IMF Survey: IMF Board Approves €28 Billion Loan for Greece

IMF News, March 15, 2012

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The IMF’s 24-member Executive Board agreed March 15 that the new loan will be made under the Extended Fund Facility, which is designed for countries undertaking reforms to address deep-seated structural weaknesses.
The new loan amount: €28 billion, to be disbursed in equal tranches over a four-year period.
Approval of the new program will lead to the immediate disbursement of about €1.65 billion ($2.2 billion).
The previous 3-year Stand-By Arrangement that was approved in May 2010 has been cancelled by the Greek authorities; any undisbursed funds under that arrangement have also been cancelled and will not automatically become part of the new program.

Key ingredient: a substantial write-down of Greece’s bonded debt concluded on March 9, with private sector investors agreeing to write down 75 percent of their Greek bond holdings.
The debt exchange is described as the largest and steepest debt reduction agreement in history.
IMF position: Greece must reduce its debt-to-GDP ratio to 120 percent by 2020 if its debt is to become sustainable in the medium term.
Official sector support for the second Greek program entails €130 billion (about US$170 billion) in new financing, in addition to the remainder of the financing support for the first program of €34 billion (about US$44 billion).
IMF contribution: €28 billion (see above).

Main goal of the program: support a return to growth through a major improvement in competitiveness.
Competitiveness problems identified:
- Unit labor costs increased by over 35 percent during 2000-10, compared to just under 20 percent in the euro area.
- Exports of goods and services amounted to only about 14 percent of the goods Greece produces.
- Greece’s competitiveness gap compared to its main competitors stands at around 15-20 percent of GDP.
Labor market and wage policy:
- Currency devaluation is not an option because of eurozone membership; unit labor costs can only be improved through improved productivity or wage adjustments.
- The program includes labor market reforms, including a substantial reduction in the minimum wage intended to align it more closely with levels in other European countries.
- The minimum wage in Greece is reported as 50 percent higher than in Portugal, 17 percent higher than in Spain (elsewhere text cites 18 percent higher than in Spain), and 5-7 times higher than in Romania and Bulgaria.
- Expected benefits: reduce the competitiveness gap and help young people gain a foothold in the labor market; youth unemployment is close to 40 percent.
Structural competition reforms:
- Many service professions are insulated from competition, leading to higher prices and impeding innovation and job creation.
- Opening up these sectors is targeted to bring greater price competitiveness, though reforms may face resistance.

Public sector wage bill as a percent of GDP in Greece averaged 12.6 percent from 2005-2009, compared to the EU average of 10.5 percent during the same period.
Wages in the public sector are on average almost one and half times higher than in the private sector.
Unit labor costs increased by over 35 percent during 2000-10, compared to just under 20 percent in the eurozone.
Competitiveness gap: around 15-20 percent of GDP.
Unemployment:
- Overall unemployment rate stood at more than 20 percent as of November 2011.
- Youth unemployment (aged 15-29) is close to 40 percent.
Public spending and tax revenue:
- Public spending in Greece as a percent of GDP is still close to the euro area average of 49-50 percent.
- Tax revenue is 39 percent of GDP, significantly below the euro area average.
Since 2000, social security spending in Greece has increased by about 6 percent of GDP.
Asset sales: government committed to selling €50 billion in public assets; timetable scaled back with full amount to be achieved early in the next decade.

Program targets new reductions in public spending on top of deep cuts made during the previous three years.
Priority on stemming tax evasion and expanding bases; large numbers of self–employed people pay very little in taxes despite high earnings.
Better tax collections expected to deliver only a small portion of the 7 percent of GDP needed to attain the fiscal target of 4½ percent of GDP for 2014 agreed under the program.
Social spending reform:
- Focus on restraining spending while strengthening the core social safety net.
- Aim to better and more efficiently target social transfers to protect the most vulnerable.
- Example of poor targeting: 60 percent of all family benefits go to the 40 percent with the highest incomes.

Since 2009, banks have lost about 30 percent of their deposit base.
Non-performing loans rose to more than 15 percent of all loans by end-September 2011.
Banks must recognize losses on government bond holdings because of the private sector debt exchange.
Under the new IMF-supported program, €50 billion has been set aside to help banks cope with these challenges.
Recapitalization framework:
- Appropriate incentives structured to encourage private participation in recapitalization.
- Framework for recapitalization and resolution overhauled to ensure funds are put to good use and political interference is minimized.
- During the recapitalization process depositors will be protected.
- Support designed to encourage continued liquidity support from the euro system.

IMF Managing Director Christine Lagarde statements:
- “Greece has made tremendous efforts to implement wide-ranging painful measures over the past two years, in the midst of a deep economic recession and a difficult social environment. The fiscal deficit has been reduced markedly and competitiveness has gradually improved. However, the challenges confronting Greece remain significant, with a large competitiveness gap, a high level of public debt, and an undercapitalized banking system.”
- “The new Fund-supported program will enable Greece to address these challenges while remaining in the Eurozone. The program focuses on restoring competitiveness and growth, fiscal sustainability, and financial stability.”
- “Risks to the program remain exceptionally high, and there is no room for slippages. Full and timely implementation of the planned adjustment—alongside broad-based public support and support from Greece’s European partners—will be critical to success.”
European partners’ commitment: provide adequate support, during and beyond the program period, for as long as it takes for Greece to regain market access, provided agreed policies are implemented in full.
Even with the private debt write-off, Greece’s debt will remain very high for some time.

IMF Survey: IMF Board Approves €28 Billion Loan for Greece (IMF Survey online, March 15, 2012).