Transcript of a Conference Call on Greece

July 30, 2013

Washington, D.C.
Tuesday, July 30, 2013

MR. SILVESTRE: Thank you. Good afternoon or good evening everyone. I'm Bruno Silvestre with the IMF Communications Department, and I'd like to welcome you to this conference call on the staff report for the completion of the fourth review of the Extended Funds Facility for Greece. With me here are Poul Thomsen, the current Deputy Director of the European Department and the Mission Chief to Greece, and Rishi Goyal, who is the Deputy and Mission Chief for Greece. And before I pass the floor to Poul for a few introductory points, followed by questions, let me remind you that the documents you received a couple of hours ago and Poul's remarks are embargoed until tomorrow 8:00 a.m., Washington time, that is 12 noon, GMT. Poul, you have the floor.

MR. THOMSEN: Thank you very much, and thanks to all of you for participating in this. As was said, the board completed yesterday the fourth review of the EFF, and before I take your questions let me give you a few observations, the key issues. Importantly, the macro framework is on track. I know the GP assumptions that were built into the program at the end of last year—for this year, we still think they are attainable, which means we still think that the economy is set for seeing a bottoming out of the recession and a gradual recovery next year, and a modest recovery in 2014.

Importantly, the Greek economy is rebalancing at a notable pace. The comparative gap in terms of wages suddenly has narrowed significantly. And the current account deficit has come down very notably. So there is a clear movement towards a much more sustainable position. If you look at policies, as we’ve seen in the past fiscal policy is doing very well. The fiscal adjustment is, by any standard, very impressive. Greece is on course to achieving primary balance this year, which is very impressive, given that when we started out three years ago, we had a primary deficit of well above ten percent. This is an impressive achievement in the face of very, very strong headwinds. I should note, as we have said before, the government that came into office last year was in a different position. There was no more scope for relying on revenue measures. It had to focus on expenditure measures and difficult expenditure measures. It did so, and it has implemented this program as agreed, and there was only need for a minor adjustment of fiscal policy to keep it on track.

We did see some slippages in the area of public administration reform and tax administration reform. The growth program was behind schedule, and we have agreed on corrected measures to catch up. That's important, because as we go forward the program will increasingly rely on these measures to yield results and support for fiscal consolidation. We also see some slippages in the privatization program, but the authorities assure us this is only a temporary nature, and we hope that is the case.

In the financial sector Greece has taken a major step forward by completing the recapitalization program. We have four core banks in place supported by significant public money through the EFSF, notable despite the dramatic turmoil facing Greece that they preserved financial stability, deposits are safe, and the next step here now is to focus on returning these banks to full private ownership and in the interim ensuring that there is good governance. Overall, Greece has much work still ahead of it, but I do think that there is a steady progress. Let me leave it at that and take your questions.

QUESTIONER: Poul, do you really believe that the macro assumptions are on track, or is positive growth next year overly optimistic? Secondly, does the IMF have a contingency plan if the current majority loses its majority? And finally, you say the Eurogroup has initiated discussions on how to eliminate the projected financing gaps. Can you elaborate on that please?

MR. THOMSEN: Well, I didn't comment on the financing gap, but I'll be happy to do so. On growth, we think that it is attainable. We do recognize, as we say in the report, that there are some downside risks to the forecast for next year. In that regard, I remind you that the assumption of a gradual recovery next year is based on the assumption that we have a rebound in confidence dependent factors like consumption and investment. If there are notable rebounds on the strength of sustaining limitation of policies and broad political support for the program, I think what we have seen so far this year is actually the confidence factors, be it deposits, be it support for the bank recapitalization scheme, be it investor interest in Greece, the confidence has, if anything, surprised on the upside and that is good news.

But I will also acknowledge that for the recovery to take place as planned, we would need a significant and sustained improvement in confidence. So I acknowledge that there is some downside risk, but I have no doubt that we will see a bottoming out and gradual recovery in output next year. The exact timing is perhaps where the uncertainty comes, but I'm still confident that it will happen early next year. That's why we have maintained our assumption.

QUESTIONER: Okay, and on the second question, does IMF have a contingency plan if the current majority loses its majority?

MR. THOMSEN: We don't go into a speculative scenario. We have an excellent working relationship with this government and this is what we focused on.

QUESTIONER: And finally, the financing gap discussions.

MR. THOMSEN: On the financing gap there is a clear undertaking from the Eurogroup to provide support for Greece until it can return to markets, provided of course, that Greece continues to implement the program. As you know in the fund, when we approve a program we want to be sure that they are concrete assurances for the 12 months ahead. The program is fully financed for the next 12 months, so that's what matters.

QUESTIONER: Please forgive me, and my colleagues please forgive me. You say in the report the Eurogroup has initiated discussions on how to eliminate the projected financing gaps. I'm asking you to comment on those discussions.

MR. THOMSEN: That report is referring to what I have just said here.

QUESTIONER: The promises.

MR. THOMSEN: Well, this is a long-standing promise and the Eurogroup has persisted to deliver to that and make sure that on a 12 months forward looking basis the program is financed. It is still financed for the next 12 months, and the Euro Group has said when we get together at the next review, if there is a need for additional financing, looking forward, it will provide this financing, provided the program is on track.

QUESTIONER: My question relates to the financing question. When you look forward towards the end of the decade, do you see any need for some kind of debt-restructuring or debt write-down increase?

MR. THOMSEN: There is a framework in place. Greece's European partners have undertaken to ensure that debt to GDP is reduced more than 124 percent by 2020, and well below 110 percent by 2022. It's recognized that this will possibly require some additional support that we will see when we have to make that assessment. That assessment will be made in two states at the beginning of 2015, and this contingent relief will be forthcoming, provided that Greece achieves the primary balance targets for the previous two years. So the Eurogroup has put a framework in place for providing support, and ensuring that that remains sustainable. And we think that framework is appropriate.

QUESTIONER: Just a quick clarification on the financing gap, and then—you mentioned that the program has to be funded for the net 12 months. And you also say there's going to be a financing gap that opens up in August 2014. So, essentially, Europe has to agree on something before the end of August 2014—or, I mean, August of this year, is that correct?

MR. THOMSEN: No, that's not quite correct. Europe would have to provide financing assurances at the time when the next review is completed. And the next review is unlikely. The mission for the next review will only be sometime in September. So we will not go to the Board, even under the best of circumstances, before sometime in October. And only at that time would there need to be a new one on financing assurances. What exactly will be needed at that time will depend on the assessment at that time. The mission will go out in September, and review the outlook for the next 12 months. An important part of that reassessment is going to be a comprehensive reassessment of the privatization program. And, as you know, that features importantly in the whole financing picture. So, it's too early to have a view on the exact amount of financing needed for the 12 months period ahead, once we get to the next review.

QUESTIONER: And, my second question. The statements after the Board's discussion yesterday—and from Lagarde’s comments—had mentioned concerns on privatization structure and management. So I was wondering if you could elaborate about that. Does that mean that the IMF could require new management, a privatization agency, or could foreign advisors step in? What do you mean by that?

MR. THOMSEN: Clearly, privatization is an area where the program continues to disappoint, where it has been disappointing almost since the start. And still, we are well short of targets. A new management of the privatization agency came into office in the second half of last year, and at that time it was agreed that we would have a comprehensive review of the privatization program in this coming September. So that will feature very dominantly in the next mission, though this time around we took note of the fact that there is a shortfall. We accepted the information that it's temporary, but we do have concerns that it might reflect some more structural problems in the privatization process, including sort of limitations, non-technical limitations on privatization. We want to review that. When undertaking this review, and when coming up with corrective actions, we also need to consider whether the government structure of the privatization process is as it should be. So I think all issues will be on the table in September. But it is too early to have any firm conclusions.

QUESTIONER: I just wanted to ask you—regarding the financing gap, we heard the Europeans last week mention a figure of 3.9 billion, but then in your report here I see 4.4 billion euros. So if you could just clarify the discrepancy. Also, for what you call the "framework for debt relief," you do mention 4 percent of GDP that would take place early 2014 and 15. Well, first of all, is it percent of GDP would go from, say, 160 to 156? Is it how it should be understood? And debt relief seems to be something that Europeans really don't want to speak about at this stage, but it's factored in.

MR. THOMSEN: First, on the financing numbers, I cannot comment on speculations last week of numbers. But, as I said, we do have something, tentative numbers, in the program for the 4.4 that you mentioned. And we will have to review that when we get there in September. It could be less, it could be more, once we have reviewed all the privatization programs. What matters is that we don't have a gap in the next 12 months.

Now, on the other issue of debt relief, yes there is a mentioning of 4 percent, but that is just a number that comes from the debt service analysis that we have right now. As you know, the debt relief agreed by the Europeans, the commitment to provide any debt relief, if necessary, to bring the debt-to-GDP to 124 percent by 2020, will be based on a DSA analysis in two years, right? So it's too early to say if any debt relief will be needed and how much. Under our current projections, that would be 4 percent. But the projections are revised every quarter as we go forward. So we cannot go out and say that the IMF says that x-percent will necessarily be needed. That will depend on the DSA at that time.

QUESTIONER: I understand. But it's not that far, right? Early 2014, it's not two years.

MR. THOMSEN: Right. Well, it's in two stages, 2014 and 2015, based on the outcome for '13 and '14. As I said, there's going to be a review of the privatization program. There's going to be a review of all aspects of the programs. And some of these things have more, some have less, influence on the DSA. It can move in either direction. It's not possible to speculate right now on what will the actual amount be. But it's true that our projections right now imply that there will be a need for some relief in order to get to 124 percent. But whether that conclusion has been maintained once we get there will depend on developments until then, and how they affect the projections. I hope that's clear.

QUESTIONER: Thank you. Mr. Samaras implied today to the Reuters that there is a risk that the members of the parliament are going to stop voting for the measures if they don't see a light at the end of the tunnel. And many members of the parliament believe that the troika does not throw any light the last three years. Also, they say the troika just asks for more measures in every review. I wanted to know your thoughts on this, Mr. Thomsen.

MR. THOMSEN: Well, as I said before, our projections suggest that Greece will gradually see a recovery take hold next year, as we have been projecting for some time. We still think that's a realistic assumption. There's clear signs of the recession bottoming out and, if the MPs support the program, if they vote for the program, if they show the support for the government and for its policies, I am confident that we also will see growth.

QUESTIONER: I have another question, if I may. On the second paragraph of yesterday's press release, IMF is saying that in completing their review, the Executive Board also approved a waiver of applicability. My question is this: Without these waivers, the Greek debt is not sustainable—did I understand well?

MR. THOMSEN: Let me ask my colleague to answer that. That's a misunderstanding.

MR. GOYAL: Yes, that is a misunderstanding. These are just standard, in the sense that in reviews, we have what are called quantitative performance criteria. And in this current review we have six quantitative performance criteria at the end of June.

The waivers of applicability are essentially to say that for three of those, we did not have the data. The Board meeting was held before the data were released. Therefore, the Greek authorities requested the Board simply to waive the application of those three quantitative performance criteria. Our understanding—as you would have read in the documents—is that all of these three criteria have been met, based on information that we have. Based on projections that we make, we believe that the end-June data on these criteria have, indeed, been met. So what you said is a misunderstanding. Is that clear?

QUESTIONER: Yes. Thank you very much. You mean that the debt is sustainable—correct?

MR. GOYAL: Well, yes.

QUESTIONER: Very good.

MR. GOYAL: As Mr. Thomsen was saying, there is a framework for the debt. There is a clear framework for where debt is going. And as long as this framework continues to be applied, debt should reach 124 percent of GDP by 2020.

QUESTIONER: Yes, Poul, I want to ask you, please, about structural reforms. When you mentioned these four in the document, which is the most important? Is it labor market reforms? Is it regulating, ending the regulation in the professions? Is it privatization? Judicial reform? And then, what if there's action on this, on what basis can we assume that all of that will result in this restoration of investor confidence that you say is necessary?

MR. THOMSEN: Well, these are two excellent questions. You know, you will not be surprised when I'm sort of reluctant to pick one reform over the other, because they are really complementary, right? We need all of these reforms. I would note that we already have seen very considerable reforms in the labor market, and that one of the problems we have is that the labor market reforms have produced a significant adjustment in wages, but that this wage adjustment has not been passed through to lower prices, because not enough has been done to open up product and service markets—you know, the regulated professions—to competition. So too much of the burden of adjustment is falling on the real wage right now. But I think it's a matter of priority to secure an early supply response, but also to maintain broad political support for this program, that priority is give to opening up, making sure that markets are contested, and that we get some reduction in prices and services to follow this significant adjustment in wages that we see. That's as far as priorities are concerned.

We have seen confidence indicators improving notably during the last six to nine months. Real improvement in competitiveness is clearly on the way. I am confident that further reforms along the lines that we just discussed will sort of catalyze and sustain improvement and investment that eventually will allow a recovery in consumption and investment in other confidence-related factors to more than offset the negative drag from fiscal adjustment, from continued fiscal adjustment, and ensure that the economy again starts growing. And I still believe that there’s a good chance we’ll see that sometime next year.

QUESTIONER: Can I just clarify on the debt framework, the 4 percent of GDP relief measures are just to meet the 124 percent in 2020. It would require, presumably, more debt relief measures to meet the 110 percent. And then going back to the 2020, the 124 percent, if growth was lower than projected next year, then that 4 percent would be higher. And if privatizations are lower income—or lower in the coming year, that 4 percent would also be higher. Am I correct?

MR. THOMSEN: That’s correct. And if growth is stronger than expected, that 4 percent will be lower.

QUESTIONER: It would be the first time.

MR. THOMSEN: Well, you know, the experience is, of course, once growth starts recovering, once the corner is turned, often the recoveries get underway faster than we expect. So it is true that sometimes one underestimates on the way down, but it’s also equally true that on the way up sometimes one underestimates the strength of the recovery. So there are upsides, also.

QUESTIONER: And in your response to my original question you said that there’s no doubt we will see a bottoming out of the recovery by at least next year. I imagine a bottoming out meaning that you could still be in negative territory next year.

MR. THOMSEN: Well, you know, our best guess is right now, as we see it right now, and under the assumption about sustained policy implementation that is built into these assumptions, we do expect that we will get this small positive increase, what is 0.6 percent, next year. We accept that there are some downside risks, but the way I look at it is there are clear signs of a bottoming out. Now, whether we will hit this sort of bottom at the end of this year or beginning of next year or three to six months later, that’s the kind of uncertainty we are looking at. Right now we still think that it’s reasonable to assume that it will happen early next year. But that will certainly require a notable further improvement in confidence in the next six months.

MR. SILVESTRE: Well, if we don’t have any additional questions, I’d like to thank everyone who’s taken part in this call. Thank you, Poul and Rishi. We anticipate that we’ll post a transcript on the call either later today or early tomorrow once we get it finalized. And again, thank you for being with us and we look forward to speaking to you again in the future.


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