## _cr0726

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### Executive Summary — Background and Vulnerabilities
- Real GDP grew by 3¾ percent a year on average during 1995–2005.
- Growth drivers:
  - Financial-sector liberalization and a sharp drop in interest rates with euro adoption leading to very large increases in private sector credit and strong domestic demand growth.
  - Expansionary fiscal policy in the first part of the decade, including spending to fund the 2004 Olympic games.
  - Strong capital formation and productivity growth.
  - Substantial immigration, mainly from the Balkans, swelling the workforce.
- Emerging vulnerabilities:
  - General government deficit peaked at 6.2 percent of GDP in 2004.
    - Primary spending averaged 8.3 percent a year in 2001–04.
    - Debt-GDP ratio stood at 85.3 percent in 2005 (107.5 percent on the old national accounts estimates).
    - EC launched an excessive deficit procedure (EDP) in 2004, requiring a deficit below 3 percent of GDP by 2006.
    - Authorities cut the deficit sharply in 2005 and again in the 2006 budget.
  - Private-sector borrowing expanded rapidly; FSAP (2005) flagged risks from lending to new/un-tested client classes and rising exposures in the Balkans.
  - External current account deficit widened to an estimated 7½ percent of GDP in 2006 (balance of payments basis).
  - Centralized wage bargaining produced higher unit labor cost growth; cumulative private sector wage increase of over 11 percent in the 2006–07 two-year settlement.
  - Real exchange rate appreciated steadily; staff estimates imply a real overvaluation of 12–22 percent (subject to high margins of error).

### Competitiveness and Structural Issues
- Indicators of competitiveness deterioration:
  - Real effective exchange rate appreciated by 20–30 percent on a ULC basis and by 10 percent on a CPI basis.
  - Export deflator rose by 10 percent, the highest among euro-area countries.
  - Greece lost export market share; export growth in the past five years was the second weakest among euro area countries.
- Restoring competitiveness (illustrative staff scenarios):
  - Eliminating the competitiveness gap on staff baseline productivity assumptions:
    - Would take 5 years if nominal wages were frozen.
    - Would take 10 years if nominal wages grew at 2 percent a year.
  - Structural reforms effect: a 1 percentage point increase in productivity growth plus a 0.3 percentage point decline in inflation would shorten the adjustment period by 1½ years.
  - Eliminating the competitiveness gap could reduce the current account deficit by about 3 percent of GDP; completing adjustment in 5 years through exports alone would require nominal export growth of about 12 percent a year for 5 years (about 4¼ percentage points higher than staff baseline).

### Fiscal Adjustment: Outcomes, Composition, and Medium-Term Objectives
- 2005–06 outcomes:
  - Deficit fell to 4.2 percent of GDP in 2005; 2006 budget targets 2.1 percent of GDP (2.6 percent on the old national accounts basis).
  - Cumulative estimated deficit decline for 2005–06: 4 percent of GDP, composed of:
    - 2.4 percentage points from primary spending restraint (including 1.3 percentage points attributable to the end of the Olympics).
    - 0.9 percentage point from revenue increases.
  - In 2006 the policy focus shifted toward revenue increases, including progress in combating tax fraud, a 1 percentage point increase in the VAT, and higher excise taxes on tobacco and mobile phones introduced mid-2006.
- Medium-term objectives and staff view:
  - Authorities’ announced intention: achieve budget balance or surplus by 2012.
  - Fund staff recommendation: cyclically adjusted balance by 2010 and a surplus thereafter.
  - Mission arguments for further deficit reduction include providing a fiscal cushion and rapid reduction of public debt before aging costs mount.
- 2007 budget near-term stance:
  - 2007 budget targets little deficit reduction: general government deficit falls by only 0.2 percent of GDP (mainly lower interest payments; revenues and primary spending little changed).
  - Temporary measures in the 2006 budget worth 0.3 percent of GDP will not be repeated in 2007; authorities view this non-repetition as implying a structural improvement of 0.5 percent of GDP.
- Tax policy changes and administration:
  - Corporate tax rate scheduled to fall to 25 percent (20 percent for smaller firms) in 2007.
  - Personal income tax reform: increase basic exemption and reduce marginal tax rates except the top 40 percent rate for incomes over €75,000.
  - Personal exemption raised from €11,000 to €12,000 with effect from 2007 (it was €10,000 in 2004).
  - Mission recommendation: minimize revenue losses by reducing distortionary exemptions or compensate by further spending compression; simplify the tax code to improve administration.
- Long-term fiscal pressures:
  - Estimates (dating from 2000) imply pension and health-care costs will rise by some 10½ percent of GDP by 2050.
  - National Actuarial Authority (NAA) understaffed; new cost estimates being prepared slowly.
  - Authorities planned no reforms before the next election; commission established and high-level “Analytis Commission” to use new estimates.

### Outlook, Projections, and Risks
- Short-term projections:
  - Staff projects real GDP will rise by 4.1 percent in 2006 and ease to 3¾ percent in 2007.
  - Inflation projected to ease somewhat as oil prices stabilize.
  - Current account deficit projected to remain about 7½ percent of GDP in 2007.
- Medium-term baseline:
  - Staff baseline projects gradual slowing of growth to about 3 percent as consumers’ taste for increased debt wanes and lost competitiveness weighs on traded goods sector.
  - Baseline medium–term trajectories (selected Table 4 highlights, 2004–2011):
    - Real GDP growth: 4.7, 3.7, 4.1, 3.8, 3.5, 3.0, 2.8, 2.8.
    - Current account (percent of GDP): -4.9, -6.2, -7.5, -7.4, -6.9, -6.3, -5.9, -5.4.
    - Gross debt (% of GDP): 86, 85, 83, 80, 78, 76, 74, 72.
- Downside scenarios:
  - Pronounced slowdown scenario: growth of about ¾ percent a year for two years would raise the fiscal deficit and the debt-GDP ratio.
  - Public debt sustainability scenarios illustrated include a growth shock where real GDP growth drops to 0.7 percent in 2007 and recovers to 2.8 percent by 2011; combined shocks include a real depreciation of 30 percent and a 10 percent of GDP contingent liabilities shock in 2007.

### Financial Sector — Soundness, Vulnerabilities, and Supervisory Responses
- Banking system status:
  - Solvency and liquidity satisfactory; profitability driven by rising lending volumes in Greece and southeastern Europe.
  - BoG stress tests indicate capital adequacy ratios would remain well above regulatory thresholds under severe credit risk scenarios.
- Key vulnerabilities:
  - Rapid credit growth may overextend households; household debt to GDP series: 9.1, 10.7, 13.6, 18.1, 22.3, 26.5, 32.0, 38.4, 41.0 (1998−June 2006 sequence).
  - Nonperforming loans (share of total loans): 8.7, 11.2, 7.2, 5.6, 5.5, 5.1, 5.4, 5.5, 5.5 (1998−June 2006 sequence); selected June 2006 share of nonperforming loans in total loans: 5.6, 5.5, 5.1, 5.4, 5.5, 5.5 (2001–2006).
  - Loan growth outstripping deposit growth leads to higher-cost market funding; customer deposits to total (non-interbank) loans: 191.1, 190.8, 176.3, 166.0, 147.4, 135.3, 130.6, 127.5, 124.2 (1998−June 2006 sequence).
- Supervisory actions and recommendations:
  - BoG intensified monitoring, studied debtor characteristics, introduced prudential measures to limit credit to highly indebted households, and increased provisioning and write-offs of NPLs.
  - Mission recommended further increase provisioning and write-offs, intensify BoG monitoring, and urge banks to improve risk-management tools and practices.
  - BoG examined retail credit risk by raising the probability of default by 30 percent in sensitivity tests.
- Other financial sectors:
  - Capital market, second pillar pension, and insurance sectors remain very small; insurance sector in weak financial condition.
  - New independent insurance supervisor legislation passed in early 2004 expected to be fully operational in early 2007; mission urged a rapid but smooth transition.

### Structural Reform, SOEs, PPPs, and Labor Markets
- Product market reforms and privatization:
  - Progress: simplified procedures for manufacturing startups, “one-stop shops”, eased overtime regulations somewhat, liberalization of network industries (telecoms, electricity, gas), SOE reforms, ongoing privatization (including stakes in three banks and planned offering of OTE), overhaul of bankruptcy legislation nearing fruition.
- Public enterprise reform law (November 2005) requires annual business plans, strategic plans, charters of consumer obligations, greater personnel flexibility for new hires, adoption of international accounting standards.
- PPPs:
  - 2005 PPP law in operation; law covers projects less than €200 million; PPPs to pass cost-benefit tests and be subject to full cost accounting and transparency.
  - Recommendation: present full accounting for costs, including future budgetary obligations, in a transparent way alongside the budget.
- Labor market:
  - Progress limited; no further reforms planned until after elections.
  - Centralized collective bargaining yields relatively high minimum wages and compressed wage scale; mission argued for more decentralized bargaining and easing employment protection to encourage hiring.
- Tackling unrecorded economy and corruption:
  - Revenue-to-GDP ratio about 34½ percent despite statutory tax rates similar to other European countries; indicates an eroded tax base from avoidance and evasion.
  - Authorities instituted 2005 reform of tax inspectorate and efforts to press on social security contribution evasion.

### Data Issues and National Accounts Revision
- National accounts revision:
  - GDP level revised up by about 26 percent for 2000–05; real GDP growth rates little affected.
  - Bulk of the revision: 20.9 percentage points of the 25.7 percent revision in 2000 are accounted for by conformity with ESA95 and resolving Eurostat reservations.
  - Sources of revision: 2001 general census, new surveys on retail and wholesale commerce, transport, hotels, dwellings, better use of administrative databases, new estimates of rents, capital stock, and capital consumption.
  - For 2000, census raised estimates of total employment by 10.4 percent.
  - Output revision concentrated in wholesale trade (16.4 percent), hotels and restaurants (15.4 percent), construction (11.1 percent), other business activities (10 percent).
- Impact on fiscal and external ratios (selected table excerpts):
  - GDP at current prices (2000): Old 124.4 New 156.5 Change 25.8.
  - General Government Deficit (2005): old -5.2 new -4.2.
  - General Government Debt (2005): old 107.5 new 85.3.
  - Current Account Deficit (2005): old -7.8 new -6.2.
- Data quality and statistical recommendations:
  - Noncentral government fiscal data improved with quarterly census of pension funds, but arrears in the hospital sector caused a fiscal restatement in 2005.
  - Mission encouraged publishing financing-side fiscal data, properly seasonally adjusted quarterly national accounts, making NSSG independent of MoEF, and more timely revisions (perhaps at five-year intervals).
  - Authorities reported new quarterly series due for publication in 2007.
  - Under the Coordinated Compilation Exercise, authorities produced FSIs broadly consistent with the Fund's FSI Compilation Guide.

### Staff Appraisal — Priorities and Recommendations
- Short-term: strong outlook supported by low interest rates, rapid credit expansion, rising employment, and corporate tax cuts.
- Medium-term risks: addressing competitiveness erosion, large current account deficits, and sustained high private-sector credit growth is essential to sustainability.
- Principal policy priorities highlighted:
  - Achieve a soft landing via appropriately paced medium-term fiscal adjustment emphasizing current primary spending restraint and improvements in tax administration and expenditure management.
  - Complete pension reform with timely cost estimates and social dialogue.
  - Strengthen financial sector risk management and supervision; ensure sufficient provisioning and write-offs of NPLs.
  - Advance structural reforms, particularly in labor markets, to boost productivity and competitiveness.
  - Resolve data and national accounts issues; strengthen credibility and independence of the national statistical office.
- Specific fiscal advice:
  - Move toward cyclically adjusted balance by 2010 and surplus thereafter (staff recommendation); authorities targeted balance or surplus by 2012.
  - Seize any opportunity in 2007 to cut the deficit further; use durable measures rather than temporary ones.
- Financial sector supervisory recommendations:
  - Continue careful supervision of banks’ risk management practices, intensify monitoring, and strengthen incentives to contain risks.
  - Ensure rapid establishment of a fully operational independent insurance supervisor.
  - Maintain close cooperation with regional supervisors given Greek banks’ presence in southeastern Europe.
- Structural and SOE recommendations:
  - Extend simplified business licensing procedures to all sectors, hasten liberalization of network industries, combat corruption and widespread tax evasion.
  - Strengthen and hold SOE management accountable; continue privatizations of commercially reformed SOEs.

### Selected Key Statistics and Indicators (as reported)
- Real GDP growth (2006=staff projection): 4.1 percent (2006); 3.8 percent (2007 projection in Appendix table).
- Output gap (Table 4 example sequence 2004–2011): 2.4, 2.3, 2.5, 2.4, 2.1, 1.4, 0.6, 0.0.
- Unemployment rate (Table 4 / projections): 10.5, 9.9, 9.0, 8.8, 8.6, 9.0, 9.3, 9.5 (selected series).
- Current account (settlements basis; percent of GDP): -4.9, -6.2, -7.5, -7.4, -6.9, -6.3, -5.9, -5.4 (2004–2011 Table 4).
- General government deficit (selected series and projections): -3.9, -4.1, -4.9, -6.2, -4.2, -2.2, -2.0 (historical and baseline sequences).
- Gross debt (percent of GDP, selected): 90, 88, 85, 86, 85, 83, 83, 80, 80 (memorandum items Table 2); medium-term projection sequence: 86, 85, 83, 80, 78, 76, 74, 72 (2004–2011).
- Household debt to GDP (1998−June 2006 sequence): 9.1, 10.7, 13.6, 18.1, 22.3, 26.5, 32.0, 38.4, 41.0.
- Banking sector prudential indicators (selected): regulatory capital to risk-weighted assets (1998–2006 snapshots) include 10.2, 16.2, 13.6, 12.4, 10.5, 12.0, 12.8, 13.2, 12.3; nonperforming loans to total gross loans: 8.7, 11.2, 7.2, 5.6, 5.5, 5.1, 5.4, 5.5, 5.5.
- Doing Business indicators (2005 selected): Starting a Business — Procedures 15.0; Time (days) 38.0; Cost (% of income per capita) 24.6. Licenses and Permits — Time (days) 176.0; Cost (% of income per capita) 71.9.

### Institutional and Fund Relations (mission and Article IV cycle)
- Mission: October 9–20, 2006; team led by Mr. Ford.
- Greece joined IMF December 27, 1945; Article VIII.
- Quota: 823.00 SDR Million; Fund holdings of currency: 737.89 SDR Million (89.66 percent of quota).
- Greece is on a 12-month Article IV consultation cycle; Executive Board concluded the 2006 Article IV Consultation with Greece on January 22, 2007 (Public Information Notice No. 07/10).
- Recommendation: next Article IV consultation to take place on the normal 12-month cycle.

*Source: Executive Summary and selected sections of the IMF staff report (content unit: _cr0726).*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Background

- Real GDP grew by 3¾ percent a year on average during 1995–2005.
- Drivers of growth:
  - Financial-sector liberalization and a sharp drop in interest rates with euro adoption leading to very large increases in private sector credit and strong domestic demand growth.
  - Expansionary fiscal policy in the first part of the decade, including spending to fund the 2004 Olympic games.
  - Strong capital formation and productivity growth.
  - Substantial immigration, mainly from the Balkans, swelling the workforce.
- Vulnerabilities that developed despite significant reforms:
  - Fiscal deficit widened: general government deficit peaked at 6.2 percent of GDP in 2004.
    - Primary spending averaged 8.3 percent a year in 2001–04.
    - Debt-GDP ratio stood at 85.3 percent in 2005 (107.5 percent on the old national accounts estimates).
    - EC launched an excessive deficit procedure (EDP) in 2004, requiring a deficit below 3 percent of GDP by 2006.
    - Authorities cut the deficit sharply in 2005 and again in the 2006 budget.
  - Private-sector borrowing expanded rapidly.
    - FSAP (2005) found no systemic threats but highlighted risks from lending to new/un-tested client classes, expansion into new activities, and rising exposures of some banks in the Balkans.
    - Some credit expansion reflects greater financial intermediation; relatively low debt-income ratios suggest intermediation is still incomplete.
  - External current account deficit widened to an estimated 7½ percent of GDP in 2006 (balance of payments basis).
    - Inflationary pressures from strong domestic demand and credit growth.
    - Centralized wage bargaining delivered higher unit labor cost growth than elsewhere in the euro area; cumulative private sector wage increase of over 11 percent in the 2006–07 two-year settlement continued this trend.
    - Real exchange rate appreciated steadily, opening a competitiveness gap vis-à-vis trading-partner countries.
    - Membership in the monetary union keeps long-term interest rate premia low (about 30 basis points against Germany), but a substantially smaller current account deficit would be needed to stabilize the net foreign asset position.
      - Illustration: a current account deficit of 3½ percent of GDP would be needed to stabilize the 2005 ratio of net external liabilities to GDP of 65 percent.
- National accounts revision:
  - National accounts were revised, raising the level of output in 2000-05 by about 26 percent; real GDP growth rates were little affected (see Section II.E and Box 4).
  - The report uses the revised estimates throughout, unless otherwise indicated.

### Competitiveness and Structural Issues (Box 1 summary)

- Indicators point to significant erosion of cost and price competitiveness since EMU accession:
  - Real effective exchange rate appreciated by 20–30 percent on a ULC basis and by 10 percent on a CPI basis.
  - Export deflator rose by 10 percent, the highest among euro-area countries.
  - Staff estimates imply a real overvaluation of 12–22 percent (subject to high margins of error).
  - Greece scores low relative to other euro-area members on international competitiveness rankings.
- Export performance:
  - Greece has lost export market share; export growth in the past five years was the second weakest among euro area countries.

### Policy Recommendations Implementation Snapshot (text table summary)

- Fiscal Policy:
  - Previous recommendation: substantial deficit reduction in 2005-06; budget balance by 2010 and surplus after that; adjustment should be in current primary spending; tax administration and expenditure management need reform.
  - Implementation: deficit reduced by 4 percent of GDP in 2005-06; adjustment mainly on spending but shifted to revenue in 2006; authorities’ medium-term objective is budget balance or better by 2012; tax and expenditure reforms have begun.
- Pension Reform:
  - Previous recommendation: urgent reform; produce new cost estimates and intensify social dialog.
  - Implementation: cost estimates being produced somewhat slowly; commission established; reform measures await the next parliament.
- Financial Sector:
  - Previous recommendation: strengthen risk management to guard against vulnerabilities from very high credit growth and moves into new markets.
  - Implementation: supervisor tightened prudential measures, including to encourage improved risk management.
- Structural Reform:
  - Previous recommendation: product and labor market reforms.
  - Implementation: substantial progress on product market reform in several areas; less progress on labor markets.

### II. Policy Discussions — A. The Outlook

- Short-term outlook:
  - Staff projects real GDP will rise by 4.1 percent in 2006, slightly above staff estimate of potential (3.9 percent).
  - Indicators from the first half of 2006 suggest continued strength in private domestic demand.
  - For 2007, staff projects growth to ease to 3¾ percent, reflecting a mild slowing of consumption and investment from the 2006 rebound.
  - Inflation projected to ease somewhat as oil prices stabilize at levels lower than seen earlier in the year.
  - Current account deficit projected to remain at about 7½ percent of GDP in 2007.
  - Projection uncertainties for 2007 include robustness of consumption and investment and external factors (appreciation of the euro, slowdown in the United States).
- Medium-term outlook and risks:
  - Staff baseline projects gradual slowing of growth to somewhat below potential (about 3 percent) as consumers’ taste for increased debt wanes and lost competitiveness weighs on traded goods sector and weakens investment.
  - Inflationary pressures ease and current account deficit narrows, although adjustment is incomplete as competitiveness and export market share deteriorate somewhat further.
  - Persistent real exchange rate appreciation and unsustainable current account deficits raise the prospect of a sharper slowdown.
  - A pronounced slowdown scenario: growth of about ¾ percent a year for two years (Figure 4) — while unlikely — would raise the fiscal deficit and the debt-GDP ratio.
- Comparative context (Box 2 summary):
  - Comparison with Netherlands, Portugal, Ireland, Spain over the past decade:
    - All experienced demand pressures, strong credit growth, and higher credit-to-GDP ratios.
    - House prices rose strongly in Netherlands, Ireland, Spain; less so in Portugal and Greece.
    - All faced sustained inflation differentials, declining competitiveness, and deteriorating current accounts (Ireland began from a surplus).
    - Netherlands and Portugal experienced sharp downturns; Ireland and Spain continued strong growth (as has Greece).
  - Greece lacks some extreme preconditions of prior downturns (e.g., very high indebtedness or rapid house price increases), suggesting imbalances may unwind gradually per staff baseline.
- Authorities’ view:
  - Authorities shared concerns about competitiveness and the current account but were optimistic about medium-term growth, citing:
    - Room for productivity catch-up.
    - Resurgence in tourism.
    - Promising commercial prospects in southeastern Europe.
    - Robust investment supported by EU funds and structural reforms.
    - Pickup in export growth in 2005 and expected strong result in 2006.
  - Mission noted sustaining recent outperformance requires further structural reform; substantial erosion of competitiveness will take time to reverse, requiring strong productivity growth and considerable wage moderation.

### II. Policy Discussions — Restoring External Competitiveness (Box 3 summary)

- Restoring competitiveness requires cutting unit labor cost growth below corresponding growth in other euro area countries via wage moderation or higher productivity.
- Illustrative scenarios:
  - On staff baseline productivity assumptions, eliminating the estimated competitiveness gap:
    - Would take 5 years if nominal wages were frozen.
    - Would take 10 years if nominal wages grew at 2 percent a year.
  - Structural reforms could shorten the adjustment period:
    - A 1 percentage point increase in productivity growth plus a 0.3 percentage point decline in inflation (temporary while competition intensifies) would shorten time to close the competitiveness gap by 1½ years.
- Impact on current account:
  - Eliminating the competitiveness gap could, all else equal, reduce the current account deficit by about 3 percent of GDP.
  - Completing the adjustment in 5 years through exports alone would require nominal export growth of about 12 percent a year for 5 years, about 4¼ percentage points higher than in the staff baseline — suggesting some adjustment must come from lower demand.

### II. Policy Discussions — Other Major Themes (topics listed in source structure)

- Fiscal Policy (see Section II.B in source for detailed discussion).
- The Financial Sector (see Section II.C in source for detailed discussion).
- Structural Reform and Medium–Term Growth (see Section II.D in source for detailed discussion).
- Data Issues (national accounts revisions discussed in Section II.E and Box 4).

### III. Staff Appraisal

- The short-term outlook is strong, but medium-term sustainability depends on addressing vulnerabilities in competitiveness, the large current account deficit, and sustained high private-sector credit growth.
- Policy priorities highlighted by staff include:
  - Achieving a soft landing through an appropriately paced medium-term fiscal adjustment with emphasis on current primary spending restraint and improvements in tax administration and expenditure management.
  - Completing pension reform with timely cost estimates and social dialogue.
  - Strengthening financial sector risk management and supervision in light of high credit growth and expansion into new markets.
  - Advancing structural reforms, particularly in labor markets, to boost productivity and competitiveness.
  - Resolving data and national accounts issues following the recent revision of output levels.

*Source: Executive Summary of the IMF country report (content unit: _cr0726 - Executive Summary).*

### 6.      The authorities began cutting the deficit sharply in 2005. The deficit fell to

### 6. The authorities began cutting the deficit sharply in 2005.

### Fiscal adjustment in 2005–06: outcomes and composition
- The deficit fell to 4.2 percent of GDP in 2005, and the 2006 budget targets 2.1 percent of GDP (2.6 percent on the old national accounts basis).
- For 2005–06, the cumulative estimated deficit decline was 4 percent of GDP, composed of:
  - 2.4 percentage points from primary spending restraint (including 1.3 percentage points attributable to the end of the Olympics).
  - 0.9 percentage point from revenue increases.
- In 2006 the policy focus shifted toward revenue increases, reflecting:
  - progress in combating tax fraud,
  - a 1 percentage point increase in the VAT,
  - introduction in mid-2006 of higher excise taxes on tobacco and mobile phones.

### Medium-term fiscal objectives and staff recommendations
- Authorities’ announced intention: achieve budget balance or surplus by 2012.
- Fund staff recommendation: cyclically adjusted balance by 2010 and a surplus thereafter.
- Mission arguments for further deficit reduction:
  - Appropriately countercyclical in the short term.
  - Provide greater room for a fiscal cushion if the economy slows.
  - Foster a rapid reduction of public debt before costs of population aging mount around the middle of the next decade.

### 2007 budget and near-term stance
- The 2007 budget targets little deficit reduction: as a fraction of GDP, the general government deficit falls by only 0.2 percent of GDP, reflecting lower interest payments while both revenues and primary spending are little changed.
- Authorities’ view: front-loaded deficit cuts in 2005–06 justify easing the pace of consolidation in 2007.
- Temporary measures in the 2006 budget worth 0.3 percent of GDP will not be repeated in 2007; authorities view this non-repetition as implying a structural improvement of 0.5 percent of GDP.
- Mission view: welcome end of temporary measures and improved quality of adjustment, but argued a larger actual deficit cut was warranted for countercyclical and medium-term objectives.

### Tax policy changes and fiscal implications
- Corporate tax rate scheduled to fall to 25 percent (20 percent for smaller firms) in 2007.
- Personal income tax reform: increase basic exemption and reduce marginal tax rates except the top 40 percent rate for incomes over €75,000.
- Authorities judged revenue implications for 2007 to be very small because the reform is phased in.
- Mission recommendation: minimize revenue losses by reducing distortionary exemptions or compensate by further spending compression; simplification of the tax code would help improve tax administration.

### Tax administration and public expenditure management reforms under way
- Tax-side actions noted by authorities:
  - formation of a compliance improvement committee,
  - reform of auditing services,
  - strengthening of VAT operations,
  - stronger enforcement of arrears collection,
  - improvements in penalties and appeals process.
- Measures under consideration but not yet implemented:
  - regional tax directorates,
  - risk-based enforcement and auditing,
  - simplification of VAT returns,
  - adjustment of penalties to improve compliance.
- Expenditure-side actions:
  - new audit directorate to be established in the Ministry of Economics and Finance (MoEF); mission emphasized audits must examine whether programs meet objectives and spending is efficient.
  - initial steps on program-based budgeting (PBB): translating administratively based spending system into nine broad program categories.
  - Mission recommendation: develop PBB further to ensure categories are detailed enough to match policy objectives and introduce a medium-term budget framework to help set fiscal priorities (authorities had no immediate plans for a medium-term framework).

### Long-term fiscal pressures: pensions and health care
- Estimates (dating from 2000) imply pension and health-care costs will rise by some 10½ percent of GDP by 2050, among the largest increases in the EU.
- Concerns and institutional issues:
  - National Actuarial Authority (NAA) is understaffed, slowing preparation of new cost estimates.
  - New estimates to be used by a high-level “Analytis Commission” and by the ILO to provide a pension model.
  - Social dialog needed for reform had not advanced far; authorities planned no reforms before the next election but intended to step up enforcement of past reforms and reduce contribution evasion.
  - For health care, authorities are introducing better controls, especially over procurement, but mission cautioned on difficulty of containing costs while providing high-quality services.

### Financial sector—soundness, vulnerabilities, and supervisory responses
- Banking sector: solvency and liquidity satisfactory; stress tests by the Bank of Greece (BoG) indicate capital adequacy ratios would remain well above regulatory thresholds even if credit risks materialized.
- Profitability driven by rising lending volumes in Greece and southeastern Europe, wide margins, and some cost cutting.
- Vulnerabilities identified:
  - Rapid credit growth may overextend households; credit-GDP ratios still low by international standards.
  - Persistently high NPLs in the face of rapid loan growth suggest continued lending to poor risks.
  - Loan growth outstripping deposit growth leads banks to higher-cost market funding.
  - Increase in Greek banks’ vulnerability since late 1990s coincided with pickup in credit growth; banks with higher credit growth seem more vulnerable to economic slowdowns.
- Mission recommendations and BoG actions:
  - Heighten prudential measures: further increase provisioning and write-offs of NPLs to sharpen banks’ incentives to manage risk.
  - Intensify BoG monitoring of risks and urge banks to improve risk-management tools and practices.
  - BoG has intensified monitoring, studied debtor characteristics, introduced prudential measures to limit credit to highly indebted households and increase provisioning and write-offs of NPLs.
- Stress-test note: BoG examined retail credit risk and tested sensitivity by raising the probability of default by 30 percent.

### Other financial sectors
- Capital market, second pillar pension, and insurance sectors remain very small; insurance sector in weak financial condition.
- Insurance supervision historically weak; new independent insurance supervisor legislation passed in early 2004 and expected to be fully operational in early 2007 after several postponements.
- Mission urged a rapid but smooth transition to the new insurance supervisor to avoid disruption or gaps in supervision; meanwhile existing supervisor increased on-site inspections and closed some insurers.

### Structural reform and medium-term growth agenda
- Overarching authorities’ goal: enhance productivity and improve business climate.
- Key policy requirements: further reform of product and labor markets and continued infrastructure investment.
- Product market reforms implemented but incomplete:
  - simplified procedures for manufacturing startups and “one-stop shops”,
  - eased overtime regulations somewhat,
  - liberalization of network industries (telecoms, electricity, gas),
  - SOE reforms: changed work rules for newly hired employees and increased oversight of business plans,
  - ongoing privatization (including stakes in three banks and planned offering of telephone operator OTE),
  - overhaul of bankruptcy legislation nearing fruition,
  - plans to improve returns on public properties.
- Importance of tackling the unrecorded economy and corruption:
  - Despite statutory tax rates similar to other European countries, revenue-to-GDP ratio at about 34½ percent is relatively low, indicating an eroded tax base from avoidance and evasion.
  - 2005 reform of tax inspectorate and efforts to press on social security contribution evasion; culture of evasion seen as deeply rooted.
- Labor market progress limited:
  - No further reforms planned until after elections; measures to increase participation and lower unemployment key to sustaining growth and easing wage pressures.
  - Centralized collective bargaining (including minimum wages) yields relatively high minimum wages and compressed wage scale; mission argued for more decentralized bargaining and easing employment protection to encourage hiring.
- Infrastructure investment:
  - 2005 PPP law in operation; projects in bidding or planning stage.
  - PPPs to pass cost-benefit tests and be subject to full cost accounting and transparency.
  - Law covers only projects less than €200 million; larger projects to be examined by same MoEF staff before approval.
  - EU funds important for infrastructure financing; authorities plan to step up absorption under CSF3 and streamline CSF4 absorption. Authorities expect national accounts revisions to have very little effect under CSF4.

### Data issues and national accounts revisions
- At end-September 2006 the authorities announced large revisions to national accounts for 2000–05: GDP revised up by some 26 percent for 2000–05, sharply reducing many fiscal ratios and the current account deficit as ratios to GDP.
- Authorities stated new estimates are official and beginning in 2006 national accounts are no longer produced using the old methodology; figures for 2002–05 remain provisional because results of new surveys have not been fully incorporated.
- Public skepticism noted due to size of revision and timing; mission encouraged strengthening public credibility of the National Statistical Service of Greece (NSSG) and making the NSSG independent of the MoEF; authorities concurred and agreed revisions should be more timely, perhaps at five-year intervals.
- Box 4 (key numerical excerpts):
  - Level of GDP was revised up by about 26 percent (first major revision since ESA79 base year 1988 which had a 20 percent revision).
  - Bulk of the revision: 20.9 percentage points of the 25.7 percent revision in 2000 (new base year) are accounted for by bringing conformity with ESA95 and resolving Eurostat reservations.
  - Revision sources: 2001 general census, new surveys on retail and wholesale commerce, transport, hotels, dwellings, better use of administrative databases, new estimates of rents, capital stock, and capital consumption.
  - For 2000, census raised estimates of total employment by 10.4 percent.
  - Output revision concentrated in four branches: wholesale trade (16.4 percent), hotels and restaurants (15.4 percent), construction (11.1 percent), other business activities (10 percent).
  - Table excerpts (in billions of euros / percent of GDP as presented):
    - GDP at current prices (old vs new):
      - 2000 Old 124.4 New 156.5 Change 25.8
      - 2001 Old 133.1 New 168.0 Change 26.2
      - 2002 Old 143.5 New 181.0 Change 26.2
      - 2003 Old 155.5 New 196.6 Change 26.4
      - 2004 Old 168.4 New 212.7 Change 26.3
      - 2005 Old 181.1 New 228.2 Change 26.0
    - General Government Deficit (in percent of old GDP vs new GDP):
      - 2000 old -4.0 new -3.2
      - 2001 old -4.9 new -3.9
      - 2002 old -5.2 new -4.1
      - 2003 old -6.1 new -4.9
      - 2004 old -7.8 new -6.2
      - 2005 old -5.2 new -4.2
    - General Government Debt (in percent of old GDP vs new GDP):
      - 2000 old 113.3 new 90.1
      - 2001 old 114.1 new 90.4
      - 2002 old 110.7 new 87.8
      - 2003 old 107.8 new 85.3
      - 2004 old 108.5 new 85.9
      - 2005 old 107.5 new 85.3
    - Current Account Deficit (in percent of old GDP vs new GDP):
      - 2000 old -8.5 new -6.8
      - 2001 old -8.0 new -6.3
      - 2002 old -7.1 new -5.6
      - 2003 old -7.1 new -5.6
      - 2004 old -6.2 new -4.9
      - 2005 old -7.8 new -6.2
    - Unemployment Rate (old vs new):
      - 2000 Old 11.7 New 11.4
      - 2001 Old 11.2 New 10.8
      - 2002 Old 10.9 New 10.4
      - 2003 Old 10.4 New 9.7
      - 2004 Old 11.0 New 10.5
      - 2005 Old 10.4 New 9.9

*Source: IMF staff report content as provided.*

### 23.      Data have improved substantially in many areas and are adequate for

### 23.      Data have improved substantially in many areas and are adequate for surveillance.

### Data quality and statistics
- Noncentral government fiscal data, especially on pension funds, have improved considerably with the institution of a quarterly census of the relevant bodies.
- Apparently undetected arrears built up in the hospital sector, causing another (relatively small) fiscal restatement in 2005.
- The general government deficit was revised up by ¼ to ¾ percent of GDP for 2002−05, reflecting the new census on pension funds.
- The mission encouraged the authorities to:
  - publish financing-side fiscal data, and
  - properly seasonally adjusted quarterly national accounts data.
- Authorities reported that the project to improve the quarterly data is near completion and new series are due for publication in 2007.
- Urgent priorities include improvements to the quarterly national accounts and publication of full financing-side fiscal data.
- The recently announced revision to the national accounts points to the desirability of a policy of timely updates and suggests the need to strengthen the credibility of the national statistical office, particularly by granting it independent status.

### III. STAFF APPRAISAL — Recent performance and near-term outlook
- The economic boom of the past several years continued in 2006, and growth is likely to be strong in 2007 as well.
- Domestic demand is supported by low interest rates, rapid credit expansion, and rising employment.
- Two years of sharp fiscal consolidation are over; corporate tax cuts and structural reforms have begun to underpin activity.
- World oil prices have moderated, and Greece’s prospects in southeastern European markets seem favorable.
- The external sector remains a drag on growth, but goods exports have shown resilience despite several years of eroding cost competitiveness.
- Risks noted:
  - effects of euro appreciation, and
  - the possibility that the U.S. and world economies may slow more sharply than now expected.

### Medium-term outlook and adjustment needs
- Medium-term growth will probably slow gradually as imbalances that have built up during the boom unwind, but there is a risk of a sharper correction.
- The large current account reflects strong domestic demand and persistent wage and price inflation differentials with the euro area which have eroded competitiveness.
- Very high rates of credit growth observed in recent years are unsustainable in the medium term.
- An orderly transition requires:
  - less domestic demand growth,
  - more moderate wage increases—less than Greek productivity growth plus the euro-area inflation rate to reverse past competitive losses, and
  - further reform of product and labor markets to raise potential growth and reduce the need for slower domestic demand growth.

### Fiscal policy assessment and recommendations
- Fiscal consolidation has been the most urgent policy priority for the past three years; substantial deficit reductions in 2005–06 are commendable.
- The 2006 budget deficit target seems likely to have been attained on currently available information.
- Adjustment shifted toward reliance on revenues, including through some one-off measures and increases in some indirect taxes.
- A steady and cumulatively significant strengthening of the public finances is still needed, with the objective of achieving a cyclically adjusted budget balance in 2010 and a surplus after that.
- Further deficit cuts would:
  - help restrain domestic demand and ease cost pressures,
  - cushion the public finances in the event of an economic downturn, and
  - promote a rapid reduction of the public debt to help deal with the looming costs of population aging.
- Policy priorities:
  - focus on controlling current primary spending to preserve room for needed infrastructure investments and further tax cuts, and to maximize the probability that fiscal adjustment will prove durable.
- The 2007 budget offers little further consolidation; as a fraction of GDP, the general government deficit falls only slightly, reflecting mainly lower interest payments, and both revenues and primary spending are little changed.
- Any opportunity to cut the deficit more in the course of 2007 should be seized.
- The decision to end recourse to the temporary measures of 2006 is a welcome improvement to the quality of fiscal adjustment; looking forward, only durable measures should be used to meet deficit-reduction goals.

### Tax policy and administration
- Further tax reforms are welcome, but should not be allowed to jeopardize needed fiscal consolidation.
- The reduction of the corporate tax rate will improve the business climate.
- For personal income tax reform, the most significant benefits would flow from broadening the tax base by phasing out the long list of distortionary exemptions, which would improve economic efficiency, reduce the burden on taxpayers, and foster improvements in tax administration.
- Substantial reforms to tax administration and expenditure management are welcome and need to be pressed further.
- The full benefits of program-based budgeting will be reaped only when fully integrated into budget preparation and execution.
- The new directorate of fiscal audit should focus on evaluating programs against objectives and ensuring value for money.
- A medium-term budget framework should be developed to guide fiscal strategy and prioritize policy objectives.
- Tax evasion remains a particular problem; authorities’ initiatives to tackle this problem, which appear to have borne fruit in 2006, should be redoubled.

### Social security, aging, and healthcare
- Unless the social security system is fundamentally reformed, the long-term costs of population aging will threaten the sustainability of the public finances.
- The necessary task of estimating aging costs has proceeded slowly; the National Actuarial Authority should quickly be brought up to full strength and data provision by social security funds speeded up.
- It will be crucial for an early adoption of concrete measures and for all social partners to step up efforts to build momentum for reform.
- Welcome reforms are underway in the health-care sector, but the key challenge remains providing quality medical services while containing costs.

### Financial sector stability
- The banking system appears to be sound, but persistently high loan expansion and nonperforming loans raise vulnerabilities.
- Households may become overextended and asset quality degraded as credit continues to grow at very high rates.
- The persistence of high NPL ratios indicates that banks may need to refine their risk management practices further.
- The proactive approach of the Bank of Greece (BoG) is commendable.
- Recommended supervisory actions:
  - continue to carefully supervise banks’ risk management practices,
  - intensify monitoring of risks,
  - strengthen banks’ incentives to contain risks, including by ensuring sufficient provisioning and further writeoffs of NPLs.
- With the increasing presence of Greek banks in southeastern Europe, the BoG needs to maintain close relations with other supervisors in the region.
- Regarding the insurance sector, the new supervisor should be made fully operational and care taken to ensure a smooth transition as it takes up its duties.

### Competitiveness, product and labor market reform, and public administration
- Strengthening international competitiveness will require further reforms to product and labor markets, and public administration.
- Greece still lags on many indicators of competitiveness.
- Product market reform should be extended by:
  - extending simplified business licensing procedures to all sectors,
  - hastening liberalization of network industries, and
  - redoubling efforts to combat corruption and widespread tax evasion.
- Further labor market initiatives include relaxation of strong employment protection legislation and decentralization of the bargaining system.

### State-owned enterprises and privatization
- Recent moves to improve the performance of state-owned enterprises (SOEs) are welcome.
- As a group, SOEs remain relatively inefficient and, by registering commercial losses, are a cost to the budget.
- Recommendations:
  - strengthen and hold SOE management accountable for performance,
  - follow up carefully on newly submitted business plans,
  - continue further privatizations, including privatizing SOEs that have been put on a commercial footing.
- Recent privatizations included the sale of stakes in the telephone operator OTE and three banks.

### Public-private partnerships (PPPs)
- The new PPP law provides a framework for financing infrastructure investment.
- Although projects are just beginning to be put in place under the new law, the intention to:
  - subject projects considered for PPP financing to cost-benefit tests, and
  - integrate them into the wider public investment strategy,
  is welcome.
- A full accounting for the costs, including future budgetary obligations, should be presented in a transparent way alongside the budget.

*IMF staff appraisal text as provided.*

### 37.      It is recommended that the next Article IV consultation take place on the normal 12-

### _cr0726 - 37.      It is recommended that the next Article IV consultation take place on the normal 12-

### Recommendation
- It is recommended that the next Article IV consultation take place on the normal 12-month cycle.

### Key macroeconomic findings (selected)
- Real GDP growth (selected annual/period values and comparisons):
  - Greece: GDP growth figures reported in tables and figures include annual series and projections (examples shown): 4.7, 3.7, 4.1, 3.8, 3.5, 3.0, 2.8, 2.8 (2004–2011 sequence in Table 4).
  - Real GDP Growth: 1998–2006 charts show Greece among the highest in the EU for 2006 (charts compare Greece to Euro Area and individual countries).
- Output gap:
  - Reported output gap values include 2.4, 2.3, 2.5, 2.4, 2.1, 1.4, 0.6, 0.0 (2004–2011 sequence in Table 4).
- Domestic demand and components (selected projections):
  - Domestic demand: 4.6, 2.4, 4.7, 4.0, 3.4, 2.8, 2.6, 2.6 (2004–2011).
  - Private consumption: 4.6, 3.7, 3.9, 3.4, 2.8, 2.8, 2.6, 2.6 (2004–2011).
  - Gross fixed capital formation: 5.8, 0.2, 8.2, 7.0, 5.7, 3.3, 2.7, 2.5 (2004–2011).

### Inflation and labor costs
- Consumer prices (HICP), period average and end of period:
  - Period average (selected): 3.0, 3.5, 3.3, 3.2, 3.2, 3.0, 2.7, 2.5 (2004–2011).
  - End of period: 3.1, 3.5, 3.3, 3.2, 3.2, 3.0, 2.7, 2.5 (2004–2011).
- Unit labor costs (economy wide): 3.2, 3.3, 3.0, 3.0, 3.0, 3.0, 3.0, 3.0 (2004–2011).

### Labor market
- Unemployment rate (selected series and projections):
  - Unemployment rate (Table 4 projections): 10.5, 9.9, 9.0, 8.8, 8.6, 9.0, 9.3, 9.5 (2004–2011).
  - Labor market charts (Figure 2) indicate: Unemployment remains high; employment growth has weakened relative to Euro Area.
- Employment growth (selected): 0.9, 1.3, 1.9, 1.1, 1.1, 0.5, 0.6, 0.6 (2004–2011).

### External sector and balance of payments
- Current account (national accounts; settlements basis), percent of GDP:
  - -4.9, -6.2, -7.5, -7.4, -6.9, -6.3, -5.9, -5.4 (2004–2011 Table 4).
- Exports and imports of goods and services (percent of GDP, projections):
  - Exports of goods and services: 18.5, 18.3, 18.3, 18.5, 18.7, 19.1, 19.5, 19.9 (2004–2011).
  - Imports of goods and services: 23.2, 23.5, 24.4, 24.6, 24.4, 24.3, 24.2, 24.3 (2004–2011).
- Balance on goods and services and income:
  - Balance on goods and services (percent of GDP): -5.7, -4.7, -5.2, -6.1, -6.1, -5.7, -5.2, -4.8, -4.4 (Table 5 memo).
  - Income balance (percent of GDP): -1.9, -1.9, -2.4, -2.7, -2.5, -2.3, -2.2, -2.1, -2.0 (Table 5 memo).

### Fiscal position (general government, selected)
- Overall balance (percent of GDP), historical and projections:
  - Historical and baseline scenarios show overall balance series including: -3.9, -4.1, -4.9, -6.2, -4.2, -2.2, -2.0 (Table 1 and Table 2 sequences).
  - Medium-term baseline (Table 4 / Table 6 projections): -6.2, -4.2, -2.2, -2.0, -1.9, -1.8, -1.6, -1.4 (2004–2011).
- Primary balance (percent of GDP):
  - Table 2 baseline: 1.8, 0.6, -0.5, -1.8, -0.3, 1.5, 1.5, 1.6 (2001–2008 snapshot).
  - Table 6 projections: Primary balance: 0.6, -0.5, -1.8, -0.3, 1.5, 1.9, 2.4, 2.9, 3.3, 3.6, 4.0 (2002–2012 sequence).
- Revenues and expenditures (percent of GDP, selected):
  - Total revenues: 33.7, 33.4, 34.6, 34.7, 34.6, 34.8, 35.1, 35.5 (2004–2011 Table 4).
  - Total expenditures: 39.9, 37.6, 36.8, 36.6, 36.5, 36.6, 36.7, 36.9 (2004–2011 Table 4).
  - Interest expenditures: 4.3, 3.9, 3.7, 3.5, 3.4, 3.4, 3.4, 3.3 (2004–2011 Table 4).
- Structural balances:
  - Structural primary balance and structural overall balance figures reported (examples): Structural primary balance: 1.6, 0.5, -1.1, -2.6, -1.1, ... , 0.6, ... , 0.7 (Table 2 excerpts).
  - Structural overall balance: -4.0, -4.3, -5.4, -7.0, -4.9, ... , -3.1, ... , -2.8 (Table 2 excerpts).

### Public debt and sustainability analysis
- Gross debt (percent of GDP; historical and projections):
  - Memorandum items: Gross debt: 90, 88, 85, 86, 85, 83, 83, 80, 80 (Table 2 sequence).
  - Medium-term projections: Gross debt: 86, 85, 83, 80, 78, 76, 74, 72 (2004–2011 Table 4).
- Public debt sustainability (Figure 4 bound tests and scenarios):
  - Baseline and scenario boxes show baseline: 1.7, scenario: 4.1, historical: 3.2 (figures in boxes refer to average projections for variables in baseline and scenario).
  - Growth shock: scenario assumes real GDP growth drops to 0.7 percent in 2007 and recovers to 2.8 percent by 2011.
  - Combined shock and interest-rate/primary-balance shocks illustrated; a real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2007 in one scenario.

### Credit and financial sector indicators
- Domestic credit growth (year-on-year percent change): charts show large credit expansion 1998–2006 with total credit and loans to enterprises & households increasing substantially (figures in charts).
- Private sector credit growth and composition (selected series):
  - Private domestic credit (percent of GDP) and private sector credit growth series illustrate rising credit-to-GDP ratios and strong housing and consumer lending growth.
- Banking sector prudential and performance indicators (selected):
  - Regulatory capital to risk-weighted assets (1998–2006): 10.2, 16.2, 13.6, 12.4, 10.5, 12.0, 12.8, 13.2, 12.3.
  - Regulatory Tier I capital to risk-weighted assets: 9.7, 15.3, 13.5, 10.9, 8.8, 9.8, 10.0, 10.9, 10.3.
  - Nonperforming loans net of provisions to capital: 29.3, 24.1, 23.2, 17.4, 18.7, 16.1, 16.3, 18.0, 19.1.
  - Nonperforming loans to total gross loans: 8.7, 11.2, 7.2, 5.6, 5.5, 5.1, 5.4, 5.5, 5.5.
  - Sectoral lending shares (selected): Non-financial corporations: 75.0, 72.2, 70.5, 65.7, 60.4, 57.7, 54.4, 50.4, 49.5; Lending for house purchase: 17.0, 18.8, 18.8, 21.0, 24.3, 26.1, 27.6, 31.4, 32.0.
  - Return on assets (after taxes): 0.7, 2.4, 1.4, 1.0, 0.5, 0.6, 0.3, 0.9, 1.2.
  - Return on equity (after taxes): 13.7, 28.6, 15.4, 12.4, 6.8, 8.9, 5.6, 16.2, 21.7.
  - Liquid assets to total assets: 55.2, 50.3, 46.4, 41.1, 39.5, 37.0, 33.4, 34.0, 34.2.

### Medium-term baseline and policy (summaries)
- Medium–Term Baseline Scenario (2004–11, Table 4 highlights):
  - Real GDP growth: 4.7, 3.7, 4.1, 3.8, 3.5, 3.0, 2.8, 2.8 (2004–2011).
  - Current account (percent of GDP): -4.9, -6.2, -7.5, -7.4, -6.9, -6.3, -5.9, -5.4 (2004–2011).
  - Gross debt trajectory: 86, 85, 83, 80, 78, 76, 74, 72 (2004–2011).
- Medium–Term Staff Policy (Adjustment) Scenario (2002–12, Table 6 highlights):
  - Total revenues and expenditures and primary and overall balance trajectories are presented showing gradual fiscal improvement under the adjustment scenario, with overall balance moving from negative territory toward surplus by 2011–12 in staff projections (overall balance projection sequence includes -1.6, -1.0, -0.5, 0.0, 0.5, 1.0 in the 2007–2012 horizon in Table 6).

### Doing Business and structural indicators (selected)
- Doing Business—Selected Indicators, 2005 (Table 3):
  - Starting a Business: Number of procedures 15.0; Time (days) 38.0; Cost (% of income per capita) 24.6.
  - Licenses and Permits: Number of procedures 17.0; Time (days) 176.0; Cost (% of income per capita) 71.9.
  - Closing a Business: Time (years) 2.0; Cost (% of estate) 9.0.
  - Labor indices (2005): Difficulty of Hiring Index 78.0; Rigidity of Hours Index 80.0; Difficulty of Firing Index 40.0; Rigidity of Employment Index 66.0; Firing costs (weeks of wages) 68.8.

### Policy implications and scenarios illustrated
- Charts and tables present scenario analyses including:
  - Growth shock: scenario where real GDP growth drops to 0.7 percent in 2007 and recovers to 2.8 percent by 2011.
  - Interest-rate shock and primary balance shock scenarios and combined shocks (including one-time real depreciation of 30 percent and a 10 percent of GDP contingent liabilities shock in 2007) are illustrated in public debt sustainability bound tests (Figure 4).
- Fiscal policy trajectories and adjustment scenarios show avenues to improve primary balances and reduce gross debt ratios over the medium term under staff adjustment assumptions.

*Source: IMF staff tables, figures, and text as contained in the provided content unit.*

### 5.6 for June 2006.7/ 2006 figures refer to July 2006 and to all banks on a non-consolidated basis (i.e. commercial, coop

### Table 7. The Core Set of Financial Soundness Indicators for Deposit Taking Institutions (1998−June 2006 unless otherwise indicated)

### Corporate Sector
- Total debt to equity 2/: 33.7, 18.8, 38.3, 58.9, 84.0, 77.0, 73.0, 61.6, 62.2
- Return on equity 3/: ... ... ... ... 13.8, 14.2, 12.7, 14.6, ...
- Number of applications for protection from creditors 4/ 5/: 2228, 2029, 1788, 1463, 1458, 1545, 2141, 2036, 827
- Footnotes:
  - 1/ June 2006 figures refer to Greek quoted banks unless otherwise indicated.
  - 2/ For 2006 Q1 figures only. Figures refer to all banks on a non-consolidated basis (i.e. commercial, cooperative and foreign branches).
  - 3/ 2006 figures refer to July 2006 and to all banks on a non-consolidated basis (i.e. commercial, cooperative and foreign branches).
  - 4/ Other indicators of corporate distress would include spreads on corporate bonds, credit rating upgrades/downgrades, and delayed payments on loans or bonds.
  - 5/ The figure for 2006 refers to May 2006.

### Deposit-taking institutions
- Capital to assets 7/: 6.5, 10.6, 9.2, 8.5, 6.9, 6.9, 5.0, 5.8, 5.2
- Geo graphical distribution of loans to total loans (enterprises and households) 3/ 8/:
  - Domestic 32/: 95.3, 90.8, 93.9, 94.7, 95.6, 96.3, 96.6, 96.8, 96.9
  - Other euro area countries 3/: 0.2, 0.2, 0.2, 0.2, 0.2, 0.1, 0.1, 0.1, 0.1
  - Non-euro area countries 3/: 4.4, 9.1, 5.9, 5.1, 4.2, 3.5, 3.2, 3.1, 3.0
- Large exposures to capital 8/: .. . ... ... ... 154.1, 190.8, 123.7, 144.5, 145.5
- Trading income to total income 7/ 9/: 14.8, 27.5, 17.3, 13.1, 4.9, 4.6, 3.2, 1.6, 4.2
- Personnel expenses to noninterest expenses 7/: 66.8, 63.6, 61.8, 59.8, 59.0, 58.2, 59.6, 60.3, 61.6
- Spread between reference lending and deposit rates 3/: 9.0, 6.7, 6.3, 6.1, 6.1, 5.8, 5.9, 6.0, 6.1
- Customer deposits to total (non-interbank) loans 3/: 191.1, 190.8, 176.3, 166.0, 147.4, 135.3, 130.6, 127.5, 124.2
- Foreign currency-denominated liabilities to total liabilities 3/: 34.5, 25.7, 24.5, 16.6, 12.8, 13.2, 12.9, 12.5, 12.5
- Net open position in equities in capital 10/: ... ... ... 21.5, 12.9, 10.4, 5.8, 3.4, 4.6
- Footnotes:
  - 6/ These may be grouped in different categories based on ownership, business lines, or group structure.
  - 7/ Data on a non-consolidated basis. From 2004 in accordance with IFRS.
  - 8/ May want to include indicators of connected lending such as the proportion of loans to controlling shareholders.
  - 9/ If available, a breakdown of such income into fees from off-balance sheet activities might indicate the importance of such activities.
  - 10/ Data on a consolidated basis.

### Market liquidity
- Average bid-ask spread in the securities market 11/: 45.5, 23.7, 14.0, 9.8, 9.4, 8.2, 6.1, 7.9, 7.8
- Average daily turnover ratio in the securities market 11/ 12/: ... ... 0.1, 0.2, 0.2, 0.1, 0.2, 0.1, 0.1
- Footnotes:
  - 11/ Or in other markets that are most relevant to bank liquidity, such as foreign exchange markets.
  - 12/ Figures refer to volumes of securities traded and not numbers.

### Other financial corporations
- Assets to total financial system assets 2/: 106.7, 124.9, 114.3, 112.9, 105.7, 105.7, 103.9, 111.0, 113.9
- Assets to GDP 2/: 32.2, 54.4, 39.1, 34.3, 28.8, 30.9, 30.4, 28.9, 28.4

### Households
- Household debt to GDP 2/ 3/: 9.1, 10.7, 13.6, 18.1, 22.3, 26.5, 32.0, 38.4, 41.0

### Real estate markets
- Residential real estate loans to total loans 3/ 13/: 8.2, 9.0, 10.2, 13.2, 16.7, 18.2, 20.7, 22.9, 23.8
- Footnote:
  - 13/ Revised series. Interbank loans are included.

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### Table 8. Greece: The Encouraged Set of Financial Soundness Indicators (1998−June 2006 unless otherwise indicated)

### Institutional counts and categories (1998–2006)
- NumberBanks (1998–2006): 23, 20, 19, 23, 24, 22, 21, 21, 22
- Private commercial: 12, 10, 8, 12, 12, 12, 13, 13, 13
- State-owned: 8, 7, 7, 7, 7, 6, 3, 3, 3
- Foreign-owned subsidiaries: 3, 3, 4, 4, 5, 4, 5, 5, 6
- Branches of foreign banks: 23, 22, 22, 21, 21, 20, 23, 23, 23
- Securities companies: 65, 75, 90, 88, 103, 98, 75, 65, 62
- Life insurance companies 2/: 22, 21, 20, 18, 18, 19, ...
- General insurance companies 2/: 104, 93, 90, 89, 84, 81, ...
- Other credit institutions: 14, 15, 16, 17, 17, 17, 18, 18, 17
- ConcentrationBanks 3/: 9, 7, 7, 7, 7, 7, 7, 7, 7
- Footnotes:
  - 1/ 2006 figures refer to July 2006 unless otherwise indicated.
  - 2/ All insurance companies. 2006 figures refer to Q1 2006.
  - 3/ Number of institutions with 75 percent of total assets (of all credit institutions operating in Greece, i.e. banks, branches of foreign banks and other credit institutions).
  - 4/ Euro billion.

### Shares of assets and deposits by institution type (Assets 4/Banks; Deposits 4/Banks)
- Assets 4/Banks (1998–2006): 100.2, 124.9, 145.7, 158.7, 165.5, 174.0, 186.6, 228.6, 254.6
  - Private commercial: 26.1, 41.8, 43.2, 44.8, 46.7, 52.4, 115.6, 134.7, 145.4
  - State-owned: 69.6, 74.4, 84.4, 92.6, 92.1, 91.5, 40.7, 44.2, 35.7
  - Foreign-owned subsidiaries: 4.5, 8.7, 18.1, 21.3, 26.8, 30.1, 30.4, 49.7, 73.6
  - Branches of foreign banks: 16.4, 17.9, 22.3, 17.8, 17.4, 19.2, 23.0, 28.5, 31.2
  - General insurance companies: 5.0, 7.2, 7.8, 7.9, 8.4, 9.6, ..., 15.5, 17.7
  - Other credit institutions: 12.1, 12.7, 13.6, 15.2, 16.6, 17.7, 20.7, 24.3, 13.2
- Deposits 4/Banks (1998–2006): 76.0, 82.7, 89.9, 98.6, 102.9, 112.4, 125.8, 151.3, 169.6
  - Private commercial: 18.4, 25.4, 23.6, 25.9, 26.9, 30.8, 69.5, 86.9, 93.1
  - State-owned: 54.5, 53.4, 55.9, 59.0, 59.9, 63.2, 31.3, 34.0, 29.7
  - Foreign-owned subsidiaries: 3.1, 3.9, 10.3, 13.6, 16.1, 18.4, 25.0, 30.4, 46.8
  - Branches of foreign banks: 8.2, 7.5, 8.5, 8.9, 8.9, 9.5, 12.7, 16.9, 18.3

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### Table 9. Greece: Financial System Structure (1998−July 2006)
- Note: Euro billion units for assets and deposits as indicated in Table 8 footnotes.

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### Table 10. Greece: Indicators of External and Financial Vulnerability, 2001–06 (In percent of GDP, unless otherwise indicated)

### External indicators (2001–2006; latest dates shown where provided)
- Exports of goods (annual percent change, in U.S. dollars): -0.5, -4.7, 27.5, 25.2, 12.5, 21.0 (Sep-06)
- Imports of goods (annual percent change, in U.S. dollars): -4.0, 5.4, 22.0, 24.1, 9.8, 21.4 (Sep-06)
- Terms of trade (annual percent change): -0.3, 1.7, 6.3, 4.9, -6.3, 0.9, ...
- Current account balance (settlements basis): -6.3, -5.6, -5.6, -4.9, -6.2, -2.7 (Sep-06)
- Capital and financial account balance: 1.8, 7.7, 3.5, 3.7, 6.4, ...
  - Inward portfolio investment (debt securities etc.): 6.0, 7.2, 10.6, 11.8, 11.4, ...
  - Inward foreign direct investment and other investments: -3.9, 5.2, -1.1, -0.6, 5.9, ...
- Official reserves (in U.S. dollars, millions, end of period): 5,154, 8,083, 4,361, 1,191, 506, 703 (Sep-06)
- Official reserves in months of imports GS: 1.5, 2.4, 1.1, 0.2, 0.1, -0.04 (Sep-06)
- Net international investment position: -38.4, -42.2, -46.9, -58.3, -64.9, -69.8 (Mar-06)
- External central government debt: 5.1, 2.6, 1.7, 1.2, 1.2, 1.1, ...
- External interest payments to exports GS (in percent): 10.4, 9.7, 16.0, 14.5, 16.4, 23.4 (Jun-06)
- Exchange rate (per U.S. dollar, period average): 1.1, 1.1, 0.9, 0.8, 0.8, 0.8 (Oct-06)

### Financial market indicators and risk factors (2001–2006; latest dates shown where provided)
- Public sector debt (Maastricht definition): 114.7, 111.6, 108.8, 109.3, 108.7, ...
- Greek contribution to euro area M3 excluding currency in circulation (percent change, 12-month basis): 8.3, -2.1, 5.2, 8.2, 7.3, 10.3 (Sep-06)
- Private sector credit (percent change, 12-month basis): 24.8, 16.9, 17.0, 19.5, 21.8, 22.3 (Sep-06)
- 12-month T-bill yield: 4.1, 3.5, 2.3, 2.3, 2.3, 3.8 (Oct-06)
- 12-month T-bill yield (real): 0.4, -0.4, -1.1, -0.8, -1.2, 0.5 (Oct-06)
- Stock market index: 2,592, 1,748, 2,264, 2,786, 3,664, 4,129 (Oct-06)
- Share prices of financial institutions: 4,788, 2,688, 4,247, 6,129, 7,904, 6,002 (Oct-06)
- Spread of 12-month treasury bill rate with Germany (percentage points, end of period): 0.4, 0.5, 0.4, 0.3, 0.3, 0.5 (Oct-06)
- Spread of 10-year bond with Germany (percentage points, end of period): 0.6, 0.5, 0.5, 0.5, 0.4, 0.3 (Oct-06)

### Financial sector risk factors and bank indicators (latest data shown)
- Foreign exchange loans to the private sector (in millions of U.S. dollars): 6,542, 6,054, 6,252, 6,528, 8,356, 9,371 (Sep-06)
- Share of foreign exchange loans in total lending to the private sector: 9.9, 7.4, 5.5, 4.5, 4.9, 4.8 (Sep-06)
- Deposits in foreign exchange (in millions of U.S. dollars): 19,905, 16,026, 19,899, 22,621, 26,191, 27,288 (Sep-06)
- Share of foreign deposits in total deposits: 21.8, 16.3, 15.2, 14.2, 13.4, 13.0 (Sep-06)
- Share of mortgages in private credit: 21.1, 24.5, 26.2, 28.3, 31.5, 32.1 (Sep-06)
- Commercial banks' return on assets (after tax): 1.0, 0.5, 0.6, 0.3, 0.9, 1.2 (Jun-06)
- Interest rate margin to gross income: 62.8, 72.5, 73.9, 76.3, 75.3, 71.1 (Jun-06)
- Share of nonperforming loans in total loans 2/: 5.6, 5.5, 5.1, 5.4, 5.5, 5.5 (Jun-06)
- Regulatory capital to risk-weighted assets: 12.4, 10.5, 12.0, 12.8, 13.2, 12.3 (Jun-06)

- Sources: Bank of Greece, Monthly Statistical Bulletin; data provided by the authorities; and IMF, International Financial Statistics.
- Footnote:
  - 2/ This figure does not include ATEbank and rescheduled loans. If rescheduled loans were included, then the relevant ratios would become 5.6 for 2005 and 5.6 for June 2006.

*Source: Excerpt from IMF staff report tables (1998–July 2006 figures as indicated).*

### APPENDIX I. GREECE: FUND RELATIONS

### APPENDIX I. GREECE: FUND RELATIONS

### Mission and Outreach
- Mission: October 9–20, 2006.
- Team: Mr. Ford (head), Ms. Moreno Badia, Messrs. Gagales and Rossi (all EUR).
- Meetings: Ministry of Economy and Finance, Bank of Greece, other government ministries and agencies, trade unions, industrialists, and banks.
- Outreach: The mission met with trade unions and industrialists. The concluding statement was published and a press conference held at the end of the mission.

### Membership and Fund Accounts
- Membership status: Joined December 27, 1945; Article VIII.
- Quota and holdings:
  - Quota: 823.00 SDR Million (100.00 percent of quota).
  - Fund holdings of currency: 737.89 SDR Million (89.66 percent of quota).
  - Reserve position in Fund: 85.16 SDR Million (10.35 percent of quota).
- SDR Department:
  - Net cumulative allocation: 103.54 SDR Million (100.00 percent allocation).
  - Holdings: 19.84 SDR Million (19.16 percent of allocation).
- Outstanding Purchases and Loans: None.
- Financial Arrangements: None.
- Implementation of HIPC Initiative: Not Applicable.
- Resident Representative: None.

### Projected Obligations to Fund
- Forthcoming charges/interest and principal (SDR million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 0.81, 3.39, 3.40, 3.39, 3.39 (for 2006, 2007, 2008, 2009, 2010 respectively).
  - Total: 0.81, 3.39, 3.40, 3.39, 3.39 (for 2006–2010).

### 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 were last notified in accordance with Decision 144.

### Article IV Consultation Cycle
- Greece is on a 12-month consultation cycle; the last Article IV consultation discussions were concluded on December 14, 2005.
- Executive Board concluded the 2006 Article IV Consultation with Greece on January 22, 2007 (Public Information Notice No. 07/10).

### Executive Board Assessment — Key Findings and Projections
- Near-term performance:
  - 2006 real GDP rose by an estimated 4.1 percent, driven by private domestic demand and a pick up in goods exports.
  - Fiscal deficit fell sharply to under 3 percent of GDP in 2006 (staff estimates: general government deficit 2.2 percent of GDP in 2006; 2.8 percent and 104.9 percent on the old national account estimates).
- Risks and vulnerabilities:
  - Rapid private sector credit growth following financial liberalization and euro adoption.
  - Continued inflationary pressures and a gradual erosion of competitiveness.
  - Large current account deficits.
  - Labor markets performing poorly by international standards despite falling unemployment.
- Banking sector:
  - Appears sound with high profitability and strong capital and liquidity positions.
  - Concerns: continued strong credit expansion, potential household overextension, persistently high non-performing loans ratios.
  - Bank of Greece actions: stepped-up monitoring of lending standards, strengthened provisioning requirements, prudential measures to limit credit to highly indebted households.
- Growth outlook:
  - Staff projects gradual slowing of growth: growth remains above euro-area average but faces downside risks from exchange rate appreciation and large current account deficits.
- Fiscal outcomes and projections:
  - 2006: general government balance reduced to 2.2 percent of GDP (staff estimate).
  - 2007 budget targets a small deficit reduction of 0.2 percent of GDP (reflecting lower interest payments; both revenues and primary spending little changed).
  - Directors urged opportunities to achieve a larger deficit cut than currently budgeted and recommended moving toward a medium-term budget surplus.
  - Some Directors favored balancing the budget by 2012 and moving to a surplus after that; several others recommended balancing the budget by 2010.
- Structural reform priorities:
  - Further product and labor market reforms to sustain medium-term growth and competitiveness.
  - Extend simplified business licensing procedures to all sectors, accelerate liberalization of network industries, combat corruption and tax evasion.
  - Labor market: relax strong employment protection legislation and decentralize the bargaining system.
  - State-owned enterprises: improve governance, reduce losses, pave way for privatization.
  - Public-private partnerships: useful for infrastructure if full and transparent cost accounting is ensured.
- Statistical improvements urged:
  - Improve quarterly national accounts and publish full financing-side fiscal data.
  - More timely updates of national accounts.
  - Grant formal independence to the national statistical office to strengthen credibility.

### Executive Directors' Policy Recommendations (summarized)
- Fiscal policy:
  - Pursue medium-term consolidation focused on primary spending.
  - Combat tax evasion; strengthen tax administration.
  - Integrate program-based budgeting into budget preparation and execution.
  - Use fiscal audits and develop a medium-term budget framework.
  - Accelerate pension reform and prepare revised estimates of aging costs; ensure early implementation.
  - Health-care reform to contain costs while providing quality services.
- Financial sector supervision:
  - Continue supervision of banks’ risk management and assets; strengthen incentives to contain risks (provisioning and write-offs).
  - Ensure rapid establishment of a fully operational independent insurance supervisor.
  - Enhance cooperation with regional supervisors given Greek banks’ presence in southeastern Europe.
- Structural reforms:
  - Continue product market liberalization and improve governance of state-owned enterprises.
  - Ensure transparency and full cost accounting for PPPs.
- Statistics:
  - Strengthen economic statistics, especially quarterly national accounts and financing-side fiscal data; consider independence for the statistical office.

### Statistical Issues and Technical Assistance
- Statistical status:
  - Economic data adequate for surveillance but should be strengthened.
  - Greece subscribed to the Special Data Dissemination Standard (SDDS) on November 8, 2002.
  - National accounts revised substantially to comply with ESA95; new benchmark year 2000.
  - Data for 2002–2005 still provisional; NSSG to incorporate new surveys and produce estimates for 1995–1999.
  - Seasonal adjustment of quarterly national accounts relies on indicator series; NSGG plans to introduce properly seasonally adjusted quarterly national accounts in 2007.
  - Balance of payments data present some departures from BPM5; progress made since 2003 ROSC but significant differences remain relative to national-accounts-based current account data.
  - General government revenue, expenditure, and deficit compiled on an accrual basis; absence of financing data impedes consistency checks and reconciliation with debt and other macro datasets.
  - Labor market interpretation hampered by immigrant coverage and size of unrecorded economy.
  - Under the Coordinated Compilation Exercise for Financial Soundness Indicators, authorities produced indicators broadly consistent with the Fund's FSI Compilation Guide.
- Technical assistance (selected entries):
  - 1993 FAD: Treasury Reform, June 1993.
  - 1993 MAE: Central Bank Independence in the Context of the Maastricht Treaty, June 1993.
  - 1994 MAE: Development of Primary and Secondary Markets in Government Securities, September 1994.
  - 2002 STA: Action plan and time frame for SDDS subscription, June 2002.
  - 2003 FAD: Tax Policy and Tax Administration Reform, July 2003.
  - 2005 FAD: Public Expenditure Management, May 2005.
  - 2005 FAD: Tax Administration, July 2005.
  - 2005 FAD: Fiscal Transparency, July 2005.

### Selected Economic Indicators and Key Statistics (2002–07, as presented)
- Real economy (change in percent):
  - Real GDP: 2002: 3.9; 2003: 4.9; 2004: 4.7; 2005: 3.7; 2006: 4.1; 2007 Proj.: 3.8.
  - Final domestic demand: 2002: 4.5; 2003: 5.4; 2004: 4.6; 2005: 2.4; 2006: 4.7; 2007 Proj.: 4.0.
  - Private consumption: 2002: 3.8; 2003: 4.2; 2004: 4.6; 2005: 3.7; 2006: 3.9; 2007 Proj.: 3.4.
  - Public consumption: 2002: 6.5; 2003: -1.3; 2004: 2.5; 2005: -0.5; 2006: 2.1; 2007 Proj.: 1.7.
  - Gross fixed capital formation: 2002: 5.6; 2003: 13.3; 2004: 5.8; 2005: 0.2; 2006: 8.2; 2007 Proj.: 7.0.
  - Foreign balance (contribution): 2002: -1.0; 2003: -0.7; 2004: -0.3; 2005: 1.3; 2006: -0.9; 2007 Proj.: -0.6.
  - Unemployment rate (in percent): 2002: 10.3; 2003: 9.7; 2004: 10.5; 2005: 9.9; 2006: 9.0; 2007 Proj.: 8.8.
  - Employment: 2002: 2.2; 2003: 2.4; 2004: 0.9; 2005: 1.3; 2006: 1.9; 2007 Proj.: 1.1.
  - Unit labor costs (economy wide): 2002: 3.0; 2003: 2.4; 2004: 3.2; 2005: 3.3; 2006: 3.0; 2007 Proj.: 3.0.
  - GDP deflator: 2002: 3.7; 2003: 3.6; 2004: 3.3; 2005: 3.4; 2006: 3.4; 2007 Proj.: 3.3.
  - HICP (year average): 2002: 3.9; 2003: 3.4; 2004: 3.0; 2005: 3.5; 2006: 3.3; 2007 Proj.: 3.2.
- Public finance (percent of GDP):
  - General government balance: 2002: -4.1; 2003: -4.9; 2004: -6.2; 2005: -4.2; 2006: -2.2; 2007 Proj.: -2.0.
  - General government primary balance: 2002: 0.6; 2003: -0.5; 2004: -1.8; 2005: -0.3; 2006: 1.5; 2007 Proj.: 1.5.
  - General government structural balance: 2002: -4.3; 2003: -5.4; 2004: -7.0; 2005: -4.9; 2006: -3.1; 2007 Proj.: -2.8.
  - General government gross debt: 2002: 88; 2003: 85; 2004: 86; 2005: 85; 2006: 83; 2007 Proj.: 80.
- Money and credit:
  - Domestic credit (end of year, percent change): 2002: 8.5; 2003: 3.0; 2004: 10.3; 2005: 17.0; 2006: 15.7; 2007 Proj.: ...
- Interest rates:
  - Deposit rate: 2002: 2.8; 2003: 2.5; 2004: 2.3; 2005: 2.2; 2006: 2.6; 2007 Proj.: ...
  - Government bond yield: 2002: 5.1; 2003: 4.3; 2004: 4.3; 2005: 3.6; 2006: 4.1; 2007 Proj.: ...
- External sector:
  - Exports of goods and services (percent of GDP): 2002: 17.4; 2003: 16.6; 2004: 18.5; 2005: 18.3; 2006: 18.3; 2007 Proj.: 18.5.
  - Imports of goods and services (percent of GDP): 2002: 24.0; 2003: 22.2; 2004: 23.2; 2005: 23.5; 2006: 24.4; 2007 Proj.: 24.6.
  - Trade balance (percent of GDP): 2002: -6.6; 2003: -5.7; 2004: -4.7; 2005: -5.2; 2006: -6.1; 2007 Proj.: -6.1.
  - Current account (percent of GDP): 2002: -5.6; 2003: -5.6; 2004: -4.9; 2005: -6.2; 2006: -7.5; 2007 Proj.: -7.4.
- Exchange rate:
  - Exchange rate regime: Euro area.
  - Present rate (January 5, 2007): 0.76.
  - Nominal effective exchange rate (1990=100): 2002: 103.6; 2003: 109.3; 2004: 110.9; 2005: 110.3; 2006: 110.6; 2007 Proj.: ...
  - Real effective exchange rate (1990=100): 2002: 104.3; 2003: 111.1; 2004: 113.0; 2005: 113.7; 2006: 115.1; 2007 Proj.: ...

*Source: APPENDIX I. GREECE: FUND RELATIONS (As of October 31, 2006) and related IMF Article IV documentation (Public Information Notice No. 07/10, January 25, 2007).*

### 2006. The personal exemption was raised from €11,000 to €12,000 (it was € 10,000 in 2004)

### 2006. The personal exemption was raised from €11,000 to €12,000 (it was € 10,000 in 2004)

### Tax reform and personal income taxation
- Personal exemption raised from €11,000 to €12,000 with effect from 2007 (it was € 10,000 in 2004).
- Personal income tax rates scheduled to decline gradually over the period 2007-09:
  - Low incomes (€12,000-30,000): from 30 to 25 percent.
  - Middle incomes (€30,000-75,000): from 40 to 35 percent.
- Top marginal tax rate of 40 percent will only apply to incomes above €75,000 (compared to the current €30,000).
- Several tax exemptions were abolished simultaneously, broadening the tax base.

### Public enterprise reform
- Law on public enterprise reform approved by Parliament in November 2005.
- Objectives:
  - Increase commercial orientation of public enterprises.
  - Streamline operations to reduce reliance on debt guarantees and budget transfers.
- Requirements and provisions:
  - Public enterprises must submit annual business plans and longer-term strategic plans for approval by the Ministry of Economy and Finance.
  - Draw up charters of “obligations to the consumer” defining service obligations.
  - Greater flexibility in personnel management by ending civil service status of newly-hired employees (no life tenure).
  - Adoption of international accounting standards and best practices of corporate governance.

### Pension reform
- Authorities recognize aging-related issues as a threat to long-term fiscal sustainability and emphasize need for broad consensus before reform.
- Pension system is highly fragmented (more than seventy pension funds); a national register is pending.
- A high-level committee mandated to make a technical assessment and prepare actuarial projections with the assistance of the ILO.
  - The committee is due to present its findings for public debate in the fall of 2007.
- Efforts to control health care system finances (partly funded by pension funds) include centralizing and reforming procurement practices.
- Accumulation of arrears to suppliers in the past were taken over by the government and added to the public debt.

### Other structural reforms
- Greece has closed some of the living-standards gap with the euro area but a persistent inflation differential relative to the euro area remains.
- Policy priorities and actions:
  - Improve productivity and competitiveness.
  - Make product and labor markets more flexible.
  - Promote competition and improve the business climate by reducing administrative barriers and costs along with the tax burden.
  - Gradual liberalization of network industries; government seeking a strategic ally for the incumbent telecom company.
  - Further deregulation and privatization needed to attract foreign direct investment and reap technology benefits.

### Financial stability
- Banking sector accounts for more than 80 percent of the financial sector and appears generally sound.
  - Profitability, solvency and liquidity are satisfactory.
  - Recent stress tests by the Bank of Greece (BoG) show capital adequacy ratios would remain well above regulatory thresholds even under severe credit risk scenarios.
- BoG actions and system improvements:
  - Proactive stance building on FSAP and previous Article IV recommendations.
  - AML/CFT system fully adjusted to a risk-based approach.
  - Enhanced frameworks for banks’ internal controls, compliance and risk management functions.
  - Introduction of compulsory liquidity ratios to address increasing reliance on non-retail funding.
  - Country risk monitoring requested for internationally active Greek banking groups.
- Credit risks and nonperforming loans (NPLs):
  - Continued rapid credit growth and persistently high NPLs warrant continued vigilance.
  - Transition in risk management systems between Basel I and II; BoG exploiting new methodologies and enhanced data availability.
  - BoG requiring increased write-offs and improved risk monitoring; expects a material reduction in the NPL ratio by the end of 2007.
  - BoG asked risk managers to set their risk appetite at an NPL ratio of 3-4 percent, well below the current level of 5.5 percent of total loans.
  - Prudential measures introduced to limit credit to highly indebted households; measures incorporated in banks’ credit and scoring systems.

*IMF staff report content (source document).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0726.pdf_