EXECUTIVE SUMMARY
A joint Commission / ECB / IMF mission met with the Greek authorities in Athens from 3 May to 2 June, and 21 to 23 June 2011. The mission assessed compliance with the terms and conditions of the Fourth Review under the Economic Adjustment Programme.
Over the last year, the programme of economic policies has shown to be appropriate to help Greece in reducing its macroeconomic and fiscal imbalances. The objectives of the programme are restoring fiscal sustainability; preserving financial stability and adequate
liquidity in the banking sector; and restoring competitiveness.
After a strong start in the summer of 2010, reform implementation has substantially decelerated in recent quarters. Insufficient political consensus on a number of reforms,
weaknesses in political coordination and constraints in administrative capacity have weighed on
programme implementation. A reinvigoration of the adjustment programme is necessary to
prevent the fiscal deficit from getting entrenched at unsustainable levels, but also to implement
the structural reforms that will support the recovery.
The recession appears to be somewhat deeper and longer than initially projected.
Economic activity contracted in 2010 by 4½ percent, slightly more than projected at the
inception of the programme and subsequent reviews. The contraction mainly concerned
domestic demand, while the external sector has gained traction, thus contributing to the
reduction in external imbalances. Progress in rebalancing the economy is also evidenced by a
gradual reduction in inflation, wage settlements and labour costs. Yet, a further substantial
reduction in unit labour costs will be necessary to perceptibly improve competitiveness.
Contrary to earlier expectations, economic activity is expected to continue contracting in the
second half of 2011, as additional fiscal consolidation and liquidity constraints are taking their
toll on the economy. Real GDP growth for 2011 is now forecast at -3¾ percent in 2011, and to
return to positive territory from 2012 onwards.
The fiscal performance criteria for the first quarter of 2011 have been met but underlying
problems remain unresolved. The performance criteria concern state expenditure, government
primary balance, central government debt and new state guarantees. Tax collection continues to
underperform compared to plans, even after the downward revisions agreed in previous reviews.
Although part of this underperformance results from the severity of the recession and the
liquidity constraints of taxpayers, several measures to fight tax evasion have not been fully
effective. Nonetheless, the quarterly performance criterion on the primary balance has been
achieved thanks to under-execution of expenditure at the state level, and relatively favourable
results in the budgetary execution of local government and social security. Moreover, a number
of weaknesses in expenditure control have not yet been overcome. As a result, arrears to
suppliers by the ministries, hospitals and other public entities, instead of having been eradicated,
have increased further. There is a distinct risk that the performance criterion on primary balance
for end-June has been missed.
The government is adopting a number of structural measures to ensure that the ESAbased
fiscal deficit ceiling for 2011 is respected. The previous review mission (February)
found that, without additional measures, the fiscal target for 2011 would be missed by at least ¾
of a percentage point of GDP. In the meantime, the gap between projections and the deficit
ceiling has widened substantially. If no action was taken, the government deficit in 2011 would
European Commission
The economic adjustment programme for Greece
2
remain close to the 2010 level, above 10 percent of GDP. To close this gap, the government has
announced several deficit-reducing measures amounting to almost 3 percent of GDP in 2011.
A medium-term fiscal strategy (MTFS) has been prepared to ensure the durability of
fiscal consolidation. The aim is to reduce the government deficit to 2½ percent of GDP in 2014
and further in 2015, and place the debt ratio on a downward slope. To meet this objective, the
government identified fiscal consolidation measures of about 10 percent of GDP between 2011
and 2014, and above 11 percent of GDP if the period through 2015 is considered. The MTFS
includes multiannual spending ceilings per ministry and establishes, therefore, a medium-term
fiscal framework.
The MTFS addresses a number of key weaknesses of public finances in Greece. While a
large-scale fiscal consolidation package needs to touch all areas of government activity, the
MTFS particularly aims to reduce overstaffing of the public sector, improve financial
performance of state-owned enterprises and streamline social transfers. Expenditure measures
include cuts in the public sector wage bill, operational expenditure, defence expenditure and
investment; reduction in transfers to extra-budgetary funds and other entities; savings in stateowned
enterprises; cost-cutting initiatives in healthcare expenditure, pensions and other social
benefits while protecting the most vulnerable. The cuts in the public sector wage bill will be
achieved by eliminating most allowances in the context of a comprehensive wage grid reform
and an increase in working hours. An attrition rule of 1 recruitment for 5 exits had already been
taken into account in previous projections: it is now made stricter for 2011 and extended into
2015. The attrition rule, a reduction in temporary contracts, and the abolition in elected
positions following the recently implemented local government reform are expected to reduce
the number of government staff by 20 percent from 2010 to 2015. Moreover, excess staff is
expected to be moved to a labour reserve at reduced wages. Revenue measures entail increases
in a number of tax rates, some new taxes, abolition of several exemptions and measures to
improve tax compliance. However, the most recent tax measures increase the complexity of the
system. Efforts will, therefore, be necessary in the future to broaden tax bases and streamline the
tax system as a whole.
To be successful, the MTFS has to be implemented in a decisive manner. Implementing
legislation has been approved by Parliament at the end of June, and the approval of some other
acts is expected shortly. Nonetheless, the implementation of this comprehensive policy package
which aims to remove waste in all government entities is subject to significant risks. The delays
in preparing the MTFS illustrate the increasing difficulties of the government to formulate and
collectively support the necessary economic reforms. On the positive side, the impact of the
measures that raise particularly large implementation risks, and that are difficult to quantify,
have not be considered for the initial years (2011-13) covered by the MTFS. Among these are
measures to reduce tax evasion or the misuse of social benefits.
Important steps have been agreed to strengthen and accelerate the privatisation
programme. The Greek government is one of the European sovereigns with the richest
portfolio of assets. This portfolio includes listed and non-listed companies, concessions and
commercially-viable real estate (buildings and land). Most of these assets have not provided any
relevant revenue, while loss-making state-owned enterprises have actually been a source of
costs. Privatising those assets will contribute to reduce debt with a small, if any, cost in terms of
future revenue. At the same time, privatisation promotes the economic activity and foreign
direct investment. Key assets to be privatised have been identified and an indicative calendar of
privatisation has been agreed. In order to accelerate the procedure, and ensure the irreversibility
Executive summary
3
of the whole process, the appropriate governance is being put in place: a privatisation fund
managed by an independent and professional board has been legislated and will be established
shortly. A new quantitative quarterly criterion on the cumulative privatization proceeds will
help monitor progress in this area.
The financial sector situation remains fragile. Banks are still shut off from international
capital markets and the level of deposits keeps contracting. This reflects consumption
smoothing and lack of working capital at corporate level, but also the uneasiness caused by the
ongoing discussion about debt restructuring. Concomitantly, the reliance of Greek banks on
Eurosystem funding peaked in June 2011, after declining during the first quarter of 2011.
Banks’ liquidity has been further affected by shrinking collateral pools because of rating
downgrades and declines in collateral valuation, as well as changes in the Eurosystem’s
collateral rules.
The Greek banks entered the crises with relatively strong capital buffers, though these
varied considerably among banks. Asset quality has continued to deteriorate amid a weak
economic environment, and provisioning levels are comparatively low. Several Greek banks are
under restructuring, though the process has been slow. The Bank of Greece will require
additional capital buffers against potential further deterioration of the operational environment,
based on each bank’s specific risk profile. Obviously, the outlook for the Greek financial sector
is not independent from choices concerning private sector involvement.
Several structural reforms have been legislated. Over the last year, the Greek government
has adopted several structural reforms in the areas of pensions, healthcare, labour market,
product and service market regulation and other reforms to improve the business environment.
Other than the reforms that are part of the fiscal consolidation efforts (e.g. pension and
healthcare), these reforms aim at removing rigidities, reducing production costs, and increasing
competition and competitiveness. While a decline in wages has contributed to competitiveness,
the growth-enhancing reforms have not yet reached a critical mass that allows them to have a
tangible impact on the economy’s productivity and ability to grow. A decisive implementation
of the several measures which were legislated or are under preparation is necessary to improve
the business climate and pave the way for sustainable economic recovery.
Delays in implementing structural reforms reflect administrative capacity limits and
constraints in political coordination. Against this background, the mission discussed the need
to establish a formal project-management framework, in particular for the structural reforms. It
recommended that project managers be nominated for each initiative to be carried out in key
areas (labour market reform, product and service market reform, fast-track investment, etc.) and
that an internal committee be mandated to develop, utilise, and publish result-oriented indicators
for each of the key structural reform initiatives, on a regular basis.
Strengthening technical assistance is crucial to assure strict programme implementation
and addressing capacity issues. Technical assistance by the Commission and the IMF has been
useful in a number of areas like statistics, absorption of structural funds and land registry; and
taxation, public finance management and financial sector reforms. Effective technical assistance
should now be extended to other areas and should be provided also by the euro-area Member
States.
Debt sustainability can only be restored if the government fully adheres to the fiscal
consolidation and the privatisation plan. On the basis of current projections, the Greek
European Commission
The economic adjustment programme for Greece
4
government debt ratio will peak in 2012 and decline afterwards, with a significant contribution
from the privatisation plan. In any case, the Greek government debt will remain for many years
at a high level and, therefore, subject to possible adverse developments that cannot be predicted.
In particular the debt sustainability assessment is very sensitive to growth outcomes,
highlighting the crucial importance of frontloading growth-enhancing structural reforms.
The cost of market financing remains prohibitive. Yields have increased substantially in
recent months recording peaks well above those registered at the programme’s inception. It is
unlikely that yields will return to affordable levels in a matter of a few quarters. Reflecting this
situation, the Greek sovereign rating has been further downgraded by the main credit rating
agencies. The market scepticism is related to doubts about the ability of the Greek government
and society to persevere in fiscal consolidation, and in restoring competitiveness.
__________________
One year after the start of the programme, almost half of the international assistance
loans have been disbursed. By now, the euro-area Member States and the IMF together have
disbursed EUR 53 billion: EUR 38.5 billion by the euro-area Member States and EUR 14.5
billion by the IMF. The fifth disbursement would amount to EUR 8.7 billion from the euro-area
Member States and EUR 3.3 billion from the IMF, and bring total disbursements to EUR 65
billion.
Full and timely implementation of the comprehensive policy package agreed during the
mission should ensure further progress towards fiscal consolidation, financial stability and
improved competitiveness. In particular, the ambitious medium-term fiscal strategy and the
enhanced privatisation programme are expected to keep the economic adjustment programme
on track. However, there are significant implementation risks, which, if not properly addressed,
would endanger the success of the programme in restoring competitiveness and debt
sustainability.
A number of pre-conditions are necessary for the adjustment process to be successful. The
programme of fiscal, financial and growth-enhancing reforms needs to be strictly implemented.
Privatisation has to accelerate. Given the length, magnitude and nature of required reforms,
political and social consensus remains a prerequisite for success. Weaknesses in institutional
capacity will need to be addressed through enhanced technical assistance.
Against this background, a reinvigorated economic adjustment programme with scaled up
financing assistance appears necessary. While noting the responsibility of the Greek
government and other stakeholders to contain implementation risks identified in this report, the
Commission services recommend this disbursement to take place, and at the same time to set up
the main parameters for a new financing programme..
Δείτε το πλήρες κείμενο
A joint Commission / ECB / IMF mission met with the Greek authorities in Athens from 3 May to 2 June, and 21 to 23 June 2011. The mission assessed compliance with the terms and conditions of the Fourth Review under the Economic Adjustment Programme.
Over the last year, the programme of economic policies has shown to be appropriate to help Greece in reducing its macroeconomic and fiscal imbalances. The objectives of the programme are restoring fiscal sustainability; preserving financial stability and adequate
liquidity in the banking sector; and restoring competitiveness.
After a strong start in the summer of 2010, reform implementation has substantially decelerated in recent quarters. Insufficient political consensus on a number of reforms,
weaknesses in political coordination and constraints in administrative capacity have weighed on
programme implementation. A reinvigoration of the adjustment programme is necessary to
prevent the fiscal deficit from getting entrenched at unsustainable levels, but also to implement
the structural reforms that will support the recovery.
The recession appears to be somewhat deeper and longer than initially projected.
Economic activity contracted in 2010 by 4½ percent, slightly more than projected at the
inception of the programme and subsequent reviews. The contraction mainly concerned
domestic demand, while the external sector has gained traction, thus contributing to the
reduction in external imbalances. Progress in rebalancing the economy is also evidenced by a
gradual reduction in inflation, wage settlements and labour costs. Yet, a further substantial
reduction in unit labour costs will be necessary to perceptibly improve competitiveness.
Contrary to earlier expectations, economic activity is expected to continue contracting in the
second half of 2011, as additional fiscal consolidation and liquidity constraints are taking their
toll on the economy. Real GDP growth for 2011 is now forecast at -3¾ percent in 2011, and to
return to positive territory from 2012 onwards.
The fiscal performance criteria for the first quarter of 2011 have been met but underlying
problems remain unresolved. The performance criteria concern state expenditure, government
primary balance, central government debt and new state guarantees. Tax collection continues to
underperform compared to plans, even after the downward revisions agreed in previous reviews.
Although part of this underperformance results from the severity of the recession and the
liquidity constraints of taxpayers, several measures to fight tax evasion have not been fully
effective. Nonetheless, the quarterly performance criterion on the primary balance has been
achieved thanks to under-execution of expenditure at the state level, and relatively favourable
results in the budgetary execution of local government and social security. Moreover, a number
of weaknesses in expenditure control have not yet been overcome. As a result, arrears to
suppliers by the ministries, hospitals and other public entities, instead of having been eradicated,
have increased further. There is a distinct risk that the performance criterion on primary balance
for end-June has been missed.
The government is adopting a number of structural measures to ensure that the ESAbased
fiscal deficit ceiling for 2011 is respected. The previous review mission (February)
found that, without additional measures, the fiscal target for 2011 would be missed by at least ¾
of a percentage point of GDP. In the meantime, the gap between projections and the deficit
ceiling has widened substantially. If no action was taken, the government deficit in 2011 would
European Commission
The economic adjustment programme for Greece
2
remain close to the 2010 level, above 10 percent of GDP. To close this gap, the government has
announced several deficit-reducing measures amounting to almost 3 percent of GDP in 2011.
A medium-term fiscal strategy (MTFS) has been prepared to ensure the durability of
fiscal consolidation. The aim is to reduce the government deficit to 2½ percent of GDP in 2014
and further in 2015, and place the debt ratio on a downward slope. To meet this objective, the
government identified fiscal consolidation measures of about 10 percent of GDP between 2011
and 2014, and above 11 percent of GDP if the period through 2015 is considered. The MTFS
includes multiannual spending ceilings per ministry and establishes, therefore, a medium-term
fiscal framework.
The MTFS addresses a number of key weaknesses of public finances in Greece. While a
large-scale fiscal consolidation package needs to touch all areas of government activity, the
MTFS particularly aims to reduce overstaffing of the public sector, improve financial
performance of state-owned enterprises and streamline social transfers. Expenditure measures
include cuts in the public sector wage bill, operational expenditure, defence expenditure and
investment; reduction in transfers to extra-budgetary funds and other entities; savings in stateowned
enterprises; cost-cutting initiatives in healthcare expenditure, pensions and other social
benefits while protecting the most vulnerable. The cuts in the public sector wage bill will be
achieved by eliminating most allowances in the context of a comprehensive wage grid reform
and an increase in working hours. An attrition rule of 1 recruitment for 5 exits had already been
taken into account in previous projections: it is now made stricter for 2011 and extended into
2015. The attrition rule, a reduction in temporary contracts, and the abolition in elected
positions following the recently implemented local government reform are expected to reduce
the number of government staff by 20 percent from 2010 to 2015. Moreover, excess staff is
expected to be moved to a labour reserve at reduced wages. Revenue measures entail increases
in a number of tax rates, some new taxes, abolition of several exemptions and measures to
improve tax compliance. However, the most recent tax measures increase the complexity of the
system. Efforts will, therefore, be necessary in the future to broaden tax bases and streamline the
tax system as a whole.
To be successful, the MTFS has to be implemented in a decisive manner. Implementing
legislation has been approved by Parliament at the end of June, and the approval of some other
acts is expected shortly. Nonetheless, the implementation of this comprehensive policy package
which aims to remove waste in all government entities is subject to significant risks. The delays
in preparing the MTFS illustrate the increasing difficulties of the government to formulate and
collectively support the necessary economic reforms. On the positive side, the impact of the
measures that raise particularly large implementation risks, and that are difficult to quantify,
have not be considered for the initial years (2011-13) covered by the MTFS. Among these are
measures to reduce tax evasion or the misuse of social benefits.
Important steps have been agreed to strengthen and accelerate the privatisation
programme. The Greek government is one of the European sovereigns with the richest
portfolio of assets. This portfolio includes listed and non-listed companies, concessions and
commercially-viable real estate (buildings and land). Most of these assets have not provided any
relevant revenue, while loss-making state-owned enterprises have actually been a source of
costs. Privatising those assets will contribute to reduce debt with a small, if any, cost in terms of
future revenue. At the same time, privatisation promotes the economic activity and foreign
direct investment. Key assets to be privatised have been identified and an indicative calendar of
privatisation has been agreed. In order to accelerate the procedure, and ensure the irreversibility
Executive summary
3
of the whole process, the appropriate governance is being put in place: a privatisation fund
managed by an independent and professional board has been legislated and will be established
shortly. A new quantitative quarterly criterion on the cumulative privatization proceeds will
help monitor progress in this area.
The financial sector situation remains fragile. Banks are still shut off from international
capital markets and the level of deposits keeps contracting. This reflects consumption
smoothing and lack of working capital at corporate level, but also the uneasiness caused by the
ongoing discussion about debt restructuring. Concomitantly, the reliance of Greek banks on
Eurosystem funding peaked in June 2011, after declining during the first quarter of 2011.
Banks’ liquidity has been further affected by shrinking collateral pools because of rating
downgrades and declines in collateral valuation, as well as changes in the Eurosystem’s
collateral rules.
The Greek banks entered the crises with relatively strong capital buffers, though these
varied considerably among banks. Asset quality has continued to deteriorate amid a weak
economic environment, and provisioning levels are comparatively low. Several Greek banks are
under restructuring, though the process has been slow. The Bank of Greece will require
additional capital buffers against potential further deterioration of the operational environment,
based on each bank’s specific risk profile. Obviously, the outlook for the Greek financial sector
is not independent from choices concerning private sector involvement.
Several structural reforms have been legislated. Over the last year, the Greek government
has adopted several structural reforms in the areas of pensions, healthcare, labour market,
product and service market regulation and other reforms to improve the business environment.
Other than the reforms that are part of the fiscal consolidation efforts (e.g. pension and
healthcare), these reforms aim at removing rigidities, reducing production costs, and increasing
competition and competitiveness. While a decline in wages has contributed to competitiveness,
the growth-enhancing reforms have not yet reached a critical mass that allows them to have a
tangible impact on the economy’s productivity and ability to grow. A decisive implementation
of the several measures which were legislated or are under preparation is necessary to improve
the business climate and pave the way for sustainable economic recovery.
Delays in implementing structural reforms reflect administrative capacity limits and
constraints in political coordination. Against this background, the mission discussed the need
to establish a formal project-management framework, in particular for the structural reforms. It
recommended that project managers be nominated for each initiative to be carried out in key
areas (labour market reform, product and service market reform, fast-track investment, etc.) and
that an internal committee be mandated to develop, utilise, and publish result-oriented indicators
for each of the key structural reform initiatives, on a regular basis.
Strengthening technical assistance is crucial to assure strict programme implementation
and addressing capacity issues. Technical assistance by the Commission and the IMF has been
useful in a number of areas like statistics, absorption of structural funds and land registry; and
taxation, public finance management and financial sector reforms. Effective technical assistance
should now be extended to other areas and should be provided also by the euro-area Member
States.
Debt sustainability can only be restored if the government fully adheres to the fiscal
consolidation and the privatisation plan. On the basis of current projections, the Greek
European Commission
The economic adjustment programme for Greece
4
government debt ratio will peak in 2012 and decline afterwards, with a significant contribution
from the privatisation plan. In any case, the Greek government debt will remain for many years
at a high level and, therefore, subject to possible adverse developments that cannot be predicted.
In particular the debt sustainability assessment is very sensitive to growth outcomes,
highlighting the crucial importance of frontloading growth-enhancing structural reforms.
The cost of market financing remains prohibitive. Yields have increased substantially in
recent months recording peaks well above those registered at the programme’s inception. It is
unlikely that yields will return to affordable levels in a matter of a few quarters. Reflecting this
situation, the Greek sovereign rating has been further downgraded by the main credit rating
agencies. The market scepticism is related to doubts about the ability of the Greek government
and society to persevere in fiscal consolidation, and in restoring competitiveness.
__________________
One year after the start of the programme, almost half of the international assistance
loans have been disbursed. By now, the euro-area Member States and the IMF together have
disbursed EUR 53 billion: EUR 38.5 billion by the euro-area Member States and EUR 14.5
billion by the IMF. The fifth disbursement would amount to EUR 8.7 billion from the euro-area
Member States and EUR 3.3 billion from the IMF, and bring total disbursements to EUR 65
billion.
Full and timely implementation of the comprehensive policy package agreed during the
mission should ensure further progress towards fiscal consolidation, financial stability and
improved competitiveness. In particular, the ambitious medium-term fiscal strategy and the
enhanced privatisation programme are expected to keep the economic adjustment programme
on track. However, there are significant implementation risks, which, if not properly addressed,
would endanger the success of the programme in restoring competitiveness and debt
sustainability.
A number of pre-conditions are necessary for the adjustment process to be successful. The
programme of fiscal, financial and growth-enhancing reforms needs to be strictly implemented.
Privatisation has to accelerate. Given the length, magnitude and nature of required reforms,
political and social consensus remains a prerequisite for success. Weaknesses in institutional
capacity will need to be addressed through enhanced technical assistance.
Against this background, a reinvigorated economic adjustment programme with scaled up
financing assistance appears necessary. While noting the responsibility of the Greek
government and other stakeholders to contain implementation risks identified in this report, the
Commission services recommend this disbursement to take place, and at the same time to set up
the main parameters for a new financing programme..
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