Greece: Staff Concluding Statement of the Second Post-Program Monitoring Mission

IMF News, October 2, 2020

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GDP contracted by 7.9 percent in the first half of 2020, down from 1.9 percent growth in 2019.
The economy is expected to contract by 9.5 percent in 2020, before gradually recovering over the medium term.
A rebound is expected in 2021–22 to reach an average 5 percent growth annually, backed by the Next Generation EU (NGEU) funds and a recovery in foreign demand.
As the NGEU gradually phases out, growth is projected to return to its long-term potential rate of 1 percent.
Greece’s heavy reliance on tourism makes it particularly vulnerable to prolonged disruptions in travel and global tourism demand.
The unemployment rate has increased noticeably since March 2020, despite significant employment support measures.

The primary deficit for 2020 is projected at 6¾ percent, due to both lower economic activity and the government’s stimulus measures.
Greece’s medium-term public debt repayment capacity remains adequate, reflecting manageable gross financing needs under the baseline, increased EU and ECB support, and a substantial precautionary cash buffer.
Following a spike in 2020, public debt is projected to decline gradually over the medium-term, albeit remaining at higher levels than previously forecast.
Staff’s assessment of Greece’s long-term debt sustainability remains unchanged and will be updated during the next Article IV Consultation.
The sovereign’s repayment capacity could be compromised if significant downside risks materialize, which would require a strong procyclical fiscal adjustment and/or further support from European partners.

Substantial uncertainties and downside risks continue to cloud the outlook.
Downside scenario: a prolonged pandemic accompanied by a permanent slump in global tourism would significantly worsen the outlook.
Upside scenario: an early vaccine discovery and its swift mass distribution could help boost the rebound.
Contingent government liabilities could materialize from:
- new and existing state guarantees;
- potential additional support to banks and firms in a downside scenario;
- ongoing court cases that challenge key program reforms.
A new wave of Non-Performing Exposures (NPEs) could emerge in the banking sector once government support measures and supervisory accommodation are unwound.

Extraordinary ECB and SSM accommodation is cushioning the pandemic’s immediate impact on banks.
Interest and mortgage payment subsidies introduced by the Greek authorities will help support both borrowers and banks in 2020-21.
The provision of state guarantees on bank securitizations (project Hercules) is progressing but is not a comprehensive solution: it leaves a significant amount of NPEs on bank balance sheets and does not address weak quality of bank capital.
The Bank of Greece’s proposal to establish an Asset Management Company could be an important addition to the toolkit.
The pandemic could add further strain to the banking sector and could undermine the improvement in firms’ balance sheets achieved during the past decade, requiring effective tools to resolve corporate and household debt distress.
The authorities’ new draft bankruptcy code is a promising and timely initiative; implementation to facilitate restructuring and minimize moral hazard will be critical to its effectiveness.

Maintain accommodation and make good use of fiscal space as the near-term priority.
Given the large output gap and to minimize the risk of permanent economic damage, avoid a sharp fiscal contraction in 2021 and target a primary deficit of at least 2 percent of GDP.
Fiscal support should be frontloaded ahead of the release of NGEU resources (expected around the middle of 2021).
Improve the fiscal policy mix by:
- prioritizing health care spending;
- addressing coverage gaps in the Social Solidarity Income scheme;
- expanding opportunities for reskilling the labor force.
Enhance public investment execution to boost the effectiveness of NGEU financing.
As the impact of COVID-19 dissipates over the medium-term, shift fiscal support to firms toward viability-based assessments.

Ongoing structural reforms should be accelerated in areas that can be credibly implemented.
Support the goals and ambition of the draft national growth strategy to boost productivity and promote innovation.
Continue simplification of business processes and digitization reform.
Accelerate deliverable reforms such as:
- liberalizing product markets;
- facilitating female labor participation (through access to childcare and early childhood education, for example);
- enhancing active labor market policies.

Greece: Staff Concluding Statement of the Second Post-Program Monitoring Mission, October 2, 2020.