Greece: 2009 Article IV Consultation: Concluding Statement of the IMF Mission
IMF News, May 25, 2009
Source details
- Canonical URL
- Greece: 2009 Article IV Consultation: Concluding Statement of the IMF Mission
Other formats
Bibliographic details
- Published: May 25, 2009
Outlook and macroeconomic assessment
- After years of strong growth, the Greek economy is entering a downturn. Per-capita incomes approached the euro-area average during the upswing, financed largely by debt, generating large fiscal and external imbalances.
- The current global crisis has started to affect Greece and marks a turning point in economic conditions.
- Growth projection: between -1 and -2 percent in 2009 with a recovery beginning late in 2010.
- Key near-term developments observed:
- Sharp drops in consumer and business confidence, industrial production, and retail sales.
- Greece felt the downturn with some delay due to high real wage growth and reliance on small and medium-sized enterprises.
- Greece is highly integrated with the euro area; decoupling is unlikely.
- High wage growth is further eroding competitiveness.
- Medium-term prospects:
- Recovery will likely be tepid absent significant reforms.
- Large imbalances at the start of the downturn: high public sector debt, inflation above trading partners’ average, structural rigidities, and a large current account deficit.
- Delaying adjustment could lead to extended slow growth.
- Policy priority:
- A comprehensive medium-term program is needed to bolster confidence and boost potential growth, including maintaining a sound banking system, reducing public debt and deficits while protecting the poor, and lowering costs in bureaucracy, product, service, and labor markets.
Banking system: assessment and recommendations
- Systemic picture:
- Greek banks have shown resilience due to traditional retail business models and lack of toxic assets, but have felt the crisis (increased funding costs, compressed margins, reduced loan applications, rising impaired loans, increased provisioning, and declining profits).
- The banking system appears to have enough buffers to weather the expected slowdown: profits, capital cushions, and stepped-up provisioning should provide resources to absorb increased impaired loans (in Greece and Southeastern Europe (SEE)). ECB liquidity policies are supportive.
- Authorities’ crisis measures implemented:
- Deposit insurance per person per bank increased from €20,000 to €100,000.
- Capital adequacy was boosted as banks could sell €5 billion (already substantially committed) of 5-year preference shares to the government with one state representative in the Board. Payout of ordinary dividends has been restricted.
- Liquidity assistance: €8 billion in special 3-year zero-coupon government bonds that can be collateralized for liquidity operations with the ECB.
- Debt guarantees offered up to €15 billion.
- Supervisors intensified monitoring and contacts with banks’ managements.
- Risks and cautions:
- Near-term operating conditions could remain challenging; domestic credit quality may deteriorate further; portfolios in SEE could face pressures as local economies slow and exchange rates shift.
- Mission’s policy recommendations for the banking sector:
- Bank assistance: keep the package in place preemptively; government involvement should remain at arm’s length; the state representative on bank Boards should refrain from advocating directed lending.
- Liquidity: banks need to prepare an exit strategy to unwind positions as conditions improve, since ECB liquidity provision will not last indefinitely.
- Cross-border issues: pursue opportunities in SEE but avoid financial nationalism and protectionism; continue developing strong relationships with central banks and supervisors in SEE and conduct crisis-management exercises with partner countries.
- Crisis resolution framework: seek market solutions first (e.g., merging banks); if public support is required, minimize government involvement and spell out clear exit strategies.
- Financial Stability Report: welcome the report being prepared; encourage regular publication, issuance in English, and a mid-year update.
Fiscal consolidation: fiscal outlook and recommended adjustments
- Fiscal outlook projections (no-policy-change):
- Deficit estimate: at least 6 percent of GDP in 2009, rising to over 7 percent in 2010.
- Debt-to-GDP ratio would continue rising for many years if no further measures are taken.
- Spiking spreads on government bonds reflected these pressures; spreads are easing but return to pre-crisis low levels is unlikely.
- Measures already taken:
- Durable measures of early 2009 (moderating incomes policy, cuts in nonessential expenditure, higher excises) could yield over 1 percent of GDP in saving.
- Mission’s fiscal policy recommendations:
- "There is no room for fiscal stimulus." Protect the most vulnerable (assistance to the unemployed and poor) but avoid income transfers to high income groups; avoid measures that increase debt while doing little for growth.
- Adopt a coherent multiyear fiscal plan to place debt on a downward path. This should be consistent, durable, high quality, forward looking, and well-communicated with monitorable high-frequency milestones.
- Recommended annual adjustment: about 1½ percent of GDP in permanent measures beginning in 2010 to place the debt ratio on a downward path by 2012. Automatic stabilizers can operate around this path.
- Resist pressures to grant favors to special interest groups or specific sectors.
- Measures must be of high quality; specific areas highlighted:
- Tax effort:
- Focus on income that escapes taxation and spread tax burden more fairly.
- Potential measures include: (i) broadening tax bases by reducing exemptions and deductions; (ii) taxing the self employed and the informal sector via information cross-checking and presumptive taxation; (iii) increasing selected excise taxes to the euro-area average; and (iv) suspending the corporate and personal income tax rate cuts of 1 percent a year through 2014 until the deficit is confirmed to be below 3 percent of GDP.
- Incomes policy:
- Continue wage moderation (extended to pensions) to help moderate wage and pension growth in the private sector and restore competitiveness.
- Continue restrictive hiring policies to shrink payroll.
- From 2010, implement a new wage-policy system for new hires to reinforce expenditure containment.
- Social security reform:
- The pension system is not actuarially balanced; social transfers are putting growing pressure on the budget.
- The reform just begun (merging 133 into 13 funds) is welcome and can generate short-run savings if implemented tightly (issuing and requiring social security numbers for all citizens and services; cross-checking data for revenue enhancement; accelerating new IT and accounting systems).
- Targets for the reform need quantification and publication for public monitoring.
- Provide the Actuarial Authority with resources and data to prepare annual actuarial reports for all funds; publish these reports for citizen monitoring.
- Prepare parametric reforms in dialogue with social partners with quantified targets; bring pension payments in line with contributions to protect future generations; introduce reforms gradually.
- Public enterprises:
- Set a 5-year deadline to eliminate public-enterprise operating deficits, which constitute an off-budget source of debt.
Structural reforms to restore competitiveness and growth potential
- Diagnosis:
- Above-euro-average inflation reflects high administrative costs (captured by government), high margins (captured by employers), and high labor costs (captured by workers), resulting in a significant competitiveness gap and negative-sum outcomes for society.
- Restoring competitiveness requires ambitious and comprehensive reforms across public administration, product and service markets, and the labor market, supported by dialogue with social partners.
- Mission’s structural policy recommendations:
- Public administration:
- Streamline and make public administration more transparent.
- Actions needed: (i) cut entities, reduce staffing, limit political appointees; (ii) accelerate privatization of public enterprises; and (iii) publish more information (including financial statements of state enterprises and hospitals).
- Product and service markets:
- Further liberalize markets by: (i) rationalizing legislation and cutting administrative burdens; (ii) completing reforms and unbundling of network industries; and (iii) ambitiously implementing the EU Services Directive to liberalize professional services, retail trade, and other activities.
- Labor market:
- Key to achieving lower unit labor costs; cannot be solved by more government spending alone.
- Encourage: (i) a tri-partite social contract among employers, unions, and the public sector focused on wage moderation in return for investment and employment promotion; and (ii) facilitation of more part-time work to boost participation of youths and women.
Closing
- The mission thanks the authorities and other interlocutors for their cooperation, extensive discussions, and hospitality.
Concluding Statement of the IMF Mission, Athens, May 25, 2009