## _cr1168 ## Source details **Canonical URL:** [_cr1168](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1168.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1168.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1168.pdf.json) --- ### Recent developments (real economy and prices) - GDP decline in 2010 estimated at 4½ percent over the full year (flash estimate for 2010Q4). - Quarter-on-quarter decline in 2010Q4 was less than projected. - Average 2010 headline inflation: 4.7 percent; January 2011 HICP inflation: 4.9 percent year-on-year (down from 5.2 percent in December 2010). - Economy-wide unit labor costs (ULC) started to fall in 2010Q1; ULCs remain high in agriculture and non-traded services. - CGER-type analysis (2010 data) indicates significant overvaluation ranging from 20–34 percent. - Unemployment: 13.9 percent in November. - Greece lost market share in tourism and goods exports in 2010. - External current account deficit contracted: June–December period contraction of 16 percent in euro-denominated terms year-on-year; trade balance (excluding oil and ships) improved by 27 percent over same period. - Drivers of current account contraction: substantial decline in goods imports, large increase in shipping receipts, weaker tourism receipts; overall improvement driven by stronger public saving and falling private saving. ### Financial sector developments and stress - Total deposits shrunk by €35.8 billion (12¾ percent) over 2010; bulk outflow €28.8 billion in first half of 2010. - ECB liquidity support stabilized just below €100 billion, or 18 percent of total liabilities. - Government guarantee package for uncovered bonds: €25 billion (end-November). - Changes in ECB collateral rules on January 1 and a Fitch downgrade in January tightened liquidity conditions again. - Credit growth to the domestic private sector turned negative y-o-y in December 2010: -0.2 percent (contraction in credit to households). - Nonperforming loans increased 30 percent during first nine months of 2010, reaching 10 percent of total loans; coverage by provisions remained broadly unchanged. - Largest four banks posted group-level profits up to 2010Q3 but on average two-thirds less than the year before; domestic activities were loss-making. - Capital metrics and recapitalization: Tier 1 ratio remains above 10 percent; total CAR at 11.4 percent. - National Bank of Greece rights offering: €1.8 billion (completed Q4). - Piraeus Bank capital raised: €800 million. - State bank (ATE) due diligence suggests capital need of €300-400 million; government intends to meet bulk through HCLF surplus reserves. ### Private sector balance sheets - Households’ debt-to-disposable-income ratio: about 40 percent in 2009. - Share of consumer credit in total household debt is among the highest in the EU. - Corporate indebtedness slightly lower than the European average (except small enterprises), rose very rapidly pre-crisis. - Corporate credit quality held up relatively well; NPL increases more moderate for corporates than for housing and consumer lending. ### Fiscal outcomes, measures, and public sector reforms - General government deficit estimated reduced by about 5¾ percent of GDP (ESA95 basis) to about 9½ percent of GDP in 2010. - Achieving that improvement required some 8 percent of GDP in measures. - Level target for the deficit would be missed by some 1½ percent of GDP due to November data revisions with Eurostat (expanded definition of general government). - Revenues grew by 5.6 percent in 2010 versus original program target of 13.7 percent; revenues weaker than projected. - Expenditure under-execution: state budget under-execution -9.5 percent (versus -5.3 percent foreseen). - Stock of arrears at end-November (excluding health arrears predating 2010): €4.0 billion. - 2011 budget target: general government deficit of 7½ percent of GDP; some 3½ percent of GDP in net new measures will need to be implemented to achieve the target. - Pension reforms: actuarial studies suggest recently enacted reforms would stabilize main pension funds’ spending at the 2009 level (relative to GDP) by 2060. - Health reforms emphasize IT extension, control of pharmaceutical spending (about 40 percent of total public health spending), and centralize procurement. - Early 2011 legislation introduced public sector wage cuts of over 10 percent and public transport tariff increases averaging 30 percent. - PFM reforms: three-pillar plan (budgeting, spending controls with commitment registers, fiscal reporting); commitment registries may be fully effective across general government by mid-year; about 50 percent of general government entities outside the state budget still do not report arrears. ### Structural reforms and business environment - Labor market reforms implemented in two rounds covering employment protection; December reforms on arbitration and collective bargaining. - Product and service market reforms focused on road and rail transportation and regulated professions; framework law to remove restrictions to competition in regulated professions passed. - Business environment measures legislated: investment fast-track approval for large projects; one-stop shop for business start-ups — implementation delayed pending IT, personnel, and ministerial decisions. - Impact assessment (Box 3) — selected effects: - Business start-ups: procedures reduced from 15 to 4; days from 21 to 7; estimated cost from €4,134 to €1,416; expected starting-a-business ranking move from 140 to 43 (all else equal). - Licensing: days reduced from 169 to 119; procedures 15 to 11; expected licensing ranking move from 52nd to 18th (all else equal). - Trading across borders: expected ranking improvement from 83rd to 44th (all else equal). - Combined reforms: move Greece from 109th to 85th Doing Business ranking (all else equal); further improvement to 79th when export barriers reduced. ### Market sentiment, sovereign spreads, and external support - Market sentiment weak; spreads rose significantly in Q4 2010. - 10-year bond spreads briefly spiked close to 1000 bps in mid-January 2011; later stabilized around 800 bps. - ECB stepped up purchases under the SMP. - Greece’s gross financing need in 2011: some €58 billion (including clearance of budgetary arrears); almost all covered by EU and IMF financing. ### Macroeconomic outlook and projections - Outlook broadly unchanged since last review; economy expected to bottom out in second half of 2011. - Projected growth for 2011: -3 percent. - Inflation projected to retreat to close to 1 percent by end-2011 and remain around 1 percent for some time. - GDP-deflator-based REER projected improvement: about 10 percent over the next 5 to 6 years. - Current account projected to improve by about 2½ percent of GDP driven largely by stronger public sector savings-investment balance and moderate improvement in private sector balance. - Comparative growth projections (percent change) — selected rows preserved: - Actual -4.5 - EC/ECB/IMF -4.2 -3.0 1.1 2.1 2.1 2.7 (Nov-10) - OECD -3.9 -2.7 0.5 (Nov-10) - Average -4.0 -2.9 0.8 1.6 2.0 2.4 ### Debt sustainability, scenarios, and contingent risks - Under program baseline, debt remains sustainable but large risks remain, including contingent banking liabilities. - Debt expected to crest at high levels and begin to decline in 2013. - Banking shock (no second-round impacts) would push debts to over 200 percent of GDP before declining. - Upside from asset initiatives: debt could drop by an additional 16½ percent of GDP by 2015 if asset initiatives are realized. - Fiscal gap for 2012–14 (Box 1): Third review fiscal gap 8.0 (percent of GDP); May program gap 1.7; Difference 6.3. Breakdown (percent of GDP): - Inclusion of 2014: 2.5 - Economic factors: 1.0 - Measures: 2.8 - of which Lower yields or advanced measures: 2.3 - Expiration after 2013: 0.5 - Changes in fiscal baseline: 0.0 ### Banking liquidity support and orderly deleveraging (Box 2; Section 22) - Bank of Greece prepared to extend ELA to solvent, fundamentally sound banks. - Government requesting Parliament approval for new tranche of €30 billion of guarantees for uncovered bank bonds (structural benchmark for end-March); tranche would make these bonds eligible as collateral at the ECB and be allocated case-by-case with conditions. - Banks asked to devise medium-term funding plans; preliminary drafts by mid-April; submission to ECB and Bank of Greece proposed as structural benchmark for end-May 2011. - ATE due diligence: capital need of €300-400 million; exact capital increase to be finalized by end-February 2011. - FSF capacity: - €1½ billion available in an account at the Bank of Greece; further €1 billion to be set aside in an intermediate blocked account. - Amounts would provide capacity to deal with up to a five percent reduction of capital in the banking system; fully funded FSF would cover up to a one-third reduction in Tier I capital or 3½ percent of risk-weighted assets. - Next transfer to blocked account: €1 billion in the second quarter. ### Public financial management and revenue administration reforms - Anti-evasion plan: five task forces started implementing plans in January; monthly performance indicators to be published starting end-March. - VAT Gap (2006): Greece 30.0; EU-25 average 12.0. - Shadow economy (2007): Greece 25.1; OECD 21 average 13.34. - Tax debt to annual net revenue (2007; 2010 estimate for Greece): 37.9; OECD average 8.5. - Number of verifications to taxpayers (2007): Greece 0.2; OECD average 4.1. - Commitment registers being established; accounting officers to be appointed in all line ministries and major GG entities (structural benchmark end-March). - Publish monthly consolidated GG fiscal reports and arrears data beginning end-March; three consecutive months of consistent arrears and consolidated reports proposed as a structural benchmark for end-June. ### Asset, privatization, and debt management strategy - Public corporations estimated value €44 billion (OECD, 2010); liquid holdings of shares ~€8 billion. - Authorities consider a privatization/real estate program amounting to €15 billion until end of program achievable; tentative target €50 billion through 2015 (to be confirmed). - If executed timely, could potentially reduce debt by some 18 percent of GDP by 2020. - Debt issuance strategy: focus on treasury bills, moving to 9 month and 1 year bills as market conditions permit; diaspora bond targeted at expatriates. - Amortization scenario: with EU extension and EFF, amortizations during 2013–15 drop from €163 billion to €110 billion. ### Program modalities, monitoring, and risks - Program continues to meet key targets; all end-December performance criteria met; indicative target on government spending arrears missed. - New structural benchmarks proposed: adoption of new tranche of government guarantees; submission of medium-term funding plans by banks; strategic plan for revenue administration reform; improvements in fiscal reporting; reforms to general government personnel system; revised privatization plan. - Financing: program can continue to fully cover government financing needs through early 2012. - Principal risks: - Delays in implementing fiscal-institutional and structural reforms. - Inability to re-access markets even with program on track. - Excessively fast bank deleveraging could have negative macroeconomic and fiscal repercussions. ### Key numeric projections and fiscal aggregates (selected) - General government deficit (ESA95) 2010: about 9½ percent of GDP. - 2011 budget target: 7½ percent of GDP general government deficit. - Greece’s gross financing need in 2011: some €58 billion. - Public sector debt path (public sector DSA baseline): 2008: 110; 2009: 127; 2010: 143; 2011: 153; 2012: 159; 2020: 130 (percent of GDP). - Gross financing need (percent of GDP): 2010: 20.9; 2011: 23.9; 2012: 26.5; 2014: 32.1. - Real GDP (selected years, percent change): 2010: -4.5; 2011: -3.0; 2012: 1.1; 2013: 2.1. - Unemployment rate (percent): 2010: 12.4; 2011: 14.8; 2012: 15.0. - Inflation (HICP period average): 2010: 4.7; 2011: 2.4; 2012: 0.5. - Privatization receipts scenario: €50 billion over 2011-15 would reduce debt to 134 percent of GDP by 2015 (vs 151 percent under baseline) and to 112 percent by end-2020. ### Actions, timelines, and conditionality (selected milestones) - Medium-term budget strategy paper: publish for consultation before end-March; adopt by Council of Ministers by mid-April; vote by Parliament by mid-May. - Appointment of accounting officers in all line ministries and major GG entities: end-March (structural benchmark). - Commitment registers operational and arrears reporting: March–June 2011. - National Actuarial Authority to complete assessment of main supplementary funds by end-March 2011 (structural benchmark); reforms to be adopted by end-September 2011 and implemented from January 1, 2012. - New tranche of government guarantees for uncovered bank bonds: proposed €30 billion tranche (structural benchmark for end-March). - ATE capital increase finalization: end-February 2011. - Privatization: initial draft by end-March; final plan adopted by Council of Ministers by end-July; first inventory of commercially-viable public real estate by end-June. - Health tender for comprehensive e-prescribing system: launch tender by end-April; task force interim report by end-March; final report by end-May; time-bound action plan by end-June. *Source: _cr1168 - 1. What Explains the 8 percent of GDP Fiscal Gap for 2012–14? (IMF staff report excerpt).* ### 1. What Explains the 8 percent of GDP Fiscal Gap for 2012–14? ..........................................24 ### 1. What Explains the 8 percent of GDP Fiscal Gap for 2012–14? ### Recent developments (real economy and prices) - GDP decline in 2010 estimated at 4½ percent over the full year (flash estimate for 2010Q4). - Quarter-on-quarter decline in 2010Q4 was less than projected. - High-frequency indicators (industrial production, retail trade, economic sentiment, employment) indicate continuing compression of domestic activity, with some improvement in leading indicators (hotel reservations, industrial orders and turnover for the foreign market) in Q4. - Average 2010 headline inflation: 4.7 percent. - January 2011 HICP inflation: 4.9 percent year-on-year (down from 5.2 percent in December 2010). - Economy-wide unit labor costs (ULC) started to fall in 2010Q1; ULCs in absolute terms remain high in agriculture and non-traded services. - CGER-type analysis (2010 data) indicates significant overvaluation ranging from 20–34 percent. - Unemployment: 13.9 percent in November (year not explicitly restated in the excerpt). - Greece lost market share in tourism and goods exports in 2010. - External current account deficit contracted: June–December period contraction of 16 percent in euro-denominated terms compared to a year ago; euro-denominated trade balance (excluding oil and ships) improved by 27 percent over the same period. - Drivers of current account contraction: substantial decline in goods imports (despite rising oil import bill), large increase in shipping receipts, weaker tourism receipts; overall improvement driven by stronger public saving and falling private saving. ### Financial sector developments and stress - Total deposits shrunk by €35.8 billion (12¾ percent) over 2010; bulk outflow €28.8 billion in first half of 2010. - ECB liquidity support stabilized just below €100 billion, or 18 percent of total liabilities. - Government guarantee package for uncovered bonds: €25 billion (end-November). - Changes in ECB collateral rules on January 1 and a Fitch downgrade in January tightened liquidity conditions again. - Credit growth to the domestic private sector turned negative year-on-year in December 2010: -0.2 percent (contraction in credit to households). - Nonperforming loans (NPL) increased 30 percent during first nine months of 2010, reaching 10 percent of total loans; coverage by provisions remained broadly unchanged. - Lending surveys indicate banks continue to tighten lending terms and credit standards. - Largest four banks posted group-level profits up to 2010Q3 but on average two-thirds less than the year before; domestic activities were loss-making. - Capital metrics and recapitalization: Tier 1 ratio remains above 10 percent; total CAR at 11.4 percent. - National Bank of Greece rights offering: €1.8 billion (completed Q4). - Piraeus Bank capital raised: €800 million. - Sale of marketable foreign businesses under way for some banks; restructuring plan for ATE Bank (government to participate in capital increase). ### Private sector balance sheets - Households’ debt-to-disposable-income ratio: about 40 percent in 2009 (well below the European average). - Share of consumer credit in total household debt is among the highest in the EU. - Corporate indebtedness slightly lower than the European average (except small enterprises) and substantially below other European peripheral countries, but rose very rapidly pre-crisis. - Corporate credit quality has held up relatively well compared with housing and consumer lending; NPL increases more moderate for corporates. ### Fiscal outcomes and public sector reforms - General government deficit estimated reduced by about 5¾ percent of GDP (ESA95 basis) to about 9½ percent of GDP in 2010. - Achieving that improvement required some 8 percent of GDP in measures. - Level target for the deficit would be missed by some 1½ percent of GDP due to November data revisions agreed with Eurostat (expanded definition of general government). - Revenues grew by 5.6 percent in 2010 versus the original program target of 13.7 percent; revenues weaker than projected. - Expenditure overruns occurred in subnational entities and social security funds; offset by state budget under-execution: -9.5 percent spending reduction (versus -5.3 percent foreseen in original program). - Stock of arrears at end-November (excluding health arrears predating 2010): €4.0 billion; higher cash payments at end-year partially unwound arrears at state budget level. - 2011 budget targets general government deficit of 7½ percent of GDP (consistent with program); some 3½ percent of GDP in net new measures will need to be implemented to achieve the target. - Deficit of non-state entities estimated to have fallen from some 8½ percent of GDP in 2009 (excluding state transfers) to about 7¼ percent of GDP in 2010. - Pension reforms: actuarial studies for largest pension funds suggest recently enacted reforms would stabilize main pension funds’ spending at the 2009 level (in relation to GDP) by 2060. - Health system reforms focus: extend IT across fragmented system, better control pharmaceutical spending (about 40 percent of total public health spending), centralize procurement. - Early 2011 legislation introduced public sector wage cuts of over 10 percent and public transport tariff increases averaging 30 percent. - State enterprise restructuring plans articulated for railroad companies and Athens urban transportation system. - Fiscal institution reforms: revenue administration completed plan to combat tax evasion with quantitative indicators; Ministry of Finance implementing three-pillar PFM plan (budgeting, spending controls with commitment registers, fiscal reporting). - PFM progress slower than expected: commitment registries may be fully effective throughout general government by mid-year; about 50 percent of general government entities outside the state budget still do not report arrears. ### Structural reforms and business environment - Labor market reforms implemented in two rounds covering employment protection; December reforms on arbitration and collective bargaining. - Product and service market reforms focused on road and rail transportation and regulated professions. - Business environment measures legislated: investment fast-track approval process for large projects; one-stop shop for business start-ups — implementation delayed pending IT, personnel, and ministerial decisions. - Authorities focusing on simplifying licensing procedures and strengthening the competition authority; draft legislation awaiting parliament. ### Market sentiment and sovereign spreads - Market sentiment remained weak; spreads increased significantly during Q4 2010. - A short resurgence of volatility in mid-January 2011 saw 10-year bond spreads briefly spike to close to 1000 bps. - Spreads later stabilized at around 800 bps; ECB stepped up purchases under the SMP. ### Macroeconomic outlook and projections - Outlook broadly unchanged since last review; economy expected to bottom out in second half of 2011. - Projected growth for 2011: -3 percent (projection remains within reach). - Domestic demand trending weaker than anticipated; improved external demand, improving competitiveness, and rebound in tourism expected to partly offset domestic weakness. - Inflation projected to retreat to close to 1 percent by end-2011 and remain around 1 percent for some time. - GDP-deflator-based real effective exchange rate (REER) projected improvement: about 10 percent over the next 5 to 6 years, with additional improvements thereafter. - Current account projected to improve by about 2½ percent of GDP driven largely by stronger public sector savings-investment balance and moderate improvement in private sector balance; export improvements and import compression expected to contribute despite higher oil import prices. *Source: _cr1168 - 1. What Explains the 8 percent of GDP Fiscal Gap for 2012–14? (IMF staff report excerpt).* ### 8. The baseline projections are broadly in line with other forecasters’ expectations. ### 8. The baseline projections are broadly in line with other forecasters’ expectations. ### Outlook and projections - Most forecasters project a continuation of the current recession through 2011, with a gradual return to positive GDP growth thereafter. - While there is broad consensus on the 2011 outlook, analysts diverge on the strength of the ensuing recovery: - Greece-based forecasters are generally more bullish than outsiders. - The program projection is close to the middle. - A similar pattern of divergence emerges for inflation and external outlooks. - Compared to forecasts for other countries, Greece is expected to take more time to recover from recession, reflecting that it entered the downturn with about a one-year lag and has experienced a crisis of greater scale. - Comparative growth projections (percent change) reported: - Actual -4.5 - EC/ECB/IMF -4.2 -3.0 1.1 2.1 2.1 2.7 (Nov-10) - OECD -3.9 -2.7 0.5 (Nov-10) - NBG -4.0 -3.0 (Jan-11) - Alpha -3.8 -1.0 1.8 2.6 3.4 3.3 (Jan-11) - Eurobank -3.6 -2.9 1.5 (Jun-10) - Piraeus -4.5 -3.0 to -4.0 (Feb-11) - Bank of America -4.1 -2.5 1.1 (Dec-10) - Citi -4.0 -2.6 -1.0 0.5 1.0 1.5 (Jan-11) - Natixis -4.0 -3.0 (Jan-11) - KEPE -4.1 -3.5 (Jan-11) - IOBE -4.0 -2.9 (Jan-11) - EIU -3.9 -4.1 0.2 0.5 1.6 2.0 (Dec-10) - Average -4.0 -2.9 0.8 1.6 2.0 2.4 - Sources for the comparative table: Bank of Greece; publications of the various institutions. ### Near-term and medium-term risks - Near-term risks remain skewed to the downside; medium-term risks are more balanced. - Key near-term vulnerabilities: - Fragile market sentiment. - Much fiscal, financial sector, and structural adjustment remaining. - Contagion risk: sovereign spreads could increase sharply if market doubts about the Euro area response intensify. - Although the program keeps the government out of the market during 2011, increased contagion would have indirect impacts on banking system liquidity and would frustrate efforts to revive business confidence and investment. - Key medium-term upside: - Prospect for higher growth via convergence to higher core-EU levels of output and productivity. - Growth levels achieved in the decade leading up to the crisis indicate the upside potential. - Realizing upside requires vigorous and timely structural reform implementation and a significant productivity dividend from reducing Greece’s large shadow economy. ### Debt sustainability and contingent risks - Under the program baseline, debt remains sustainable, although large risks remain, including from growing contingent banking sector liabilities (Appendix 1). - The public debt sustainability assessment is broadly unchanged compared to the 2nd review. - Debt is expected to crest at high levels and to begin to decline in 2013. - The updated sustainability analysis highlights the risk from banking system problems given government guarantees that have been, or are likely to be, extended. - Under a banking shock, and with no second-round impacts (e.g. via higher interest rates), debts would jump to over 200 percent of GDP before declining (although asset recovery by the government could provide some benefit). - The analysis highlights upside as the government implements its more ambitious plan to maximize return from assets: - The debt could drop by an additional 16½ percent of GDP by 2015 if asset initiatives are realized. - Once the government has completed preparations and fully defined its plan, the DSA baseline scenario will be updated to incorporate higher proceeds. ### Fiscal policy stance and medium-term structural adjustment - Discussions focused on strengthening underpinnings of the program, with emphasis on: - Designing a sustainable fiscal adjustment program based on accelerated fiscal structural and institutional reforms. - Establishing a framework to balance banking system liquidity and deleveraging needs against program fiscal and macro targets. - Catalyzing progress on labor, service market liberalization, privatization, and business environment reforms to support competitiveness and recovery. - Fiscal policy developments and targets: - Authorities aim to put fiscal adjustment on a more sustainable footing (MEFP ¶5). - Discretionary portion of the state budget has fallen from nearly 30 percent in 2005 to under 25 percent at present. - For 2011, authorities reiterated commitment to meet the program target of a 7½ percent of GDP general government accrual deficit (MEFP ¶6). - On present trends, the budget would fall short of the program target by some ¾ percent of GDP; main source is downward adjustment to revenue projections due to weak performance of underlying revenues at end-2010 (excluding tax settlement payments). - Authorities expect to meet near-term fiscal targets via conservative first quarter budget implementation plans and a contingency reserve (newly introduced in 2011). - Any shortfall projected after the first quarter would be addressed by adopting structural measures from the medium-term strategy. - Medium-term public sector structural adjustment plan (MEFP ¶7–8): - Focus areas: state enterprises, extra-budgetary funds, tax reform, the wage bill, public administration reform, better targeting of social spending, military spending. - Authorities will closely review and prioritize public investment projects. - Macro-fiscal baseline agreed: about 8 percent of GDP in measures will be needed during 2012-2014 to achieve a general government deficit under 3 percent of GDP. - Authorities intend to define additional measures to handle contingencies (e.g., probable fiscal shortfall in 2011). - Specific numerical targets mentioned: - Realize 2 percent of GDP through the wage bill. - Over 1 percent of GDP through state enterprise reforms. - Timeline and process: - Working groups and external advisors will analyze options. - Public consultations planned in March. - Medium-term plan expected to be adopted by the Cabinet in mid-April. - Plan will form the basis for the 2012–15 fiscal strategy, to be adopted in May in line with new budget procedures. ### Social security, health reforms, and fiscal institutions - Social security reforms: - After an initial phase, authorities are preparing a second stage (MEFP ¶9). - Pension system: next step is to deal with supplementary and welfare funds; actuarial assessment to be complete by the second quarter; reforms to be implemented by early 2012; mechanisms identified include stricter links between contributions and benefits. - Health system: challenge to strengthen spending controls and extend measures to reduce pharmaceutical spending across all social security funds and hospitals; government preparing to issue a tender by end-April for a complicated IT project; working group preparing a detailed study to allow formulation and adoption of a time-bound action plan of further reforms by end-June. - Fiscal institutional reforms (MEFP ¶10, Tables 11-12): - Revenue administration: - Law expected to be passed in March to remove legal and administrative obstacles to effective revenue administration (would meet a program structural benchmark). - Quantitative performance indicators identified to guide anti tax evasion plan; to be published monthly (including targets on collection of tax arrears, and on number of risk based audits of the largest taxpayers and of high wealth and self employed taxpayers). - Initial figures (against EU-25 and OECD averages) show scale of the challenge. - Authorities committed to a medium term reform plan: introduce a large taxpayer unit, a risk management framework, and re-organize the tax audit function (proposed as a new structural benchmark). - Completion of the second planning phase pushed back to mid-year to focus on maximizing output of anti-evasion plans. - Public Financial Management (PFM): - Authorities have begun to establish commitment registers (shifting spending control point back to point of commitment) and are preparing to appoint accounting officers across general government entities (structural benchmark for end-March). - Complications across budgeting, control, and reporting include weak control over unfunded mandates introduced into parliament, difficulties for high volume spending agencies and small entities in adopting commitment registers, and poor timeliness/comprehensiveness of fiscal reporting (especially arrears data). - Authorities intend to strengthen financial certification requirements for new spending bills; simplify commitment registrations for high volume agencies and phase in registers for small entities; introduce sanctions for non-reporting. - A proposed structural benchmark covering fiscal reporting (over a three month period ending in mid-year) should signal progress. - Selected tax administration and evasion indicators (percentage values): - VAT Gap (2006): Greece 30.0; EU-25 average 12.0 - Shadow economy (2007): Greece 25.1; OECD 21 average 13.34 - Tax debt to annual net revenue (2007): Greece (2010 estimate) 37.9; OECD average 8.5 - Number of verifications to taxpayers (2007): Greece 0.2; OECD average 4.1 - Sources for these indicators: OECD 2009, EC 2009, Schneider 2010. ### Asset, liability, and privatization strategy - Policy focus: facilitate a gradual return to bond markets (MEFP ¶11, Table 13, Figure 9). - Need to provide time to convince markets that the program will deliver; higher demand for Greek sovereign bonds can help bring spreads down. - Authorities gearing up privatization and real estate development program to shield public from deeper budget cutbacks and support growth; also to reduce financing requirements. - Potential for longer maturities on EU/IMF loans to reduce private sector rollover requirements and the higher spreads they bring. - Near-term debt issuance strategy geared to instruments likely entry points for new investors. - Ambitious program to maximize return from state assets (MEFP ¶12): - Asset base: - Public corporations estimated value €44 billion (OECD, 2010), of which liquid holdings of shares in public enterprises represent some €8 billion. - Government real estate and land holdings expected to generate significant new resources. - Commercially viable properties will be catalogued and valued in two stages during 2011; experts in real estate law and management to be drawn on. - Privatization and real estate program targets: - Authorities consider a program amounting to €15 billion until the end of the program achievable. - They tentatively set a target of €50 billion through 2015 (to be confirmed as preparatory work is completed). - If executed in a timely manner and as market conditions permit, this could potentially reduce debt by some 18 percent of GDP by 2020. - Sales and concessions could rationalize areas with documented waste, reshape organization of critical sectors, and attract FDI (e.g., in the tourist sector). - Financing and debt amortization scenarios: - Management intends to propose an extended arrangement under the EFF upon cancellation of the existing SBA by the authorities, once understandings are reached with the EU and European governments on extension of loan maturities. - An extended arrangement under the EFF would provide Greece with a repayment schedule of 10 years on new disbursements (the five-year amortization schedule for existing SBA disbursements would not change). - In the event of an extension by the EU and approval of an extended arrangement by the Fund, amortizations during 2013–15 would drop by a third from €163 billion to €110 billion, which in turn would raise the probability of earlier market access on better terms. - Near-term gross financing need and issuance strategy: - Greece’s gross financing need in 2011 amounts to some €58 billion (including clearance of budgetary arrears). Almost all of this will be covered by EU and IMF financing. - Beyond gross financing need, Greece needs to build up government deposits, targeted to remain well above low points in late 2009 and early 2010, but below the level staff would consider minimally appropriate (three months of gross financing needs). - Final demand for new issues currently limited to domestic financial institutions; expected to remain relatively stable given deleveraging plans for domestic banks. - Authorities expect to generate some interest from Greek expatriates for a “diaspora” bond and anticipate initial interest from non-traditional buyers (e.g., those specializing in emerging markets). - Likely entry points for new investors and those rolling over exposures are treasury bills; issuance focus in 2011 will be on treasury bills, moving to 9 month and 1 year bills as market conditions permit. ### Financial sector challenges - Authorities recognize many challenges to restore medium-term stability in the financial system (MEFP ¶14). - Banking system status and risks: - Banking system has remained stable so far, but challenges accumulate as the recession deepens. - Deposits continue to fall. - Banks have no access to the markets; liquidity position remains very tight; dependency on Eurosystem liquidity is acute. - Priority: support banks’ efforts to deleverage and restructure in an orderly manner, if and when needed, without exacerbating the economic contraction. - Continued delays in increasing resources available for banking supervision are adding to challenges, because the volume of work has increased considerably. *Italic: IMF staff report — Chapter/section content as provided in the source PDF.* ### 22. Additional liquidity will be made available to banks under some conditions ### 22. Additional liquidity will be made available to banks under some conditions ### Liquidity needs and government action - ECB collateral rules are due to be tightened again in March 2011, and combined with the risk of further ratings downgrade, this could lead to a loss of available collateral. - Continuing losses of deposits as the recession continues, plus maturing bank bonds, will contribute further to liquidity needs. - The Bank of Greece remains fully prepared to extend emergency liquidity assistance (ELA) to solvent, fundamentally sound banks to address sudden and large new liquidity needs. - To meet liquidity pressures in a smoother way and anticipate deleveraging, the government is requesting Parliament’s approval for a new tranche of €30 billion of guarantees for uncovered banks bonds (structural benchmark for end-March). - This tranche would make these bonds eligible as collateral at the ECB. - The total amount should provide for sufficient system liquidity. - More demanding conditions will be attached to the allocation of this tranche to prepare for eventual phase out of government guarantees over the medium-term. - Conditions are expected to include approval on a case-by-case basis by the ECB, conditioned on adoption by banks of credible medium-term funding plans and subsequent satisfactory implementation. ### Planning for orderly deleveraging and bank funding plans - It was agreed that the time was right to begin planning for the orderly deleveraging and restructuring of the banking system. - Context and rationale: - Greek banking system size relative to the economy is lower than in several other European countries, but leverage increased significantly prior to the crisis. - Dependency on Eurosystem refinancing operations ranks among the highest in the Eurozone. - The Bank of Greece has asked banks to devise and implement medium-term funding plans; preliminary drafts will be completed by mid-April. - Guiding principle: consistency with the program’s macroeconomic and fiscal framework to avoid intensification of credit constraints and fire sales of assets at depressed prices. - A top-down program forecast for the banking system has been prepared as a baseline to evaluate options and potential feedbacks. - Each bank will need to examine options for disposal of non-core assets, including sales of subsidiaries, pools of assets, or accelerated run-down of non-core lending portfolios. - The Bank of Greece and the ECB, cooperating with the EC and IMF, will assess adequacy of plans and call for adjustments to align with aggregate constraints. - The speed of the deleveraging process will depend on market appetite for Greek banks’ assets. ### State bank restructuring (ATE) - For ATE, due diligence of its loan portfolio has been performed by a reputable international accounting firm. - The review looked at loan quality of a significant part of ATE’s loan book, including single reviews of 58 of the largest loans. - The review suggests a capital need of €300-400 million (i.e. to bring the bank back in full compliance with Pillar II capital requirements). - The exact size of the capital increase will be finalized by end-February 2011, also based on a review by the Bank of Greece. - Next steps for ATE: - Proceed with all other necessary steps, including approval by the EC. - The government confirmed its intention to meet the bulk of ATE’s capital needs by relying on the surplus reserves of the HCLF. - They are on track to unbundle the HCLF’s commercial activities by end-March. - The 2011–13 privatization plan shows commitment to sell state bank holdings, with a cautious approach depending on market conditions. ### Banking sector soundness and the FSF - Systemic banks remain sound. - The four large private banks are determined to rely on market-based solutions and have taken actions including selling valuable foreign assets and raising capital through rights issues at prices highly detrimental to existing shareholders. - The FSF retains adequate capacity to provide a safety net for systemic and solvent banks. - €1½ billion is available in an account at the Bank of Greece, and a further €1 billion will soon be set aside in an intermediate (blocked) account. - The amounts now available would provide the capacity to deal with up to a five percent reduction of capital in the banking system. - Fully funded, the FSF will have the capacity to deal with up to a one-third reduction in Tier I capital in the banking system, or 3½ percent of risk-weighted assets. - The next transfer to the blocked account, in an amount of €1 billion, will be made in the second quarter. - The FSF will not be used to support small, non-systemic, non-viable banks; amounts available are more than adequate at present. - Operational preparedness: Board is in place and steps are being taken to recruit qualified staff by end-June 2011; arrangements established for sourcing additional human resources from reputable consultancy firms and the Bank of Greece. ### Supervision capacity and insurance sector oversight - Supervision capacity needs strengthening. - The Bank of Greece faced challenges meeting its commitment to be fully staffed in bank supervision by end-March 2011 due to centralized public recruitment constraints; full staffing is now expected by end-June. - Supervisory attention to the insurance sector must be increased. - The Bank of Greece takeover of insurance supervision became effective in December 2010. - The Greek insurance sector represents three percent of financial system assets (€14 billion), and a large part is affiliated with banks or large international insurance companies. - Sector characteristics: poor profitability, weak corporate governance, weak risk and asset liability management techniques, and an inadequate regulatory framework (as found in the 2005 FSAP). - Bank of Greece preliminary review (based on 2009 data) found the market in total has available capital exceeding the required solvency margin by €390 million. - The central bank plans to perform a diagnostic assessment of insurance companies immediately and has requested Fund technical assistance to develop a more effective supervisory framework, including correcting inadequacies related to the funding structure of policy protection schemes. ### Structural reforms to support investment and export-led recovery - Authorities focused on implementing a critical mass of structural reforms covering labor market, product and service market liberalization, and entrepreneurship reforms. - Labor market: - Collective bargaining reforms completed, allowing an opt-out from automatic extension of collectively agreed wages to non-negotiating parties. - Effectiveness depends on rigorous application of opt-out access conditions; an opinion by the Labor Inspectorate and consent by sectoral unions in small firms are required. - Authorities committed to full enforcement and to amend legislation if the reform fails to help small firms become more competitive. - Experience with opt-out clauses will be monitored during the first half of the year. - Liberalization of regulated professions: - Framework legislation enacted to prohibit in general terms restrictions related to quantity, geography, scale, incorporation, prices, number of licenses, and prior conditions for licenses. - Law allows a 4 month period to define exceptions to the general liberalization; ministerial decree will list professions affected. - Oversight by the Council of State and requirement for an economic rationale to restore any restrictions. - The law already addresses "closed professions" (lawyers, notaries, engineers, architects, and auditors); pharmacists covered by separate health care law. - Staff estimates suggest every 10-percent reduction in the costs of business services achieved through this liberalization could translate into a ½ percent reduction in overall prices. - Industry-specific liberalization: - Studies of tourism and retail trade (about 20 percent of Greek gross value added) identified insufficient scale and over-regulation; work now focuses on time-bound action plans. - Energy sector liberalization being developed with EC assistance; comprehensive reform covering generation, wholesale and retail distribution. - A fully competitive electricity market will take time; some transitory upward drift in final prices could be observed as regulated prices become cost reflective, but more efficient energy consumption can prevent an increase in final energy bills. - Business environment reforms and implementation: - Continued legislative drive balanced against follow-up implementation work. - Recent and forthcoming initiatives include one-stop shops, fast-track procedures for large investments, draft laws to simplify licensing and strengthen competition authority. - Key initiatives to be undertaken: - Establishment of a single public procurement authority (by March). - Reform of the labor inspectorate. - Reduction of the administrative burden on exports (by September). - Current export metrics: 20 days, 6 documents and $1,153 per container to export, compared with EU (best-3) averages of 6 days, 4 documents, and $934. - Review of VAT refund procedures to ensure export refunds are paid on time. - Authorities acknowledged delays in implementation (one-stop shops, fast track procedures) due to limited administrative capacity; actions and deadlines identified and a mid-year status review planned. ### Program modalities, monitoring, and risks - Program performance and monitoring: - The program continues to meet key targets; all end-December performance criteria were met, as well as the continuous PC on external arrears. - The indicative target on government spending arrears was missed due to persistent problems in subnational entities. - Structural benchmark implementation record was mixed; some benchmarks partially met or delayed. - Two prior actions for the review were met: tabling of legislation to strengthen tax administration (passage is a benchmark, with expected small delay by mid-March) and passage of legislation concerning liberalization of regulated professions. - Program monitoring updates for 2011: - Quantitative performance criteria proposed for September 2011 and December 2011 (converting existing indicative targets with a small modification to the end-September general government cash deficit ceiling). - Several new structural benchmarks proposed, including: - Adoption of a new tranche of government guarantees for uncovered bank bonds. - Submission of medium-term funding plans by banks to the Bank of Greece. - A strategic plan for revenue administration reform. - Improvements in fiscal reporting. - Reforms to the general government personnel system. - A revised and more comprehensive privatization plan. - Financing and repayment capacity: - Financing needs and repayment capacity remain as previously evaluated. - The program can continue to fully cover government financing needs through early 2012. - Risks to a successful return to the bond market are higher at present; prospects should improve with strong program implementation. - Under the current SBA arrangement, Greece’s capacity to repay the Fund will critically depend on successful post-program market re-access. - A potential extension of EU loans and possible approval of an extended arrangement by the Fund (upon cancellation of the SBA) would significantly improve repayment capacity. - Illustration: peak debt-service to export ratio in 2013–15 would decline from 17 percent to 12.6 percent. - Principal risks to the program: - Delays in implementing fiscal-institutional and structural reforms due to political or administrative constraints could leave the deficit stuck at an unsustainable level and undermine recovery; a tailored DSA scenario suggests debt could be brought under control at a significantly higher level if financing is sustained. - Inability of the government to re-access markets even with the program on track, exacerbated by continuing problems in the euro-area periphery; a successful European crisis-management framework and a shift to an EFF or similar EU terms would help mitigate this risk. - An excessively fast bank deleveraging process could have negative macroeconomic and fiscal repercussions and undermine the banking system; consistency of bank plans with the program’s macro and fiscal framework is intended to mitigate this risk. *Source: _cr1168 - 22. Additional liquidity will be made available to banks under some conditions* ### 38. The program has made further strides towards its objectives. Output remains close ### _cr1168 - 38. The program has made further strides towards its objectives. Output remains close ### Program progress and macroeconomic outcomes - Output remains close to the targeted path. - Underlying inflation remains low. - Unit labor costs are beginning to fall. - Policies continue to be prepared and legislated broadly as planned, although implementation has lagged in a few instances. - The program is slowly gaining traction but remains at a crossroads between stabilization and deeper structural reform. ### Phase 1: Stabilization achieved in 2010 - The government completed a first phase of adjustment focused on stabilization amid a sharply deteriorating external environment. - General government fiscal deficit reduced from 15½ to 9½ percent of GDP in 2010. - This reduction required measures of about 8 percent of GDP because of headwinds from a weakening economy. - Measures implemented included socially difficult wage and pension cuts, tax increases, and deep spending cuts. - The authorities’ stabilization achievements in 2010 are described as “extraordinarily ambitious” and “very impressive” by international comparison. ### Need for a second phase: structural reforms and medium-term budget strategy - The program is entering a second phase that will require much greater emphasis on structural reforms. - Although the overall fiscal target was met for 2010, achievement relied on under-execution of the state budget to offset revenue shortfalls and overspending at local levels. - Weak tax administration and problems in controlling spending led to a build up of budgetary arrears. - Fiscal consolidation began to outpace underlying structural and institutional changes. - The government is prioritizing development of a medium-term budget strategy covering virtually every area of the public sector. - Specific measures must be carefully designed to ensure a fair adjustment burden and to limit impacts on growth. - The reform process has started with delays due to technical complexity and sensitive social and political issues; the government plans dialogue with social partners as a critical element. ### Timing and implementation priorities for 2011–2012 - Aim to begin implementing medium-term policy reforms during the second half of 2011. - Staff believes implementation in 2011 is critical to program sustainability. - Technical work to design: - public personnel policy reforms, - tax reforms, - reforms to better target social spending, should be completed by the middle of 2011. - Implementation should begin immediately to: - support achievement of the 2011 fiscal target (there is no room to continue to eliminate a projected shortfall by again under executing the budget), - support the planned 2012 adjustment. - In parallel, the government must continue to combat tax evasion and tighten control over spending. - The government will need to show determination against strong resistance from vested interests. - The government’s resolve in pushing ahead with health sector reforms is noted as encouraging. ### Privatization and state asset management - Staff welcomes the government’s commitment to notably scale up its privatization program and to realize better returns from its extensive portfolio of assets. - More efficient use of state assets is expected to: - promote growth and employment, - reduce the need for deeper budgetary cutbacks, - help Greece retire maturing debt and limit financing requirements. - Recommendation: complete the first stage of a comprehensive inventory of government real estate assets by mid-year to help define a phased action plan. ### Deepening structural reforms to support recovery - Achievements to date include labor market reform and legislation to open up regulated professions. - Delays in making already legislated reforms operational need to be overcome. - Remaining key reforms to advance include: - cutting administrative barriers to exports, - strengthening public procurement procedures. - Overall, the reform effort is still “well away from the critical mass” needed to secure a gradual economic recovery beginning in 2012. ### Financial sector: deleveraging, liquidity support, and supervision - Time must be provided to allow banks to deleverage and restructure in an orderly fashion. - The banking system needs to extricate itself from exceptional liquidity support being provided by the Eurosystem; this will take time given macroeconomic and fiscal fragility. - It is crucial for the Bank of Greece and ECB to heed macro-fiscal constraints when approving banks’ medium-term funding plans. - The Financial Stability Fund (FSF) should be available to provide support to solvent systemic banks, if needed. - Problems in smaller non-viable banks should not be allowed to consume FSF resources. - Financial supervision should be strengthened: - Supervisors’ capacity to track emerging issues urgently needs to be upgraded. - Restrictive personnel rules holding up recruitment of additional staff must be overcome. ### Box 1 — What Explains the 8 percent of GDP Fiscal Gap for 2012–14? - Fiscal gap (Third review): 8.0 - Fiscal gap (May program): 1.7 - Difference: 6.3 - Breakdown (in percent of GDP): - Inclusion of 2014: 2.5 - Economic factors: 1.0 - Measures: 2.8 - of which Lower yields or advanced measures: 2.3 - Expiration after 2013: 0.5 - Changes in fiscal baseline: 0.0 - Notes and explanation: - The present fiscal gap is considerably larger than estimated at program approval. At approval, yet-to-be-specified measures amounted to 1¾ percent of GDP through 2013 (expected to come from revenue administration reforms). - Inclusion of 2014 adds 2½ percent of GDP to meet deficit below the 3 percent of GDP Maastricht criterion. - Economic factors: faster-than-projected rebalancing with wages dropping weighed negatively on wage-related taxes (1 percent of GDP). - Other changes in the fiscal baseline: gains from the pension reform broadly offset the increase in interest payments following upward revision of debt. - Measures: estimated yields for some measures have fallen; other measures dropped out or will expire at end-2013; remaining measures overlap with areas authorities target for new measures and have been excluded from the presentation (total 2¾ percent of GDP). - Under measurement norms used at the time of the 2nd Review, the gap would now be calculated as 5¾ percent of GDP given earlier definitions and assumptions about tax administration gains. - Assumption: Assumes investment spending is reduced with reduced EU inflows over time. ### Box 2 — Greece: Banking System Deleveraging (assumptions and results) - Key liability-side assumptions: - Deposit/GDP ratios fall back to about their pre-2008 levels in mid-2012, before they start rising again as the economy recovers and external adjustment proceeds. - Banks’ access to the wholesale funding market remains very limited until the sovereign successfully returns to the market. - Banks aim to increase capital and loan loss provisions, beginning in line with recent trends and gradually stabilizing towards the end of 2012. - Key asset-side assumptions: - Total domestic private sector credit is estimated based on projected GDP, house prices, and long-term interest rates. - Consumer loans are reduced faster than the stock of corporate and housing loans, which have a longer average maturity. - Net issuance of domestic public debt is fully absorbed by the domestic banking system. - Banks shrink their net claims on foreign financial institutions, subject to limits connected to maturities and commitments towards foreign subsidiaries (e.g., in the context of the Bank Coordination Initiative). - Banks reduce foreign non-financial corporate credit exposures faster than domestic exposures. - Preliminary projected outcomes: - A contraction of credit demand in the coming two years on a similar scale as economic activity, with about a one year lag. - Deleveraging is expected to be a medium-term process: deposits will likely contract until the economy stabilizes, and banks will remain dependent on exceptional liquidity support until market access is reestablished. - Context and empirical support: - Empirical evidence from international episodes suggests real bank credit falls markedly in the first three years after a crisis, even after real output begins to recover (Hoggard and Reidhill, 2003). - McKinsey (2010) finds deleveraging episodes last on average 6-7 years and reduce the ratio of credit to GDP by 25 percent. - Caution: - Credit data needs careful interpretation during crises because it may include write-offs of bad loans; capitalization of interest payments; revaluation adjustments of foreign currency loans; and possibly transfers of impaired loans to special institutions outside the banking system. ### Conclusion and outlook for program reviews - Policies to effect the shift from fiscal/financial stabilization to structural reforms have been identified and are being designed and can be implemented within 2011. - These reforms will be a key subject for future reviews. - Staff supports the completion of the 3rd review. *Source: Excerpt of the provided IMF staff report content.* ### Box 3. Impact Assessment of Business Environment Reforms ### Box 3. Impact Assessment of Business Environment Reforms ### Overview - Assessment approach: Use of the World Bank’s Doing Business Index, composed of blocks including: starting a business; dealing with licenses; trading across borders; getting credit; protecting investors; paying taxes; enforcing contracts; and closing a business. ### Business start ups - Indicator composition: (i) the number of procedures required; (ii) the number of days required; (iii) the minimum required company capital; and (iv) the total cost for a start-up (including payments to lawyers and notaries). - Reforms and quantitative impacts: - Necessary steps reduced from 15 to 4. - Number of days reduced from 21 to 7. - Estimated total cost reduced from €4,134 to €1,416. - Expected ranking change: from position 140 to position 43 in the starting a business indicator ranking (all else equal). ### Business licensing - Reform effects on licensing metrics: - Number of days in dealing with licenses reduced from the current 169 to 119 days. - Number of procedures reduced from 15 procedures to 11 procedures. - Expected ranking change: from 52nd to 18th in the licensing ranking (all else equal). - Comparative benchmark: reform should place Greece in the EU average in terms of ease of licensing. ### Trade (trading across borders) - Reform scenario: Reducing administrative barriers to exports to align Greece with best practices. - Expected ranking change: improve Greece’s position in the trading across borders ranking from 83rd to 44th (all else equal). ### Other categories - Tax administration reforms: recently introduced reforms will simplify paying taxes (effects to be assessed). - Insolvency framework: legislation passed to eliminate a significant gap in Greece’s current insolvency framework (covering procedures to allow over-indebted natural persons to repay debts and obtain relief where necessary). - These changes will have additional to-be-assessed effects. ### Combined effects on Doing Business ranking - Combined effect of business start up and licensing reforms (both nearing completion): - Move Greece from 109th to 85th place in the Doing Business rankings (all else equal). - Further improvement once administrative barriers to exports are lowered: - Ranking could further improve to 79th. *Italic: Source: Box 3. Impact Assessment of Business Environment Reforms (extracted from the provided IMF content).* ### 1. Direct taxes21.48.914.320.420.320.920.6 ### _cr1168 - 1. Direct taxes21.48.914.320.420.320.920.6 ### Direct taxes: composition and series - Total direct taxes: 21.4 8.9 14.3 20.4 20.3 20.9 20.6 - Income taxes: 16.6 6.0 10.3 14.9 14.3 14.8 14.5 - PIT: 10.9 4.3 6.8 10.0 9.4 10.6 10.0 - CIT: 3.4 1.1 2.2 3.3 3.2 2.8 3.0 - Other: 2.3 0.6 1.3 1.6 1.7 1.4 1.5 - Property taxes: 0.5 0.1 0.4 0.6 0.5 0.9 0.9 - Tax arrears collection (direct): 2.4 1.2 1.6 2.3 2.9 2.7 2.9 - Other direct taxes: 1.9 1.6 2.1 2.6 2.6 2.5 2.4 ### Indirect taxes: composition and series - Total indirect taxes: 28.3 14.8 22.0 31.5 31.0 32.0 31.0 - Transaction taxes: 17.9 8.9 13.6 18.8 18.5 19.3 18.6 - VAT: 16.6 8.4 12.8 17.7 17.4 18.0 17.5 - Other transaction taxes: 1.3 0.5 0.8 1.1 1.1 1.3 1.1 - Consumption taxes: 9.6 5.5 8.0 11.9 11.8 11.6 11.4 - Tax arrears collections (indirect): 0.4 0.2 0.3 0.4 0.3 0.5 0.5 - Other indirect taxes: 0.4 0.2 0.3 0.4 0.4 0.5 0.4 ### Transfers, nontax revenue, and one-offs - Transfers EU: 0.3 0.1 0.2 0.4 0.3 0.3 0.3 - Nontax revenue: 2.3 1.4 2.1 2.6 2.8 4.3 4.3 - One-off revenue: 1.1 0.9 1.2 1.6 1.8 1.8 2.1 - Tax Refunds (-): 5.0 2.3 3.3 5.1 5.0 3.8 3.8 ### Public investment and EU flows - Public investment budget: 2.0 0.4 1.3 2.9 3.1 3.9 3.9 - A. EU flows: 1.9 0.3 1.2 2.6 2.8 3.7 3.7 - B. Own revenues: 0.2 0.1 0.2 0.3 0.3 0.2 0.2 ### Expenditure aggregates and components - Total expenditure: 83.6 34.1 54.4 75.1 74.7 78.6 78.8 - Total ordinary spending: 70.3 30.2 48.4 65.0 64.9 68.1 68.2 - Total ordinary primary spending: 58.0 24.5 36.8 51.7 51.7 52.1 52.1 - A. Remuneration and pensions: 25.2 11.3 16.9 22.7 22.8 21.6 21.6 - B. Insurance and Healthcare: 17.6 7.4 10.7 16.0 15.7 16.0 16.1 - C. Operating and other expenditure and returned resources: 14.5 5.4 8.6 12.4 12.6 13.3 13.3 - D. Payments in exchange of claims of insurance fund 1/: 0.8 0.4 0.5 0.6 0.6 0.6 0.6 - E. Reserve: 0.6 0.6 - Interest expenditure: 12.3 5.7 11.7 13.3 13.2 15.9 16.1 - Transfers to hospitals for the settlement of past debt: 1.5 0.0 0.3 0.3 0.4 0.5 0.5 - Investment spending: 9.6 3.7 5.4 8.5 8.4 8.5 8.5 - Spending on military procurement: 2.2 0.2 0.2 1.3 1.0 1.6 1.6 ### Budget balances and aggregates (cash/modified) - State Budget primary spending (variable monitored for PC): 71.3 28.4 42.4 61.5 61.1 62.7 62.7 - Balance state budget: -33.1 -9.9 -16.5 -20.8 -20.5 -19.2 -20.4 - II. Balance local governments 2/: 0.0 0.3 0.1 0.0 -0.4 0.0 0.0 - III. Balance social security funds 2/: 0.5 -0.1 1.0 1.5 1.8 0.7 0.7 - IV. Balance of extra-budgetary funds (ETERPS) 2/: ... ... ... ... ... 0.2 0.2 - V. Called guarantees from non-general govt entities: ... ... ... ... ... -0.1 -0.2 - VI. Balance of reclassified public enterprises 2/: ... ... ... ... ... -0.8 -1.0 - VII. Modified general government cash balance: -32.5 -9.7 -15.5 -19.3 -19.1 -19.1 -20.6 - of which: Modified general government primary cash balance (variable monitored for PC): ... -3.9 -3.5 -5.7 -5.5 -3.2 -4.5 - VIII. Adjustments 3/: -3.6 ... ... ... -3.1 -2.9 2.3 1.8 - IX. General government balance (ESA 95) before measures: -36.1 ... ... ... -22.3 -22.0 -16.8 -18.8 - X. To be identified measures: ... ... ... ... ... ... 1.8 - XI. General government balance (ESA 95) incl. measures: -36.1 ... ... ... -22.3 -22.0 -16.8 -17.0 ### Memorandum items (fiscal rules) - Floor on the modified general government primary cash balance: ... -3.9 -3.5 ... -5.5 -3.2 -4.5 - Ceiling on state budget primary spending: ... 2842 ... 616363 *Source: Greek Ministry of Finance and Fund staff projections.* ### Greece: General government aggregates (Table 5 highlights) - Revenue: 88.8 92.3 92.6 96.9 95.6 - Taxes on production, and imports: 26.1 29.7 29.1 31.6 31.0 - Taxes on income, and property: 19.2 17.1 17.1 18.4 17.7 - Social contributions: 30.8 30.1 30.9 29.4 30.0 - Capital transfers: 3.1 4.7 4.8 4.4 4.5 - Primary expenditure: 112.5 99.9 99.9 98.7 99.4 - Primary balance: -23.7 -7.6 -7.3 -1.8 -3.8 - Interest payments: 12.4 14.7 14.7 15.0 15.0 - Overall balance: -36.1 -22.3 -22.0 -16.8 -18.8 - Overall balance including measures: -36.1 -22.3 -22.0 -16.8 -17.0 - Gross debt (Maastricht): 298.0 327.2 326.9 347.2 345.6 - Revenue (percent of GDP): 37.8 39.8 40.4 42.4 42.3 - Primary balance (percent of GDP): -10.1 -3.3 -3.2 -0.8 -1.7 - Overall balance (percent of GDP): -15.4 -9.6 -9.6 -7.4 -8.3 - Gross debt (percent of GDP): 127 141 143 152 153 - Nominal GDP (in euro billions): 235 232 229 228 226 ### Status of fiscal structural reforms (Table 6 highlights) - Pensions: Comprehensive pension reform adopted Jul-10; lowers projected increase in pension spending in 2010-2060 to 2.5-4.5 percent of GDP (from 12.5 percent of GDP); safeguard clause for adjustments; preliminary studies indicate significant reduction in projected increase for IKA, OAEE, OGA. - Health: Pension law includes institutional reforms Jul-10; financial and accounting independence of health funds by December 2010; central health agency; integration of social security funds with the NHS by December 2012. - Health arrears: Jun-10 identified about €5.5 billion arrears and unpaid bills for 2005-09 to be settled using bonds; clearance ongoing. - Pharmaceuticals: Prices reduced by 20 percent Jun-10; measures in Jan/Feb-2011 include consolidated budget for social security funds, e-prescribing in OAEE, electronic scanning in IKA, extended negative list, co-payment increased to €5 (from €3). Law to implement health services reforms adopted Feb-11. - Local Governments: Law adopted May-10 reduces municipalities from 1,034 to 325, regions from 13 to 7; merging expected completed by March 2011. - State Owned Enterprises: Railway reform law adopted Oct-10; business plan Nov-10 to break even; quarterly financial statements published Oct-10 for 52 public enterprises; wages reductions Jan-11 for public enterprise employees earning over €1,800; law for Athens transport presented Feb-11. ### Status of sectoral reforms (Table 7 highlights) - Labor market: Employment Protection Legislation, mediation/arbitration services, and Collective bargaining legislation completed by Q4-2010. - Services liberalization: Law 3844/2010 adopted; operationalization in progress. - Liberalization of regulated professions: Legislation completed Q1-2011. - Business environment: Law 3853/2010 for one-stop-shops adopted Q2-2010; fast-track law for large investments approved Q4-2010; simplification of business licensing legislation in progress Q4-2010. - Sectoral deregulation: Road transportation and railway sector reform legislation completed Q3-2010 and Q4-2010 respectively. ### Medium-term macroeconomic framework (Table 8 highlights, 2010–2016) - Real GDP: -4.2 -4.5 -3.0 1.1 2.1 2.1 2.7 2.9 - Output gap (percent of pot. output): -1.3 -0.3 -3.1 -2.8 -1.8 -1.1 0.0 0.3 - Total domestic demand: -7.3 -6.9 -5.6 -0.7 0.7 1.0 1.7 2.3 - Private consumption: -4.1 -4.1 -4.6 0.5 1.1 1.2 1.3 1.2 - Public consumption: -9.0 -9.0 -8.5 -6.0 -1.0 -0.3 1.1 4.3 - Gross fixed capital formation: -18.8 -17.4 -7.5 -2.6 1.1 1.2 4.6 5.5 - Exports of goods and services: 0.9 0.6 6.3 5.9 7.3 6.7 7.3 6.0 - Imports of goods and services: -12.0 -12.0 -6.0 -1.5 1.5 2.1 3.6 3.6 - Unemployment rate (percent) 2/: 12.2 12.4 14.8 15.0 14.5 13.8 12.7 11.6 - Consumer prices (HICP), period average: 4.6 4.7 2.4 0.5 0.7 1.0 1.0 1.2 - Current account (percent of GDP): -10.4 -10.5 -8.2 -7.1 -6.6 -5.5 -4.4 -3.8 - Total revenues (percent of GDP) 3/: 39.8 40.4 42.3 42.3 41.9 38.3 38.3 37.8 - Total expenditures (percent of GDP) 3/: 49.4 50.0 50.6 51.1 51.6 49.8 48.3 47.8 - Overall balance: -9.6 -9.6 -7.5 -6.5 -4.8 -2.6 -2.1 -2.1 - Primary balance 4/: -3.3 -3.2 -0.9 1.0 3.5 6.0 6.3 6.1 - Gross debt (percent of GDP): 141 143 153 159 158 154 151 147 - Nominal GDP (billions of euros): 229 229 226 229 236 244 252 263 - Nominal GDP (percentage change): -1.5 -2.4 -1.5 1.5 2.9 3.3 3.3 4.2 ### Balance of payments summary (Table 9 highlights) - Current account balance (billions of euro): -25.8 -9.7 -4.4 -3.1 -6.8 -25.6 -24.0 -18.5 -16.2 -15.7 -13.4 -11.1 - Current account balance (percent of GDP): -11.0 -4.2 -1.9 -1.9 -0.4 -10.8 -10.5 -8.2 -7.1 -6.6 -5.5 -4.4 - Balance of goods and services (percent of GDP): -7.7 -3.1 -1.6 -1.6 0.8 -7.1 -6.6 -3.9 -2.5 -0.6 1.2 2.9 - Goods balance (percent of GDP): -13.1 -3.6 -3.1 -3.1 -2.9 -13.0 -12.3 -10.9 -10.3 -9.2 -8.1 -7.2 - Services balance (percent of GDP): 5.4 0.5 1.5 1.5 3.6 5.8 5.8 7.1 7.8 8.6 9.4 10.1 - Income balance (percent of GDP): -3.8 -0.8 -1.1 -1.1 -1.3 -4.0 -4.0 -4.8 -4.9 -6.4 -7.1 -7.6 - Capital and financial account balance (percent of GDP): 11.2 4.1 -6.6 -2.3 1.5 -5.3 -3.2 -12.4 -3.4 3.3 5.5 4.4 - Program financing (billions of euro): ... ... 20.2 8.8 2.5 38.0 31.5 46.5 24.0 8.0 0.0 0.0 - External debt (billions of euro): 173.5 180.0 187.5 187.8 183.1 183.5 190.6 198.5 207.7 215.2 219.9 221.1 - Public sector: 114.3 119.4 133.8 117.1 132.8 132.6 138.5 151.2 147.8 139.1 117.5 94.6 - Private sector: 59.3 60.6 53.7 70.7 50.3 50.9 52.1 47.3 59.9 76.1 102.4 126.5 ### Policy priorities for fiscal consolidation (Table 10 highlights) - State enterprise restructuring (timetable End-June 2011 for those in general government; all others by end-2011) - Review tariff policy to improve cost recovery. - Prioritize investment. - Cut operational expenditure. - Tighten hiring freeze, downsize, further limit allowances, and align wages with the private sector. - Limit subsidies to public service obligations. - Sell nonstrategic assets and increase dividends. - Estimated 2011 expenditure impact: 1-1.5 percent of GDP - Eliminate unnecessary public entities (implementation during 2011 and 2012) - Eliminate entities with no function. - Pass functions to the appropriate line ministry where functions overlap. - Merge entities performing similar functions and eliminate duplication. - Align operational costs with private sector comparators. *Source: IMF staff; Greece authorities (as provided in the content unit).* ### 0.8 percent of GDP ### 0.8 percent of GDP ### Simplify the tax system - Corporate tax: broaden base (e.g. decrease depreciation rates, eliminate exemptions, tighten transfer pricing regulations). - Rationalize the system of taxation of capital income. - Streamline the number of tax exemptions and incentives. - End-June 2011. ### Tax expenditure - Tax expenditure estimated at at least 3 percenf of GDP. - 2-4 percent of GDP. ### Reform public administration - Streamline public sector organizations and activities, pending findings of the functional review. - 2012 budget. ### Social spending reform - Reduce benefits to households above the poverty line (improve targeting). - Eliminate duplication of benefits. - 2012 budget. - 18 percent of GDP. - 1-2 percent of GDP. ### Contain the wage bill - Tighten hiring freeze, limit the number of contracts, and downsize across general government. - Increase working hours from 7 to 8 (in line with private sector) and reduce overtime. - Simplify the remuneration schemes, e.g. limit the ratio of allowances to the base wage. - Limit wage drift and promotions. - End-June 2011. - 10 percent of GDP. - 2 percent of GDP. ### Contain military spending, particularly procurement - Reduce military spending towards EU average, i.e. by prioritizing procurements and improving the cost-efficiency of operational spending. - 3.6 percent of GDP (2009). - 1 percent of GDP. ### Prioritize domestic investment - Better prioritize investment based on concessionality of funding and impact on growth. - End-June 2011. - 2.5 percent of GDP (excluding EU grants). ### Health reform - Introduce a general physician system; shift informal into formal co-payments. - 6 percent of GDP. - 1 percent of GDP. ### Summary of fiscal estimates and targets (IMF staff estimates) - Tax expenditure estimated at at least 3 percenf of GDP. - 2-4 percent of GDP (related tax/expenditure adjustment range). - Social spending: 18 percent of GDP with potential 1-2 percent of GDP savings. - Wage bill: 10 percent of GDP with potential 2 percent of GDP savings. - Military spending: 3.6 percent of GDP (2009) with 1 percent of GDP potential reduction. - Domestic investment: 2.5 percent of GDP (excluding EU grants). - Health sector: 6 percent of GDP with 1 percent of GDP potential savings. ### Revenue Collection Process — Issues and Actions (Table 11) - 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 / Next steps: - Centralized Taxpayer Service Directorate to be established, as part of the medium term reform plan (June 2011). - Legislation presented to Parliament allowing acceptance of VAT tax returns without full payment of taxes contingent to installment arrangements (February 2011). - Control - Issues: - Weak and decentralized filing and payment enforcement. Procedures not automated. - Data gathering is ad hoc with no central control for monitoring and enforcing compliance. - Legal requirement to audit all tax returns generally prevents prioritization and risk-based selection audit cases. - Potentially large tax evasion: about 70 percent of self employed professionals declaring taxable income below minimum exemption threshold. - Limited use of indirect methods of assessment. Limited legal gateways to collect third party information. Audit process not centralized. - Actions taken / Next steps: - Anti-evasion plan: a task force is in place to strengthen filing enforcement through centralized control with defined performance targets (early 2011). - Monitor progress towards achieving performance targets (Monthly reports, 2011). - Anti-evasion plan (early 2011): task forces are in place to secure control of top 1200 taxpayers, and high wealth individuals and self-employed (including performance targets on filing, payment and audit results). - Legislation and administrative changes required to eliminate mandatory audits for all returns. - Medium-term reform plan to develop action to introduce a risk-based compliance framework for verification programs, and create a large taxpayer unit (June 2011). - Anti evasion plan to implement centralized audits of top 1200 taxpayers and high wealth individuals (early 2011). - Legislation presented to Parliament to partially centralize some audit functions (early 2011). - Administrative measures to be enacted to allow: (i) better use of indirect methods of assessment, and (ii) data collection from third parties (2011). - Enforcement - Issues: - 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 to access the judicial appeal process largely waived by courts. - Poor collection enforcement: collection of fines and penalties around 1 percent, debt collection not centralized. - Actions taken / Next steps: - Legislation approved to reform the judicial appeal process (October 2010). - Legislation submitted to Parliament to reform the administrative tax dispute process and create an independent arbitration system. Legislation aims at: reducing the 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 (February 2011). - Anti-evasion plan: a taskforce is in place to coordinate centrally and accelerate collection of tax debt with defined performance targets (early 2011). - Monitor progress towards achieving performance targets (Monthly reports 2011). ### Spending Process — Issues and Actions (Table 12) - Budgeting: Develop a medium term budget framework - Issues: - A medium-term strategy for the general government does not exist. - Budgets prepared in a bottom-up fashion with no hard budget constraints. - Fiscal planning largely confined to the state budget with the MOF only responsible for administration and management. - Budget preparation processes for other general government entities disjointed. - Responsibility for social security fragmented with no effective preparation, management and monitoring of social security budget. - Parliamentary budget oversight weak and no intra-year supplementary budgets required. - Actions taken / Next steps: - New Fiscal Responsibility and Management Act (FRMA) approved, establishing medium term fiscal strategy covering general government (August 2010). - Present a full MTFS for the period 2012-15 for the GG to Parliament. The MTEF will set: (i) the deficits of the GG and its subsectors; (ii) estimates of revenue and expenditure for each subsector, including transfers; and (iii) an expenditure ceiling for the ordinary and investment budgets of the state (April-November 2011). - The FRMA establishes: MOF's responsibilities for setting and controlling budget policies for all GG entities; top-down budget procedures and expenditure ceilings; alignment of budget preparation processes across the general government entities; separate social budget, and supplementary budgets; a Parliamentary Budget Office. - 2011 budget published, with abridged MTFS for GG, alongside the state budget, and consolidated social and local government budgets (December 2010). - Present a full MTFS and 2012 budget to Parliament, including State budget, Social budget, and consolidated LG budgets (November 2011). - Start issuing regulations to fully implement the FRMA, including assessment of policy initiatives initiated during the year that have a potential bearing on the budget (2011). - Control: Release budget appropriations to spending units, and units make expenditure commitments - Issues: - Line ministries do not check or control expenditure commitments; no central control on incurred commitments. - Execution of budget releases focused on verifying payments. - Actions taken / Next steps: - Commitment registers established. A presidential decree issued establishing commitment registers in all line ministries and GG entities (November 2011) and implementing circular issued (January 2011). - Commitment registers to be made operational in all line ministries and major GG entities (early 2011). - Accounting officers to be appointed in all line ministries and major GG entities. The officers have the responsibility and authority to ensure sound financial controls and that expenditure commitments do not exceed appropriations (March 2011). - Control: Pay invoices after accounting and audit controls - Issues: - Cumbersome checking procedures to make payments, with several institutions involved (e.g. the department of financial services of the spending unit, the Fiscal Audit Office (FAO) and the Court of Audit locally stationed). - Controls are mainly compliance-oriented. - Next steps: - Role of Financial Audit Office (FAO) in spending units to be clarified, following the appointment of accounting officers. - Procedures for audit clearance and payment orders to be streamlined, including the scaling down of preventive audits (June 2011). *Source: IMF staff estimates.* ### 3. Reporting ### 3. Reporting ### Collect and analyze information on payments, pending bills and arrears - Finding: No real-time monitoring of arrears and other pending bills. Collection of payment information at non-central government level difficult. - Actions taken: - Data on arrears published, using surveys while waiting for commitment registers to be established (September 2010). - Next steps: - Commitment registers in use in most of GG entities and used to publish arrears data (March 2011). - Accounting officers (to be appointed in most of general government agencies) have the responsibility, among others, to improve monitoring at spending unit level (March 2011). - Work to begin to review the FMIS. Overall functionalities of the Financial Management Information System (FMIS) to be reviewed to use the new system to control fiscal operations and report fiscal data for the GG (June 2011). - FMIS to be operational, (late 2011). ### Monitoring and reporting of fiscal developments for general government - Finding: Monitor and reporting focused on state budget. No timely in-year monitoring or reporting for general government published. Budget deviations not detected on time. - Actions taken: - Aggregate monthly fiscal reports for GG published, using banking data for non-central government entities (September 2010). - Next steps: - Detailed monthly fiscal reports for GG to be published, monitoring aggregate revenue, expenditure and transfers for all non central government entities (March 2011), and showing the composition of revenue and expenditure by sub-sector and major economic category (June 2011). - Arrears data based on commitment registers to be published (March 2011). - FMIS to be operational, to allow for automated detailed monthly fiscal reporting and financial controls (late 2011). ### Parliamentary oversight and general auditing - Findings: - The Court of Audit does not carry out performance audits on a systematic base. Audits are mainly ex-ante and focused on the legality of spending. The court does not audit spending from some entities (e.g. public law entities, secret defense and foreign affairs procurement). - The mandate of the Public Finance Committee in Congress is limited to review information provided by the ministry of finance and reports submitted by the Court of Audit. - Next steps: - Establish a Parliamentary Budget Office (early 2011). *Source: IMF staff* ### 2. Baseline and sensitivity analysis remain largely unchanged from the 2 ### 2. Baseline and sensitivity analysis remain largely unchanged from the 2nd review ### Fiscal baseline and sensitivity analysis - Baseline: - Debt peaks at 159 percent of GDP in 2012, and declines to 130 percent of GDP by 2020. - Large rollover needs in the medium term remain a feature of Greece’s debt. - Sensitivity analysis (shocks from identified program risks would leave debt at very high levels): - Weaker growth: A one percentage point reduction in the GDP growth rate each year would result in debt rising to around 173 percent of GDP by 2020. - Faster growth: A one percentage point higher growth rate would bring the debt down to 92 percent of GDP by 2020. - Recognition of implicit or contingent liabilities: - Absorbing all state-guarantees, including those to the financial system (amounting to a projected €85 billion after the latest liquidity support tranche), would leave debt at 199 percent of GDP by 2020. - Under a 20 percent asset recovery rate, debt would be 190 percent of GDP by 2020. - Weaker fiscal adjustment: A slower fiscal adjustment—1 percent of GDP less per year—would imply a decline of the debt ratio to about 142 percent of GDP by 2020. - Higher interest rate: An interest rate increase of 200bps would increase public debt to 141 percent of GDP by 2020. - Full realization of privatization plans: Privatization receipts of €50 billion over 2011-15 would: - Reduce the debt to 134 percent of GDP by 2015 (compared with 151 percent of GDP under the baseline). - Result in a debt ratio of 112 percent of GDP by end-2020. ### Combined tailored shock (fiscal DSA) - Scenario components: - Two additional years to bring fiscal policy on target and to restore growth (due to delayed reforms). - Absorption of €10 billion in contingent banking liabilities. - Delays in privatization receipts. - Higher interest rate spreads (200 bps). - Outcome: - Debt-to-GDP would peak at 181 percent of GDP in 2015. - Debt declines to 175 percent of GDP by 2020 and then remains on a declining path. ### Public sector DSA: key projection points and assumptions (from Table A1) - Baseline: Public sector debt (percent of GDP) - 2008: 110 - 2009: 127 - 2010: 143 - 2011: 153 - 2012: 159 - 2013: 158 - 2014: 154 - 2015: 151 - 2016: 147 - 2017: 143 - 2018: 139 - 2019: 134 - 2020: 130 - Change in public sector debt (percent of GDP) - 2009: 16.5 - 2010: 15.7 - 2011: 10.4 - 2012: 5.6 - 2013: -0.5 - 2014: -4.3 - 2015: -3.1 - 2016: -3.9 - 2017: -3.8 - 2018: -4.2 - 2019: -4.3 - 2020: -4.8 - Identified debt-creating flows and components (percent of GDP, selected) - Primary deficit: 2008: 4.5; 2009: 10.1; 2010: 3.2; 2011: 0.9; 2012: -1.0; 2013: -3.5; 2014–2020: around -6.0 to -5.9. - Revenue and grants: 2011: 43.1; 2012: 42.8; 2013: 42.0; 2014: 39.3; 2015: 38.5; 2020: 36.5. - Primary (noninterest) expenditure: 2011: 44.0; 2012: 41.7; 2013: 38.5; 2014: 33.2; 2015: 32.2; 2020: 30.5. - Automatic debt dynamics contribution: 2011: 8.8; 2012: 5.3; 2013: 3.8; 2014: 3.6; 2015: 3.6; 2020: 1.2. - Privatization receipts (negative): 2011: -1.1; 2012: -1.3; 2013: -1.3; 2014: -0.8; 2015: -0.8; 2020: -0.3. - Recognition of implicit or contingent liabilities (percent of GDP): 2008: 1.0; 2009: 0.3; 2010: 3.0; 2011: 1.9; 2012: 2.7; subsequent years: 0.5 or 0.4. - Gross financing need (percent of GDP) - 2008: 9.5 - 2009: 15.4 - 2010: 20.9 - 2011: 23.9 - 2012: 26.5 - 2013: 25.6 - 2014: 32.1 - 2015: 31.0 - 2016: 25.6 - 2017: 27.6 - 2018: 22.3 - 2019: 26.8 - 2020: 17.0 - Key macro-fiscal assumptions (selected) - Real GDP growth (percent): 2008: 1.2; 2009: -2.3; 2010: 3.3; 2011: -4.2; 2012: -3.0; 2013: 1.1; 2014: 2.1; 2015: 2.1; 2016–2020: 2.7 to 3.0 (3.0 in 2020). - Average nominal interest rate on public debt (percent): 2008: 5.0; 2009: 4.8; 2010: 5.5; 2011: 4.9; 2012: 4.6; 2013: 5.0; 2014: 5.4; 2015: 5.7; 2020: 5.9. - Spreads above German bund (10-year, basis points): 2008: 550; 2009: 525; 2010: 350; 2011: 300; 2012–2014: 300; 2016: 300; 2017: 275; 2018: 250. - Inflation rate (GDP deflator, percent): 2008: 3.1; 2009: 1.5; 2010: 3.3; 2011: 1.9; 2012: 1.6; 2013: 0.4; 2014: 0.8; 2015: 1.2; 2020: 1.8. - Scenario comparisons: - Scenario with key variables at historical averages: debt around 143–145 percent in early projection years, then 142 percent from 2013 onward. - Scenario with no policy change (constant primary balance) in 2010-2020: debt rising to 195 percent in 2017 and 2018, and 201 percent in 2019, 206 percent in 2020 (historical column shows a steady rise to 211 in later years). ### External DSA: changed assumptions, baseline, and sensitivities - Assumption changes: - Interest rates on external debt adjusted to reflect more adverse market conditions, ensuring consistency with public DSA assumptions. - Higher oil prices: oil prices for 2011 projected at around $95 per barrel (compared to $78), and prices assumed on average 16 percent higher for 2012-2015. - Revised baseline: - Net external debt-to-GDP ratio projected to peak at 110 percent of GDP in 2013 (about 6 percentage points higher from previous baseline). - Net external debt-to-GDP ratio projected at 107 percent of GDP in 2015 (about 9 percent of GDP higher than in the previous baseline). - Adjustment of external imbalances is more gradual due to higher commodity prices and higher interest rate assumptions. - External sensitivity analysis: - Weaker real GDP growth: A one percentage point reduction in GDP growth each year would increase the net debt ratio by about 6½ percentage points of GDP by 2015 relative to the baseline. - Higher interest rate: A 200 basis point higher average interest rate would increase the debt ratio by about 12½ percentage points of GDP by 2015 relative to the baseline. - Higher current account deficit: A current account deficit 1½ percent of GDP higher than in the baseline would raise the debt ratio by about 10 percent of GDP in 2015. - Combined (tailored) shock: Featuring lower growth, higher interest rates, and weaker fiscal adjustment, external debt would peak in 2014 and fall after that, closely in line with public sector debt patterns. ### External DSA: key projection points and assumptions (from Table A2) - Baseline: External debt (percent of GDP) - 2005: 58.2 - 2006: 61.7 - 2007: 67.5 - 2008: 74.4 - 2009: 85.8 - 2010: 97.3 - 2011: 105.4 - 2012: 108.6 - 2013: 109.6 - 2014: 108.8 - 2015: 106.8 - Change in external debt (percent of GDP) - 2010: 11.5 - 2011: 8.2 - 2012: 3.2 - 2013: 1.0 - 2014: -0.8 - 2015: -2.0 - Identified external debt-creating flows (percent of GDP, selected) - Current account deficit, excluding interest payments: 2010: 7.9; 2011: 5.0; 2012: 3.7; 2013: 2.2; 2014: 0.5; 2015: -1.1. - Deficit in balance of goods and services: 2010: 6.6; 2011: 3.9; 2012: 2.5; 2013: 0.6; 2014: -1.2; 2015: -2.9. - Net non-debt creating capital inflows (negative): 2011: -0.9; 2012: -1.6; 2013: -1.7; 2014: -1.8; 2015: -1.9. - Automatic debt dynamics: 2011: 4.7; 2012: 1.9; 2013: 1.4; 2014: 1.6; 2015: 2.2. - Gross external financing need (in percent of GDP) - 2008: 45.1 - 2009: 70.3 - 2010: 78.0 - 2011: 86.2 - 2012: 74.4 - 2013: 63.3 - 2014: 72.8 - 2015: 97.4 - Key macro assumptions (selected) - Real GDP growth (percent): 2008: 0.8; 2009: -2.3; 2010: -4.2; 2011: -3.0; 2012: 1.1; 2013: 2.1; 2014: 2.1; 2015: 2.7. - Nominal external interest rate (percent): 2008: 4.9; 2009: 3.5; 2010: 3.0; 2011: 3.3; 2012: 3.4; 2013: 4.3; 2014: 4.8; 2015: 5.4. - Current account balance (percent of GDP): 2008: -14.7; 2009: -11.0; 2010: -10.5; 2011: -8.2; 2012: -7.2; 2013: -6.7; 2014: -5.6; 2015: -4.5. ### Figure-based insights (from Figures A1 and A2) - Public debt dynamics (Figure A1): - The pace of real GDP growth is critical to ensuring falling debt/GDP ratios. - 1 ppt higher growth per year versus 1 ppt lower growth per year produce widely divergent debt paths (baseline vs ±1 ppt scenarios). - Combined adverse shocks and recognition of implicit liabilities shift debt levels substantially upward, though most individual shocks (except combined adverse) maintain a downward path for debt/GDP. - Net external debt dynamics (Figure A2): - Individual permanent shocks shown include interest rate shock (+200bps), growth shock (-1 percentage point), non-interest current account shock, deflation shock, and a combined shock. - Interest rate shock and combined shock notably raise net external debt ratios relative to baseline; baseline net external debt is shown peaking around the early 2010s per the table projections. *Source: IMF staff projections and analyses as presented in the content unit.* ### Appendix II. Fund Relations ### Appendix II. Fund Relations (As of January 31, 2011) ### I. Membership Status and Exchange Rate Arrangements - Membership: Joined December 27, 1945. Accepted the obligations of Article VIII, Sections 2, 3, and 4. - Exchange rate arrangements: - Currency: euro, which floats freely and independently against other currencies. - Maintains an exchange system free of restrictions apart from those resulting from European Council regulations, last notified in accordance with Decision 144 under EBD/08/35, 4/18/08. ### II. General Resources Account and Quota Positions - Quota and Fund positions (SDR Million; Percent Quota): - Quota: 823.00 100.00 - Fund holdings of currency: 9,783.45 1,188.75 - Reserve position in Fund: 170.95 20.77 ### III. SDR Department - SDR positions (SDR Million; Percent Allocation): - Net cumulative allocation: 782.36 100.00 - Holdings: 609.06 77.85 ### IV. Outstanding Purchases and Loans - Stand-by Arrangements (SDR Million; Percent Quota): - Stand-by Arrangements: 9,131.30 1,109.51 ### V. Latest Financial Arrangements - Stand-By Arrangement: - Type: Stand-By - Date of Approval: May 09, 2010 - Date of Expiration: May 08, 2013 - Amount Approved (SDR Million): 26,432.90 - Amount Drawn (SDR Million): 9,131.30 ### VI. Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs) - Principal, Charges/Interest, and Total by year: - 2011 2012 2013 2014 2015 - Principal - 1,471.814,565.653,093.84 - Charges/Interest - 252.28263.77289.21202.8434.88 - Total - 252.28263.771,761.024,768.493,128.72 ### VII. Safeguards Assessment - A first-time safeguards assessment of the Bank of Greece (BoG) was conducted in connection with the current Stand-By Arrangement and finalized on August 16, 2010. - Key findings and actions: - Found a well established safeguards framework at the central bank. - BoG adopted relevant guidelines and good practices promulgated by the European Central Bank. - Financial statements are independently audited and results are published. - BoG has initiated reforms to strengthen its internal audit function; an independent audit committee has been established. - Assessment recommended a few measures to further enhance financial reporting and audit mechanisms. ### VIII. Article IV Consultation and Review Missions - Last Article IV mission: - Discussions for the 2009 Article IV Consultation: Athens, May 13–25, 2009. - Staff Report (Country Report No. 09/244) considered by the Executive Board on July 24, 2009. - Article IV Consultations are held on a 12-month consultation cycle. - The Third Review: - Took place from January 26 to February 11. - Meetings with Minister of Finance, Governor of the Bank of Greece, other Cabinet Ministers, private banks, think tanks, employer associations. - Staff team: P. Thomsen (head), M. Flanagan, G. Everaert, H. Floerkemeier, E. Perez Ruiz (all EUR); G. Palomba (FAD); Y. Sun (SPR); O. Frecaut, G. Mitchell Casselle and A. Buffa di Perrero (MCM). - Assistance from B. Traa, S. Eble, and G. Gatopoulos (IMF resident representative office). ### IX. Technical Assistance and Resident Representation - Resident Representatives: - Mr. Bob Traa (senior resident representative) and Mrs. Stephanie Eble (junior resident representative) assumed positions in October 2010. - Technical assistance (Department — Purpose — Date): - MCM — Banking supervision — March 2010 - FAD — Public Financial Management: initial analysis and priority reforms — April 2010 - FAD — Revenue Administration: Initial analysis and priority reforms — April 2010 - STA — Data quality and misreporting (K-1 Report) — April 2010 - FAD — Expenditure Policy — June 2010 - FAD — Public financial management: Follow up on priority reforms — June 2010 - MCM — Implementation of financial sector components of the SBA program — June 2010 - FAD — Revenue Administration: Design and implementation of the anti-evasion plan — July 2010 - MCM — Implementation of financial sector components of the SBA program — September 2010 - FAD* — Revenue administration: Implementation status of the anti-evasion plan — September 2010 - FAD — Public Financial Management: Implementation status of priority reforms — September 2010 - FAD — Revenue Administration: Progress on the anti-evasion plan and the medium term reform agenda — October 2010 - STA — Monitoring of fiscal data for the program — September 2010 - *With participation from LEG. ### X. Letter of Intent — Main Program Status and Requests (Athens, February 28, 2011) - Program progress highlights: - Quarterly quantitative performance criteria for end-December were met, as well as the continuous performance criterion on external arrears. - ESA95 accrual deficit was above target but at the level projected at the time of the last review. - Overall reduction in the headline deficit in 2010 estimated to have amounted to a higher-than-initially targeted 6 percentage points of GDP. - Reduction in the stock of general government arrears at the very end of 2010 was insufficient to meet the indicative target. - Financial system: - Private banks raised capital; state bank restructuring has started. - Exceptional ECB liquidity support helped bridge the system toward implementation of medium-term funding plans. - Financial Stability Fund is well-financed relative to projected needs. - Structural reforms: - Structural benchmark on a 2011–13 privatization plan was met. - Benchmark on collective bargaining reform was partially met; time needed to assess implementation. - Opening of restricted professions advanced with legislation passed in February. - Legislation concerning restructuring of public enterprises approved. - Request to the IMF: - Completion of the third review under the Stand-By Arrangement, and the fourth purchase under this arrangement in the amount of SDR 3,604.5 million. - Request that existing indicative targets for September 30 and December 31, 2011 (ceilings and floors for primary cash balance, state budget primary spending, stock of central government debt, new central government guarantees, and external debt) be converted to quantitative performance criteria. - Proposal of new structural benchmarks in fiscal, financial sector, and asset/liability management areas. - Commitment: - Government believes policies set forth in the May 3, 2010 Letter of Intent and MEFP, and subsequent updates, are adequate to achieve program objectives and stands ready to take corrective actions and consult with the Fund, European Commission, and ECB as needed. - Signatories: - /s/ George Papaconstantinou — Minister of Finance - /s/ George Provopoulos — Governor of the Bank of Greece ### XI. Memorandum of Economic and Financial Policies — Outlook and Fiscal Strategy (selected substantive points) - Outlook and projections: - GDP: Program projects stabilization in late 2011; full year 2011 expected GDP contraction of about 3 percent. - Inflation: Projected to decline to an average of about 2½ percent in 2011. - Current account: Projected to narrow to around 8 percent of GDP in 2011 (from an estimated 11 percent in 2010). - Key challenges: - Need for further fiscal consolidation to secure lower deficit and debt and place adjustment on a sustainable footing. - Banks remain reliant on Eurosystem liquidity; need to ensure more sustainable funding models. - Need to strengthen business environment and supply-side conditions to support export- and investment-led recovery. - Fiscal policy objectives: - Aim to sustainably reduce the deficit below 3 percent of GDP by 2014. - Government committed to achieve a €17 billion (7½ percent of GDP general government deficit) in 2011, measured on an ESA 95 basis. - Current trends point to a fiscal gap of ¾ percent of GDP for 2011 due to lower revenue projections and revised yield estimates; government will specify structural measures in March and will under execute the budget in the interim to help meet targets. - Medium-term budget strategy: - Strategy paper to set annual spending ceilings for line ministries and fiscal balance targets through 2014. - Estimate that some 8 percent of GDP in permanent measures will be needed, some already identified in May 2010 program. - Medium-term budget strategy paper: publish for consultation end-March; approve by Council of Ministers before mid-April (structural benchmark); vote by Parliament by mid-May. - Sectoral plans to realize the 8 percent of GDP in permanent measures (each plan to set targets through 2014 and be available in draft by end-March): - State enterprises: - Managed by Secretariat of State Owned Enterprises in Ministry of Finance. - Aim: bring efficiency in line with private sector and European peers; tariff increases; operating cost reductions; investment prioritization; wage, benefit, and employment adjustments; changes in dividend payments and subsidy reductions; governance reforms. - Deadlines: state enterprises defined under general government to finalize detailed implementation plans by end-June; all other state enterprises by end-year. - Extrabudgetary funds: - Managed by dedicated working group under Ministry of Finance in coordination with Office of the Deputy Prime Minister. - Aim: simplify public sector structure, improve budget flexibility, merge overlapping entities, integrate accounts into budget, privatize or close entities, restructure operations. - Specify a two-year implementation timeline with entities/accounts to be closed or merged before end-2011 and before end-2012. - Tax policy reforms: - Managed by working group in Ministry of Finance. - Aim: simplify tax system, raise revenue progressively, facilitate effective tax administration, support growth and investment. - Areas of focus: business tax code, corporate taxation, tax exemptions, tax incentives, capital income taxation. - More detailed plan by end-May; implementing legislation for first stage to be tabled in parliament by end-September. - Public wage bill: - Managed by joint working group of Ministries of Interior and Finance. - Preliminary report published by end-February found complex wage/benefit systems and misallocation of human resources. - Plan focuses on attrition, tighter contract worker policies, vacancy cancellations, simplification of wage grid; aims for decompression across grades and specialized career streams. - Necessary legislative changes to be adopted by end-June 2011 (proposed program structural benchmark). - Public administration: - Managed by joint working group of Ministries of Interior and Finance. - Aim: identify services/programs for rationalization and streamline organizations to eliminate overlapping responsibilities. - More detailed plan by end-July to set implementation timeline for 2012 budget actions. - Social spending reform: - Managed by joint working group of Ministries of Interior, Labor, Health and Finance. - Aim: streamline social programs, eliminate duplication, improve targeting. - More detailed plan by end-July to set implementation timeline for 2012 budget actions. - Public investment: - Managed by joint working group of Ministries of Regional Development, Infrastructure, and Finance. - Aim: prioritize projects, estimate savings from rescheduling, remove projects to rationalize spending while speeding execution of remaining projects. - Implementation timeline by end-June for 2012 budget actions. - Military spending: - Prepared by Ministries of Defense and Finance (under Government’s Committee for Foreign and Defense Policy). - Cover military procurement and operations spending to contribute durably to fiscal consolidation while preserving national defense capabilities. - Plan will set implementation timeline for 2012 budget and medium-term military expenditures. *Appendix II. Fund Relations (As of January 31, 2011) — IMF document excerpt* ### 9. The government is preparing for a next phase of social security reforms, during ### _cr1168 - 9. The government is preparing for a next phase of social security reforms, during ### Social security reforms — Pensions - National Actuarial Authority’s projections: the July 2010 pension reform has gone a long way towards stabilizing spending of the main pension funds at the 2009 level (in relation to GDP). - Remaining problems: supplementary and welfare funds, and pensions for arduous professions. - Actions and timing: - National Actuarial Authority to complete assessment of the main supplementary funds by end-March 2011 (structural benchmark). - Reform supplementary and welfare funds to eliminate imbalances in funds with deficits. - Introduce a strict link between benefits and contributions to guarantee sustainability of all funds, and reduce the number of existing funds. - Revise the list of heavy and arduous professions to reduce it to less than 10 percent of employees (current and future). - Prepared to adjust further parameters of the main pension funds if needed to limit pension spending increases to less than 2½ percent of GDP by 2060. - Reforms to be adopted by end-September 2011 and implemented beginning January 1, 2012, with principal focus on the supplementary funds. ### Social security reforms — Health - Implementation broadly on track for 2011 budget measures: cost-reducing reforms in hospitals, co-payments, extended negative list of non-reimbursable pharmaceutical products. - Progress on hospital computerization; measures to overcome delays in e-prescribing: - Launch tender by end-April to implement a comprehensive and uniform health care e-prescribing system. - Independent task force for overall health system reform: - Interim report by end-March 2011. - Final report by end-May 2011 defining policies and quantitative targets for service provision, pharmaceutical spending, financing and governance, accounting and assessment systems. - Government to adopt a time-bound action plan by end-June 2011 using the final report. ### Fiscal institutional reforms — Revenue administration - Anti-tax evasion measures: - Five task forces started implementing anti-tax evasion action plans in January. - Ministry of Finance to publish and announce anti-evasion plans in March, and to publish monthly reports on task force performance beginning at end-March (including pre-defined progress indicators). - Legislative measures (prior action): table legislation to: - Streamline judicial appeal process and create independent arbitration process. - Create new disciplinary body to accelerate investigations of misconduct in revenue administration. - Strengthen administrative tax dispute process and remove barriers to efficient tax collection (e.g., simplify debt recovery and allow installment payments subject to strict controls on abuse). - Medium-term strategic plan: - Articulate a strategic plan of medium-term reforms by end-June (proposed program structural benchmark). - Plan to introduce a risk management framework, a large taxpayer unit, and rebuild the tax audit function. ### Fiscal institutional reforms — Public financial management - Strengthening spending controls: - Commitment registers being established in line ministries and main general government entities; will provide consistent commitment and arrears data starting in March with limited coverage gaps. - Training and technical assistance to general government entities; aim to complete establishment process during the first quarter for all social security funds and major local authorities. - Commit to appoint accounting officers in all line ministries and main general government entities by end-March (presidential decree to specify qualifications, responsibilities, and appointment procedures). - Fiscal reporting improvements: - ELSTAT concluded Memoranda of Understanding with 9 ministries and entities to improve compilation of ESA95 general government fiscal statistics. - Finalize December arrears report by end-March to ensure full coverage of recurrent and investment spending across all line ministries, social security funds, public hospitals, extra budgetary funds, and largest local governments. - Publish monthly consolidated general government reports with revenue, expenditures and intra-governmental transfers for each sub-sector beginning with end-March. - Publishing three consecutive months of consistent arrears and consolidated general government fiscal reports (excluding small general government entities) proposed as structural benchmark for end-June. - Introduce automatic administrative and/or financial sanction mechanisms on institutions and/or responsible officers for delays in reporting. - Addressing gaps in budget framework: - Amend Law 2469/1997 by end-June 2011 to require legislative proposals carrying budget burdens to be accompanied by Ministry of Finance assessment estimating budgetary cost and certifying coverage in budget or identification of resources. ### Asset and liability management — Program financing and privatization - Program financing: - Disbursements by euro-area Member States and the IMF expected to almost fully cover Greece’s gross financing needs during 2011 (amortization of medium and long-term debt, the cash deficit and full arrears clearance) and contribute significantly to financing needs in 2012. - Privatization and real estate development scale-up: - Comprehensive plan through 2013 to be finalized, using existing 2011-13 privatization plan (railroad sector, airports, post office, water companies, ports, gaming companies) and state enterprise restructuring plans. - Complete a first inventory of commercially-viable public real estate by end-June (including valuation estimate); extend to other commercial-potential real estate by end-year. - Plan targets proceeds of about €15 billion until the end of the program. - Provide quarterly and semiannual schedule for transactions one-year and two years ahead respectively. - Initial draft by end-March and final plan adopted by Council of Ministers by end-July (proposed structural benchmark). - Consult with European Commission, ECB, and IMF staff on new legislative initiatives regarding privatization. - Real estate asset management: - Create first portfolio of major real estate assets after end-June inventory; second portfolio after end-2011 inventory. - Appoint external and financial advisors for portfolio formation and transaction structuring by end-March. - Establish a General Secretariat of Real Estate Development under the Ministry of Finance and appropriate special investment vehicles. ### Debt issuance program - Public Debt Management Authority (PDMA) focus: - Concentrate on treasury bill issuance; expand issuance to maturities of up to a year as demand permits. - Introduce a diaspora bond issuance program in 2011 targeted at the Greek expatriate community. ### Financial sector policies — Liquidity and bank restructuring - System status and priorities: - Financial system remained stable; banking system solvent. - Priority: support orderly bank restructuring, reduce dependency on Eurosystem liquidity, and ensure an effective capital safety net. - Government guarantee tranche: - Propose a new tranche of government guarantees for uncovered bank bonds as structural benchmark for end-March. - Tranche amount: €30 billion. - Guarantee scheme subject to approval by decision of the European Commission. - Tranche to be made available bank-by-bank, conditioned on adoption and implementation of medium-term funding plans by banks. - Bank of Greece medium-term funding plans: - Plans to reduce reliance on Eurosystem refinancing and state guarantees at a pace consistent with the program’s macroeconomic and fiscal framework. - Institution-specific measures (balance sheet size and composition, capital structure, operational efficiency). - Preliminary drafts completed by mid-April. - Assessment by Bank of Greece and ECB, in cooperation with EC and IMF; submission to ECB and Bank of Greece proposed as structural benchmark for end-May 2011. ### Financial sector policies — State and private bank restructuring, FSF - ATE restructuring: - Due diligence confirmed a capital need in the order of €300 to 400 million. - Exact capital increase size to be finalized by end-February 2011 based on BoG review; proceed with necessary steps including EC approval. - Intend to meet bulk of ATE’s capital needs by relying on surplus reserves of the HCLF; unbundle HCLF’s commercial activities by end-March. - Legislative changes to place all registered bank employees under the same private sector status to be tabled by end-March 2011. - Committed to consider sale of state bank holdings as market conditions permit. - Private banks: - Encourage capital raising through sale of non-core assets, rights issues, and capital injections from foreign parents. - Require banks to actively raise capital as needs arise and explore strategic alliances. - Support restructuring operations, including steps to limit bonuses and eliminate the “balance sheet premium,” or equivalent measures. - For viable banks, the FSF will remain available as capital backstop. - Financial Stability Fund (FSF) funding and staffing: - Board in place; arrangements to second staff from the Bank of Greece and retain external consultants. - Hiring of full time staff to be complete by end-June 2011. - Funding: - €1½ billion available in FSF account at the Bank of Greece. - Another €1 billion to be made available in a separate dedicated government account to be set up by end-February 2011. - Remainder of the €10 billion foreseen for the FSF will be deposited into the dedicated government account, beginning with a deposit of €1 billion during the second quarter of 2011. - Amounts released to FSF consistent with bank capital needs determined by program reviews. ### Financial sector policies — Supervision and insurance - Banking supervision: - Strengthening in resources has not been commensurate with rising needs; ongoing hiring program expected to be complete by end-June 2011. - Bank of Greece to ensure prudential bank supervision and focus on preserving financial stability. - Insurance sector: - Bank of Greece took over insurance supervision as of December 2010. - Requested IMF technical assistance to strengthen insurance supervision. - Undertake diagnostic assessment of insurance firms (including stress tests) and review policyholder protection schemes. - Diagnostic work to be completed by end-June; will inform a strategy to secure the sector while protecting the government from financial commitments. ### Structural reform policies — Overview - Government committed to structural reforms to spark investment and export-led revival in 2011. - Reform scope: labor market, product and service market liberalization, and business environment reforms to reduce red tape. ### Structural reform policies — Labor market - Legislation on arbitration and collective bargaining passed in December. - Firm-level collective agreements allowed subject to conditions: non-binding Labor Inspectorate evaluation and consent by sectoral unions in small firms. - Government to monitor implementation and may amend legislation by end-July to support greater firm-level wage flexibility. ### Structural reform policies — Liberalization of restricted professions - Framework law to be passed by end-February (prior action for the review): - Remove restrictions related to quantity, geography, scale, incorporation, prices, number of licenses, and prior conditions for licenses. - Four-month period after passage to define exceptions adhering to principles of non-discrimination, necessity and proportionality; exceptions subject to Council of State approval and economic rationale assessment. - Ministry of Finance to produce report evaluating implementation by end-September 2011. - Specific changes for closed professions: - Notaries: substantial reduction of fees (through a regressive scale) and free negotiation of prices for high-value transactions. - Lawyers: elimination of minimum prices (except justified cases such as legal aid). - Engineers and architects: elimination of minimum fees. - Auditors: two-year sunset clause for regulation of working hours (minimum-per-audit and maximum-per-year working hours). - Separate law for pharmacists by end-February: - Permit incorporation, increase operating hours, reduce fixed profit margins, and reduce minimum population criterion for opening new pharmacies. - Ministry of Finance to issue a circular listing professions subject to liberalization principles and requesting implementation steps within 4 months. ### Structural reform policies — Industry-specific liberalization - Tourism and retail trade: diagnostic work completed; recommendations and time-bound action plans anticipated by end-April. - Energy sector liberalization to focus on: - Competitive access to lignite fired generation capacity. - Gradual deregulation of tariffs. - Unbundling of transmission and distribution from generation. - Plan awarding hydro management to an independent body. ### Structural reform policies — Business environment and licensing - New laws to be approved in March: - New law for the competition authority to increase efficiency and effectiveness, strengthen independence and continuity of Board, maintain financial capacity, and reinforce governance and accountability. - New licensing laws to set deadlines for issuing necessary opinions (non-response leads to tacit agreement) and deadlines for granting licenses. - Companion environmental permits law to set deadlines for opinions and permits, reclassify environmental impact categories in line with EU average practices, and coordinate licensing procedures electronically. - Implementation steps: - Issue necessary presidential decrees to operationalize licensing law by end-June. - Complete data migration from the Chambers to the General Commercial Registry and issue all Ministerial decisions required by the law by end-March to prepare one-stop shops. - Issue ministerial decisions and transfer experts for evaluation of large investment projects by end-June. - Issue a report by end-June covering status of implementation of all business environment reforms. - Additional reforms to finalize during 2011: - Amend legislation to remove administrative burdens on exports by end-September. - Accelerate progress towards a well-functioning land registry. - Minimize legal and administrative impediments to public works and investment projects. - Adopt legislation by end-March to establish a Single Public Procurement Authority with mandate to issue opinions on legislation affecting public procurement; draft standardized tender documents of binding nature; and perform effective control functions. ### Key numeric figures and performance criteria excerpt - Reduce list of heavy and arduous professions to less than 10 percent of employees. - Limit pension spending increases to less than 2½ percent of GDP by 2060. - Privatization target: proceeds of about €15 billion until the end of the program. - Government guarantee tranche for uncovered bank bonds: €30 billion. - ATE capital need: in the order of €300 to 400 million. - FSF funding details: - €1½ billion available in FSF account at the Bank of Greece. - €1 billion to be made available in a separate dedicated government account by end-February 2011. - €10 billion foreseen for the FSF in total, with initial €1 billion deposit during the second quarter of 2011. - Timeline highlights: end-March 2011, end-April 2011, end-May 2011, end-June 2011, end-July 2011, end-September 2011, January 1, 2012. - Performance Criteria (Floor on the modified general government primary cash balance) listed values: - Mar-11: -5.7 - Jun-11: -5.7 - Sep-11: -5.5 - Dec-11: -2.0 - Dec-12: -4.3 - Dec-13: -4.0 - Progr. 1/: -3.2 - Adjusted Progr. 1/ 7/: 2.4 - Act.: 7.4 *IMF staff report content as provided in the source PDF chapter.* ### 2. Ceiling on State Budget primary spending ### 2. Ceiling on State Budget primary spending ### Quantitative ceilings and targets - 2. Ceiling on State Budget primary spending - 67 - 67 - 61 - 15 - 30 - 45 - 63 - 68 - 69 - 3. Ceiling on the overall stock of central government debt - 342 - 366 - 340 - 394 - 394 - 394 - 394 - .. - .. - 4. Ceiling on the new guarantees granted by the central government - 2.0 - 2.0 - 1.3 - 1.0 - 1.0 - 1.0 - 1.0 - 0.0 - 0.0 - 5. Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by general government 6/ - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - Indicative Targets6. Ceiling on the accumulation of new domestic arrears by the general government - 0.0 - 0.0 - 3.0 - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - 0.0 - Notes (as given) - 1/ Cumulatively from January 1, 2010 (unless otherwise indicated). - 2/ Cumulatively from January 1, 2011 (unless otherwise indicated). - 3/ Cumulatively from January 1, 2012 (unless otherwise indicated). - 4/ Cumulatively from January 1, 2013 (unless otherwise indicated). - 5/ Indicative targets. - 6/ Applies on a continuous basis from January 1, 2010 onward. - 7/ Adjustor for upward revision to end-2009 stock of central government debt. - Table heading: Table 1. Greece: Quantitative Performance Criteria (Billions of Euro, unless otherwise indicated) - 2011 - Medium Term 5/ - 2010 - Dec-10 ### Structural conditionality, end-December structural benchmarks, and prior actions - End-December structural benchmarks (select items) - 1. Publish a detailed report by the ministry of finance in cooperation with the single payment authority on the structure and levels of compensation and the volume and dynamics of employment in the general government. - Macrocritical relevance: Reduces wage escalation. Improves transparency of public sector employment. - Status: Partially observed (with delay). A report was completed in January and published in February, that covered part of the general government. - 2. Adopt new Regulation of Statistical Obligations for the agencies participating in the Greek Statistical System. - Macrocritical relevance: Enhance confidence in fiscal reporting and support the formulation of fiscal policy. - Status: Partially observed (with delay). MoUs between key data-providing institutions and ELSTAT have been drafted and have been signed. The regulation now must be approved by ELSTAT. - 3. Prepare a privatization plan for the divestment of state assets and enterprises with the aim to raise at least €1 billion a year during the period 2011-2013. - Macrocritical relevance: Reduces state intervention in the real economy; improves market efficiency; and cuts fiscal contingencies. - Status: Observed - 4. The National Actuarial Authority to produce a report to assess whether the parameters of the new system significantly strengthen long-term actuarial balance. - Macrocritical relevance: Reduces budgetary costs of ageing and improves long-term fiscal sustainability. Increases labor force participation. - Status: Observed - Prior actions (select items) - 1. Table legislation to: (i) streamline the administrative tax dispute and judicial appeal processes; (ii) remove impediments to the exercise of core tax administration functions (e.g. centralized filing enforcement and debt collection, indirect audit methods, and tax returns processing); and (iii) introduce a more flexible human resource management system (including the acceleration of procedures for dismissals and of prosecution of cases of breach of duty). (Structural benchmark for end-February) - Macrocritical relevance: Removes legal and administrative impediments to tax collection. - Status: Observed - 2. Pass a framework law removing restrictions to competition in regulated professions (as defined in the EU Services Directive), addressing specific closed professions (lawyers, notaries, engineers, architects, and auditors). - Macrocritical relevance: Liberalizes services sector with the aim to strengthen competition and improve efficiency. - Status: Observed - Upcoming structural benchmarks and proposed conditionality (select items and deadlines) - End-March structural benchmarks - Appointment of financial accounting officers in all line ministries and major general government entities (with the responsibility to ensure sound financial controls). - Pass legislation to separate the core consignment activity from the commercial activities of the HCLF. - End-April structural benchmarks - The National Actuarial Authority to produce a report for the main supplementary funds to assess whether the parameters of the new system significantly strengthen long-term actuarial balance. - End-June structural benchmarks - Publish the medium-term budget strategy paper, laying out time-bound plans to address: (i) restructuring plans for large and/or loss making state enterprises; (ii) the closure of unnecessary public entities; (iii) tax reform; (iv) reforms of public administration; (v) the public wage bill; and (vi) military spending. - Proposed new structural conditionality - Government to put forward for legislative adoption a new tranche of government guarantees for uncovered bank bonds (end-March 2011). - Other items with dates in 2011 - Commercial banks to submit medium-term funding plans to the ECB and the Bank of Greece (end-May 2011). - Articulate a strategic plan of medium-term revenue administration reforms to fight tax evasion (end-June 2011). - Publish three consecutive months of consistent arrears and consolidated general government fiscal reports (excluding small local governments) (end-June 2011). - Adopt the necessary changes to enact the plan to reform the general government personnel system (end-June 2011). - The Council of Ministers to adopt a comprehensive privatization plan through 2015 (end-July, 2011). ### Technical Memorandum of Understanding: scope, exchange rates, and reporting - TMU date: February 28, 2011 - Purpose: Sets out understandings regarding definitions of indicators subject to quantitative targets (performance criteria and indicative targets), methods to be used in assessing program performance, and information requirements for monitoring. - Consultation commitment: "We 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 (prevailing on April 30, 2010) to evaluate foreign currency-related assets, liabilities, and flows (except items affecting government fiscal balances, which are measured at current exchange rates): - €1 = 1.3315 U.S. dollar - €1 = 125.81 Japanese yen - €1.135 = 1 SDR - Data provision commitments - The Ministry of Finance (MoF) will provide to the European Commission, ECB and IMF detailed information on monthly revenues and expenditures, domestic and foreign debt redemptions, new domestic and foreign debt issuance, change in the domestic and foreign cash balances of the central government at the central bank of Greece, all other sources of financing including capital transactions, and arrears of the general government. - Data frequency: within four weeks after the closing of each month. - 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. ### Definitions and reporting standards for the Modified General Government Primary Cash Balance (MGGPCB) - Definition overview - MGGPCB = modified general government cash balance (MGGCB) minus interest payments by the state budget. - MGGCB = sum of: - cash balance of the ordinary state budget, - cash balance of the public investment budget, - minus the change in 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 net financial assets of ETERPS, - minus the change in net financial assets of reclassified public enterprises (RPEs). - Privatization receipts and the proceeds from the sale of land and buildings will be excluded from cash receipts. - Net lending operations by the state budget will be recorded as cash expenditures. - Components: cash balance of the ordinary state budget - 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; 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; and called guarantees where the state or central government assumes payments on behalf of entities outside of the general government. - Publication source: monthly on the official website of the General Accounting Office of the Ministry of Finance, aligned with the ordinary state budget line items. - Components: cash balance of the public investment budget - Measured from above the line, based on investment budget revenues minus investment budget expenditures as published monthly on the official website of the General Accounting Office of the Ministry of Finance. - Change in the stock of arrears from line ministries - Measured on a cumulative basis, from January 1, 2011 onwards as the stock of arrears prevailing at the time of measurement of the PC minus the stock of arrears prevailing at end-December 2010. - The stock of arrears reflects all arrears outstanding, irrespective of the time period in which the unpaid commitments were entered into. - Includes arrears related to the activities of the ordinary and investment budgets for line ministries and other spending bodies with a vote in the budget. - Change in net financial assets: local governments - Defined on a transactions basis as the 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 in domestic credit institutions (measured at face value excluding accrued interest). - Financial liabilities include short and long term loans from domestic credit institutions to local governments (measured at face value). - Change in net financial assets: social security funds - Defined on a transactions basis as the change in total financial assets minus financial liabilities of social security funds, adjusted for valuation changes by the Bank of Greece; minus the change in the stock of arrears of public hospitals (NHS hospitals) to entities outside of the general government. - Financial assets include deposits of social security funds in the Bank of Greece and domestic credit institutions; holdings of shares quoted on the Athens Stock Exchange held either 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 (measured at nominal value); bank bonds issued abroad. - Financial liabilities include short and long term loans from domestic credit institutions to the social security funds. - Change in stock of arrears of public hospitals: - Data available within four weeks of the end of each month. - Measured cumulatively from January 1, 2011 onwards relative to end-December 2010. - Excludes the 5.34 billion hospital arrears to pharmaceutical companies which were incurred by end-2009 to the extent these are still outstanding. - Covers arrears related to the activities of the 135 NHS hospitals. - Data source: monthly publications of hospital arrears on the Ministry of Finance website, expected to be based on commitment registers. - Change in net financial assets: ETERPS - Defined on a transactions basis as the 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; holdings of shares quoted on the Athens stock exchange; holdings of Mutual Fund units issued by Greek management companies; holdings of central government bonds; other bonds issued abroad. - Financial liabilities include short and long term loans from domestic credit institutions to ETERPS, measured consistently with monetary survey data, or other lending from the Bank of Greece. - Change in net financial assets: reclassified public enterprises (RPEs) - Defined on a transactions basis as the change in total financial assets minus financial liabilities of RPEs, adjusted for valuation, minus the amount of guarantees called from entities which are consolidated within the general government. - Financial assets include deposits of RPEs in the Bank of Greece and in 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; holdings of central government bonds; other bonds issued abroad. - Financial liabilities include short and long term loans from domestic credit institutions to RPEs, short and long term loans from the foreign banking system, and loans from the EIB or other official lenders. ### Other provisions (exclusions, transitional rules, and special treatments) - Exclusion of bank support from primary expenditure monitoring - Primary expenditure of the central government that is monitored excludes payments related to bank support, when carried out under the program’s banking sector support and restructuring strategy. - Excludable transactions may include loans to financial institutions and investments in equity of financial institutions (requited recapitalization); unrequited recapitalization; purchases of troubled assets; and operations related to the FSF. - Any financial operation by central government to support banks, including the issuance of guarantees or provision of liquidity, will be immediately reported to IMF, European Commission and ECB staff. - 2010-specific adjustments and exclusions - For 2010, the change in the net financial assets of social security funds will be increased by the change in net financial assets of AKAGE (on a cumulative basis from January 1, 2010 onward, adjusted for valuation changes) in case these are not yet included in the net financial assets of social security funds. - For 2010, the following items will be excluded from calculations: - Capital transfers to social security funds or other entities by bonds; - Settlement of past debt; - Called guarantees; - Changes in the stock of arrears of public hospitals (NHS hospitals) to entities outside of the general government; - Change in net financial assets of ETERPS; and - Changes in the stock of arrears to line ministries. - The change in net financial assets of RPEs will be excluded during 2010, as well as for the end-March and end-June PCs in 2011. For the measurement of the end-September and end-December 2011 PCs, the change in net financial assets of RPEs will be included, measured on a cumulative basis 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, and the settlement related to the judiciary liabilities, and to the compensation for former Olympic Airways employees. *Source: _cr1168 - 2. Ceiling on State Budget primary spending (PDF chapter), Technical Memorandum of Understanding, February 28, 2011.* ### 7. Supporting material. ### 7. Supporting material ### A. Data provision and reporting timelines - 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. Data will include detailed information on revenue and expenditure items, capital transfers to social security funds or other entities in bonds, and called guarantees. - Net financial assets of local authorities and social security funds, extra-budgetary funds including ETERPS, AKAGE, and reclassified public enterprises: provided to the 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: - 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. - Monthly expenditure data of the ordinary and investment state budget and monthly data on the stock of arrears of line ministries: provided by the General Accounting Office of the Ministry of Finance (timing as above). ### B. Ceiling of State Budget Primary Spending (Performance Criterion) - Definition: - State budget primary spending = state budget spending (ordinary state budget + public investment budget) minus interest expenditures paid by the state budget + change in the stock of the arrears of line ministries to entities outside the general government. - Excludes any cash payments related to bank restructuring when carried out under the program’s banking sector restructuring strategy. - Excludable costs may include: loans to financial institutions and investments in equity of listed and non-listed financial institutions (requited recapitalization); unrequited recapitalization; and purchase of troubled assets. - Any financial operation by central or general government to support banks, including issuance of guarantees or provision of liquidity, will be immediately reported to European Commission, ECB and IMF staff. - Other provisions: - Capital transfers to social security funds by bonds and called guarantees from outside the general government will be excluded from primary spending during 2010. - The change in the stock of arrears of line ministries will be excluded during 2010 for the monitoring of the PC; for 2011 onward, such exclusion will no longer apply. ### C. Non-Accumulation of Domestic Arrears by the General Government (Continuous Indicative Target) - Definition: - Domestic arrears = unpaid invoices that have past the due date by 90 days. If no due date specified, an unpaid commitment is in arrears 90 days after initiation of the invoice. - Data provided within four weeks after the end of each month. - Continuous non-accumulation = no accumulation of arrears at the end of every month during which quarter the indicative target is being monitored. - Excludes arrears accumulated by the Civil Servants’ Welfare Fund. - Supporting material: - Ministry of Finance will provide consistent monthly data on expenditure arrears of the general government within four weeks after the end of each month, including accounts payable overdue for more than 30 and 60 days. ### D. Ceiling on the Overall Stock of Central Government Debt (Performance Criterion) - Definition: - Overall stock of central government debt refers to ESA95 central government debt and is defined for program purposes as total outstanding gross debt liabilities; includes securities and loans; excludes accounts payable. - Debt measured at nominal value. Program exchange rate applies to all non-euro denominated debt. Inflation indexation applies to inflation indexed debt using the relevant index specified in the instrument. - The ceiling excludes debt arising from payments for bank restructuring when carried out under the program’s banking sector restructuring strategy (does not cover debt related to the Financial Stability Fund). This includes loans to financial institutions and investments in equity of financial institutions (requited recapitalization); unrequited recapitalization; and purchase of troubled assets. - Any financial operation by the central government to support banks, including issuance of guarantees or provision of liquidity, with the exception of Hellenic Republic intermediation in repos between foreign and domestic financial institutions, will be immediately reported to IMF, European Commission and ECB staff. - Other provisions: - For 2010, definition will exclude the reclassified public enterprises, debts of extra-budgetary funds, and other ESA 95 adjustments. - Adjusters: - For 2010, the ceiling will be adjusted upward (downward) by the amount of any upward (downward) revision to the stock of end-December 2009 central government debt of 298.9 billion. - For 2011, the ceiling will be adjusted upward (downward) by the amount of any upward (downward) revision to the stock of end-December 2009 ESA95 central government debt of 322.9 billion. - Supporting material: - Data on the total stock of central government debt will be provided to the European Commission, ECB and IMF staff by the General Accounting Office consistent with the ESA95 definition no later than 30 days after the end of each month. ### E. Ceiling on New Central Government Guarantees (Performance Criterion) - Definition: - Ceiling includes new guarantees granted by the state and by any other entity classified under ESA95 under central government, but excludes guarantees to entities whose debt is covered under the ceiling on the stock of central government debt (paragraphs 13 and 14). - Excludes guarantees to support banks and guarantees related to EIB financed loans. - New guarantees are those extended during the current fiscal year, including guarantees for which maturity is extended beyond initial contractual provisions. - Other provisions: - For the end-December 2010 PC on new central government guarantees, factors shall be included on a cumulative basis starting October 1, 2010. - Supporting material: - All new central government guarantees will be reported in detail, identifying amounts and beneficiaries. The General Accounting Office will provide the data on a monthly basis within three weeks after the end of each month. - Non-state entities classified under the central government shall report the new guarantees they extended to the General Accounting Office on a monthly basis within three weeks after the end of each month. ### F. Non-Accumulation of External Debt Payment Arrears by the General Government (Continuous Performance Criterion) - Definition: - External debt payment arrear = 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 the program period. - Supporting material: - Stock of external arrears of the general government will be provided by the General Accounting Office with a lag of not more than seven days after the test date. ### G. Overall Monitoring and Reporting Requirements - Performance monitored from data supplied to the EC, ECB and IMF by the Ministry of Finance, the General Accounting Office, and Bank of Greece. - Authorities will transmit to the IMF, EC and ECB staff any data revisions in a timely manner. ### III. Monitoring of Structural Benchmarks - Pension reform: - Parliament adopted separate laws reforming pensions for the public and private sector in mid-July (ahead of the end-September deadline). - An actuarial evaluation of this law is underway. - National Actuarial Authority to complete assessment of effects on the main pension funds by the end of December 2010, expanded to include the largest auxiliary pension funds (including ETEAM, TEADY, MTPY) by end of March 2011. - The actuarial assessment will determine whether further adjustments are needed to contain the increase in pension spending 2010-2060 at 2.5 percentage points of GDP. - Any needed adjustments to parameters of main pensions and reform of auxiliary and welfare funds will be completed by end of June 2011 in consultation with the EC/IMF/ECB; and enacted by end of December 2011. - Public financial management reforms: - Authorities will publish: - Monthly reports on arrears of the general government using data from commitment registers. - Monthly consolidated general government reports with revenue, expenditures and intra-governmental transfers for each sub-sector of the general government. - For the benchmark, reports begin with end March 2011 data and must include ordinary and investment budget arrears across all line ministries, public hospitals, and the largest social security funds, extra-budgetary funds and local governments. - Definitions for “largest” coverage: - “Largest” social security funds: at least the top 50 funds in terms of spending as from ELSTAT reporting. - “Largest” extra-budgetary funds: 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. - Largest local governments: 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 benchmark, 3 consecutive months of reports need to be published. ### Letter of Intent summary (Athens, 23 February 2011) - Quarterly quantitative performance criteria for end-December were met; ESA95 accrual deficit was above target but at the level projected at the time of the last review. - Overall reduction in the headline deficit in 2010 is estimated to have amounted to a higher-than-initially targeted 6 percentage points of GDP. - Stock of general government arrears reduced at the very end of 2010 but missed the indicative target. - Fiscal-structural reforms progress: - Actuarial study of main pension funds: met. - Removing barriers to effective tax administration: expected to be met in mid-March (with tabling legislation as a prior action for the review). - Study of public employment and compensation: partially met. - Improving statistical reporting to Elstat: partially met (progress on MOUs and regulations). - Financial system status: - Private banks have raised capital; state bank restructuring has started. - Exceptional ECB liquidity support provided. - Financial Stability Fund is well-financed relative to projected needs. - Structural reforms: - 2011-13 privatization plan benchmark: met. - Collective bargaining reform benchmark: partially met. - Legislation passed opening restricted professions in February. - Legislation concerning restructuring of public enterprises approved. - Request for disbursement: - Authorities request release of the fourth installment of financial assistance by the euro-area Member States, pooled by the European Commission, in the amount of EUR 10 900 million. *Source: _cr1168 - 7. Supporting material.* ### 1. Actions for the fourth review (actions to be completed by end Q1-2011) ### _cr1168 - 1. Actions for the fourth review (actions to be completed by end Q1-2011) ### Fiscal consolidation - Government rigorously implements the budget for 2011 in line with this Memorandum. - Ministry of Finance ensures tight supervision of expenditure commitments across: - extrabudgetary funds, the public investment budget, social security funds and hospitals, local governments and public enterprises. - effective tax collection to secure attainment of the programme quantitative criteria (Article 1 (2 and 3) of Council Decision 2010/320/EU, as amended, and Table 2 of the MEFP). - Cash management rule: Ministry of Finance releases 1/14 of the annual budgetary appropriation (excluding wages, pensions and interest) per month to each ministry; remaining appropriations will not be released before September 2011 and may be cancelled to respect the government deficit ceiling. - Government clears payment arrears accumulated in 2010 and reduces those of previous years. Medium-term budgetary planning - Government prepares a medium-term budgetary strategy paper identifying permanent fiscal consolidation measures of at least 8 percent of GDP, plus a contingency reserve to ensure deficit targets up to 2014 and to put the debt-to-GDP ratio on a sustainable downward path. - Publication and approval timetable: - published for public consultation before end-March; - adopted by the Council of Ministers by mid-April; - voted by Parliament by mid-May. - The strategy paper will be the basis for preparing the 2012 budget and includes: - prudent macroeconomic forecasts; - baseline revenue and expenditure projections for the state and other government entities; - description of permanent fiscal measures, timing and quantification; - annual spending ceilings for each ministry and fiscal targets for other government entities through 2014; - post-measures fiscal projections for general government in line with the deficit and debt targets; - longer-term debt projections based on prudent macroeconomic projections, stable primary surpluses from 2014 on, and privatisation plans. - Medium-term strategy will be articulated with healthcare and pension reforms and with sectoral plans (draft plans to be available by end-March) covering: - state-owned enterprises; extrabudgetary funds (legal entities of the public sector and earmarked accounts); tax policy reforms; public wage bill; public administration; social spending; public investment; military spending. - Each sectoral plan will be managed by interministerial taskforces to be appointed by end February. ### Structural fiscal reforms Revenue administration reforms - Government launches an anti-tax evasion plan including quantitative performance indicators to hold revenue administration accountable. - Government adopts legislation to: - streamline administrative tax dispute and judicial appeal processes; - centralise filing enforcement and debt collection, indirect audit methods and tax return processing; - adopt acts/procedures to better address misconduct, corruption and poor performance of tax officials, including prosecution for breach of duty and a more flexible recruitment process based on meritocracy, objectivity and transparency. - Government starts publishing monthly reports of the five anti-tax evasion taskforces, including a set of progress indicators. Public financial management reforms - To strengthen expenditure control, Government: - adopts an act specifying qualifications and responsibilities of accounting officers to be appointed in all line ministries and major government entities; - appoints financial accounting officers; - accelerates establishment of commitment registries and will make operational registries covering the whole general government (except the smallest entities). Public sector wages and human resource management - Government presents a detailed action plan with timeline to complete and implement the simplified remuneration system, based on the Ministry of Finance and the Single Payment Authority report. - Government prepares a medium-term human resource plan up to 2014 in line with the rule of 1 recruitment for 5 exits. The plan includes tighter rules for temporary staff, cancellation of vacant job posts and reallocation of qualified staff to priority areas. - Government starts publishing monthly data on staff movements (entries, exits, transfers among entities) of several government departments. Pension reform - National Actuarial Authority (NAA) submits comprehensive long-term projections of pension expenditure up to 2060 under the adopted reform; projections to be peer-reviewed and validated by the EU Economic Policy Committee and the European Commission, IMF and ECB staff; projections to encompass main supplementary (auxiliary) schemes based on comprehensive data collected by NAA. Asset management - Government starts compiling inventory of state-owned assets, including stakes in quoted and non-quoted enterprises, commercially viable real estate and land. - Government provides an interim report including a first list of assets and describes steps to ensure the first part of the inventory will be ready by June 2011. - Government appoints financial advisors for formation of real estate and land portfolios and structuring associated privatisation transactions. - Proceeds from privatisation are to be used to redeem debt and do not substitute fiscal consolidation efforts. Fighting waste in public enterprises - Government adopted an act by end 2010 that: - cuts primary remuneration in public enterprises by at least 10 percent at company level (applicable from January 2011 on); - limits secondary remuneration to 10 percent of primary remuneration at company level (applicable from January 2011 on); - establishes a ceiling for gross earnings of EUR 4 000 per month (12 payments per year) (applicable from January 2011 on); - increases urban transport tariffs by at least 30 percent; - establishes actions to reduce operating expenditure in public companies between 15 to 25 percent, according to enterprise needs. - These measures should be immediately effective and yield annual fiscal savings of at least EUR 800 million compared to 2010. - Government publishes an action plan for restructuring state-owned enterprises and other public entities leading to closure of non-viable enterprises and extra-budgetary funds that have outlived their purpose. - Specific case: Government adopts and starts implementing a legal act and a business plan for restructuring the Athens transport network (OASA) to make the company economically viable; subsidies shall not exceed 40 percent of operational cost in conformity with EU practices. Required legal act adopted by end February 2011; restructuring starts to be effective by end March 2011. - Government publishes monthly information on accounts of public enterprises classified in general government with a lag of three weeks, based on the central registry for public enterprises. - Government revises Law 3429/2005 on state-owned corporate governance to require auditing of companies' accounts at least semi-annually (quarterly for at least the ten largest state-owned enterprises by turnover), strengthen internal controlling, rules on asset management and introduce more flexible working practices. - When restructuring or preparing enterprises for privatisation, specific attention to timely clear state aid issues. Local administration - Government monitors implementation of recently adopted acts on restructuring of local government, the no-deficit rule (at least until 2014) and transfers to local government. - Continued implementation of public administration reform and reorganisation of local government with aim of reducing costs and increasing revenue by at least EUR 1 500 million in 2013, of which at least EUR 500 million in 2011 and additional EUR 500 million in 2012. Health care system modernisation - Objective: keep public health expenditure at or below 6 percent of GDP, while maintaining universal access and improving quality of care delivery. - Government has taken 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. - Measures implemented by end March 2011 include: Governance - Government implements provisions of Article 31 and 32 of Law 3863/2010. Health Benefit Coordination Council (SYSPY): - establishes new criteria and terms for conclusions of contracts by social security funds (including OPAD) and initiates actions in Article 32 to achieve targeted spending reduction; - initiates joint purchase of medical services and goods to achieve substantial expenditure reduction of at least 25 percent compared to 2010 through price-volume agreements. Comprehensive E-prescribing - Government extends e-prescribing of medicines, diagnostics and doctors' referrals to all social security funds, health centres and hospitals. - Government finalises tendering procedures to implement a comprehensive and uniform health care information system (e-health system) in compliance with EU procurement rules. - Each social security fund together with SYSPY establishes a process to regularly assess e-prescribing information and produces reports at least on a six-monthly basis; monitoring by a dedicated common unit under SYSPY; yearly report published and feedback provided to each physician; sanctions and penalties enforced as follow-up. Hospital computerisation and monitoring system - Ministry of Health completes the programme of hospital computerisation, finalises centralisation of information on the web-based platform esy.net, creates a dedicated service/unit to collect and scrutinise data and produce monthly and annual reports (copy to Ministry of Finance). Measures to integrate and consolidate hospitals' IT systems. Accounting, procurement and billing improvements - Finalise introduction of double-entry accrual accounting systems in all hospitals. - Use of uniform coding system and a common registry for medical supplies developed by Health Procurement Commission (EPY) and National Centre for Medical Technology (EKEVYL) for procuring medical supplies. - Calculation of stocks and flows of medical supplies in all hospitals using the uniform coding system. - Timely invoicing of treatment costs no later than 2 months to Greek social security funds, other EU Member States and private health insurers for non-nationals/non-residents. - Use of e-prescribing for all medical acts (medicines, referrals, diagnostics, surgery) in all NHS facilities. Generics and pricing - Government ensures at least 50 percent of the volume of medicines used by public hospitals by end of 2011 is composed of generics with price below similar branded products and off-patent medicines; compulsory hospital procurement by active substance. - Pricing measures: - move responsibility of pricing medicines to EOF and all other pharmaceutical policy aspects to Ministry of Health; - reduce profit margin of pharmacies on retail prices directly to 15-20 percent, or indirectly via rebates for pharmacies with sales above a threshold; - reduce profit margin of wholesale companies distributing pharmaceuticals by at least one third; - update and publish the complete price list for medicines using the new pricing mechanism and continue quarterly updates; - lift caps to the price reductions used when the price list was first introduced. - Prescribing and monitoring: - publish prescription guidelines for physicians defined by EOF based on international guidelines; - publish new positive list of reimbursed medicines using the new reference price system developed by EOF. - Accounting and control: - By end February, Government starts publishing monthly data on healthcare expenditure for at least the main social security funds (IKA, OAEE, OGA and OPAD) with a lag of three weeks after month end (see annex 1). Task force - Independent task force of health policy experts created end 2010 produces, in cooperation with the European Commission, ECB and IMF, an interim policy report with initial indications on necessary revisions and improvements for coming years; task force has access to all necessary health-related information and receives administrative support. ### Financial sector regulation and supervision - Government transfers, by end February, EUR 1 000 million to a dedicated government account opened by the General Accounting Office. Funds are regularly released to the Hellenic Financial Stability Fund to ensure it keeps a cash balance of EUR 1 500 million if programme reviews of bank capital suggest resources are necessary; release subject to agreement by European Commission, ECB and IMF staffs. - Government puts forward for parliamentary adoption a new tranche of government guarantees for uncovered bank bonds amounting to EUR 30 billion; tranche subject to European Commission approval. - Government tables legislation to unbundle core consignment activity of the Loan and Consignment Fund from deposit-taking and loan distribution activities. - FSF is adequately staffed. - Government tables legislation placing all registered banks' employees under the same private sector status regardless of bank ownership. - Government takes steps to limit bonuses and eliminate the 'balance-sheet premium' or equivalent measures to support bank restructuring efforts. - Bank of Greece commits to reduce remuneration of its staff in light of overall fiscal consolidation effort. ### Structural reforms Labour market and trade unions - Government reforms legislation on fixed-term contracts and working-time management. - Government simplifies procedure for creation of firm-level trade unions. Public procurement and better regulation - Government adopts legislation establishing the Single Public Procurement Authority with mandate, objectives, competences and schedule for entry into force in line with the Action Plan agreed with the European Commission in November 2010; draft law transmitted to the Commission for review. - Government launches development of an e-procurement IT platform with intermediate milestones: testing a pilot version, availability of all functionalities for all contracts and phasing-in mandatory use of e-procurement for supplies, services and works contracts. - Government adopts measures to implement the 'Better Regulation agenda' covering codification, impact assessment, reduction of administrative burdens and the 'Better Regulation' structure. Competition and restricted professions - Government adopts legislation to remove unjustified or disproportionate restrictions in restricted professions including: - legal profession: remove unnecessary restrictions on fixed minimum tariffs, ban on advertising, territorial restrictions; - notary profession: reduce fixed tariffs and increase number of notaries; - pharmacy profession: permit incorporation, increase operating hours and reduce minimum population criterion for opening new pharmacies (voted in February); - architects and engineers: address fixed minimum tariffs; - auditing services: cover fixed tariffs, minimum hours per case and maximum annual working hours. - Government publishes opinion of the Hellenic Competition Commission on this legislation. - Government screens statutes of professional chambers to identify rules contrary to new law on restricted professions and EU law; necessary changes to statutes adopted by June. - Government removes prohibitions on commercial communications by regulated professions and ensures rules are non-discriminatory, justified by overriding public interest and proportionate. - Recognition of professional qualifications: Government continues measures to ensure effective implementation of EU rules on recognition of professional qualifications, including compliance with ECJ rulings; updates information on pending applications and sends it to the Commission. Sectoral growth drivers and business environment - Government publishes reports analysing potential contribution of: - tourism sector to growth and jobs, identifying legislative, administrative and other obstacles; - retail sector to price flexibility, growth and jobs, identifying obstacles. - Government finalises adoption of a law modifying institutional framework of Hellenic Competition Commission (HCC) to ensure independence, effectiveness and accountability; law abolishes notification system for agreements under Article 1 of Law 703/1977, grants HCC power to reject complaints, prioritize cases and establishes deadlines for investigation and decisions. - Investment and licensing: - Government adopts presidential decrees and ministerial decisions necessary to implement law on aid for private investment ensuring accordance with fiscal consolidation requirements. - Government accelerates environmental licensing by committing authorising authority to proceed after a specified time period. - Commercial and land registry: - Government makes General Commercial Registry (GEMI) and one-stop shops for business start-ups operational. - Government provides sufficient resources to accelerate completion of land registry: tender cadastral projects for additional 4 million rights by December 2011, complete works for large urban centres by 2015 and complete overall project by 2020. - Business-friendly Greece: Government starts implementing measures in the action plan to remove the 30 most important remaining restrictions to business activity, investment and innovation according to the timetable. - Export and R&D promotion: - Government evaluates R&D and innovation actions and presents an action plan to enhance quality and synergies between public and private R&D and tertiary education; action plan identifies timetable and accounts for budgetary impact. - Government finalises creation of an external advisory council to foster innovation and strengthen links between public research and industries. - Government presents action plan to abolish requirement of registration with the exporter's registry of the chamber of commerce for obtaining a certificate of origin by September 2011. Services Directive implementation - Government ensures the point of single contact (PSC) distinguishes between procedures for providers established in Greece and cross-border providers. - Government ensures: - adequate links between PSC and other relevant authorities (including professional associations); - online completion of procedures covering at least distribution services, tourism, education and construction sectors, food and beverage services, services of regulated professions (including recognition of professional qualifications), real estate services and business services. - Government completes adoption of changes to sectoral legislation in tourism, retail and private education services to: - facilitate establishment by abolishing/amending prohibited requirements and significantly reducing requirements (quantitative and territorial restrictions, legal form, shareholding, fixed tariffs and restrictions on multidisciplinary activities); - facilitate provision of cross-border services so compliance with Greek law is required only in exceptional cases (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. Energy sector - Government commences implementation of plan for opening up lignite-fired electricity generation to third parties. - Government presents detailed plans for maximum market opening of the non-interconnected system. - Government commences implementation of commitment to award hydro reserves management to an independent body. - Government starts implementing mechanism to ensure energy component of regulated tariffs gradually reflects wholesale market prices by June 2013 at the latest, except for vulnerable consumers. - Unbundling and regulator independence: - Government adopts Decision on modalities of unbundling of the transmission system operator in line with the third energy liberalization package and adopts legislation to create fully unbundled electricity and gas transmission system operators by March 2012. - Government ensures creation and effective operation of an independent Distribution System Operator in line with the second and third energy liberalisation packages. - Government transfers to RAE all regulatory powers assigned to EU energy regulators in the third energy liberalisation package (licensing, network access, network charges, market monitoring, etc). - Government adopts measures to ensure independence of RAE (impartial and transparent nomination of board, management authority regarding budget and personnel) in line with the third energy liberalisation package. Transport sector - Government adopts new regulatory framework to facilitate concession agreements for regional airports, mindful of competition and state aid rules. - Government adopts law removing restrictions on provision of occasional passenger transport services by buses, coaches and limousines, guaranteeing market access for operators meeting professional capacity criteria; licensing fees shall not exceed administrative costs and must be transparent, objective and proportionate. Education - Government establishes, by end February 2011, an independent taskforce on education policy to indicate measures to increase efficiency and effectiveness of public education (primary, secondary and higher) and reach more efficient use of resources. Absorption of structural and cohesion funds - Government adopts legislation to shorten deadlines and simplify procedures on contract award and land expropriations (including deadlines for legal proceedings). - Government carries out evaluation of time-saving effects of legislation on: - contract awards and land expropriation; - permits by the Central Archaeological Council in Athens; - environmental licensing. - Government submits a timetable for preparation, selection and implementation of different types of projects (including scenarios of legal proceedings) derived from the above legislation; timetable will serve as benchmark for monitoring projects. *Source: _cr1168 - 1. Actions for the fourth review (actions to be completed by end Q1-2011).* ### 2. Actions for the fifth review (actions to be completed by end Q2-2011) ### _cr1168 - 2. Actions for the fifth review (actions to be completed by end Q2-2011) ### Fiscal consolidation - Government rigorously implements the budget for 2011 in line with this Memorandum and the fiscal consolidation measures in the budget. - Government stands ready to define and enact additional measures if needed to reach the budgetary targets. - The Council of Ministers adopts the medium-term budgetary strategy paper by end April, to be voted by Parliament by mid-May. ### Structural fiscal reforms — pensions and related measures - Government proceeds with an in-depth revision of the functioning of secondary/supplementary public pension funds (including welfare funds and lump-sum schemes) to: - reduce the number of existing funds; - eliminate imbalances in those funds with deficits; - stabilise current spending at sustainable level through appropriate adjustments from 1 January 2012; - ensure long-term sustainability of secondary schemes through a strict link between contributions and benefits. - Reform contributes to achieving the target of reducing the overall (basic, contributory, supplementary and any other related scheme, including lump sums at retirement) increase of public sector pension spending, over the period 2009-60, to under 2.5 percentage points of GDP. - Reform of secondary schemes is to be designed in close consultation with European Commission, IMF and ECB staff; estimated impact validated by the EU Economic Policy Committee. New secondary notional defined-contribution system parameters ensure long-term actuarial balance as assessed by the National Actuarial Authority. - If National Actuarial Authority projections show projected increase in total public pension expenditure would exceed the 2.5 percentage points of GDP limit over 2009-60 even after supplementary reforms, Government revises main parameters of the pension system provided by Law 3863/2010 in close consultation with European Commission, IMF and ECB staffs. - Government substantially revises the list of heavy and arduous professions, reducing coverage to no more than 10 percent of employment. The new list of Difficult and Hazardous Occupations (Law 3863/2010) applies from 1 July 2011 to all current and future workers. - Bank of Greece commits not to grant pension privileges to its staff and to revise main parameters of its pension scheme to align them with those of IKA. ### Military spending - New National Medium-Term Military Procurement Programme, 2011-25, expected to be adopted by May 2011, plans a reduction in military expenditure that durably contributes to fiscal consolidation without prejudice to national defence capability. ### Asset management and privatisation - Government publishes an inventory of state-owned assets, including stakes in listed and non-listed enterprises and commercially viable real estate and land, and provides estimated values. Inventory to be updated until end-year to ensure comprehensiveness. - Government establishes a General Secretariat of Real Estate Development to improve coordination and accelerate privatisation and asset management and takes steps to create special investment vehicles. - Based on the inventory, privatisation plans are revised and accelerated targeting total proceeds of at least EUR 15 billion during the programme period. - Government privatises its stake in Casino Mont Parnes and extends the concession of the Athens International Airport. ### Health care modernisation — policies, targets, and governance - Measures to promote generic medicines: - compulsory doctors' e-prescription by active substance; - 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) on the basis of other EU experience; - set maximum price of generics to 60 percent of the branded medicine with similar active substance. - Extend capitation payment 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 Member States' experience. - Move towards greater equalisation across funds regarding contribution rates and minimum benefit packages, aiming for full equalisation by 2012, building on Law 3655/2008. - To reduce costs and improve quality: - adjust public hospital provision via joint management/joint operation between small-scale hospitals and big hospitals within same district and health region; - revise activity of small hospitals towards specialisation (e.g., rehabilitation, cancer treatment) where relevant; - in districts with more than one hospital (excluding university hospitals) use joint management/joint operation system; - increase mobility of healthcare staff (including doctors) within and across health regions. - Independent task force of health policy experts (created end-2010) to produce, in cooperation with European Commission, ECB and IMF, its final policy report by end May 2011 with recommendations covering: - health system governance to reduce fragmentation; - financing: pooling, collection and distribution of funds; - harmonization of health packages across funds; - service provision and incentives for providers (integration private/public, primary care vs specialist/hospital care, hospital efficiency, pharmaceutical consumption, human resources); - public health priorities, health promotion and disease prevention; - data collection, health technology assessment and performance assessment; - expenditure control mechanisms. - Report will provide quantitative targets to keep public expenditure on health as a ratio to GDP constant at, or below, 6 percent. Government adopts an action plan by end June 2011, including a timetable for concrete actions. - Accounting and control: - internal controllers assigned to all major hospitals; - hospital computerisation programme to allow measurement of hospital and health centres activity and to define a core set of activity and expenditure indicators in line with Eurostat, OECD and WHO health databases; ELSTAT starts providing data in line with the System of Health National (joint questionnaire collection exercise); - hospital computerisation to allow setting up of a basic system of patient electronic medical records. - By end-May, Government starts publishing monthly data on healthcare expenditure by all social security funds with a lag of three weeks after the end of the respective month. - Wages and human resource management: - Ministry of Health and Ministry of Labour, in cooperation with Ministry of Finance, prepare a regular annual report (first to be published by end-May 2011) on structure and levels of remuneration (including fees to consultants and doctors) and the volume and dynamics of employment in hospitals, health centres, and health funds; report presents plans for allocation of human resources up to 2013 and specifies any plan to reallocate qualified and support staff within the NHS and health funds. ### Financial sector regulation and supervision - Government transfers EUR 1 000 million to a dedicated government account opened by the General Accounting Office. Funds from this account are regularly released to the Hellenic Financial Stability Fund to ensure the latter keeps a cash balance of EUR 1 500 million and if programme reviews of bank capital suggest that the resources are necessary. Release of funds subject to agreement by European Commission, ECB and IMF staffs. - Capital increase of ATE is completed. - FSF is fully staffed. - Bank of Greece hires qualified staff to strengthen banking supervision. - Bank of Greece undertakes a diagnostic assessment of insurance firms. ### Structural reforms — public administration, labour, procurement, professions, education, business environment - Public administration: - assess results of first phase of the independent functional review of central administration including operational policy recommendations; functional review of existing social programmes finalised. - adopt legislation establishing a simplified remuneration system covering basic wages and allowances applying to all public sector employees to ensure remuneration reflects productivity and tasks as part of overall Human Resource management reform. - Public procurement: - thorough review of system of redress against award procedures and the role to confer to the Single Public Procurement Authority in agreement with the European Commission. - review identifying areas to increase efficiency of public procurement system outside the Single Public Procurement Authority, with conclusions and actions in agreement with the European Commission. - Restricted professions and professional qualifications: - take measures on commercial communications by regulated professions and on multidisciplinary activities, in accordance with the Services Directive. - adopt all presidential decrees necessary for fast-track licensing procedure for technical professions, manufacturing activities and business parks. - remove prohibitions so holders of franchised diplomas from other Member States have right to work in Greece under same conditions as holders of Greek degrees. - Education: - independent taskforce on education publishes a detailed blueprint for efficiency and effectiveness improvements in public education; blueprint includes concrete policy recommendations for Ministry of Education implementation. - Labour market institutions: - complete reform to strengthen the Labour Inspectorate, fully resourced with qualified staff; set quantitative targets on number of controls. - adapt legislation on tackling undeclared work to require registration of new employees before they start working. - Business environment and competition: - adopt legislation on services sectors (agriculture, transport, employment, technical services, sanitary facilities, welfare, wholesale and others identified in Q4-2010 progress report) and specify timetable for remaining sectors by end-2011 to ensure full compliance with Services Directive. - adopt legislation and structural actions to implement reports analysing potential contribution of tourism and retail sectors to growth, jobs and price flexibility. - simplify and shorten procedures for environmental impact studies and approval of environmental terms to reduce number of projects subject to environmental licensing and duration of approval procedures to EU average levels. - implement action to abolish requirement of registration with exporter's registry of chamber of commerce for obtaining certificate of origin. - review and codify legislative framework of exports (Law 936/70 and Law Order 3999/59), simplify customs clearance processes and allow larger companies or industrial areas to be certified to clear cargo themselves. - Raising absorption of EU funds: - Government meets targets for payment claims in absorption of EU structural and cohesion funds (programming period 2007-2013) as specified in Table 1; compliance measured by certified data. - Government achieves semi-annual target of submitting 5 major project applications to the Commission and provides data on expenditure for non-targeted de minimis state aid measures declared to the Commission in 2010. - Government adopts and implements appropriate acts to ensure smooth and timely implementation of structural-fund programmes in the framework of recent local administration reform. ### Table 1 — Targets for payment claims in the absorption of Structural and Cohesion Funds (programming period 2007-2013) to be submitted between 2010 and 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 - Total annual target - 2010 target: 2 750 - 2010 outcome: 2 820 - 2011: 3 350 - 2012: 3 730 - 2013: 3 890 - Semi-annual targets (first half / second half) - 2011 first half: 1 105 - 2011 second half: 2 245 - 2012 first half: 1 231 - 2012 second half: 2 499 - 2013 first half: 1 284 - 2013 second half: 2 606 --- *Source: _cr1168 - 2. Actions for the fifth review (actions to be completed by end Q2-2011)* ### 4. Actions for the seventh review (actions to be completed by end Q4-2011) ### 4. Actions for the seventh review (actions to be completed by end Q4-2011) ### i. Fiscal consolidation - Government achieves the target for the 2011 general government deficit of not more than EUR 17 065 million and other quantitative performance criteria. - Parliament adopts the final budget for 2012 targeting a further reduction of the general government deficit which, in ESA95-based terms, should not exceed EUR 14 916 million. ### ii. Fiscal structural reforms - Asset management - Government publishes the second part of the state's assets inventory. - Government privatises DEPA, LARKO, TRAINOSE (at least 49 percent, including shares management with the new shareholders), and sells concession SPVs in relation to the Egnatia motorway and accelerates the divestment of |public real estate. - To modernise the health care system - Government defines a hospital case-based costing system to be used for budgeting purposes from 2013. - The independent taskforce of health policy experts produces an implementation report, revising the policies implemented so far. ### iii. Structural reforms - To modernise public administration - Functional reviews - Government assesses the results of the second (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. - Public procurement - Single Public Procurement Authority starts its operations with the necessary resources to fulfil its mandate, objectives, competences and powers as defined in the Action Plan. - To improve the business environment and strengthen competition in open markets - Energy - Government removes regulated tariffs for customers except households and small enterprises (as defined in the second and third energy liberalisation packages). - To upgrade the education system - Government starts publishing a bi-annual progress report on the implementation of the law on quality assurance in primary, secondary and higher education. - To raise the absorption rates of Structural and Cohesion Funds - 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. - Government submits 5 additional major project applications to the Commission, in view of achieving an annual target of submitting 10 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. - Government introduces the fully-operational web-based open-access monitoring tool of procedures for approval of project proposals and for implementation of public projects. - Government ensures that the managerial capacity of all managing authorities and intermediate bodies of operational programmes under the framework of the National Strategy Reference Framework 2007-13 has been certified according to the standard ISO 9001:2008 (quality management). - Government presents a report on the activities of the task force assessing progress in ensuring the rapid implementation absorption of structural funds, and proposing improvements when necessary. - Government provides an impact assessment of legislative measures since 2010 to accelerate the absorption of structural and cohesion funds adopted since May, and indicates any further measures. *Source: _cr1168 - 4. Actions for the seventh review (actions to be completed by end Q4-2011)* ### 15.4 percent a year earlier, on account of revenue increases accompanied by significant ### _cr1168 - 15.4 percent a year earlier, on account of revenue increases accompanied by significant ### Fiscal developments and recent reforms - Revenue increases accompanied by significant under-execution of the expenditure budget led to the 15.4 percent a year earlier outcome. - Crucial fiscal structural reforms aimed at broadening the tax base and rationalizing spending have moved forward. - Landmark reforms ratified in February 2011 include bills on restructuring public transportation and on opening up closed-shop professions. - Authorities committed to keeping the program on track and emphasize stronger implementation of structural reforms. ### Economic outlook - GDP declined by 4.5 percent in 2010 and is estimated to further contract by 3 percent in 2011. - Leading indicators (Bank of Greece figures) for 2010: - Industrial turnover rose y-o-y by 5.6 percent. - Industrial new orders rose y-o-y by 3.9 percent. - Foreign-market leading indicators in December 2010: - Industrial turnover increased y-o-y by 28.7 percent. - Industrial new orders increased y-o-y by 12.8 percent. - HIPC inflation in 2010 exceeded projections due to indirect taxation increases and higher-than-expected oil prices; HIPC dynamics expected to slow to 2.4 percent in 2011. - Current account deficit narrowed to 10.5 percent of GDP in 2010, helped by improved non-oil trade balance and increased shipping activities. - Economy-wide unit labor costs fell by 2.6 percent in 2010, supporting competitiveness improvements that began in the second half of 2010. - Unemployment increased in 2010 to an average rate of almost 12.5 percent. - Key labor market reforms on employment protection, arbitration, and collective bargaining have been approved and are expected to deliver medium-term benefits. ### Fiscal policy strategy and measures - Objective: reduce the fiscal deficit to below 3 percent of GDP by 2014. - Parliament approved a central government budget targeting a deficit-to-GDP ratio of 7.5 percent for 2011. - January 2011 data show a central government surplus of euro 165 million. - Medium-term public sector adjustment plan to be presented this month and expected to be approved by Parliament in May after consultations; plan will contain measures amounting to 8 percent of GDP. - Authorities prepared to define additional contingency actions if targets are missed. - Plan design: - Set annual spending ceilings for line ministries and fiscal balance targets for the 2012-14 period. - Increase state enterprise tariffs. - Reduce operating costs, including the wage bill; prioritize investment. - Simplify the public wage grid including allowances and reduce excess employment in the public sector. - Enhance tax administration, simplify the tax system, and raise revenues. - Streamline social programs, eliminate duplications, and better target social spending. - Prioritize public investment projects and estimate savings to the budget. - Implement far-reaching anti-evasion measures and legislative steps to remove barriers to tax collection and streamline judicial appeals. - Improve public financial management. - Pension and health reforms: - July 2010 pension reform stabilized spending of the main pension funds at the 2009 level (in percent of GDP). - Assessment of main supplementary pension funds expected by end-March 2011; authorities ready to adjust parameters further if needed. - Health plan broadly on track (cost-reducing reforms in hospitals, co-payments, extended negative lists for non-reimbursable pharmaceutical products). - An independent task force to map overall health system reform will deliver its final report by the end of May; a time-bound action plan is due by the end of June. - Public assets and privatization: - Comprehensive inventory of government assets to be established by end of the year. - Enhanced privatization program through 2013 aims to raise euro 15 billion in 2011-13; program scheduled to be adopted by the Council of Ministers by the end of July. - New law creating a single public procurement authority expected to be approved by the Greek parliament by the end of March. ### Financial sector policies - Banking sector remains under pressure: tight credit and liquidity conditions, declining asset quality and profitability, but system remains resilient. - Private banks have succeeded in raising capital in markets. - Deposit trends: substantial slowdown in the decline of total deposits in the second half of the year. - Capital ratios: - Tier 1 ratio remains above 10 percent. - Total Capital Adequacy Ratio (CAR) of 11.4 percent. - BoG requested Greek banks to prepare medium-term plans to adjust funding. - Authorities committed to activating, with the ECB, a supplementary tranche of euro 30 billion to guarantee bank bonds. - BoG will monitor liquidity and allow banks flexibility to move toward sustainable medium-term funding and to implement unavoidable cost-base reductions. - Financial Stability Fund (FSF) actions: - FSF to be boosted by an additional euro 1 billion soon. - A further euro 1 billion deposit on a dedicated account for the FSF will be made in the second quarter of 2011. - Further amounts of up to euro 6.5 billion will be released consistently with the need for bank capital, according to the program reviews. ### Structural policies and competitiveness - Substantial progress on a far-reaching structural reform agenda; pace uneven across areas but overall expeditious. - Recent reform focus areas: labor market; liberalization of closed professions; licensing; services directives; liberalization of the energy market; competition; market entry. - Study of public pay and employment delayed; new statistical regulations specified and will be approved shortly by the National Statistical Agency (ELSTA). - Specific actions and timelines: - Liberalization of closed professions advancing; Ministry of Finance to issue a report evaluating the reform by end-September. - New law strengthening the competition authority’s competencies and independence expected to be passed by Parliament by the end of this month. - One-stop-shop law to be made fully operational by April 1st. - Decrees implementing the framework for large investment projects to be issued by the end of June. *Source: _cr1168 - 15.4 percent a year earlier, on account of revenue increases accompanied by significant* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1168.pdf_