## _cr11175 ## Source details **Canonical URL:** [_cr11175](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11175.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11175.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11175.pdf.json) --- ### Medium-Term Fiscal Strategy (MTFS) — objectives and composition - MTFS objective: define 10 percent of GDP in measures to deliver a general government deficit under 3 percent of GDP by 2014. - MTFS composition and targets: - Overall spending decline from 49.5 (percent of GDP) in 2010 to 43.1 percent of GDP by 2015. - Overall revenues to rise from 39 (percent of GDP) in 2010 to 41.6 percent of GDP by 2015. - End point: target a primary surplus in the range of 6½ percent of GDP. - Estimated total amount of necessary CAPB revised up to 10 percent of GDP (versus 8 percent of GDP at the time of the last review). - MTFS measures (selected quantified items — totals and percent of GDP): - Total measures: 24,220 Millions of Euro; In percent of GDP: 10.4. - Broadening the tax base: 8,276 Millions of Euro; 3.6 percent of GDP. - Improvement in tax and contribution administration: 3,295 Millions of Euro; 1.4 percent of GDP. - Pension reforms: 2,361 Millions of Euro; 1.0 percent of GDP. - Streamline and better targeting of social benefits: 2,092 Millions of Euro; 0.9 percent of GDP. - Health sector reforms: 1,659 Millions of Euro; 0.7 percent of GDP. - Rationalization of the public wage bill: 2,124 Millions of Euro; 0.9 percent of GDP. - Closure of non-essential public entities: 1,090 Millions of Euro; 0.5 percent of GDP. ### Fiscal implementation stance, sequencing, and contingencies - Front-loading: key reforms representing 45 percent of required measures over the period and 80 percent of required measures for 2011 already legislated (prior action). - Second phase: implementing acts representing 10 percent of required measures scheduled for August (structural benchmark). - Built-in tolerance: projected 2012–13 yields from complex measures provide a contingency margin equal to almost 10 percent of total value of all measures in 2012–13. - Risk areas: administratively complex reforms (tax administration, health and pension administration, IT-related reforms) amount to almost one-quarter of the total package. ### Macroeconomic outlook and key projections - GDP growth (selected): Real GDP projected: -4.5 (2010), -3.9 (2011), 0.6 (2012), 2.1 (2013), 2.3 (2014), 2.7 (2015), 2.9 (2016). - Program projections and near-term estimates: - GDP projected to contract by 3¾ instead of 3 percent in 2011. - Return to positive quarter-on-quarter growth projected for the first half of 2012. - Inflation: average inflation just under 3 instead of 2½ percent in 2011; inflation at constant taxes expected well below Euro area average. - Unemployment: 12.5 (2009), 15.8 (2010), 16.2 (2011), 15.0 (2012), 14.5 (2013). - External sector: - Current account trailing 12 month deficit at 9½ percent of GDP (text), Q1 2011 shows about 25 percent year-over-year improvement in euro terms. - Current account deficit expected to contract to 8¼ percent of GDP in 2011. - Competitiveness: - Unit labor costs declined in 2010; ULC total-economy-deflated REER improvement targeted about 4 percent by 2012 (wide confidence interval). ### Banking sector stress, capital, liquidity, and resolution framework - Market and bank stress indicators: - Deposit withdrawals accelerating since April 2011; ECB decreased value of Greek collateral. - Nonperforming loan ratio: 10.4 percent at end-2010 → 11.5 percent in March 2011. - Provisioning for bad loans increased 18 percent during Q1 2011; provision coverage fell to 45 percent versus 57 percent in a representative sample of large European banks. - Banks’ combined market value €13 billion versus reported Tier I capital of €30 billion. - Capital requirements and timeline: - Minimum Core Tier 1 capital requirement: 10 percent from the beginning of 2012. - Banks to present plans to BoG by end-January 2012 to reach the CAR target by end-September 2012 through market solutions. - Large private banks raised regulatory Tier I capital ratio above the 10 percent bar; system average Tier I capital ratio stands at 11 percent; Tier I capital ratios at 11.1 percent as of 2011Q1. - Liquidity support and contingencies: - Previously agreed €30 billion tranche of government-guaranteed bank bonds; BoG ELA as fallback (subject to ECB approval). - If next tranche fully disbursed, peak support could top €130 billion, or almost 60 percent of Greek GDP. - Banks cannot rapidly reduce existing ECB exposure without risking a severe credit crunch. - FSF and resolution reforms: - FSF to be strengthened; baseline assumes additional contribution to the FSF of €16 billion disbursed to banks in the near term (Appendix I assumptions). - Reforms to FSF law: controls on recapitalization pricing and disposal timeline; parliamentary legislation to revise FSF operating framework and bank resolution framework proposed as structural benchmark by September 15, 2011. - Diagnostic: single international advisory firm to perform loan-portfolio diagnostic to be complete by December (staff view: publicly disclosed). ### Bank recapitalization and state-owned banks / privatization of banks - ATE recapitalization: government injecting about €420 million net to raise ATE Tier I to 11 percent (text). - State banks and early privatization timetable: - Hellenic Postbank targeted to be sold by end year; ATE by early 2012. - HCLF commercial activities to be disposed within 12 months (unbundling law passed). - ATE restructuring plan: reduce balance sheet by 26 percent by end-2013 (EC-approved plan). ### Privatization program: scope, targets, and Fund design - Aggregate targets: - €15 billion in assets migrate to private sector control by end 2012; build to €50 billion by end-2015. - Privatization receipts revised (Annex): 2011 end-July floor €390 million; 2011 Q4 floor €5,000 million; 2012 Q4 floor €15,000 million; 2015 floor €50,000 million. - Asset categories and estimated values: - Listed state enterprises: about €5 billion (present market values). - Non-listed state enterprises: about €2 billion (discounted book value). - Concessions and rights to public infrastructure: about €9 billion (discounted cash flow). - Real estate assets held in KED: at least €35 billion (legal values), study estimates up to €50 billion maximum value. - Privatization Fund (National Wealth Fund) features: - Legislation passed to create private law vehicle; sole task: sell assets and return proceeds to State. - Governance: Advisory Board with international experience; EC and Eurogroup-appointed observers; Directors appointed by parliament; indemnification for Board and staff. - Operations and financing: initial €30 million capital injection; Fund may borrow on market terms but may not grant liens that impede privatization; advisors to be appointed and transferred; Fund operational by end-July with initial assets estimated at €25–30 billion transferred. - Transparency: quarterly reports and audited finances; proceeds remitted to Special Privatization Account at Bank of Greece. ### Debt sustainability, stress tests, and downside scenarios (APPENDIX I) - Baseline public debt path: - Debt peaks at 172 percent of GDP in 2012 and declines to 130 percent of GDP by end-2020. - External debt peaks at 115 percent of GDP in 2012 and declines to 101 percent of GDP by 2016 (baseline). - Key assumptions (selected): - Privatization inflows: €3 billion in 2011; €7.5 billion in 2012; €11 billion in 2013; €13.5 billion in 2014; €15 billion in 2015. - Private sector involvement (PSI) assumed to reduce financing needs by €33 billion through June 2014 (voluntary rollovers, 5-year new bonds, 100 percent take up among targeted holders). - Official support: €71 billion additional from euro area member states through June 2014 (on top of €80 billion existing). - Market return assumed in second half of 2014; spreads fall from 675 bps (2014) to 250 bps (2020). - Sensitivity and tailored downside: - Incomplete fiscal adjustment, privatization shortfalls, or delays in reforms → debt remain very high and likely unsustainable through 2020. - Tailored downside scenario assumptions: growth lower by 1 percentage point each year until 2016; spreads +150 bps until 2016; lower privatization proceeds (€10 billion); extra contingent banking liabilities €10 billion → debt peaks at 186 percent of GDP in 2015 and remains above 178 percent of GDP in 2020. - Failure of PSI but full official financing: debt peaks at 165 percent of GDP and is 132 percent of GDP by end-2020. - Alternative PSI illustrative: debt could fall to 125 percent of GDP by 2020 under an exchange with 85 percent participation and 10-year maturity extension with coupon 1 percentage point lower. ### Risks — near-term skew and contagion / spillovers - Near-term risks skewed to the downside: - Poor market sentiment and high spreads could hurt the banking sector, cause credit contraction, and accelerate domestic demand contraction. - Combined deeper private-sector retrenchment and sharp fiscal contraction would produce a much sharper recession than in the program. - Spillover considerations (Box 4 highlights): - Foreign holdings of Greek government bonds estimated about €180 billion as of end-May 2011; concentrations in German and French banks. - Greek banks account for over 20 percent of total bank assets and deposits in Bulgaria, FYR of Macedonia, and Albania. - Policy prerequisites to limit direct spillovers: liquidity backstops, capital backstops, and effective communication strategy. - Specific shock scenarios (Appendix summary): - Lower FDI scenario: €10 billion less privatization and/or lower foreign participation → reduce FDI by about €30 billion and deteriorate public debt by 11 percentage points of GDP versus baseline. - Combined shocks (interest rate shock + current account shock + FDI shock) could push external debt to 126 percent of GDP by 2016. ### Revenue administration, tax enforcement, and performance targets - Shift to implementation and results: anti-tax-evasion action plan published April; multi-taskforce approach. - Performance targets (2011): - Full-scope audits of large taxpayers: target end-September 50; end-December 75. - VAT audits of large taxpayers: target end-September 150; end-December 225. - VAT audits of non-filers: target end-September 750; end-December 1,000. - Collection timing from new audits (large taxpayers and non-filers): 20 percent within 3 months; 30 percent within 6 months. - Collection of tax debt (5 percent of collectable debt): €200 million target to end-September; €400 million target to end-December. - Institutional steps: - New arbitration body and fast-track administrative-dispute resolution process by September 2011; large taxpayers unit and central directorate for debt collection initiated later in year. ### Public Financial Management (PFM) reforms and arrears control - PFM priorities and actions: - Appoint accounting officers in all line ministries; commitment controls introduced; establish commitment registries to cover whole general government (except smallest entities). - Inspections covering entities accounting for at least 75 percent of arrears to be completed by end-July. - Establish central coordinating committees for budgeting, controls and reporting with performance targets. - Arrears and reporting: - End-2010 stock of arrears (excluding pre-2010 health arrears) reached 2.2 percent of GDP; Q1 2011 arrears increased to 2.6 percent of GDP excluding pre-2010 health arrears. - Publish monthly consolidated general government reports and monthly arrears reports within four weeks after end of each month; three consecutive months required to meet end-July 2011 benchmark. ### Health sector reform targets (2.7 To modernise the health care system) - Aggregate target: keep public health expenditure at or below 6 percent of GDP. - Pharmaceutical savings: at least EUR 2 billion relative to 2010 level, of which at least EUR 1 billion in 2011. - Key milestones: - EOPYY operational and equalisation by July 2011; start operating Q3-2011 with administrative staff reduced by at least 50 percent and contracted doctors reduced by at least 25 percent (targets). - Publish prescription guidelines and extend e-prescribing; e-prescribing and e-health tendering Q3-2011 and full coverage Q1-2012. - Target hospital cost reductions: at least 10 percent in 2011 and additional 5 percent in 2012. ### Structural reforms, business environment, and labor market - Structural reform priorities: - Liberalize regulated professions; Law 3919/2011 to be operational by July 2, 2011 (text references 128–141 professions identified). - Fast-track procedures for large investments: take one fast-track project through by September 2011. - Simplify export procedures and create single electronic trade window by end-September 2011. - Energy law to be passed by end-July 2011; unbundling and regulatory strengthening timelines through Q1-2012. - Labor market measures: - Reduce labor tax wedge through broadening contribution base and later reducing rates; first step expected by January 1, 2012. - Firm-level collective agreements framework introduced; special firm-level agreements limited use to date (6 signed by mid-2011). - Strengthen Labour Inspectorate and pilot electronic labour card (pilot: maximum 100 firms; duration max four months; Q3-2011). - Complementarities (Box 2): deregulation of upstream sectors magnifies labor market reform benefits; coordinated reforms can increase employment effects by up to 40 percent (or 20 percent under modest effort). ### Program modalities, conditionality, and monitoring - Prior actions completed (four prior actions) for the review: - Passage of MTFS by Parliament. - Passage of first stage MTFS implementation legislation (45 percent of measures). - Passage of privatization and real estate development strategy. - Passage of legislation establishing the privatization agency. - Quantitative and structural monitoring: - New quarterly performance criterion on cumulative privatization proceeds introduced. - End-July 2011 performance criteria proposed; completion of the fifth review conditioned on meeting them. - Structural benchmarks include passage of second-stage pension reforms, new civil service wage grid, closure of extra-budgetary funds, and targets in anti-tax evasion action plan. - Reporting and data provision: - Monthly and quarterly data flows defined in TMU (Ministry of Finance, GAO, BoG, FSF reporting deadlines specified). - Definitions: modified general government primary cash balance (MGGPCB) and other program metrics defined in TMU. ### External financing strategy, PSI design, and financing assurances - Residual financing gap: - Despite privatization, residual financing gap about €70 billion through end of program (mid-2013); could rise to €104 billion through mid-2014 if market access delayed (text). - Strategy agreed: combine private sector involvement (PSI) with additional official support from euro area member states to fill gap. - PSI design and assumptions (Appendix I baseline): - Voluntary rollovers/maturity extensions assumed to reduce financing needs by €33 billion through June 2014. - Participation assumed to include Euro-area banks and Greek social security funds with 100 percent take up for targeted holders. - Official support: - Euro-area member states agreed to ensure required program financing after accounting for PSI (Eurogroup July 2 announcement). - Additional support from euro area member states of €71 billion assumed through June 2014 (on top of €80 billion existing program). - Staff cautions: - PSI must preserve banks’ ECB eligibility and minimize spillovers; voluntary scheme preferred but may be difficult to avoid temporary credit-event ratings. ### Staff appraisal and program conclusion (selected) - Program delivers initial results: macro rebalancing, improving competitiveness, fiscal deficit reduction despite deep recession. - Critical implementation imperative: timely and determined implementation of fiscal, privatization and structural reforms is essential; debt dynamics leave little scope for deviation. - Banking system: need stronger capital buffers, resolution tools, and clear medium-term funding plans; continued exceptional ECB liquidity support critical in near term. - External support and PSI: comprehensive PSI appropriate given financing needs; euro area member states must guarantee liquidity support to banking system if PSI undertaken. - Staff recommendation: support completion of the 4th review, waiver of applicability of performance criteria, and modification of performance criteria; future reviews to focus on implementation. *Italic: IMF staff report content unit _cr11175 (selected chapters and annexes as provided in the source PDF).* ### 1. The Medium Term Fiscal Strategy (MTFS), 2011–14 ........................................................34 ### 1. The Medium Term Fiscal Strategy (MTFS), 2011–14 ### Background and political context - Deep divisions in Greece and in Europe over how to handle Greece’s challenges. - Opposition escalated to the authorities’ program; government secured internal consensus in the governing party after a cabinet reshuffle (including replacement of the Minister of Finance). - European confidence waned; strong opposition emerged to extending additional financing to Greece and public discussion about private sector involvement (PSI). - European leaders reached a consensus in early July to continue supporting the authorities’ program after program prior actions had been met. ### Market developments and sovereign risk - Market surveys suggest about 95 percent of participants expect a Greek debt restructuring. - Since March, spreads on 2-year and 10-year debt over German bunds have soared to record highs, exceeding 2650 bps and 1400 bps, respectively. - Rating agencies downgraded Greece to near-default status: CCC (Standard & Poors), Caa1 (Moody’s), and B+ (Fitch). ### Macroeconomic performance and labor markets - Output: cumulative drop of some 7¾ percent from its 2008 peak. - Unemployment exceeded 16 percent in March 2011. - Domestic demand decline continued unabated in Q1 2011; improving net exports offer offset. - Nominal labor costs (wages and non-wage labor cost) declined -6.8 percent year-on-year in Q1 2011. - Productivity dropped by ¼ percent year-on-year in Q1 2011. - ULC-total-economy-deflated REER improved by around 6 percent in 2010 and continued to fall in Q1 2011. - Headline inflation (HICP) reached 3.1 percent in May 2011 (Euro area average 2.8 percent). - Core inflation declined to 1.7 percent (from 2.8 percent in March). - Inflation at constant taxes was 1.3 percent in April 2011. - Current account: trailing 12 month deficit at 9½ percent of GDP; Q1 2011 shows about 25 percent year-over-year improvement in euro terms. ### Banking sector stress and transmission - Liquidity needs are acute due to steady and accelerating deposit withdrawals since April 2011; depositor confidence undermined by public PSI discussion. - ECB decreased value of Greek collateral, necessitating banks to post additional collateral; wholesale funding markets remain closed; exceptional ECB liquidity support has grown. - ECB Governing Council had not decided whether to accept the proposed new €30 billion tranche of government guaranteed bank bonds as eligible collateral. - Nonperforming loan ratio worsened from 10.4 percent at end-2010 to 11.5 percent in March 2011. - Provisioning for bad loans increased 18 percent during Q1 2011; provision coverage fell to 45 percent versus 57 percent in a representative sample of large European banks. - Stock of restructured loans increased to 3.7 percent of loans. - Large private banks raised regulatory Tier I capital ratio above the 10 percent bar; system average Tier I capital ratio stands at 11 percent. - ATE bank recapitalization will raise its Tier I capital ratio to 11 percent with the government injecting about €420 million net. - Banks’ combined market value €13 billion versus reported Tier I capital of €30 billion. - Fragilities remain among small banks: one audited and strengthening capital; the other with 4½ CAR well short of the 8 percent minimum and pursuing a merger. ### Credit conditions and real economy transmission - Credit to households continued to contract in the first four months of 2011; corporate credit growth marginally positive and concentrated in short-term trade credits. - Lending spreads on new loans have continued to increase, particularly for households. - Banks increasingly curtail new lending and rollovers of maturing loans to address liquidity stress. ### Fiscal position, execution, and institutional reforms - Fiscal position stalled at a primary deficit around 3½ percent (Table 5; Figure 6). - 2010 fiscal consolidation around 5 percent of GDP; ESA95 deficit around 10½ percent of GDP (¾ percent of GDP higher than earlier estimated). - End-2010 stock of arrears (excluding pre-2010 health arrears) reached 2.2 percent of GDP, including about 2 percent of GDP accumulated in 2010. - Q1 2011: cash revenue collections fell 0.6 percent of GDP short of expectations; arrears increased to 2.6 percent of GDP excluding pre-2010 health arrears; state budget under execution of 0.6 percent of GDP. - Early EU grant inflows of ¼ percent of GDP and better non-state balances allowed Q1 targets to be met; budget running about 0.1 percent of GDP ahead of program target through end-May. - Fiscal institutional reforms: March tax legislation removed several legal and administrative obstacles; Ministry of Finance published a comprehensive anti-tax-evasion action plan in April. - Accounting officers appointed in all general government entities; commitment controls introduced but slow to take hold (in March only 35 percent of line ministries fully reporting results). - Fiscal and arrears reporting coverage improved; quality of data, particularly arrears data, needs improvement. ### Short-term financing and changes to official financing - Authorities’ access to Treasury-bill funding tightened; banks reluctant to roll over outstanding t-bill stock of €9 billion. - Yields rose to 4.6 percent for 3-month bills and 5.0 percent for 6-month bills (from 3.9 and 4.6 percent respectively in February). - Euro area member states agreed to extend maturities and lower interest rates on their loans. - Amendment to the Loan Facility Agreement signed on June 14 allows retroactive maturity extension to EFF-equivalent terms and a lowering of the spread over euribor rates by 100 bps, bringing current cost of borrowing to around 3.7 percent. - By shifting the amortization profile, this would lower gross market financing needs by some €47 billion over 2012–15. ### Structural reforms and competitiveness - Delays in implementation are being reduced but not fast enough to achieve critical reform mass needed to boost productivity (Table 7, Figure 3). - 2010 labor market liberalization: firms using more flexible contracts in 2011; only 6 special firm-level collective bargaining agreements signed to date. - One-stop shops for business start-ups operational; close to 1,400 new start ups registered through mid-June. - Fast-track procedure for large investments implemented; three applications under review. - Authorities published list of professions subject to new law comprised of 136 professions (in addition to lawyer, notary, engineer, architect, and auditor); requests for exemptions to be evaluated and implementation decisions finalized by July 2. - Legislation strengthening the competition authority approved in March; law streamlining licensing procedures for technical professions and business parks passed and published in June; environmental licensing law under preparation. ### Outlook and projections - GDP projected to contract by 3¾ instead of 3 percent in 2011. - The fiscal contraction necessary to achieve 2011 fiscal targets will be about 1 percent of GDP higher than originally programmed. - Return to positive quarter-on-quarter growth projected for the first half of 2012. - Inflation: higher oil prices expected to raise average inflation to just under 3 instead of 2½ percent; inflation gap with the Euro zone projected to gradually close and turn in Greece’s favor in 2012. - Competitiveness: unit labor costs expected to continue declining at a rate similar to 2010; consistent with a 4 percent improvement in the ULC total-economy-deflated REER by 2012 (wide confidence interval). - Current account deficit expected to contract to 8¼ percent of GDP in 2011. - Tourism prospects supportive: double-digit increase in bookings for 2011. *Source: IMF staff report chapter "1. The Medium Term Fiscal Strategy (MTFS), 2011–14" (pages and tables referenced in source content).* ### 10. Risks remain skewed to the downside in the near term. Poor market sentiment and ### 10. Risks remain skewed to the downside in the near term. Poor market sentiment and high spreads, if sustained, would hurt the banking sector (creating pressures for credit contraction). These factors could also directly affect business and consumer sentiment, accelerating the contraction of domestic demand. And a deeper private sector retrenchment, on top of the sharp fiscal contraction now underway, would lead to a much sharper recession than now projected in the program. There remains upside potential in the medium term, particularly given the gap between Greek and core euro-area productivity levels. But realizing this remains a matter of determined and timely structural reform implementation. ### Near-term risks and macroeconomic implications - Downside risks are dominant in the near term: poor market sentiment and high spreads, if sustained, would: - hurt the banking sector and create pressures for credit contraction; - directly affect business and consumer sentiment and accelerate domestic demand contraction; -, combined with private sector retrenchment and sharp fiscal contraction, produce a much sharper recession than currently projected. - Medium-term upside potential exists due to the gap between Greek and core euro-area productivity levels, but realization requires determined and timely structural reform implementation. ### Public and external debt dynamics (summary of stress-test findings) - Public debt (program baseline and stress tests): - Under very ambitious fiscal and privatization programs, public debt would peak at 172 percent of GDP in 2012 and decline to 130 percent of GDP by end-2020 (compared with 159 and 130 percent of GDP at the third review). - The higher peak relates to higher estimated upfront FSF funding needs. - Incomplete fiscal adjustment, privatization shortfalls, or delays in structural reform implementation (producing a considerably slower economic recovery and fiscal adjustment) would see debt remain at very high and likely unsustainable levels through 2020. - Debt service needs will remain large in the medium term, creating uncertainty about the authorities’ ability to obtain financing on reasonable terms. - Provided market access is restored, debt dynamics are not sensitive to minor variations in spreads. - A tailored scenario capturing underperformance across program assumptions and macro projections shows an unsustainable increase in the debt. - External debt: - If the program is fully implemented, external debt would peak at 115 percent of GDP in 2012 and decline to 101 percent of GDP by 2016. - Stress testing shows high sensitivity of external debt to delays in program implementation (involving slower closure of the competitiveness gap) and to lower non-debt creating flows (e.g., delays in privatization). - Outlook hinges on the pace at which the ECB withdraws exceptional support to the Greek banking system: a withdrawal pace inconsistent with the program macro framework would lift spreads, significantly reduce growth (as bank credit contracts), initially plunge GDP (lifting debt ratios), but eventually improve competitiveness and current account contraction. ### Key policy challenges identified (from program discussions) - Overarching challenges recognized by authorities: - Deeper fiscal reforms needed to prevent the fiscal deficit from becoming entrenched around 10 percent of GDP. - A larger capital buffer and a stronger capital support framework needed to restore banks’ access to wholesale markets. - Significant transfer of state-owned assets to the private sector needed to propel higher growth and bring down government debt ratios. - A critical mass of structural reforms needed to support restoration of competitiveness and economic rebalancing through higher productivity. - Restoration of market confidence will take time; financing to support program policies needed. Solutions were identified and agreed in each case. ### Fiscal policy: targets, scale, and implementation - Program fiscal targets (MEFP ¶4 and Table 10): - Greece to achieve a 7½ percent of GDP general government deficit in 2011. - Deficit below 3 percent of GDP by 2014. - Targets extended to 2015 with a small additional adjustment to a 1½ percent of GDP deficit foreseen. - End point: Greece would be targeting a primary surplus in the range of 6½ percent of GDP to reduce debt significantly. - Note: a 6½ percent primary surplus is higher than the average 4 percent of GDP primary surplus achieved in Greece during the second half of the 1990s, and exceeds the estimated debt stabilizing primary balance of about 3 percent of GDP. - Recommendation: switch headline program targets to focus on primary balances to insulate assessments from variability in interest payments. - Scale of required adjustment: - Estimated total amount of necessary CAPB revised up to 10 percent of GDP (versus 8 percent of GDP at the time of the last review). - Revision reflects reduced expected medium-term revenues (worse than expected 2010 outcome) and macro and market interest rate factors. - Adjustment necessity rooted in Greece’s extraordinarily high pre-crisis structural deficit and persistent public finance problems (weak revenue administration, bloated public employment, untargeted social support, fragmented and oversized public administration). - Medium-Term Fiscal Strategy (MTFS) objectives and composition: - MTFS designed to permanently reduce size of the Greek state: - Overall spending decline from 49.5 (percent of GDP) in 2010 to 43.1 percent of GDP by 2015 (below the euro-area average). - Overall revenues to rise from 39 (percent of GDP) in 2010 to 41.6 percent of GDP by 2015 (approaching the euro-area average). - MTFS measures include: significant reduction in public employment, scale back number of public sector entities, scale back benefits/access, broaden tax base, and administrative measures to ensure accurate tax assessments and enforcement. - Staff concern: over-reliance on revenue measures and potential lack of broad popular support could work against tax administration improvements. Agreed that tax reform would be on the agenda for the fall to broaden the base and reduce rates; authorities to explore further expenditure rationalization. - Implementation stance and risks: - Authorities to implement strategy in a front-loaded fashion; key reforms representing 45 percent of required measures over the period and 80 percent of required measures for 2011 already legislated (prior action for the review). - Second phase of implementation acts representing 10 percent of required measures scheduled for August (structural benchmark). - Significant implementation risks from administratively complex reforms (tax administration, health and pension administration, IT-related reforms) amounting to almost one-quarter of the total package. - Complex reforms launched early; yields conservatively incorporated into program forecasts and systematically back-loaded where appropriate. - Built-in tolerance: projected 2012–13 yields from complex measures provide a contingency margin equal to almost 10 percent of total value of all measures in 2012–13. - Near-term 2011 target to rely on well-defined and well-costed policy changes; mid-2011 implementation to have carry-over benefits for fiscal year 2012. ### Revenue administration reforms and performance targets - Shift from planning/legislation to implementation and results (Table 12): - Implementation steps: - New arbitration body, independent fast-track administrative-dispute resolution process for large cases, and dedicated chambers for judicial appeals to be in place by September 2011. - Consider more effective use of available anti-money laundering tools. - Framework of quantitative performance indicators to monitor anti-evasion plan: intermediate targets (e.g., number of risk-based audits for large taxpayers and non-filers) and output/revenue targets (e.g., collection from assessed taxes and from tax arrears). - Start major institutional changes later in the year: central directorate for debt collection, a large taxpayers unit, and closing/merging uneconomic local tax offices. - Performance targets (Greece: Targeting Improvements in Revenue Administration: Performance Targets, 2011): - Audits: - Number of full scope audits of large taxpayers: Target to end-September 50; Target to end-December 75. - Number of VAT audits of large taxpayers: Target to end-September 150; Target to end-December 225. - Number of VAT audits of non-filers: Target to end-September 750; Target to end-December 1,000. - Collection timing targets for assessed taxes and penalties from new audits of large taxpayers: - Within 3 months: Target 20 percent of assessed taxes. - Within 6 months: Target 30 percent of assessed taxes. - Collection timing targets for assessed taxes and penalties from new audits of non-filers: - Within 3 months: Target 20 percent of assessed taxes. - Within 6 months: Target 30 percent of assessed taxes. - Collection of tax debt (5 percent of collectable debt): €200 million target to end-September; €400 million target to end-December. ### Public Financial Management (PFM) reforms and controls - MTFS budgeting reform and execution issues: - First MTFS exercise; technical priorities include establishing a workable process and defining expenditure ceilings. - Next MTFS cycle to focus on deadlines, better engagement with line ministries, and expanded fiscal risk assessment and contingency planning in documentation. - Spending controls: - Need to build capacity in line ministries and general government entities. - Authorities to accelerate creation of general directorates of financial services and appoint permanent accounting officers in line ministries. - Ministry of Finance to improve technical support for operating commitment registers and undertake inspections in entities with largest arrears. - Reporting and reconciliation: - Inter-ministerial committee to examine data sources/types submitted to Ministry of Finance to identify discrepancies. - New procedures to automate reconciliation of data from the main bank account to be introduced shortly. - Oversight: - Establish central coordinating committees in the three pillars of the PFM strategy (budgeting, controls and reporting). - Committees to have performance targets and milestones (e.g., usage of commitment registers, reporting rate from registers, size of discrepancy in fiscal reports). ### Financial sector policies: stability, liquidity, and support framework - Banking sector stress and capital: - Banks under significant stress; review completion expected to reduce uncertainty and deposit outflows, but pressures will remain. - Need to rebuild buffers while government’s delayed return to market will likely delay banks’ return to wholesale markets. - Tier I capital ratios at 11.1 percent as of 2011Q1 (European average 11 percent). - Market discounts value of banks’ large government bond holdings; planned private sector involvement in government financing may require banks to recognize losses on bonds (currently mostly in held-to-maturity portfolios). - Agreed need for a stronger support and resolution framework. - Liquidity support and reliance on ECB: - System liquidity pressures likely to remain very high for remainder of 2011 due to deposit losses, maturing bank bonds, and further possible loss of collateral eligibility. - Significant baseline liquidity support could be needed, and more in the event of deposit instability. - Liquidity support, if necessary, could be delivered via: - Previously agreed €30 billion tranche of government-guaranteed bank bonds; and - Direct support from the Bank of Greece (BoG), funded through emergency liquidity operations, mainly ELA (subject to approval of the ECB Governing Council). - Timeline for ECB approval of new government-guaranteed bonds is unknown; authorities have prepared technical arrangements to enable ELA-related lending. - If next tranche of government-guaranteed bonds is fully disbursed, peak support could top €130 billion, or almost 60 percent of Greek GDP. - Greek banks cannot rapidly reduce existing ECB exposure without risking a severe credit crunch and economic collapse. - Uncertainty about the pace of ECB support withdrawal is a negative factor for system stability and contributes to tight credit conditions. - Agreed policy: banks should regularly update medium-term funding plans, with the BoG providing guidance based on assessment of aggregate plans, to ensure orderly exit consistent with the program’s macroeconomic framework. _Italic: IMF staff report content unit _cr11175, chapter 10 (as provided in the source PDF)._ ### 20. There was agreement that banks would likely face significant additional capital ### 20. There was agreement that banks would likely face significant additional capital needs ### Bank capital needs and diagnostic exercise - Banks would likely face significant additional capital needs (MEFP ¶11). - Capital buffers must be large enough to reassure markets that banks can manage: - a further deterioration in their loan books, and/or - crystallization of potential losses on Greek government bond holdings. - A single recognized international capital advisory firm (paid for by banks) will be commissioned by the BoG to perform a diagnostic of banks’ loan portfolios (as was done, for example, in Ireland). - The work should be complete by December, and in staff‘s view should be publicly disclosed. - The diagnostic will likely point to a need for higher provisions. - Concerning government bonds: - The government’s PSI exercise (see below, ¶37) may require banks to recognize losses. - The EBA stress tests assume some loss of value on government bonds (given current credit rating valuations) and may point to higher capital needs through this channel. ### Core Tier I capital target and transition timeline - A core Tier I capital target and time line were established (MEFP ¶11). - Banks will be required to maintain core Tier 1 capital at a minimum 10 percent from the beginning of 2012. - Under Pillar II requirements, additional capital buffers may be applied for individual banks based on their specific risk profile. - Banks must present plans to the BoG by end-January 2012 detailing how they intend to reach the new CAR target by end-September 2012 through market solutions. - Transition rationale and options: - The transition period allows pursuit of market solutions given many banks simultaneously attempting to raise capital in a thin market and to avoid nationalizing the system. - Market solutions could include rights issues or sale of non-core assets. - The government can directly inject capital into any bank it owns (if it cannot first privatize the banks). - Authorities committed to encourage banks to seek foreign merger partners (Greek banks offer broader exposure to southeastern Europe). - Greece’s macroeconomic conjuncture, funding difficulties, and balance sheet challenges will hamper full market solutions; mergers will likely need to await a longer track record of program implementation. ### Strengthening the framework for bank restructuring and resolution (MEFP ¶12) - The authorities indicated they would strengthen the framework for supporting bank restructuring and resolution, covering three areas: - The Financial Stability Fund (FSF) - No near-term use of the fund is expected. - The planned third-party diagnostic, the expected outcome of EBA stress tests, and PSI-related changes in government bond values suggest banks may need to raise additional capital. - Capital needs could rise if the market value of government bonds continues to fall and/or unexpected problems in loan books are revealed. - For the FSF to remain a credible backstop for private banks it must have adequate resources. - Government resources for private banks are limited by debt dynamics concerns. - Public sector commitments will be contained via: - new controls on the price at which the FSF would inject capital into a bank (to give banks a strong incentive to go to the market), and - controls on the timeline for the FSF to dispose of any investments (to allow the fund to revolve faster). - The amount of additional capital to be added to the FSF will be determined at the time of the next review, once capital needs are further clarified. - The resolution framework - The BoG has broadly adequate powers to take remedial and early intervention measures (although not all have been used in the past): - upon certain triggers it may appoint a commissioner with managerial powers to run a troubled bank; - it may withdraw a bank license and then put the bank into liquidation; and - it can impose a moratorium on a bank's claims. - The Greek legal framework lacks specific bank resolution tools used in other countries (for example, techniques to allow continuity of banking operations including sustained depositor access, such as purchase and assumption or bridge bank resolution). - Reforms are needed to: - ensure the deposit insurance fund can be used to fund such techniques, and - establish depositor preference over unsecured creditors to better ensure recovery of guarantee funds. - The authorities agreed to improve the framework. - As changes involve complicated issues related to property rights and potentially funding bridge banks, passing new legislation is expected to take until mid-September. - Combined with changes to the FSF law, this is proposed as a new program structural benchmark. - Supervisory and oversight framework - Greece needs to clearly identify an agency with overarching responsibility for resolution. - The working relationship between the four existing agencies (MoF, BoG, FSF and Deposit Insurance Fund) is weak due to insufficient resources and insufficient collaboration. - Two steps taken in this review: - A Memorandum of Understanding between the FSF and BoG to spell out information sharing and confidentiality arrangements allowing the FSF to receive information regarding the soundness of financial institutions. - Staffing measures: well-qualified staff will be identified for transfer into the BoG bank supervision department; the BoG is also considering long-term technical assistance from other European supervisory agencies. ### Actions for undercapitalized banks (MEFP ¶13) - The authorities will take action concerning banks whose capital base falls short of regulatory requirements. - They recognized they could not wait for the new resolution framework to be in place to take action and ruled out use of the FSF in the immediate instance. - Market conditions—ongoing deposit withdrawals threatening financial stability—precluded immediate use of existing powers (e.g., liquidation). - The supervisor requested that undercapitalized banks meet regulatory requirements or find appropriate merger partners by end-September. - In one instance, a merger with a state-owned bank (which already owns a significant share of the bank in question) has been announced, conditional on an assessment of the financial impact on the state-owned bank. ### State-owned financial institutions and early privatization (MEFP ¶14) - Authorities’ plans shifted towards early privatization: - Hellenic Postbank is targeted to be sold by end year. - ATE (the Agricultural bank) by early in 2012. - The HCLF’s commercial activities within 12 months. - Challenges: - Given market conditions and banks’ balance sheet conditions (including exposures to the government), this timetable is challenging. - Preparatory steps: - ATE has been recapitalized by the government. - A law to unbundle the core consignment function from the commercial activities of the HCLF has been passed. - A restructuring plan for ATE approved by the EC targets a reduction in the bank’s balance sheet by 26 percent by end-2013, although events (notably voluntary rollovers of debt) may require EC approval to maintain exposures. - The government intends to establish equal treatment of agricultural land collateral across financial institutions to ensure a level playing field between ATE and competing banks. ### Insurance sector strengthening (MEFP ¶15) - Work to strengthen the insurance sector is underway. - Market structure: - Weak institutions represent less than 7 percent of the industry. - Subsidiaries of large foreign insurance companies along with the affiliates of Greek banks represent 80 percent of the market. - Actions taken and outcomes: - Some nonviable insurance companies (representing 1.1 percent of insurance company assets) have already been closed with no reported negative reactions. - Other companies have successfully raised capital; the largest entity, representing one-fourth of the market, is undertaking a capital-raising exercise. - Supervisory approach: - The supervisor is anticipating the outcome of the Euro-wide stress testing exercise for the insurance sector and will use existing powers to address companies which do not pass the stress test. - Measures include intensifying supervisory oversight, requiring institutions to raise capital within a certain time period, or resolving them using other measures. ### Privatization: commitments, scope, timeline, and targets (MEFP ¶16–19) - Authorities reiterated commitment to an ambitious transfer of assets to the private sector (MEFP ¶16). - Targets: some €15 billion in assets migrate to private sector control by end 2012, building to a total of €50 billion by end-2015. - State enterprises involved represent about 15 percent of total Greek investment and 2-3 percent of value added. - Debt reduction of 18 percent of GDP through 2020 would save Greece 1–1½ percent of GDP per year in interest (net of the income previously earned by the assets). - Having to pay the interest on 18 percent of GDP in debt would, for instance, require VAT rates to be 3-4 percent higher. - Comprehensive privatization and real estate development strategy specified and approved by parliament as a prior action for the review (MEFP ¶17). - Scope: - Assets drawn from three categories: 1. listed state enterprises (about €5 billion, based on present market values); 2. non-listed state enterprises (about €2 billion, based on a heavily discounted book value); 3. concessions and rights, generally to public infrastructure (about €9 billion, based on estimates of future discounted cash flow); 4. various real estate assets held in KED, the public real estate management firm (at least €35 billion, according to a study based on legal values of commercial land with clear legal title). - Uncertainty: estimated value of real estate is subject to the most uncertainty; authorities committed to assign a land use to plots targeted for sale to maximize returns. - Extra margins: about €1½ billion in state-enterprise assets are not included in the current portfolio; estimates of maximum value of the real estate portfolio extend as high as €50 billion; portfolio does not yet include properties held by the Ministry of Tourism. - Timeline: - Prioritize companies ready for sale (listed state enterprises); assets requiring intermediate steps (incorporation, extension of concessions, deregulation) will be sold in 2012–2013. - Most real estate assets will be sold in 2014–2015 to address title and land use issues and transform land into investment portfolios. - Authorities ahead of schedule on intermediate steps: advisors appointed for all transactions in 2011–12; laws on land use, surface rights, and establishment of leaseholds passed in the MTFS implementation bill. - Given importance for debt dynamics, the privatization timeline will be supported by a quarterly performance criterion; at each test date the target is backed up by multiple options. - Privatization Targets (Euro million) — as presented in the source: - 2011 end-July: Floor on Privatization Receipts 390; Est. Value of Assets incl. in Plan 443 - Q3: 1,700; 2,070 - Q4: 5,000; 8,317 - 2012 Q1: 7,000; 10,181 - Q2: 9,000; 11,387 - Q3: 11,000; 13,407 - Q4: 15,000; 19,366 - 2013 Q1: 17,000; 19,446 - Q2: 18,000; 19,780 - Q3: 20,000; 21,696 - Q4: 22,000; 24,418 - 2014: 35,000; 38,993 - 2015: 50,000; 53,567 - The Fund for privatization will be operational by end-July with initial assets transferred expected to amount to an estimated €25–30 billion, leaving remaining assets (mainly real estate) to be transferred over time as portfolios are prepared. ### Privatization Fund design features (MEFP ¶18–19) - Legislation passed to create a private law vehicle into which privatizable assets will be transferred; sole task: sell them over a given time period and return proceeds to the State. - Design follows the German Treuhandanstalt model: - Governance and legal protections: - Requirements for an Advisory Board with international experience, and EC and Eurogroup-appointed observers. - Restrictions on ability to subsidize or invest in the assets it controls. - Legal protection for the Board and staff from civil liability and indemnification in defending legal proceedings. - All expenditures will fall within the program’s general government fiscal target. - Borrowing: - It was agreed desirable to allow borrowing (in coordination with the debt management agency) to realize upfront proceeds from concessions and bring forward resources from assets that take longer to sell. - Borrowing against collateral in a manner that would impede the Fund’s ability to fully sell assets in a timely and effective manner was ruled out. - Operational timing: - The Fund is expected to be operational by end-July with initial assets estimated at €25–30 billion transferred at that time. ### Structural reform policies and labor market (MEFP ¶20–21) - Continued ambitious reforms are needed to secure full implementation of earlier legislative initiatives (MEFP ¶20). - Since EU accession, Greece has failed to take advantage of the single market; large upside potential exists to boost competitiveness and growth. - Structural reform program launched mid-2010 aimed at promoting employment, investment, and market efficiency to address Greece’s large productivity gap. - Success requires comprehensive reforms, tackling issues including the high labor tax wedge, additional sectoral barriers to growth, and inefficiencies in the judicial system. - Authorities acknowledged a need to improve reform implementation, sequencing, and timely execution to exploit synergies among reforms (Box 2). - Labor market focus (MEFP ¶21): - Objectives: secure a well-functioning labor market, improve competitiveness, and increase labor participation. - Context: relatively high labor costs (on a ULC-adjusted basis), sharply rising unemployment, and low participation rates. - Emphasis on market-based solutions and a framework for firms to flexibly manage labor costs. - Specific measures: - Facilitating collective bargaining and market flexibility: - Special firm-level collective agreements introduced in late 2010 allow wage reductions below sectoral minima (to the nationally-agreed floor) within the formal bargaining framework but have been used little to date. - If the framework proves too cumbersome, legislation would need further simplification. - At end-June 2011, legislation was passed providing for more flexibility in working-time management and in the use of fixed-term contracts, and introduction of youth term contracts at sub-minimum wages. - Cutting the labor tax wedge: - A lower tax wedge could significantly boost employment and reduce informal economy incentives (e.g., Bouis and Duval (2011) estimate a 1½–3½ percentage point employment gain from tax wedge reforms in Greece over a 5–10 year period). - Fiscal consolidation constrains funding avenues for reductions (consumption taxes are already being increased). - Agreed focus: broaden the contribution base (gradually raising income ceilings for social contributions) and improve collections (strengthen labor inspectorate effectiveness, including launching an electronic labor card pilot project). - A wider contribution base alone (for instance, elimination of income ceilings for social contributions) could allow for an estimated 6 percentage point reduction in the wedge (though pension scheme adjustments may be needed to avoid new pension spending obligations). - It is expected that a first step towards reducing the wedge could be taken in 2012. *Source: IMF staff report excerpts (sections 20–30) as provided in the content unit.* ### 31. The government emphasized its continued commitment to remove barriers to ### 31. The government emphasized its continued commitment to remove barriers to investment and exports ### Investment and exports: objectives and implementation steps - Domestic consumption expected to remain subdued; boosting investment and exports is crucial to unlock demand during the needed transformation of the economy. - Both investment and exports have significant upside potential once reforms to remove barriers are fully implemented. - Fast-track procedures for large investment projects had yet to be tested; a number of applications were in the pipeline but with no concrete outcomes. - Authorities committed to: - Take one fast-track project through by September to get the system working. - Once the framework is functional, lower and generalize the qualification thresholds. - Remove administrative barriers to exports—including customs procedures—by September; a working group had been established to identify needs and draft legislation, and plans were underway to develop a single window for trade to facilitate information dissemination. ### Service sector liberalization: scope, expected gains, and implementation timetable - Reforms focus on intermediate inputs (professional services, transportation, electricity) expected to lower costs and improve total factor productivity. - Academic estimates on multifactor productivity gains from easing restrictive regulations in intermediate sectors: - Buis and Duval (2011) estimate about 3–7 percent increase in multifactor productivity in Greece in 5–10 years. - Burles et. al (2010) estimate multifactor productivity gains of about 8 percent. - Reforms should open opportunities for higher investment. - Implementation steps discussed: - Liberalizing closed professions: - Authorities intended to strictly limit any reintroduction of restrictions and to finalize implementing decrees for high-impact professions by July 2nd. - Thereafter, screen existing specific legislation and integrate needed changes to conform to the new law. - Transportation sector initiatives: - Next steps towards road freight liberalization (a second decree on official license prices to be issued by end-December). - Deregulation steps for taxi services. - Implementation of agreed restructuring plans for public transportation entities. - Energy sector reform: - New energy law to be passed by end-July 2011 to strengthen the regulatory authority, provide for consumer protection, and allow unbundling electricity and gas transmission. - Continued efforts to improve competition, foster privatization and investment. ### Sector diagnostics and tourism - Authorities agreed to undertake a deeper diagnosis of obstacles to restarting growth in sectors crucial for Greece’s economic transformation. - Tourism sector study completed; tourism accounts for 15 percent direct and indirect impact on output. - Tourism study recommendations: - Develop and upgrade infrastructure, ports and marinas. - Facilitate investment in integrated resorts and vacation home complexes. - Increase flight connectivity with high-growth markets. - Legal and policy instruments supporting tourism objectives: - New fast-track investment law and licensing law. - Planned sales of publicly-owned real estate. - Laws in progress on land use, tourism (vacation homes and integrated resorts), and liberalization of tourist coaches. - Cross-sector productivity gaps: - Labor productivity gaps exist in most sectors relative to the euro area average—especially manufacturing, wholesale and retail trade, and market services—partly due to small business size and lack of economies of scale. - Authorities commissioned external studies to analyze cross-sectoral and sector-specific barriers, with targets: - Specific recommendations for the retail sector by end-September. - Recommendations for other sectors (including wholesale trade, manufacturing and energy) by end-year. ### Judicial reform (medium-term) - A medium-term reform of the judicial system to be a new element of the program. - Identified judicial weaknesses: inefficient procedures, lengthy court processes, postponed cases, cumbersome execution of court decisions, and lack of transparency. - These weaknesses have negatively affected private investment, FDI, entrepreneurship, exports, and fiscal performance; reflected in scores below OECD and world averages on contract enforcement and investor protection indices. - Agreed near-term actions: - Further simplify procedures for fiscal cases, including fully implementing specialized tax chambers in the large courts to improve revenue collection. - Develop an action plan with concrete targets and deadlines for clearing the existing large case backlog in courts (e.g., to help recover overdue tax revenues). - Adopt additional efficiency measures to reduce processing time of court cases to remove obstacles to entrepreneurship. - First-step institutional measures: - Establish task forces to review the code of civil procedures and design a performance and accountability framework for courts. ### Strengthening reform management and monitoring - Reform implementation lagged since launch a year earlier, reflecting capacity constraints and lack of oversight and monitoring mechanisms. - Authorities recognized need to: - Establish a committee to oversee structural reform work, identify capacity and technical assistance needs, and propose adjustments to reform strategy. - Appoint project managers for each reform initiative to establish clear responsibility and accountability. - IMF staff to collaborate with authorities to develop and update monitoring indicators to track implementation status of reforms and outcomes. ### External financing: financing gap and strategy - Current financing circumstances make it unlikely Greece would regain private market access by early 2012 as initially envisaged. - Despite significant privatization effort, a residual financing gap of about €70 billion would remain through the end of the program period (mid-2013). - This gap could rise perhaps to a total of €104 billion through mid-2014 if market access is further delayed by the need to demonstrate a more advanced state of fiscal and macroeconomic adjustment. - Additional needed amounts are spread across the program period, with some front loading likely due to additional estimated funding needs for the FSF. - Strategy agreed with authorities and euro area member states: - Fill the gap through private sector involvement (PSI), with additional official support from euro area member states covering amounts not provided by PSI. - An orderly, pre-emptive and comprehensive PSI operation can improve Greece’s debt service profile and prospects to return to the market. - PSI may crystallize losses on Greek banks’ balance sheets, necessitating extra funding for the FSF. - The design of a debt operation must preserve Greek banks’ eligibility for ECB refinance and minimize spillovers; European policymakers sought a voluntary scheme that would not involve a credit event or a ratings downgrade to selective default (although that may not be possible to avoid temporarily). ### PSI design, advisory support, and timeline - Financing strategy to be fully developed by the time of the next review. - Authorities have hired a legal adviser and intend to hire a financial advisor soon to help design the framework for voluntary rollover commitments by the private sector. - Scope of PSI under discussion; likely to extend through at least mid-2014 and aim for wide private sector participation to substantially reduce Greece’s funding needs. - IMF staff cautioned against offering incentives for creditor participation that would negatively impact Greece’s debt dynamics and emphasized allowing time to develop proposals with creditors. ### Program modalities, targets, and conditionality - Key program targets and prior actions: - All end-March quantitative performance criteria were met, as was the continuous performance criterion on external arrears for end-June. - The end-March indicative target on the accumulation of new domestic arrears by the general government was missed in March; a waiver of applicability requested for end-June performance criteria (except external arrears). - End-March structural benchmarks (fiscal institutional reform, pension reform follow-up, bank restructuring, provision of new liquidity to banks) and end-April structural benchmark (publication of MTFS draft) were met, although with delays. - End-May structural benchmark on banks’ medium-term funding plans submission to ECB and BoG was observed. - End-June structural benchmarks on strategic plan for revenue administration, fiscal data publication, and single pay scale had not yet been observed but were expected with delay by end-July (single pay scale as part of new proposed benchmark for implementation of the second stage of the MTFS). - Prior actions completed to reassure implementation capacity (four prior actions): - Passage by Parliament of the medium-term fiscal strategy (detailing how deficits will be brought under 3 percent of GDP by 2014). - Passage of the first stage MTFS implementation legislation (covering 45 percent of the measures by value in the MTFS). - Passage of the agreed privatization and real estate development strategy (detailing objects and timeline). - Passage of the legislation establishing the privatization agency. ### Program monitoring: new quantitative and structural benchmarks - Quantitative performance criteria: - End-July 2011 performance criteria proposed; completion of the fifth review conditioned on their being met. - Fiscal targets for September and December 2011 reset to capture phasing of newly approved MTFS measures. - Definitions of fiscal performance criteria proposed to be maintained, with staff bias toward broadening them at future reviews to capture additional accrual elements (only with evidence of data progress). - A new quarterly performance criterion on cumulative privatization proceeds proposed to support monitoring of privatization strategy implementation. - Structural benchmarks: - New benchmarks specified to support program objectives: - Passage of legislation to implement second-stage pension reforms, the new civil service wage grid, and closure of extra-budgetary funds. - Achievement of targets set in the anti-tax evasion action plan to combat entrenched tax evasion and improve tax collection. - Legislation to strengthen the FSF operating framework and bank resolution framework to support timely, orderly, and effective bank intervention and resolution. ### Technical assistance - Authorities indicated plans to expand use of technical assistance to support timely and effective program implementation. - IMF technical assistance expected to continue in revenue administration, public financial management, and banking issues. - Complementary assistance from EU member states planned in areas linked to fiscal policy and structural reform initiatives, including: - Health and social security reforms (e-procurement, e-prescription, IT systems). - State enterprise reforms (performance reviews). - Growth-enhancing structural reforms (labor training). - Fiscal management reforms (administrative reorganization and budget monitoring systems). - Taxation reforms (anti-corruption reforms and audit techniques). - Discussions underway to ensure coordination with Fund technical assistance. ### Exceptional access criteria and assessment - Substantive criteria for exceptional access continued to be observed: - Exceptional balance of payments pressure: capital account pressures remain acute and Greece faces extremely high spreads with large rollover requirements generating financing needs well beyond normal Fund limits. - Debt sustainability on a forward-looking basis: very significant uncertainty around the baseline projection prevents staff from deeming debt sustainable with high probability. Meeting the high probability test is not required under the revised exceptional access policy when there is a risk of international systemic spillover effects, as is now the case in Greece. - Prospects to regain market access: markets attach a high probability that Greek debt will be restructured; until this risk abates, market access will not be possible on the scale necessary to repay Fund resources. The program provides time to change market perceptions by implementing fiscal adjustment and privatization plans; restoring growth and a declining debt ratio should allow market access to resume. The continuing commitment of euro area member states to backstop Greece is expected to help reassure markets. - Capacity to deliver the program: despite exceptional political and social pressures and administrative capacity constraints, authorities completed a first year of adjustment with significant fiscal and structural achievements and completed prior actions for the review. Deepened commitment to technical assistance in macro-critical areas provides reassurance about technical capacity. ### Financing assurances - Euro-area member states agreed to ensure required program financing is in place after accounting for PSI, as announced by the Eurogroup on July 2. - The amount of official support will depend on the success of the PSI initiative (a purely voluntary rollover scheme may yield very little). - Euro-area member states noted preparedness, based on Greece’s policy commitments and a revised financing strategy involving PSI, to launch a new medium-term program to support Greece’s adjustment efforts and secure medium-term balance of payments viability. - Allocation of financing between PSI and official sector commitments to be determined at the next review once the PSI process is clarified. *Source: _cr11175 - 31. The government emphasized its continued commitment to remove barriers to* ### 45. The authorities have the capacity to repay the Fund under the program baseline. ### 45. The authorities have the capacity to repay the Fund under the program baseline. ### Capacity to repay and Fund exposure - The authorities have the capacity to repay the Fund under the program baseline. - Indicators of Fund exposure are elevated but have improved since the last review given the change in the terms of EC loans (Table 19). - In the baseline, repayment to the Fund depends on restoring market access. - Risks to the Fund are mitigated by the Fund’s long-standing preferred creditor status in relation to other private and official bilateral creditors. ### Risks to the program - Policy implementation delays - Political commitment demonstrated to pass reforms despite social unrest and political pressures; with medium-term reforms passed and elections still distant, this risk has receded but remains significant given popular dissatisfaction with reforms. - Delays due to capacity problems or bureaucratic resistance have grown in potential importance, especially given the complexity of measures targeted in the MTFS. - Policy mitigation: tightly monitored front loaded implementation of measures and deeper technical assistance in the program. - Macroeconomic downside risks - Growing pressure on the banking system raises the prospect of a debilitating credit crunch, leading to depressed economic activity and mounting fiscal revenue shortfalls. - Mitigation: critical that the ECB withdraw its exceptional liquidity support to the banking sector at a pace consistent with the program’s macroeconomic framework (as envisioned in the context of banks’ medium-term funding plans). - Financing risks - The risk of delayed market access has materialized; an alternative financing strategy has been specified but is not without risks. - Private sector involvement (PSI) may generate a selected default rating for Greece, although perhaps only for a short period of time. - Continued eurosystem liquidity support for the banking system would be critical to contain the risks. - European policymakers should establish in advance how liquidity support would be made available. ### Staff appraisal — key findings - The program is delivering some important results: - The macro-economy is rebalancing, with demand shifting from domestic to external sources. - Competitiveness is gradually improving. - The fiscal deficit is being reduced despite a deep recession. - Greece faces a critical juncture: - Fiscal adjustment has run somewhat ahead of underlying structural and institutional changes. - Macro rebalancing has not yet benefited from structural-reform led productivity improvements, contributing to a deeper recession. - Market confidence has dropped sharply, putting pressure on the financial system. - Authorities’ policy package to move beyond the crossroads: - A medium-term fiscal strategy (MTFS) has been defined to secure targeted consolidation. - An ambitious privatization plan approved to transfer assets to the private sector and reduce government financing needs. - The financial sector strategy adjusted to confront vulnerabilities more aggressively. - Additional financing to support program policies has been identified. - Commendation and challenges - The MTFS is a major undertaking: defining 10 percent of GDP in measures to deliver a general government deficit under 3 percent of GDP by 2014. - The government confronted long-standing taboos: public employment terms, closing public entities, and broadening the tax base. - Privatization target: sell €50 billion in assets by end-2015; a Privatization Fund established to help insulate the process from political influence. - Implementation imperative - For program success, timely and determined implementation of fiscal and privatization agenda is essential. - Debt dynamics show little scope for deviation. - Prior actions implemented ahead of the review are a good start, but implementation risks are high and near-term targets will be challenging. - Authorities must strengthen capacity of Greek institutions, including improving revenue administration and public financial management. - Stronger oversight of fiscal institutional reforms, supported by continued technical assistance, is needed. - Broader public support for reforms is imperative through careful public explanation. - Structural reforms and competitiveness - Greece must tackle structural reforms more vigorously to strengthen competitiveness and better integrate into the euro area. - Timing and sequencing are crucial to realize synergies (e.g., privatization benefits require reduction of red tape). - Authorities’ efforts to address high labor tax wedge and weak judicial system are noted; concerns remain about capacity to manage reform effort. - New management process and technical assistance welcomed. - Banking sector and liquidity - Authorities must encourage banks to raise their capital buffer and strengthen the support and resolution framework. - Higher capital helps banks manage balance sheet risks; authorities’ efforts to have banks act on their own help limit use of scarce government resources. - Greece’s macroeconomic circumstances make collective capital raising challenging; an adequate safety net and wider menu of resolution tools should be in place by the next review. - Continued exceptional liquidity support from the ECB remains critical to program success; Greek banks cannot fully extricate themselves until sovereign market access problems are resolved. - Clarification that exceptional support will remain in place, in the context of agreed medium-term funding plans for banks, is crucial. - Expeditious approval by the ECB’s Governing Council of the use of new government-guaranteed bonds would help manage near-term liquidity risks. - The Bank of Greece must be prepared to utilize its whole toolkit of options, including ELA. - External support and PSI - Greece will take longer to regain capital market access, necessitating additional external support; euro area member states have agreed to provide this. - Public debate in Europe over PSI has been a major problem for securing confidence around the program. - Euro area member states need to decide how they wish to support Greece and put mechanisms in place to deliver support. - Comprehensive private sector involvement is appropriate given the scale of financing needs and desirability of burden sharing. - Greece’s debt service capacity may need to be bolstered by combining appropriate PSI and official support going forward. - Given PSI’s potential impact on Greece’s credit rating, euro area member states must guarantee liquidity support to Greece’s banking system while a PSI operation is undertaken. - Conclusion and staff recommendation - Greece has specified policies necessary to overcome inertia and deliver program objectives; the authorities need to implement these policies vigorously and timely. - Implementation will be the key subject for future reviews. - The program faces significant implementation risks but represents the best option to resolve Greece’s challenges and avoid broader contagion in Europe. - Staff supports the completion of the 4th review, the waiver of applicability of performance criteria, and the modification of performance criteria. ### Box 1 — Medium Term Fiscal Strategy (MTFS), 2011–14: key fiscal structural reforms and quantified measures - MTFS objective: define 10 percent of GDP in measures to deliver a general government deficit under 3 percent of GDP by 2014. - Reforms to reduce the wage bill (0.8 percent of GDP) - Public wage bill was 13 percent of GDP in 2009. - Euro area average wage bill: 10.5 percent of GDP, over 1995–2009. - OECD average wage bill: 11 percent of GDP, 2009. - MTFS aims to bring the wage bill to around 9-10 percent of GDP. - Retrenchment of public employment (0.3 percent of GDP) - Public employment would be reduced by about 20 percent by 2015. - Reductions via contract employment (0.2 percent of GDP), attrition policies (0.1 percent of GDP), and involuntary redundancies (0.1 percent of GDP, in addition to redundancies for closure of public entities). - Target: bring the ratio of public employment to labor force below the OECD average (14.4 percent, 2005). - Adjustments in public employee compensation (0.6 percent of GDP) - Prior to 2010 reform, public sector wage premium over private sector was about 11 percent after controls; 32 percent without controls. - Closure of non-essential public entities (0.5 percent of GDP) - About 6,000 public entities; around 1,500 in central government (precise number unknown). - Focusing on 300 autonomous agencies, total spending about 1.2 percent of GDP, mostly concentrated in wages and operational spending (60 percent of the total). - Immediate actions: legislation to be passed in July to close, merge or downsize 12 large entities; stock taking exercise to be completed in October to identify other entities for closure/merger in 2012 budget. - Streamlining and targeting pension and social benefits (1.9 percent of GDP) - After 2010 reform, main supplementary and lump sum pension funds remain in deficit. - Disability pensions are almost 50 percent higher than other EU countries as are pensions for arduous professions. - Total social spending is about 3 percent of GDP higher than in the rest of the Euro area. - MTFS measures: - Extend pension reform to supplementary (0.3 percent of GDP), lump sum (0.2 percent of GDP), disability and arduous profession pensions (0.2 percent of GDP). - Improve targeting of selected benefits (e.g., unemployment benefits). - A social spending review is in progress to inform further costed actions. - Broadening the tax base (2.9 percent of GDP) - Widespread exemptions and preferential treatments undermine yields from main taxes; MTFS aims to capture about half of these losses. - PIT: noncore deductions and credits lead to revenue losses of about 0.7 percent of GDP; PIT revenue was 4.8 percent of GDP. - Measures: cap tax deductions, reduce tax free threshold, introduce a broad-based low rate charge on personal incomes. - Property tax: yields at 0.2 percent of GDP; measures include reducing tax free threshold and increasing minimum rates. - VAT: selected VAT rate increases (e.g., on food and beverages sold by restaurants, bars etc.) to recover 0.4 percent of GDP; VAT administration leakages imply potential revenue losses of about 2 percent of GDP. ### Box 2 — Structural Reform Synergies - Product and labor market reform complementarity - Deregulation of product markets increases firms’ elasticity of labor demand, magnifying labor market deregulation effects on employment and output. - Empirical evidence: added benefit from coordination increases employment effect by up to 40 percent if reforms are sufficiently ambitious (or 20 percent under a more modest effort). - Upstream sector reforms produce downstream spillovers - Entry barriers in upstream sectors (e.g., transport services) reduce downstream competition through input-output linkages. - For Greece, total multifactor productivity gains in downstream sectors from adopting best practices in upstream sectors would be around 1.2 percent per year, with most gains from deregulation of wholesale and retail trade, transportation and storage, and renting of material and equipment and other business activities. - Complementarities between regulatory reforms and privatization - Privatization can increase efficiency, raise investment, and attract FDI, but ownership change alone is insufficient. - Required complementary actions: establish independent regulatory agencies, strengthen competition authority, promote investor protection and corporate governance, reduce red tape, simplify procedures, and ensure a well functioning judicial system. - Fiscal and financial reforms reinforce structural reforms - Wage moderation requires both private labor market reforms and fiscal reforms reducing government wage bill. - Measures to reduce tax wedge should be part of broader social security reforms. - Financial reforms protecting system stability are essential to ensure firms’ access to financing. *Source: Excerpts from the IMF staff appraisal and supporting boxes in the provided document.* ### Box 3. Experience with Private Sector Involvement ### Box 3. Experience with Private Sector Involvement ### Forms of PSI and historical cases - PSI has taken various forms: formal commitments by banks to maintain exposure, participation in debt operations, voluntary rollovers, and debt exchanges. - Key historical episodes discussed: - The Latin American debt crisis (1982 onward). - Brady deals in the late 1980s and early 1990s. - Debt operations in the 1990s and more recent years (e.g., Ukraine, Pakistan, Uruguay, the Dominican Republic, Jamaica, Ecuador, Russia, Seychelles). - Voluntary debt rollover initiatives during the Asian crisis and the 2008 global crisis (including the European Bank Coordination Initiative/Vienna Initiative). ### Latin American debt crisis — findings - Voluntary rollovers and capitalization of interest payments by foreign banks were central in the first phase after the Mexican default in 1982. - Participation was high, with average rollovers of 90 percent for major debtors. - Favorable US regulatory treatment allowing banks to hold debt at face value until provisioning began was a key element underpinning initial success. ### Brady deals — findings - Brady plans combined principal haircuts and long extensions of maturities at par with reduced interest rates or at discount with market rates. - The Brady plans were successful in addressing debt overhang and allowing a return to market access after a decade. - Participation was high, with haircuts averaging 40 percent of eligible debt. - The quasi-voluntary structure, menu of options (including new money), and ability to offer principal and interest guarantees contributed to avoiding lengthy litigation and facilitating creditor agreement. - High market rates on zero-coupon AAA assets enabled effective use of Fund and WB resources to purchase collateral at cheap face value. ### Debt operations (1990s and more recent years) — findings - Many restructurings were conducted on a preemptive basis through debt exchanges involving maturity extensions at pre-crisis interest rates. - NPV reductions varied by country and tended to be larger in post-default cases (examples: Ecuador, Russia, Seychelles). - Creditor participation rates generally exceeded 90 percent. - Debt workouts were typically completed in less than 2 years, with Argentina as a notable exception. - Successful PSI strategies combined incentives and coercion; limited availability of official financing provided a credible threat of default. - Other success factors included: effective communication with bondholders, minimum participation thresholds and exit consents, presence of collective action clauses, and additional incentives to reduce coordination problems. ### Voluntary debt rollover initiatives — findings - During the Asian crisis, PSI was mainly voluntary rollovers of short-term debt and interbank claims. - In Korea, rolled-over short-term debt was eventually converted into sovereign bonds with maturities between one and three years. - In Thailand, commitments by Japanese groups to maintain exposure were short-lived due to problems in parent banks. - During the 2008 global crisis, several Eastern European program countries secured voluntary commitments by foreign banks to keep subsidiaries adequately capitalized and liquid. - The European Bank Coordination Initiative (Vienna Initiative) achieved rollover rates on average exceeding 100 percent in the first year of the crisis. - Factors underpinning Vienna Initiative success: effective coordination between home and host authorities, financial and technical support from the Fund, EC, EIB, and other IFIs; a limited number of banks involved; parent-subsidiary relationships; lack of alternative lending opportunities during the global crisis; satisfactory loan performance in branches/subsidiaries; and adequate consolidated liquidity for parent banks. - As market conditions eased, demand and supply dynamics led to gradual reductions in exposures, notably by parent banks in Greece and other euro area periphery countries facing liquidity pressures at home. *Source: Box 3. Experience with Private Sector Involvement* ### Box 4. Greece: Spillover and Contagion Risks ### Box 4. Greece: Spillover and Contagion Risks ### Direct spillovers and key channels - Direct spillovers can remain manageable, provided that necessary safeguards (liquidity and capital backstops) and an effective communication strategy are put in place. - Two key direct channels: - Host-country exposure via Greek bank subsidiaries: - The countries most exposed to direct spillovers from Greece are those hosting Greek bank subsidiaries. These are concentrated in Southern Eastern Europe, with Greek banks accounting for over 20 percent of total bank assets and deposits in Bulgaria, FYR of Macedonia, and Albania. - Although signs of regional contagion have so far been limited, with relatively stable CDS spreads and no reported bank problems, fast deleveraging by Greek parent banks or deposit pressures in their subsidiaries could have significant macro-financial spillovers to these countries. - Foreign holdings of Greek government bonds (GGBs): - The foreign holdings of GGBs, estimated at about €180 billion as of end-May 2011, tend to be concentrated in European countries, notably in German and French banks (with some of the latter also exposed to private sector debt via their Greek subsidiaries). - Exposures appear manageable when compared to the size of the affected economies, averaging around 1½ percent of GDP, although exposure relative to bank equity is higher, and there are some concentrations of exposure in individual banks. - Beyond individual Euro area exposures, the ECB could also be directly affected by a broad debt operation in Greece, as a result of losses on its holding of Greek securities and its lending to Greek banks. - Provided factual exposure lines as presented in source: - Germany17.10.75.2 - France11.30.63.7 - UK2.60.20.5 - Italy1.80.10.8 - Belgium1.30.42.5 - USA1.10.00.1 - Switzerland0.50.10.4 - Spain0.40.00.2 - Others4.7...... - Total40.8 - 1/ BIS reporting banks, December 2010. ### Indirect spillovers and escalation scenarios - Risks could escalate dramatically under a poorly implemented debt operation without adequate safeguards, or under a disorderly default scenario. These instances could threaten stability in the euro area, with substantial spillovers to the global financial system. - Largely indirect spillover channels in an escalated episode: - Markets could assess a change in the “rules of the game”, in particular that Europe was willing to tolerate defaults. Risks would be repriced accordingly, with market pressures propagating to countries in the euro area with high debt-to-GDP ratios and growth/competitiveness problems. - Markets could also doubt the adequacy of the European safety net to deal with the emergence of generalized sovereign funding disruptions and sizable credit losses in the banking system. This could trigger deposit runs, and liquidity problems in the European banking system, which remains relatively highly leveraged (both in absolute terms and compared to the U.S. and U.K), and dependent on wholesale market funding. - Given the financial interconnectedness of the affected countries with the rest of the world, these shocks could quickly spread across the globe and generate heightened capital flow volatility. ### Indicators and observed market reactions (summary from figures and text) - Sovereign and bank market pressures observed: - Stock market and bank equity indices remain depressed, with bank equities leading declines. - Fair value bond spreads over Libor and sovereign 2-year and 10-year spreads surged to record highs in April 2011. - Sovereign 5-year credit default swap spreads increased on restructuring fears. - Regional exposure metrics: - Greek banks account for over 20 percent of total bank assets and deposits in Bulgaria, FYR of Macedonia, and Albania (textual statement preserved). - Foreign holdings of GGBs estimated at about €180 billion as of end-May 2011. - Exposures average around 1½ percent of GDP across affected economies, though relative exposure to bank equity is higher and concentrated in some institutions. ### Policy implications and necessary safeguards - Key prerequisites to keep direct spillovers manageable: - Establish liquidity backstops. - Establish capital backstops. - Implement an effective communication strategy to shape market expectations and avoid adverse repricing. - Risks of inadequate implementation: - Poorly implemented debt operations or disorderly defaults can prompt market repricing, doubts about the European safety net, deposit runs, liquidity stress in banks, and rapid global transmission of shocks. *Source: Box 4. Greece: Spillover and Contagion Risks (excerpts and figures as presented in the source content).* ### 1. Direct taxes21.48.914.320.34.13.920.620.5 ### 1. Direct taxes21.48.914.320.34.13.920.620.5 ### Revenue composition: direct and indirect taxes, transfers, and nontax revenue - Direct taxes (level series): 21.4 8.9 14.3 20.3 4.1 3.9 20.6 20.5 - Income taxes: 16.6 6.0 10.3 14.3 2.5 2.2 14.5 14.0 - PIT: 10.9 4.3 6.8 9.4 1.7 1.7 10.0 9.7 - CIT: 3.4 1.1 2.2 3.2 0.5 0.0 3.0 2.7 - Other: 2.3 0.6 1.3 1.7 0.3 0.4 1.5 1.7 - Property taxes: 0.5 0.1 0.4 0.5 0.2 0.0 0.9 0.7 - Tax arrears collection: 2.4 1.2 1.6 2.9 0.9 0.7 2.9 2.7 - Other direct taxes: 1.9 1.6 2.1 2.6 0.6 1.0 2.4 3.0 - Indirect taxes (level series): 28.3 14.8 22.0 31.0 8.3 7.1 31.0 30.3 - Transaction taxes: 17.9 8.9 13.6 18.5 5.3 4.7 18.6 18.5 - VAT: 16.6 8.4 12.8 17.4 5.0 4.5 17.5 17.5 - other: 1.3 0.5 0.8 1.1 0.3 0.2 1.1 1.0 - Consumption taxes: 9.6 5.5 8.0 11.8 2.8 2.2 11.4 10.7 - Tax arrears collections: 0.4 0.2 0.3 0.3 0.1 0.1 0.5 0.6 - Other indirect taxes: 0.4 0.2 0.3 0.4 0.1 0.1 0.4 0.4 - Transfers EU: 0.3 0.1 0.2 0.3 0.1 0.0 0.3 0.2 - Nontax revenue: 2.3 1.4 2.1 2.8 0.5 0.6 4.3 4.6 - One-off revenue: 1.1 0.9 1.2 1.8 0.5 0.3 2.1 2.1 - Tax Refunds (-): 5.0 2.3 3.3 5.0 0.9 0.8 3.8 3.8 ### Public investment and EU flows - Public investment budget: 2.0 0.4 1.3 3.1 0.0 0.6 3.9 3.9 - A. EU flows: 1.9 0.3 1.2 2.8 0.0 0.0 3.7 3.7 - B. Own revenues: 0.2 0.1 0.2 0.3 0.0 0.6 0.2 0.2 ### Expenditure totals and components (percent of GDP) - Total expenditure 1/: 83.6 34.1 54.4 74.7 17.7 16.4 78.8 75.9 - Total ordinary spending: 70.3 30.2 48.4 64.9 15.6 15.3 68.2 66.4 - Total ordinary primary spending: 58.0 24.5 36.8 51.7 12.3 12.1 52.1 50.4 - Major ordinary spending components: - A. Remuneration and pensions: 25.2 11.3 16.9 22.8 5.3 5.1 21.6 21.6 - B. Insurance and Healthcare: 17.6 7.4 10.7 15.7 4.2 4.2 16.1 15.4 - C. Operating and other expenditure and returned resources: 14.5 5.4 8.6 12.6 2.6 2.5 13.3 12.3 - D. Payments in exchange of claims of insurance fund 2/: 0.8 0.4 0.5 0.6 0.2 0.2 0.6 0.6 - E. Reserve: ............ 0.1 0.0 0.6 0.6 - Interest expenditure: 12.3 5.7 11.7 13.2 3.2 3.2 16.1 16.0 - Transfers to hospitals for the settlement of past debt 3/: 1.5 0.0 0.3 0.4 0.2 0.4 0.5 0.5 - Investment spending: 9.6 3.7 5.4 8.4 1.6 0.7 8.5 7.6 - Spending on military procurement: 2.2 0.2 0.2 1.0 0.4 0.1 1.6 1.5 - State Budget primary spending 1/ (variable monitored for PC): 71.3 28.4 42.4 61.1 14.3 13.4 62.7 60.1 ### Balances and fiscal aggregates - Balance state budget 1/: -33.1 -9.9 -16.5 -20.5 -5.3 -4.7 -20.4 -18.1 - II. Balance local governments 1/ 4/: 0.0 0.3 0.1 -0.4 0.0 0.2 0.0 -0.1 - III. Balance social security funds 1/ 4/: 0.5 -0.1 1.0 1.7 0.2 0.6 0.7 0.8 - IV. Balance of extra-budgetary funds (ETERPS) 1/ 4/: ............ 0.1 0.1 0.2 0.4 - V. Called guarantees from non-general govt entities: ............ 0.0 0.0 -0.2 -0.2 - VI. Change in arrears of line ministries: ............ 0.0 -0.2 0.0 0.0 - VII. Change in arrears of NHS hospitals: ............ 0.0 -0.2 0.0 0.0 - VIII. Balance of reclassified public enterprises 1/ 4/: .................. -1.0 -0.3 - IX. Modified general government cash balance 5/: -32.5 -9.7 -15.5 -19.3 -5.1 -4.2 -20.6 -17.5 - of which: Modified general government primary cash balance (variable monitored for PC): ... -3.9 -3.5 -5.7 -1.9 -0.9 -4.5 -1.5 - X. Adjustments 6/: -3.6 ...... -2.7 ...... 1.8 0.4 - XI. General government balance (ESA 95) before measures: -36.1 ...... -22.0 ...... -18.8 -17.1 - XII. To be identified measures: .................. 1.8 0.0 - XIII. General government balance (ESA 95) incl. measures: -36.1 ...... -22.0 ...... -17.0 -17.1 - Memorandum items: - Floor on the modified general government primary cash balance: ... -3.9 -3.5 -5.7 -2.0 -0.9 ... -1.5 - Ceiling on state budget primary spending: ... 28426115136360 - Source line: Source: Greek Ministry of Finance and Fund staff projections. - Footnotes: 1/ Including measures taken in the context of the Medium Term Fiscal Strategy, passed by parliament on June 29, 2011. - 2/ For the personnel of the Public Power Company. - 3/ Such transfers are excluded from spending for measurement of the PCs in 2010. - 4/ Change in net financial assets. Excludes valuation changes. - 5/ Including balances of reclassified public enterprises - 6/ Cash to accrual, coverage, and other ESA adjustments. ### Macro-structural reforms (selected indicators and status) - Employment protection: Law 3863/2010, July 15 2010. Implementation completed. - Collective bargaining, mediation and arbitration: Law 3899/2010, Dec. 14, 2010. Implementation completed. - Special Firm Level Collective Agreements implemented (eop, cumulative): 0 (2010) → 1 (Q1 2011) → 6 (2011Q2 1/) - estimated average wage reduction in SFLCA (in percent): 0 → 0 → 6-8 - Liberalization of regulated professions: Law 3919/2011, Feb. 22, 2011. Implementation to be completed by July 2, 2011. - Number of restrictions reapplied for: 1 - Number of identified professions subject to new law: 141 - Liberalization of road freight transportation: Law 3887/2010, Sept. 28, 2010. Implementation to be completed by Q3 2012. - Number of new licenses issued: 0 0 0 - Average price of licenses in the secondary market: 100,000 15,000 15,000 - Liberalization of cruise ships (cabotage): Law 3872/2010, Aug. 31, 2010. Implementation completed (contracts signed 2 years ahead). - Number of new contracts signed: 0 1 - Number of non-EU flag ships departing from and terminating in a Greek port: 0 0 - Number of new business start-ups: 1,386 - Number of businesses registered in the Electronic Registry: 8,635 - Number of one-stop shops: 1,939 - Simplification of business and environmental licensing: Law L3982/2011 passed in June, implementation of main decrees to be finalized by Q3-2011. - Strengthening the Competition Authority: Law passed in April 2011. Implementation in progress. ### Medium-Term Macro Framework, 2010-16 (selected projections) - Real GDP: -4.5 -3.9 0.6 2.1 2.3 2.7 2.9 - Output gap (percent of pot. output): 0.1 -3.4 -3.5 -2.4 -1.5 -0.4 0.0 - Total domestic demand: -5.9 -6.0 -1.9 1.0 1.4 1.8 1.8 - Private consumption: -4.6 -4.9 -1.2 1.1 1.2 1.4 1.3 - Public consumption: -8.3 -8.4 -5.0 -1.0 -0.3 0.3 0.6 - Gross fixed capital formation: -16.5 -8.8 -1.5 2.7 4.0 5.0 5.4 - Exports of goods and services: 3.8 6.4 6.7 6.5 6.6 6.8 6.3 - Imports of goods and services: -4.8 -4.2 -3.3 1.9 2.8 3.2 2.4 - Unemployment rate (percent) 1/: 12.5 15.8 16.2 15.0 14.5 13.3 12.0 - Consumer prices (HICP), end of period: 5.2 2.1 0.6 0.9 1.0 1.0 1.3 - Total revenues (percent of GDP): 39.0 40.9 42.2 41.9 42.0 41.6 40.2 - Total expenditures (percent of GDP): 49.4 48.5 48.8 46.7 44.7 43.1 42.4 - Overall balance (percent of GDP): -10.4 -7.6 -6.5 -4.8 -2.6 -1.5 -2.2 - Primary balance (percent of GDP): -4.9 -0.8 1.5 3.6 6.4 7.7 6.4 - Gross debt: 143 166 172 170 160 146 143 ### Balance of Payments summary (2009–16) — key lines (billions of euro and percent of GDP) - Current account balance (billions): -25.8 -24.1 -18.6 -16.2 -14.8 -14.6 -13.1 -10.2 - Current account balance (percent of GDP): -11.0 -10.4 -8.2 -7.1 -6.3 -6.0 -5.2 -3.9 - Balance of goods and services (billions): -18.1 -15.0 -9.5 -6.7 -3.9 -1.3 1.2 4.0 - Goods balance (billions): -30.8 -28.3 -26.2 -26.0 -25.4 -25.2 -25.0 -24.9 - Exports (billions): 15.3 17.1 19.3 20.8 22.4 24.2 26.4 28.8 - Imports (billions): 46.1 45.4 45.6 46.8 47.8 49.4 51.4 53.6 - Services balance (billions): 12.6 13.2 16.7 19.3 21.5 23.9 26.3 28.9 - Income balance (billions): -9.0 -9.2 -10.0 -10.3 -11.7 -14.1 -15.2 -15.2 - Capital and financial account balance (billions): 26.4 -7.4 -48.3 -26.5 -13.4 2.9 13.1 10.2 - External debt (percent of GDP): 174.1 178.1 183.9 182.0 175.9 170.4 166.1 164.4 - Public sector: 114.6 120.4 145.7 145.3 139.7 127.3 112.1 105.9 - Private sector: 59.4 57.8 38.2 36.8 36.2 43.1 54.0 58.5 ### General Government operations (2009–15) — headline fiscal aggregates - Revenue (billion euro): 87.7 89.9 95.6 91.9 96.3 98.4 102.1 104.7 - Taxes on production, and imports (billion euro): 26.1 28.6 31.0 29.4 31.6 32.6 34.7 35.7 - Taxes on income, and property (billion euro): 19.0 17.4 17.7 16.7 17.9 18.5 19.9 21.2 - Social contributions (billion euro): 29.5 29.7 30.0 29.4 29.7 29.9 31.0 31.4 - Other (billion euro): 9.9 9.6 12.4 11.8 12.5 12.5 13.0 12.9 - Primary expenditure (billion euro): 111.8 101.3 99.4 93.8 93.0 90.1 86.5 85.3 - Wages (billion euro): 30.6 27.2 27.7 24.7 23.4 21.6 20.3 20.4 - Social benefits (billion euro): 48.8 47.4 48.9 45.1 44.7 44.6 43.5 43.7 - Goods and services (billion euro): 17.2 13.3 10.0 11.8 12.1 11.2 9.9 8.3 - Capital (billion euro): 11.5 9.4 8.7 8.3 8.9 8.8 8.8 8.8 - Primary balance (billion euro): -24.1 -11.4 -2.0 -1.9 3.3 8.4 15.6 19.4 - Interest payments (billion euro): 12.3 12.6 15.0 15.2 18.2 19.7 22.0 23.1 - Overall balance (billion euro): -36.5 -24.0 -17.0 -17.1 -14.9 -11.4 -6.4 -3.7 - Gross debt (Maastricht, percent of GDP): 298.7 328.6 345.6 373.2 392.2 399.1 388.1 368.5 - Same aggregates in percent of GDP (selected): - Revenue: 37.3 39.0 42.3 40.9 42.2 41.9 42.0 41.6 - Primary expenditure: 47.6 44.0 44.0 41.7 40.8 38.3 35.6 33.9 - Primary balance: -10.3 -4.9 -0.9 -0.8 1.5 3.6 6.4 7.7 - Interest payments: 5.2 5.5 6.6 6.8 8.0 8.4 9.0 9.2 - Overall balance: -15.5 -10.4 -7.5 -7.6 -6.5 -4.8 -2.6 -1.5 - Gross debt (Maastricht): 127 143 153 166 172 170 160 146 ### Fiscal measures (2011-14) — totals and selected items - Total measures: 24,220 Millions of Euro; In percent of GDP: 10.4 - Rationalization of the public wage bill: 2,124 Millions of Euro; 0.9 percent of GDP - Reduction of public employment: 689; 0.3 - Reduction in contract employment: 329; 0.1 - Labor reserve (Furlough): 240; 0.1 - Others: 120; 0.1 - Adjustment in public employees' compensations: 1,435; 0.6 - Single public sector wage scale and reduction automatic wage drift: 800; 0.3 - Others: 635; 0.3 - Closure of non essential public entities and agencies: 1,090; 0.5 - Reduction in grants to entities outside the general government: 490; 0.2 - Closure of identified public entities: 300; 0.1 (Include closure of 12 large entities in 2011) - Others: 300; 0.1 - Improvement in the performance of state enterprises: 1,040; 0.4 - Increase in tariff and other revenue: 315; 0.1 (Tariff increase in 2013-2014) - Reduction in personnel and other costs: 560; 0.2 - Others: 165; 0.1 - Streamline and better targeting of social benefits: 2,092; 0.9 - Strengthening means testing: 791; 0.3 - Review of social benefits: 980; 0.4 - Others: 321; 0.1 - Pension reforms: 2,361; 1.0 - Supplementary pensions: 760; 0.3 - Lump sum pensions: 350; 0.2 - Disability pensions: 405; 0.2 - Others: 846; 0.4 - Health sector reforms: 1,659; 0.7 - Central procurement system: 275; 0.1 - Pharmaceutical spending: 1,043; 0.5 - Others: 341; 0.1 - Elimination of tax exemptions and special tax regimes, and increases in contributions: 8,276; 3.6 - Reduction in the tax free PIT threshold: 1,350; 0.6 (From €12,000 to €8,000) - Solidarity charge: 1,367; 0.6 (Low rate charge (1-4 percent) levied on personal income (no deductions)) - Property taxation: 800; 0.3 (Low threshold (€200,000), higher minimum rate, 2 year re-evaluations) - Minimum tax on self employed: 400; 0.2 - Increases in social security contributions (not related to pensions): 1,741; 0.7 - Others: 2,619; 1.1 - Improvement in the administration of taxes and social security contributions: 3,295; 1.4 - Improvements in revenue administration: 2,308; 1.0 - Improvements in the administration of social security contribution: 987; 0.4 - Others: 2,282; 1.0 - Reduction in operational expenses: 766; 0.3 - Reduction in operational defense expenses: 267; 0.1 - Improved performance of local governments: 745; 0.3 - Rationalization of the public investment budget: 504; 0.2 (Including investment incentives) ### Revenue collection process — issues, actions taken, and next steps (selected) - Stage 1: Assessment - Issues: Taxpayer services are decentralized or non-existent. Tax returns can only be filed if tax due is paid in full. About 30 percent of VAT returns are not filed or filed late. - Actions taken: Legislation allowing acceptance of VAT tax returns without full payment of taxes contingent to installment arrangements (March 2011). - Next steps: Centralized Taxpayer Service Directorate to be established following presentation of medium term strategic plan (September 2011). - Stage 2: Control - Issues: Weak and decentralized filing and payment enforcement with procedures not automated. Data gathering is ad hoc with no central control for monitoring and enforcing compliance. - Actions taken: Anti-evasion plan: task force to strengthen filing enforcement through centralized control with defined performance targets (early 2011). Legislation approved obliging electronic submission of income tax returns by legal entities (March 2011). - Next steps: Monitor progress towards achieving performance targets (Monthly reports, 2011). - Audit selection and execution - Issues: Legal requirement to audit all tax returns generally prevents prioritization and risk-based selection. Potentially large tax evasion: about 70 percent of self employed professionals declaring taxable income below minimum exemption threshold. - Actions taken: Anti-evasion plan (early 2011): task forces to secure control of top 1200 taxpayers, and high wealth individuals and self-employed. Legislative obligation of auditing all tax returns eliminated (March 2011). High risk case to be subject to audit identified (April 2011). - Next steps: Monitor progress towards task forces' performance targets (Monthly reports, 2011). Administrative changes required to eliminate mandatory audits for all returns and introduce risk-based audits (2011). Following the medium-term strategic plan, introduce a risk-based compliance framework and create a large taxpayer unit (July 2011). - Audit assessment and collection - Issues: Limited use of indirect methods of assessment. Limited legal gateways to collect third party information. Audit process not centralized. Collection of assessed tax low. - Actions taken: Anti-evasion plan to implement centralized audits of top 1200 taxpayers and high wealth individuals (early 2011). Legislation approved to centralize and strengthen some audit functions, and enforce data transfers from identified parties (March 2011). Administrative and legislative measures enacted to allow data collection from third parties (March 2011). - Next steps: Administrative and legislative measures to be enacted to allow better use of indirect methods of assessment (2011). *Source: Greek Ministry of Finance; IMF staff projections; Greece authorities; Bank of Greece; IMF staff estimates.* ### 3. Enforcement ### 3. Enforcement ### Tax dispute resolution: findings - Average time to resolve tax disputes in judicial appeals process is 7 to 12 years and has created a huge backlog of pending cases (140,000-160,000). - Administrative tax dispute process not independent from tax administration. - Pre-payment prior to the judicial appeal largely waived by courts. ### Tax dispute resolution: actions taken - Legislation adopted to reform the judicial appeal process (October 2010). - Legislation adopted to Parliament to allow the reform of the administrative tax dispute process and create an independent arbitration system. Legislation aims at: reducing the judiciary dispute period (no longer than 3 years), increasing the payment to access the judicial appeal process, and reducing the instances for payment suspensions granted by courts (March 2011). ### Tax dispute resolution: next steps - An independent fast track administrative dispute resolution process to be established to deal rapidly with large dispute cases (July 2011). - The newly established arbitration agency to be operative (September 2011). ### Collection enforcement: findings - Appealed tax assessments and tax arrears (including penalties and fines) are collected. - Poor collection enforcement: collection of fines and penalties around 1 percent, debt collection not centralized. ### Collection enforcement: actions taken - Anti-evasion plan: a taskforce is in place to coordinate centrally and accelerate collection of tax debt with defined performance targets (early 2011). - Legislation approved to facilitate collection of tax debt (March 2011). ### Collection enforcement: next steps - Monitor progress towards achieving performance targets (Monthly reports 2011). *Source: IMF staff* ### APPENDIX I. DEBT SUSTAINABILITY ANALYSIS ### APPENDIX I. DEBT SUSTAINABILITY ANALYSIS ### A. Assumptions - The DSA updated to reflect delayed market re-access, new financing from the EC and via private sector involvement, and the new ambitious privatization program. - Public and external debt sustainability hinges on full and timely implementation of fiscal, privatization, and structural reforms, macroeconomic developments in line with program projections, and the restoration of market access at reasonable terms in the post-program period. - Macro assumptions: - GDP growth: Real growth lowered by ¾ percent in 2011 and ½ percent in 2012. Medium term returns to the path envisaged at the third review. Growth projected to average 1¾ percent over 2012–14, and 2.9 percent over 2015–20. - Deflator: GDP deflator moderately increased, reflecting higher oil prices and tax increases. For the medium term, deflator follows trend of inflation, which stays below the Euro area target throughout the projection period. - Terms of trade: Expected to improve by about 1½ percentage points in 2011. Average oil prices for 2011 increased to $106 per barrel, compared to $95 at the third review, and expected to decline only gradually below $100 by end-2016. - External demand: External demand expected to slightly improve, with an increase of imports of goods by almost ½ percentage points in 2011 and a further ½ percentage point on a cumulative basis for the remainder of the program period. - Policy assumptions: - Fiscal adjustment: Primary balances for 2015 and the medium term revised slightly upward (7½ percent of GDP versus 6¼ percent of GDP for 2015; and 6½ percent of GDP vs. 6 percent of GDP before). - Privatization: Receipts revised up to reflect target of €50 billion over 2011–15. Inflows assumed to scale up: €3 billion in 2011; €7.5 billion in 2012; €11 billion in 2013; €13.5 billion in 2014; and €15 billion in 2015. - Arrears clearance: Total amount of €5.1 billion in arrears (stock excluding arrears to the civil servants’ welfare fund and pre-2010 health arrears) assumed to be cleared, spread over 2011–13. Remaining €4.5 billion stock of pre–2010 health arrears assumed settled in 2011. - Deposit buffer: Financing framework builds a deposit buffer of up to €10 billion (about 1½ month of expenditures, or a medium-sized bond redemption) by mid-2014. - FSF funding: Baseline assumes an additional contribution to the FSF of €16 billion, disbursed to banks in the near term, with government recovering equity investment by 2014–15. - Financing assumptions: - Private sector involvement (PSI): Voluntary rollovers/maturity extensions assumed to reduce financing needs by €33 billion through June 2014. New bonds assumed 5-year maturity and coupon equal to existing coupon. Participation assumed to include Euro-area banks (including Greek banks) and Greek social security funds, with 100 percent take up. ECB and foreign non-bank entities assumed non-participants. - Official support: Additional support from euro area member states of €71 billion assumed through June 2014 (on top of €80 billion in the existing program). EC loans recorded on newly agreed terms: interest rate 200 bps above 3-month Euribor up to three years, and after that at 300 bps; principal repayments between 4½ and 10 years from disbursement. Fund lending remains at €30 billion on SBA terms. - Market access: Greece assumed to return to the market in the second half of 2014. Spreads on 10 year bonds over German bunds assumed to gradually fall from 675 bps in 2014 to 250 bps in 2020. - ECB liquidity support: Domestic banks’ exposure to the ECB expected to decline gradually to below €70 billion by May 2013. Retail and wholesale funding sources projected to recover very slowly. ### B. Fiscal DSA - Baseline projection: - Debt expected to eventually decline. Debt would peak at 172 percent of GDP in 2012 but fall to 130 percent of GDP by end-2020. - Positive impact of larger privatization receipts offset by deposit accumulation, arrears clearance, higher stock flow adjustments, higher FSF needs, and more cautious growth and spread assumptions. - Importance of full and timely implementation: - Incomplete fiscal adjustment: If primary balance remains around -1 percent of GDP (2011 target), 1½ percent of GDP (2012 target), 2 percent of GDP, or 3½ percent of GDP (2013 target), debt would either stall at around 155 percent of GDP or become clearly unsustainable. - Privatization shortfalls: If only €10 of €50 billion realized, debt would remain above 150 percent of GDP through 2020. - Sensitivity to macro outcomes: - Growth: Permanently lower growth (-1 percentage point each year) would render debt unsustainable; higher growth (+1 percentage point each year) would lead to debt below 100 percent of GDP by 2020. - Spreads: Spreads must drop to secure a sustainable trajectory; if spreads are 150 bps higher than baseline, debt-to-GDP converges to 134 percent of GDP by 2020. - REER adjustment: With deflator lower by 1 percentage point each year but nominal fiscal targets met through 2015, debt would peak at 174 percent of GDP and end at 147 percent of GDP by 2020; decline between 2015 and 2020 would slow from 16 percentage points of GDP to 7 percentage points of GDP. - Tailored downside scenario (assumptions and impact): - Assumptions: (i) growth lower by 1 percentage point each year compared to baseline until 2016; (ii) higher interest rate spreads (+150 bps until 2016); (iii) higher overall fiscal deficits (primary balance frozen at 6 ½ percent of GDP, deficit below 3 percent of GDP only after 2030); (iv) lower privatization proceeds (only €10 billion); (v) higher contingent banking liabilities (extra €10 billion). - Impact: Debt would peak at 186 percent of GDP in 2015 and remain above 178 percent of GDP in 2020. - Private sector involvement alternatives: - Failure of PSI but full official financing: If PSI entirely fails but additional official financing on EFF terms provided, debt dynamics similar to baseline; debt would peak at 165 percent of GDP and be 132 percent of GDP by end-2020. - Alternatively structured PSI (illustrative): - Debt exchange with 85 percent participation of all non-ECB bond holders, 10-year maturity extension, coupon 1 percentage point lower: debt would fall to 125 percent of GDP by 2020; official additional assistance lower at €52.7 billion. - Rollover with 3-year maturity extension and 4 percentage point higher coupon: debt would converge to 136 percent of GDP; spreads likely higher. ### C. External DSA - Baseline external debt dynamics: - Net debt-to-GDP ratio projected to peak at 115 percent of GDP in 2012 (about 9 percentage points higher than previous baseline), then decline to 104 percent of GDP in 2015 (about 2¾ percent of GDP lower than previous baseline). - Improved end-point reflects improved external outlook, more favorable EC loan terms, and voluntary bond rollovers with market access delayed to mid-2014. - Sensitivity analysis — vulnerabilities: - Faster REER adjustment: Quicker internal devaluation with lower GDP deflator growth and nominal GDP would increase external debt ratio in short term to 117 percent of GDP, but medium-term dynamics would remain downward as competitiveness improves. - Higher interest rates: An additional 150 basis points would raise the debt ratio by 4 percentage points of GDP in 2016 relative to baseline; impact partly mitigated by delayed market return and increasing share of official debt (average increase in implied interest rate on stock of total external debt equivalent to 50 basis points). - Higher current account deficits: A terms-of-trade shock of about 5 percentage points or weaker competitiveness would raise the non-interest current account deficit by 1¼ percent of GDP relative to baseline, increasing the debt ratio by about 8 percentage points of GDP in 2016 and setting external debt on an unsustainable path. *Source: APPENDIX I. DEBT SUSTAINABILITY ANALYSIS (as provided).* ### 10. Policy slippages would also be critical, especially if generating more debt ### 10. Policy slippages would also be critical, especially if generating more debt creating flows. ### Risks from policy slippages and specific shocks - Lower FDI scenario: - Assumption: Delays in the fiscal privatization program (€10 billion compared to €50 billion in the baseline) and/or lower than expected foreign participation. - Impact on FDI: reduce FDI by about €30 billion. - Impact on public debt: debt ratio would deteriorate by 11 percentage points of GDP compared to the baseline. - Tailored downside / combined shock scenario: - Features: delayed program implementation and macro underperformance, higher spreads, loss of market share (see fiscal DSA discussion). - Impact on external debt: external debt would remain on an upward sloping path reaching 126 percent of GDP by 2016. - Scenario components referenced in figures and tables: - Interest rate shock: market interest rates on sovereign issuance higher by 150bps during the projection period, resulting in a shock of 50bps to the implied interest rate on the total stock of external debt. - Current account shock: current account deficit higher by a 1.3 percent of GDP due to delayed macro adjustment and term-of-trade shock. - FDI shock: decline in FDI due to a delay in the privatization program. - Combined shock scenario: combines the above, producing external debt of 126 (percent of GDP) by 2016 in the figure. ### Key public sector DSA baseline projections and mechanics (selected figures) - Baseline: Public sector debt (general government) (in percent of GDP): - 2008: 111 - 2009: 127 - 2010: 143 - 2011: 166 - 2012: 172 - 2013: 170 - 2014: 160 - 2015: 146 - 2016: 143 - 2017: 140 - 2018: 138 - 2019: 134 - 2020: 130 - Change in public sector debt (in percent of GDP): - 2008: 5.3 - 2009: 16.4 - 2010: 15.6 - 2011: 23.2 - 2012: 6.2 - 2013: -2.3 - 2014: -10.0 - 2015: -13.4 - 2016: -3.0 - 2017: -3.1 - 2018: -2.7 - 2019: -3.5 - 2020: -3.7 - Identified debt-creating flows (4+7+12) (in percent of GDP): - 2008: 6.4 - 2009: 18.0 - 2010: 16.6 - 2011: 23.2 - 2012: 6.2 - 2013: -2.3 - 2014: -10.0 - 2015: -13.4 - 2016: -3.0 - 2017: -3.1 - 2018: -2.7 - 2019: -3.5 - 2020: -3.7 - Primary deficit (in percent of GDP): - 2008: 4.8 - 2009: 10.3 - 2010: 4.9 - 2011: 0.8 - 2012: -1.5 - 2013: -3.5 - 2014: -6.4 - 2015: -7.7 - 2016–2020: -6.4 (each year) - Revenue and grants (in percent of GDP): 2008: 39.8; 2009: 37.3; 2010: 39.0; 2011: 41.0; 2012: 41.9; 2013: 41.7; 2014: 41.7; 2015: 41.4; 2016: 40.0; 2017: 39.4; 2018: 39.2; 2019: 38.9; 2020: 38.5 - Primary (noninterest) expenditure (in percent of GDP): 2008: 44.7; 2009: 47.6; 2010: 44.0; 2011: 41.8; 2012: 40.4; 2013: 38.2; 2014: 35.3; 2015: 33.7; 2016: 33.5; 2017: 33.0; 2018: 32.7; 2019: 32.5; 2020: 32.1 - Automatic debt dynamics (in percent of GDP): - 2008: 0.6 - 2009: 6.1 - 2010: 8.0 - 2011: 10.2 - 2012: 5.8 - 2013: 3.2 - 2014: 3.6 - 2015: 3.6 - 2016: 3.0 - 2017: 2.9 - 2018: 3.3 - 2019: 2.6 - 2020: 2.4 - Other identified debt-creating flows (in percent of GDP): - 2008: 1.0 - 2009: 1.5 - 2010: 3.6 - 2011: 12.2 - 2012: 1.8 - 2013: -1.9 - 2014: -7.1 - 2015: -9.3 - 2016: 0.5 - 2017: 0.4 - 2018: 0.4 - 2019: 0.4 - 2020: 0.4 - Privatization receipts (negative, in percent of GDP): - 2008: 0.0 - 2009: -0.4 - 2010: 0.0 - 2011: -1.3 - 2012: -3.3 - 2013: -4.7 - 2014: -5.6 - 2015: -6.0 - 2016–2020: 0.0 (each year) - Recognition of implicit or contingent liabilities (in percent of GDP): - 2008: 1.0 - 2009: 0.3 - 2010: 1.0 - 2011: 12.3 - 2012: 3.4 - 2013: 1.7 - 2014: -2.0 - 2015: -3.3 - 2016: 0.5 - 2017: 0.4 - 2018: 0.4 - 2019: 0.4 - 2020: 0.4 - Residual, including asset changes (2-3) (in percent of GDP): - 2008: -1.1 - 2009: -1.6 - 2010: -1.1 - 2011–2020: 0.0 (each year, for projections) - Public sector debt-to-revenue ratio (in percent): - 2008: 277.9 - 2009: 340.5 - 2010: 365.5 - 2011: 404.7 - 2012: 410.6 - 2013: 407.1 - 2014: 383.0 - 2015: 353.6 - 2016: 358.7 - 2017: 355.5 - 2018: 351.2 - 2019: 344.7 - 2020: 338.2 - Gross financing need (in percent of GDP): - 2008: 9.8 - 2009: 15.5 - 2010: 18.9 - 2011: 22.3 - 2012: 19.6 - 2013: 16.6 - 2014: 19.2 - 2015: 19.2 - 2016: 20.7 - 2017: 28.2 - 2018: 23.5 - 2019: 31.2 - 2020: 23.2 - Gross financing need (in billions of U.S. dollars) (selected years shown): - 2008: 34.2 - 2009: 50.8 - 2010: 56.9 - 2011: 64.3 - 2012: 57.1 - 2013: 49.5 - 2014: 59.0 - 2015: 60.7 - 2016: 68.3 - 2017: 97.1 - 2018: 84.4 - 2019: 117.4 - 2020: 91.6 ### Key external DSA baseline projections and mechanics (selected figures) - Baseline: External debt (in percent of GDP): - 2006: 62.0 - 2007: 67.7 - 2008: 74.4 - 2009: 85.8 - 2010: 104.4 - 2011: 113.0 - 2012: 114.7 - 2013: 112.5 - 2014: 109.1 - 2015: 104.3 - 2016: 101.7 - Change in external debt (in percent of GDP): - 2006: 3.9 - 2007: 5.7 - 2008: 6.8 - 2009: 11.3 - 2010: 18.7 - 2011: 8.6 - 2012: 1.6 - 2013: -2.2 - 2014: -3.4 - 2015: -4.8 - 2016: -2.6 - Identified external debt-creating flows (4+8+9) (in percent of GDP): - 2006: 3.9 - 2007: 4.7 - 2008: 10.2 - 2009: 10.8 - 2010: 12.3 - 2011: 9.7 - 2012: 4.0 - 2013: 1.0 - 2014: 0.5 - 2015: -0.6 - 2016: -2.0 - Current account deficit, excluding interest payments (in percent of GDP): - 2006: 9.1 - 2007: 11.8 - 2008: 11.5 - 2009: 8.4 - 2010: 7.6 - 2011: 4.8 - 2012: 3.5 - 2013: 2.3 - 2014: 1.4 - 2015: 0.4 - 2016: -0.7 - Exports (in percent of GDP): - 2006: 21.2 - 2007: 21.5 - 2008: 22.7 - 2009: 18.0 - 2010: 19.8 - 2011: 22.3 - 2012: 23.8 - 2013: 25.0 - 2014: 26.1 - 2015: 27.3 - 2016: 28.5 - Imports (in percent of GDP) (note formatting in source): - 2006: 30.6 - 2007: 32.5 - 2008: 34.1 - 2009: 25.7 - 2010: 26.3 - 2011: 26.5 - 2012: 26.7 - 2013: 26.6 - 2014: 26.7 - 2015: 26.8 - 2016: 27.0 - Net non-debt creating capital inflows (negative, in percent of GDP): - 2006: -3.2 - 2007: -5.3 - 2008: -1.4 - 2009: -0.8 - 2010: 0.1 - 2011: -1.0 - 2012: -1.7 - 2013: -1.8 - 2014: -1.9 - 2015: -2.0 - 2016: -1.9 - Automatic debt dynamics (in percent of GDP): - 2006: -2.0 - 2007: -1.7 - 2008: 0.0 - 2009: 3.2 - 2010: 4.5 - 2011: 5.9 - 2012: 2.1 - 2013: 0.5 - 2014: 1.0 - 2015: 1.0 - 2016: 0.6 - Contribution from nominal interest rate (in percent of GDP): - 2006: 2.2 - 2007: 2.6 - 2008: 3.1 - 2009: 2.6 - 2010: 2.8 - 2011: 3.4 - 2012: 3.6 - 2013: 4.0 - 2014: 4.6 - 2015: 4.8 - 2016: 4.6 - Contribution from real GDP growth (in percent of GDP): - 2006: -2.4 - 2007: -2.6 - 2008: -0.8 - 2009: 1.5 - 2010: 4.1 - 2011: 4.0 - 2012: -0.7 - 2013: -2.3 - 2014: -2.5 - 2015: -2.8 - 2016: -2.9 - Contribution from price and exchange rate changes (in percent of GDP): - 2006: -1.7 - 2007: -1.8 - 2008: -2.3 - 2009: -0.9 - 2010: -2.3 - 2011: -1.5 - 2012: -0.8 - 2013: -1.1 - 2014: -1.1 - 2015: -1.0 - 2016: -1.1 - Residual, including change in gross foreign assets (2-3) (in percent of GDP): - 2006: 0.0 - 2007: 1.0 - 2008: -3.4 - 2009: 0.5 - 2010: 6.4 - 2011: -1.1 - 2012: -2.3 - 2013: -3.3 - 2014: -3.9 - 2015: -4.2 - 2016: -0.5 - External debt-to-exports ratio (in percent): - 2006: 292.9 - 2007: 314.2 - 2008: 327.3 - 2009: 476.5 - 2010: 528.0 - 2011: 507.9 - 2012: 482.2 - 2013: 450.7 - 2014: 417.2 - 2015: 381.6 - 2016: 357.1 - Gross external financing need (in billions of euros) (selected years): - 2006: 73.9 - 2007: 93.2 - 2008: 122.9 - 2009: 166.3 - 2010: 180.4 - 2011: 232.0 - 2012: 192.8 - 2013: 169.1 - 2014: 167.4 - 2015: 178.2 - 2016: 202.9 - Gross external financing need (in percent of GDP): - 2006: 35.1 - 2007: 41.2 - 2008: 51.9 - 2009: 70.8 - 2010: 78.3 - 2011: 103.1 - 2012: 84.6 - 2013: 72.0 - 2014: 68.9 - 2015: 70.8 - 2016: 77.5 ### Macroeconomic and fiscal assumptions underlying baseline (selected) - Real GDP growth (in percent): - 2008: 1.2 - 2009: -2.3 - 2010: 3.3 - 2011: -4.4 - 2012: -3.8 - 2013: 0.6 - 2014: 2.1 - 2015: 2.3 - 2016: 2.7 - 2017–2020: 2.9, 3.0, 3.0, 3.0 respectively - Average nominal interest rate on public debt (in percent): - 2008: 4.9 - 2009: 4.7 - 2010: 5.5 - 2011: 4.2 - 2012: 4.6 - 2013: 4.9 - 2014: 5.0 - 2015: 5.5 - 2016: 5.9 - 2017: 6.1 - 2018: 6.4 - 2019: 6.9 - 2020: 6.7 - Spreads above German bund (10-year) (basis points): - 2008: 1,175 - 2009: 1,175 - 2010: 1,000 - 2011: 800 - 2012: 675 - 2013: 600 - 2014: 500 - 2015: 400 - 2016: 350 - 2017: 300 - 2018: 250 - 2019: (not listed explicitly for 2019 in the extract) - German bund rate (in percent) (selected entries as shown): - 2008: 225 - 2009: 275 - 2010: 350 - 2011–2020: 350 (repeated entries through projection) - Inflation rate (GDP deflator, in percent): - 2008: 3.1 - 2009: 1.6 - 2010: 3.3 - 2011: 2.5 - 2012: 1.5 - 2013: 0.7 - 2014: 1.0 - 2015: 1.0 - 2016: 0.9 - 2017: 1.1 - 2018: 1.3 - 2019: 1.4 - 2020: 1.7 - Growth of real primary spending (deflated by GDP deflator, in percent): - 2008: 7.9 - 2009: 4.0 - 2010: 6.1 - 2011: -11.6 - 2012: -8.5 - 2013: -2.7 - 2014: -3.7 - 2015: -5.3 - 2016: -2.0 - 2017: 2.4 - 2018: 1.4 - 2019: 2.1 - 2020: 2.1 ### Scenario outcomes illustrated (selected) - Figure A1 bounds/tests show: - Baseline external debt path around 102 (percent of GDP) in the baseline box. - Interest rate shock path rises to higher levels (figure labels include 106, 113, 126 for different scenarios). - Non-interest current account shock and FDI shock raise external debt relative to baseline (examples: FDI shock box shows 113; combined shock box shows 126). - Failed rollover scenario shown (baseline and failed rollover both display 102 in some labeling in extract). ### Policy implications and priorities implied by the analysis - Preserve privatization program implementation and foreign investor confidence to avoid a roughly €30 billion reduction in FDI and an 11 percentage point-of-GDP deterioration in the debt ratio relative to baseline. - Avoid combined shocks (delayed program implementation plus macro underperformance) that would push external debt to 126 percent of GDP by 2016 under the tailored downside scenario. - Manage market access and spreads: market access is assumed to start in mid-2013 in the public sector DSA; higher spreads (as in the interest rate shock) materially increase external debt paths. - Focus on fiscal adjustment and structural reforms to sustain the baseline primary balance and privatization receipts that underpin the projected debt dynamics. *Source: IMF staff country report content (excerpts from the Public Sector and External Debt Sustainability Framework tables and accompanying text).* ### 11. The government expects the economy to stabilize in late 2011. Revised national ### _cr11175 - 11. The government expects the economy to stabilize in late 2011. Revised national ### Economic outlook and headline projections - Revised national account figures for end-2010 indicate a deeper contraction of domestic demand than previously expected. - Economic activity stabilized during the first quarter of 2011. - External demand is recovering strongly. - With fiscal adjustment continuing to represent an important headwind, GDP is projected to decline by 3¾ percent in 2011. - The economy is expected to return to positive year-on-year growth in early 2012. - External current account deficit is expected to narrow to 8¼ percent of GDP in 2011. ### Competitiveness and inflation - Private sector adjustments are accelerating: reducing costs and reorienting production towards the external sector. - Unit labor costs declined in 2010 and are projected to decrease further in 2011. - Inflation pressures remain elevated due to higher commodity prices and additional indirect tax rate adjustments. - Inflation at constant taxes is expected to remain well below the Euro area average, supporting external competitiveness. - Goods exports are recovering strongly; tourism prospects are improving. ### Fiscal strategy and targets - The government aims to reduce the overall deficit of the general government to €17 billion (7½ percent of GDP) in 2011. - The objective is to bring the deficit to under 3 percent of GDP by 2014. - The government forecasts that about 10 percent of GDP in measures are needed to achieve the 2014 target (including 3 percent of GDP to close a 2011 gap). - Reduction in the deficit by 5 percent of GDP occurred in 2010, but the deficit remained above 10 percent of GDP and debt was approaching 150 percent of GDP. - The debt-to-GDP ratio is expected to begin declining in 2013. - The Medium-Term Fiscal Strategy (MTFS) has been approved by parliament as a prior action for the program. ### Medium-term fiscal measures (aggregate and by category) - Overall adjustment during 2011-14 is split almost evenly between revenue increases and spending restraint. - Key quantified measures by category (as presented): - Expenditure adjustments: - Reduction of public employment: 0.3 percent of GDP. - Target: reduce public sector employment by 150,000 or about 20 percent by 2015. - Attrition rules: 1:10 hiring rule in 2011 and 1:5 subsequently. - Labor reserve: up to 12 months at no more than 60 percent of their wage (excluding overtime and other extra payments). - Working hours extended to match the 40-hour work week private sector norm. - Closure of non-essential public entities and agencies: 0.5 percent of GDP. - Progress: some 4,500 entities closed or merged under “Kallikratis”. - Planned: close 77 entities already, pass legislation by mid-August to close a further 40 small entities, merge 25 other small entities, and close/merge/consolidate an additional 11 large entities with total current employment of 7,000. - Initial stock taking exercise to be completed in October 2011. - Adjustments in public employee compensation: 0.6 percent of GDP. - New wage structure to be introduced by mid-August and phased in over 3 years; aim for “equal pay for equal work”. - Streamlining and better targeting of social benefits: 0.9 percent of GDP. - Social spending review to be completed by September 2011. - Legislation and regulations by Q1 2012 aiming at an overall annual saving of about €760 million by 2014. - Pension reforms: 1 percent of GDP. - Objective to limit the increase in expenditures of pension funds to below 2½ percent of GDP by 2060. - Supplementary pension funds reforms: adopted during Q3 2011 and implemented beginning in January 2012. - Arduous professions list: reduce workers in arduous professions to less than 10 percent of total employees, effective from July 2011. - Disability pensions: revise definition and application by end-August; target to reduce disability pensions from 14½ percent of overall pension spending to 10 percent via (re)certification regulation by end-August 2011 and operational central evaluation office. - Lump sum pensions: cut by at least 10 percent for civil servants and public enterprise employees; studies of other lump sum pensions completed by end-September with adjustments by end-year. - Health sector reforms: 0.7 percent of GDP. - Task force to produce report by September 2011; time bound action plan by end-November 2011. - Revenue increases: - Elimination of tax exemptions and special regimes: 2.8 percent of GDP. - Actions already taken: broadened personal income tax base (ceiling on some tax credits and deductions, reduced tax free threshold, removed invoice-based tax refunds under personal income tax, introduced special low rate solidarity charge on individual income including currently exempt income); increased some reduced VAT rates on non basic items; widened property tax base and raised rates; reduced tax benefits for investment and heating oil (fully in effect by 2011 for legal entities and 2013 for households). - By end-September: table tax reform legislation covering VAT, personal income tax and corporate income tax aiming to simplify, broaden base, and overall be fiscally neutral. - Stronger enforcement of tax laws: 1½ percent of GDP through 2014. - Measures include increased tax audits, boosted debt collection, prosecution of tax offenders, and presumptive tax methods; projected gains assumed to arise later in the forecast period. - Reforms to state enterprises: - Improvements in operating performance: 0.4 percent of GDP. - Benchmarking exercise and updated business plans by end-July 2011. ### Implementation timing, front-loading, and contingencies - Key reforms representing 4.5 percent of GDP of the required total measures (and 2.4 percent of GDP of the required 2011 adjustment) have been legislated in an MTFS Implementing Bill as a prior action. - A second phase of implementing acts to be passed by August 15 (laws to effect pension adjustments, adjust the civil service wage grid, and close extrabudgetary funds); completion of this second phase proposed as a program structural benchmark. - Phasing provides extra amounts of measures in each year through 2013 as a contingency margin against implementation delays or shortfalls in yields. ### Institutional reforms to support fiscal adjustment - Revenue administration reforms and tax compliance improvements: - 5 task forces established in 2010 under a steering committee to design short-term anti-tax evasion action plans and identify barriers. - Anti-tax evasion action plan published in April (operational plan). - Quarterly quantified performance indicators to monitor progress; achieving targets proposed as a program structural benchmark for end-December 2011. - Tax law passed in March to remove barriers to effective tax administration. - Reassess tax auditors’ qualifications and hire new auditors by end-September. - Make operational the newly established arbitration agency by end-September. - Set up an independent fast track administrative dispute resolution process by end-July to deal with large dispute cases within 90 days. - Possibility for courts to introduce dedicated chambers for tax cases; expected fully in place by end-September. - Strategic plan for medium term reforms to be completed by end-July. - Establish central directorate general for debt collection by end-July. - Initiate a large taxpayers unit by end-September. - Merge and close about 200 local tax offices (beginning in July for completion by end-December). - Public financial management modernization to address arrears: - Appoint interim financial accounting officers; permanent officers with adequate qualifications to be appointed by August. - Circular to be issued by end-July clarifying responsibilities and sanctions for financial accounting officers. - General directorates for financial services to be established in all line ministries by September. - Inspections by the general accounting office covering entities accounting for 75 percent of arrears to be complete by end-July. - Expand commitment registers to cover the investment budget after initial implementation. - Fiscal and arrears data coverage increased to, on average, 98 percent of general government spending. - Publish consistent arrears and consolidated general government fiscal reports through end-April (excluding small general government entities); expect to meet end-June structural benchmark upon publication of May results. - Coordination committees for budget preparation, fiscal reporting and implementation of commitment registers to be established, with performance targets and oversight by a central coordinator; regular progress reports for the Minister of Finance to commence in July. ### Program priorities (summary) - Secure fiscal adjustment needed to restore confidence and market access. - Facilitate larger capital buffers in banks while ensuring orderly transition to sustainable medium-term funding. - Transfer public assets to more productive private sector uses. - Improve implementation of structural reforms and broaden their scope. - Establish financing to support implementation of program policies. *Source: _cr11175 - 11. The government expects the economy to stabilize in late 2011. Revised national* ### 19. The government and the Bank of Greece will continue to take all necessary steps ### _cr11175 - 19. The government and the Bank of Greece will continue to take all necessary steps ### Financial stability context and strategy - Greece’s sovereign financing crisis has put the financial system under stress: liquidity pressured by deposit outflows, capital affected by recession-driven loan quality deterioration, and wholesale market access "all but eliminated." - Systemic problems have been avoided due to ECB exceptional liquidity support through monetary policy operations and some banks raising capital from private sources. - Strategy components: - Ensure sufficient system liquidity. - Require banks to strengthen capital buffers. - Restructure or resolve banks facing particular challenges. - Enhance the regulatory framework to facilitate appropriate capital support, resolution procedures, and supervision. ### Preserving system liquidity - Parliament passed legislation for a €30 billion expansion of the government program of guarantees for uncovered bank bonds. - May legislation permits the Ministry of Finance to guarantee the Bank of Greece’s financial exposure stemming from support provided to credit institutions. - Over the medium term, banks must reduce reliance on Eurosystem refinancing operations and state guarantees at a pace consistent with the program’s macroeconomic, fiscal, and financial framework. - Banks have been asked to set up and maintain medium-term funding plans. - The Bank of Greece will provide regular guidance on: - Assumptions pertaining to deposit growth (to be in line with the projected recovery). - Projected pace of re-access to wholesale markets (in line with the government’s projected return to market access). ### Capital buffer requirements and timeline - Minimum Core Tier 1 capital requirement: - Banks required to maintain minimum Core Tier 1 capital of 10 percent from the beginning of 2012. - Core Tier 1 requirements will exclude hybrid capital, but include preference shares issued by banks and subscribed by the Greek government at the outset of the global financial crisis in 2008-09. - Additional measures: - Bank of Greece will require additional capital buffers based on each bank’s specific risk profile and the European stress test results. - As part of the Pillar II exercise, a single reputable and qualified international advisory firm (paid for by banks) will be commissioned by the Bank of Greece to perform a diagnostic of banks’ loan portfolios. - The Bank of Greece, in consultation with the EC/ECB/IMF, will agree on the terms of reference for the diagnostic. - Diagnostic exercise to be completed by end-2011 and carried out in coordination with the EC/ECB/IMF. - Banks must present plans to the Bank of Greece by end-January 2012 on how they intend to reach the new capital requirements through market solutions. - Bank of Greece will require banks to meet higher capital buffers, taking into account the outcome of the diagnostic exercise, no later than end-September 2012. - Interim supervision: banks not meeting requirements will be subject to intensive supervision until requirements are met. - Authorities will encourage exploration of strategic alliances with domestic and foreign partners to strengthen capital and address structural funding issues. - State representatives on Boards of banks receiving government support will not use veto rights to block measures favorable to financial stability, such as a cross-border alliance. ### Bank restructuring, resolution, and FSF framework - Revision of FSF operating framework and bank resolution framework: - Legislation to be submitted to parliament by mid-August, with passage proposed as a program structural benchmark for September 15, 2011. - Financial Stability Fund (FSF) operational framework key points: - FSF available as a capital backstop for viable banks to safeguard macrofinancial stability. - State commits not to request FSF resources to recapitalize state-owned banks; state will exercise full responsibilities as main shareholder for state banks. - For private banks: amend FSF law in line with EU State aid rules to require existing shareholders of listed and non-listed banks to absorb the full loss from forward-looking Pillar II assessments prior to any FSF recapitalization. - Private sector burden-sharing requirements to avoid public subsidization of private shareholders. - Listed firms should demonstrate they offered new shares (rights issues) at prices substantially below the average market price prevailing after the announcement of bank capital needs before seeking FSF support. - FSF may offer capital injections at prices substantially below the average market price after announcement if private sector funding fails, subject to conditions to minimize downside risks and the burden on taxpayers. - FSF will dispose of any acquired bank holdings within 24 months of recapitalization and take measures to facilitate merger, takeover, or transfer of activities. - Resolution framework: - Strengthen resolution framework for problem banks consistent with EU Treaty rules and international sound practices. - Introduce a broad set of tools to ensure a resolution regime for financial institutions to safeguard financial stability and ensure effective depositor protection. ### FSF funding assessments and contingency - Bank of Greece to undertake quarterly forward-looking assessments of bank profitability as part of Pillar II reviews. - Next such assessment to be completed by end-September. - Assessment will project potential use of FSF funding in consultation with the EC/ECB/IMF and assess impact of the revised program financing strategy on banks’ balance sheets. - If necessary, government will establish a revised total level for FSF capital and an amended schedule for transfers into the dedicated government account used to fund the FSF. - Transfers from this account to the FSF will be made as required. ### Supervisory capacity and inter-agency coordination - Bank of Greece needs to strengthen supervisory capacity; recruitment delays through ASEP noted. - Actions and deadlines: - Transfer staff with prerequisite specialist skills (banking, financial analysis, accounting, data management and IT) into the bank supervision department by end-July. - Bank of Greece will consider requesting long-term technical assistance to be resourced from other European supervisory authorities by end-July. - FSF will address its staffing shortfall by end-July. - By end-July, the Bank of Greece and FSF will complete a memorandum of understanding to strengthen cooperation, including sharing appropriate supervisory information. ### Immediate remedial action for undercapitalized banks - Bank of Greece will require capital shortages to be addressed by end-September, or take other appropriate actions. - Until capital shortages are resolved, affected banks will be closely monitored and subject to continuous enforcement of appropriate remedial measures. ### Restructuring and privatization of state banks - Plans to restructure two state banks have been approved and implementation schedules set. - All state banks included in the government’s strengthened privatization program. - Specifics for ATE Bank: - At the beginning of April, ATE Bank announced plans for a share capital increase of €1,260 billion through a rights issue. - Commission approved the restructuring plan of ATE Bank on May 23, 2011. - By 2013, the plan foresees: - a reduction in balance sheet size by 25.7 percent (from the end-2009 level), - a cost reduction by 25 percent, - the sale of non-core subsidiaries and banking participations, - the run-off of certain portfolios. - ATE Bank to maintain an asset quality reinforcement policy by maintaining a coverage ratio above 50 percent throughout the duration of the restructuring plan. - HCLF unbundling: - At the beginning of May 2011, government adopted a law on the unbundling of the HCLF. - Law stipulates carve-out of commercial activities into a separate entity. - Implementing decree will ensure remaining activities will not compete with commercial activities and specify a detailed timetable to fully dispose of commercial activities during the next 12 months. - All state banks included in privatization program. ### Insurance sector actions - Bank of Greece has developed a supervisory watch list for weak insurance companies and will complete comprehensive on-site inspections by end-June. - Several weak insurance entities have been closed; capital raising initiatives underway for other entities. - Bank of Greece participating in the European Insurance and Occupational Pensions Authority’s second Europe-wide stress testing exercise for the insurance sector. - Results anticipated by end-July. - Bank of Greece will use supervisory powers to deal with firms that do not pass the stress test, including requiring capital increases or structural measures within a specific timeframe. ### Privatization objectives and timeline - Government committed to transferring assets to more productive uses and using proceeds to reduce Greece’s debt; privatization expected to encourage investment and support economic recovery. - Targets for privatization proceeds: - €5 billion by end-2011, - €15 billion by end-2012, - €50 billion by end-2015. - Strategy elements: - Detailed inventory of targeted assets (shareholdings in listed and non-listed state companies and banks; public infrastructure; commercial real estate and publicly held land). Inventory estimated value in excess of €50 billion. - Timeline for divesting each asset: - Quarterly schedule of transactions through 2013, annual schedule for 2014 and 2015. - For 2011: sell 10 percent of state-held shares in OTE by end-June 2011. - Third and fourth quarters of 2011: sell holdings in Hellenic Postbank, Piraeus and Thessaloniki Port, Thessaloniki Water, Public Gas Corporation, Trainose, Larco, Casino Mont Parnes, ETA, and other assets listed in Annex II. - Sales of listed companies, non-listed company holdings, public infrastructure concession SPVs targeted for completion by end-2012. - Proceeds from real estate development commence in Q4 2011 and continue through 2015. - Proposal: new program quantitative performance criterion on cumulative privatization proceeds to support monitoring; scheduling of transactions may be adjusted to ensure achievement of cumulative proceeds target. - Action plan to prepare assets for privatization: - Intermediate steps during 2011–2012 include: - unbundling of Athens water by Q2 2012; - unbundling of PPC by Q3 2011; - unbundling of DEPA by Q3 2011; - extension of concession for Athens International Airport by end-Q3 2011; - extension of concession for OPAP and granting of new concessions by end-Q3 2011; - incorporation of regional airports by Q2 2012; - for privatization of ATE, enact legislation to establish equal treatment of farm collateral across financial institutions for end-September 2011. - Steps toward real estate development already taken in MTFS implementation law: - laws for surface rights and long-term leaseholds; - laws to develop tourism properties and establish clear land titles; - framework law to assign land use. - Single asset inventory to be set up in four tranches, starting with first tranche in June 2011 and completed by Q4 2012. ### National Wealth Fund (Privatization Fund) design and operations - Legislation creating the fund will be a prior action for the review; Fund to become operational within a month of legislation entering into force. - Fund features: - Governance: - Established under Greek law for a period of 6 years, professionally run, governed by a Board of Directors. - Directors appointed by parliament upon proposal of the Minister of Finance for a renewable fixed term. - European Commission and the Eurogroup have the right to appoint two observers on the Board. - Fund may establish an Advisory Board; Directors and staff indemnified for actions in context of official duties. - Transparency: - Board will publish a quarterly report on activities and an audited report of finances; activity report submitted to parliament and will cover asset transaction status. - Asset transfer and management: - Full legal and economic ownership of assets to be privatized (including voting rights) transferred to the fund in an irreversible manner. - State or transferring entity will have no residual rights of ownership without prejudice to regulatory power. - Mandate: - Fund mandated to privatize assets at prevailing market conditions as soon as technically feasible and in an open and transparent manner. - Fund cannot transfer assets back to general government unless transaction completed (i.e., a concession or lease). - Ministry of Finance retains responsibility for any operating subsidies. - If Board determines an asset cannot be sold, it will be unbundled and sold by the fund (liquidation retained as an option). - Fund provided with quarterly targets for proceeds to be transferred back to government. - Operations and financing: - Initial €30 million capital injection by the state. - Subsequently financed from an appropriate portion of privatization proceeds as determined by the Board in consultation with the advisory board. - Fund entitled to hire advisors for each transaction; advisors already hired by the Special Secretariat for Asset Restructuring and Privatizations will be retained and mandates transferred. - All advisors for transactions in 2011-12 will be appointed by end-June 2011. - Limits on borrowing: - Fund may raise money on market terms, including by discounting or selling revenue streams of specified assets. - Fund may not grant liens over any of its assets if this might prevent or delay privatization. - Net proceeds from money raising operations and privatizations to be paid over to the State. - Any borrowing coordinated with the Ministry of Finance and the PDMA. ### Asset transfers into the Fund and real estate portfolios - Assets transferred to the Fund upon decision of the Inter-Ministerial Committee of Asset Restructuring and Privatization (ICARP). - Non-real estate assets transferred to the Fund within 1 month of completion of intermediate steps necessary to mature assets for sale. - Real estate portfolios: - Marketable portfolios to be formed in August and December 2011, and June and December of 2012. - Estimated total value of at least €35 billion. - Portfolios transferred to the Fund within 1 month of formation. ### Structural reform priorities - Government priority: accelerate implementation of structural reforms to promote employment, investment, and market efficiency. - Context and objectives: - Greece’s competitiveness affected by lack of contested markets and an unfriendly business environment, discouraging labor force participation and private sector investment, productivity, and exports. - Mid-2010 comprehensive structural reform program launched covering key sectors described in May 2010 MoU and MEFP. - Updated program continues 2010 agenda, enhanced to cover judicial reforms and reforms to tackle Greece’s high labor tax wedge. - Effective and timely implementation of reforms—covering labor, product and service market reforms, reductions in red tape, and judicial reforms—crucial to reap benefits and start a new growth cycle. *IMF staff report excerpt: _cr11175 (selected sections on financial stability, bank restructuring, and privatization).* ### 31. The government is committed to creating a well-functioning labor market. This ### _cr11175 - 31. The government is committed to creating a well-functioning labor market. This ### Labor market reforms — objectives and measures - Objective: improve competitiveness and facilitate a shift of labor resources toward the tradable sector. - Early legislative changes enacted: introduce changes in minimum wages, improve arbitration, and reduce entry and exit costs. - Observed outcome: unemployment has been rising. - Employment and bargaining framework (measures and commitments) - Firms are using part-time, irregular, and individual contracts to manage labor costs; limited use of special firm-level collective agreements allowed by the new law. - Government actions: - Continue close monitoring of reform implementation. - Underscore the right of social partners at the firm level to utilize special firm-level agreements. - Reaffirm the nonbinding nature of the Labor Inspectorate assessments. - Preparedness to amend the legislation by end-July 2011 if necessary to support greater firm-level wage flexibility. - Working-time and fixed-term contract changes: - Permit individuals to work longer hours for a longer period while reducing the use of overtime pay. - Lower severance pay associated with fixed-term contracts and limit renewals. - Introduce term contracts for youth to gain work experience at sub-minimum wages. - Cutting the labor tax wedge (measures and sequencing) - Fiscal constraint means any reduction in social contribution rates requires broadening the base. - Plan: gradually raise income ceilings for social security contributions and subsequently reduce rates in an offsetting way, ensuring the reform does not affect pension obligations. - Timing: a first step will be taken by January 1, 2012. - Compliance measures: - Strengthen labor inspectorate effectiveness against the informal economy. - Launch an electronic labor card pilot project to evaluate incentives for compliance. - Evaluate realized collections against projections; if unforeseen compliance improvements exceed program projections, reduce rates (while ensuring pensions unaffected). ### Removing barriers to investment and exports — agenda and timelines - One-stop shops for business start-ups have reduced procedures, cost, and time to set up a business. - Fast-track law for investment projects - Take one large project through approvals by end-September 2011 to help system operate and complement privatization agenda. - As system functions, thresholds for qualifying will be significantly lowered and generalized. - Licensing procedures - Pass the new law for environmental permits by end-July 2011. - Publish main ministerial decisions required to operationalize the environmental law and the licensing law for technical professions and industry by end-October 2011. - Integrate manufacturing licenses within the one-stop-shop and develop an electronic environmental-licensing registry thereafter. - Export procedures - Finalize new legislation removing obstacles to exports (e.g., simplify customs procedures) by end-September 2011. - Develop a single electronic window centralizing standardized trade-related information and documents by end-September 2011. - Simplification of legislation - Under the better regulation agenda, identify priority areas, set targets, and develop a timetable for screening the entire body of existing regulation by end-July 2011, aiming to codify, recast, consolidate, repeal obsolete legislation, and simplify existing legislation. ### Liberalization of service markets and sector-specific reforms - Goal: lower cost of doing business and create opportunities for entry and new investment. - Recent actions: legislation liberalizing transportation sector and regulated professions. - Regulated professions - New law becomes fully operational on July 2 2011. - A list published in May includes 128 professions beyond those already explicitly identified in the law. - Government committed to evaluate exemption requests according to non-discrimination, necessity, and proportionality and implement them no later than July 2, 2011. - Notaries: publish decisions significantly reducing pro-rata and other fees by end-September, 2011. - Prepare a timetable to screen and amend existing legislation to align with the new law once in effect. - Transportation sector reforms - Road haulage law: publish a secondary decree by end-December 2011 establishing new, lower licensing fees not to exceed administrative costs. - Legislation liberalizing tourist coaches finalized and to be passed by end-July. - Ministerial decisions on cost (proportionate to administrative costs) and timing (20 business days to receive licenses) to be issued no later than end-September 2011. - Energy sector liberalization - New energy law to be passed by end-July 2011. - Law to strengthen regulatory authority, provide consumer protection, and allow unbundling of electricity and gas transmission (to be completed by end-March 2012). - Liberalize tariffs for all customers except vulnerable households by Q2 2013. - Ensure competitive access to lignite-fired generation by end-July, 2011 (including legislation where required). ### Diagnosing obstacles to growth — tourism and other sectors - Tourism - External study finalized: need to develop and upgrade infrastructure, ports and marinas; facilitate investment in integrated resorts and vacation home complexes; increase flight connectivity with high-growth markets. - Support measures: fast-track law, sales of publicly-owned real estate, laws on land use and title. - Tourism law to be passed by end-August 2011 to address barriers related to vacation homes and resorts. - Other sectors - Ongoing studies covering manufacturing, energy, retail and wholesale trade, and cross-sectoral barriers. - Deliverables and timing: - Finalize a plan with concrete actions and timeline for the retail sector by end-September 2011. - Finalize plans for additional sectors by end-December 2011. ### Judicial reform — objectives, timelines, and specific measures - Rationale: inefficiencies (low cost of litigation, complex procedures, incentives to postpone cases, cumbersome execution, lack of transparency, lack of linkage between court performance and budgeting) created large backlog of unresolved civil and administrative cases and harmed private investment, FDI, entrepreneurship, exports, and fiscal performance. - Simplification of procedures for tax cases - By end-September 2011: finalize establishment and full operationalization of specialized tax chambers in administrative tribunals and courts with at least three chambers; staff with experienced judges having special tax training; begin publishing quarterly recovery rates, number of filings, and number of decisions. - By end-December 2011: Ministry of Justice to assess: - (i) impact of the 50 percent deposit requirement for appeal in tax and customs matters; - (ii) effectiveness of measures limiting the maximum number of suspensions by tax courts; - (iii) effectiveness of e-filing and e-tracking systems in tax chambers of the four largest administrative tribunals and related courts of appeal. - Government stands ready to modify legislation and e-systems as required. - Clearing existing case backlog - Ministry of Justice, jointly with an external body, will conduct a study of the backlog in all administrative tribunals and courts of appeal by end-January 2011. - Based on study recommendations, develop an action plan by end-March 2012 with a timetable for a targeted reduction of at least 50 percent of the backlog of tax cases by end-July 2012, aiming for full clearance of such backlog by end-July 2013. - For all other courts, including the Supreme Court and the Supreme Administrative Court, a similar study will be finalized by end-June 2012. - Improving case processing - By end-September 2011, reduce processing time through measures including: - (i) simplifying case registration; - (ii) rationalizing docket management to allow resolution of docketed cases; - (iii) providing computer support to judges to allow issuance of formal written decisions within two weeks from the judges taking the decision. - Increase court registration fees in civil and administrative matters by end-December 2011. - Reviewing the Code of Civil Procedure - By end-June 2012, establish a task force broadly representing the legal community (including independent legal profession representatives) to review the Code of Civil Procedure and align with international best practices on: - (i) case management; - (ii) execution of decisions and orders to pay (esp. small claims) to reduce judge role; - (iii) enforcing statutory deadlines for court processes, debt enforcement, and insolvency cases. - Task force to make specific recommendations by end-December 2012. - Performance and accountability framework for courts - By end-December 2011, establish a task force to design a performance framework by end-September 2012, including: - dependable data management system; - workload measurement system; - management structure for cost-effective, responsive, accountable judicial management. - By end-September 2012: - fully operationalize and publish a database with case data for each court (and consolidated data), providing basic performance data including number of judges and staff, number of cases (including by case type) and backlogs; - develop a work plan on benchmarking cases for workload measurement, focusing on delays and case types with most acute delays. ### Project management, oversight, and monitoring - Establish a formal project-management framework; amend legislation as necessary to set up a committee to oversee structural reform work. - Committee mandates: - identify capacity and technical assistance needs; - propose adjustments to the growth strategy; - appoint project managers for each initiative (labor market reform, product and service market reform, investment promotion, judicial reform) with clear responsibility and accountability. - Monitoring: committee to develop, utilize, and publish on the government’s website monitoring indicators for each key structural reform initiative on a quarterly basis, starting with end-June 2011 data. ### External financing and technical assistance - Additional financing needs - Statement: Greece is unlikely to meet programmed return to private market access by early 2012, leaving additional public sector financing needs of €55 billion for the remainder of the program period. - Financing strategy - Seek financing commitments from the private sector and official sector. - Precise modalities for private sector involvement and additional official funding to be determined in coming weeks to ensure required program financing is in place. - Consultations with Greece's creditors have begun to define modalities for voluntary private sector involvement with a view to achieving a substantial reduction in Greece's financing needs. - Strategy intended to form the basis for launching a new medium-term program supporting Greece's adjustment efforts. - Technical assistance (TA) - Expand use of TA to support timely and effective implementation due to capacity constraints. - Sources: IMF, EC, and bilateral expert assistance from EU member states. - Areas identified for additional assistance: - health and social security reforms (e.g., e-procurement, e-prescription, IT systems); - state enterprise reforms (e.g., performance reviews); - growth-enhancing structural reforms (e.g., labor training); - fiscal management reforms (e.g., administrative reorganization and budget monitoring systems); - taxation reforms (e.g., anti-corruption reforms and audit techniques). - Coordination: TA to be closely coordinated under existing TA program and long-term advisors. ### Quantitative performance criteria and structural benchmarks (selected figures and schedules) - Additional public sector financing need: €55 billion. - Planned sequencing and deadlines (selected): - Amend legislation to support firm-level wage flexibility: by end-July 2011. - First step to raise income ceilings for social security contributions: January 1, 2012. - Fast-track investment project approvals: one large project by end-September 2011. - Environmental permits law: pass by end-July 2011; ministerial decisions by end-October 2011. - Export legislation and single electronic trade window: by end-September 2011. - Regulated professions law operational: July 2 2011. - Notaries fee decisions: by end-September 2011. - Road haulage secondary decree: by end-December 2011. - Tourist coaches legislation: passed by end-July 2011; licensing ministerial decisions by end-September 2011. - Energy law: passed by end-July 2011; unbundling by end-March 2012; tariff liberalization (except vulnerable households) by Q2 2013; competitive access to lignite-fired generation by end-July, 2011. - Tourism law: pass by end-August 2011. - Retail sector action plan: by end-September 2011; other sectors by end-December 2011. - Specialized tax chambers operationalized and quarterly reporting begun: by end-September 2011. - Ministry of Justice assessments on appeals and e-systems: by end-December 2011. - Study of backlog in administrative tribunals and courts of appeal: by end-January 2011. - Action plan to reduce tax case backlog by 50 percent: by end-March 2012 with target end-July 2012; full clearance target end-July 2013. - Study of other courts backlog including Supreme Court: by end-June 2012. - Case processing efficiency measures and computer support: by end-September 2011. - Increase court registration fees: by end-December 2011. - Task force to review Code of Civil Procedure established: by end-June 2012; recommendations by end-December 2012. - Court performance framework task force established: by end-December 2011; framework by end-September 2012; database and benchmarking work plan by end-September 2012. - Committee to publish monitoring indicators on a quarterly basis starting with end-June 2011 data. - Selected table entries (Quantitative Performance Criteria — presented as in source): - Floor on the modified general government primary cash balance: -2.0; -0.9; -4.3; ..; -5.1; -5.0; -1.5; 2.4; 7.4 - Ceiling on State Budget primary spending: 15; 13; 30; ..; 34.7; 44.5; 60.1; 68; 69 - Ceiling on the overall stock of central government debt: 394; 366; 394; ..; 394; 394; 394; ..; .. - Ceiling on the new guarantees granted by the central government: 1.0; 0.1; 1.0; ..; 1.0; 1.0; 1.0; 0.0; 0.0 - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by general government 5/: 0.0; 0.0; 0.0; [0.0]; 0.0; 0.0; 0.0; 0.0; 0.0 - Floor on privatization receipts 6/: ..; ..; ..; ..; 0.39; 1.70; 5.00; 15.00; 22.00 - Indicative target — Ceiling on the accumulation of new domestic arrears by the general government: 0.0; 4.3; 0.0; ..; 0.0; 0.0; 0.0; 0.0; 0.0 - Selected structural benchmarks (status highlights) - Appointment of financial accounting officers in all line ministries and major general government entities: Met with a delay (interim accounting officers appointed; financial officers appointed accounting officers in general government entities). - Pass legislation to separate core consignment activity from commercial activities of the HCLF: Met with a delay. - National Actuarial Authority report for main supplementary funds: Met with a delay. - New tranche of government guarantees for uncovered bank bonds: Observed. - Commercial banks to submit medium-term funding plans to the ECB and the Bank of Greece (end-May 2011): Observed. - Articulate medium-term revenue administration reform plan (end-June 2011): In progress (preliminary draft plan elaborated). - Publish three consecutive months of consistent arrears and consolidated general government fiscal reports (end-June 2011): In progress. - Adopt changes to enact plan to reform general government personnel system (end-June 2011): In progress. - Council of Ministers to adopt comprehensive privatization plan through 2015 (end-July, 2011): Converted to prior action. *Source: _cr11175 (IMF staff report excerpt).* ### 1. Parliament to approve medium-term budget strategy (MTFS). ### 1. Parliament to approve medium-term budget strategy (MTFS) ### Observed structural measures and objectives - 1. Parliament to approve medium-term budget strategy (MTFS). - To reduce the overall deficit to below 3 percent of GDP by 2014. - Observed. - 2. Government to legislate key fiscal-structural reforms in an MTFS Implementation Bill (detailed in Annex I). - To improve the efficiency and quality of public spending, to reduce waste and inefficiency in the broader public sector, and to broaden the tax base, and to reduce tax and social contribution evasion. - Observed. - 3. Parliament to approve privatization and real estate development strategy. - To transfer public assets to more productive uses, and to use proceeds to reduce Greece's debt. - Observed. - 4. Government to legislatively establish a Privatization Agency (a private law vehicle into which privatizable assets will be transferred to be sold). - To facilitate privatization transactions. - Observed. ### Proposed structural benchmarks and timelines - Proposed structural benchmark (Proposed) — August 15: - 1. Government to enact legislation in the context of MTFS implementation (phase II) to: - (i) introduce pension adjustment bill stipulating freezes through 2015, introducing individual social security numbers, caps, means testing, and rationalizing benefits of pension funds; - (ii) introduce single public pay scale bill, temporarily freeze automatic progression, and halve productivity allowance; - (iii) close 40 small public entities, merge 25 more small entities, and close an additional 10 large entities under line ministries and in the social security sector. - To reduce the overall deficit to below 3 percent of GDP by 2014. - Proposed structural benchmark (Proposed) — September 15: - 2. Parliament to pass legislation revising the FSF operating framework (to address conditions for recapitalization) and revising the bank resolution framework (in particular, the deposit guarantee scheme, and the early intervention and bank liquidation frameworks). - To strengthen the resolution framework for problem banks and to allow timely and effective intervention and resolution. - Proposed structural benchmark (Proposed) — end-December: - 3. Government to achieve quantitative targets set under its anti-tax evasion plan. - To combat tax evasion and improve tax collection. ### MEFP Annex I — The MTFS Implementation Bill: Key actions (by section) - 1 Wages and employment - Application of the 1:10 employment rule during 2011 and extension of the 1:5 rule until 2015. - Reduction of civil servants’ overtime compensation to not more than 20 hours per month. - Reduction in fixed term and temporary contracts (50 percent in 2011 and 10 percent thereafter). - Introduction of part-time employment and extension of unpaid leave. - 2 Tax measures - a. VAT and PIT exemptions - Eliminate preferential reduced rate on food and drinks sold by restaurants and bars (from 13 percent to 23 percent). - Reduce the tax free threshold from €12,000 to €8,000 and introduce a 10 percent tax rate on income between €8,000-€12,000 (with some exclusions for pensioners, young people and disabled). - Impose a solidarity contribution on individual incomes (without deduction) at 1-5 percent rate depending on income. - Eliminate selected tax credits and deductions and set an overall cap on total tax credits and deductions to be used. - Eliminate invoice based tax refunds in 2012. - Increase the criteria for presumptive taxation by 60 percent. - Introduce a minimum tax of €300 on self-employed for financial year 2011 and of at least €400 for 2012 with the exception of professionals of less than five years activity or of less than three years to retirement. - b. Property tax exemptions - Reduce the threshold for the individual property tax to €200,000 and increase the minimum rate to 0.2 percent. - c. Excises and other indirect tax - Increase the specific component of the excise on cigarettes. - Introduce excises on natural gas, LPG, and non alcoholic beverages. - Increase the excise tax on heating oil for households and legal entities. - Introduce a luxury levy on vehicles, with an exemption regarding cars hired by disable people, motorbikes and pools. - Increase circulation fee for cars. - Introduction of a special levy on permits for smoking spaces. - 3 State owned enterprises - Establishment of a labor reserve for staff furloughed by SOEs at 60 percent of the base wage. - 4 Social contributions and pension adjustments - Increase of unemployment solidarity contribution for private sector employees by 1 percent, civil servants by 2-3 percent, and a monthly fee for self-employed. - Increase of the pension solidarity contribution rates for monthly pensions exceeding €1.700, and an additional increase in the special contribution for pensioners younger than 60 years old who have monthly pensions exceeding €1.700. - Introduction of special income-scaled contribution on supplementary pensions above €300 per month. - Sector-specific percentage of annual corporate turnover to be paid to OAEE starting 2013. - Increase in contribution rates for professional pension funds and OAEE. - Reduction in lump-sum pensions for public enterprises by 10 percent (except PPC at 15 percent). - Reduction of NAT (sail men pension fund) pensions by 6 percent and cut in subsidy to OTE. - Family allowance to be included in the ceiling on maximum pensions. - Tighten criteria for seasonal unemployment benefits. - 5 Other - Suspend the sharing formula with sub-national governments for the additional revenue deriving from anti-crisis measures and reduce transfers to them, consistent with the local government adjustment measures included in the MTFP. ### Annex III — Greece: Privatization Plan (selected scheduled transactions and participations) - 2011 Q2 - OTE 10.0% share sale. - 2011 Q3 - Thessaloniki Water (EYATH) at least 40% share sale of SPV. - Athens Intl Airport 100.0% Concession. - OPAP 1 100.0% Concession. - OPAP 2 100.0% New games (Gaming law enacted by end-August). - Thessaloniki Port 23.3% share sale of SPV. - State Lotteries 100.0% share sale of SPV. - 2011 Q4 - Piraeus Port 23.1% share sale of SPV. - Hellenic Defense Systems (EAS) 99.8% share/asset sale. - Hellenic Postbank 34.0% share sale. - Public Gas Company (DEPA) 65.0% share sale (Operations and infrastructure). - Public Gas Company (DESFA) 31.0% share sale (to be separated by Q3-2011). - Railway Operator (TRAINOSE) 100.0% share sale. - Larco 55.2% share sale. - Alpha bank 0.6% share sale. - National Bank of Greece (NBG) 1.2% share sale. - Hellenic Horse Racing (ODIE) 100.0% share sale (Gaming law enacted by end-August). - Mobile Telephony Licenses 100.0% sale of rights. - Casino Mont Parnes 49.0% share sale. - Hellenic Vehicle Industry (ELBO) 72.6% share sale. - OPAP 34.0% share sale. - Hellenikon 1 100.0% share sale of SPV (Land use assigned by Q3-2011). - Four Airbus Aircraft 100.0% Sale. - Real Estate Assets 1 (incl. office sp) 100.0% share sale of SPV (Land use assigned by Q3-2011). - 2012 Q1–Q4 and 2013–2015 - Multiple scheduled share sales and sales of rights, including Athens Intl Airport at least 21% (Q1 2012), Hellenic Petroleum (ELP) 35.5% (Q1 2012), Hellenic Post (ELTA) at least 40% (Q1 2012), Public Power Corporation 17.0% (Q3 2012), Hellenikon 2 100.0% (Q4 2012), numerous Real Estate Assets portfolios 100.0% share sale of SPV, and staged sales of Hellenic Motorways through 2015. - Specific intermediate steps and conditions are noted for many transactions (for example, “to be unbundled by Q3-2011”, “Market to be regulated by Q2-2012”, “Portfolio to be created by Q4-2011”, “Land use assigned by Q3-2011”, “Licencing of exising 3 concessionaries by Q1-2012”, “Incorporatized and grouped by Q2-2012”, and others). ### Technical Memorandum of Understanding (TMU) — program definitions and reporting - General program coordination and consultation - The government will consult with the Fund, European Commission and ECB before modifying measures contained in this 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. - Program exchange rates (program exchange rates are those that prevailed on May 31, 2011) - €1 = 1.4385 U.S. dollar. - €1 = 116.30 Japanese yen. - €1.1128 = 1 SDR. - Note: For program purposes, all foreign currency-related assets, liabilities, and flows will be evaluated at “program exchange rates”, with the exception of the items affecting government fiscal balances, which will be measured at current exchange rates. - Definition of General Government (for program purposes) - The general government includes: - The central government, including: - Entities covered under the State Budget as defined in Chapter 2 of the Law 2362/1995 as modified by Law 3871/2010 regarding “Public Accounting, Auditing of Government Expenditures and Other Regulations,” and other entities belonging to the budgetary central government. - Other entities or extra-budgetary funds (EBFs) not part of the State budget, but which are, under European System of Accounts (ESA95) rules, classified under central government. This includes ETERPS and the National Wealth Fund. - The following state enterprises and organizations included by the National Statistical Service (ELSTAT) under the definition of central government: ATTIKO METRO, ETHEL, ISAP, HLPAP, TRAM, ELGA, HELLENIC DEFENCE SYSTEMS S.A., OSE, TRAINOSE, ERT, ELECTROMECHANICA KYMI LTD, OPEKEPE, KEELPNO, EOT, INFORMATION SOCIETY IN GREECE, Unit for the Organization and Management of Development Projects S.A. (References to individual companies are understood to include all of their subsidiaries which are to be consolidated under IFRS requirements.) - Local government comprising municipalities, prefectures, and regional governments including their basic and special budgets, including all agencies and institutions attached thereto, which are classified as local governments according to ESA 95. - Social security funds comprising all funds that are established as social security funds in the registry of ELSTAT. - Other extra budgetary entities included by ELSTAT under general government, which are not yet counted under central government. - 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 (the government will inform IMF, European Commission and ECB staff of the creation of any such new funds, programs, or entities immediately). - The general (central) government, as measured for purposes of the program monitoring in 2011, shall not include entities that are re-classified from outside general (central) government into general (central) government during the course of 2011. - 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. - The Ministry of Finance, in collaboration with the Ministry of Interior, will provide monthly data on revenues and expenditures for local governments, as collected in the Ministry databank. - The Minister of Finance, in collaboration with the Ministry of Labor and Social Security, will provide monthly data on revenues and expenditures in main social security funds (including IKA, OGA, OAEE, OAED). - The Bank of Greece will provide detailed monthly data on assets and liabilities of local authorities, social security funds, ETERPS (and other extra-budgetary funds), and state enterprises included in the definition of general government in line with monetary survey data. - Data will be provided within four weeks after the closing of each month. *Source: _cr11175 - 1. Parliament to approve medium-term budget strategy (MTFS).* ### 43. Definition: The modified general government primary cash balance (MGGPCB) is ### Definition: The modified general government primary cash balance (MGGPCB) ### Core 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 and the public investment budget, - minus the change in the stock of arrears from line ministries, - minus the change in net financial assets of local government, - minus the change in net financial assets of social security funds minus the change in the stock of arrears of public hospitals, - minus the change in net financial assets of ETERPS, - minus the change in net financial assets of reclassified public enterprises (RPEs) minus guarantees called to entities within the general government, - and minus the spending by the National Wealth Fund. - Privatization receipts and proceeds from the sale of land and buildings are excluded from cash receipts. - Net lending operations by the state budget are recorded as cash expenditures. ### Ordinary state budget cash balance (measurement and scope) - Measured from above the line. - Based on ordinary budget revenues (recurrent revenue plus non-recurrent revenue, including NATO revenues, minus tax refunds) minus ordinary budget expenditures. - Ordinary budget expenditures exclude amortization payments 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; - the reserve, interest payments; - transfers for the settlement of past debt; - payments for military equipment procurement on a cash basis; - NATO expenses; - capital transfers to social security funds or other entities by bonds; - called guarantees where the state or central government assumes payments on behalf of entities outside of the general government. - Data source: monthly publications on the official website of the General Accounting Office of the Ministry of Finance, aligned with ordinary state budget line items. ### Public investment budget cash balance - 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, aligned with investment state budget line items. ### Change in the stock of arrears from line ministries - Measured cumulatively: stock of arrears at time of measurement of the PC minus stock at the end of the previous year. - Stock reflects all arrears outstanding irrespective of when unpaid commitments were entered into. - Includes arrears of line ministries and other spending bodies with a vote in the budget (examples listed in source). - Data: monthly publications of state budget arrears on the Ministry of Finance website; based on survey data until commitment register data are assessed by IMF, European Commission, and ECB staff. ### Change in net financial assets of local governments - Defined on a transactions basis as change in total financial assets minus financial liabilities of local authorities, adjusted for valuation changes by the Bank of Greece. - Financial assets include deposits of local governments in the Bank of Greece and domestic credit institutions (measured at face value excluding accrued interest). - Financial liabilities include short and long term loans from domestic credit institutions (measured at face value). ### Change in net financial assets of social security funds - Defined on a transactions basis as change in total financial assets minus financial liabilities of social security funds, adjusted for valuation changes by the Bank of Greece; minus change in stock of arrears of public hospitals to entities outside the general government. - Financial assets include: - deposits of social security funds in the Bank of Greece and domestic credit institutions and deposits held directly or indirectly through the IKA mutual fund (measured at face value excluding accrued interest); - holdings of shares quoted on the Athens Stock Exchange held directly or indirectly through the IKA mutual fund; - direct or indirect holdings of Mutual Fund units issued by Greek management companies (other than the IKA mutual fund); - holdings of central government bonds (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) measured at nominal value; - holdings of bonds issued abroad and other foreign assets. - Financial liabilities include short and long term loans from domestic credit institutions to social security funds (measured consistently with monetary survey data). - Change in stock of arrears of public hospitals (NHS hospitals): - Data on hospital arrears should be available within four weeks of the end of each month. - Measured cumulatively: stock of arrears at time of PC measurement minus stock at end of previous year. - Stock excludes the 5.34 billion hospital arrears to pharmaceutical companies incurred by end-2009 to the extent still outstanding. - Includes arrears related to activities of the 134 NHS hospitals. - Data: monthly publications of hospital arrears on the Ministry of Finance website; based on survey data until commitment register data are assessed by IMF, European Commission, and ECB staff. ### Change in net financial assets of ETERPS - Defined on a transactions basis as change in total financial assets minus financial liabilities of ETERPS, adjusted for valuation changes by the Bank of Greece. - Financial assets include: - deposits of ETERPS in the Bank of Greece and domestic credit institutions (measured at face value excluding accrued interest); - holdings of shares quoted on the Athens Stock Exchange; - holdings of Mutual Fund units issued by Greek management companies; - holdings of central government bonds; - holdings of other bonds issued abroad. - Financial liabilities include short and long term loans from domestic credit institutions to ETERPS or other lending from the Bank of Greece. ### Change in net financial assets of reclassified public enterprises (RPEs) - Defined on a transactions basis as change in total financial assets minus financial liabilities of RPEs, adjusted for valuation, minus guarantees called from entities consolidated within the general government. - RPEs listed in the source (exact names preserved). - Financial assets include: - deposits of RPEs in the Bank of Greece and credit institutions (domestic and foreign) measured at face value excluding accrued interest; - holdings of shares quoted on the Athens Stock Exchange; - holdings of Mutual Fund units issued by Greek management companies; - holdings of central government bonds; - holdings of other bonds issued abroad. - Financial liabilities include short and long term loans from domestic credit institutions measured consistently with monetary survey data, loans from foreign banking system, and loans from EIB or other official lenders. ### Expenditures of the National Wealth Fund (NWF) - Defined from below the line as the change in deposits of the NWF net of deposit changes due to borrowing for securitization purposes that are remitted to the central government as privatization receipts. - Changes in net deposits of the NWF and borrowing are measured from monetary survey data for borrowing and deposits in commercial banks. - For deposits at the central bank, net deposits are measured directly from the Bank of Greece. - Remittance of privatization proceeds to the state measured from inflows into the Treasury Single Account. ### Other provisions (program-specific exclusions and timing) - Primary expenditure of the central government monitored excludes payments related to bank support under the program’s banking sector support and restructuring strategy. Excludable transactions include: - loans to financial institutions and investments in equity of financial institutions (requited recapitalization); - unrequited recapitalization; - purchases of troubled assets; - operations related to the FSF. - Any financial operation by central government to support banks, including issuance of guarantees or provision of liquidity, must be immediately reported to IMF, European Commission, and ECB staff. - The change in net financial assets of RPEs will be excluded for the end-June PCs in 2011. - For end-July, end-September and end-December 2011 PCs, the change in net financial assets of RPEs will be included, measured cumulatively from January 1, 2011 onward. - Capital transfers to social security funds or other entities by bonds shall exclude: - bond issuance for settlement of end-2009 health related arrears; - settlement related to the judiciary liabilities; - compensation for former Olympic Airways employees. ### Supporting material (reporting frequencies and responsible agencies) - Data on cash balances of the ordinary and 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 each month. - Includes detailed information on revenue and expenditure items in line with monthly reports published on the Ministry of Finance website, and data on capital transfers to social security funds or other entities in bonds and called guarantees. - Data on net financial assets of local authorities, social security funds, extra-budgetary funds including ETERPS, AKAGE, and reclassified public enterprises: - Provided to IMF, European Commission and ECB by the GAO in cooperation with the Statistics Department of the Bank of Greece within four weeks after the end of each month. - Monthly data on arrears: - Arrears of public hospitals (NHS hospitals) provided by the Ministry of Health within four weeks after the end of each month. - Arrears of line ministries provided by the Ministry of Finance within four weeks after the end of each month. ### Related fiscal targets and performance criteria (definitions and reporting) - Ceiling of State Budget Primary Spending (Performance Criterion): - State budget primary spending = state budget spending (ordinary + public investment) minus interest expenditures paid by the state budget plus change in stock of arrears of line ministries to entities outside the general government (in line with definitions above). - Primary expenditure monitored excludes cash payments related to bank restructuring under the program’s banking sector restructuring strategy (similar exclusions as above). - Supporting material: The General Accounting Office will provide monthly expenditure data of the ordinary and investment state budget and monthly data on stock of arrears of line ministries. - Non-Accumulation of Domestic Arrears by the General Government (Continuous Indicative Target): - Domestic arrears defined as unpaid invoices past due by 90 days. - If no due date specified, unpaid commitment is in arrears 90 days after initiation of the invoice. - Continuous non-accumulation defined as no increase in the stock of all general government arrears outstanding at the end of every month during the quarter the indicative target is monitored. - Exclusions: arrears accumulated by the Civil Servants’ Welfare Fund; €5.34 billion hospital arrears to pharmaceutical companies incurred by end-2009 to the extent still outstanding. - Supporting material: Ministry of Finance provides monthly expenditure arrears data within four weeks after the end of each month, including accounts payable overdue for more than 30 and 60 days. - Ceiling on the Overall Stock of Central Government Debt (Performance Criterion): - Refers to ESA95 central government debt (state debt, debts of extrabudgetary funds and public enterprises consolidated into central government, and other ESA95 adjustments). - Defined as total outstanding gross debt liabilities; includes securities and loans; excludes accounts payable. - Debt measured at nominal value; program exchange rate applies to non-euro denominated debt; inflation indexation applies to indexed debt using specified index. - Excludes debt arising from payments for bank restructuring under the program’s banking sector restructuring strategy (does not cover debt related to the Financial Stability Fund). - Any central government financial operation to support banks (with specified exception) to be immediately reported to IMF, European Commission and ECB staff. - Adjuster for 2011: ceiling will be adjusted upward (downward) by amount of any upward (downward) revision to stock of end-December 2010 ESA95 central government debt of 353.761 billion. - Supporting material: GAO will provide total stock of central government debt data consistent with ESA95 no later than 30 days after end of each month. - Ceiling on New Central Government Guarantees (Performance Criterion): - Includes new guarantees granted by the state and by entities classified under ESA95 as central government, excluding guarantees to entities whose debt is covered under central government debt ceiling. - Excludes guarantees to support banks and guarantees related to EIB financed loans. - New guarantees are those extended during the current fiscal year, including maturity extensions. - Supporting material: All new central government guarantees reported in detail identifying amounts and beneficiaries; GAO to provide data monthly within three weeks after end of each month; non-state entities classified under central government to report new guarantees to GAO monthly within three weeks after end of each month. - Non-Accumulation of External Debt Payment Arrears by the General Government (Continuous Performance Criterion): - External debt payment arrear defined as a payment on debt to non-residents contracted or guaranteed by the general government not made within seven days after falling due. - Performance criterion applies on a continuous basis throughout program period. - Supporting material: Stock of external arrears provided by GAO with a lag of not more than seven days after the test date. - Floor on Privatization Proceeds (Performance Criterion): - Privatization proceeds defined as cash receipts from asset sales carried out by the privatization agency (the National Wealth Fund) and, prior to its establishment, directly by the government. - Includes sale of equity of listed or non-listed companies and banks; shareholdings in public infrastructure; shareholdings in SPVs; leasehold in commercial real estate and publicly held land; sale-lease back operations; securitization of asset-related cash streams; sale of rights and concessions (including securitization of proceeds of concessions); and other assets in the authorities’ privatization program. - Proceeds valued in euro and reported on a gross basis, excluding associated capital expenditure or other restructuring costs and operating costs of the National Wealth Fund (operating costs recorded as expenditure according to modified cash deficit definition). - Proceeds measured as inflows of cash received by the National Wealth Fund, or prior to its establishment directly by government, as deposited in the Special Privatization Account at the Bank of Greece on the day the transaction is settled. *Source: IMF program document definitions and supporting reporting requirements (text provided).* ### 58. Supporting material. Quarterly information on the cash receipts from asset sales, ### _cr11175 - 58. Supporting material. Quarterly information on the cash receipts from asset sales, ### Transparency and reporting on asset sales and Sovereign Wealth Fund activity - Quarterly information on the cash receipts from asset sales, quarterly balances of the privatization account, inflows to the account (by project), and outflows to the state budget, will be made available by the Minister of Finance, in collaboration with the National Wealth Fund, no later than two weeks after the end of each quarter. - The Ministry of Finance will also provide a quarterly progress report on the Sovereign Wealth Fund activity, including: - a description of its operations; - information on any borrowing (amounts, terms, and collateral); - updates on the key steps in the operational plan; and - latest estimates of the expected proceeds and timeline for completion of the transactions. - Quarterly reports on the National Wealth Fund’s activities, along with an audited report of its finances will be published on the website of the Ministry of Finance as from end-December 2011. ### 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 to the IMF, EC, and ECB staff any data revisions in a timely manner. ### Monitoring of structural benchmarks — Public financial management reforms - The authorities will publish: - (i) monthly reports on arrears of the general government; and - (ii) monthly consolidated general government reports with aggregate revenue, expenditures and intra-governmental transfers for each sub-sector of the general government, within four weeks after the end of each month. - The arrears reports will include both ordinary and investment budget arrears across all line ministries, public hospitals, and the largest social security funds, extra-budgetary funds and local governments, with definitions: - The “largest” social security funds will cover at least the top 50 funds in terms of spending as from ELSTAT reporting. - The “largest” extra-budgetary funds will cover 80 percent of existing extra budgetary funds, including at least all public enterprises classified under the general government, ETERPS, and the top 100 entities in terms of expenses as from ELSTAT reporting. - The largest local governments will be defined to include at least the 100 largest local authorities in terms of population out of the 324 authorities as defined under the “kallikrates” law. - To meet the end-July 2011 benchmark, three consecutive months of reports will need to be published. ### Monitoring of structural benchmarks — Revenue administration progress and targets - Benchmarks to be reported monthly and assessed quarterly include: - Completion of 75 full-scope audits and 225 VAT audits of large taxpayers, as identified by relevant taskforce, by end-December 2011; - Collection of 20 percent of all assessed taxes and penalties from new audits of large taxpayers within 3 months of the assessment date; and collection of 30 percent of all assessed taxes and penalties from new audits within 6 months of the date of assessment; - Collection for the year of 5 percent of the estimated stock of collectable tax debt (€8 billion), with €300 million by end-December 2011. - Completion of 1000 VAT audits of VAT non-filers as identified by the relevant task force by end-December 2011. - Collection of 20 percent of all assessed taxes and penalties from new VAT audits of non filers within 3 months of the assessment date; and collection of 30 percent of all assessed taxes and penalties from new audits within 6 months of the date of assessment. - Supporting material: Monthly information on full-scope audits and VAT audits of large taxpayers and non filers, collection of assessed taxes and penalties, and collection of tax debt will be made available by the Minister of Finance, in collaboration with the steering committee on revenue administration, no later than two weeks after the end of each month. First data submission will include data back to the beginning of 2011. Information will continue to be provided after December 2011. ### Monitoring of MTFS implementation (Phase II) — required legislation by August 15, 2011 1. Single public wage scale bill: - Introduction of a single pay scale for the public sector; - Reduction in productivity allowance (by 50 percent); - Tightening of the ceiling on overtime; - Reduction in the remuneration for committee participation; - Hiring from state-owned enterprises, private law entities and from the furlough scheme to count against the hiring rule. 2. Pension adjustment bill: - Introduction of individual social security numbers and a cap on total pensions paid to a single pensioner; - Expansion of means testing of pensioners' social solidarity benefit to include all types of income and wealth (EKAS); - Reduction in lump-sum pensions for civil servants, starting in 2011; - Extend freeze of main and supplementary pensions to 2015; - Reduction in the core pension of OGA and in the lower pension thresholds of other SSFs, and tightening of beneficiary criteria based on location of permanent residence. 3. Closing non essential public entities and other miscellaneous legislation: - Closure and downsizing of 40+11, and merger of 25 already identified general government entities; - Reduce penalties to allow the registration of boats currently registered as commercial boats (for tax avoidance) as privately owned boats, provided VAT and other taxes are paid; - Reevaluate fines on unauthorized buildings and settlement of planning infringements. ### Additional fiscal and privatization commitments and targets - Request for disbursement: EUR 8 700 million (fifth installment of financial assistance). - Adoption of additional fiscal measures for 2011 with the aim of reducing the deficit to EUR 17 065 million [Q2-2011]. - Asset management and privatization commitments: - Government privatises assets worth at least EUR 390 million, and adopts a privatisation programme [Q2-2011] with the aim of collecting at least EUR 15 billion by end-2012, and at least EUR 50 billion by end-2015. - A privatisation fund with sound governance is established to accelerate the privatisation process and guarantee its irreversibility and professional management. [Q2-2011] - Government publishes an inventory of state-owned assets. [Q2-2011] The inventory will continue to be updated until end-2011 to ensure it is comprehensive. - A new General Secretariat of Real Estate Development is established. [July 2011] - Government adopts an act enabling the promotion of investment in the tourism sector. [August 2011] - Government adopts the legal framework enabling fast assignment of land use and accelerates state land ownership registration. [Q3-2011] ### Reforms in public enterprises, staffing and tariffs - Legislation to close, merge and downsize non-viable entities tabled by government [July 2011] and adopted by Parliament. [mid-August 2011]; specified entities listed for closure/merger/downsizing. - Measures to reduce procurement and third party costs, update tariffs, create new business lines, and reduce personnel costs through an employment retrenchment plan. [Q3-2011] - Excess staff management and labour reserve: - Hiring rule: 1 recruitment for 5 exits (1 for 10 in 2011). This rule is without sectoral exceptions. - Staff in the labour reserve will be paid at 60 percent of their wage (excluding overtime and other extra payments) for not more than 12 months, after which they will be dismissed. [continuous starting Q3-2011] - Tariffs in OASA and OSE and other state-owned enterprises will increase by at least 25 percent. [Q1-2013] ### Tax reform and revenue administration actions and timelines - Tax base broadening and rate changes: - Broadens the personal income tax base by limiting the application of the basic allowance, introducing a ceiling to deductions. [July 2011] - Moves non-basic goods and services (restaurants and bars) from the VAT reduced rate to the standard rate. [July 2011] - Widens the property tax base and increases rates. [July 2011] - Reduces investment-related tax expenditure. [ministerial decision in July 2011] - Revenue-sharing adjustment mechanisms to avoid additional local government spending from revenue measures. [Q3-2011] - Revenue administration reforms and deadlines: - Prepare a strategic plan for medium term reforms. [July 2011] - Establish a central directorate general for debt collection, and a large-scale tax payers unit. [Q3-2011] - Overhaul the administration into a more modern functionally-based organization including the work of the 5 task forces. [Q3-2011] - Implement the anti-tax evasion action plan. [continuous] - Reassess tax auditors’ qualifications and hire new auditors by Q3-2011. - Make operational the newly established arbitration agency and set up an independent fast track administrative dispute resolution process to deal rapidly with large dispute cases (i.e. within 90 days). [Q3-2011] - Merge, transfer competences and close 200 local tax offices identified as inefficient by starting Q3-2011, completed Q4-2011. - Dedicated court chambers for tax cases expected to be operational by end-September 2011. - Further measures to simplify the tax system, broaden bases and reduce tax rates in a fiscally-neutral manner for personal income tax, corporate income tax and VAT. [September 2011] *Source: _cr11175 - 58. Supporting material. Quarterly information on the cash receipts from asset sales,* ### 2.4 Public financial management reforms ### 2.4 Public financial management reforms ### Expenditure control and payment arrears - Government clears payment arrears accumulated until end-2010 and ensures that no payment arrears are accumulated from Q3-2011 on. - To strengthen expenditure control, Government: - adopts a decision specifying the qualification and responsibilities of accounting officers to be appointed in all line ministries with the responsibility to ensure sound financial controls; [July 2011] - appoints financial accounting officers; [July 2011] - accelerates the process of establishing commitment registries. It will make operational registries covering the whole general government (except the smallest entities); [July 2011] - undertakes inspections in the several ministries and general government entities with the largest arrears, to ensure the application of registers. Inspections cover entities accounting for at least 75 percent of arrears; [July 2011] - creates general directorates for financial services in each ministry. [Q3-2011] ### Functional reviews and public administration modernisation - Government assesses the results of the first phase of the independent functional review of central administration, including operational policy recommendations. These recommendations should determine how to achieve a more streamlined and effective public service, define clear responsibilities and command lines of ministerial departments, eliminating overlapping competences, and improving inter- and intra-mobility. [Q2-2011] - The functional review of existing social programmes is finalised. [Q3-2011] - Government assesses the results of the second and final phase of the independent functional review of central administration. Government adopts legislation and measures to implement the operational recommendations of the first phase of the functional review of public administration at central level and of the full review of existing social programmes. [Q3-2011] - Government assesses the results of the second and final phase of the independent functional review of central administration [Q4-2011] ### Public sector wages and human resource management - Government finalises a medium-term staffing plan for the period up to 2015 in line with the rule of 1 recruitment for 5 exits (1 for 10 in 2011). The plan will include tighter rules for temporary staff, cancellation of vacant job post and reallocation of qualified staff to priority areas and takes into account the extension of working hours in the public sector. [July 2011] - A detailed action plan with a timeline to complete and implement the simplified remuneration system is presented, in line with private sector wages, achieving a reduction in the total wage bill. This plan is based on the results of the report published by the Ministry of Finance and the Single Payment Authority. The legislation for a simplified remuneration system will be introduced in Parliament by July 2011 and phased in over 3 years. Wages of state-owned enterprises employees will be in line with the new wage grid for the public sector. - Publication of monthly data on staff movements (entries, exits, transfers among entities) of the several government departments commences. [July 2011] ### Public procurement reforms - Legislation is adopted to establish the Single Public Procurement Authority (SPPA) with the mandate, objectives, competences, powers and schedule for entry into force, in line with the Action Plan agreed with the European Commission in November 2010. [July 2011] - Government launches the development of an e-procurement IT platform and sets intermediate milestones in line with the action plan. This includes testing a pilot version (agora.gov.gr), availability of all functionalities for all contracts and phasing-in of the mandatory use of e-procurement system for supplies and services. [July 2011]. Works contracts will also be added to the e-procurement platform, promptly. - A thorough review of the system of redress against award procedures and the role to confer to the SPPA is carried out, in agreement with the European Commission. [Q3 2011] - Government undertakes a review identifying areas to increase the efficiency of the public procurement system outside the SPPA, as specified in the Action Plan. The review includes conclusions and actions in agreement with the European Commission. [July 2011] - Government issues decisions: - to provide for the institution and establishment of positions for the SPPA’s personnel, as well as for the organization of human resources and services of the Authority in accordance with the provisions of the law on the SPPA - to appoint the members of the SPPA. [Q3-2011] - The SPPA starts its operations with the necessary resources to fulfil its mandate, objectives, competences and powers as defined in the law on the SPPA and the Action Plan agreed with the European Commission in November 2010. [January 2012] - The e-procurement framework is fully operational, and a common website is created for the publication of all procurement procedures and outcomes. [Q2-2012] ### Key timelines and implementation milestones - [Q2-2011] Assessment of first functional review phase results and related operational recommendations. - [July 2011] Series of actions including adoption of accounting officer decision; appointment of financial accounting officers; commitment registries operational for whole general government (except smallest entities); inspections covering entities accounting for at least 75 percent of arrears; staffing plan finalised; legislation to establish SPPA adopted; e-procurement pilot/testing and milestones set; introduction of simplified remuneration legislation to Parliament. - [Q3-2011] Creation of general directorates for financial services in each ministry; thorough review of redress system for procurement; appointment of SPPA members; design and validation steps for pension-related reforms (see pension reform section). - [Q4-2011] Assessment of second functional review phase results. - [January 2012] SPPA starts operations with necessary resources. - [Q1-2012] Phased implementation of reform measures in related areas (see pension reform section). - [Q2-2012] Full operationalisation of the e-procurement framework and creation of a common procurement website. *Source: _cr11175 - 2.4 Public financial management reforms* ### 2.7 To modernise the health care system ### 2.7 To modernise the health care system ### Objectives and aggregate targets - Keep public health expenditure at or below 6 percent of GDP while maintaining universal access and improving quality of care delivery. - Achieve measures yielding savings on pharmaceuticals of at least EUR 2 billion relative to the 2010 level, of which at least EUR 1 billion in 2011. This will bring average public spending on outpatient pharmaceuticals to about 1 percent of GDP by end 2012 (in line with the EU average). ### Governance and institutional reform - Implement provisions of Article 31 and 32 of Law 3863/2010, including SYSPY (Health Benefit Coordination Council) activities: - Establish new criteria and terms for conclusions of contracts by social security funds with all healthcare providers and other actions envisaged in Article 32 to achieve targeted reduction in spending. - Initiate joint purchase of medical services and goods to achieve substantial expenditure reduction of at least 25 percent compared to 2010 through price-volume agreements. [July 2011] - Equalise the common benefit package for insurers of EOPYY, aiming for full equalisation of benefits and contributions across funds by December 2011; align contributions paid by OGA members to those of other members of EOPYY. [July 2011] - Take all necessary steps for EOPYY to initiate operations as planned 6 months after adoption of Law 3918/2011, including appointment of necessary and qualified staff; set up a selection committee with objective criteria. [July 2011] - EOPYY starts operating. Target reductions compared to the four originating funds combined: - administrative staff reduced by at least 50 percent; - contracted doctors reduced by at least 25 percent; - aim to achieve a ratio of patients per doctor in line with the European average. [Q3-2011] - Revoke market regulation 40 (17.12.1990) to abolish the 0.4 percent contribution of wholesale sales prices in favour of the Panhellenic Pharmaceutical Association. [Q3-2011] - Adopt an action plan by early November 2011, based on the final report of the task force, including a timetable for concrete actions. [Q4-2011] ### Pricing of medicines and medical services - Collect rebates from pharmacies with sales above a designated threshold against payments due to pharmacies on a monthly basis. - Publish complete price list for medicines in the market using a new pricing mechanism based on the three EU countries with the lowest prices; update the list quarterly. - Lift caps to price reductions used when the price list was first introduced. [Q2-2011] - Review fees for medical services outsourced to private providers to reduce related costs by at least 15 percent in 2011, and by an additional 15 percent in 2012. [Q4-2011] - From 2012, calculate pharmacies' profit margins as a flat amount or flat fee combined with a small profit margin aiming to reduce overall profit margin to no more than 15 percent, including on the most expensive drugs as defined in law 3816/2010. [Q1-2012] ### Prescribing, e-prescribing, and monitoring - Publish binding prescription guidelines for physicians defined by EOF on the basis of international prescription guidelines to ensure cost-effective use of medicines. [July 2011] - Publish and continuously update the positive list of reimbursed medicines using the reference price system developed by EOF. [Q2-2011] - Extend e-prescribing of medicines, diagnostics and doctors' referrals to all social security funds, health centres and hospitals; conduct necessary tendering procedures to implement a comprehensive and uniform health care information system (e-health system) in compliance with EU procurement rules. [Q3-2011] - EOPYY and remaining social security funds to: - establish process to regularly assess information from e-prescribing and produce regular reports at least quarterly to Ministry of Labour, Ministry of Health, Ministry of Finance and ELSTAT; - monitoring and assessment carried out through a dedicated common unit under SYSPY; - provide feedback to each physician at least every quarter and publish a yearly report; - enforce sanctions and penalties as follow-up to assessment. [Q4-2011] - Government to produce a semi-annual report on prescription and consumption of medicines and diagnostic tests including information on rebates from pharmacies and pharmaceutical companies and on volume and value of medicines; provide quarterly feedback to all physicians; intensify monitoring and reporting of misconduct and conflict of interest in prescription behaviour. [Q4-2011] - E-prescribing to cover all medical acts (medicines, referrals, diagnostics, surgery) in both NHS facilities and providers contracted by EOPYY and social security funds; detailed monthly auditing reports produced by NHS facilities and providers. [Q1-2012] ### Promoting generic medicines - Additional measures: - compulsory e-prescription by active substance and of less expensive generics when available; - associate a lower cost-sharing rate to generic medicines that have a significantly lower price than the reference price (lower than 60 percent of the reference price); - set maximum price of generics to 60 percent of the branded medicine with similar active substance. [Q2-2011] - Ensure at least 30 percent of volume of medicines used by public hospitals is generics below the price of similar branded products and off-patent medicines by making public hospitals procure by active substance. [Q3-2011] - Ensure at least 50 percent of volume of medicines used by public hospitals is generics below the price of similar branded products and off-patent medicines by making public hospitals procure by active substance. [Q4-2011] ### NHS (ESY) service provision and hospital efficiency - Prepare short- and medium-term reorganisation and restructuring plan to reduce inefficiencies, utilise economies of scale and scope, and improve quality of care; aim to reduce hospital costs by: - at least 10 percent in 2011; and - an additional 5 percent in 2012 in addition to the previous year. - Measures to achieve cost reductions: - adjust public hospital provision within and between hospitals within the same district and health region; - revise activity of small hospitals towards specialisation (rehabilitation, cancer treatment, terminal care) where relevant; - increase mobility of healthcare staff (including doctors) within and across health facilities and health regions; - prepare joint management/operation systems in districts with more than one hospital, excluding university hospitals. [Q2-2011] - Set up transparent selection criteria for hospital management requiring recognised standing in health, management and health administration. [Q2-2011] - Set up a system for comparing hospital performance (benchmarking) on the basis of a comprehensive set of indicators. [Q1-2012] Annual reports to be published as of end-2012. ### Wages and human resource management - Ministries of Health and Labour with Ministry of Finance to prepare a first draft report presenting structure (age, specialty, grade, regional distribution), levels of remuneration (including fees provisions to consultants and doctors) and volume and dynamics of employment in hospitals, health centres, and health funds; update annually and use as HR planning instrument. - 2011 report to present plans for allocation and re-qualification of human resources up to 2013 and provide guidance for the education system; specify plan to reallocate qualified and support staff within NHS and health funds. [Q3-2011] - Extend use of capitation payments of physicians (currently used by OAEE) to all contracts between social security funds and contracted doctors: - new payment mechanism starts for each new contract renewed in 2011 and for all contracts from 2012; - defines a minimum number of patients per doctor based on other EU countries' experience; - expected reduction in overall compensation cost (wages and fees) of physicians by at least 10 percent in 2011, and an additional 15 percent in 2012 as compared to the previous year. [Q3-2011] ### Accounting, reporting, and control - Assign internal controllers to all major hospitals. [Q3-2011] - Start publishing monthly report with analysis and description of detailed data on healthcare expenditure by all social security funds with a lag of three weeks after the end of the respective month. [By Q2-2011] - Social security funds to publish an annual report on medicine prescription; individual prescription reports to serve as regular feedback to each physician at least semi-annually; annual and individual reports examine prescription behaviour with focus on most costly and most used medicines. [Q1-2012] ### Hospital computerisation, DRGs and activity measurement - Carry out necessary tendering procedures to develop full and integrated hospitals' IT systems. [Q3-2011] - Ministry of Health to complete programme of hospital computerisation; finalise centralisation of information building on ESY.net; collect and scrutinise data and produce monthly and annual reports which are published. [Q2-2011] - Improve accounting and book-keeping of medical supplies and billing systems by: - finalising introduction of double-entry accrual accounting systems and regular annual publication of balance sheets in all hospitals; - calculating stocks and flows of medical supplies in all hospitals using uniform coding system for medical supplies developed by EPY and EKEVYL for procurement; - timely invoicing of treatment costs (no later than 2 months) to Greek social security funds, other EU countries and private health insurers for treatment of non-nationals/non-residents. [Q4-2011] - Define a core set of activity and expenditure indicators in line with Eurostat, OECD and WHO health databases; ELSTAT to start providing data in line with the System of Health National Accounts (joint questionnaire collection exercise). [Q4-2011] - Set up basic system of patient electronic medical records via hospital computerisation programme. [Q4-2011] - Pilot the set of DRGs (diagnostic-related groups) in a group of hospitals to develop a modern hospital costing system for contracting (on basis of prospective block contracts); develop clinical guidelines to support DRGs. [Q4-2011] ### Centralised procurement - Move towards centralised procurement of pharmaceuticals and medical goods for the NHS through the Supplies Coordination Committee with support of the Specifications Committee, using the uniform coding system for medical supplies and pharmaceuticals. [Q1-2012] ### Independent task force of health policy experts - Produce, in cooperation with the European Commission, ECB and IMF, a first draft policy report with specific recommendations covering: - health system governance to reduce fragmentation; - financing: pooling, collection and distribution of funds; - harmonisation of health packages across funds; - service provision and incentives for providers including integration between private and public provision; primary care vis-à-vis specialist and hospital care; efficiency in hospital services; pharmaceutical consumption; human resources; - public health priorities, health promotion and disease prevention; - data collection, health technology assessment and assessment of performance; - expenditure control mechanisms. [Q2-2011] - Report to provide preliminary quantitative targets to contribute to keeping public health expenditure constant at, or below, 6 percent of GDP. - Produce final comprehensive policy report with specific recommendations. [Q3-2011] - Government to adopt an action plan by October 2011 based on the report, including a timetable for concrete actions. - Task force to produce an implementation report revising policies implemented so far. [Q1-2012] *Source: 2.7 To modernise the health care system, _cr11175 - 2.7 To modernise the health care system* ### 4.1 To strengthen labour market institutions ### 4.1 To strengthen labour market institutions ### Reforms to contracts, working time, and firm-level unions - Government reforms legislation on fixed-term contracts (including by establishing specific fixed-term contracts for youth at sub-minima wages) and on working-time management, and simplifies the procedure for the creation of firm-level trade unions. [Q2-2011] ### Tackling undeclared work - Government adapts legislation on tackling undeclared work to require the registration of new employees before they start working. [July 2011] ### Strengthening the Labour Inspectorate and pilot on labour card incentives - The reform to strengthen the Labour Inspectorate is completed, with the appropriately qualified staff. - Quantitative targets on the number of controls to be executed are set for the Labour Inspectorate. - A pilot study is to be implemented to verify the favourable financial net impact on the overall social security budget of a discount of up to 10 percent on social contributions for those enterprises introducing the labour card. - Pilot scope: maximum 100 firms. - Pilot duration: maximum four months. [Q3-2011] ### Firm-level collective agreements and sectoral bargaining - Government promotes, monitors and assesses the implementation of the new special firm-level collective agreements. - Government ensures there is no formal or effective impediment to these agreements and that they contribute to improve the adaptability of firms to market conditions, with a view to create and preserve jobs and improve the firms’ competitiveness, by aligning wage developments with productivity developments at firm level, thereby promoting competitiveness and creating and preserving jobs. - Government provides a report on its assessment. - Any other amendment to the law on sectoral collective bargaining is adopted before end-July 2011. ### Assessment, conditionality, and possible amendments - An assessment on the effectiveness of the Labour Inspectorate law will be made six months after its implementation. - Should the law prove ineffective, an appropriate amendment will be adopted. - Any wider-scale application of a discount of up to 10 percent on social security contributions for those enterprises introducing the labour card will be conditional on the pilot study showing sufficient evidence of a favourable financial impact of the discount on the overall social security budget. [Q4-2011] *Source: _cr11175 - 4.1 To strengthen labour market institutions* ### 4.2 To improve the business environment and enhance competition in open ### 4.2 To improve the business environment and enhance competition in open markets ### Regulated professions - Implementation of Law 3919/2011: restrictions to be reinstated consider the need to promote competition and take into account international best practice; Government consults widely before the adoption of these restrictions. [Q2-2011] - Ministerial Decision sets the value of a transaction above which the notaries' pro rata fee for drafting contracts is the maximum permissible fee. For transactions below this maximum value, pro rata fees are set at successively decreasing rates in inverse proportion to the graduated increase, with the starting fee, ending fee and the number of tranches set so as to ensure a sharp reduction of the average fee by, at least, 50 percent. The Ministerial Decision also lowers fees for company creation, for copies and for additional pages. [Q3-2011] - Presidential Decree revises percentages applicable to the reference amounts (Article 96(2) of the Code of Lawyers, as amended), setting prepaid amounts for each procedural act or court appearance. [Q3-2011] - Government screens laws and regulations of professional chambers to identify rules on pricing, access to, and exercise of, the profession that are against Law 3919/2011, EU law and competition rules. [July 2011] - Measures identified to ensure providers are not subject to requirements obliging exclusive exercise of a given activity or restricting joint/partnership exercise of activities, except as set in the Services Directive. [July 2011] - Measures identified to remove complete prohibitions on commercial communications by regulated professions and to ensure commercial communication rules are non-discriminatory, justified by an overriding public interest reason and proportionate. [July 2011] - Audit launched to assess reasonableness, proportionality and justification of lawyers' and engineers' contributions to cover operating costs of their professional associations. [July 2011] - Government starts screening legislation on main regulated professions to assess justification and proportionality of requirements reserving certain activities to providers with specific professional qualifications. [July 2011] - Government publishes a report on implementation of Law 3919/2011 including: - the list of professions falling under the scope of the law; - the list of professions exempted from the lifting of restrictions by Presidential Decree and the justifications for such exemptions; - an assessment of whether further measures are needed on rules on access to, and exercise of, the profession and on pricing to align Greek legislation with EU law and competition rules; - a timetable to screen existing legislation and to adopt necessary changes to specific regulations (Presidential Decrees, Ministerial Decisions and Circulars) to make them fully compatible with chapter A of Law 3919/2011, EU law and competition rules. [July 2011] - The said Presidential Decrees, Ministerial Decisions and Circulars are promptly adopted. [Q3-2011] - Government identifies measures to reinforce transparency in professional bodies by requiring publication of an annual report on their webpage regarding financial performance and statistics on disciplinary actions in defence of consumers' interests. [Q3-2011] - Government monitors implementation of Law 3919/2011 and publishes a study on the law's effectiveness in increasing competition and reducing prices. [Q3-2011]. Adjustments to the law with the aim of increasing competition are adopted by Q1 2012. - Government presents results of screening requirements reserving certain activities to providers with specific professional qualifications for the main regulated professions. [Q3-2011] - All Presidential Decrees needed for implementation of the law on fast-track licensing procedure for technical professions are adopted. [October 2011] - Government prepares acts by end-2011, to be adopted by Q1-2012, to: - abolish provisions of professional chambers' regulations on access to, and exercise of, the profession and on pricing that are against Law 3919/2011 and EU law including competition rules; - ensure providers are not subject to requirements obliging exclusive exercise of a given activity or restricting joint/partnership exercise of activities, except under the Services Directive; - remove complete prohibitions on commercial communications and ensure such rules are non-discriminatory, justified by public interest and proportionate; - reinforce transparency in functioning of professional bodies (see requirement for Q3-2011); - set contributions of lawyers and engineers to their professional associations that reflect operating costs of services provided by those associations; - simplify requirements reserving certain activities to legal and engineering professions that are not justified or proportionate; - tackle any other issues identified in the Q3-2011 assessment of Law 3919/2011 implementation. [Q4-2011] - Government requests the Hellenic Competition Commission to issue an opinion on the proposed acts. [Q4-2011] ### Recognition of professional qualifications - All necessary measures taken to ensure effective implementation of EU rules on recognition of professional qualifications, including compliance with ECJ rulings (inter alia, related to franchised diplomas). Government actions: - updates information on the number of pending applications for recognition of professional qualifications, and sends it to the Commission. - presents draft legislation amending Law 3328/2005 on the Hellenic Academic Recognition and Information Center and other provisions to remove the prohibition to recognise professional qualifications derived from franchised degrees; holders of franchised degrees from other Member States should have the right to work in Greece under the same conditions as holders of Greek degrees. [Q3-2011] - Legislation amending Law 3328/2005 is adopted to ensure holders of franchised diplomas from other Member States have the right to work in Greece under the same conditions as holders of Greek degrees. [Q4-2011] ### Services Directive - Government completes adoption of changes to existing sectoral legislation in key services sectors (retail, wholesale, agriculture, employment, technical services). For any remaining services sector, Government specifies a timetable for adopting sectoral regulations by end-2011 to ensure full compliance with the Services Directive. New regulations should: - facilitate establishment by: - abolishing or amending requirements prohibited by the Services Directive; - abolishing or amending unjustified and disproportionate requirements, including quantitative and territorial restrictions, legal form requirements, shareholding requirements, fixed minimum and/or maximum tariffs and restrictions to multidisciplinary activities. - facilitate provision of cross-border services, so providers of cross-border services are required to comply with specific Greek requirements only in exceptional cases (when admitted by Articles 16 or 17 of the Services Directive). - provide legal certainty for cross-border providers by setting out which requirements can and cannot be applied to cross-border services. [Q3-2011] - Government ensures: - the point of single contact (PSC) distinguishes between procedures applicable to service providers established in Greece and those applicable to cross-border providers (in particular for regulated professions). [July 2011] - adequate connection between the PSC and other relevant authorities (including professional associations). [July 2011] - Online completion of procedures covers, at least, procedures in distribution services, tourism, education and construction sectors as well as in food and beverage services, services of regulated professions, real estate services, and business services. [July 2011] - PSC is fully operational and electronic completion of procedures is possible in all sectors covered by the Services Directive. [Q3-2011] - Any remaining sectoral regulation is adopted ensuring full compliance with the Services Directive. [Q4-2011] ### Sectoral growth drivers - Government publishes reports analyzing: - the potential contribution of the tourism sector to growth and jobs, identifying legislative, administrative and other obstacles hindering competition and market entry. [July 2011] - the potential contribution of the retail sector to price flexibility, growth and jobs, identifying legislative, administrative and other obstacles hindering competition and market entry. [July 2011] - Legislation and other structural actions are prepared [Q3-2011] and adopted [Q4-2011] to implement findings of the tourism and retail reports. - Government initiates additional studies on manufacturing, energy, and wholesale sectors to remove remaining obstacles to growth. [Q3-2011] On the basis of these studies, Government prepares concrete actions and a timetable for implementation. [Q4 2011] ### Business environment - Government presents a plan [Q2-2011] for a "Business-Friendly Greece" to tackle 30 remaining restrictions to business activities, investment and innovation. The plan identifies hurdles from company creation to liquidation and presents corrective actions including measures to: - simplify and reduce costs linked to company publication requirements; - complete the setting-up of the General Commercial Registry (GEMI) by training OSS and GEMI users, completing the GEMI database, further developing web services and use of electronic signatures, interconnecting GEMI to the Chamber's information systems and to the PSC to ensure online completion for company formation and administrative procedures; - simplify location, environmental, building and operating permits; - eliminate distortions in fuel distribution; - develop a "single electronic window" centralizing standardized trade-related information and simplifying documents needed to export; - address restrictions in the transport sector, including transport of empty containers and of non-hazardous waste; - reduce complexity of the Code of Books and Records and provide clarity on all categories of non-deducted expenses. - Government starts implementing the "Business-Friendly Greece" action plan. [Q2-2011] - Government starts screening Ministerial Decision A2-3391/2009 on market regulations and related regulations, in cooperation with the Hellenic Competition Commission, to identify administrative burdens and unnecessary barriers to competition and to develop less restrictive policies. [Q2-2011] - A comprehensive list of non-reciprocating charges in favour of third parties is presented, identifying beneficiaries and quantifying contributions paid by consumers in favour of those beneficiaries. [Q3-2011] - Legislation adopted to simplify and shorten procedures for environmental impact studies and approval of environmental terms, aiming to reduce number of projects subject to environmental licensing and duration of approval procedures to EU average levels; acceleration ensured by committing the authorising authority to proceed after a specified time period. [July 2011] - Government reviews and codifies legislative framework of exports (Law 936/79 and Law Order 3999/59), simplifies customs clearance for exports and imports and allows larger companies or industrial areas to be certified to clear cargo for customs themselves. [Q3-2011] - Obligation of registration with exporters’ registry of the Chamber of Commerce is abolished; registration is simplified and becomes voluntary. [Q3-2011] - To attract investment in key sectors (tourism, energy, real estate), Government speeds up review of private project applications in the pipeline and advances at least one large public sector project. [Q3-2011] - Decrees necessary for implementation of law on fast-track licensing for manufacturing activities and business parks are implemented. [October 2011] - Government introduces 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. [Q3-2011] - An impact assessment is presented to evaluate Law 3853/2010 on simplification of procedures for company establishment in terms of savings in time and cost to set up a business. [Q3-2011] - Government submits to the European Commission the draft regulation on the market surveillance service, as provided for in Article 53(2) of the Competition law. [Q3-2011] - Government provides sufficient resources for accelerating completion of the land registry, with a view to: - tendering cadastral projects for additional 4 million rights by December 2011; - digitalising operations of all mortgage and notaries' offices and conveying all newly registered deeds to the cadastre by 2015; - exclusively-operating cadastral offices for large urban centres by 2015; - establishing a complete cadastral register and exclusively operating cadastral offices nationwide by 2020. [Q4-2011] - A Ministerial Decision on market regulations is issued following screening launched in Q2-2011. [Q1-2012] ### Transport - Government ensures quarterly update of business plans of OSE/TRAINOSE and OASA, with detailed monitoring and enforcement mechanisms and realistic key performance indicators and benchmarks per line of activity. By Q2-2011, OASA Group's merging process is terminated and monitored to ensure the group breaks even. - Legislation liberalizing tourist coaches is passed by end-July. Secondary legislation establishing costs and timing for issuing new licenses adopted by end-September; costs will not exceed the administrative costs and required timing will not exceed 20 business days in total. - TRAINOSE breaks even. [Q3-2011] and is prepared for privatisation. [Q4-2011] - Government submits a policy paper indicating how all regional airports will be merged into groups to ensure economic viability in compliance with state-aid rules, including realistic projections identified by appointed financial advisors. [Q3-2011] After ensuring viability, Government launches an effective transaction strategy leading to privatisation. [Q4-2011] - A report on functioning of regular passenger transport services (KTEL) is submitted, presenting options for liberalisation. [Q3-2011] - Secondary legislation as foreseen in Law 3887/2010 (Article 14(11)) is adopted, specifying cost for issuing new road transport operator licences; cost is transparent, objectively calculated in relation to number of vehicles and does not exceed relevant administrative cost. [Q4-2011] ### Energy - Government finalises remedies to ensure access of third-parties to lignite-fired electricity generation. [Q2-2011] - Legislation adopted to award hydro reserves management to an independent body. [July 2011] - To ensure network activities unbundled from supply activities: - law on unbundling modalities of the Transmission System Operator (TSO) and the Distribution System Operator (DSO) is adopted, in compliance with the third energy liberalisation package. [July -2011] - the TSO is established as a legal entity. [July -2011] All necessary transfers of staff and assets are completed. [Q3 2011] - the DSO is established as a legal entity. [July -2011] All necessary transfers of staff are completed. [Q1-2012] - All regulatory powers assigned to EU energy regulators in the third energy liberalisation package (licensing, network access, network charges, market monitoring, etc.) are transferred to the Regulatory Authority for Energy (RAE). [July -2011] - Measures adopted to ensure independence of RAE (impartial and transparent nomination of board, management authority with regard to budget and personnel, etc.) in line with third energy liberalisation package. [July -2011] - Government starts implementing measures ensuring access by third parties to lignite-fired electricity generation. [Q3-2011] - Detailed plans presented for ensuring maximum market opening of the non-interconnected system, covering access of suppliers to non-interconnected system markets, in particular Rhodes and Crete. Government submits a request for derogation under certain conditions of Art 44 Directive 2009/72 for small isolated systems. [Q3-2011] - Hydro reserves are effectively and fairly managed by an independent body. [Q3-2011] - Unbundling of the TSO (electricity and gas) and DSO (electricity) is effectively completed. [Q1-2012] - Government removes regulated tariffs for customers except households and small enterprises (as defined in the second and third energy liberalisation packages). [Q4-2011] - Further measures adopted to ensure energy component of regulated tariffs for households and small enterprises reflects, at the latest by June 2013, wholesale market prices, except for vulnerable consumers. [Q4-2011] - Government completes implementation of measures to ensure access by competitors of PPC to lignite-fired electricity generation; third parties can effectively use lignite-fired generation in the Greek market. [Q2-2012] ### R&D and innovation - Government pursues an up-to-date and in-depth evaluation of all R&D and ongoing innovation actions, including in various operational programmes, and presents a strategic action plan for policies aimed at enhancing quality and synergies between public and private R&D and innovation, as well as tertiary education. The action plan identifies a clear timetable for relevant measures, takes budgetary impact into account and harmonises actions with other relevant initiatives, in particular the investment law. [Q4-2011] ### Better regulation - Government adopts legislation to improve regulatory governance covering: - principles of better regulation; - obligations of regulators for fulfilment of those principles; - tools of better regulation, including codification, recast, consolidation, repeal of obsolete legislation, simplification, screening of entire body of existing regulation, ex-ante and ex-post impact assessments and public consultation processes; - transposition and implementation of EU law and exclusion of gold plating; - setting-up of better regulation structures in each ministry and creation of a Central Better Regulation unit; - requirement that draft laws and important draft legislative acts (Presidential Decrees and Ministerial Decisions) are accompanied by an implementation timetable; - electronic access to a directory of existing legislation and an annual progress report on Better Regulation. [July 2011] - On impact assessments, legislation provides that: - implementing legislation with potentially large significant impact is subject to the requirement to produce an impact assessment; - impact assessments address competitiveness and other economic effects using the Commission Impact Assessment guidelines and the OECD Competition Assessment toolkit; - the Central Better Regulation Unit can seek opinions of other ministerial departments and independent authorities to improve quality of impact assessments; - an independent authority and the Central Better Regulation Unit carry out quality checks of impact assessments; - the Central Better Unit consults the Hellenic Competition Commission when formulating and drafting guidelines for ministries' better regulation units; - impact assessments are published. - Government identifies priority areas to codify and simplify existing legislation within the better regulation agenda. [July 2011] - On administrative burden reduction, Government submits a list of 13 selected priority areas to the European Commission that will be subject to measurement, sets deadlines for completion of measurements, for identification of proposals to reduce burdens and for amendment of regulations. This policy initiative should reduce administrative burdens by 25 percent (compared with the baseline year 2008) in the 13 priority areas. [July 2011] *IMF staff report excerpt: 4.2 To improve the business environment and enhance competition in open markets* ### 4.3 To raise the absorption rates of structural and cohesion funds ### 4.3 To raise the absorption rates of structural and cohesion funds ### Legislative and procedural measures - Legislation is adopted, and immediately implemented, to shorten deadlines and simplify procedures on contract award and land expropriations, including the deadlines needed for the relevant legal proceedings. [Q3-2011] - Government adopts and implements the appropriate acts to ensure the smooth and timely implementation of structural-fund programmes in the framework of the recent local administration reform. [Q2-2011] ### Targets for payment claims and project submissions - Government meets targets for payment claims in the absorption of EU structural and cohesion funds set down in the table below. Compliance with the targets shall be measured by certified data. In addition, Government achieves a semi-annual target of submitting 5 major project applications to the European Commission. It provides data on expenditure for non-targeted de minimis state aid measures declared to the European Commission in 2010. [Q2-2011] - Government meets targets for payment claims in the absorption of EU structural and cohesion funds set down in Table 1. Compliance with the targets shall be measured by certified data. In addition, Government submits 10 additional major project applications to the Commission, in view of achieving an annual target of submitting 15 major projects. In meeting absorption rate targets, recourse to non-targeted de minimis state aid measures should be gradually reduced. Government provides data on expenditure for non-targeted de minimis state aid measures co-financed by the structural funds in 2011. [Q4-2011] ### Table 1: Targets for payment claims in the absorption of Structural and Cohesion Funds (programming period 2007-2013) to be submitted between through 2013 (in EUR million) - European Regional Fund and Cohesion Fund - 2010 target: 2 330.0 - 2010 outcome: 2 372.4 - 2011: 2 600 - 2012: 2 850 - 2013: 3 000 - European Social Fund - 2010 target: 420.0 - 2010 outcome: 447.6 - 2011: 750 - 2012: 880 - 2013: 890 - Target of first half of the year - 2011: 1 105 - 2012: 1 231 - 2013: 1 284 - Target of second half of the year - 2011: 2 245 - 2012: 2 499 - 2013: 2 606 - Total annual target - 2010 target: 2 750 - 2010 outcome: 2 820 - 2011: 3 350 - 2012: 3 730 - 2013: 3 890 ### Monitoring, IT and managerial capacity - Government launches an internal pilot web-based monitoring tool of procedures for approval of project proposals and for implementation of public projects. [Q3-2011] - The web-based open-access monitoring tool of procedures for approval of project proposals and for implementation of public projects is fully operational. [Q4-2011] - The managerial capacity of all managing authorities and intermediate bodies of operational programmes under the framework of the National Strategy Reference Framework 2007-13 is certified according to the standard ISO 9001:2008 (quality management). [Q4-2011] - A report is presented on the activities of the task force assessing progress in ensuring the rapid implementation absorption of structural funds, and proposing improvements when necessary. [Q4-2011] - Government provides an impact assessment of measures since 2010 to accelerate the absorption of structural and cohesion funds adopted since May 2010, and indicates any further measures. [Q4-2011] *Source: _cr11175 - 4.3 To raise the absorption rates of structural and cohesion funds* ### Annex 2: Terms of reference for the privatisation fund ### Annex 2: Terms of reference for the privatisation fund ### Governance - The fund will be established under Greek law for a period of 6 years, professionally run, and governed by a Board of Directors. - Directors will be appointed by parliament, upon the proposal of the Minister of Finance for a renewable fixed term. - The Board will be comprised of individuals known for their international expertise in the field and will be vested with broad powers to perform all acts of divestment and administration within the Fund's purpose and interest. - The European Commission and the Eurogroup will have the right to appoint two observers in the Board of Directors. - The fund may also establish an Advisory Board to allow it to benefit from international experience and technical expertise. - Directors and staff of the fund will be indemnified for actions undertaken in the context of their official duties. - Parliament will approve the acts of the Board of Directors and release them from liability, at least semi-annually. ### Transparency - The Board will, on a quarterly basis, publish a report on its activities, along with an audited report of its finances. - The activity report will be submitted to parliament and will cover where each asset held stands in the transaction process. ### Asset Transfer and Management - Full legal and economic ownership of the assets to be privatized (including all rights attached to them such as voting rights) will be transferred to the fund in an irreversible manner. - Neither the state nor the transferring entity will have any residual rights of ownership or otherwise over these assets without prejudice to the regulatory power of the state. ### Mandate - The fund will have a mandate to privatize these assets at prevailing market conditions as soon as technically feasible and in an open and transparent manner. - The fund will not be able to transfer assets back to the general government unless the transaction has been completed (i.e. a concession or lease). - The Ministry of Finance will retain the responsibility for any operating subsidies for the assets in question. - If it is determined by the Board (on the advice of the fund’s panel of experts) that an asset cannot be sold, it will be unbundled and sold by the fund (with liquidation retained as an option). - The fund will be provided with quarterly targets for proceeds to be transferred back to the government. ### Operations - The fund will finance its operations by an initial EUR 30 million capital injection by the state and subsequently from an appropriate portion of privatization proceeds (as determined by the Board in consultation with the advisory board). - The fund will be entitled to hire advisors for each transaction to enable it to conduct its activities with sufficient flexibility. - Advisors already hired for transactions by the Special Secretariat for Asset Restructuring and Privatizations (at the Ministry of Finance) will be retained and their mandates transferred. - All advisors for transactions in 2011-12 will be appointed by end-June 2011. ### Limits on borrowing - The fund will be able to raise money, on market terms, including by discounting or selling revenue streams of specified assets (such as interests in concessions). - The fund many not grant liens over any of its assets if this might prevent or delay the relevant assets from being privatized. - Net proceeds generated as a result of money raising operations will be paid over to the State, as will net proceeds of other privatizations. - Any borrowing would be coordinated with the Ministry of Finance and the PDMA. ### Planned privatisation proceeds (Annex 3) - Privatization receipts (€ Millions): - 2011 Q2: 390 - 2011 Q3: 1700 - 2011 Q4: 5000 - 2012 Q1: 7000 - 2012 Q2: 9000 - 2012 Q3: 11000 - 2012 Q4: 15000 - 2013 Q1: 17000 - 2013 Q2: 18000 - 2013 Q3: 20000 - Q422000 - 201435000 - 201550000 ### Provision of data (Annex 4) — To be provided by the Ministry of Finance - Preliminary monthly data on the state budget execution (including breakdown by main categories of revenue and expenditure and by line ministry). (Data compiled by the Ministry of Finance) - 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 breakdown by main categories of revenue and expenditure and by line ministry. (Data compiled by the Ministry of Finance) - Monthly, 30 days after the end of each month. - Preliminary monthly cash data on general government entities other than the state. (Data compiled by the Ministry of Finance) - 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, including a breakdown in nominal wage and allowances paid to government employees per line ministry and public entity), number of employees (including a breakdown per ministry and public entities outside the central government) and average wage (including the relative shares of the base wage, allowances and bonuses). (Data compiled by the Ministries of Interior and Finance) - Monthly, 30 days after the end of each month (starting in June 2010). - Monthly data on staff: number of employees, entries, exits, transfers among government entities; and from and into the labour reserve, per entity. (Data compiled by the Ministries of Interior and Finance) - Monthly, 30 days after the end of each month. - Weekly information on the Government's cash position with indication of sources and uses as well of number of days covered. (Data compiled by the Ministry of Finance) - Weekly on Friday, reporting on the previous Thursday. - Data on below-the-line financing for the general government. (Data compiled by the Ministry of Finance) - 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, including the State, local government, social security, hospitals and legal entities. (Data compiled by the Ministry of Finance on the basis of basic data from the several line ministries) - Quarterly, within 55 days after the end of each quarter. - Data on use of international assistance loans split among following categories: Financial stability fund, escrow account, debt redemption, interest payments, other fiscal needs, building of cash buffer; per quarter and cumulative - Quarterly, by the end of each quarter. - Data on public debt and new guarantees issued by the general government to public enterprises and the private sector. Data on maturing debt (planned redemptions per month, split between short-term (Treasury bills and other short-term debt) and long-term (bonds and other long-term) debt). Data on planned monthly interest outflows. (Data compiled by the Ministry of Finance) - Monthly, within one month. - Data on assets privatised and proceeds collected. (Data compiled by the Ministry of Finance) - Quarterly. - Data on debt redeemed with privatisation proceeds. (Data compiled by the Debt Management Office) - Monthly, by the end of each month. - Data on public enterprises: revenue, costs, payroll, number of employees and liabilities (including maturities of public enterprises' debts). (Data compiled by the Ministry of Finance) - Monthly, within three weeks of the end of each month for the ten largest enterprises. Quarterly within three weeks of the end of each quarter for the other enterprises. Quarterly for the maturities of public enterprises' liabilities. - Monthly statement of the transactions through off-budget accounts. (Data compiled by the Ministries of Finance and Education) - Monthly, at the end of each month. - Monthly statement of the operations on the special accounts. (Data compiled by the Ministry of Finance) - Monthly, at the end of each month. - Report on progress with fulfilment of policy conditionality. (Report prepared by the Ministry of Finance) - Quarterly before the respective review starts. - Monthly data on healthcare expenditure by the social security funds with a lag of three weeks after the end of the respective quarter. (Data compiled by the Ministries of Labour and Health) - Monthly, within three weeks of the end of each month. Starting with data for January 2011 for IKA, OAEE, OGA and OPAD, and from April 2011 on for the other funds. ### Provision of data — To be provided by the Bank of Greece - 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. - Report on banking sector liquidity situation. - Weekly, next working day. - Report on the evolution of financial stability indicators. - Quarterly, 30 days after the publication data of each quarter. - Report on results from the regular quarterly solvency assessment exercise. - Quarterly, 15 days after the end of each quarter depending on data availability. - Weighted average of Loan-to-value (LTV) ratio for new loans with real estate collateral - Yearly. ### Provision of data — To be provided by the Hellenic Financial Stability Fund - 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: Terms of reference for the privatisation fund — Source document as provided.* ### 3.2 percent and 1.7 percent in 2011 and 2012, respectively. ### _cr11175 - 3.2 percent and 1.7 percent in 2011 and 2012, respectively. ### External Sector and Competitiveness - Current account developments: - In January-April 2011 the current account deficit shrank by 23.4 percent y-o-y. - Drivers of the improvement: substantial increase in transfers to the general government; a fall in the non-fuel import bill (by 12 percent); an increase in exports’ goods receipts (by 22 percent). - BoG projections (more conservative than staff): current account deficit may fall below 9½ percent of GDP in 2011 and below 8½ percent in 2012. - Competitiveness and unit labor costs: - BoG estimate: unit labor cost growth in total economy turned negative (-3.0 percent) in 2010. - Projection: unit labor costs are projected to further contract by 2.9 percent in 2011, reflecting the projected sharp reduction in the wage bill of public enterprises and the effects of new labor market legislation. - Expected effect: such developments would help boost external competitiveness. ### Fiscal Policy - 2010 and early-2011 fiscal outcomes: - Eurostat figures (published on April 26th): the 2010 general government deficit was 10½ percent of GDP, down from 15.4 percent in 2009. - 2010 deficit was higher than projected (9.4 percent) because of: lower-than-expected tax revenues owing to GDP dynamics more subdued than envisaged; deteriorated fiscal balances of local governments and social security funds reflecting past debt repayments and increases in unemployment benefits; worsening financial performance of public hospitals. - Ministry of Finance figures for January–May 2011: the state deficit amounted to euro 10,275 million on an accrual basis, slightly higher than previously envisaged (euro 9,072 million set in the 2011 budget). - Revenue shortfall drivers: larger-than-projected recession in the last quarter of 2010; lower receipts from vehicle’s circulation fees; withholding personal income tax in 2011 as a result of the new tax law; increase of refunds for the settlement of past years’ obligations. - Medium-Term Fiscal Strategy (MTFS) and measures: - 2011 deficit target: 7½ percent of GDP. - Government decision: frontload a significant part of the recently approved MTFS to meet the 2011 target. - MTFS characteristics: longer-term, broadly-based fiscal plan encompassing revenue-enhancing and expenditure-plummeting measures, while improving the core of social safety nets. - Specific measures envisaged: substantial reduction of public employees; pension and health sector reform; rationalization of non-essential public agencies; adjustments in public employees’ compensation; streamlining and better targeting social benefits. - Revenue measures: increases in direct and indirect taxes, including elimination of special tax regimes; increases in social contribution; stringent measures to fight tax evasion. - Institutional reforms: revenue administration, fiscal reporting, public financial management, and spending controls. - Privatization program: - Program size: euro 50 billion aimed at reducing Greece’s public debt, attracting know-how and capital, boosting investment and growth, and alleviating fiscal costs. - Performance criteria: privatization timeline supported by quarterly performance criteria. - Intermediate targets: end-2011 overall privatization proceeds of euro 5 billion; end-2012 privatization proceeds totaling euro 15 billion. - Implementation vehicle: Privatization Agency (the National Wealth Fund) where assets for privatization will be placed. - The Fund will become the sole shareholder of transferred assets, with a mandate to privatize them at prevailing market conditions, and will not be able to transfer assets back to the government unless the transaction is completed. - The Board of Directors of the Fund will be appointed by Parliament; the European Commission and the Eurogroup may appoint two observers. ### Financial Sector Policies - Banking sector conditions: - Ongoing pressures from deposit outflows. - Credit and liquidity conditions remain tight. - Asset quality and profitability are decreasing. - Banks’ capital affected by recession through deterioration of loans’ quality. - Systemic problems avoided due to expansion of a government program of guarantees for uncovered bank bonds and exceptional liquidity support provided by the ECB. - Policy measures and requirements: - Parliament passed legislation for a euro 30 billion expansion of the government program guarantees for uncovered bank bonds. - May legislation permitting the Ministry of Finance to guarantee the BoG’s financial exposure from support provided to credit institutions. - Authorities’ commitment: continue to take all necessary measures to safeguard financial stability and preserve sufficient system liquidity, in consultation with the ECB. - Capital requirement: banks will be required to maintain an adequate capital buffer (Core Tier 1 capital of 10 percent) starting from the beginning of 2012. - Institutional actions: revising the Financial Stability Fund, including its funding, and the banking resolution framework; strengthening supervision capacity; stepping up inter-agency coordination. - All state banks have been included in the government’s strengthened privatization program. *Source: _cr11175 - 3.2 percent and 1.7 percent in 2011 and 2012, respectively.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11175.pdf_