under the Hercules program to €24 billion and extended the deadline for securitizations until end-2022.
  - Direct liquidity support to corporates via ‘repayable advance’ scheme administered by the tax authority: €7.3 billion.
  - PDMA conducted Liquidity Management Operations (LMOs); swaps with three SIs resulted in a €1.1 billion windfall in their trading income.
  - ECB measures: lifted restrictions on GGBs enabling PEPP purchases and banks to post GGBs as collateral; eased funding costs via LTRO/TLTROs.
  - SSM temporarily loosened enforcement of supervisory requirements (temporary operation below P2G, capital conservation buffer, and LCR) and allowed flexibility in classifying and provisioning for NPEs covered by public guarantees and moratoria.
- NPEs, liquidity, and capital:
  - Systemwide NPE ratio declined by 10.4 percentage points to 25 percent compared to 2.7 percent for EU banks (ECB definition).
    - Note: ECB NPE definition is lower than Greek definition (30.4 percent). Excluding reclassification related to Frontier sale, system wide NPE ratio would be 3.5 percentage points higher (34 percent, national definition or 28.5 percent, ECB definition).
  - Liquidity improved substantially; as of end-2020, all SIs complied on a consolidated basis with the 100 percent Liquidity Coverage Ratio (LCR).
  - CET1 ratio dropped to 15.1 percent at end-2020 (or 12.7 percent versus 15.5 percent for EU banks on a fully-loaded basis).
  - Deferred Tax Credits (DTCs) accounted for 59 percent of total capital of the 4 SIs — a 4.5 percentage point increase compared to 2019.
  - Market signals: Greek SIs have the second lowest price-to-book ratios in the EA; cost of long-term unsecured funding has increased (Alpha Bank issued Tier 2 bonds in March at a yield of 5.5 percent, 100 basis points higher than a similar issuance in February 2020).

### Developments in NPE reduction, deleveraging, and execution risks
- Hercules securitizations:
  - NPE reduction plans rely on securitizations totaling €32 billion under the Hercules scheme; about half are yet to be completed.
  - Execution risks and potential delays due to concerns over collateral values, senior tranche coupon payments dependence on servicer collection rates, recovery of real estate prices, and implementation speed of debt restructuring tools.
  - Organic NPE reduction has been slow as new NPE inflows exceeded curings; net NPE inflows were negative in 2020 due to moratoria.
  - Given slow organic NPE reduction and delayed insolvency reform effects, inorganic solutions may require additional fresh capital.
- Private indebtedness and servicers:
  - Since 2017, NPE stock declined by €54 billion, while assets held by servicers increased by €38 billion — limited evidence of material private debt resolution.
  - Bank moratoria, collateral auction suspensions, and gradual implementation of the new insolvency regime will impact the rate of future meaningful debt resolution.

### Capital quality, liquidity, and profitability implications
- Capital quality and risks:
  - Level and especially quality of capital in the four SIs likely to deteriorate further.
  - Corporate “hive-downs” prevent DTC conversion; DTC share of CET1 capital rose by 5 percentage points to about 60 percent and could rise further.
- Liquidity:
  - Total deposits rose by 14 percent in 2020 (for both corporates and households) and reached 98 percent of GDP — the highest level since 2010.
  - Banks’ asset-side expansion relied mostly on assets with zero-risk weight such as HQLAs (cash at central banks and GGBs), and loans receiving state guarantees.
- Profitability:
  - Weak profitability persists: systemwide ROE was the lowest in the EU despite support measures.
  - The largest bank, Piraeus, missed a convertible bond coupon payment which prompted conversion into equity and majority state-ownership via HFSF (see Box IV.1).
  - Piraeus subsequently raised €1.4 billion in fresh CET1 capital; HFSF stake fell below blocking minority after participation in capital increase.
  - Piraeus plans to securitize €17.8 billion in NPEs through Hercules and sell/lease €1.5 billion NPEs to reach a new NPE target of 9.4 percent by end-2021.

*Source: IMF country report excerpt (Annex III and Annex IV, Greece).*

### 8.      Profitability was weak, benefiting from one-off Greek  Government Bond swaps. Greek

### 1grcea2021001 - 8.      Profitability was weak, benefiting from one-off Greek  Government Bond swaps. Greek

### Profitability headline findings
- Greek banks are the least profitable in Europe: an ROE of -6.5 percent in 2020 versus 2 percent on average for EU banks.
- High impairment costs and losses from securitizations drove weak profitability: the cost of risk was 3.1 percent versus 0.7 percent on average in the EU.
- Low net-fee and commission income further hampered profitability.
- Banks relied mainly on nonrecurrent income (asset sales) and especially GGB trading: PDMA GGB swaps with Alpha, Eurobank, and NBG in 2020 resulted in trading income totaling €1.1 billion (or 6 percent of the banks’ equity).
- In 2020, other operating income as a share of equity was the highest in the EU.

### Deferred Tax Credits (DTCs) and regulatory capital
- Greek DTCs are special deferred tax assets that the law allows banks to “convert” into immediate claims on the government (cash or cash equivalents) in case of reported losses, in exchange for an increased government stake (diluting other private shareholders).
- This special treatment means banks are not required to deduct such ‘DTC’ assets from calculation of regulatory (CET1) capital.
- “Hive downs” (transformation of “old” banks into holding companies and creation of a “new” bank) have prevented the conversion of DTCs into equity (owned by the state) and dilution of other shareholders despite recent losses due to NPE securitizations and subsequent sales that depleted capital.
- Therefore, the share of DTCs in terms of CET1 capital has been rising. (Chart: Deferred Tax Credits as Share of CET1 Capital — Percent of CET1 Capital; years shown 2018, 2019, 2020.)

### Business models, governance, and competitive threats
- Progress on strengthening banks’ business plans and internal governance has been limited.
- Three challenges identified:
  - The four SIs’ business models are broadly similar, in the context of a shallow domestic market with a large debt (and collateral) overhang and a weak payment culture.
  - Potential threats from Fintech developments: a cloud-based electronic payment company acquired a banking license to open a digital bank.
  - Continued reliance on securitizations may reduce banks’ customer bases, as there are regulatory constraints on extension of new credit to borrowers whose loans have been securitized.

### Credit to the economy and official support
- Bank lending to NFCs through government-support programs reached €8.6 billion in 2020–21:Q1 (about 45 percent of new credit provided by banks during that period).
- Additional official credit support totaled €9.6 billion (€7.3 billion in ‘repayable advances’ and €2.3 billion in EIB loans).
- As a result, banks are relying on government funding to finance private sector activity.
- Other official support outside the banking system (which may increase if the government on-lending of NGEU loans moves forward) may “crowd out” demand for bank lending going forward.

### Liquidity and deposit developments
- Greek SIs took advantage of ECB TLTRO windows.
- The overall LCR ratio improved to the EU average.
- Strong deposit growth was driven by spending constraints (households) and precautionary cash build-up (NFCs).
- Greek private sector deposits in percent of GDP reached pre-GFC levels.
- Figures referenced: time series for Central Bank Funding components (Emergency liquidity assistance, Open market operations, Central Bank Funding) and charts for Liquidity Coverage Ratio (Greece vs EU), 12-month percentage change in bank deposits of Households and NFCs, and Outstanding Bank Deposits of Households and NFCs (Percent of GDP).

### Drivers of profitability (detailed)
- Components contributing to negative ROE include high impairments (credit risk losses), low net fee and commission income, reliance on other operating income (including one-off operations), net interest income weakness, and administrative costs.
- Comparative indicators illustrated in charts:
  - Costs of Risk vs. Net Fee and Commission Income (Percent).
  - Return on Equity — Greek vs. EU banks (Percent).
  - Other Operating Income — Greek vs. EU Banks (Percent of equity).
- Time series breakdowns of profitability components (Net interest income; Other operating income; Net fee and commission income; Net trading income; Impairments; Staff expenses; Other admin. Expenses; Provisions; Other) are shown quarterly for 2019Q1–2020Q4.

*Source: IMF staff report excerpt (Financial Stability indicators and analysis) contained in the Greece: Staff Report for the 2021 Article IV Consultation — Informational Annex.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1grcea2021001.pdf_