## _cr13156

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### Executive summary — objectives, outcomes, and overall assessment
- Primary objective of Greece’s May 2010 program supported by a Stand-By Arrangement (SBA): restore market confidence and lay the foundations for sound medium-term growth through strong and sustained fiscal consolidation and deep structural reforms, while safeguarding financial sector stability and reducing the risk of international systemic spillovers.
- Greece was to stay in the euro area and an estimated "20-30 percent competitiveness gap" would be addressed through wage adjustment and productivity gains.
- Major successes (May 2010–March 2012):
  - Strong fiscal consolidation achieved and the pension system put on a viable footing.
  - Greece remained in the euro area.
  - Spillovers that might have severely affected the global economy were relatively well-contained.
- Major failures and adverse outcomes:
  - Market confidence was not restored.
  - The banking system lost "30 percent" of its deposits.
  - The economy experienced a much-deeper-than-expected recession with exceptionally high unemployment.
  - Public debt remained too high and was eventually restructured, damaging bank balance sheets.
  - Competitiveness improved somewhat via falling wages, but structural reforms stalled and productivity gains proved elusive.
- Assessment of program necessity and baseline projections:
  - Program judged a necessity given contagion danger despite misgivings about debt sustainability.
  - Exceptional access criterion was amended to permit an alternative justification based on high risk of international spillover effects where debt was not sustainable with high probability.
  - The baseline showed debt to be sustainable as required, though macro outcomes were far below the May baseline and baseline macro projections can be criticized as too optimistic.

### Context and background (selected factual findings)
- Real GDP growth averaged "4 percent" from 2000–07.
- Government interest expenditure dropped from "11½ percent of GDP" in the mid-1990s to "5 percent of GDP" in the mid-2000s; increased spending on wages and pensions swamped those savings.
- General government deficit reached "15½ percent of GDP" (after data revisions), up from "4 percent of GDP" in 2001.
- Public debt was "129 percent of GDP" at end-2009, with "75 percent" held by foreigners.
- Current account deficit reached "15 percent of GDP" in 2008.
- Competitiveness (ULC-based REER) declined by "20-30 percent" in the decade following euro adoption.
- After Lehman, spreads on Greek government bonds over 10-year bunds jumped to "300 bps" from about "50 bps" before the crisis.
- In October 2009 projected 2009 budget deficit revised from "4" to "12½ percent of GDP" (still 3 percentage points short of the final estimate).
- Greece’s 2010 Stability Program aimed to cut the deficit from "12½ percent of GDP" to "8¾ percent of GDP" in 2010 and by a further "3 percentage points" in 2011 and in 2012 (the “4-3-3” plan).

### Program design and pillars (section 15)
- Objectives: lower fiscal deficit and public debt ratio, reduce domestic demand in line with supply capacity, and increase supply and competitiveness to invigorate investment, exports, and private sector growth.
- Three pillars:
  - Fiscal consolidation:
    - Required adjustment in the primary balance by 2014 of 14½ percentage points of GDP.
    - Revenue and expenditure measures amounting to 11 percent of GDP identified, on top of 5 percent of GDP in measures implemented in the first half of 2010.
    - Reforms to tax administration and public financial management; major pension system changes to ensure viability.
  - Structural reforms:
    - Internal devaluation in the absence of an exchange rate lever; increase competition in labor and product markets, boost productivity, and improve the business environment.
    - Positive GDP growth projected from 2012.
  - Financial stability:
    - Banks seen as vulnerable; Hellenic Financial Stabilization Fund (HFSF) set up to provide capital.
    - Program included €10 billion available to provide resources to the HFSF if needed.
- Program financing:
  - Total financing agreed in early May 2010 amounted to "€110 billion", of which the Fund committed "€30 billion" under an SBA (approved May 9).
  - Fund access equaled "€30 billion", or "3,212 percent of quota".
  - EFSF created with "€500 billion" in financing (described as a lending capacity of "€440 billion" combined with EFSM of "€60 billion").
  - Footnote on official loan pricing: euro area member state loans priced at 300 basis points over the swap rate for up to 3 years’ maturity and 400 basis points above for longer maturities.

### Macroeconomic outcomes and projections
- Real GDP: 2012 was 17 percent lower than in 2009, compared to a 5½ percent decline projected in the SBA-supported program.
- Unemployment: 2012 rate was 25 percent vs. original program projection of 15 percent.
- Inflation and wages: ULC REER estimated to have declined by 9 percent during the SBA period; reductions in unit labor costs were wage driven with few indications of productivity increases.
- Current account: deficit decreased broadly as projected, though by less than expected in cyclically-adjusted terms; sharp compression of imports but little pick-up in exports.
- Projection revisions: original growth projections largely maintained until the fifth review (December 2011), then marked down with expected recovery delayed until 2014.

### Fiscal policy outcomes
- Primary deficit consolidation: change in the primary deficit during 2010–11 was 8 percentage points of GDP, slightly above target despite the deep recession.
- Authorities introduced a Medium-Term Fiscal Strategy amounting to 10½ percent of GDP during 2011–14 once initial measures proved insufficient.
- Cyclically-adjusted improvement: primary balance improved by "about 13 percent of potential GDP" during the SBA (source wording preserved).
- Tax measures: increases in VAT rates and other indirect tax hikes; new property tax; somewhat higher income taxes; efforts to strengthen tax administration and raise collections.
- Expenditure measures: elimination of 13th and 14th monthly pension payments (with safeguards); cuts in public sector salaries, bonuses, allowances; reductions in health care drug spending; cuts in capital spending; reorganization of subnational governments (Kalikrates); new budget framework and spending control mechanisms.
- Arrears and reporting: domestic arrears accumulation breached an end-2010 performance criterion by "€3 billion, or a bit over 1 percent of GDP"; definition of the performance criterion was subsequently modified to incorporate domestic arrears.
- Expenditure composition: primary expenditure declined by 4 percentage points of GDP in 2009–11, but still exceeded the 2005 level by about the same amount. Wage bill remained high relative to other EU countries; social protection programs largely untargeted and inefficient.

### Debt, financing outcomes, and PSI
- Initial DSA projection: debt projected to peak at 154-156 percent of GDP in 2013 (depending on data revisions).
- Revised projections: by the fourth review in July 2011, end-2013 debt ratio projected at 170 percent of GDP (before PSI was in prospect).
- Underlying dynamics: output contractions and deflation more pronounced than expected; lower nominal growth raised the interest rate-growth differential and led to higher expected debt paths; data revisions exacerbated trends.
- Privatization receipts: original program envisaged about €10 billion; fourth review assumed receipts rising to €50 billion (described as extremely optimistic); later reviews made much lower projections.
- Public debt outturns and PSI:
  - Adjusting original SBA with figures used in January 2013 review implies public debt at about 180 percent of GDP in 2020.
  - Debt restructuring (PSI) provided more than an offset and latest projections show debt declining to about 120 percent of GDP by 2020.
- Creditor composition shifts: non-resident holdings of government debt dropped sharply in 2010–12; purchases under SMP created rigidities when debt was restructured because SMP and national central bank holdings were excluded from the PSI.
- Specific debt change: Debt restructuring in March 2012 led to a 60 percent reduction in privately held debt. Public debt fell by "€62.4 billion to €305.5 billion." Some relief provided on official debt in March and December 2012 including a reduction in interest rates on the euro area loans.

### Structural reforms and competitiveness
- Labor market reforms encountered resistance; wage bargaining system reformed but few firm-level agreements; significant labor reforms (including cuts in minimum wages in the private sector) occurred only with approval of the EFF in March 2012.
- Product and regulatory reforms: initial laws passed (one-stop-shops, fast-track investment approval, law liberalizing regulated professions) but implementation delayed or deadlines postponed.
- Pension reform (Box 3):
  - Pension spending at "16 percent of GDP" in 2010.
  - Replacement rate "57 percent"; dependency rate "29 percent"; official retirement age "60" (OECD average "63.2").
  - Reforms: retirement age "65 years and indexed to life expectancy"; pension base from "Last 5 years earnings" to "Lifetime earnings"; accrual rate from "2–3%" to "0.8–1.5%"; replacement rate from "70%" to "60%"; early retirement age from "<60" to "60"; indexation moved to "CPI and GDP"; projected annual deficit in 2060 fell from "12.5%" to "2.5%."
- Box 2 on internal devaluation:
  - "The ULC-based real effective exchange rate depreciated by 9 percent from May 2010 to March 2012."
  - "The CPI-based real effective exchange rate depreciated by only 3 percent" during the SBA period.
  - Major competitiveness improvement due to wage reductions associated with recession; limited gains in productivity; ULC in non-traded goods improved more than in traded goods.

### Financial sector distress, HFSF, and ECB support
- Banking system at program start: capital ratio was 11.7 percent aided by a recapitalization in 2009.
- Deterioration: higher NPLs as economy weakened; liquidity tightened in 2009 due to loss of wholesale market access and some deposit outflows.
- By 2011:
  - Deleveraging and restructuring of state-owned banks perceived necessary.
  - ATE, the largest state-owned bank and the only Greek bank to fail the Europe-wide stress tests in mid-2010, had to be recapitalized.
  - Sizable deposit outflows began in the second half of 2011.
- ECB extraordinary measures:
  - From May 2010, ECB suspended link between sovereign credit ratings and collateral eligibility.
  - ECB intervened directly in the government bond market under the SMP.
  - ECB accepted uncovered bank bonds guaranteed by the government as collateral.
- Impact of PSI on banks:
  - Greek banks held government bonds with a book value of about "€40 billion" (after some initial June 2011 impairments).
  - Core capital was "€22 billion", roughly the same magnitude as capital needs arising from the PSI.
  - Only "€1.5 billion" was drawn from the HFSF during the SBA-supported program; subsequent capital needs dwarfed the HFSF provision.
  - As of the fourth review, HFSF’s purpose changed to providing substantial public injections; the amount needed for the HFSF in the context of the EFF was estimated at "€50 billion".
- Funding shifts: increases in Eurosystem borrowing and Emergency Liquidity Assistance; funding structure shifted toward central bank liabilities and overnight/short-term deposits; NPLs increased across consumer, mortgage, and corporate categories by 2012.

### Program design questions, risks, and exceptional access
- Pace of fiscal adjustment:
  - Required primary balance adjustment was 14½ percentage points of GDP — characterized as an enormous adjustment and the minimum needed to bring debt down to 120 percent by 2020.
  - The SBA extended the period to achieve Maastricht deficit target from 3 to 5 years; program ran only through mid-2013, leaving part of the adjustment after program end.
  - A flatter (slower) adjustment would have required more than "€110 billion" in financing; euro partners could have provided more than "€80 billion" (more than 35 percent of Greek GDP), which was politically difficult.
- Forecasting the downturn and fiscal multipliers:
  - Program initially assumed a fiscal multiplier of 0.5; later iterations assumed a multiplier of twice the size.
  - Deeper contraction reflected absence of private sector pick-up, domestic turmoil, and talk of a Greek exit.
- Assessment of exceptional access criteria:
  - GRA thresholds: annual limit "200 percent of quota"; cumulative limit "600 percent of quota, net of rescheduled repurchases."
  - Greece’s access during the first year of the SBA would amount to "1,550 percent of quota" and peak at "3,212 percent of quota in April 2013."
  - Criterion 1 (exceptional BOP pressures) satisfied at each stage.
  - Criterion 2 (high probability of public debt sustainability) not satisfied; Board modified summing up to allow exception in cases with high risk of international spillovers.
  - Criterion 3 (prospect of regaining private capital markets) judged to be met though financing assurances were not strong.
  - Criterion 4 (prospect of program success given institutional/political capacity) considered met ex ante but proved too optimistic in retrospect.
- Debt sustainability stress scenarios (section 54):
  - Combined adverse shocks could place public debt "on a clearly unsustainable path (above 220 percent of GDP by 2020 and still rising)."
  - A deflation shock of "3 percent more" in the DSA would have caused debt to jump to "175 percent of GDP."

### Troika, inter-institutional challenges, and facility choice
- The Troika (IMF, EC, ECB) arrangement was unusual given Greece’s euro membership; no clear division of labor and overlapping responsibilities.
- Differences of view existed within the Troika (notably on growth projections); program documentation was voluminous and variably secret.
- Facility choice and timing:
  - Initial program was a three-year SBA; questions arose whether an EFF should have been used from the outset given the large structural component.
  - Conversion from SBA to EFF was considered early but deferred pending consensus with euro partners on longer-term financing and PSI.
  - Under later assurances, euro area members committed to reduce debt below "110 percent of GDP by 2020" conditional on continued program implementation.

### Lessons, recommendations, and political economy implications
- Broad concurrence: fiscal adjustment and structural reforms were "clearly essential."
- Lending policies and currency unions:
  - Recommendation to refine Fund lending policies to better accommodate monetary union circumstances.
  - Exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases; the baseline still had to show debt sustainable.
  - The Fund arrangement for Greece "should ideally have been an EFF from the outset."
- Debt restructuring:
  - Avoid undue delays in debt restructuring; earlier restructuring "could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output."
  - Delay allowed private creditors to reduce exposures and shift debt into official hands.
- Political economy, ownership, and tax compliance:
  - Recommendation: pay more attention to political economy of adjustment and to spreading burden across society to build support.
  - Lack of political will to make clear progress on tax compliance was a considerable obstacle.
  - Program success hinges centrally on depth of ownership.
- Fiscal structural reforms and conditionality:
  - Recommendation: more parsimony in fiscal structural reforms; detailed structural conditionality warrants scrutiny given the premium on parsimony in Fund conditionality.
  - Fund TA on revenue administration may have moved into institution-building; authorities seemed to welcome involvement.
- Troika process:
  - Recommendation: streamline Troika processes and clarify division of labor; explore delegating non-macro-critical structural work to European institutions.
- Euro area architecture:
  - Finding: need for more effective risk-sharing arrangements within the euro area, a banking union, and strengthened fiscal rules to reduce vulnerabilities.

### Revenue administration reform (Box 4) — outcomes and lessons
- Structural benchmarks on revenue administration largely implemented by deadlines; quantitative performance targets mostly met except for full-scope audits initially.
- Key performance indicators (December 2011) — Actual / Target / Met status:
  - Pre-2011 debt collected: "946 / 400 / Met"
  - Number of completed full-scope audits: "447 / 75 / Not met"
  - Assessed taxes collected (percent): "66.5 / 20/30 / Met"
  - Number of completed audits of wealthy and high income taxpayers: "404 / 400 / Met"
  - Assessed taxes collected (percent) from wealthy audits: "47.3 / 20/30 / Met"
  - Number of VAT audits of non-filers: "22,235 / 1,000 / Met"
- Outcomes: C-efficiency indicator deteriorated in 2011; VAT rate increases in 2010 did not raise VAT collections to GDP ratio.
- Underlying factors: large informal economy, complex tax system, limited capacity of revenue administrators, worsened economic and political conditions, and limited ownership by authorities.
- Operational shortcomings: initial focus on laws and plans left operational weaknesses (audits, collections, staffing) unaddressed; anti-evasion policies not fully operational.

### Views of the authorities (Appendix I)
- Visit and consultations held in Athens from March 20-22, 2013 with current and former officials and banking sector representatives.
- Authority perspectives:
  - IMF participation necessary given its crisis experience; EC/ECB lacked similar program experience.
  - EC’s initial “4-3-3” approach seen as overly legalistic and too ambitious.
  - High initial interest rates on euro-partner loans undermined sustainability perceptions.
  - Short negotiation timelines and limited consultation reduced program ownership and effectiveness.
  - Underestimation of recession depth, deposit outflows, and elasticities led to downside risks materializing and lower-than-expected revenue.
  - Data revisions widened the 2009 fiscal deficit by "2 percentage points of GDP", increasing adjustment requirements.
  - Greater early emphasis needed on privatization, targeting tax evaders, and strengthening tax administration.
  - Troika coordination improved over time but structural differences and team discontinuities complicated policy implementation.

*Source: IMF staff assessment as presented in the supplied content of _cr13156 (section starting "15. Greece embarked on a far-reaching program of reforms in May 2010.").*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview and program objective
- Primary objective of Greece’s May 2010 program supported by a Stand-By Arrangement (SBA): restore market confidence and lay the foundations for sound medium-term growth through strong and sustained fiscal consolidation and deep structural reforms, while safeguarding financial sector stability and reducing the risk of international systemic spillovers.
- Greece was to stay in the euro area and an estimated "20-30 percent competitiveness gap" would be addressed through wage adjustment and productivity gains.

### Major successes during the SBA-supported program (May 2010–March 2012)
- Strong fiscal consolidation was achieved and the pension system was put on a viable footing.
- Greece remained in the euro area (its stated political preference).
- Spillovers that might have had a severe effect on the global economy were relatively well-contained, aided by multilateral efforts to build firewalls.

### Major failures and adverse outcomes
- Market confidence was not restored.
- The banking system lost "30 percent" of its deposits.
- The economy encountered a much-deeper-than-expected recession with exceptionally high unemployment.
- Public debt remained too high and eventually had to be restructured, causing collateral damage to bank balance sheets that were also weakened by the recession.
- Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.

### Assessment of program necessity and baseline projections
- Given the danger of contagion, the report judges the program to have been a necessity, despite the Fund’s misgivings about debt sustainability.
- Tension identified between supporting Greece and the concern that debt was not sustainable with high probability (a condition for exceptional access).
- In response, the exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases: a proviso was added that where debt was not sustainable with high probability, a high risk of international spillover effects provided an alternative justification for exceptional access.
- The baseline still showed debt to be sustainable, as required for all Fund programs; however, macro outcomes were far below the May baseline and the baseline macro projections can be criticized for being too optimistic.

### Program appropriateness and implementation capacity
- Broad thrust of policies under the program judged appropriate: rapid fiscal adjustment was unavoidable given loss of market access and official financing limits; competitiveness-boosting measures and fiscal structural reforms were essential.
- The depth of ownership of the program and the capacity to implement structural reforms were overestimated.

### Implications for Fund policies and political economy lessons
- Greece’s SBA suggests the need to explore refining the Fund’s lending policies and framework to better accommodate the circumstances of monetary unions.
- A particular challenge: translate promises of conditional assistance from partner countries into formal program agreements.
- Political economy lessons:
  - Importance of spreading the burden of adjustment across different strata of society to build support for a program.
  - Critical importance of ownership of a program; obstacles in implementing reforms mirror findings of many previous Ex-Post Evaluations (EPEs).
- Other operational lessons:
  - Need to find ways to streamline the Troika process in the future.
  - Fund staff should be more skeptical about official data during regular surveillance.
  - The detailed nature of structural fiscal conditionality in the Greek program warrants scrutiny given the premium attached to parsimony in Fund conditionality.

### Context and background to the crisis (selected factual findings)
- Euro adoption and loose global credit conditions in the 2000s allowed Greece easy access to foreign borrowing that financed a significant expansion of government spending; real GDP growth averaged "4 percent" from 2000–07.
- Government interest expenditure dropped from "11½ percent of GDP" in the mid-1990s to "5 percent of GDP" in the mid-2000s, but increased spending on wages and pensions swamped those savings.
- The general government deficit reached "15½ percent of GDP" (after data revisions), up from "4 percent of GDP" in 2001.
- Public debt was "129 percent of GDP" at end-2009, with "75 percent" held by foreigners.
- Current account deficit reached "15 percent of GDP" in 2008.
- Competitiveness, as measured by the unit labor cost (ULC)-based real effective exchange rate (REER), declined by "20-30 percent" in the decade following euro adoption.
- After the Lehman shock, spreads on Greek government bonds over 10-year bunds jumped to "300 bps" compared to about "50 bps" before the crisis.
- In October 2009 the projected 2009 budget deficit was revised up from "4" to "12½ percent of GDP" (still 3 percentage points short of the final estimate).
- Greece’s 2010 Stability Program aimed to cut the deficit from "12½ percent of GDP" to "8¾ percent of GDP" in 2010 and by a further "3 percentage points" in 2011 and in 2012 (the “4-3-3” plan).

### The rescue package and multilateral response
- Total financing agreed in early May 2010 amounted to "€110 billion", of which the Fund committed "€30 billion" under an SBA (approved May 9).
- Fund access equaled "€30 billion", or "3,212 percent of quota" — the largest Fund program ever relative to quota.
- The euro area initiated creation of a financial safety net: the European Financial Stability Facility (EFSF) with "€500 billion" in financing (later described as composed of a lending capacity of "€440 billion" combined with the European Financial Stabilization Mechanism (EFSM) of "€60 billion").
- The ECB set up the Securities Markets Program (SMP) in May 2010 and relaxed eligibility requirements so that Greek government debt instruments remained eligible as collateral despite being below investment grade.

### Exceptional aspects of the program highlighted
- First-ever program with a member of the euro area involving formal Fund support and ECB participation.
- Public debt was projected to rise during the program period, peaking at "149 percent of GDP" only in 2013 (a pending data revision was expected to raise this projection by "5–7 percentage points").
- The Fund’s rules for exceptional access had to be modified to accommodate the program given uncertainties over debt sustainability and the risk of systemic spillovers.

*Prepared by an interdepartmental staff team consisting of J. Gordon (head, OBP), I. Karpowicz (OBP), S. Lanau (SPR), J. Manning (EUR), W. McGrew (EUR), M. Nozaki (FAD), and M. Shamloo (EUR), with assistance from A. Shtuni (OBP) and C. Piatakovas (EUR).*

### 15.      Greece embarked on a far-reaching program of reforms in May 2010. Under the

### _cr13156 - 15.      Greece embarked on a far-reaching program of reforms in May 2010.

### Program design and pillars
- Objective: lower the fiscal deficit and public debt ratio, reduce domestic demand in line with supply capacity, and increase supply and competitiveness to invigorate investment, exports, and private sector growth.
- Three pillars:
  - Fiscal consolidation: required adjustment in the primary balance by 2014 of 14½ percentage points of GDP. Revenue and expenditure measures amounting to 11 percent of GDP were identified, on top of the 5 percent of GDP in measures implemented in the first half of 2010. Reforms to tax administration and public financial management; major pension system changes to ensure viability.
  - Structural reforms: internal devaluation in the absence of an exchange rate lever; increase competition in labor and product markets, boost productivity, and improve the business environment. Positive GDP growth was projected from 2012.
  - Financial stability: banks viewed as vulnerable; Hellenic Financial Stabilization Fund (HFSF) set up to provide capital. Program included €10 billion available to provide resources to the HFSF if needed.
- Program financing: included €110 billion calculated as sufficient to cover the remaining fiscal deficit, HFSF needs, and all government bonds falling due in 2010 and 2011. Market access was assumed to be regained in 2012.
- Footnote on official loan pricing: Interest rates on the loans by euro area member states were 300 basis points over the swap rate for up to 3 years’ maturity and 400 basis points above for longer maturities.

### Macroeconomic outcomes
- Real GDP: in 2012 was 17 percent lower than in 2009, compared to a 5½ percent decline projected in the SBA-supported program.
- Unemployment: the unemployment rate in 2012 was 25 percent compared to the original program projection of 15 percent.
- Inflation and wages: inflation initially overshot due to indirect tax increases, then fell as activity weakened. Prices fell by less than wages; reductions in unit labor costs (ULCs) were wage driven with few indications of productivity increases. The ULC REER is estimated to have declined by 9 percent during the period of the SBA.
- Current account: deficit decreased broadly as projected, although by less than expected in cyclically-adjusted terms. Sharp compression of imports, but little pick-up in exports.
- Projection revisions: original growth projections largely maintained until the fifth review (December 2011), then marked down with expected recovery delayed until 2014.

### Fiscal policy outcomes
- Primary deficit consolidation: change in the primary deficit during 2010–11 was 8 percentage points of GDP, slightly above target despite the deep recession.
- Additional measures: authorities introduced Medium-Term Fiscal Strategy amounting to 10½ percent of GDP during 2011–14 once initial measures proved insufficient.
- Cyclically-adjusted improvement: the primary balance improved by about 13 percent of potential GDP during the SBA (noting the source’s wording "about 13 percent of potential GDP").
- Tax measures: increases in VAT rates and other indirect tax hikes; a new property tax; somewhat higher income taxes; efforts to strengthen tax administration and raise collections.
- Expenditure measures: cuts to public sector wages and pensions via elimination of 13th and 14th monthly payments (with safeguards); cuts in public sector salaries, bonuses, allowances; reductions in health care drug spending; cuts in capital spending; reorganization of subnational governments (Kalikrates); new budget framework and spending control mechanisms.
- Arrears and reporting: accumulation of domestic arrears affected end-2010 performance criterion (indicative target breached by €3 billion, or a bit over 1 percent of GDP); definition of performance criterion subsequently modified to incorporate domestic arrears. Arrears and inadequate data reporting remained an issue throughout the SBA-supported program.
- Expenditure composition: primary expenditure declined by 4 percentage points of GDP in 2009–11, but still exceeded the 2005 level by about the same amount. Wage bill remained high relative to other EU countries; social protection programs largely untargeted and inefficient.

### Debt and financing outcomes
- Initial DSA projection: debt projected to peak at 154-156 percent of GDP in 2013 (depending on data revisions).
- Revised projections: by the fourth review in July 2011, end-2013 debt ratio projected at 170 percent of GDP (before PSI was in prospect).
- Underlying dynamics: output contractions and deflation were more pronounced than expected; lower nominal growth raised the interest rate-growth differential and led to higher expected debt paths; data revisions exacerbated trends.
- Privatization receipts: original program envisaged about €10 billion; fourth review assumed receipts rising to €50 billion (extremely optimistic); later reviews made much lower projections and DSA assumptions became more conservative.
- Public debt outturns and PSI: adjusting original SBA with figures used in January 2013 review implies public debt at about 180 percent of GDP in 2020; debt restructuring (PSI) provided more than an offset and latest projections show debt declining to about 120 percent of GDP by 2020.
- Creditor composition shifts: non-resident holdings of government debt dropped sharply in 2010–12; resident holdings initially rose then fell. Large-scale substitution from privately-held to publicly-held debt. Purchases under SMP created rigidities when debt was restructured because SMP and national central bank holdings were excluded from the PSI.
- Specific debt change: Debt restructuring in March 2012 led to a 60 percent reduction in privately held debt. Public debt fell by €62.4 billion to €305.5 billion. Some relief provided on official debt in March and December 2012 including a reduction in interest rates on the euro area loans.

### Structural reforms
- Labor market: reforms encountered resistance. Wage bargaining system reformed but few firm-level agreements; Fund judged labor market reforms not to have delivered enough flexibility. Absence of early private wage reductions may have aggravated job losses. Significant labor reforms (including cuts in minimum wages in the private sector) occurred only with the approval of the EFF in March 2012.
- Product and regulatory reforms: initial laws passed (one-stop-shops, fast-track investment approval, law liberalizing regulated professions), but implementation delayed or deadlines postponed; slow progress hindered realization of productivity gains.
- Pension reform: a far-reaching pension reform approved by Parliament in July 2010 designed to substantially contain increases in pension benefits over the long run.
- Tax administration: reform efforts met political resistance and capacity constraints; while TA improved on-time VAT filing, few signs by end of SBA that collection efficiency was permanently improved.

### Financial sector outcomes
- Banking system at program start: bank capital ratio was 11.7 percent aided by a recapitalization in 2009.
- Deterioration: balance sheets pressured by higher nonperforming loans (NPLs) as the economy weakened; liquidity tightened in 2009 due to loss of wholesale market access and some deposit outflows.
- HFSF and support: HFSF established to provide capital to banks; €10 billion available in program financing for HFSF resources if needed.
- Funding and liquidity injections: notable increases in Eurosystem borrowing and Emergency Liquidity Assistance during the period; changes in funding structure toward central bank liabilities and overnight/short-term deposits. NPLs increased across consumer, mortgage, and corporate categories by 2012.

*Source: IMF staff assessment as presented in the supplied content of _cr13156 (section starting "15. Greece embarked on a far-reaching program of reforms in May 2010.").*

### 35.      As the recession intensified and liquidity tightened, the financial sector became

### _cr13156 - 35.      As the recession intensified and liquidity tightened, the financial sector became

### Financial sector distress and ECB support
- Financial sector distress resulted from the protracted recession and sovereign debt problems; causality differed from Ireland and Spain where the financial sector problems preceded sovereign distress.
- By 2011:
  - Deleveraging and restructuring of state-owned banks was perceived necessary.
  - ATE, the largest state-owned bank and the only Greek bank to fail the Europe-wide stress tests in mid-2010, had to be recapitalized.
  - Sizable deposit outflows began in the second half of 2011, fanned by fears of a Greek euro exit.
- ECB extraordinary measures:
  - From May 2010, the ECB suspended the link between sovereign credit ratings and eligibility of collateral for refinancing operations.
  - The ECB intervened directly in the government bond market under the SMP.
  - The ECB began to accept uncovered bank bonds guaranteed by the government as collateral eligible for refinancing operations.

### Impact of PSI on banks and recapitalization needs
- Greek banks held government bonds with a book value of about €40 billion (after some initial June 2011 impairments).
- Core capital was €22 billion, roughly the same magnitude as capital needs arising from the PSI.
- Only €1.5 billion was drawn from the HFSF during the SBA-supported program, but subsequent capital needs dwarfed the HFSF provision.
- As of the fourth review, the HFSF’s purpose changed to providing substantial public injections; the amount needed for the HFSF in the context of the EFF was estimated at €50 billion.

### Program design — overarching assessment
- Significant fiscal adjustment occurred during the SBA, but critical objectives such as regaining confidence and restoring growth were not achieved.
- Key program-design questions considered include pace and flexibility of adjustment, expectations about the downturn, structural reforms, mix of fiscal measures, ownership and capacity, and adequacy of financing.

### A. Pace of fiscal adjustment
- The required adjustment in the primary balance was 14½ percentage points of GDP — characterized as an enormous adjustment and the minimum needed to bring debt down to 120 percent by 2020.
- The SBA-supported program extended the period to achieve the Maastricht deficit target from 3 to 5 years; the program ran only through mid-2013, leaving part of the adjustment after program end.
- A flatter (slower) adjustment path would have required more than €110 billion in financing.
  - Euro partners could have provided more than €80 billion (already more than 35 percent of Greek GDP), which was politically difficult.
  - Debt restructuring was not politically feasible at the time.

### B. Flexibility of the adjustment path
- Scope for increased flexibility was limited.
- Automatic stabilizers were not allowed to operate and fiscal targets were not adjusted until the fifth review in December 2011.
- Earlier adjustment of targets could have tempered contraction but would have required additional financing and stretched the date by which debt started to decline beyond the program period.

### C. Forecasting the downturn and fiscal multipliers
- Reasons cited for GDP decline exceeding expectations:
  - The program initially assumed a fiscal multiplier of 0.5 despite recognition that Greece’s closed economy and lack of exchange rate tool would concentrate the fiscal shock.
  - Recent iterations of the Greek program have assumed a multiplier of twice the size.
  - Deeper contraction also reflected absence of private sector pick-up due to limited productivity gains and investment-climate improvements, domestic social and political turmoil, and talk of a Greek exit from the euro by European policy-makers.
- Market forecasters were no more accurate; a deep recession was deemed unavoidable given loss of market access and large amortization obligations in early 2010.

### D. Structural reforms, competitiveness, and growth
- Structural reforms were critical for internal devaluation under a fixed exchange rate.
- Program actions:
  - Public sector wages and bonuses were cut.
  - No direct attempts were made to lower private sector wages; emphasis was on firm-level bargaining scope.
- Program assumed only about 3 percent of the estimated 20-30 percent improvement required in competitiveness would be achieved by 2013.
- The program anticipated a V-shaped recovery from 2012; a quick supply response was judged unlikely even with transformative reforms.

### E. Mix of fiscal measures
- The adjustment mix was revenue-heavy despite the fiscal crisis being expenditure-driven.
- Tax changes constituted almost half of the measures targeted for the first two years of the program.
- Rationale for indirect tax increases: quick effect and less resistance; VAT rates were lower than the median level in Europe.
- Evidence exists that expenditure-based fiscal adjustment is more durable.

### F. Ownership and administrative capacity
- Ownership of the program was limited beyond the core authorities; difficult measures (privatization, downsizing the public sector, labor market reform) saw little progress.
- Limited bipartisan parliamentary support and adversarial union relations impeded an incomes policy.
- Implementation capacity was overestimated; administrative capacity weaknesses were deeper than anticipated despite World Bank indicators not showing Greece as an extreme outlier among program countries.
- Structural conditionality became very detailed; by the fifth review one fiscal structural prior action had nine sub-prior actions.

### G. Financing adequacy and market-access assumptions
- Financing adequacy required favorable assumptions, including renewed market access from 2012; composition of debt holders (official lenders senior) could deter private lenders.
- Research suggested the market access assumption was sanguine compared to emerging-market past experience.
- Projected borrowing and financing charts (2009–2015) indicated reliance on Troika and limited private financing.

### H. Banking sector recapitalization needs and HFSF capacity
- The HFSF was established with up to €10 billion from program disbursements to safeguard banking stability.
- 2009 Article IV stress tests indicated new capital of up to €2.9 billion required under the considered mild shocks.
- Given the severity of subsequent shocks and pessimistic growth projections, the €10 billion set aside under the HFSF was likely all needed.

### Consideration of debt restructuring at the outset
- The program rested on ambitious assumptions (fiscal targets, growth, deflation, privatization receipts, regaining market access). Varying these assumptions would materially affect debt sustainability and raised the question whether debt restructuring should have been attempted earlier.

*International Monetary Fund — content from the referenced IMF Country Report excerpt*

### 54.      The risks were explicitly flagged. Staff made it clear that the program supported by the

### The risks were explicitly flagged. Staff made it clear that the program supported by the SBA was an ambitious program that was subject to considerable risks.

### Debt sustainability and stress scenarios
- Adjustment needs were described as "huge" and reforms "would be socially painful, and commitment might flag."
- Debt was "not judged to be sustainable with high probability" and small deviations or external shocks could generate a less favorable debt trajectory.
- Combined adverse shocks (lower growth, greater deflation, higher interest rates, larger contingent liabilities) were shown to place public debt "on a clearly unsustainable path (above 220 percent of GDP by 2020 and still rising)."
- A deflation shock of "3 percent more" in the DSA would have caused debt to jump to "175 percent of GDP."
- Sensitivity analysis results demonstrated the precariousness of the debt trajectory under fairly mild shocks.

### Debt restructuring (PSI) decisions and consequences
- Ex ante debt restructuring was not attempted; "PSI was not part of the original program."
- Reasons cited for ruling out restructuring included:
  - Moral hazard concerns among some Eurozone partners and the political difficulty of obtaining approval from all euro area parliaments.
  - Direct harm to Greek banks’ balance sheets, implying a call on program financing beyond amounts set aside under the HFSF.
  - Risk of contagion to other Eurozone members and potentially another Lehman-type event; the EFSF was not yet in place.
- Despite being ruled out, many commentators considered debt restructuring inevitable.
- The chosen strategy to move ahead without restructuring "served as a holding operation," delaying restructuring and allowing many private creditors to reduce exposure and shift debt into official hands, thereby limiting the eventual bail-in.

### Program role and macroeconomic impact
- The SBA-supported program provided time for the euro area to build a firewall and helped avert potentially severe global effects.
- Not tackling public debt decisively at the outset or early in the program "created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output."
- The program’s nonconcessionary official interest rates worsened debt dynamics.
- Market indicators (e.g., bond spreads) suggested markets were unconvinced the program would succeed.

### Consistency with Fund rules: exceptional access assessment
- Exceptional access thresholds in the GRA: "annual limit of 200 percent of quota; and a cumulative limit of 600 percent of quota, net of rescheduled repurchases."
- Greece’s access during the first year of the SBA would amount to "1,550 percent of quota" and access was expected to peak at "3,212 percent of quota in April 2013."
- The Fund’s commitment was "only 30 percent of the official financing."
- Criterion assessments:
  - Criterion 1 (exceptional balance of payments pressures) was "satisfied at each stage of the program."
  - Criterion 2 (high probability of public debt being sustainable in the medium term) was "not satisfied." The Board modified the summing up so that an exception would be made in cases with a high risk of international spillover effects.
  - Criterion 3 (good prospects of regaining access to private capital markets) was "judged to be met" though "additional financing assurances were not strong."
  - Criterion 4 (reasonably strong prospect of the program’s success taking into account institutional and political capacity) was "considered to be met" ex ante but, in retrospect, those judgments proved too optimistic.
- Financing assurances requirements: the Fund must be satisfied that the member has secured firm financing commitments for "a period of 12 months" and have "good prospects for full financing until the end of the program." As outcomes deviated, no new financing was committed and projected privatization receipts increased substantially, casting doubt on prospects for full financing.

### Troika arrangement and inter-institutional challenges
- The Troika (IMF, EC, ECB) arrangement was "unusual" given Greece’s membership in a systemic currency union.
- No clear division of labor across the Troika; responsibilities overlapped and expertise differed:
  - EC needed involvement to ensure conformity with European laws and had structural reform expertise but focused on EU compliance rather than growth impact.
  - Fund brought program experience and rapid policy formulation capabilities, including fiscal adjustment know-how.
  - ECB provided significant liquidity support but was not expert in bank supervision where the Fund had specialist knowledge.
- Differences of view existed within the Troika (notably on growth projections), but pre-bargained positions limited public disagreements. Program documentation was voluminous, overlapping, and variably secret.

### Facility choice and timing
- The initial program was a three-year SBA; questions arose whether an EFF should have been used from the outset given the large structural component.
- Board preferences historically disfavored using EFF resources as a means of providing exceptional access and the EFF had been seen as a facility for LICs.
- Conversion of SBA into EFF was considered early in the program but deferred pending consensus with euro partners on longer-term financing and on PSI.
- Under later assurances, euro area members committed to reduce debt below "110 percent of GDP by 2020" conditional on continued program implementation.

### Possible lessons and retrospective judgments
- The report concurs that the unique global environment in May 2010 justified provision of an exceptional access SBA to Greece, given systemic risks and the recent memory of the Lehman dislocation.
- The report does not question the overall thrust of policies under the SBA-supported program: fiscal adjustment and structural reforms were "clearly essential."
- Some policy design questions are noted: an "overly reliant on tax increases" fiscal composition and "structural conditionality (too detailed in the fiscal area)."
- With hindsight, certain program assumptions (ownership, financing assurances, prospects for market access) were overly optimistic.

*Source: IMF Country Report No. 10/110.*

### 68.      Nonetheless, there are possible lessons to be learned. The SBA-supported program

### _cr13156 - 68.      Nonetheless, there are possible lessons to be learned. The SBA-supported program

### Program outcomes and broad assessment
- The SBA-supported program avoided a disorderly default and limited euro-wide contagion.
- Greece remained in the euro, but the recession was deep with exceptionally high unemployment.
- The program "did not restore growth and regain market access as it had set out to do."
- Major contributory factors to lack of success: poor implementation of reform by the authorities, adverse political developments, and inconsistent policy signals by euro leaders.
- The Fund emphasized considerable downside risks around the baseline: "growth could be lower, reforms might flag, deflation could be more severe, additional liabilities could appear."
- The baseline macro projections have been criticized as "overly optimistic."

### Lending policies and Fund program design for currency unions
- Recommendation: Better tailoring of Fund lending policies to the circumstances of monetary unions.
  - Given contagion risk, there was a need to support Greece despite debt sustainability concerns.
  - The exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases.
  - "The baseline still showed debt to be sustainable, as is required for all Fund programs."
  - Program design did not fully take advantage of Greece’s potential future support from euro area partners conditioned on program implementation.
  - Adjusting lending policies could allow conditional future assistance by partners to be recognized in program agreements.
  - To some extent, this approach is being followed in the EFF-supported program, with euro area partners indicating willingness to provide additional financing and debt relief conditional on continued implementation.
- Sensitivity to structural component when exchange rates are fixed:
  - "The Fund arrangement for Greece should ideally have been an EFF from the outset."
  - More generally, "the case for refining the Fund’s policies and framework for lending to members of currency unions needs to be explored."

### Debt restructuring
- Finding: Avoid undue delays in debt restructuring.
  - Upfront debt restructuring was not feasible at the outset.
  - The Fund began to push for PSI once the program went off track in early 2011, but stakeholders took time to agree on a coherent strategy.
  - Earlier debt restructuring "could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output."
  - Delay allowed private creditors to reduce exposures and shift debt into official hands on a significant scale, leaving the official sector more exposed.

### Political economy, ownership, and tax compliance
- Recommendation: More attention to the political economy of adjustment.
  - Reform durability likely depended on visible progress in getting those on high incomes to pay taxes.
  - The program attempted to shield low-income pensioners from cuts.
  - Fund continually flagged risks to public support from not reducing tax evasion.
  - "The lack of political will to make clear progress with improving tax compliance was nonetheless a considerable obstacle to the program’s success."
- Ownership:
  - Program success "hinges centrally on the depth of its ownership."
  - The SBA-supported program attracted more bipartisan support over time, including formation of a technocratic government in late 2011, but significant opposition remained.

### Fiscal structural reforms and Fund involvement
- Recommendation: More parsimony in fiscal structural reforms.
  - The Fund’s unprecedented TA programs in Greece, especially on revenue administration, may have gone beyond technical advice into institution building.
  - Detailed conditionality is considered macro-critical and essential given the large fiscal adjustment and need to strengthen Greek fiscal institutions.
  - Authorities seemed to welcome the degree of Fund involvement "with no suggestion that it has become overly-intrusive."
  - Nonetheless, such efforts are unlikely to substitute for political ownership; the case for a more hands-off approach should be considered.

### Troika process and division of labor
- Recommendation: More streamlining in the Troika process.
  - Clear division of labor is difficult given overlapping institutional responsibilities.
  - European institutions have comparative advantage in certain structural issues beyond the Fund’s core expertise.
  - Options for dividing work on areas that are not macro-critical should be explored.
  - There may be scope for streamlining procedures and documents to reduce the burden on authorities.

### Euro area architecture and risk-sharing
- Finding: More effective risk-sharing arrangements within the euro area are needed.
  - The crisis exposed shortcomings in euro area architecture related to risk sharing and crisis response.
  - "The lack of fiscal risk sharing arrangements or a true banking union within the euro area makes individual member states vulnerable to sovereign debt crises that could spill over to banking systems (or be caused by banking crises) and the real economy, without exchange rate flexibility or independent monetary policy to help with the adjustment."
  - Euro area responses included establishing firewalls (EFSF, ESM, and OMT), taking steps towards a banking union, and strengthening fiscal rules to reduce vulnerabilities.

### Box 1 — Chronology of salient market and policy events (selected highlights)
- Initial improvements in sentiment dissipated after a ratings downgrade in June 2010; spreads tightened again after successful completion of the first review in September 2010.
- Adverse market reaction to Deauville statements in October 2010 that set off debate on debt restructuring and PSI.
- November 2010: estimated 2009 fiscal deficit revised from "13½ to 15½ percent of GDP."
- December 2010: general strikes and rioting in response to labor reforms.
- By the third review in February 2011, program implementation problems became apparent; the need for PSI was acknowledged by the fourth review in July 2011.
- Late 2011: Greek euro exit discussed at Cannes summit; referendum announced then cancelled; government resigned and was replaced by a technocratic government.
- March 2012: SBA cancelled and replaced with an EFF; sentiment turned around once PSI took effect. ECB actions in 2012 were "extremely supportive."

### Box 2 — Progress with internal devaluation under the SBA-supported program
- Greece began with large competitiveness gaps due to rapid labor cost growth and market inefficiencies.
- Structural reform agenda included: reducing public sector wages; liberalizing wage-setting; loosening private sector employment restrictions; improving business environment; reducing barriers to entry and market distortions.
- Unit labor costs (ULC) declined significantly during the program:
  - "The ULC-based real effective exchange rate depreciated by 9 percent from May 2010 to March 2012."
  - "The CPI-based real effective exchange rate depreciated by only 3 percent" during the SBA period.
- Major part of competitiveness improvement due to wage reductions associated with recession; "limited gains in productivity."
- Price rigidity: delayed service sector reforms left professions and sectors closed to new entrants, keeping nontradeables prices elevated.
- Relative prices of tradeables only began to fall compared with trading partners in 2012.
- ULC in non-traded goods improved more than ULC in traded goods, but this has not yet translated into similar relative price improvements.

### Box 3 — Pension reform
- Context and indicators:
  - Pension spending at "16 percent of GDP" in 2010, among highest in the EU.
  - Replacement rate was "57 percent" (third highest in EU).
  - Dependency rate (pensioners-to-contributors) was "29 percent."
  - Official retirement age was "60" (well below OECD average "63.2").
- Reform changes under SBA:
  - Retirement age set at "65 years and indexed to life expectancy."
  - Pension base calculation changed from "Last 5 years earnings" to "Lifetime earnings."
  - Accrual rate changed from "2–3%" to "0.8–1.5%."
  - Replacement rate changed from "70%" to "60%."
  - Early retirement age changed from "<60" to "60."
  - Indexation of pensions: from "Policy decision" to "CPI and GDP."
  - Projected annual deficit in 2060 fell from "12.5%" to "2.5%."
- Implementation and assessment:
  - Reform approved in July 2010 amid widespread social discontent.
  - Reform was accelerated without a prior proper actuarial study (a structural benchmark).
  - Considered essential to restoring long-term sustainability, though implementation risks remain.
  - Second-stage reforms addressed supplementary accounts and poorly targeted social benefits; social spending reforms continued under the MTFS.

### Box 4 — Revenue administration reform (key results as of December 2011)
- Context: Low revenue efficiency chronic; VAT C-efficiency below average among European countries.
- SBA structural benchmarks on revenue administration included:
  - Set up taskforces to implement anti-evasion actions (by September 2010).
  - Table legislation to remove obstacles (by February 2011).
  - Articulate a medium-term reform plan (by June 2011).
  - Achieve quantitative performance targets (by December 2011).
- Implementation: The first three structural benchmarks were implemented broadly as scheduled; quantitative performance targets were met except for audits of large taxpayers.
- Key Performance Indicators of Tax Administration, December, 2011 (Actual / Target / Met status):
  - Pre-2011 debt collected (millions of euros): "946 / 400 / Met"
  - Number of completed full-scope audits: "447 / 75 / Not met" (this target was reset as a prior action for the 2012 EFF and met by February, 2012)
  - Assessed taxes collected (percent): "66.5 / 20/30 / Met"
  - Number of completed audits of wealthy and high income taxpayers: "404 / 400 / Met"
  - Assessed taxes collected (percent) from wealthy audits: "47.3 / 20/30 / Met"
  - Number of VAT audits of non-filers: "22,235 / 1,000 / Met"
- Notes on targets: "20 percent of all assessed taxes and penalties from new audits within 3 months of assessment, and collection of 30 percent of all taxes and penalties from new audits within 6 months of assessment date."

*International Monetary Fund — content unit _cr13156 excerpt*

### Box 4. Revenue Administration Reform (cont.)

### Box 4. Revenue Administration Reform (cont.)

### Outcomes of the revenue administration reform
- Program benchmarks were met, but improving tax administration proved to be "considerably more complex and time-consuming than expected."
- The C-efficiency indicator deteriorated in 2011.
- "The VAT rate increases in 2010 did not bring about a higher ratio of VAT collections to GDP."
- Possible explanations identified in the text:
  - Behavioral changes of consumers (i.e., demand shifted towards goods with preferential VAT rates).
  - Worsened tax compliance.
- Anti-evasion policies "do not appear to have become fully operational."
- Basic operational functions remained severely understaffed: audits, debt collections, and the newly established large taxpayer unit.
- The target for audits of wealthy taxpayers was met largely due to temporary incentives to taxpayers rather than permanent improvements in business practices.

### Factors underlying unsatisfactory progress
- Deep-rooted structural problems, including:
  - Existence of the large informal economy.
  - A complex tax system.
  - Limited capacity of revenue administrators.
- Worsened economic and political conditions during the crisis, which "severely hampered anti-evasion efforts."
- Limited ownership by the authorities:
  - Fund and EC staff reviews pointed to "a lack of full political commitment to reform, absence of leadership, and continued internal resistance to reform" as underlying reasons.

### Operational and design shortcomings noted
- Structural benchmarks achieved did not fully reflect permanent improvements in administration or business practices.
- Initial program focus on changes in laws and plans that were "relatively easy to achieve" left operational weaknesses unaddressed.
- Anti-evasion plan implementation was hampered by insufficiently functional reform plans and under-resourcing of key administration functions.

### Specific measures referenced in the program (selected)
- Increase standard VAT rate from 21 to 23 percent and reduced rate from 10 to 11 percent; and increase excise tax rates on alcohol, tobacco, and fuel with "a yield of at least €1.25 billion in the remainder of 2010." — Request / PA / Met
- Put in place an effective project management arrangement (including tight MOF oversight and five specialist taskforces) to implement the anti-evasion plan, including:
  - strengthened collection funds—of the largest debtors;
  - a reorganized large taxpayer unit focused on compliance of the largest revenue contributors;
  - a strong audit-enforcement and recovery of tax arrears—coordinated with the social security program to defeat pervasive evasion by high-wealth individuals and high income self-employed, including prosecution of the worst offenders;
  - a strengthened filing and payment control program. — Request / Sep-10 / Met

### Lessons and recommendations (as described in the text)
- Structural benchmarks could have been more effective if authorities had been willing to address:
  - Fundamental institutional issues (e.g., "increase autonomy by revamping the governance and organization structure").
  - Operational aspects (e.g., "ensure appropriate resource allocations to key administration functions").
- In practice, the program had to shift focus increasingly to operational details—organizational structures, audit practices, dispute procedures, and resource allocation—to try to restore tax discipline and collect large outstanding tax debts.

*Source: IMF staff text in Box 4. Revenue Administration Reform (cont.).*

### References

### Appendix I. Views of the Authorities

### Visit and consultations
- Views were sought during a visit to Athens from March 20-22, 2013.
- Meetings held with officials in both the current government and the government in office when the SBA was negotiated in 2010; meetings also with representatives of the banking sector and the Bank of Greece.

### Fund involvement and program design
- General view: resolution within the EU/euro zone would have been preferable, but neither the authorities nor the EC or ECB had the required program experience; the Fund’s experience in crisis resolution made it a necessary part of the process.
- Criticism of the “4-3-3” deficit reduction program initially insisted on by the EC as too ambitious and reflecting a legalistic approach to meeting the Maastricht Criteria and Excessive Deficit Procedure.
- Concern that initial interest rates on loans from euro partners were too high, creating doubts about sustainability.
- Officials noted resistance early on to debt restructuring because of concerns about domestic political costs, implications for social security funds, and contagion; the possibility ripened over time. The Deauville announcement is reported to have unexpectedly put restructuring back on the table and severely unsettled markets.
- The public debate by euro partners about the possibility of Greece exiting the euro was viewed as inappropriate and should have occurred behind closed doors.

### Political economy, ownership, and consultation
- Negotiations occurred in a very short period of time, which limited political dialogue and consultation with administrative-level staff; this reduced buy-in and limited use of local knowledge to tailor conditionality to Greece’s specifics.
- Limited ownership undermined implementation: the political atmosphere in 2010 did not secure broad support; the government did not build cross-party consensus and the opposition contested the program.
- Attempts by the Fund to engage trade unions were not fruitful.
- Consensus on the program improved with the coalition government, but the crisis and recession produced very high unemployment and severe social stress with extreme parties gaining support.

### Macroeconomic projections, financing, and program targets
- Officials believed no one could have predicted the depth and length of the recession, but acknowledged program macroeconomic projections had downside risks that materialized amid political instability and deposit outflows.
- In calculating effects of tax measures, price and income elasticities were underestimated, reducing revenue yield.
- Data revisions widened the 2009 fiscal deficit by 2 percentage points of GDP, making the required fiscal adjustment more demanding.
- Greater emphasis should have been placed on addressing deposit outflows and maintaining financing conditions consistent with the macroeconomic program.
- Financing constraints implied limits on flexibility of targets, creating a vicious circle: the deeper the recession, the greater the need for measures, and the deeper the recession.
- Some officials argued the SBA should have been an EFF from the start; an EFF was later used for Ireland, which officials noted had far less structural problems.
- Concerns were raised about insufficient financing in 2013 and 2014 after the program ended.

### Fiscal strategy and structural measures
- Doubts about the original program’s emphasis on raising taxes rather than reducing spending:
  - Taxes were relatively low and raising them was politically easier.
  - The private sector bore the brunt of adjustment while public sector employees retained permanent employment.
- With hindsight, greater early effort should have been devoted to privatizing state assets and clamping down on prominent tax evaders.

### Implementation capacity and technical assistance
- Program implementation started decisively, but social and political unrest and uncertainty about euro area policy worried markets.
- Officials recognized they had underestimated program requirements and overestimated Greece’s administrative capacity to undertake reforms.
- When laws were changed, there was insufficient follow-up to ensure implementation; results were not analyzed, measured, and tracked.
- Weak administration and management necessitated multi-layered and repeated reforms and increasingly detailed conditionality, particularly regarding tax administration.
- Intensive technical assistance (TA) involvement by the EC Task Force and the Fund was welcomed and not considered intrusive given the deep assistance Greece needed.

### Troika coordination and conditionality
- The Troika reflects three different institutions, which sometimes posed coordination problems:
  - The Fund made decisions in a structured fashion.
  - Decision-making in the Euro Zone spanned Heads of State and multiple agencies and was more fragmented.
- It took time for the Troika to gel as a unit (for example, in formulating a common macro view), but overall dealing with the Troika was described as fairly smooth; partners listened to each other and were well-prepared.
- Detailed conditionality increased coordination challenges and a lack of continuity in Troika teams sometimes exacerbated uncertainty and reduced possibilities for early agreements.

### Summary of key authority views (bulleted)
- IMF participation was necessary given its crisis experience.
- The EC’s initial “4-3-3” approach was seen as overly legalistic and too ambitious.
- High initial interest rates on euro-partner loans undermined sustainability perceptions.
- Short negotiation timelines and limited consultation reduced program ownership and effectiveness.
- Underestimation of recession depth, deposit outflows, and elasticities led to downside risks materializing and lower-than-expected revenue.
- Data revisions widened the 2009 fiscal deficit by 2 percentage points of GDP, increasing adjustment requirements.
- Greater early emphasis needed on privatization, targeting tax evaders, and strengthening tax administration.
- Administrative capacity constraints necessitated sustained TA and more detailed conditionality.
- Troika coordination improved over time but structural differences and team discontinuities complicated policy implementation.

*Source: Views of the Greek authorities summarized following meetings in Athens, March 20-22, 2013.*

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