Transcript of an IMF Conference Call on Greece

March 15, 2012

Washington, D.C.
Thursday, March 15, 2012

MS. LOTZE: Welcome to this conference call everybody. Let me say a few words at the beginning. I have here with me the Mission Chief Poul Thomsen and Deputy Mission Chief Mark Flanagan who will speak to you. This call is on the record. Poul will make a few introductory remarks and then we will go to your questions. Thank you. Poul?

MR. THOMSEN: Thank you very much and welcome to this conference call. Our Executive Board approved this morning a new arrangement for four years to replace the existing Stand-By Arrangement. The new arrangement will be in the amount of €28 billion and will be for four years with an equal disbursement each quarter.

I think we need to at the outset recognize that a lot was achieved during the period of the Stand-By Arrangement. Major fiscal adjustment took place under this arrangement. Important reforms were put in place also not least during the first part of that arrangement. I think it is very important to keep in mind that Greece has already achieved a lot while it still has more to do. The Stand-By Arrangement delivered an important result. We know in some areas, in particular during 2011, we ran into considerable headwinds and there were fewer outcomes than expected.

I think the key challenge has been that we need the economy to adjust through productivity-boosting reforms. So far most of the adjustment reflected has been too low on GDP which is not sustainable. I agree with those that say that the policies need to be focused on growth. That doesn't mean that there will be no more need for fiscal adjustment. The fiscal deficit is too high and the fiscal adjustment is still an important part of the program. But a major change now is to try to get an earlier supply response.

A key part of the measures in this regard are significant labor market reforms, significant liberalization of the framework for collective agreements. We think that that enables a faster realignment of wages and productivity in individual enterprises and therefore put individual enterprises in a better competitive situation and help facilitate this earlier supply response. As you will see from the paper which will be issued shortly, we are fully mindful of the fact that these labor market reforms will only be fully effective if complemented by liberalization of product and services markets and this will remain an important objective that the government will have to continue to pursue.

Overall I think on the structural side this is an impressive program, a very good start has already been tested through important prior actions that have been put in place not least in the labor market in the last couple of weeks—although as I said, much still needs to be done.

As far as fiscal is concerned, as I also mentioned there are still important challenges here. Clearly there is a need for more fiscal adjustment. It's essential that that's being done in a socially responsible and socially well-balanced manner. It's essential that an important part of this fiscal adjustment is improvement in tax administration and a reduction in tax evasion, but we do not believe going forward that there is any scope for any significant increase in tax rates. We do think that except for the extent to which tax collections can improve that fiscal adjustment has to come entirely on the expenditure side and formulating a program for how to achieve that is beyond 2012 and one of the challenges that will be dealt with at the time of the first review.

The financial sector. There is a major program for recapitalization of the financial sector. The financial sector has incurred notable losses as a result of the PSI [private sector involvement], but resources are being put in to ensure that banks are recapitalized and that we have a stable banking system. So this is an important part of the program.

This is an ambitious program. It is being supported by large-scale support from Greece's foreign partners—from the ECB and from us. It's being supported in what is a very important reduction in the debt of private creditors. Private creditors are making a major contribution. There is no doubt about that, and I think that's all called for in support of what is the continued major effort by the Greek government, and it is entirely appropriate that this major effort is being supported by significant exceptional support from Greece's partners. Let me with these very general remarks open up the floor for questions. Thanks.

QUESTIONER: Thanks for doing this. What is the potential for the risk of financing gaps opening up in the months and years ahead? You said in your February 15 DSA [debt sustainability analysis] that financing needs through 2020 under your tailored downside scenario would amount to €245 billion and that that would be funded by the EFSF or by Europe. I'm not sure what that number actually compares to, that 230. And is that still accurate?

MR. THOMSEN: I'm not quite sure what exactly you're referring to. I can tell you what the outlook is on the program as approved. There is in our estimate a total financing need of the Greek economy through the end of 2014 of €165 billion and that amount is being fully covered by the assistance committed by member states of the Euro Zone through the EFSF and by the Fund. So there are no financing gaps during these almost three years that lie ahead of us now. Beyond that, we will have to see about Greece's market access. We are hopeful that they are in the process of gradually restoring market access, but we will have to see at that time. This is into the future so to the end of 2014, no financing gaps.

QUESTIONER: You have not described to the Board that there are any risks for there being financing gaps?

MR. THOMSEN: We have said that unless Greece returns to the market by the end of that period there will be some financing gaps. They actually are not very big because a major impact of the PSI operation is a dramatic reduction in the financing needs during the remainder of this decade. We don't need at this stage to go in and have specific commitments for the fourth year.

The key here is really that Greece's European partners as you know from the communiqués from the summits last summer and again here in October, Greece's European partners have assured Greece that it will continue to assist Greece, continue to provide assistance for as long as it takes to restore market access provided of course that the program remains on track. So the assurances are definitely there, but what the actual financing need is, one would have to see—depends on market access.

QUESTIONER: Two quick questions. The Greek finance minister recently mentioned that the IMF would make an additional contribution of €8.2 billion in 2015 and I wanted to see if you could clarify whether that's part of this 20 billion or if you mean something else. My second question is what Greece can do concretely at this stage to improve its tax collection?

MR. THOMSEN: The €28 billion will be provided over four years in equal quarterly installments. There are 17 installments including the one on approval here and that actually indeed means that the drawings in 2015 and the first quarter of 2016—four years from now—are about €8.2 billion. So, yes, leaving about €20 billion—or €19.8 billion or something like that—for the period until the end of 2014. So that's correct.

QUESTIONER: The second question?

MR. THOMSEN: On how to improve tax collection—let me ask Mr. Flanagan to answer that.

MR. FLANAGAN: Let me try to keep the answer short even though it's quite a complicated situation because in the Greek tax administration, there are problems at each stage of the revenue-collection process from assessment through controls over taxpayers to enforcement so that Greeks need to take steps at each of these levels of revenue collection to improve things.

What are we doing? We're reorganizing the administration to concentrate resources in a central head office to make more efficient use of them, to improve control over the outlying offices and introduce internal audits which haven't existed to this point in the Greek tax administration. We're changing operating procedures and methods in the Greek tax administration to better target the work to cases where collection is more feasible, namely, arrears that are more recent. Processes are being streamlined to improve the speed with which follow-up is done on cases where taxes go into arrears so that there are now administrative processes being put into place to ensure that disputes are dealt with rapidly. And there are processes being put in place by Greece's judicial system to speed up processing of cases in the courts.

So there is a lot being done on all levels to improve the situation with revenue collection and this is going to be a multiyear process. There is no one specific measure that is going to solve the problem. It's going to be a wealth of measures over a period of time that will slowly make inroads into what is an enormous challenge.

QUESTIONER: Hello Mr. Thomsen and Mr. Flanagan. My question is actually also related to tax collection if that's okay. Today the Task Force head, Mr. Reichenbach, gave a press conference in Athens and he highlighted some €8 billion in collectable tax arrears from €60 billion owed to the state currently. How confident are you that the Greek authorities can make inroads into this pool of potential revenue given its rather questionable track record on this level? And do you categorically rule out any further tax increases?

MR. FLANAGAN: We do think they can do a better job of collecting tax arrears, but collecting tax arrears is a complicated process. There is due process in any country. Taxpayers are allowed to appeal. They're allowed to go through administrative appeals. They're allowed to take things to court. Even once you've done that you have to have the ability to enforce the payment.

In Greece historically what the picture is, is that it takes about 10 to 12 years to enforce collection of overdue taxes which is an eternity. Generally in tax administration if you're letting an arrear go 12 years, you're not going to collect it. Or what happens in Greece, some government comes along in the interim and provides an amnesty and you get a big break on your taxes. The government in the new program has committed not to offer amnesties and to streamline all these procedures to make sure that these arrears get collected more rapidly.

On the second question on tax rates, I think there is an intention to see that the tax burden not rise. Will there be adjustments to tax rates here and there? I think in general there's a desire to see rates fall. That will require broadening the base so some taxpayers will have to face higher effective rates because they have fewer exemptions available to them. But overall I think the intention in this program is to try to reduce the burden on the formal sector of high tax rates and improve collections from the informal sector, that is, reduce evasion.

QUESTIONER: Thanks for doing this. Mr. Thomsen, I have two questions. One is what is the debt-to-GDP ratio you get now with the final program in 2020 and what would it be in 2014 or 2015 when the European program ends? The second question I have is you talked about market access for Greece. If I remember right, at the end of last year the IMF had the idea that market access might happen around 2020. Did I understand you right that you expect market access for Greece now much earlier, even around 2014 or 2015?

MR. THOMSEN: On the debt to GDP by 2020, you remember there was a target of going to at least 120 percent. Debt to GDP is now projected by 2020 to be 116.5 percent, better than hoped for, and that reflects somewhat higher participation in the PSI than initially expected so that is good news. That projection is consistent with debt to GDP by 2014 of 160, 160.7 percent, to be precise. I should say these are still very high numbers. It certainly signals an important move toward debt sustainability but it also shows of course that Greece has no room for maneuver and this points to the importance of really strict implementation of the program. Because major delays in the reforms, significantly slower fiscal adjustment or failure to reach privatization targets could set off an unsustainable debt dynamic. So as I say, this shows that there is very limited room for maneuver.

As far as market access is concerned, this is of course a question of judgment. We do think that Greece will be able to restore market access before 2020. It's going to be a process. We'll have to see. It will depend on a number of factors. But I do think that once we have debt on a downward trajectory—clearly a downward trajectory because of a primary balance that is above the debt-stabilizing primary deficit—once Greece has been a couple of years above the primary balance to stabilize debt, once the world has seen that Greece has implemented reforms and that they can grow robustly, I think it is realistic to assume that a process of normalizing market access will be well underway. We know this will start by accessing at the short end and accepting relatively high interest rates, but—structures will gradually—and interest rates will gradually come down. It's a gradual process. When exactly we would have full normalization I cannot speculate about, but that will be a process in the years after the program is finished.

QUESTIONER: In the years after the program means after 2015?

MR. THOMSEN: Yes. It's a process during that period. I cannot tell you how much market access they will have in 2015, 2016, 2017 and 2018. It's a process.

QUESTIONER: I have a couple of quick questions. On the Extended Fund Facility that is now being put in place, are the conditions that existed under the Stand-By and the organizational structure vis-à-vis the euro countries going to remain the same? In other words, are the percentages of funding and I think the Fund's was 27 percent under the Stand-By? Are you and the European countries working to preserve the same ratio or has that changed? Secondly, are you going to have to go back and redo all the conditions or are you going to carry over with some modification the conditions that existed under the Stand-By? I've got a specific one after that, but I'm wondering about these first.

MR. THOMSEN: Let's start with those. On our contributions, it was recognized from the outset that there are a number of components of this number of €164.5 billion that really should not be part of the base if you want to put it like that in calculating the share of the Fund. If you take out the PSI-related payments and if you take out the payments on bonds held by the ECB, then you will find that we will finance about three eleventh of this total financing need of €165 billion through the end of 2014. Your second question was?

QUESTION: The second question was the conditions basically.

MR. THOMSEN: A good question. As I say, I think there is an important strengthening of the program in terms of an increased focus on measures that will facilitate an early supply response, in particular, the labor market reforms to make sure that downward pressure on output now not only reflects higher unemployment but that we get adjustment in wages to stimulate hiring of people and get as I say the early supply response—so a notable strengthening of not least the labor market component of the program. But otherwise, all the key elements of the structural reform program of the old program carry over. The same with the medium-term fiscal program carries over. There is some easing of the fiscal target for this year. The fiscal target is about 1 percent of GDP, looser for 2012 and assume at the time of the fifth review of the Stand-By Arrangement. That reflects the fact that the economy is weaker and we thought that sticking to the original target would entail an excessively procyclical fiscal stance, and therefore it was agreed to ease the target somewhat.

QUESTIONER: That makes sense. One specific question-14 that lays out the financing requirement sources in billions of Euros and there’s one line in that and that’s financing provided by PSI, and you’ve got a projection of how that’s going to ease the situation as a source of funding.

I don’t know what was the assumption of the percentage of the haircut what underlined that estimate. Obviously, we now know what it is, but I’m wondering, do you know what—in your financing provided by PSI—the percentage haircut you were assuming to get those numbers?

MR. THOMSEN: Well, first off, we have to make a distinction here. I mean, the PSI contributed in two different ways. It reduces the stock of debt and reduces the flow of financing needed.

The bigger the haircut, the bigger is the reduction in debt. Now, the flow of financing relief is not really depending on the haircut because it’s a debt exchange where you have a 10-year grace period. Now, whether you have a haircut of X or Y percent, you will, in any case, have no debt servicing payments for the first ten years. So, these financing tables were not depending on the haircut.

QUESTIONER: Oh, I see. Okay. Good clarification. Thank you.

QUESTIONER: Hi, all, and thanks for taking the time on this. I had a couple things. One, was it made clear— and forgive me if it was, whether or not the ECB’s bond holdings are going to end up contributing to this program in any way? I know there was talk about a possible pass-through of profits through the national central banks and I don’t know whether that’s built into this program now or not, Poul?

And then just a little more broadly, you know, sort of stepping back from this a little bit, you now had Greece go into selective default, you’ve had the CDS triggered, you’ve had the PSI negotiated and all of this has passed with a fairly muted response from markets. Is the Fund comfortable now that Greece really has finally been insulated from—or the rest of Europe has been insulated from Greece?

MR. THOMSEN: On the first question, the first question was--sorry--oh, the ECB, very good question. On the ECB, ECB bond holdings are assumed to be amortized according to their normal schedule so the ECB bond holdings are not part of the PSI.


MR. THOMSEN: Now, there is an agreement among member states to forego some of the income on the part of the holdings of bonds that relate to the purchase on the security market program, so there is essentially a transfer to Greece that corresponds to that income.

Apart from that, I think the key issue here is that the European partners felt it was important to keep the ECB out of the PSI. It was a choice that was made to say the IMF is, in effect, not contributing to the increase in the financing requirement that results from that decision.

QUESTONER: Okay. And on the second issue, the sort of macro view?

MR. THOMSEN: Well, clearly, I think that with a PSI, with the strengths of the program, with the political commitments from the two main parties and with a very substantial commitment of resources from the international community, I think that there is a clear sense that there is a much reduced risk but there is also a sense that there is still risk.

Greece, as we know—and you know that, we have talked about that—Greece’s problem is, above all, a competitiveness problem. The day after the PSI, Greece was still an economy facing a big competitiveness gap.

Greece will have to deal with this through the means of internal devaluation and this will require structural reforms, difficult structural reforms, and this will undoubtedly be socially and politically challenging, so I certainly would not say that there are no risk. I think you will see from the staff report that it’s candid about risks, but we also think that with the changes that are on the table, with the financial support, this is doable.

QUESTIONER: I was wondering, Mr. Thomsen, if you could give us a sense of the message that the Board has given to you and to Greece about implementation of this program to ensure that the Fund’s credibility is still intact. That’s one of the big issues that Board members or member countries have felt about the second bail out.

So, I was wondering what message you got and also whether you think, looking forward on the political risk, whether that is a problem for the program right now.

MR. THOMSEN: Well, it’s a fact, if we look back at 2011, that the Greek program encountered increasing implementation problems. It’s also a fact that in the last couple of months following realignment in Greek politics to two major parties, both supported the program and they are still supporting the program. We are all expecting elections. They are assuring us that even after the elections they will continue to pursue policies that are consistent with the fundamental objectives and policies of the program.

Meanwhile, all the European partners have said they will continue these policies as long as it takes, even if there are strong headwinds, provided Greece continues to make steady progress. That too, of course, is important in looking at the implementation problem, but there is no doubt, at the same time, as I said, in the previous answer to your colleague that Greece still faces major challenges, it still has a very large competitiveness gap.

That gap has to be closed. True productivity-boosting reforms are needed, because if not, Greece will continue to see significant declines in income, in GDP. These reforms are, in themselves, difficult, socially difficult, it will be politically and socially challenging. And, I mean, there was a clear message from the Board that they have very, very little room for maneuver going forward. Debt will still remain high, deficits still remain high, no room for slippages.

The Fund and European partners are providing exceptionally high support for Greece and there’s a clear message that we will do so, we will continue to do so as long as Greece make continued progress. But there is clearly also in there a strong signal that implementation has to improve compared to what we saw in 2011.

QUESTIONER: Thank you very much. So, Mr. Thomsen, if the recession continues and the Greek economy does not return to the budget surplus in 2014, are you seeing any chances of a new debt restructuring? And what will be the role of the official involvement in IMF (inaudible) settlement? Thank you.

MR. THOMSEN: Well, let me just repeat what I said before, that debt will still remain high. It’s clearly on a trajectory—a good trajectory, downward trajectory, but there is no room for maneuver and external shocks or lack of implementation of the Greek policies could trigger unsustainable debt dynamics.

QUESTIONER: So, do you expect that additional measures for 2012 will be necessary?

MR. THOMSEN: I expect that the program will be implemented as agreed, that it will deliver the hope for results, and that there will be no need for further debt restructuring.

QUESTIONER: Two short questions for you, Poul. The first one, which are the two highest risks that could derail the implementation of the new program for Greece? Have you elaborated other scenarios for the future in case these risks become true? And my other question, please, do you agree with those saying early elections in Greece, at the end of April, at this moment could delay the implementation of structural reforms? Thank you.

MR. THOMSEN: What are the main risks to the program? I think the main risk to the program is indeed to pick up on where you ended up: on a delay in structural reform, and here I’m not really thinking about whether it’s now or in two months.

But, you know, the program assumes that there will be a major reinvigoration of structural reforms because it’s a fact that Greece will go through an extended period of fiscal consolidation that will tend to create downward pressures on growth. And in such a situation, to get the recovery going we need to get a strong impulse from productivity-boosting reforms and failure to launch such reforms could indeed mean that we will not get to this sort of inflection point where it starts going up any time soon, but that the economy will continue to trend down for longer than expected. I think that is clearly the main risk as far as I see it.

Another risk to structural reform is, if there is failure to undertake strong structural reforms inside the public sector, I cannot see how the deficit can go down without structural reforms. There are no more, as I’ve said before, low-hanging fruit, no more easy adjustment. Fiscal adjustment needs to be underpinned by fiscal structural reform.

And that, in my view, will entail addressing some difficult issues—if you want “taboos”, as we have talked about before. It means streamlining of the system for social transfers, it means closing public enterprises that have outlived their usefulness, and it means steadily reducing the public payroll, the number of employees in the public sector.

That’s another risk. If there are no such fundamental structural reforms in the public sector, the deficit will get stuck at too high a level.

QUESTIONER: And my other question about the early elections in Greece?

MR. THOMSEN: Well, on the early elections, you know, I have absolutely no view. I don’t see that as a problem. Greece will go through elections and I’m sure that policies will be implemented as agreed and we will sit down with the new government. I am confident with the assurance that we have that the new government—while it might want to do some things differently—the overall thrust of the policies of the new government will be consistent with the program and Greece will move ahead.

MS. LOTZE: Okay, thank you very much, everybody.


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