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INTERNATIONAL MONETARY FUND
GREECE
Fifth Review Under the Stand-By Arrangement, Rephasing and Request for Waivers of
Nonobservance of Performance Criteria
Prepared by the European Department in Consultation with Other Departments
Approved by Reza Moghadam and Lorenzo Giorgianni
November 30, 2011
Stand-By Arrangement. On May 9, 2010, the Executive Board approved a three-year Stand-By Arrangement for
Greece in the amount of SDR 26.4 billion (2,399.1 percent of quota). Purchases have been made at the time of approval
and upon completion of each of the first four reviews (in a total amount equivalent to SDR 15.6194 billion, or
€17.9 billion). The sixth disbursement, subject to completion of this review, would be in an amount equivalent to
SDR 1.9224 billion (about €2.2 billion). To date, Euro area countries have disbursed €47.1 billion (of €80 billion
committed) and will make available about €5.8 billion with this review.
Recent Developments.
At the July and October EU Summits, European leaders mapped out an enhanced official
support package for Greece and set the parameters for significant private sector involvement (PSI, targeting a face value
haircut of 50 percent). However, the drawn-out debt restructuring discussions have taken a toll on market sentiment and
ratcheted up pressure on the banking system (which is heavily exposed to sovereign bonds). Emergency liquidity
assistance from the Bank of Greece has helped address a significant increase in deposits outflows. Meanwhile, since the
fourth review, the economic situation in Greece has taken a turn for the worse, with the economy increasingly adjusting
through recession and related wage-price channels, rather than through structural reform-driven increases in productivity.
After a large adjustment in 2010, fiscal policy has struggled to keep up with recessionary pressures.
The authorities have also struggled to implement the reforms approved under the June medium-term fiscal strategy. Privatization plans are
advancing, but difficult market conditions and technical delays prevented any sales during the third quarter. Structural
reforms have not yet delivered expected results, in part due to a disconnect between legislation and implementation.
Finally, in an important shift in the political landscape, the three major political parties combined to form a coalition
government to be led by a technocratic PM Elections are now expected late in Q1 2012.
Program Status. Staff’s overall assessment is that the new government and parties supporting it are committed to the
program’s objectives and policies.
Against this political backdrop, the authorities have taken steps to bring the fiscal program back on track, taking meaningful measures to cut public wages, employment and pensions, and to broaden the tax base (prior actions).
The new financing strategy can place the program on a sustainable foundation (assuming that the
PSI strategy delivers the targeted debt gains via near universal participation of creditors).
Policies have been adapted in a
way that will better deliver program objectives and with greater balance, in particular by adjusting the primary surplus
targets guiding fiscal policy and the near-term and post-program privatization targets. In the privatization area, the
authorities have advanced the preparation of various assets for sale (prior action). In the financial sector, they have
legislated a new framework for bank resolution, refined the capital support strategy to better handle the implications of
the PSI agreement, and taken steps to strengthen the operations of oversight agencies (prior action). Finally, concerning
growth-enhancing structural reforms, they have scaled up the ambition of labor market reforms to meet the challenge
from rising unemployment (prior action) and specified strategies to bring other reforms back on track. Still, risks to the
program remain large, both from external sources (the worsening outlook for the euro area), and internal sources (a
relapse into weak implementation).
Discussions. See the Fund Relations Appendix
Publication. The Greek authorities consent to the publication of the Staff Report
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Contents Page
I. Background .............................................................................................................................4
II. Recent Developments ............................................................................................................4
III. Discussions ..........................................................................................................................9
IV. Staff Appraisal ...................................................................................................................32
Tables
1. Selected Economic Indicators, 2006–11 ..............................................................................48
2. Monetary Survey, 2006–11 ..................................................................................................49
3. Financial Soundness Indicators, 2005–11 ............................................................................50
4. Modified General Government Cash Balance, 2011 ...........................................................51
5. Status of Macro-Structural Reforms ....................................................................................52
6. Medium-Term Macroeconomic Framework, 2010–16 ........................................................53
7. Summary of Balance of Payments, 2009–16 .......................................................................54
8. General Government Operations, 2009–15 .........................................................................55
9. Revenue Collection Process .................................................................................................56
10. Spending Process ...............................................................................................................57
11. Banking Sector: Uses and Sources of Funds, 2006–16 .....................................................58
12. Structural Reforms Ahead ..................................................................................................59
13. Access and Phasing Under the Stand-By Program ............................................................60
14. General Government Financing Requirements and Sources .............................................61
15. External Financing Requirements and Sources, 2009–16 .................................................62
16. Indicators of Fund Credit ...................................................................................................63
Figures
1. Financial Indicators ..............................................................................................................39
2. Selected Indicators ...............................................................................................................40
3. Competitiveness Indicators ..................................................................................................41
4. Balance of Payments ............................................................................................................42
5. Money and Banking Indicators ............................................................................................43
6. Budget Execution .................................................................................................................44
7. Revised Macro Projections ..................................................................................................45
8. Macro Projections—International Comparison ...................................................................46
9. Minimum Wage and Tax Wedge .........................................................................................47
Boxes
1. PSI Discussions ....................................................................................................................36
2. Cyclical Factors in Recession and Recovery .......................................................................37
3. Managing the Impact of PSI on the Banking System ..........................................................38
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Appendixes
I. Debt Sustainability Analysis ................................................................................................64
II. Fund Relations.....................................................................................................................76
Attachments
I. Letter of Intent ......................................................................................................................79
II. Memorandum of Economic and Financial Policies ............................................................82
III. Technical Memorandum of Understanding .....................................................................103
IV. Letter of Intent to EC and ECB .......................................................................................116
V. Memorandum of Understanding on Specific Economic Policy Conditionality ...............119
