## _cr0604 ## Source details **Canonical URL:** [_cr0604](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0604.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0604.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0604.pdf.json) --- ### Executive Summary — background and macro situation - Real GDP growth fell to an estimated 3½ percent of GDP in 2005 after several years of very strong growth. - Fiscal deficit deteriorated sharply, reaching 6.6 percent of GDP in 2004; public debt stood at 111 percent of GDP. - Real primary expenditure grew by 5.9 percent a year on average in 2000−04 (5.1 percent excluding the Olympics). - Growth drivers: sharp fall in interest rates following euro adoption and ECB easing; rapid private-sector credit increases after financial liberalization; procyclical fiscal policy; spending on the Olympics; strong capital formation; high labor productivity growth; significant immigration. - Competitiveness has eroded: persistent inflation differential vis-à-vis the euro area, high unit labor cost increases, and steady appreciation of the real exchange rate. Export market shares have fallen by some 17 percent since 2000. - Inward FDI has been chronically weak. - Greek banking system transformed: private-sector intermediation replacing holdings of public debt; banks extended credit aggressively to households and SMEs and moved into southeast Europe. Rapid credit expansion raises resilience concerns under a sharp slowdown or higher interest rates. Nonbank financial sector remains small. ### Policy discussions and staff assessment — key findings and priorities - Fiscal consolidation is the top priority; authorities intend to bring the deficit below 3 percent in 2006. - Staff supports consolidation but argues for a multi-year program of durable spending measures to achieve structural budget balance by 2010, after which aging costs begin to rise. - Sustained current primary spending restraint should be bolstered by deep reforms to expenditure management and tax administration, as recommended by the fiscal ROSC and Fund TA reports. - Pension reform will be needed to avoid explosive public debt; authorities committed not to introduce measures during this term of office; staff urges more vigorous public debate to pave the way for eventual reform. - FSAP judged the banking sector generally in good health but noted credit growth raised concerns about credit quality and recommended strengthening supervision and risk management. - Structural reforms initiated: corporate tax cuts; unified and extended shopping hours; more flexible overtime arrangements; new competition law; elimination of job tenure at the telecoms firm; simplification of business licensing; immigration integration law. Further reforms needed to improve productivity and competitiveness. - Data are adequate for surveillance but should be strengthened: fiscal data remain in flux; fiscal financing data should be published; quarterly national accounts are poor (new series to be published next year); banking system data should be more timely; statistical office should be given formal independence. ### Economic outlook and risks - 2005: both authorities and staff broadly agree on estimated growth at 3½ percent. - 2006: authorities project real GDP growth of 3¾ percent; staff projects a mild slowdown to 3¼ percent. - Medium-term: staff projects a gradual decline in growth to potential of 3 percent. - Risks identified: stronger-than-expected rebound in investment; higher interest rates damping activity; changes in oil prices; EU economic growth; developments in tourism and shipping; erosion of competitiveness cutting potential growth more than incorporated in projections; possibility of a sharper end to the boom as occurred in Portugal. ### Fiscal policy — details, scenarios, and staff projections - 2005 implementation (staff estimate): deficit will fall to 4.6 percent of GDP in 2005, a reduction of 2 percentage points, driven primarily by end of Olympics spending (accounting for 1¼ percent of GDP, including a sharp fall in public-sector investment), lower interest costs (½ percent of GDP), and lower growth of public sector wage costs and pensions. - Authorities planned securitization of tax arrears to raise revenue of 1 percent of GDP in 2005 and another 1 percent in 2006; 2005 securitization was not included in the 2006 budget document pending Eurostat issues; decision on 2006 securitization to be made by year-end. - Authorities’ 2006 target: deficit of 2.6 percent of GDP, with measures including reduction in corporate tax rate, introduction of a VAT on real estate transactions, restraint of public sector wage bill, tighter control on spending of public enterprises and hospitals; consolidation also depends on unspecified tax and non-tax revenues (some temporary) and lower infrastructure investment. - Staff baseline for 2006 (assuming spending targets met but excluding unspecified revenue measures): projected deficit of 3.8 percent of GDP. - Staff alternative: if unspecified measures yield the revenue assumed by the authorities, staff projects a deficit of 2.7 percent of GDP. - Staff Fiscal Projections, 2006 (In percent of GDP) - Baseline -- Includes Specified Measures: - Revenue: 41.4 - Expenditure: 45.2 - Overall balance: -3.8 - Structural balance: -4.3 - Includes Unspecified Measures: - Revenue: 42.5 - Expenditure: 45.2 - Overall balance: -2.7 - Structural balance: -3.2 - Excluding temporary measures: -3.8 - Memorandum items: - Unspecified revenue measures: 1.1 - of which: temporary: 0.6 - Source for projections: Staff estimates. ### Consolidation path, sequencing, and expenditure management - Mission argued for continued consolidation to achieve structural budget balance by 2010; required structural deficit reductions about 1 percent of GDP a year on average. - Recommended front-loading consolidation to take advantage of buoyant growth and because the electoral cycle will make restraint increasingly difficult in 2007−08. - Near-term focuses urged by mission: - Greater control of state-owned enterprises (SOEs) to reduce subsidies and loan guarantees. - Reinforcing tax collection through electronic cross-checking of VAT returns. - Stepping up absorption of EU funds. - Broad areas for possible savings: - Continued restraint of public sector wages. - Taking advantage of retirements (authorities estimate about 7000 a year) to slim the public service. - Better control of spending by SOEs, transport companies, and hospitals. - Scaling back high military spending. - ROSC and TA identified expenditure management weaknesses: focus on spending lines rather than program objectives; ineffective audit and accounting controls; lack of transparency. Mission urged high-level task forces be given strong political backing. ### Long-term fiscal risks: aging, pensions, and health care - EC estimates (2001) project spending on pensions and health care to rise by 10½ percent of GDP between 2010 and 2050, which would result in an explosive debt-GDP ratio absent corrective action. - Authorities politically committed not to act in the current term but began preparatory steps by referring the issue to the Economic and Social Council for social partner discussion. - Mission emphasized building political support as prerequisite to reform and urged a more visible and comprehensive dialog soon. - National Actuarial Authority has fallen far behind schedule; mission recommended immediate provision of additional resources, including outsourcing the work. - Health-care measures needed include better pricing and costing mechanisms and improved auditing. - Suggested pension reform options: - Reducing high replacement rates. - Running budget surpluses beyond 2010 to reduce public debt more rapidly. - Raising the effective retirement age. - Streamlining the highly fragmented system and unifying entitlement conditions. - Developing a clear vision on an adequate (but affordable) level of minimum protection. - Strengthening sustainability assessments. ### Financial sector — FSAP findings and recommended reforms - FSAP conclusions: - Banking system appears profitable and well capitalized; returns on assets and equity have risen. - Bank credit to the private sector has grown very rapidly, raising potential challenges in managing associated risks. - Nonperforming loans exceed European averages and are high for the current stage of the cycle. - Stress tests: market risk does not threaten bank soundness, but banks carry significant unhedged equity and interest rate risks on their banking books. - Greek banks have high cost structures; profitability supported by high spreads for consumer lending, so intensified competition will pose challenges. - Deposit growth falls short of rapid credit growth; banks increasingly tap new, more costly funding sources; larger banks raise funds in euro-area capital markets while access is limited for smaller banks. - Introduction of IFRS may result in one-time capital charges due to tighter rules on impaired assets, asset valuation and hedging, and recognition of employee benefits (including pension obligations). - FSAP selected recommendations: - Stability-related: close monitoring of credit risk, develop integrated monitoring and reporting of risk management, operationalize the Insurance Supervisory Commission (ISC), adopt a more risk-focused, forward-looking supervisory approach, expand on-site inspection, and develop supervisory capacity to assess risks. - Structural: intensify cooperation with regional supervisors, address tax and legal restrictions creating competitive disadvantages, streamline legal process for debt recovery, develop internal BoG crisis-resolution procedures, strengthen deposit insurance funding procedures. - Supervisory arrangements: strengthen legal protection for supervisors, develop supervisory expertise, ensure operational independence of ISC, strengthen HCMC accountability, ensure wide adoption of IFRS by all companies listed on the Athens Stock Exchange. - Authorities’ responses and actions: - BoG tightened prudential framework, strengthened provisioning, and improved on-site and off-site inspection. - Preparations for move to Basle II underway; large banks developing sophisticated risk management capabilities; some medium-sized banks lagging. - Legislation enacted for transfer of bank pensions to public sector system; process not yet complete. - Insurance supervisor not yet fully operational; mission urged establishing it with independence assured. - Need for stronger pension supervision; plan to establish a coordinating committee chaired by the BoG. ### Competitiveness and structural reform agenda - Product-market reforms needed: improved tax administration, tax simplification, reduced red tape, modernization of bankruptcy law, liberalization of gas and electricity markets, and privatization. - Labor-market reforms needed: relax employment protection measures and reduce minimum wages (implying changes in central bargaining arrangements), at least for sectors under economic stress. - Authorities enthusiastic about product market reform but pessimistic about prospects for labor market reform. - Recent measures implemented: corporate tax cuts; unified and extended shopping hours; more flexible overtime arrangements; new competition law and stronger competition authority; elimination of job tenure at the telecoms firm; simplification of business licensing; immigration integration law; further gas and electricity liberalization. - Mission recommended stronger political support for Competition Authority and faster implementation of product- and labor-market reforms to restore competitiveness. ### SOEs, privatization, and PPPs - Telecoms: elimination of permanent job tenure and guaranteed pay scales for new employees; costly buy-out of many existing workers; mission welcomed measure and intention to extend to other SOEs. - Authorities introducing IFRS and closer oversight of SOE business plans; medium-term benefits in preparing SOEs for privatization. - New PPP framework law and new investment law introduced; PPPs to be introduced gradually beginning in 2006 and expected to lower costs vs public provision. - Mission warned against using PPPs principally to defer budgetary costs; recommended PPP selection integrate with public investment strategy and fully transparent accounting of full costs. Authorities indicated MoEF body would decide PPP suitability and that accounting would be transparent. ### Data, statistics, and ROSC recommendations - Fiscal data for 1997−2004 were revised up substantially after the authorities’ “fiscal audit” and Eurostat review; figures revised again in September and remain not definitive. - Comprehensive financing-side data for general government still not available; progress limited. - Quarterly national accounts estimates are poor: raw numbers not available; seasonally adjusted numbers show pronounced seasonal pattern; authorities developed a new estimation procedure and new series to be published in 2006. - Banking system data releases delayed by shift to IFRS; authorities agree more timely banking system data are needed. - Recommendation: give the statistical office formal independence. - ROSC key recommendations included: consolidate ordinary and investment budgets; move to programmatic budgeting and a medium-term budget framework; extend management systems to entire general government; move to full accrual accounting; make quasi-fiscal activities more transparent; streamline expenditure controls; strengthen internal financial management; move to ex-post value-for-money audits; introduce modern self-assessment in tax administration with risk-based enforcement; return to periodic filing of VAT returns; introduce stronger measures to collect tax arrears; improve IT for accounting and budget management. ### Data adequacy for surveillance and specific needs - Overall: economic data are adequate for surveillance but should be strengthened. - Specific needs: - Fiscal data: still in flux; comprehensive financing-side data for general government would enhance analysis. - Quarterly national accounts: better estimates important for up-to-date assessments; new series under preparation. - Banking system data: more timely releases would improve transparency and market discipline. - Statistical governance: National Statistical Service’s intention to adopt EU Statistics Code of Practice is welcome; Service should be given formal independence. ### Financial soundness and selected indicators (high-level extracts) - Household debt to GDP: 1998: 9.8; 1999: 11.6; 2000: 14.3; 2001: 18.5; 2002: 22.7; 2003: 26.8; 2004: 32.3; Q2 2005: 35.1. - Share of nonperforming loans in total loans 8/: 1998: 8.7; 1999: 11.2; 2000: 7.2; 2001: 5.6; 2002: 5.5; 2003: 5.1; 2004: 5.4; Jun-05: 6.1. - Risk-based capital asset ratio 10/: 1998: 10.2; 1999: 16.2; 2000: 13.6; 2001: 12.5; 2002: 10.6; 2003: 12.1; 2004: 12.9; Jun-05: 12.8. - Assets — Banks (Euro billion): 1998: 100.2; 1999: 124.9; 2000: 145.7; 2001: 158.7; 2002: 165.5; 2003: 174.0; 2004: 186.6; Q2 2005: 204.9; Q3 2005: 217.4. - Official reserves (U.S. dollars, millions, end of period): 1998: 17,458; 1999: 18,122; 2000: 13,424; 2001: 5,154 2/; 2002: 8,083; 2003: 4,361; 2004: 1,191; Aug-05: 816. ### Executive Board conclusions and policy recommendations (summary) - Directors welcomed strong growth but noted built-up imbalances: fiscal deterioration and loss of competitiveness due to persistent inflation differential. - Top priority: fiscal consolidation given very high debt level and prospective large aging costs. - Urged implementation of additional and durable measures to contain current spending and reach fiscal balance by the end of the decade. - Encouraged full and timely implementation of Fund TA recommendations on tax administration, public expenditure management, FSAP recommendations, and Fiscal ROSC recommendations. - On pensions and health: accelerate pension reform preparation and update projections of fiscal costs associated with aging; follow up health-care reforms to contain cost pressures. - On competitiveness: simplify tax system and overhaul tax administration, cut red tape, liberalize gas and electricity, strengthen Competition Authority, ease hiring and firing restrictions, allow greater flexibility on minimum wages where needed. - On SOEs and PPPs: ensure transparent and full accounting of fiscal implications and bring large public investment projects under the PPP framework. - On statistics: strengthen reporting of fiscal data (including financing-side data), improve quarterly national accounts, and grant formal independence to the statistical service. ### Selected key fiscal and macro figures (preserved exact values, selected) - Authorities’ goal: reduce deficit below 3 percent of GDP in 2006. - Real GDP growth projection (year referenced): 3½ percent. - Prospect trend growth: about 3 percent. - Recommended structural deficit reduction pace: about 1 percent of GDP a year. - GDP growth by year (2000–2006): 4.5, 4.6, 3.8, 4.6, 4.7, 3.5, 3.3. - Overall balance (general government, percent of GDP, 2000–2006): -4.1, -6.1, -4.9, -5.7, -6.6, -4.6, -3.8. - Gross debt (percent of GDP, 2000–2006): 114, 114, 112, 109, 111, 108, 105. - Staff note: Staff estimates for 2006 exclude impact of planned additional revenue measures unspecified; inclusion of authorities' estimate would yield a deficit of 2.7 percent of GDP. _Italic: IMF staff report — Executive Summary and selected mission text (content unit: _cr0604)._ ### Executive Summary ...................................................................................................... ### Executive Summary ### Background - Real GDP growth had been very strong for several years but fell to an estimated 3½ percent of GDP in 2005. - The fiscal deficit deteriorated sharply, reaching 6.6 percent of GDP in 2004; public debt stood at 111 percent of GDP. - Real primary expenditure grew by 5.9 percent a year on average in 2000−04 (5.1 percent excluding the Olympics). - Growth drivers: sharp fall in interest rates following euro adoption and ECB easing; rapid private-sector credit increases after financial liberalization; procyclical fiscal policy; spending on the Olympics; strong capital formation; high labor productivity growth; significant immigration. - Competitiveness has eroded: a persistent inflation differential vis-à-vis the euro area, high unit labor cost increases, and a steady appreciation of the real exchange rate. Export market shares have fallen by some 17 percent since 2000. - Inward FDI has been chronically weak. - The Greek banking system has been transformed with private-sector intermediation replacing holdings of public debt; banks extended credit aggressively to households and SMEs and moved into southeast Europe. Rapid credit expansion raises concerns about resilience under a sharp slowdown or higher interest rates. The nonbank financial sector is small. ### Policy discussions and assessment — key findings - Fiscal consolidation is the top priority; the authorities intend to bring the deficit below 3 percent in 2006. - Staff supports consolidation but argues for a multi-year program of durable spending measures to achieve structural budget balance by 2010, after which aging costs begin to rise. - Sustained current primary spending restraint should be bolstered by deep reforms to expenditure management and tax administration, as recommended by the fiscal ROSC and Fund TA reports. - Pension reform will be needed to avoid explosive public debt; the authorities have committed not to introduce measures during this term of office, and staff urges more vigorous public debate to pave the way for eventual reform. - The FSAP judged the banking sector to be generally in good health but noted credit growth raised concerns about credit quality and recommended strengthening supervision and risk management. - Structural reforms initiated include corporate tax cuts, unified and extended shopping hours, more flexible overtime arrangements, a new competition law, elimination of job tenure at the telecoms firm, simplification of business licensing, and better economic integration of immigrants; further reforms are needed to improve productivity and competitiveness. - Data are adequate for surveillance but should be strengthened: fiscal data remain in flux; fiscal financing data should be published; quarterly national accounts are poor (a new series is to be published next year); banking system data should be more timely; the statistical office should be given formal independence. ### Economic outlook and risks - 2005: both authorities and staff broadly agree on estimated growth at 3½ percent. - 2006: authorities project real GDP growth of 3¾ percent; staff projects a mild slowdown to 3¼ percent. - Medium-term: staff projects a gradual decline in growth to potential of 3 percent. - Risks (both sides): stronger-than-expected rebound in investment; higher interest rates damping activity; changes in oil prices; EU economic growth; developments in tourism and shipping; erosion of competitiveness cutting potential growth more than incorporated in projections; possibility of a sharper end to the boom as occurred in Portugal. ### Fiscal policy — details and scenarios - 2005 budget implementation: staff estimates the deficit will fall to 4.6 percent of GDP in 2005, a reduction of 2 percentage points, driven primarily by the end of Olympics spending (accounting for 1¼ percent of GDP, including a sharp fall in public-sector investment), lower interest costs (½ percent of GDP), and lower growth of public sector wage costs and pensions. - The authorities planned to securitize tax arrears to raise revenue of 1 percent of GDP in 2005 and another 1 percent in 2006; the 2005 securitization was subsequently not included in the 2006 budget document pending resolution of technical issues with Eurostat, although some securitization may still take place. A decision on a securitization for 2006 will be made by year-end. - Authorities’ 2006 target: deficit of 2.6 percent of GDP, with measures including a reduction in the corporate tax rate, introduction of a VAT on real estate transactions, restraint of the public sector wage bill, and tighter control on spending of public enterprises and hospitals. Consolidation also depends on unspecified tax and non-tax revenues (some temporary) and lower infrastructure investment. - Staff baseline for 2006 (assuming spending targets met but excluding unspecified revenue measures): projected deficit of 3.8 percent of GDP. - Staff alternative: if the measures yet to be announced yield the revenue assumed by the authorities, staff projects a deficit of 2.7 percent of GDP. ### Financial sector - FSAP assessment: banking sector generally in good health; credit growth raised concerns about credit quality. - Recommendations from FSAP and Fund advice: strengthen supervision and risk management further; insurance supervisor not yet operational; banks and supervisor have strengthened risk management in line with longstanding Fund recommendations. - Nonbank financial sector remains small and plays a limited role in intermediation. ### Competitiveness and medium-term growth — structural reform agenda - Product market reforms needed: improved tax administration, tax simplification, reduced red tape, modernization of bankruptcy law, liberalization of gas and electricity markets, and privatization. - Labor market reforms needed: relax employment protection measures and reduce minimum wages (implying changes in central bargaining arrangements), at least for sectors under economic stress. - Authorities enthusiastic about product market reform but pessimistic about prospects for labor market reform. - Recent structural measures implemented: corporate tax cuts; unified and extended shopping hours; more flexible overtime arrangements; new competition law and stronger competition authority; elimination of job tenure at the telecoms firm; simplification of business licensing for industrial and commercial sectors; immigration integration law; further gas and electricity liberalization. - Government and National Reform Program emphasize improving productivity and competitiveness to meet Lisbon objectives and close the income gap with western Europe. ### Data and statistics - Fiscal data revisions: fiscal data for 1997−2004 were revised up substantially after the authorities’ “fiscal audit” and Eurostat review; figures were revised up again this September and are still not definitive. - Data gaps and weaknesses: historical budget estimates under discussion with Eurostat; fiscal financing data not yet available; quarterly national accounts data are poor (a new series is to be published next year); banking system data should be more timely. - Recommendation: give the statistical office formal independence. _Italic: IMF staff report — Executive Summary (content unit: _cr0604 - Executive Summary)._ ### 12. The mission supported the large fiscal consolidation in 2005−06, but argued ### _cr0604 - 12. The mission supported the large fiscal consolidation in 2005−06, but argued ### Fiscal consolidation, temporary measures, and staff projections - The mission supported the large fiscal consolidation in 2005−06 but argued durable measures would be needed; it was critical of securitization and other temporary measures and of past resort to tax amnesties. - Staff projects (net of temporary measures and adjusted for the cycle) the deficit would still be about 4¼ percent of GDP in 2006. - Staff Fiscal Projections, 2006 (In percent of GDP) - Baseline -- Includes Specified Measures: - Revenue: 41.4 - Expenditure: 45.2 - Overall balance: -3.8 - Structural balance: -4.3 - Includes Unspecified Measures: - Revenue: 42.5 - Expenditure: 45.2 - Overall balance: -2.7 - Structural balance: -3.2 - Excluding temporary measures: -3.8 - Memorandum items: - Unspecified revenue measures: 1.1 - of which: temporary: 0.6 - Source for projections: Staff estimates. - The mission warned that, in the absence of further measures, the outlook is for little narrowing of the deficit in coming years and that very high levels of public debt would expose Greece to continued risks to debt sustainability if interest rates rose significantly or growth declined sharply. ### Consolidation path, timing, and structural targets - The mission argued for continued consolidation to achieve structural budget balance by 2010. - Required structural deficit reductions: about 1 percent of GDP a year on average (Table 4 referenced). - Front-loading of consolidation was recommended to take advantage of currently buoyant growth and because the electoral cycle will make restraint increasingly difficult in 2007−08. - Given authorities’ policy to sustain public investment and implement tax reform, current primary spending growth would have to be held to levels well below rates earlier in this decade; nevertheless there would still be room for real primary current spending to rise in real terms if the economy grows as in the staff projection and revenue collection remain strong. ### Authorities’ stance and near-term measures - Authorities agreed further durable measures would be needed in 2007 and beyond but stressed the 2005−06 deficit reduction was very large and that developing and implementing structural measures would take time. - Key near-term focuses: - Greater control of state-owned enterprises (SOEs) to reduce the need for subsidies and loan guarantees. - Reinforcing tax collection through electronic cross-checking of VAT returns. - Stepping up absorption of EU funds. ### Spending prioritization and expenditure-management reforms - Mission recommended spending be clearly prioritized, facilitated by a multi–year adjustment strategy and tax and expenditure reform. - Broad areas of possible saving: - Continued restraint of public sector wages (noting rapid rise in recent years). - Taking advantage of retirements (authorities estimate about 7000 a year) to slim the public service. - Better control of spending by SOEs, transport companies, and hospitals. - Scaling back high military spending. - The mission emphasized consolidation will require decisions on which programs to contract. - Expenditure management weaknesses identified (fiscal ROSC and TA): - Focus on spending lines rather than program objectives. - Ineffective audit and accounting controls. - Lack of transparency. - Authorities have established high-level task forces to review recommendations; mission urged these task forces be given strong political backing. ### ROSC key recommendations (fiscal transparency) and TA on expenditure/tax administration - Key recommendations listed in Box 2: - Fully consolidate budget, including ordinary and investment budgets, and execute through a more transparent treasury single account. - Move to programmatic budgeting and a medium term budget framework, with comprehensive mid-year reviews and fiscal sustainability analyses. - Extend management systems to entire general government, with better defined responsibilities and more complete reporting at sub-national level and pension funds. - Begin to move to full accrual accounting. - Make quasi-fiscal activities more transparent. - Streamline expenditure controls with greater emphasis over commitments. - Strengthen internal financial management in budget institutions to promote accountability. - Move to ex-post, value-for-money audits; increase relevance of Court of Audit reports and effectiveness of parliamentary oversight. - Introduce modern system of self-assessment in tax administration supported by risk-based enforcement, and reduce degree of discretion. - Return to periodic filing of VAT returns. - Introduce stronger measures to collect tax arrears. - Improve accounting and budget management through more effective information technology. ### Aging, pensions, health care, and long-term fiscal risks - Authorities and mission agreed that, absent corrective measures, pension and health-care costs threaten longer-term fiscal sustainability. - EC estimates (2001) project spending on these items to rise by 10½ percent of GDP between 2010 and 2050, which would result in an explosive debt-GDP ratio absent corrective action. - Authorities committed politically not to act in the current term but began preparatory steps by referring the issue to the Economic and Social Council for social partner discussion. - Mission emphasized building political support as prerequisite to reform and urged a more visible and comprehensive dialog soon because pension reforms often become fully effective only long after implementation. - National Actuarial Authority tasked with updating aging-cost estimates has fallen far behind schedule; mission recommended immediate provision of additional resources, including outsourcing the work. - On health care, authorities have recently improved financial monitoring and procurement systems; additional measures needed include better pricing and costing mechanisms and improved auditing. ### Reform options for pensions and fiscal sustainability - Mission suggested reform options based on international experience: - Reducing high replacement rates. - Running budget surpluses beyond 2010 to reduce public debt more rapidly. - Raising the effective retirement age. - Streamlining the highly fragmented system and further unifying entitlement conditions. - Developing a clear vision on an adequate (but affordable) level of minimum protection. - Strengthening sustainability assessments. ### Financial sector assessment and recommendations (FSAP) - FSAP conclusions: - Banking system appears profitable and well capitalized; returns on assets and equity have risen so far this year (Tables 5, 6, and 7 referenced). - Bank credit to the private sector has grown very rapidly for several years, raising potential challenges in managing associated risks. - Nonperforming loans exceed European averages and are high for the current stage of the cycle. - Stress tests: market risk does not threaten bank soundness, but banks carry significant unhedged equity and interest rate risks on their banking books. - Greek banks have high cost structures; profitability supported by high spreads for consumer lending, so intensified competition will pose challenges. - Deposit growth falls short of rapid credit growth; banks increasingly tap new, more costly funding sources; larger banks raise funds in euro-area capital markets while access is limited for smaller banks. - Introduction of IFRS may result in one-time capital charges due to tighter rules on impaired assets, asset valuation and hedging, and recognition of employee benefits (including pension obligations). - FSAP main recommendations (Box 3) — selected: - Stability-related: - Close monitoring of credit risk, particularly lending to new clients and in new regions. - Develop more integrated monitoring and reporting of banks’ risk management techniques. - Bring the Insurance Supervisory Commission (ISC) to operational readiness as soon as possible. - Develop a more risk-focused, forward-looking approach to supervision, expand on-site inspection, and develop supervisory capacity to assess risks. - Key structural: - Intensify cooperation with regional supervisors and increase on-site inspections of Greek banks’ subsidiaries in Southeastern Europe. - Address tax and legal restrictions that create competitive disadvantages (e.g., the 60 basis point charge and labor market rigidities). - Streamline legal process for settling disputes concerning debt recovery to match EU averages. - Develop more detailed internal BoG procedures for crisis resolution. - Strengthen deposit insurance system by establishing funding procedures in case of need and ensuring adequate information on insured deposits. - Strengthening supervisory arrangements: - Strengthen legal protection for all financial sector supervisors. - Develop supervisory expertise where market practices evolve rapidly (risk management techniques, capital market funding instruments). - Establish procedures for effective cooperation among regulatory bodies. - Ensure operational independence of the ISC and strengthen HCMC accountability (reporting on performance, internal rules on disclosure of conflicts of interest, code of conduct). - Ensure wide adoption of, and compliance with, IFRS by all companies listed on the Athens Stock Exchange. ### Authorities’ responses on financial sector - Bank of Greece (BoG) and banks responding: - BoG tightened prudential framework, strengthened provisioning, and improved on-site and off-site inspection. - Preparations for move to Basle II underway; large banks developing sophisticated risk management capabilities; some medium-sized banks lagging. - Historical-data-based techniques may not reflect full cycle experience, raising possibility credit risk is greater than now estimated. - Legislation enacted for transfer of bank pensions to public sector system; process not yet complete. - Nonbank sector: - Not presently systemically important but supervision should be strengthened in anticipation of medium-term challenges. - Insurance sector weak and poorly supervised; mission urged new supervisory body legislated in February 2004 be made fully operational with independence assured. - Need for stronger pension supervision; plan to establish a coordinating committee chaired by the BoG. ### Competitiveness, labor markets, and medium-term growth - Authorities view improved competitiveness as key to sustaining medium-term growth and closing living standards gap with western Europe. - Mission concurred that a sustained inflation differential and further real exchange rate appreciation threaten medium-term growth; recommended wage increases no more than productivity increases in Greece plus inflation in the euro area. - Scope to improve business climate by streamlining business establishment procedures and lowering hiring and firing costs, notably strong employment protection arrangements. - Labor market performance weak relative to other EU countries: high unemployment rates, high long-term unemployment, and low participation rates, especially among youth and women. - Mission welcomed reform measures taken but argued more needed for robust medium-term growth: - Product-market priorities: reduce red tape and petty corruption, rapid adoption of modernized bankruptcy law, faster gas and electricity market liberalization. - Labor-market priorities: reform employment protection and increase flexibility regarding central bargaining to lower minimum wages at least in sectors facing severe economic pressure. - Authorities intend further product market reforms; on labor market they agreed further measures desirable but doubted near-term feasibility. ### State-owned enterprises (SOEs), privatization, and PPPs - SOE reforms: - Telecoms: eliminated permanent job tenure and guaranteed pay scales for new employees; costly buy-out of many existing workers. - Mission welcomed the measure and government intention to extend to other SOEs. - Authorities strengthening governance of SOEs by introducing IFRS and closer oversight of business plans; mission noted medium-term benefits in preparing SOEs for privatization. - Authorities plan to continue privatization gradually in most cases. - Investment and PPPs: - New framework law for PPPs and a new investment law introduced; PPPs under the new framework to be introduced gradually beginning in 2006, expected to lower costs vs public provision. - Mission warned against using PPPs principally to defer budgetary costs and argued PPP selection should integrate with public investment strategy and fully transparent accounting of full costs. - Authorities indicated a high-level MoEF body would decide which projects are suitable as PPPs and accounting would be fully transparent; mission argued same procedures and safeguards should be extended to all projects. - Investment law designed to promote regional development and expected to involve relatively small amounts for next two years; mission expressed concern that budgetary costs not get out of hand. *Source: Excerpts from IMF staff report (Staff estimates, FSAP, ROSC, and related mission text).* ### 26. Economic data have improved significantly, but further strengthening is ### _cr0604 - 26. Economic data have improved significantly, but further strengthening is ### Data quality and statistical issues - Fiscal data for 1997−2004 experienced very large revisions, raising concerns about reliability. - Authorities, in collaboration with Eurostat, implemented marked improvements last year, but another revision occurred in September and some issues remain outstanding. - Comprehensive financing-side data for the general government are still not available; progress appears limited. - Quarterly national accounts estimates are difficult to interpret: - Raw numbers are not available. - Seasonally adjusted numbers appear to have a pronounced seasonal pattern. - Authorities acknowledged the methodology is inadequate and results in incomplete deseasonalization; a new estimation procedure was developed and new data series were to be published in 2006. - Banking system data releases have been delayed by the shift to IFRS; authorities agree more timely banking system data are needed for transparency. - National Statistical Service intends to adopt the new EU Statistics Code of Practice; the mission argued credibility would be bolstered by granting the Service full independence (it is currently part of the MoEF), but there are no plans to do so. ### Staff appraisal — macroeconomic overview and growth outlook - Greece has made important progress in addressing macroeconomic and structural challenges, but imbalances remain severe. - Recent developments: - After strong performance in prior years, growth seems set to moderate but should compare favorably with the euro area. - The economic boom was fueled by low interest rates, procyclical fiscal stance, and rapid private-sector credit growth following financial-sector liberalization. - End of Olympics spending weakened domestic demand. - Projections and expectations: - Real GDP growth is expected to fall to a still-robust 3½ percent in the year referenced. - Prospect for a return to trend growth of about 3 percent in the years ahead as euro-adoption stimulus fades and headwinds (higher oil prices, further erosion of competitiveness, fiscal consolidation) restrain demand. - Competitiveness: - Real exchange rate has appreciated in recent years because of a sustained inflation differential, causing a loss of competitiveness. ### Fiscal consolidation — assessment and recommendations - Fiscal consolidation is the top policy priority; authorities’ goal to reduce the deficit below 3 percent of GDP in 2006 is welcomed. - Consolidation so far (2005 and planned 2006) is substantial and largely achieved through spending restraint. - Concerns about sustainability of measures: - Reliance on temporary expedients (e.g., securitization) does not improve underlying budgetary position. - The 2006 effort tilted toward revenue increases and less infrastructure investment rather than current spending restraint; additional high-quality measures need specification to meet the deficit objective. - Medium-term objective: - Achieving a structural budget balance by the end of this decade is recommended. - Structural deficit reductions of about 1 percent of GDP a year, on average, would be required, with some front-loading desirable. - Fiscal adjustment strategy: - Adjustment will have to fall on current primary spending growth, which must be held well below the high rates of recent years. - Broad possible savings areas: restraining public sector wages and reducing defense spending, but better program prioritization is key. - Institutional reforms needed: - Establish a multi-year fiscal strategy. - Reform budgeting and expenditure management to emphasize strategic planning and program prioritization; integrate ordinary and investment budgets. - Strengthen tax administration with a modern assessment system, risk-based enforcement, frequent periodic filing of VAT returns, improved audit procedures, stronger measures to collect tax arrears, and abandonment of the tradition of tax amnesties. - Improve information management and systems to support expenditure and tax reforms. - Specific actions underway: - Early establishment of high level task forces on expenditure management and tax administration; their recommendations need strong political backing. ### Long-term fiscal pressures: pensions and health care - Long-term outlook dominated by rising pension and health-care outlays due to adverse demographics; without corrective measures this will lead to explosive public debt growth. - Recommendations: - Initiate a highly visible and comprehensive social discussion immediately on pension reform and implement urgently needed reforms. - Bring the National Actuarial Authority up to full strength to update long-run projections of fiscal costs of aging. - Advance health-care reform beyond procurement improvements to control costs while ensuring high service levels. ### Financial sector: banking, insurance, and supervision - Banking system transformation: - Liberalization and privatization expanded and transformed the banking system. - Commercial banks are well capitalized, profitable, and liquid, but rapid credit growth raises the risk of rapid deterioration in credit quality in adverse conditions. - Banks are relatively small with high costs, potentially vulnerable to intensified competition. - Insurance and pension sectors: - Insurance industry is weak and poorly supervised. - Pension sector dominated by government-guaranteed schemes; likely rise in second-pillar schemes raises supervisory adequacy questions. - Supervisory recommendations: - Bank of Greece (BoG) should monitor rapid bank asset expansion and growth of nonperforming loans; improve capacity to supervise new lines of bank business. - Develop more uniform risk management capacity across banks and integrate it with business operations. - Make the new insurance supervisor operational, fully resourced, and independent quickly. - Strengthen pension supervision. - Establish procedures for effective cooperation among supervisory agencies and strengthen legal protection of supervisors. ### Structural reforms to improve productivity and competitiveness - National Reform Program priorities are appropriate and would contribute to Lisbon objectives if implemented effectively. - Recent reforms and recommended actions: - Further measures to improve the business climate: simplify the tax system, lower tax rates, overhaul tax administration. - Reform business licensing and modernize bankruptcy law. - Accelerate liberalization of gas and electricity markets. - Provide strong political support to the strengthened Competition Authority to implement the new competition law and tackle uncompetitive activities. - Labor market reforms: - Easing overtime restrictions and new immigration law are positive. - Further reforms needed: relax strong employment protection legislation, allow greater opt-out from centrally agreed minimum wages in stressed sectors. - Wage growth should not exceed the sum of productivity growth in Greece and inflation in the euro area to avoid competitiveness losses. - State-owned enterprises (SOEs) and PPPs: - SOE reforms are welcome; eventual privatization should often be the goal. - Limit early retirement packages to avoid fiscal drain and “early retirement” culture. - The new PPP law is welcome but should be used cautiously; extend the PPP framework to large projects and ensure full transparency of budgetary implications over the life of projects. ### Data adequacy for surveillance and specific data recommendations - Overall assessment: economic data are adequate for surveillance but should be strengthened further. - Specific needs: - Fiscal data: still in flux; comprehensive financing-side data for general government would enhance fiscal analysis. - Quarterly national accounts: better estimates important for up-to-date assessments. - Banking system data: more timely releases would improve transparency and market discipline. - Statistical governance: National Statistical Service’s intention to adopt EU Statistics Code of Practice is welcome; Service should be given formal independence. ### Key fiscal and macro figures cited (selected) - Authorities’ goal: reduce deficit below 3 percent of GDP in 2006. - Real GDP growth projection for the year referenced: 3½ percent. - Prospect trend growth: about 3 percent. - Recommended structural deficit reduction pace: about 1 percent of GDP a year. - Table highlights (selected, as presented): - GDP growth by year (2000–2006): 4.5, 4.6, 3.8, 4.6, 4.7, 3.5, 3.3. - Output gap (2000–2006): -0.9, 0.0, 0.0, 0.9, 1.8, 1.6, 1.2. - Unemployment rate (annual averages): 11.4, 10.8, 10.3, 9.7, 10.5, 10.0, 10.0. - Current Account (percent of GDP, 2000–2006): -6.9, -6.2, -6.0, -5.6, -3.8, -3.2, -3.6. - Overall balance (general government, percent of GDP, 2000–2006): -4.1, -6.1, -4.9, -5.7, -6.6, -4.6, -3.8. - Gross debt (percent of GDP, 2000–2006): 114, 114, 112, 109, 111, 108, 105. - Staff note: Staff estimates for 2006 exclude impact of planned additional revenue measures unspecified; inclusion of authorities' estimate would yield a deficit of 2.7 percent of GDP. *Source: IMF staff report text and tables provided in the content unit.* ### 26.5 for 2004 and 25.9 for June 2005. ### _cr0604 - 26.5 for 2004 and 25.9 for June 2005. ### Financial Soundness Indicators (selected) - Corporate sector - Number of applications for protection from creditors: 1998: 2228; 1999: 2029; 2000: 1788; 2001: 1463; 2002: 1458; 2003: 1545; 2004: 2131; Q2 2005: 962. - Deposit-taking institutions (selected ratios, see notes for consolidation basis) - Capital to assets 2/: 1998: 6.5; 1999: 10.6; 2000: 9.2; 2001: 8.5; 2002: 6.9; 2003: 6.9; 2004: 6.8; Q2 2005: 5.0. - Geographical distribution of loans to total loans (enterprises and households) 3/ — Domestic 3/: 1998: 95.3; 1999: 90.8; 2000: 93.9; 2001: 94.7; 2002: 95.6; 2003: 96.3; 2004: 96.6; Q2 2005: 96.3. - Geographical distribution — Other euro area countries 3/: 1998: 0.2; 1999: 0.2; 2000: 0.2; 2001: 0.2; 2002: 0.2; 2003: 0.1; 2004: 0.1; Q2 2005: 0.1. - Geographical distribution — Non-euro area countries 3/: 1998: 4.4; 1999: 9.1; 2000: 5.9; 2001: 5.1; 2002: 4.2; 2003: 3.5; 2004: 3.2; Q2 2005: 3.5. - Gross asset position in financial derivatives to capital 2/: 2002: 195; 2003: 275; 2004: 262; Q2 2005: 227. - Large exposures to capital 4/: 2002: 154.1; 2003: 190.8; 2004: 123.7; Q2 2005: 138.8. - Trading income to total income 4/: 1998: 14.8; 1999: 27.5; 2000: 17.3; 2001: 13.1; 2002: 4.9; 2003: 4.6; 2004: 3.2; Q2 2005: 2.0. - Personnel expenses to noninterest expenses 4/: 1998: 66.8; 1999: 63.6; 2000: 61.8; 2001: 59.8; 2002: 59.0; 2003: 58.2; 2004: 59.6; Q2 2005: 48.5. - Spread between reference lending and deposit rates 2/: 1998: 9.0; 1999: 6.7; 2000: 6.3; 2001: 6.1; 2002: 6.1; 2003: 5.8; 2004: 5.9; Q2 2005: 5.8. - Customer deposits to total (non-interbank) loans 4/: 1998: 191.1; 1999: 190.8; 2000: 176.3; 2001: 166.0; 2002: 147.4; 2003: 135.3; 2004: 130.6; Q2 2005: 127.7. - Foreign currency-denominated liabilities to total liabilities 4/: 1998: 34.5; 1999: 25.7; 2000: 24.5; 2001: 16.6; 2002: 12.8; 2003: 13.2; 2004: 12.9; Q2 2005: 12.9. - Net open position in equities in capital 2/: 2001: 21.5; 2002: 12.9; 2003: 10.4; 2004: 5.8; Q2 2005: 4.3. - Market liquidity - Average bid-ask spread in the securities market 4/: 1998: 45.5; 1999: 23.7; 2000: 14.0; 2001: 9.8; 2002: 9.4; 2003: 8.2; 2004: 6.1; Q2 2005: 7.7. - Other financial corporations - Assets to total financial system assets 5/: 1998: 214.6; 1999: 197.8; 2000: 189.6; 2001: 183.6; 2002: 213.7; 2003: 250.7; 2004: 266.0. - Assets to GDP 5/: 1998: 138.9; 1999: 216.3; 2000: 196.4; 2001: 176.2; 2002: 115.1; 2003: 125.2; 2004: 129.9. - Households - Household debt to GDP 3/: 1998: 9.8; 1999: 11.6; 2000: 14.3; 2001: 18.5; 2002: 22.7; 2003: 26.8; 2004: 32.3; Q2 2005: 35.1. - Residential real estate loans to total loans 4/: 1998: 17.8; 1999: 19.5; 2000: 19.9; 2001: 21.9; 2002: 24.5; 2003: 26.2; 2004: 28.1; Q2 2005: 30.0. - Notes on coverage and basis - 1/ June 2005 figures refer to Greek quoted banks only. - 2/ Data on a consolidated basis. - 3/ September 2005 figures refer to all banks on a nonconsolidated basis (i.e. commercial, cooperative and foreign branches). - 4/ Data on a nonconsolidated basis. - 5/ Provisional data for the series 1998−2004. - ATEbank (Agricultural Bank of Greece) exclusions: several indicators in the source exclude ATEbank; inclusion would change specific ratios (see source table notes). ### Financial System Structure (selected) - Number of banks (1998–Q3 2005, selected years) - Total banks: 1998: 23.0; 1999: 20.0; 2000: 19.0; 2001: 23.0; 2002: 24.0; 2003: 22.0; 2004: 21.0; Q2 2005 1/: 21.0; Q3 2005 1/: 21.0. - Private commercial banks: 1998: 12.0; 1999: 10.0; 2000: 8.0; 2001: 12.0; 2002: 12.0; 2003: 12.0; 2004: 13.0; Q2 2005: 13.0; Q3 2005: 13.0. - State-owned banks: 1998: 8.0; 1999: 7.0; 2000: 7.0; 2001: 7.0; 2002: 7.0; 2003: 6.0; 2004: 3.0; Q2 2005: 3.0; Q3 2005: 3.0. - Foreign-owned subsidiaries: 1998: 3.0; 1999: 3.0; 2000: 4.0; 2001: 4.0; 2002: 5.0; 2003: 4.0; 2004: 5.0; Q2 2005: 5.0; Q3 2005: 5.0. - Branches of foreign banks: 1998: 23.0; 1999: 22.0; 2000: 22.0; 2001: 21.0; 2002: 21.0; 2003: 20.0; 2004: 23.0; Q2 2005: 23.0; Q3 2005: 23.0. - Concentration (number of institutions with 75 percent of total assets) - Banks 2/: 1998: 9.0; 1999: 7.0; 2000: 7.0; 2001: 7.0; 2002: 7.0; 2003: 7.0; 2004: 7.0; Q2 2005: 7.0; Q3 2005: 7.0. - Assets and deposits of banks (Euro billion) 3/ - Assets — Banks: 1998: 100.2; 1999: 124.9; 2000: 145.7; 2001: 158.7; 2002: 165.5; 2003: 174.0; 2004: 186.6; Q2 2005: 204.9; Q3 2005: 217.4. - Private commercial assets: 1998: 26.1; 1999: 41.8; 2000: 43.2; 2001: 44.8; 2002: 46.7; 2003: 52.4; 2004: 115.6; Q2 2005: 118.2; Q3 2005: 128.4. - State-owned assets: 1998: 69.6; 1999: 74.4; 2000: 84.4; 2001: 92.6; 2002: 92.1; 2003: 91.5; 2004: 40.7; Q2 2005: 43.4; Q3 2005: 42.4. - Deposits — Banks: 1998: 76.0; 1999: 82.7; 2000: 89.9; 2001: 98.6; 2002: 102.9; 2003: 112.4; 2004: 125.8; Q2 2005: 138.2; Q3 2005: 143.4. - Private commercial deposits: 1998: 18.4; 1999: 25.4; 2000: 23.6; 2001: 25.9; 2002: 26.9; 2003: 30.8; 2004: 69.5; Q2 2005: 80.2; Q3 2005: 83.6. - State-owned deposits: 1998: 54.5; 1999: 53.4; 2000: 55.9; 2001: 59.0; 2002: 59.9; 2003: 63.2; 2004: 31.3; Q2 2005: 32.9; Q3 2005: 32.0. - Note: 1/ Provisional data. 2/ Number of institutions with 75 percent of total assets (of all credit institutions operating in Greece). 3/ Euro billion. Source: Bank of Greece. ### Doing Business — Selected Indicators, 2005 (comparison with EU-15 average excl. Greece and Luxembourg) - Starting a Business - Number of procedures: Greece: 15.0; EU-15 average: 6.5. - Time (days): Greece: 38.0; EU-15 average: 22.8. - Cost (% of income per capita): Greece: 24.6; EU-15 average: 6.9. - Licenses and Permits - Number of procedures: Greece: 17.0; EU-15 average: 13.7. - Time (days): Greece: 176.0; EU-15 average: 179.9. - Cost (% of income per capita): Greece: 71.9; EU-15 average: 84.0. - Closing a Business - Time (years): Greece: 2.0; EU-15 average: 1.4. - Cost (% of estate): Greece: 9.0; EU-15 average: 9.4. - Labor indices 2/ (indices 0–100; higher = greater rigidity) - Difficulty of Hiring Index: Greece: 78.0; EU-15 average: 35.0. - Rigidity of Hours Index: Greece: 80.0; EU-15 average: 61.5. - Difficulty of Firing Index: Greece: 40.0; EU-15 average: 35.4. - Rigidity of Employment Index: Greece: 66.0; EU-15 average: 44.1. - Firing costs (weeks of wages): Greece: 68.8; EU-15 average: 43.0. - Note: 1/ Indicators do not take account of reforms implemented in 2005. 2/ Unless otherwise indicated, the figures are indices which range from 0 to 100, with higher numbers indicating greater rigidity. Source: World Bank, Doing Business 2005. ### External, Financial Market, and Risk Indicators (selected, percent of GDP or as noted) - External indicators (annual percent change, in U.S. dollars, unless noted) - Exports (annual percent change, in U.S. dollars): 1998: 4.0; 1999: -32.0; 2000: 19.5; 2001: 1.0; 2002: -5.0; 2003: 27.7; 2004: 25.3; Jul-05: 14.1. - Imports (annual percent change, in U.S. dollars): 1998: 7.3; 1999: -14.2; 2000: 14.6; 2001: -2.5; 2002: 5.1; 2003: 22.1; 2004: 24.1; Jul-05: 7.9. - Current account balance (settlements basis, percent of GDP): 1998: -3.0; 1999: -3.8; 2000: -6.9; 2001: -6.2; 2002: -6.1; 2003: -5.6; 2004: -3.9; Jun-05: -7.4. - Capital and financial account balance: 1998: 0.0; 1999: 7.7; 2000: 11.4; 2001: 2.3; 2002: 9.8; 2003: 4.4; 2004: 4.6; Jun-05: 16.5. - Inward portfolio investment (debt securities etc.): 1998: 7.6; 1999: 5.4; 2000: 8.1; 2001: 7.7; 2002: 9.2; 2003: 13.5; 2004: 15.2; Jun-05: 11.9. - Inward foreign direct investment and other investments: 1998: -2.3; 1999: 3.7; 2000: -2.2; 2001: -5.0; 2002: 6.7; 2003: -1.8; 2004: -1.2; Jun-05: 0.9. - Official reserves (U.S. dollars, millions, end of period) - 1998: 17,458; 1999: 18,122; 2000: 13,424; 2001: 5,154 2/; 2002: 8,083; 2003: 4,361; 2004: 1,191; Aug-05: 816. - Official reserves in months of imports GS: 1998: 6.0; 1999: 6.1; 2000: 3.9; 2001: 1.5; 2002: 2.4; 2003: 1.1; 2004: 0.2; Aug-05: 0.0. - External debt and payments - Total external debt: 1998: 55.4; 1999: 55.5; 2000: 73.3; 2001: 69.6; 2002: 68.2. - Of which: General government debt 3/: 1998: 25.4; 1999: 26.6; 2000: 27.7; 2001: 6.5; 2002: 3.3; 2003: 2.2; 2004: 1.5. - External interest payments to exports GS (in percent): 1998: 14.3; 1999: 11.7; 2000: 10.4; 2001: 10.4; 2002: 9.7; 2003: 16.0; 2004: 14.5; Jul-05: 21.7. - Exchange rate - Exchange rate (per U.S. dollar, period average): 1998: 295.5; 1999: 305.7; 2000: 365.4; from 2001: 1.1; 2002: 1.1; 2003: 0.9; 2004: 0.8; Aug-05: 0.8. - Financial market indicators - Public sector debt (Maastricht definition): 1998: 112.4; 1999: 112.3; 2000: 114.0; 2001: 114.7; 2002: 112.2; 2003: 109.3; 2004: 110.5; 2004 (another entry): 108.3. - Greek contribution to euro area M3 excluding currency in circulation (percent change, 12-month basis): 1998: 9.8; 1999: 5.5; 2000: 10.4; 2001: 8.3; 2002: -2.1; 2003: 5.2; 2004: 8.2; Jul-05: 6.3. - Private sector credit (percent change, 12-month basis): 1998: 15.0; 1999: 14.2; 2000: 27.6; 2001: 24.8; 2002: 16.9; 2003: 17.0; 2004: 15.8; Jul-05: 14.0. - 12-month T-bill yield: 1998: 12.0; 1999: 9.4; 2000: 6.6; 2001: 4.1; 2002: 3.5; 2003: 2.3; 2004: 2.3; Aug-05: 2.2. - 12-month T-bill yield (real): 1998: 6.9; 1999: 6.6; 2000: 3.7; 2001: 0.4; 2002: -0.4; 2003: -1.0; 2004: -0.8; Aug-05: -1.5. - Stock market index: 1998: 2,738; 1999: 5,535; 2000: 3,389; 2001: 2,592; 2002: 1,748; 2003: 2,264; 2004: 2,786; Aug-05: 3,232. - Share prices of financial institutions: 1998: 5,799; 1999: 10,165; 2000: 7,307; 2001: 4,788; 2002: 2,688; 2003: 4,247; 2004: 6,129; Aug-05: 6,901. - Spread of 12-month treasury bill rate with Germany (percentage points, end of period): 1998: 6.9; 1999: 5.4; 2000: 1.9; 2001: 0.4; 2002: 0.5; 2003: 0.4; 2004: 0.3; Aug-05: 0.3. - Spread of 10-year bond with Germany (percentage points, end of period): 1998: 4.1; 1999: 2.0; 2000: 0.9; 2001: 0.6; 2002: 0.5; 2003: 0.5; 2004: 0.5; Aug-05: 0.4. - Financial sector risk factors (selected) - Foreign exchange loans to the private sector (in millions of U.S. dollars) 7/: 1998: 11,022; 1999: 11,693; 2000: 14,225; 2001: 7,865; 2002: 6,723; 2003: 6,983; 2004: 7,302; Sep-05: 7,647. - Share of foreign exchange loans in total lending to the private sector 7/: 1998: 24.3; 1999: 26.2; 2000: 27.6; 2001: 9.7; 2002: 7.4; 2003: 5.5; 2004: 4.6; Sep-05: 4.9. - Deposits in foreign exchange (in millions of U.S. dollars) 7/: 1998: 38,611; 1999: 31,118; 2000: 35,661; 2001: 19,603; 2002: 17,858; 2003: 22,268; 2004: 24,815; Sep-05: 25,251. - Share of foreign deposits in total deposits 7/: 1998: 35.2; 1999: 30.9; 2000: 39.3; 2001: 21.8; 2002: 16.3; 2003: 15.6; 2004: 14.2; Sep-05: 14.4. - Share of real estate sector in private credit: 1998: 17.8; 1999: 19.5; 2000: 19.9; 2001: 21.9; 2002: 24.5; 2003: 26.2; 2004: 28.1; Sep-05: 30.0. - Commercial banks' return on assets (after tax): 1998: 0.8; 1999: 2.4; 2000: 1.4; 2001: 1.0; 2002: 0.5; 2003: 0.6; 2004: 0.5; Jun-05: 0.8. - Interest rate margin: 1998: 7.9; 1999: 6.3; 2000: 6.2; 2001: 6.0; 2002: 5.7; 2003: 5.7; 2004: 4.8; Sep-05: 4.8. - Share of nonperforming loans in total loans 8/: 1998: 8.7; 1999: 11.2; 2000: 7.2; 2001: 5.6; 2002: 5.5; 2003: 5.1; 2004: 5.4; Jun-05: 6.1. - Share of nonperforming loans in total assets 9/: 1998: 2.7; 1999: 4.0; 2000: 3.2; 2001: 2.7; 2002: 3.0; 2003: 2.9; 2004: 3.3; Jun-05: 3.9. - Risk-based capital asset ratio 10/: 1998: 10.2; 1999: 16.2; 2000: 13.6; 2001: 12.5; 2002: 10.6; 2003: 12.1; 2004: 12.9; Jun-05: 12.8. - Regulatory capital to risk-weighted assets 11/: 1998: 10.2; 1999: 16.2; 2000: 13.6; 2001: 12.4; 2002: 10.5; 2003: 12.0; 2004: 12.8; Jun-05: 12.8. - Ratings (selected entries) - Standard & Poor's (Long term): Mar-97 to Nov-04: BBB- → BBB → A- → AAA+ → AA. Outlook: Positive → Positive → Positive → Positive → Positive → Stable → Stable → Stable. - Moody's (Bonds and notes): Dec-96 to Nov-02: Baa1 → A2 → A2 → A2 → A1 → A1 → A1 → A1. - IBCA (Long term): Jun-97 to Oct-03: BBB → BB → BBA- → AAA+ → A+ → A+. - Notes on methodology and coverage - 1/ Interpretation of some indicators is affected by participation in EMU in 2001. - 2/ Official reserves declined in 2001 with EMU participation, due in large part to the redefinition of foreign exchange reserves and the fall in foreign exchange reserve requirements for commercial banks. - 3/ From 2001, foreign debt includes only liabilities in non-euro area currencies. - 4/ Euros per U.S. dollar from 2001. - 5/ Data provided by Eurostat. - 6/ Data prior to 2001 refer to growth of Greek liquidity measure M4N. - 7/ As from 2001, loans and deposits in euro and its national denominations are not included in foreign exchange loans and foreign exchange deposits respectively. - 8/ Data refer to all commercial banks incorporated in Greece excluding the Agricultural Bank of Greece. If Agricultural Bank of Greece is included, then the relevant ratios for the past years become 7.3 for 2002, 7.0 for 2003 and 7.1 for June 2004. - 9/ Data refer to all commercial banks incorporated in Greece excluding the Agricultural Bank of Greece. If Agricultural Bank of Greece is included, then the relevant ratios for the past years become 4.1 for 2002. *Source: Bank of Greece; data provided by the authorities; IMF, International Financial Statistics.* ### 4.3 for 2003 and 4.5 for June 2004. Nonperforming loans are defined as all loans with interest and/or principal payment ### _cr0604 - 4.3 for 2003 and 4.5 for June 2004. Nonperforming loans are defined as all loans with interest and/or principal payment ### Nonperforming loans and banking coverage - Nonperforming loans are defined as all loans with interest and/or principal payments in arrears for three months or more, and include all loans classified as doubtful by the banks themselves. - Data coverage notes: - "10/ Data refer to all banks operating in Greece." - "11/ Data refer to all commercial banks incorporated in Greece." ### Selected macrofinancial indicators (1998–2005) — summary of patterns and key observations - Real GDP growth: - Growth has been strong through 2005 and is expected to remain strong (figures plotted for Greece and Euro Area, year-on-year percent change, 1998–2005). - REAL GDP GROWTH: 2005 (in percent) — country comparisons list Ireland, Spain, Greece, Luxembourg, Sweden, Denmark, United Kingdom, Austria, Finland, France, Belgium, Germany, Netherlands, Portugal, Italy. - Interest rates and credit: - INTEREST RATE DIFFERENTIAL (vis a vis Euro Area): long-term interest rate declines over 1998–2005. - DOMESTIC CREDIT GROWTH: high credit growth (year-on-year percent change), with series for Total credit, General government 1/, Enterprises and households 2/ (1998–2005). - Output gap and prices: - An output gap has opened up (OUTPUT GAP in percent of potential output, Greece vs Euro Area, 1998–2005). - PRICES (year-on-year percent change): persistent inflation differential — Greek HICP, Euro Area HICP, Greece Core, Euro Area Core (1998–2005). - Competitiveness and external position: - REAL EFFECTIVE EXCHANGE RATE (REER; CPI-based; 2000= 100 and NULC based) shows appreciation eroding competitiveness (1998–2005). - EXTERNAL INDICATORS (in US$ billions unless otherwise noted) indicate a weak external position: Exports, f.o.b.; Imports, c.i.f.; Current Account; Goods Export Market Share (2000=100); Services Export Market Share (2000=100). - Labor market: - UNEMPLOYMENT RATE (in percent) remained high relative to Euro Area (1998–2005). - EMPLOYMENT GROWTH slowed (in percent, 1998–2005). - Fiscal developments: - GENERAL GOVERNMENT DEFICIT (in percent of GDP) — fiscal deficits have widened (Overall Deficit and Primary Deficit series, 1998–2005). - GENERAL GOVERNMENT REVENUE AND EXPENDITURE (in percent of GDP) show revenues and expenditures diverging due to high spending (1998–2005). ### Credit developments and financial indicators - DOMESTIC CREDIT GROWTH (Year-on-year percent change) series for 1998–2005 shows rapid increases for Total credit, General government 1/, Enterprises and households 2/. - CREDIT/GDP RATIOS (1997–2004): Greece, total; Greece, public sector 3/; Greece, private sector; Euro area, total. - PRIVATE SECTOR CREDIT GROWTH 4/ (Year-on-year percent change, 1998–2005): separate series for Enterprises, Housing, Consumer credit. - Footnotes preserved from source: - 1/ Data prior to 1999 refer to public sector. - 2/ Data prior to 1999 refer to private sector. - 3/ Excludes banks' holdings of government securities. - 4/ Data prior to 2000 refers to commercial bank credit. ### Cyclical indicators and financial markets - CONFIDENCE INDICATORS (1998–2005): Consumer Confidence Indicator and Industrial Confidence Indicator. - MANUFACTURING PRODUCTION (year-on-year percent change), ECONOMY-WIDE PROFITABILITY (1990-2000=100), and STOCK EXCHANGE INDICES (1995 = 100) series for Athens Stock Exchange (in Euros) and FTSE Europe (in Euros). ### Public debt sustainability (Figure 4) — scenario framework and shocks - Public debt expressed in percent of GDP with baseline and scenario paths plotted for 2001–2009. - Shock experiments noted: - Individual shocks are permanent one-half standard deviation shocks. - 2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance. - 3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2006, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator). - Figures in boxes represent average projections for the respective variables in the baseline and scenario; ten-year historical average also shown. - Examples of annotated averages from the figure captions (preserved wording and numeric values): - Baseline:2.1 - Scenario:2.4 - Historical:2.3 - Baseline:1.5 - Scenario:1.0 - Historical:0.4 - Baseline:3.2 - Scenario:0.5 - Historical:4.4 - Gross financing need under baseline is also shown (right scale) in the figure. ### Labor market indicators (2004 cross-country comparisons) - EMPLOYMENT RATE (in percent of total labor force) — Greece compared with Euro Area and other countries. - UNEMPLOYMENT RATE (in percent of total labor force) — listing ranks with Luxembourg lowest through Spain highest; Greece shown among higher rates. - LONG-TERM UNEMPLOYMENT RATE (in percent of total unemployment): Greece among highest. - PARTICIPATION RATE and FEMALE PARTICIPATION RATE (in percent of working age population) — Greece appears low in female participation. - YOUTH PARTICIPATION RATE (in percent of working age population) — cross-country ranking with Greece mid/high. ### Greece: Fund relations (Appendix I) — key institutional and financial data (As of September 30, 2005) - I. Membership Status: - Joined December 27, 1945; Article VIII. - II. General Resources Account: SDR Million % Quota - Quota 823.00 100.00 - Fund holdings of currency 619.75 75.30 - Reserve position in Fund 203.26 24.70 - III. SDR Department: SDR Million % Allocation - Net cumulative allocation 103.54 100.00 - Holdings 19.73 19.05 - IV. Outstanding Purchases and Loans: None - V. Financial Arrangements: None - VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs) — Forthcoming: - Charges/Interest: 2005 0.57; 2006 2.25; 2007 2.25; 2008 2.26; 2009 2.25 - Total: 0.57 2.25 2.25 2.26 2.25 - VII. Implementation of HIPC Initiative: Not Applicable. - VIII. Exchange Rate Arrangements: - Greece entered the final stage of European Economic and Monetary Union on January 1, 2001, at a rate of 340.750 Greek drachmas per 1 euro. - Greece maintains restrictions on the making of payments for current international transactions vis-à-vis Iraq; these restrictions were notified to the Fund under Decision 144-(52/51) in EBD/90/304, 9/21/90. - IX. Article IV Consultation: - Greece is on a 12-month consultation cycle; the last Article IV consultation discussions were concluded on May 16, 2003. - X. ROSCs: - Standard Code Assessment entries and dates preserved in source (Fiscal Transparency and Data Module entries from October 6, 1999 through December 22, 2004). - XI. Technical Assistance: - Years and purposes listed in source (including 1993 FAD Treasury Reform June 1993; MAE Central Bank Independence; 1994 MAE Government Securities markets; 2002 STA SDDS action plan June; 2003 FAD Tax Policy and Tax Administration Reform July; 2005 FAD Public Expenditure Management May; 2005 FAD Tax Administration July; 2005 FAD Fiscal Transparency July). - XII. Resident Representative: None ### Statistical issues and IMF recommendations (Appendix II and Update) - Overall assessment: - Economic data are adequate for surveillance but should be strengthened further. - Greece subscribed to the Special Data Dissemination Standard (SDDS) on November 8, 2002 and took a flexibility option on the periodicity of central government operations data on financing (released annually). - A data module of the ROSC was prepared in 2003 and updated in 2004. - Main areas needing improvement and recommended actions (preserved language and emphasis): - Improve quality and coverage of general government public finances and cross-sector data consistency; prepare financial accounts of the government. - Bring government finance and balance of payments statistics closer to internationally accepted methodologies. - Provide more short-term national accounts data, with reconciliation across datasets for government finance, monetary, and balance of payments statistics. - Improve statistical presentations to facilitate analysis and understanding; disseminate more detailed metadata including wider identification of compilers in press releases and publicize contact persons. - Clarify and publicize revision policy — most statistics do not provide the public with a clear statement of the revision policy. - National accounts: - NSSG national accounts based on the 1995 ESA extend beyond recommended range of annual tables, but sometimes rely on old benchmark ratios and residual estimates of unrecorded activities. - Quarterly national accounts estimates from Q1 1970 to Q3 2002 rely more on econometric estimation than on actual data. - Balance of payments and external trade: - BoG has revised BOP data to be BPM5-consistent; data for 1999 first available under new system; estimates for 1997–98 recompiled. - Monthly BOP data compiled and disseminated; quarterly BOP and, since 2004, quarterly IIP reported for IFS and Balance of Payments Statistics Yearbook. - Improvements: preliminary estimates on reinvested earnings based on annual FDI survey; portfolio investment income for bonds and money market instruments recorded on accrual basis since April 2005; more comprehensive goods and investment income presentation per BPM5. - Significant differences remain compared to national-accounts-based current account data, with sizable differences in changes and even direction of the current account and its components in recent years. - Government accounts: - NSSG compiles general government revenue, expenditure, and deficit on an accrual basis in the context of the 1995 ESA Transmission Program and the Excessive Deficit Procedure. - Absence of financing data (waiver for financial accounts reporting until 2005) impedes checks on consistency between deficit and debt and across sectors. - Central government monthly data are very aggregated; reliability and timeliness of other public entities' data (social security funds and local governments) are poor. - Capital injections by the government require careful monitoring for proper statistical treatment (above or below the line). - Monetary accounts: - Since euro participation, monetary statistics compiled per ECB requirements; reporting is timely. - Large and volatile reporting discrepancies among banks' bilateral positions have lessened but some discrepancies remain; further source-data accuracy and reliability improvements recommended. - Cross-checks between monetary statistics and other data could be more systematic. - Labor market: - Since fall 1998, more detailed quarterly labor force survey with enlarged sample provides EU-harmonized data. - Coverage of immigrants remains difficult and hampers interpretation; immigrants constitute a relatively large fraction of the Greek labor market compared with other EU countries. - Data on earnings have not been produced since 1998. - Short-term data and release practices: - Quarterly national accounts publication is an important improvement. - Other high-frequency indicators (retail sales, industrial production, wholesale prices, other indices) sometimes rely on out-of-date benchmark ratios and suffer reporting delays undermining usefulness. - Source data and techniques could be strengthened for prices and government finance statistics. - NSSG has announced an advance publications schedule for all statistical releases. *International Monetary Fund staff compilation and assessment as presented in the source document.* ### 1. The ROSC recommended the establishment of procedures for cross checking ### _cr0604 - 1. The ROSC recommended the establishment of procedures for cross checking ### ROSC overarching recommendations and institutional actions - ROSC recommended establishment of procedures for cross checking consistency among national accounts, government finance, monetary, and balance of payments statistics. - ROSC recommended dissemination of statements about revision policy and practice and undertaking regular revision studies to assess the accuracy of statistics. - ROSC recommended compilation of consistent and comprehensive documentation on concepts and definitions, scope, classification, basis for recording, source data, and statistical techniques. - ROSC recommended setting up the Statistical Council, as envisaged under law, to provide guidance on quality and on improving the serviceability and accessibility of national statistics. - ROSC recommended institutionalization of regular contacts with users of economic statistics to learn about their data needs. ### Inter-agency coordination and user engagement - September 2005: permanent inter-agency working group set up to check consistency of net borrowing of various sectors in the National and the Financial Accounts; group comprises representatives from the Ministry of Economy and Finance, the National Statistical Service of Greece (NSSG), the General Accounting Office (GAO), and the Bank of Greece (BoG); chaired by the Ministry of National Economy; meets on an ad hoc basis. - Dialogue between compilers and users is not institutionalized; surveys of statistical needs of non-governmental users are not conducted. - NSSG conducts semiannual customer satisfaction surveys. - End-users are consulted on an ad hoc basis and often participate during development of new statistics (examples: BoG statistics on securitized loans and housing loans). ### Legal and organizational reforms - Revision of the National Statistical Law underway and expected to be completed in 2006. - Main elements: strengthen independence, accountability and integrity of the NSSG; enhance confidentiality policy; establish a National Statistical Council to provide guidance on improving the quality, serviceability and accessibility of national statistics. - Revision will take into account fully the recommendations of the European Statistical Code of Practice (CoP). - No plans to separate the NSSG from the Ministry of Economics and Finance. - NSSG staff consider Legislative Degree 3627/1956 grants sufficient operational independence. - NSSG plans to implement the Statistical Code of Practice fully over the next three years. - NSSG currently has no code of ethics but plans to introduce one in the context of the revision of the National Statistical Law. - Medium-term statistical work programs of the NSSG and the BoG are not disseminated to the public. - Current main priority: improve statistical surveys that form the basis of economic statistics. - Work program also takes into account initiatives at EU level and recommendations by Eurostat and the ECB. ### Data dissemination and metadata - NSSG and the BoG disseminate statistical series in text and PDF formats. - In 2005 the BoG started posting statistical series in spreadsheet format and is preparing dissemination of further series in user-friendly formats. - In the ECB project to disseminate national data on a dedicated website, the BoG posts contact persons for all disseminated data (in metadata section only). ### National Accounts — findings and actions - ROSC noted need to improve short-term source data, reduce reliance on outdated ratios, and make data more accessible (charts, tables, analysis). - Preparation of analytic quarterly national accounts progressing; first full set of tables (including value added and employment by branch, raw and seasonally adjusted series) expected to be available by the end of 2006, with data starting from 2000. - NSSG developing source databanks to allow estimation of quarterly GDP from both expenditure and production sides. - Benchmark year for national accounts will change to 2000 and statistical ratios will be updated; seasonal adjustment methodology is being reconsidered. - Current seasonally adjusted quarterly national accounts exhibit an inexplicably pronounced seasonal pattern. - NSSG has posted the methodology of compiling national accounts in Greece at http://www.statistics.gr/MainPage/NationalAccounts/NationalAccountsMethodology.pdf. - Revision calendars for annual and quarterly national accounts are not publicly available; practice is to produce each year provisional figures for the previous year and final ones for the year before. - Temporary deviation: owing to workload for revision of the benchmark year, all national account figures since 2000 remain provisional. - National accounts press releases include charts but very limited background information; example: second quarter 2005 release did not contain information on substantial revision of earlier figures. - NSSG reviewing content and format of press releases. ### Consumer Price Index (CPI) - ROSC recommended use of modern techniques for dealing with quality changes and introduction of statistical sample section methods. - Revision of the CPI expected to have been completed in the beginning of 2006, as originally scheduled. - New index based on the 2004–05 Household Budget Survey; weights of the cities based on the 2001 population census (price data collected from 25 cities considered representative). - NSSG working on the composition of the basket; representative item method used for selecting items. - Outlets selected on a judgmental basis by price collectors in consultation with the central unit. - NSSG reviewing data collection process and quality adjustment techniques, taking into consideration Eurostat’s regulations and guidelines. - At this stage NSSG is not contemplating introduction of explicit quality adjustment techniques (hedonics) owing to high demands on statistical infrastructure. ### Wholesale Price Index / Producer Price Index (PPI) - ROSC noted need to improve timeliness of source data and weight revisions; establish formal process for dialogue between compilers and users (e.g., users’ surveys); and use sampling techniques to cover small enterprises. - Beginning of 2005: PPI replaced the Wholesale Price Index in line with EU member state practice. - NSSG considers new index incorporates most ROSC recommendations for the WPI. - In 2006 NSSG plans to post detailed tabulations for the PPI and the CPI on its website. ### Government Finance Statistics (GFS) - ROSC recommended: - compilation and dissemination of a full set of financial accounts for general government and sub-sectors; - compilation and dissemination of monthly financing data for central government; - migration to the GFSM 2001, with ESA 95 data as starting point; - integration of GFS codes and nomenclature in the Treasury accounting system; - assignment to a single agency main responsibility for compiling and disseminating comprehensive and integrated government finance statistics, including financing transactions (financial accounts); - preparation of a periodic publication on government finance statistics. - NSSG revised general government debt and deficit figures for 2001−04 to align with EU guidelines on recording of EU transactions and liabilities of hospitals. - Pending issues remained in recording of EU transactions, accounts of social security, and amounts of other receivables and payables for years 2002−04. - NSSG preparing for migration to GFSM 2001, planned for 2006, and dissemination of detailed general government finance statistics including time series. - Project delayed by revision of fiscal accounts. - No plans to disseminate general government financing data prior to migration to GFSM 2001. - NSSG and BoG have divided responsibilities for collection and compilation of financial accounts: - NSSG collects relevant data for general government. - BoG collects data for all other sectors and compiles financial accounts. - Collection, checking and processing of quarterly data already started; BoG expects to start publishing financial accounts by end-2005. - September 2005: GAO announced an international call for bids to set up an integrated fiscal management information system (http://www.mof-glk.gr/anakoinwseis/rfpf.zip). - Transition table from the State Budget to ESA95 is submitted to Eurostat but not disseminated to the public. ### Monetary statistics - ROSC recommended: - increase of staff resources in line with needs of longer-term statistical work program (including compilation of financial accounts and improving source data); - improvements in accuracy of source data and removal of inconsistencies in reports of other monetary and financial institutions (OMFIs); - use of consistent terminology and full explanations concerning inter-temporal comparability and consolidation; - identification as memorandum items of data on financial derivatives, accrued interest, and claims on and liabilities to public non-financial corporations. - BoG has started collecting statistics for insurance companies, other financial intermediaries, non-financial corporations, local government, and social security funds. - These data are in final checking phase and a complete set of Financial Accounts (stocks and flows) expected to be published by end-2005. - 2005 progress in reducing inconsistencies in reports of OMFIs: - Inconsistencies between OMFIs and BoG on OMFIs’ assets and liabilities vis-à-vis the BoG mainly reflect timing differences (float); resolved by using BoG data and adjusting OMFI figures accordingly. - “Other items” of OMFIs reduced from 2.3% of total assets in 2004 to 1.4 percent in 2005. - Discrepancy between interbank assets and liabilities reduced significantly and currently fluctuates around 2.3 percent of total inter-OMFI assets. ### Balance of Payments statistics - ROSC recommended introducing estimates for reinvested earnings and undistributed branch profits into balance of payments statistics and reporting on an accrual basis data on interest payments for government debt. - Since July 2005: transfers decomposed into current and capital; presentation of current account changed to comprise trade balance, services balance, income account, and current transfers; capital transfers appear separately. - Since April 2005: interest payments/receipts on government debt reported on an accrual basis with data as of December 2003. - BoG finalized annual figures of reinvested earnings (inward and outward FDI) for 2003 and compiled first estimates for 2004. - These data will be incorporated in revised annual balance of payments statistics expected to be released by the end of 2005. - BoG developing a statistical model for estimating monthly balance of payments indicators. - BoG medium-term objective: disseminate detailed information for main balance of payments items (e.g., breakdown of goods by product and country, and of travel by country). ### Supplementary fiscal information (Staff Report for the 2005 Article IV Consultation — Supplementary Information) - Supplement prepared by the European Department; approved by Michael Deppler and Juha Kähkönen; dated December 8, 2005. - Supplement updates staff fiscal projections for 2006 based on information received after the staff report was finalized; attaches the Public Information Notice; does not change thrust of staff appraisal. - Authorities (draft budget submitted to parliament and submission to the EU, both on November 21) reaffirmed commitment to reduce deficit to 2.6 percent of GDP in 2006. - Documents consistent with staff report; unspecified revenue measures clarified as tax revenue enhancements and temporary non-tax revenues. - Staff projects that if adopted measures produce revenues in line with authorities’ expectations, staff projects the 2006 general government budget deficit will fall to 2.7 percent of GDP. *International Monetary Fund — Staff Report for the 2005 Article IV Consultation Supplementary Information (December 8, 2005)* ### 3. The key aspects of revenue enhancement are measures to combat tax evasion and ### 3. The key aspects of revenue enhancement are measures to combat tax evasion and ### Revenue enhancement measures - Campaign to raise public awareness of penalties for tax evasion. - More comprehensive cross-checking of invoices. - Intensified and better targeted audits. - Improved auditing information systems. - Mandatory filing of periodic (every 1 or 3 months, depending on the class of business) VAT returns. - These initiatives are fully consistent with the recommendations of the Fund technical assistance mission on tax administration. - A high level task force examining these recommendations has already offered its first proposals to the Minister of Finance. - Securitization of tax arrears, discussed at the time of the Article IV mission, will not take place in 2005 and has not been included as revenue in the 2006 budget. ### Temporary non-tax measures and deficit reduction (2006) - Temporary non-tax measures account for about one-third (0.6 percent of GDP, as indicated in the staff report) of the deficit reduction in 2006. - Components of temporary non-tax measures: - Extra dividends from three government-owned financial institutions sale. - Extension of concession rights. - Clearance of fines and licenses by the Telecommunications and Post Commission. ### Fiscal outcomes and adjustments (2005–06) - Fiscal adjustment in 2005 amounted to 2.3 percent of GDP, of which: - 0.4 percentage points from current expenditure reduction. - 1.4 pps from investment expenditure reduction (including 1 pp of non-recurrent spending on Olympic Games infrastructure). - 0.5 pps from improvements in the general government accounts. - General government deficit estimates: - Peak of 6.6 percent of GDP in 2004 (compared with an initial estimate of 5.3 percent). - Declined to 4.3 percent in 2005 (authorities' estimate). - Fiscal adjustment in 2006 (based on the 2006 draft budget submitted to Parliament on November 21) amounts to a further 1.7 percent of GDP, leading to a decline in the general government deficit from 4.3 percent in 2005 to 2.6 percent in 2006. - Within this total, permanent measures amount to 1.1 percent of GDP, including interest savings of 0.4 percent of GDP as maturing debt is rolled over at lower rates. - One-off measures amount to 0.6 percent of GDP, consisting mainly of higher dividends from state-controlled banks and proceeds of concession rights on roads, airports, and casinos. ### Structural fiscal reforms and administration - Authorities invited two technical assistance missions from the Fund on Tax Administration and Public Expenditure Management. - High-level task forces have been formed to follow up on the Fund’s recommendations and to propose a reform agenda and timetable by end-December. - Authorities requested technical assistance and a full fiscal ROSC to enhance effectiveness and transparency of fiscal management. - Consideration of multi-year budgeting to replace year-at-a-time decision-making with a rules-based system aimed at achieving a zero budget deficit over the medium term. - Implementation underway of Fund recommendations, including obligatory periodic filing of VAT returns. ### Public enterprises and healthcare finances - Urgent need to impose hard budget constraints on public enterprises and entities: - Some enterprises continue to operate while generating losses, defaulting on their debt to banks and accumulating arrears to the tax authorities and social security organizations. - Public entities such as hospitals accumulate arrears to suppliers that are eventually taken over by the government, adding to public debt. - Government actions: - Submitted to Parliament a draft law on public enterprises aimed at increasing their commercial orientation and significantly reducing their reliance on budget transfers. - Efforts to gain control over the finances of the health care system, including centralizing and reforming procurement practices. ### Selected fiscal and macroeconomic indicators (preserved exact figures from tables) - GDP growth (Est./Proj. series in tables): 4.5, 4.6, 3.8, 4.6, 4.7, 3.5, 3.3. - Output gap (examples): -0.9, 0.0, 0.0, 0.9, 1.8, 1.6, 1.2. - Unemployment rate (annual averages): 11.4, 10.8, 10.3, 9.7, 10.5, 10.0, 10.0. - Current Account (percent of GDP): -6.9, -6.2, -6.0, -5.6, -3.8, -3.2, -3.6. - Total revenues (percent of GDP, settlements basis): 46.7, 42.9, 43.3, 42.5, 41.6, 41.1, 42.5. - Total expenditures (percent of GDP, settlements basis): 50.8, 48.9, 48.3, 48.3, 48.3, 45.4, 45.6. - Overall balance (percent of GDP): -4.1, -6.1, -4.9, -5.7, -6.6, -4.6, -2.7. - Primary balance (percent of GDP): 4.0, 1.2, 1.3, 0.0, -0.9, 0.7, 2.2. - Structural overall balance (percent of GDP): -3.7, -6.1, -5.0, -6.1, -7.4, -5.2, -3.2. - Gross debt (percent of GDP / memorandum): 114, 114, 112, 109, 111, 108, 104. - Nominal GDP (in billions of euros, memorandum): 122, 132, 142, 154, 167, 179, 191. *IMF staff report content as provided in the source PDF.* ### 3. Even though the authorities are taking measures to bring the deficit of the general ### 3. Even though the authorities are taking measures to bring the deficit of the general government down to below 3 percent of GDP in 2006, the aging of the population and its impact on pensions imposes further challenges ### Fiscal sustainability and aging - Authorities aim to bring the general government deficit to below 3 percent of GDP in 2006 and the draft 2006 budget targets a deficit of 2.6 percent of GDP. - In 2004 the general government deficit rose to 6.6 percent of GDP; public debt stood at 111 percent of GDP. - In 2005 authorities implemented substantial fiscal consolidation, reducing the budget deficit to 4.6 percent of GDP on staff calculations. - About one-third of the 2006 adjustment consists of temporary measures. - Staff and Directors agree that, in the absence of corrective measures, pension and health care costs threaten long-term fiscal sustainability. - Available estimates imply aging costs will rise by more in Greece than in any other EU country between now and 2050. - Authorities invited the Economic and Social Council to commission an actuarial study and initiated public debate; the Greek Actuarial Authority was made operational this year. - Fund staff prepared pension projections included in the Selected Issues paper; authorities promoted ongoing data-gathering and analysis. ### Growth-oriented reforms (measures taken) - Labor market: introduced reforms to increase flexibility, including reduction in overtime pay and more flexible workweek arrangements to accommodate seasonal peaks with lower recourse to overtime. - Tax policy: cut corporate taxes from 35 to 25 percent over three years; planning to reduce personal income taxes to align the top marginal income tax rate more closely with the corporate tax rate. - Investment incentives: introduced an investment incentives law (in effect since January 2005) providing tax credits and other incentives to promote job creation, skills upgrading, R&D and innovation. - PPPs: introduced legislation governing PPPs (in effect since mid-2005) to facilitate private sector involvement in public investment projects with due attention to fiscal side of concessions. - Product market deregulation and competition: liberalized shopping hours; strengthened the Competition Commission’s power; draft legislation to deregulate the energy sector to be tabled soon. - ICT and broadband: taken steps to promote diffusion of ICT productivity gains and accelerate investment in broadband networks. - Additional planned initiatives: revision to bankruptcy legislation; changes to management and employment contracts in state-owned enterprises. ### FSAP findings and financial-sector developments - Authorities welcomed the FSAP to streamline adaptation to international standards including adoption of IFRS, Basel II, and EU directives. - Greece’s AML/CFT law was revised and voted by Parliament on November 30, 2005; authorities acknowledged Fund recommendations in the new framework design. - Banking system (about 80 percent of the financial sector) is well capitalized and profitable; risk-management systems have improved significantly. - Stress tests confirm Greek banks are adequately protected from market and credit risk. - Adoption of IFRS required certain state-controlled banks to include unfunded pension liabilities; addressed via capital increases and mandatory transfer of part of liabilities to IKA. - Rapid credit growth following liberalization of consumer credit and interest rate convergence in the run-up to EMU raises concern about increased exposure to credit risk. - Bank of Greece actions: raising specific provisions and capitalization levels; mandating risk-management and credit-rating systems; facilitating compilation of comprehensive credit information on individual borrowers. - Insurance sector described as weak and poorly supervised; Directors urged making the new insurance supervisor fully operational and independent as soon as possible. ### Executive Board assessment and policy recommendations - Directors welcomed strong growth and narrowing living-standards gap with the euro area, but noted built-up imbalances: fiscal deterioration and loss of competitiveness due to a persistent inflation differential. - Top priority: fiscal consolidation given very high debt level and prospective large aging costs. - Urged implementation of additional and durable measures to contain current spending and reach fiscal balance by the end of the decade. - Key fiscal management priorities: - Improving auditing. - Strengthening information management systems. - Streamlining control of spending and better prioritizing expenditure. - Developing risk-based tax assessment and enforcement. - Strengthening measures to collect tax arrears. - Establishing a multi-year fiscal framework to enhance planning and credibility. - Encouraged full and timely implementation of Fund technical assistance recommendations on tax administration and public expenditure management and the Fiscal ROSC recommendations. - On pensions and health: urged acceleration of pension reform preparation and updating projections of fiscal costs associated with aging as soon as possible; follow up recent health care reforms to contain cost pressures. - On financial supervision: encouraged full implementation of FSAP recommendations; called for continued strengthening of the supervisory framework, close monitoring of bank assets and non-performing loans, and further development of banks’ risk management. - On competitiveness and structural reform: encouraged simplifying the tax system and overhauling tax administration, cutting red tape, further liberalizing gas and electricity, ensuring a proactive competition authority, easing hiring and firing restrictions, and more flexibility in minimum wages where needed. - On SOEs and PPPs: welcomed reforms and a new PPP framework; emphasized transparent and full accounting for proper assessment of current and future fiscal costs and bringing large public investment projects under the framework. - On statistics: welcomed improvements to fiscal data after the fiscal audit with Eurostat; recommended strengthened reporting of fiscal data (including financing-side fiscal data), improved quarterly national accounts data (under preparation), and formal independence for the statistical service. ### Key statistics and projections (selected) - Real GDP growth: 2001: 4.6; 2002: 3.8; 2003: 4.6; 2004: 4.7; 2005: 3.5; 2006: 3.3 (Proj.) - Final domestic demand (change in percent): 2001: 2.7; 2002: 4.5; 2003: 5.7; 2004: 4.6; 2005: 3.1; 2006: 3.9 (Proj.) - Private consumption (change in percent): 2001: 2.9; 2002: 3.3; 2003: 4.5; 2004: 4.4; 2005: 4.4; 2006: 4.0 (Proj.) - Public consumption (change in percent): 2001: -1.5; 2002: 7.3; 2003: -2.1; 2004: 3.9; 2005: 1.1; 2006: 0.6 (Proj.) - Gross fixed capital formation (change in percent): 2001: 4.9; 2002: 6.0; 2003: 13.7; 2004: 5.7; 2005: 1.0; 2006: 5.4 (Proj.) - Foreign balance (contribution) (change in percent): 2001: 1.7; 2002: -1.1; 2003: -1.4; 2004: -0.5; 2005: 0.1; 2006: -1.0 (Proj.) - Unemployment rate (in percent): 2001: 10.8; 2002: 10.3; 2003: 9.7; 2004: 10.5; 2005: 10.0; 2006: 10.0 (Proj.) - Employment (change in percent): 2001: -0.1; 2002: 2.2; 2003: 2.4; 2004: 0.9; 2005: 1.1; 2006: 0.5 (Proj.) - Unit labor costs (economy wide) (change in percent): 2001: 2.8; 2002: 3.0; 2003: 2.4; 2004: 3.2; 2005: 3.3; 2006: 3.0 (Proj.) - GDP deflator (change in percent): 2001: 3.5; 2002: 4.0; 2003: 3.5; 2004: 3.6; 2005: 3.6; 2006: 3.3 (Proj.) - CPI (year average) (change in percent): 2001: 3.7; 2002: 3.9; 2003: 3.4; 2004: 3.0; 2005: 3.6; 2006: 3.3 (Proj.) - General government balance (percent of GDP): 2001: -6.1; 2002: -4.9; 2003: -5.7; 2004: -6.6; 2005: -4.6; 2006: -2.7 (Proj.) - General government primary balance (percent of GDP): 2001: 1.2; 2002: 1.3; 2003: 0.0; 2004: -0.9; 2005: 0.7; 2006: 2.2 (Proj.) - General government structural balance (percent of GDP): 2003: -6.1; 2004: -7.4; 2005: -5.2; 2006: -3.2 (Proj.) - General government gross debt (percent of GDP): 2001: 114; 2002: 112; 2003: 109; 2004: 111; 2005: 108; 2006: 104 (Proj.) - Domestic credit (end of year, percent change) (staff estimates): 2001: 9.3; 2002: 8.5; 2003: 3.0; 2004: 7.7; 2005: 10.1; 2006: ... - Deposit rate (percent): 2001: 3.3; 2002: 2.8; 2003: 2.5; 2004: 2.3; 2005: 2.2; 2006: ... - Government bond yield (percent): 2001: 5.3; 2002: 5.1; 2003: 4.3; 2004: 4.3; 2005: 3.5; 2006: ... - Exports of goods and services (percent of GDP): 2001: 25.5; 2002: 22.2; 2003: 21.1; 2004: 23.6; 2005: 24.1; 2006: 24.7 (Proj.) - Imports of goods and services (percent of GDP): 2001: 35.0; 2002: 30.6; 2003: 28.3; 2004: 29.5; 2005: 29.3; 2006: 30.2 (Proj.) - Trade balance (percent of GDP): 2001: -9.5; 2002: -8.4; 2003: -7.2; 2004: -6.0; 2005: -5.2; 2006: -5.5 (Proj.) - Current account (percent of GDP): 2001: -6.2; 2002: -6.0; 2003: -5.6; 2004: -3.8; 2005: -3.2; 2006: -3.6 (Proj.) - Nominal effective exchange rate (1990=100) (As of September 2005): 2001: 62.4; 2002: 63.4; 2003: 65.8; 2004: 66.4; 2005: 66.2; 2006: ... - Real effective exchange rate (1990=100) (As of September 2005): 2001: 108.9; 2002: 112.1; 2003: 117.8; 2004: 119.9; 2005: 121.3; 2006: ... *IMF Public Information Notice (PIN) No. 06/3 — IMF Executive Board Concludes 2005 Article IV Consultation with Greece (January 6, 2006).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0604.pdf_