## _cr10110 ## Source details **Canonical URL:** [_cr10110](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10110.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10110.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10110.pdf.json) --- ### Executive summary and program overview - Greece requests a 3-year Stand-By Arrangement (SBA) under exceptional access and emergency financing for €30 billion (SDR 26.4 billion or 3,212 percent of quota) with an initial purchase of €5.5 billion (SDR 4.8 billion) available upon Board approval. - Euro-zone partner countries prepared to commit €80 billion with a first disbursement of €14.5 billion. - Program objectives: - Lower the fiscal deficit and the debt ratio. - Reduce domestic demand in line with capacity and achieve internal devaluation to restore competitiveness. - Increase supply capacity so the economy can move to investment- and export-led growth. - Safeguard financial sector stability via a Financial Stability Fund (FSF) and liquidity support, including ECB backing. - Frontloaded fiscal adjustment: measures of 7½ percent of GDP in 2010, 4 percent of GDP in 2011, and 2 percent of GDP in 2012 and 2013, each, with measures identified up to 2013. - Fiscal targets: fiscal deficit targeted to drop below 3 percent of GDP by 2014; debt-ratio projected to peak at 149 percent of GDP in 2013. - Social protections: exempting minimum-wage recipients from reductions in wages and pensions; social expenditures provide targeted safety nets for the most vulnerable. ### Macroeconomic baseline, outlook, and key projections - Growth profile (real GDP growth, selected years): 2009 -2.0; 2010 -4.0; 2011 -2.6; 2012 1.1; 2013 2.1; 2014 2.1; 2015 2.7. - Nominal GDP growth (selected years): 2009 -0.7; 2010 -2.8; 2011 -3.1; 2012 2.1; 2013 2.8; 2014 3.1; 2015 3.8. - Unemployment rate (selected years): 2009 9.4; 2010 11.8; 2011 14.6; 2012 14.8; 2013 14.3; 2014 14.1; 2015 13.4. - CPI inflation (selected years): 2009 1.3; 2010 1.9; 2011 -0.4; 2012 1.2; 2013 0.7; 2014 0.9; 2015 1.0. - External sector (current account balance, percent of GDP): 2009 -11.2; 2010 -8.4; 2011 -7.1; 2012 -5.6; 2013 -4.0; 2014 -2.8; 2015 -1.9. - Real export growth (national accounts basis, percent change): 2009 -18.1; 2010 4.5; 2011 5.4; 2012 5.9; 2013 6.0; 2014 5.9; 2015 6.0. - Program narrative: sharp contraction in 2010–11 and recovery thereafter (V-shaped pattern under baseline), with unemployment peaking at nearly 15 percent by 2012. ### Fiscal strategy, measures, and targets - Total consolidation package: 11 percent of GDP during 2010–13 in addition to 5 percent of GDP measures already adopted in 2010. - Target for primary balance: reach medium-term target of 5–6 percent of GDP; primary balance projected (percent of GDP): 2009 -8.6; 2010 -2.4; 2011 -0.9; 2012 1.0; 2013 3.1; 2014 5.9; 2015 6.0. - Cumulative measures (percent of GDP, by year): 2010 2.5; 2011 6.7; 2012 9.0; 2013 11.0; 2014 12.6; 2015 12.2. - Composition of the 11 percent package: - Expenditure measures: estimated 5.2 percent of GDP (examples: elimination of 13th and 14th pensions/wages for higher earners, employment reductions, cuts in discretionary investment, consolidation of local governments). - Revenue measures: estimated 4.0 percent of GDP (examples: VAT rate increase—standard VAT 21 to 23 percent and reduced rate 10 to 11 percent—excises on fuel, cigarettes, tobacco to EU averages; higher real estate assessment; presumptive taxation; temporary crisis levy on profitable firms). - Structural fiscal reforms yield: 1.8 percent of GDP by 2013 (improved budget control and tax administration). - Box 3 tabulated composition (Percent of GDP): Total: 2.5 4.1 2.4 2.0 Cum. 11.1; Revenue: 0.5 3.0 0.8 -0.3 4.0; Expenditure: 2.0 1.1 1.7 0.5 5.3; Structural reforms: 1.8 1.8. - Medium-term fiscal indicators (selected, percent of GDP): - Overall balance: 2009 -7.7; 2010 -13.6; 2011 -8.1; 2012 -7.6; 2013 -6.5; 2014 -4.9; 2015 -2.6; 2016 -2.0. - General government debt: 2008 99; 2009 115; 2010 133; 2011 145; 2012 149; 2013 149; 2014 145; 2015 139. ### Financial sector stability, FSF design, and liquidity - Banking sector starting position: - Capital increased from €24 billion to €33 billion during 2009; average capital adequacy ratio 11.7 percent at end-2009. - Nonperforming loans (NPLs) reached 7.7 percent at year-end 2009; return on assets (after taxes) turned negative in 2009 (-0.1). - Immediate liquidity pressures: - Banks lost wholesale market access since end-2009; increasing reliance on Eurosystem credit. - Government extended early-2009 support package: original package €28 billion (of which €11 billion used by end-2009); additional liquidity provided €17 billion; implementing another extension subject to EC approval. - ECB announcement of May 3: Greek government market debt instruments to remain eligible as collateral, independent of ratings, to alleviate liquidity pressures. - Financial Stability Fund (FSF): - Purpose: ensure adequate capitalization of banks and provide equity in form of preferential shares convertible to ordinary shares; trigger mandatory if supervisory assessment indicates capital buffers fall below adequate levels. - Resources: MoF will fund FSF from proceeds of IMF-eurozone credit disbursement; amount destined for FSF €10 billion. - Governance and operational features: - FSF fully independent; lifespan limited to 7 years; board includes appointees from Bank of Greece and MoF; ECB and EC observers with right to participate in meetings. - FSF to manage participations aiming to sell holdings within a limited timeframe; remaining shares at cessation transferred to MoF. - Preference shares repurchase/remuneration rules and conversion conditions aligned with EU state aid and competition requirements. - Supervisory strengthening: Bank of Greece to intensify supervision, increase staffing, increase frequency/speed of data reporting, enhance stress-testing, and grant legal protection for staff actions in good faith. ### Program financing, Fund access, and phasing - Total external financing gap for the fiscal program projected around €110 billion; within which resources for the FSF are expected to be €10 billion. - Financing split: bilateral lending support from euro area member states €80 billion; IMF support €30 billion; Greece to draw on IMF and EU resources in a constant 3:8 ratio throughout program period. - Proposed Stand-By Arrangement total access: SDR 26,432.9 (3,211.8 percent of quota). - Phasing and purchases (selected SDR mn and percent of quota): - May 9, 2010 — Board approval: 4,805.9; 583.9 - Aug 30, 2010 — First Review: 2,162.7; 262.8 - Feb 28, 2011 — Third Review: 3,604.5; 438.0 - (Full phasing table preserved in source.) - Projected Fund disbursements (millions of euros): 2010: 10,364; 2011: 10,909; 2012: 6,546; 2013: 2,182. - Projected outstanding Fund credit (millions of euros, selected): 2010: 10,364; 2011: 21,273; 2012: 27,818; 2013: 28,330; 2014: 20,523; 2015: 9,921. ### Capacity to repay, debt service, and Fund risk assessment - Fund exposure implications: - Outstanding credit to the Fund expected to peak in 2013 at about 12 percent of GDP (GRA credit to Greece in percent of GDP: 2012 9.5; 2013 12.2; 2014 12.1; 2015 8.5). - Debt service to the Fund as ratio of exports of goods and services projected to peak at 17 percent (projected total debt service to the Fund as percent of Exports of goods and services: 2015 17.0). - Combined peak debt service including eurozone borrowing: about SDR 36 billion annually; combined peak external debt service ratios about 17 percent of GDP; about 46 percent of general government revenues; over 60 percent of exports of goods and services. - Annex findings on public debt (public sector debt percent of GDP, selected): 2008 98; 2009 115; 2010 133; 2011 145; 2012 149; 2013 149; 2014 145; 2015 139; 2020 120. - Annex sensitivity scenarios (selected impacts relative to baseline): - Recognition of implicit/contingent liabilities (25.8 billion or 11 percent of GDP): debt would be 138 percent of GDP by 2020. - Weaker fiscal adjustment (smaller adjustment of 1 percent of GDP per year): debt would decline to about 132 percent of GDP by 2020. - Weaker growth (1 percentage point reduction in GDP growth each year): debt would rise to around 166 percent of GDP by 2020. - Faster growth (1 percentage point higher): debt would fall to 80 percent of GDP by 2020. - More severe deflation (3 percentage point lower inflation than baseline in 2010–12): debt-to-GDP ratio would peak at 174 percent of GDP and decline to 168 percent of GDP by 2020. - Higher interest rate (increase of 200bps): public debt would increase to 131 percent of GDP by 2020. - Conclusion on exceptional access criteria: - Criterion 1: Met (exceptional BOP pressures). - Criterion 2: Met with caveats (debt peaks at almost 150 percent of GDP then declines only under strong reforms and regained market access). - Criterion 3: Met (prospect of regaining market access within Fund resource period conditional on implementation and partners). - Criterion 4: Met (policy program provides reasonable prospect of success given measures and political backing). ### Key program risks and contingencies - Major downside risks: - Growth weaker than projected; deeper upfront contraction hurts debt dynamics. - Political fatigue and resistance from entrenched interests delaying reforms. - Private sector wage downward rigidity and delayed price adjustment. - Financial sector deterioration requiring additional public resources. - Data weaknesses and revisions that could worsen fiscal outlook. - Adverse spillovers from other highly indebted countries. - Contingency stance: - Government committed to cut discretionary spending further if required. - FSF and ECB/Bank of Greece liquidity support to mitigate banking risks. - Continuous technical support from Fund and EU to strengthen institutions and data. - If revenues outperform, authorities will save overperformance to accelerate debt reduction. ### Structural reforms and conditionality (programmatic priorities and benchmarks) - Structural reform priorities: public administration modernization, labor market flexibility, competition and business environment, network industry liberalization, improved absorption of EU structural funds, pension and health sector reforms. - Pension reform (planned and benchmarks): - Draft law available by end-June 2010; comprehensive reform to be adopted by end-September 2010; objectives include reducing replacement rates (from average 75 percent to 60 percent in staff proposal), increase normal retirement age to 65, limit early retirement to age 60 for all workers, index benefits to prices, and merge pension funds into three funds. - If fully implemented, pension reform would reduce the projected increase in pension spending over 2010–50 from 12½ percentage points of GDP to less than 4½ percentage points. - Health sector reforms: implement double-entry accrual accounting in hospitals, publish audited accounts, improve pricing and costing, separate health funds from pension administration, move toward unification of health activities under one ministry. - Structural benchmarks (selected, end-June 2010): - Establish independent Financial Stability Fund (FSF). - Adopt and start to implement reorganization of sub-central government (Kalikrates). - Submit to parliament amendments to Law 2362/1995 to introduce three-year fiscal strategy, top-down budgeting with expenditure ceilings, contingency margins, and commitment controls. - National Actuarial Authority to produce actuarial report on pension system parameters. - Monitoring and reporting: - Program monitored via quarterly performance criteria, indicative targets, structural benchmarks, joint IMF/EC/ECB reviews; TMU dated May 3, 2010 defines indicators and reporting requirements. - Timely monthly and quarterly reporting obligations by MoF, GAO, and Bank of Greece specified in TMU (e.g., central government revenue cumulative from Jan 1, 2010: June 2010 €25,056 million; Sept 2010 €41,232 million; Dec 2010 €58,382 million). ### Key policy recommendations and operational features (implied actions) - Frontload and fully identify consolidation measures through 2013; maintain balance between revenue and expenditure measures. - Protect low-income households and ensure fair burden sharing (income tax harmonization, means-tested compensation to low-income retirees and civil servants). - Implement FSF with independent governance, clear conversion and restructuring rules consistent with EU state aid and competition law. - Intensify Bank of Greece supervision: more staffing, faster reporting, regular stress-testing, legal protections for staff, and cross-border coordination with host supervisors. - Strengthen statistical governance and fiscal reporting: full independence of Statistical Office, monthly cash reporting, GAO strengthening, and Eurostat action plan implementation. - Pursue deep structural reforms to restore competitiveness: make labor markets more flexible, open restricted professions, liberalize network industries, improve public administration efficiency, and boost absorption of EU funds. *Source: _cr10110 - Executive Summary; MEFP; TMU; Annex 1; Annex 3; Staff Appraisal; Attachment V — excerpts from the IMF staff report (May 2010).* ### Executive Summary ### _cr10110 - Executive Summary ### Background - The Greek economy is teetering due to heavy public debt and loss of market access. - The structural fissure is in weak competitiveness—inflation has consistently out-paced the euro average. - The dual challenge of undertaking very large fiscal adjustment and simultaneously achieving internal devaluation is bound to limit growth for a protracted period, weighing in turn on the banking system. - Banks entered the crisis with sound liquidity and solvency indicators, but sovereign downgrading dragged them down, and the recession and uncertainty are causing distress. ### Main elements of the program - Greece is adopting an ambitious comprehensive multi-year adjustment program to lower the fiscal deficit and the debt ratio, reduce domestic demand in line with capacity, and increase supply and competitiveness so that the economy can step onto a higher growth path led by investments and exports. - Authorities request a 3-year Stand-By Arrangement under the exceptional access policy and the emergency financing mechanism for €30 billion (SDR 26.4 billion or 3,212 percent of quota) with an initial purchase of €5.5 billion (SDR4.8 billion) available upon Board approval. - The euro-zone partner countries are prepared to commit €80 billion with a first disbursement of €14.5 billion. - Fiscal policy is frontloaded with measures of 7½ percent of GDP in 2010, 4 percent of GDP in 2011, and 2 percent of GDP in 2012 and 2013, each, to turn around the fiscal position and help place the debt ratio on a downward path. Measures are identified up to 2013. - The fiscal deficit is targeted to drop below 3 percent of GDP by 2014, and the debt-ratio would peak at 149 percent of GDP in 2013. - Program provisions include shielding low-income households: exempting those living on the minimum from the reductions in wages and pensions, and social expenditures will provide the safety net for the most vulnerable. - A Financial Stability Fund (backed by the international financing package) will be established to ensure adequate capitalization of the banking system; liquidity pressures would be met, including with ECB support. - Coordination with the European Commission (EC) and the European Central Bank (ECB) on program implementation and financing will be crucial. - Risks to the program are high: the adjustment needs are unprecedented and will take time, so fatigue could set in. Any unforeseen shock could weigh on the economy and the banking system even if the fiscal program is on track. Greece needs to persevere to ensure continued international support. ### Introduction and strategic diagnosis - Greece entered the crisis with deep-rooted vulnerabilities: - High fiscal deficits and dependency on foreign borrowing fueled demand; growth averaged some 4 percent over 2000–08, while fiscal policies were pro-cyclical, worsening the primary balance by nearly 7 percentage points of GDP over this period. - In 2009 output dropped by 2 percent and election-driven and partially-unreported spending worsened the fiscal deficit to 13.6 percent of GDP. - High aging and entitlement costs: spending on pensions is projected to increase by 12½ percentage points of GDP over 2010‒50, while the health system's spending is projected to increase by 4½ percentage points of GDP over the same period. - Weak competitiveness, limited supply capacity, and a poor business environment: estimated overvaluation of Greece’s real effective exchange rate of 20‒30 percent and poor scores on OECD and EU indicators for economic efficiency and flexibility. - Consequence: Greece needs a strong and sustained adjustment program to lower the fiscal deficit substantially, create the basis for a declining debt ratio, bring domestic demand in line with supply capacity, and improve competitiveness. ### Recent economic developments and financial sector implications - Data revisions and misreporting: - The 2008 deficit was revised from 5 percent of GDP to 7.7 percent of GDP. - The projected 2009 deficit was revised from 3.7 percent of GDP to 12.5 percent of GDP; the provisional estimate for 2009 now stands at 13.6 percent of GDP. - Public debt was corrected from 99.6 percent of GDP to 115.1 percent of GDP at end-2009. - Eurostat validation could lead to an upward revision of the 2009 deficit by 0.3–0.5 percent of GDP and the debt by 5–7 percent of GDP; corrections for previous years cannot be ruled out. - Institutional shortcomings and political interference in data disclosure were identified; remedial actions include a new law granting independence to the Statistical Office and an action plan with Eurostat. - Market reaction and financing pressures: - Initial government measures in January–March 2010 were insufficient to restore confidence; access to foreign funding dried up and spreads on government paper widened, threatening the banking system and economy. - Banking sector position and stress: - Banks entered the crisis with strengthened capital buffers: capital increased from €24 billion to €33 billion during 2009, yielding an average capital adequacy ratio of 11.7 percent at end-2009. - Despite this, sovereign downgrades and market volatility pressured liquidity; credit contraction and rising loan impairments led to NPLs reaching 7.7 percent at year end. - Increasing funding costs and limited wholesale access led banks to increasingly use Eurosystem credit. ### Contagion and external risks - Immediate contagion channels include: - Sovereign debt and financial markets of other eurozone countries with relatively weak fiscal finances. - Foreign financial institutions with substantial exposures to Greek paper. - Depositor confidence in Southeastern Europe (SEE) where Greek banks’ subsidiaries are important. - Beyond immediate effects, contagion could be unpredictable and pose serious risks to the global recovery. ### Framework for cooperation (IMF, EC, ECB) - Program design: coordinated framework with quadrilateral discussions producing unified macroeconomic and structural policy parameters in the MEFP/TMU (IMF) and MEFP/MoU (EC). - Program monitoring: Fund conditionality via quarterly performance criteria and structural benchmarks; EC conditionality based on overall progress against the MoU and macro targets, assessed in liaison with the ECB; joint review missions with IMF, EC and ECB staff; disbursements intended to coincide in a fixed 3-8 proportion between the Fund and European financing mechanism. - Financing arrangements: bilateral support from Greece’s 15 partner eurozone countries in ratio to ECB capital shares; governed by a single loan agreement signed by the EC on their behalf covering the full three years; loans match Fund maturities, carry floating rates (3-month Euribor) plus a spread of 3 percentage points, rising to 4 percentage points for amounts outstanding beyond three years; one-off service charge of 0.5 percent; Greece to draw on IMF and EC facilities in a constant 3:8 ratio throughout the program period. *Source: _cr10110 - Executive Summary.* ### 9. The authorities’ program focuses on the three key challenges: ### 9. The authorities’ program focuses on the three key challenges: ### Program objectives and key challenges - Restoring confidence and fiscal sustainability: - The program envisages an exceptionally strong frontloaded fiscal effort, with fully identified measures through 2013. - Objective: bolster confidence, regain market access, and put the debt-to-GDP ratio on a declining path from 2013. - Restoring competitiveness: - Measures include nominal wage and benefit cuts and structural reforms to reduce costs and improve price competitiveness. - Aim: help Greece transition to a more investment and export-led growth model. - Also envisages improved transparency and a reduced role of the state in the economy. - Safeguarding financial sector stability: - As the banking system goes through a period of disinflation expected to impact profitability and bank balance sheets, tools for dealing with solvency pressures will be expanded by establishing a Financial Stability Fund (FSF). - To mitigate potential liquidity pressures, the existing government banking liquidity support facilities will be extended. - The ECB’s recent suspension of the application of the minimum credit rating threshold in the collateral eligibility requirements on debt instruments issued by the Greek government will also serve as a useful liquidity backstop. ### Exceptional international support and baseline outlook - Exceptional efforts by the authorities are envisioned to be met with exceptional financial support from the international community to allow the government time to turn the economy and the fiscal balance around. - Under the baseline macroeconomic framework, strict adherence to program policies with strong international support should allow a gradual rebuilding of market access at reasonable spreads. ### Macroeconomic framework: key projections and dynamics - Transition to a sustainable model will take time; fiscal consolidation needs are large and must be sustained over several years. - Without exchange rate adjustment, Greece must rely on internal devaluation—a long process. Fiscal multipliers are likely large; foreign sector is relatively small. - External environment expected to remain weak short term; structural reforms take time to implement and yield results. - Real GDP growth path: - Expected to contract sharply in 2010–11 and recover thereafter, following a V-shaped pattern. - Frontloaded fiscal contraction in 2010–11 will suppress domestic demand short run; from 2012 onward confidence effects, regained market access, and structural reforms are expected to lead to recovery. - Unemployment is projected to peak at nearly 15 percent by 2012. - Inflation expectations: - Inflation is expected to remain below the euro average. - Price adjustment to come from domestic demand tightening, fiscal adjustment, moderation of public wages and pensions, and broader cost moderation. - Improved public wage dynamics should contribute to moderation of private sector wages and help restore price competitiveness over time. ### Greece: Selected Macroeconomic Indicators, 2009-2015 (Percentage change; or percent) - Years: 2009 2010 2011 2012 2013 2014 2015 - Nominal GDP growth: -0.7 -2.8 -3.1 2.1 2.8 3.1 3.8 - Real GDP growth: -2.0 -4.0 -2.6 1.1 2.1 2.1 2.7 - CPI inflation: 1.3 1.9 -0.4 1.2 0.7 0.9 1.0 - Employment growth: -1.4 -2.6 -3.2 -0.2 0.7 0.3 0.9 - Unemployment rate: 9.4 11.8 14.6 14.8 14.3 14.1 13.4 - Per capita real GDP growth: -2.2 -4.2 -2.7 1.0 2.1 2.0 2.6 - Sources: Greek authorities; and Fund staff projections. ### Current account and external sector - Current account deficit expected to narrow gradually as domestic demand and inflation moderate and as structural reforms improve export supply. - Continued high interest costs on large accumulated external debt will limit the speed of headline current account deficit reduction. ### Greece: Selected External Indicators, 2009-2015 (Percent of GDP, unless otherwise indicated) - Years: 2009 2010 2011 2012 2013 2014 2015 - Current account balance: -11.2 -8.4 -7.1 -5.6 -4.0 -2.8 -1.9 - Primary current account 1/: -5.4 -1.1 2.1 3.8 4.9 5.7 6.1 - 1/ Excluding interest payments. - International Investment Position: -86 -95 -104 -106 -106 -105 -102 - Real export growth 2/: -18.1 4.5 5.4 5.9 6.0 5.9 6.0 - Real import growth 2/: -14.1 -9.7 -6.1 1.6 3.8 4.6 3.7 - 2/ National accounts basis. Percentage change. - Sources: Greek authorities; and Fund staff projections. ### Policy discussion — Fiscal policy: objectives and measures - Agreement: fiscal adjustment should be frontloaded and aimed at reducing the debt-GDP ratio from 2013 and the general government deficit to well below 3 percent of GDP by 2014. - Target: bring the primary balance to its medium-term target of 5–6 percent of GDP, essential to secure a rapidly declining debt ratio. - Total package: - 11 percent of GDP during 2010–13, in addition to the 5 percent of GDP in measures already adopted in 2010. - Rationale: necessary given very high deficits and debt, sharp erosion in market confidence, higher interest payments, and the cyclical impact on revenue and expenditure; structural aging-related spending pressures also matter. - Five prongs of the 11 percent of GDP adjustment package: - Frontloading and full identification of measures: - Annualized effect of the new 2010 measures will account for 3½ percent of GDP, in addition to the 5 percent already in place. - All measures identified; staff stressed yield will need reassessment at subsequent reviews. - Mostly permanent measures: - Of the 11 percent of GDP, only about 0.5 percent of GDP relates to measures that will expire by end-2013 (temporary crisis levies). - Balancing revenue and expenditure measures: - Need to increase taxes (including on sectors that previously had not shouldered their fare share) and scale back the public sector (public employment and social transfers together amount to 75 percent of non-interest expenditures). - High quality measures: - Revenue measures broaden tax bases, improve structure and equity, and limit growth impact; recent tax reform reduced exemptions and introduced presumptive taxation. - Expenditure measures include reduction in public sector nominal wages and pensions (government as wage leader), and need firm implementation of structural reform agenda (public enterprise restructuring and large scale local administration reforms). - Ensuring fair burden sharing and protecting vulnerable groups: - Personal income tax harmonization and steeper marginal schedule; presumptive taxation expanded. - Protections: lower income retirees shielded from elimination of Easter, summer, and Christmas bonus via compensatory flat annual benefit; low-earners in public sector receive means-tested bonuses; surcharges to high pensions apply only to top 10 percent of pensioners; minima protected. - Risks and contingencies: - Remaining risks: lower revenue from weaker growth, higher social transfers, additional financial sector and public enterprise liabilities, and fiscal data weaknesses. - Program built on cautious estimates for yield from structural fiscal reforms; government committed to cut discretionary spending further if needed. - Continuous technical support by international community to strengthen institutions. - If revenue outperforms projections, authorities will save the overperformance to accelerate return to fiscal sustainability and debt reduction. ### Box 3: The Adjustment Measures (composition and magnitudes) - Expenditure measures estimated at 5.2 percent of GDP. - Elimination of the Easter, summer, and Christmas pensions and wages, and cuts in allowances and high pensions, frontloaded and yield 2 percent of GDP of the 11 percent total package. - Other expenditure cuts: employment reductions, cuts in discretionary and low priority investment spending, untargeted social transfers, consolidation of local governments, and lower subsidies to public enterprises. - Revenue measures add another 4 percent of GDP: - Increase in standard VAT rate from 21 to 23 percent and reduced rate from 10 to 11 percent; move lower taxed products (utilities, restaurants and hotels) to standard VAT; increase excises on fuel, cigarettes, and tobacco to EU averages — those measures yield 2.1 percent of GDP. - Remaining revenue measures: higher assessment of real estate; temporary crisis levy on profitable firms; presumptive taxation; taxes and levies on unauthorized establishments and buildings; new gaming royalties and license fees. - Structural fiscal reforms would yield 1.8 percent of GDP in 2013: - Improvements in budget control and processes (lowering expenditure) and improved tax administration (increasing revenue buoyancy). - Budgetary effects reserved for end of program in 2013, but could produce earlier upside. - Protection of the most vulnerable through means-tested benefits; compensation measures targeted at low-income retirees and civil servants. - Tabulated composition (Percent of GDP): - 2010 2011 2012 2013 Cum. - Total: 2.5 4.1 2.4 2.0 11.1 - Revenue: 0.5 3.0 0.8 -0.3 4.0 - Excises: 0.2 0.3 0.1 0.6 - VAT: 0.3 0.9 0.2 1.5 - PIT: 0.2 0.0 0.2 - CIT: 0.4 0.4 - Property tax: 0.8 0.1 0.0 0.9 - Other: 0.4 0.3 -0.3 0.4 - Expenditure: 2.0 1.1 1.7 0.5 5.3 - Wages: 0.5 0.2 0.3 0.2 1.2 - Pensions: 0.8 0.3 0.1 0.1 1.3 - Social benefits: 0.2 0.0 0.2 0.4 - Consumption: 0.3 0.4 0.2 0.2 1.1 - Subsidies: 0.7 0.7 - Investment: 0.2 0.2 0.2 0.7 - Structural reforms: 1.8 1.8 - Sources: Greek authorities; and Fund staff projections. ### Medium-term fiscal strategy: selected indicators and paths - Key projected series (Percent of GDP): - Passive without measures: - Revenue: 40.6 36.9 40.0 39.0 38.5 38.2 37.2 36.3 (2008–2015 timeline implied in table) - Noninterest expenditure: 43.7 45.4 44.9 46.6 46.5 46.0 43.9 42.5 - Measures cumulative: 2.5 6.7 9.0 10.9 12.6 12.2 - Primary balance: -3.2 -8.6 -2.4 -0.9 1.0 3.1 5.9 6.0 - Interest: 4.6 5.0 5.6 6.6 7.5 8.1 8.4 8.1 - Overall balance: -7.7 -13.6 -8.1 -7.6 -6.5 -4.9 -2.6 -2.0 - Cyclical fiscal balance: -5.9 -10.0 -2.4 0.8 2.8 4.6 7.2 7.1 - General government debt: 99 115 133 145 149 149 145 139 - Sources: Greek authorities; and Fund staff projections. ### Key fiscal reforms: pensions and health - Pension reform planned for 2010: - Introduce a new system: contributory pension to top-up a non-contributory, means-tested pension; financed on a pay-as-you-go basis. - Measures: reduce replacement rates (from an average of 75 percent of wages to 60 percent); limit early retirement (benefits available starting at age 60 for all workers); increase normal retirement age in line with life expectancy; index benefits to prices. - If fully implemented, reform would reduce the increase in pension spending over 2010–50 from 12½ percentage points of GDP to less than 4½ percentage points. - Risks: partial implementation, more generous parameters, or slower transition. Staff recommended an actuarial report by the National Actuarial Authority to verify long-term impact before full adoption. - Health sector management priorities: - Health spending identified as one of main culprits of recent fiscal slippages. - Need to close budget loopholes and force arrears to be reported to Parliament as they develop. - Staff urged immediate start of double-entry accrual accounting in hospitals, periodic publication of audited accounts, and improved pricing and costing mechanisms. - Health funds to be separated from pension administration as part of pension reform. - Medium-term objective: unify health-related activities under one ministry. ### Fiscal management and revenue administration priorities - Urgent need to strengthen data reporting and the budgetary framework to restore confidence and monitor consolidation. - Focus on immediate reforms rather than overly far-reaching program budgeting; amend budget law timely for 2011 budget preparation. - Improvement in tax administration critical to support consolidation: - Address wide tax evasion and corruption in tax administration to exploit large revenue base. - Implement recent tax collection initiatives within a targeted anti-evasion plan and broader tax administration reforms. - Technical assistance from the Fund and EC to support reforms; yields from such reforms to be assessed later in program once material results appear. ### Structural policies: priorities and reforms - Objective: strong structural reform program to restore competitiveness and growth; address price competitiveness gap stemming from high administrative costs, inefficiencies, high margins, and rising labor costs. - Reform areas: - Public administration: - Reorganize sub-central governments and public entities to reduce number of local administrations, entities, and elected and appointed officials. - Reduce risks from state-owned enterprises through greater transparency and enhanced accountability. - Review state-held assets for potential divestment to reduce state role and improve asset-liability management; publish financial statements of large loss-making state companies; prepare plan to divest state assets (structural benchmark for December 2010). - Incomes policy: - Reform legal framework for wage bargaining and arbitration in private sector. - Introduce entry-level wages below current statutory minimum to assist young and long-term unemployed. - Revise employment protection legislation to facilitate entry and exit, including part-time work. - Business environment and competition: - Cut red tape, establish one-stop shops for business start-ups. - Tackle tariff and other restrictions in important professions (notaries, road haulage, legal, pharmacy, engineering, architect, auditing) where distortions and excessive costs hamper market functioning. - Liberalize network industries progressively, strengthen competition authority, and forcefully implement EU Services Directive. - Improve absorption of EU structural funds to bolster productive capacity. ### Financial sector policy (introductory elements) - Financial sector stability measures described earlier: FSF establishment, extension of government liquidity support facilities, and ECB collateral rule suspension as liquidity backstop. - Anticipated challenges: banking profitability and balance sheet impacts during disinflation; preparedness to deal with solvency and liquidity pressures. *Italic: Source — _cr10110 - 9. The authorities’ program focuses on the three key challenges:* ### 23. The immediate challenge for the banks is to manage carefully the current tight ### The immediate challenge for the banks is to manage carefully the current tight ### Liquidity conditions and emergency measures - Greek banks have lost wholesale market access to fund their operations since end-2009 as a result of market concerns about the sovereign debt. - Maturing interbank liabilities have not been renewed, or only at high costs; some moderate deposit outflows took place during the first months of 2010; prices of pledged collateral have fallen, putting pressure on the liquidity position of many banks. - Reliance on ECB liquidity has increased. - Government measures: - Extended the support package of early 2009 (the portion that was not used at that time) to provide a substantial €17 billion in additional liquidity and is implementing another extension of this support facility, subject to approval by the EC. - Announcement by the ECB on May 3 that market debt instruments issued or guaranteed by the Greek government will remain eligible as collateral for repo transactions, independent of rating agencies grading, is anticipated to provide significant relief from liquidity pressures. - Backup Eurosystem options: - The existing Eurosystem framework includes adequate options for national central banks to give support to temporarily illiquid, but solvent institutions against adequate collateral. - If such support were given by the Bank of Greece, it would be fully guaranteed by the Greek state in a manner that is consistent with relevant ECB and EU requirements. ### Financial Stability Fund (FSF): purpose, design, and resources - Purpose: - Ensure that banks in Greece remain adequately capitalized during the downturn to preserve stability. - Provide a safety net if additional private capital resources cannot be found. - Capital support mechanics: - Shareholders will be invited to bring additional capital or take bridging capital support from the FSF if supervisory assessments conclude a bank’s capital buffer might fall below adequate levels. - The capital support program would provide equity to banks in the form of preferential shares that could convert to ordinary shares. - When banks are not able to repay the capital support after an adequate amount of time, a restructuring process will be devised for the credit institution; if targets are not met during restructuring, the shares will be converted at a price in line with EU requirements for competition and state aid. - Governance and operational features: - The FSF will be fully independent and will have governance arrangements that ensure the safeguarding of international financial resources. - The FSF will manage its participations with a view to sell all holdings in a limited timeframe and to maximize sale proceeds. - The FSF will have a duration limited to 7 years to de-couple it from the political cycle. - Any shares remaining in the FSF at the time it ceases its activities will be transferred to the MoF. - The FSF will be independent, transparent and accountable; appointees by the Bank of Greece, the Governor of the Bank of Greece, and the Ministry of Finance will sit on the board, while appointees by the ECB and the EC will have the right to participate in board meetings as observers. - The power of the Governor of the Bank of Greece to nominate its director is expected to give it some distance from domestic treasury operations; the FSF will report regularly to the Greek parliament, the EC, the ECB, and the IMF staff. - Resources: - The MoF will fund adequately the FSF from the proceeds of the IMF-eurozone credit disbursement to Greece. - The amount of funds destined for the FSF will be €10 billion, which would accommodate expected losses under a stress-test scenario. - The resources made available by the eurozone and the IMF under the program are more than sufficient to cover this amount. ### Banking supervision, legal framework, and cross-border coordination - Supervision enhancements: - Resources dedicated to banking supervision will be increased to allow for increased supervision. - The frequency and speed of data reporting will be increased and the framework for conducting stress-testing of financial institutions will be enhanced. - Staffing will be increased both for on-site inspections and off-site review, taking into account the new responsibilities of the Bank of Greece with respect to insurance supervision. - Additional flexibility will be introduced in the management of human resources, and all Bank of Greece staff will be granted strong legal protection for actions performed in good faith. - Legal and insolvency framework: - The current proposal for the personal insolvency law will be strengthened to ensure that strong credit discipline is maintained, creditor and consumer rights are protected, and important information concerning borrower’s history is not lost. - Cross-border supervision: - Authorities will maintain close coordination with home and host country authorities within the EU framework of cross border banking supervision. - A number of MOUs have been signed with host supervisory authorities to clarify and strengthen supervisory arrangements in countries where Greek banks have a significant presence, notably in SEE. ### Program modalities, financing needs, and FSF linkages - Request and financing package: - Authorities request a three-year SBA in an amount equivalent to SDR 26.4 billion, or 3,212 percent of the quota (€30 billion), with a frontloaded disbursement of €5.5 billion; the eurozone members are expected to contribute €80 billion to the overall financing package. - The total external financing gap for the fiscal program is projected to be around €110 billion, within which resources for the FSF are expected to be €10 billion. - The program assumes the government would continue to issue T-bills for the program period (keeping the stock at around €8 billion), but the rollover of medium- and long-term debt from the private sector will only be gradually restored, starting in 2012. - In the event the program unlocks a better-than-projected private sector response, program financing could be reduced, pari passu with eurozone countries’ assistance. - Market access and debt management: - The strength of the program and the scale of official support are expected to catalyze market access over time as the authorities demonstrate success in adhering to the program. - There may be scope to bolster market access by seeking coordinated voluntary rollover understandings among creditor groups, although dispersion of government debt holdings may complicate this. - Prudent debt management could help lengthen debt maturities to reduce bunching in the post program period. ### Exceptional access criteria assessment - Criterion 1: - Met: member is experiencing exceptional balance of payments pressures as heightened market concerns have led to a sharp increase in sovereign spreads and restricted market access. - Criterion 2: - Met (with caveats): Under the staff baseline, public debt will increase to almost 150 percent of GDP and then decline after 2013, provided strong and sustained fiscal and structural reforms are implemented and Greece regains market access at favorable terms. - Significant uncertainties noted: initial government debt 115 percent of GDP in 2009; may be revised upwards by 5‒7 percentage points according to Eurostat; hidden and potential liabilities may increase it further. - Criterion 3: - Met: prospects of regaining access to private capital markets within the timeframe when Fund resources are outstanding, contingent on successful program implementation and undertakings by Greece’s EU partners. - Criterion 4: - Met: policy program provides a reasonably strong prospect of success given recent strong measures by the government since taking office in October, political backing at high levels, and ongoing technical support from the Fund and the EU. ### Capacity to repay the Fund and program risks - Capacity and exposures: - With disciplined program implementation, Greece’s debt is expected to be sustainable in the medium term and its repayment capacity adequate. - Outstanding credit to the Fund is expected to peak in 2013 at about 12 percent of GDP. - Debt service to the Fund as a ratio of exports of goods and services will peak at 17 percent (Table 8). - Overall debt service will rise sharply after the program: payments to both the Fund and EU would peak at 62 percent of exports of goods and service, and about 17 percent of GDP in 2015. - Fund’s preferred creditor status mitigates risks to the Fund. - Key risks to the program: - Growth may be weaker than projected; a deeper upfront contraction would negatively affect debt dynamics. - The large multiyear fiscal and structural adjustment requires a decisive break from past behavior; political will and public support are critical. - Debt sustainability analysis assumes the headline primary surplus will improve on a sustained basis by 2.9 percentage points after the end of the program; smaller surpluses would slow debt decline. - Restoring market access in 2012 and later years may be more constrained than assumed, particularly under adverse shocks. - Absent exchange rate flexibility, sustained wage discipline by both public and private sectors is required to improve competitiveness. - Side effects of adjustment (wage and price deflation, contraction in activity) could lead to sharp reductions in tax revenues and complicate fiscal consolidation. - Financial sector deterioration could bring sizable fiscal consequences: low growth, deteriorating asset quality, and higher funding costs could require more public resources in resolution and increase liquidity needs. - The establishment of the FSF and availability of liquidity support from the ECB and the Bank of Greece will help to manage these risks. - Data weaknesses continue to pose a risk: accuracy and reliability of fiscal and national accounts data remain a concern, with frequent significant revisions. - Staff will monitor implementation of the joint Greek government and European Commission Statistical Action Plan; assistance from a resident technical advisor (financed by the European partners) and close cooperation with Eurostat will help assess and manage these data risks. - Coordination with EC and ECB may pose complications; the joint IMF/EC/ECB team will remain in close contact between missions to identify and reconcile differences early. *Source: IMF mission report excerpt (PDF chapter).* ### 36. In accordance with Fund policy, staff has initiated the safeguards assessment of ### VII. STAFF APPRAISAL ### Safeguards assessment and IMF deposits - Staff has initiated the safeguards assessment of the Bank of Greece; the assessment is expected to complete by the time of the first review. - IMF funds will be deposited in the government account at the Bank of Greece. ### Program scale, frontloading, and external support - The authorities have embarked on a bold multi-year program that is extraordinary in terms of the scale of planned adjustment and the comprehensiveness of reforms. - Greece’s European partners, in cooperation with the IMF, are responding with an equally extraordinary three-year promise of unprecedented financial support. - The decision to specify all measures for the entire full three-year period at the outset, and the balance between revenue and expenditure measures, adds to the program’s credibility. - Reliance in the first two years on concrete measures with easily projected impact is highlighted as strengthening credibility. - The combination of strong frontloading of measures and large external support is seen as key to the program’s credibility. ### Fiscal outcomes, timing, and debt dynamics - The fiscal program is described as impressive, with unprecedented scale and frontloading of the adjustment. - The sharp improvement in the primary balance: it will turn positive already in 2012 after a deficit of 8.6 percent of GDP in 2009. - A notable decline in nominal GDP and attendant contraction in the tax base is expected, causing debt-to-GDP to rise initially from an already high level before beginning to decline at the end of the program period. - As reforms engender a supply response, the debt-to-GDP ratio will begin to decline apace. ### Banking sector, liquidity, and FSF - Staff welcomes the ECB’s decision regarding Greek government bonds that ensures such bonds will remain eligible for repo transactions, removing a serious uncertainty. - With this change, liquidity facilities available to Greek banks, including the mechanism for provision of emergency liquidity through the Bank of Greece, are viewed as appropriate. - Greek banks have weathered the global crisis well and are comfortably capitalized, but the decline in economic activity ahead could expose vulnerabilities. - Establishment of a FSF that stands ready to inject funds if a bank’s capital is impaired is an important precautionary measure. - The management of the FSF must consist of independent experts to ensure that affected banks quickly return to viability. ### Structural reforms, privatization, and competitiveness - Long-term success hinges on deep and comprehensive structural reforms: make labor markets much more flexible; eliminate pervasive barriers to entry and unleash competition; and reform state enterprises. - Without such reforms, Greece would not restore competitiveness; growth and real incomes will remain stagnant and unemployment high; and the debt burden would eventually prove unsustainable. - The authorities’ structural reform program is ambitious, but concrete and time-bound plans remain to be fully specified in important areas. - Staff finds privatization plans disappointing and is concerned that plans for reform of state enterprises are weak. - The government must now focus attention on structural reforms, building on diagnostic work done in cooperation with the EC. ### Wages and labor-market adjustment - Authorities decided not to extend the elimination of the 13th and 14th wages in the private sector, or to undertake other top-down measures to lower wages. - Staff believes that, considering the time reforms will take to take hold, it is also necessary for private sector wages to decline in order to restore competitiveness. - Staff agrees wage reduction is likely to occur without top-down measures as economic activity declines and labor market pressures ease, but such measures should be contemplated if this were not to be the case. ### Social impact and mitigation - The adjustment ahead will be socially painful and will affect all segments of Greek society. - Staff strongly welcomes measures to mitigate the impact on the most vulnerable groups, including the decision to shield people with low wages and pensions from the impact of wage and pension cuts. ### Risks, timeline for market confidence, and policy implications - The scale of the challenge means it could take some time for markets to regain confidence. - Given the size of external support, the authorities have 1‒2 years to demonstrate resolve and build a convincing track record before they need to return to the market. - Obvious risks include: - Fierce resistance from entrenched vested interests that has stalled reforms in the past. - Downwardly rigid private sector wages and prices given inflexible markets. - The possibility of yet higher interest rates. - Loss-making public enterprises presenting additional pressures on the budget. - Acute risks to banks until confidence in a strong downward path for the fiscal deficit takes firmer hold. - External risk of negative spillover from other highly indebted countries in the region. - The government must stand ready to take early and forceful corrective actions to make sure the program remains on track. - The very strong measures taken by the government in early 2010—before entering into discussions on a program that could be supported by eurozone countries and the Fund—are cited as evidence of determination and commitment. *Source: _cr10110 - 36.* ### 48. While risks regarding debt sustainability are undeniably high, the Fund’s ### _cr10110 - 48. While risks regarding debt sustainability are undeniably high, the Fund’s ### Fund decision and rationale - The staff supports the authorities’ request for an SBA in an amount equivalent to SDR 26.4 billion. - Justifications: - The new government’s strong initiatives. - Substantial cofinancing by the eurozone countries. - Systemic concerns from spillover effects if Greece were not given an opportunity to improve its economic policies. - The SBA is viewed as appropriate in view of Greece’s balance of payments needs and the comprehensive package of adjustment measures already taken and proposed by the authorities. ### Real economy projections and labor market (selected indicators, 2009–2015) - Real GDP: -2.0; -4.0; -2.6; 1.1; 2.1; 2.1; 2.7 - Output gap (percent of pot. output): 4.0; -1.1; -4.6; -4.7; -4.0; -3.7; -3.1 - Total domestic demand: -2.4; -7.1; -5.2; 0.1; 1.7; 1.8; 2.1 - Private consumption: -1.8; -4.0; -3.7; 0.8; 2.8; 2.5; 2.5 - Public consumption: 9.6; -10.6; -5.1; -3.6; -6.6; -3.2; -0.1 - Gross fixed capital formation: -13.9; -11.4; -11.8; 0.8; 4.8; 3.5; 2.3 - Exports of goods and services: -18.1; 4.5; 5.4; 5.9; 6.0; 5.9; 6.0 - Imports of goods and services: -14.1; -9.7; -6.1; 1.6; 3.8; 4.6; 3.7 - Unemployment rate (percent): 9.4; 11.8; 14.6; 14.8; 14.3; 14.1; 13.4 - Employment: -1.4; -2.6; -3.2; -0.2; 0.7; 0.3; 0.9 - Consumer prices (HICP), end of period: 2.6; 1.0; -0.5; 0.7; 0.8; 1.2; 1.0 - Current account (percent of GDP): -11.2; -8.4; -7.1; -5.6; -4.0; -2.8; -1.9 ### External sector and balance of payments (selected levels and ratios) - Trade balance (percent of GDP): -7.7; -3.5; -0.2; 0.6; 1.3; 1.9; 2.4 - Exports of goods and services (percent of GDP): 17.8; 21.1; 23.6; 24.8; 25.8; 26.8; 27.7 - Imports of goods and services (percent of GDP): 25.5; 24.6; 23.8; 24.2; 24.5; 24.8; 25.2 - Net international investment position: -86; -95; -104; -106; -106; -105; -102 - Current account balance (billion of euros): -26.6; -19.3; -15.9; -12.9; -9.4; -6.8; -4.9 - Financing gap (billions of euros, selected): ...; 38.0; 40.0; 24.0; 8.0; 0.0; 0.0 ### Public finances (general government, selected indicators) - Total revenues (percent of GDP): 36.9; 40.0; 39.0; 38.5; 38.2; 37.2; 36.3 - Total expenditures (percent of GDP): 50.4; 50.5; 53.2; 53.9; 54.0; 52.3; 50.6 - Primary expenditures (percent of GDP): 45.4; 44.9; 46.6; 46.5; 46.0; 43.9; 42.5 - Measures (cum.) (percent of GDP): ...; 2.5; 6.7; 9.0; 11.0; 12.6; 12.2 - Overall balance (percent of GDP): -13.6; -8.1; -7.6; -6.5; -4.8; -2.6; -2.0 - Primary balance (percent of GDP): -8.6; -2.4; -0.9; 1.0; 3.1; 5.9; 6.0 - Gross debt (percent of GDP): 115; 133; 145; 149; 149; 146; 140 - Gross debt (Maastricht, percent of GDP): 273.4; 307.5; 324.7; 339.7; 350.4; 353.8; 353.1 - Primary balance (Euro billions): -20.4; -5.6; -2.1; 2.4; 7.4; 14.2; 15.2 - Interest payments (percent of GDP): 11.9; 13.0; 14.9; 17.1; 18.9; 20.4; 20.3 - Overall balance (Euro billions): -32.3; -18.6; -17.0; -14.7; -11.5; -6.2; -5.1 ### Public financing requirements and market access (selected, Table 3) - Gross borrowing need (billion euros): 68.6; 73.6; 55.1; 57.9; 53.1; 70.7; 76.6 - Gross financing sources (billion euros): 68.6; 35.6; 15.1; 33.9; 45.1; 70.7; 76.6 - Financing gap (billion euros): 38.0; 40.0; 24.0; 8.0; 0.0; 0.0; 0.0 - EU contribution (8/11 of the gap, billion euros): 27.6; 29.1; 17.5; 5.8; 0.0; 0.0; 0.0 - IMF contribution (3/11 of the gap, billion euros): 10.4; 10.9; 6.5; 2.2; 0.0; 0.0; 0.0 - Net placement (market access-amortization, billion euros): 32.0; -4.0; -22.9; -9.2; 2.6; 3.3; -0.8 ### External financing requirements and sources (Table 5, gross financing requirements and gap) - GROSS FINANCING REQUIREMENTS (billion euros): 167.1; 186.1; 179.7; 158.1; 154.5; 182.9; 202.4 - Current account deficit (billion euros): 26.6; 19.3; 15.9; 12.9; 9.4; 6.8; 4.9 - Medium- and long-term debt amortization (billion euros): 28.2; 22.8; 28.1; 25.8; 25.4; 47.7; 55.3 - Short-term debt amortization (billion euros): 112.2; 144.0; 135.7; 119.4; 119.8; 128.3; 142.2 - New borrowing and debt rollover (billion euros): 191.8; 151.9; 129.0; 141.9; 158.9; 194.8; 208.9 - FINANCING GAP (billion euros): ...; 38.0; 40.0; 24.0; 8.0; 0.0; 0.0 - European Union (8/11 of total) (billion euros): ...; 25.3; 26.7; 16.0; 5.3; 0.0; 0.0 - IMF (3/11 of total) (billion euros): ...; 12.7; 13.3; 8.0; 2.7; 0.0; 0.0 ### Fund access, phasing, and projected Fund credit (Table 7 and Table 8) - Proposed Stand-By Arrangement total access (SDR millions): 26,432.9 - Total percent of quota: 3,211.8 - Phasing and purchase schedule (selected review availability and amounts, SDR millions; percent of quota): - May 9, 2010 — Board approval of SBA: 4,805.9; 583.9 - August 30, 2010 — First Review: 2,162.7; 262.8 - November 30, 2010 — Second Review: 2,162.7; 262.8 - February 28, 2011 — Third Review: 3,604.5; 438.0 - May 30, 2011 — Fourth Review: 2,883.6; 350.4 - August 30, 2011 — Fifth Review: 1,922.4; 233.6 - November 30, 2011 — Sixth Review: 1,201.5; 146.0 - February 28, 2012 — Seventh Review: 2,403.0; 292.0 - May 30, 2012 — Eighth Review: 1,441.8; 175.2 - August 30, 2012 — Ninth Review: 1,441.8; 175.2 - November 30, 2012 — Tenth Review: 480.6; 58.4 - February 28, 2013 — Eleventh Review: 1,441.8; 175.2 - April 30, 2013 — Twelfth Review: 480.6; 58.4 - Total Fund access and percent of quota: 26,432.9; 3,211.8 - Projected Fund disbursements (millions of euros, Table 8): 2010: 10,364; 2011: 10,909; 2012: 6,546; 2013: 2,182 - Projected outstanding Fund credit (millions of euros, selected years): 2010 outstanding stock: 10,364; 2011: 21,273; 2012: 27,818; 2013: 28,330; 2014: 20,523; 2015: 9,921 - Projected debt service to the Fund (interest and charges, million euros): 2010: 131; 2011: 600; 2012: 1,190; 2013: 1,797; 2014: 1,842; 2015: 1,196 - Projected amortization to the Fund (million euros): 2013: 1,670; 2014: 7,807; 2015: 10,602 - Projected total debt service to the Fund as percent of Exports of goods and services: 2010: 0.3; 2011: 1.1; 2012: 2.1; 2013: 5.7; 2014: 14.9; 2015: 17.0 ### Banking sector and financial soundness indicators (selected FSI trends, 2000–2009) - Regulatory capital to risk-weighted assets: 13.6; 12.4; 10.5; 12.0; 12.8; 13.2; 12.2; 11.2; 9.4; 11.7 - 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; 10.6 - 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; 38.2 - Nonperforming loans to total gross loans: 11.7; 8.3; 7.4; 7.0; 7.0; 6.3; 5.4; 4.5; 5.0; 7.7 - Return on assets (after taxes): 1.4; 1.0; 0.5; 0.6; 0.4; 0.9; 0.8; 1.0; 0.2; -0.1 - Return on equity (after taxes): 15.4; 12.4; 6.8; 8.9; 6.4; 15.9; 12.7; 14.8; 3.2; -1.5 - Liquid assets to total assets: 46.4; 41.1; 39.5; 37.0; 33.4; 34.0; 33.6; 35.1; 38.7; 45.2 ### Key program implications and fiscal policy priorities (implied by tables and projections) - Large initial SBA access (SDR 26.4 billion) matched to a significant near-term financing gap (38.0; 40.0; 24.0 billion euros in successive years). - Substantial external support envisaged from the European Union (8/11 of gap) and the IMF (3/11 of gap) in early program years. - Fiscal consolidation reflected in large cumulative measures (2.5; 6.7; 9.0; 11.0; 12.6; 12.2 percent of GDP) and substantial improvements in the primary balance (from -8.6 percent of GDP in 2009 to projected 6.0 percent of GDP in 2015). - Continued pressure on public debt dynamics: gross debt rises to very high levels (145; 149 percent of GDP) before gradual decline toward 140 percent of GDP by 2015 under projections. - Heavy near-term external amortization and short-term debt rollover needs drive the financing gap and justify coordinated official sector financing. *Source: IMF staff estimates and projections as presented in the provided IMF country document.* ### Annex 1. Public Debt Sustainability ### Annex 1. Public Debt Sustainability ### Overview and recent history - Despite favorable economic conditions, debt remained around 100 percent of GDP during 2000‒08, despite strong economic growth at around 4 percent and low and declining real interest rates. - Debt rose sharply to 115 percent of GDP in 2009 due to: - a drop in economic growth, - high real interest rates (recession reduced inflation and market confidence weakened), - a sharp increase in the fiscal deficit to 13.6 percent of GDP. ### Baseline scenario and underlying assumptions - Baseline: public debt as a share of GDP would peak at 149 percent in 2013 and gradually decline to 120 percent by 2020. (Maastricht debt definition) - Key baseline drivers and assumptions: - Primary balance improves from -8.6 percent of GDP in 2009 to 6 percent of GDP by 2014 and beyond. - Output contracts in 2010–11; growth reaches 2¾ percent after 2015. - Inflation is moderately below EU average. - Interest rate spreads on new debt decline as confidence improves. - Inclusion of €10 billion for the Financial Stability Fund, recovered by 2015. - Privatization proceeds of €1 billion every year after 2011. ### Debt structure - Average remaining maturity of general government debt: eight years, but concentrated maturities mean large rollover needs over next three to five years. - Maturity profile: more than one third of the debt stock will mature in the next three years; almost half will mature in the next five years. - Currency and interest composition: - 98.5 percent of total general government debt is denominated in euro. - 89 percent is fixed rate debt (floating share expected to rise to 40 percent during 2012/13). - EU bilateral and IMF loans (both floating) amount to 30 percent of the total stock in projection. - Interest rate profile: debt maturing soon was issued at relatively high nominal interest rates, so the interest differential between new market debt and old maturing debt is not as high as in other crises. ### Sensitivity analysis — key risks and quantified scenarios - The baseline outlook is mainly affected by growth shocks; other major risk factors: greater deflation, higher interest rates, contingent liabilities from state-owned enterprises and the banking system. - Individual shock impacts (relative to baseline unless otherwise indicated): - Recognition of implicit or contingent liabilities (Debts of public enterprises and identified guarantees totaling 25.8 billion or 11 percent of GDP; future debt-creating flows from losses of public enterprises cumulative 2 percent of GDP): debt would be 138 percent of GDP by 2020. - Weaker fiscal adjustment (smaller adjustment of 1 percent of GDP per year): debt would decline more gradually to about 132 percent of GDP by 2020. - Weaker growth (1 percentage point reduction in GDP growth each year): debt would rise to around 166 percent of GDP by 2020. - Faster growth (1 percentage point higher): debt would fall to 80 percent of GDP by 2020. - More severe deflation (3 percentage point lower inflation than baseline in 2010‒12): debt-to-GDP ratio would peak at 174 percent of GDP and decline to 168 percent of GDP by 2020. - Higher interest rate (increase of 200bps reflecting higher Euribor and SDR rate): public debt would increase to 131 percent of GDP by 2020. - Combined adverse shock: a combined adverse shock would render debt dynamics clearly unsustainable. ### Projections and key fiscal statistics (selected figures from Table A.1) - Public sector debt (percent of GDP): 2008: 98; 2009: 115; 2010: 133; 2011: 145; 2012: 149; 2013: 149; 2014: 145; 2015: 139; 2016: 135; 2017: 131; 2018: 127; 2019: 124; 2020: 120. - Change in public sector debt (percent of GDP): 2008: 2.1; 2009: 17.5; 2010: 18.1; 2011: 11.9; 2012: 3.6; 2013: 0.5; 2014: -4.7; 2015: -5.5; 2016: -3.9; 2017: -3.9; 2018: -3.9; 2019: -3.8; 2020: -4.1. - Primary deficit (percent of GDP): 2008: 0.7; 2009: 8.6; 2010: 2.4; 2011: 0.9; 2012: -1.0; 2013: -3.1; 2014 onward: -6.0 (2014–2020). - Revenue and grants (percent of GDP): 2008: 39.9; 2009: 36.9; 2010: 41.3; 2011: 42.7; 2012: 43.5; 2013: 44.1; 2014: 44.5; 2015: 43.9; 2016: 42.9; 2017: 42.5; 2018: 41.9; 2019: 41.6; 2020: 41.3. - Primary (noninterest) expenditure (percent of GDP): 2008: 40.6; 2009: 45.4; 2010: 43.8; 2011: 43.6; 2012: 42.5; 2013: 41.0; 2014: 38.6; 2015: 37.9; 2016: 36.8; 2017: 36.5; 2018: 35.9; 2019: 35.6; 2020: 35.3. - Automatic debt dynamics (percent of GDP): 2008: -2.1; 2009: 6.2; 2010: 9.0; 2011: 10.9; 2012: 4.5; 2013: 4.0; 2014: 3.9; 2015: 2.8; 2016: 2.2; 2017: 2.1; 2018: 2.1; 2019: 2.2; 2020: 1.9. - Contribution from real interest rate (percent): 2008: 0.5; 2009: 4.2; 2010: 4.3; 2011: 7.3; 2012: 6.0; 2013: 7.1; 2014: 6.9; 2015: 6.5; 2016: 5.8; 2017: 5.6; 2018: 5.5; 2019: 5.5; 2020: 5.1. - Contribution from real GDP growth (percent): 2008: -2.7; 2009: 2.0; 2010: 4.7; 2011: 3.6; 2012: -1.5; 2013: -3.1; 2014: -3.0; 2015: -3.7; 2016: -3.6; 2017: -3.5; 2018: -3.4; 2019: -3.3; 2020: -3.2. - Public sector debt-to-revenue ratio (percent): 2008: 244.7; 2009: 312.4; 2010: 322.6; 2011: 339.9; 2012: 341.8; 2013: 338.9; 2014: 324.9; 2015: 317.1; 2016: 315.6; 2017: 309.0; 2018: 304.1; 2019: 297.1; 2020: 289.8. - Gross financing need (percent of GDP): 2008: 5.0; 2009: 13.6; 2010: 21.3; 2011: 23.4; 2012: 24.7; 2013: 24.0; 2014: 31.8; 2015: 31.3; 2016: 24.7; 2017: 22.0; 2018: 17.8; 2019: 22.9; 2020: 14.3. - Gross financing need (in billions of U.S. dollars): 2008: 17.9; 2009: 44.3; 2010: 69.2; 2011: 73.2; 2012: 78.5; 2013: 77.7; 2014: 104.9; 2015: 107.2; 2016: 88.2; 2017: 82.0; 2018: 69.2; 2019: 92.9; 2020: 60.5. ### Alternative scenarios (selected outcomes from Table A.2 and Figure A1) - Scenario with key variables at their historical averages: projected debt path in percent of GDP (selected): 2013: 133.3; 2014: 132.2; 2015: 131.1; 2016: 129.6; 2017: 126.0; 2018: 122.9; 2019: 121.8; 2020: 120.8; and further gradual declines. - Scenario with no policy change (constant primary balance) in 2010–2020: projected debt path in percent of GDP (selected): 2010: 133.3; 2011: 146.7; 2012: 153.7; 2013: 159.9; 2014: 163.9; 2015: 167.1; 2016: 172.2; 2017: 177.3; 2018: 182.6; 2019: 188.2; 2020: 193.6. ### Key macro-fiscal baseline assumptions (selected) - Real GDP growth (percent): 2008: 3.0; 2009: -2.0; 2010: -4.0; 2011: -2.6; 2012: 1.1; 2013: 2.1; 2014: 2.1; 2015: 2.7; 2016–2020: 2.7 each year. - Average nominal interest rate on public debt (percent): 2008: 4.9; 2009: 5.0; 2010: 4.8; 2011: 4.8; 2012: 5.3; 2013: 5.6; 2014: 5.8; 2015: 5.8; 2016: 5.9; 2017: 5.9; 2018: 5.9; 2019: 6.0; 2020: 5.9. - Average interest rate on new market debt (percent): 2009: 5.0; 2010: 5.3; 2011: 5.4; 2012: 5.5; 2013: 5.6; 2014: 5.6; 2015: 5.6; 2016: 5.6; 2017: 5.7; 2018: 5.7; 2019: 5.8. - Average interest rate on all new debt (includes EU bilateral and IMF debts, percent): 2009: 3.8; 2010: 4.8; 2011: 5.6; 2012: 6.0; 2013: 6.2; 2014: 6.1; 2015: 5.8; 2016: 5.7; 2017: 5.7; 2018: 5.7; 2019: 5.8. - Spreads above German bund (basis points): 2008: 250; 2009: 200; 2010: 150; 2011: 100; 2012 onward: 100. - German bund rate (basis points): 2008: 175; 2009: 275; 2010: 350; 2011 onward: 350. - Average real interest rate (percent): 2008: 0.7; 2009: 4.3; 2010: 3.4; 2011: 5.4; 2012: 4.0; 2013: 4.9; 2014: 4.8; 2015: 4.7; 2016: 4.4; 2017: 4.4; 2018: 4.4; 2019: 4.5; 2020: 4.4. - Inflation rate (GDP deflator, percent): 2008: 4.2; 2009: 0.7; 2010: 1.2; 2011: -0.5; 2012: 1.0; 2013: 0.7; 2014: 1.0; 2015: 1.1; 2016: 1.5; 2017: 1.5; 2018: 1.5; 2019: 1.5; 2020: 1.5. - Growth of real primary spending (deflated by GDP deflator, percent): 2008: 4.6; 2009: 8.7; 2010: -7.7; 2011: 122.6; 2012: -57.1; 2013: -1.6; 2014: -3.8; 2015: 0.8; 2016: -0.2; 2017: 1.7; 2018: 1.1; 2019: 1.8; 2020: 1.6. ### Observations and implications - Large and front-loaded rollover needs combined with high debt ratios and sensitivity to growth, inflation, and contingent liabilities create substantial risks to sustainability. - Reasonable-sized individual adverse shocks could still be consistent with a turnaround, but a combined adverse shock would make dynamics unsustainable. - Policy shift (primary balance improvement to 6 percent of GDP by 2014 and beyond) is central to the baseline stabilization path. *Source: IMF staff calculations, Annex 1. Public Debt Sustainability.* ### Annex 3. External Debt Sustainability Analysis ### Annex 3. External Debt Sustainability Analysis ### Recent trajectory and baseline projection - Net external debt increased from 51 percent of GDP in 2002 to 83 percent of GDP in 2009. - The increase reflects a rising current account deficit which reached over 11 percent of GDP in 2009. - Under the baseline, the net debt-to-GDP ratio is projected to continue rising, peak at 103 percent of GDP in 2013, and then decline to 96 percent of GDP in 2015. - The baseline deterioration is driven by weakening growth, declining inflation (to below EU average), and rising interest rates, despite a rapidly improving current account under program projections. ### Sensitivity to adverse shocks (individual and combined) - Weaker real GDP growth: A 1 percentage point lower GDP growth increases the net debt ratio by about 6 percentage points of GDP by 2015 relative to the baseline. - Higher deflation: Reducing inflation by 3 percentage points in 2010 and 2012 increases the debt ratio by 6 percentage points by 2015 relative to the baseline. - Higher interest rate: A 100 basis points increase in interest rate increases the debt-to-GDP ratio by 6 percentage points by 2015 relative to the baseline. - Higher current account deficit: A permanent 1/4 standard deviation shock to the current account deficit increases the debt-to-GDP ratio by 10 percentage points relative to the baseline. - Combined shocks have a very large negative impact on the debt ratio and debt path; individual shocks each increase the debt ratio though the shape of the debt path remains broadly similar. ### Key projected debt and flow metrics (selected series, in percent of GDP unless noted) - Net external debt (selected years): 2005: 58.0; 2006: 62.0; 2007: 67.7; 2008: 73.8; 2009: 83.4; 2010: 92.7; 2011: 101.5; 2012: 103.1; 2013: 102.2; 2014: 99.7; 2015: 95.8. - Change in external debt (percent of GDP): 2005: 4.4; 2006: 3.9; 2007: 5.7; 2008: 6.1; 2009: 9.6; 2010: 9.3; 2011: 8.7; 2012: 1.6; 2013: -0.9; 2014: -2.4; 2015: -4.0. - Identified external debt-creating flows (4+8+9): 2005: 2.0; 2006: 3.9; 2007: 4.7; 2008: 9.5; 2009: 10.9; 2010: 10.7; 2011: 8.7; 2012: 3.0; 2013: 0.1; 2014: -1.1; 2015: -2.5. - Current account deficit, excluding interest payments (percent of GDP): 2005: 5.5; 2006: 9.1; 2007: 11.8; 2008: 11.4; 2009: 8.6; 2010: 4.8; 2011: 2.3; 2012: 0.8; 2013: -0.5; 2014: -1.5; 2015: -2.2. - Net non-debt creating capital inflows (negative = inflows): 2005: -2.8; 2006: -3.2; 2007: -5.3; 2008: -1.4; 2009: -0.8; 2010: -1.0; 2011: -0.9; 2012: -1.6; 2013: -1.7; 2014: -1.8; 2015: -1.9. - Automatic debt dynamics (percent of GDP): 2005: -0.8; 2006: -2.0; 2007: -1.7; 2008: -0.5; 2009: 3.1; 2010: 7.0; 2011: 7.4; 2012: 3.8; 2013: 2.3; 2014: 2.2; 2015: 1.6. - Contribution from nominal interest rate: 2005: 1.8; 2006: 2.2; 2007: 2.6; 2008: 3.1; 2009: 2.6; 2010: 3.6; 2011: 4.8; 2012: 4.8; 2013: 4.5; 2014: 4.3; 2015: 4.1. - Contribution from real GDP growth: 2005: -1.1; 2006: -2.4; 2007: -2.6; 2008: -1.3; 2009: 1.5; 2010: 3.4; 2011: 2.5; 2012: -1.1; 2013: -2.1; 2014: -2.1; 2015: -2.6. - Contribution from price and exchange rate changes: 2005: -1.5; 2006: -1.7; 2007: -1.8; 2008: -2.3; 2009: -1.0; 2010: -1.0; 2011: 0.4; 2012: -1.0; 2013: -0.7; 2014: -1.0; 2015: -1.1. - External debt-to-exports ratio (in percent): 2005: 271.4; 2006: 292.9; 2007: 314.2; 2008: 327.3; 2009: 468.1; 2010: 439.9; 2011: 429.3; 2012: 415.7; 2013: 396.1; 2014: 372.5; 2015: 346.2. - Gross external financing need (in billions of euros): 2005: 49.4; 2006: 68.8; 2007: 90.4; 2008: 106.8; 2009: 166.1; 2010: 197.1; 2011: 172.7; 2012: 135.4; 2013: 106.6; 2014: 96.6; 2015: 95.3. - Gross external financing need (in percent of GDP): 2005: 25.3; 2006: 32.7; 2007: 39.9; 2008: 44.6; 2009: 69.9; 2010: 85.4; 2011: 77.2; 2012: 59.3; 2013: 45.4; 2014: 39.9; 2015: 37.9. ### Key macroeconomic assumptions underlying the baseline (selected series) - Real GDP growth (in percent): 2005: 2.2; 2006: 4.5; 2007: 4.5; 2008: 2.1; 2009: -2.0; 2010: -4.0; 2011: -2.6; 2012: 1.1; 2013: 2.1; 2014: 2.1; 2015: 2.7. - GDP deflator in US dollars (change in percent): 2005: 2.8; 2006: 3.1; 2007: 3.0; 2008: 3.5; 2009: 1.4; 2010: 1.2; 2011: -0.5; 2012: 1.0; 2013: 0.7; 2014: 1.0; 2015: 1.1. - Nominal external interest rate (in percent): 2005: 3.6; 2006: 4.1; 2007: 4.6; 2008: 4.9; 2009: 3.5; 2010: 4.1; 2011: 5.1; 2012: 4.9; 2013: 4.5; 2014: 4.3; 2015: 4.3. - Growth of exports (euro terms, in percent): 2005: 6.0; 2006: 6.6; 2007: 9.6; 2008: 10.4; 2009: -21.5; 2010: 15.0; 2011: 8.7; 2012: 7.1; 2013: 7.0; 2014: 7.1; 2015: 7.2. - Growth of imports (euro terms, in percent): 2005: 8.6; 2006: 20.3; 2007: 14.3; 2008: 9.6; 2009: -25.2; 2010: -6.0; 2011: -6.4; 2012: 3.7; 2013: 4.2; 2014: 4.6; 2015: 5.4. - Current account balance, excluding interest payments (percent of GDP): 2005: -5.5; 2006: -9.1; 2007: -11.8; 2008: -11.4; 2009: -8.6; 2010: -4.8; 2011: -2.3; 2012: -0.8; 2013: 0.5; 2014: 1.5; 2015: 2.2. - Net non-debt creating capital inflows (percent of GDP): 2005: 2.8; 2006: 3.2; 2007: 5.3; 2008: 1.4; 2009: 0.8; 2010: 1.0; 2011: 0.9; 2012: 1.6; 2013: 1.7; 2014: 1.8; 2015: 1.9. ### Interpretation and implications - Net external debt dynamics are driven by a combination of a large initial external deficit, high external interest bill (over 5 percent of GDP noted in the broader report), and adverse automatic debt dynamics when growth weakens and interest rates rise. - The debt path is vulnerable: relatively small adverse changes in growth, inflation, interest rates, or current account outcomes materially worsen the debt ratio by 2015. - Policy focus to contain vulnerabilities should emphasize restoring growth and competitiveness, reducing inflation relative to euro-area peers, and improving the current account through structural reforms and domestic demand tightening. *Source: Annex 3. External Debt Sustainability Analysis; Sources: Greek authorities, and staff estimates.* ### 8. The government is committed to fairness in the distribution of the adjustment ### 8. The government is committed to fairness in the distribution of the adjustment ### Social fairness measures and protection of vulnerable groups - Pension reductions: - Elimination of the 13th and 14th pensions is compensated, for those receiving less than €2500 a month, by introducing a new flat bonus of €800 a year. - The benefit reduction is weighted toward the higher pension earners. - Wage bill reductions: - The 13th and the 14th wage payments will be eliminated for all employees. - For those receiving less than €3000 a month, a flat bonus payment of €1000 a year per employee will be introduced, financed through cutting salary allowances for higher income segments. - Minimum pensions and family support instruments will not be cut. - The government will invite representatives of businesses and labor to sign a social pact for the duration of the program to explain and forge consensus on policies. - Objective: maintain strong social cohesion, fight poverty, and maintain employment. ### Fiscal policies — strategy, timing, and headline targets - Recognizes the need for a frontloaded multiyear adjustment given very high and still growing debt ratio and large fiscal deficit. - Fiscal strategy anchored on: - Placing the debt-GDP ratio on a declining path from 2013 onward. - Reducing the general government deficit to well below 3 percent of GDP by 2014. - Timing and scope: - All fiscal measures for the remainder of 2010–2012 have been identified; most to be adopted in coming weeks. - Fiscal measures for 2013 identified with some residual gap to be addressed in coming reviews. - Upfront actions and 2010 impact: - Three biggest upfront measures: immediate cut in the public sector wage bill, cuts in pension outlays, and further increases in VAT and selected excises (together with other steps yielding 2½ percent of GDP in further savings already in 2010). - These measures will help reduce the deficit from an estimated 13.6 percent of GDP in 2009 to 8.1 percent of GDP in 2010. - 2011–2013 projected adjustment pace: - 2011 projected adjustment needs: 4 percent of GDP. - 2012 projected adjustment pace: 2½ percent of GDP. - 2013 projected adjustment pace: 2 percent of GDP. - Headline deficit expected to drop to 7½ percent in 2011 given expected weakness in GDP, with larger declines in subsequent years when growth resumes. ### Fiscal measures — expenditures and revenues - Expenditure-side measures: - Expenditures will be cut by the equivalent of around 7 percent of GDP through 2013. - Policy elements: - Wage and entitlement program costs to be curtailed; wages and pensions frozen in nominal terms for the duration of the program. - Replace only 20 percent of retiring employees over time. - Consolidation of municipalities and local councils. - Rationalize investment spending and shift to more intensive and efficient use of EU structural and cohesion funds. - Independent reviews by internationally renowned experts of public administration and social programs to identify rationalization and improved targeting. - Revenue-side measures: - Revenues will be increased by the equivalent of around 4 percent of GDP through 2013. - Measures include: - Boost in (presumptive) taxation on liberal professions. - Increase in luxury goods taxation. - (Temporary) surcharges on highly profitable entities and high valued properties. - Measures to combat tax evasion included in recently adopted tax reform legislation. - Broadening the VAT base, increasing rates and raising excise taxes where Greece is below the euro area average and collection efficiency is low. - Green taxes and “health” taxes (such as on consumption of alcohol and tobacco). ### Structural fiscal reforms and institutional strengthening - Pension reform: - Reform to be adopted before end-June 2010. - National Actuarial Authority to produce a report verifying long-term actuarial balance. - Existing pension funds will be merged in three funds. - New system: strengthen link between contributions and benefits, uniform rules apply pro-rata to all current and future workers. - Normal retirement age set to 65 years, increasing in line with life expectancy. - Benefits indexed to prices. - Restrict early retirement (including for those insured before 1993) and reduce list of heavy and arduous professions. - Introduce a means-tested social pension for all citizens above the normal retirement age. - Health sector reform: - Implement double-entry accrual accounting in hospitals and regular publication of audited accounts. - Improve pricing and costing mechanisms. - Separate health funds from administration of pensions, merge funds to simplify fragmented system, and bring health-related activities under one ministry. - Tax reform: - Passage of a tax bill making the income tax system more progressive, reducing exemptions and deductions to broaden the tax base, and introducing reforms to fight tax evasion (tightening obligations to issue receipts for VAT, document living expenses, and introduce presumptive taxation). - Further review of the tax system to simplify and increase efficiencies as necessary. - Tax administration improvements: - Short-run focus: safeguard revenue from largest taxpayers, stronger enforcement and auditing of high-wealth individuals and self-employed, prosecute worst offenders, strengthen enforcement of VAT filing and payment, collect large stock of tax arrears. - Medium-term program: develop comprehensive compliance risk management framework (notably preparing a compliance strategy for 2012); develop taxpayer service capacity; improve enforcement operations using risk-based approaches; build headquarters strategic management and planning capabilities in tax and customs administration. - Public financial management and fiscal framework: - Re-prioritize IMF and European Commission technical assistance on public financial management and longer-term budgeting reforms. - GAO responsible for monitoring and reporting general government data. - Introduce standardized commitment control procedures for all public entities to prevent re-emergence of arrears. - Ensure budgets prepared within a medium-term fiscal strategy and presented before the start of the fiscal year. - Introduce top-down budgeting with expenditure ceilings, a sufficient contingency reserve, and a medium-term expenditure framework for the State budget. - Require a supplementary budget for any overruns above contingency provision; amend the 1995 budget management law to give effect to the above. - Continue working with IMF and European Commission technical assistance teams and create an independent fiscal agency attached to parliament. - Debt management framework: - Update debt management strategy and tools to ensure risk is adequately managed. - Review operational and risk management framework for debt management to ensure transparency and predictability. - Technical assistance sought from the IMF. - Fiscal and public sector reporting and statistics: - New government disclosed under-reported 2008 fiscal deficit upon taking office in October 2009 and revised it. - Working with Eurostat on fiscal data processing and reporting; joint action plan with European Commission to address statistical issues. - Full independence granted to the Greek Statistical Office; resources to improve statistical systems and seek resident technical assistance. - Implement measures in joint Greek government and European Commission Statistical Action Plan. - Since January 2010, timely monthly central government budget reports on a cash basis have been published. - GAO to start publishing monthly data on expenditures pending payment, including arrears, from July 2010. - Intensify efforts to improve collection and processing of general government data compiled according to ESA and compile comprehensive data on employment in the general government. - Furnish detailed information to the European Commission, the ECB and the Fund on operating accounts and balance sheets of key public enterprises. ### Monitoring, risks, and contingency stance - Program monitoring: program will be closely monitored and measures taken as necessary. - Risks identified: - Lower revenue. - Higher social transfers. - Further downward revisions of growth. - Additional fiscal liabilities from the public and financial sector. - Higher interest costs. - Government readiness: stands ready to take appropriate measures to preserve program objectives, including reducing discretionary spending as necessary. - Upside potential: - 2010–2011 projections include cautious estimates of measures taken; positive confidence effects could boost GDP growth and reduce market risk premia. - Revenue administration efforts could yield more revenue gains than currently assumed. - Should confidence rebound or supply response from reforms be stronger, benefits will be saved and intended deficit reductions will be brought forward to achieve speedier fiscal sustainability. ### Financial sector policies and safety nets - Banking system summary: - Banking system equity base strengthened in 2009, jumping from €24 to €33 billion, including through capital injections from the government, for €3.8 billion, capital increases from owners, and retained earnings. - All banks compliant with capital adequacy requirement of 8 percent. - Average capital adequacy ratio rose to 11.7 percent at end 2009. - Non-performing loans reached 7.7 percent at end-2009; profitability declined and might become negative this year. - Liquidity challenges and state support: - Greek banks lost wholesale market access since end-2009; maturing interbank liabilities not renewed or only at high costs; moderate deposit outflows in early 2010. - Banks increasingly relied on Eurosystem credit operations. - Government extended the banking assistance package of early 2009 (€28billion of which €11 billion had been used by end-2009), to provide €17 billion in additional liquidity and is implementing another extension subject to European Commission approval. - Under Eurosystem framework, national central banks may give support to temporarily illiquid but solvent institutions; such support by the Bank of Greece will be fully guaranteed by the Greek state in a manner consistent with relevant ECB and EU requirements. - Financial Stability Fund (FSF): - Government to establish, by June 30, 2010 (structural benchmark), through specific legislation and in consultation with the IMF, the European Commission, and the ECB, a fully independent Financial Stability Fund (FSF). - FSF key decision makers to be persons of recognized standing in financial matters, appointed by the government and the Governor of the Bank of Greece (who will make most appointments). - Primary purpose: preserve financial sector soundness and capacity to support the Greek economy by providing equity support to banks as needed. - Supervisory assessments that indicate capital buffers might fall below adequate levels will require shareholders to immediately bring additional capital or take bridging capital support from the FSF. - If banks cannot raise capital and repay the FSF, a restructuring process will take place under FSF lead, in line with EU competition and state aid requirements. - Other financial sector measures: - Strengthen corporate debt restructuring legislation and personal debt restructuring proposal in line with international best practices to maintain credit discipline, protect creditor and consumer rights, and preserve borrower track record information. *Source: _cr10110 - 8. The government is committed to fairness in the distribution of the adjustment* ### 20. The Bank of Greece will implement intensified supervision and increase the ### _cr10110 - 20. The Bank of Greece will implement intensified supervision and increase the ### Banking supervision and regulatory capacity - The Bank of Greece will implement intensified supervision and increase the resources dedicated to banking supervision. - Actions to be taken: - Increase the frequency and speed of data reporting. - Further develop a comprehensive framework for regularly stress-testing financial institutions. - Increase staffing for on-site inspections and off-site review, taking into account new responsibilities with respect to insurance supervision. - Introduce additional flexibility in human resources management. - Grant all Bank of Greece staff strong legal protection for actions performed in good faith. ### Cross-border coordination - Close coordination will be maintained with home and host country supervisors within the EU framework for cross-border bank supervision. - Authorities recognize significant presence of Greek banks in South Eastern European (SEE) countries. - A number of MoUs with host supervisory authorities (both EU and non-EU) have been signed. - Communication with regulators in SEE regarding risk assessments and liquidity contingency plans is intensifying. ### Structural policies — objectives and broad strategy - Purpose: Strengthen competitiveness, boost flexibility and productive capacity, restore and sustain international competitiveness, and shift the economy toward investment- and export-led growth. - The Greek government will work closely with the European Commission and the ECB to pursue reforms as specified in the MoU attached to this MEFP. ### Structural policy measures (detailed) - Modernizing public administration: - Reorganize recruitment procedures and finalize the single payment authority for wages. - Introduce a simplified remuneration system covering basic wages and all allowances applicable to all public sector employees, implemented in a cost-saving manner. - Strengthen procurement practices to generate efficiency gains and ensure transparency. - Overhaul the health care system through reforms in management, accounting and financing systems. - Reorganize sub-central government to reduce the number of local administrations and elected/appointed officials. - Collaborate with the EC to launch an independent external functional review of public administration at the central government level. - Aim: prioritize government activities and strengthen the fight against waste and corruption. - Strengthening labor markets and income policies: - Make private sector wages more flexible to allow extended cost moderation, in line with lowering of public sector wages. - Reform legal framework for wage bargaining in the private sector, including eliminating asymmetry in arbitration (following consultation with social partners and within EU law). - Adopt legislation for minimum entry level wages to promote employment for the young and long-term unemployed. - Implement a new control system for undeclared work and modernize labor market institutions. - Revise employment protection legislation (extend probationary periods, recalibrate rules governing collective dismissals, facilitate greater use of part-time work). - Revise scope for improvements in targeting social expenditures to enhance social safety net for the most vulnerable. - Improving the business environment and bolstering competitive markets: - Adopt legislation establishing one-stop shops for starting new enterprises to cut procedures, costs and delays. - Introduce legislation to cut licensing and other costs for industry. - Fully implement key steps of the EU Services Directive in 2010, especially in tourism, education and retail. - Over the next year, open restricted professions by reducing fixed tariffs and other restrictions in legal, pharmacy, notary, engineering, architect, road haulage, and auditing professions. - Strengthen the role of the Hellenic Competition Commission (HCC). - Progressively liberalize network industries, especially in transport and energy, and strengthen regulators in these sectors in line with EU policies. - Managing and divesting state enterprises: - Increase transparency to raise efficiency and reduce losses. - Publish 2009 financial statements audited by chartered accountants of the ten largest loss makers on the internet. - Produce a timetable and action plan for improving financial performance of main loss-makers, notably railway and public transportation companies; include steps to reduce costs (streamline networks) and increase tariffs. - Review role for divesting state assets, including land owned by public enterprises or the government. - Review scope for improving corporate governance and enhancing oversight of state-ownership. - Improving absorption of EU structural and cohesion funds: - Work with the EC to raise absorption rate of Structural and Cohesion Funds. - Establish targets for payment claims based on Management Information System (MIS) data every six months measured by certified data. - Implement a "fast track project production" system with deadlines for each approval and implementation step. - Submit a minimum of ten major projects per annum. - Establish a central account for national co-financing of Structural and Cohesion Funds within the agreed public investment envelope. - Establish a specific Task Force with the Commission to ensure faster delivery of high-quality projects. ### Program financing - Anticipated coverage of program financing requirements: - Projected public financing gap for the program period: around €110 billion. - Expected coverage: bilateral lending support from euro area member states €80 billion; IMF support €30 billion. - Greece will draw on resources in parallel throughout the program period, drawing bilateral and IMF financing in a ratio of 8 to 3 in each disbursement (measured at the program exchange rate). - If fiscal consolidation proceeds faster than expected or market conditions improve significantly, Greece would refrain pari passu from drawing on the full bilateral and IMF support. ### Program monitoring and safeguards - Monitoring mechanisms: - Progress monitored through quarterly (and continuous) quantitative performance criteria (PCs) and indicative targets, structural benchmarks, program reviews and consultation clauses. - Quantitative targets up to December 2010 are PCs; targets for 2011-2013 are indicative and for 2011 will be converted into PCs at the time of the second review before end-2010. - A joint EC/ECB MoU specifies structural policies recommended in the MEFP with precise time frames. - Safeguards and related arrangements: - The Bank of Greece will undergo a safeguards assessment in accordance with the IMF safeguards policy. - Authorities have provided information requested for the assessment to commence and authorized external auditors to provide information to and hold discussions with IMF staff. - Because IMF financing will be used to provide direct budget support, a memorandum of understanding between the government and the Bank of Greece will establish modalities for repayment of IMF financing and servicing of interest payments and other charges. - Fund disbursements will be deposited into the government’s single treasury account at the Bank of Greece pending their use. ### Fiscal measures included in the program (high-level highlights and totals) - Total annual measures (2010–2013 and cumulative): 5,800; 9,150; 5,575; 4,775; 25,300; Cum % GDP 11.0 - Revenue measures (annual by year and cumulative): 1,250; 6,600; 1,725; -625; 8,950; Cum % GDP 3.9 - Expenditure measures (annual by year and cumulative): 4,550; 2,550; 3,850; 5,400; 16,350; Cum % GDP 7.1 - Total measures (in percent of GDP) by year and cumulative: 2.5; 4.1; 2.4; 2.0; 11.0 - Revenue measures (in percent of GDP): 0.5; 3.0; 0.8; -0.3; 3.9 - Expenditure measures (in percent of GDP): 2.0; 1.1; 1.7; 2.3; 7.1 - Memorandum item: Nominal GDP: 231; 224; 228; 235; 229 (years shown in table heading: 2010 2011 2012 2013 Cum % GDP) - Selected line items (in millions of Euros; preserve presented sequencing): - VAT rates increase by 10 percent (10% to 11%; 21% to 23%): 800; 1,000; 0; 0; 1,800; 0.8 - Broadening VAT base: 0; 1,000; 500; 0; 1,500; 0.7 - Excise tax on fuel: 200; 250; 0; 0; 450; 0.2 - Excise tax on cigarettes: 200; 300; 0; 0; 500; 0.2 - Excise tax on alcoholic beverages: 50; 500; 0; 0; 100; 0.0 - Gaming royalties: 0; 200; 400; 0; 600; 0.3 - Special levy on highly profitable firms: 0; 600; 0; 0; 600; 0.3 - Presumptive taxation of professionals: 0; 400; 100; 0; 500; 0.2 - Reduce wage bill by cutting bonuses/allowances: 1,100; 400; 0; 0; 1,500; 0.7 - Workforce reduction beyond 5:1 (add. 20,000): (blank); (blank); 0; 600; 500; 1,100; 0.5 - Eliminate pension bonuses (except for minimum pensions): 1,500; 500; 0; 0; 2,000; 0.9 - Yet to be quantified yield from structural reform initiatives: 0; 0; 0; 4,200; 4,200; 1.8 - Total measures (sum rows in table): 5,800; 9,150; 5,575; 4,775; 25,300; 11.0 ### Performance criteria, indicative targets, and structural conditionality (selected) - Quantitative Performance Criteria (Table 2 headings preserved): - Floor on the modified general government primary cash balance (values shown in table: -5.0; -4.0; -5.7; ..; ..; ..; -2.1; 2.4; 7.4) - Ceiling on State Budget primary spending (values: 34; 5; 0; 67; ..; ..; ..; 67; 68; 69) - Ceiling on the overall stock of central government debt (values: 342; 342; 342; ..; ..; ..; 365; ..; ..) - Ceiling on the new guarantees granted by the central government (values: 2.0; 2.0; 2.0; ..; ..; ..; 1.0; 0.0; 0.0) - Ceiling on the accumulation of new domestic arrears by the general government: continuous from April [30] onward (applies on a continuous basis). - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by general government (values: 0; 0; 0; ..; ..; ..; 0; 0; 0) - Structural benchmarks and prior actions (selected): - Prior actions: 1. Reduce public wage bill by cutting bonuses/allowances; and pension bonuses (except minimum pensions). Rationale: Improves fiscal sustainability; has signaling effect for private sector wage setting. 2. Increase standard VAT rate from 21 to 23 percent and reduced rate from 10 to 11 percent and excise tax rates on alcohol, tobacco, and fuel with a yield of at least €1.25 billion in the remainder of 2010. Rationale: Improves fiscal sustainability. 3. Appoint staff team and leader in GAO responsible for general government in-year cash reporting. Rationale: Establishes in-year oversight responsibilities of general government fiscal policy. - Structural benchmarks (end-June 2010 and subsequent dates): - End-June 2010: 1. Establish independent Financial Stability Fund (FSF). 2. Adopt and start to implement reorganization of sub-central government (Kalikrates). 3. Submit to parliament amendments to Law 2362/1995 to introduce three-year fiscal strategy, top-down budgeting with expenditure ceilings, contingency margins, supplementary budget requirements, and commitment controls. 4. National Actuarial Authority to produce report assessing parameters of new system for long-term actuarial balance. - End-September 2010: 1. Adopt comprehensive pension reform reducing projected increase in public spending on pensions over 2010-60 to 2½ percent of GDP. 2. Establish a commitment register in all line ministries and public law entities; begin publishing monthly data on general government in-year fiscal developments (including arrears). 3. Publish 2009 financial statements of the ten largest loss-making public enterprises, audited by chartered accountants, on the Ministry of Finance website. 4. Put in place effective project management arrangement to implement the anti-evasion plan, including strengthened collection enforcement, reorganized large taxpayer unit, strong audit program, prosecution of worst offenders, and strengthened filing and payment control program. - End-December 2010: 1. Publish a detailed report by the Ministry of Finance with the single payment authority on compensation structure, levels and employment dynamics in general government. 2. Adopt new Regulation of Statistical Obligations for agencies participating in the Greek Statistical System. 3. Prepare a privatization plan to raise at least 1 billion euro a year during 2011-2013. ### Technical Memorandum of Understanding (TMU) — monitoring basics - TMU date: May 3, 2010. - Program exchange rates (as of April 30, 2010) for program purposes: - €1 = 1.3315 U.S. dollar - €1 = 125.81 Japanese yen - €1.135 = 1 SDR - Definition of general government for program purposes includes: - Entities covered under the State Budget as defined in Chapter 2 of Law 2362/1995. - Local authorities (municipalities, prefectures, regional governments) including basic and special budgets and attached agencies classified as local authorities according to ESA 95. - Social security funds as established in the registry of the National Statistical Service. - Any new funds or special budgetary and extra budgetary programs created during the program period that carry out fiscal operations as defined in the IMF’s Manual on Government Finance Statistics 2001; authorities will inform IMF, European Commission and ECB immediately of any such creations. - Reporting requirements: - The Ministry of Finance will provide detailed monthly information on revenues and expenditures, domestic and foreign debt redemptions, new domestic and foreign debt issuance, changes in domestic and foreign cash balances of the central government at the Bank of Greece, all other sources of financing including capital transactions, and arrears of the general government. Data will be provided within 30 days. - The Bank of Greece will provide detailed monthly data on assets and liabilities of local authorities and social security funds in line with monetary survey data. *Source: Excerpts from the IMF staff report (MEFP and TMU) in the provided content unit.* ### 5. Definition: The modified general government primary cash balance (MGGPCB) is ### _cr10110 - 5. Definition: The modified general government primary cash balance (MGGPCB) is ### Definition of MGGPCB - The modified general government primary cash balance (MGGPCB) is defined as the modified general government cash balance (MGGCB) minus interest payments by the state budget. - The MGGCB is defined as the sum of: - the cash balance of the ordinary state budget, - the cash balance of the investment state budget, - the change in net financial assets of local authorities, - and the change in net financial assets of social security funds. - Privatization receipts will be excluded from cash receipts. - Net lending operations by the state budget will be recorded as cash expenditures. ### Components — Ordinary State Budget Cash Balance - Measured from above the line. - Based on ordinary budget revenues (recurrent revenue plus non-recurrent revenue minus tax refunds) minus ordinary budget expenditures. - Ordinary budget expenditures will exclude amortization payments and capital transfers to social security funds by bonds but include: - salaries and pensions; - grants to social security funds, medical care and social protection; - operational and other expenditure; - returned resources; - payments in exchange of claims of insurance fund for the personnel working in the Public Electricity Company; - interest payments; - payments for military equipment procurement; - NATO expenses. - Data source and frequency: published monthly on the official website of the General Accounting Office of the Ministry of Finance, and in line with the corresponding line items established in the ordinary state budget. ### Components — Investment State Budget Cash Balance - Measured from above the line. - Based on investment budget revenues minus investment budget expenditures. - Data source and frequency: published monthly on the official website of the General Accounting Office of the Ministry of Finance, and in line with the corresponding line items established in the investment state budget. ### Components — Net Financial Assets of Local Authorities - Defined as financial assets minus financial liabilities of local authorities. - Financial assets include deposits of local authorities in the Bank of Greece and deposits in the commercial domestic banking sector. - Deposits measured at face value excluding accrued interest in line with recording for monetary survey data. - Financial liabilities include short and long term loans from the domestic banking system to local authorities, measured at face value, consistent with monetary survey data. ### Components — Net Financial Assets of Social Security Funds - Defined as financial assets minus financial liabilities of social security funds. - Financial assets include: - Deposits of social security funds in the Bank of Greece and direct deposits in the domestic commercial banking system and indirect deposits held by the IKA mutual fund; deposits measured at face value excluding accrued interest. - Holdings of direct shares or indirect shares (through the IKA mutual fund) quoted on the Athens Stock Exchange; measured at the end-of-month market value. - Direct or indirect holdings of Mutual Fund units issued by Greek management companies (other than the IKA mutual fund); measured at the end-of-month market value. - Holdings of central government bonds, including short and long-term securities issued domestically, long-term securities issued abroad operated from Bank of Greece accounts, and indirect holdings through the IKA mutual fund; holdings measured at nominal value. - Financial liabilities include short and long term loans from the domestic banking system to the social security funds, measured consistently with monetary survey data. ### Adjustments to Primary Expenditure Monitoring - Primary expenditure of the central government that is monitored excludes payments related to bank support, when carried out under the program’s banking sector support and restructuring strategy. - Costs that may be excluded include: - loans to financial institutions and investments in equity of financial institutions (requited recapitalization); - unrequited recapitalization; - purchases of troubled assets. - Any financial operation by central government to support banks, including issuance of guarantees or provision of liquidity, will be immediately reported to IMF, European Commission and ECB staff. - The performance criterion will be adjusted upward for any possible revenue overperformance in the central government against the current projection as indicated below. ### Central Government Revenue (Cumulative from January 1, 2010) - June 2010: €25,056 million - September 2010: €41,232 million - December 2010: €58,382 million ### Supporting material and reporting timelines - Cash balances of the ordinary and investment state budgets: provided to the European Commission, ECB and IMF by the General Accounting Office in the Ministry of Finance within three weeks after the end of the month; data include detailed information on revenue and expenditure items in line with monthly reports published since January 2010. - Net financial assets of local authorities and social security funds: provided to the IMF, European Commission and ECB by the Statistics Department of the Bank of Greece within four weeks after the end of the month. ### B. Ceiling of State Budget Primary Spending (Performance Criterion) - Definition: state budget primary spending = state budget spending (ordinary + investment) minus interest expenditures paid by the state budget, in line with prior definitions. - Exclusions: primary expenditure monitored excludes cash payments related to bank restructuring when carried out under the program’s banking sector restructuring strategy; costs that may be excluded include loans to financial institutions and investments in equity (requited recapitalization), unrequited recapitalization, and purchase of troubled assets. - Any financial operation by central or general government to support banks, including issuance of guarantees or provision of liquidity, will be immediately reported to European Commission, ECB and IMF staff. - Supporting material: monthly expenditure data of the ordinary and investment state budget will be provided by the General Accounting Office of the Ministry of Finance. ### C. Non-accumulation of Domestic Arrears by the General Government (Continuous Indicative Target) - Definition: domestic arrears are accounts payable to domestic suppliers past due date by 90 days. - Data will be provided within four weeks after the end of the month. - The stock of arrears as of end-April stood at 5.6 billion euro. - Supporting material: Ministry of Finance will provide monthly expenditure arrears data within four weeks after the end of the month. ### D. Ceiling on the Overall Stock of Central Government Debt (Performance Criterion) - Definition: overall stock of central government debt refers to debt corresponding to activities of the state budget; defined as total outstanding gross debt liabilities of the central government, including but not limited to liabilities in the form of securities and loans. - The program exchange rate will apply to all non-euro denominated debt. - Exclusions: ceiling excludes debt arising from payments for bank restructuring when carried out under the program’s banking sector restructuring strategy (loans to financial institutions, investments in equity, unrequited recapitalization, purchase of troubled assets). - Any financial operation by the central government to support banks, including issuance of guarantees or provision of liquidity, will be immediately reported to IMF, European Commission and ECB staff. - Adjusters: the ceiling will be adjusted upward (downward) by the amount of any upward (downward) revision to the stock of end-December 2009 central government debt. - Supporting material: total stock of central government debt data provided to the European Commission, ECB and IMF staff by the General Accounting Office consistent with the debt published in the public debt bulletin no later than 30 days after the end of each month. ### E. Ceiling on New Central Government Guarantees (Performance Criterion) - Definition: ceiling on new central government guarantees shall exclude guarantees to support banks and exclude guarantees related to EIB financed loans. - Supporting material: all new central government guarantees will be reported in detail, identifying amounts and beneficiaries; General Accounting Office will provide data monthly within three weeks after the end of each month. ### F. Non-accumulation of External Debt Payments Arrears by the General Government (Continuous Performance Criteria) - Definition: an external debt payment arrear is a payment on debt contracted or guaranteed by the general government, not made within seven days after falling due. - The performance criterion applies continuously throughout the program period. - Supporting material: stock of external arrears of the general government system will be provided by the General Accounting Office with a lag of not more than seven days after the test date. ### G. Overall Monitoring and Reporting Requirements - Performance under the program will be monitored from data supplied to the EC, ECB and IMF by the Ministry of Finance, the General Accounting Office, and Bank of Greece. - The authorities will transmit promptly to the IMF, EC and ECB staff any data revisions in a timely manner. ### H. Monitoring of Structural Benchmarks — Pension Reform - The government has initiated a pension reform which should be adopted by the end of September 2010. - The National Actuarial Authority will produce a report to assess whether parameters significantly strengthen long-term actuarial balance. - The draft law for the new and actuarially-balanced system should be available by the end of June, 2010. ### Expectations for the Pension Reform - Merge pension funds in three funds by 2018. - Introduce a new system to strengthen the link between contributions and benefits, with uniform rules that will apply pro-rata (as a sum of the accrued rights under the old system and the benefits accrued under the new system) to all current and future workers. Workers retiring in and after 2015 will collect benefits from this system. - Set the normal retirement to age 65 across all systems, including for those insured before 1993 and women in the public sector, by 2015. After 2020, the normal retirement age will increase in line with life expectancy. - Restrict early retirement to age 60 by 2011, including for those insured before 1993, workers in heavy and arduous professions, and those with 35 or more years of contributions. - Index benefits to changes in the consumer price index, starting in 2014 (benefits will be frozen 2010–2013). - Include a means-tested pension for all citizens older than the normal retirement age so that an important safety net is provided, consistent with fiscal sustainability. - Lengthen the years over which the pensionable earnings base is calculated from the top 5 out of the last 10 years of earnings to lifetime earnings. - Review conditions for disability pensions by the end of March of 2011 and introduce stricter conditions for eligibility by December of 2011, including periodic re-examination of those with disability pensions. ### Excerpted MEFP context and key macro figures (selection) - Request for financial assistance from euro area Member States for a total amount of €80 billion over a 36 months period. - Parallel request for financial assistance to the IMF for a total amount of €30 billion (SDR 26.4 billion). - Program aim: reduce the deficit significantly below 3 percent of GDP in 2014; achieve a downward trajectory in the public debt-GDP ratio in 2013; safeguard financial system stability; implement structural reforms to boost capacity to produce, save, and export. - Recent macro developments cited: - Greek real GDP declined by 2 percent in 2009. - Deficit of 5.1 percent of GDP in 2007. - Estimated deficit jumped to 13.6 percent of GDP in 2009. - Public debt rose to over 115 percent of GDP in 2009. - External current account deficit at end 2009 was still over 11 percent of GDP. - Net international investment position is over negative 83 percent of GDP. - External interest bill on the foreign debt has increased to over 5 percent of GDP. - Policy focus: major reorientation to correct fiscal and external imbalances, preserve banking sector soundness, and implement medium-term fiscal and structural policies to restore confidence and support future growth. *Source: Memorandum of Economic and Financial Policies and Memorandum of Understanding (May 3, 2010) — excerpts on definitions, monitoring, and benchmarks.* ### 6. The government foresees an extended adjustment period: ### 6. The government foresees an extended adjustment period: ### Macroeconomic outlook - Real GDP growth is set to contract significantly in 2010‒2011, with the economic program assuming negative growth of 4 percent in 2010 and 2½ percent in 2011. - Recovery is expected to begin from 2012 onward as confidence effects from front-loaded fiscal measures, a strong medium-term economic program, and comprehensive structural reforms take hold. - Inflation needs to be reduced significantly below the euro area average to regain price competitiveness; this requires domestic demand tightening, moderation of wages and pensions, cost-cutting measures, and addressing oligopolistic structures to reduce high markups. - The external deficit is projected to decline gradually over the medium term as domestic demand and inflation moderate and as structural reforms improve export supply and reduce import dependence; however, interest costs on substantial external debt will pressure the current account for some time. ### Overall policy approach - To achieve program objectives, the government will use fiscal, financial, and structural policies to correct fiscal imbalances, place debt on a downward path in the medium term, maintain banking sector stability, and restore competitiveness. - Fiscal adjustment is the cornerstone: the government is committed to durable adjustment measures, on top of those announced in March, of 11 percent of GDP in cumulative terms through 2013, with additional remedial measures in 2014 to reduce the deficit to well below 3 percent of GDP. - The debt-GDP ratio is to be placed on a downward trajectory from 2013 onward and sustained thereafter by keeping primary balances in a sizeable surplus (at least 5 percent of GDP) up to 2020. - The government will strengthen the fiscal policy framework and fiscal institutions to sustain consolidation. ### Fiscal measures and targets - 2010 actions: - Significant contraction in the 2010 first quarter deficit has already been achieved. - Three biggest upfront measures: immediate cut in the public sector wage bill, cuts in pension outlays, and further increases in VAT and selected excises (together with other steps yielding 2½ percent of GDP in further savings already in 2010). - Deficit projected to drop from an estimated 13.6 percent of GDP in 2009 to 8.1 percent of GDP in 2010. - 2011–2013 planned adjustments: - Adjustment needs for 2011 projected at 4 percent of GDP. - Adjustment measures in 2012 projected at 2½ percent of GDP. - Adjustment measures in 2013 projected at 2 percent of GDP. - Headline deficit expected to drop to 7½ percent in 2011, with larger declines in subsequent years when growth resumes. - Expenditure measures: - Expenditures to be cut by the equivalent of around 7 percent of GDP through 2013. - Wages and pensions to be frozen in nominal terms for the duration of the program. - Replace only 20 percent of retiring employees over time; consolidate municipalities and local councils; rationalize investment spending and shift to more intensive use of EU structural and cohesion funds as feasible. - Independent reviews of public administration and social programs to be launched by internationally renowned experts. - Revenue measures: - Revenues to be increased by the equivalent of around 4 percent of GDP through 2013. - Measures include presumptive taxation on liberal professions, increased luxury goods taxation, temporary surcharges on highly profitable entities and high valued properties, broadening the VAT base, increasing VAT rates, raising excise taxes where Greece is below the euro area average, and green and “health” taxes. - Steps to combat tax evasion included in recently adopted tax reform legislation. ### Social distribution and protection - Commitment to fairness and protecting the most vulnerable; larger contributions to consolidation will be raised from those who traditionally have not borne their fair share of the tax burden. - Pension reductions: - Elimination of the 13th and 14th pensions is compensated, for those receiving less than €2500 a month, by introducing a new flat bonus of €800 a year. - Benefit reduction weighted toward higher pension earners. - Wage bill reductions: - The 13th and the 14th wage payments will be eliminated for all employees. - For those receiving less than €3000 a month, a flat bonus payment of €1000 a year per employee will be introduced, financed through cutting salary allowances for higher income segments. - Minimum pensions and family support instruments will not be cut; the most vulnerable will be compensated for possible adverse impacts. - The government will invite representatives of business and labor to sign a social pact for the duration of the program to maintain social cohesion, fight poverty, and maintain employment. ### Structural fiscal reforms and public management - Pension reform: - Reform to be adopted before end-June 2010; National Actuarial Authority to verify long-term actuarial balance. - Existing pension funds to be merged into three funds; new system to strengthen link between contributions and benefits with uniform rules applying pro-rata to all current and future workers. - Normal retirement age set to 65 years, increasing in line with life expectancy; benefits indexed to prices; early retirement restricted; list of heavy and arduous professions reduced. - A means-tested social pension for all citizens above the normal retirement age to provide a safety net. - Health sector reform: - Implement double-entry accrual accounting in hospitals, periodic publication of audited accounts, improvements in pricing and costing mechanisms. - Separate health funds from pension administration, merge funds to simplify fragmentation, and bring health activities under one ministry. - Tax reform and tax administration: - Income tax system made more progressive; exemptions and deductions reduced to broaden the tax base; measures to fight tax evasion (tightened obligations to issue receipts for VAT, document living expenses, introduction of presumptive taxation). - Short-run tax administration strategy: safeguard revenue from largest taxpayers, stronger enforcement and auditing of high-wealth individuals and self-employed, prosecute worst offenders, strengthen enforcement of VAT filing and payment, collect on large stock of tax arrears. - Medium-term tax administration program: develop comprehensive compliance risk management framework (including a compliance strategy for 2012), develop taxpayer service capacity, improve enforcement operations using risk-based approaches, build headquarters strategic management and planning capabilities in tax and customs administration. - Public financial management and fiscal framework: - IMF and European Commission technical assistance re-prioritized for short-term challenges. - General Accounting Office (GAO) to monitor and report general government data; introduce standardized commitment control procedures; ensure budgets prepared within a medium-term fiscal strategy and presented before the fiscal year; introduce top-down budgeting with expenditure ceilings and contingency reserve; require supplementary budget for overruns; amend the 1995 budget management law accordingly. - Plan to create an independent fiscal agency attached to parliament. - Debt management: - Update debt management strategy and tools to manage risk; review operational and risk management framework for debt management to ensure transparency and predictability; technical assistance sought from the IMF. - Statistical reporting: - Full independence granted to the Greek Statistical Office; resources to be devoted to improve statistical systems and seek resident technical assistance. - Joint Greek government and European Commission Statistical Action Plan to be fully implemented. - Since January 2010, timely monthly central government budget reports on a cash basis published; GAO to publish monthly data on expenditures pending payment, including arrears, from July 2010. - Efforts to improve collection and processing of general government data compiled according to ESA; furnish detailed information to the European Commission, the ECB and the Fund on operating accounts and balance sheets of key public enterprises. ### Monitoring, risks, and contingency - Program monitoring: close monitoring with willingness to take measures as necessary to preserve objectives, including reducing discretionary spending. - Risks to the program include lower revenue, higher social transfers, further downward revisions of growth, additional fiscal liabilities from the public and financial sector, and higher interest costs. - Upside potential: cautious estimates are used for 2010‒2011 projections; positive confidence effects could boost GDP growth and reduce market risk premia; revenue administration efforts could yield more gains than assumed. If confidence and supply responses materialize earlier, benefits will be saved and could bring forward correction to achieve faster fiscal sustainability. ### Financial sector policies and status - Banking system capital and solvency: - System equity base strengthened from €24 to €33 billion in 2009, including government capital injections of €3.8 billion, capital increases from owners, and retained earnings. - All banks compliant with the capital adequacy requirement of 8 percent; average capital adequacy ratio rose to 11.7 percent at end 2009. - Emerging banking challenges: - Fiscal crisis and weakening economic environment caused a reversal in credit growth and an increase in non-performing loans, which reached 7.7 percent at end-2009. - Profitability declined and might become negative in the current year. - Supervisory response: - Bank supervisors to monitor liquidity and nonperforming loans closely at individual banks. - The Bank of Greece and the government will strengthen and clarify key elements of Greece’s supervisory and financial crisis framework to assist the banking system through the period of lower growth. *Source: 6. The government foresees an extended adjustment period* ### 16. The immediate challenge for the banks is to manage carefully the current tight ### _cr10110 - 16. The immediate challenge for the banks is to manage carefully the current tight ### Banking sector liquidity and near-term support - Greek banks have lost wholesale market access to fund their operations since end-2009. - Maturing interbank liabilities have not been renewed, or only at high costs. - Some moderate deposit outflows were noted during the first months of 2010, putting pressure on banks’ liquidity positions. - Banks have increasingly relied on Eurosystem credit operations. - Government extensions and amounts: - Early-2009 banking assistance package: €28 billion (of which €11 billion had been used by end-2009). - Additional liquidity provided: €17 billion. - Government implementing another extension of this support facility subject to approval by decision of the European Commission. - Within the Eurosystem framework, national central banks may give support to temporarily illiquid, but solvent institutions; support by the Bank of Greece would be fully guaranteed by the Greek state in a manner consistent with relevant ECB and EU requirements. ### Financial Stability Fund (FSF): purpose, governance, and operations - Objective: preserve the financial sector’s soundness and capacity to support the Greek economy by providing equity support to banks as needed. - Timeline/commitment: Government will establish, by June 30, 2010 (structural benchmark), a fully independent Financial Stability Fund through specific legislation and in consultation with the IMF, the European Commission, and the ECB. - Governance: - FSF’s key decision makers will be persons of recognized standing in financial matters. - Appointments made by the government and the Governor of the Bank of Greece (who will make most of the appointments). - Operational rules: - When supervisory assessments conclude a bank’s capital buffer might fall below adequate levels, shareholders will be invited to immediately bring additional capital or take bridging capital support from the FSF. - If banks cannot expeditiously raise additional capital and repay the FSF, a restructuring process will be led by the FSF, in line with EU competition and state aid requirements. ### Strengthening the financial sector safety net and supervision - Corporate and personal debt restructuring: - Corporate debt restructuring legislation and the current proposal for a personal debt restructuring law will be aligned with international best practices. - Goals: maintain credit discipline, protect creditor and consumer rights, and preserve borrower track-record information. - Bank of Greece supervisory enhancements: - Implement intensified supervision and increase resources dedicated to banking supervision. - Increase frequency and speed of data reporting. - Further develop a comprehensive framework for regularly stress-testing financial institutions. - Increase staffing for on-site inspections and off-site review; account for new insurance supervision responsibilities. - Introduce additional flexibility in human resource management. - Grant all Bank of Greece staff strong legal protection for actions performed in good faith. - Cross-border coordination: - Maintain close coordination with home and host country supervisors within the EU framework for cross-border bank supervision. - Several MoUs with host supervisory authorities (both EU and non-EU) have been signed, noting significant Greek bank presence in South Eastern European (SEE) countries. - Intensifying communication with regulators in SEE regarding risk assessments and liquidity contingency plans. ### Structural policies to boost competitiveness and recovery - Objectives: enhance flexibility and productive capacity, restore and sustain international competitiveness, and shift toward investment- and export-led growth. - Cooperation: Government will work closely with the European Commission and the ECB to pursue reforms as specified in the MoU attached to the MEFP. - Major reform areas and specific measures: - Modernizing public administration: - Reorganize recruitment procedures and finalize the single payment authority for wages. - Introduce a simplified remuneration system covering basic wages and all allowances for all public sector employees. - Strengthen procurement practices for efficiency and transparency. - Overhaul health care through reforms in management, accounting and financing systems. - Reorganize sub-central government to reduce number of local administrations and elected/appointed officials. - Collaborate with the EC to launch an independent external functional review of central government public administration. - Strengthening labor markets and income policies: - Make private sector wages more flexible in line with public sector wage lowering. - Reform legal framework for wage bargaining in the private sector, including eliminating asymmetry in arbitration (following consultation with social partners and within EU law). - Adopt legislation for minimum entry level wages to promote employment for youth and long-term unemployed. - Implement a new control system for undeclared work and modernize labor market institutions. - Revise employment protection legislation (extend probationary periods, recalibrate collective dismissal rules, facilitate greater use of part-time work). - Revise targeting of social expenditures to enhance the social safety net for the most vulnerable. - Improving business environment and competition: - Establish one-stop shops for starting new enterprises to cut procedures, costs and delays. - Introduce legislation to cut licensing and other costs for industry. - Fully implement key steps of the EU Services Directive in 2010, especially in tourism, education and retail. - Open restricted professions by reducing fixed tariffs and other restrictions in legal, pharmacy, notary, engineering, architect, road haulage, and auditing professions. - Strengthen the role of the Hellenic Competition Commission (HCC). - Progressively liberalize network industries, especially transport and energy, and strengthen regulators in line with EU policies. - Managing and divesting state enterprises: - Increase transparency to improve efficiency and reduce losses. - Publish 2009 financial statements audited by chartered accountants of the ten largest loss makers on the internet. - Produce a timetable and action plan to improve financial performance of main loss-makers (notably railway and public transportation companies), including concrete steps to reduce costs (streamline networks, increase tariffs). - Review role for divesting state assets, including land owned by public enterprises or the government. - Review scope for improving corporate governance and oversight of state-ownership. - Improving absorption of EU Structural and Cohesion Funds: - Establish targets for payment claims based on MIS data every six months measured by certified data. - Implement a system of "fast track project production" with deadlines for each step of approval and implementation. - Submit a minimum of ten major projects per annum. - Establish a central account for national cofinancing of Structural and Cohesion Funds within the overall public investment envelope agreed in the program. - Establish a specific Task Force with the Commission to ensure faster delivery of high-quality projects. ### Program financing - Projected public financing gap for the program period: around €110 billion. - Expected coverage: - Bilateral lending support from euro area member states: €80 billion. - IMF support: €30 billion. - Disbursement modality: - Greece will draw on bilateral and IMF resources in parallel throughout the program period, drawing in a ratio of 8 to 3 in each disbursement (measured at the program exchange rate). - Contingency: If fiscal consolidation proceeds faster than expected or market conditions improve significantly, Greece would refrain from drawing on the full bilateral and IMF support. ### Program monitoring, safeguards, and institutional arrangements - Monitoring tools: - Quarterly (and continuous) quantitative performance criteria (PCs) and indicative targets. - Structural benchmarks. - Program reviews and consultation clauses. - Definitions in the attached TMU. - Quantitative targets up to December 2010 are PCs; targets for 2011–2013 are indicative and for 2011 will be converted into PCs at the time of the second review before end-2010. - A joint EC/ECB MoU specifies structural policies and sets a precise time frame for implementation. - Bank of Greece safeguards assessment: - The Bank of Greece will undergo a safeguards assessment in accordance with the IMF safeguards policy. - Authorities provided requested information and authorized external auditors to provide information to and hold discussions with IMF staff. - Use and handling of Fund disbursements: - Purchases from the IMF will be used to provide direct budget support. - A memorandum of understanding between the government and the Bank of Greece will establish modalities for repayment of IMF financing and servicing of interest and other charges. - Fund disbursements will be deposited into the government’s single treasury account at the Bank of Greece pending their use. ### Key fiscal measures and impacts (selected figures from Tables) - Total measures 2010–2014: 30000 million EUR, 13.0 percent of GDP. - 2010 (in million EUR; % of GDP): - Increase in VAT rates: 800, 0.3 - Increase in excise tax on fuel: 200, 0.1 - Increase in excise tax on cigarettes: 200, 0.1 - Increase in excise tax on alcohol: 50, 0.0 - Wage bill cut (reducing Easter, summer and Christmas bonuses and allowances): 1100, 0.5 - Intermediate consumption: 700, 0.3 - Pension cuts (highest pensions): 350, 0.1 - Elimination of solidarity allowance (second instalment): 400, 0.2 - Pensions cut by reducing Easter, summer and Christmas bonuses: 1500, 0.6 - Public investment reduction: 500, 0.2 - TOTAL ANNUAL IMPACT: 5800, 2.5 - 2011 (in million EUR; % of GDP): - Carry over from last year: 1.1 - Increase the VAT rates: 1000, 0.4 - Increase in excise tax on fuel: 250, 0.1 - Increase in excise tax on cigarettes: 300, 0.1 - Increase in excise tax on alcohol: 50, 0.0 - Wage bill cut (bonuses/allowances): 400, 0.2 - Pensions cut (bonuses): 500, 0.2 - TOTAL ANNUAL IMPACT: 9150, 4.1 - 2012 (in million EUR; % of GDP): - Excise non-alcoholic beverages: 300, 0.1 - Gaming licenses: 225, 0.1 - Gaming royalties: 400, 0.2 - VAT - broadening base: 300, 0.1 - Presumptive taxation: 100, 0.0 - Increase of legal values of real estate: 200, 0.1 - TOTAL ANNUAL IMPACT: 5575, 2.4 - 2013 (in million EUR; % of GDP): - Presumptive taxation: 100, 0.0 - Gaming licenses: -725, -0.3 - Reduction in public employment additional to the 5-to-1 replacement rule: 500, 0.2 - TOTAL ANNUAL IMPACT: 4775, 2.0 - 2014 (in million EUR; % of GDP): - Temporary measures: -0.4 - Special levy on profitable firms (discontinuation of temporary measures): -600, -0.2 - Levies on illegal buildings (discontinuation of temporary measures): -450, -0.2 - Unidentified measures: 5750, 2.4 - TOTAL ANNUAL IMPACT: 4700, 1.9 ### Quantitative performance criteria (selected entries from Table 2) - Floor on the modified general government primary cash balance (in billions of euros): - juin-10: -5.0 - sept-10: -4.0 - déc-10: -5.7 - déc-11: -2.1 - déc-12: 2.4 - déc-13: 7.4 - Ceiling on State Budget primary spending: - juin-10: 34 - sept-10: 50 - déc-10: 67 - déc-11: 67 - déc-12: 68 - déc-13: 69 - Ceiling on the overall stock of central government debt: - juin-10: 342 - sept-10: 342 - déc-10: 342 - déc-11: 365 ### Structural conditionality and benchmarks for 2010 (selected items from Table 3) - Prior actions: 1. Reduce public wage bill by cutting bonuses/allowances; and pension bonuses (except minimum pensions). 2. Increase standard VAT rate from 21 to 23 percent and reduced rate from 10 to 11 percent and excise tax rates on alcohol, tobacco, and fuel with a yield of at least €1.25 billion in the remainder of 2010. 3. Appoint staff team and leader in GAO responsible for general government in-year cash reporting. - Structural benchmarks (End-June 2010): 1. Establish the independent Financial Stability Fund (FSF) to preserve the financial sector's soundness and thus its capacity to support the Greek economy by providing equity support to banks as needed. 2. Adopt and start to implement a reorganization of sub-central government with the aim to reduce the number of local administrations and elected/appointed officials (Kalikrates). 3. Submit to parliament amendments to Law 2362/1995 to require the MoF to present a three-year fiscal and budget strategy; introduce top-down budgeting with expenditure ceilings for the State budget and multi-year expenditure estimates by line ministry; introduce standard contingency margins; require a supplementary budget for any overspending above the contingency; and introduce commitment controls. The amended law should be immediately effective, including in the context of the 2011 budget. 4. The National Actuarial Authority to produce a report to assess whether the parameters of the new system significantly strengthen long-term actuarial balance. - Structural benchmarks (End-September 2010): 1. Adopt a comprehensive pension reform that reduces the projected increase in public spending on pensions over the period 2010-60 to 2½ percent of GDP. 2. Establish a commitment register in all line ministries and public law entities. Begin publishing monthly data on general government in-year fiscal developments (including arrears). 3. Publish 2009 financial statements of the ten largest loss-making public enterprises, audited by chartered accountants, on the official website of the Ministry of Finance. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 4. Put in place an effective project management arrangement (inc ### 4. Put in place an effective project management arrangement (including tight MOF oversight and five specialist taskforces) to implement the anti-evasion plan to restore tax discipline ### Objectives and expected outcomes - Implement an anti-evasion plan focused on: - strengthened collection enforcement and recovery of tax arrears—coordinated with the social security funds—of the largest debtors; - a reorganized large taxpayer unit focused on the compliance of the largest revenue contributors; - a strong audit program to defeat pervasive evasion by high-wealth individuals and high income self-employed, including prosecution of the worst offenders; - a strengthened filing and payment control program. - Achieves revenue targets and enhances sustainability of the consolidation by increasing burden sharing of the adjustment. - Deadline: End-December 2010. ### Structural and transparency measures (selected structural benchmarks and actions) - 1. Publish a detailed report by the ministry of finance in cooperation with the single payment authority on the structure and levels of compensation and the volume and dynamics of employment in the general government. - Expected effects: Reduces wage escalation. Improves transparency of public sector employment. - 2. Adopt new Regulation of Statistical Obligations for the agencies participating in the Greek Statistical System. - Expected effects: Enhance confidence in fiscal reporting and support the formulation of fiscal policy. - 3. Prepare a privatization plan for the divestment of state assets and enterprises with the aim to raise at least 1 billion euro a year during the period 2011-2013. - Expected effects: Reduces state intervention in the real economy; improves market efficiency; and cuts fiscal contingencies. - Note: Structural benchmarks for 2011 will be determined in the reviews for end-September and end-December 2010. ### Fiscal financing gap and disbursement schedule, 2010‒2013 (selected figures, billion euro) - Table headline: Greece: Fiscal financing gap and disbursement schedule, 2010‒2013, billion euro 1/ - A. GG deficit — SUM: 48.5; 2010: 6.1; 2011 Jan-Apr: 3.1; 2011 May-Jun: 4.6; subsequent quarterly values shown (preserve table detail in original). - B. GG deficit + PE borrowing need — SUM: 53.0; 2010: 6.8; 2011 Jan-Apr: 3.4; 2011 May-Jun: 4.9; ... - C. Debt amortization (existing bonds) — SUM: 138.3; 2010: 20.1; 2011 Jan-Apr: 9.5; 2011 May-Jun: 5.4; ... - D. of which short-term debt — SUM: 50.0; (table shows quarterly breakdown with many 4.0, 4.5, etc.). - E. of which long-term debt — SUM: 88.3; (table shows quarterly breakdown including values 9.5, 0.8, 0.1, 9.8, ...). - F. Stock flow adjustment — SUM: 1.5; each quarter: 0.1. - G. Public sector financing need (B+C+F) — SUM: 192.8; 2010: 27.0; 2011 Jan-Apr: 13.0; 2011 May-Jun: 10.4; ... - H. Rollover of short-term debt — percentages by quarter include: 0%, 87%, 93%, 100%, 100%, 113%, 113%, 100%, 100%, 111%, 111%, 100%, 100%. - I. Rollover of long-term debt — percentages by quarter include: 0% for many quarters, then 75% and 100% in later quarters as shown. - J. New GG borrowing — SUM: 77.9; 2010: 28.9; 2011 Jan-Apr: 0.0; 2011 May-Jun: 4.0; ... - K. of which short-term borrowing (D*H) — SUM: 47.0; quarterly values include 0.0, 4.0, 4.0, 4.0, 4.0, 4.5, 4.5, 4.0, 4.0, 5.0, 5.0, 4.0, 4.0. - L. of which long-term borrowing (E*I) — SUM: 30.9; quarterly values include 0.0 until later quarters with 11.3, 6.9, 6.1, 0.8, 5.8, 11.6. - M. Privatisation receipts — all periods: 0.0. - N. PE borrowing — all periods: 0.0. - O. Bank support scheme — SUM: 10.0; 2010: 0.0; 2011 Jan-Apr: 5.0; 2011 May-Jun: 5.0; others: 0.0. - P. Financing gap (E-G-H-I+J+O) — SUM: 109.2; 2010: -1.9; 2011 Jan-Apr: 18.0; 2011 May-Jun: 11.4; 2011 Q3: 5.4; ... - Q. Loan disbursements — SUM: 110.0; 2010: 0.0; 2011 Jan-Apr: 20.0; 2011 May-Jun: 9.0; 2011 Q3: 9.0; 2011 Q4: 15.0; ... - R. of which IMF — SUM: 30.0; 2010: 0.0; 2011 Jan-Apr: 5.5; 2011 May-Jun: 2.5; 2011 Q3: 2.5; 2011 Q4: 4.1; ... - S. of which EU — SUM: 80.0; 2010: 0.0; 2011 Jan-Apr: 14.5; 2011 May-Jun: 6.5; 2011 Q3: 6.5; 2011 Q4: 10.9; ... 1/ Data in this table are subject to revision. ### Memorandum of Understanding on Specific Economic Policy Conditionality — May 3, 2010 (selected operative points) - Quarterly disbursements of bilateral financial assistance from euro area Member States subject to quarterly reviews of conditionality for the duration of the arrangement. - Release of tranches based on observance of quantitative performance criteria, and a positive evaluation of progress with respect to policy criteria in the MEFP and this Memorandum, up to the end of 2011; detailed criteria for 2012 and 2013 to be specified at the spring 2011 review. - Authorities commit to consult with the European Commission, the ECB and the IMF on adoption of policies not consistent with this memorandum and to provide all requested information for monitoring progress; a compliance report required prior to release of instalments. ### Actions for the first review (to be completed by end Q2-2010) i. Fiscal consolidation — measures generating savings totaling 2.5% of GDP in 2010 (explicit yields shown) - Increase in VAT rates, with a yield of at least EUR 1800 million for a full year (EUR 800 million in 2010); - Increase in excises for fuel, tobacco and alcohol, with a yield of at least EUR 1050 million for a full year (EUR 450 million in 2010); - Reduction in the public wage bill by reducing the Easter, summer and Christmas bonuses and allowances paid to civil servants, with net savings amounting to EUR 1500 million for a full year (EUR 1100 million in 2010); - Elimination of the Easter, summer and Christmas bonuses paid to pensioners, while protecting those receiving lower pensions, with net savings amounting to EUR 1900 for a full year (EUR 1500 million in 2010); - Cancel budgetary appropriations in the contingency reserve with the aim of saving EUR 700 million; - Reduce the highest pensions with the aim of saving EUR 500 million for a full year (EUR 350 million in 2010); - Abolish most of the budgetary appropriation for the solidarity allowance (except a part for poverty relief) with the aim of saving EUR 400 million; - Reduce public investment by EUR 500 million compared to plans; - Parliament adopts, as planned in the stability programme of January 2010, a Law introducing a progressive tax scale for all sources of income and a horizontally unified treatment of income generated from labour and assets; - Parliament adopts, as planned in the stability programme of January 2010, a Law abrogating exemptions and autonomous taxation provisions in the tax system, including income from special allowances paid to civil servants. The law applies retroactively from January 1, 2010. ii. Structural Fiscal Reforms - Government adopts by end June 2010 a law that requires the monthly publication by the General Accounting Office (GAO) of timely monthly statistics (on a cash basis) on revenue, expenditure and financing for the State, as well as on spending pending of payment, including arrears. iii. Financial sector regulation and supervision - The Bank of Greece, on behalf of the Government, establishes an independent Financial Stability Fund, with a strong governance structure, to deal with potential solvency issues and to preserve the financial sector’s soundness and its capacity to support the Greek economy, by providing equity support to banks as needed (Annex 2). - Start implementation of intensified supervision of banks, including by allocating more human resources, also with a view to the take-over of insurance supervision, frequent reporting under tighter deadlines and quarterly solvency stress tests. - Review the private sector bankruptcy law to ensure consistency with ECB observations. iv. Structural reforms (public administration, labor market, competition, transport, EU funds absorption) - Public administration: - Parliament adopts legislation reforming public administration at the local level, notably by merging municipalities, prefectures and regions with the aim of reducing operating costs and wage bill. - Parliament adopts legislation requiring online publication of all decisions involving commitments of funds in the general government sector. - Labour market: - Government starts discussions with social partners in order to revise private sector wage bargaining and contractual arrangements. - Competition and business environment: - Government adopts law to simplify the start-up of new businesses. - Government adopts the horizontal legislation on the Services Directive. - Railway sector recovery plan to specify how operational activities will be made profitable (including closing loss-making lines), ensure effective implementation of EU Directives allowing competition among providers of railway services, and provide for restructuring of holding company including sale of land and other assets. - Absorption of Structural and Cohesion Funds: - Government will put in place measures, including implementation of Law 3840/2010, the establishment of a "fast-track project production”, to achieve the six-monthly targets for payment claims in the absorption of Structural and Cohesion Funds (programming period 2007-2013). - Payment claims to be submitted between 2010 and 2013 (in million of euro) — table data provided in-source (European Regional Fund and Cohesion Fund and European Social Fund figures including annual and half-year targets). - Government establishes a technical task force in direct contact with Commission services to ensure rapid implementation of major transport projects, environmental projects, financial engineering instruments and public administration reform, relying on increased technical assistance. - Government shall have completed steps to ensure that budgetary appropriations for the national co-financing of Structural and Cohesion Funds are channelled to a special central account that cannot be used for any other purposes and which should be available to provide co-financing to all entities in the general government. *Source: Excerpt from the IMF document "_cr10110 - 4. Put in place an effective project management arrangement (inc..."* ### 2. Actions for the second review (to be completed by end Q3-2010) ### 2. Actions for the second review (to be completed by end Q3-2010) ### i. Fiscal consolidation - Rigorously implement the budget for 2010 and the fiscal consolidation measures announced afterwards, including those in this Memorandum. Progress is assessed against the (cumulative) quarterly deficit ceilings in the MEFP (including the TMU). - Government submits the draft budget for 2011 to Parliament. The budget: - Provides information and reliable projections on the entire general government sector. - Targets a further reduction of the general government deficit in line with the MEFP. - Includes a detailed presentation of fiscal consolidation measures amounting to at least 3.2% of GDP (4.3% of GDP, if carryovers from measures implemented in 2010 are considered). - Includes detailed information on the situation of public enterprises. - The budget includes the following measures (in exceptional circumstances, measures yielding comparable savings could be considered in close consultation with European Commission, IMF and ECB staff): - Implement the rule of replacing only 20 percent of retiring employees in the public sector (central government, municipalities, public companies, local governments, state agencies and other public institutions). - Reduction in intermediate consumption of the general government by at least EUR 300 million compared to the 2010 level, on top of savings envisaged in the context of reforming public administration and the reorganisation of local government. - Government starts implementing legislation reforming public administration and the reorganisation of local government with the aim of reducing costs by at least EUR 1500 million from 2011 to 2013, of which at least EUR 500 million in 2011. - Freeze in the indexation of pensions, with aim of saving EUR 100 million. (Adjustments may be needed in case of negative inflation.) - Reduction in domestically-financed investments by at least EUR 1000 million, by giving priority to investment projects financed by EU structural and cohesion funds. - Temporary "crisis levies" on highly profitable firms, yielding at least EUR 600 million in additional revenue per year in 2011, 2012 and 2013. - Incentives to regularise land-use violations, yielding at least EUR 1500 million from 2011 to 2013, of which at least EUR 500 million in 2011. - Enforce the presumptive taxation of professionals, with a yield of at least EUR 400 million in 2011 and increasing returns in 2012 and 2013. - Broaden the VAT base by including services that are currently exempted and move a significant proportion (at least 30%) of the goods and services currently subject to the reduced rate to the normal rate, with a yield of at least EUR 1000 million. - Start phasing in a "green tax" on CO2 emissions, with a yield of at least EUR 300 million in 2011. - Collect revenue from the licensing of gaming: at least EUR 500 million in sales of licences and EUR 200 in royalties. - Expand the base of the real estate tax by updating asset values to yield at least EUR 500 million additional revenue. - Increase taxation of wages in kind, including by taxing car lease payments (at least EUR 150 million). - Initiate the collection of a special tax on unauthorised establishments (at least EUR 800 million per year). - Increase taxes on luxury goods by at least EUR 100 million. - The budget will establish detailed expenditure ceilings for each line-ministry, local governments, and social security funds consistent with the general government deficit target. This also pertains to the medium-term fiscal framework for 2012-2013. - The budget will contain indicative information on monthly revenue per category, and expenditure per Ministry. Updated figures will be regularly made available online. - Parliament adopts modifications to the organic budget law, if necessary, to ensure that the draft budget law for 2011 onwards contains detailed information on outturn and plans of the entire general government sector – including local government, social security, hospitals and legal entities. An annex to the budget will present key figures on the financial performance of the largest public enterprises, concomitant budgetary and tax expenditures, and related fiscal risks. ### ii. Structural fiscal reforms - Parliament adopts legislation to improve the efficiency of the tax administration and controls, implementing recommendations provided by the European Commission and IMF. In particular: - Put in place an effective project management arrangement (including tight MOF oversight and taskforces) to implement the anti-evasion plan to restore tax discipline through: - Strengthened collection enforcement and recovery of tax arrears (coordinated with the social security funds) of the largest debtors. - A reorganized large taxpayer unit focused on the compliance of the largest revenue contributors. - A strong audit program to defeat pervasive evasion by high-wealth individuals and high income self-employed, including prosecution of the worst offenders. - A strengthened filing and payment control program. - Parliament adopts a reform of the pension system to ensure its medium- and long-term sustainability. It should limit the increase of public sector spending on pensions, over the period 2010‒2060, to under 2.5 percent of GDP. The reform will be designed in close consultation with European Commission, IMF and ECB staff, and its estimated impact on long-term sustainability will be validated by the EU Economic Policy Committee. The parameters of the system will ensure long-term actuarial balance, as determined by the National Actuarial Authority. The reform should include the following elements: - Simplification of the fragmented pension system by merging the existing pension funds in three funds and introducing a unified new system for all current and future employees. The new universally binding rules on entitlements, contributions, accumulation rules and indexation of pension rights shall be applied pro rata to everybody from 1 January 2013. - Introduction of a unified statutory retirement age of 65 years, including for women in the public sector (phased in immediately after adoption), to be completed by December 2013. - Gradual increase in the minimum contributory period for retirement on a full benefit from 37 to 40 years by 2015. - Amendment of the pension award formula in the contributory-based scheme to strengthen the link between contributions paid and benefits received, with accrual rate limited to an average annual rate of 1.2%, and pensions indexed to prices. - Introduction of an automatic adjustment mechanism that, every three years and starting in 2020, will increase the (minimum and statutory) retirement age in line with the increase in life expectancy at retirement. - Extend the calculation of the pensionable earnings from the current last five years to the entire lifetime earnings (while retaining acquired rights). - Reduction of the upper limit on pensions. - Introduction of a means-tested minimum guaranteed income for elderly people (above the statutory retirement age), to protect the most vulnerable groups, consistent with fiscal sustainability. - Measures to restrict access to early retirement. In particular, increase the minimum early retirement age to 60 years by 1st January 2011, including for workers in heavy and arduous professions and those with 40 years of contributions. Abolish special rules for those insured before 1993 (while retaining acquired rights). Substantial revision of the list of heavy and arduous professions. - Reduction of pension benefits (by 6% per year) for people entering retirement between the ages of 60 and 65 with a contributory period of less than 40 years. - Introduction of stricter conditions and regular re-examination of eligibility for disability pensions. - Government adopts a reform of the GAO, including: - Strengthening of the role of the GAO in budget planning and control. - Provision of the necessary resources in terms of high-level personnel, infrastructure and equipment support, managerial organisation and information-sharing systems. - Provision of safeguards for GAO staff against political interference, and personal accountability in the provision of reliable data. - Strengthen the institutional mechanisms for providing reliable and plausible official budgetary forecasts that take into account available recent execution developments and trends; to this end, the official macroeconomic forecasts should be reviewed by external experts. - Government takes the following measures to ensure timely provision of reliable fiscal accounts and statistics: - GAO starts, in June 2010, the publication of timely monthly statistics (on a cash basis) on revenue, expenditure and financing and spending arrears for the "available general government" and its sub entities (state, social security, hospitals, local governments and legal entities). - Government adopts a detailed time-bound action plan, to be agreed with Eurostat, to improve collection and processing of general government data required under the existing EU legal framework, in particular by enhancing the mechanisms that ensure the prompt and correct supply of these data, and ensure personal responsibility in cases of misreporting; and seek appropriate resident technical assistance to ensure rapid progress. - Government starts to publish timely information on the financial situation in public enterprises (at least the 10 largest loss-making ones) and other public entities not classified in the general government (including detailed income statements, balance sheets and data on employment and the wage bill). To this end, a regular and timely reporting mechanism is introduced. ### iii. Financial sector regulation and supervision - The Bank of Greece and the Government ensure that the Financial Stability Fund is fully operational. - Review the adequacy of the insolvency framework, for banks as well as for non-financial entities. ### iv. Structural reforms - Progress with reforms to modernise public administration: - Government launches the process, including the principles and timetable, for establishing a simplified remuneration system covering basic wages and allowances. It shall apply to all public sector employees, and be part of an overall reform of Human Resource management. This should lead to a system where remuneration reflects productivity and tasks. - Government launches independent functional reviews of the public administration at central level and of existing social programmes. It is to be conducted by internationally renowned and external experts. The Terms of Reference for the reviews will be agreed with European Commission, IMF and ECB staff. The objectives of the reviews are: - To take stock of the use of resources, including human resources, to carry out government functions (e.g., employment, goods and services) in the central government and subordinated public institutions. - To identify actions to rationalize the organisation of public administration and generate productivity gains, and quantify possible fiscal savings from implementation of these actions. - To assess effectiveness and appropriateness of existing social programmes and make proposals for reform or cancellation of the least effective ones, while quantifying possible fiscal savings from implementation of these actions. - To strengthen competition in open markets: - Authorities make the General Commercial Registry (GEMI) fully operational. - Under the Services Directive, the government finalizes the review of existing sectoral legislation (screening), ensures that the point(s) of single contact is(are) operational. - Government adopts a law on road freight transport that removes restrictions not provided for in Directive 96/26/EC of 29 April 1996 on admission to the occupation of road haulage, including minimum fixed prices. - Issue a Ministerial Decree for the liberalisation of wholesale electricity market and a Ministerial Decision on rationalisation of electricity consumer tariffs. - Promoting investments and exports: - Government takes measures, in line with EU competition rules, to facilitate FDI and investment in innovation in strategic sectors (green industries, ICT etc...) through a revision of the Investment Law, the adoption of measures to facilitate PPPs, action to fast-track large FDI projects and measures to strengthen export promotion policy. *Source: _cr10110 - 2. Actions for the second review (to be completed by end Q3-2010)* ### 4. Actions for the fourth review (to be completed by end Q1-2011) ### _cr10110 - 4. Actions for the fourth review (to be completed by end Q1-2011) ### Actions for the fourth review (to be completed by end Q1-2011) - Fiscal consolidation - Rigorously implement the budget for 2011 in line with this memorandum, and the fiscal consolidation measures in the budget. - Progress is assessed against the (cumulative) quarterly deficit ceilings in the MEFP (including the TMU). - Structural fiscal reforms - Parliament adopts legislation to strengthen the fiscal framework, consistent with this memorandum. - Structural reforms (public administration and business environment) - Government completes effective transposition of Directive 2007/66/EC on public procurement regarding remedies, and ensures that responsibility for the review of award procedures be vested with the administrative courts. - Government completes the transposition of Directives 2009/81 on defence and security expenditure. - Government fully implements the recovery plan for the railway sector to make operational activities profitable, implement EU Directives and restructure the holding company. - Parliament adopts legislation unbundling electricity and gas activities. - Government adopts measures, in line with EU requirements, to: - strengthen the independence and capacity of the Energy Regulatory Authority; - further unbundle the transmission system operators DESMIE (electricity) and DESFA (gas), including by bringing forward transparent criteria and procedure to govern the selection of the chair and members of RAE. ### Actions for the fifth review (to be completed by end Q2-2011) - Fiscal consolidation - Rigorously implement the budget for 2011 in line with this memorandum, and the fiscal consolidation measures in the budget. - Progress is assessed against the quarterly deficit ceilings in the MEFP (including the TMU). - Structural reforms (modernise public administration; labour market; competition; EU funds) - Government adopts legislation/decrees establishing a simplified remuneration system covering basic wages and allowances that applies to all public sector employees ensuring that remuneration reflects productivity and tasks; this reform should be part of an overall reform of Human Resource management in the public sector. - On the findings of the external and independent functional review of public administration at central level, the government adopts legislation and measures to rationalize the use of resources, the organisation of the public administration and social programmes. - Labour market institutions: - Government completes the reform to strengthen the Labour Inspectorate, which should be fully resourced with qualified staff and has quantitative targets on the number of controls to be executed. - Government adapts the legislation on tackling undeclared work to require the registration of new employees before they start working. - Review the scope for improvements in the targeting of social expenditures to enhance the social safety net for the most vulnerable. - Competition in restricted professions: - Government adopts specific legislation to in restricted professions including for the legal profession, the pharmacy profession, the notary profession, architects, engineers and auditing services. - Structural and Cohesion Funds absorption: - Government to meet targets for payment claims to be measured against certified data. ### Actions for the sixth review (to be completed by end Q3-2011) - Fiscal consolidation - Rigorously implement the budget for 2011 in line with this memorandum, and the fiscal consolidation measures in the budget. - Progress is assessed against the quarterly deficit ceilings in the MEFP (including the TMU). - Government adopts draft budget for 2012 aiming at a further reduction of the general government deficit in line with the programme and including the detailed presentation of consolidation measures amounting to at least 2.2% of GDP, including the following measures (in exceptional circumstances, measures yielding comparable savings could be considered in close consultation with European Commission, IMF and ECB): - Reduce public employment on top of the rule of 1 recruitment for each 5 retirements in the public sector; the reduction in public employment on top of the 5-to-1 rule should allow savings of at least EUR 600 million; - Establish excises for non alcoholic beverages, for a total amount of at least EUR 300 million; - Continue the expansion of the base of the real estate tax by updating asset values to yield at least EUR 200 million additional revenue; - Continue the reorganisation of local government, to generate at least EUR 500 million in savings; - Nominal freeze in pensions; - Continue to increase the effectiveness of the presumptive taxation of professionals, with the aim of collecting at least additional EUR 100 million; - Reduction of transfers to public enterprises by at least EUR 800 billion following their restructuring; - Make unemployment benefits means-tested (aiming at savings of EUR 500 million); - Collect further revenue from the licensing of gaming: at least EUR 225 million in sales of licences and EUR 400 in royalties; - Further broadening of VAT base, by moving goods and services from the reduced to the normal rate, with the aim of collecting at least additional EUR 300 million. - Structural reforms (public administration; business environment; customs) - Government ensures full operation of the Better Regulation Agenda to reduce administrative burden by 20% compared with 2008 level, and sends report to the Commission. - Government changes legislation to mitigate tax obstacles to mergers and acquisitions such as the non-transfer of accumulated losses, together with the company and the complex computation of "excessive benefit" (Law 3522/2006, Article 11) in the transfer of private limited companies. - Government takes decisions to simplify the process to clear customs for exports and imports and give larger companies or industrial areas the possibility to be certified to clear cargo for the customs themselves; Government abolishes the requirement of registration with the exporter’s registry of the chamber of commerce for obtaining a certificate of origin. ### Actions for the seventh review (to be completed by end Q4-2011) - Fiscal consolidation - Government achieves the programme target for the 2011 general government deficit. - Parliament adopts draft budget for 2012 a further reduction of the general government deficit and including consolidation measures amounting to at least 2.2% of GDP, in line with Memorandum. - Structural reforms (EU funds absorption; project monitoring; certification) - Government to meet targets for payment claims (to be measured against certified data) and for the submission of large projects. - Introduction of a web-based open-access monitoring tool of procedures for approval of project proposals and for implementation of public projects. - Ensure that the managerial capacity of all Managing Authorities and Intermediate Bodies of operational programmes under the framework of the National Strategy Reference Framework 2007-2013 has been certified by the International Organization for Standardization according to the standard ISO 9001:2008 (Quality Management). ### Annex 1. Provision of data (reporting schedules and responsibilities) - General instruction - During the programme, indicators and reports shall be made available to the European Commission, the ECB and the IMF by the authorities on a regular basis. - Reporting information provided to other lenders involved in the programme shall at the same time also be provided to the Commission, unless the Commission has indicated that this is not specifically required. - The authorities shall provide the Commission and the ECB with compliance reports on the fulfilment of conditionality immediately after test dates. - To be provided by the Ministry of Finance (selected items and frequencies) - Preliminary monthly data on the state budget execution (including functional breakdown by main categories of revenue and expenditure and by line ministry): Monthly, 15 days after the end of each month; these data should also be included in subsequent transmissions in case of revision. - Updated monthly plans for the state budget execution for the remainder of the year, including functional breakdown by main categories of revenue and expenditure and by line ministry: Monthly, 30 days after the end of each month. - Preliminary monthly cash data on general government entities other than the State: Monthly, 30 days after the end of each month, these data should also be included in subsequent transmissions in case of revision. - Monthly data on the public wage bill (of general government...), number of employees ... A functional breakdown ... will be added: Monthly, 30 days after the end of each month (starting in June 2010). - Quarterly data on general government accounts, and general government debt as per the relevant EU regulations on statistics: Quarterly accrual data, 90 days after the end of each quarter. - Weekly information on the Government's cash position ...: Weekly on Friday, reporting on the previous Thursday. - Data on below-the-line financing for the general government: Monthly, no later than 15 days after the end of each month; these data should also be included in subsequent transmissions in case of revision. - Data on expenditure pending payment (including arrears) of the general government ...: Quarterly, within 55 days after the end of each quarter. - Data on expenditure pending payment (arrears) of the State and hospitals: Monthly, 30 days after the end of each month. - Public debt, and new guarantees issued by the general government to public enterprises and the private sector: Monthly, within one month. - Income and expenditure statement and balance sheets of 30 largest public enterprises by total expenditures: Quarterly, three months after the end of the quarter. - Data on EU project grants (reimbursements and advances) ...: Monthly, within three weeks of the end of each month. - Monthly statement of the transactions through off-budget accounts: Monthly, at the end of each month. - Monthly statements of the operations on the special account: Monthly, at the end of each month. - Report on progress with fulfilment of policy conditionality: Monthly, at the end of each month. - To be provided by the Bank of Greece (selected items and frequencies) - Assets and liabilities of the Bank of Greece: Weekly, next working day. - Assets and liabilities of the Greek banking system - aggregate monetary balance sheet of credit institutions: Monthly, 30 days after the end of each month. - Evolution of the external funding provided by Greek banks to their subsidiaries abroad: Monthly, 15 days after the end of each month. - External funding flows for the banking, corporate and government sector, including also expected developments in the 12 months ahead: Monthly, 30 days after the end of each month. - Report on banking sector liquidity situation: Weekly, next working day. - Report on the evolution of financial stability indicators: Quarterly, 15 days after the end of each quarter depending on data availability. - Report on results from the regular quarterly solvency stress tests: Quarterly, 15 days after the end of each quarter depending on data availability. - Detailed report on the balance sheet of the Financial Stability Fund with indication and explanation of changes in the accounts: Weekly, next working day. ### Annex 2. Financial Stability Fund (FSF) — design, funding, governance, powers, conditions and follow-up - General purpose and scope - The purpose of the Financial Stability Fund (the ‘Fund’) is to maintain the stability of the Greek banking system by providing equity capital in case of a significant decline of capital buffers. - The Fund will not provide liquidity support, which will be provided under existing arrangements. - The equity will be provided in the form of preference shares to credit institutions authorised to operate in Greece by license from the Bank of Greece. The preference shares will be convertible into ordinary shares at a later stage under certain conditions to be further specified in the legislation establishing the Fund. - Participation in the Fund will be mandatory, based on a trigger linked to the minimum required level of capital adequacy requirements, as established for specific credit institutions by the Bank of Greece, in its capacity as the competent supervisory authority, if no private solution has been found. - If banks are then not able to expeditiously raise additional capital on their own and repay the Fund, a restructuring process will take place under the lead of the Fund, in line with EU competition and state aid requirements. - The Fund will be established by specific Greek legislation. - An initial lifespan of seven years will be set for the Fund. After the end of the lifespan of the Fund, the ownership of the Fund rests with the Greek state to the extent of its shareholding in the Fund. - Legal status and funding - The Fund will be established as a private law legal entity in order to enhance its flexibility and efficiency. - The legal structure of the Fund should allow for private participation. - The FSF will be fully funded by the government out of the resources available under the EU-IMF program for this purpose in the amount of EUR 10 billion. This implies that the risk of losses arising out of the Fund’s operations would lie exclusively with the Greek Government, as the primary shareholder in the Fund. - The purchase of preference shares by the Fund shall be made in cash. - Organizational issues and governance - The Fund will be managed by a Governing Council composed of: - (1) a Chairperson, a Chief Executive and three directors appointed by the Governor of the Bank of Greece; and - (2) two ex officio directors who represent the Minister of Finance and the Governor of the Bank of Greece. - The European Commission and the ECB will each nominate an observer who would have a right to participate, without voting, in meetings of the Governing Council. - The Chairperson, Chief Executive and the non-ex officio directors will be required by law to be persons of recognised standing in banking or financial matters in Greece, the EU or internationally. - Each of the Chairperson and the non-ex officio directors will be appointed to a five year term of office, renewable for a further two years, and may only be compulsorily removed from office by an appropriate Greek court on application of either the Governor of the Bank of Greece or the Governing Council of the Fund where (1) no longer capable of fulfilling the conditions required for the performance of the duties of office or (2) guilty of serious misconduct. - No member of the Governing Council may be represented on the board of directors of any credit institution. - Legislation establishing the Fund will provide that, when exercising the powers and carrying out the tasks and duties conferred upon them, neither the Governor of the Bank of Greece nor the members of the Governing Council of the Fund shall seek or take instructions from the Greek Government or any other State entity. - The Governing Council will present a semi-annual report to the Greek Parliament, the European Commission, the ECB and the IMF. - The operating expenses will be covered by the Fund. - Powers of the Fund (examples) - To require the BoG to provide the Fund with all information on financial institutions necessary for it to fulfil its tasks. - To appoint a member of the Board of Directors of a credit institution. - To require a credit institution to present a restructuring plan. - To veto key decisions of a credit institution (e.g., business strategy, dividend distributions, salary caps, liquidity and asset-liability management). - To call a general shareholders’ meeting for a credit institution in accordance with Greek company law. - To require conversion of preference shares into ordinary shares insofar as a credit institution fails to meet (1) the minimum required level of capital adequacy requirements established for credit institutions generally under applicable regulatory requirements or (2) certain financial conditions to be established in the restructuring plan for the credit institution; the legislation will further specify an objective procedure to be followed in establishing a market-based conversion price. - To conduct diagnostic studies and special audits with the help of outside consultants to assess the solvency of a credit institution where the Fund considers this necessary. - Each of the Bank of Greece and the Fund will be authorised to exchange confidential information with one another to the fullest extent permitted by EU law. - Conditions applicable to capital increases and remuneration - Conditions should be aligned with the Commission Decision of 19.11.2008 (N 560/2008 support measures for the credit institutions in Greece). - Credit institutions will be expected to pay a market-oriented, non-cumulative remuneration unless an analysis of the restructuring plan warrants an alternative approach. - A market-oriented, non-cumulative remuneration can either be 10% as stipulated in the above decision or depending on the risk profile of the credit institution and the quality of the capital, between 7% and 9.3%, whereas core tier 1 capital for fundamentally sound credit institutions should normally be remunerated at not less than 9%. - Credit institutions will not pay dividends or coupon on hybrid capital, unless they are legally obliged to do so. - Preference shares shall be repurchased by the credit institution for an amount that is equivalent to the amount originally invested in the credit institution. After five years the shares shall be repurchased or be remunerated at penal rates. If they cannot be repurchased because the capital adequacy requirements are not fulfilled, the preference shares shall be converted into ordinary shares. - Approval of restructuring plan by European Commission - Any restructuring plan needs to be in accordance with State aid rules and approved by decision of the European Commission ensuring that the credit institutions will restore viability at the end of the restructuring period, burden sharing of shareholders is achieved and distortion of competition is limited. - Follow-up - The Greek authorities would prepare the necessary legislation implementing the details of the above by the end of June 2010, at the latest. *Source: _cr10110 - 4. Actions for the fourth review (to be completed by end Q1-2011)* ### Annex 3. Structural reforms conditionality ### Annex 3. Structural reforms conditionality ### Public administration reforms - Simplify the remuneration system for public sector employees: - launch a process to create a simplified remuneration system to cover basic wages and all allowances applying to all public sector employees and ensuring that remuneration reflects productivity and tasks. - establish a fully operational Single Payment Authority to centralize the payment of all salaries paid to civil servants at all levels of government. - adopt legislation for a simplified remuneration system. - Time frame: September 2010; December 2010; June 2011. - Public procurement: - complete the first phase of the public procurement system for all sectors and levels of government with a fully operational electronic platform introducing the use of e-auctioning systems. - implement EU Directives and have an effective appeals system. - Time frame: December 2010; March 2011. - Transparency of public spending decisions: - adopt legislation to ensure transparency by requiring online publication of all government expenditure decisions. - Time frame: June 2010. - Local administration reform: - adopt legislation reforming public administration at the local level. - adopt all legislation and decrees for full entry force of the reform on 1 January 2011 involving transfer of responsibilities and resources across entities. - Time frame: June 2010; December 2010. - Independent functional review of the central government: - launch an independent and external review of the organization and functioning of the central administration. - adopt legislation and measures to rationalize the use of resources, the organisation of the public administration and the effectiveness of social programmes. - Time frame: September 2010; June 2011. - Better Regulation: - adopt legislation to implement the Better Regulation agenda. - ensure full implementation to reduce administrative burden by 20 compared with 2008 level and submit a progress report to the Commission. - Time frame: December 2010; September 2011. ### Labour market and wages - Start discussion with social partners to prepare the revision of private sector wage bargaining and contractual arrangements. - Time frame: June 2010. - Reform Employment Protection Legislation: - extend the probationary period for new jobs to one year. - reduce the overall level of severance payments which should apply equally to blue and white collar workers. - raise the minimum threshold for activating rules on collective dismissals especially for larger companies. - put measures in place to guarantee that current minimum wages remain fixed in nominal terms for 3 years. - facilitate use of temporary contracts and part-time work. - Time frame: December 2010. - Reform minimum wages: - following dialogue with social partners, government to adopt legislation on minimum wages to introduces sub-minima for groups at risk such as the young and long term unemployed. - guarantee that current minimum wages remain fixed in nominal terms for three years. - Time frame: December 2010. - Reform private wage bargaining system to ensure wage moderation: - adopt legislation to reform wage bargaining system in the private sector, including local territorial pacts to set wage growth below sectoral agreements. - introduce variable pay to link wages to productivity performance at the firm level. - amend regulation of the arbitration system. - Time frame: December 2010. - Increase the flexibility of working hours: - adjust legislation to introduce annual time accounts and reduce overtime pay. - Time frame: December 2010. - Fight undeclared work: - strengthen legislation to enforce the registration of new employees. - ensure the Labour Inspectorate is fully staffed and quantitative controls targets are in place. - Time frame: June 2011. - Review social safety net: - Review the scope for improvements in the targeting of social expenditures to enhance the social safety net for the most vulnerable. - Time frame: June 2011. ### Pensions - Reform pension system: Government to adopt a new simplified system (pro rata) for all current and future employees including: - by December 2015, a unified statutory retirement age of 65 years, including for those insured before 1 Jan 1993. - an increased retirement age of women in the public sector to 65 by 2013. - strengthened link between contributions and benefits. - pension earnings calculated on the entire lifetime. - an average annual accrual rate of 1.2. - price indexation of pensions. - an automatic adjustment mechanism that links the retirement age with increases in life expectancy at retirement. - an increased minimum contribution period from 37 to 40 years by 2015. - restricted access to early retirement and increased minimum retirement age of 60 years by 1st January 2011, including for workers in heavy and arduous professions, and those with 40 years of contributions. - a revised disability scheme. - reduced (by 6 per year) pension benefits for people retiring between the ages of 60 and 65 with less than 40 years of contribution. - no special rules for those insured before 1 Jan 1993. - substantial cuts in the list of heavy and arduous professions (to no more than 10 of employees). - a means-tested minimum guaranteed pension for people aged above 65 years of age. - a reduction in the number of funds to 3. - Parliament adopts the pension reform. - Time frame: June 2010; September 2010. ### Healthcare - Healthcare reform: - Complete reforms to improve management and procurement systems of health system: complete move to double accounting systems, establish operational oversight by the Finance Minister, the publication of audited accounts. - Time frame: December 2010. ### Business environment - Facilitate business start ups: - Simplify the start up of new businesses and make the General Commercial Registry (GEMI) fully operational. - Time frame: June 2010; September 2010. - Simplify the licensing of industrial units and reduce the costs of doing business: - simplify and accelerate the process of licensing enterprises, industrial activities and professions through legislation and by making the spatial plans operational. - Government to change legislation to mitigate tax obstacles to mergers and acquisitions, and lower costs associated with customs. - Time frame: December 2010; September 2011. - Implement the Services Directive: - adopt horizontal legislation, finalize screening of sectoral legislation. - make single points of contact operational. - adopt measures in key service sectors such as tourism, retail and education. - Time frame: June 2010; September 2010; December 2010. - Open up restricted professions: - propose sector-specific legislation to remove restrictions to trade in the legal profession, the pharmacy profession, the notary profession, architects, engineers, auditing services. - implement the Professional Qualifications Directive so that qualifications from third countries are recognized. - adopt legislation to open up restricted professions. - Time frame: December 2010; June 2011. - Reform road freight transportation: - Liberalize road freight transport by removing all unnecessary restrictions on admission to the occupation of road haulage, including minimum fixed prices. - Time frame: September 2010. - Competition policy framework: - Modify the existing institutional framework of the Hellenic Competition Commission, including to allow prioritisation on important cases and to strengthen the independence of HCC members. - Time frame: December 2010. - Railways: - prepare a recovery plan for the railway sector to restore profitability to operational services, ensure compliance with EU Directives, and specify a timetable for the restructuring of the holding company including the sale of land and other assets. - implement fully the recovery plan for the railway sector. - Time frame: June 2010; March 2011. - Energy: - finalise plans for the liberalization of the wholesale electricity market and commence with the rationalization of consumer tariffs. - adopt legislation to unbundle electricity and gas activities, including measures. - adopt measures to strengthen the independence and capacity of the Energy Regulatory Authority. - Time frame: September 2010; March 2011; March 2011. ### Promoting investment and exports - Promoting FDI and investment in strategic sectors: - Government to take measures to facilitate FDI and investment in innovation in strategic sectors (green industries, ICT etc...), through a revision of the Investment Law, the adoption of measures to facilitate PPPs, action to fast-track large FDI projects and measures to strengthen export promotion policy. - Time frame: September 2010. - R&D and innovation: - Carry out in depth evaluation of all R&D and innovation actions, including in various Operational Programmes, in order to adjust the national strategy. - create an Advisory Council financed through the 7th R&D programme, to consider how to foster innovation, how to strengthen links between public research and Greek industries and the development of regional industrial clusters. - Time frame: December 2010. ### Structural and Cohesion Funds - Increase absorption of Structural and Cohesion Funds: - put in place measures to achieve binding targets for payment claims of Structural and Cohesion Funds and for submission of large projects. - establish Task Force with the Commission to speed-up the development of high quality projects, through better coordination and other actions. - complete steps to prioritize public investment spending for projects benefiting from EU funds, including the introduction of a central bank account. - meet targets for payment claims (measured against certified data) and large projects. - introduce a web-based open access monitoring tool of procedures for approval of project proposals and for implementation of public projects. - ensure that the managerial capacity of all Managing Authorities and Intermediate Bodies of operational programmes. - Time frame: June 2010; December 2010 and every six months thereafter; December 2011. ### Technical Memorandum of Understanding — General Government and Program Definitions - Program understanding and consultation: - The TMU sets out definitions of indicators subject to quantitative targets (performance criteria and indicative targets) specified in the Letter of Intent (LOI). - Authorities will consult with the Fund, European Commission and ECB before modifying measures contained in the letter or adopting new measures that would deviate from the goals of the program, and provide the European Commission, ECB and the Fund with the necessary information for program monitoring. - Date: May 3, 2010. - Program exchange rates: - For program purposes, all foreign currency-related assets, liabilities, and flows will be evaluated at “program exchange rates” as defined below, with the exception of the items affecting government fiscal balances, which will be measured at current exchange rates. - The program exchange rates are those that prevailed on April 30, 2010. - Exchange rates set: €1 = 1.3315 U.S. dollar, €1 = 125.81 Japanese yen, €1.135 = 1 SDR. - Definition of General Government for program purposes: - Entities covered under the State Budget as defined in Chapter 2 of the Law 2362/1995 regarding “Public Accounting, Auditing of Government Expenditures and Other Regulations.” - Local authorities comprising municipalities, prefectures, and regional governments including their basic and special budgets, including all agencies and institutions attached thereto, which are classified as part of local authorities according to ESA 95. - Social security funds comprising all funds that are established as social security funds in the registry of the National Statistical Service. - Includes any new funds, or other special budgetary and extra budgetary programs that may be created during the program period to carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2001; authorities will inform IMF, European Commission and ECB staff of the creation of any such new funds or programs immediately. - Reporting and supporting material: - The Ministry of Finance (MoF) will provide to the European Commission, ECB and IMF detailed information on monthly revenues and expenditures, domestic and foreign debt redemptions, new domestic and foreign debt issuance, change in the domestic and foreign cash balances of the central government at the central bank of Greece, all other sources of financing including capital transactions, and arrears of the general government. - Data will be provided within 30 days. - The Bank of Greece will provide detailed monthly data on assets and liabilities of local authorities and social security funds in line with monetary survey data. - Floor of the Modified General Government Primary Cash Balance (Performance Criterion): - Definition: The modified general government primary cash balance (MGGPCB) is defined as the modified general government cash balance (MGGCB) minus interest payments by the state budget. - The MGGCB is defined as the sum of the cash balances of the ordinary state budget, the cash balance of the investment state budget, the change in net financial assets of local authorities and the change in net financial assets of social security funds. - Privatization receipts will be excluded from cash receipts. - Net lending operations by the state budget will be recorded as cash expenditures. - Cash balance of the ordinary state budget: measured from above the line, based on ordinary budget revenues (recurrent revenue plus non-recurrent revenue minus tax refunds) minus ordinary budget expenditures (ordinary budget expenditures will exclude amortization payments and capital transfers to social security funds by bonds but include salaries and pensions; grants to social security funds, medical care and social protection; operational and other expenditure; returned resources; payments in exchange of claims of insurance fund for the personnel working in the Public Electricity Company; interest payments; payments for military equipment procurement; and NATO expenses) as published monthly on the official website of the General Accounting Office of the Ministry of Finance. - Cash balance of the investment state budget: measured from above the line, based on investment budget revenues minus investment budget expenditures as published monthly on the official website of the General Accounting Office of the Ministry of Finance. - Net financial assets of local authorities: defined as financial assets minus financial liabilities of local authorities. - Financial assets include deposits of local authorities in the Bank of Greece and deposits of local authorities in the commercial domestic banking sector; deposits measured at face value excluding accrued interest. - Financial liabilities include short and long term loans from the domestic banking system to local authorities, measured at face value. - Net financial assets of social security funds: defined as financial assets minus financial liabilities of social security funds. - Financial assets include: - Deposits of social security funds in the Bank of Greece and direct deposits of social security funds in the domestic commercial banking system and indirect deposits held by the IKA mutual fund; deposits measured at face value excluding accrued interest. - Holdings of direct shares or indirect shares (through the IKA mutual fund), held by social security funds quoted on the Athens Stock Exchange; holdings measured at the end-of-month market value. - Direct or indirect holdings of Mutual Fund units issued by Greek management companies (other than the IKA mutual fund); holdings measured at the end-of-month market value. - Holdings of central government bonds, including short and long-term securities issued domestically, long-term securities issued abroad operated from Bank of Greece accounts, and indirect holdings through the IKA mutual fund; holdings measured at nominal value. - Financial liabilities include the short and long term loans from the domestic banking system to the social security funds, measured consistently with monetary survey data. *Annex 3. Structural reforms conditionality — _cr10110 - Annex 3. Structural reforms conditionality_* ### 6. Adjustments. For the purpose of the program, the primary expenditure of the central ### 6. Adjustments ### Adjustments to Primary Expenditure Monitoring - Primary expenditure of the central government that is monitored excludes payments related to bank support, when carried out under the program’s banking sector support and restructuring strategy. - Costs that may be excluded from the balance include: - loans to financial institutions and investments in equity of financial institutions (requited recapitalization); - unrequited recapitalization; - purchases of troubled assets. - Any financial operation by central government to support banks, including the issuance of guarantees or provision of liquidity, will be immediately reported to IMF, European Commission and ECB staff. - This performance criterion will be adjusted upward for any possible revenue overperformance in the central government against the current projection as indicated below. ### Central Government Revenue (Cumulative from January 1, 2010) - June 2010: €25,056 million - September 2010: €41,232 million - December 2010: €58,382 million ### Supporting Material (Revenue and Cash Balances) - Data on cash balances of the ordinary and state budgets will be provided to the European Commission, ECB and IMF by the General Accounting Office in the Ministry of Finance within three weeks after the end of the month. Data will include detailed information on revenue and expenditure items, in line with monthly reports that are published since January 2010 on the official website of the Ministry of Finance. - Data on net financial assets of local authorities and social security funds will be provided to the IMF, European Commission and ECB by the Statistics Department of the Bank of Greece within four weeks after the end of the month. ### Ceiling of State Budget Primary Spending (Performance Criterion) - Definition: state budget primary spending = state budget spending (ordinary state budget + investment budget) minus interest expenditures paid by the state budget. - Primary expenditure of the central government monitored for the PC excludes any cash payments related to bank restructuring (same exclusions as above). - Any financial operation by central or general government to support banks, including guarantees or provision of liquidity, will be immediately reported to European Commission, ECB and IMF staff. - Supporting material: The General Accounting Office of the Ministry of Finance will provide monthly expenditure data of the ordinary and investment state budget. ### Non-accumulation of Domestic Arrears by the General Government (Continuous Indicative Target) - Definition: domestic arrears = accounts payable to domestic suppliers past due date by 90 days. - Data will be provided within four weeks after the end of the month. - The stock of arrears as of end-April stood at 5.6 billion euro. - Supporting material: The Ministry of Finance will provide data on monthly expenditure arrears of the general government; data will be provided within four weeks after the end of the month. ### Ceiling on the Overall Stock of Central Government Debt (Performance Criterion) - Definition: overall stock of central government debt = total outstanding gross debt liabilities of the central government (liabilities in the form of securities and loans, etc.). The program exchange rate will apply to all non-euro denominated debt. - The ceiling excludes debt arising from payments for bank restructuring (same exclusions as above). - Adjusters: the ceiling will be adjusted upward (downward) by the amount of any upward (downward) revision to the stock of end-December 2009 central government debt. - Supporting material: Data on the total stock of central government debt will be provided to the European Commission, ECB and IMF staff by the General Accounting Office consistent with the debt published in the public debt bulletin no later than 30 days after the end of each month. ### Ceiling on New Central Government Guarantees (Performance Criterion) - Definition: the ceiling on the new central government guarantees shall exclude guarantees to support banks and exclude guarantees related to EIB financed loans. - Supporting material: All new central government guarantees will be reported in detail, identifying amounts and beneficiaries. The General Accounting Office will provide the data on a monthly basis within three weeks after the end of each month. ### Non-accumulation of External Debt Payments Arrears by the General Government (Continuous Performance Criteria) - Definition: an external debt payment arrear = a payment on debt contracted or guaranteed by the general government, which has not been made within seven days after falling due. - The performance criterion applies on a continuous basis throughout the program period. - Supporting material: The stock of external arrears of the general government system will be provided by the General Accounting Office with a lag of not more than seven days after the test date. ### Overall Monitoring and Reporting Requirements - Performance under the program will be monitored from data supplied to the EC, ECB and IMF by the Ministry of Finance, the General Accounting Office, and Bank of Greece. - The authorities will transmit promptly to the IMF, EC and ECB staff any data revisions in a timely manner. ### Monitoring of Structural Benchmarks — Pension Reform - The government has initiated a pension reform which should be adopted by the end of September 2010. - The National Actuarial Authority will produce a report to assess whether the parameters of the new system significantly strengthen long-term actuarial balance. - The draft law for the new and actuarially-balanced system should be available by the end of June, 2010. - Expectations for the Pension Reform: - Merge pension funds in three funds by 2018. - Introduce a new system to strengthen the link between contributions and benefits, with uniform rules that will apply pro-rata (as a sum of the accrued rights under the old system and the benefits accrued under the new system) to all current and future workers. Workers retiring in and after 2015 will collect benefits from this system. - Set the normal retirement to age 65 across all systems, including for those insured before 1993 and women in the public sector, by 2015. After 2020, the normal retirement age will increase in line with life expectancy. - Restrict early retirement to age 60 by 2011, including for those insured before 1993, workers in heavy and arduous professions, and those with 35 or more years of contributions. - Index benefits to changes in the consumer price index, starting in 2014 (benefits will be frozen 2010–2013). - Include a means-tested pension for all citizens older than the normal retirement age so that an important safety net is provided, consistent with fiscal sustainability. - Lengthen the years over which the pensionable earnings base is calculated from the top 5 out of the last 10 years of earnings to lifetime earnings. - Review conditions for disability pensions by the end of March of 2011 and introduce stricter conditions for eligibility by December of 2011, including periodic re-examination of those with disability pensions. --- ### Attachment V — Greece: Assessment of the Risks to the Fund and the Fund’s Liquidity Position (May 6, 2010) ### Proposed Stand-By Arrangement (SBA) — Access and Phasing (summary) - Authorities request a three-year SBA with access of SDR 26.43 billion (3,212 percent of quota or 2,399 percent of post second-round quota). - The arrangement would have a frontloaded purchase schedule with a first purchase of SDR 4.81 billion (584 percent of quota) upon approval, followed by twelve purchases. - Access during the first year would reach almost 1,550 percent of quota and the last purchase under the arrangement would be available in May 2013. - Table 1 (selected entries, exact figures as presented): - 2010 May (approval): 4,805.95 SDR mn; 583.9 percent of quota; cumulative 583.9 - 2010 August: 2,162.72 SDR mn; 262.8 percent of quota; cumulative 846.7 - 2010 November: 2,162.72 SDR mn; 262.8 percent of quota; cumulative 1,109.5 - 2011 February: 3,604.54 SDR mn; 438.0 percent of quota; cumulative 1,547.5 - 2011 May: 2,883.63 SDR mn; 350.4 percent of quota; cumulative 1,897.9 - 2011 August: 1,922.42 SDR mn; 233.6 percent of quota; cumulative 2,131.4 - 2011 November: 1,201.51 SDR mn; 146.0 percent of quota; cumulative 2,277.4 - 2012 February: 2,403.02 SDR mn; 292.0 percent of quota; cumulative 2,569.4 - 2012 May: 1,441.81 SDR mn; 175.2 percent of quota; cumulative 2,744.6 - 2012 August: 1,441.81 SDR mn; 175.2 percent of quota; cumulative 2,919.8 - 2012 November: 480.65 SDR mn; 58.4 percent of quota; cumulative 2,978.2 - 2013 February: 1,441.81 SDR mn; 175.2 percent of quota; cumulative 3,153.4 - 2013 April: 480.65 SDR mn; 58.4 percent of quota; cumulative 3,211.8 - Total: 26,432.93 SDR mn; 3,211.8 percent of quota; cumulative 3,211.8 - Note: Starting August 30, 2010, purchases will depend on the completion of a review. ### Background — External and Public Debt (key figures from assessment) - Greece’s total external debt at end-2009 stood at 170 percent of GDP. - At end-2009 almost 65 percent of total external debt was public sector debt (Table 2 indicates Public 264 in level terms and 111.0 percent of GDP). - Private sector external debt in 2009: 59 percent of GDP (text). - Greece’s total stock of short-term external debt at end-2009 stood at approximately 60 percent of GDP; short-term external debt (billions of euros) memorandum items: 28 35 43 68 112 144 136 (as listed). - Total public sector debt (% of GDP) memorandum item: 98.6 100.0 97.1 95.6 99.2 115.2 133.3 (as listed across years). - Public external debt increased from 71 percent of GDP in 2004 to 111 percent of GDP in 2009 (Table 2 percent rows). - In 2009, about 80 percent of public debt was owed to external creditors (text). - Consolidated BIS-reporting bank claims on Greece (end-2009, percent of total claims): - French Banks 36% - German Banks 21% - Other European Banks 32% - Non-European banks 11% ### Debt-Service and Risk Observations - Greece’s external debt service is higher than that for most of the other exceptional access cases. - If short-term obligations are included, the debt service reaches about 375 percent of exports of goods and services. - Total public debt is estimated at 115 percent at end-2009 (text). - Public external debt has increased rapidly since 2004 from 71 percent of GDP to 111 percent of GDP in 2009 (text). - A large part of the public debt (Euro 150 billion at end-2009) is held by foreign banks, mostly European. ### Risks to the Fund from the Proposed SBA - If all purchases were made as scheduled, Greece’s outstanding use of GRA resources would rise to: - 584 percent of quota upon approval; - about 1,550 percent of quota during the first year; - just over 3,200 percent of quota in May 2013. - In terms of GDP and external public debt, if all purchases under the proposed SBA are made: - GRA credit outstanding to Greece would be equivalent to 12.1 percent of GDP by 2013. - GRA credit outstanding would be about 8.3 percent of total external public debt by 2013. - In terms of SDRs, the projected peak GRA exposure of SDR 26.43 billion would be the highest among recent exceptional access cases. *Source: Excerpts from the IMF staff report and attachments (Selection of program definitions, monitoring, supporting material, pension reform benchmarks, and Attachment V: “Greece—Assessment of the Risks to the Fund and the Fund’s Liquidity Position,” Approved May 6, 2010).* ### 7. If all purchases under the proposed SBA take place as scheduled, debt service ### 7. If all purchases under the proposed SBA take place as scheduled, debt service ### Debt service projections to the Fund - Greece’s projected debt service to the Fund would peak at almost SDR 10 billion in 2015 (Table 3). - At that peak, debt service to the Fund would be: - about 4½ percent of GDP, - over 12 percent of general government revenues, - about 16 percent of exports of goods and services. - These ratios are the highest in recent exceptional access cases and occur in the context of overall external debt service peaking at over 100 percent of exports of goods and services. - Allowing for an SDR interest rate path rising to 3.5 percent by 2015, debt service would be over 11 percent higher on average (see Annex). - Assumptions used: - Debt service to the Fund is calculated assuming that all repurchases are made as scheduled, i.e., each purchase is repurchased in eight quarterly installments, beginning in 3¼ years after each purchase and ending after 5 years. Surcharges apply to outstanding credit above 300 percent of quota. ### Combined impact when eurozone support is included - Financial support from the eurozone members has a debt service schedule aligned with the Fund’s repurchase schedule. - When debt service on borrowing from the eurozone members is included, peak debt service would reach about SDR 36 billion annually. - Combined peak external debt service ratios would be about: - 17 percent of GDP, - about 46 percent of general government revenues, - over 60 percent of exports of goods and services. - These figures are based on the SDR interest rate path in the staff report and highlight the scale of market access needed soon after the end of the program, given average amortizations of public medium- and long-term external debt of over 65 percent of general government revenue. ### Impact on the Fund’s liquidity position and risk exposure - The proposed arrangement would reduce Fund liquidity significantly: - One-year Forward Commitment Capacity (FCC) currently stands at about SDR 169 billion. - Commitments under the proposed arrangement would reduce the FCC by over 15 percent. - If the first purchase is made: - Fund credit to Greece would represent over 10 percent of total GRA Fund credit. - The share of the top five users of Fund resources of total outstanding credit would decrease to about 71 percent. - Potential total GRA exposure to Greece relative to precautionary balances: - After the first purchase, Fund credit to Greece would be over 65 percent of the Fund’s current precautionary balances. - Total access would be over 3½ times the current level of precautionary balances. - Credit outstanding to Greece will exceed the current level of precautionary balances through 2015, and average at over twice their size. - Burden-sharing and arrears risk: - Were Greece to fully draw on resources available under the proposed SBA, charges accruing to Greece’s GRA obligations would far exceed the Fund’s burden sharing capacity if they were to fall into arrears. - Charges on GRA obligations would equal about SDR 110 million in 2010, over five times the current estimated residual burden-sharing capacity. ### Table 3 — Selected capacity-to-repay indicators (selected entries preserved exactly) - Exposure and Repayments (In SDR millions) - GRA credit to Greece 2/: 4,805.9 (May-10), 9,131.3 (2010), 18,743.3 (2011), 24,510.5 (2012), 24,961.1 (2013), 18,082.6 (2014), 8,740.9 (2015). - (In percent of quota): 583.9 (May-10), 1,109.5 (2010), 2,277.4 (2011), 2,978.2 (2012), 3,032.9 (2013), 2,197.2 (2014), 1,062.1 (2015). - Charges due on GRA credit 3/: -, 110.3 (2010), 423.5 (2011), 673.0 (2012), 912.3 (2013), 915.6 (2014), 571.4 (2015). - Debt service due on GRA credit 4/: -, 110.3 (2010), 423.5 (2011), 673.0 (2012), 2,384.1 (2013), 7,794.2 (2014), 9,913.0 (2015). - Debt and Debt Service Ratios (selected) - Total external debt (In percent of GDP): 170.0 (2010), 185.0 (2011), 193.3 (2012), 198.4 (2013), 202.2 (2014), 203.8 (2015), 200.9 (2015). - External debt, public (In percent of GDP): 111.1 (2010), 142.7 (2011), 147.8 (2012), 150.9 (2013), 150.3 (2014), 148.7 (2015), 147.7 (2015). - GRA credit to Greece (In percent of GDP): 2.2 (2010), 4.5 (2011), 9.5 (2012), 12.2 (2013), 12.1 (2014), 8.5 (2015), 3.9 (2015). - Total external debt service 6/ (In percent of GDP): 14.2 (2010), 13.8 (2011), 18.0 (2012), 17.1 (2013), 16.1 (2014), 24.5 (2015), 26.4 (2015). - Debt service due on GRA credit (In percent of Exports of Goods and Services): -, 0.3 (2010), 0.9 (2011), 1.3 (2012), 4.5 (2013), 13.6 (2014), 16.2 (2015). ### Table 4 — Impact on GRA finances (as of 4/29/2010, millions of SDR unless otherwise noted) - Liquidity measures - One-year Forward Commitment Capacity (FCC) 1/: 169,119 - Impact on FCC on approval 2/: -26,433 - Prudential measures - Fund GRA commitment to Greece in percent of current precautionary balances: 373 - Fund GRA commitment to Greece in percent of total GRA credit outstanding 3/: 64 - Fund GRA credit outstanding to top five borrowers in percent of total GRA credit outstanding 3/: 78 - Fund GRA credit outstanding to top five borrowers in percent of total GRA credit outstanding including first Greek purchase: 71 - Greece's annual GRA charges in percent of the Fund's residual burden sharing capacity for 2010: 554 - Memorandum items - Fund's precautionary balances (as of end-2009) 4/: 7,093 - Fund's Residual Burden Sharing Capacity 5/: 19.8 ### Assessment and program risks - Program objective: - The proposed Stand-By Arrangement (SBA) intends to support the authorities’ economic program to restore market confidence and lay foundations for sound medium-term growth through strong and sustained fiscal consolidation and deep structural reforms while safeguarding financial sector stability and reducing the risk of international systemic spillovers. - Principal risks to Greece’s capacity to repay the Fund: - A deeper-than-expected upfront economic contraction and/or a slower economic recovery that weakens tax revenues and worsens debt dynamics while undermining political consensus for reform. - The financial sector could require additional public resources beyond the baseline to preserve public confidence, increasing the debt burden. The Financial Stability Fund and liquidity support from the ECB and the Bank of Greece should mitigate solvency and liquidity risks. - Difficulty in securing a further substantial improvement in the primary fiscal balance after the end of the program. - More constrained access to capital markets than assumed, raising the possibility of prolonged Fund involvement. - Overall assessment: - While the Fund’s liquidity position would remain adequate, the proposed access would entail very substantial risks to the Fund given Greece’s large external obligations and fiscal adjustment requirements. - The Fund would be highly exposed to Greece in both outstanding credit stock and projected debt service, with overall debt and debt service burdens peaking at high levels when Fund repayments are due. - The circumstances are characterized as highly exceptional, requiring strong international support given the high risk of international systemic spillovers. - Mitigating factors include: Greece’s capacity to mobilize sizeable private-sector resources in the medium term, the authorities’ commitment to a comprehensive adjustment program, strong support from European partners, and the Fund’s preferred creditor status. *Source: IMF staff report content supplied in the provided document excerpt.* ### Annex Table 3. Greece—Capacity to Repay Indicators 1/ ### Annex Table 3. Greece—Capacity to Repay Indicators 1/ ### Program overview and financing - Three-year Stand-By Arrangement of SDR 26.4 billion (€30 billion). - Front-loaded immediate IMF availability: SDR 4.8 billion (about €5.5 billion) to Greece as part of joint financing with the European Union, for a combined €20.0 billion in immediate financial support. - In 2010, total IMF financing will amount to about €10 billion and will be partnered with about €30.0 billion committed by the EU. - The cooperative package with the European Union amounts to €110 billion (about US$145 billion) over three years. - Exceptional access to IMF resources amounting to more than 3,200 percent of Greece’s quota; approved under the Fund's fast-track Emergency Financing Mechanism procedures. - Greece will draw on IMF and European Commission resources in a constant ratio of 3 to 8 in each disbursement throughout the program’s period. ### Policy objectives and main components - Primary objectives: - Reduce fiscal deficit to well below 3 percent of GDP by 2014. - Restore debt sustainability with debt-to-GDP ratio beginning to stabilize by 2013 and then declining gradually. - Safeguard financial sector stability. - Restore competitiveness through structural reforms. - Fiscal consolidation strategy: - Large package of fiscal measures of 11 percent of GDP in 2010–13; measures heavily frontloaded and fully identified. - Measures distributed to protect the most vulnerable and to impose higher tax burden on relatively affluent. - Specific fiscal measures include: - Increase tax revenues by 4 percent of GDP by 2013 (increase VAT rates; increase consumption excise taxes for fuel, alcohol, and tobacco; broaden tax base; introduce new taxes such as a green tax). - Reduce expenditures by 5.2 percent of GDP by 2013 (abolish 13th and 14th salaries and pensions except for low-salaries and low-pensions; freeze public salaries and pensions; drastically limit new public hiring—one new civil servant will replace five retirees; reduce operational costs of local governments). - Expected outcome: primary surpluses starting in 2012. - Structural and competitiveness measures: - Nominal wage and benefit cuts and reforms to reduce costs and improve price competitiveness. - Reforms to increase labor market flexibility and improve domestic competition. - Reduce role of the state in the economy and improve transparency. - Curtail bureaucracy in licensing; tighten control over underground economy and informal labor market; absorb EU structural funds. - Financial sector measures: - Establishment of a fully independent Financial Stability Fund (FSF) to support banks if necessary; independent board. - Extend government banking liquidity support facilities to mitigate liquidity pressures. - Strengthen banking supervision and legal frameworks; Bank of Greece to intensify supervisory activity and augment resources. - European Central Bank decision to suspend minimum credit rating threshold for Greek marketable debt collateral to support bank liquidity. ### Growth, inflation, and labor market outlook - Real GDP growth expectations: - Sharp contraction in 2010–2011, recovery thereafter; unemployment peaking at nearly 15 percent of GDP by 2012. - Frontloaded fiscal adjustment in 2010‒11 will suppress domestic demand in the short run; rebound expected from 2012 onward due to improved market confidence, return to credit markets, and structural reforms. - Inflation expectations: - Inflation expected to remain below the euro average. - Price adjustment expected to come from domestic demand tightening (fiscal adjustment, moderation of public wages and pensions) and moderation in private sector wages to help restore price competitiveness. ### Statistical governance - Acknowledged misreporting of Greece’s 2008 fiscal and public debt data; breach of obligations under Article VIII, Section 5 of the Fund’s Articles of Agreement. - Authorities have taken remedial measures; committed to additional corrective actions in consultation with the Fund, EU partners, and Eurostat. - Reform of the Greek Statistical System: - New law making the Statistical Service a fully independent authority; President and Board appointed with a four-fifths majority vote by a Parliamentary Committee. - Establishment of an Investigation Committee into past misreporting episodes. - Independent expert committee completed a report and corrective actions have already been taken. - No further action required by the Fund under its procedures for the breach of obligations; going forward, strict compliance with reporting requirements to the Fund will be required. ### Key policy commitments and expected protections - Protection measures for vulnerable groups: minimum pension and family allowances preserved. - Tax reform to make system more progressive: abolish tax exemptions, fight tax evasion, modernize tax administration, focus on largest taxpayers, enforce and audit high-wealth individuals and self-employed, prosecute worst offenders, strengthen VAT compliance, collect large stock of tax arrears. - Pension reform: merge existing pension funds into three funds; link contributions and benefits; increase normal retirement age to 65 years; restrict early retirement. - Health sector savings: double entry accrual accounting in hospitals; periodic publication of audited accounts; improvements in pricing and costing mechanisms; separation of health funds from pension administration. ### Selected economic indicators (percent change or levels as presented) - Real GDP: 2009 -2.0, 2010 -4.0, 2011 -2.6, 2012 1.1, 2013 2.1, 2014 2.1, 2015 2.7 - Output gap (percent of pot. output): 2009 4.0, 2010 -1.1, 2011 -4.6, 2012 -4.7, 2013 -4.0, 2014 -3.7, 2015 -3.1 - Total domestic demand: 2009 -2.4, 2010 -7.1, 2011 -5.2, 2012 0.1, 2013 1.7, 2014 1.8, 2015 2.1 - Private consumption: 2009 -1.8, 2010 -4.0, 2011 -3.7, 2012 0.8, 2013 2.8, 2014 2.5, 2015 2.5 - Public consumption: 2009 9.6, 2010 -10.6, 2011 -5.1, 2012 -3.6, 2013 -6.6, 2014 -3.2, 2015 -0.1 - Gross fixed capital formation: 2009 -13.9, 2010 -11.4, 2011 -11.8, 2012 0.8, 2013 4.8, 2014 3.5, 2015 2.3 - Foreign balance (contribution): 2009 0.7, 2010 3.8, 2011 3.6, 2012 1.0, 2013 0.4, 2014 0.5, 2015 0.3 - Exports of goods and services: 2009 -18.1, 2010 4.5, 2011 5.4, 2012 5.9, 2013 6.0, 2014 5.9, 2015 6.0 - Imports of goods and services: 2009 -14.1, 2010 -9.7, 2011 -6.1, 2012 1.6, 2013 3.8, 2014 4.6, 2015 3.7 - Unemployment rate (percent): 2009 9.4, 2010 11.8, 2011 14.6, 2012 14.8, 2013 14.3, 2014 14.1, 2015 13.4 - Consumer prices (HICP), period average: 2009 1.3, 2010 1.9, 2011 -0.4, 2012 1.2, 2013 0.7, 2014 0.9, 2015 1.0 - GDP deflator: 2009 1.4, 2010 1.2, 2011 -0.5, 2012 1.0, 2013 0.7, 2014 1.0, 2015 1.1 - Current account: 2009 -11.2, 2010 -8.4, 2011 -7.1, 2012 -5.6, 2013 -4.0, 2014 -2.8, 2015 -1.9 - Trade balance: 2009 -7.7, 2010 -3.5, 2011 -0.2, 2012 0.6, 2013 1.3, 2014 1.9, 2015 2.4 - Net income receipts: 2009 -4.1, 2010 -5.2, 2011 -7.5, 2012 -6.7, 2013 -5.7, 2014 -5.1, 2015 -4.7 - Net international investment position: 2009 -86, 2010 -95, 2011 -104, 2012 -106, 2013 -106, 2014 -105, 2015 -102 - Public finances (general government) — Total revenues 1/: 2009 36.9, 2010 40.0, 2011 39.0, 2012 38.5, 2013 38.2, 2014 37.2, 2015 36.3 - Total expenditures 1/: 2009 50.4, 2010 50.5, 2011 53.2, 2012 53.9, 2013 54.0, 2014 52.3, 2015 50.6 - Measures (cum.) 2/: 2009 ..., 2010 2.5, 2011 6.7, 2012 9.0, 2013 11.0, 2014 12.6, 2015 12.2 - Overall balance: 2009 -13.6, 2010 -8.1, 2011 -7.6, 2012 -6.5, 2013 -4.8, 2014 -2.6, 2015 -2.0 - Primary balance: 2009 -8.6, 2010 -2.4, 2011 -0.9, 2012 1.0, 2013 3.1, 2014 5.9, 2015 6.0 - Gross debt: 2009 115, 2010 133, 2011 145, 2012 149, 2013 149, 2014 146, 2015 140 - Memorandum: Nominal GDP (billions of euro): 2009 237, 2010 231, 2011 224, 2012 228, 2013 235, 2014 242, 2015 251 - Nominal GDP (percentage change): 2009 -0.7, 2010 -2.8, 2011 -3.1, 2012 2.1, 2013 2.8, 2014 3.1, 2015 3.8 Notes from table: - 1/ Excluding unidentified measures. - 2/ Measures fully identified up to 2013. - 3/ As of January 2010. - 4/ Domestic credit growth of households and enterprises. *Source: Annex Table 3. Greece—Capacity to Repay Indicators 1/* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10110.pdf_