Imf Greece Dec10

IIF RESEARCH NOTE
Greece: Stabilization Advances

but Major Challenges Remain
December 6, 2010
Jeffrey Anderson
DIRECTOR
European Department
1-202-857-3636
janderson@iif.com
 Deep spending cuts and improving tax collection should enable the fiscal deficit to
be cut more than planned through the medium term
 Government debt, as a result, should increase much less than projected under the Ondrej Schneider
EU-IMF program, adjusting for recent and final upward revisions by Eurostat SENIOR ECONOMIST
European Department
 Ongoing fiscal adjustment and tight credit will constrain recovery despite impressive
1-202-857-3635
initial steps advancing structural reforms that will strengthen potential growth oschneider@iif.com
 With debt set to increase further from already high levels, greatly intensified
privatization efforts remain key to address market concerns about debt
sustainability, even though the EU and IMF will now be repaid over a longer period
Impressive spending cuts have led to a strong start on fiscal adjustment. Sustained spending With activity constrained
restraint should enable the fiscal deficit to be narrowed more than planned over the medium for some time to come,
term, causing debt to rise less than feared (Chart 1). Markets reacted positively until mid- markets will continue to
October when spreads widened again with further revisions to past fiscal data, the approach doubt that debt
of local elections and moves to include provisions for private creditor losses as part of a restructuring can ultimately
be avoided if deficits are
permanent Eurozone financing mechanism (Chart 2). Reinforced by stronger tax collection,
not reduced and
thoroughgoing structural reforms should begin to improve competitiveness and strengthen privatization accelerated
growth potential. With ongoing fiscal adjustment and constrained bank credit tempering much more than targeted
growth, however, doubts will persist about debt sustainability unless the authorities begin to
make as much progress on privatization, using proceeds to pay down and buy back debt,
as they have to date on fiscal adjustment, pension reforms and labor market liberalization.
Chart 1 Chart 2
General Government Debt 5-Year CDS Spreads
percent GDP basis points
160
1200 Ireland
Portugal
1000
Greece
140 Spain
800
600
Program
120 IIF 400
200
100 0
2009 2010f 2011f 2012f 2013f 2010
Source: Bloomberg.
IIF.com © Copyright 2010. The Institute of International Finance, Inc. All rights reserved. CONFIDENTIAL
page 2
IIF RESEARCH NOTE
Greece: Stabilization Advances but Major Challenges Remain
OUTPUT CONTRACTION DEEPENS AS INDIRECT TAX HIKES BOOST INFLATION
Moderating decreases in private consumption and exports helped slow the decline of real
Real GDP fell 1.1 percent in
GDP during the third quarter to 1.1 percent in seasonally adjusted terms from 1.7 percent in
seasonally adjusted terms
the second, when sharp falls in private consumption, fixed capital formation and services
during the third quarter to
exports caused output contraction to accelerate. The third-quarter decrease was the 4.5 percent less than a year
seventh consecutive decline since the final quarter of 2008. The third quarter decline was earlier
larger than a year before, however, quickening the 12-month fall to 4.5 percent from
3.4 percent on average during the first half and 2.3 percent last year as a whole.
Partial data indicate that domestic demand fell further during the third quarter, perhaps as
much as the 3.8 percent quarter-on-quarter decrease registered in the second. This
suggests that the annual contraction in domestic spending widened to 8 percent from
5.1 percent during the first half. Weaker retail sales data indicate that much if not most of the
third-quarter weakness in domestic spending was accounted for by faltering private
consumption, the 12-month decrease in which may have roughly doubled from 4.2 percent
in the second quarter (Table 1).
In quarter-on-quarter terms, however, private consumption may have fallen by only about
Private consumption
half the 6 percent drop registered in the second quarter. Although unemployment rose appears to have fallen
further during the third quarter, to 12.2 percent by August from 9 percent a year earlier, the much less in the third
seasonally adjusted increase looks to have been much less than in the first and second quarter than in the second
quarters. Real wage incomes have been hit by decreasing employment, a drop in nominal
government wages averaging about 7 percent from a year before during January-September
and by slowing growth in private sector wages. The latter increased only 1 percent from a
year before during the first half after rising 2.2 percent last year as a whole. Incomes for
government workers and pensioners were hit by the cancellation of vacation bonuses
Table 1 Chart 3
Output, Expenditure and Inflation Consumer Prices
12-month percent change, seasonally adjusted 12-month percent change
2009 2010 6
Q3 Q4 Q1 Q2 Q3
Real GDP -2.5 -3.2 -2.7 -4.0 -4.5
5
Domestic Demand -3.3 -5.0 -4.0 -6.1 -8.0
CPI
Private Consumption -1.9 -1.6 1.5 -4.2 --
4
Public Consumption 9.8 8.4 -9.8 -8.4 --
Fixed Investment -14.8 -19.0 -14.6 -18.6 --
Stockbuilding1 -2.4 -1.5 2.5 2.7 -- 3
1
Net Foreign Balance -1.0 3.5 2.2 2.5 5.0
Exports2 -19.8 -15.5 -0.5 -5.0 -- 2
Imports2 -16.2 -18.0 -6.6 -13.5 -- Constant Tax
Memoranda: 1
Unemployment, % 9.2 10.2 11.7 11.8 12.1
Compensation/Employee 6.0 4.2 -2.3 -1.7 --
Consumer Prices 0.7 2.0 3.0 5.2 5.5 0
1 2
Change as percent of GDP; Goods and nonfactor services. 2009 2010
page 3
IIF RESEARCH NOTE
normally paid in July, equivalent to half a regular monthly wage and pension payment. Higher Real incomes have been hit
inflation, meanwhile, has lowered real household incomes with hikes in indirect taxes causing by decreasing employment,
12-month consumer price inflation to rise sharply from 1.2 percent on average last year nominal cuts in government
(Chart 3). Real government consumption, meanwhile, is likely to have remained weak during wages and pensions and
stepped-up inflation
the third quarter following little change in the second and a 10 percent seasonally adjusted
contraction in the first.
Companies have reacted to the sharp fall in private consumption and renewed export
weakness by cutting back sharply on fixed capital formation. Together with a marked
reduction in government investment spending, retrenchment by firms (and households on
housing) caused fixed capital formation to fall 15 percent in the second quarter in seasonally
adjusted terms. Sharply reduced fixed investment was largely offset, however, by increased
stockbuilding as the drop in final demand outpaced the contraction of economic activity.
Inventory investment rose, as a result, by roughly 2.5 percent of GDP in both the first and
second quarters, reversing earlier declines last year.
Large increases in VAT and excise tax rates were the key factors accelerating 12-month
Large increases in VAT and
headline inflation to 5.2 percent by October from 2.6 percent in December 2009. Net of
excise tax rates
these tax increases, 12-month inflation slowed to 0.4 percent by September from accelerated 12-month
2.1 percent in December 2009 in response to sharply weaker demand and substantially headline inflation to
increased unemployment that moderated the earlier effects of a generally weaker exchange 5.2 percent by October
rate, measured in trade-weighted terms. The 12-month increase in euro import prices eased from 2.6 percent in
December 2009
to 5 percent by September from a recent peak of 10 percent in April. This helped reduce
prices for food and energy. Net of these and of changes in indirect taxes, 12-month core
inflation appears to have been negative in September, compared with about 2 percent in
December 2009.
LIMITED EXTERNAL ADJUSTMENT TO DATE DESPITE SEVERE FINANCING

STRESS
The sharp contraction in domestic spending notwithstanding, reduced inflows of tourism

The current account deficit
earnings left the current account deficit little changed from a year earlier during January-
was little changed from a
September at 9.2 percent of GDP, including capital transfers, or €16.3 billion. Merchandise year before during January-
export volumes appear to have risen 1 percent from a year earlier as merchandise import September despite sharply
volumes fell 7 percent. The surplus on invisibles was little changed from a year earlier at reduced domestic demand
€0.8 billion as tourism receipts slipped 7 percent in euro terms and receipts of EU Structural
and Cohesion Funds remained unchanged (Chart 4). These were offset, in part, however, by
a 16 percent surge from a year earlier in transportation earnings as payments to Greek
shipping companies recovered as a result of the upturn in global trade.
The modest increase in the current account deficit was accompanied by marked shifts in Resident capital outflows
external financing during January-September. Net flows of resident capital switched to an shifted to large net inflows
inflow of €4.8 billion, including unrecorded items, from an outflow of €29.1 billion a year this year as foreign capital
earlier and €28.3 billion last year as a whole. This mainly reflected a shift from lending abroad inflows swung to large net
outflows
page 4
IIF RESEARCH NOTE
Table 2 Chart 4
Balance of Payments Current Account
€ billion € billions, 12-month moving total
Jan-Sep 20
2008 2009 2009 2010
Current Account -30.7 -23.8 -16.1 -16.4
% GDP (-13.0) (-10.2) (-9.1) (-9.2) 10 Invisibles
Foreign Capital 59.2 53.6 46.5 11.9

Direct Equity 3.7 2.1 2.0 1.3 0
Portfolio Equity -3.7 0.5 0.9 -1.3 06 07 08 09 10
Foreign Borrowing 59.2 51.0 43.6 11.9
Government 15.0 26.8 27.6 2.8 -10
Central Bank 24.6 13.7 3.3 38.8
Banks 18.1 2.3 4.2 -29.6
Other 1.6 8.2 8.4 -0.1 -20
Resident Capital -28.9 -28.3 -29.1 4.8

Equity 1.2 -2.2 -2.0 -1.9 -30
Resident Lending -30.1 -26.1 -27.5 7.1 Current Account
Banks -39.8 -26.0 -25.5 12.6
-40
Other 9.3 -0.9 -2.1 -5.6 Merchandise Trade
Errors & Omissions 0.3 -1.4 -1.2 -0.3

-50
Reserves -0.0 0.1 0.0 0.1
to drawdowns of foreign assets by domestic banks. These drawdowns amounted to

€12.0 billion and were in response to severe liquidity pressures stemming from deposit
outflows and net repayments of maturing credits to foreign lenders that banks were unable
to refinance. Lending and investment abroad by companies and households increased, but
by much less, rising to €5.6 billion from €2.1 billion a year earlier and €0.9 billion last year as
a whole. Portfolio equity investment abroad by residents amounted to €1.2 billion and direct
investment abroad by Greek firms another €0.7 billion (Table 2).
The shift to resident capital inflows was accompanied by a sharp drop in foreign capital
Including ECB purchases of
inflows, which slowed to €11.9 billion during January-September from €46.5 billion a year
Greek government debt,
earlier. This drop occurred despite official financial support of €68 billion during January- official financial support
September, equal to 38 percent of period GDP. (Official lending included the disbursement in probably exceeded
May and September of €8.2 billion from the IMF and €21.0 billion from the EU and ECB €110 billion during January-
financing provided Greek banks through its various lending facilities, which jumped to September, equaling nearly
three-fifths of period GDP
€38.8 billion during January-September from €3 billion a year before.) Private foreign lenders
received net repayments equal to €56.7 billion. These repayments included €24.8 billion in
net sales and redemptions of government securities (after net purchases of similar
magnitudes a year earlier and last year as a whole). Net sales and redemptions of
government bonds by nonresidents exceeded their likely share of payments on maturing
bonds by as much as €14-15 billion from April through September. This suggests that if
balance of payments data are correct, same-sized purchases were made by residents. In
addition, domestic banks made net repayments to foreign lenders of €29.6 billion, compared
page 5
IIF RESEARCH NOTE
with €4.2 billion of net borrowing a year before. Enterprises borrowed €8.4 billion in net
terms a year before, but nil this year. Direct equity investment from abroad fell from a year
earlier to €1.3 billion while net sales of portfolio equity by foreign investors rose to
€1.3 billion.
Including secondary market purchases of Greek government bonds by the ECB, official
Private foreign lenders are
financial exposure to Greece is likely to have increased by more than €110 billion during
likely to have cut their
January-September, equal to more than three-fifths of period GDP. Taking ECB purchases
exposure to Greek
into account, private foreign lenders are likely to have reduced their claims against Greek borrowers by more than
borrowers by roughly the same amount, measured at face value, or by more than one-fourth €100 billion during January-
since the start of the year. September, or by one-
fourth since the start of the
year
FISCAL ADJUSTMENT LIKELY TO PROVE STONGER THAN TARGETED DESPITE

REVENUE SHORTFALL
Impressive spending restraint has enabled the fiscal deficit to be cut more than many
Chart 5
thought possible thus far this year despite sizable revenues shortfalls. Spending cuts
Budgetary Central
narrowed the cash deficit of the budgetary central government to 9.1 percent of GDP during Government Balance
January-October, including military equipment outlays, from 13.4 percent a year earlier € billion
(Chart 5). Cash outlays were cut 10 percent in euro terms from a year earlier, substantially 5
more than the 5 percent decrease targeted for the full year under the EU-IMF program.
0
Noninterest spending was cut 14 percent, or by 3.8 percent of GDP. Reductions in
-5
investment outlays accounted for one-third of the drop in overall spending and cuts in
current spending for items other than wages and pensions for another fourth. The latter was -10 2008
broadly in line with the freeze of outlays under the contingency reserve set up early in the -15
year, which limits monthly outlays for items other than wages, pensions, interest and
-20 2010
investment to just 7 percent of the annual totals appropriated in the 2010 budget. Direct
outlays for wages and pensions were reduced by 7 percent, thanks to cuts in wage -25
supplements for government workers and the abolition of the summer bonus. Transfers to -30 2009
social security funds were reduced by 0.9 percent of GDP, including outlays for social
-35
protection, partly to reflect the abolition of the summer pension bonus. Interest payments, by Jan Dec
contrast, increased by 0.4 percent of GDP, mostly reflecting the sharp increase in debt
incurred since the start of 2009.
Constrained by weak private consumption, revenues rose 3 percent in euro terms from a Table 3
year earlier during January-October (Table 3). This was well short of the 16 percent full-year Budgetary Central
increase projected under the EU-IMF program. The 12-month drop in direct tax receipts Government
accelerated to 16 percent from August through October from 5 percent on average during percent GDP
the first seven months of the year. Indirect tax revenues, by contrast, rose 8 percent from a Jan-Oct
year earlier during January-October, with 12-month increments averaging 17 percent during 2009 2010
August-October, up from 5 percent during January-July (Table 4). This improvement Revenues 20.8 21.6
reflected increases in excises for fuel and tobacco in February and again in July and hikes in Spending 34.2 30.8
VAT rates in March and July. (VAT receipts have risen with roughly a three-month lag Balance -13.4 -9.1
because larger firms are allowed by law to spread monthly VAT payments over that period if
page 6
IIF RESEARCH NOTE
Table 4
Budgetary Central Government
€ billion
Jan-Oct Nov-Dec Jan-Dec
2009 2010 2009 2010 2010 2009 2010 2010
Outturn Outturn Outturn Estimate1 IIF Outturn Estimate1 IIF
Revenues 41.0 42.4 9.5 11.9 12.0 50.6 54.3 54.4
Direct Taxes 17.3 15.8 5.9 4.6 4.6 21.4 20.4 20.4
Indirect Taxes 23.2 25.1 7.8 6.4 6.5 28.3 31.5 31.6
Tax Refunds -4.0 -3.6 -1.5 -1.5 -1.2 -5.0 -5.1 -4.8
Nontax Revenues 4.5 5.1 1.3 1.9 1.6 5.9 7.5 7.2
EU Transfers 1.2 1.2 0.7 1.4 1.1 2.3 3.0 3.0
Other 3.3 3.9 0.6 0.5 0.5 3.6 4.5 4.2
Expenditures 67.2 60.3 16.3 17.0 14.3 83.5 77.3 74.6

Salaries and Pensions 19.9 18.6 5.3 4.1 4.1 25.2 22.7 22.7
Insurance and Healthcare 13.4 11.8 4.2 4.2 2.9 17.6 16.0 14.7
Operational Expenditures 7.3 6.3 1.9 2.9 2.2 9.2 9.2 8.5
Investment 8.0 6.0 1.6 2.5 2.5 9.6 8.5 8.5
Interest 12.1 12.7 0.2 0.6 0.6 12.3 13.3 13.3
Military Equipment Deliveries 1.4 0.6 0.8 0.9 0.9 2.2 1.5 1.5
Other 5.1 4.3 2.3 1.8 1.1 7.4 6.1 5.4
Balance -26.2 -17.9 -6.8 -5.1 -2.3 -33.0 -23.0 -20.2

(% GDP) (-13.4) (-9.1) (-16.8) (-14.5) (-6.5) (-13.9) (-9.9) (-8.7)
1
Government projection for 2010 as per 2011 draft budget, November 22, 2010.
Source: Ministry of Finance and IIF.
they choose, with only a modest penalty. Small and medium-sized firms, which account for
Constrained by weak
70 percent of nonfinancial business value added, are required to remit VAT payments only private consumption,
quarterly.) Dividend payments on preference shares issued to banks as part of the bank revenues rose 4 percent in
support package put in place last year caused nontax revenues to rise relative to GDP even euro terms from a year
though receipts of transfers from the EU were little changed from a year before, lagging the earlier during January-
63 percent increase assumed for the full year under the program. October
Despite the strong upswing of indirect tax receipts since July, intensified economic
Indirect tax receipts have
weakness and the lag of direct tax revenues and receipts of EU transfer suggest that
risen substantially since
revenues will fall well short of the original program target. Substantial uncertainty remains,
July, but overall revenues
moreover, about how much further activity will weaken and how long it will take for stepped- look likely to fall €4 billion
up enforcement efforts to improve tax compliance. Difficulties implementing needed short of the original
information system changes, for example, have hampered the timely transmittal of revised program target
real estate tax assessments and the settlement of back taxes owed by companies and
individuals. Tax arrears payments under an amnesty program announced recently seem
unlikely to yield much in the way of additional revenue through yearend and may complicate
efforts to boost tax compliance in 2011 and thereafter if taxpayers expect amnesties to recur
in the future. Taking these factors into consideration, the cash revenues of the central
government budget look likely to fall as much as €4 billion short of the original program
target for 2010 as a whole. Revenues would increase all the same to 23.5 percent of GDP
this year from 21.6 percent in 2009.
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IIF RESEARCH NOTE
The need to pay down €2.3 billion in spending arrears incurred through the end of
The need to pay down
September (€1.7 billion of them outside the budgetary central government) will limit scope to
spending arrears will limit
reduce cash spending from a year earlier over the remainder of 2010. (These spending scope to reduce cash
arrears include payments more than 90 days overdue and exclude €5.3 billion in debts spending over the
incurred by hospitals before this year that the government intends to settle with zero-coupon remainder of 2010
bonds maturing from 2013 to 2015.) That spending arrears declined during September after
rising in July and August lends support to the notion that spending will turn out to be less
than the government’s most recent projection. Investment and military equipment deliveries
to date, in addition, have lagged the full-year increases projected by the government for
some time. Data showing a growing social security fund surplus suggests that transfers from
the budget may lag the government’s most recent projections, taking into account the fact
that December pension outlays are set to decline from a year before by as much as
€1.5 billion thanks to the cancellation of Christmas bonuses. The government, finally,
remains committed not to release funds frozen to date in the contingency reserve. Assuming
these funds continue to be frozen, aside from amounts used to clear arrears, cuts in
Christmas wage bonuses ought to assure that the cash outlays of the budgetary central
government decrease 11 percent in euro terms this year as a whole. At 32.2 percent of
GDP, spending by the budgetary central government would then be 4.4 percentage points
less than last year and 2.3 percentage points less than was provided for originally under the
program. The resulting cash deficit would then amount to €20.2 billion, or 8.7 percent of
GDP, about ½ percent of GDP less than originally targeted. (In drawing up the 2011 budget,
the government projected that spending and the deficit would be €2¾ billion larger this year
as a whole, mostly reflecting cautious assumptions about spending arrears and the need for
budget transfers to support the social security funds.)
Financial data registered an aggregate surplus for extrabudgetary funds, social security
Sustained spending
funds and local governments equal to €1.1 billion during January-September. This compares restraint should enable the
with the €2.6 billion surplus assumed originally for 2010 as a whole. With December pension general government deficit
outlays reduced and data indicating that social security contributions have held up despite to be cut to 8.3 percent of
the economic downturn, these parts of the general government should run a combined GDP this year on an ESA95
basis from 15.4 percent last
surplus at least as large as the €0.5 billion now projected by the government for 2010, even
year, an underlying
if data end up confirming that local government spending surged ahead of municipal
adjustment of 8½ percent
elections in early November. Were losses among state-owned enterprises and hospitals cut of GDP
a bit less than planned, perhaps by one-third from €2.4 billion last year, the cash deficit of
the general government should amount to roughly €21 billion, or 9.0 percent of GDP.
Accruals adjustments in line with those estimated by the government for 2010 (in the latest
version of the 2011 draft budget) would narrow the deficit on an ESA95 basis to 8.3 percent
of GDP (Table 5). This compares with the 8.1 percent of GDP targeted originally under the
IMF program on a narrower definition of the general government. This represents a reduction
of more than 7 percent of GDP from 15.4 percent in 2009. Adjusting for cyclical effects, one-
offs and changes in interest payments and receipts of EU transfers, the underlying fiscal
stance would tighten this year by 8½ percent of GDP. (Defined on the narrower basis used
when the EU-IMF program targets were drawn up in May, excluding loss-making state-
owned enterprises now included in the general government and using survey-based
estimates of social security fund finances that have now been replaced with more rigorous
page 8
IIF RESEARCH NOTE
Table 5
General Government, ESA95 basis
percent GDP
Outturn Program1 IIF
2009 2010 2011 2012 2013 2010 2011 2012 2013
Revenues 38.1 40.6 42.2 42.0 42.4 40.6 42.2 42.0 42.4
Expenditures 53.7 50.1 49.7 48.5 47.2 48.9 47.9 45.5 43.9
Balance -15.4 -9.4 -7.4 -6.5 -4.8 -8.3 -5.8 -3.5 -1.5
One-Offs/Military Equipment Deliveries -1.3 -0.6 -0.4 -0.3 -0.3 -0.6 -0.4 -0.3 -0.3
Cyclical Effects1 0.3 -0.6 -1.9 -1.9 -1.6 -1.5 -1.8 -2.9 -2.7
Transfers from the EU, net 0.3 0.5 1.0 1.5 1.8 0.8 1.3 1.2 1.0
Interest Payments 5.4 6.1 6.6 7.4 8.0 6.0 6.3 6.9 7.1
Adjusted Noninterest Balance2 -9.4 -2.6 0.4 1.6 3.3 -0.9 1.5 5.3 7.6
Memoranda:
Debt 127.9 142.7 152.6 159.0 159.4 135.7 142.2 142.1 138.4
Nominal GDP, € billion 233.0 231.9 228.4 230.0 235.0 233.1 230.0 234.8 244.2
Real GDP, % change -2.3 -4.2 -3.0 1.1 2.1 -3.9 -3.0 1.0 2.1
GDP Deflator, % change 1.2 3.5 1.3 0.4 0.7 4.1 1.7 2.1 1.0
1
As per 2011 draft budget, November 22, 2010.
2
Balance less one-off items, cyclical effects, net EU transfers and interest payments.
Source: IMF (First Review Under the Stand-By Arrangement, August 26, 2010), Ministry of Finance (Government Budget for 2011) and IIF.
financial reporting, the deficit would narrow about 1 percent more than the 5.5 percent of
GDP targeted, or to about 7 percent of GDP from 13.6 percent last year.)
The 2011 draft budget revised in November targets a significant further reduction in ESA95
The 2011 draft budget
deficit next year to 7.4 percent of GDP from the 9.4 percent outturn the government now
targets a 2 percent of GDP
projects for 2010. The draft budget assumes real GDP declines a further 3 percent and reduction in the general
nominal GDP 1.5 percent. The cash revenues of the budgetary central government are government deficit next
projected to increase by 9 percent in euro terms, boosting them by 2.6 percent of GDP. In year
part, this should reflect the full-year effects of hikes in indirect taxes carried out this year. In
addition, in line with the program, a range of items will be shifted to the higher VAT rate, the
lower VAT rate raised from 11 percent to 13 percent, tax rates on property and luxury goods
increased and the surcharge on corporate profits extended. Noninterest expenditures are
targeted to decrease in line with GDP, with outlays on wages and healthcare reduced by
7 percent thanks to employment reductions and the abolition of the Easter bonus. Nonwage
consumption spending is to be cut a further 10 percent as strict expenditure caps are
implemented and the contingency reserve introduced this year is sustained and reinforced.
Substantial savings are expected as well from local government reforms eliminating and
consolidating provincial administrations, which should give scope for incremental spending
savings equal to 0.2 percent of GDP a year from 2011 to 2013. Pension expenditures will fall
with the elimination of the Easter bonus, a nominal freeze again on pensions and further cuts
Tax increases, spending
in higher-end pensions, all of which should enable budget transfers to the social security cuts, and reduced losses
funds to be cut another 5 percent in nominal terms. among state-owned
enterprise should reduce
These measures should be sufficient to increase revenues and reduce spending by another the fiscal deficit by
3¾ percent of GDP in 2011, assuming no improvements in tax compliance. (Tax 2.5 percent of GDP next
compliance, indeed, should improve given the scale of efforts to strengthen collection.) year
page 9
IIF RESEARCH NOTE
Cyclical effects look likely to add 1.7 percent of GDP to the deficit, assuming real GDP
declines 3 percent in line with the program. With interest payments likely to rise by
0.3 percent of GDP, the cash deficit of the budgetary central government should narrow to
7.5 percent of GDP. Assuming the combined surpluses of social security funds,
extrabudgetary funds and local governments increase marginally to 0.5 percent of GDP as
losses among state-owned firms shift to small profits and losses among hospitals are cut to
nil, as the government now intends, the cash deficit of the general government would narrow
by a further 2 percent of GDP next year to 6.5 percent. Using again the accruals
adjustments projected by the government in the 2011 budget, the general government
deficit would narrow to 5.8 percent of GDP on an ESA95 basis. Adjusted for cyclical effects,
one-offs and changes in interest payments and receipts of EU funds, the underlying fiscal
stance would tighten by roughly 3.5 percent of GDP, about one-third as much as seems
likely this year.
How much further the deficit will be reduced in 2012 and 2013 will depend importantly on
the strength and the timing of output recovery and the rigor with which tax collection is The pace of deficit
reduction after 2011 will
improved and spending restraint sustained. The EU-IMF program calls for additional
depend on the strength and
measures in 2012 that would boost revenue and reduce spending by a further 2 percent of the timing of output
GDP. The program assumes growth in real GDP of 1.1 percent and 2.1 percent in 2012 and recovery and the rigor with
2013, respectively, with growth in nominal GDP accelerating to 1.5 percent and 2.9 percent which tax collection is
over the same period. The program calls for additional revenue increases and spending improved and spending
reduction sufficient to reduce the deficit by another 2.3 percent of GDP in 2012 and restraint sustained
1.9 percent in 2013. In 2012, these would include further steps to broaden the VAT base,
raise gaming license and royalty fees, introduce excises on nonalcoholic beverages and
increase property assessments to bolster real estate and presumptive tax receipts.
Expenditures are to be cut as a result of local government consolidation, cuts in public
sector employment, means testing for unemployment benefits and further reductions in
operational outlays, subsidies for public enterprises and institutions, and public investment.
Further savings are assumed from local government consolidation and public sector
employment cuts in 2013.
Three-fourths of the adjustment targeted in 2013, equivalent to 1.5 percent of GDP, is

Ongoing expenditure
assumed under the program to result from measures not yet specified. This amount,
restraint and the
however, is roughly equal to the increase in tax revenues the authorities hope will result by implementation of
2013 from efforts to bolster tax collection that should intensify next year. Tax compliance measures called for under
might well improve earlier, however, in response to stepped-up enforcement efforts and the program should cut the
moves to strengthen presumptive taxation. Were tax compliance to improve sooner, the fiscal deficit to 3.5 percent
of GDP by 2012 and
adjustment measures called for under the program might narrow the deficit to as little as
1.5 percent in 2013
5¼ percent of GDP in 2011, 2½ percent in 2012 and rough balance by 2013. This would
constitute a best case scenario, albeit one not beyond reach if sustained political will
facilitates the full implementation of measures called for under the program and if
macroeconomic developments turn out not substantially different from those assumed.
A baseline scenario, assuming macroeconomic developments and measures in line with the
program but no early improvement in tax compliance, would see the deficit narrowing to
page 10
IIF RESEARCH NOTE
3.5 percent of GDP by 2012 and 1.5 percent in 2013 from 5.8 percent next year. A
downside scenario would entail ongoing lags in tax collection, sizable ongoing losses at
state-owned firms and activity contracting as much as 4 percent next year and 2 percent in
2012 with renewed growth deferred until 2014. Under these circumstances, the deficit would
still narrow but only by about ½ percent of GDP a year from perhaps 7-7½ percent in 2011.
This assumes, of course, adjustment measures continue to be implemented in line with
those called for under the program.
Deficit reduction in line with the baseline scenario would result in the government debt rising
Deficit reduction in line with
from 143 percent of GDP at the end of this year to a peak of 147 percent of GDP in 2012,
the baseline scenario would
followed by a gradual decline afterwards. Deficit financing is assumed by the program to be
result in the government
funded fully from disbursements from EU and IMF through the program’s expiration in mid- debt rising from
2013. Treasury bill refinancing is assumed to be covered in full from the financial markets by 143 percent of GDP at the
the first quarter of 2011 and three-fourths of bond repayments met from the markets by the end of this year
first quarter of 2012 rising to 100 percent by the first quarter of 2012. Bond issues to the
markets would rise under these assumptions to €25 billion during 2012 and €17 billion
during the first half of 2013.
Net of borrowing to fund the Financial Stability Fund (FSF), which the authorities may not
need to do, and zero-interest debt used to pay hospital arrears, the debt-to-GDP ratio would
peak at 142 percent. In a best case scenario, and assuming privatization revenues twice the
unambitious €1 billion a year targeted in the EU/IMF program, debt would peak at
146 percent in 2011 or 139 percent, net of the FSF and the zero-interest hospital-related
debt. In the downside scenario sketched out above, the government debt would not peak
until 2013, reaching 161 percent of GDP, or 155 percent of GDP, net of the FSF and zero-
interest hospital-related debt.
UNPRECEDENTED FOREIGN SUPPORT HAS HELPED OFFSET SEVERE

BANKING SECTOR STRESSES
Large-scale deposit outflows brought the banking system under severe strain from January
Large-scale deposit
until a tentative reversal in August and September. Deposits fell by €25.9 billion from January
outflows brought the
through July, or by nearly 11 percent, before increasing €0.8 billion again in August, banking system under
remaining unchanged in September and declining again by €1.6 billion in October. Foreign severe strain from January
interbank lenders and depositors withdrew more than domestic depositors during January- until a tentative reversal in
October, receiving net repayments of €32 billion. These withdrawals equaled 20 percent of August that continued in
September
banks’ foreign liabilities at the start of the year (including off-balance sheet borrowing of
€41 billion in securitized liabilities that were brought onto banks’ balance sheets officially only
in June). Rough estimates might suggest that net repayments to foreign interbank lenders
and depositors amounted to not quite 60 percent of maturing foreign liabilities during
January-October (taking into account that about half the €154 billion banks owed foreign
lenders at the start of the year had original maturities of less than one year and assuming the
remainder matures in equal portions over five years). The near complete closure of the
interbank market until quite recently suggests, however, that amounts actually falling due
were considerably smaller than these estimates and success refinancing maturities much
more limited. More recently, market access has begun to improve. In late October, one of
page 11
IIF RESEARCH NOTE
the larger banks announced €800 million in repo financing borrowing, including a
€300 million two-year deal collateralized by Greek government bonds at a spread of less
than 200 basis points. This was followed by the announcement in early November by the
largest bank of €4.7 billion in one-year repo refinancing at “competitive terms.” The same
bank reported an additional €0.8 billion in funding had been secured by the end of
November.
Deposit outflows and foreign debt repayments were more than offset through September by
Deposit outflows and
large-scale liquidity support from the central bank, drawings on assets held abroad by
foreign debt repayments
domestic banks, unguaranteed bond issuance and drawdowns on excess reserves held with
have been more than offset
the central bank. Liquidity provision by the central bank amounted to €45 billion, €39 billion by large-scale liquidity
of which was financed in turn via refinancing from the ECB. (After declining by €6.2 billion in support from the ECB,
September thanks mainly to liquidity injected by the disbursement that month to the drawings on assets held
government of €9.3 billion from the EU and IMF, credit outstanding from the ECB rose again abroad, bond issuance and
drawdowns on excess
by €3.7 billion in October.) ECB funding has been facilitated by the issue by banks of
reserves
€28 billion of government-guaranteed bonds and the provision of about €3 billion of “special
bonds” by the government to banks (in exchange for real estate and other collateral) under
the liquidity support program set up in late 2008. (The guarantee portion of the liquidity Chart 6
Loans to
support program was expanded by a further €25 billion in August, but only allocated for use
Nongovernment
in early December.) Also unutilized from the original bank support program is €1.2 billion of Borrowers
€5 billion in capital injection funds via government purchases of preference shares.) Banks 12-month percent change
also funded themselves by drawing down €20.8 billion of foreign assets during January- 25
September and issuing another €11 billion of unguaranteed debt securities, some of which
20 Corporates
appear to have been to affiliated foreign parties.
15 Nongovernment
These different sources of financing were sufficient to support a modest expansion of credit
to nongovernment borrowers, the 12-month increase in which slowed even so to 10
1.0 percent in October from 4.1 percent in December 2009 (Chart 6). Credit to businesses
5
slowed to a 12-month increase of 2.2 percent from 5 percent over the same period as
borrowing demand weakened and lending standards were tightened. The same factors cut 0
the 12-month increase in credit to households to nil from 3 percent in December, as did the Households
-5
need to use government liquidity support to sustain lending to small and medium
enterprises. -10 2009 2010
Despite beginning this year with relatively solid financial positions, at least among larger
Nonperforming loans rose
institutions, weakening credit quality has left most domestic banks subject to ongoing
to 9.0 percent at the end of
pressures, notwithstanding abundant liquidity support from the government and the ECB.
June while the Tier 1 capital
Nonperforming loans rose to 9 percent of the total at the end of June from 7.7 percent at the ratio for the system as a
end of 2009 and 5 percent at the end of 2008. Net interest income exceeded provisioning whole decline to
charges during the first half of the year but at an eroding margin as banks have bid up 11.0 percent
deposit rates in an effort to bolster funding. The aggregate Tier 1 capital ratio for the system
as a whole fell to 11 percent from 12 percent at the end of 2009 after being increased from
8.7 percent at the end of 2008 as a result of share issues by several banks, the
nondistribution of earnings and the government’s purchase of €3.8 billion of preference
shares. A successful rights issue by the National Bank of Greece raised €1.8 billion in
page 12
IIF RESEARCH NOTE
September and is expected to be followed soon by another €1 billion in capital added with
proceeds of the sale of a 20 percent stake in a profitable Turkish subsidiary and a €0.8 billion
rights issue by Piraeus Bank. Stress tests published in July by the central bank and the
Committee of European Bank Supervisors for the six largest banks found that, with respect
to Tier 1 capital, all six surpassed both the regulatory minimum of 4 percent and the stress
test benchmark of 6 percent set in the baseline scenario. The aggregate net surplus above
the 6 percent benchmark amounted to € 3.3 billion. Under the adverse scenario, however,
which includes sovereign shock requiring Greek government debt held in trading books to
be discounted by 23 percent, the Tier 1 capital of the ATEBank, the state-owned agricultural
bank, fell to 4.4 percent, a shortfall of €242 million from the 6 percent benchmark. Another
bank, Piraeus, registered Tier 1 capital equal only to the 6 percent benchmark. The stress
tests were widely criticized, however, for exempting sovereign debt in hold-to-maturity
banking books from discounts. More than 90 percent of Greek sovereign debt held by the
six banks was in hold-to-maturity accounts.
THOROUGHGOING STRUCTURAL REFORMS BEGIN TO BE ADVANCED
Deeply rooted and widespread structural rigidities have plagued the Greek economy for
Deeply rooted and
years, thanks to a dysfunctional, opaque and inefficient public administration and the widespread structural
adverse business environment to which it has given rise. The government has committed rigidities have plagued the
itself to an ambitious agenda of structural reforms under the EU-IMF program, however, Greek economy for years,
which offers the hope of turning these weaknesses to Greece’s advantage. Important even though real GDP
growth averaged 4 percent
progress has made with the enactment of a thoroughgoing pension reform and long-
a year from 2001 to 2008
overdue first steps to liberalize the labor market. Together with the tighter enterprise-level
financing constraints promised by moves to strengthen and broaden tax collection, market
reforms and liberalization are aimed at unleashing readily available but untapped and long-
suppressed growth potential. Privatization efforts are intended to do the same. Greater
potential exists to allay concerns about debt sustainability, arguably, if the focus of
privatization effort is shifted to mobilize the considerable financial potential of the asset side
of the government’s now highly indebted balance sheet. This will require stronger political
will, however, than the government has shown to date.
Excessive regulation and high barriers to entry have resulted in rigid markets for labor and
Excessive regulation and
services that have undercut external competitiveness, contributing to the widening of the high barriers to entry have
current account deficit from 5.6 percent of GDP in 2001 to 10.6 percent last year and the resulted in rigid markets for
deceleration of potential output growth from 4 percent in 2000 to less than 1 percent this labor and services
year, according to estimates from the European Commission. (Strong credit growth,
however, facilitated by sharply reduced interest rates after euro adoption and strong inflows
of foreign capital to finance credit expansion and the fiscal deficit enabled real GDP growth
to average 4 percent from 2001 through 2008. Macroeconomic imbalances widened sharply
as a result as potential output growth slowed.) The weakness of Greece’s competitive
position is underscored by low rankings in prominent international surveys of business
conditions. The World Economic Forum’s competitiveness ranking puts Greece 83rd, the
worst of any EU or OECD country. The World Bank’s Doing Business rankings put Greece
page 13
IIF RESEARCH NOTE
109th, the worst again in the EU and the OECD (Chart 7). Transparency International ranked
Greece 78th in corruption perceptions, down from 71st last year, the lowest in the EU and
below many emerging markets (Chart 8).
Rightly aiming to reverse the decline in growth potential, the EU-IMF program calls for far-
reaching structural reforms to uproot privileges amassed by influential vested interests and
force the firm-level restructuring needed to improve competitiveness and attract foreign
investment. Bold initial steps have been taken on pension reform, labor market liberalization
and services market liberalization. Less progress has been made to date and considerably
more is needed advancing privatization, tax administration and public sector restructuring,
both to bolster fiscal sustainability but also to improve competitiveness and growth.
The dismal business environment may be the area in which Greece lags most behind its
The dismal business
peers in the EU and the OECD and many emerging markets. Burdensome regulation, high environment may be the
barriers to entry in key sectors such as transportation and professional services and an area in which Greece lags
inefficient judiciary have constrained investment and stifled innovation by fostering pervasive most behind its peers in the
favoritism in administrative decisions and undercutting investor rights protection. The result EU and the OECD and many
emerging markets
has been high transaction costs, pervasive corruption and an outsized informal sector
underpinned by heavy tax evasion. The OECD estimates, indeed, that informal activity could
be as large as 30 percent of reported GDP, one-third more than the EU average. The OECD
also thinks that output losses attributable to excessive regulation could be as large as
10 percent of GDP.
Labor market reforms and the liberalization of closed professions are intended to bring
Labor market reforms and
relatively quick returns in reducing business costs and improving competitiveness. Social the liberalization of closed
security contribution payments have been waived for workers newly hired on minimum professions are intended to
wage. Mandatory severance payments have been slashed and rigid rules restricting layoffs bring relatively quick
relaxed, albeit only modestly. The government also plans to revamp the collective bargaining returns in reducing
business costs and
system, phasing out previously binding minimum wage increases for all firms. This should
improving competitiveness
leave trade unions no longer able to negotiate nationwide wage increases.
Chart 7 Chart 8
Ease of Doing Business Corruption Perceptions
ranking ranking
0 0
Germany 10 Germany
20
20
40 Spain Spain
30
60 40
Czech Republic
50
80 Italy
60
Czech Republic
Greece Italy
100 70
Greece
80
120
05 07 09
06 08 10
Source: Transparency Int ernat ional.
Source: World Bank.
page 14
IIF RESEARCH NOTE
Six of 160 closed professions will have been liberalized this year, beginning with lawyers,
pharmacists, notaries, auditors, architects, engineers and truckers. The remaining closed
professions are to be liberalized in 2011, when Greece, after long delays, has promised to
implement fully the EU’s services directive and replace the current highly restrictive regulatory
system with an EU-compatible licensing system. The full implementation of the EU’s services
directive, which also provides for cross-border provision of services, could reduce the cost
of most services by as much as 10 percent, according to estimates by a prominent Greek
economic research institute. Over the medium term, the government also plans to liberalize
the wholesale power sector, which is among the most monopolized in Europe.
In the near term, however, moves to advance privatization would be likely to have the largest
potential to bolster market confidence and boost foreign investment. With sufficient political Privatization has lagged,
partly because of the
resolve, and given large state holdings in energy and transportation, Greece should be able
priority given to
to raise much more than the €1 billion a year assumed in the EU/IMF program for 2011- restructuring state-owned
2013. Privatization, however, has been one of the few areas where implementation has firms to reduce losses and
lagged. This reflects in part the priority the government has accorded to reduce losses, state-owned real estate to
especially of the railway, both by cutting costs and by enacting legislation needed to split the facilitate increased income
train operations from infrastructure, making the former profitable in 2011 and the latter viable for the state from partially
privatized assets
over the medium term. The government hopes sales of associated real estate will defray part
of the railway’s debt, which is likely to top €11 billion this year. The government has also
been focused more on restructuring state-owned airports and ports to facilitate the
conclusion of concession arrangements and the privatization of all but minority controlling
stakes. These arrangements may result in proceeds from asset sales next year, in 2012 and
2013, but might equally be seen more as increasing investment returns from state-owned
assets that have contributed far more in costs than earnings over the years. More generally,
the government has clung to the expensive notion that it will limit full divestment of stakes to
firms not producing public goods and not involved in activities deemed strategic where the
public interest or national security considerations require the state to retain control.
A range of state-owned assets could be privatized more quickly, however. These would
The government could
include the divesture of directly and indirectly held stakes in OTE, the telecommunication generate as much as
company, gas and power utilities, a petroleum refinery and banks. Holding of quoted shares €8 billion by selling shares
by the central government amounted to roughly €8 billion at the end of 2009. Quoted shares in listed firms
held by social security funds amounted to another roughly €4 billion. Sales of these holdings
would generate modest amounts, perhaps, in relation to overall financing needs and overall
government. These sales could be implemented quickly, however, and thereby send a
forceful signal to the market about the government’s determination to mobilize the asset side
of its balance sheet. Modest initial buybacks of government debt would have a larger effect,
taking into account large secondary market discounts on government debt. Increased
inflows of foreign direct and portfolio investment would contribute to stronger output growth
as well.
Real estate holdings are much more substantial, although estimates of their value are
necessarily sketchy given substantial legal ambiguities and environmental considerations that
are likely to curtail the extent to which they can be sold. Some 71,000 properties in the
page 15
IIF RESEARCH NOTE
portfolio of the Hellenic Public Real Estate Corporation, which is supervised by the finance
Greater administrative
ministry, were valued informally several years ago at €272 billion. The valuation was based
effort and stronger political
on minimal regional averages of private property prices used for tax assessment purposes.
will than have been evident
An inventory of these properties indicates, however, that only 13 percent, with a presumptive to date will be needed to
value of €37 billion were unencumbered and available for potential sale, much of the realize much from the vast
remainder being inaccessible, without clear title or subject to some form of environmental and potentially valuable real
damage or restriction. Another 12 percent were in the possession of the military, hospitals or estate owned by the
government
other public entities, and a further 40 percent illegally occupied by private individuals or
companies, in many cases inhabited by privately built structures. Some portion of the former
could be made available for sale and much of the latter ought to bring retroactive financial
compensation to the state, assuming legal procedures are sufficiently streamlined to facilitate
early payment. The potential for sale or leasing revenues from government-owned land is
well illustrated by the contemplated investment by Qatar’s sovereign fund in developing the
area around the former Athens airport, which could total €5 billion or more over time.
Privatization priorities for 2011 focus on nine projects under plans the government must Privatization priorities for
finalize by yearend. During the first quarter, the government hopes to complete the sale of 2011 focus on nine projects
four A340 Airbus aircraft currently being tendered. During the second quarter, it plans to
complete the sale of a casino and reach agreement on extension of a concession for the
Athens International Airport. During the third quarter, the government plans to conclude
agreements to sell a small defense contractor and digital frequency licenses. During the final
quarter, the government plans sales to reduce its stake in DEPA, the gas utility, and to
complete sales of a 49 percent stake in TRAINOSE, the railway operating company, and a Chart 9
strategic stake in Larco, a loss-making nickel producer. Also planned for the fourth quarter is Pension Expenditures
the conclusion of a concession agreement for the operation of the Egnatia motorway linking % of GDP
Turkey with a port on the Adriatic Sea. 30
Substantial progress was made in July with the enactment of a thoroughgoing pension 25 2007 2060
reform that should both support medium-term fiscal adjustment and reverse much of a large
20
projected increase in expenses due to adverse demographics, which had posed a grave
threat to long-term fiscal sustainability (Chart 9). New legislation in July revamped what had 15
been one of Europe’s most generous pension systems, consolidating 13 pension funds into
10
three, unifying the statutory retirement age at 65 (women employed in the public sector were
previously able to retire at 61), to be increased in line with life expectancy after 2020, and 5
shifted the basis for pensions from the final five years of earnings to lifetime average
earnings. Links between contributions and benefits were strengthened by limiting accrual 0
e in l y al y d
rates, shifting benefit indexation from ad-hoc mixes of inflation and wage increases to
e ec p a Ita t ug an lan
S r rm re
inflation alone and reducing benefits for those eligible for early retirement by 6 percent for Gr Po Ge I
Source: European Commission.
each year between their age of actual retirement and age 65 or before 40 years of
contributions. The new law also calls for rigorous means testing of newly established
minimum pensions and abolished bonus payments for most pensioners. These bonuses had
Substantial progress was
previously equaled one month’s regular payment at Christmas and half-month payments in
made in July with the
July and again at Easter. (Easter bonuses were paid in 2010 but will be abolished from enactment of a
2011.) Bonus abolition should reduce pension outlays by 1.2 percent of GDP this year and a thoroughgoing pension
further 0.4 percent in 2011. Savings from the other measures are likely to prove substantial reform
page 16
IIF RESEARCH NOTE
over the medium term, cutting pension outlays by as much as 10 percent from what they
might have been in the absence of reform, or by 1¼-1½ percent of GDP.
Further reform plans call for cutting back the number of “arduous” occupations from more
The July reform should
than 600 previously. Employees in these professions had paid smaller pension contributions
reduce annual pension
and had been eligible for generous early retirement benefits. Full implementation of the
spending by as much as
second-stage reforms should reduce pension spending by a further 1-1½ percent of GDP 2 percent of GDP by 2020
towards the end of the current decade. Part of the savings resulting from the increase in the from their level in 2009
retirement age may be offset in the short run by rising unemployment, however, and the shift
to inflation indexation is unlikely to have a substantial impact in the next few years with wage
growth likely to be depressed. Even so, savings over the medium term are likely to be
substantial, reducing pension outlays by 1½-2 percent of GDP by 2020 from their level in
2009. This would compare with the 1.6 percent of GDP increase the European Commission
has projected without this year’s reforms (Chart 9).
Reform plans in health care are more modest, however. A new system of drug prescription
monitoring and procurement favoring generic medicines has been implemented, which the Healthcare reforms are
more modest than pension
government believes has cut pharmaceutical prices by 25-30 percent this year. Lower drug
reforms and have
prices are expected to save €0.7 billion this year and a further €1.1 billion in 2011. The
concentrated thus far on
introduction of a €3 copayment for all services should also help restrain costs by containing reducing pharmaceutical
excessive demand for outpatient services. These measures, although very useful in the short prices and containing
run, are unlikely to be sufficient to help reduce fraud, impose financial discipline, or, most hospital costs
importantly, reverse much of aging-related increase in healthcare costs likely over the
medium term.
The EU-IMF program also called for steps to improve public financial management, public
Municipal governments’
administration and tax enforcement. Three-year budgets are now to be set with mandatory
consolidation is intended to
expenditure ceilings for the entire general government sector rather than just for the
reduce local government
budgetary central government as is the case now. Reporting requirements have been spending by €0.5 billion a
tightened to improve the government’s ability to monitor and control spending by social year from 2011 to 2013
security funds, local governments and state-owned hospitals and companies. A new single
payment authority has been established to make centralized wage payments for all public
sector employees. The government will also establish a central procurement authority and
carry out a functional review of the central government administration with a view to
identifying areas where public sector employment can be reduced. A new local
administration law passed in May will merge and consolidate municipal governments. This
should give the government scope to reduce costs, improve spending discipline and scale
back local government spending by roughly €0.5 billion a year during 2011-2013.
Whether fiscal adjustment can be sustained will depend importantly on measures to simplify
Five specialized task forces
the tax system, improve equity and curtail evasion. Personal income taxes have been unified
have been established with
and apply to dividend income. Property tax receipts will be increased by the reintroduction of the tax authority to bolster
the inheritance tax and by the implementation of progressive taxation for large property tax collection under the
owners. Taxes will also be levied on “presumptive income,” should income declarations fall terms of the EU-IMF
short of that suggested by double-checks on consumption, including real estate holdings, program
registered automobiles and education outlays. (The government hopes presumptive income
page 17
IIF RESEARCH NOTE
assessment will yield an extra 0.1-0.2 percent of GDP a year in revenues.) In an effort to
clear tax arrears, the government also introduced a voluntary “tax settlement” that envisages
the settlement of tax court disputes by determining the tax due in accordance with a simple
formula. (The number of such outstanding cases is estimated at 150,000, the durations of
which have averaged more than 7 years.) The government expects that settling these could
yield ½ percent of GDP in extra revenues, a rather conservative assessment given that the
tax and social security contribution arrears amounted to 13 percent of GDP at the end of
2009, net of penalties and interest. To speed the resolution of arrears, judicial procedures for
tax disputes will be shortened and appeals limited to one. The tax authority, in addition, will
narrow the focus of audits to help speed the resolution of existing tax disputes and improve
compliance. Five specialized task forces have been established with the tax authority to
bolster tax collection under the terms of the EU-IMF program. These will focus on arrears
collection, large taxpayers, strengthening audits of high-income and wealthy individuals,
improving filing and payment controls and speed the prosecution of worst offenders.
UNCERTAIN GROWTH PROSPECTS AND HEAVY DEBT CLOUD THE OUTLOOK
Slowing declines recently in industrial production and retail sales and improvements in
Output contraction looks
exports suggest that output contraction has continued in the fourth quarter at roughly the likely to continue in the
slower third quarter pace. This would leave the 12-month fall in real GDP unchanged in the fourth quarter at roughly
fourth quarter from 4.5 percent in the third and bring the full-year decline to 3.9 percent. the slower third-quarter
pace
Further, if less pronounced, fiscal tightening is likely to contribute to additional output
contraction in 2011. Real GDP seems likely to register quarterly declines at least through
midyear, resulting in a full-year contraction in line with the 3 percent the government now
assumes. Recovery from mid-2011 looks likely to prove halting, despite being supported by
competitiveness gains afforded by lower private sector wages and lower transaction costs
as deregulation advances. Much of the impetus for renewed growth should result from new
capacity among firms taking advantage of structural reforms implemented already and
required under the program to liberalize labor and product markets and improve the
business environment. Assuming underlying fiscal tightening continues in 2012 in line with
the 2 percent of GDP assumed in the program, growth in real GDP that year may well be
Real GDP looks likely to
held to just 1 percent, less than potential. Substantial economic slack, with unemployment decline by 3 percent in 2011
peaking near 15 percent in 2012, should support the steady decline of headline inflation from before growing again by
an average of about 5 percent in 2010 to roughly 2 percent in 2011 and 1 percent or less in only 1 percent in 2012
2012.
Further contractions in real GDP later this year and in 2011 should be accompanied by still Contractions in real GDP
larger decreases in domestic demand as household spending declines further and should be accompanied by
decreases in government consumption are sustained. Import volumes should contract still larger decreases in
substantially, as a result, given a likely shift to inventory destocking, the high-income domestic demand and
elasticity of consumer goods imports and improvements in competitiveness as labor costs export growth, narrowing
the current account deficit
decline. Costs will remain high, however, and price competitiveness gains limited, until
to 5-6 percent of GDP in
stronger tax collection efforts begin to trigger consolidation among the preponderance of 2011 and 2012
page 18
IIF RESEARCH NOTE
small businesses, especially in trade, distribution and tourism, with resulting gains in
efficiency and productivity. Exports, meanwhile, should be supported by improved
competitiveness and continued growth in foreign demand (even if at a more moderate pace
than in 2010). Tourism earnings should recover, moreover, from levels depressed this year
by cancellations triggered by widespread demonstrations during the spring. Coupled with
improved utilization of EU structural funds, these factors should narrow the current account
deficit to 5.5-6 percent of GDP in 2011 and 2012 from perhaps 9.0 percent this year as a
whole.
External financing will remain critically dependent on official financing from the EU, IMF and External financing will
ECB. Disbursements from the EU and IMF are set to rise from €32 billion this year to remain critically dependent
€47 billion in 2011 before decreasing to €24 billion in 2012 and €8 billion in 2013. The IMF on official financing from
estimates that principal payments of medium- and long-term debt to foreign holders of the EU, IMF and ECB
Greek government bonds and other foreign lenders will rise from €23 billion this year to
Table 6
External Financing
€ billion
2008 2009 2010 2011 2012
Current Account -30.7 -23.8 -21.1 -13.6 -14.7
(% GDP) (-13.0) (-10.2) (-9.0) (-5.5) (-6.0)
Equity Investment, net 1.3 0.4 -2.5 2.4 4.5

Direct Equity 2.0 0.6 0.7 2.0 4.0
Portfolio Equity -0.8 -0.2 -3.2 0.4 0.5
Foreign Borrowing, net 59.2 50.7 7.0 11.7 16.2

Medium- and Long-Term Disbursements 35.1 56.2 36.6 57.0 38.2
Government 25.4 39.9 32.5 46.5 29.0
(EU/IMF) -- -- (31.7) (46.5) (24.0)
Banks 7.3 7.6 4.0 8.0 8.2
Other 2.5 8.7 0.3 2.5 1.0
Medium– and Long-Term Amortization 19.9 28.2 22.8 28.1 25.8
Government 14.6 15.8 15.7 17.0 16.5
Banks 4.5 11.0 6.8 8.7 9.1
Other 0.8 1.1 0.3 2.3 0.2
Portfolio Debt, net 13.6 29.3 -13.8 -4.0 1.5
Government -- -- -11.3 -4.0 0.0
Other -- -- -3.8 0.0 1.5
Short-Term Borrowing, net 44.0 22.7 4.5 -17.2 3.8
Government 4.3 2.7 1.5 2.0 3.0
Central Bank 24.6 13.7 42.0 -14.0 -1.5
Banks 15.3 5.7 -38.0 -5.0 1.8
Other -0.1 0.6 -1.0 -0.2 0.5
Resident Lending Abroad -30.6 -26.9 16.4 -0.5 6.0

Banks -39.8 -26.0 20.0 8.0 8.0
Other 9.2 -0.9 -2.6 -7.5 -2.0
Errors and Omissions 0.8 -0.3 0.0 0.0 0.0
Reserves -0.0 -0.1 0.2 0.0 0.0

1
IMF Program data for Disbursements and Amortization.
page 19
IIF RESEARCH NOTE
€28 billion in 2011 before declining to €26 billion in 2012 and €25 billion in 2013.
Amortization payments by domestic banks appear set to rise from €7 billion this year to
€9 billion in 2011 and 2012 while those by companies jump from €0.3 billion this year to
€2 billion next year before subsiding again to €0.2 billion in 2012 (Table 6). The ECB, in
addition, will want to scale back liquidity support to Greek banks as it moves to phase out
the extraordinary facilities put in place in late 2008.
Greece faces considerable challenges restoring the broader access to financial markets
required to reduce the need for official financial support and to ease concerns about Retimed to longer
maturities than the
prospective default. The IMF estimated in May that medium- and long-term repayments on
3-5 years agreed in May,
external debt would rise to €48 billion in 2014 and €55 billion in 2015 as the government repayments to the EU and
begins to make repayments to the EU and IMF. (Including funds intended for the FSF that IMF would peak later at a
the government may well use for other purposes, repayments to the EU and IMF would rise smaller magnitude,
from €5 billion in 2013 to €28 billion in 2014 and €39 billion in 2015 before declining to facilitating an earlier return
€26 billion in 2016, €10 billion in 2017 and €1billion in 2018). Statements by EU and Greek of access to private foreign
debt markets
officials since suggest that these repayments now will be much less, with the EU and IMF
likely to shift the maturities on loans to Greece from the 3-5 years originally agreed to the
4.5-10 years characteristic of the IMF’s Extended Financing Facility. (Retimed in this fashion,
repayments to the EU and IMF would then rise more gradually from 2014 to a smaller peak
of €18 billion in 2018-2019, facilitating an earlier return of access to private foreign debt
markets, at least in theory, for the government and domestic banks.) FDI inflows, meanwhile,
seem likely to remain constrained and portfolio equity investment outflows to continue in net
terms. This assumes the government moves slowly, as seems likely, advancing the sale of
stakes in state-owned firms and concluding privatizations and concession arrangements for
transport infrastructure and government-owned real estate.
The program assumes that resident lending abroad slows from an average of €24 billion a
year from 2005 to 2009 to €7 billion this year before reversing to a net inflow of €7 billion in
2011 and then reverting again to net outflows averaging €15 billion a year until 2015.
Stronger efforts on tax collection and moves to extract payment from the owners of buildings
constructed illegally on state-owned land could result in substantially smaller resident net
outflows, however. That said, company lending abroad has picked up this year and is on
pace to total €5 billion this year as a whole, compared with nil in 2009. Tightened liquidity
constraints look likely to prompt domestic banks to repatriate as much as €20 billion of
funds previously lent abroad this year as a whole. This compares with net outflows averaging
nearly €30 billion a year from 2007 through 2009.
Despite impressive measures this year to cut spending, raise taxes and advance much-
Whether Greece can avoid
needed structural reforms, the outlook for debt sustainability remains uncertain. The political
eventual default and
will required to undertake these measures has outstripped by a considerable margin that
restructuring remains
demonstrated by any previous government, including those that built the infrastructure unclear despite impressive
needed for the 2004 Olympics and carried out the fiscal tightening needed to bring Greece adjustment and reform
into the Eurozone in 2002. Fiscal adjustment measures totaling an outsized 17 percent of measures taken to date and
GDP from the start of 2010 through 2013 are intended to assure the eventual reduction of likely to be implemented
the fiscal deficit to less than the 3 percent of GDP Maastricht limit but also to contain the
page 20
IIF RESEARCH NOTE
increase of government debt relative to GDP and bring forward the start of steady declines
after 2013. Deficit projections have erred on the side of caution, however, with increases in
interest payments and negative cyclical effects assumed to offset fully one-third of deficit
reduction measures.
The heavy emphasis put on structural reforms by the government, the EU, the IMF and the
Heavy emphasis on
ECB speaks to strong hopes that accelerated growth will enable debt servicing to be
structural reforms by the
maintained and debt restructuring to be avoided. Financial markets will have a hard time government, the EU, the
believing that the government will be able to grow out of its debt problem unless data begin IMF and the ECB speaks to
to register the renewal of a recovery robust enough to look sustainable. Ongoing adjustment strong hopes that
measures, in the meantime, will limit the ability of domestic demand to catch up with accelerated growth will
enable debt servicing to be
increases that structural reforms are expected to deliver as regards domestic supply. Much
maintained and debt
will depend on foreign demand and on the extent to which expansions of competitive
restructuring to be avoided
capacity in export sectors such as transportation and tourism prompt a shift of foreign
spending toward Greek providers of traded services.
With lingering doubts about the economy’s growth potential likely to cloud perceptions of
Ongoing efforts to reduce
creditworthiness for some time to come, ongoing efforts to cut spending and raise taxes will
deficit remain essential but
remain essential but seem likely to do little on their own to generate the market confidence stronger efforts will be
needed to underpin the renewal of substantial financial market access for Greek borrowers. needed to privatize more of
Stronger efforts will be needed to privatize more of the government’s sizable holdings of the government’s sizable
financial and real estate assets. The government has come up with impressive ideas about holdings of financial and
real estate assets
how to increase financial returns on infrastructure holdings. Large potential remains,
moreover, to realize sizable sums from the sale of substantial real estate holdings, including
retroactive payments for structures constructed illegally on state-owned land. Realizing the
financial potential of all of these considerable assets is likely to take much longer, however,
than the government has. This will be especially true if, as seems likely, markets continue to
balk at the idea of refinancing repayments to the EU and IMF when they fall due in sizable
amounts after 2014.
Against this backdrop, ongoing reluctance by the government to part with key holdings in
The preservation of “state
prominent state enterprises looks increasingly likely to exact a heavy cost. The sad truth may
pillars” in key sectors of the
end up being that to preserve controlling stakes in profit-making companies, including
economy may require the
restructured ports and airports, further and ongoing cuts will be needed in government government eventually to
wages, pensions and employment if default and restructuring are really to be avoided. By cut public sector wages
sustaining “state pillars” in key sectors of the economy, moreover, the government may limit and pensions even further
scope for the recoveries in investment, output and employment needed for the stronger
recovery of growth required to convince markets that creditworthiness has been restored
and can be sustained.
IIF DATABASE: GREECE 06-Dec-10
Page 1
Code DOMESTIC ECONOMY & EXTERNAL TRADE 2005 2006 2007 2008 2009 2010f 2011f 2012f
DOMESTIC ECONOMY
E100 Real GDP (€ billion, chained to 2000 prices) 168.12 175.67 183.14 185.44 181.20 174.13 168.91 170.60
E101 Real GDP % change 2.3 4.5 4.3 1.3 -2.3 -3.9 -3.0 1.0
E201 Domestic demand % change 0.6 5.5 6.1 0.9 -2.2 -6.8 -2.2 -1.9
E211 Private consumption % change 4.5 5.6 3.1 3.2 -1.8 -5.0 -2.0 1.5
E221 Public consumption % change 1.1 1.3 9.2 1.0 7.6 -9.0 -3.0 0.0
E231 Gross fixed capital formation % change -6.3 10.6 5.4 -7.6 -11.4 -20.0 -5.0 2.0
E262 Change in stockbuilding % GDP -1.3 -0.5 1.8 0.2 0.0 1.6 0.4 -3.5
E301 Exports of goods and services % change 2.5 5.3 5.8 4.0 -20.1 -0.4 7.8 3.0
E311 Imports of goods and services % change -1.5 9.7 9.8 4.0 -18.6 -9.5 -4.3 3.1
E322 Change in net foreign balance % GDP 1.1 -2.0 -2.1 -0.5 2.2 2.9 2.9 -0.2
E400 Real GNP (€ billion) 163.22 169.62 175.59 177.03 173.55 163.70 156.60 160.32
E401 Real GNP % change 1.7 3.9 3.5 0.8 -2.0 -5.7 -4.3 2.4
E500 Nominal GDP (€ billion) 194.82 209.92 225.54 235.68 233.05 233.07 230.43 234.81
E501 Nominal GDP % change 5.2 7.8 7.4 4.5 -1.1 0.0 -1.1 1.9
E505 GDP deflator % change 2.8 3.1 3.1 3.2 1.2 4.1 1.9 0.9
E510 Nominal GDP ($ billion) 242.28 263.34 308.69 345.23 323.75 307.21 293.72 315.50
E600 Nominal GNP (€ billion) 189.14 202.70 216.24 224.99 223.21 219.11 213.64 220.67
E601 Nominal GNP % change 4.6 7.2 6.7 4.0 -0.8 -1.8 -2.5 3.3
E605 GNP deflator % change 2.8 3.1 3.1 3.2 1.2 4.1 1.9 0.9
E610 Nominal GNP ($ billion) 235.21 254.28 295.96 329.57 310.08 288.81 272.32 296.50
E701 Average nominal earnings % change -4.9 2.2 3.4 2.4 7.2 0.5 -1.0 0.5
E801 Industrial production % change -1.6 0.8 2.3 -4.0 -9.4 -4.0 -2.0 3.0
E901 Agriculture value-added % change 2.8 -16.7 -1.8 -4.4 0.8 2.0 0.0 1.0
EXTERNAL TRADE
T103 Goods exports: volume % change 7.7 9.1 4.9 10.6 -18.8 -4.8 3.3 4.5
T105 Goods exports: unit value % change 4.2 5.3 12.3 10.2 -9.7 -1.9 -0.6 5.4
T203 Goods imports: volume % change 5.2 18.5 12.2 3.1 -26.4 -11.2 -3.4 3.9
T205 Goods imports: unit value % change 4.2 4.9 11.4 12.8 -7.1 -2.2 -4.8 10.9
T305 Terms of trade % change 0.0 0.4 0.9 -2.2 -2.9 0.3 4.5 -5.0
T400 Exchange rate, end-period (€/$) 0.848 0.759 0.679 0.719 0.694 0.763 0.769 0.741
T410 Exchange rate, average (€/$) 0.804 0.797 0.731 0.683 0.720 0.759 0.785 0.744
T430 Nominal effective rate (2000 = 100) 106.1 105.5 106.8 109.7 110.2 110.3 112.1 110.9
T440 Real effective rate (2000 = 100) 112.9 113.5 115.4 119.2 120.6 124.0 126.2 125.2
T441 Real effective rate % change 0.6 0.5 1.7 3.3 1.2 2.8 1.8 -0.8
e = IIF estimate, f = IIF forecast

Page 2
Code EXTERNAL BALANCE 2005 2006 2007 2008 2009 2010f 2011f 2012f
B100 Trade Balance ($ million) -34295 -44341 -56892 -64805 -42882 -35900 -30800 -36600
B110 Merchandise exports 17672 20299 23916 29149 21355 19900 20500 22500
B120 Merchandise imports -51968 -64640 -80808 -93954 -64237 -55800 -51300 -59100
B200 Balance on Services, Income & Transfers 18497 18307 18136 19629 8569 8100 14700 17800
B210 Services & income receipts 37989 40077 49210 58318 43367 41700 44000 45700
B212 Exports of services 33915 35642 42961 50118 37617 37800 41500 43000
B214 Interest receipts 3716 4035 5746 7692 5340 3500 2100 2200
B216 Other services & income receipts 357 400 503 507 411 400 400 500
B220 Services & income payments -25899 -29863 -39194 -48766 -39413 -40000 -39500 -39300
B222 Imports of services -14762 -16370 -20215 -24908 -19995 -17700 -15600 -17600
B224 Interest payments -10864 -13141 -18523 -23254 -18843 -21800 -23500 -21200
B226 Other services & income payments -274 -353 -456 -603 -574 -500 -400 -500
B230 Transfers, net 6408 8094 8120 10077 4614 6400 10200 11400
B232 Private transfers, net 1669 1718 1389 1234 478 1000 1300 1400
B234 Official transfers, net 4739 6376 6731 8844 4136 5400 8900 10000
B250 Current Account Balance -15798 -26034 -38756 -45176 -34313 -27800 -16100 -18800
B252 % GDP -6.5 -9.9 -12.6 -13.1 -10.6 -9.0 -5.5 -6.0
F280 Equity investment, net 3604 3077 5886 1852 606 -3301 3037 5822
F281 Direct investment -499 -1530 -4386 2994 852 924 2513 5175
F282 Portfolio investment 4103 4607 10272 -1142 -246 -4225 525 647
F300 International financial institutions 1869 -666 -54 808 -1069 13714 14612 8951
F310 IMF 0 0 0 0 0 13932 14411 8803
F320 IBRD 0 0 0 0 0 0 0 0
F330 Other multilateral creditors 1869 -666 -54 808 -1069 -218 200 148
F340 Official bilateral creditors 4759 2695 5541 45547 13574 82017 24494 20126
F350 Commercial banks 14667 4490 18814 21546 25782 -63399 -17816 -10173
F351 Credit flows 14667 4490 18814 21546 25782 -63399 -17816 -10173
F354 Interest arrears 0 0 0 0 0 0 0 0
F358 Discounted debt transactions 0 0 0 0 0 0 0 0
F360 Other private creditors 22332 28553 60998 6462 32309 -24410 -17772 -15411
F361 Credit flows/interest arrears 22332 28553 60998 6462 32309 -24410 -17772 -15411
F400 Resident lending abroad, net -31471 -12197 -53033 -32124 -36189 23059 9646 9585
F450 Errors and omissions, net -67 361 1060 1113 -594 0 0 0
F480 Monetary gold (- = increase) 0 0 0 0 0 0 0 0

F500 Reserves excluding gold (- = increase) 104 -279 -457 -29 -106 219 0 0

Page 3
Code EXTERNAL DEBT AND ASSETS ($ million) 2005 2006 2007 2008 2009 2010f 2011f 2012f
D100 External Debt 262954 329782 454200 504612 588662 542633 525457 549230
D102 % GDP 108.5 125.2 147.1 146.2 181.8 176.6 178.9 174.1
D105 % Exports goods, services & income 472.4 546.2 621.1 576.9 909.5 880.9 814.7 805.3
D202 Medium/Long term debt 195895 272809 353786 348974 395501 335891 348342 360071
D203 Short term debt 67059 56973 100415 155638 193161 206742 177115 189158
D204 Interest arrears 0 0 0 0 0 0 0 0
By creditor:
D300 International financial institutions 8064 8283 9098 9481 8620 21797 35692 45359
D310 IMF 0 0 0 0 0 14187 28175 37393
D320 IBRD 0 0 0 0 0 0 0 0
D330 Other multilateral creditors 8064 8283 9098 9481 8620 7610 7517 7966
D340 Official bilateral creditors 7298 10962 18013 60507 75961 216006 232069 261575
D350 Commercial banks 139479 160102 196990 209113 240816 134082 111198 105424
D352 Medium/long term 105400 110872 141689 151025 170374 119538 103463 95040
D353 Short term 34079 49230 55301 58088 70442 14544 7735 10384
D360 Other private creditors 108113 150436 230099 225512 263265 170748 146497 136872
By borrower ($ million): 262954 329782 454200 504612 588662

D400 Public sector 179842 214464 276611 316379 386919
D410 Private sector 21179 24941 34171 33484 39156
D420 Deposit money banks 61933 90378 143418 154749 162588
D600 $ Exchange rate valuation effect -33961 31757 39119 -23951 13454
EXTERNAL ASSETS ($ million)
A500 Reserves excluding gold 506 566 631 344 1555 1189 1143 1189
A505 % Imports of goods, services, & income 0.7 0.6 0.5 0.2 1.5 1.2 1.3 1.2
A506 Months' imports goods, services & income 0.1 0.1 0.1 0.0 0.2 0.1 0.2 0.1
A510 Gold value (market prices) 1544 2171 3014 3190 3944
A512 Gold (million ounces) 3.471 3.593 3.618 3.617 3.615
A600 Deposit money banks' foreign assets 60852 84740 133070 187848 239290
A700 Deposits in BIS banks 51849 60015 79640 98936 124173

Page 4
Code DEBT SERVICE PAYMENTS ($ million) 2005 2006 2007 2008 2009 2010f 2011f 2012f
P100 Total debt service 30539 36702 47264 52531 57738 53225 64956 72044
P105 % Exports goods, services & income 54.9 60.8 64.6 60.1 89.2 86.4 100.7 105.6
P110 Interest payments due 10864 13141 18523 23254 18843 21800 23500 21200
P120 Amortization paid 19675 23561 28741 29277 38895 31425 41456 50844
P204 Average interest rate on external debt 4.2 4.4 4.7 4.9 3.4 3.9 4.4 3.9
P214 Average real rate on external debt 0.6 1.5 0.8 2.8 0.8 -0.2 4.4 2.0
AMORTIZATION 2011 2012 2013 2014 2015 2016
R100 Total principal repayments due 41456 50844 32861 61712 71544 77625
R110 IMF 0 0 2219 10183 13839 2872

R120 IBRD 0 0 0 0 0 0
R130 Other multilateral creditors 2011 2129 2194 2258 2323 2258
R140 Official bilateral creditors 550 640 5880 25940 36800 24900
R150 Commercial banks 14785 17713 3170 3329 3495 3670
R160 Other private creditors 24111 30363 19398 20002 15088 43925
WORLD ECONOMIC FRAMEWORK 2005 2006 2007 2008 2009 2010f 2011f 2012f
W101 Industrial country real GDP % change 2.4 2.8 2.3 -0.1 -3.6 2.5 1.8 2.3
W204 $ LIBOR (six-month, average) 3.8 5.3 5.3 3.1 1.2 0.9 1.0 1.1
W304 Brent spot oil price ($/bbl, average) 55.2 66.3 72.6 98.3 62.3 79.3 78.6 83.2
W410 SDR/$, end-period 0.70 0.66 0.63 0.65 0.63 0.64 0.66 0.66
W420 €/$, end-period 0.84 0.76 0.69 0.72 0.70 0.77 0.80 0.77
W430 ¥/$, end-period 117.8 119.1 111.7 90.7 93.0 86.0 95.0 95.0
W505 World price commodities % change 6.0 23.2 14.1 7.5 -18.7 21.0 9.2 -0.4
W515 World price manufactured goods % change 2.5 2.6 5.9 6.7 -6.1 3.1 1.4 2.9
W603 Export market volume % change 7.2 9.1 6.7 0.4 -10.9 14.2 8.5 4.5
W615 Trading partners' $ prices % change 3.1 3.6 10.4 7.9 -5.1 -3.6 -3.7 7.3
COUNTRY TRADE BY COMMODITY
Imports:
C300 Petroleum ($ million) 11059 14704 16803 24141 14861 18186 17494 18694
C302 Volume (thousand b/d) 549 608 634 673 654 628 610 616
C303 Volume % change 1.3 10.7 4.4 6.0 -2.8 -3.9 -3.0 1.0
C304 Unit price ($/bbl) 55.2 66.3 72.6 98.3 62.3 79.3 78.6 83.2
C305 Unit price % change 44.9 20.1 9.5 35.5 -36.7 27.3 -0.8 5.8

Page 5
Code GOVERNMENT & MONETARY SECTORS 2005 2006 2007 2008 2009 2010f 2011f 2012f
GOVERNMENT SECTOR (€ billion)
G200 General government balance, ESA95 basis -10.1 -12.1 -14.5 -22.6 -36.1 -19.2 -13.3 -8.2
G202 General government balance % GDP -5.2 -5.8 -6.4 -9.6 -15.4 -8.3 -5.8 -3.5
G210 General government revenue 75.2 82.7 90.4 94.0 88.9 94.6 97.2 98.7
G211 General government revenue % change 6.6 10.0 9.3 4.0 -5.4 6.5 2.7 1.6
G212 General government revenue % GDP 38.6 39.4 40.1 39.9 38.1 40.6 42.2 42.0
G220 General government expenditure 85.3 94.8 104.9 116.6 125.0 113.9 110.4 106.8
G221 General government expenditure % change 0.9 11.2 10.6 11.2 7.2 -8.9 -3.0 -3.2
G222 General government expenditure % GDP 43.8 45.2 46.5 49.5 53.6 48.9 47.9 45.5
G250 General government non-interest balance % GDP -0.7 -1.4 -2.0 -4.6 -10.2 -2.2 0.6 3.5
G500 General government debt, ESA95 basis 195.4 224.2 238.6 261.4 298.0 316.3 327.5 333.7
G502 General government debt % GDP 100.3 106.8 105.8 110.9 127.9 135.7 142.1 142.1
G510 General government debt in local currency 192.9 221.3 235.5 258.0 294.2
G520 General government debt in foreign exchange 2.5 2.9 3.1 3.4 3.9
MONETARY SECTOR (€ billion)
M100 Net foreign assets 3.1 -0.5 -0.7 2.4 24.1
M200 Domestic credit 151.2 170.2 198.5 215.1 208.4

M201 Domestic credit % change 14.7 12.6 16.6 8.4 -3.1
M210 Claims on the public sector 14.2 13.3 14.8 14.7 15.2
M250 Claims on the private sector 137.0 156.9 183.7 200.4 193.2
M300 Other liabilities -13.4 -16.1 -15.1 -29.1 -26.9
M400 Money + quasi-money (M2) 167.6 185.8 212.9 246.6 259.4

M401 M2 % change 21.6 10.8 14.6 15.8 5.2
M411 M2 velocity % change -13.5 -2.8 -6.3 -9.8 -6.0
M500 Money (M1) 111.4 113.5 113.1 106.9 122.3

M501 M1 % change 8.7 1.9 -0.4 -5.5 14.4
M805 Consumer prices % change average 3.5 3.2 2.9 4.2 1.2 4.4 1.4 1.0
M815 Consumer prices % change end-period 3.6 2.9 3.9 2.0 2.6 4.1 0.0 1.9
FINANCIAL MARKETS
K100 Athens Stock Exchange, ATHEX Composite index, € t 3663.9 4394.1 5178.8 1786.5 2196
K101 € terms % change 31.5 19.9 17.9 -65.5 22.9
K110 Athens Stock Exchange, ATHEX Composite index, dol 4322.3 5787.1 7623.8 2486.3 3163.8
K111 $ terms % change 13.9 33.9 31.7 -67.4 27.2
K120 Equity market capitalization (€ billion) 279.1 349.5 390.2 270.0 279.9
K130 Equity market turnover (€ billion) 57.9 85.3 121.3 78.2 50.9
K200 Discount rate 3.25 3.75 3.25 1.25 1.00
K210 Lending rate 3.25 4.50 5.00 3.00 1.75
K220 Deposit rate 1.25 2.50 3.00 2.00 0.25
K230 Real deposit rate -2.22 -0.67 0.10 -2.07 -0.95
K300 Government bond yield, 10-year 3.6 4.0 4.5 5.1 5.5 8.5 7.0 6.0
K310 Government bond yield, 3-year 3.0 3.8 4.2 4.3 3.7 7.0 6.0 5.0
e= IIF estimate, f = IIF forecast

Page 6
Code STRUCTURAL FACTORS 2005 2006 2007 2008 2009 2010f
MERCHANDISE TRADE
S100 Merchandise exports ($ million) 17672 20299 23916 29149 21355

Export composition % total:
S102 Machinery and Equipment 12.7 12.7 13.4 14.0 13.6
S103 Fuels and Raw Materials 16.9 21.7 18.8 17.3 16.4
Export destination % total:

S112 € area 61.8 63.9 65.0 64.3 62.7
S113 United Kingdom 6.7 6.0 5.4 4.8 4.4
S115 Exports % GDP 7.3 7.7 7.7 8.4 6.6
S120 Merchandise imports ($ million) 51968 64640 80808 93954 64237

Import composition % total:
S122 Fuels and Raw Materials 20.8 21.9 18.3 23.1 7.7
S123 Machinery and Equipment 28.6 28.4 29.6 27.2 34.3
Import origin % total:

S132 € area 58.2 57.3 57.8 55.2 64.3
S133 United Kingdom 3.7 3.7 3.6 3.2 3.8
S135 Imports % GDP 21.4 24.5 26.2 27.2 19.8
REAL GDP BY ORIGIN: 2006 = 100
S210 Agriculture (3.8% GDP in 2006) 120.1 100.0 98.2 93.9 94.7

S230 Industry (12.7% GDP in 2006) 95.9 100.0 104.6 115.9 118.5
S240 Construction (7.0% GDP in 2006) 84.8 100.0 100.8 83.1 73.8
S250 Other (76.6% GDP in 2006) 93.8 100.0 108.8 115.6 116.0
INVESTMENT AND SAVINGS % GNP
S305 Gross domestic investment 20.3 21.6 22.9 21.8 17.2

S315 Gross national savings 8.0 7.0 6.1 3.5 1.5
S325 Net foreign balance -12.3 -14.6 -16.8 -18.3 -15.7
POPULATION AND EMPLOYMENT
S400 Population (million) 11.1 11.1 11.2 11.2 11.3

S401 Population % change 0.4 0.4 0.4 0.4 0.4
S411 Per capita real GDP % change 1.9 4.1 3.8 0.9 -2.7
S420 Per capita $ GDP 21860 23671 27631 30786 28752
S430 Employment, labor force survey (million) 4.3 4.4 4.4 4.5 4.4
S431 Employment % change 0.8 1.8 1.4 1.1 -1.1
S440 Recorded unemployment rate (%) 9.7 9.3 8.9 8.9 10.2

Imf Greece Dec10

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Imf Greece Dec10

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IIF RESEARCH NOTE

Greece: Stabilization Advances

OUTPUT CONTRACTION DEEPENS AS INDIRECT TAX HIKES BOOST INFLATION

LIMITED EXTERNAL ADJUSTMENT TO DATE DESPITE SEVERE FINANCING

The sharp contraction in domestic spending notwithstanding, reduced inflows of tourism

Foreign Capital 59.2 53.6 46.5 11.9

Resident Capital -28.9 -28.3 -29.1 4.8

Errors & Omissions 0.3 -1.4 -1.2 -0.3

to drawdowns of foreign assets by domestic banks. These drawdowns amounted to

FISCAL ADJUSTMENT LIKELY TO PROVE STONGER THAN TARGETED DESPITE

Expenditures 67.2 60.3 16.3 17.0 14.3 83.5 77.3 74.6

Balance -26.2 -17.9 -6.8 -5.1 -2.3 -33.0 -23.0 -20.2

Three-fourths of the adjustment targeted in 2013, equivalent to 1.5 percent of GDP, is

UNPRECEDENTED FOREIGN SUPPORT HAS HELPED OFFSET SEVERE

THOROUGHGOING STRUCTURAL REFORMS BEGIN TO BE ADVANCED

UNCERTAIN GROWTH PROSPECTS AND HEAVY DEBT CLOUD THE OUTLOOK

Equity Investment, net 1.3 0.4 -2.5 2.4 4.5

Foreign Borrowing, net 59.2 50.7 7.0 11.7 16.2

Resident Lending Abroad -30.6 -26.9 16.4 -0.5 6.0

Errors and Omissions 0.8 -0.3 0.0 0.0 0.0

Reserves -0.0 -0.1 0.2 0.0 0.0

e = IIF estimate, f = IIF forecast

F480 Monetary gold (- = increase) 0 0 0 0 0 0 0 0

e = IIF estimate, f = IIF forecast

By borrower ($ million): 262954 329782 454200 504612 588662

EXTERNAL ASSETS ($ million)

e = IIF estimate, f = IIF forecast

AMORTIZATION 2011 2012 2013 2014 2015 2016

R110 IMF 0 0 2219 10183 13839 2872

COUNTRY TRADE BY COMMODITY

e = IIF estimate, f = IIF forecast

GOVERNMENT SECTOR (€ billion)

MONETARY SECTOR (€ billion)

M100 Net foreign assets 3.1 -0.5 -0.7 2.4 24.1

M200 Domestic credit 151.2 170.2 198.5 215.1 208.4

M300 Other liabilities -13.4 -16.1 -15.1 -29.1 -26.9

M400 Money + quasi-money (M2) 167.6 185.8 212.9 246.6 259.4

M500 Money (M1) 111.4 113.5 113.1 106.9 122.3

e= IIF estimate, f = IIF forecast

Code STRUCTURAL FACTORS 2005 2006 2007 2008 2009 2010f

S100 Merchandise exports ($ million) 17672 20299 23916 29149 21355

Export destination % total:

S115 Exports % GDP 7.3 7.7 7.7 8.4 6.6

S120 Merchandise imports ($ million) 51968 64640 80808 93954 64237

Import origin % total:

S135 Imports % GDP 21.4 24.5 26.2 27.2 19.8

REAL GDP BY ORIGIN: 2006 = 100

S210 Agriculture (3.8% GDP in 2006) 120.1 100.0 98.2 93.9 94.7

INVESTMENT AND SAVINGS % GNP

S305 Gross domestic investment 20.3 21.6 22.9 21.8 17.2

POPULATION AND EMPLOYMENT

S400 Population (million) 11.1 11.1 11.2 11.2 11.3

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