GREECE:

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MONTHLY MACROECONOMIC OUTLOOK
Strategy and Economic Research Division
NATIONAL BANK
OF GREECE May 2010

 The large fiscal adjustment effort of more than 10 percentage

What are the margins for points of GDP until 2014 cannot be accomplished without a
increasing PIT revenue in significant increase of tax revenue, which currently falls
significantly short of the euro area average, mainly due to
the Greek economy? rampant tax evasion.

 Revenue from personal income tax is the starting point, as it

shows the largest gaps in cross-country comparisons (PIT
Main Macroeconomic Indicators revenue averaged 4.6 per cent of GDP during the past decade
in Greece, compared with 8.7 per cent in the euro area),
2007 2008 2009 2010f 2011f
accounting for the bulk of the 4.8 percentage points of GDP
difference between the total level of tax revenue between the
GDP Greece (y-o-y change) 4,5 2,0 -2,0** -3,8 -1,9
two regions.
CPI inflation (y-o-y change) 2,9 4,2 1,2 4,5 0,8

Current Account Deficit (% GDP) 14,1 14,4 11,2 7,6 6,3

 NBG Research provides estimates of the existence of a
significant margin for raising government revenue from PIT
Gen. Government Deficit (% GDP)1 3,6 7,7 13,6 8,1 7,6 -- after a persistent effort which would last for several years --
GDP Euro area (y-o-y change) 2,6 0,7 -3,8 1,3 2,0 by about €9 billion annually, equivalent to 3.8 per cent of
GDP SEE-5 (y-o-y change) 6,2 6,6 -5,5 0,9 2,9
GDP, sufficient to cover one third of the necessary fiscal
adjustment.
Oil prices (in euro, pa) 53 66 44 61 64

ECB main refinancing rate (eop) 3,75 2,75 1,00 1,00 1,75  Our estimate for undeclared income from personal income tax
is about €50 billion (20% of GDP), comprising mostly of
Baltic Dry Index (pa) 7070 6010 2760 3100 3700
non-wage income – it derives from the difference between the
Source: EU Commission, El.Stat, BoG and NBG forecasts
**Revised data by El. Stat
1
MNEC
national accounts and the declared income to the tax
authorities – and does not include estimates of the
underground economy.
 The other source of lower PIT revenue compared with the
Macroeconomic Analysis euro area reflects the relatively large tax breaks in calculating
pp. 12-18 PIT (e.g. the large zero bracket as well as the higher social
security contributions for employees), the application of
preferential taxation rules, until recently, on a sizeable part of
incomes (salaries as well as dividends, with interest income
Paul Mylonas still at a favorable rate).
Director of Research
NBG Group Chief Economist There is considerable scope for raising additional
(+30210) 334 1521
e-mail: pmylonas@nbg.gr 35 revenue from PIT in Greece
30 Total Tax Revenue (excl SSC) as
% GDP, 2000-2008 average
Nicholas Magginas, Ph.D 25
(+30210) 334 1516
20
e-mail: nimagi@nbg.gr
15
Evangelia Pateli, M.Sc
10
(+30210) 334 2803
e-mail:pateli.evaggelia@nbg.gr 5
0
GR PT NL ES IE FR EA DE AT IT BE FI

PIT Other taxes

Strategy and Economic Research Division

86 Eolou Str., 102 32 Athens, Greece
http://www.nbg.gr/Press/Publications/GreekMonthly
NBG
 STRATEGY AND ECONOMIC RESEARCH DIVISION

What are the options for broadening the tax base of the Greek
economy?
The Greek economy is currently facing its most severe fiscal
adjustment challenge since the early 1990s. Against a backdrop of
deteriorating domestic macroeconomic conditions and
unprecedented market pressure, Greece needs to refinance sizeable
debt coming due as well as a large fiscal deficit. Against this
background, the Greek Government presented an ambitious fiscal
austerity programme -- detailed in the draft of the new Stability and
Growth Programme (SGP) supported by €110 billion from the EU
Greece is facing a severe adjustment
challenge...
and the IMF -- which aims to bring the structural deficit down by
20 20
General Government
over 10 percentage points, to below 3 per cent of GDP by 2014. The
15 Deficit (% GDP) 15 size of the fiscal adjustment, especially if one takes into effect the
10 10 rising headwinds from population ageing, is the highest ever in the
5 5 euro area, corresponding to an average annual reduction in the
0 0 structural deficit of 3.2 percentage points.
-5 -5 The adjustment will need to focus on expenditure cuts, with the
2010f
2011f
2012f
2013f
2014f
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

additional benefit of diminishing the invasive role of the state,

which hampers competitiveness. On the revenue side, the
Greece Euro area authorities will have to focus on widening the tax base, both by
Source: OECD, European Commission, Greek MoF reducing rampant tax evasion as well as eliminating large
exemptions, especially as the 2010 adjustment has exhausted most
room to raise tax rates, which are now already at relatively high
levels, as further tax rate increases will raise issues of inequity as
well as provide a brake to output growth.

Personal income tax collection in Greece is particularly weak

compared with the euro area
Personal income tax is the natural starting point in an effort to
…to bring its fiscal balances to a
broaden the tax base, as it shows the largest gaps in cross-country
sustainable level comparisons. Indeed, PIT revenue averaged 4.6 per cent of GDP
160 160
140 140 during the past decade compared with 8.7 per cent for the euro area,
120 120
accounting for the most part of the 4.8 percentage points of GDP
100 100
80 80 difference between the total level of tax revenue between the two
60 60
regions (2000-2008 average).
40 General government 40
20 Debt as % GDP 20
0 0
As regards revenue from other key taxes, it appears that revenue
from total indirect taxes, as a per cent of GDP, was about 1
2010f
2011f
2012f
2013f
2014f
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

percentage point of GDP lower than the euro area average during
Greece Euro area the past decade (although private consumption as a per cent of GDP
Source: Eurostat, Commission, Greek MoF
is 72 per cent in Greece versus 58 per cent for the euro area), CIT
revenue was broadly analogous to the euro area average (3.4 per
cent versus 3.2 per cent of GDP), while social security
contributions, as a per cent of GDP, were 0.6 percentage points
below those in the euro area, mainly reflecting lower social security
contributions by the self-employed.

The shortfall in PIT revenue appears to reflect, to a significant

extent, the problem of a narrower tax base, as many taxpayers

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 2

 STRATEGY AND ECONOMIC RESEARCH DIVISION

appear to substantially under-report their incomes and the fact that,

until recently, Greece had lower effective tax rates on non-wage
income. Besides the easier issue, from an implementation point of
view, of raising effective tax rates, a crucial question is whether the
source of tax evasion can be identified with some confidence and
how this revenue potential could be tapped efficiently. A more
detailed analysis of the income base will permit the tax authorities
to allocate their resources more efficiently and improve tax
Tax revenues are below the euro area collection considerably.
35 average...
Total Taxes
30 (excl. SSC, % GDP)
NBG Research attempts to obtain an estimate of the opportunities
25
from improved tax collection, comparing information from national
accounts with that reported to tax authorities in order to identify
20
discrepancies. As data availability from the tax authorities is limited
15
due to privacy issues, we also look at cross-country differences in
10
the returns from income taxation. The identification of the
5
unreported or partly reported segment of household income is
0 attempted through three complementary methods:
GR DE ES PT NL IE EA FR AT IT BE FI
Source: Eurostat i) The first is based on the comparison of the effective (implicit)
tax rates with those in the euro area, using national accounts
data to estimate the tax base, and then statutory tax rates to rate
the effective tax rates;
ii) The second method uses the discrepancy between national
accounts household income data with the respective reported
income information obtained from the electronic taxation
information system, TAXIS, to estimate income under-
reporting; and
iii) Finally, the properties of the bi-modal distribution of reported
... and PIT revenue shows the largest incomes for the two broad taxpayer categories -- “wage” and
14 gap in cross-country comparisons “non-wage” income earners from the tax authorities -- are used
12 Personal Income Tax in conjunction with the national accounts data on the relative
(%GDP, 2007) compensation of the two income categories to estimate the
10
potential size of the tax base.
8

6
All three approaches provide estimates of the existence of an
overall margin for raising government revenue from PIT -- after a
4
persistent effort which would last for several years -- by €9 billion
2
(or 3.8 per cent of GDP). Around two thirds of this adjustment
0 reflects tax evasion, while the remainder mainly reflects large tax
GR PT IE NL FR ES EA DE AT IT BE FI breaks in calculating PIT in Greece, favorable tax rates applied in
Source: Eurostat
several sub-categories of personal income, as well as higher social
security contributions of employees (which are deductable from the
tax base).
An important clarification is that in our analysis we do not attempt
to measure the fiscal impact of “missing GDP” i.e. the portion of
income not measured in the official national accounts data, but only
that reported in official GDP statistics. In other words, our estimates
clearly underestimate the tax cache. The second necessary

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 3

 STRATEGY AND ECONOMIC RESEARCH DIVISION

clarification concerns the manner in which economic activities

escape taxation. The analysis considers tax evasion and tax
Greek household income is in line with avoidance as a single activity, namely the activity of not declaring
the euro area average, though the incomes that should generally be taxed. Whether this is done by
80 composition is very different
under-reporting income or by legally exploiting taxation law
70 % GDP
60
loopholes (e.g. overstating deductions) is not relevant in our
50 context.
40
30 Household income as a per cent of GDP is analogous to the euro
20 area average, with non-wage income corresponding to a relatively
10 large part of household remuneration
0
The shortfall in PIT revenue occurs despite the fact that total
Portugal

Greece
France

Spain
Ireland

Italy
Euro area

household income -- the tax base for PIT -- is broadly in line, as a

per cent of GDP (national accounts basis), with the euro area
average (61 per cent of GDP in Greece versus 63.8 per cent in the
Wage Non-wage euro area in 2008). Recall that the other components of GDP,
besides household income, are retained earnings, depreciation of
fixed capital, indirect taxes, corporate taxes, and employer social
Self-employment corresponds to a security contributions.
respectable share of employment and
economic activity in Greece More importantly for tax purposes, the structure of household
40 income exhibits some notable differences compared with the euro
35
area average. Indeed, dependent employment remuneration amounts
30 Employers, self-employed to 26.4 per cent of GDP, which is far lower than the respective
25
and family workers as % of
total employment share of 36.0 per cent for the euro area. This shortfall reflects the
20
significant share of self-employment, and unincorporated
15
production activity in the Greek economy. Their compensation
10
cannot be easily decomposed between capital and labor income, and
5
is generally included in the non-wage component of household
0
income (more specifically in the national accounts component of
FR DE FI NL AT BE EA IE ES PT IT GR
household “mixed income”), rather than the income of the corporate
sector -- the tax base for CIT.
This composition should not be surprising in view of the significant
role of SMEs and especially of very small enterprises (with less
100 Very small enterprises play a key role... than 10 employees) in economic activity, which in conjunction with
the large share of self-employment in total employment in the
75
Greek economy, arise as the key factors behind the extensive under-
number of SMEs per reporting of personal income in Greece. It is widely known that
1000 inhabitants)
very small enterprises play a predominant role in the Greek
50
economy, corresponding to 56 per cent of total employment, while
around 77 SMEs correspond to every 1,000 persons compared with
25 only 39 enterprises for the EU average. In the same vein, self-
employment (including individual proprietorships, farmers,
0 professionals and own-account occupation) accounts for 35 per cent
PT GR IT ES EU BE FR FI AT NL UK IE DE of total employment in Greece, exceeding by far the respective EU
average of 15 per cent.
*data for 2005
This composition also reflects the still high share of agriculture in
the Greek economy, which, despite its strongly declining trend

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 4

 STRATEGY AND ECONOMIC RESEARCH DIVISION

during the past two decades, corresponded to about 4 per cent of

domestic value added and 11 per cent of total employment in 2008
... in economic activity in Greece compared with 1.6 and 3.8 per cent, respectively, for the euro area.
70
The second broad component of household income comprises the
Share of micro mixed income of households, which relates to the part of the value
enteprises in total
45 employment added from unincorporated production activity received by
households together with the net remuneration of the own-occupied
capital and labor of family members and the self-employed. Non-
20 wage household income also includes income from rents, dividends
and interest income. In this respect, total non-wage income of
Greek households is 38.8 per cent of GDP, against a euro area
-5 average of 28 per cent. Indeed, non-wage income corresponds to 59
ES
GR

NL
AT

DE
FR
IT

IE
PT

EU-27

FI

UK
BE

per cent of total Greek household income versus 44 per cent in the
*data for 2005
euro area.
Statutory tax rates on labor are not low by international standards,
but are highly progressive…
... and their presence is negatively Low statutory tax rates on wages do not appear to be the source of
correlated with PIT revenue collection
low tax revenue as they appear to be broadly in line with the euro
14 area average (and would appear high if adjusted for Greece’s lower
13 FI
12 BE per capita income). Indeed, although the two top marginal tax rates
IT
PIT (% GDP)

11 (of 35 and 40 per cent in 2008, which have been raised to 40 and 45
10 AT
9
EU-27 per cent in 2010) were applied at a relatively low level of income
8 FR
NL ES threshold (of €30,000 and 75,000, respectively, in Greece,
7
6 IE compared with an estimated average of €37,000 and 90,000 for
PT
5
GR other euro area countries), the effective tax rate applied to the
4
income brackets where the bulk of taxpayers are concentrated (i.e.
10 20 30 40 50 60
micro enterprises as a share of non - €13,000-27,000) is estimated at around 17 per cent being broadly in
financial SMEs line with other southern European countries with a per capita
income similar to Greece (such as Italy and Portugal). It is
important to note that Greece does, however, have one of the largest
“zero” tax brackets, much larger than that of comparable countries
(€12,000, for wage income in 2008 versus €6,700 in the euro area),
14,0 Decomposition of PIT revenue which is even higher when compared with the respective per capita
12,0 incomes. Moreover, 2.6 million taxpayers (or about 48 per cent of
10,0 PIT decomposition the total tax forms submitted to tax authorities) report average
% GDP
8,0
income below the tax-free level.
6,0 …while social security contributions of employees are among the
4,0 highest in the euro area
2,0 The social security contribution rate applied on the average
0,0 employee exceeds the euro area average (14.5 per cent of gross
-2,0 GR PT IE NL FR ES DE AT IT BE FI labor income against 11.8 per cent for the euro area). As a result,
Employed labor income Self-employed income the actual level of social security contribution paid by employees
Capital income Social Transfers & pensions also exceeds the euro area average (4.6 per cent of GDP versus 4.0
Source: Eurostat per cent of GDP in the euro area), despite the existence of
significant contribution evasion in line with income tax evasion.
Nevertheless, social security contributions for employers and the

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 5

 STRATEGY AND ECONOMIC RESEARCH DIVISION

self-employed are slightly lower than the euro area average

basically due to the latter (by 1.4 per cent of GDP) although the
share of these two categories in total employment is 230 per cent
higher in Greece in comparison with the euro area.
Non-wage income is the main culprit for the narrow tax base
The ratio of actual tax receipts to an estimated measure of the
Personal income tax rates and
potential tax base for each income category (the so-called “implicit
120000 thresholds tax rate”) is an important measure of tax efficiency. NBG Research
uses income data from the national accounts of Greece and other
45%
100000 euro area countries to obtain proxies for the level and structure of
underlying personal income tax liabilities, and compares the derived
40% 43% 42%
80000 40% implicit tax rates across different countries with a view to
40%
41% 40% identifying the main source of slippages in PIT revenue collection.
60000
35%
27% The components of PIT receipts from the national accounts (which
38% 36,5
30%
38% 24,1 broadly tally with the fiscal ones), are used as numerators for the
40000 41%
36% calculation of the respective implicit tax rates, while the
32% 34%
20000 25%
26% 27%
18,3% corresponding national account measures of wages, net transfers to
14% 24% 20%
5,5%
18%
23%
23,5 15,7% households and distributed operating surplus and mixed income, are
0% 0% 13%
0
0% 0% 0% 10,5% 0% used as denominators (i.e. as proxies of the potential tax base for
each income category).
GR (new)

ES
GR
FR

IE

IT

PT

Wage Income
The estimated implicit tax rate on wage income in Greece is 8.8 per
cent against an estimated euro area average of 11.5 per cent. This
discrepancy could reflect deductions from higher employee social
security contributions and/or a higher zero tax bracket as well as an
under-reporting of actual wage income. Indeed, a reduction of the
zero tax bracket to the average level of the euro area (€6,700 – not
GDP per
Tax-free
Ratio
adjusted for Greece’s lower per capita income) would be sufficient
capita (1)
threshold*
(2)/(1) % to generate about €1.1 billion of additional tax revenue from wage-
(2) income taxation (as about 2.3 million wage earners would be taxed
GR 21300 12000 56
at a marginal rate of 10 per cent for about €5,000 of their annual
FI 34700 12600 36
income which was previously untaxed).
AT 33800 10000 30
DE 30400 7665 25 The effective shortfall in wage taxation is mitigated further if we
ES 23900 5151 22 take into account the relatively higher social security contributions
BE 32200 6400 20 of employees in Greece (4.7 per cent of GDP during the past decade
FR 30400 5687 19 compared with 4.0 per cent for the euro area average), which are
IT 26200 1840 7 deducted from income prior to the calculation of PIT. Indeed,
NL 36200 2074 6 higher social security contributions appear to be responsible for
IE 40900 1830 4 another €0.15 billion of the shortfall in revenue from wage taxation.
Source: OECD, Greek MoF
* Tax free thresholds are not fully comparable among different Overall, potential tax revenue from the harmonization of the zero
countries as they can reflect either a zero tax rate income range
or a tax allowance or credit or they can be proportional to the tax threshold for wage earners, adjusting for the higher social
level of income
security contributions, is sufficient to bring the implicit tax rate on
wage income in Greece 1.8 percentage points below the euro area
average, while the remaining €0.5 billion needed to fully equalize
the implicit tax rates between the two regions could be attributed to

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 6

Implicit tax rates on capital &

 STRATEGY AND ECONOMIC RESEARCH DIVISION

the implementation of specific autonomous taxation rules for some

income categories (see below) or tax evasion. In the event, the
overall additional revenue potential from wage income taxation is
Social security contributions... thus estimated at €1.7 billion or 0.7 per cent of GDP with a small
impact from tax evasion.
20%
Statutory social security
18%
contribution rates for Non-wage income
16% employees as per cent of As regards the second key constituent of personal income, i.e.
14% gross labor income
12% capital, business and property income, of households and self-
10% employed, the implicit tax rate is an impressive 8.3 percentage
8%
points lower in Greece (6.5 per cent versus 14.8 per cent for the
6%
4% euro area). In this case, social security contributions cannot explain
2% any part of the shortfall in revenue from non-wage income taxation
0%
as contributions of employers and the self-employed in Greece are
NL IE FI ES IT PT DE FR BE GR AT
about 1.5 per cent of GDP lower compared with the euro area
average. As regards the impact of the zero tax bracket, we estimate
that the potential tax revenue that could be raised by lowering this
bracket to the euro area average of €6,700 for labor income would
...exceed the euro area average amount to €0.4 billion and would be sufficient to increase the
implicit tax rate on non-wage income by only 0.5 percentage points
7,0
Employees' Social to only 7.0 per cent. Closing the remaining gap of 7.8 percentage
6,0 Security Contributions
(% GDP) points between the implicit tax rates on non-wage income in Greece
5,0
and the euro area would require about €6.8 billion (or 2.8 per cent
4,0 of GDP) of additional revenue from non-wage income taxation
3,0 annually.
2,0

1,0 An additional part of the tax difference is likely to reflect a more

0,0 favorable tax treatment of non-wage income relative to wage
IE ES IT FI PT FR BE EA GR AT DE NL income in Greece (as a result of higher margin for tax deductions
Source: Eurostat from non-wage income related to deductions of operational, input
purchases and other business expenses). The scope for exploiting
the favorable tax treatment is considerable in Greece for the self-
employed, who correspond to 59 per cent of the total non-wage
Decomposition of non-wage income
income in Greece against a euro area average of 41 per cent.
45
40 In the same vein, the favorable treatment is also evident in the
35
30 % GDP taxation of property income (the third component of non-wage
25 income) as reflected by the low taxation of dividends and interest
20 relative to other euro area countries. Indeed, the top statutory rate
15
10
on dividend income (at the shareholder level) in Greece was zero
5 until 2008 and was taxed at a rate of 10 per cent in 2009 compared
0
with a euro area average rate of 23.7 per cent (taking account of all
Ireland
France

Portugal
Italy
Greece

Spain

types of reliefs and gross-up provisions at the shareholder level).

Similarly, the effective tax rate on interest income is 10 per cent
compared with 21 per cent for the euro area average, as interest
Operating surplus Mixed income Property income
income is not taxed at the marginal PIT rate, but at an autonomous
rate of 10% (a withholding tax). It should be noted that although
rents are supposed to be taxed at the marginal PIT rate, there is
purportedly significant under-reporting of rental income to the tax

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 7

 STRATEGY AND ECONOMIC RESEARCH DIVISION

authorities in Greece, especially as rental income relates mostly to

individuals rather than corporations (as in other euro area
countries).
The effective taxation of non-wage
income is very low in Greece mostly due It must be also emphasized that some sub-categories of both wage
25,0 to under-reporting of income by
self-employed... and non-wage remuneration in Greece were not taxed until 2009 at
20,0 the regular tax scale, but under specific autonomous rules (i.e. at
distinct rates which were considerably lower than top statutory
15,0
rates). This income is estimated to be more than 16 per cent of the
10,0 total income reported to tax authorities (about €19 billion in 2008).
5,0
The taxation of these incomes at the regular scale could enhance
government revenue by at least €1.0 billion, assuming a
0,0 (conservative) marginal increase of about 5 percentage points in the
GR NL FR EA ES BE IT FI
effective rate.
* for Greece data refer to 2006, for the rest of the
countries 2007
Interestingly, the taxation of the respective non-wage income
categories in Italy, which has an income structure similar to Greece,
yet a country which has made great strides in combating large tax
evasion, is significantly higher than in Greece. More specifically, a
comprehensive regional tax (IRAP) was introduced in Italy in 1998,
applying to the value of production (net of depreciations) of all
...also due to low dividend tax rates...
45
business activities (incorporated, unincorporated and those carried
40
by self-employed) at a flat rate of 4.5 per cent. Since the tax base of
net top statutory rate at the
35 shareholder level, taking account of IRAP is very large, roughly coinciding with the total economy’s net
all types of reliefs and gross-up
30 provisions at the shareholder level value-added, the Italian Government raised considerable revenue --
(2009)
25 despite the relatively low statutory rate of the tax -- leading the
20 implicit tax rate on capital and business income in Italy to the 2nd
15 highest position among euro area countries, and also allowed for a
10
reduction in the statutory rate of taxation on corporate profits.
5
Moreover, interest income in Italy is subject to a 12.5 per cent
0
GR IT BE ES FI PT AT NL DE FR IE
withholding tax for interest income from sovereign bonds (with a
Source: OECD
duration longer than 18 months) or 27 per cent on interest from
deposit accounts, while in Greece the respective tax rates are 10 per
cent in both cases.
All in all, the total revenue-increasing potential from non-wage
...and interest income taxation income taxation is estimated at €7.2 billion or almost 3.0 per cent of
GDP, which could be attributed mainly to tax evasion.
35

30 Combining this result with that from wage income suggests that the
25 total potential increase in annual tax revenue from PIT is estimated
20
at 3.8 per cent of GDP or about €9.0 billion annually of which
around 70 per cent (or €6.2 billion) reflects tax evasion (including
15
the impact of the abolishment of unique taxation rules). This
10
revenue could be enough to support more than one third of the
5
necessary fiscal adjustment.
0
BE GR ES PT IT DE
Source: Doing business, World Bank

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 8

 STRATEGY AND ECONOMIC RESEARCH DIVISION

Using information from the Greek taxation registration system to

refine the estimate of the revenue-increasing potential of the Greek
economy
Decomposition of PIT revenue gap In view of the significant margin for raising additional tax revenue
Income category especially from the non-wage income pool of the Greek economy
(bn euro) Wage Non wage and the extensive heterogeneity of people belonging to this group
Tax free bracket 1,1 0,4 (who range from unskilled farmers and street workers to highly-
skilled professionals), we attempt to improve our estimates by
Autonomous tax rates 0,5 0,5
incorporating in our analysis the distributional characteristics of the
Tax Evasion … 6,2 reported tax base and the income structure of the various taxpayer
1,7 7,2 groups as provided by the electronic taxation information system,
Total tax revenue
TAXIS.
potential 9,0
A look at the TAXIS data brings forward some clearly discernible
Source: Eurostat, MNEC and NBG trends:
i) wage income declared in TAXIS (€68.1 billion equivalent to
28.6 per cent of GDP) is slightly lower compared with the wage
Tax revenue per reported income and salary component of the national accounts (of about €70
bracket billion) confirming that tax evasion on behalf of dependent
5.000 (wage earners)
4.500 employment is relatively limited;
4.000
3.500
ii) non-wage income reported in TAXIS amounts to around €23
3.000 billion (or 9.6 per cent of GDP), which is considerably lower in
2.500
2.000
comparison to the size of net operating surplus, mixed and
1.500 property income of households, which exceeded €70 billion in
1.000
500 2008 according to national accounts data (31 per cent of GDP).
0
in mn €

By tapping this estimated deviation of about €50 billion between

160 - 170
220 - 250

500 - 550
700 - 800
11 - 12
15 - 16
19 - 20
26 - 28
36 - 39
50 - 55
70 - 75
90 - 95
0
3-4
7-8

120 - 130

340 - 370

Tax revenue per reported income
bracket (non-wage earners)
actual and potential tax base, the tax authorities could raise about
€9.5 billion (or 4 percentage points of GDP) of additional tax
revenue annually, under the assumption that this additional income
is taxed at an average implicit rate (weighted average of implicit tax
rates applied on wage and non-wage income on the basis of the
relative share of these 2 categories in Greek households income),
somewhat higher than the euro area average of 20 per cent, as this
income is mostly marginal income.

700 total tax revenue per

Tax base estimates based on reported income distributions
600 bracket
By examining TAXIS data at a more disaggregated level, we can
income in mn €

500
400 see that both the average income declared by the tax payer for each
300 category of personal income as well as the distribution of tax
200 revenue across different income categories suggest significant
100 abnormalities in Greek personal income taxation. Indeed, while the
0
average income per taxpayer declaring wage as his/her main source
160 - 170
220 - 250

500 - 550
700 - 800
11 - 12
15 - 16
19 - 20
26 - 28
36 - 39
50 - 55
70 - 75
90 - 95
0
3-4
7-8

120 - 130

340 - 370

of income amounts to €17,000 per year, the average declared

income for taxpayers whose income is obtained mainly from
sources other than wages and pensions (excluding agriculture) is
only €16,400. These latter taxpayers contain two extremes --
professionals such as lawyers, doctors, engineers, with relatively
high incomes, as well as artisans and small shopkeepers, suggesting

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 9

 STRATEGY AND ECONOMIC RESEARCH DIVISION

the existence of a bi-modal distribution of income. The data,

however, reveal the existence of bi-modal distribution for both
Tax revenue per reported income categories of taxpayers. In the case of wage earners, there is a
bracket (non-wage earners) Simulated clustering around the cut-off for the zero tax bracket of €12,000 as
well as second clustering at a mean income level of €24,000,
800
700
whereas the respective clusterings for non-wage earners are at
income levels of €10,000 and €26,000, respectively (with the latter
income in mn €

600
500 mode surprisingly low as it is equal to that of wage earners).
400
300 total tax revenue per
bracket
To estimate the tax revenue shortfall, we leave unchanged the
200
100 distribution of wage earners (a conservative assumption) and
0 increase the mean income of the first mode of the distribution of
160 - 170
220 - 250

500 - 550
700 - 800
11 - 12
15 - 16
19 - 20
26 - 28
36 - 39
50 - 55
70 - 75
90 - 95
0

7-8
3-4

120 - 130

340 - 370

non-wage earners, to equalize with the mean income of the low

mode of wage earners, while we shift the mean income of the
second mode to €42,000, which derives from applying the ratio of
the average per capita compensation of non-wage income earners
over the compensation of wage earners in the national accounts data
(after taking into account the shift in the lower mode). The potential
widening of the PIT tax base obtained on the basis of the new bi-
The cost of tax administration modal distribution for non-wage income earners is estimated at
2,0
(Ratio of administrative costs to net revenue around €47 billion which could be translated (under the assumption
collections, 2004)
per cent of an average implicit tax rate of 20 per cent) to €9½ billion of
additional PIT revenue per annum.
1,5

All in all, the three methods provide estimates of PIT revenue

1,0
increasing potential by €9 billion (or 3.8 per cent of GDP) of which
around €6.2 billion can be attributed to tax evasion.

0,5
Key steps to reduce tax evasion
In view of the large potential benefits from reducing the high
0,0 amount of tax evasion in Greece, as well as the urgency in
AT FI ES DE IE NL FR IT PT GR BE improving the large fiscal imbalance, the following are some “quick
Source: OECD, Tax administration database wins” in terms of policies:
1. “Carrot and stick”: the ease with which tax payers interact with
tax offices should be improved and the penalty for non-payment
Aggregate staff usage on audit should be increased. Not so much the statutory penalty, but the
investigation & other verification effective one. Indeed, few people suffer significant punishment
%
80 functions as a per cent of total persons for tax evasion in Greece. In addition, a policy of “name and
employed in tax administration
70 shame”, whereby the names of the tax evaders who have been
60 caught (and fined) are put in the public domain, has proven
50 effective elsewhere, and the Government has already begun to
40 do this quite recently.
30 2. Bank account secrecy: Greece still has one of the strictest bank
20 secrecy legislations in Europe. As a result, it is difficult for tax
10 auditors to open up accounts when conducting a routine audit
0 unless there is existing evidence of tax evasion rather than the
PT ES GR IE NL FI BE DE AT IT
opposite – opening up the account of a person being audited
Source: OECD
with a view to finding evidence of tax evasion (e.g. large

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 10

 STRATEGY AND ECONOMIC RESEARCH DIVISION

transaction flows compared with declared income). Even though

this legislation has been made less strict, tax auditors still do not
rely sufficiently on bank account data in conducting audits.
3. Implementation of risk management methodology for audits:
Audits should be conducted primarily on tax payers with high
Aggregate staff usage on major tax risk characteristics of tax evasion. Specifically, tax auditors
administration functions in 2007
80 should choose to audit potentially high income individuals, such
70 as professionals, who report low income (compared with
60 benchmarks such as the average for their cohort group) but live
50 or work in high income areas (or have other high income
40 characteristics). The goal is to maximize the “bang” per audit
30 and not to audit the full population.
20
4. Auditing the audit inspectors: In view of the accusation of
10
corruption in tax collection, the relatively few individuals who
0
perform audits (approximately 6,000 tax auditors in Greece)
PT ES GR IE NL FI BE DE AT IT
should be held to higher accountability. For example, they
Audit, investigation & other verification functions
should voluntarily subject their family to audits, with a view to
Enforced debt collection & related functions
Source: OECD
improving the reputation of tax auditors and staying on the
moral high ground.
These four measures should help the MoF improve the tax take
quickly as it would attack the “low hanging fruit”. In the event, the
Government should not try to reinvent the wheel. When introducing
measures to stem tax evasion there is a wealth of knowledge in
terms of what has worked in other countries and in this regard
Greece should request technical assistance either from the IMF or
other countries’ tax authorities (as it has done in the past with the
US IRS) or other knowledgeable institutions (e.g. the UK Institute
for Fiscal Studies).

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 11

 STRATEGY AND ECONOMIC RESEARCH DIVISION

Greece: Macroeconomic Developments

May 2010

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 12

 STRATEGY AND ECONOMIC RESEARCH DIVISION

In 2009, the Greek economy witnessed its largest recession since 1987, with economic activity declining by 2 per cent
y-o-y, as indicated by the revised GDP figures for 2009. Αll components of domestic demand registered sizeable
contractions (private consumption shrunk by 1.8 per cent y-o-y and fixed investment by 13.9 per cent), while exports of
goods and services declined by 18.1 per cent y-o-y. In Q1:2010, economic activity continued to contract at a pace
analogous to Q4:2009 (-0.8 per cent q-o-q and -2.3 per cent y-o-y), as the increasing drag on economic activity from
shrinking government consumption and fixed investment was ameliorated by the bottoming-out of export revenue and
the continuing decline of imports. The economy is expected to fall deeper in recession in the following quarters, with
GDP contracting by -3.8 per cent y-o-y, on average, in 2010, as domestic demand is held back by the widespread
uncertainty about the measures needed to alleviate the sizeable fiscal imbalances in view of the accumulated
implementation credibility deficit, as well as the ambitious consolidation programme, which was augmented by
supplementary austerity measures in March and May (in total corresponding to an additional direct fiscal drag of
around 2.6 per cent y-o-y). Nevertheless, the activation of the joint EU/IMF financial support mechanism by Eurogroup
and the effective implementation of a complementary austerity package are expected to gradually ameliorate the
uncertainty about the country’s near and medium-term economic prospects. This will improve financing conditions
considerably and speed up credibility gains, especially if accompanied in their implementation by the acceleration of
structural reforms. In this event, a bottoming-out in economic activity is expected by mid-2011, although economic
growth, on a y-o-y basis, will remain in negative territory for the most part of 2011, due to a sizeable negative carry (-1.4
pps in 2011 from -0.9 pps in 2010).
Greece: Growth Outlook
2007 2008 2009 2010f 2011f 2009 2010f A widespread contraction in
Q3 Q4 Q1e Q2f Q3f Q4f domestic demand continues

Forecasts
GDP (per cent y-o-y) 4,5 2,0 -2,0 -3,8 -1,9 -2,5 -2,6 -2,3 -3,8 -4,6 -4,7 7
GDP (per cent q-o-q) … … … … … -0,5 -0,8 -0,8 -1,9 -1,2 -0,9 5
Domestic Demand (y-o-y) 5,8 1,0 -2,4 -7,4 -4,2 -3,1 -4,7 -5,5 -7,4 -8,5 -8,3 3
1
Final Consumption (y-o-y) 4,9 2,0 0,4 -6,1 -3,7 0,3 0,3 -3,5 -5,9 -7,4 -7,5 -1
Private Consumption (y-o-y) 4,0 2,3 -1,8 -5,8 -3,5 -1,9 -1,6 … … … … -3
Public Consumption (y-o-y) 8,9 0,6 9,6 -7,1 -6,0 9,8 8,4 … … … … -5
Fixed Capital Formation (y-o-y) -0,4 -7,5 -13,9 -12,7 -5,4 -14,8 -19,0 -15,5 -11,0 -12,0 -12,3 -7
-9
Construction 1,8 -14,5 -8,8 -12,2 -4,9 -13,4 -18,3 … … … …

2010:Q1
2002:Q3

2003:Q4

2005:Q1

2006:Q2

2007:Q3

2008:Q4
Equipment 9,3 -9,6 -23,9 -13,2 -5,7 -15,2 -22,0 … … … …
Inventories (contribution to GDP) 2,2 1,2 0,0 -0,3 -0,3 -0,6 -1,5 0,1 -1,0 -0,5 0,0
Net exports (contribution to GDP) -1,9 0,9 0,7 4,4 2,5 1,0 2,7 3,9 4,4 4,8 4,4 Consumption Net Exports
Exports (y-o-y) 1,2 4,1 -18,1 2,9 9,5 -19,8 -15,5 -4,9 3,1 7,2 6,1 Investment Inventories
Imports (y-o-y) 6,3 0,2 -14,1 -12,1 -1,8 -16,2 -18,0 -14,6 -12,0 -11,5 -10,4 Growth
Source: National Statistical Authority

Consumer spending, as reflected in the volume of retail sales, recovered during the January-February period, increasing
by +3.4 per cent y-o-y (against a sizeable drop of -6.3 per cent y-o-y in Q4:2009), benefiting from favorable base effects
and a decent start to the winter sales period. Nevertheless, private consumption is expected to shrink further in 2010
(-5.8 per cent y-o-y versus 1.8 per cent in 2009), against a background of plunging consumer sentiment (consumer
confidence tumbled to a 25-year low) reflecting mounting uncertainty over the short-term prospects of the Greek
economy, the drag from real household disposable income (down by almost 11 per cent y-o-y) due to the fiscal austerity
measures, and accelerating inflationary pressures (CPI inflation will exceed 4 per cent y-o-y). The double-digit decline in
disposable income will reflect the effective decline in nominal wages of public servants by about 15 per cent annually (as
a result of the cuts in the 13th and 14th salaries and in other allowances of public servants, in conjunction with the
implementation of the higher direct and indirect taxes and the abolishment of unique taxation rules) and the decline in
compensation in the private sector of 3 per cent y-o-y (reflecting zero wage changes and the implementation of higher
direct and indirect taxes), as well as an estimated decline in employment of 2.0 per cent y-o-y and increased VAT and
excise taxes. The behavior of this component of demand is the most uncertain and will depend greatly on the speed with
which household confidence improves in line with the successful implementation of the IMF/EU programme.
Retail sales had benefited from ...but the conditions deteriorated ...putting private consumption
the temporary improvement in sharply in recent months... under severe pressure
-15
% confidence in Q4:2009... 12,00
35 60
-25 7,00 6 6
25 45
15 30 2,00 3 3
15 -35
5 0 0
0 -3,00
-5 -15 -45
-8,00 -3 -3
-15 -30
-25 -45 -55 -6 -6
-13,00
Feb-04
Nov-04
Aug-05

Feb-07
Nov-07
Aug-08

Feb-10
May-03

May-06

May-09

-65 -18,00 -9 -9
-12 -12
Jul-09
Oct-07

Feb-10
Aug-06
Jan-06

May-08

Dec-08
Mar-07

2010f
1996

1998

2000

2002

2004

2006

2008

New Passenger Car Registrations (y-o-y

change, right axis) Consumer confidence (left axis)
Consumer Durables, vol (y-o-y change, Private Consumption
left axis) Retail sales, y-o-y change (right axis)
Real Disposable Income

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 13

 STRATEGY AND ECONOMIC RESEARCH DIVISION

Business sector activity reflects the deterioration in domestic macroeconomic conditions, with the non-tradables segment
of entrepreneurial activity (especially retail and wholesale trade, services to households and real estate related services)
facing the most severe domestic demand contraction in decades, which will intensify in 2010 (-2.4 per cent y-o-y in 2009
and -8.0 per cent in 2010). Industrial production contracted by -3.7 per in March (against -9.2 per cent y-o-y in February
2010), following the striking differentiation of Greek manufacturing PMI from the euro area average (with the former
upticking slightly to 43.6 per cent in April, but remaining near the 11-month low of 42.9 per cent in March) against a
backdrop of poor domestic orderbooks, tighter credit conditions and a process of inventory depletion. Although some
export-oriented sectors of industrial activity (such as chemicals, pharmaceuticals and base metals, in which the
contraction started earlier (since mid-2008), provide tentative signs of a bottoming-out, most other segments of the
industrial sector and non-tourism related services are expected to witness a second year of severe adjustment. The
contraction in private construction is expected to continue for a 3rd successive year (declining by 14 per cent on an
annual basis), against a backdrop of a still sizeable backlog of unsold houses (of about 95,000 housing units versus an
estimated annual sale of 37,000 units) and a weak commercial real estate market, both reflecting poor demand conditions
(partly due to the envisaged increase of the effective tax burden), while support from public investment activity will
weaken, as the state of public finances requires their rationalization.
...and the improvement in ... while the correction in the
Industrial production and capacity
forward looking indicators construction sector continues %
% utilization remain in recessionary came to a halt...
10 territory... without support from public
85 5 50 investment activity
5 5 165
81 2 2 30
110
0 -1 10
77 -1 55
-10 0
-5 -4 -4
73 -30 -55
-7 -7 -50 -110
-10 69
-10 -10 -70 -165
-15 65 -13 -13 -90 -220
Feb-04

Feb-07

Feb-10
Nov-07
Aug-08
Nov-04
Aug-05
May-03

May-06

May-09

Aug-09
Aug-03

Aug-05

Aug-07
Apr-06
Apr-04

Apr-08

Apr-10
Dec-02

Dec-04

Dec-06

Dec-08
Aug-03

Aug-05

Aug-07

Aug-09
Apr-04
Apr-02

Apr-06

Apr-08

Apr-10
Dec-06
Dec-02

Dec-04

Dec-08

Capacity Utilization (right axis) PMI, deviat. from 50 (left axis) Construction Confidence (left axis)
Industrial Production (y-o-y change, left Industial production, y -o-y change (right PIP Disbursements (y-o-y change, 3m moving
axis) axis) average, right axis)

The unemployment rate remains on an sharply upward trend, climbing to 12.1 per cent in February 2010 (from an
already high 10.3 per cent in Q4:2009 and 11.3 per cent in January 2010), while employment shrunk by 1.9 per cent
y-o-y, reflecting the ongoing weakening of demand in the key sectors of economic activity such as retail and wholesale
trade, business services and construction. The labor market is expected to remain under considerable strain in 2010, as
the continuing decline in domestic demand, and the subsequent shortage in employment opportunities and working
hours in the private sector, in conjunction with the recruitment freeze and the non-renewal of short-term contracts in the
public sector, are expected to bring further losses in employment (the estimated employment decline is expected to be
c. 2.0 per cent in 2010, and even more in terms of adjusted working hours), pushing the average unemployment rate
above 12 per cent, with a further rise expected in 2011 (c. 14 per cent p.a.) and further in 2012 (c. 14½ per cent p.a.).

The unemployment rate is on ...as employment continues to ...while labor market

an upward trend... contract in most sectors of conditions are expected to
5 economic activity... 5 deteriorate sharply in 2010
4 4 30 15
12 12 3 3
15 5
2 2
10 10 -5
1 1 0
-15
0 0
8 8 -15 -25
per cent -1 per cent y-o-y -1
-2 -2 -30 -35
6 6
Jun-09
Jun-03

Jun-06

Sep-08
Sep-02

Sep-05

Dec-07
Dec-01

Dec-04

Mar-10
Mar-04

Mar-07

-3 -3
2004:Q2
2004:Q4
2005:Q2
2005:Q4
2006:Q2
2006:Q4
2007:Q2
2007:Q4
2008:Q2
2008:Q4
2009:Q2
2009:Q4

2006:Q1

2006:Q3

2007:Q1

2007:Q3

2008:Q1

2009:Q1

2009:Q3
2008:Q3

2010:Q1

Employment Expectations in Services (left

axis)
Employment Expectations in Industry
Greece Euro Area (right axis)
Greece Euro Area
Source: EC Business Surveys

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 14

 STRATEGY AND ECONOMIC RESEARCH DIVISION

Inflationary pressures are accelerating rapidly (headline inflation rose to 4.8 per cent y-o-y in April from 3.0 per cent in
Q1:2009), reflecting adverse base effects from low energy prices in H1:2009 in conjunction with the cumulative impact of
the increases in January and March in excise taxes on motor fuel (by 50 per cent cumulatively) and the hikes in
consumption tax on alcohol and tobacco (of 22 per cent and 20 per cent, respectively) in January. The above factors are
estimated to jointly add about 3.6 pps to the annual change of CPI in March. The impact of the increase in VAT rates
(the standard rate rose from 19 to 21 per cent and the basic rate from 9 to 10 per cent), which has been in force since
mid-March, in conjunction with the additional 2 pp hike in VAT and new increases in excise taxes (announced on May
2nd), are expected to push up inflation further, adding another 2.1 pps to average headline inflation in 2010. This impact
is on the low side of empirical estimates of the pass-through of VAT increases on consumer prices, as the contraction in
domestic demand and the concomitant widening of the output gap, to in excess of 4.5 per cent, will further curb the
pricing power of firms, constraining core inflation to the vicinity of 3½ per cent in 2010 in comparison to an estimated
average headline inflation of 4½ per cent during the same period.
Headline inflation is on a sharp ...refecting, inter alia, the
NBG Inflation Projections upward path... impact of unfavorable base
y-o-y change CPI Core 5,0 5,0 effects and higher excise taxes
4,0 6,0
Average 2009 1,2 2,5 4,0 4,0 3,0
on energy prices
5,0
Q1:2010 (p.a) 3,0 1,8 3,0 3,0
2,0 4,0
1,0
3,0
Q2:2010f (p.a) 5,3 3,6 2,0 2,0 0,0
-1,0 2,0
Q3:2010f (p.a) 5,2 4,3 1,0 1,0 -2,0 1,0
Q4:2010f (p.a) 4,7 4,1 -3,0 0,0
0,0 0,0

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09
Average 2010 (1) 4,5 3,4
Apri-02

Apri-04

Apri-06

Apri-08

Apri-10
Aug-03

Aug-05

Aug-07

Aug-09
Dec-08
Dec-02

Dec-04

Dec-06

Average 2011 0,8 1,4

Contribution of energy (in percentage
points, left axis)
Core inflation Headline inflation CPI inflation (y-o-y change, right axis)
(1) Assuming oil prices at and 78$/brl and $/€ of 1.27 for 2010

The request by the Greek Government for the activation of the EU/IMF financial support mechanism was accompanied
by the announcement a new set of austerity measures amounting to 2.5 per cent of GDP on May 2nd, which complement
the 2.1 pps of GDP austerity package implemented in March and the fiscal measures included in the original version of
the SGP (of around 2 pps of GDP) presented in January and the mini package of February (0.5 per cent of GDP). The
combined impact of the measures (which are mostly of a permanent nature) amounts to 7.0 per cent of GDP (in 2010)
and appear sufficient to bring the general government deficit in the vicinity of 8.0 per cent of GDP even under a very
adverse scenario for GDP growth and despite the recent upward revision of the deficit for 2009 by Eurostat (to 13.6 per
cent from an initial estimate of 12.7 per cent). The estimated average annual fiscal adjustment for the years 2011-2014 is
milder, amounting to 1.5 per cent of GDP annually until 2014, when the general government deficit is expected to fall
below the 3 per cent of GDP threshold. Public debt is expected to peak in the vicinity of 150 per cent of GDP in 2014.
These supplementary austerity measures include, inter alia:
i) An abolishment of the 13th and 14th salaries of public servants (corresponding to Christmas, Easter and summer
holiday allowances) for employees with a gross wage above €3,000 per month and substitution of these salaries with
a flat €1,000 annual allowance for those earning less.
ii) An additional cut on remaining allowances to public servants of 8 per cent (on top of the 12 per cent cut envisaged
under the SGP and the previous round of austerity measures announced in March), with total cuts in civil servant
wages amounting to about 15 per cent.
iii) The abolishment of the 13th and 14th pension payments for all retirees and substitution of these pensions with a
total annual allowance of €800 for those having a pension below €2,500 per month, as well as the imposition of an
additional tax for financing the social security system (with a progressive rate of 5-9 cent) for pensioners earning
more than €1,500 (amounting to a 9 per cent cut in the average pension as most pensions are low).
iv) An additional 10 per cent increase in VAT rates (of 2 pps for the high rate, of 1 pp for the basic rate and of 0.5 pps
for the reduced rate to 23, 11 and 5.5 per cent, respectively, on top of an analogous increase in March).
v) A civil servant wage and full economy pension freeze until the conclusion of the consolidation programme.

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 15

 STRATEGY AND ECONOMIC RESEARCH DIVISION

Budget implementation during the January-April period remains on track, with government expenses growing well
below the SGP target and revenue growing slightly below the annual target supported, inter alia, from the special tax on
enterprise profits (corresponding to about €0.7bn during the January-February period). More importantly, revenue has
regained momentum in April (+9.4 per cent y-o-y versus +1.6 per cent in March), despite the declining trend in economic
activity and is expected to meet the annual target, supported in the following months by the impact from the new
measures and the intensification of efforts against tax evasion. BoG data, on a cash deficit basis, exhibit broadly similar
trends with a more pronounced acceleration in revenue in April (+30 per cent y-o-y versus +9.4 per cent for MoF data
and +5.1 per cent versus +10 per cent, respectively, for the January-April period with the deviation in April figures
mainly reflecting the delayed collection of March VAT receipts, due to Easter holidays and the payment of the Easter
allowance in March instead of April in the previous year).

Fiscal measures 2010*

Cum. Budget Implementation (annual percentage change)
Greece: A very ambitious as % of GDP January March May
Impact
consolidation programme Jan Jan-Feb Jan-Mar Jan-Apr SPG
200 15 Revenue side Ordinary Budget
10/ 09 10/09 10/09 10/09 Target
VAT hikes … 0,5 0,3 0,8 1.Net Revenues (a - b) 16,6 13,2 9,7 10,0 11,7
%GDP increases in excise taxes 0,5 0,6 0,2 1,3
150
10 taxation system reform 0,7 … … 0,7 a. Revenues before tax refund 9,8 7,9 5,9 6,0 10,1
Other measures* 0,6 0,2 … 0,8
100 b. Tax Refund -37,2 -30,6 -24,4 -26,7 -6,1
Total revenue 3,6
Expenditure side
2. Expenditure (a+b) -10,7 -9,6 -3,0 -8,1 -3,5
5
50
a. Primary Expenditure -6,8 -9,3 -6,2 -8,7 -2,8
Containment of the public b. Interest Payments -31,6 -12,0 14,5 -4,6 5,1
sector wage and allowance bill
0,5 0,3 0,5 1,3
0 0 Containment of the pensions Public Inv. Budget (%GDP) -0,02 -0,3 -0,5 -0,8 -2,7
0,2 0,2 0,7 1,1
2014f
2010f
2011f
2012f
2013f
2000
2001

2007
2002
2003
2004
2005
2006

2008
2009

bill
3. Revenues 97,7 3,9 -36,0 -39,8 89,1
Cuts in the public investment
program
… 0,3 0,2 0,5 4. Expenditure -84,3 -58,2 -48,2 -39,1 7,4
General Government Debt (left axis)
Other measures 0,1 … 0,5 0,6 5. CG Budget Deficit ( %GDP) -0,2 0,4 1,8 2,6 8,7
General Government Deficit (right axis) Total expenditure 3,5
*inlcuding one offs *Source MNEC and NBG calculations Source: Ministry of Finance

The pace of credit expansion to the private sector has slowed further in March (increasing by 3.5 per cent y-o-y), mainly
due to the rapid deceleration of credit to enterprises (to 4.3 per cent y-o-y in March from 4.9 per cent y-o-y in February),
especially lending to commercial enterprises and non-monetary financial institutions. The pace of mortgage credit
growth has slowed slightly to 3.5 per cent y-o-y in March from 3.6 per cent y-o-y in February, whereas consumer credit
has slowed further to 1.0 per cent y-o-y in March (down from 1.1 per cent y-o-y in February and 1.6 per cent y-o-y in
January) as economic uncertainty takes a heavy toll on household spending decisions and credit conditions have
tightened the most in this segment in March. Outstanding amounts of euro area resident deposits have contracted by 1.3
per cent y-o-y after a protracted period of rapid slowdown, as the contraction in non-core deposits (-9.4 per cent y-o-y in
March down from +31.8 per cent y-o-y in March 2009) has not been offset by the continuously slowing growth in core
deposits (+12.1 per cent y-o-y in March from +14.3 per cent y-o-y in February). Around 60 per cent of the estimated
outflow of €10.6bn of domestic deposits during the first 3 months of the year reflects a shrinkage in deposits of
enterprises, while around 80 per cent of the €6.6bn deposits decline, compared with the same period of 2009, reflects an
outflow of non-resident deposits (comprised of offshore, immigrants and ship-owners deposits).

Credit expansion exhibits a ..on the back of the Annual change in deposits by
stabilizing trend acceleration of credit to bn€ sector
(in absolute terms)
Credit expansion to the private 35 enteprises 35
35
30 30
25
sector (y-o-y growth) 25 25 25
20 20
15 15 15 15
10 10
5 5
5 5 0 0 -15
Jul-05

Jun-08
Oct-03

Nov-07
Feb-06
Sep-06

Aug-09
Jan-09
Apr-07
Dec-04
May-04
Mar-03

Mar-10
Nov-04

Nov-06

Nov-08
Jul-05

Jul-07

Jul-09
Mar-06

Mar-10
Mar-08

-5 -5
Jul-08
Jun-06

Oct-09
Nov-06

Sep-07
Aug-05

Feb-08
Jan-06

Apr-07

Dec-08
May-09
Mar-05

Mar-10

Non financial enterprises

Loans to Households (including Households
securitized loans) Non euro area residents
Corporate lending (including bond loans) Total domestic deposits
Greece Euro area
Source: Bank of Greece

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 16

 STRATEGY AND ECONOMIC RESEARCH DIVISION

The critical situation of public finances in conjunction with the sizeable credibility deficit and the EU’s delay in reaching
a consensus on the terms and conditions of a support package for Greece have further undermined markets’ perception
of the credit risk of the Greek economy, pushing sovereign spreads to even higher levels for shorter-term maturities (965
bps for 2 years at end-April). Against this backdrop, Fitch lowered Greece's credit rating to BBB- (on April 9th) and
S&P to below investment grade (to BB+ on April 27th), arguing that a deepening recession and rising debt service costs
would make it harder for Athens to meet its deficit-reduction target. In view of the negative outburst in liquidity
conditions in the electronic secondary market, HDAT has deteriorated further (with turnover 47 per cent lower in
Q1:2010 compared with the average monthly level in Q4:2009). Nevertheless, the pressures on Greek sovereign debt
valuations are expected to ease in the following months on the back of the detailed presentation of a credible financing
package for Greece, and its activation, in tandem with the ECB’s decision of May 3rd to suspend the application of the
minimum credit rating threshold in the collateral eligibility requirements in Eurosystem’s credit operations in the case
of marketable debt instruments issued or guaranteed by the Greek government.

The activation of the EU/IMF ... to ease the extreme tensions ...covering most of the public
support mechanism for in the Greek sovereign debt sector's financing
800 Greece... 800 market... 80
requirements until early-2012
700 700 150 10,2
600 10-year sovereign 600 9,2 60
500 spreads over Bund 500 monthy average 8,2 euro bn
100
400 400 7,2 40
300 300 6,2
200 200 50 5,2 20
100 100 4,2
0 0 0 3,2 0
Jun-07

Jun-08

Nov-09
Nov-08
Dec-06

Dec-07

May-09

May-10

Jul-08
Jun-04

Oct-06

Feb-09
Nov-03

Aug-05

Sep-09
Jan-05

Apr-10
Apr-03

Dec-07
May-07
Mar-06

2010* 2011 2012

Gross financing needs**
Portugal Spain Ireland
EU/IMF support mechanism
Turnover on HDAT (bn euros, left axis) *remaining financing needs
Italy Greece **excl. ST debt
Source: Datastream, Reuters Bond Yields (right axis)
Source: MoF, IMF

In 2009, the current account deficit narrowed by 3.4 pps to 11.2 per cent of GDP on the back of the sizeable contraction
in both oil and non-oil trade deficit (of the order of €4.6bn and €8.7bn, respectively), reflecting the shrinkage of domestic
demand, which counterbalanced the €3.3bn drop in non-oil exports and the €4.6bn contraction of the services surplus
(net tourism and transportation revenue shrunk by €1.1bn and €3.4bn, respectively). This trend is expected to continue
in 2010, bringing the current account deficit in the vicinity of 7½ per cent of GDP, as rapidly weakening domestic
demand is expected to further curb imports (with the exception of the oil balance, which will shrink only marginally as
oil prices are projected to be 22 per cent higher, on average, compared with their 2009 level), while the gradual recovery
of the world economy, along with improving prospects for tourism and world seaborne trade, are expected to strengthen
demand for exports of Greek goods and services. The €2.3bn widening of the current account deficit in the first two
months of 2010 reflects mainly the €2.1bn deficit in current transfers balance due to a transitory delay in inflows from
the European Agricultural Guidance and Guarantee Fund, in conjunction with the €0.4bn widening in the oil deficit due
to higher oil prices.
Balance of Payments (in billion EUR) Merchandise trade appears to ...as did services exports
Source: Bank of Greece
2008 2009 2010f 2011f have bottomed...
Current Account -35,0 -26,7 -18,0 -14,8 25 70 70
20
Current Account ( % of GDP) -14,6 -11,2 -7,6 -6,3 50 y-o-y change 50
Non-oil Trade Balance -31,9 -23,2 -15,5 -13,3 30 30
0
Non-oil Exports 15,6 12,3 12,8 14,3 0 10 10
Non-oil Imports -47,5 -35,4 -28,3 -27,6 -10 -10
y-o-y change
Oil Balance -12,2 -7,6 -7,3 -7,7 -25 -20 -30 -30
Services Balance 17,2 12,6 13,6 15,2 -50 -50
Income Balance -10,9 -9,8 -10,2 -10,8
Q3 2004
Q2 2005
Q1 2006
Q4 2006
Q1 2003
Q4 2003

Q3 2007
Q2 2008
Q1 2009
Q4 2009

Current Transfers, net 2,8 1,3 1,5 1,7 -50 -40

Q2:2006

Q4:2006

Q4:2007

Q2:2008

Q4:2008

Q2:2009
Q2:2007

Q4:2009

Capital transfers 4,1 2,0 2,2 2,5

Financial Account 30,2 24,2 … …
Foreign Direct Investment, net 1,7 1,1 … … Net travel receipts, 2-q mov. aver.,
Portfolio Investment, net 1,7 27,9 … … y-o-y change
Other Investment, net 12,1 -3,6 … … Exports (excl. oil and ships, 2 -quarter ma)
Net transportation receipts, 2 -q mov.
Change in Reserve Assets 0,0 -0,3 … … aver., y-o-y change
Source: Bank of Greece Imports (excl. oil and ships, 2 -quarters ma)

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 17

 STRATEGY AND ECONOMIC RESEARCH DIVISION

Market valuations in the Greek and European stock markets dropped by 25.3 per cent and by 3.8 per cent, respectively,
at mid-May from their December levels (against rises of 5.1 per cent over the same period for the US stock market) as
the critical situation of public finances and the concomitant uncertainty concerning the creditworthiness of the Greek
economy, along with the poor prospects for growth, continue to undermine the stock market performance. Large,
medium and small caps have depreciated by 24.3, 27.2 and 26.4 per cent, respectively. The best performing sector since
the beginning of the year has been food and beverages (+14.7 per cent), whereas insurances and industrial goods and
services have displayed relative resilience (+5.1 per cent and +2.2 per cent, respectively), while the worst performers
have been healthcare (-43.6 per cent), real estate (-36.1 per cent) and media (-35.2 per cent).

Comparative Returns in Local Main Athens Stock Market Implied Volatility

Currency Terms Indices
75,0 75,0
(1/1/2004=100) (1/1/2004=100 )
350 350 65,0 65,0
280 280 300 300 55,0 55,0
%
230 230 250 250 45,0 45,0
200 200 35,0 35,0
180 180
150 150 25,0 25,0
130 130 15,0 15,0
100 100
5,0 5,0
80 80 50 50

Jun-04

Jun-05

Jun-06

Oct-08

Oct-09
Nov-06

Nov-07
Apr-08
Jan-04

Apr-10
Dec-04

Dec-05

Dec-08
May-07

May-09
Jul-08
Jun-04

Jun-09

Jul-08

Jun-09
Oct-05

Oct-06
Sep-06
Nov-04

Aug-07

Nov-09

Sep-07
Feb-08

Nov-09
Jan-04

Jan-08
Apr-06

Jan-04

Jan-09
Dec-08
May-05

May-10

May-10
Mar-07

Mar-06

Mar-07

ASE GENERAL Index FTSE-ASE 20

S&P 500 Index FTSE-ASE 20 FTSE-ASE 40
Dow Jones Euro STOXX 50
DJ EUROSTOXX Index FTSE-ASE 80

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 18

 GREECE:
STRATEGY AND ECONOMIC RESEARCH DIVISION

MONTHLY MACROECONOMIC OUTLOOK

* Strategy and Economic Research Division
May 2010

NATIONAL BANK

This Report can be viewed at: http://www.nbg.gr/Press/Publications/GreekMonthly

Editor: P. Mylonas, Director of Research, NBG Group Chief Economist, Tel: (+30210) 3341521, Fax:
(+30210) 3341702, e-mail: pmylonas@nbg.gr. Contributors: N. Magginas, PhD and E. Pateli, MSc. This
report is provided solely for the information of professional investors who are expected to make their own
investment decisions without undue reliance on its contents. Under no circumstances is it to be used or
considered as an offer to sell, or a solicitation of any offer to buy. Any data provided in this bulletin has been
obtained from sources believed to be reliable. Because of the possibility of error on the part of such sources,
National Bank of Greece does not guarantee the accuracy, timeliness or usefulness of any information. The
National Bank of Greece and its affiliate companies accept no liability for any direct or consequential loss
arising from any use of this report.

Note: The report is based on data up to May 12 2010, unless otherwise indicated.

NATIONAL BANK OF GREECE Greece: Monthly Macroeconomic Outlook – May 2010 19