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

_IMF News, March 15, 2012_

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## Bibliographic details
- Published: March 15, 2012

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### Program approval and structure
- 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.

### Financing package and debt restructuring
- 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).

### Restoring growth and competitiveness
- 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.

### Snapshot of key economic indicators and structural features
- 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.

### Fiscal consolidation, tax policy, and social protection
- 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.

### Banking sector solvency and depositor protection
- 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.

### Risks, conditionality, and international support
- 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).*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [Read the press release](https://www.imf.org/external/np/sec/pr/2012/pr1285.htm)
- [Watch the video](https://www.imf.org/external/mmedia/view.aspx?vid=1510432257001)
- [Fast facts on Greece](https://www.imf.org/external/np/exr/countryfacts/grc/)
- [The IMF and Europe](https://www.imf.org/external/region/eur/index.htm)
- [Factsheet on Europe](https://www.imf.org/external/np/exr/facts/europe.htm)
- [The Extended Fund Facility](https://www.imf.org/external/np/exr/facts/eff.htm)
- [Factsheet on social protection](https://www.imf.org/external/np/exr/facts/protect.htm)
- [said](https://www.imf.org/external/np/sec/pr/2010/pr10187.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar031512b_