## _cr09244

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---

### Executive summary — background and key developments
- Economic activity "held up better than in partner countries, but a recession seems unavoidable."
- "Inflation is receding but remains above the euro-area average."
- Banks have "weathered well the downturn so far, including with confidence-boosting government assistance and enhanced supervision."
- Increasing fiscal deficit reflects cyclical effects partly offset by cuts in the high structural deficit.
- Macro averages 2000–2008 (Percent, unless otherwise indicated):
  - Per-Capita GDP growth: 3.8
  - CPI inflation: 3.4
  - Unemployment rate: 9.7
  - CA deficit (percent of GDP): -9.0
- Imbalances at end-2008:
  - Current account deficit: 14½ percent of GDP in 2008.
  - International investment position (IIP): -75 percent of GDP at end-2008.
- Financial market stress:
  - Borrowing spreads on 10-year Bunds jumped to 300 bp before receding to 185 bp recently.
  - S&P downgraded Greece "to two notches from minimum ECB collateral standards."
- Political context: thin parliamentary majority for the center-right New Democracy (re-elected September 2007); opposition successes and political tensions noted.

### Cyclical developments, labor markets, and competitiveness
- Growth and demand:
  - Growth slowed to 2.9 percent in 2008.
  - "First quarter output declined by 4.8 percent qoq, saar."
  - Domestic demand eased, led by investment; employment fell at year-end.
- High-frequency indicators:
  - Industrial production, orders, and retail sales dropped sharply; tourism arrivals down; Baltic Dry Index declined significantly from its peak in 2008.
- Wages and competitiveness:
  - Wage agreements 2008–2009 resulted in "12 percent nominal wage hikes over this period."
  - Real wage growth turned up as inflation declined at end-2008, further eroding competitiveness.
- Labor and productivity indicators (selected):
  - Unemployment rate (percent): 2008: 7.6; 2009: 9.5; 2010: 10.5; 2011: 10.0; 2012: 9.7; 2013: 9.0; 2014: 8.5.
  - Unit labor costs (economy wide): 2005 -3.3; 2006 4.9; 2007 3.5; 2008 5.7; 2009 4.0; 2010 2.4.

### Financial sector — performance, risks, and policy measures
Findings:
- Banks' direct exposure to toxic assets limited; retail orientation and lack of SIVs.
- Profitability pressures from higher funding costs, slowing activity, asset-quality erosion in Greece and SEE.
- Credit growth slowed; bank equities down sharply year-on-year.

Selected banking indicators (percent) 2005 2006 2007 2008:
- Return on equity: 15.9 12.7 14.8 3.0
- Return on assets: 0.9 0.8 1.0 0.2
- CAR 1/: 13.2 12.2 11.2 9.4
- Tier 1 1/: 10.9 9.9 9.2 7.9
- Capital to assets: 5.9 6.7 6.6 4.5
- Liquid/total asset ratio: 34.0 33.6 35.1 38.7
- NPL ratio: 6.3 5.4 4.5 5.0
- Impaired loan coverage ratio: 61.9 61.8 53.4 48.9

Exposures in Emerging Europe (2008): Total exposure in SEE at €53 billion (203 percent of equity); examples include Romania €19.6 billion (market share 16.2 percent) and Bulgaria €10.2 billion (market share 28.7 percent).

Bank support package (implemented through end-May 2009):
- Deposit insurance limit raised from €20,000 to €100,000 per person per bank.
- Capital injections available up to €5 billion in preferred shares; so far €4.1 billion subscribed, increasing system high-quality Tier-1 capital from 7.9 to 10.1 percent.
- Liquidity assistance up to €8 billion in special-issue zero-coupon government bonds eligible for ECB discounts; about €4.4 billion approved.
- Funding guarantees up to €15 billion (duration up to three years); €3 billion used to date.

Stress-test conclusions and scenarios:
- Identified risks: Credit risk, cross-border risks, market risk, liquidity risk.
- Assuming simultaneous shocks, some institutions may require up to a total of €2.9 billion in new capital (1.2 percent of GDP).
- Stress test scenarios (parameters preserved as presented): Real GDP growth: -3 percent cumulative decline over 2 years; unemployment: 12 percent; nominal lending rates increase: +400 bp; tourism and construction NPL increases 250 percent; interest rates: +300 bp; equity prices falling 40 percent; 30 percent appreciation/depreciation (euro against US$, £, ¥); liquidity roll-over failures of wholesale funding and time deposits.

Staff recommendations and operational points:
- Keep government bank involvement at arm’s length; limit distortions to credit allocation.
- Maintain bank support package preemptively while preparing exit strategies to reduce ECB dependence.
- Intensify supervision, cross-border cooperation with SEE supervisors, and crisis-management exercises.
- Publish Financial Stability Report in English and provide midyear updates.

### Fiscal position, financing needs, and measures
Short-run assessment:
- Deficit exceeded Maastricht limit in 2007 after exiting the EDP in 2006; increased to 5 percent of GDP in 2008 with "large structural deterioration."
- "Entitlements and the wage bill now claim over ⅔ of spending."
- Staff concerned about large and growing data discrepancies ("stock-flow adjustments") and recurring data shortcomings.

General government financing needs (billions of euros, excerpted as in source table):
- Borrowing requirements: 47.1; 61.3; 40.7
- Deficit: 12.2; 15.2; 18.6
- Amortization: 26.3; 32.7; 18.6
- Stock-flow adjustment: 8.6; 4.9; 3.6
- Bank recapitalization...4.1...
- Bank liquidity provision 1/...4.4...

Fiscal measures implemented (staff estimates for 2009):
- Deficit-reducing total: 1.8 (percent of GDP)
  - Revenues: Dividend tax 0.1; Property tax 0.2; Tax amnesty 0.3; Personal income tax surcharge 0.1; Increase in consumption excises 0.1; Increase in taxes on tobacco and alcohol 0.1
  - Expenditures: Wage and pension freeze 0.2; Hiring restrictions 0.2; 10% cut in elastic expenditures 2/ 0.2; Improved public procurement for health 0.2
- Deficit-increasing total: 0.4 (percent of GDP)
  - Expenditures: Farmer support package 0.2; Ad hoc income support to low-incomes 0.1; Interest subsidy for small enterprises 0.1; Support construction sector 0.02; Support tourism sector n.a.; Active labor market policies n.a.

June 2009 government revised measures (percent of GDP):
- Total measures: 0.8
  - Revenues: Increase of excise duty on petrol 0.1; Increase of duties paid by mobile phone subscribers 0.1; Tax on earnings from gambling 0.1; Special tax on automobiles and yachts 0.1; Settlement for semi-open air spaces 2/: 0.5; Increase in lawsuit and court fees 0.02
  - Expenditures: Reduction of Official Development Assistance 0.05
- Memorandum: One-off measures: 0.5; Permanent measures 3/: 0.3 (3/ Equivalent to 0.6 percent of GDP on a full-year basis.)

Fiscal vulnerabilities and financing projections:
- Staff projects general government deficit: 6.2 percent of GDP in 2009 and 7.5 percent in 2010 if no further measures are taken.
- Including the banking assistance package, public debt could rise to 109 percent of GDP in 2009 and 115 percent of GDP by 2010.
- Baseline scenario (selected items, percent of GDP 2008–2014):
  - Total revenues: 39.9; 40.3; 40.1; 40.2; 40.4; 40.6; 40.7
  - Primary expenditures: 40.6; 41.8; 42.5; 42.6; 42.9; 43.2; 43.5
  - Primary balance: -0.7; -1.5; -2.3; -2.4; -2.5; -2.6; -2.8
  - Interest expenditures: 4.4; 4.8; 5.2; 5.5; 5.7; 5.9; 6.2
  - Overall balance: -5.0; -6.2; -7.5; -7.9; -8.2; -8.6; -8.9
  - Structural overall balance (over pot. output): -7.4; -6.8; -7.0; -7.1; -7.4; -7.9; -8.5
  - Gross debt: 98; 109; 116; 122; 126; 130; 134
- Adjustment scenario (selected items, percent of GDP 2008–2014):
  - Overall balance: -5.0; -6.2; -6.0; -4.9; -3.7; -2.6; -1.4
  - Structural overall balance (over pot. output): -7.4; -6.8; -5.5; -4.2; -3.0; -2.0; -1.0
  - Gross debt: 98; 109; 115; 118; 117; 116; 112

Staff quantitative guidance:
- Recommend annual adjustment of about 1½ percent of GDP in permanent measures beginning in 2010 to place public debt on a declining path; under baseline the underlying structural balance is deteriorating and debt would only be well below the Maastricht limit by 2013 under sustained effort.
- Advise postponing planned corporate and personal income tax rate cuts of 1 percent a year through 2014 until deficit confirmed below 3 percent of GDP; authorities disagreed.

Spending and revenue priorities:
- Revenue-side: broaden tax bases, phase out exemptions and deductions, tax the self-employed and the informal sector, increase selected excise taxes to the euro-area average.
- Spending-side: wage moderation (extended to pensions), restrictive hiring policies, implement different wage-policy system for new employees from 2010, contain social transfers.
- Public enterprise and service reform: 5-year deadline to eliminate operating deficits, increase tariffs to cover costs, speed up privatization, publish financial statements.

Long-run fiscal challenges:
- Incremental aging costs of 15.9 percent of GDP through 2060 (EU Aging Working Group).
- Greek population growth forecast to turn negative in 2017, raising dependency ratios and reducing labor input.
- Combining long-run aging costs with current policies yields public sector net worth of -395 percent of GDP at end-2008.
- Pension reforms: 2008 consolidation of 133 funds into 13; need tight administrative implementation and parametric reforms; staff suggested empowering the Actuarial Authority to publish annual actuarial reports.

### External sector, current account, and spillovers
Current account outlook and drivers:
- Shipping receipts (a third of exports) have dropped with lower world trade and will take time to recover.
- Tourism receipts (over a third of exports) expected to fall due to weaker demand from high-income countries and competition from neighbors with weaker exchange rates.
- Short run: imports projected to contract sharply, reducing trade deficits; medium term: trade deficit expected to improve with lower outlays for ships and recovering world demand.
- Net income deficit structural, reflecting large negative IIP; authorities broadly share these views.

Balance of risks — staff vs. authorities:
- Staff view: balance of risks on the downside; risks include further drop in domestic demand in 2010 if real wages reset downward or employment falls faster, deteriorating competitiveness, high crowding-out public debt, and market sentiment shifts.
- Authorities’ view: more benign outlook; expect activity slightly positive, support from infrastructure spending with EU funds, mobilizing PPPs, buoyant tourism compared to staff, and smaller spillovers due to reliance on SMEs and low export dependence.

Linkages and spillovers:
- Inward spillovers: Greek exports vulnerable to shocks in SEE and euro area; SEE absorbed almost a quarter of total Greek nonfuel exports at end-2008; tourism reliant on Germany, U.K., Italy, U.S. (half of tourism earnings).
- Banking-sector exposure: Greek banks large players in SEE; exposures turning into pressures as local economies deteriorate and FX volatility affects unhedged borrowers.
- Outward spillovers: Greece’s external debt some 147 percent of GDP, around 2/3rds public; euro-area countries hold over €200 billion of this debt; abrupt adjustment in Greece could create banking problems in SEE due to high loan-to-deposit ratios and parent funding reliance.
- Policy stance: authorities agree financial protectionism should be avoided; Greek banks participate in Vienna bank coordination initiative.

External sector projections (selected, percent of GDP / levels preserved as in source):
- Current account (percent of GDP, memorandum): 2008: -14.4; 2009: -10.9; 2010: -10.4; 2011: -9.9; 2012: -9.3; 2013: -8.8; 2014: -8.4
- External debt (percent of GDP): 2008: 149.2; 2009: 159.0; 2010: 168.6; 2011: 175.2; 2012: 179.5; 2013: 182.2; 2014: 184.1
- Gross external financing need (billions of euros): 63.3; 59.1; 74.7; 87.4; 126.4; 166.8; 140.2; 178.8; 194.8; 210.0; 226.6
- External debt-to-exports ratio (in percent): 472.0; 537.7; 562.5; 632.5; 672.6; 935.0; 965.3; 972.6; 970.1; 960.4; 944.0

### Structural reform agenda and competitiveness
Findings:
- Significant competitiveness gap: REER appreciation of 20–37 percent since 2001; staff CGER estimates indicate a comparable gap of 20–30 percent.
- Causes: high administrative costs, sector inefficiencies, high margins, rising labor costs, strong wage growth, appreciating euro.

Staff structural reform priorities:
- Public administration: cut entities, reduce staffing, limit political appointees, accelerate privatization, publish more information, publish financial statements of state enterprises and hospitals.
- Goods and services markets: cut administrative burdens and red tape, liberalize network industries by unbundling electricity and gas, achieve ambitious transposition of the EU Services Directive, ensure adequate staffing and authority for the Competition Commission.
- Labor market: pursue wage moderation through cooperative bargaining, promote part-time work to boost youth and female participation, ease employment protection legislation, and seek tripartite agreements among employers, unions, and public sector.

Authorities’ stance:
- Agreed with the thrust of staff suggestions but favor gradual implementation and prioritizing reforms one at a time under the National Reform Programme 2008–2010.

### Statistics, data weaknesses, and governance
- Data weaknesses hamper surveillance: national accounts, government finance, balance of payments, and their inter-relationships.
- Introduction of a production method for quarterly national accounts increased volatility and large statistical discrepancies.
- Fiscal data mapping to national accounts unstable; cash data show consistently weaker results than accrual SGP data.
- Authorities report projects to improve monitoring, accounting systems, and reporting, and plan to revise national accounts in 2010 with Eurostat; staff welcomed steps but called for firmer political support.

### Outlook, staff appraisal, and recommended surveillance cycle
Staff macro projections (Real GDP percent change, preserved exactly):
- 2008: 2.9; 2009: -1.7; 2010: -0.4; 2011: 0.6; 2012: 1.2; 2013: 1.6; 2014: 1.8.
Potential output (percent):
- 2008: 2.1; 2009: 1.6; 2010: 1.3; 2011: 1.2; 2012: 1.2; 2013: 1.3; 2014: 1.4.
Output gap (percent of potential):
- 2008: 4.1; 2009: 0.7; 2010: -1.0; 2011: -1.6; 2012: -1.6; 2013: -1.4; 2014: -0.9.

Selected macro indicators (2005–10, preserved):
- Real GDP: 2005 2.9; 2006 4.5; 2007 4.0; 2008 2.9; 2009 -1.7; 2010 -0.4
- Unemployment rate (percent): 2005 9.9; 2006 8.9; 2007 8.3; 2008 7.6; 2009 9.5; 2010 10.5
- Consumer prices (HICP), period average: 2008 4.2; 2009 1.1; 2010 1.7
- Nominal GDP (billions of euros, memorandum): 2008 243; 2009 244; 2010 247

Staff appraisal — key messages:
- Recession projected despite recent resilience; decoupling from euro-area downturn unlikely.
- Banking system weathered crisis relatively well but faces rising funding costs, asset-quality deterioration, and challenges in SEE exposures; vigilance required.
- Fiscal consolidation cannot be postponed; on unchanged policies headline deficit expected to widen and public debt to increase sharply.
- No room for stimulus; deficit-reducing 2009 measures welcome but further durable, high-quality consolidation required.
- Structural reforms to restore competitiveness are imperative; use the crisis as an opportunity to press ahead.
- Statistics improvements are essential; recommend continuation of 12-month Article IV consultation cycle.

Recommendation:
- It is recommended that Greece remain on the 12-month consultation cycle.

*Source: Executive Summary and excerpts from IMF staff report materials contained in the provided PDF content (_cr09244).*

### Executive Summary

### Executive Summary

### Background and key developments
- Economic activity has "held up better than in partner countries, but a recession seems unavoidable."
- "Inflation is receding but remains above the euro-area average."
- "Banks have weathered well the downturn so far, including with confidence-boosting government assistance and enhanced supervision."
- "The increasing fiscal deficit reflects cyclical effects partly offset by cuts in the high structural deficit."
- Macro averages 2000–2008 (Percent, unless otherwise indicated):
  - Per-Capita GDP growth: 3.8
  - CPI inflation: 3.4
  - Unemployment rate: 9.7
  - CA deficit (percent of GDP): -9.0
- Imbalances at end-2008:
  - Current account deficit: 14½ percent of GDP in 2008.
  - International investment position (IIP): -75 percent of GDP at end-2008.
- Financial market stress:
  - Borrowing spreads on 10-year Bunds jumped to 300 bp (the highest in the euro area) before receding to 185 bp recently.
  - S&P downgraded Greece "to two notches from minimum ECB collateral standards."
- Political context: thin parliamentary majority for the center-right New Democracy (re-elected September 2007); opposition successes and political tensions noted.

### Cyclical developments and labor markets
- Growth and demand:
  - Growth slowed to 2.9 percent in 2008.
  - Domestic demand eased, led by investment; employment fell at year-end.
- Q1 2009 and high-frequency indicators:
  - "First quarter output declined by 4.8 percent qoq, saar."
  - Industrial production, orders, and retail sales have dropped sharply.
  - Tourism arrivals are down; the Baltic Dry Index declined significantly from its peak in 2008.
- Wages and competitiveness:
  - Wage agreements for 2008–2009 "incorporated high inflation expectations, resulting in 12 percent nominal wage hikes over this period."
  - Real wage growth turned up as inflation declined at end-2008, further eroding competitiveness.
- Labor market indicators (2001–08 highlights):
  - Unemployment declined earlier but is now slowing toward increases.
  - Labor productivity in cyclical upswing; nominal wages and unit labor costs rose above euro-area peers.

### Financial sector: performance and risks
- Banks' direct exposure to toxic assets limited; retail orientation and lack of SIVs.
- Profitability pressures due to higher funding costs, slowing activity, asset quality erosion in Greece and Southeastern Europe (SEE).
- Credit growth has slowed; bank equities are down sharply year-on-year.
- Market indicators (2007–09):
  - Sovereign 9-Year Credit Default Swaps rose markedly for Greece.
  - Fair value bond spreads over Libor for major Greek banks widened.
  - Government bond spreads peaked and have eased from peak levels.
- Banking support and funding:
  - "The government has completed funding for 2009 and spreads are easing again."
  - The debt office placed "over €50 billion (21 percent of GDP) in market borrowing in 2009, with some shortening of terms to limit costs."

### Fiscal developments and financing needs
- Fiscal deterioration:
  - The deficit exceeded the Maastricht limit in 2007 after exiting the EDP in 2006.
  - The deficit increased to 5 percent of GDP in 2008 with a "large structural deterioration."
  - "Entitlements and the wage bill now claim over ⅔ of spending."
- General government financing needs and components (billions of euros, as presented):
  - Borrowing requirements 2008–2010 line items (excerpted as in source table):
    - Borrowing requirements: 47.1; 61.3; 40.7
    - Deficit: 12.2; 15.2; 18.6
    - Amortization: 26.3; 32.7; 18.6
    - Stock-flow adjustment: 8.6; 4.9; 3.6
    - Bank recapitalization...4.1...
    - Bank liquidity provision 1/...4.4...
  - The government will issue bonds placed directly with banks for part of the funding.
- Staff note: "Revenue shortfalls and rising expenditure are widening the fiscal deficit."

### Outlook and staff projections
- Growth outlook:
  - Staff projects negative growth in 2009 and 2010.
  - Greece’s projected Real GDP (percent change): 2008: 2.9; 2009: -1.7; 2010: -0.4; 2011: 0.6; 2012: 1.2; 2013: 1.6; 2014: 1.8.
  - Potential output: 2008: 2.1; 2009: 1.6; 2010: 1.3; 2011: 1.2; 2012: 1.2; 2013: 1.3; 2014: 1.4.
  - Output gap: 2008: 4.1; 2009: 0.7; 2010: -1.0; 2011: -1.6; 2012: -1.6; 2013: -1.4; 2014: -0.9.
- Components and forecasts (selected, 2008–2014):
  - Total domestic demand: 0.7; -2.5; -1.6; 0.2; 0.7; 1.1; 1.4.
  - Private consumption: 2.2; -0.4; -0.3; 0.0; 0.5; 0.8; 1.0.
  - Public consumption: 3.2; 1.7; 0.5; 0.9; 0.4; 1.1; 1.6.
  - Gross fixed capital formation: -11.5; -10.2; -5.0; 0.6; 1.7; 2.2; 2.5.
  - Exports of goods and services: 2.2; -19.2; 0.3; 3.9; 4.7; 4.9; 5.1.
  - Imports of goods and services: -4.4; -16.5; -4.4; 1.3; 2.2; 2.4; 2.5.
  - Unemployment rate (percent): 2008: 7.6; 2009: 9.5; 2010: 10.5; 2011: 10.0; 2012: 9.7; 2013: 9.0; 2014: 8.5.
  - Consumer prices (HICP), period average: 2008: 4.2; 2009: 1.1; 2010: 1.7; 2011: 1.6; 2012: 1.8; 2013: 2.0; 2014: 2.0.
  - Current account (percent of GDP): 2008: -14.4; 2009: -10.9; 2010: -10.4; 2011: -9.9; 2012: -9.3; 2013: -8.8; 2014: -8.4.
- Risks and dynamics:
  - Downside risks remain given impaired competitiveness, large external imbalances, and the need for fiscal consolidation.
  - Even with staff’s weaker outlook, Greece’s peak-to-trough growth decline would remain milder than for the euro-area as a whole.

### Staff views and policy recommendations
- Fiscal strategy:
  - "Greece needs a coherent fiscal adjustment path, based on durable measures, aimed at returning the debt ratio to a downward trajectory."
  - "Revenue enhancements are needed, but the main tasks are to address the wage bill and structurally worsening entitlement programs."
  - "Fiscal consolidation cannot be postponed."
- Financial sector policy:
  - "The operating environment for banks remains challenging, and close domestic and cross-border supervision and cooperation is appropriate."
  - Bank support measures and liquidity provisions are part of the authorities’ response (see Box and Tables in full report).
- Competitiveness and labor policy:
  - "Reforms to bolster competitiveness and growth are essential to avoid slipping into stagnation."
  - Authorities should "work with social partners to forge a tri-partite approach, based on dialogue and transparency of tasks and burdens, to address serious competitiveness concerns."
- Social dialogue and implementation:
  - Emphasis on transparency, dialogue with social partners, and durable structural measures to address the wage bill and entitlement programs.

### Authorities’ views and actions
- The authorities "aim to cut the fiscal deficit as agreed with EU partners to limit debt accumulation," assuming a "more favorable economic outlook than staff’s."
- Agreed priorities and measures highlighted by authorities:
  - Progress in privatizing state enterprises.
  - "Tight public sector incomes policy."
  - Active labor market policies.
  - Implementing the EU Services Directive by end-2009.
- Outreach during the mission included meetings with banks, trade unions, industrialists, and private analysts.

### Mission and outreach
- The mission team: B. Traa (Head), M. Moreno Badia, F. Jaumotte, D. Velculescu (all EUR).
- Country interlocutors included: the Minister of Economy and Finance, the Minister of Employment and Social Protection, the Governor of the Bank of Greece, officials at the Prime Minister’s office, and staff in these and other government ministries and agencies.
- Outreach: meetings with banks, trade unions, industrialists, and private analysts.

*Source: Executive Summary (_cr09244).*

### 12.      The current account deficit is expected to narrow. Shipping receipts (a third of

### _cr09244 - 12.      The current account deficit is expected to narrow. Shipping receipts (a third of exports) have dropped with lower world trade and will take time to recover.

### Current account outlook
- Shipping receipts (a third of exports) have dropped with lower world trade and will take time to recover.
- Tourism receipts (over a third of exports) are expected to fall due to lower demand from high-income countries and increased competition from neighbors whose exchange rates are weakening.
- With lower absorption in the short run, imports are projected to contract sharply, leading to lower trade deficits.
- Over the medium term, the trade deficit is expected to improve with lower outlays for ships and recovering world demand.
- The net income deficit has become structural, reflecting the large negative IIP.
- The authorities broadly share these views.

### Balance of risks and outlook differences
- Staff view:
  - Sees the balance of risks on the downside and calls for sustained firmer policies to address risks.
  - Risks include a further drop in domestic demand in 2010 if real wages are reset downward or employment drops faster than foreseen.
  - Deteriorating competitiveness and high crowding-out public debt increase risks of prolonged slow growth.
  - Large imbalances and lack of reform consensus could change market sentiment for Greece; staff sees more urgency for stronger policies to shore up confidence and avoid a replay of the spike in spreads.
  - If external financing weakens again, the current account deficit could unwind rapidly and growth could falter badly.
- Authorities’ view:
  - More benign outlook: note staff has underestimated growth in recent years and expect activity to be slightly positive.
  - Expect support from infrastructure spending with EU funds, mobilizing PPPs, and more buoyant tourism activity compared to staff.
  - Anticipate smaller spillover effects from the global downturn because of Greece’s reliance on small and medium-size enterprises and relatively low dependence on exports.
  - Acknowledge some downward adjustment to projections could not be excluded but believe the outlook remains less risky than staff.

### Linkages and spillovers (Box 1)
- Inward spillovers:
  - Greek exports are vulnerable to shocks in SEE and the euro area.
  - SEE absorbed almost a quarter of total Greek nonfuel exports at end-2008; exports to the region would weaken in the global crisis.
  - Transportation services face downside risks from sharply declining global trade.
  - Tourism receipts are vulnerable to recessions in advanced economies; Germany, U.K., Italy, U.S. bring half of tourism earnings.
  - Banks’ credit quality likely to erode as external weakness feeds into the domestic economy and from direct lending to tourism and shipping.
- Banking sector exposure to SEE:
  - Greek banks became major players in SEE seeking high profit margins; exposures are turning into pressures as local economies deteriorate and FX volatility affects unhedged borrowers.
- Outward spillovers:
  - Greece’s external debt is some 147 percent of GDP, of which around 2/3rds is public sector debt.
  - Euro-area countries hold over €200 billion of this debt.
  - Abrupt financial adjustment in Greece could lead to banking problems in SEE due to high loan-to-deposit ratios and reliance on parent funding.
- Policy stance noted:
  - Authorities agree financial protectionism should be avoided; Greek banks participate in a bank coordination initiative (Vienna) to seek orderly transition to lower external funding dependence in SEE.

### IV. Policy discussions: Bolstering confidence and sustainability — Key messages
- Given high vulnerabilities in growth, public finances, and the financial sector, policies need to restore confidence and bolster sustainability.
- Financial supervision should remain tight and the authorities should be ready to act if systemic pressures arise.
- Greece cannot postpone fiscal consolidation; adjustment must be realistic but show strong commitment to improving the fiscal balance step-by-step.
- Structural reforms are imperative to improve competitiveness for renewed growth.

### A. Preserving Financial Sector Stability — Findings and measures
Findings:
- Greek banks have shown resilience but felt the effect of the crisis; aided by a traditional business model and a large deposit base at home.
- Domestic credit growth and lending in SEE are slowing.
- Declining profitability in 2008 reflected increased provisioning and margin compression.
- Bank capital is adequate but declining.
- Selected banking indicators (percent):  
  - Return on equity: 15.9 12.7 14.8 3.0 (2005 2006 2007 2008)  
  - Return on assets: 0.9 0.8 1.0 0.2 (2005 2006 2007 2008)  
  - CAR 1/: 13.2 12.2 11.2 9.4 (2005 2006 2007 2008)  
  - Tier 1 1/: 10.9 9.9 9.2 7.9 (2005 2006 2007 2008)  
  - Capital to assets: 5.9 6.7 6.6 4.5 (2005 2006 2007 2008)  
  - Liquid/total asset ratio: 34.0 33.6 35.1 38.7 (2005 2006 2007 2008)  
  - NPL ratio: 6.3 5.4 4.5 5.0 (2005 2006 2007 2008)  
  - Impaired loan coverage ratio: 61.9 61.8 53.4 48.9 (2005 2006 2007 2008)
- Exposures in Emerging Europe (2008) show significant country-level figures (e.g., Romania €19.6 billion, market share 16.2 percent; Bulgaria €10.2 billion, market share 28.7 percent). Total exposure in SEE at €53 billion (203 percent of equity).

Measures and staff recommendations:
- Bank support package (Box 2) implemented through end-May 2009:
  - Deposit insurance limit raised from €20,000 to €100,000 per person per bank.
  - Capital injections available up to €5 billion in preferred shares; so far €4.1 billion subscribed, increasing system high-quality Tier-1 capital from 7.9 to 10.1 percent.
  - Liquidity assistance up to €8 billion in special-issue zero-coupon government bonds eligible for ECB discounts; about €4.4 billion approved.
  - Funding guarantees up to €15 billion (duration up to three years); €3 billion used to date.
- Staff urged government bank involvement remain at arm’s length to ensure sound lending and avoid market distortions; package best kept in place preemptively.
- Supervision: Bank of Greece intensified monitoring and contacts with bank managements; implement increased provisioning and capital strengthening as appropriate.
- Cross-border cooperation: BoG stepped up information exchange with SEE counterparts; staff recommends gradual correction of high loan/deposit ratios in SEE while avoiding financial nationalism and conducting crisis-management exercises with SEE partners.
- Crisis management: new BoG committee monitors financial stability and implements internal early-warning procedures.
- Financial Stability Report (FSR): authorities started publishing an FSR; staff recommended simultaneous English version and midyear update.
- Stress tests (end-2008 data) indicate:
  - Identified risks: Credit risk, cross-border risks, market risk, liquidity risk.
  - Assessed that profits, capital cushions (including with government assistance), and stepped-up provisioning should absorb foreseen losses.
  - Assuming simultaneous shocks, some institutions may require up to a total of €2.9 billion in new capital (1.2 percent of GDP).
  - Banks appear to have enough liquid funds but need gradual exit strategies to reduce dependence on ECB facilities.
- Stress test scenarios and parameters (as presented):
  - Real GDP growth: -3 percent cumulative decline over 2 years; unemployment: 12 percent; nominal lending rates increase: +400 bp.
  - Tourism and construction: Increase in NPLs of 250 percent.
  - Shipping industry: (1) Short term: sharp decrease on freight rates and resale vessels' values based on the lowest prices of 2000-08; (2) Medium term: average freight rates and resale vessels' values over 2000-08.
  - Cross-border risk (emerging Europe) NPLs: Turkey and Poland (13); Romania, Bulgaria, and Albania (15); Other SEEs (20).
  - Interest rates: +300 bp.
  - Spreads of sovereign: +150 bp; spreads of foreign bonds: increase of 100 percent for corporates and by 50 percent for sovereign.
  - Equity prices falling 40 percent.
  - 30 percent appreciation/depreciation (euro against US$, £, ¥).
  - Liquidity risks: Inability to roll over 50 percent of wholesale funding; inability to roll over 10 percent of time deposits; 10 percent withdrawal of sight and saving deposits.
- Authorities’ operational points:
  - Bank support package not aimed at influencing credit allocation.
  - Greek banks have slowed credit growth in SEE for prudential reasons; banks committed to keeping exposures in SEE.
  - BoG has boosted banks’ liquidity requirements.
  - Conditions improving with debt and interbank markets slowly opening up, which should allow banks to reduce reliance on ECB support over time.

### B. Strengthening the Fiscal Position — Short-run assessment and recommendations
Findings:
- Greece is entering the downturn with an already weak fiscal position.
- Failures to stick to budget plans, deficit-increasing one-off measures, expenditure slippages, and ad-hoc revenue efforts have coincided with persistent deficits above 3 percent since 2000.
- Social transfers have increased by over 3 percentage points of GDP, outpacing social contributions.
- The wage bill has also been rising.
- European Commission has reinvoked the EDP for Greece, asking to reduce the deficit below 3 percent by 2010.
- Staff concerned that large and growing data discrepancies (including “stock-flow adjustments”) between cash accounts and those of the SGP could harbor a worse underlying deficit than currently reported.
- Data shortcomings are recurring, with debt consistently rising faster than indicated by the SGP deficits reported to Eurostat.

Policy recommendations:
- Operating control needs to improve; policies should emphasize structural over one-off measures.
- Budgets need to aim at long-run sustainability.
- Restoring confidence requires durable consolidation and improved accounting systems that allow timely responses to slippages and publication of more stable fiscal indicators.

*Source: IMF staff report content provided in the supplied excerpt.*

### 24.      Staff projects the headline deficit to widen and public debt to increase sharply in

### _cr09244 - 24.      Staff projects the headline deficit to widen and public debt to increase sharply in

### Fiscal outlook and near-term projections
- Staff projects the general government deficit to reach 6.2 percent of GDP in 2009 and 7.5 percent in 2010 (Table 6) if no further measures are taken.
- Including the banking assistance package, public debt could rise to 109 percent of GDP in 2009 and 115 percent of GDP by 2010.
- In view of unfavorable fiscal outturn in the first quarter, staff sees the balance of risks on the downside.
- These projections factor in the fiscal consolidation measures implemented by the authorities through May 2009.
- The authorities agreed under the EDP to reduce the deficit to 3.7 percent of GDP in 2009 and below 3 percent in 2010, while acknowledging these objectives are difficult given a 2008 starting deficit increased to 5.0 percent.

### Fiscal measures implemented and their effects
- Consolidation measures taken so far could help to improve the structural primary balance by nearly 1 percent of GDP in 2009.
- Staff welcomed durable components: moderating public wages (extended to pensions), cuts in discretionary spending, higher excises, and the new property tax (delayed from 2008).
- Staff advised against further use of one-off measures such as the tax amnesty and the one-time PIT surcharge for high-income taxpayers because they may weaken future receipts and encourage tax avoidance.
- Authorities plan to reduce the wage bill through attrition—replacing every two job leavers with one hire—but intend to substitute up to 60,000 persons from unemployed to the (local) public sector, which risks becoming permanent and burdening the wage bill.

### Greece: Main Fiscal Measures, 2009 (Staff estimates)
- Deficit-reducing total: 1.8 (percent of GDP)
  - Revenues
    - Dividend tax 0.1
    - Property tax 0.2
    - Tax amnesty 0.3
    - Personal income tax surcharge 0.1
    - Increase in consumption excises 0.1
    - Increase in taxes on tobacco and alcohol 0.1
  - Expenditures
    - Wage and pension freeze 0.2
    - Hiring restrictions 0.2
    - 10% cut in elastic expenditures 2/ 0.2
    - Improved public procurement for health 0.2
- Deficit-increasing total: 0.4 (percent of GDP)
  - Expenditures
    - Farmer support package 0.2
    - Ad hoc income support to low-incomes 0.1
    - Interest subsidy for small enterprises 0.1
    - Support construction sector 0.02
    - Support tourism sector n.a.
    - Active labor market policies n.a.
- 1/ Staff estimates.
- 2/ Discretionary current spending, excluding wages and social transfers.

### Baseline and adjustment fiscal scenarios (2008–14) — key series (Percent of GDP)
- Baseline scenario (selected items by year):
  - Total revenues: 39.9, 40.3, 40.1, 40.2, 40.4, 40.6, 40.7 (2008–2014)
  - Primary expenditures: 40.6, 41.8, 42.5, 42.6, 42.9, 43.2, 43.5
  - Primary balance: -0.7, -1.5, -2.3, -2.4, -2.5, -2.6, -2.8
  - Interest expenditures: 4.4, 4.8, 5.2, 5.5, 5.7, 5.9, 6.2
  - Overall balance: -5.0, -6.2, -7.5, -7.9, -8.2, -8.6, -8.9
  - Structural overall balance (over pot. output): -7.4, -6.8, -7.0, -7.1, -7.4, -7.9, -8.5
  - Structural primary balance (over pot. output): -2.8, -2.0, -1.9, -1.7, -1.8, -2.0, -2.4
  - Gross debt: 98, 109, 116, 122, 126, 130, 134
- Adjustment scenario (selected items by year):
  - Overall balance: -5.0, -6.2, -6.0, -4.9, -3.7, -2.6, -1.4
  - Structural overall balance (over pot. output): -7.4, -6.8, -5.5, -4.2, -3.0, -2.0, -1.0
  - Gross debt: 98, 109, 115, 118, 117, 116, 112
- Staff recommended annual adjustment of about 1½ percent of GDP in permanent measures beginning in 2010 to place public debt on a declining path; under baseline the underlying structural balance is deteriorating every year, and debt would only be well below the 3-percent Maastricht limit by 2013 under sustained effort.

### Policy recommendations for consolidation and fiscal governance
- Emphasize high-quality, durable, and forward-looking consolidation measures to boost confidence and support growth (an expansionary fiscal contraction).
- Revenue-side priorities:
  - Broaden tax bases by phasing out exemptions and deductions.
  - Tax the self-employed and the informal sector.
  - Increase selected excise taxes to the euro-area average.
  - Focus on income that escapes taxation to spread the burden more fairly.
- Spending-side priorities:
  - Continue wage moderation (extended to pensions) and restrictive hiring policies.
  - Implement a different wage-policy system for new employees from 2010 to reinforce restraint.
  - Address long-run spending pressures from growing social transfers.
- Staff advised postponing planned corporate and personal income tax rate cuts of 1 percent a year through 2014 until the deficit is confirmed to be below 3 percent of GDP; authorities disagreed citing parliamentary commitments and potential Laffer-curve effects.
- Improve expenditure control and introduce program budgeting:
  - Lower procurement costs in health care; develop financial statements for hospitals; curb pharmaceutical costs.
  - Pilot full performance budgeting by 2012 and implement top-down multiannual budget ceilings by 2011.
  - Improve accounting toward a modified cash basis with new management information systems to start operating in 2010.
- Strengthen public enterprise performance:
  - Set a 5-year deadline to eliminate enterprise operating deficits, increase tariffs to cover costs, speed up privatization, and create incentives for good service.

### Structural and long-run fiscal challenges: aging and pensions
- Greece has the highest long-run aging costs in the euro area: incremental aging costs of 15.9 percent of GDP through 2060 (EU Aging Working Group).
- Greek population growth is forecast to turn negative in 2017, with growing dependency ratios and reduced labor input, leading to declining potential growth.
- Combining long-run aging costs with current policies yields a deeply negative public sector net worth of -395 percent of GDP at end-2008.
- Pension reform needs:
  - 2008 reform consolidated 133 pension funds into 13 funds; potential savings depend on tight administrative implementation (social security numbers, cross-checking data, IT and accounting systems).
  - Early retirement incentives remain strong and statutory replacement rates very high; parametric reforms are essential and should not be postponed.
  - Staff suggested empowering the Actuarial Authority to prepare and publish annual actuarial reports for all funds to inform budget drafting.

### Competitiveness and structural reform priorities
- Indicators show a significant competitiveness gap: REER appreciation of 20–37 percent since 2001; staff CGER estimates indicate a comparable gap of 20–30 percent.
- Causes: high administrative costs and inefficiencies, high margins in several sectors, rising labor costs, strong wage growth, and the appreciating euro.
- Policy areas for reforms:
  - Public administration: streamline, increase transparency, cut entities, reduce staffing and political appointees, accelerate privatization, publish financial statements of state enterprises and hospitals.
  - Product and service markets: further liberalize, rationalize legislation, cut administrative burdens, liberalize network industries, unbundle gas and electricity markets, implement EU Services Directive to liberalize professional services and retail trade, and enhance Competition Authority resources.
  - Labor market: pursue wage moderation through cooperative bargaining, promote part-time work to boost youth and female participation, and ease employment protection legislation.
- Staff noted comprehensive structural reforms can boost competitiveness and growth; authorities agreed competitiveness has weakened but disputed the magnitude of staff’s gap estimates.

*IMF staff report (excerpts) contained in content unit _cr09244 - 24.*

### 37.      The authorities agreed with the thrust of these suggestions, albeit favoring a

### _cr09244 - 37.      The authorities agreed with the thrust of these suggestions, albeit favoring a

### Authorities' stance and reform approach
- Authorities agreed with the thrust of staff suggestions, favoring gradual implementation.
- Authorities committed to a comprehensive Lisbon reform agenda as outlined in the National Reform Programme for 2008–2010.
- Authorities planned to set clear priorities and tackle reforms one at a time to manage opposition and steadily move the agenda forward.
- Staff noted the current crisis could be used to spur ambitious and faster reforms than achieved in Greece so far.

### Competitiveness and export performance (findings drawn from Figures 13–14)
- Greece's real exchange rate has been appreciating.
- Greece has lost market share relative to peers.
- Greece has made some inroads into higher-tech goods exports and fast growing services (sectors referenced: sea transport, communications, travel, construction, financial insurance, other transport, air transport, computer).
- Greece's relative export prices have deteriorated.
- Greece ranks poorly on competitiveness measures (Global Competitiveness Rankings 2008-2009; Lisbon Scores 2008-09).
- Greek product markets are some of the most heavily regulated in the OECD; doing business is difficult, especially on information society and enterprise environment.
- Specific indicators shown or referenced: Real Exchange Rate (Index, M1 2001=100, monthly data), Relative export prices (index, 2000=100, annual data), Export market shares (Volume Index, 2000=100, annual data), Global Competitiveness Index ranks (2008-2009 and 2007-2008), Lisbon Scores 2008-09, Ease of Doing Business Overall Ranking 2008-09, Starting a Business Indicators 2008-09, Product Market Regulation Indicator 2008.

### Greece: Structural Reform Needs (staff summary)
- Public Administration
  - Cut entities, reduce staffing, and limit political appointees
  - Accelerate privatization of public enterprises
  - Place greater trust in the public by publishing more information
- Goods and Services Markets
  - Cut administrative burdens and red tape
  - Reform network industries by unbundling electricity and gas
  - Achieve an ambitious transposition of the EU Services Directive
  - Ensure adequate staffing and authority for the Competition Commission
- Labor Market
  - Promote a social contract focused on employment growth through strong wage moderation
  - Expand part-time work opportunities
  - Reduce employment protection

### Statistics: data weaknesses and ongoing improvements
- Some data weaknesses hamper analysis (Appendix II).
- Statistics on growth and the fiscal position tend to be revised significantly, complicating projections and policy making.
- Delays in fiscal data make it difficult for the authorities to respond in a timely manner.
- Mapping of fiscal and balance of payments data to the national accounts is not straightforward; their differences tend to be unstable over time.
- Cash fiscal data show consistently weaker results than accrual SGP data, which is inadequately explained.
- Authorities reported several projects underway to improve monitoring, accounting systems, and reporting, and are working with Eurostat to revise and improve the national accounts in 2010.
- Staff welcomed these steps but said they need firmer political support from the highest levels.

### Staff appraisal: near-term outlook, banking sector, fiscal policy, and reform priorities
- Near-term macroeconomic outlook
  - The staff projects a recession despite recent resilience.
  - Given high integration with the euro area (experiencing a sharp recession), decoupling is unlikely.
  - Underlying vulnerabilities and high wage growth have eroded competitiveness; inflation persists above trading partners’ average.
  - Structural rigidities have contributed to a large current account deficit.
  - Staff views the balance of risks as still on the downside; likelihood of a prolonged period of slow growth is increased.
- Banking sector assessment and recommendations
  - Greek banks have weathered the global crisis relatively well but funding costs increased and loan activity dropped due to deleveraging.
  - Authorities’ bank assistance package has boosted confidence and proven highly valuable; supervisors have intensified monitoring and expanded contacts with bank managements.
  - Stress tests suggest the banking system has enough buffers to weather the expected slowdown: profits, capital cushions, and provisioning should provide enough resources to absorb impaired loans in Greece and SEE.
  - ECB liquidity policies are helping; debt and interbank markets are slowly opening up, and there remains room under the banking package.
  - Near-term operating conditions remain challenging; vigilance is needed as domestic credit quality may deteriorate further and portfolios in SEE could face further pressures.
  - Policy guidance: manage risks cautiously with a well-targeted set of policies; direct involvement in banks should remain limited and focused on maintaining sound lending; unused portions of the banking package should be kept in place preemptively; banks need to prepare to unwind positions with the ECB.
  - Authorities should remain prepared to act if systemic pressures arise; market solutions (e.g., merging banks) are appropriate first steps; if public support is required it should include exit strategies.
  - The new Financial Stability Report is welcome and should become a regular feature.
  - Greek banks’ commitment to stay involved in SEE is welcome; authorities continue to strengthen relationships with Central Banks and supervisors in SEE and could expand by conducting joint crisis-management exercises.
- Fiscal outlook and recommendations
  - Fiscal consolidation cannot be postponed: on unchanged policies the headline deficit is expected to widen and public debt to increase sharply for several years.
  - This outlook has been reflected in spiking spreads on government bonds as liquidity tightened; spreads are now easing but a return to pre-crisis low levels is unlikely and risks of new spikes remain if policies are not strengthened.
  - Given weaknesses in fiscal operating controls, downside surprises cannot be ruled out and should be countered as they occur.
  - The deficit-reducing measures of 2009 are welcome and further steps are needed. There is no room for stimulus.
  - Government’s response to the crisis has included protecting the poor; further measures must be consistent, durable, of high quality, and forward looking to lower underlying deficits and debt.
  - The fiscal plan should be clearly communicated and offer monitorable high-frequency milestones to establish a confidence anchor; with strong confidence, fiscal adjustment can be expansionary.
  - Specific numeric guidance: Annual adjustment of about 1½ percent of GDP in permanent measures beginning in 2010 would place the debt ratio on a downward path by 2012. Automatic stabilizers can be allowed to operate around this path.
  - Measures should be high quality, including improving revenue from income that presently escapes taxation.
  - Authorities’ planned income policies are valuable if fully implemented as they would contribute to moderating the public wage bill and pension costs.
  - Given very high projected aging costs, deeper social security reform should not be postponed; achieving a consensus will require time and dialogue.
- Structural reform priorities to restore competitiveness
  - Streamline the costly public sector
  - Reduce administrative burdens
  - Complete network industry reforms
  - Ambitiously implement the EU Services Directive
  - Labor reforms aimed at lower unit labor costs and higher employment, supported in tripartite agreements between employers, unions, and the public sector
  - Expand part-time work opportunities to assist youths and women
  - Authorities need to implement efforts forcefully and without delay
- Statistics priority reiterated
  - Improving economic statistics deserves high priority; frequent revisions and reconciliation difficulties complicate monitoring, analysis, and policy making.
  - Welcome improvements are underway but publishing higher-quality economic statistics deserves firmer support from the highest levels.

* _cr09244 - 37.      The authorities agreed with the thrust of these suggestions, albeit favoring a_*

### 52.      It is recommended that Greece remain on the 12-month consultation cycle.

### _cr09244 - 52.      It is recommended that Greece remain on the 12-month consultation cycle.

### Recommendation
- It is recommended that Greece remain on the 12-month consultation cycle.

### Macroeconomic outlook (Selected Economic Indicators, 2005–10)
- Real GDP: 2.9; 4.5; 4.0; 2.9; -1.7; -0.4
- Output gap (percent of pot. output): 0.4; 1.8; 3.2; 4.1; 0.7; -1.0
- Total domestic demand: 2.1; 4.7; 5.1; 0.7; -2.5; -1.6
- Private consumption: 4.3; 4.8; 3.0; 2.2; -0.4; -0.3
- Public consumption: 1.2; 0.0; 7.7; 3.2; 1.7; 0.5
- Gross fixed capital formation: -0.5; 9.2; 4.9; -11.5; -10.2; -5.0
- Change in stocks (contribution): -0.7; -0.3; 1.0; 1.5; -0.7; -0.6
- Foreign balance (contribution): 0.5; -0.8; -1.6; 2.1; 1.0; 1.3
- Exports of goods and services: 4.2; 10.9; 3.1; 2.2; -19.2; 0.3
- Imports of goods and services: 1.4; 9.7; 6.7; -4.4; -16.5; -4.4
- Unemployment rate (percent): 9.9; 8.9; 8.3; 7.6; 9.5; 10.5
- Employment: 1.3; 1.9; 1.3; 1.1; -1.5; -0.8
- Unit labor costs (economy wide): -3.3; 4.9; 3.5; 5.7; 4.0; 2.4
- Consumer prices (HICP), period average: 3.5; 3.3; 3.0; 4.2; 1.1; 1.7
- Core prices, period average (Core prices exclude energy, food, alcohol, and tobacco): 3.3; 2.4; 3.1; 3.1; ...... 
- GDP deflator: 3.4; 3.2; 2.9; 3.4; 2.3; 1.7
- Long-term lending interest rate (As of March 2009): 5.8; 6.3; 7.2; 7.2; 6.4; ...
- Private credit growth (Domestic credit growth of households and enterprises; As of March 2009): 21.2; 21.1; 21.5; 15.9; 10.8; ...
- Nominal effective exchange rate (As of April, 2009): 4/-2.7; 1.8; 2.3; 1.6; -1.2; ...
- Real effective exchange rate (CPI-based) (As of April, 2009): 4/-1.4; 2.3; 2.6; 1.4; -1.1; ...
- Real effective exchange rate (man. ULC-based) (As of May, 2009): 5/-2.5; 6.7; 5.3; 4.2; 2.4; ...

- Memorandum: Nominal GDP (billions of euros): 198; 213; 228; 243; 244; 247
- Memorandum: Nominal GDP (percentage change): 6.3; 7.9; 7.0; 6.5; 0.5; 1.3

Sources for Table 1: National Statistical Service; Ministry of Economy and Finance; Bank of Greece; and IMF staff estimates.

### Balance of payments and external sector (Summary, 2008–14 & 2008–10 projections)
- Current account balance (percent of GDP, 2008–14): -35.0; -26.6; -25.7; -25.1; -24.3; -23.8; -23.6
- Balance of goods and services: -26.9; -19.1; -17.0; -16.3; -15.2; -14.3; -13.7
  - Goods balance: -44.0; -31.2; -30.2; -30.7; -31.0; -31.6; -32.7
    - Exports of goods: 19.8; 15.0; 15.7; 16.7; 17.7; 18.8; 20.0
    - Imports of goods: 63.9; 46.2; 45.9; 47.4; 48.6; 50.4; 52.8
  - Services balance: 17.2; 12.1; 13.2; 14.3; 15.8; 17.3; 19.0
    - Credit (services): 34.1; 26.5; 27.5; 28.8; 30.6; 32.5; 34.6
    - Debit (services): 16.9; 14.4; 14.3; 14.5; 14.8; 15.1; 15.6
- Income balance: -10.9; -10.7; -12.0; -12.4; -12.8; -13.4; -13.9
  - Income credit: 5.7; 5.9; 6.1; 6.3; 6.7; 7.0; 7.4
  - Income debit: 16.6; 16.6; 18.1; 18.7; 19.5; 20.4; 21.3
- Current transfers (net): 2.8; 3.2; 3.4; 3.6; 3.7; 3.9; 4.0
- Capital and financial account balance: 35.0; 26.6; 25.7; 25.1; 24.3; 23.8; 23.6
  - Capital account balance: 4.1; 4.1; 4.2; 4.3; 4.4; 4.5; 4.7
  - Financial account: 30.9; 22.5; 21.5; 20.8; 19.9; 19.3; 18.8
    - Direct investment: 1.7; 0.7; 1.0; 1.3; 1.3; 1.4; 1.4
    - Portfolio investment: 16.4; 14.7; 14.8; 14.9; 14.6; 14.0; 13.2
    - Other investment: 12.8; 7.1; 5.7; 4.6; 4.0; 3.9; 4.3
- Memorandum: Current account balance (percent of GDP, 2008–14): -14.4; -10.9; -10.4; -9.9; -9.3; -8.8; -8.4
  - Balance of goods and services (memorandum): -11.1; -7.8; -6.9; -6.5; -5.8; -5.3; -4.9
  - External debt (percent of GDP): 149.2; 159.0; 168.6; 175.2; 179.5; 182.2; 184.1

Sources for Table 2: Bank of Greece; and IMF staff projections.

### Financial soundness and banking sector (2000–08)
- Regulatory capital to risk-weighted assets: 13.6; 12.4; 10.5; 12.0; 12.8; 13.2; 12.2; 11.2; 9.4
- Regulatory Tier I capital to risk-weighted assets: 13.5; 10.9; 8.8; 9.8; 10.0; 10.9; 9.9; 9.2; 7.9
- Nonperforming loans net of provisions to capital: 33.4; 29.4; 28.9; 27.0; 26.5; 19.2; 15.4; 16.8; 26.1
- Nonperforming loans to total gross loans: 11.7; 8.3; 7.4; 7.0; 7.0; 6.3; 5.4; 4.5; 5.0
- Sectoral distribution of loans (2000–08 highlights):
  - Consumer credit: 9.3; 10.6; 11.3; 12.3; 14.3; 15.2; 16.3; 15.0; 14.1
  - Lending for house purchase: 18.8; 21.0; 24.4; 26.1; 27.7; 31.4; 33.4; 34.5; 32.4
  - Non-financial corporations: 70.5; 65.7; 60.4; 57.7; 54.4; 50.5; 47.1; 47.2; 50.4
- Return on assets (after taxes): 1.4; 1.0; 0.5; 0.6; 0.4; 0.9; 0.8; 1.0; 0.2
- Return on equity (after taxes): 15.4; 12.4; 6.8; 8.9; 6.4; 15.9; 12.7; 14.8; 3.0
- Interest margin to gross income: 54.5; 62.8; 72.5; 73.9; 77.0; 75.5; 72.3; 71.8; 84.5
- Liquid assets to total assets: 46.4; 41.1; 39.5; 37.0; 33.4; 34.0; 33.6; 35.1; 38.7
- Net open position in foreign exchange to capital: ...; 3.5; 7.2; 5.7; 3.5; 2.8; 4.8; 3.9; 6.3

Source for Table 3: Bank of Greece.

### Encouraged financial soundness indicators and system structure (2000–08)
- Corporate sector: Total debt to equity: 133.2; 142.8; 156.6; 162.8; 156.9; 171.9; 181.6; 186.4; 244.8
- Deposit-taking institutions: Capital to assets: 9.2; 8.5; 6.9; 6.9; 5.3; 5.9; 6.7; 6.6; 4.5
- Household indicators: Household debt to GDP: 12.5; 16.3; 20.6; 24.4; 29.6; 35.6; 41.2; 46.8; 50.3
- Residential real estate loans to total loans: 10.2; 13.2; 16.7; 18.2; 20.7; 22.9; 24.8; 23.5; 20.7

Source for Table 4: Bank of Greece; and ICAP, Greek Financial Directory, 2008.

### Structure of the financial system (2000–08)
- Number of banks: 19; 23; 24; 22; 21; 21; 21; 21; 19
- Banks' assets (billions of euros): 145.7; 158.7; 165.5; 174.0; 186.6; 228.6; 272.6; 336.0; 412.1
- Deposits - banks (billions of euros): 89.9; 98.6; 102.9; 112.4; 125.8; 151.3; 183.1; 219.7; 251.5

Source for Table 5: Bank of Greece.

### General government accounts (2005–10)
- Revenues (billions of euros): 75.2; 83.1; 91.3; 96.9; 98.4; 99.3
  - Taxes on production and imports: 22.8; 25.5; 27.8; 30.0; 30.9; 31.2
  - Taxes on income and property: 16.6; 16.8; 18.0; 18.8; 20.3; 19.6
  - Social insurance contributions: 26.1; 28.0; 31.8; 33.9; 33.3; 33.7
- Noninterest expenditures (billions of euros): 76.6; 80.4; 90.3; 98.6; 102.0; 105.1
  - Remuneration of workers: 22.3; 23.3; 25.2; 27.2; 29.1; 30.0
  - Social transfers, excl. those in kind: 31.8; 35.2; 39.4; 44.6; 48.2; 49.8
  - Investment expenditure: 9.0; 8.2; 9.3; 11.1; 10.1; 10.5
- Primary balance (billions of euros): -1.4; 2.7; 1.0; -1.6; -3.6; -5.8
- Interest (billions of euros): 8.7; 8.7; 9.3; 10.6; 11.6; 12.8
- Overall balance (billions of euros): -10.1; -6.0; -8.3; -12.2; -15.2; -18.6
- Revenues (percent of GDP): 38.1; 39.0; 40.0; 39.9; 40.3; 40.1
- Noninterest expenditures (percent of GDP): 38.8; 37.7; 39.6; 40.6; 41.8; 42.5
- Primary balance (percent of GDP): -0.7; 1.3; 0.5; -0.7; -1.5; -2.3
- Interest (percent of GDP): 4.4; 4.1; 4.1; 4.4; 4.8; 5.2
- Overall balance (percent of GDP): -5.1; -2.8; -3.6; -5.0; -6.2; -7.5
- Structural primary balance (over pot. output): -0.9; 0.6; -0.3; -2.8; -2.0; -1.9
- Structural overall balance (over pot. output): -5.3; -3.6; -4.5; -7.4; -6.8; -7.0
- Gross debt (percent of GDP): 99; 99; 95; 98; 109; 116

Sources for Table 6: Ministry of Economy and Finance; and IMF staff calculations.

### Public sector balance sheet (2007–14; Billions of euros and percent of GDP)
- Assets (billions of euros, 2007–14): 192.5; 196.0; 205.5; 208.0; 212.6; 214.4; 221.9; 226.0
- Financial assets (billions of euros): 76.1; 72.1; 81.0; 81.9; 83.5; 81.4; 84.2; 83.1
  - Shares: 42.0; 35.8; 36.0; 36.4; 37.2; 38.4; 39.8; 41.3
  - Banking assistance package: 0.0; 0.0; 8.5; 8.5; 8.5; 4.1; 4.1; 0.0
- Public sector capital stock (billions of euros): 116.4; 123.9; 124.6; 126.1; 129.0; 133.0; 137.7; 142.9
- Liabilities (billions of euros): 1,078.6; 1,155.9; 1,245.1; 1,331.6; 1,423.9; 1,517.9; 1,622.7; 1,722.1
  - Financial liabilities (billions of euros): 235.4; 249.2; 273.1; 292.0; 312.5; 330.4; 354.6; 376.7
  - Securities: 210.1; 222.3; 246.0; 264.6; 284.5; 301.5; 324.7; 345.6
- Net worth (billions of euros): -886.1; -959.9; -1,039.6; -1,123.6; -1,211.3; -1,303.5; -1,400.7; -1,496.1
- Memorandum: Gross debt Maastricht (Billions of euros): 216; 237; 266; 288; 309; 328; 352; 375
- Memorandum: Gross debt Maastricht (Percent of GDP): 94.8; 97.6; 108.8; 116.5; 122.2; 125.7; 130.4; 133.7

Source: IMF staff calculations that include the WEO Medium Term Baseline.

### External debt sustainability and vulnerability indicators (2004–14 projections and stress tests)
- Baseline external debt (percent of GDP, 2004–14): 100.1; 112.8; 117.4; 135.2; 149.2; 159.0; 168.6; 175.2; 179.5; 182.2; 184.0
- Change in external debt (percent of GDP): 5.6; 12.7; 4.7; 17.8; 14.0; 9.8; 9.6; 6.6; 4.3; 2.7; 1.8
- Identified external debt-creating flows (percent of GDP): -7.0; -4.2; -2.6; 0.2; 28.6; 10.5; 8.8; 6.1; 4.8; 3.7; 3.2
  - Current account deficit, excluding interest payments: 2.8; 4.0; 7.1; 9.5; 9.1; 4.5; 3.6; 2.8; 2.0; 1.4; 0.9
  - Deficit in balance of goods and services: 5.4; 6.2; 9.4; 10.9; 11.1; 7.8; 6.9; 6.5; 5.8; 5.3; 4.9
  - Exports (percent of GDP): 21.2; 21.0; 20.9; 21.4; 22.2; 17.0; 17.5; 18.0; 18.5; 19.0; 19.5
  - Imports (percent of GDP): 26.6; 27.1; 30.2; 32.3; 33.2; 24.8; 24.4; 24.5; 24.3; 24.3; 24.4
  - Net non-debt creating capital inflows (negative): -5.5; -5.7; -5.4; -6.3; 22.4; -2.9; -2.2; -2.7; -2.6; -2.4; -1.9
  - Automatic debt dynamics: -4.4; -2.5; -4.3; -3.0; -2.9; 8.9; 7.4; 6.0; 5.4; 4.7; 4.3
    - Contribution from nominal interest rate: 3.0; 3.5; 4.0; 4.7; 5.3; 6.4; 6.8; 7.1; 7.3; 7.5; 7.5
    - Contribution from real GDP growth: -4.3; -2.7; -4.7; -4.4; -3.7; 2.; 5; 0.6; -1.1; -2.; 0; -2.7; -3.3 (table formatting preserved as in source)
  - Residual, incl. change in gross foreign assets (2-3): 12.6; 16.9; 7.2; 17.5; -14.6; -0.7; 0.8; 0.5; -0.5; -1.0; -1.4
- External debt-to-exports ratio (in percent): 472.0; 537.7; 562.5; 632.5; 672.6; 935.0; 965.3; 972.6; 970.1; 960.4; 944.0
- Gross external financing need (in billions of euros): 63.3; 59.1; 74.7; 87.4; 126.4; 166.8; 140.2; 178.8; 194.8; 210.0; 226.6
  - in percent of GDP: 34.1; 29.9; 35.1; 38.3; 52.0; 68.3; 56.7; 70.7; 74.7; 77.8; 80.9
- Scenario with key variables at their historical averages (summary): 159.0; 160.2; 161.1; 161.3; 161.3; 160.8; -6.1 (as presented)

Key macroeconomic assumptions underlying baseline:
- Real GDP growth (in percent): 4.9; 2.9; 4.5; 4.0; 2.9; -1.7; -0.4; 0.7; 1.2; 1.6; 1.9
- GDP deflator in euros (change in percent): 3.3; 3.4; 3.2; 2.9; 3.4; 2.3; 1.7; 1.6; 1.9; 2.0; 1.9
- Nominal external interest rate (in percent): 3.4; 3.7; 3.8; 4.3; 4.2; 4.3; 4.3; 4.3; 4.3; 4.3; 4.3
- Growth of exports (euro terms, in percent): 21.1; 5.2; 7.4; 9.6; 10.5; -22.9; 4.0; 5.5; 5.9; 6.2; 6.6
- Growth of imports (euro terms, in percent): 13.0; 8.6; 20.2; 14.3; 9.6; -24.9; -0.6; 2.8; 2.5; 3.3; 4.3
- Current account balance, excluding interest payments: -2.8; -4.0; -7.1; -9.5; -9.1; -4.5; -3.6; -2.8; -2.0; -1.4; -0.9
- Net non-debt creating capital inflows: 5.5; 5.7; 5.4; 6.3; -22.4; 2.9; 2.2; 2.7; 2.6; 2.4; 1.9

Stress tests and bound tests (selected scenario outcomes):
- Interest rate shock, non-interest current account shock, combined shock, real depreciation shock, growth shock depicted with baseline and historical averages (figures and scenario labels preserved as in source tables and charts).
- Example scenario highlights from figures (as presented): Baseline: 100; Historical: 161; Interest rate shock: 186; Growth shock: 188; Real depreciation shock (30% depreciation): 264; Combined shock: 191; CA shock: 184.

Notes on methodology in External Debt Sustainability Framework:
- Automatic debt dynamics derived using formula with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in euro terms; g = real GDP growth rate; ε = nominal appreciation; α = share of domestic-currency denominated debt in total external debt.
- Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

### Document identification and preparation
- Document: Staff Report for the 2009 Article IV Consultation—Informational Annex
- Prepared by: European Department
- Date: June 30, 2009

*Source: IMF staff report materials contained in the provided PDF content.*

### APPENDIX I. GREECE: FUND RELATIONS

### APPENDIX I. GREECE: FUND RELATIONS

### I. Membership Status
- Joined December 27, 1945.
- Accepted the obligations of Article VIII, Sections 2, 3, and 4.

### II. Exchange Rate Arrangements
- Currency: euro, which floats freely and independently against other currencies.
- Maintains an exchange system free of restrictions apart from those resulting from European Council regulations, last notified to the Fund in accordance with Decision 144 under EBD/08/35, 4/18/08.

### III. General Resources Account (SDR Million; Percent Quota)
- Quota: 823.00 — 100.00 percent
- Fund holdings of currency: 668.27 — 81.20 percent
- Reserve position in Fund: 154.77 — 18.81 percent

### IV. SDR Department (SDR Million; Percent Allocation)
- Net cumulative allocation: 103.54 — 100.00 percent
- Holdings: 15.34 — 14.81 percent

### V. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
Forthcoming principal and charges/interest by year:
- 2009 — Charges/Interest: 0.20
- 2010 — Charges/Interest: 0.41
- 2011 — Charges/Interest: 0.41
- 2012 — Charges/Interest: 0.41
- 2013 — Charges/Interest: 0.41
- Total (listed): 0.20 0.41 0.41 0.41 0.41

### VI. Article IV Consultation Cycle and Missions
- Consultation cycle: 12-month.
- Last Article IV consultation discussions concluded: April 18, 2008 (EBM/08/34–1).
- Last Article IV mission: May 13–25, 2009 in Athens.
- Mission concluding statement available at: http://www.imf.org/external/np/ms/2009/052509.htm

### VII. Statistical Issues — Assessment of Data Adequacy for Surveillance (As of June 5, 2009)
General:
- Greek economic data have some weaknesses for surveillance. Most affected areas: national accounts, government finance, balance of payments, and their inter-relationships.

National Accounts:
- Broadly in line with the European System of Accounts (ESA95).
- Introduction of a production method approach for quarterly national accounts has resulted in volatility and large statistical discrepancies, reducing usefulness for assessing conjunctural developments and projections.
- Greece intends to change the GDP base in 2010 (in line with other EU countries).
- Labor market interpretation hampered by difficulties covering immigrants and the large size of the unrecorded economy; recent national accounts revisions may not have fully captured the unrecorded economy.

Government Finance Statistics:
- National Statistical Service compiles general government revenue, expenditure, and deficit on an accrual basis under the 1995 ESA Transmission Program and the Excessive Deficit Procedure.
- Absence of financing data impedes checks on data consistency, including reconciliation between government deficit and debt and between government finance statistics and other macro datasets.
- Fiscal data are difficult to match with public consumption and capital formation in national accounts; differences are not stable over time.
- Mapping of fiscal cash accounts to accrual SGP data is unstable and tends to indicate a lower deficit in SGP accounts; differences tend to be partially reconciled ex-post, leading to an increase in the SGP deficit.
- Fiscal data, even on cash revenue, are published with large delays.
- Social security data are weak and incomplete.

External Sector Statistics:
- Balance of payments (BOP) data present departures from BPM5.
- Significant differences remain compared with national-accounts-based current account data.
- Discrepancies in exports and imports between BOP and NA data are unstable over time.
- Efforts are underway to address these problems.

### VIII. Data Standards and Quality
- Subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since November 8, 2002.
- A data module of the Report on the Observance of Standards and Codes (ROSC) was published in 2003, and was updated in 2004 and 2005 in the context of the Article IV staff report.

### IX. Selected Operational Reporting and Data-Frequency Notes (As of June 5, 2009)
- Exchange Rates: latest observation Jun. 09; Date received 6/5/09; Frequency of Data/Reporting/Publication: D / D / D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: latest observation Apr. 09; Date received 5/29/09; Frequency: M / M / M.
- Reserve/Base Money: May. 09; received 6/1/09; Frequency: M / M / M.
- Broad Money: Apr. 09; received 5/29/09; Frequency: M / M / M.
- Central Bank Balance Sheet: Apr. 09; received 5/29/09; Frequency: M / M / M.
- Consolidated Balance Sheet of the Banking System: Apr. 09; received 5/29/09; Frequency: M / M / M.
- Interest Rates: Jun. 09; received 6/5/09; Frequency: D / D / D.
- Consumer Price Index: Apr. 09; received 5/7/09; Frequency: M / M / M.
- Revenue, Expenditure, Balance and Composition of Financing — General Government: 2008; received 3/11/09; Frequency: A / A / A.
- Revenue, Expenditure, Balance and Composition of Financing — Central Government: Mar. 09; received 5/11/09; Frequency: M / M / M.
- Stocks of Central Government and Central Government-Guaranteed Debt: 2009 Q1; received 05/20/09; Frequency: Q / Q / Q.
- External Current Account Balance: 2009 Q1; received 5/22/09; Frequency: M / M / M.
- Exports and Imports of Goods and Services: 2009 Q1; received 5/22/09; Frequency: M / M / M.
- GDP/GNP: 2009 Q1; received 6/4/09; Frequency: Q / Q / Q.
- Gross External Debt: 2008 Q4; received 4/24/09; Frequency: Q / Q / Q.
- International Investment Position: 2008 Q4; received 3/30/09.

(Note: Frequency codes — Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); not available (NA).)

### X. Supplementary Information — Government Revised Outlook and Fiscal Measures (June/July 2009)
Government revised macro outlook and measures:
- Authorities revised down their growth forecast for 2009 from 1.1 percent to zero percent; expect a recovery to begin at end-2009.
- Authorities continue to target a fiscal deficit of 3.7 percent of GDP in 2009.
- Introduced a package of fiscal measures expected to yield, in gross terms, 0.8 percent of GDP (largest is a one-off revenue measure).
- Authorities stepping up efforts at reducing tax evasion and envision announcing further structural measures in October to assist consolidation in the 2010 budget.

IMF staff fiscal projections and assessment:
- Staff reduced its headline deficit projections in net terms by 0.3 percentage point to 5.9 percent of GDP in 2009 and by 0.8 percentage point to 6.7 percent in 2010 (staff estimates remain wider than authorities’).
- Staff estimates do not include €500 million sale/lease-back operations of government properties planned for 2009 and 2010 each (could temporarily reduce headline deficit).
- Taking into account permanent components in measures and some expenditure increases, the structural balance is estimated to improve by a net 0.4 percentage point of GDP (full-year effects) in the medium term.
- Staff welcomes additional policy steps but emphasizes that significant durable fiscal consolidation from 2010 onward remains essential, including containing expenditures.

Greece: Fiscal Measures, June 2009 (Percent of GDP)
- Total measures: 0.8
  - Revenues:
    - Increase of excise duty on petrol: 0.1
    - Increase of duties paid by mobile phone subscribers: 0.1
    - Tax on earnings from gambling: 0.1
    - Special tax on automobiles and yachts: 0.1
    - Settlement for semi-open air spaces 2/: 0.5
    - Increase in lawsuit and court fees: 0.02
  - Expenditures:
    - Reduction of Official Development Assistance: 0.05
- Memorandum items:
  - One-off measures: 0.5
  - Permanent measures 3/: 0.3
  - 3/ Equivalent to 0.6 percent of GDP on a full-year basis.
  - 2/ Legalizing previously unauthorized construction, yielding a one-time revenue settlement.
- Footnote: 1/ Measures announced by the Minister of Finance on June 25, 2009.

### XI. Executive Board Assessment and Public Information Notice Highlights (July–August 2009)
Key points from Executive Directors:
- Welcomed extended period of strong growth through 2008 that narrowed the gap in real per-capita income with the EU-15.
- Noted Greece’s large fiscal and external imbalances making it vulnerable during the global downturn.
- Emphasized need to address loss in competitiveness and implement a comprehensive plan for fiscal consolidation and structural reform.
- Observed banks have weathered the crisis relatively well but face higher funding costs, slower activity, asset-quality erosion, and rating downgrades; commended authorities’ bank assistance package and stress tests; advised continued vigilance and preparation for unwinding liquidity support.
- Emphasized fiscal consolidation can no longer be postponed, welcomed 2009 deficit-reducing measures, called for further durable efforts to place public debt on sustainable downward path, protect vulnerable groups, continue income policies to slow public wage and pension costs, and renew social security reform efforts.
- Urged structural reform in public administration, public enterprises, product and labor markets; streamline public sector, reduce administrative burdens, liberalize network industries, implement the EU Services Directive, and strengthen official statistics and data publication.

### XII. Greece: Selected Economic Indicators, 2005–09 (Selected series; values preserved exactly)
Real economy (change in percent)
- Real GDP: 2005 2.9; 2006 4.5; 2007 4.0; 2008 2.9; 2009 -1.7
- Domestic demand: 2005 2.1; 2006 4.7; 2007 5.1; 2008 0.7; 2009 -2.5
- HICP (average): 2005 3.5; 2006 3.3; 2007 3.0; 2008 4.2; 2009 1.1
- Unemployment rate (in percent): 2005 9.9; 2006 8.9; 2007 8.3; 2008 7.6; 2009 9.5

Public finance (general government; in percent of GDP)
- Overall balance: 2005 -5.1; 2006 -2.8; 2007 -3.6; 2008 -5.0; 2009 -5.9
- Primary balance: 2005 -0.7; 2006 1.3; 2007 0.5; 2008 -0.7; 2009 -1.2
- Gross debt: 2005 98.8; 2006 95.9; 2007 94.8; 2008 97.6; 2009 108.5

Interest rates
- Long-term lending interest rate: 2005 5.8; 2006 6.3; 2007 7.2; 2008 7.2; 2009 6.4
- Government bond yield: 2005 3.6; 2006 4.1; 2007 4.5; 2008 4.8; 2009 5.2

Balance of payments (in percent of GDP)
- Trade balance: 2005 -6.2; 2006 -9.4; 2007 -10.9; 2008 -11.1; 2009 -7.8
- Current account: 2005 -7.5; 2006 -11.1; 2007 -14.1; 2008 -14.4; 2009 -10.9

Fund position (as of May 31, 2009)
- Holdings of currency (in percent of quota): 81.2
- Holdings of SDRs (in percent of allocation): 14.8
- Quota (in millions of SDR): 823.0

Exchange rate
- Exchange rate regime: Euro Area Member
- Present rate (July 9, 2009): US$ 1.4026 per euro
- Nominal effective rate (2000 = 100): 2005 109.4; 2006 111.4; 2007 113.9; 2008 115.7; 2009 115.3
- Real effective rate (2000 = 100): 2005 113.1; 2006 115.8; 2007 118.7; 2008 120.4; 2009 120.2

(Sources cited in the content: National Statistical Service; Ministry of Economy and Finance; Bank of Greece; and IMF staff estimates.)

*APPENDIX I. GREECE: FUND RELATIONS (As of May 31, 2009; Statistical and Supplementary information as of June–July 2009).*

### 3.7 percent of GDP therefore implied a substantial consolidation in structural terms. With

### _cr09244 - 3.7 percent of GDP therefore implied a substantial consolidation in structural terms. With

### Fiscal strategy and objectives
- Short-run aim: contain mounting fiscal pressures while protecting the most vulnerable social groups and avoiding a more pronounced slowdown.
- Medium-term aim (beyond 2009): pursue further fiscal consolidation and structural fiscal reforms to place the debt-to-GDP ratio firmly on a downward path and correct the external imbalance.
- Risk noted: the general government deficit in 2009 could exceed the 3.7 percent of GDP target, which was based on a better economic outlook than is now envisaged.

### Fiscal measures taken in 2009
- March measures:
  - Freeze on government wages and pensions in 2009.
  - One-off payment of up to €500 for lower-paid workers and pensioners.
  - One-off levy on high-income earners.
- June 25 package:
  - Additional measures expected to yield 1 percent of GDP in the remainder of the year (1.4 percent of GDP on an annualized basis).
  - Package consists largely of one-off revenue measures with immediate impact on the deficit.
  - These measures largely offset the operation of automatic stabilizers.
- Authorities' acknowledgement:
  - One-off measures cannot substitute for fundamental reform needed to address the sources of the excessive deficit.
  - A package of longer-term structural measures is being prepared to be announced in the fall in the context of the 2010 budget.

### Planned structural reforms and administrative actions
- Focus of longer-term structural consolidation measures:
  - Public sector wage bill.
  - Deficits of the social security funds.
  - Deficits of public enterprises.
  - Deficits of hospitals.
- Administrative and accounting reforms already underway:
  - More effective control over finances of local governments, hospitals, and state entities.
  - Move to double-entry book-keeping and online mechanisms for cross-checking and auditing.
  - Administrative reform of the social security funds concluded in 2008 could result in considerable savings when fully implemented.

### Financial sector condition and policy response
- Systemic assessment:
  - Greek banks were not exposed to toxic structured products.
  - Reliance on wholesale funding was manageable given a large deposit base and access to ECB funding.
  - Banks were well capitalized and liquid, but credit risk increased and asset quality deteriorated amid a weaker economic environment.
  - Fragilities also stemmed from exposure to Southeastern Europe.
- Bank support package (late 2008):
  - Total amount: €28 billion (11 percent of GDP).
  - Components: capital injections, liquidity support, and funding guarantees.
  - Greek banks received a €4 billion capital injection through the package and raised an additional €2 billion from the market so far this year.
- Stress tests and supervisory actions:
  - Stress tests by the Bank of Greece and Fund staff concluded the banking system as a whole has sufficient capital buffers to weather the recession, although some institutions might need additional capital under some stress scenarios.
  - The Bank of Greece took preventive steps to ensure robust capital positions and adequate provisioning.
  - Several banks were able to issue unsecured loans at spreads significantly lower than in the recent past.
- Financial Stability Report findings (inaugural issue, late June):
  - Impact of the global crisis on the Greek banking sector was milder than elsewhere in the Euro area.
  - Exposure to credit and liquidity risk increased and capital adequacy declined but stayed above statutory limits as the crisis deepened in late 2008.
  - Negative trends continued into Q1 2009: NPLs rose to 6 percent, causing the provisions-to-NPL ratio to fall to 44 percent.
  - Note: the provisions-to-NPL ratio does not take into account sizeable guarantees and collateral held by Greek banks; its steady decline across all loan categories points to the need for continued vigilance.
  - Overall conclusion: capital and liquidity buffers of the Greek banking sector remain fundamentally sound and provide a satisfactory margin of safety to cover risks and ensure financial stability.

*Source: IMF staff report excerpt contained in the provided PDF content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09244.pdf_