EUROPEAN COMMISSION Brussels, 27.2.2019 SWD(2019) 201 final COMMISSION STAFF WORKING DOCUMENT Enhanced Surveillance - Greece, February 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION Enhanced Surveillance - Greece, February 2019 {COM(2019) 201 final}



ADEDY: Ανώτατη Διοίκηση Ενώσεων Δημοσίων Υπαλλήλων (Civil Servants' Confederation) AFEK: Ατομικό Φύλλο Εκκαθάρισης (personal clearance certificate) AIA: Athens International Airport ANFA: Agreement on Net Financial Assets APS: Asset Protection Scheme ASEP: Ανώτατο Συμβούλιο Επιλογής Προσωπικού (Supreme Council for Civil Personnel Selection) BoG: Bank of Greece CDLF (ΤΠΔ): Ταμείο Παρακαταθηκών και Δανείων (Consignment Deposits and Loans Fund) CET1: Common Equity Tier 1 CF: Cohesion Fund CIT: corporate income tax CO2: carbon dioxide CoCo: contingent convertible bond CoEx: Committee of Experts CoS: Council of State DEPA: Δημόσια Επιχείρηση Αερίου (Public Gas Corporation of Greece) DESFA: Διαχειριστής Εθνικού Συστήματος Φυσικού Αερίου (Natural Gas Transmission System Operator) DSA: debt sustainability analysis DTAs: deferred tax assets

DTCs: deferred tax credits EBRD: European Bank for Reconstruction and Development ECB: European Central Bank EDA Attiki: Εταιρεία Διανομής Αττικής (Natural Gas Distribution Company of Attica) EDP: excessive deficit procedure EFKA: Ενιαίος Φορέας Κοινωνικής Ασφάλισης (Unified Social Security Fund ) EFSF EFSF: European Financial Stability Facility EIB: European Investment Bank EKAPY: Εθνική Κεντρική Αρχή Προμηθειών Υγείας (National Central Authority of Health Procurements) EKAS: Επίδομα Κοινωνικής Αλληλεγγύης Συνταξιούχων (pensioners' social solidarity grant) ELA: emergency liquidity assistance ELSTAT: Ελληνική Στατιστική Αρχή (Hellenic Statistical Authority) ELTA: Ελληνικά Ταχυδρομεία (Hellenic Post) EMFF: European Maritime and Fisheries Fund ENFIA: Ενιαίος Φόρος Ιδιοκτησίας Ακινήτων (unified property tax) EOPYY: Εθνικός Οργανισμός Υπηρεσιών Υγείας (national health insurance body) EPA Attiki: Εταιρεία Παροχής Αερίου Αττικής (Natural Gas Supply Company of Attica) ERDF: European Regional Development FundESA: European System of Accounts ESF: European Social FundESKAEN: Εθνικό Συμβούλιο για την Κωδικοποίηση και την Αναμόρφωση της Ελληνικής Νομοθεσίας (National Council for the Codification of Legislation) ESM: European Stability Mechanism

ETAA: Ενιαίο Ταμείο Ανεξαρτήτων Απασχολούμενων (Independent professionals Social Security Fund) ETAD: Εταιρεία Ακινήτων Δημοσίου ΑΕ (Public Properties Company) ETMEAR: Ειδικό Τέλος Μείωσης Εκπομπών Αερίων Ρύπων (Special Duty for Reduction of Gas Emissions) ETS: emissions trading scheme EU: European Union EYATH A.E.: Εταιρεία Ύδρευσης και Αποχέτευσης Θεσσαλονίκης Α.Ε.(Thessaloniki Water Supply and Sewerage Company S.A.) EYDAP A.E.: Εταιρεία Ύδρευσης και Αποχέτευσης Πρωτευούσης A.E. (the Athens Water Supply and Sewerage Company S.A.) FDI: foreign direct investment GAIAOSE: SOE active in the fields of railway property and rolling stock exploitation, management and development GAO: General Accounting Office (part of Ministry of Finance) GDP: gross domestic product GFN: gross financing needs GLF: Greek Loan Facility GSCO: General Secretariat for Coordination HCA: Hellenic Court of Audit HCAP: Hellenic Corporation of Assets and Participations HFED: Hellenic Fund for Entrepreneurship and Development HFSF: Hellenic Financial Stability Fund HICP: harmonised index of consumer prices HR: human resources

HRMS: human resource management system IAPR: Independent Authority for Public Revenue ICT: information and communication technologies IMC: inter-ministerial coordination JMD: joint ministerial decision KEPA: Κέντρο Πιστοποίησης Αναπηρίας (Disability certification centre) KPI: key performance indicator LCR: liquidity coverage ratio MAR: Ministry of Administrative Reform MFI: monetary financial institution MoJ: Ministry of Justice, Transparency and Human Rights MoF: Ministry of Finance MREL: minimum requirement for own funds and eligible liabilities MTFS: Medium-Term Fiscal Strategy MW: megawatt NFC: non-financial corporation NOME: Nouvelle Organisation du Marché de l'Electricité (electricity auction) NPE: non-performing exposure NPL: non-performing loan NSJ: National School of Judges

NSRF: National Strategic Reference Framework OAEE: Οργανισμός Ασφαλίσεων Ελεύθερων Επαγγελματιών (Self-employed Social Security Fund) OAKA: Ολυμπιακό Αθλητικό Κέντρο Αθήνας «Σπύρος Λούης (Olympic Athletic Centre of Athens) OASA: Οργανισμός Αστικών Συγκοινωνιών Αθηνών (Athens’ public transport company) OASTH: Οργανισμός Αστικών Συγκοινωνιών Θεσσαλονίκης (Thessaloniki’s public transport company) OCW: out-of-court workout mechanism OGA: Οργανισμός Γεωργικών Ασφαλίσεων (Agricultural Insurance Organization) OSDDY/PP: Ολοκληρωμένο Σύστημα Διαχείρισης Δικαστικών Υποθέσεων / Πολιτικών και Ποινικών (Integrated Management System for Judicial Cases / Civil and Penal) PCI: European Project of Common Interest PCR: price coupling of regions PDMA: Public Debt Management Agency PIB: public investment budget PIT: personal income tax PPC: Public Power Corporation PSO: public service obligation RAE: Regulatory Agency for Energy RAEM: Regulatory Authority for Passenger Transport RES: renewable energy source RFA: Relationship Framework Agreement ROSCO: Rolling-Stock Maintenance Company

SME: small and medium-sized enterprise SMP: Securities Markets Programme SOE: State-owned enterprise SPA: Single Payment Authority SRSS: Structural Reform Support Service SSI: social solidarity income SSM: Single Supervisory Mechanism SSW: Special Secretariat for Water TAIPED: Ταμείο Αξιοποίησης Ιδιωτικής Περιουσίας του Δημοσίου AE (Hellenic Republic Asset Development Fund) TOMY: Τοπική Μονάδα Υγείας (Primary Health Care Unit) VAT: value added tax YEI: Youth Employment Initiative This report is prepared as accompanying document to the Commission's assessment pursuant Article 3(5) of Regulation (EU) 472/3013 published as Communication from the Commission – Enhanced Surveillance – Greece, February 2019. It was prepared in the Directorate General Economic and Financial Affairs, under the direction of Marco Buti, Director General, Carlos Martínez Mongay, Deputy Director General, Declan Costello, Director and Mission Chief, and the coordination of Paul Kutos, Head of Unit and Deputy Mission Chief and Júlia Lendvai, Deputy Head of Unit. Contributors: Chris Allen, Giuseppe Carone, Declan Costello, Fotini Dionyssopoulou, Francesco Di Comite, Matteo Duiella, Christos Gofas, András Hudecz, Alexander Ioannidis, Dimitrios Karastogiannis, Paul Kutos, Veli Laine, Eloise Lecouturier, Júlia Lendvai, Milan Lisicky, Vasileios Maroulis, Benedetta Martinelli, Vasilis Nikitas, Elena Pavlova, Zoltán Petrov, Miguel Angel Otero, Nevenka Tosici, Andreas Trokkos, Vasiliki Vasilopoulou, Irene Vlachaki, Rainer Wichern, Alkistis Zavakou. Assistance was also provided by Fotini Louka and Siofra Mc Donnell. The European Central Bank (ECB) Staff participated in the drafting of this report in accordance with the ECB’s competences and thus provided expertise on financial sector policies and macro-critical issues, such as headline fiscal targets and sustainability and financing needs. Staff of the European Stability Mechanism (ESM) contributed to the preparation of this report in the context of the ESM's Early Warning System and in accordance with the Memorandum of Understanding of 27 April 2018 on working relations between the European Commission and ESM. IMF staff participated in the context of the post-programme monitoring framework. Comments on the report would be gratefully received and should be sent, by mail or e-mail to: Paul Kutos European Commission

Unit ECFIN-F-2 CHAR 10/236 B-1049 Brussels e-mail: ECFIN-GREECE-REQUESTS@ec.europa.eu Commission Staff Working Document9 Executive summary11 1.Introduction19 2.Macroeconomic developments21 3.Fiscal and fiscal-structural policies23 3.1.Fiscal policy23 3.2.Fiscal structural policies27 3.2.1.Taxation27 3.2.2.Revenue administration27 3.2.3.Public Financial Management32 4.Social welfare37 4.1.Pensions37 4.2.Health care37 4.3.Safety nets38

5.Financial sector41 5.1.Financial sector developments41 5.1.1.Financial sector overview and financial stability assessment41 5.1.2.Financing of the economy43 5.2.Financial sector policies44 5.3.Hellenic Financial Stability Fund50 6.Labour and product markets53 6.1.Labour market53 6.2.Product market and competitiveness58 6.2.1.Business environment58 6.2.2.Network industries (energy, water, transport and logistics)61 7.Hellenic Corporation of Assets and Participations (HCAP) and privatisation67 7.1.HCAP67 7.2.Implementation of the asset development plan69 8.Public administration and justice73 8.1.Public administration73 8.1.1.Appointments of senior management positions73 8.1.2.Improving the human resource management in the public administration74 8.1.3.Better regulation and coordination75 8.1.4.Strengthening recruitment planning and the internal capacity of the Ministry for Administrative Reconstruction75

8.1.5.Controlling the size and cost of the public sector76 8.2.Justice77 9.Sovereign financing and capacity to repay79 9.1.Sovereign financing79 9.2.Debt sustainability81 Annex83 LIST OF Tables 2.1.Main features of the macroeconomic scenario22 3.1.Main drivers of the fiscal projection25 5.1.Financial stability indicators43 8.1.Evolution of public sector staff and wage bill (2009-2018)76 8.2.Hiring limits of permanent personnel and indicative ceilings for temporary personnel to be monitored in the Enhanced Surveillance Reports (2018-2022)77 9.1.State financing requirements, sources and financial buffer in 2018 and 201980 9.2.Main results of the DSA calculations assuming full implementation of the medium term measures, and the main underlying assumptions82 LIST OF Graphs 2.1.Real GDP growth and growth contributions22 3.1.EU funds claimed in the current and previous programming period (left) and primary balances and fiscal space (right)23 5.1.Bank deposits (left panel) and total borrowing from the Eurosystem (right panel)42

5.2.Bank credit to non-financial corporations and households43 5.3.Bank interest rates on new loans44 5.4.Submitted out-of-cour workout applications48 5.5.Cumulative number of e-auctions conducted since 29 November 201749 6.1.Evolution of competitiveness and employment indicators53 6.2.Minimum wage levels in euro area countries and relative competitiveness position of Greece55 6.3.Share of uninsured workers found in high-risk sectors57 6.4.Time required to register private companies59 6.5.Evolution of retail market share compared to targets63 9.1.5-year government bond yield spreads to the Bund79 9.2.Medium and long-term amortisations80 9.3.Greek spread of 10-year government bond yield over Italy81 9.4.Main results of the debt sustainability analysis81 LIST OF Boxes 3.1.Taxation – Structure and Main Issues28 3.2.Tax administration31 3.3.Arrears clearance measures34

Greece has been integrated into the European Semester and the Commission also activated enhanced surveillance under Regulation (EU) No 472/2013. Enhanced surveillance has been prolonged for a further six months by a Commission Decision of 20 February 2019. The second enhanced surveillance report is issued alongside the European Semester Country Report for Greece, which inter alia outlines the medium-term growth and investment challenges facing Greece. This staff working document accompanies that report. Enhanced surveillance also provides the basis for assessing the commitments given by Greece to the Eurogroup of 22 June 2018. These include a general commitment to continue and complete reforms adopted under the ESM stability support programme and to safeguard the objectives of the reforms adopted under this programme and its predecessors. In this context, it provides the basis for monitoring the implementation of specific reform commitments annexed to the Eurogroup statement of 22 June 2018 in the areas of (i) fiscal and fiscal-structural policies, (ii) social welfare, (iii) financial stability, (iv) labour and product markets, (v) privatisation and (vi) public administration. Real GDP is forecast to grow by 2% in 2018 and to accelerate to around 2.2% and 2.3% in 2019 and 2020, respectively. Labour market conditions continued improving in the second half of 2018: the unemployment rate dropped to 18.5% in November 2018, down from its peak of 27.9% in mid-2013, although long-term unemployment (13.5% 2018 third quarter) and youth unemployment (39.1% in November 2018) remain high. Overall, the balance of risks is tilted to the downside. Greece has made progress in implementing the specific reform commitments due for end-2018, but some actions remain to be completed, especially in the area of financial sector reform. Beyond the specific reform commitments, developments in some areas raise concerns about reform delivery and continuity, including with a view to risks to the medium-term outlook. As regards fiscal and fiscal structural policies, Greece implemented many reform commitments. Greece is likely to have over-achieved the primary surplus target of 3.5% of GDP in 2018. Moreover, the 2019 budget is projected to ensure the achievement of the primary surplus target of 3.5% of GDP, thus completing an end-2018 specific commitment. The Greek authorities have initiated preparatory work on assessing the fiscal impact and risks stemming from court rulings on reforms enacted under the financial assistance programmes: the authorities should continue to monitor these fiscal risks, and should take offsetting measures as needed in the context of the Medium-Term Fiscal Strategy (MTFS). Greece has reduced its stock of net arrears (continuous specific commitment) however, the pace of reduction has slowed significantly and new arrears continue to be created. Further steps are needed to fully implement all reform commitments on fiscal and fiscal-structural policies. More specifically:

·To address the shortfall (an end-2018 specific commitment) in the staff levels of permanent employees at the Independent Authority for Public Revenue (IAPR), the authorities need to complete the adoption of complementary measures including the amendment of the enabling legislation to allow for the establishment of a grading system for the IAPR that is linked to job descriptions. ·The authorities should address concerns on the medium-term orientation of fiscal and fiscal structural policies. Greater effort is needed to tackle structural problems which lead to the continued creation of new arrears and persistent under execution of the public investment budget. The authorities should take steps to respect their ceilings for permanent and temporary recruitments in the public sector, which are at risk based on announcements of excessive levels of recruitments in 2019. Finally, the authorities are expected to implement growth-friendly tax reforms for 2020, involving the widening of tax bases and the lowering of tax rates on corporates and labour. Reform commitments to establish a sustainable social welfare system are largely on track. The rollout of the primary health care system is advancing, with significant progress in the opening of primary health care units (TOMYs) almost reaching the nominal target of 120 (an end-2018 specific commitment). EKAPY, the body for centralised procurement, has been set up in line with the end-2018 specific commitment and activity has resumed, though on a limited scale. Progress on other aspects of the health care reform is uneven and the authorities should address issues identified by the Commission as regards the frequency and design of pharmaceutical repricing and the operation of the clawback scheme. The reform of other social safety nets (disability benefits, the Social Solidarity Income scheme) has continued, and a new housing benefit for renters is about to be introduced (albeit with a slight delay). The financial system in Greece continues to face important challenges. The liquidity situation of banks has improved and the reduction of non-performing loans (NPL) has continued, although the take-up of tools for their resolution lags behind expectations. The number of e-auctions rose in the fourth quarter of 2018, but the failure rate remains high and a large share of successful auctions lead to the purchase of the asset by the bank that launched the auction. The Hellenic Financial Stability Fund (HFSF) has developed its exit strategy for the sale of its shares in the four systemic banks (end-2018 specific commitment). Progress has been made in enhancing the case-processing capacities of courts through new staff appointments and through the financial training of judges (specific commitment for end-2018). Capital controls have been gradually relaxed in line with the agreed roadmap (continuous specific commitment). Greece needs to complete some remaining reform commitments related to the financial sector: ·Discussions are still ongoing regarding a proposal of the Greek authorities for a new system of protection of primary residences to replace the current protection under the Household Insolvency (Katseli) law. There are a large number of design and technical details which need to be settled so as to ensure that the scheme is genuinely temporary, properly targeted, can be operational in the near future and improves the payment culture. In addition, the action plan to eliminate the backlog of pending cases under the household insolvency law by 2021 needs to be better specified, taking into account the new legal framework for the protection of primary residences, impediments to the successful conduct of e-auctions should be addressed. An agreed legislative amendment and a draft action plan for State-guaranteed loans are are currently under assessment. Finally, the alignment of the mandate of the HFSF Selection Panel with the recently extended mandate of the HFSF needs to be confirmed by the Legal Council of State. In line with the HFSF law, the Minister of Finance should complete the appointment of the Deputy CEO of the HFSF and the vacant General Council position. ·On a more medium-term orientation, greater priority needs to be attached to measures needed to restore the banking sector to robust health. To this end, coordination across government departments and vis-à-vis stakeholders should be improved, and policy initiatives should avoid across-the board solutions which, by protecting strategic defaulters, create risks of moral hazard and further undermine the payment culture. Recent proposals from the authorities on new systemic instruments to achieve a faster pace of NPL reduction are welcome, but inter alia will need to be assessed from an antitrust perspective. As regards reforms on labour and product market reforms, the picture is mixed as some reforms are still underway. The government has increased the statutory minimum wage by 10.9%, effective as of 1 February 2019, and abolished the sub-minimum wage for persons aged under 25 (implying an increase of 27% for this group). In making the revision, the authorities formally followed the procedure (an end-2018 specific commitment) of Law 4172/2013; however, such a large increase poses risks for employment growth and competitiveness and important lessons should be drawn for the next revision of the minimum wage due in June 2020. As regards product market reforms, enabling legislation on installation and operation licensing procedures for environmental infrastructures has been adopted (an end-2018 specific commitment) and work is progressing well on the cadastre and the forest maps. However, further actions and commitments are needed on product and labour market reforms: ·The divestment of lignite-generating capacity by the Public Power Corporation (specific commitment for end-2018) was not completed, and discussions between the Greek authorities, PPC and the Commission are still underway to find an acceptable remedy to the antitrust case in line with the requirements of EU law. ·The Greek authorities should clarify how they intend to safeguard wage competitiveness over the medium term and to establish an environment which is genuinely business and investment-friendly. The large increase in the minimum wage may generate a short-term positive impact on economic activity, but this comes at the potential costs of lower employment growth and a sustained loss of competitiveness over the medium term. More generally, the authorities need to develop a compelling reform strategy that supports investment and potential growth based on progress in key reforms such as energy and privatisation. Progress has been made as regards reform commitments on the Hellenic Corporation of Assets and Participations (HCAP) and on privatisation, but some open issues need to be addressed. HCAP has continued the implementation of its strategic plan in line with the continuous specific commitment, and the real-estate subsidiary ETAD has been restructured; the implementation of the coordination mechanism for SOEs falling under HCAP has been launched, and a roadmap has been adopted for the transfer of the Olympic Centre (OAKA) (end-2018 specific commitments). Regarding the end-2018 commitments on privatisation tenders, the transaction of DESFA (the natural gas transmission operator) and the concession for Athens International Airport were successfully concluded, and on the Hellinikon project key intermediate steps related to the casino licence and urban planning and environmental studies have been completed. Nonetheless, the following actions on privatisation remain to be finalised: ·The authorities need to accelerate the implementation of the transactions for 2019, as reflected in the specific commitments made by the Greek authorities to the Eurogroup partners in June 2018 and in the updated Asset Development Plan (ADP), and in particular adopt all the agreed actions to remove impediments in the Egnatia transaction. Progress with advancing public administration reforms has been uneven, and there is a need to clarify the medium-term orientation of policies, especially as regards recruitment. The third cycle of the mobility scheme was launched in August 2018 with a view to be completed as a specific commitment by mid-2019, while the fourth mobility cycle is planned to be launched by the end of February 2019. The authorities have continued their solid progress towards establishing an integrated Human Resource Management System which is a specific commitment for the end of 2019. While the appointment of 90 Directors General has been completed, the authorities need to address significant delays on the appointment of Administrative Secretaries (end-2018 specific commitment). To this end, the authorities have adopted a series of complementary measures to ensure that the core objectives of the reform remain on track, including the adoption of a law on strategic recruitment as well as specifying the modalities of the independent assessment of the selection process for the Administrative Secretaries and Directors General that is planned to be completed by mid-2019. To complete their reform commitments in the area of public administration: ·The authorities need to accelerate the appointment of senior managers at the level of directors and heads of division, and related to legal codification, take the approval decision for 'digital portal' tender, and the legal provisions for 'Central Committee on Codification' should be submitted to the Parliament. ·The authorities should clarify how they intend to respect their own ceilings for permanent and temporary recruitments in the public sector, as announcements on planned recruitments in 2019 appear to be above the available ceilings. Progress with the implementation of end-2018 specific commitments to the Eurogroup ( Eurogroup annex 22 June 2018) Commitment State of play and next steps 1 Fiscal target: the annual budget achieves a medium-term primary surplus of 3.5% of GDP. The 2019 budget was adopted and it is consistent with the primary surplus target. 2 Public revenue administration: Permanent staffing positions at the Independent Authority of Public Revenue (IAPR) to reach 12,000 by end-2018. Permanent staff stood at 11,487 at end-2018, thus below target. The authorities have adopted the following complementary measures: ·Blueprint (2019-2021): IAPR has adopted its 'Blueprint' ·IT: agreement reached between GSIS and IAPR on an annual envelope for IAPR services part of GSIS' budget. In addition, the authorities need to complete the following actions: ·HR Reform: adopt enabling legislation regarding establishment of a grading system based on job descriptions. This measure is connected to the public administration reform area (#16). ·Liability for tax/customs officials: legislation to be adopted. ·Transfers to IAPR from the mobility scheme: legal provisions to be adopted to facilitate the transfer of staff to IAPR from the mobility scheme. ·Joint Ministerial Decision on 'fuel markers': to be adopted. 3 Public financial management: Avoid the accumulation of new arrears. December 2018 data show that the stock of net arrears has been reduced since the end of the ESM programme. Going forward, additional efforts are still needed to clear the backlog and avoid the build-up of new arrears. 4 Health care: Open at least 120 primary health care centres (TOMYs) by end-2018. Based on the latest reports, 112 primary health care units (TOMYs) were opened across the territory. 5 Health care: Establish the main body responsible for central procurement (EKAPY) by end-2018. The main body responsible for central procurement, EKAPY, and centralised procurement has resumed. 6 Non-Performing Loans (NPL): continue to implement reforms aimed at restoring the health of the banking system, including NPL resolution efforts by ensuring the continued effectiveness of the relevant legal framework. The authorities need to complete the following measures. Household insolvency law: the authorities’ proposal for a successor scheme to the primary residence protection under the Katseli law is currently being assessed by the institutions with a number of open crucial issues. Backlog of household insolvency cases: the current Household Insolvency action plan will need to be updated, with a view to reaching the target of eliminating the backlog by end-2021. E-auctions: impediments to the successful conduct of e-auctions should be addressed. State-guaranteed loans: agreed legislative amendment and a draft action plan are under assessment. 7 Capital controls: relaxation of capital controls in line with the roadmap of May 2017. The authorities continued to lift capital controls in line with the agreed roadmap. 8 Justice: complete phase I of the establishment of the e-justice system (OSDDY-PP) by end 2018. Phase I of the OSDDY-PP has been completed with all deliverables formally handed over by the contractor by January 2019. 9 The HFSF will by end-2018 develop an exit strategy for the sale of its stakes in the systemic banks and the mandate of the Selection Panel of the HFSF shall be aligned with the mandate of the HFSF. Exit Strategy: The HFSF General Council has approved the divestment framework for the sale of its shares in the four systemic banks. Selection Panel mandate extension: The authorities clarified that in their view the mandate of the HFSF Selection Panel as a body is in alignment with the recently extended mandate of the HFSF; this is to be confirmed by the Legal Council of State. In line with the HFSF law, the Minister of Finance should complete the appointment of the Deputy CEO of the HFSF and the vacant General Council position on the basis of the shortlist produced by the Selection Panel. 10 Labour market: Safeguard competitiveness through an annual update of the minimum wage in line with the provisions of Law 4172/2013. The authorities have updated the minimum wage following the procedure laid down in Article 103 of Law 4172/2013. As a result, the minimum wage has been raised by 10.9% and the sub-minimum wage for persons aged under 25 was eliminated (implying an increase of some 27%). The magnitude of the increase raises concerns for the employment prospects (especially for the young and old-age low-skilled workers), and for competitiveness in the medium term. 11 Investment Licensing: adopt all enabling licensing legislation All enabling legislation had been adopted by the issuance of a joint ministerial decision (FEK/B/436 - 14.02.2019). 12 Energy: Complete the agreed divestment of Public Power Corporation's lignite-fired capacity w by end-2018. The divestment of the Public Power Corporation lignites been delayed as the tender process did not yield any successful bids. Steps to remedy this situation need to be agreed with the Commission, and the authorities have signalled their intention to submit a new proposal. 13 Hellenic Corporation of Assets and Participations (HCAP): The Strategic Plan of HCAP will be implemented on a continuous basis. HCAP prepared the Strategic Plan which was approved by the General Assembly in January 2018. On the basis of the Strategic Plan, the non-listed subsidiaries submitted updated Business Plans to HCAP. Furthermore, HCAP prepared the Business Plan of the Corporation for the period 2019-2021 implementing the Strategic Plan and setting key performance indicators for the non-listed subsidiaries. 14 HCAP The transfer of OAKA to HCAP and the restructuring of ETAD will be completed by end-2018. The restructuring of ETAD has been completed. The transfer of OAKA is taking longer to complete than initially planned. The authorities have developed a roadmap for specific actions to be taken during 2019 to address the open technical issues, which appears appropriate in light of the complexity of the project. In addition, on 21 February 2019, the Cabinet Committee and HCAP have launched the coordination mechanism for State-owned enterprises. 15 Tenders The Asset Development Plan of TAIPED will be implemented on a continuous basis. The transactions on the AIA concession, Hellinikon and DESFA will be completed by end-2018 Asset Development Plan (ADP): The updated ADP of TAIPED was endorsed by KYSOIP on 15 February (FEK 461, 15 February 2019). DESFA: The financial closing of the transaction was completed on 20 December 2018. AIA: The AIA extension agreement was ratified by the Greek Parliament on 14 February 2019 and the payment of the financial transaction of EUR 1.1 billion plus an annual rate of 10.3% paid proportionally by AIA from 1 January 2019 until closing date, was done on 22 February 2019, thereby closing the transaction. Hellinikon: the project has encountered some delays mainly concerning the award of the casino licence and the urban planning and environmental approvals. As key intermediate steps: (i) the request for proposal for the award of the casino licence was uploaded on 19 February; (ii) the studies on the urban planning zone, the development zone, and the park were submitted by the investors to the Greek authorities, on 6 February 2019, and the Integrated Environmental Impact Assessment study followed on 18 February. The authorities need to implement all agreed complementary actions related to the concession of Egnatia motorways, to remove impediments to the transaction. 16 Public Administration - Appointments. The implementation of reforms to modernise the public administration will be sustained. As part of this effort, Greece will complete reforms to modernise human resource management in the public sector, and in particular the appointment of Administrative Secretary Generals and all Directors General according to law 4369/2016 by end-2018. Director-Generals: all appointments (90 posts) have been completed. Administrative Secretaries: to date no appointment (of 69) has been made and as complementary actions, the authorities have adopted a law on strategic recruitment (also linking the hiring plan with the Medium-Term Fiscal Strategy) and strengthening the capacity of the Ministry of Administrative Reconstruction and: (i) provided an updated timeline for the completion of the recruitments of Administrative Secretaries by end 2019; (ii) agreed with the Commission the modalities of the independent assessment of the appointment cycles of Administrative Secretaries and Director-Generals to be completed by June 2019 with follow-up measures adopted by September 2019; (iii) committed to a specific road map on the streamlining job qualifications ('klados'), (iv) committed to update the census ('apografi') database to also report on - flows of permanent staff of legal entities of private law and insert a category of temporary staff of legal entities of private law being paid by NSRF/other sources; (v) committed to launch the first calls for Heads of Division appointments by end-March 2019. As a complementary measure, the authorities need to complete the following actions: related to legal codification, they should take the approval decision for the 'digital portal' tender and should submit the legal provisions for the 'Central Committee on Codification' to the Parliament. In addition, related to the important HR reform of the public revenue administration, the authorities should adopt an amendment that allows the implementation of the first-stage linking of grading to job descriptions for IAPR.

Economic developments and policies in Greece are monitored under the regular economic surveillance framework for euro-area Member States under the European Semester for economic policy co-ordination and under the enhanced surveillance framework according to Regulation (EU) No 472/2013.() The Commission has prolonged enhanced surveillance for Greece, effective for six months as from 20 February 2019.() That decision acknowledges the fact that over the medium term, Greece needs to continue adopting measures to address the sources or potential sources of economic and financial difficulties, while implementing structural reforms to support a robust and sustainable economic growth. Greece made a general commitment at the Eurogroup of 22 June 2018 to continue and complete reforms adopted under the ESM programme and to ensure that the objectives of the important reforms adopted under the financial assistance programmes are safeguarded. In addition, Greece made specific commitments to complete key structural reforms started under the programme in six key areas by agreed deadlines up to mid-2022, namely (i) fiscal and fiscal-structural policies, (ii) social welfare, (iii) financial stability, (iv) labour and product markets, (v) privatisation and (vi) the modernisation of public administration.() In this context, 16 specific commitments were made with a deadline of end-2018, progress on which is assessed in this report. This report is based on the findings of a mission to Athens between 21 and 25 January 2019 conducted by the Commission in liaison with the ECB(); the IMF participated in the context of its Post-Programme Monitoring (PPM) framework, while the ESM participated in the context of its Early Warning System and in line with the Memorandum of Understanding of 27 April 2018 on working relations between the European Commission and ESM. Enhanced surveillance provides a comprehensive framework for monitoring economic developments and the pursuit of policies needed to ensure a sustainable economic recovery. To this end, this report includes an assessment of economic conditions in Greece (chapter 2); an assessment of implementation of reform commitments given by Greece to the European partners (chapters 3-8); and an update on sovereign financing conditions and debt repayment capacity (chapter 9). The Eurogroup on 22 June 2018 agreed that the package of debt relief measures for Greece should include incentives to ensure a strong and continuous implementation of the reform measures agreed in the programme. To this end, the implementation of some of the agreed debt measures (the abolition of the step-up interest rate margin related to the debt buy-back tranche of the European Financial Stability Facility (EFSF) programme as of 2018 and the restoration of the transfer of equivalent amounts to the income earned by euro-area national central banks on Greek government bonds held under the Agreement on Net Financial Assets (ANFA) and the Securities Market Programme (SMP) will be made available to Greece subject to compliance with its commitments on reform continuity and completion, based on positive reports under enhanced surveillance. The return of SMP-ANFA income equivalent amounts would be made available to Greece in semi-annual tranches of some EUR 640 million up to mid-2022. The waiver of the step-up interest rate margin, for part of the EFSF loans, would reduce interest payments by some EUR 220 million annually. It would be waived on a semi-annual basis until 2022 and permanently after 2022. Given that half of last year’s and the full amount of this year’s instalments of the step-up margin are currently eligible for a waiver, the policy-contingent debt measures for possible release at this stage amount to some EUR 970 million. The economic recovery will continue into 2019.() The recovery continued in the third quarter of 2018 with real GDP growing at 1% quarter-on-quarter (seasonally and working-day adjusted), which corresponds to a 2.2% year-on-year growth. This followed an already encouraging 0.5% and 0.4% q-o-q growth rate in the first and second quarter. Growth is expected to have reached 2% for 2018 as a whole. GDP is forecast to accelerate further in 2019 and 2020 to reach growth rates of 2.2% and 2.3% respectively. Domestic drivers of growth, i.e. private consumption and investment are expected to strengthen, while contributions from the external sector are expected to moderate on the back of the projected slowdown in the EU and increased domestic import demand. Private consumption is expected to remain a major contributor to growth in 2019. Private spending was an important driver of growth in the first two quarters of 2018 and, although its (quarterly) growth halted, in the third quarter it is still expected to have had a major contributory effect for the year as a whole. Despite some moderation in aggregate economic sentiment indicators, consumer confidence and retail confidence have improved up until January 2019 and reached some of their best readings since 2008-2009.() Private consumption is thus expected to provide much of the growth contribution on the demand side in 2019 and possibly in 2020 as well. The export sector continues to perform well, and its outlook remains mostly positive despite the slowdown in the EU. Both the tourism industry recorded a very good year in 2018 with over 10% increase in tourist expenditures, and export of goods increased dynamically, reaching almost 9% real growth on average in 2018 from January to November. Import growth was moderate in the first half of the year, but has increased markedly since, and thus will limit the growth contribution of foreign trade. In 2019, export of goods is projected to continue to grow, albeit some slowdown is expected after what was an exceptionally good year for Greek exports. The slowdown in the EU is not expected to be disruptive to Greek goods’ exports, as demand for primary products are generally less closely linked to income developments. The export of services, however, is likely to see very modest growth at best, as the renewed competition from Turkey, and the contracting demand from some key markets pose severe challenges in 2019. Investment performance has been mixed. The residential construction sector has started to recover. According to anecdotal evidence, the increased activity on flat sharing platforms and the Golden Visa program are channelling purchasing power to the real estate market, thereby boosting investment demand. Non-residential construction is markedly below its 2017 level, due to the base effect created by the delivery of the highway construction in 2017-Q3. As for equipment, transport and weapon equipment purchases show a decline compared to 2017, while other types of equipment show a steady increase. In any case, the broad-based recovery of business investment has not materialised as it was expected a year ago. In the coming years, a rebound and sustained growth of investments will be key for a healthy economic recovery. An encouraging first sign of investment potential is that new corporate lending has mildly accelerated in the very last months of 2018, even though it remained mostly in the negative territory throughout the year indicating that the deleveraging process is still in place. Labour market conditions continued improving in the second half of 2018. Employment grew by 1.5% in the first three quarters of 2018 according to national accounts statistics, which is the same growth rate as in 2017. Labour Force Survey data show a slightly better figure: 2% annual growth for the period January-November 2018. Consistently, unemployment rate dropped to 18.5% in November from 20.8% at the end of 2017. However, youth and long-term unemployment remain very high (respectively, 39.1% of the labour market participants and 71.8% of total unemployed). Inflation reached 0.8% in 2018. The almost 4% annual increase in energy prices was one of the main contributors to headline inflation in 2018. Although the headline figure marks a slight disinflation compared to 2017, some of this is due to the inflationary effect of the indirect tax increases in 2017. Core inflation reached 0.5% in 2018, slightly below its 0.6% value in 2017. Due to a downward revision of the oil price forecasts, the inflation forecast for Greece is also revised. As energy prices are expected to moderate significantly in 2019, headline inflation is expected to remain below 1% in 2019 and in the outer years as core inflation strengthens and energy prices stabilise. Overall, the balance of risks is tilted to the downside. The outlook assumes that reform momentum will be maintained, providing credibility and a good investment climate. Consumption growth may be higher than expected in 2019, should the increase in the minimum wage translate into higher consumption spending.() However, downside risks dominate the forecast: the increase in the minimum wage poses potential downside risks both on investment recovery and on export performance due to the possible losses in competitiveness. Risks to investment are exacerbated by the high level of non-performing loans which continues to weigh on the intermediation capacity of banks (a pre-requisite for the financing of the projected investment growth). FDI inflows could be further hampered by delays in privatisation, and on public administration and business environment reforms. Finally, the global and in particular the EU slowdown, may further hamper Greece's recovery. Graph 2.1:Real GDP growth and growth contributions Source: European Commission Table 2.1:Main features of the macroeconomic scenario Source: European Commission 3.1.Fiscal policy

Public finances in 2018 Greece is likely to have over-achieved the primary surplus target of 3.5% of GDP in 2018, for the fourth year in a row. Based on data available to date, the authorities expect the primary surplus in 2018 to have reached 3.8% of GDP, after taking into account wage refunds that were paid to uniformed personnel and other public officials following a court ruling and the payment of a means-tested transfer (’social dividend’), both implemented at the end of 2018. The outcome could be even higher based on the incoming data confirming large-scale underspending vis-à-vis the initial 2018 budget. As in previous years, the main driver of the over-performance is likely to be the public investment budget; other factors include lower-than-budgeted ordinary expenditure of the State budget and on lump-sum pensions, all recurrent issues. First outturn data for the 2018 general government headline balance in accrual terms will be released on 23 April this year. Faced with an expected over-performance, the government decided to grant a one-off means-tested cash transfer targeting low-income households (the so-called "social dividend") at the end of 2018, the size of which turned out to be larger than expected. The cost of the benefit is expected to reach EUR 782 million in total, which represents a considerable overrun compared to the initially foreseen envelop of EUR 710 million. The overrun is related to a sudden increase in the number of persons reported as self-standing households, which may imply risks for other social benefits and the taxable income, where the household status is a relevant criterion. The authorities are expected to investigate this issue further. Graph 3.1:EU funds claimed in the current and previous programming period (left) and primary balances and fiscal space (right) Source: European Commission deparatments and the Greek authrotrities’ projections Although Greece has been among the top absorbers of EU funds until recently, an under-execution of the public investment budget was observed in 2018 which did not only concern domestic but also EU co-financed investment. In 2018, the authorities effectively drew EUR 870 million under the European Regional Development Fund and the Cohesion Fund, falling well short of the EUR 1.85 billion forecast by the authorities in July. As shown in Graph 3.1, so far the use of EU funds in the current programming period (2014-2020) has been significantly lower than in the previous one (2007-2013). The delays result largely from a lack of high-quality projects in the pipeline and complex public procurement procedures. While the risk of losing EU funds is contained until 2020, the back-loaded profile induces significant risks for the remaining years. Accelerating the implementation of EU funded programmes is essential to avoid pressure at the closure of the programming period. Outlook for 2019 and beyond The 2019 budget adopted in December 2018 is expected to ensure the achievement of the primary surplus target of 3.5% of GDP (end-2018 specific commitment). The assessment of the budget was provided in the first enhanced surveillance report published in November 2018. Updated projections will be presented in the Commission 2019 spring forecast and the Commission assessment of the 2019 Stability Programme. This report presents an overview of recent and expected upcoming developments with an impact on the budget, which will need to be addressed in the upcoming Stability Programme. A number of measures with an impact on the 2019 public finances has been adopted or announced after the 2019 budget was voted. The impact of these measures will need to be quantified in the Stability Programme. Measures with a balance-deteriorating impact include: ·the extension of the VAT discount on five Aegean islands hosting refugee centres for the fourth time in December 2018. While the impact of the extension on the primary balance is expected to be limited, the abolition of the discount was an important reform commitment under the ESM programme. The new framework links the elimination of the discount to the easing of migration pressures, an assessment of which is to be carried out on a biannual basis; ·plans to introduce new settlement schemes for social contributions and tax debt. These measures have not yet been adopted but, if confirmed, they could have a sizeable negative impact on the collection of public revenues and the primary balance; ·the public wage bill shows some worrying trends that need to be addressed. The main challenges are related to the increase in the number of temporary personnel and the pressures that may arise to extend the application of newly adopted wage calculation rules for Ministry of Finance staff to the wide public administration. The increase in the minimum wage as from 1 February could have a balance-improving impact in the short run, as higher revenues, mainly from social security contributions, are expected to outweigh increased spending on unemployment benefits and other benefits affected by the change. A large unspecified spending appropriation created in the 2019 budget raises concern, as it could be used for spending not foreseen in the Commission fiscal projection. The appropriation was created as a buffer for the case that the above-mentioned wage refunds, which were foreseen to be paid in December 2018, should slip to 2019. While statistically this transaction still accrues to 2018, i.e. the year when the liability to carry out the refund was recognised by the government and the amount determined, an appropriation needed to be created in the budget to cater for the possible cash expenditure. Part of the refunds was indeed paid only in early 2019 but to a smaller extent than expected, leaving thus about EUR 650 million (0.3% of GDP) of the appropriation available for other spending that was not foreseen in the fiscal projections of the first enhanced surveillance report. As the forecast is based on the assumption that spending appropriations will be used fully, removing the unused appropriation would be warranted to avoid a negative impact on the Commission assessment. Finally yet importantly, the Stability Programme provides an opportunity to clarify the consistency of the medium-term elements of the 2019 budget package with the tax reform adopted in June 2017 and set to enter into force in 2020. In the 2019 budget, the authorities presented a number of measures to enter into force in 2020: a progressive cut in the corporate income tax (CIT) rate in total by 4 percentage points over four years starting from 2020, a reduction in the dividend tax rate from 15% to 10% in 2020, and the agreement to limit the size of the public investment budget to EUR 1 billion throughout 2020. Some of these measures will interact with the balance-neutral tax reform adopted during the second review of the ESM programme in June 2017 to enter into force as from 1 January 2020. The pre-legislated package encompassed, on the consolidation side, a reduction in the personal income tax credit threshold to broaden the tax base, and, on the expansionary side, reductions in the personal and corporate income tax rates and the property tax rate. Box 3.1 provides a short overview of the main issues in the Greek tax system. It is critical that the tax system be made more growth friendly through a broadening of the tax base and lowering of tax rates on labour and in particular on corporates. Table 3.1:Main drivers of the fiscal projection Source: European Commission Fiscal risks Greece’s public finances are facing important fiscal risks. The risks are mostly related to past and pending court rulings related to reforms enacted under the financial assistance programmes but some also have a more political dimension. The most significant ones are the recent court rulings against the past pension reforms and the potential restoration of seasonal wage bonuses to civil servants. Other risks relate to pressures on the public wage bill. The risks, once materialised, may entail a retrospective and/or a recurrent impact on public finances of significant size. The Greek authorities should continue to monitor fiscal risks, including court rulings, and are invited to take offsetting measures as needed to meet the medium-term fiscal targets in the context of the Medium-Term Fiscal Strategy (MTFS) and its annual updates. In the event of court rulings overturning key structural elements of reforms agreed under the programme, the recurrent fiscal implications of such rulings should be largely addressed by reforms/actions within the same policy field. Regarding the 2012 pension reform, on 10 June 2015, the Council of State (CoS), Greece’s highest administrative court, ruled that pension cuts implemented in 2012 and 2013 as part of a broader pension reform were unconstitutional and will need to be partly refunded. More specifically, the court challenged: (a) the reduction of supplementary pensions by 10 - 20% which came into effect on 1 January 2012, (b) the reduction of main pensions higher than EUR 1,000 by 5 - 20% which came into effect on 1 January 2013 and (c) the abolition of seasonal bonuses of pensioners from 1 January 2013. The court decided that the unconstitutionality of the reductions comes in effect from the date of the ruling’s publication in June 2015 and only claims that were submitted before that date are entitled to a refund. The period of the refund starts from the date the reduction came into effect and goes up to the end of 2014, as the following period is covered by the 2016 pension reform that was applied retroactively. Therefore, the fiscal impact of the decision depends on the number claimants who filed a petition before June 2015. It should be noted that long delays occur between the time of an appeal and the time when the administrative department of the main pension fund is notified. However, the Ministry of Labour estimates that by today all appeals submitted until June 2015 should be known. According to the authorities, the number of claimants eligible for a refund is only 121, which implies negligible fiscal cost; however, the question is not yet finally settled as some lower courts have ruled against the restricted eligibility for the compensatory payments Moreover, residual uncertainty concerns the retroactive application of the 2016 pension reform (recalibration of pensions, new replacement rates, etc.), which has also been challenged at the CoS and the ruling is expected to be published in 2019. Since the reform has followed the guidance of the CoS ruling from 2015, it is not clear at this stage whether the challenge will succeed and, if so, which aspects of the reform could be affected. The potential restoration of seasonal wage bonuses to public servants, still to be decided by the CoS, creates additional uncertainty. The seasonal bonuses totalling some EUR 1,000 annually were eliminated as of 2013. Since then, several courts ruled in favour of claims that the abolition of the bonuses was unlawful. In December 2018, the Supreme Court of Cassation ruled that the elimination of seasonal bonuses was unconstitutional indeed but given the high importance of the case, it will be settled by the plenary session of the CoS. The decision is likely to be made in 2019 and given the chain of court decisions up to now, the risk of a ruling in favour of unconstitutionality is material. The eventual fiscal cost could entail both a retroactive and a recurrent amount in case the court rules in favour of the reinstitution of the bonuses. The overall fiscal cost is estimated at 1.3% of GDP, of which 1.1% relates to the retroactive liability, assuming that all public servants will be eligible for a refund and the limitation on wage claims is five years; the recurrent costs would amount to 0.2% of GDP annually. The public wage bill could be additionally affected by the recent decision to exempt certain officials, mostly at the Ministry of Finance, from the unified wage grid introduced under the ESM programme. To recall, employees hired before November 2011, when the first uniform wage grid came into effect, are entitled to receive a ‘personal difference’ that limited the size of the wage cuts implied by the uniform wage grid to 25%. An October 2018 legislation, however, extended the personal difference to employees hired or transferred to the Ministry of Finance and its supervised entities from November 2011 to October 2018. Although the estimated direct cost of the legislation is small, pressure could arise to extend the application of the personal difference to the wider public administration. Unlike for the previous two cases, no final court case is pending. The trigger could be either an individual legal challenge on equal treatment grounds, or a unilateral decision of various general government entities to extend it on an ad hoc basis. The process may be difficult to contain once the process, which has already started, reaches a critical mass. At this stage, no personal difference has been restored retrospectively, hence the fiscal risk relates only to recurrent cost that could reach up to 0.1% of GDP once/if the personal difference is spread across entire public administration.

3.2.Fiscal structural policies 3.2.1.Taxation Greece has continued to make progress in the reform of ENFIA property tax valuation. The reform aims at fully aligning property tax zonal values with market prices by 2020, thus widening the tax base and improving the efficiency and fairness of the tax. The legal framework for the new system of property valuation by professional real estate valuers has been established by an amendment in law 4587/2018. A Property Tax Valuation Unit has now been established and two key IT projects have been initiated to map electronically zonal boundaries and to systemise the collection of real estate data. An independent quality assessment exercise of the results of the last year's nationwide valuation exercise is currently underway with technical support. Preliminary results suggest that a new nationwide valuation exercise is not needed in 2019 and that the realignment of property tax values can be continued on the basis of last year's exercise. Moreover, only a limited number of public objections to last year's revaluation have been received to last year's partial revaluation of zonal values. Progress has also been made on other tax policy issues. Three joint ministerial decisions have finally established a user-friendly framework for business tax incentives for the employment of youth and long-term unemployed, investments in energy- and water-saving technologies, and for the support of audio-visual productions. With the help of technical support, reviews are currently underway of the system of Stamp Duty and of the potential individual liability of corporate managers for tax offences. 3.2.2.Revenue administration The specific commitment related to staffing levels was not met, however this reporting period has seen significant progress on a number of key reforms (e.g. HR reform, blueprint and IT envelope) that will still need to be firmed up by early March 2019. Overall the Independent Authority for Public Revenues (IAPR) is continuing to make steady progress in terms of improving tax collection, including reducing the long overdue debts. A more detailed overview of IAPR's achievements since its launch in 2017 and progress in achieving set targets on a number of key performance indicators (KPIs) is included in the end of this section (see Box 3.2). The specific commitment to have reached a staffing level of 12,000 permanent employees at the IAPR by the end of 2018 has not been met. The overall staff level actually decreased during 2018 (from 11,682 to 11,492). The main reason given by the authorities was the delay of new hirings, in particular as concerns the recruitment carried out by the Supreme Council for Civil Personnel Selection (ASEP) of new tax/customs officials (546 posts). However, it should be noted that a contributing factor of ASEP's limited processing capacity causing this delay was the priority assigned by the government to another ongoing recruitment process() that was determined to be of specific public interest to which ASEP had to consequently allocate a significant proportion of its resources. According to latest updates by ASEP the final selection table for the tax/customs officials (546 posts) should be published by April 2019. This would mean that the first new hirings should be able to take up their positions by mid-2019. Another reason provided why the staffing target was not met was the lower than expected number of realised transfers from the mobility scheme. In addition, more exits took place than expected, mainly due to the increased number of retirements. The authorities will need take specific actions in order to ensure that the specific commitment to reach a staffing level of 12,500 permanent employees by end-2019, while also reflecting if the number of retirements is expected to remain at the elevated level of 2018, considering the rather high average age of current IAPR staff. Worryingly, IAPR's own estimates currently indicate that 12,114 permanent staff will be in place by end of 2019. By contrast, the authorities have agreed to take complementary measures with a view to enhancing the overall operational capacity and efficiency of the IAPR across a number of dimensions, although for some of these intensive discussions are ongoing with the expectation that the measures will be adopted by early March 2019. In particular: ·Steps have been taken to further enhance the IAPR's overall capacity and efficiency, with the most noteworthy measure concerning the human resources (HR) reform of the IAPR. This entails the introduction of grading, remuneration and performance assessment tailored to the IAPR and is seen as essential in order to enhance IAPR's prospects to attract highly-qualified staff and to allow for their development and progression. More specifically, a legislative amendment to IAPR's enabling legislation is currently under intense discussions with the authorities with the expectation that it will be adopted by the Parliament by early March 2019. This law amendment, if adopted, will allow IAPR to proceed and adopt the required secondary legislation, thereby introducing a new grading scheme that is linked to job descriptions. This is the first step needed for the introduction of a specific remuneration scheme linked to job descriptions. As concerns the second and final step to introduce a supplementary remuneration scheme for IAPR, this will require primary legislation setting out the provisions for the supplementary wage grid. The authorities are in the process of finalising a detailed timeplan for completing the HR reform that is expected to be in place by end of 2019. It is worth pointing out that (i) the HR reform is closely aligned with the overall principles of the HR reforms promoted by the Ministry of Administrative Reconstruction (MAR) and covering the overall public administration; and (ii) the additional budget foreseen for the supplementary remuneration part of the HR reform is already part of the budget adopted for 2019. Further, the Governor has issued a decision end-2018, setting out another part of the HR reform, namely the appraisal system that will be applied for all IAPR staff as of 2019. This decision is yet to be published in the Government Gazette. ·The IAPR has adopted its reform action plan ("Blueprint") for the period 2019-2021 following securing the additional funding needed. The "Blueprint" sets out specific measures and investments that will be required to continue the transformation of the IAPR into a modern, flexible and effective organisation. The "Blueprint" foresees specific actions on a number of areas, such as the automation of obligations currently requiring physical presence and enforcing compliance. Most actions and projects will be covered through secured funding sources (mainly from EU funds); however, the Ministry of Finance agreed to cover the financing gap of about EUR 80 million, out of which EUR 5 million is expected to annually recurrent cost, thereby demonstrating its strong support to continue strengthening the capacity of IAPR. ·The General Secretariat of Information Systems (GSIS) and the IAPR have reached an agreement on an annual envelope for the IAPR’s IT infrastructure/tools. This means that a specific amount for 2019 (approximately EUR 5 million) has been pre-allocated for IT support and services to be provided exclusively to IAPR mainly relating to maintenance and renewal of licenses. Other measures expected to be taken by early March, include (i) legal provisions to further facilitate the transfer of staff to IAPR from the mobility scheme; (ii) legal provisions to strengthen liability protection for tax/customs officials, which are expected to facilitate the introduction of new/indirect audit methods; and (iii) joint ministerial decision adopted by the Ministry of Finance, Ministry of Infrastructure & Transport, Ministry of Economy & Development and Ministry of Environment & Energy that will allow IAPR to launch the tender for the procurement of fuel markers. The single centre for the collection of social security debt (KEAO) continues to meet its set targets for the collection of social security debt. For 2018, the target was an overall collection of EUR 1.2 billion and the actual collection exceeded this target by close to 15%.() Notwithstanding the steady progress achieved in terms of social security debt collection, the total amount of debt due to the single pension fund EFKA continues to increase (11% increase in 2018()). As concerns the joint actions between IAPR-KEAO, a positive step expected during the next reporting period, secondary legislation is expected to be adopted that will allow KEAO to consider directly applying IAPR’s classification of the persons/entities considered to have 'uncollectable' debt. The government has informed the European institutions that they do not intend to proceed in the near future with revisions to instalment schemes for tax debt and social security debt, as they need to undertake further technical analysis and reflection. It is important to avoid creating fiscal risks or undermining the payment culture, and to respect the core objectives of the reforms carried out as part of the ESM programme. (Continued on the next page) Box (continued) 3.2.3.Public Financial Management

The Greek authorities have committed to avoid the accumulation of new arrears (continuous action) and to complete the implementation of reforms identified by the Hellenic Court of Auditors (HCA) by mid-2019. The net stock of arrears has decreased since the end of the programme. However, the pace of reduction has slowed significantly as new arrears continue to be created . Besides, the implementation of some reforms identified by the HCA is so far lagging behind. Programme financing and own resources have been utilised to clear arrears. The end-December 2018 stock of net arrears stood at EUR 1.4 billion, thus EUR 0.3 billion lower than the end-August 2018 stock of arrears, which was set as benchmark for the assessment. While September and October saw mixed progress, clearance re-accelerated in November and December. Of the total EUR 7 billion disbursed for arrears clearance during the programme, only EUR 0.2 billion remain unused by end-December 2018. In the same period, the authorities have used more than four times the disbursed amount to clear arrears from own resources, i.e. in total some EUR 35 billion including about EUR 28 billion of Greek own resources). Much of this amount needed to be devoted to new arrears, which have continued to be created. Despite the substantial improvement relative to the initial stock, the remaining arrears as of end-December 2018 need to be cleared, and looking ahead, the stock of arrears to be preserved at the minimum level possible. The authorities are currently implementing structural measures to address the bottlenecks of arrears management and clearance with a view to fully clearing arrears, within the limits of technical and legal feasibility. The measures are based on the recommendations of systemic nature issued by the Hellenic Court of Auditors (HCA) following its audit on arrears in May 2018. Progress on the implementation of the action plans of the IAPR and the General Accounting Office (GAO) show mixed results. Both the IAPR and GAO action plans are experiencing some delays On the IAPR side out of the total 35 actions at least 8 have been delayed and six are foreseen to be completed after the mid-2019 cut-off date for the completion of this commitment. For the GAO action plan, some entities have reported that measures with end-December 2018 deadline have not yet been implemented. The entities in question have identified the reasons for the delays and proposed corrective actions. Some of the actions have already been finalised by end-January, the remaining ones are expected to be finalised in the coming months according to revised deadlines. The overall implementation of the reforms in both action plans will be assessed in mid-2019 based on a follow-up audit by the HCA. The authorities are also taking parallel actions to ensure that remaining arrears are being cleared. These include legislative amendments resolving issues and clarifying processes related to arrears in hospitals and social security funds, a more efficient reallocation of financing among the entities and a clearance plan for the remaining arrears in the first quarter of 2019. Efforts need to continue both to strengthen the system for arrears clearance and to tackle the causes of arrears creation. The current slow progress of arrears clearance and the continuing creation of new arrears suggest that further measures could usefully be considered by the authorities. Discussions are ongoing to pinpoint further measures in addition to the ones already in the pipeline, inter alia through streamlining payment processes. (Continued on the next page) Box (continued) 4.1.Pensions The authorities are making good progress in implementing the action plan for the completion of the setup of the unified main pension fund EFKA, which is a mid-2020 commitment. The authorities have continued publishing detailed statistical information on pensions (monthly Helios reports) and quarterly reports on pension claims. The authorities have also made available reports on the progress in the creation of electronic records for retirees and insured persons, which show that the vast majority of insurance records have already been recorded electronically. The remaining unprocessed data is estimated to be fully digitized within the coming months. The authorities have started discussions with the National Bank of Greece (NBG) concerning the future of NBG employees’ supplementary pension fund. These discussions are still in a very early phase, and therefore the repercussions on inter alia public pension spending cannot yet be assessed. 4.2.Health care The rollout of the primary health care system is progressing, though the pace is still slow. The authorities have declared their full commitment to the implementation of this reform and to make efforts to overcome stakeholders’ resistance. Based on the latest reports, 112 primary health care units (TOMYs) were opened across the territory, which is just below the nominal target of 120 (end-2018 specific commitment) and additional units are foreseen in the coming weeks; there are also different levels of staffing across sites. An additional call to recruit family doctors is envisaged to take place in March 2019. Meanwhile, the authorities are engaging in further negotiations with private family doctors to be contracted by the National Health Insurance Agency, EOPYY, and this seems to represent the main obstacle to a swift implementation. The level of population registered with primary health care centres is below 2 million, which is less than one fifth of the total population: this nonetheless represents marked progress as the numbers have doubled since November 2018. Due to capacity constraint of doctors, who cannot be expected to effectively treat patients beyond a given threshold, the current level of registered patients is thus close to the maximum capacity of the present stock of public-sector family doctors. The rest of the population are currently either still self-referring to specialists or visiting private family doctors, in the last case having to pay out-of pocket. Many of these private family doctors were previously contracted by EOPYY but refused to adhere to the new contractual arrangement, which was considered less favourable. The authorities argue that this situation has not translated into a substantial increase of out-of-pocket payments for citizens, nor has it in any way constrained access. Centralised procurement in the area of health care has resumed, but no new tenders have been launched so far. The authorities in line with the end-2018 specific commitment have set up the main body responsible for central procurement (EKAPY), with a view to achieving a share of centralised procurement in total hospital expenditure of 30% in mid-2020 and 40% in mid-2022. While the management board is still on temporary appointment, EKAPY is operational. More specifically: ·based on available information, the authorities have achieved the first results in terms of savings by completing old tenders from 2014, i.e. initiated by the previous organisation responsible for central procurement, (EPY). However, that entity was abolished by the current government and, following a suspension of the procurement activities, replaced by EKAPY, intended to be an upgraded version of EPY. As it stands, it is not yet possible to assess whether EKAPY will improve on EPY, due to the rather long period in which activities were interrupted and to the fact that EKAPY has not yet launched genuinely new tenders. ·The authorities are currently focusing on attracting skilled workforce, improving the organisation’s administrative and operational processes, including the monitoring and coordination of other bodies under EKAPY’s responsibility and on issuing new centralised tenders. In order to achieve this, the foundations are being set for the standardisation of processes and the realisation of economies of scale. ·Regarding new tenders, the 2018 operational plan spells out the nature and budget of the new tenders that are to be launched during 2019 and how these relate to the 30% target, however the exact timeline was not set yet. There are still critical issues related to the capacity to design and launch new tenders with a view to reaching that target by mid-2020 given the current staff limitations, but the authorities made legislative amendments() to convert secondments into EKAPY’s permanent staff and they are working on further amendments to obtain additional personnel, which would bring EKAPY to be almost 40% staffed by the first semester of 2019 to reach 70% by the second semester of the same year. Greece is currently receiving technical support, but without adequate endowment of staff capacity, EKAPY may not be able to support planned operations. The authorities have revised some measures adopted under the ESM programme, with uncertain impacts in terms of system efficiency. More specifically:

·the repricing procedure for pharmaceuticals has been changed into one single yearly repricing (as opposed to bi-annual), originally envisaged for February 2019, which already shifted to March. Moreover, the pricing mechanism has been modified to take as reference the two cheapest prices in the euro area (instead of in the whole EU), which is expected to increase prices. One positive aspect of the new methodology would be the harmonisation of the prices of generics which would all have the same price by category and be priced at no more than 32.5% of their originator. While the authorities argue that the new system will yield savings due to the fact that it will limit withdrawals of well-established and cost-effective drugs that would otherwise be replaced by newer and more expensive alternatives, simulations suggest that the overall effect of these changes so far was an increase in the pharmaceutical price level by 1% (as opposed to the decrease that would have been generated by the old system). ·The implementation of the full offsetting and collection of the clawback by June every year for the previous calendar year is ongoing, but the authorities passed an amendment to extend the maximum allowed period for repayment schemes of excess spending in the area of outpatient pharmaceuticals for the past years. The amendment raises concerns on the capacity to collect the past clawback, thus worsening the liquidity of EOPYY. Meanwhile, the discontinuity in the presidency of EOPYY may translate into delays affecting the June 2019 deadline, though this cannot be assessed yet. 4.3.Safety nets The comprehensive reform of the Greek welfare system is being continued with the introduction of a new housing benefit. The scheme, which was originally destined to low-income households either renting or servicing a mortgage on their main residence, will consist in a means-tested subsidy for renters only. The amount of the monthly benefit is between EUR 70 and EUR 210, depending on the household size. This corresponds to 30-50% of average rental costs in Greece. The relevant secondary legislation has been finalised later than expected and it is now scheduled to be adopted by the end of February 2019 (but the benefit will be granted retroactively as of 1 January 2019). Part of the original budget allocation (EUR 100 million out of 400 million) will be destined to a separate scheme dedicated to mortgage-holders (see also Section 5.2). Although its design has not yet been specified, from preliminary discussions it seems that the scheme for mortgage-holders would target only non-performing mortgages. If this were to be the case, this would penalise low-income households who still manage to service their mortgage, possibly creating disincentives for regular loan servicing. Besides the exclusion of mortgage-holders, the cost of the housing benefit for renters has also been revised downward due to a revision of the expected take-up rate based on more precise estimates. The review of the system of disability benefits (specific commitment mid-2019) is progressing, albeit with some delays. As a first step, the Greek authorities have been upgrading and simplifying the administrative processes to certify disability status for claiming benefits. These new procedures have been piloted in three provinces and are now to be gradually introduced in the rest of the country. In parallel, a new approach for determining the degree of disability is being developed with technical support. This new approach integrates the current purely medical assessment of disability with a functional assessment. New disability determination standards and protocols should be defined on the basis of the results of the initial pilot, and applied consistently to all disability benefits. However, some initial bottlenecks in the new procedure slowed down the data collection phase, which in turn delayed the pilot evaluation (originally expected by end-2018). A first assessment based on preliminary data has become available in February 2019. The Social Solidarity Income (SSI) scheme is reaching its maturity, with progress being made in the implementation of its social inclusion and labour market (re-)integration elements, to be achieved by end-2019 (specific commitment). The SSI scheme guarantees a minimum level of income to households confronted with extreme poverty and has become a well-established element of the Greek social welfare system. The scheme reaches about 300 000 households (corresponding to more than 600 000 individuals), for annual expenditure of around EUR 750 million. Since its inception, the scheme has been designed around three pillars: (i) income support; (ii) social inclusion; and, (iii) labour market (re-)integration. With respect to the second pillar, a network of Community Centres has been established throughout the country with the support of the European Social Fund, expanding the provision of social services at local level in a coordinated way. The third pillar relies on the provision of active labour market services to help SSI recipients (re-)enter the labour market. For its successful implementation, the reform of the system of active labour market policies needs to be completed, with the shift to a new delivery model to allow the provision of individualised services to jobseekers based on their needs, as well as better job matching services to employers. This new system is currently being tested in a pilot project launched in June 2018 in one local office of the public employment service covering three municipalities (with a population of about 10 000 registered unemployed), and it should be gradually expanded to the entire country by the end of 2019. The authorities committed to review the system of subsidies for local public transport (specific commitment end-2019). Different categories of people such as students, the over-65, the unemployed, the disabled and members of large families, currently benefit from subsidised fares for local public transport. Thanks to the recent introduction of electronic ticketing on the public transport network of Athens, data on actual transport usage by each category of beneficiaries has become available, allowing a more precise costing of these policies. The Greek authorities are expected to carry out a study to assess the appropriateness of the current system of subsidised fares. The study should be concluded by June 2019 and contain recommendations for possible improvements to the system. 5.1.Financial sector developments 5.1.1.Financial sector overview and financial stability assessment Despite the progress made in the context of the financial assistance programmes and the improving liquidity situation of Greek banks, the financial system in Greece is still characterised by a number of challenges, in particular the very high levels of non-performing loans (NPLs). The sovereign-bank nexus remains strong, including through high levels of deferred tax credits (DTCs) on bank balance sheets. Recently, also banks’ profitability has weakened. Capital controls have been gradually relaxed in line with the roadmap (end-2018 specific commitment), but some restrictions still remain in place.() The capital position of the banking system as a whole is broadly adequate but it remains challenged by low profitability and poor asset quality. During the first nine months of 2018, operating profit declined and the proportion taken up by provisions reached 95%. The decline in operating profit is giving the banks less room for manoeuvre to meet their NPL targets and to comply with the forthcoming provisioning calendar without incurring net losses. As of the third quarter of 2018, the Greek banking system had a Common Equity Tier 1 (CET1) of 15.7% in comparison with an EU average of 15.1%. However, the high level of deferred tax credits, which are not deducted from capital, are still a source of concern in terms of capital quality and their contribution to the strong sovereign-bank nexus in Greece. In addition, in line with the EU banking regulatory framework, Greek banks, like all EU banks, do not only have to meet capital requirements but will also have to issue bail-inable debt in the following years in order to meet the minimum requirement for own funds and eligible liabilities (MREL).() Banks’ private sector deposits have been stable and reliance on central bank funding has decreased. All four systemic banks have repaid their emergency liquidity assistance entirely. Private sector deposits have increased slightly towards the end of 2018, as compared with the immediate aftermath of ESM programme (see Graph 5.1). The improved liquidity situation of Greek banks and increased confidence of depositors gave room for a further loosening of capital controls as of 1 October 2018, which allowed for unlimited cash withdrawals from credit institutions in Greece and further mitigated the adverse impact from capital controls on Greek businesses. Graph 5.1:Bank deposits (left panel) and total borrowing from the Eurosystem (right panel) Source: Bank of Greece NPL resolution remains the most important challenge for the banking sector in Greece. NPL reduction is essential to ensure the stability of the Greek banking sector. The pace of NPL reduction so far is in line with supervisory targets, but an acceleration in the reduction path, which is constrained by weak profitability, is needed to meet the NPL targets for 2019 and future years. Efforts should continue in the various important reforms related to the insolvency framework for households and corporations, the enforceability of collateral through electronic online auctions, the out-of-court debt workout mechanism, as well as the activation of a secondary market for non-performing loans. Moreover, the high level of non-performing loans makes it advisable to accelerate the speed of cleaning-up the balance sheets and requires major efforts in the immediate post-programme period also in view of application of the prudential backstop in the coming years.() A more ambitious pace of NPL reduction would allow Greek banks to fulfil their mission of providing credit to the real economy more promptly and may better enable the banks to attract equity investors. Further efforts to address the challenges related to NPLs and the sovereign-bank nexus would serve to safeguard reform momentum and underpin credibility over the medium term and to reassure markets and interested stakeholders that sound financial practices will be sustained. Credibility remains key after the end of the ESM programme, in order to fully restore market access – for both the sovereign and the banks – and provide reassurances of a stable financial sector in Greece. In this respect, providing a comprehensive workable scheme to assist NPL resolution would benefit both the banks and the sovereign. The low processing rate of called State guarantees related to bank loans is in urgent need of improvement, and the authorities need to take effective corrective measures. Over the last seven years, a backlog in payment by the General Accounting Office (GAO) of claims made by banks under State-guaranteed loans has accumulated, which totals approximately EUR 1.5 billion. Most of the underlying loans were granted to private companies and individuals, some of them by virtue of Ministerial Decisions issued after the occurrence of natural disasters or similar circumstances. However, statistics show that in some segments the processing rate of called guarantees is very low, which puts a significant burden on banks due to the non-payment of primary obligors and the guarantor. The authorities have adopted legislative amendments to remove uncertainty which was worsened by an earlier legislative amendment in mid-2018, as regards the enforceability of guarantees and have submitted an action plan which is currently under assessment. The legal provision is currently under assessment. These actions are essential in order to yield results, e.g. in the form of a significantly increased processing rate still in 2019. Table 5.1:Financial stability indicators Source: ECB 5.1.2.Financing of the economy Bank lending remains subdued, with a gradual improvement for companies during the second half of 2018. Since 2016, the annual growth rate of loans extended to non-financial corporations had been negative, but close to zero (Graph 5.2). During the second half of 2018, a gradual recovery in lending to non-financial corporations was observed. The growth rate for loans to households has been very slowly recovering since July 2016, but as of the end of 2018 remained in clearly negative territory. This was mainly driven by subdued mortgage developments, although banks reported improved housing prospects and stronger demand for housing loans (Graph 5.2). Growth in consumer loans remained close to zero, with a slight shift from credit card and overdraft credit to longer-term loans for consumer durables. Factors that supported new credit to the private sector include the recent moderate recovery in economic activity and a slight reduction in lending rates, notably for companies. On the downside, the burden of a high NPL stock has been inhibiting new lending by banks. In 2018, credit standards for new loans have not been eased overall.

Graph 5.2:Bank credit to non-financial corporations and households Source: Bank of Greece Lending rates to non-financial corporations are decreasing, while interest rates on mortgage and consumer loans are increasing (Graph 5.3). Lending spreads remain elevated. The gradual decline in lending rates to non-financial corporations has continued during 2018, driven by lower credit risk and the favourable effect of the financing instruments available to SMEs (e.g. by the Hellenic Fund for Entrepreneurship and Development, the European Bank for Reconstruction and Development and the European Investment Bank Group). By contrast, as of the end of 2018 lending rates to households continued to follow the upward trend of the past 4 years, mainly reflecting credit risk developments, as the NPL ratio for consumer loans is particularly high and the NPL ratio for mortgage loans has been deteriorating recently as compared to other loan categories. Graph 5.3:Bank interest rates on new loans Source: Bank of Greece Small and medium-size enterprises in Greece continue to be adversely affected by the very limited access to finance. Small firm size and weak performance are important limiting factors in firms’ access to credit. Export-oriented firms and relatively younger firms seem to be overall less likely to report constraints. Macroeconomic conditions and bank balance sheet strength remain important factors for the severity of constraints encountered by SMEs. The demand for external financing in Greece continued to be the strongest in the euro area. Surveys show that there are signs of a slight improvement in the willingness of banks to provide credit in Greece since the beginning of 2017, but overall SMEs continued to be disproportionately affected by the lack of access to bank financing. 5.2.Financial sector policies The significant drop in the share prices of Greek banks since the end of the ESM programme by around 40% underlines the importance to make swift further progress on the repair of their balance sheets, supported by appropriate financial sector policies in an environment conducive to NPL reduction. At the same time, the reform momentum has abated and efforts to improve the effectiveness of major legislative frameworks have stalled. It is important that legislative actions do not lead to a deterioration of the payment culture. Non-performing loans and insolvency legislation At the June 2018 Eurogroup, the Greek authorities committed to “continue to implement reforms aimed at restoring the health of the banking system, including non-performing loans (NPL) resolution efforts by ensuring the continued effectiveness of the relevant legal framework (i.e. household and corporate insolvency, out-of-court workout, NPL sales, e-auctions) and taking all necessary actions to this effect.” This assessment covers the various dimensions of the NPL resolution strategy. The stock of NPLs has been gradually decreasing, but at a slow pace and remains elevated and according to the latest available data amounted to EUR 84.7 billion or 46.7% of total exposures in September 2018. This is almost 1 pp. lower than the previous quarter and 2 pps. lower than one year before. This compared with an EU average NPL ratio of 3.4% at the end of September 2018(). The pace of reduction of NPLs continued to accelerate, driven by sales and also due to e-auctions, although both face some difficulties in practice. By typology of loans, the NPL reduction in the third quarter was driven by consumer loans and, to a lesser extent, by business loans. In contrast to the general trend the NPL ratio in residential loans, far from being reduced, continues on an increasing trend since September 2016 having reached in September 2018 a NPL ratio of 44.7% (the highest for this segment since the beginning of the crisis). This is explained by the subdued performance of the mortgage book. In that context, it is important to note that the amount of NPLs under the legal protection of the household insolvency law remains significant at approximately EUR 17 billion, corresponding to a backlog of pending court cases of around 135 000. Diverging trends in the NPL ratio of these loans from the general trend suggest that the protection, in its current form, creates adverse incentives that have severely damaged the payment culture by households during the crisis. The Greek authorities are exploring additional initiatives to support NPL reduction efforts. Technical work is being undertaken by the authorities on a possible asset protection scheme based on the initiative and preparations of the HFSF. In addition, the Bank of Greece has proposed a different scheme, which would include the transfer of denounced loans currently held by Greek banks along with part of their deferred tax credits to an Asset Management Company, where the loans would be serviced by external specialist firms. Such initiatives could be helpful elements in the toolkit for NPL resolution, provided they are based on thorough technical preparation, inter alia on scope, governance, funding, compatibility with EU competition and State aid rules and impact on bank and sovereign balance sheets, based on a comprehensive analysis of relevant indicators. The analysis could provide a basis for a comparative assessment of the cost-effectiveness of the various proposals, thus assisting the decision-making by the authorities. In January 2019, the Ministry of Finance announced that it established a working group with the Bank of Greece and the HFSF, which may support the coordinated assessment of the respective schemes, including through improved cooperation and consultations with relevant European stakeholders (e.g. regarding State aid aspects). It will be important that the preparations of the respective schemes progress in an expedited manner, in order to allow for the swift implementation of the schemes, which may benefit from elements of State support subject to State aid and other regulatory approval and taking into account relevant supervisory considerations. Household insolvency law and other debtor protection schemes The Greek authorities shared with the institutions their proposals and plans for the adoption of legislation on a new scheme for the protection of primary residences, but a large number of important open issues remain. The protection of primary residences under the household insolvency framework was agreed to be a temporary crisis measure due to expire by end-2018. However, the protection was unilaterally extended in December 2018 by two months, during which the authorities presented a new protection scheme that would apply after the expiration of protection under the Katseli Law, would require banks to accept debt restructurings for a large group of eligible borrowers and would offer them a limited State subsidy component. More specifically, the scheme would offer a restructuring to debtors fulfilling the requisite eligibility criteria (related to the value of the primary residence, the outstanding amount of the loan, annual income and wealth, personal and professional status). Applications under the new scheme would be submitted via an online platform. The eligibility control would be automatic, conducted through the platform. The scheme would allow for the agreement between banks and eligible debtors on case-by-case restructuring solutions. A haircut would be applicable on the outstanding amount of eligible loans in excess of 120% of the value of the primary residence. Eligible debtors would stand to receive a State subsidy of the monthly instalment, depending on individual assessment of their repayment capacity, provided the restructured principal amount payable would not exceed 120% of the market value of the primary residence. The subsidy level would be reassessed periodically and the debtor would receive the subsidy for the duration of the restructuring plan (fixed at 25 years, with an age limit of the debtor of 80 years). Provisional relief (stay of enforcement and liquidation measures) would be statutory and/or ordered by the court (in the event of a judicial continuation of the proceedings following failure at reaching a consensual solution); rescheduling agreements would be subject to judicial confirmation. As for the proposed cut-off date for the implementation of the new framework, it would be 31 December 2018. Based on a preliminary assessment of its principal features, the proposal raises serious concerns regarding its impact on the payment culture and bank balance sheets; its overall design could enable strategic default: 1. in terms of scope and perimeter, it would cover not only household loans but would also extend to business loans secured by a mortgage on the primary residence); 2. it would create an additional protection scheme that would apply in parallel to existing loan rescheduling mechanism such as the household insolvency law; 3. the replacement scheme would require banks to accept mandatory pre-defined debt restructurings for a large group of eligible borrowers irrespective of their individual financial circumstances and actual repayment capacity; 4. the proposal is not sufficiently targeted to the most vulnerable debtors; the proposed thresholds for income and wealth criteria need to be carefully calibrated and frequently updated and debtors should be assessed on an annual basis as to their ongoing eligibility. Furthermore, the proposal would interact directly with several other proceedings, namely the ones under the insolvency code, special administration, OCW, and NPL sales and securitisations laws; 5. it risks creating further delays for debtors with pending applications under the existing protection scheme who would choose to apply under the new scheme, as all pending proceedings would be suspended until the new restructuring procedure is completed;

6. no impact assessment of the proposal has been provided, for example on the potential impact on the capital base of banks; 7. the wide scope puts the authorities’ commitment to eliminate the backlog of all household insolvency applications by end 2021 at risk; 8. new stays on enforcement introduced by the proposal would be expected to affect future auctioning and foreclosure proceedings; 9. additional clarity on the fiscal aspects of the proposal is required. Discussions with the institutions are ongoing with a view to address the open issues. The authorities will also need to formally consult the ECB on their legal proposal, and any new scheme will require state-aid approval by the Commission. The expected expiry of primary residence protection under the household insolvency law at the end of December 2018 and the speculation on possible new debtor protection schemes, led to a sharp increase of new filings of applications in the fourth quarter of 2018, which is bound to adversely affect the processing of pending cases by courts, thus creating a potential need for adjustments to the authorities’ current action plan. More specifically, new applications increased by 112% during the fourth quarter of 2018 based on preliminary data compared with the previous quarter (i.e. 11 455 new cases in the fourth quarter of 2018 against 5412 in the third quarter). The extension of the protection to 28 February 2019, which took place despite the institutions’ scepticism about its potential impact, is likely to trigger additional applications during the first quarter 2019. An increase of 24% in completed/resolved cases to some 12,400 was reported in the fourth quarter of 2018 as compared to the third quarter 2018. Nevertheless, the surge in incoming cases led to the result that the backlog has not diminished materially in net terms in the fourth quarter. For the first three quarters of 2018, the Ministry of Justice had reported an improvement in the relevant KPIs. Specifically, completed cases