IMF Survey: Greece Needs Deeper Reforms to Overcome Crisis

IMF News, December 16, 2011

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The economy is projected to shrink by about 6 percent in 2011.
Unemployment has reached 16½ percent of the work force.
Competitiveness is slowly improving, but Greece has not yet built up a critical mass of structural reforms to reenergize growth.
IMF mission chief for Greece, Poul Thomsen: “The economy is continuing to trend downwards, reflecting that the hoped for improvement in market sentiment and in the investment climate is not materializing.”

On December 5, the IMF’s Executive Board approved the fifth review of Greece’s economic program and released a tranche of €2.2 billion under the country’s 3-year Stand-By Arrangement.
The IMF-supported program, approved in May 2010, is part of a joint package of financing with euro area member states amounting to €110 billion.
Political development: appointment of Lucas Papademos as prime minister and public endorsement of program objectives by all major political parties has raised expectations for progress. Thomsen: “One problem with the program has clearly been the lack of broad political support.”

During 2010, the Greek government managed to reduce the fiscal deficit by 5 percentage points, despite a contraction in GDP of almost 4 percent.
The fiscal deficit is now expected to be 9 percent this year, against the program target of 7½ percent.
Thomsen: “One of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes. Any further measures, if needed, should be on the expenditure side, and on the revenue side we have to rely on improving tax administration.”

Greece and European partners agreed October 26 on a debt write-down by private creditors of 50 percent of sovereign bond face value to help reduce Greece’s overall debt burden and restore debt sustainability.
PSI will also help secure financing needed to implement the adjustment program; specific details remain to be finalized, with January now mentioned as a deadline for completion.
Thomsen: “What the debt sustainability analysis shows is that the outlook for debt is highly dependent on growth... If we don’t get this boost to potential growth over the medium term, the debt sustainability analysis shows that there is clearly a problem.”

Greek banks are heavily exposed to Greek sovereign bonds; a 50 percent haircut would have a deep impact on bank capital and could imply large recapitalization needs.
Deposit withdrawals since the beginning of the year amount to €32 billion, or more than 16 percent of end-year deposits.
Consequences: bank liquidity remains very tight; banks are reevaluating credit risks and deleveraging, contributing to growing difficulties for businesses and households in accessing credit.
Measures: a process is underway to strengthen the public backstop mechanism to provide capital for banks that cannot raise necessary capital through market-based means.

Two flagship reforms—on collective bargaining and liberalizing restricted professions—have yet to deliver substantial results.
Delays in reform implementation are a crucial reason investor sentiment has not recovered as expected and why the economy is weaker than expected.
Thomsen: “Progress has been made on many fronts but there is still a long way to go. Greece is still far away from the critical mass of reforms needed to transform the investment climate.”

Recent staff visit focused on program implementation and the outlook for 2012.
Thomsen: “We continue to expect to be supporting Greece. There is no formal request yet for a new program,” and any new program would have to be evaluated by the IMF’s management and Executive Board before negotiations could proceed.

IMF Survey online, December 16, 2011.