Greece: Staff Concluding Statement of the 2021 Article IV Consultation Mission
IMF News, June 2, 2021
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- Published: June 2, 2021
Pandemic impact and government response
- The economy contracted by 8.2 percent in 2020.
- The government provided among the largest on-budget fiscal stimuli in the euro zone, which prevented a spike in corporate distress and kept workers attached to the labor market, although young and part-time workers experienced a sharp drop in employment.
- Supervisory and ECB accommodation shielded the banking sector and kept financial conditions highly supportive.
- The mission expressed condolences and solidarity with the people of Greece impacted by the pandemic and recognized frontline workers.
Near-term outlook and growth projections
- Growth is projected at 3.3 percent in 2021, accelerating to 5.4 percent in 2022.
- Main drivers of the recovery: investment through Next Generation EU (NGEU) grant funding, pent-up consumption funded by deposit drawdown, and tourism resumption.
- The permanent output loss from the pandemic (“scarring”) is projected to reach 3 percent.
- Upside scenario: full execution of the authorities’ Recovery and Resilience Fund’s (RRF) plans could raise productivity growth, move the country to investment grade, and anchor long-term debt sustainability through higher investment, economies of scale, and increased export orientation.
- Upside caveat: the mission views the virtuous cycle from RRF execution as subject to significant execution risks.
Risks and uncertainties
- Substantial uncertainties and downside risks remain: a more prolonged pandemic, uncertain extent of pandemic-related Non-Performing Exposures (NPEs), weaker-than-anticipated absorption of NGEU funding, reversal of global accommodative financial conditions, and geopolitical risks.
- The uncertain extent of pandemic-related NPEs could affect banks’ securitization plans and curb credit growth.
- Uncertainty about the long-term neutral rate and risk premia is too high to reach a definitive assessment on long-term debt sustainability.
Public debt, financing, and sustainability
- Following a spike in 2020, Greece’s public debt is projected to peak in 2021 and decline gradually over the medium-term, albeit remaining at higher levels than forecast before the pandemic.
- Greece’s public debt remains sustainable over the medium-term, predicated on the negative interest rate-growth differential and a gradual return to primary surpluses.
- The government’s large cash buffer and active liability management mitigate refinancing risks.
- Gross financing needs and IMF repayment capacity remain adequate under a variety of downside risks.
- The mission notes that a feasible set of policies and interest rate trajectories could deliver sustainable debt dynamics over the long-term, but alternative scenarios and high uncertainty prevent a firm conclusion.
Fiscal stance and recommendations
- Pandemic-related measures imply a primary deficit of around 7¼ percent of GDP in 2021, with much of the support frontloaded ahead of NGEU disbursements.
- The headline primary deficit for 2022 is expected to recover to 1 percent of GDP.
- The underlying fiscal stance, excluding temporary COVID-19 measures, remains expansionary by about 2 percent of GDP.
- The mission offered qualified support for maintaining fiscal accommodation in 2022, noting that from a cyclical perspective the case for further stimulus is weak given the rapid closing of the output gap under the baseline, but stimulus could reduce scarring risks and support job creation if properly spent.
- The authorities should use additional support to initiate a durable improvement in the fiscal policy mix:
- Continue reductions in the corporate income tax (CIT) rate and advanced CIT payments to strengthen investment incentives and preserve firm liquidity.
- Address gaps in the Guaranteed Minimum Income scheme as support transitions from job retention towards targeted income support and worker reactivation.
- Address unmet needs in healthcare provision.
- Match structural fiscal measures with renewed efforts to create fiscal space over the medium term, including through personal income tax base-broadening, tackling VAT compliance gaps, and aiming for expenditure savings in less-well targeted entitlement programs (including pensions), in the public wage bill, and in State Owned Enterprises.
Banking sector health and financial sector policies
- Slow progress with restoring banking sector health prior to the pandemic reflected institutional and policy constraints: weak core profitability, market values of NPEs below book valuation, lukewarm investor interest given the risk of dilution from the high and rising share of Deferred Tax Credits (DTCs) in bank capital.
- Greek and European authorities relied on financial engineering to reduce NPEs without triggering DTC conversion or high, upfront, fiscal costs, while adhering to EU-wide state aid rules.
- The Hercules securitization strategy could achieve a rapid reduction in NPEs provided capital-raising efforts are successful.
- The mission welcomed the extension of additional government guarantees for NPE securitizations (“Hercules-II”) but suggested that backup plans should be formulated in case fresh capital raising efforts by banks are insufficient and/or other execution risks materialize.
- The Bank of Greece’s proposal to establish an Asset Management Company (AMC) has been shelved; the mission encouraged the authorities to work with European partners to find a solution for the weak quality of bank capital.
- Stand-alone DTC conversion could be considered as a last resort if it restores investor confidence for banks unable to fully utilize existing tools.
- The mission encouraged the authorities to swiftly finalize a DTC law amendment to ensure that the instruments are loss absorbing in resolution.
- Effective implementation and use of the new Insolvency Code, including by servicers, will be critical for meaningful debt resolution.
Structural reforms and labor market
- Structural reform implementation is essential to minimize scarring risks and leverage NGEU resources.
- Reforms have progressed in a number of areas, but addressing the overvaluation of the Real Effective Exchange Rate and strengthening convergence prospects requires accelerating reforms that boost productivity, reduce non-wage costs, and close the investment gap.
- Improving the fiscal policy mix would support labor force participation objectives by encouraging female labor participation (particularly by funding childcare) and by investing in youth prospects and older worker reskilling.
- NGEU funds can support a transition to a job-rich, fairer, and greener growth model provided the public investment framework is upgraded.
- The mission recommended that upcoming labor codification should foster labor market flexibility and that the minimum wage adjustment should be prudent.
- The mission encouraged proper safeguards to ensure transparency and accountability of COVID-19-related emergency spending and to protect the independence and credibility of the statistical agency and its staff, upholding the “Commitment on Confidence in Statistics” endorsed by the government in 2012.
Greece: Staff Concluding Statement of the 2021 Article IV Consultation Mission