## 1grcea2022001 - 2022. Both growth and inflation are expected to decelerate in 2023, reaching 2.6 and 1.2 ## Source details **Canonical URL:** [1grcea2022001 - 2022. Both growth and inflation are expected to decelerate in 2023, reaching 2.6 and 1.2](https://www.imf.org/-/media/files/publications/cr/2022/english/1grcea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1grcea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1grcea2022001.pdf.json) --- ### Executive Board Assessment and Context - Executive Directors welcomed the stronger-than-expected economic recovery in 2021, citing: - Greece’s strong policy response to the COVID-19 crisis, past structural reforms, and support from the European Union. - Early repayment of all outstanding Fund credit (finalized April 4, 2022). - Output returning to pre-pandemic levels. - Public debt on a downward trajectory and rollover risks appearing manageable over the medium term. - Directors noted continued downside risks, especially from: - Further intensification of the war in Ukraine. - Substantial uncertainties associated with the pandemic. - Policy guidance emphasized: - Fiscal policy should remain accommodative but well-targeted in 2022 before returning to a gradual and growth-friendly consolidation with sustained primary surpluses thereafter. - Replace across-the-board subsidies for high energy prices with targeted support for vulnerable groups. - Carefully assess plans for permanent cuts in social security contributions and elimination of the solidarity tax; if enacted, these should be fully funded through benefit adjustments and base-broadening measures. - Preserve recent increases in health spending and public investment; resist pressures to raise pensions and civil service wages. - Enhance the Guaranteed Minimum Income (GMI) scheme to form the basis for targeted support during adverse shocks. - Continue reforms to address crisis legacies and enhance financial resilience. ### Outlook and Key Projections - Growth and inflation: - Real GDP growth (percent): 2021 (prel.) 8.3; 2022 (proj.) 3.5; 2023 (proj.) 2.6. - CPI inflation (period avg., percent): 2021 (prel.) 0.6; 2022 (proj.) 6.1; 2023 (proj.) 1.2. - Labor market: - Unemployment rate (percent): 2021 (prel.) 15.0; 2022 (proj.) 12.8; 2023 (proj.) 12.4. - External and external-debt projections: - Current account (percent of GDP): 2021 (prel.) -6.5; 2022 (proj.) -6.5; 2023 (proj.) -5.5. - FDI (percent of GDP): 2021 (prel.) -2.2; 2022 (proj.) -2.9; 2023 (proj.) -2.5. - External debt (percent of GDP): 2021 (prel.) 310.1; 2022 (proj.) 287.0; 2023 (proj.) 279.6. - Public finance headline projections: - Revenue (percent of GDP): 2021 (prel.) 48.9; 2022 (proj.) 48.4; 2023 (proj.) 47.4. - Expenditure (percent of GDP): 2021 (prel.) 56.9; 2022 (proj.) 52.9; 2023 (proj.) 49.3. - Overall balance (percent of GDP): 2021 (prel.) -8.0; 2022 (proj.) -4.5; 2023 (proj.) -1.9. - Primary balance (percent of GDP): 2021 (prel.) -5.5; 2022 (proj.) -1.9; 2023 (proj.) 0.9. - Public debt (percent of GDP): 2021 (prel.) 199.4; 2022 (proj.) 183.4; 2023 (proj.) 177.4. - Exchange rate: - REER (percent change, CPI-based): 2021 (prel.) -2.0; 2022 (proj.) -0.4; 2023 (proj.) -1.1. ### Fiscal Policy Findings and Recommendations - Recent fiscal developments: - Cumulative on-budget COVID-19 measures amounted to about 14½ percent of GDP during 2020–21. - The 2021 primary deficit declined to about 5½ percent of GDP. - Greece tapped the bond market seven times in 2021 raising €15.8 billion and held cash reserves at €31.6 billion at end-2021. - Authorities finalized repayment of all outstanding IMF credit on April 4, 2022, using part of the SDR allocation equal to 1.51 billion (around €1.9 billion). - Staff and Directors’ recommendations: - The planned adjustment in 2022 is appropriate but subject to significant downside risks. - Medium-term fiscal consolidation should be gradual and growth friendly. - Reverse or fully fund plans for permanent cuts in social security contributions and elimination of the solidarity tax for all taxpayers. - Preserve the increase in health spending and public investment; resist pressures to raise pensions and civil service wages; respect pension freeze and planned indexation formula. - Accelerate fiscal structural reforms and enhance the Guaranteed Minimum Income scheme (GMI benefit noted as €200 per month for a single-person household; coverage confined to households in extreme poverty). ### Financial Sector Findings and Recommendations - Banking sector developments and risks: - System-wide NPL ratio fell from 25.5 percent at end-2020 to 7 percent at end-2021 due to securitizations and loan sales under the ‘Hercules’ program. - Deferred Tax Credits (DTCs) increased to 64 percent of total capital at end-2021, deteriorating the quality of capital (DTCs amounting to €15 billion). - Bank liquidity reached record levels at end-2021; liquidity supported by increased savings and ECB’s TLTROIII operations and PEPP program. - New Insolvency Code operational as of end-2021. - Policy advice to restore resilience: - Further progress in reducing distressed debt through implementing the new insolvency law, improving banks’ credit risk management, and developing viable long-term restructurings. - Strengthen capital buffers and enhance the quality of capital; reduce reliance on DTCs and consider stand-alone DTC conversion only as a last resort. - Prepare a conditions-based roadmap to guide activation of macroprudential tools, including the CCyB, under preconditions: - (a) a firm economic recovery; - (b) advanced clean-up of bank NPLs; - (c) favorable financing conditions. - Restore sustainable profitability drivers, address medium-term funding challenges (MREL and phasing out of ECB extraordinary measures), and adapt business models for competition from non-banks/Fintech. - Monitor risks from credit servicers and the non-bank financial sector. ### Asset-quality Uncertainty and Pandemic Support - Outstanding loans receiving support: around €15 billion (moratoria, public guarantees, step-up products, repayment subsidy programs). - Moratoria and program magnitudes (end-2021): - Moratoria: €0.1 billion (fell from a peak of €28 billion in 2020:Q3). - Step-up products: €1.6 billion. - Gefyra programs: €7.8 billion. - Public guarantee scheme: €5.5 billion. - HAPS guarantees up to €24 billion until 2022; unutilized amount around €5.5 billion. - EBA 2021 stress test: suggests considerable losses under the adverse scenario. ### External Position and Current Account (Annex II highlights) - CA deficit: 2021 CA: -6.5 percent of GDP; CA gap estimated around -1.7 percent of GDP. - REER assessment: corresponding REER overvaluation of 5.0 percent (staff estimate). - Financing in 2021: FDI surged above pre-pandemic levels; other investment flows, capital account, ECB PEPP, and NGEU funds contributed to financing. - Key exposures: - Russia accounts for 6–7 percent of imports, less than 1 percent of goods exports, and 2–3 percent of travel receipts. - About one quarter of fuels, oil, and related products and 40 percent of natural gas are imported from Russia. - Medium-term outlook: - CA deficit expected to remain elevated in 2022 and narrow thereafter as travel receipts recover and imports normalize. - Staff projects NIIP at -181 percent of GDP at end-2021 with gross liabilities 343 percent of GDP and debt liabilities 294 percent of GDP. ### Public Debt, Financing, and Debt Sustainability (DSA and Annex III) - Public debt trajectory (selected): - Public debt (percent of GDP): 2021: 199.4; 2022: 183.4; 2023: 177.4; 2024: 171.1; 2025: 166.3; 2026: 163.3; 2027: 158.8. - Change in public debt (year-on-year): 2022: -16.0; 2023: -6.0; 2024: -6.3. - Gross financing needs (GFNs; percent of GDP): 2021: 18.7; 2022: 16.1; 2023: 11.3; 2024: 9.0; 2025: 7.9. - Major DSA findings and stress scenarios: - Staff assesses overall risk of sovereign stress as moderate. - Cash buffer: EUR 31.6 billion at end-2021 (equivalent to 11 months of GFN). - Customized contingent liability shock simulated at total of 31 billion euros over 2022-27 appears manageable in staff analysis. - A 30-basis point interest shock or 1.2 percentage point CA deterioration would raise debt by around 15 percentage points of GDP; a larger combined shock could raise debt by up to 45 percentage points compared to baseline. - Macro assumptions used in DSA: - Real GDP growth (percent): 2021: 8.3; 2022: 3.5; 2023: 2.6; 2024: 2.0; 2025–2032: gradual convergence to 1.2 percent. - Inflation (GDP deflator; percent): 2021: 2.1; 2022: 6.9; 2023: 1.2. - Effective interest rate (percent): 2021: 1.5; 2022: 1.6; 2023: 1.6. ### Structural Policy, Climate Transition, and Social Protection - Structural priorities: - Execution of reforms supported by Next Generation EU (NGEU) funds is key to raising convergence prospects. - Priorities: modernize public employment agency, enhance digital skills, align vocational education and training with labor market needs. - Recovery and Resilience Plan (NRRP) / NGEU: NRRP includes 68 reforms and 106 investment projects through 2026; total NRRP envelope EUR 31 billion (2018 values). - Labor market and wages: - Minimum wage increase of 7.54 percent effective May 1 (statutory minimum monthly pay EUR 713 noted by authorities as a 7.1 percent annual increase compared to 2021). - Staff cautioned about risks of wage-price pressures and high youth unemployment from the minimum wage increase; BoG estimates pass-through from minimum wages to average wage close to 50 percent. - Climate policy: - Consider gradual increase in carbon taxes to finance targeted transfers and green investment while protecting vulnerable groups. - Targets: renewable energy share of gross final energy consumption 2020: 22.3; 2030 target: 50%. - Draft Climate Law: at least 55 percent reduction in greenhouse gas emissions by 2030 and 80 percent by 2040 (compared to 2019 levels). - Social protection gaps: - GMI coverage limited; staff recommends addressing coverage gaps and raising benefits at least in line with inflation to make GMI the “go-to” safety net. - Poverty rate (percent): 27.4; Population (millions): 10.7; Per capita GDP (€'000): 15.5. ### Financial Sector Background Note: Additional Key Findings - NPL dynamics: - NPL ratio fell from 25 percent in 2020 to 7 percent at end-2021 (inorganic measures). - Coverage ratio reached 42 percent at end-2021. - Banking performance: - Return on equity declined to – 19 percent at end-2021; cost of risk reached 5 percent. - Tier 1 capital adequacy ratio at end-2021: 12.6 percent. - Liquidity coverage ratio reached 198 percent at end-2021. - Loan-to-deposit ratio declined to 61 percent. - Structural reforms needed: - Implement sale-and-lease-back (SLBO) scheme, insolvency/judicial reforms, accelerate court modernization, and improve data/statistics for asset-quality assessment. - Operational resilience: - Authorities committed to enhancing cybersecurity and operational risk management; EBA guidelines to be implemented and LSIs monitored. ### Risk Assessment Matrix (Annex I) — Major Risks and Policy Responses - Major domestic risks: - Under-execution of planned fiscal consolidation — Relative Likelihood: High; Impact: Medium. - Key policy responses: fund tax cuts through base-broadening measures/benefit adjustments; reallocate budget; contain pension and public wage bills; save overperformance as contingency reserve. - Systemic risk build-up in financial system — Relative Likelihood: Medium; Impacts: multiple Medium assessments. - Key policy responses: accelerate bank clean-up, build capital buffers, consider DTC conversions as last resort, upgrade macroprudential tools. - Structural reform implementation — Relative Likelihood: Medium (downside); Impact: Downside Medium / Upside Low. - Key policy responses: execute National Growth Strategy, prioritize public investment management, engage stakeholders. - Major external risks: - Outbreaks of lethal COVID-19 variants — Relative Likelihood: Medium; Impact: Medium. - Responses: promote vaccination, strengthen healthcare, targeted support, seek EU flexibility. - Rising and volatile food and energy prices — Relative Likelihood: High; Impact: High. - Responses: reallocate budget for targeted support, diversify energy sources, facilitate green transition. - Russia’s invasion of Ukraine escalation — Relative Likelihood: High; Impact: Medium. - Responses: engage partners, build contingency buffers, diversify energy sources, monitor debt portfolio risk. - De-anchoring of inflation expectations in major economies — Relative Likelihood: Medium/Low; Impact: Medium. - Responses: enhance credibility of fiscal targets, contain spreads, monitor debt risk. *GREECE — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (May 23, 2022).* ### 2022. Both growth and inflation are expected to decelerate in 2023, reaching 2.6 and 1.2 ### 1grcea2022001 - 2022. Both growth and inflation are expected to decelerate in 2023, reaching 2.6 and 1.2 ### Executive Board Assessment and Context - Executive Directors welcomed the stronger-than-expected economic recovery in 2021, citing: - Greece’s strong policy response to the COVID-19 crisis, past structural reforms, and support from the European Union. - Early repayment of all outstanding Fund credit. - Output returning to pre-pandemic levels. - Public debt on a downward trajectory and rollover risks appearing manageable over the medium term. - Directors noted continued significant downside risks, especially from: - A further intensification of the war in Ukraine. - Substantial uncertainties associated with the pandemic. - Policy guidance emphasized by Directors: - Fiscal policy should remain accommodative but well-targeted in 2022 before returning to a gradual and growth-friendly consolidation with sustained primary surpluses thereafter. - Replace across-the-board subsidies for high energy prices with targeted support for vulnerable groups. - Carefully assess plans for permanent cuts in social security contributions and elimination of the solidarity tax. - Preserve the recent increase in health spending and public investment; resist pressures to raise pensions and civil service wages. - Enhance the Guaranteed Minimum Income scheme to form the basis for targeted support during adverse shocks. - Continue reforms to address crisis legacies and enhance financial resilience. ### Outlook and Key Projections - Growth and inflation projections: - Real GDP growth (percent): 2021 (prel.) 8.3; 2022 (proj.) 3.5; 2023 (proj.) 2.6. - CPI inflation (period avg., percent): 2021 (prel.) 0.6; 2022 (proj.) 6.1; 2023 (proj.) 1.2. - Labor market: - Unemployment rate (percent): 2021 (prel.) 15.0; 2022 (proj.) 12.8; 2023 (proj.) 12.4. - Fiscal and public debt: - Revenue (percent of GDP): 2021 (prel.) 48.9; 2022 (proj.) 48.4; 2023 (proj.) 47.4. - Expenditure (percent of GDP): 2021 (prel.) 56.9; 2022 (proj.) 52.9; 2023 (proj.) 49.3. - Overall balance (percent of GDP): 2021 (prel.) -8.0; 2022 (proj.) -4.5; 2023 (proj.) -1.9. - Primary balance (percent of GDP): 2021 (prel.) -5.5; 2022 (proj.) -1.9; 2023 (proj.) 0.9. - Public debt (percent of GDP): 2021 (prel.) 199.4; 2022 (proj.) 183.4; 2023 (proj.) 177.4. - External sector and debt: - Current account (percent of GDP): 2021 (prel.) -6.5; 2022 (proj.) -6.5; 2023 (proj.) -5.5. - FDI (percent of GDP): 2021 (prel.) -2.2; 2022 (proj.) -2.9; 2023 (proj.) -2.5. - External debt (percent of GDP): 2021 (prel.) 310.1; 2022 (proj.) 287.0; 2023 (proj.) 279.6. - Exchange rate: - REER (percent change, CPI-based): 2021 (prel.) -2.0; 2022 (proj.) -0.4; 2023 (proj.) -1.1. ### Fiscal Policy Findings and Recommendations - Recent fiscal stance and developments: - Cumulative on-budget COVID-19 measures amounted to about 14½ percent of GDP during 2020–21. - The 2021 primary deficit declined to about 5½ percent of GDP. - Greece tapped the bond market seven times in 2021 raising €15.8 billion and held cash reserves at €31.6 billion at end-2021. - The authorities finalized repayment of all outstanding IMF credit on April 4, 2022, using part of the SDR allocation equal to 1.51 billion (around €1.9 billion). - Staff and Directors’ recommendations: - The planned adjustment in 2022 is appropriate but subject to significant downside risks. - Medium-term fiscal consolidation should be gradual and growth friendly. - Plans for permanent cuts in social security contributions and elimination of the solidarity tax for all taxpayers should be reversed or at least fully funded through benefit adjustments and base-broadening measures, respectively. - Preserve the increase in health spending and public investment; resist pressures to raise pensions and civil service wages. - Accelerate fiscal structural reforms and enhance the Guaranteed Minimum Income scheme. ### Financial Sector Findings and Recommendations - Banking sector developments: - System-wide NPL ratio fell from 25.5 percent at end-2020 to 7 percent at end-2021 due to securitizations and loan sales under the ‘Hercules’ program. - Deferred Tax Credits (DTCs) increased to 64 percent of total capital at end-2021, deteriorating the quality of capital. - Bank liquidity reached record levels at end-2021; liquidity supported by increased savings and ECB’s TLTROIII operations and PEPP program. - New Insolvency Code operational as of end-2021, aligning with the European Directive on Preventive Restructuring and Insolvency. - Risks and policy advice: - Risks have largely migrated to the non-bank financial sector and, to a lesser extent, to the state. - Further progress in reducing distressed debt should come from implementing the new insolvency law, improving banks’ credit risk management, and developing viable long-term restructurings. - Rebuild banking sector resilience by strengthening capital buffers, enhancing the quality of capital, restoring sound profitability drivers, addressing medium-term funding challenges, and adapting business models. - Prepare a conditions-based roadmap to guide the activation of macroprudential tools in the medium term. ### Structural Policy and Climate Transition - Structural reform priorities: - Execution of reforms supported by Next Generation EU funds is key to raising convergence prospects. - Minimum wage increase supports purchasing power but risks entrenching wage-price pressures and high youth unemployment; monitor effects on inflation and youth unemployment. - To meet ambitious climate goals and protect vulnerable groups, consider a gradual increase in carbon taxes to finance targeted transfers and green investment and to address gaps in social protection. - Strengthen social safety nets; enhance the Guaranteed Minimum Income scheme as a basis for targeted support. ### Key Statistical and Contextual Facts - Population (millions of people): 10.7. - Per capita GDP (€'000): 15.5. - IMF quota (millions of SDRs): 2428.9. - Literacy rate (percent): 97.9. - Poverty rate (percent): 27.4. - (Percent of total) 0.5 — appears in the source listing (preserve as presented). - GHG emission per capita (tonnes of CO2 equivalent): 8.4. - Main products and exports: tourism services; shipping services; food and beverages; industrial products; petroleum and chemicals. - Key export markets: E.U. (Italy, Germany, Cyprus, Bulgaria, Spain), Turkey, USA, UK. *GREECE — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (May 23, 2022).* ### 6. The current account (CA) balance recovered modestly in 2021, but external imbalances ### 1grcea2022001 - 6. The current account (CA) balance recovered modestly in 2021, but external imbalances ### External position and current account (CA) - CA deficit of 6.5 percent of GDP in 2021. - Recovery drivers: robust recoveries in travel receipts and goods exports. - Offsetting factor: strong import growth. - Financing: FDI surged above pre-pandemic levels; official flows including the ECB’s asset purchase program and initial Next Generation EU (NGEU) funds contributed to financing the CA. - External position assessment: in 2021 Greece’s external position was moderately weaker than that consistent with medium-term fundamentals and desirable policies. - CA gap estimated around -1.7 percent of GDP. - Corresponding REER overvaluation of 5.0 percent (see Annex II). ### Outlook and risks - Growth projections and near-term impact: - Growth reduced by a full percentage point to 3½ percent for 2022 due to the war in Ukraine, high inflation, and spillbacks. - Over the medium term, growth expected to converge to 1½ percent, supported by NGEU funds and channeling of NGEU loans into private investment. - Output gap expected to close around 2023–24. - Strong 2021 rebound and NGEU investments projected to mostly eradicate pandemic scarring. - Inflation projections: - Average inflation projected at 6.1 percent in 2022, driven mainly by pass-through of oil and especially natural gas prices. - Inflation expected to decelerate in 2023:H2, settling at an average of 1.2 percent in 2023 and 1.9 percent over the medium term. - Sharp near-term decline assumptions: normalization of energy prices, moderation of food inflation, no substantial further increases in wages, and a smooth green transition without significant energy supply disruptions. - Current account outlook: - CA deficit projected to remain elevated in 2022 due to high energy prices and narrow thereafter as travel receipts recover to pre-pandemic levels in 2023 and imports normalize. - Key uncertainty and downside risks: - Further intensification of the war in Ukraine, high international energy prices, supply chain disruptions, intensification of sanctions. - Prolonged shut-off of Russian natural gas could significantly dent growth. - Price pressures and shortages could entrench a wage-price spiral. - Future COVID-19 variants could lead to renewed mobility restrictions. - Faster-than-expected reversal of global accommodative financial conditions may cause capital outflows and higher financing costs; ECB expected to provide some support until end-2024. - Other risks: weaker-than-anticipated absorption of NGEU funds, slower tourism recovery, intensifying geopolitical risks, extreme weather events. - Specific exposure notes: - Russia accounts for 6–7 percent of imports, less than 1 percent of goods exports, 2–3 percent of travel receipts. - About one quarter of fuels, oil, and related products and 40 percent of natural gas are imported from Russia. - Foreign direct and portfolio investment from Russia and overall exposure to Ukraine are very limited. - Greece has followed the EU and imposed sanctions on Russia (financial sector, transport, trade activities, bans on exports and investment in energy sector; sanctions on selected individuals including travel bans and asset freezes/seizures). ### Public debt, financing, and sovereign risk - Public debt trajectory and risks: - Public debt is falling and rollover risks appear manageable over the medium term. - Debt expected to decline faster than previously projected and drop below pre-pandemic levels by 2022. - Gross financing needs declining following fiscal normalization. - Improvement drivers: stronger growth in 2021, higher growth and stronger fiscal adjustment in the medium-term, and higher inflation amid a very large share of fixed rate debt. - Sovereign risk assessment: - Greece's overall risk of sovereign stress is assessed to be moderate. - Key risks: future interest-growth differential and feasibility of large and sustained fiscal consolidation as official financing is replaced with market funding. - Despite large cash buffer and active liability management, Greece’s ability to service debt under a severe shock depends on continued regional support. - Debt stock composition note: - NGEU loans and net SDR holdings have been added to the debt stock. ### Authorities’ views (on outlook, risks, and buffers) - Authorities’ assessment: - Agreed broadly with staff’s outlook and risks; highlighted high uncertainty around projections. - Expected the war in Ukraine to reduce growth in 2022 by 1 to 2 percentage points from a pre-war baseline of around 5 percent. - Cited structural reforms, high consumer and producer sentiment, successive credit rating upgrades, favorable debt profile and financing conditions, large cash buffer, long maturities, large share of fixed rate debt, high early tourism bookings, and banking sector balance sheet improvements as evidence of resilience. - Noted increased private bank deposits and increasing inflows from EU funds as buffers. - Expected average inflation to accelerate to over 5 percent due to surging energy costs, with BoG noting risks of second-round effects from the recent minimum wage adjustment. - Agreed that risks to growth are to the downside and that sovereign stress risk is moderate. - Noted recent prepayment of all outstanding IMF credit and planned prepayment of a portion of GLF loans by end-2022 to reduce rollover risks and gross financing needs and aid the target to reach investment grade in 2023. - Expected external imbalances to narrow over the medium term as imports normalize and exports strengthen with NGEU funding and reforms. ### Fiscal policy stance and risks - 2022 fiscal stance: - Despite large headline consolidation, the fiscal stance in 2022 remains accommodative. - Budgeted consolidation largest in the eurozone, reflecting roll-off of most COVID-19 support. - Pandemic-related measures extended include reductions of social security contributions (SSC) and the solidarity tax for private sector employees, VAT cuts in selected service sectors, and a few employment support programs. - Energy-related measures: - To mitigate high energy prices the government introduced substantial support measures: general electricity and gas bill discounts to households and firms and targeted subsidies to vulnerable groups. - Total cost of energy-related measures estimated at about 2½ percent of GDP. - Direct budget impact limited to about ½ percent of GDP as the bulk expected to be financed by higher ETS revenues. - Government calibrating electricity and gas discounts monthly to match increase in ETS revenues to ensure budget-neutrality. - Government announced a 13 percent permanent reduction in the Single Property Tax rate (ENFIA) amid the move to higher market values. - Excluding temporary measures, the underlying fiscal policy stance is accommodative. - Fiscal risks and contingent liabilities: - Key fiscal risks: higher-than-expected energy prices leading to additional spending or subsidies that exceed ETS revenue increases, pensions, and public sector wages. - Contingent liabilities from bank-sovereign nexus (unexpected losses from Hercules and potential DTC conversion costs), outstanding state guarantees, and adverse court rulings on past pension and wage reforms. - Staff estimates realization of these contingent liabilities could raise the debt level in the medium-term by 14 percentage points and gross financing needs by up to 4 percentage points compared to the baseline (see annex III). ### Policy discussions and staff recommendations (Fiscal) - Short-term and targeting recommendations: - Maintain an accommodative fiscal stance in 2022 but improve targeting. - Staff recommended targeting a primary deficit below 2 percent of GDP in 2022. - Accommodate greater-than-expected downside risks from the war in Ukraine through automatic stabilizers. - Phase out across-the-board electricity and gas subsidies and replace with targeted support for vulnerable groups and viable firms while allowing gradual pass-through of higher prices. - Identify and address gaps in the mean-tested Guaranteed Minimum Income (GMI) scheme and raise its benefit levels at least in line with inflation to make it the “go-to” safety net during adverse shocks. - Note: GMI coverage confined to households in extreme poverty; benefit is €200 per month for a single-person household. - Medium-term fiscal adjustment: - Aim for a gradual, growth-friendly, but credible fiscal adjustment over the medium term. - Staff’s baseline projects the primary balance to gradually increase to 2 percent of GDP by 2027. - Staff’s recommended path guided by long-term sustainable level of the primary surplus of 1.5 percent of GDP and slightly positive output gap over the medium term. - Staff urged reversal of plans for permanent cuts in SSCs and elimination of the solidarity tax for all taxpayers, or at least ensure full funding through benefit adjustments and base‑broadening measures (including streamlining tax incentives). - Preserve improvements in fiscal mix (higher health care spending and public investment, improved VAT collections, lower tax wedge for corporates financed by higher fees on diesel). - Contain spending pressures on pensions and civil service wages, including respecting the pension freeze this year and the indexation formula from next year onwards. - Phase out transfers to public enterprises and fuel subsidies provided prior to the war over the medium term to make room for critical social spending and recurrent investment once NGEU funding ends. - Further improvements needed: tackle narrow tax base, address tax evasion by the self-employed, and narrow social protection gaps. - Continue applying anti-money laundering tools using the registry of beneficial ownership of legal persons in tax crime investigations. - Fiscal structural reforms and safeguards: - Staff welcomed progress in public sector accounting reforms and use of the Unified Chart of Accounts, consolidation and digitalization of the pension system, modernization of the Independent Authority for Public Revenue (IAPR), and clearance of government arrears. - PIMA has resumed following pandemic delay. - Encouraged further IAPR modernization including business process review and planned IT modernization. - Additional revenue administration measures: improve tax compliance risk management, consolidate debt collection in a few enforcement centers, and enhance taxpayers’ electronic services. - Safeguards for COVID-related spending: - Authorities published special report on pre-contractual audits of high-value public procurements during the pandemic (March 2020–early November 2021); audits did not reveal significant irregularities. - Separate audit of government grants associated with the pandemic underway and expected to conclude in April 2022. - Selected information on all public procurement contracts published online. - Staff strongly encouraged authorities to require awardees to provide information on beneficial owners and to publish that information. - Staff recommended audits of emergency-related public procurement contracts not covered in pre-contract audits and publication of findings. ### Authorities’ fiscal position and plans (views on measures) - Authorities’ intentions: - Aim for a primary deficit up to 2 percent of GDP in 2022 and a return to primary surpluses from 2023 onwards. - May maintain energy subsidies to low-income and vulnerable groups longer if necessary. - Consider addressing GMI coverage gaps after internal evaluation, conditional on fiscal space. - Plan permanent cuts in SSCs and elimination of solidarity tax to reduce tax burden on labor and corporate operating income, and to partially compensate civil servants and retirees for higher inflation. - Expect part of fiscal cost to be covered by revenue buoyancy and declining labor informality. - Intend to prioritize maintaining high public investment and health care spending. - Reiterate commitment to respect the pension freeze this year and not introduce any pension indexation scheme this year, but follow legislated indexation from 2023 onwards. - Noted significant progress in fiscal structural reforms (clearance of government arrears, IAPR modernization) and measures to safeguard pandemic-related expenditures (pre-contractual audits, audits of emergency grants, publication of procurement contracts online). *Source: IMF staff report excerpt — 1grcea2022001, Chapter 6 and related sections.* ### 15. Significant uncertainty remains about the impact of the pandemic on banks’ asset ### 15. Significant uncertainty remains about the impact of the pandemic on banks’ asset ### Asset-quality uncertainty and pandemic support measures - Around €15 billion in outstanding loans receive support from moratoria, public guarantees, step-up products, and repayment subsidy programs, with further support from the extension of the Hercules scheme during the pandemic. - Forward-looking metrics of credit risk and pandemic related NPL inflows indicate increasing risks to asset quality and ensuing expected credit losses (text figure 7). - In absence of a comprehensive asset quality review, uncertainty remains over the adequacy of credit classification and loan-loss provisioning. - Further challenges to asset quality and liquidity may arise when PEPP and TLTROIII operations expire. - The results of the 2021 EBA stress test for Greek banks suggest considerable losses under the adverse scenario. ### Emerging systemic vulnerabilities - Residential real estate prices have rebounded by almost 25 percent since 2018, accompanied by a significant increase in price-to-rent and income ratios. - Commercial real estate prices have also rebounded, albeit to a weaker extent. - Household credit expansion has surpassed disposable income growth. - Model-based analyses suggest positive private sector credit gaps for Greece. A further acceleration of credit growth is anticipated from NGEU loans being channeled through the banking system. ### Policy discussions and staff recommendations - Restoring sound bank asset quality - With the expiration of the Hercules Asset Purchase Program (HAPS) in October 2022, securitizations and sales will be less attractive in terms of risk weighting. - The NPL ratio of SIs is projected to reach 5 percent in 2023, approaching the average of EU countries with relatively higher NPL levels. - Staff recommended: - Close monitoring of new NPL inflows associated with COVID-19-related policy withdrawal. - Accelerating NPL workouts by resolving delays in implementing and applying the new insolvency law and further judicial system reforms. - Ensuring adequate credit classification and loan-loss provisioning. - Improving bank credit risk management practices and developing viable long-term restructurings. - Close monitoring of risks associated with credit servicers, noting that slow NPL recovery could generate additional loan losses in the future. - The scheme has an unutilized amount of state guarantees up to € 5.5 billion, which is estimated to be sufficient to address the NPL legacy issue and complete the planned securitization deals for 2022. - Rebuilding banking sector resilience - Enhancing the quality of capital - The excessive share of DTCs in bank capital increases complexity in loss-absorption capacity and undermines attractiveness for investors during downturns. - Staff encouraged the authorities to work with European partners to reduce reliance on DTCs. - Stand-alone DTC conversion could be considered as a last resort if it restores investor confidence for banks unable to fully utilize existing tools. - Strengthening capital buffers - Pandemic experience suggests releasable buffers should be strengthened for future stress episodes, while ensuring adequate levels of structural buffers for systemically important banks. - Structural capital buffers - Given high concentration and relatively low buffers for O-SII, staff encouraged phasing in envisioned buffer increases. - Countercyclical capital buffer (CCyB) - Immediate activation of CCyB is not needed in the near term due to relatively low private sector indebtedness and ongoing balance-sheet clean-up. - Staff recommended preparing a conditions-based roadmap to guide activation of a positive CCyB rate gradually over the medium term, under preconditions: - (a) a firm economic recovery; - (b) advanced clean-up of bank NPLs; - (c) favorable financing conditions. - Staff also recommended developing a similar roadmap for borrower-based measures depending on sectoral systemic risk build-up. - Ensuring sustainable bank profitability - NPL disposal combined with the pandemic has weakened profitability, eroding ability to build buffers, limiting capacity to fund loan growth, and reducing investor attractiveness. - Some improvement expected over the medium term; supervisors should ensure banks adapt business models and restore sustainable profitability drivers using SREP prerogatives. - Addressing medium-term funding challenges - Phasing out of ECB extraordinary monetary policy measures and need for further debt issuances to meet MREL require banks to build additional buffers and satisfy regulatory requirements over the medium term. - Preparing for structural transformation of the financial system - Competition from non-banks and Fintech - Major Greek banks have launched strategies for new business opportunities and innovative services; LSIs lag behind. - Staff recommended authorities ensure highest standards of sound governance and risk management for non-bank competitors. - Tackling climate-related financial risks - Staff recommended building on Network for Greening the Financial System guidance to: - (a) assess the financial system’s exposure to climate-related financial risks and identify key transmission channels; - (b) establish and implement structured and tailor-made supervisory strategies to mitigate such risks. ### Authorities’ views - Authorities noted significant progress in restoring banking sector stability and reiterated commitment to addressing remaining challenges to enhance resilience. - Highlighted continuous successful implementation of the “Hercules” securitization program, which would lapse this year, and expressed confidence in achieving a single-digit NPL ratio in 2022. - Supervisors viewed the pandemic’s impact to date as limited and judged the effect of geopolitical risks on banks’ asset quality as contained under a short conflict scenario. - Noted progress in implementation of the new insolvency code, while recognizing need for stronger data collection and analysis to address bottlenecks. - Operationalizing the sale and lease back scheme and accelerating court modernization plans remain priorities to address the debt overhang. - Short-term focus, per SSM, is on share capital increases for some small banks and on sustainability of banks’ business models to replenish capital buffers organically and improve capital markets access. - The Bank of Greece agreed that bank capital used to absorb losses from NPL securitizations needs to be replenished and requested close collaboration with staff to prepare a conditions-based roadmap to activate CCyB and borrower-based measures over the medium term. - The BoG shared staff’s view that the continued increase in the share of DTCs in bank capital contributed to low capital quality and amplified risks from an intensifying bank-sovereign nexus. *Source: IMF staff report content provided.* ### 22. The authorities noted their strong ownership of the structural reform agenda which ### 1grcea2022001 - 22. The authorities noted their strong ownership of the structural reform agenda which ### Authorities' assessment and priorities - Strong ownership of the structural reform agenda ensured effective implementation to date. - Corporate sector balance sheets remain healthy following deleveraging and structural transformation since the global financial crisis, helping firms survive the pandemic and rebound in 2021. - NGEU resources and the RRF reform agenda are viewed as a catalyst for tackling remaining structural bottlenecks and closing productivity gaps. - Priority reforms highlighted: - Modernize the public employment agency. - Enhance digital skills. - Align vocational education and training with labor market needs to reduce structural unemployment and support re-skilling and up-skilling. - Authorities welcomed staff’s positive assessment of the Recovery and Resilience Plan and the inclusion of investment funded through NGEU loans into staff’s baseline; timely and effective execution remains a top priority. - Minimum wage policy: - Noted the minimum wage increase of 7.54 percent effective on May 1. - Government view: the increase is prudent, balancing protection of workers against rising cost of living while preserving competitiveness and employment gains without triggering an inflation-wage spiral. - Bank of Greece (BoG) concern: danger of second round effects on inflation due to a strong pass-through from minimum wages to the average wage level, estimated at close to 50 percent. - Climate and governance: - Agreement with staff on protecting vulnerable groups during the green transition. - Plans to continue upgrading civil protection capacities relying on EU resources. - Political challenge acknowledged in raising carbon taxes during a period of high energy prices. - Highlighted the 2022–2025 National Anti-Corruption Action Plan, continued judicial reforms, and initiatives to update the national assessment of anti-money laundering and terrorist financing risks. ### Staff appraisal — recent performance and recovery drivers - Economic recovery: - The Greek economy recovered strongly from the severe COVID-19-induced recession in 2020. - Output returned to its pre-pandemic level in 2021, reflecting: - Faster-than-expected tourism recovery. - Rising private consumption as households unwound pandemic-related savings. - Robust private investment supported by surging foreign direct investment. - Key supports: strong fiscal response, accommodative monetary policy and prudential policies, and sizable EU support. - Crisis legacy improvements: - Sharp decline in NPLs under the ‘Hercules’ program. - Lower unemployment. - Improvements in the fiscal policy mix. - Early repayment of all outstanding IMF credit completed on April 4, which terminated the Post-Financing Assessment framework. ### Outlook, inflation, and risks - Growth and inflation projections and impacts: - The war in Ukraine and high inflation are expected to reduce growth this year by a full percentage point to 3.5 percent. - Stronger and more persistent energy price growth is expected to push up average inflation to 6.1 percent in 2022, before it settles at 1.9 percent over the medium term. - Key risks and uncertainties: - War in Ukraine and intensification of sanctions could trigger energy shortages, stronger-than-expected domestic inflation, tourism impacts, and faster tightening of global financial conditions. - Other risks: new COVID-19 waves, NGEU grant and loan implementation risks, spending pressures and unfunded tax cuts jeopardizing medium-term fiscal adjustment, increasing public debt and widening spreads. - Continued supportive stance by the ECB is a mitigating factor. ### Public debt and fiscal policy recommendations - Debt outlook and risks: - Public debt-to-GDP ratio is expected to drop below pre-pandemic levels by 2022, reflecting robust growth, fiscal adjustment, and higher inflation amid a very large share of fixed-rate and long-maturity debt. - Overall risk of sovereign stress judged moderate, but uncertainty remains about sustaining high primary surpluses and future interest rates once market funding replaces official financing. - Greece’s ability to service debt under a severe shock depends on continued regional support despite a large cash buffer and active liability management. - Fiscal stance and targets recommended by staff: - Maintain an accommodative fiscal stance in 2022 and reach a primary surplus in 2023. - Phase out pandemic-related temporary measures by end-2022. - Target a primary deficit below 2 percent of GDP in 2022 — still an accommodative underlying fiscal stance given the negative output gap. - Aim for a primary surplus in 2023 while accommodating downside risks through automatic stabilizers. - Phase out across-the-board subsidies for high energy prices and replace them with targeted support for vulnerable groups and viable firms while allowing a gradual pass-through of higher prices to consumers. - Address coverage gaps in the means-tested Guaranteed Minimum Income scheme and raise benefit levels at least in line with inflation to make it the “go-to” safety net. - Gradual consolidation path to achieve a primary surplus of 2 percent of GDP by 2027, underpinned by credible measures. - Reverse or fully fund plans for permanent cuts in social security contributions and elimination of the solidarity tax for all taxpayers through benefit adjustments and base-broadening measures. - Protect pandemic-era improvements in the fiscal mix (higher health care spending and public investment). - Contain spending pressures on pensions and civil service wages, including respecting the pension freeze this year and the indexation formula from next year onwards. - Phase out transfers to public enterprises and pre-war fuel subsidies over the medium term and tackle tax evasion by the self-employed. - Accelerate fiscal structural reforms to facilitate these efforts. ### Banking sector: progress and remaining challenges - Achievements and shifting risks: - Rapid clean-up of major banks’ balance sheets is welcome; successful securitization of NPLs. - Risks have largely migrated to the non-bank financial sector and to a lesser extent to the state. - Progress in NPL workout has remained limited. - Recommendations to reduce distressed debt and strengthen resilience: - Implement the new insolvency law. - Improve banks’ credit risk management frameworks. - Develop viable long-term restructurings. - Closely monitor risks from new NPL inflows once policy measures are fully withdrawn, ensure adequate credit classification and provisioning, and supervise risks from credit servicers active in the distressed debt market. - Replenish capital used to absorb losses from NPL securitizations to ensure adequate buffers — may require share capital increases and stronger structural capital buffers in the short term. - Prepare a conditions-based roadmap for activation of countercyclical capital buffers and borrower-based measures over the medium term. - Work with European partners to address the high share of deferred tax credits (DTCs) in bank capital. - Supervisors should ensure banks adapt business models to restore sustainable profitability amid increased Fintech competition and climate-related financial risks and meet substantial medium-term funding needs. ### Structural reforms, labor market, and statistics - Structural reform impacts and priorities: - Past structural reforms helped Greece weather the COVID-19 crisis and facilitated a job-rich recovery. - Resilient goods exports have cushioned the hard-hit tourism sector; external position recovered in 2021 but remained moderately weaker than a level consistent with medium-term fundamentals and desirable policies. - The recent minimum wage increase supports purchasing power and consumption in the near term but may risk entrenching wage-price pressures and high youth unemployment. - Recovery and Resilience Plan provides a good reform blueprint; implementation is key to realizing benefits of green and digital investments and labor market re-skilling and up-skilling programs. - Raising convergence prospects requires more efficient public investment management, sound governance, transparency, and a more business-friendly environment. - Statistics and institutional credibility: - Authorities should 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. ### Climate policy and social protection - Climate strategy and social considerations: - Greece’s commitment to climate-friendly policies is welcome and the draft Climate Law sets ambitious goals supported by a substantial boost in green investment, partially financed by NGEU resources. - Climate change and climate policies would disproportionately affect vulnerable groups; staff views a strong social safety net as critical to adaptation. - Introducing a new carbon tax and gradually increasing it over time could be considered to finance targeted transfers and green investment. *Source: 1grcea2022001 - 22.* ### 33. It is proposed that the next Article IV consultation take place on the standard ### 1grcea2022001 - 33. It is proposed that the next Article IV consultation take place on the standard ### Health Developments - Cases and mortality in Greece rose sharply in the Omicron wave; vaccination progress is in line with peers. - Capacity constraints remain for severe cases, with more elevated hospital admissions. - Vaccination uptake (April 2022): booster, primary course, one-shot categories shown relative to EU average (primary); hospital beds (2021) per 100,000 people show Greece positioned among peers. - New hospital admissions series plotted (2020W01–2022W15) show Greece above CE average and EU average in 2021–2022. *Sources cited: Blavatnik School of Government at the University of Oxford; Bloomberg Finance L.P.; European Center for Disease Prevention and Control; Eurostat; Greek Authorities; Haver Analytics; Johns Hopkins University; Kalavrezou et al (2021); and IMF staff calculations.* ### Recent Macroeconomic Developments - Real GDP growth: - 2021: 8.3 - 2022 (proj): 3.5 - 2023–2027 (proj): 2.6; 2.0; 1.6; 1.4; 1.2 - Recovery in 2021 supported by construction, industry and trade/hospitality. - Manufacturing PMI remained in expansion (+50 = Expansion) though softened recently. - Inflation (HICP) picked up sharply driven by the surge in energy prices; HICP (period average) projections in Table 1: 2022: 6.1; 2023: 1.2; 2024: 1.6; 2025: 1.8; 2026: 1.9; 2027: 1.9. - Sectoral quarterly gross value added indexed to 2019Q3=100 shows regained ground in trade/hospitality, construction and industry. ### Labor Market Developments - Unemployment rate (period average, LFS): - 2019: 17.3 - 2020: 16.4 - 2021: 15.0 - 2022–2027 (proj): 12.8; 12.4; 11.6; 11.2; 10.9; 10.6 - Employment and hours worked increased in 2021; both full-time and part-time job counts rose. - Rise in average wages subdued despite increase of minimum wages; unit labor costs reverted to pre-pandemic level. - Labor market slack remains among the highest in the EA; participation rates are among the lowest in the EA (20–64 years). ### External Sector Development - Current account (percent of GDP, Table 1): - 2019: -2.2 - 2020: -7.3 - 2021: -6.5 - 2022–2027 (proj): -6.5; -5.5; -4.9; -4.0; -3.5; -3.2 - Cumulative travel receipts (Jan–Dec series) rose in 2021 to close to 60 percent of 2019 levels. - CPI-based REER depreciated in 2021, falling to its lowest level since 2002. - Net IIP stabilized as external government debt declined in percent of GDP; gross external debt (Table 2, billions of euros) projections: - 2019: 249.2 - 2020: 304.8 - 2021: 310.1 - 2022–2027 (proj): 287.0; 279.6; 272.5; 265.7; 258.8; 252.1 - Financial account composition: Other investment and FDI broadly offset portfolio outflows; incoming FDI flows rose above pre-pandemic levels. ### Fiscal Policy Mix - Government reduced tax rates for labor and corporates during the pandemic; revenue gaps with EA peers remain large, especially for direct taxes. - Tax rates (latest available 2021 data for Greece; illustrative categories shown): personal income tax, corporate income tax, social contribution, value-added tax. - VAT gap (2019) and VAT compliance remain issues; tax compliance weak, especially in VAT. - Public spending shifts in 2020: pandemic-related increases in health spending and public investment; large state transfers to pension funds and transfers to SOEs noted as inefficient policy mix. - Table 3 fiscal headline figures (billions of euros and percent of GDP): - Nominal GDP (billions of euros): - 2019: 183.3 - 2020: 165.3 - 2021: 182.8 - 2022–2027 (proj): 202.3; 210.2; 217.4; 224.9; 232.2; 239.4 - Primary balance (accrual, percent of GDP): - 2019: 3.2 - 2020: -7.9 - 2021: -5.5 - 2022–2027 (proj): -1.9; 0.9; 1.3; 1.5; 1.8; 2.0 - Overall balance (percent of GDP): - 2019: 0.2 - 2020: -10.9 - 2021: -8.0 - 2022–2027 (proj): -4.5; -1.9; -1.4; -1.2; -0.9; -0.7 - Gross public debt (percent of GDP, Table 3): - 2019: 185.6 - 2020: 212.4 - 2021: 199.4 - 2022–2027 (proj): 183.4; 177.4; 171.1; 166.3; 163.3; 158.8 ### Financial Sector Developments - Banks’ capital base impacted by NPL offloading but remained resilient; total capital ratio and CET1 ratio series show improvement relative to EU in recent years. - NPLs drastically reduced but remain relatively high; NPL ratio (GRC) and "Texas ratio" series presented. - Impaired and restructured loans remain significant; Stage 2 loans and loans under moratoria tracked (2020Q2–2021Q4). - Profitability: return on equity declined and net interest margin trending down. - Liquidity and funding risks decreased markedly: steady deposit inflows; loan-to-deposit and liquidity coverage ratios improved. - Financial soundness indicators (Table 5 highlights): - Regulatory capital to risk-weighted assets (percent): ranges shown (e.g., 2014–2021 entries with values such as 14.1, 16.5, 16.9, 17.0, etc.). - Nonperforming loans to total gross loans (percent): series includes 30.0; 35.7; 37.4; 45.6; 42.0; 36.4; 27.0; 26.5; 17.3; 12.8. ### Tackling Climate Change - Greece has made progress in reducing emissions, but carbon intensity is the 2nd highest in the EA (GHG emission per unit of GDP, gCO2e per euro in 2015 price). - Renewable energy share of gross final energy consumption: - 2020: 22.3 - 2030 target: 50% - Fossil fuel and other energy subsidies (2020) and environmental taxes (2020) indicate scope to phase out subsidies and boost renewables. - Significant carbon pricing gaps exist in certain sectors; carbon pricing by sector (2018) shows proportions of emissions priced above different effective rates. ### Social Protection Gaps - Social assistance spending among the lowest in percent of GDP and per capita terms relative to peers (social assistance benefits, 2019). - Costly pensions crowd out critical social assistance that is better targeted at low-income groups. - Coverage and targeting: - Coverage of social transfers and social assistance schemes by quintile show pensions reach broader shares across income distribution while social assistance is concentrated less effectively. - Sickness, housing and education benefits have extremely low coverage and are poorly targeted. ### Key Medium-Term Projections (Table 1 highlights) - Real GDP (percentage change): - 2019: 1.8 - 2020: -9.0 - 2021: 8.3 - 2022–2027 (proj): 3.5; 2.6; 2.0; 1.6; 1.4; 1.2 - Unemployment rate (period average, percent) projected to decline to 10.6 by 2027. - Consumer prices (HICP), period average (Table 1): - 2019: 0.5 - 2020: -1.3 - 2021: 0.6 - 2022–2027 (proj): 6.1; 1.2; 1.6; 1.8; 1.9; 1.9 - Current account (percent of GDP, cash terms): 2019: -1.5; 2020: -6.6; 2021: -5.9; 2022–2027 (proj): -6.0; -5.1; -4.5; -3.6; -3.1; -2.8 *Sources: ELSTAT; Ministry of Finance; Bank of Greece; Eurostat; European Central Bank; Haver Analytics; IHS Markit; OECD; European Commission; Greece National Energy and Climate Plan; 2020 EU-SILC survey dataset; and IMF staff calculations and estimates.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Major domestic risks, likelihoods, impacts, and policy responses - Under-execution of the planned fiscal consolidation. (C) - Relative Likelihood: High - Impact if Realized: Medium — "Credibility of fiscal adjustment becomes in doubt, higher public debt and current account deficit, wider spreads, and a further deterioration in the fiscal policy mix dents growth." - Policy Response: - "Fund extensions of tax cuts through base-broadening measures respectively benefit adjustments." - "Budget reallocation to create fiscal space to adhere to fiscal adjustment targets while scaling up targeted support to vulnerable groups." - "Contain pension spending and the public sector wage bill." - "Save any fiscal overperformance as a contingency reserve to accommodate future downside risks." - Systemic risk build-up in the financial system. (C) - Relative Likelihood: Medium (multiple lines indicate varying sub-risks; overall entries show Medium and Low across sub-items) - Impacts if Realized (multiple): - "Less resilience of the banking sector and negative market sentiment towards banks with high levels of NPLs, would decrease banks’ ability to access liquidity and capital markets, leading to higher funding costs and credit supply constraints." (assessed Medium) - "Banks curtail lending to preserve capital, reducing consumption, particularly by highly indebted households, especially if accompanied by declines in employment and income." (assessed Medium) - "Large exposure of banks to government bonds limit banks’ ability to borrow from capital markets, constraining their funding and hampering lending to the private sector. An increase in sovereign risk may lead to banks’ losses and tighter funding and deleveraging by reducing credit to the private sector." (assessed Medium) - Policy Response: - "Accelerate bank clean-up and the build-up of capital buffers." - "Stand-alone DTC conversions for banks that are unable to utilize existing tools." - "Close monitoring of emerging risks and prepare for upgrading macroprudential tools." - "Accelerate current banking sector reforms, including steps to reduce risks from the sovereign-bank nexus by establishing an early warning system." - Structural reform implementation. (S) - Relative Likelihood: Medium (downside), Low (upside) - Impact if Realized: - Downside (Medium): "Lower growth, slower convergence, wider CA deficit and higher debt-to-GDP ratio." - Upside (Low): "Growth above baseline, faster convergence, improved debt and CA dynamics." - Policy Response: - "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." - "Improve public investment management to ensure effective use of the RRF resources." ### Major external risks, likelihoods, impacts, and policy responses - Outbreaks of lethal and highly contagious COVID-19 variants. (C) - Relative Likelihood: Medium - Impact if Realized: Medium — "Renewed containment measures including trade and travel restrictions undermine the recovery. Increased uncertainties may raise risk perception by markets, leading to repricing of risk assets." - Policy Response: - "Further promote vaccination and strengthen healthcare capacities." - "Provide targeted support to affected groups if the pandemic persists." - "Seek continued flexibility from European partners to maintain a counter-cyclical policy stance." - Rising and volatile food and energy prices. (C) - Relative Likelihood: High - Impact if Realized: High — "Elevated energy and food prices lead to bouts of inflation, imposing a burden on still vulnerable households, denting investor confidence and deterring investment, and causing short-term disruptions in the green transition." - Policy Response: - "Reallocate the budget to create fiscal space to adhere to fiscal adjustment targets while scaling up targeted support to affected groups." - "Pursue policies to diversify energy sources and facilitate the green transition." - Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions. (C) - Relative Likelihood: High - Impact if Realized: Medium — "Linkages with Russia and Ukraine are limited outside the energy sector. Nonetheless, the conflict and sanctions could divert focus/spending away from the reform agenda, undermine the recovery, stimulate capital outflows, and raise financing costs and hurt tourism through confidence channels. Disorderly migration flows could create fiscal and social pressures." - Policy Response: - "Engage partners in dialogue." - "Build contingency buffers; reallocate the budget to accommodate targeted support to affected groups." - "Pursue policies to diversify energy sources and facilitate the green transition." - "Continued monitoring and lowering of debt portfolio risk." - De-anchoring of inflation expectations in the U.S. and/or advanced European economies. (C) - Relative Likelihood: Medium/Low - Impact if Realized: Medium — "The tightening of financial conditions by the ECB could result in a risk premium spike, which would increase Greece’s financing cost and expose its external, fiscal, and banking sector vulnerabilities." - Policy Response: - "Enhance the credibility of fiscal targets by rebalancing the policy mix to contain spreads." - "Continued monitoring and lowering of debt portfolio risk." - Geopolitical tensions and de-globalization. (S) - Relative Likelihood: High - Impact if Realized: Medium — "Regional tensions would divert focus/spending away from the reform agenda and hurt tourism. De-globalization would reduce external demand, lower growth and widen external imbalances. Global supply chain disruptions worsen inflationary pressures. Disorderly migration flows could create fiscal and social pressures." - Policy Response: - "Engage partners in dialogue." - "Build contingency buffers." - "Continued monitoring and lowering of debt portfolio risk." - "Pursue policies to increase competitiveness, boost productivity, and expand the domestic market, (e.g. complete the liberalization of closed professions, open up product markets). Facilitate integration of qualified migrant workers." - Natural disasters related to climate change. (S) - Relative Likelihood: Medium - Impact if Realized: Medium — "Disruptive and more frequent extreme events (forest fires, drought, rising sea levels, coastal erosion) lower growth and increase risks." - Policy Response: - "Implement the Just Transition to improve the energy mix, prioritize reforms that support green sectors and green employment to ensure broad-based growth and cushion risks to external demand." - "Improve and accelerate urban planning and cadaster reforms." *Annex note: "The Risk Assessment Matrix (RAM) shows events that could alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability <10 percent, “medium” a probability 10–30 percent, and “high” a probability 30–50 percent). ... The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon (12–18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon."* --- ### Annex II. External Sector Assessment ### Overall assessment and policy implications - Overall Assessment: "The external position of Greece in 2021 was moderately weaker than that consistent with medium-term fundamentals and desirable policies—an improvement from the assessment staff made during the 2021 AIV consultation (for year 2020)." - Key drivers and outlook: - "The current account (CA) deficit improved gradually in 2021 as robust recoveries in travel receipts and goods exports were partially offset by strong import growth." - "The CA deficit is expected to remain elevated in 2022 on account of high energy prices but narrow over the medium-term as the trade balance gradually normalizes and the economy continues to recover from the pandemic." - "Staff projects that the large negative net international investment position (NIIP) will gradually improve in the medium-term in line with falling public debt." - Potential Policy Responses: - "Accelerate structural reforms to improve competitiveness and facilitate convergence." - "Re-prioritize reform efforts in the post-pandemic era and aim at strengthening labor force participation (particularly for youth and females), boosting productivity and private savings, facilitating private debt restructuring, reducing non-wage costs, including through reforms that reduce product market rigidities and increase competition, and continue 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 (selected figures) - "NIIP: -181 (% GDP)" - "Gross Assets: 162 (% GDP)" - "Res. Assets: 7.0 (% GDP)" - "Gross Liab.: 343 (% GDP)" - "Debt Liab.: 294 (% GDP)" - Background and assessment: - "Following the rebound in GDP growth and reduction in the current account deficit, Greece’s NIIP remained stable at -181 percent of GDP at end-2021." - "The official sector accounts for 66 percent of total external liabilities (with 47 percent attributed to the general government and 19 percent to the central bank)." - "The currency (largely euro-denominated), interest rate (largely fixed at low rates) and maturity (large share of long-term official debt) structure of the NIIP helps mitigate the risks posed by the large negative position." - "The NIIP could deteriorate in the medium term if downside risks materialize (e.g., from weaker growth, more persistent fiscal deficits, and subdued tourism receipts)." ### Current Account (selected figures and assessments) - 2021 (% GDP) figures: - "CA: -6.5" - "Cycl. Adj. CA: -7.3" - "EBA Norm: -4.0" - "EBA Gap: -3.3" - "COVID-19 Adj.: 2.5" - "Other Adj.: -0.9" - "Staff Gap: -1.7" - Background and assessment: - "The current account deficit improved to -6.5 percent of GDP as robust recoveries in travel receipts and good exports to 58 percent and 120 percent of 2019 levels were partially offset by strong import growth." - "Staff estimates that Greece’s external position in 2021 was moderately weaker than one consistent with medium-term fundamentals and desirable policies." - "Staff applies COVID adjustor for temporary shocks on tourism (1.3 percent of GDP), transport (0.5 percent of GDP) and medical goods balance (0.4 percent of GDP) and for shifts in household consumption composition (0.3 percent of GDP) as well as an adjuster to account for external stability considerations (- 0.9 percent of GDP), resulting in a final staff gap of -1.7 percent of GDP." - "Accounting for uncertainty in the estimates, this implies a CA gap in the range of [-0.7 to -2.7] percent of GDP." - "The identified policy gap amounts to -0.4 percent of GDP, largely reflecting Greece’s relatively wider cyclically-adjusted fiscal deficit compared to that of the rest of the world." ### Real Exchange Rate (REER) assessment - Background: - "The ULC-based REER (ULC-REER) ... fell by 21 percent during 2007–15 ... The REER-CPI fell by 4 percent in 2015–21 ... The REER-ULC declined by 3.6 percent during this period." - Assessment: - "The EBA REER models indicate a range of overvaluation of 3.1 percent (index model) and 27.0 percent (level model) in 2021. Staff considers the REER model results less reliable ... Staff therefore bases the REER assessment on the EBA CA model: consistent with a CA gap of -1.7 percent and a semi-elasticity of 0.34, the REER is assessed to be overvalued by 5.0 percent." ### Capital and financial accounts; reserves - Financing composition in 2021: - "Other investment flows (16.8 percent of GDP), the capital account (2.2 percent of GDP) and net FDI inflows (2.2 percent of GDP)." - "Gross FDI inflows in 2021 surged above pre-pandemic levels to 2.8 percent of GDP." - Assessment and outlook: - "Financing conditions remained favorable in 2021 among continuation of the ECB’s PEPP program, three rating upgrades and historically low funding costs. However, financing conditions have started to tighten with interest rates for Greek government bonds now hovering around 2019 levels." - "Rollover risks are contained by the government’s large cash buffer, the large share of official loans with ultra-low interest rates and ultralong maturities and the ECB's announcement that PEPP proceeds could be reinvested into Greek government bonds if needed." - "A steady improvement in the business climate, including from continued efforts on structural reforms, and further reduction in uncertainty are needed to promote sustainable FDI further." - FX intervention and reserves: - Background: "The euro has the status of a global reserve currency." - Assessment: "Reserves held by the EA are typically low relative to the standard metrics; the currency is free floating." --- ### Annex III. Sovereign Stress and Debt Sustainability Assessment ### Risk of sovereign stress: summary signals and staff assessment - Overall staff assessment: "Staff’s assessment of 'moderate' reflects moderate medium risk of sovereign stress." - Notable mechanical and customized signals: - "The medium mechanical risk signal is moderate." - "The mechanical medium-term signal for the fan chart indicates 'high' risk, largely attributable to the debt fanchart’s width." - "The GFN module signals moderate risk, with a customized contingent liability shock appearing manageable." - Key mitigating factors cited: - "Substantial cash buffer (11 months of GFN)." - "Large share of official loans with ultra-low interest rates and ultralong maturities." - "The ECB's announcement that PEPP proceeds could be reinvested into Greek government bonds if needed." ### DSA summary assessment and staff commentary (selected points) - "Greece's overall risk of sovereign stress is assessed to be moderate, with public debt on a downward trajectory and rollover risks manageable over the medium term." - "The medium-term mechanical signal flags high risk for the fanchart driven by Greece’s high debt level and historical debt volatility. However the GFN module signals moderate risk, with a customized contingent liability shock appearing manageable." - "There is significant uncertainty around these projections, in particular with regards to whether reform momentum will be sufficient to close the investment gap and overcome adverse demographics, whether the European Union-wide fiscal rules going forward will be achievable and compatible with growth and to what extent interest rates on Greek Government Bonds will remain low amid an unprecedented handover from official to market funding over the longer term. In addition, geopolitical tensions and higher inflation could cause spreads to rise faster than anticipated and result in additional fiscal expenditure." *Source: Annex I–III, "1grcea2022001 - Annex I. Risk Assessment Matrix" (GREECE), IMF Country Report content provided in the source PDF.* ### 1. Debt coverage in the DSA: 1/CGGGNFPSCPSOther ### 1. Debt coverage in the DSA: 1/CGGGNFPSCPSOther ### Debt Perimeter and Coverage - Chosen coverage: General government (CG=Central government; GG=General government) following ESA 2010. - Subsectors included in baseline: - Budgetary central government: Yes - Extra budgetary funds (EBFs): Yes - Social security funds (SSFs): Yes - State governments: Yes - Local governments: Yes - Public nonfinancial corporations: Yes - Central bank: No - Other public financial corporations: Yes - Staff commentary: Debt coverage reported is general government and follows ESA 2010, thus not including other accounts payable and insurance, pensions and standardized guarantee schemes. Cross-holdings are netted out. The debt perimeter newly includes net SDR holdings as well as NGEU loans. ### Accounting, Recording and Valuation Notes - Basis of recording/valuation terminology preserved as in source: - Nominal value 5/: defined as the amount the debtor owes reflecting transactions, exchange rate and other valuation changes. - Face value 6/: undiscounted amount of principal to be paid at (or before) maturity. - Market value 7/: value as if acquired in market transactions on the reporting date; only traded debt securities have observed market values. - Notes on other items: - 2/: Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable. - 3/: Insurance, Pension, and Standardized Guarantee Schemes (IPSGSs), typically including government employee pension liabilities. - 4/: Includes accrual recording, commitment basis, due for payment, etc. ### Reporting on Intra-government Debt Holdings - Consolidation reporting: Cross-holdings are netted out for general government reporting. - Non-consolidated and consolidated presentation referenced (CG, CPS, NFPS, GG expected) consistent with source tables. ### Key Public Debt Structure Indicators (end-2021 and related) - Public debt at end-2021: 199.4 percent of GDP. - Currency and legal/holder structure (perimeter shown is general government): - Staff commentary: Public debt at end-2021 was almost entirely denominated in domestic currency and at fixed rates, with a weighted average maturity of 20 years. - Most of the debt is held by external official creditors. - Greece has a sizeable cash buffer that stood at EUR 31.6 billion at end-2021. - Share of official loans: More than 70 percent of Greece’s public debt consists of official loans with ultra-low interest rates and ultralong maturities (reflected in low GFNs). ### Baseline Projection (selected table entries; in percent of GDP unless indicated) - Public debt: - Actual 2021: 199.4 - 2022: 183.4 - 2023: 177.4 - 2024: 171.1 - 2025: 166.3 - 2026: 163.3 - 2027: 158.8 - 2028: 155.1 - 2029: 151.6 - 2030: 148.2 - 2031: 144.9 - 2032: 141.8 - Change in public debt (year-on-year): - 2022: -16.0 - 2023: -6.0 - 2024: -6.3 - 2025: -4.8 - 2026: -3.0 - 2027: -4.5 - 2028: -3.7 - 2029: -3.5 - 2030: -3.4 - 2031: -3.3 - 2032: -3.2 - Contribution of identified flows (percent of GDP) mirrors the change series (e.g., -16.0 in 2022, -6.1 in 2023). - Primary deficit (percent of GDP): - 2021: 5.5 - 2022: 1.9 - 2023: -0.9 - 2024: -1.3 - 2025: -1.5 - 2026: -1.8 - 2027–2032: around -1.5 to -2.0 (e.g., 2027: -2.0; 2028: -1.5) - Automatic debt dynamics (percent of GDP): - 2021: -17.6 - 2022: -16.2 - 2023: -4.0 - 2024: -3.2 - 2025: -3.3 - 2026: -2.9 - 2027: -2.5 - 2028: -2.2 - 2029: -2.0 - 2030: -1.9 - 2031: -1.7 - 2032: -1.6 - Real interest rate (percent): - 2021: -1.5 - 2022: -9.9 - 2023: 0.6 - 2024: 0.2 - 2025: -0.5 - 2026: -0.6 - 2027: -0.6 - 2028: -0.4 - 2029: -0.2 - 2030: -0.1 - 2031: 0.0 - 2032: 0.1 - Real growth rate (percent): - 2021: -16.0 - 2022: -6.3 - 2023: -4.7 - 2024: -3.4 - 2025: -2.7 - 2026: -2.3 - 2027: -1.9 - 2028: -1.8 - 2029–2032: -1.8 to -1.7 (e.g., 2032: -1.7) - Gross financing needs (GFNs; percent of GDP): - 2021: 18.7 - 2022: 16.1 - 2023: 11.3 - 2024: 9.0 - 2025: 7.9 - 2026: 8.4 - 2027: 6.9 - 2028: 8.2 - 2029: 8.3 - 2030: 8.1 - 2031: 7.8 - 2032: 7.4 - Debt service (included in GFNs; percent of GDP): - 2021: 13.2 - 2022: 14.3 - 2023: 12.1 - 2024: 10.3 - 2025: 9.3 - 2026: 10.2 - 2027: 8.9 - 2028: 9.7 - 2029: 9.8 - 2030: 9.6 - 2031: 9.3 - 2032: 8.9 - Local currency vs foreign currency composition of debt service: - Local currency debt service series equals the debt service totals above for each year (e.g., 2021: 11.2; 2022: 13.4; 2023: 12.1). - Foreign currency debt service is small or zero in projections (e.g., 2021: 2.0; 2022: 0.9; 2023 onward: 0.0). ### Macro Assumptions (selected memo lines) - Real GDP growth (percent): - 2021: 8.3 - 2022: 3.5 - 2023: 2.6 - 2024: 2.0 - 2025–2032: 1.6 down to 1.2 (e.g., 2027: 1.2; 2032: 1.2) - Inflation (GDP deflator; percent): - 2021: 2.1 - 2022: 6.9 - 2023: 1.2 - 2024–2032: mostly around 1.4–1.9 (e.g., 2023: 1.2; 2024: 1.4; 2025: 1.8) - Nominal GDP growth (percent): - 2021: 10.6 - 2022: 10.7 - 2023: 3.9 - 2024: 3.4 - 2025–2032: 3.4 down to 3.0 (e.g., 2027: 3.1; 2032: 3.5) - Effective interest rate (percent): - 2021: 1.5 - 2022: 1.6 - 2023: 1.6 - 2024 onward: around 1.5–1.9 (e.g., 2029: 1.9; 2030: 1.9) ### Staff Commentary on Baseline Drivers - Downward trend in public debt driven by: - Real GDP growth converging toward long-run level 1.2 percent of GDP. - Primary balance converging toward long-run level 1.5 percent of GDP. - Some drawdown of the cash buffer. - Public debt expected to reduce faster than previously projected due to stronger 2021 growth, higher potential growth, quicker fiscal adjustment, and higher inflation. - GFNs projected to drop below 10 percent by 2024 and remain relatively stable thereafter. ### Risk Analysis and Stress Scenarios - Mechanical fanchart signal: "high" due to wide width and elevated debt level; but 83 percent of simulated debt trajectories stabilize over next 10 years. - Debt levels in 2027 projected to fall in range of 120 to 230 percent of GDP with 90 percent probability. - GFN module mechanical signal: "moderate". - GFNs average 9.9 percent of GDP from 2022-2027 under baseline. - Under a stress scenario, GFNs can increase and leave a residual financing need averaging 5.1 percent of GDP annually after assuming authorities draw on the cash buffer (and under current rules could be absorbed by banks that would repo with the ECB). - Customized contingent liability shock: - Simulates realization of legal challenges to past pension and wage reform, outstanding state guarantees, unfunded tax cuts, spending pressures from high inflation, unexpected losses from Hercules, and potential DTC conversion costs. - Distributed over 2022-27 and amount to a total of 31 billion euros. - Staff: Impact on debt stock, trajectory, and GFNs appears manageable. - Other stress test findings: - A 30-basis point interest rate shock (or 100 bp shock on 30 percent of Greece's external debt portfolio) or deterioration in the current account by 1.2 percentage point of GDP over the projection horizon would raise the debt ratio by around 15 percent of GDP (still below 2021 level). - A decline in average growth by 2.4 percentage points over the projection horizon or a combined shock (higher interest rates, lower growth, lower current account balances) could raise the debt level by up to 45 percentage points compared to baseline. ### Fiscal Buffers and Mitigants - Cash buffer: EUR 31.6 billion at end-2021 (equivalent to 11 months of GFN). - Large share of public debt consists of official loans with ultra-low interest rates and ultralong maturities, contributing to low GFNs. - ECB policy support: PEPP reinvestments and collateral treatment for GGBs can help absorb market stress. ### Final Risk Rating - Overall medium-term mechanical signal: "moderate" risk (staff's final rating), supported by cash buffer, share of official loans, and ECB’s PEPP reinvestment policy. *Source: IMF staff estimates and projections as presented in the Greece DSA content unit.* ### Annex IV — Financial Sector Background Note: Key Findings and Developments - Inorganic NPL reduction and structural context: - NPL ratio dropped from 25 percent in 2020 to 7 percent at end-2021, driven predominantly by securitizations and sales under the government-sponsored Hercules scheme. - SIs account for around 97 percent of total banking sector assets. - Coverage ratio reached 42 percent at end-2021 (close to EU average). - Continued reliance on inorganic measures; organic actions and structural reforms (insolvency law implementation, judicial efficiency) remain limited and necessary as Hercules is scheduled to lapse in 2022. - Policy support measures (selected magnitudes and status): - Moratoria: fell to €0.1 billion at end-2021 from a peak of €28 billion in 2020:Q3; two SIs still have active non-EBA compliant moratoria expected to expire in 2022. - Step-up products: €1.6 billion at end-2021; expected to expire in 2022. - Gefyra programs: €7.8 billion at end-2021; Gefyra I envisaged to end in 2022:Q1 and Gefyra II in 2022:Q2. - Public guarantee scheme: €5.5 billion at end-2021; expected to expire in 2022. - Hercules Asset Protection Scheme (HAPS): guarantees up to €24 billion until 2022; unutilized amount around €5.5 billion. - Monetary policy support: inclusion of GGBs under ECB’s PEPP reactivated interest-rate channel and generated gains; TLTROIII operations lowered funding costs; net PEPP purchases stop from end-March 2022 but PEPP reinvestments continue until end-2024. - Prudential policy relief: SSM temporarily loosened enforcement of supervisory requirements (Pillar 2 Guidance buffer, capital conservation buffer, liquidity coverage ratio) and allowed flexibility in classifying/provisioning NPLs covered by public guarantees and pandemic-related moratoria; relief expected to remain until end-2022. - Banking system performance and risks: - Asset quality: NPL reductions faster in household sector than corporate; corporate NPLs concentrated in manufacturing, construction, and trade; inflows of new NPLs from pandemic partially offset by curing. - Profitability: Return on equity declined to – 19 percent at end-2021, primarily due to large loan loss provisions from NPL portfolio sales. - Cost of risk reached 5 percent (considerably above EU average). - Net interest margin continued to decline as loan portfolios contracted. - Net fee and commission income increased from new loan disbursements and payment activity. - Operating expenses were elevated by one-off costs (voluntary redundancy provisions, corporate transformations, impairment of goodwill and intangible assets). - Outlook: With envisaged NPL reduction to single-digit level in 2022, Greek banks are expected to restore profitability in 2023, but must adapt business models to face competition from non-banks/Fintech, tackle climate-related financial risks, and upgrade risk management practices. - Structural reforms needed: faster implementation of "sale and lease back" scheme and insolvency/judicial reforms to support organic NPL resolution. *Source: IMF staff financial sector background note and DSA material as presented in the content unit.* ### 4. While capital adequacy has been preserved, capital quality has deteriorated further. ### 4. While capital adequacy has been preserved, capital quality has deteriorated further. ### Capital adequacy and capital quality - Greece continued to have the lowest capital adequacy in the EU across various metrics in 2021. - Capital adequacy declined further following NPL sales, higher provisions, and the application of the transitioned provisions of IFRS9. - The decline was consistent with prudential capital relief measures introduced by the ECB in 2020. - Banks raised capital through additional Tier 1 bonds counting towards the minimum capital requirements and eligible liabilities (MREL). - Capital quality deterioration: - Deferred Tax Credits (DTCs) amounting to €15 billion. - DTCs represented 64 percent of prudential capital, up by 11 percentage points compared to 2020. - Significantly reducing the share of DTCs in capital through organic means and amortization will be a lengthy process. - Under Greek legislation: - DTAs may be converted into DTCs against the State. - DTCs may be offset against the income tax due for a period of 20 years, with the same period provided for gradual amortization of losses due to write-offs and disposals of non-performing loans. - The Tax Code was amended to allow for an extended amortization of the losses associated with the private sector involvement over a 30-year period through recording DTAs in banks’ balance sheets. ### Liquidity and funding - Liquidity and funding conditions improved further, underpinned by robust deposits and policy support. - Liquidity coverage ratio (LCR) reached 198 percent at end-2021, surpassing the EU average of 175 percent. - Household and corporate deposits rose due to precautionary savings and cash hoarding, extensions and deferrals of payments for debt service and tax obligations, working capital subsidies, and direct state aid. - Policy support measures: - PEPP and TLTROIII operations ensured liquidity and provided very favorable funding terms. - These measures allowed banks to substitute interbank market funding. - Loan-to-deposit ratio declined to 61 percent, substantially lower than the EU average of 109 percent. - Stronger liquidity and funding shock absorption capacity, although achieving MREL requirements may pose some medium-term challenges. ### Outlook and credit risk challenges - Substantial uncertainty about the full impact of the pandemic on banks once support measures are withdrawn, with some emerging signs of credit risk increase. - Credit risk assessment for SIs is based on forward-looking metrics grounded in IFRS9 standards in the absence of a comprehensive asset quality review. - For expired moratoria: - Stage 2 loans that have increased credit risk remained broadly unchanged. - Non-performing loans slightly declined. - Levels for both metrics in Greece were significantly higher compared to the EU average. - For non-expired moratoria: - Stage 2 loans and non-performing loans were higher for Greece than the EU average, with stage 2 loans recording a significant increase. - For newly originated loans covered by the public guarantee scheme (PGS): - Both stage 2 loans and non-performing loans increased significantly in Greece but remained below the EU average. - The 2021 EBA stress test for Greek SIs suggests considerable losses under the adverse scenario assuming a prolonged and severe impact of the pandemic. - Note: the EBA stress test assumptions include a static balance sheet, no curing of loans in stage 3, and no moratoria (except public guarantee schemes) over the stress test horizon. - Some LSIs face significant challenges because of strong inflows of new NPLs and inadequate provisioning. ### Intensifying bank–sovereign nexus - Sovereign exposures increased significantly between 2020 and 2021: - Greek banks increased holdings of Greek government bonds as a share of assets and total exposures to governments. - Comparable increases occurred in Italy, Spain, and Portugal. - Elevated sovereign exposure can provide relief to governments in stress but increases bank sensitivity to sovereign risk shocks, potentially leading to lower bank credit and economic activity. - Dependence on public sector–sponsored safety net increased: - Level of government guarantees remained elevated compared to the pre-pandemic period. - Share of DTCs in regulatory capital increased to 64 percent at end-2021. - The sovereign has considerable ownership in the banking system through the Hellenic Financial Stability Fund (HFSF). - Elevated dependence on accommodative monetary policy (PEPP and TLTROIII) that provided low cost of funding and increased liquidity. - When monetary support is reduced and unwound, this may pose challenges to the sovereign and banks, resulting in higher funding costs for corporates and households and potentially lower economic activity. ### Delayed implementation of the Sale and Lease Back (SLBO) scheme - SLBO adopted to protect vulnerable debtors from losing primary residence in insolvency: - A privately funded investment vehicle set up by the government would buy residences and lease them back for a maximum of 12 years with an option to repurchase. - Authorities will provide indirect financing to the SPV through a housing benefit towards lease payments by the debtor. - Continued delays in the SLBO (currently estimated to be implemented in 15 months) have prevented creditors from enforcing on primary residences, even in the event of non-payment. - A government scheme has provided subsidies for mortgage payments of vulnerable debtors, but there is no requirement that a restructuring agreement on the loan be reached. - These factors discourage financial institutions and debtors from finding mutual agreements on lasting restructuring solutions and have contributed to further delays in NPL resolution. ### Structural challenges: non-bank financial sector, credit servicers, climate risks - Non-bank financial sector and Fintech: - So far have not raised supervisory concerns, yet credit servicers are being monitored more closely. - Payment Systems Directive II transposition opened market space for new payment service providers (PSPs). - Competition expected to increase between banks and specialized PSPs; newly regulated entities must meet high standards of sound risk management. - The Bank of Greece (BoG) is closely overseeing this evolving sector among LSIs. - Credit servicers: - Regulated entities specialized in distressed debt collection purchased from banks. - More systemic in Greece with more than €120 billion NPLs under recovery. - Facing challenges to implement business plans and reach objectives within the pandemic environment. - Climate-related financial risks: - Receiving greater scrutiny though potential exposures are estimated as being low. - Greece formulated a national strategy reaffirmed during COP26 in November 2021. - The BoG prepared a comprehensive assessment of environmental, economic and social impact of climate change as early as 2011. - BoG committed to explore how to assess the financial system’s exposure to climate-related and environmental risks (physical risks and transition risks) and identify transmission channels; work is in progress and more structured supervisory strategies are expected. - Banking and insurance sectors are not expected to face major climate-related financial risks so far, in part because Greece has one of the highest insurance protection gaps in Europe. - Greek banks are at an early stage in addressing environmental, social and governance (ESG) issues. *Source: IMF staff compilation from the provided chapter content.* ### 12. Cybersecurity and operational risk management within the banking sector are being ### 12. Cybersecurity and operational risk management within the banking sector are being ### Cybersecurity and operational risk management - Authorities are committed to enhancing the operational risk management framework of banking institutions, including implementing the EBA guidelines on information and communication technology and security risk management. - Close monitoring of LSIs’ plans to upgrade their cybersecurity frameworks and business continuity plans is being conducted. - Operational risk is part of the regular ECB/SSM supervision of SIs. ### Financial sector developments and bank balance sheet repair - Significant progress in reducing bank Non-Performing Loans (NPLs): - NPLs were reduced by EUR 28.8 billion in 2021 to EUR 18.4 billion. - NPL ratio at end-2021: 12.8 percent. - NPL ratio at end-2020: 30.1 percent. - NPL ratio at end-2019: 40.6 percent. - Prospects for 2022: NPL ratio expected to fall to single digit levels during 2022 despite the lifting of pandemic-related bank support. - Bank capital and profitability: - Tier 1 capital adequacy ratio at end-2021: 12.6 percent. - New mortgage loans granted at 2.8 percent as of March 2022 vs. 2.5 percent at end-2021. - Average LTV ratio as of the last quarter of 2021: 64.5 percent. - Residential mortgage credit trends and housing market: - Residential mortgage credit declined by 3 percent on an annual basis at end-2021. - Residential real estate market prices rose cumulatively by 25 percent in the last four years but remain 35 percent below the 2007 highs in real terms. - Policy measures and programs contributing to NPL reduction: - Hercules Asset Protection Scheme: securitization strategy supported by market-based government guarantees fully complying with EU state-aid rules. - Comprehensive insolvency law reform with fully operational online platforms; transposes the European Directive on Preventive Restructuring and Insolvency. - Emphasis on strengthening supervisory framework, transparency, and financial disclosure on credit servicers. - Operational priorities as Hercules is scheduled to lapse later in 2022: enhance courts’ institutional capacity, activate purchases of primary residences of most vulnerable debtors with lease-back, facilitate enforcement of e-auctions, streamline out-of-court debt workouts. ### Macro outlook, growth, and inflation - Authorities’ growth projections: - 2022: 3.1 percent. - 2023: 4.8 percent. - Medium term: 3-3.5 percent. - Staff projections: - 2022: 3.5 percent. - 2023: 2.6 percent. - Potential growth by 2027: 1.2 percent. - Exports of goods in 2021: EUR 40 billion (almost 20 percent above 2019 level). - Investment projections for 2022: - Equipment investment expected to surge by almost 20 percent. - Construction investment expected to surge by almost 15 percent. - Inflation: - Authorities and staff project inflation in 2022 to reach an average level of about 6 percent, before settling below 2 percent in 2023-24. - Labor market and wage policy: - Statutory minimum wage effective May 1, 2022: monthly pay EUR 713 (a wage increase of 7.1 percent on an annual basis compared to 2021). ### Fiscal policy stance and public finance - Pandemic-related fiscal support: - Fiscal support package of 14.5 percentage points of GDP in 2020-21. - Covid-related fiscal support to phase out from 8.3 percent of GDP in 2021 to 2.1 percent of GDP in 2022. - 2021 fiscal outcome: - Primary deficit in ESA terms: 5.0 percent of GDP (lower by about 2 percentage points of GDP than budgeted). - Fiscal stance for 2022 and medium term: - 2022: primary fiscal balance expected to be reduced to a deficit of up to 2 percent of GDP. - 2023: primary balance expected to turn into a surplus of close to 1 percent of GDP. - 2024 and 2025 onwards: primary surplus expected to be more than 2 percent of GDP. - Authorities committed to maintaining sustainable primary surpluses of 2.2 percent of GDP on average over the medium-term. - Specific fiscal measures and impacts: - Temporary energy subsidies to households and businesses: fiscal impact expected of 1.4% of GDP. - Additional discounts on electricity bills covered by CO2 Emissions Trading System revenues and windfall revenues due to increased electricity prices. - Temporary waivers (solidarity tax and cuts by 3 percentage points in social security contribution rates) planned to become permanent from 2023. - Government cash buffer and debt management actions: - Government cash buffer currently at EUR 38 billion (up from EUR 31 billion at the conclusion of the ESM Program in August 2019). - Second prepayment to the Fund in the previous year: EUR 3.4 billion. - Final payment in current year to settle remaining obligations to the Fund due by end-2024: EUR 1.8 billion (using part of the SDR allocation proceeds). - Planned principal repayments later this year (endorsed by Eurogroup Feb 2022): EUR 2.65 billion due in 2023 from GLF loans. ### Debt sustainability and external financing - Staff baseline expectations: - Public debt levels expected to decline to less than 150 percent of GDP by 2030. - Gross Financing Needs (GFN) to remain on average below 10 percent of GDP throughout the period. - Authorities’ projection: - Public debt to decline to below 150 percent of GDP by 2025 due to faster growth. - Debt structural features cited by authorities: - Large cash buffer equivalent to 11 months of Gross Financing Needs. - Ultra-long maturities with presently ultra-low interest rates. - Effectively zero foreign exchange risk. - Sovereign market activity and ratings: - Greece raised EUR 28 billion in the capital markets during the pandemic at relatively low spreads. - Sovereign rating upgrades: S&P in April 2022 and DBRS in March 2022 (upgrades reached one notch below investment grade in the case of S&P). - Expected graduation from quarterly European Institutions’ Enhanced Surveillance framework by August 2022. - Long-term pension system reform impact: - Pension reforms projected to reduce pension expenditure by 3.7 percentage points of GDP between 2019 and 2060 (2021 EU Ageing Report). - Introduction of fully funded, defined contribution, supplementary pension system deployed from 2022 for new entrants; maturing to cover 90 percent of insured employees by 2065. - Based on macro assumptions of the Foundation for Economic and Industrial Research, public debt could be reduced by 6.3 percentage points of GDP cumulatively by 2070 due to the supplementary pension reform. ### Structural reforms, digitalization, and green transition - National Recovery and Resilience Plan (NRRP) / NGEU: - NRRP includes 68 structural reforms and 106 investment projects through 2026. - Total NRRP envelope: EUR 31 billion (in 2018 values) in loans and grants, of which EUR 13 billion in loans (Recovery and Resilience Facility). - Total EU funds expected to be received by Greece in coming years: EUR 70 billion (in 2018 values). - Authorities estimate NGEU impact: about 1 percentage point in real GDP growth annually on average. - RRF loan funds of EUR 1.6 billion already being disbursed in the market based on agreements with six commercial banks and two European institutions. - HDBI actively manages EUR 500 million of the loan segment of the NRRP through an equity platform instrument. - Greece received EUR 3.6 billion in April 2022, of which EUR 1.8 billion in loans, on top of EUR 4 billion in pre-financing disbursed in 2021. - Structural reform priorities highlighted: - Business environment: simplify licensing, increase ease of doing business, support investment and trade facilitation. - Incentivize private investment: cut corporate tax rates, facilitate corporate restructurings, improve access to investment finance, modernize labor relations. - Labor market: increase labor force participation, active labor market policies, childcare expansion, up-/reskilling with emphasis on digital skills, reduce non-wage costs. - Inclusiveness: reinforce workers’ rights, introduce digital work card, deploy Guaranteed Minimum Income, revamp unemployment benefits into an employment agency, tackle labor informality and gender inequality. - Digitalization: Digital Transformation 2020-25, invest in 5G, fast broadband, fiber optic infrastructure, submarine fiber cables; digitize public administration (health, education, taxes, pensions, permits, licensing, vital records). - Justice sector: document digitization and digital skills training for judges and judicial personnel to reduce court backlog. - Green transition and energy: - National Energy and Climate Plan targets: raise share of renewable energy in electricity consumption to 61% and in transport to 19% by 2030, from 29% and 7% respectively in 2018. - Draft climate legislation under Parliament for at least 55 percent reduction in greenhouse gas emissions by 2030 and 80 percent by 2040 before achieving zero-net emissions by 2050 (compared to 2019 levels). - Phase out all lignite plants by 2028 (target may be brought forward to 2025 if energy security conditions permit). - From 2025 prohibition on sale and installation of boilers using heating oil; from 2030 prohibition on use of heating oil unless combined at a ratio of 30 percent with renewable liquid fuels. - From 2025: new buildings near high-risk forest fire or flood areas must be insured before connection to electricity grid. - Vehicles: in Athens and Salonica from 2026 newly acquired taxis and one third of rental cars should be zero emission; from 2024 one fourth of newly acquired company cars should be electric or hybrid; from 2030 all newly acquired passenger cars and small commercial vans should be zero emission. - Municipal plans: reduce CO2 emissions by 10 percent by 2025 and 30 percent by 2030. ### Data, statistical coverage, and surveillance - Greece subscribed to the Fund’s Special Data Dissemination Standard (SDDS) on November 8, 2002. - Statistical improvements and coverage: - Quarterly and annual national accounts compiled in accordance with ESA 2010. - CPI chained annually with weights renewed annually based on Household Budget Survey. - General government non-financial accounts compiled under ESA 2010 and validated by Eurostat. - Bank of Greece revised general government financial accounts in 2019 enabling Eurostat validation and publication after four years. - Balance of payments data provided according to IMF’s sixth edition of the Balance of Payments Manual since January 2015. - Bank of Greece uses ELSTAT’s trade statistics since July 2015; sea transport accounts compilation changed in November 2018 using international shipping databases and administrative sources. - Monetary and Financial Statistics: central bank and aggregated ODC balance sheets reported via ECB standardized report forms (1SR and 2SR). Data on other financial corporations (OFCs) is not compiled. - Financial soundness indicators compiled and reported quarterly covering deposit takers, OFCs, nonfinancial corporations and households. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1grcea2022001.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1grcea2022001.pdf_