DMSDR1S-4184960-v1-Greece SR.DOC May 10, 2010 (4:59 PM)
INTERNATIONAL MONETARY FUNDGREECE
Request for Stand-By Arrangement
Prepared by the European Department in Consultation with Other DepartmentsApproved by Poul M. Thomsen and Martin MuhleisenMay 5, 2010
Executive SummaryBackground:
The Greek economy is teetering due to heavy public debt and loss of market access.
The structural fissure is in weak competitiveness—inflation has consistently out-paced the euroaverage.
The dual challenge of undertaking very large fiscal adjustment and simultaneously achievinginternal devaluation is bound to limit growth for a protracted period, weighing in turn on the banking system.
Banks entered the crisis with sound liquidity and solvency indicators, but sovereign downgradingdragged them down, and the recession and uncertainty are causing distress.
Main elements of the program:
Greece is adopting an ambitious comprehensive multi-year adjustment program to lower the fiscaldeficit and the debt ratio, reduce domestic demand in line with capacity, and increase supply andcompetitiveness so that the economy can step onto a higher growth path led by investments andexports.
In the attached letter, the authorities request a 3-year Stand-By Arrangement under the exceptionalaccess policy and the emergency financing mechanism for €30 billion (SDR 26.4 billion or 3,212 percent of quota) with an initial purchase of €5.5 billion (SDR4.8 billion) available upon Boardapproval. The euro-zone partner countries are prepared to commit €80 billion with a firstdisbursement of €14.5 billion. It is an extraordinary international support effort for what needs to be an extraordinary Greek adjustment effort.
Fiscal policy is frontloaded with measures of 7½ percent of GDP in 2010, 4 percent of GDP in2011, and 2 percent of GDP in 2012 and 2013, each, to turn around the fiscal position and help place the debt ratio on a downward path. Measures are identified up to 2013. The fiscal deficit istargeted to drop below 3 percent of GDP by 2014, and the debt-ratio would peak at 149 percent of GDP in 2013.
The program includes provisions to shield low-income households from the brunt of theadjustment effort, including exempting those living on the minimum from the reductions in wagesand pensions, and social expenditures will provide the safety net for the most vulnerable.
Banking problems could intensify, which would magnify fiscal risks. Therefore, a FinancialStability Fund (backed by the international financing package) will be established to ensureadequate capitalization of the banking system. Liquidity pressures would be met, including withECB support.
Coordination with the European Commission (EC) and the European Central Bank (ECB) on program implementation and financing will be crucial to the success of the program.
Risks to the program are high. The adjustment needs are unprecedented and will take time, sofatigue could set in. Any unforeseen shock could weigh on the economy and the banking systemeven if the fiscal program is on track. Greece needs to persevere to ensure continued internationalsupport.
2Contents PageExecutive Summary .................................................................................................................... 1I. Introduction ......................................................................................................................... 4II. Recent Economic Developments ........................................................................................ 6III. Overall Strategy .................................................................................................................. 8IV. Macroeconomic Framework ............................................................................................... 8V. The Program: Policy Discussion ....................................................................................... 10A. Fiscal Policy ................................................................................................................ 10B. Structural Policies ....................................................................................................... 14C. Financial Sector Policy................................................................................................ 15VI. Program Modalities ........................................................................................................... 18A.
Access, Phasing, Conditionality ................................................................................ 18B.
Capacity to Repay the Fund and Risks to the Program .............................................. 19C.
Exceptional Access Criteria ........................................................................................ 20VII. Staff Appraisal .................................................................................................................. 22Boxes1. Framework for Cooperation between the Fund, the European Commission,and the ECB ......................................................................................................................... 52. Data Misreporting ............................................................................................................... 63. The Adjustment Measures ................................................................................................ 114. The Financial Stability Fund ............................................................................................. 17Tables1. Selected Economic Indicators ........................................................................................... 262. General Government Operations, 2009–15 ...................................................................... 273. Public Sector Financing Requirements and Sources ........................................................ 284. Summary of Balance of Payments, 2009–15 .................................................................... 295. External Financing Requirements and Sources, 2009–15 ................................................ 306. Core Set of Financial Soundness Indicators for Deposits Taking Institutions, 2000
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09 . 317. Access and Phasing Under the Proposed Stand-by Arrangement, 2010–13 .................... 328. Indicators of Fund Credit .................................................................................................. 339. Monetary Survey ............................................................................................................... 34AppendicesAnnex 1. Debt Sustainability ................................................................................................... 35Annex 2. Pension Reform Assessment .................................................................................... 40Annex 3. External Debt Sustainability Analysis...................................................................... 42AttachmentsI. Greece: Letter of Intent ....................................................................................................... 45II. Greece: Memorandum of Economic and Financial Policies .......
........................ 47III. Greece: Technical Memorandum of Understanding .......................................................... 62
3IV. Letter of Intent and Memorandum of Understanding on Specific Economic PolicyConditionality (European Commission and European Central Bank) .............................69V. Greece - Assessment of the Risks to the Fund and the Fund’s Liquidity Position ........124VI. Press Release .................................................................................................................137VII. Statement by Panagiotis Roumeliotis, Alternate Executive Director for Greece ..........142
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IMF - Request for Stand-By Arrangement GREECE 2010
Approved by Poul M. Thomsen and Martin Muhleisen
May 5, 2010
May 5, 2010
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