Transcript

With Poul Thomsen, IMF Mission Chief
Servaas Dervoose, EC Mission Chief
Denis Blenck, ECB Senior Advisor, and
Gerry Rice, IMF External Relations
Athens, November 23, 2010

MR. RICE: Good morning, everyone. Welcome to this press conference. I'm Gerry Rice from the IMF. This is a joint press conference on behalf of the European Commission, the European Central Bank, and the IMF, on the second review of the Greek government's economic program.

There will be a joint press statement, as we normally do at the end of these press conferences. So you will be able to pick one up on your way out. And we have that in English and we have that in Greek.

With that, let me turn to the panel and as normal and have a few introductory remarks. To my far left is Mr. Denis Blenck. He is the Senior Advisor at the European Central Bank. Sitting next to him is Mr. Servaas Dervoose, who is the Deputy Director General in the European Commission. And to my immediate left is Mr. Poul Thomsen, who is the Deputy Director of the European Department of the IMF and Mission Chief for Greece.

So with no further ado, let me ask Mr. Dervoose to make a few opening remarks, followed by Mr. Thomsen, Mr. Blenck, and then we'll go to your questions. Thank you.

MR. DERVOOSE: Thank you very much. Very good morning, ladies and gentlemen. As you are aware, staff from the European Commission, the European Central Bank, and the IMF have visited Athens during the period 15 November to today. We have assessed compliance with the terms and conditions of the second program review.

Our overall assessment of the program is that the program is broadly on track, and we would illustrate this with four key messages. One is that the growth outlook is broadly in line with expectations. Two, impressive fiscal consolidation is underway, with the government strongly committed to respect fiscal targets despite structural data revisions. Three, financial sector stability is being consolidated. And four, after an impressive first phase of structural reforms, the government is committed to a second wave of far-reaching structural reforms.

I will go into each of these four key messages. Let's say on the first three and then on financial markets, Denis will say some words, and Poul Thomsen will add a number of words on micro and structural sides.

As to the economic outlook, let me stress that GDP growth is evolving broadly as expected, although somewhat weaker than first projected in May. But the important message is that the recession is expected to bottom out in the first half of 2011, with the recovery gradually regaining strength going forward.

Wage and price inflation are beginning to moderate, setting the stage for an adjustment in price competitiveness. Turning to budgetary issues, fiscal consolidation has been impressive and is progressing well.

Nevertheless, important challenges remain. The authorities’ fiscal strategy remains firmly anchored in reducing the deficit below 3% in 2014. All the end-September quantity targets have been met and we expect that the government will meet the end-year cash targets for 2010.

It has already been reported that for 2010 on ESA base the Government is expected to be 1 1/2 percent higher than in the program. This is essentially due to both the data revision in 2009 and underperformance on the revenue side—an issue that we have already indicated in August.

For 2011 the government’s fiscal policy has been set to achieve the program target of a deficit of €16 billion, or 7.5% of GDP. Important to stress is that for 2011 most measures have already been announced in the May 2011 program. But in order to make up for the shortfall of 2010 the government has committed to new measures of 2.5 % of GDP. This will imply a fiscal effort—again very impressive—of 6% of GDP overall in 2011.

To realize the 2014 deficit, the government will identify additional structural fiscal measures up to 5% of GDP for the period 2012-2014. In time for our next review, it will prepare a strategic paper specifying a number of actions to close this gap in the medium term.

To achieve such an ambitious, durable fiscal adjustment, far-reaching fiscal and institutional reforms are needed. Two categories of reforms are needed over the medium term: the first category are measures which address directly weaknesses on the fiscal front. The second one are measures which yield dividends in terms of growth already in the short term.

On the first category of measures, the government will undertake far-reaching reforms in the areas of healthcare, public enterprises—the DEKOs, tax administration, and privatization of state assets. As regards structural reforms to restore competitiveness and growth, the government is determined to launch a second wave of reforms. They will prioritize reforms in the areas of labor markets, restricted professions, and they will also unlock the potential in a number of key industries, in particular in tourism and trade.

I would now like to stop here and ask Poul to add a number of words.

MR. THOMSEN: Thank you, Servaas. Indeed this ambitious program remains broadly on track. Let me make five observations.

First, the this ambitious fiscal program is well underway. Targets for end-September were met, and we think that the end-September cash deficit target for the government is well within reach.

Second, the authorities have maintained the original program target for 2011. This means that in one year they will not only make up for the statistical revisions announced by EuroStat, but they will also make up for revenue weaknesses and overspending at local levels—problems that were evident in recent months. Take additional corrective measures to be sure that we stick to the original part of the fiscal deficit included in the program.

Third, this will indeed require—and is requiring—an unprecedented fiscal adjustment. In 2010 we have an improvement in fiscal deficit from 15½ to 9½ percent of GDP on an accrual basis. That's a change of 6 percent of GDP, in an economy that's contracting by 4 percent of GDP, with the revenue basis contracting, where unemployment payments are going up. In order to have this reduction in the headline deficit of 6 percent of GDP, the government has taken measures of 9 percent of GDP this year.

Looking into next year, in order to have a further reduction to 7½ for a total change over 2009 of 8 percent of GDP, during a period where we have a cumulative contraction of the economy by 7 percent of GDP, the government has taken total measures during this period towards 15 percent of GDP. This is, by any international comparison, a very ambitious fiscal path, and we are well on the way to achieving these targets.

Now, four, you will ask me is it credible? We have to realize that there are pressure points. It is evident tax collections are not doing as well as we had hoped for. It's evident that there are problems in controlling spending at local levels, not least in the health sector. So far, the government has been able to offset these shortfalls by under-spending at the state level. That's why the overall targets are still being met. That's clearly not a sustainable strategy going forward. You cannot keep on cutting at the state level to offset the lack of control in other areas.

So the sustainability of the program going forward hinges clearly on deep structural reforms in the fiscal sector, as noticed by Servaas.

Three areas are key: sustainability will hinge on comprehensive reform in the health sector to regain control over health spending, while of course at the same time preserving an efficient health system. Two, the sustainability of the fiscal program will hinge on comprehensive reform of the state enterprise sector, where there is considerable waste. And three, perhaps above all, the sustainability of the fiscal program will depend on structural reform to improve tax administration.

Let me stress: this is nothing new. We knew that when the program was drawn up. An ambitious reform in all of these three areas were part of the original memorandum, as it was formulated, but we are now at a stage that we have to start implementing and being more concrete about them.

Fifth, and the final, let me emphasize that these structural reforms are important not only from an economic perspective. I think they are also essential to maintain the social fairness of this program. So far, the burden has been shouldered to a large extent by wage earners, pensioners, and to preserve the broad social support for this program, it is essential that there is a strong effort to increase taxation, to improve tax collections—not least from the well-off. That there is an ability to cut back public enterprises that are overstaffed and overpaid, many of them. That is an essential part of preserving the fairness of this program going forward.

So in conclusion, the program is off to an impressive start, but the program is also at a crossroads, wherein sustainability of achievements to date will only be maintained if there is a very determined effort to move on structural reform in the areas that I have mentioned. The strength of the program so far has not only been that it's an ambitious front-loaded program. The strength has also been that the government is very determined, that it is the government's program, and that is socially well balanced. And what we are seeing here I think preserves these strengths. Thank you very much.

MR. RICE: Thank you, Poul. I'll call upon our colleague from The European Central Bank for a few words on the financial sector.

MR. BLENCK: Thank you, Gerry. Since the beginning of the program, the objectives of the financial sector have been met. To maintain the stability of the financial system and ensure that adequate measures are in place to secure the liquidity of the banking system and its stability.

The liquidity of the banking system—the Bank of Greece, in full cooperation with The European Central Bank, is monitoring the situation and has the necessary tools available to ensure sufficient liquidity. A new step is presented by the activation of the additional state guarantees for up to Euro 25 billion Euro.

With regard to the solvency of the banking system, further progress was done recently with the initiatives of some private banks to tap financial markets through rights issues, and those initiatives are very welcome.

A backstop is there to address any capital needs that might arise. It was set up with Hellenic Financial Stability Fund, which could get resources of up to 10 billion Euro. Support of the Fund was established. The Fund received the first assignment of resources of 1.5 billion Euro, and the rapprochement of staff is ongoing.

Finally, the banking sector, the government has devised a program to enhance the stability and efficiency of the banking entities which belong to the private sector, and which are under its control. The first steps of the program were already met, and further progress is ongoing. Thank you.

MR. RICE: Let's move to your questions.

QUESTIONER: My question is specifically for Mr. Dervoose. The IMF, I understand Mr. Paulson can tell us now whether he can give a green light for the fair increment of the loan. However, can you specify that if you write a comprehensive report, such as to the Eurogroup, that the third increment should be granted to Greece? Can you guarantee the members of the Eurozone, the finance ministers, will accept your report, and grant the increment? Because we've seen before the Germans and the Austrians suggesting that there might be some problems. Is there a guarantee for this?

MR. DERVOOSE: Let me just remind you the normal procedure for the disbursements of the loans. Today, we have finished a review to assess the compliance with conditions for second review. Like last time, we have made our assessment; we conveyed the assessment to you. We will indeed to make a compliance report which will be discussed and assessed by the bankers of the Euro area. And if they follow the assessment, which is contained in our report, they will act accordingly. I cannot speak on any of the countries that you mentioned. It is not on the order today. Thank you.

QUESTIONER: Question for Mr. Thomsen. In your previous IMF staff report on the program, you clearly stated at the beginning that you may underestimated the downside risks of the policy being implemented. That was on economic activity in Greece.

Are you saying now, three months later, with all the indicators showing a deepening recession over the mid-term, that these medium-term risks have not yet materialized—that they are still risks than can be overcome in one or even two years? Given especially the heavy burden of debt that has been piled on Greece in the past months?

MR. THOMSEN: The issue of risk is a very good question. As Servaas mentioned, as far as the development of GDP--and this year and next year we are largely on track. As deviation comes in these programs, it's actually a very, very small deviation. I think we have, what is it, 4.1, 4.2 percent this year? It's been minus 4 percent and we have minus 3 percent next year instead of minus 2.6 percent. So we are very close to the target path.

I think it's correct to say that looking into the next couple of years, I would say there are some downside risks. The external environment is uncertain, it’s quite uncertain. But I do think that the main risk, by far the main risk, is leaning to the possibility that reforms could not be as forceful or could be delayed. If reforms are are delayed, clearly we will not get the gradual improvement in the investment climate that we assume over the next couple of years. And to me, that is the key issue. But for the near term, for the rest of this year and next year, I don't see too big risks to these projections.

MR. DERVOOSE: Let me just add also a positive tone. If the very impressive setss of reforms are continued, and that is the firm intention of the government, and you will see its plans without long delay, you will see that structural reforms can contribute enormously to growth. There has been a recent economic analysis indicating that a comprehensive of structural reforms could raise quite considerably GDP growth over the medium term. You may remember that growth in Greece over the last ten years before the crisis was of the order of 3 1/2-4 percent, annually. It has come down. I guess two potential increases, around 2-3 percent growth. All forecasts indicate that growth at the end of the program will go to 2-3 percent. But I do think that if structural reforms are fully enacted, in time, then the growth will be even higher than 3 percent at the end of the program. Thank you.

QUESTIONER: Question to Mr. Thomsen. I just wanted to clarify a comment you made earlier, when you said some of the structural reforms—specifically healthcare, state enterprise reform—were known at the beginning of the program, but now it's time to become a little more specific and concrete about that. Can you tell us what is becoming more specific and concrete? Are there specific timelines? And, if I may, does state enterprise reform also include layoffs of public sector employees.

MR. THOMSEN: From the outset, it was known that you need to do deep structural reform in the fiscal sector, beginning with tax administration, but moving on to the others that I talked about. Also, some of these reforms were not specified in full details. We specify more and more details as we come closer and closer to the reform. So that what's I meant. It's nothing new that these are an important focus of the program, but we are not at the stage where we need to be more specific about such technical detail as they are coming up.

On the tax reform, in particular, significant changes have been put in place, but they are not yet yielding results, and perhaps it’s unrealistic to expect them to yield results on such a short term, but I would expect that starting early next year, in a new calendar year there will be noticeable results.

But I do think it’s important as I said before, we are at a crossroads. If we come back in March and if we sit in front of each other again, I would expect enterprise reform and health sector reform and the details of these reforms to be something that we will be discussing. Right now, it is objectives and broad areas of focus, but the details of these reforms and a timeline around the action plan for implementation of these reforms is what I will expect to discuss the next time around. On the issue of employment, we are clearly of the view that the official sector—not at least the state enterprise sector—is overstaffed and that there will have to be reductions in employment. Now, the plan of the government is, and I support this, is to do a voluntary mechanism where you only replace one in each five retiring employees. And retirement is actually pretty large, so you could have a significant reduction in a number of years through this mechanism. So, yes, there is going to be employment reduction, but it’s going to be through a voluntary mechanism.

MR. DERVOOSE: Let me just add, on the reforms. So, as Poul indicated, reforms were in the plans, but in a very simple way, just reform on healthcare will be undertaken in the course of the program. Now, after the very successful pension reform, the healthcare reform will be the second major reform in what I would call the state-fiscal area. You know very well that the healthcare systems in Greece are very expensive, the public health expenditures are on the order of 6% of GDP, well above the average of the European Union. Increases over the last 45 years in real terms were about 5 to 6%, again, well above those expenditure increases in the rest of the European Union.

So, in the discussion that we have had with the government and with the minister concerned, we have discussed quite a number of avenues to be followed, with two-fold objectives: one is to reduce waste and improve quality of service, but also to reform over time the whole healthcare system. The potential for treasury savings in the healthcare system are of the order of 2% of GDP in the medium term, that is to say in one year, we need to be clear on that. And the measures which are already undertaken in 2010 will carry over effects in 2011. And going forward with the new measures that the new minister of healthcare is planning to undertake, healthcare will contribute significantly in reaching the target of 2011. So, actions for healthcare will focus on three areas: spending on drugs, administrative reforms, and hospital expenditures. These are the three areas of the medium term that the government will focus on.

On the DEKOs, as you know, these enterprises have been brought under closer inspection of the Ministry of Finance, given that they are now following the revision of Eurostat, have been brought within the pyramid of general government. You also know that, as Poul has indicated, that the public enterprises are a source of major losses for the taxpayer and also have huge inefficiencies. So the government’s intention is to set up a plan to restructure these enterprises, to contain losses, and if necessary to close down unnecessary public entities. Thank you.

QUESTIONER: This is for the two of you please, Mr. Thomsen and Mr. Dervoose. Are you prepared to extend the repayment period on the loans, and if so, by how long?

MR. THOMSEN: Let's just remind ourselves what the issue is here. The support that is being provided, the €110 billion, is on—I wouldn't say short, but relatively short terms in that much of the repayment will take place in the first and second year after the program ends. This means that as debt is profiled right now, we are going to have a hump in debt service payments—a significant hump in debt service payments as soon as the program ends.

Now, as you know, we are confident that Greece will be able to return to the market during the program period. But whether it would be able to return to a market on a scale that will allow it to borrow, not only to roll over obligations to the market, but also to repay the IMF and the European partners. That is admittedly a question. We are aware of this issue. We are aware that this is an issue that raises some concern in markets.

We have various options for dealing with it. We could start providing the rest of the financing with facilities that allow longer repaying periods. We have that option. There is a possibility of doing that. So provided the rest of the financing with longer repayment periods. Another option, of course, is to give a follow loan, so when this loan is due you just give another loan. There are a number of options. At this stage we are confident that Greece will be able to return to the market, and we hope there would be market access on such a scale that there would be no problem to repaying these €110 billion during these periods. But if that proves to be a question, we stand ready to exercise some of these options. But there has been no decision taken on how to go ahead.

QUESTIONER: Well, the question is you've been here for 15 days now. Do you feel that the collaboration on behalf of the Greek Government is a two-level one, where some Ministers were more eager to collaborate than others? And then the second question is on the assessment of the program, between ECB and IMF, was there some kind of disagreement? Some kind of different point of view in the assessment of the program? Thank you.

MR. SERVAAS: Thank you. Let me first say we have only been here for a week, instead of two weeks. It was a shorter mission than the earlier ones, given that there were elections. Two, our counterparts and our contact points for the program is the Ministry of Finance and since the beginning of the program the Ministry of Finance has been tasked with the coordination and centralization of the program discussions on behalf of the Greek government. That has proven extremely efficient. On the other hand and also from the very beginning in all our missions, we always have contacts with all the major line ministers. It has been the case in April, it has been the case in August and in September, so we met with all the major ministers who have the direct responsibility for implementation of the program.

With all these ministers, I would like to stress, contrary to what has been mentioned in the press, that the discussions have been very informative, very open, candid, but I have not met any resistance with any of the ministers on the program itself or how it has been discussed. Of course, not all share the views. If you have three economists in the room, you will also have three views and with this, I come to your question. I have to stress here, as I have stressed on previous occasions, that the collaboration between the three institutions is extremely smooth, and while we debate a lot among ourselves, at the end of the day we reach consensus. We come to the discussions with each person’s different perspectives and insights, which is an enrichment for the program—I would like to add. Three perspectives of three institutions with different tasks, but at the end of the day the cooperation is extremely smooth, we rapidly reach consensus and at least from my side I don’t see any disagreement in all the lines that we have taken so far. Thank you.

MR. THOMSEN: Let me just say, I have nothing to add on this.

QUESTIONER: My question is do you consider that any kind of restructuring of the Greek debt would be catastrophic, and also I would like Mr. Dervoose to answer the question on the repayment period.

MR. RICE: Well, I think we just had the answer—

QUESTIONER: From Mr. Thomsen, but not from Mr. Dervoose.

MR. DERVOOSE: I fully share what Poul has said.

MR. RICE: Okay. There we go. Just to prove there are no disagreements. (Laughter)

MR. RICE: Your first question? Would you like to repeat?

QUESTIONER: Yes. Do you believe that any kind of restructuring would be catastrophic for Greece?

MR. THOMSEN: The issue is still the same. We absolutely agree with the Government's view that any benefit you could think of from such a restructuring will be far, far outweighed by the cost that would be associated with it in terms of higher interest rates and lack of confidence going forward.

Again, despite all our discussions about fiscal adjustment and the debt, the real overarching issue facing Greece is how to be competitive within the Eurozone. It's structural reform, improvement in productivity, and being able to compete in a common currency area. That is the overarching issue. And these discussions about debt reduction will not fundamentally change that chance.

QUESTIONER: About the wage system in the private sector. Would you accept some terms from the Ministry of Labor, because we know that they want to put some terms about the bargaining system? And the second. If you think that it's a realistic goal in healthcare system for 2011 for account of €2.1 billion in the system of healthcare?

MR. DERVOOSE: I’m not sure I understood the second question, but I will start with the labor reform and then perhaps you could repeat the second question. On the labor market reforms, let me first indicate where we come from.

As Poul has indicated, the program has a three-fold objective. One of these is to restore competitiveness of the Greek economy. We have seen that over the last 10 years, before the crisis, Greece has lost a substantial degree of competitiveness. Figures differ, but it’s around 20% of loss of competitiveness. If you look into data, evolutions in wages in manufacturing, wholesale and retail sectors from 2000 to 2008, you can see that evolutions in wages in Greece were double than the average in the Euro area. We just substantiate the claim that competitiveness has been lost and that wages play an important part. Let me stress, an important part—not the full part, to restore competitiveness you also have to work on productivity.

So, on the wages, we have already discussed in the past a reform of the labor markets. These labor market reforms that we referred to concern the collective wage bargaining system. It has been discussed in the past and we just want to bring the discussions on the labor market reforms to a close. On the two issues under discussion, it is clear that sectoral wage bargaining in Greece has led, or is one of the major sources behind the excessive wage evolution. And wages have been, on average, out of line with productivity. There is also quite strong international experience indicating that these types of negotiations are leading to this kind of rises in wages.

So, the question has been for several months that these collective wage bargaining systems will be improved and will be improved by two elements: by allowing flexibility for firm-level wage negotiations; and two, the elimination of the automatic extensions for these agreements. On the firm-level agreements, it is clear that in order to be effective, one should not add new conditions to these agreements. I would like to stress that we are not speaking about level of wages and we are not in discussions with the ministry. It was indicated that for instance minimum wages would not be affected by this flexibility at the firm level, so it is related to deviations on the sectoral levels in terms of growth of wages. Thank you.

QUESTIONER: Could you be more specific about the additional measures for the periods 2012, 2014?

MR. DERVOOSE: No, not for the moment. During the mission, we have essentially focused on discussions for the budget for 2011, we have also discussed the way forward, what is at the end of the program (2012-2014), what still has to be done.

So we have made estimates of the degree of further measures to be identified because in May, already, a degree of measures were identified. The 5 percent is on top of those measures already identified in May and the Ministry will prepare its strategic paper in the early months of next year. We will discuss it together at the time of our next review. It’s too early to say the concrete measures, but it is certainly true that areas that we have indicated in terms of healthcare, public enterprises privatization, tax administration, public management. These are the key areas that will have to be on the table. Thank you.

MR. THOMSEN: If I could just add. I think the way you need to think about this 5 percent that comes in 2012 and 13 has to be from fiscal structural reform. It cannot come from increasing tax rates. That's not good for the econom, nor can it come from cutting wages and pensions. It's not socially sustainable. It has to come from better collecting taxes and having more efficient use of public sector resources. It has to come from structural reform. It takes time to put in place. And it takes time for them to yield results.

QUESTIONER: Can you give us a specific number or a percentage how many employees of the state sector must we take out?

MR. DERVOOSE: I thought we already answered that issue, let me just stress if what you are missing here is that what was already answered at the time of our previous discussion. I guess what you are referring to is the 5 to 1 rule. The 5 to 1 rule is a voluntary agreement with the government, but it’s up to the government to indicate how this rule will be implemented. There will be no dismissals. This is not the issue. The issue is about replacement of people who retire and exit the public sector; only one in five will be replaced. So, that is the issue and in order to do that on an efficient basis, the government will prepare on an annual basis a human resource management plan, which will indicate where are the needs in departments and how the new entrants could be allocated. Thank you.

QUESTIONER: The question is for Denis Blenck. Would you be kind enough to reveal to us the suggestions to the government on the restructuring of the banking system? In a particular, would you mind, about Agricultural Bank. Thank you.

MR. BLENCK: As I mentioned, the government has launched a program to see how to improve the efficiency and the stability of the four entities which are under its control. The first steps were already achieved, it means due diligence procedures and the study which was completed by the investment banks on those four banking entities and their integration within the broader Greek banking system. From those first steps, a certain number of options emerged and the government has to envisage what are the best options for the future. More in-depth work has to be done anyway before taking decisions and that’s conducted also in closer contact with the European Commission because those four banking entities having received state support have to provide viability and restructuring plans to the European Commission.

So, more work has to be done and that applies especially to the Agricultural Bank, which is already conducting a restructuring plan with broad organization of the bank. More work will be done in that direction and it’s only when this restructuring plan has been moved further that the government will be in a position to decide what are the best options for the participation of that bank. So, it’s too early to say more on the developments to come; and anyway, it will be up to the government to take the proper decisions regarding the participations in those four banking entities.

MR. RICE: Thank you. Thank you all for coming. We appreciate it. Thanks very much.