2013 International Monetary Fund

Description
Fourth Review Under the Extended Arrangement Under the Extended Fund Facility.

© 2013 International Monetary Fund July 2013
IMF Country Report No. 13/241

March 12, 2012 2012 June 15, 2012
Greece: Fourth Review Under the Extended Arrangement Under the Extended Fund Facility, and
Request for Waivers of Applicability and Modification of Performance Criterion—Staff Report;
Staff Statement; Press Release; and Statement by the Executive Director for Greece

In the context of the fourth review under the Extended Arrangement under the Extended Fund Facility,
the following documents have been released and are included in this package:

? The staff report for the fourth review under the Extended Arrangement under the Extended
Fund Facility, and request for waivers of applicability and modification of performance
criterion, prepared by a staff team of the IMF, following discussions that ended on July 8,
2013, with the officials of Greece on economic developments and policies. Based on
information available at the time of these discussions, the staff report was completed on
July 16, 2013. The views expressed in the staff report are those of the staff team and do not
necessarily reflect the views of the Executive Board of the IMF.

? A staff statement of July 29, 2013 updating information on recent developments.

? A Press Release summarizing the views of the Executive Board as expressed during its
July 29, 2013 discussion of the staff report that completed the request and/or review.

? A statement by the Executive Director for Greece.

The documents listed below have been or will be separately released.

Letter of Intent sent to the IMF by the authorities of Greece*
Memorandum of Economic and Financial Policies by the authorities of Greece*
Technical Memorandum of Understanding*
Letter of Intent to the European Commission and the European Central Bank*
Memorandum of Understanding on Specific Economic Policy Conditionality*

*Also included in Staff Report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive
information.

Copies of this report are available to the public from

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International Monetary Fund
Washington, D.C.

GREECE
FOURTH REVIEW UNDER THE EXTENDED ARRANGEMENT
UNDER THE EXTENDED FUND FACILITY, AND REQUEST FOR
WAIVERS OF APPLICABILITY AND MODIFICATION OF
PERFORMANCE CRITERION
EXECUTIVE SUMMARY
Extended Arrangement. On March 15, 2012, the Executive Board approved a four-year
Extended Arrangement under the Extended Fund Facility in the amount of
SDR 23.79 billion (2,159 percent of quota; €28 billion). Purchases totaling SDR 5.7 billion
(about €6.7 billion) have been made so far, and a purchase in the amount of
SDR 1.5 billion (about €1.8 billion) is proposed to be released on the completion of the
fourth review. Euro area countries have so far disbursed €130.6 billion since the current
program approval (of €144.6 billion committed), of which €48.2 billion was for bank
recapitalization.
Macroeconomic Developments. The economy is rebalancing. However, it continues to
do so through recession, not productivity-enhancing structural reform. Domestic
demand continues to fall albeit at a moderating pace, and import compression has
resulted in a further shrinking of the current account deficit. The large output gap and
high unemployment rate are exerting downward pressure on wages, and the
competitiveness gap in unit labor cost terms has narrowed further. Product prices are
also easing. Sentiment indicators have improved, but the recent political crisis has had a
dampening effect. With economic developments essentially as projected, no substantial
changes have been made to the program’s macroeconomic and financing outlook or to
the debt sustainability analysis.
Policy Implementation. Corrective actions are being taken to ensure that the fiscal
targets for 2013–14 are met. Considering the scale of imbalances just three years ago,
achieving the targeted zero primary fiscal balance this year would be an impressive
achievement. Nevertheless, there continue to be noticeable shortfalls in public
administration reform, revenue administration reform, and privatization. Discussions
focused on steps to catch up in these areas. Following the recapitalization of the core
banks, steps are being taken to further safeguard financial stability, including through
the sale of two bridge banks.

July 16, 2013
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Approved By
Reza Moghadam and
Hugh Bredenkamp
Discussions for the fourth review under the Extended Arrangement
were held during June 4–18 and July 1–8, 2013. The mission met with
the Prime Minister, Minister of Finance, Governor of the Bank of
Greece, and other Cabinet Ministers; and staff in these and other
ministries. The mission also met with private banks, think tanks, and
employer associations. The staff team comprised P. Thomsen (head),
R. Goyal, W. McGrew, G. Gottlieb, N. Hobdari, W. Maliszewski, and
M. Shamloo (EUR); I. Petrova and M. Soto (FAD); B. Rayner (SPR);
O. Frecaut, M. Oliva, and D. Monaghan (MCM); and W. Bergthaler and
G. Esposito (LEG). B. Traa, S. Eble, M. Athanasopoulou, G. Gatopoulos,
and M. Kalimeri (IMF resident representative office) assisted the
mission. J. Manning and C. Piatakovas (EUR) assisted from
headquarters. T. Catsambas (OED) participated in some meetings.

CONTENTS
CONTEXT ............................................................................................................................................ 4 
RECENT DEVELOPMENTS ................................................................................................................. 4 
DISCUSSIONS .................................................................................................................................. 10 
A. Outlook .......................................................................................................................................................... 10 
B. Economic Policies ....................................................................................................................................... 12 
PROGRAM MODALITIES ................................................................................................................ 23 
STAFF APPRAISAL ........................................................................................................................... 25 

BOXES
1. Banking Sector Restructuring __________________________________________________________________ 28 
2. Health Spending Overruns ____________________________________________________________________ 30 
3. Toward a New Property Tax in Greece _________________________________________________________ 32 
4. Exceptional Access Criteria ____________________________________________________________________ 34 

FIGURES
1. Demand Indicators, 2007–13 __________________________________________________________________ 35 
2. Supply Indicators, 2007–13 ____________________________________________________________________ 36 
3. Labor Market Developments, 2007–13 ________________________________________________________ 37 
4. Inflation Developments, 2005–13 ______________________________________________________________ 38 
5. Balance of Payments, 2010–13 ________________________________________________________________ 39 
6. Competitiveness Indicators, 2005–13 __________________________________________________________ 40 
7. Financial Indicators, 2007–13 __________________________________________________________________ 41 
8. Money and Banking Developments, 2007–13 _________________________________________________ 42 
9. Household Balance Sheet, 2007–13 ___________________________________________________________ 43 
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10. Corporations Balance Sheet, 2007–13 ________________________________________________________ 44 

TABLES
1. Selected Economic Indicators, 2009–14 _______________________________________________________ 45 
2. Summary of Balance of Payments, 2010–18 ___________________________________________________ 46 
3. Monetary Survey, 2010–14 ____________________________________________________________________ 47 
4. Monetary Financial Institutions (excl. BoG)— Uses and Sources of Funds, 2010–16 ___________ 48 
5. Core Set of Financial Soundness Indicators for Deposit-Taking Institutions, 2009–13 _________ 49 
6. Modified General Government Cash Balance, 2012–16 _______________________________________ 50 
7. General Government Operations, 2010–17 ____________________________________________________ 51 
8. General Government Statement of Operations ________________________________________________ 52 
9. Financial Balance Sheet (GFSM 2001, stocks), 2008–12 ________________________________________ 53 
10. Revenue Collection Process—Issues and Actions ____________________________________________ 54 
11. Spending Process—Issues and Actions ______________________________________________________ 55 
12. Implementation of Structural Reforms _______________________________________________________ 56 
13. Medium-Term Macro Framework, 2012–18 __________________________________________________ 57 
14. Selected Structural Reforms Ahead, 2013–14 ________________________________________________ 58 
15. Schedule of Proposed Purchases under the Extended Arrangement, 2012–16 _______________ 59 
16. General Government Financing Requirements and Sources, 2012–16 _______________________ 60 
17. External Financing Requirements and Sources _______________________________________________ 61 
18. Indicators of Fund Credit _____________________________________________________________________ 62 

ANNEXES
I. Debt Sustainability Analysis ____________________________________________________________________ 63 
II. Fund Relations _________________________________________________________________________________ 70 

APPENDIXES
I. Letter of Intent _________________________________________________________________________________ 75 
II. Memorandum of Economic and Financial Policies ____________________________________________ 78 
III. Technical Memorandum of Understanding __________________________________________________ 105 
IV. Letter of Intent to the European Commission and the European Central Bank ______________ 124 
V. Memorandum of Understanding on Specific Economic Policy Conditionality ________________ 126 

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CONTEXT
1. Greece has made important progress in rectifying pre-crisis imbalances. The country
entered the crisis with one of the highest fiscal and external imbalances in the euro area. With
unprecedented European and international support, steadfast fiscal adjustment by the Greek
authorities since 2009 delivered an improvement in the cyclically-adjusted primary balance of over
15 percent of GDP. The country is now at the cusp of achieving primary balance—a remarkable
achievement. External imbalances have also been reduced sharply. However, this adjustment is due
principally to recession (import compression), not productivity-enhancing structural reform.
2. The ongoing correction of imbalances has come at a very high cost. The economy is in
the sixth year of recession. Output has fallen by nearly 25 percent since its peak in 2007. The
unemployment rate is about 27 percent, and youth unemployment exceeds 57 percent.
3. The high adjustment cost reflects in important part the delayed, hesitant and
piecemeal implementation of structural reforms (see Greece: Ex Post Evaluation of Exceptional
Access under the 2010 Stand-By Arrangement and 2013 Article IV Consultation). Amidst recurrent
domestic political crises, vested interests opposed to reforms have been increasingly emboldened.
Thus, reforms have fallen well short of the critical mass needed to transform the investment climate.
The onus therefore remains on delivering rapidly on structural reforms to unlock growth and create
jobs, which would lessen the pain of further adjustment.
4. The review took place against the backdrop once again of domestic political tensions
that culminated in a cabinet reshuffle. The closure of the public broadcasting company (ERT), as
part of the public administration reform of the government, led the smallest partner (Democratic
Left) to withdraw from the governing coalition. Consequently, the government’s majority in
parliament was reduced to a slim margin.
RECENT DEVELOPMENTS
5. Recent macroeconomic developments are broadly in line with program projections.
? The output contraction is slowly decelerating (Table 1; Figures 1 and 2). Real GDP declined by
5½ percent y/y in Q1 2013 (compared to -5¾ percent in Q4 2012). Fiscal adjustment and falling
incomes further reduced public and private consumption, while investment appears to have
stabilized at a depressed level. The contribution of the external sector disappointed as exports
weakened, reflecting soft global demand. But a number of indicators—e.g., economic sentiment
and higher tourism bookings—point to a milder contraction in Q2 than in Q1.
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? Ample spare capacity is lowering wages and prices (Figure 3 and 4). Unemployment
continues rising (from 26.4 percent in December 2012 to 26.9 percent in April 2013), although
the pace of increase is slowing, with a modest pickup in hiring. Spare capacity in industry has
stabilized at an elevated level. The output gap has precipitated large wage adjustments (nominal
wages declined by 11 percent during 2010–12), which have also finally started to be transmitted
to lower prices—the CPI and the GDP deflator are declining.

? External adjustment is continuing largely through import compression (Table 2 and
Figure 5–6). Besides soft global demand, weak exports reflect sluggish improvements in price
competitiveness (the ULC-based REER depreciated by over 8 percent y-on-y in Q1, but the CPI-
based REER remained broadly stable y-on-y in June) and limited availability of trade financing.
The 12-month current account deficit through Q1 2013 reached 2¼ percent of GDP (compared
to 3½ percent at end-2012). But the underlying external position remains relatively unfavorable,
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6 INTERNATIONAL MONETARY FUND
with the structural current account deficit estimated at about 6 percent of GDP in 2012, implying
an overvaluation in the CPI-based REER of about 10 percent (see External Sector Report).

? Liquidity and financial market conditions are mending slowly (Figure 7–8). Since mid-2012,
deposits have recovered and reliance on Eurosystem funding has declined sharply. In the last
two months, deposit movements have stabilized, and access to Eurosystem funding now stands
at around €85 billion. The injection of bridge capital at year-end allowed ELA to decline sharply,
but further reduction will be constrained by the pace of deposit inflows, given banks’ limited
ECB-eligible collateral. Interest rates remain elevated, and the recent political uncertainty and
expectations of tighter monetary policy in advanced economies have led to an increase in
sovereign spreads to around 900 bps (from around 700 bps after the upgrade by Fitch in May).

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6. The recession is continuing to strain balance sheets.
? Credit conditions remain tight (Tables 3–4). Overall, the deteriorating asset quality is
hampering the flow of credit to the private sector, and the contraction in credit has worsened
slightly (to -3.7 percent y/y in May) in line with staff projections.
? For the household sector, the rising liabilities-to-income ratio (at 109 percent in Q4 2012),
prospects for further nominal income adjustment, and falling house prices (-30 percent
cumulative from its Q3 2009 peak to Q1 of this year) have contributed to a simultaneous
tightening of credit conditions and a reduction in the demand for new loans in the last two
quarters (as confirmed by survey results). With falling wages, rising unemployment, and tax
increases all cutting into disposable income, the already high household NPLs increased
further to above 27 percent in Q1. Traditionally low savings rates, which remained close to
zero in Q4 2012, have made households vulnerable to income shocks (Figure 9).
? For the corporate sector, NPLs are rising (to 31 percent in March), credit is shrinking, and the
financial position of SMEs is weak owing to falling domestic demand. Survey results point to
weak demand for loans and some further tightening of credit conditions in the last two
quarters (banks maintain that good investment projects from SMEs remain rare). But the
sector as a whole generates substantial surpluses (8 percent of GDP in Q4 2012). Some large
corporations tapped the international market, raising about €2 billion through May 2013
largely to roll over debt falling due, albeit at high yields of around 8 percent (Figure 10).
? The process of recapitalizing banks is complete, but cleaning up balance sheets is yet to
begin (Box 1; Table 5). Private sector participation in the recapitalization was stronger than
envisaged (amounting to €3.1 billion, in addition to about €3 billion coming from the
recapitalization of subsidiaries by foreign banks that have since exited the country), and three
out of the four core banks have retained their private sector management. One small non-core
bank also managed to meet its capital needs through private sources and remains operating. On
July 12–13, it was announced that the two HFSF-owned bridge banks—TT New Hellenic
Postbank and Nea Proton Bank—are being sold to Eurobank.
7. Fiscal adjustment is broadly advancing albeit with some slippages (Tables 6–9), but
progress on fiscal institutional reforms has been slow (Tables 10–11). These latter reforms are
key to enhance the efficiency and effectiveness of the public sector and ensure a more equitable
distribution of the adjustment burden.
? 2013 fiscal. Fiscal outcomes year-to-date are broadly consistent with program targets. Some
current spending overruns and temporary delays in revenue collection owing to extensions of
tax declaration deadlines have been largely offset by under-execution of the investment budget.
The main risks to the program targets stem from delays in the billing of property taxes
(approximate impact of €450 million) and overruns in health spending in the year to date
(€475 million on annualized basis)—see text table. (Corrective actions are discussed below.)
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? 2014 fiscal. A preliminary identification of pressure points suggests higher health spending and
backtracking on two previous measures—a solidarity surcharge on the self employed
(€600 million) and a reform of the wage grid of the military (€250 million)—will contribute to
gaps. The identified gaps have been closed with additional measures, but these will be
reassessed in the context of the 2014 budget at the time of the next review.

? Tax administration. There has been some progress in bolstering the autonomy of the revenue
administration and in organizational reforms, but new obstacles have emerged (see also ¶22). To
improve efficiency, the authorities strengthened capacity at the units for large taxpayers and
high wealth individuals, and June key performance indicators (KPIs) show increases in the
number of audits and assessed amounts. However, the collection of the assessed amounts still
lags the targets, largely because of the continued application of deferred payment schemes.
Debt collection has also lagged behind, notwithstanding recent legislative changes to facilitate
writing off uncollectable debt so as to focus compliance efforts on collectible debt.
? Public financial management (PFM) reforms. The expansion of the commitment register has
continued, and discrepancies in reporting have declined. About 90 percent of entities with
spending above €1 million per year have functioning commitment registers. But significant
challenges remain with the clearance of arrears, with local governments and social security funds
(SSFs) continuing to face institutional constraints to comply with arrears clearance objectives
(see below). As a result, arrears clearance has lagged program goals: according to the program
definition, arrears have fallen by only €1.4 billion through May, well short of the targeted
reduction of €4.5 billion.
? Public administration reform. Progress on exits of publicly employed ordinary (or permanent)
staff through attrition has been in line with program targets (attrition is subject to the 1:5 rule of
hiring 1 new staff for 5 retiring staff). On mandatory exits, which are subject to the 1:1 rule of
replacing dismissals with new staff with the requisite skills, the authorities closed the public
broadcasting company, ERT, in June. They are opening a smaller, more efficient broadcasting
station in its place that could hire back a subset of former ERT staff. But more generally, there
have been significant delays and slippages, and the reform effort is well behind schedule.
Through end-June, staffing plans were prepared for only 361,000 staff (against 450,000
2013 2014 2013 2014
Slippage 0.5 0.5 925 875
Delay in billing of PPC tax for 2013 0.2 -0.2 450 -450
Non-implementation of solidarity contributions for self-employed 0.0 0.3 0 600
Non-implementation of new wage grid for armed forces 0.0 0.1 0 250
Overrun in spending by EOPYY 0.3 0.3 475 475
Source: IMF staff estimates and projections.
Millions of euros
Key Changes in Fiscal Projections, 2013–14
Percent of GDP
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planned). No employees were shifted into the mobility scheme (compared with a target of
12,500 by end-June 2013) from which mandatory exits were to follow. Moreover, the hiring of
contractual staff has overshot with the activation of EU-financed employment programs.
8. Structural reforms are progressing slowly (Table 12).
? The privatization program is behind schedule. While agreement was reached in June to sell
the government’s 31 percent stake of Greece's gas transportation system operator (DESFA)
(finalization of the deal is subject to regulatory approvals), there was no bidder for the natural
gas company (DEPA). Finalization of the sale of the betting company OPAP awaits regulatory
approvals (it is expected to be concluded by end-September). Projections are for sales of about
€1½ billion in 2013 (compared to the third review target of €2.5 billion).
? Progress in liberalizing regulated professions has been slower than targeted, particularly in
issuing secondary legislation for a number of professions, reflecting resistance from vested
interests (¶39).
? On judicial reforms, the court case backlog has been reduced (both tax and nontax), and a new
Code of Lawyers that eliminates some restrictions and revises the fee structure, is slated for
adoption in July. The implementation of the anti-corruption plan and preparation of a draft
Code of Civil Procedure have been delayed, however.
? On labor market reforms, a new minimum wage setting mechanism was adopted (for
application after the program period—during the program, the minimum wage is frozen), under
which the power to set the statutory minimum wage will be shifted from a non-representative
group of employers and unions to the government. This will help to address a significant
insider-outsider problem in the labor market.
9. As to program targets, all six end-June 2013 quantitative performance criteria (QPCs)
are expected to have been met, although the indicative targets and some structural
benchmarks were missed (MEFP Tables 1 and 2). End-June data are available on three QPCs
(primary state spending, external arrears, and new guarantees), which were all met. Based on the
latest available information, it appears that the three other QPCs (central government debt, general
government balance, and domestic arrears) were also met, but final data will be available only at the
end of July or early August. The authorities have therefore requested a waiver of applicability for
those three QPCs. The missed indicative targets are the ceiling on the stock of domestic arrears
(broad definition), privatization receipts, and transfers to the mobility scheme—all of which were
subject to delays. Missed structural benchmarks have been either targeted as prior actions or re-
phased (MEFP Tables 2–4), or mitigating actions are being taken.

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DISCUSSIONS
A. Outlook
10. The economic outlook remains broadly unchanged since the last review (Table 13).
? Staff projects a recovery starting in 2014. The latest macroeconomic data are consistent with
the projected 4¼ percent GDP contraction in 2013. Given tentative signs of revival, staff projects
a gradual reduction in the pace of decline of GDP, followed by a stabilization of economic
activity toward the end of the year. This
path is predicated on a positive
contribution from exports (boosted by
tourism) and investment (given the need to
replace depreciating capital and in line with
private sector expectations), offset by falling
private and public consumption (driven by
fiscal adjustment and falling household
income further straining balance sheets).
Over the medium term, the recovery is
projected to be driven by the external
sector (buoyed by improved
competitiveness) and investment.
? Wages and prices are projected to decline in the near term. Gross wages and salaries are
projected to decline by 7 percent this year and 1½ percent in 2014 (for a cumulative decline of
over 20 percent during 2010–14), before returning to modest real growth in the medium term.
Price dynamics so far this year are consistent with the projected ¾ percent deflation for 2013. In
the medium term, inflation should remain below the euro area average, given that the still wide
output gap will not close fully until 2020.

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? External adjustment is projected to continue. With improvements in competitiveness and a
stronger contribution from exports, the headline current account deficit is projected to improve
to about 1 percent of GDP this year and the structural deficit to about 5½ percent.

11. Risks to these projections are high, and mainly associated with slippages in structural
reforms, balance sheet vulnerabilities, and potential for political instability:
? Slippages in structural reforms. Productivity gains associated with structural reforms are
projected to contribute about 10 percent in cumulative growth over the medium-term (see 2013
Article IV consultation selected issues paper). Slippages would have a significant impact on the
speed of recovery, particularly given that gains are expected to be front-loaded, and on
potential GDP.
? Balance sheet vulnerabilities. Stretched balance sheets—particularly in household and SME
sectors—create a risk of faster adjustment, with a negative impact on demand and growth.
Moreover, public sector debt may also prove to be a hindrance to demand and growth.
? Potential political instability. The risk of political instability remains acute, especially in light of
high unemployment and ongoing social hardship. Further ambitious fiscal adjustment is needed
for public sector debt to decline steadily, which exacerbates the possibility of social stress and
political resistance.
? External risks. Continued weak economic performance in the euro area would negatively affect
exports and growth. Early exit from exceptional monetary policies in advanced economies would
also contribute to tighter financial conditions.
12. Debt is projected to evolve in line with the framework agreed with Greece’s European
partners (Appendix I).
? Public DSA. In view of the unchanged macroeconomic framework, public debt dynamics are
similar to the path under the Third Review. After peaking at around 176 percent of GDP this
year, debt is expected to decline to 124 percent in 2020, after additional contingent relief
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measures of about 4 percent of GDP from Greece’s European partners to be determined in
2014–15. In addition, European partners committed to reduce debt to substantially below
110 percent of GDP in 2022, if needed and conditional on Greece meeting its commitments
under the program. Risks remain to the downside, however, mainly from lower growth and
potential fiscal and privatization slippages.
? External DSA. External debt should decline gradually as a result of projected improvements in
the current account balance and continued reliance on official financing at low interest rates.
Risks to external debt sustainability include delayed structural reforms that slow competitiveness
improvements, slippages in the privatization program, and larger than expected deflation.
B. Economic Policies
13. The authorities and staff discussed how to keep the program on track. Discussions
focused on steps to ensure that the fiscal targets for 2013–14 are met, strengthen social safety nets,
modernize fiscal institutions, safeguard financial stability, and make progress on structural reforms
to enhance productivity and competitiveness.
Fiscal policy
14. Measures agreed during the first and second review have underpinned a strong fiscal
consolidation effort in 2013, albeit with some slippages that required corrective actions.
Slippages were smaller than in previous reviews. But the back-loaded revenue profile in 2013 could
strain taxpayers in the current economic environment and poses risks to revenue collection. At the
same time, the authorities committed to deliver on significant, but necessary, tax policy and revenue
administration reforms that will stretch the capacity of the revenue administration. In this context,
the authorities and staff agreed on steps to ensure program targets are met and on the strategy to
advance rationalization of the tax system with a view to making it simpler and more equitable.
15. The authorities are taking steps to ensure the implementation of the 2013 fiscal target
(MEFP ¶5; see also text table). They committed to: (i) a tighter payment schedule of the final
installment of the property taxes collected via electricity bills by the public power company (PPC);
(ii) bring forward measures agreed in the 1
st
and 2
nd
review that were expected to take place in 2014,
such as the luxury tax and the fee for lawsuits; (iii) tighten the conditions for claiming deductions for
medical spending of individuals; and (iv) complete the memorandum of understanding with ship
owners that complements a tonnage tax (see staff report and staff supplement for the first and
second reviews). Overspending in the healthcare sector will be reversed through the application of a
claw-back mechanism (by September), which is to be followed by more structural measures to
reduce prices and demand for services (Box 2; ¶28).
16. The authorities also identified steps to close potential gaps in 2014 (MEFP ¶5). In
addition to the claw-back on health overspending and other measures noted above, they
committed to close existing schemes for untaxed capital gains reserves. The package of measures
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will be examined again in the context of the 2014 budget during the next review, as will the
necessary measures for 2015–16 in the context of the medium-term fiscal strategy.

17. To address contingent fiscal liabilities from the renewable energy sector (RES), the
authorities have taken steps to lower debts in the RES account (MEFP ¶9). As of July 1, the tariffs
for household consumers were liberalized. The RES Special Levy to meet costs in the RES account is
being increased from €9.30 per MwH to €14.96 MwH. These steps are part of a program to eliminate
the debt in the RES account by end-2014. They bring average electricity prices in Greece in line with
those in the EU, and provide room to start unwinding the cross-subsidization from relatively high
industrial tariffs to relatively low household tariffs over time. Fewer distortions and better liquidity
flow will also allow the gradual reduction of arrears in the electricity sector.
18. The authorities committed to implementing an ambitious overhaul of the tax system.
The changes aim at simplifying the tax regime and codifying policy reforms that were introduced
earlier in the year and cover the following areas:
? Income tax (MEFP ¶6 and 8). The new code clarifies policy changes that were adopted in
January 2013 and unifies them with other existing income tax provisions. It also (i) eliminates
exemptions for accumulation of special reserves; (ii) simplifies the application of capital gains
taxation on equity, bonds, and property transactions; and (iii) streamlines and tightens rules for
depreciation and deductions for medical expenditures. Simplifications introduced by the code
are a significant step toward overhauling an overly complicated and nontransparent tax system.
? Tax procedures code (TPC) (MEFP ¶6). The new code simplifies taxpayers’ dealings with the
revenue administration through modern registration, filing, payment and collection procedures.
It (i) consolidates provisions that were spread over different pieces of legislation; (ii) modernizes
the penalties for noncompliance and introduces interest payments in place of surcharges for late
payment; (iii) clarifies the revenue collection roles of the revenue administration and specifies
clear collection rules; (iv) introduces a new mechanism for internal review of tax disputes; and
2013 2014 2013 2014
Total -0.5 -0.5 -925 -875
"Clawback" imposed on health overspending -0.3 -0.3 -475 -475
MOU on shipowners -0.1 -0.1 -98 -98
2014 measures brought forward -0.1 0.0 -159 0
Untaxed capital gains reserves 0.0 0.0 0 -50
Tightening conditions for claiming medical deductions 0.0 0.0 -25 -50
Shortening of PPC payment period in March, 2014 -0.1 0.1 -180 180
Revision in yield on special solidarity contribution -0.1 -0.1 -92 -92
Capital gains tax 0.0 -0.1 0 -120
Other 0.1 -0.1 104 -170
Source: IMF staff estimates and projections.
Percent of GDP Millions of euros
Offsetting Measures and Other Savings, 2013–14
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14 INTERNATIONAL MONETARY FUND
(v) consolidates provisions on deferred payment and installment arrangements. Following
adoption of the code, implementation will require rapidly overhauling IT systems, drafting
secondary legislation, and training staff—introduction by the start of 2014 will require concerted
effort, as there are considerable risks of slippages in the preparation timeline.
? Real estate tax (MEFP ¶7; Box 3). The existing PPC levy, which collects real property taxes
through electricity bills, is deeply unpopular and sanctioning non-payment by shutting off
electricity service has been deemed unconstitutional. A new framework aims at replacing the
PPC levy and the existing real-estate-based wealth tax collected by the revenue administration
(FAP) with a single state-level property tax in a revenue-neutral way. The new tax will ultimately
target properties rather than individuals and will have a broader base—including commercial
buildings and land and industrial properties—thereby reducing the tax burden on currently
taxed properties. But, as it relies on self-assessment by property owners and increases by
30 times the number of property owners receiving a bill from the revenue administration, staff
has considerable concerns regarding the capacity of the revenue administration to implement
effectively this overhaul of the property tax system. At a minimum, the administration will need
additional resources and tools to follow up on property tax bills that have fallen overdue and a
dedicated project management team to design the policy and prepare the groundwork for
implementation. This is needed especially since the revenue administration is already tasked
with undertaking numerous other major reforms in the coming months related to strengthening
its autonomy and operational efficiency, the rollout of the new income tax regime, and the
implementation of the tax procedures code. Should it become evident that a shortfall in revenue
from the new property tax cannot be overcome through further readjustment of the rate
structure, extending the existing property taxes into 2014 may be necessary, modified to take
account of concerns about constitutionality.
19. Public administration reform has lagged far behind and the authorities are beginning
to address delays:
? Motivation. Civil service reforms are critical to improve the efficiency and quality of public
services, lower the total amount of public sector employment (through attrition) and the public
sector wage bill, and bring in young and skilled workers for those whose positions have become
obsolete (through exit and the mobility scheme). But, as noted earlier, progress in completing
staffing plans and placing public sector employees in the mobility scheme has been very slow.
? Measures (MEFP ¶11). To bring these reforms back on track:
? Staffing plans. The authorities committed to catch up by the end of the year and complete
staffing plans for all ordinary employees in the general government.
? Mobility scheme. The authorities agreed to an end-September 2013 target for the mobility
scheme of 12,500 employees (a delay of one quarter) and to the full commitment of
25,000 staff in the mobility scheme by end-year. They have also committed to transfer over
4,000 staff to the scheme already in July.
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? Mandatory exits. Of those transferred to the mobility scheme in July, a substantial number
(2,000) would be intended for mandatory exit. The authorities maintain the objective of
15,000 mandatory exits from the civil service in 2013–14. In a measure that goes beyond
what was agreed previously in the program, they have reduced the maximum time an
employee could stay in the mobility scheme from 12 to 8 months. This has the effect of
bringing forward the exits in late 2014 to mid-2014. The authorities also committed to
eliminate the employment of a substantial share of about 4,000 contractual staff who were
using judicial claims to indefinitely extend their contracts.
20. Employment support programs and the social safety nets are being strengthened
(MEFP ¶12). To help address the exceptionally high unemployment, with financing from EU structural
funds, the authorities launched in July an employment voucher program that supports six-month
vocational training and internships for 45,000 unemployed youths. Preparations are also on track to
introduce later in 2013 a social community work program that targets about 50,000 individuals from
jobless households. To protect vulnerable groups and ensure a fairer distribution of adjustment
costs, the authorities are launching a Health Voucher Program that will provide 100,000 long-term
uninsured citizens with access to primary healthcare services; and they plan to extend the program
further, subject to funding from the European structural funds. Finally, with assistance from the
World Bank, they intend to launch in January 2014 a pilot means-tested minimum guaranteed
income program, and aim to roll it out nationally by 2015.
Fiscal institutional reforms
21. Discussions focused on accelerating progress on reforms to ensure projected gains
from revenue administration materialize and contain spending slippages. At present, there is
no evidence that the targeted gains from revenue administration of 0.4 percent of GDP in 2014 (and
1.5 percent of GDP by 2016) will materialize. The authorities’ focus is on organizational and
operational upgrades that will deliver results. Regarding measures to contain spending, the
authorities recognize that the framework for monitoring and control of spending, especially in the
social sector, remains weak, and threatens to undermine fiscal consolidation achievements.
Revenue administration
22. Work is underway, but more is needed to bolster the autonomy of the revenue
administration and change organizational structures (MEFP ¶13). The ability of the revenue
administration to effectively execute powers transferred to the Secretary General for Public
Revenues (SGPR) has been slow to materialize (text table). Civil service constraints to autonomy are
proving difficult to overcome. The remaining legislative work includes withdrawing powers of local
tax offices and other sub-units of the revenue administration vested by old legislation. Significant
challenges to remove interference remain—e.g., in hiring procedures and other daily operations—
and the major staff grading overhaul and integration of functions of the special prosecutor for tax
evasion into the revenue administration forthcoming in October will test the political commitment
to these reforms.
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Autonomy in the Revenue Administration Remains a Work in Progress
Desired state Issues that have arisen recently
Ability to organize sub-units ? Separate ministerial decisions are required whenever decisions
that entail costs need to be taken (thus, constraining the ability
of the Secretary General, SG)
? Legal formalism means the SG’s decisions have uncertain effect
Ability to direct local offices ? Laws are still in place that provide direct powers to local
offices, limiting the power of the SG
? Extent of delegated powers is still to be clarified
Ability to determine a grading
structure
? Position-based grading is not envisaged by the Ministry of
Administrative Reform and e-Governance or MAREG (this is
critical for incentives and for matching staff with the right skill
mix and positions)
Budget autonomy ? Flexibility to re-allocate funds is limited
? Revenue administration has no single budget
Source: IMF staff.

23. Further steps are also needed urgently to improve the efficiency of revenue
administration (MEFP ¶15). Staff remains concerned with the continued granting of tax filing
deadline extensions and deferred payment schemes that undermine the payment culture. The
authorities agreed to abolish deferred payment schemes and remaining amnesties in advance of the
TPC introduction, and to abstain from extensions of tax filing deadlines. They recognized the need
to prevent further slippages in debt collection reforms and reforms of the units for large taxpayers
and high wealth individuals—or delays in training audit and collection staff—since these would
significantly hamper their ability to secure revenue administration gains in the near term. To address
problems with debt collection, they agreed to organizational changes at the large debtor unit and
across local tax offices and to provide adequate resources for debt collection, thus, supporting
recent legislative changes in the procedures to write-off uncollectable debt.
24. Strengthening Anti Money Laundering (AML) procedures would assist in bolstering tax
compliance and help fight evasion (MEFP ¶14). Banks have a legal obligation to report customers
to the authorities that they suspect of evading taxes. This could significantly step-up revenue
collection as banks are well placed to ascertain their customers' tax evasion practices. However, the
level of reporting by banks is still low, and the information does not appear yet to be adequately
used by the revenue administration to start and support audits and facilitate debt collection.
Adequate supervision of banks to ensure that they implement their legal requirements, and revision
of the AML law to streamline the flow and use of information, would go a long way to fight evasion.
25. In light of recent slippages, the authorities are making an effort to improve the
collection of social security contributions (SSC) (MEFP ¶17). The allocation of 600 staff on
secondment to the joint collection center for SSC debt (KEAO) is welcome, as are the legislative
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changes to provide legitimacy to KEAO and enforce collection efforts of SSFs. Nevertheless, the
efficiency of the new entity is yet to be observed and could be severely constrained by the lack of
permanent staff and by delays in identifying collectible SSC debt. A monitoring framework for debt
collection agreed with the authorities should help identify and address potential collection
bottlenecks in a timely manner.
26. The new tax and SSC installment schemes have been launched (MEFP ¶16). Revenue
collected in the initial weeks is modest, but it remains premature to assess participation. Going
forward, the authorities can maximize the yield by improving monitoring capacity and focusing on
prompt collection enforcement. In the event that participation in the schemes reaches targeted
levels, such administrative issues will be particularly challenging and argue for faster implementation
of necessary IT changes. The monitoring framework agreed with the authorities will help to identify
potential shortfalls quickly.
Public financial management
27. The budget process needs to be strengthened further (MEFP ¶20). The adoption of the
2013-16 medium-term fiscal strategy (MTFS) update early in the year commenced a practice of
setting multi-year binding expenditure ceilings for the line ministries and the health sector. It also
revealed weaknesses in the existing budget preparation process. The adoption of local government
(LG) budgets was delayed well into Q1, causing slippages in arrears reporting and clearance. The
calendar for the next budget cycle was also delayed, and a parliamentary discussion of the 2014–17
MTFS framework did not take place in the spring. The authorities have started rectifying these
shortcomings, some of which could be addressed with the amendments to the organic budget law.
Mandatory budget preparation guidelines for the LGs, jointly issued by the Ministry of Interior and
GAO, will strengthen the link between the MTFS and the individual LG budgets. Finally, the
authorities have also started preparation, including outreach with the Parliamentary Budget Office,
for incorporating a structural budget balance rule with an automatic correction mechanism in the
revised organic budget law.
28. Moreover, the authorities and staff agreed that control over general government
entities of systemic importance needs to be strengthened (MEFP ¶19 and 22). Continuing lack of
consistency in the reporting of entities in the social budget calls for caution in interpreting their
reported fiscal outturn. This has become most evident in the case of EOPYY—the health fund
created in early 2012—where identifying the size and source of expenditure slippages was
hampered by the quality of data provided by the SSFs. While staff and the authorities agreed on a
reporting framework for EOPYY, significant improvements in EOPYY’s capacity will be required
before a detailed timely reporting framework can be introduced. In the interim, commitments that
the authorities have undertaken to prevent shortfalls and improve data quality include:
(i) introducing an additional automatic corrective mechanism (a claw-back) that broadens the
coverage from pharmaceuticals to diagnostic and private hospital spending and imposes greater
scrutiny on EOPYY’s expenditure outturn; and (ii) a tendering procedure for the introduction of in-
house financial and analytical cost accounting systems of EOPYY. The authorities are also addressing
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the quality of reporting on the e-portal from commitment registers of all general government
entities by conducting a review of the reporting requirements and preparing a plan to introduce
penalties for non-reporting entities.
29. The clearance of arrears has been slow and needs to be accelerated (MEFP ¶21).
According to the program definition, the total stock of general government arrears has only fallen
by €1.4 billion, from €7.6 billion at end-2012 to €6.2 billion at end-May 2013. This compares with a
target stock of arrears at end-June 2013 of €3 billion. Part of the shortfall stems from roughly
€700 million accumulation in arrears, over half of which is in the Social Budget. Also, progress in
arrears clearance has been obstructed by legal and procedural obstacles: (i) objections to
compliance issues in arrears verification by the Hellenic Court of Audit (HCA); (ii) lack of signed
memoranda for arrears clearance by some SSFs; and (iii) delays in the adoption of LG budgets. All of
these obstacles have recently been addressed.
? Expenditure arrears. The process will speed up once water companies, much like hospitals
earlier in the year, are allowed to receive direct payments on arrears owed to them, accounting
for about €0.7 billion of the outstanding stock of arrears. A number of actions have been
planned to address delays in payment processes—a major cause of continuing accumulation of
arrears—such as mandatory deadlines for each stage, removing the role of local tax offices in
the payment process, IT and administrative improvements, and a review of the legal framework.
The HCA will also review how the effectiveness of its role in this process can be enhanced.
Finally, preliminary audits of the clearance of arrears of EOPYY and five other SSFs will identify
weaknesses that hamper accurate reporting and slow down arrears repayment.
? Tax refund arrears. The new VAT refund risk analysis system encountered a slow start as
additional guidelines to staff were needed to ensure smooth implementation. With the deadline
approaching for re-defining tax refund arrears as those that have not been paid or rejected
within 90 days of a claim being made, the authorities have committed to impose a mandatory
90-day deadline for payment of VAT and income tax refund claims, after which interest to
taxpayers will accrue.
Financial sector policies
30. Following the recapitalization of the core banks, discussions and the authorities’
efforts focused on further steps to secure financial stability. In particular, the emphasis was on
developing a comprehensive strategy for a four-pillar banking sector, and on completing the sale of
two bridge banks (the sale of TT New Hellenic Postbank was originally a structural benchmark for
end-January 2013).
31. The authorities and staff discussed the main elements of the banking sector strategy
(MEFP ¶24–25).
? Structure of the banking system. The strategy argues for a system centered around four core
banks to maximize funding and operational synergies while avoiding excessive concentration. In
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line with the strategy, the announced sale of TT New Hellenic Postbank and Nea Proton Bank to
Eurobank should bolster the role of Eurobank as a core bank in the system. Besides the core
banks, the system will include small non-core banks with niche business models fully backed by
private sector capital. The strategy also covers options for the rationalization of the cooperative
sector, including the closely linked Panellinia bank, as the final step in the restructuring of the
banking sector.
? Privatization strategy. Staff argued that the partial privatization of Eurobank should occur as
early as possible, to guarantee against risks of prolonged state ownership and implied value
losses. The authorities committed to such an undertaking by early next year, while taking
preparatory steps, such as hiring advisors and inviting potential investors for due diligence
earlier. To attract strategic and long-term investors, preferably brand-name foreign banks, to
participate, the sale would be structured in a way to allow potential investors to gain controlling
stakes in this asset.
? Addressing any potential capital needs. The strategy discusses some of the modalities that
might be used for further capital injections into the banks, if needed.
? Rationalization of foreign presence. The foreign subsidiaries of Greek banks are fragmented
and often of sub-strategic size. The strategy document lays out options in this area, which is an
important component of the restructuring plans. The authorities plan to finalize their plans in
this regard in consultation with EC/ECB/IMF staff as well as DG-Comp.
32. In view of its evolving role, a review of the functioning of the HFSF is merited.
Following the completion of the recapitalization process, the HFSF’s role will evolve into managing
its portfolio and its divesture. The authorities agreed that it would thus be timely to review whether
the institution has the legal and operational tools necessary to conduct this role effectively,
including to safeguard the public interest and financial stability.
33. Progress in strengthening governance in the financial sector continues on many fronts,
but further actions are needed (MEFP ¶30). To provide the HFSF’s Executive Board and General
Council with adequate legal indemnities, consideration should be given to amending the HFSF law
to protect the members as long as their decisions are in line with the long-term interests of the
banking sector and taxpayers. Relationship Framework Agreements between the banks and the
HFSF were developed to ensure that banks under state control are free of political influence. These
have now come into effect.
34. Further steps have been taken to ensure that the system is adequately capitalized.
? Two core banks have capital shortfalls of around 1 percent of risk weighted assets (RWA) relative
to the regulatory minimum. These shortfalls have arisen because of the deterioration in asset
quality beyond the projections made in 2011. To rectify these shortfalls, liability management
exercises generated a total of €445 million CT1 capital in the two banks. In the unlikely event
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that these efforts are insufficient, the Bank of Greece will need to ask for further reduction in
RWA through faster than envisaged divestment out of non-core assets.
? The modalities and the scope of the stress test to be conducted by end-year were agreed with
the authorities, including the objective to align it as much as possible with the upcoming EBA
stress test methodology. The macroeconomic environment has deteriorated significantly
compared to the 2012 stress test. Yet, the buffers of around €5 billion in the financial sector
envelope, as well as the €3.1 billion participation by the private sector, provide a cushion against
such additional capital needs. A final round of liability management exercises has generated an
additional capital of just under €0.6 billion, which is retained in the banks. (MEFP ¶26.)
? Furthermore, the distressed credit operations review of the banks to be completed by end-
September will identify improvements needed in banks’ procedures for recovery of these assets,
which could ultimately reduce capital needs. (MEFP ¶32.)
35. Much remains to be done to facilitate the clean-up of bank balance sheets (MEFP ¶31–
32). Greek banks face several challenges in dealing with the large stock of NPLs: legal and judicial
weaknesses (moratoria on auctioning collateral, seniority of state claims over banks’ claims, and long
waiting times for court appointments); the break-down of the real estate market; and the potential
lack of human and administrative resources. Initial steps have been taken to improve the
effectiveness of NPL resolution activities by updating the household insolvency law and introducing
the ”Facilitation Program,” a medium-term forbearance scheme for over-indebted households.
Further steps are needed, including enhancing debt enforcement and collateral recovery and
designing an effective out-of-court restructuring mechanism. An inter-agency working group is
being set up in July 2013 to identify key bottlenecks and propose concrete steps for enhancements
by end-October 2013.
36. Steps taken to improve the management of assets under liquidation are broadly
sufficient, but further work would be beneficial (MEFP ¶29). The resolution of several banks has
resulted in over €8 billion of non-performing assets under liquidation. The Bank of Greece has
amended laws and regulations to enhance recovery from these assets. These enhancements include
a new mandate to restructure loans and employ services of collection companies, which have so far
resulted in significantly improved collections. Their efficiency and effectiveness could be
strengthened, e.g., by consolidating assets into central pools for management under a liquidation
company or outsourcing the collections’ process to banks.
37. The government intends to establish the Institution for Growth (IfG) to alleviate
potential financing gaps for SMEs and infrastructure projects (MEFP ¶33). While acknowledging
the potential benefits of easing credit constraints for SMEs, staff expressed concerns that such
institutions in Greece had in the past been associated with a high share of non-performing loans
and costs to the budget. The authorities, however, were convinced that such risks would be
minimized, including by putting in professional management, working with the EIB and the KfW
from Germany, limiting the government’s exposure and the level of loan guarantees of the IfG to be
equivalent to its equity participation of €350 million, through lending only at market terms, and by
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not allowing deposit taking. To ensure that the financing of the IfG is indeed additional money to
the economy that could not have been provided by the domestic banking system, the latter will not
be participating in the IfG’s equity or funding plans.
Structural reforms
38. The focus on structural reforms in this review was limited, and an in-depth assessment
of privatization will be taken up in the next review. The implementation of structural reforms has
been slow and needs to be accelerated. Further steps were agreed in this review to open up
regulated professions, liberalize further trade and transportation sectors, improve the functioning of
the judicial system, and strengthen the anti-corruption framework (Table 14). For the remainder of
2013, the structural reform agenda is focused on lowering regulatory barriers to competition, easing
the administrative burden on businesses, and reducing further excessive labor entry/exit costs.
39. The authorities committed to liberalize further regulated professions in 2013
(MEFP ¶34). Excessive restrictions were eliminated for a number of professions. Although well behind
schedule, the authorities plan to remove by end-year excessive restrictions in the area of exclusive
and shared reserved activities for engineers (24 professions). They have also committed to adopt
secondary legislation during the course of 2013 for the remaining list of professions for which the
liberalization has started but is not yet complete (TMU ¶39). To ensure that de jure liberalization
delivers the intended results, the authorities and staff agreed to monitor continuously and evaluate
developments (including price changes and new entries) and address promptly any remaining
restrictions identified by an ongoing assessment of reforms undertaken in this area (these will be
discussed at the next program review).
40. The authorities acknowledged the need to accelerate progress in promoting
competition and reducing the administrative burden (MEFP ¶35).
? Reducing red tape. Two ongoing in-depth studies, with OECD assistance, have identified a
large number of regulations that give rise to excessive barriers to entry, limit the ability and
incentives of suppliers to compete, and restrict the choices and information available to
consumers. Targeted recommendations to address these barriers are expected in September
and will be discussed at the next review, based on which reforms will be adopted by end year.
? Attracting investments. Progress on streamlining Greece’s complex investment licensing
system remains slow. Following a recent extensive review on licensing requirements to open a
new business, the authorities committed to overhaul the existing system over the next two years,
with assistance from the World Bank, by shifting from a license processing and approval
mechanism to a self-compliance system based on established standards.
? Liberalizing product and service markets. To reduce input costs and help lower consumer
prices, the authorities are taking steps to further liberalize the retail sector (by replacing the
fixed margins for over-the-counter products sold in pharmacies with maximum ones, and
increasing the flexibility of retailers’ opening days), and reduce costs for ferry services (by
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streamlining mandatory ticket discounts). Going forward, the authorities plan to adopt by end-
August 2013 a law to liberalize long-distance bus services (with secondary legislation to follow in
2014), and allow by end-September 2013 the sale of selected OTC products outside pharmacies.
? Facilitating trade. Greece continues to lag behind peers on the administrative burden of
external trade declarations, and in customs clearance and handling procedures. To that end, the
authorities remain committed to extend to imports reforms recently undertaken to facilitate
exports, including: (i) the longer opening hours in the Athens airports and the Piraeus port by
end-July; and (ii) the electronic submission system for trade declarations by end-November. In
addition, the authorities plan to align the customs risk assessment system with best practices in
EU Member States by end-September 2013 for exports, and by end-January 2014 for imports.
41. Following earlier labor market reforms that have facilitated wage adjustment, the
authorities are focusing on reducing non-wage costs and rigidities (MEFP ¶36). Labor reforms so
far under the program on collective bargaining and the minimum wage have helped firms to better
align pay with productivity, and increased incentives to hire young workers (who suffer from the
highest unemployment rate in Europe). The reduction in the redundancy notification period and
severance pay has also reduced excessive labor exit costs. However, employment protection rules in
Greece remain very rigid (especially on collective dismissals). To facilitate labor reallocation and
attract investments, the authorities plan to adopt by end-2013, in consultation with the social
partners, an appropriate set of reforms in this area. These issues will be taken up in the next review.
42. Privatization is behind schedule (MEFP ¶38). To catch up and bring the program back on
track by mid-2014, the tender of DEPA (the natural gas company) is to be re-launched as soon as
possible. Further, the authorities will press ahead with the sale of other assets, and increase the
stakes of the ports to be tendered while accelerating the process. The pricing policy for the water
companies will be issued in July, which will pave the way for their tender, and a further 250 real
estate assets were transferred to the HRADF. To facilitate the sale of the water companies, the
authorities will issue necessary legal acts to allow the Treasury to pay arrears to the water companies
from the arrears clearance program on behalf of the local governments (with a compensatory
reduction in transfers to the local governments). As next steps, a comprehensive assessment of
privatization will be undertaken in the context of the fifth review, including an assessment of
whether any changes are needed in the structure and governance of the privatization program to
improve its effectiveness. To advance with the sale of problematic assets, the government has
announced the restructuring or liquidation of three loss-making companies, to be completed by
year-end. This will release for sale the marketable portion of their assets, shifting these into more
productive use, and capping the fiscal costs of these entities.

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PROGRAM MODALITIES
Program Monitoring
43. The authorities will implement nine prior actions to set the stage for Board
consideration of the fourth review (MEFP Table 3). These measures are geared to ensure that the
program remains on track towards achieving its objectives:
? Restoring fiscal sustainability. Prior actions cover: (i) the adoption of a package of measures to
implement the fiscal strategy for 2013–14 (MEFP ¶5); (ii) the adoption of legislation to reform the
income tax code and submission to parliament of the tax procedure code (MEFP ¶6); (iii) the
adoption of steps to eliminate the debt (contingent fiscal liability) in the RES account (MEFP ¶9);
and (iv) the issuance of all necessary legal acts that would place at least 4,200 ordinary
(permanent) employees in the mobility scheme (MEFP ¶11).
? Strengthening fiscal institutions. Prior actions cover: (i) the issuance of ministerial decisions
for the transfer to the revenue administration of functions, staff, and budget allocations of
several departments previously under the ministry of finance (MEFP ¶13); and (ii) the adoption of
legislative amendments to close—effective August 1, 2013—for new entrants any installment or
deferred arrangements for payment of liabilities arising from audit assessments other than the
Fresh Start and basic installment schemes (MEFP ¶15).
? Preserving financial stability. Prior actions cover: (i) the completion of the sale of the two
bridge banks, New Hellenic Postbank and Nea Proton Bank (MEFP ¶24); and (ii) the completion
of a comprehensive banking sector strategy centered on a system of four viable core banks
(MEFP ¶25).
? Supporting privatization. A prior action covers steps to remove obstacles in the long-delayed
privatization program (MEFP ¶39).
44. Proposed revisions to program quantitative targets will support the ongoing process
of public administrative reforms and privatization (MEFP Table 1). In view of significant delays in
placing workers into the mobility scheme, the targets have been revised, while still preserving the
end-2013 totals, and a new indicative target is proposed for the number of employees in the
mobility scheme who will eventually exit. Meanwhile, the timeline for mandatory exits in 2014 has
been front-loaded. Moreover, the end-September performance criterion on privatization has been
reduced from €1.8 billion to €0.9 billion. This reduction reflects the failed tender of the natural gas
company, DEPA, which will be re-tendered with the expected sale pushed back to 2014. To achieve
the revised performance criterion will require finalization of the sale of the OPAP betting company
and national lottery, which remain subject to regulatory approvals.
45. New structural benchmarks have been established and an existing benchmark has
been re-phased (MEFP Table 4):
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? To preserve financial stability, by end-September 2013 (re-phased from end-July), banks are
required to update their restructuring plans and submit them for validation to DG-Competition
(IMF Country Report No. 13/20 MEFP ¶23).
? To secure fiscal sustainability: (i) by end-September 2013, legislation will be adopted to
establish a new property tax regime (MEFP ¶7); (ii) by end-October 2013, secondary legislation
will be adopted to implement the tax procedures code (MEFP ¶6); and (iii) end-September
targets were established for key performance indicators on revenue administration (MEFP ¶18)
and public financial management (MEFP ¶23).
46. Program reviews will continue on a quarterly basis (Table 15). The fifth review under the
program is scheduled to take place on or after September 29, 2013. This is unchanged from the
phasing approved by the Board at the last review, and provides an opportunity to review the
program again in light of any short-term developments before end-September data become
available. In the event that delays in completing program reviews persist, however, the program will
need to be re-phased in the context of future reviews. Issues that will be covered in the forthcoming
review include (in addition to other applicable program conditions): (i) review the macroeconomic
framework, in particular the growth outlook to take account of progress in structural reforms relative
to program assumptions; (ii) the 2014 budget and 2014–17 MTFS; (iii) passage and implementation
of a new real estate tax; (iv) evaluating progress on privatization and the possible need for changes
in the privatization process and structures to address repeated delays; (v) assessing progress in
revenue administration reforms to support the fiscal program; and (vi) securing adequate financing
at least through end-2014.
Exceptional access criteria, financing assurances, and capacity to repay
47. The program continues to satisfy the substantive criteria for exceptional access but
with little to no margin (Box 4). Delays in the implementation of structural reforms raise concerns
about the capacity of the authorities to implement the program in a difficult political environment.
Nevertheless, the additional efforts undertaken by the authorities in the form of strong prior actions
mitigate these concerns and allow the program to satisfy the criteria for exceptional access, albeit
with little to no margin. The continued commitment of euro area member states to support Greece,
including by providing additional official financing to fill future financing gaps and through further
debt relief as necessary, is an essential part of meeting the criteria.
48. Financing assurances are in place for the fourth review (Table 16 and 17). The program is
fully financed through July 2014, but a projected financing gap will open up in August 2014. Thus,
under staff’s current projections, additional financing will need to be identified by the time of the
fifth review, to keep the program fully financed on a 12-month forward basis. The Eurogroup has
initiated discussions on how to eliminate the projected financing gaps. In this regard, the
Eurogroup’s commitment in February and November 2012 to provide adequate support to Greece
during the life of the program and beyond, provided that Greece fully complies with the program, is
particularly important.
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49. The staff’s assessment of Greece’s capacity to repay the Fund has not changed
(Table 18). The macroeconomic outlook, debt service to the Fund, and peak access remain broadly
unchanged. Euro area member states remain committed to an official support package that will help
keep debt on a sustained downward path as long as Greece adheres to all program policies.
Therefore, capacity to repay the Fund also depends on the authorities’ ability to implement in full an
ambitious program. It continues to be the case that if the program were to go irretrievably off-track
and euro area member states did not continue to support Greece, the capacity to repay the Fund
would likely be insufficient.
STAFF APPRAISAL
50. The economy continues to rebalance apace, but sustainability concerns remain
because of the slowness of reforms. The fiscal adjustment remains exceptional by any
international standard and the external competitiveness gap continues to narrow steadily. However,
the reform effort is still not commensurate with the problems facing Greece, and the rebalancing is
mainly a result of downward pressures on wages coming from the deep and socially painful
recession. To avoid further across-the-board cuts in wages and pensions, and to assure that the
recession gradually bottoms out and gives way to a steady recovery in 2014, it is essential that
structural reforms gain much stronger support and momentum.
51. The ambitious 2013 budget is being implemented largely as planned. The authorities
are taking corrective actions to ensure that they meet the fiscal targets and achieve at least a zero
primary balance this year. The cyclically-adjusted fiscal adjustment of 15 percent of GDP and the
tolerance of the associated hardship during the last three years is evidence of the determination of
Greece to stay within the euro area.
52. But achieving the significant fiscal adjustment still ahead in a socially acceptable
manner is unlikely to be possible without much deeper public sector reforms. The authorities
face three immediate challenges in this regard:
? First, while much progress has been made in modernizing revenue administration, significant
problems remain. They include the susceptibility to political interference because of the still
insufficient autonomy of the revenue administration and the negative impact on the payment
culture of the repeated extensions of filing deadlines, modifications to deferred payment
schemes, and suggestions of tax amnesties. While it was assumed from the outset that gains
from revenue administration reforms would take time to materialize, Greece has now reached
the stage where such reforms are expected to begin contributing significantly to the adjustment
effort. Unless the authorities tackle the problems of revenue administration with much greater
urgency in the coming months, a credible 2014 budget would again need to be centered on
painful expenditure cuts.
? Second, staff has considerable doubts about the authorities’ ability to put in place a system for
real estate taxation in the coming months that could replace already from 2014 the current
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system without significant loss of revenues. Achieving high compliance rates will be a major
challenge, given that collection will be reliant on self-assessment in a culture where tax
compliance has been particularly poor. Thus, while the current practice of collecting taxes
through the electricity bill is clearly not a permanent solution, the authorities should consider
extending this scheme, modified to take account of concerns about constitutionality. Here too,
failure to take action would suggest the need for a much greater reliance on expenditure
measures in 2014 than currently envisaged by the authorities, including potentially targeted cuts
in socially sensitive areas.
? Third, despite the much publicized closure of the state-owned public broadcaster, ERT, progress
in public administration reforms remains particularly disappointing. Staff takes note of the
authorities’ assurances that recent changes in the oversight of public administration reforms
signal a much stronger political determination to advance such reforms, and new initiatives in
this area are encouraging, including proposals to resolve the problem of de facto permanent
contractual employees. However, staff is concerned that the focus is shifting significantly away
from ensuring exit of redundant or unqualified staff to reallocation of such staff within the public
sector. The reliance on attrition to bring about the necessary downsizing of the public sector is
not credible unless the government creates room to hire new staff to fill expert positions.
53. A stronger determination is also needed to support structural reforms more broadly.
While this was not a main focus of the current review—it will be central to the next one—progress
on privatization remains painfully slow, both in terms of asset preparation and financial results,
raising concerns about the effectiveness of the privatization strategy. With sales delayed into next
year, the end-2013 objectives will be missed. Regulatory and institutional constraints need to be
overcome to bring assets to the point of sale, and uncertainty in this process reduces the
attractiveness of assets for potential buyers. More importantly, political constraints and interference
remains a serious obstacle. If delays continue taking on a systemic character, then governance
changes to the privatization fund would need to be considered in the context of the next review.
54. The authorities have completed critical steps in safeguarding financial stability. They
have recapitalized the core banks and, in the context of the review, are completing the sale of the
bridge banks and further enhancing the viability of one of the weaker core banks in line with their
strategy for a four-pillar banking sector. Going forward, rebuilding a robust financial system,
cleaning up balance sheets, and ensuring strong governance structures remain key challenges.
55. As noted in the third review staff report, debt sustainability concerns continue to
remain a risk. If investors are not persuaded that the policy for dealing with the debt problem is
credible, investment and growth will be unlikely to recover as programmed. The commitment of
Greece’s European partners to provide debt relief as needed to keep debt on the programmed path
remains, therefore, a critical part of the program. But the programmed path entails still very high
debt well into the next decade, leaving Greece accident prone for an extended period. Should debt
sustainability concerns prove to be weighing on investor sentiments even with the framework for
debt relief now in place, European partners should consider providing relief that would entail a
faster reduction in debt than currently programmed.
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INTERNATIONAL MONETARY FUND 27
56. The authorities’ commitment to implement corrective actions and other program
policies will be tested in the still difficult macroeconomic and political environment. The
program remains subject to numerous risks, mainly from the worsening of the macro outlook
combined with a further deterioration in banking sector assets (feeding back to the real economy),
difficulties with the implementation of ambitious fiscal policy and administrative changes, and—
above all—failure once again to ensure a reinvigoration of structural reforms in the face of strong
resistance from vested interests. Absent a critical mass of structural reforms that would transform
the investment climate, the growth outlook—and, therefore, crucially the assumptions regarding
financing needs for the rest of the program period and the debt path—would not materialize.
Externally, closing financing gaps and delivering on the commitment to reduce debt will be a test of
European support.
57. On the basis of reforms undertaken in the context of this review, and the
government’s policy commitments going forward, staff supports the completion of the fourth
review. Staff supports the authorities’ request for waivers of applicability and modification of the
end-September performance criterion on privatization receipts.

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28 INTERNATIONAL MONETARY FUND
Box 1. Greece: Banking Sector Restructuring
The restructuring of the Greek banking sector is almost complete following the final recapitalization of four
core banks, resolution of non-core banks, and sale of two bridge banks.
? Three of the core banks—National Bank of Greece, Alpha Bank, and Piraeus Bank—were successful
in raising more than 10 percent of their capital needs from the private sector and thus stayed under
private sector management. Eurobank was fully recapitalized by the HFSF (table below).

? From the non-core banks, ATE, T-Bank and FBB were resolved via Purchase and Assumption
transactions; and Proton and TT-Hellenic Postbank were resolved into bridge banks, and
subsequently sold to Eurobank. Attica Bank was the only non-core bank that avoided resolution by
raising private sector capital. Probank is in its final stages of a capital-raising process.
? Foreign-owned banks were acquired by domestic core banks Alpha (Emporiki) and Piraeus (Geniki,
Millennium BCP and the Greek branches of Cypriot banks). In the context of their sale, they were
recapitalized by their parents.
? The post-recapitalization banking landscape is dominated by the four core banks with 96 percent
share of total deposits.

Private sector HFSF
Alpha 16.3 83.7
Eurobank 1.4 98.6
National Bank of Greece 15.4 84.6
Piraeus 21.7 78.3
Sources: Bank of Greece; HFSF; and IMF staff estimates.
Share in Ownership After Recapitalization, 2013
(Percent of total share in equity)
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INTERNATIONAL MONETARY FUND 29
Box 1. Greece: Banking Sector Restructuring (concluded)

Banks Status
Injection by Official
Sector
Injection by the
Private Sector
Core banks
NBG Recapitalized. 8,677 1,079
Eurobank Recapitalized. 5,839 0
Alpha Recapitalized. 4,021 550
Piraeus 1/ Recapitalized. 6,415 1,444
Non-core banks 2/
ATE Resolved. Purchase and assumption by Piraeus. 8,041 0
FBB Resolved. Purchase and assumption by NBG. 619 0
T-Bank 3/ Resolved. Purchase and assumption by Hellenic Postbank. 677 0
3 Cooperatives Resolved. Purchase and assumption by NBG. 320 0
Proton 3/ Resolved. Purchase and assumption by Eurobank. 2,032 0
Hellenic Postbank Resolved. Purchase and assumption by Eurobank. 4,233 0
Attica Raised private sector capital. 0 199
Geniki Purchased by Piraeus. 0 290
Emporiki 4/ Purchased by Alpha. 0 3,000
Millennium BCP Purchased by Piraeus. 0 413
Sources: Bank of Greece; HFSF; and IMF staff estimates.
2/ Resolutions include capital injections. Probank capitalization process ongoing.
3/ Includes injection by HDIGF.
4/ Includes 150 million subscription of Credit Agricole to an Alpha bond issuance.
1/ Injection by the official sector includes injection for Cypriot banks but excludes capital payment for ATE. This item is included in
resolution costs. Injection by the private sector includes subscription by SocGen and BCP to share capital increase.
The Status of Greek Banks, 2013
(Millions of euros)
Banks
Deposit
Market Share
Four core banks
NBG 25
Alpha 22
Eurobank 19
Piraeus 30
Remaining non-core banks
Attica 2
Probank 2
Panellinia