IMF Survey: Europe and IMF Agree €110 Billion Financing Plan With Greece
IMF News, May 2, 2010
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- Published: May 2, 2010
Agreement and financing package
- Greece reached agreement with the International Monetary Fund (IMF), the European Commission, and the European Central Bank (ECB) on a focused program to stabilize its economy, become more competitive, and restore market confidence with the support of a €110 billion (about $145 billion) financing package.
- The eurozone will contribute roughly two-thirds of the total financial assistance and the 186-member IMF one-third.
- IMF support will be provided under a three-year €30 billion (about $40 billion) Stand-By Arrangement (SBA).
- Euro area members have pledged a total of €80 billion (about $105 billion) in bilateral loans.
- Implementation of the program will be monitored by the IMF through quarterly reviews.
- The IMF Executive Board is expected to review the package, agreed at mission level, under its fast-track procedures and to go to the Board for approval within the week.
Objectives and twin pillars
- Twin pillars of the program aim to:
- Tackle high debt.
- Spur growth.
- Strengthen competitiveness.
- Restore market confidence.
- The IMF’s “focused conditionality” aims to tackle the twin issues of debt and competitiveness.
Key macro-fiscal figures and targets
- Budget deficit at 13.6 percent of GDP (2009).
- Public debt at 115 percent (2009).
- Fiscal consolidation equivalent to 5 percent of GDP already begun by the authorities.
- Fiscal consolidation—on top of adjustment already under way—will total 11 percent of GDP over three years.
- Adjustment designed to get the general government deficit under the 3 percent level by 2014 (compared with 13.6 percent in 2009).
- Spending measures will yield savings of 5 ¼ percent of GDP through 2013.
- Revenue measures will yield 4 percent of GDP through 2013.
- Total revenue gains and expenditure savings from structural reforms are expected to gradually total 1.8 percent of GDP during the program period.
Program measures and structural reforms
- Budget cuts, a freeze in wages and pensions for three years, and tax increases.
- Specific measures include:
- Reducing and freezing pensions and wages for three years.
- Abolishing payment of Christmas, Easter, and summer bonuses for workers, with protection for the lowest-paid.
- Raising value-added tax, and taxes on luxury items, and tobacco and alcohol, among other items.
- Strengthening tax collection and revenue administration; safeguarding revenue from the largest taxpayers.
- Strengthening budget controls and raising contributions from those who have not carried a fair share of the tax burden.
- Setting up a Financial Stability Fund, funded from the external financing package, to ensure a sound level of bank equity.
- Curtailing selected social security benefits while maintaining benefits for the most vulnerable.
- Comprehensive pension reform, including by curtailing provisions for early retirement.
- Modernizing public administration, strengthening labor markets and income policies, improving the business environment, and divesting state enterprises.
- Significant reduction in military expenditure during the period.
- Reforms to fight waste and corruption, including eliminating non-transparent procurement practices.
- Measures to clamp down on tax evasion and step up prosecution of the worst offenders.
Economic rationale and risks
- The global economic crisis exposed Greece’s weak fiscal position: revenues declined significantly while spending, especially on wages and entitlements, rose sharply.
- With Greece’s deteriorating fiscal position, rating agencies downgraded government bonds, investors backed out of Greek bonds driving up yields, and policymakers feared potential spread of the crisis to other eurozone countries.
- The program is front-loaded and considered a multi-year effort intended to put public finances under control and modernize the economy.
- The authorities emphasize fairness, with measures to protect the most vulnerable and to ask the Greek people to share the burden fairly across all levels of society.
- Poul Thomsen (head of the IMF negotiating mission) described the fiscal adjustment as large but feasible given the starting point and the space to trim expenditure and spread the tax burden.
Implementation and monitoring
- Negotiators finalized details involving fiscal consolidation, structural policies, and financial sector reforms.
- IMF monitoring will occur through quarterly reviews under the Stand-By Arrangement.
- The IMF Executive Board review is expected to proceed under fast-track procedures.
IMF Survey online, May 2, 2010