EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 45 final COMMISSION STAFF WORKING DOCUMENT Enhanced Surveillance Report - Greece, February 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION Enhanced Surveillance update - Greece, February 2020 {COM(2020) 100 final}



AIA: Athens international airport ANFA: Agreement on net financial assets AROPE: at risk of poverty or social exclusion CBD: Consolidated banking data DEPA: Δημόσια επιχείρηση αερίου (public gas corporation of Greece) ECB: European central bank EFKA: Ενιαίος φορέας κοινωνικής ασφάλισης (unified social security fund) ENFIA: Ενιαίος φόρος ιδιοκτησίας ακινήτων (unified property tax) ETAD: Εταιρεία ακινήτων δημοσίου ΑΕ (public properties company) ESM: European stability mechanism 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.) HCAP: Hellenic corporation of assets and participations IAPR: Independent authority for public revenue ICT: Information and communication technologies LEPETE: Λογαριασμός επικούρησης προσωπικού εθνικής τράπεζας της Ελλάδος (national bank of Greece supplementary pension fund) NBG: National bank of Greece NECP: National Energy and Climate Plan NOME: Nouvelle organisation du marché de l’electricité (new organization of the electricity market)

NPE: Non-performing exposure NPL: Non-performing loan OSDDY: Ολοκληρωμένο σύστημα διαχείρισης δικαστικών υποθέσεων (integrated management system for judicial cases) OTC: Over-the-counter PDMA: Public debt management agency SEK: Σύνδεσμος Ελλήνων κτηματομεσιτών (Greek real estate agents association) SMP: Securities markets programme SSI: Social solidarity income TOMY: Τοπική μονάδα υγείας (primary health care unit) TSA: Treasury single account UCoA: Unified chart of accounts VAT: Value added tax 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 2020. It was prepared in the Directorate General Economic and Financial Affairs, under the direction of Maarten Verwey, Director General, Declan Costello, Deputy Director General, and the coordination of Paul Kutos, Head of Unit and Milan Lisicky, Deputy Head of Unit. Contributors: Chris Allen, Giuseppe Carone, Fotini Dionyssopoulou, Matteo Duiella, Sotirios Giannoulis, Christos Gofas, Andras Hudecz, Alexander Ioannidis, Paul Kutos, Eloïse Lecouturier, Milan Lisicky, Vasileios Maroulis, Benedetta Martinelli, Vasilis Nikitas, Zoltan Petrov, Eleni Polemidiotou, Angelos Rammos, Marie-Luise Rud, Alexandros Tavoutsoglou, Andreas Trokkos, Vasiliki Vasilopoulou, Irene Vlachaki, Rainer Wichern, Alkistis Zavakou. Assistance was also provided by Fotini Louka. 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 its Post Program Monitoring cycle. 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 14/103 B-1049 Brussels e-mail: ECFIN-GREECE-REQUESTS@ec.europa.eu Commission Staff Working Document 1. Introduction 2. Macroeconomic developments 3. Fiscal and fiscal-structural policies 3.1. FISCAL DEVELOPMENTS AND OUTLOOK 3.2. tax policy 3.3. Revenue Administration 3.4. Public Finance Management 3.4.1. Arrears 3.4.2. Treasury Single Account 3.4.3. Chart of Accounts 4. Social welfare 4.1. pensions

4.2. healthcare 4.3. Social safety nets 5. Financial sector 5.1. FINANCIAL SECTOR DEVELOPMENTS 5.2. FINANCIAL SECTOR POLICIES 5.3. hellenic financial stability fund 6. Labour and product markets 6.1. LABOUR MARKET 6.2. PRODUCT MARKETS AND COMPETITIVENESS 7. Hellenic Corporation of Assets and Participations (HCAP) and privatisation 7.1. HELLENIC CORPORATION OF ASSETS AND PARTICIPATIONS 7.2. IMPLEMENTATION OF THE ASSET DEVELOPMENT PLAN 8. Public administration and justice 8.1. PUBLIC ADMINISTRATION 8.2. JUSTICE 8.3. ANTI-CORRUPTION 9. Sovereign financing and capacity to repay 9.1. SOVEREIGN FINANCING 9.2. DEBT SUSTAINABILITY Annex

LIST OF Tables 2.1. Summary of the main macroeconomic variables 26 3.1. Key Performance Indicators of the Independent Authority (fourth quarter of 2019) 35 3.2. Arrears clearance plan 36 5.1. Main financial stability indicators 46 LIST OF Graphs 2.1. Real GDP and growth contributions 25 3.1. Pensions timeline 31 5.1. Bank deposits (left) and total borrowing from the Eurosystem (right) 44 5.2. Non-performing loans as a % of total customer loans (left) and changes in their stock in the third quarter of 2019 (right: million EUR) 45 5.3. Bank credit to non-financial corporations and households 46 9.1. Credit ratings (left) and 10-year government bond spreads to the Bund (right) 78 9.2. Debt sustainability indicators 79

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 ( ). Following its third prolongation, enhanced surveillance for Greece is currently in place for six months as from 21 February 2020 ( ). The implementation of enhanced surveillance for Greece acknowledges the fact that over the medium term, Greece needs to continue implementing 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 European Stability Mechanism 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, 10 specific commitments were made with a deadline of end-2019, progress on which is assessed in this report, while follow-up actions to previous commitments are also monitored. This report is based on the findings of a mission to Athens between 22 and 24 January 2020 and regular dialogue with the authorities. The mission was conducted by the Commission in liaison with the European Central Bank ( ); the International Monetary Fund participated in the context of its Post Program Monitoring cycle, while the European Stability Mechanism 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 European Stability Mechanism. 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). This report is issued alongside the Country Report for Greece, prepared in the context of the European Semester of economic and social policy coordination. 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 these income equivalent amounts would be made available to Greece in semi-annual tranches of some €640 m up to mid-2022. The waiver of the step-up interest rate margin, for part of the loans extended by the European Financial Stability Facility, would reduce interest payments by some €220 m annually. It would be waived on a semi-annual basis until 2022 and permanently after 2022. Following the Eurogroup on 4 December 2019, the second tranche of policy-contingent debt measures has been completed, inter alia based on the assessment of the implementation of Greece’s commitments for mid-2019 in the enhanced surveillance report adopted by the Commission on 20 November 2019 ( ). The current report assesses the implementation of Greece’s specific reform completion commitments for end-2019, the continuous commitments and its general reform continuity commitment. The economic recovery continued in 2019 and is expected to strengthen going forward. With an average 0.7% quarter-on-quarter growth in the first three quarters of 2019, economic growth strengthened somewhat in 2019 and is expected to reach 2.2% for the year overall, well above the euro area average of 1.2%. GDP growth was mainly driven by exports, with a strong contribution of government consumption in the second quarter of 2019. A particularly positive tourism season boosted service exports but also goods exports remained resilient despite the lower growth in the euro area, which is the main export market for Greek products. Despite increases in disposable income, consumption growth remained low in the first three quarters of 2019, indicating that households continued to deleverage. Investment growth remained lower than expected in 2019, despite the sizable investment gap compared to the euro area average and the high economic sentiment indicators in the second half of 2019. Public investment is expected to have supported growth to a lesser extent than forecast given that the Public Investment Budget was not executed fully in 2019. For 2020 and 2021, the main drivers of growth are likely to be investment and private consumption, while exports are expected to grow at a slower pace. Positive expectations, on both producer and consumer side, and the tax reform package that reduces the corporate income tax in 2020 suggest that investment should be one of the main drivers of GDP growth in 2020 and 2021. Private consumption is likely to be supported by increasing wages and disposable incomes, and the steadily improving situation on the labour market. Export growth is likely to remain below the rates reached in 2018 and 2019 given the slower growth of Greece’s main export markets. Graph 2.1: Real GDP and growth contributions Source: European Commission The recovery of the labour market is expected to continue whereas inflation is forecast to remain muted in the short term. In line with the domestic driven economic recovery, employment is expected to increase steadily. Unemployment, while still the highest in the EU, decreased to 16.5% in November 2019 (national data), substantially down from its peak of 27.5% in 2013, and is expected to decrease further to 14% in 2021. Employment growth remained stable at 2.1% average quarterly year on year growth in the first three quarters of 2019 despite the minimum wage increase in February 2019. Inflation reached 0.5% in 2019, mostly on account of subdued growth of energy prices and the decreases in value added tax rates on certain goods in May 2019. For 2020 and 2021, inflation is forecast to gradually increase up to 0.9%, as wages increase. The forecast remains subject to both upside and downside risks. Latest developments in leading indicators together with recent statistical revisions point to upside risks for 2019 and 2020. Depending on the development of the tourism and transport industries, service exports could surprise with strong growth again. Greece’s export market shares continued to strengthen in 2019 and the forecast assumes that the trend will remain modest given the slowly increasing unit labour cost. Keeping wage growth in line with productivity developments would be instrumental in supporting the investment recovery and export growth. Other downside risks are related to the uncertain geopolitical situation and lasting political tensions in the wider region as well as the under-execution of the Public Investment Budget and the related negative effects on the recovery of domestic demand. The projection is contingent upon maintaining the reform path agreed under enhanced surveillance. In particular, provision of investment financing though the banking sector will depend on a swift implementation of financial sector reforms, devised to support banks’ intermediation capacity. Table 2.1: Summary of the main macroeconomic variables Source: European Commission 3.1. FISCAL DEVELOPMENTS AND OUTLOOK Based on the preliminary data for 2019, Greece is set to overachieve the primary surplus target of 3.5% of GDP, outperforming its fiscal targets for the fifth year in a row. In view of the emerging fiscal space based on updated revenue and expenditure estimates towards the end of 2019, and following consultation with the European institutions, the authorities distributed €186 million of social benefits to vulnerable households and cleared a pending public service obligation to the Public Power Corporation with an amount of close to €200 million from the ordinary budget rather than from the contingency reserves. The amount of the social dividend was calibrated to safeguard a distance of 0.2% of GDP compared to the fiscal target to cater for possible statistical revisions. The primary surplus is expected to reach around 4% of GDP in 2019 including these payments, above the 3.8% of GDP projected in the 4th enhanced surveillance report, which had not included these measures. The headline surplus is expected to have reached around 1.6% of GDP ( ) in 2019, compared with the euro area average deficit of 0.8% of GDP expected in the Commission 2019 autumn forecast. The expected over-performance can be attributed mainly to a better revenue outturn at the end of the year, which is partly due to one-off factors. General government revenues turned out stronger than expected in the previous report, primarily due to higher receipts from social contributions by around 0.2% of GDP, which are partly linked to the start of the 120 instalment scheme, and higher tax revenues by around 0.1% of GDP, after deducting tax refunds. In addition, some one-off repayments contributed to the revenues in December by 0.1% of GDP, inter alia from the European Investment Bank. Net of the end-year payments, expenditure would have been lower by 0.2% of GDP compared to the forecast in November 2019, mainly on account of lower consumption expenditure, which comes on top of the sizeable reduction in spending ceilings in 2019 implemented together with the 2020 budget. While having a broadly neutral impact on the balance, general government investment was by 1.1% of GDP lower than initially planned, marking 2019 as yet another year of very sizeable underspending. Based on preliminary data, general government investment expenditure is estimated to be lower by 0.6% of GDP compared to the authorities’ latest projection from November 2019. However, the observed under-execution comes on top of the downward revision of 0.5% of GDP implemented in November 2019, which raises the overall underspending on investment to 1.1% of GDP (€2.2 billion) compared to the initial plan. The lower execution was accompanied by lower drawing of EU funds, which broadly neutralised the impact on the general government balance. Continued undershooting of investment expenditure weighs on growth and is a growing concern. Efforts to remedy the situation are in early stages of implementation. From a fiscal perspective, the low capacity to monitor and forecast investment spending hinders effective management of fiscal policy and results in significant deviations between execution and forecasts, which impairs an efficient budget allocation. To address this problem, the authorities have started to implement a detailed action plan adopted in November 2019, as discussed in the 4th enhanced surveillance report. According to the progress report shared with the European institutions in January 2020, the actions that were scheduled to be completed by end-2019 have been implemented and detailed time-plans were shared regarding the future actions. From a structural perspective, the persistent underspending points to operational and administrative issues and a lack of a pipeline of mature projects. According to the National Development Plan, which is currently being drafted and would apply from 2021, government entities will be expected to set-up a programme of investments, including strategic goals and medium-term policy targets. Additionally, the authorities plan to create an investment project preparation facility as a fast track mechanism to prepare major bankable investment projects, whether nationally funded or co-funded with EU funds. This is expected to help to a more targeted and increased execution of the public investment budget, also in relation to the technical work on the possible use of the SMP-ANFA income equivalent amounts for agreed investments (see also below). The measures included in the 2020 Budget are being implemented and will be re-assessed in the next enhanced surveillance report. A quantitative re-assessment will be necessary for the increase in municipality levies. Since its adoption in autumn, the government amended ( ) this measure, waiving the retroactive billings for those who declare the correct surface area of their real estate by the end of March 2020. This change raises concerns from a structural perspective, as it could be considered as a tax amnesty and thus eroding payment discipline. It also disadvantages those who had already submitted correct declarations and hence had to pay the retroactive amounts in the past. Moreover, the retroactive payments were an important part of the fiscal revenues expected from the measure and cancelling them reduces the fiscal space. At the end of November 2019, the government also adopted a measure on the tax-deductibility of 40% of service costs relating to building upgrades from the personal income tax as long as they were paid through electronic means of payment. This measure is consistent with Greece’s strategy in its National Energy and Climate Plan to promote energy efficiency, which could possibly help investments under the European Green Deal. It is expected to have a fiscal impact only from 2021. The European institutions will provide an updated fiscal projection in the 6th enhanced surveillance report, along with the assessment of Greece’s Stability Programme.

While potential further growth-friendly fiscal measures for 2021 are yet to be fleshed out, the Greek authorities announced their intention to adopt a set of additional measures for 2020 subject to fiscal space. Since the adoption of the 2020 budget, the government has announced a number of possible further tax reduction measures, conditional on emerging fiscal space. Among others, the government is aiming to further reduce the ENFIA property tax while increasing its base, aiming for a fiscally neutral rebalancing. In addition, the authorities are planning a gradual reduction of the special solidarity levy, a further reduction of social security contributions, which would probably lead to the postponement of the reduction of the corporate income tax to 20%, announced in July 2019. A quantitative and qualitative assessment of such measures will be carried out when the exact timing and parameters will become known. Given the accelerating migration flows, the authorities pointed out that the current migration adjustor ( ) does not capture fully the total costs of the migration crisis. Based on a report shared by the authorities, the actual expenditure related to the management of the migration flows is much higher than the expenditure currently included in the programme adjustor. The ceiling of the adjustor was set at 0.2% of GDP during the programme, but based on the current methodology the actual amounts deducted from the primary balance are consistently well below this level. The issues that have hindered the use of the migration adjustor are currently investigated, with a view to clarifying the eligible costs that adequately reflect the current situation. The authorities also committed to identifying and addressing factors that obstruct the full use of the available EU funding, bearing in mind that the adjustor is designed to cover domestic costs and hence defined in net terms (after deducting EU migration funds). The authorities are planning to address the aspects of the 2016 pension reform that were found unconstitutional by the Council of State in a fiscally neutral manner. Sustaining the cost within the spending ceiling of the Ministry of Labour is in line with the commitment given by the authorities in the 2020 budget. The authorities are currently legislating accordingly to replace the current 13th pension with an annual social budget reserve. The fiscal neutrality is achieved by using part of the fiscal cost currently budgeted for the 13th pension. The remaining part will cover the cost of other social welfare and health policies in view of high poverty rates among non-pensioners and the compressed health care budget. Section 4 provides an overall assessment of the pension reform. The 2020 Medium-Term Fiscal Strategy will need to accommodate the cost of clearing the stock of already called state guarantees for bank loans worth 1.1% of GDP within five years. The stock may increase further in the future, given that the total stock of outstanding state guarantees in question is estimated at €3.4 billion (1.8% of GDP). As discussed in section 5.2, the authorities have provided a plan, which includes the necessary actions to shorten the examination period of the called guarantees to less than four years. Additionally, a detailed time-plan of payments was prepared which comprises a small payment of €77 million by end of the year, while for the next years an average clearance of €480 million is planned. Given that the length of the payment period is partly a function of external factors outside the control of the authorities, i.e. court cases, the authorities also shared data on the amount of claims under litigation that are prone to delays, and thus might affect the fiscal impact and/or its timing. A proper risk management based on data on the not-yet-called guarantees would facilitate assessment of fiscal risks for the coming years. Finally, the timely implementation of the plan depends on the banks’ cooperation regarding the upload of necessary documentation to the e-repository (see Section 5.2 for further analysis). Greece’s fiscal and economic outlook has improved overall. The continued solid fiscal performance and the growth-friendly policy agenda have made their impact on the economic climate as sentiment indicators approach pre-crisis levels. Greece has been successful at re-entering the sovereign bond markets achieving historically low yields. Yield spreads have substantially narrowed in the past year and the improved outlook for the Greek economy has led to gradual upgrading of Greece's credit rating. Upholding reform commitments will be key to sustaining medium and long-term growth prospects. Despite the positive outlook, Greece’s public finances continue to face fiscal risks with respect to ongoing court cases, which are difficult to quantify at this stage. Notwithstanding the Council of State rulings of 2015 ( ) and 2019 ( ) regarding the 2012 pension cuts and 2016 pension reform respectively, a large number of cases claiming retroactive payments to pensioners are still pending in courts, while some lower courts have ruled against these decisions. To solve this problem, the Council of State decided to rule on all retroactive claims in a so-called pilot trial. This will ensure a harmonised approach and prevent contradictory court decisions. The Plenary session of the Council of State will have to address three key issues related to retroactivity (see also graph 3.1): 1. Could the 2016 pension law apply retrospectively? The pension reform kept the existing pensions at the levels existing on 31 December 2014, i.e. after the pension cuts implemented in 2012. However, according to a June 2015 Court of State’s ruling, the 2012 pension cuts became unconstitutional from the date of the ruling’s publication, creating a window between the June 2015 ruling and May 2016, when the pension reform came to effect, for which the pilot trial will need to clarify whether possible retroactive amounts can be awarded. 2. Was it legal that the 2016 pension law indirectly re-enacted the 2012 cuts? As mentioned, the May 2016 pension reform kept existing pensions at levels following the cuts implemented in 2012, while putting in place a new pension formula for new pensions and a notional recalculation of old pensions (the freeze of pension indexation will result to the elimination of positive differences to actual pensions over time via inflation, or repaid if the actual pension was lower than under the new formula). The pilot trial will clarify possible retroactive amounts from the period of May 2016 to the January 2019 recalculation of pensions. 3. Is it consistent with the European Convention of Human Rights that pensioners who had not filed a petition before the 2015 Council of State ruling were excluded from receiving the retroactive amounts? Based on the 2015 Court of State’s ruling, only claims submitted before the date of its publication are eligible for a refund and the period of refund starts from the date of the reduction. This decision will clarify possible retroactive amounts for the period January 2013 until June 2015. Graph 3.1: Pensions timeline Source: European Commission An additional fiscal risk stems from the litigation cases of Attikos Helios, a company operating in the tourism and hospitality industry, against the Public Real Estate Company (ETAD). The case is ongoing, as the Public Real Estate Company has filed petitions for the annulment of recent arbitration awards, currently pending before the Athens Court of Appeal. Additional fiscal pressures might be caused by the planned arrangements concerning the private supplementary pension fund (LEPETE) of the National Bank of Greece (a private commercial bank). According to the plan that is under negotiation between the government and the National Bank of Greece, the cost of future pensions would be shared between the two parties. The plan foresees that some €40 million would be borne by the National Bank of Greece annually until 2030. The remaining cost will be taken over by the State. The risk to public finances lies in the fact that if and when the State formally would take over the pension obligations of the supplementary pension fund of National Bank of Greece, this would be recorded as capital transfer in the year of the decision, with a negative impact on the general government balance equal to the net present value of future pension obligations. The final impact will also depend on the rulings in two pending court cases, one concerning pensioners’ claims against the bank and the other concerning the bank’s claims against the state. Technical discussions on the possible use of SMP-ANFA income equivalents for reducing gross financing needs or other agreed investments have started. This follows up on the respective mandate given by the Eurogroup in December 2019 ( ). The authorities shared their initial considerations regarding the use of SMP-ANFA income equivalents and related impact on the structural balance during the enhanced surveillance mission, and the European institutions are engaging with the authorities at technical level, with a view to reporting back to the Eurogroup in June 2020. The authorities also proposed to consider establishing a fiscal smoothing mechanism allowing to take into account the past over-performance of primary surplus targets in the following year, as well as reducing the primary surplus target up to 2022. Any proposal which alters the agreement reached with European partners in June 2018, would need to be discussed at the Eurogroup and take into account the constraints on the structural balance in the context of compliance with the EU fiscal framework and debt sustainability. 3.2. tax policy Important progress has been made towards the broadening of the tax base for the 2020 ENFIA Property tax exercise, widening the inclusion of the national population covered by the zonal system from 85% to 98%. The existing 10 200 objective property tax value zones have been digitised and an additional 3 600 new property tax zones have been defined covering the remainder of the urban planned areas. A new nationwide revaluation exercise using certified valuers is planned to be completed by March 2020. The new objective tax values including those for the new zones are planned to be finalised by May and are expected to align the objective tax values to market prices, which is a mid-2020 specific commitment. In parallel, a detailed tax policy assessment will be made of the impact of the new valuations on property tax revenues. The 2020 budget implies an almost fiscally-neutral property tax exercise based on the new values, with a small increase of €140 million in ENFIA revenues compared to 2019. The base widening might give scope to restructure property tax rates and thresholds. The property tax reforms will benefit from technical support by the European Commission. The key objectives are to expand the objective value zone system to the rest of the country, digitally link the property value system to the cadastre, and improve valuation methods particularly of commercial properties. The Authorities adopted a Tax Law in December 2019, including the agreed 2020 budget tax measures and a number of other welcome tax reforms. Key non-budget tax reform measures included stronger regulations on digital short-term rental platforms, the abolition of withholding tax on corporate bonds to open up the domestic bond market, and some tax concessions to encourage the development of share option schemes, employer funding of annual passes for public transport, and the take-up of electronic vehicles. Concerning the 3-year time-limited value-added tax exemption for construction, the authorities adopted the secondary legislation by the end of January 2020 for the applicable procedure and the required documentation that must be submitted by the applicants. Overall, some 60 pieces of secondary legislation are required for the implementation of the Tax Law and these will be provided by April 2020. 3.3. Revenue Administration Staffing numbers increased at the Independent Authority for Public Revenue during 2019 but fell short of the end-2019 target (a specific commitment). The number of staff at the Authority increased in 2019 to 11 902 compared to 11 487 at the start of 2019. However, given the accumulation of previous delays, the actual staffing level remained lower than the intermediate target set for end-2019 at 12 500. The new permanent staff recruited in 2019 (540 in total) are currently undertaking a nine-month induction training and are expected to take up their respective job assignments by August 2020. Technical support is provided through the European Commission to tailor the training in accordance to the needs of the core functions and integrating best practices. The complementary measures agreed in view of the undershooting of the staffing target, have seen overall good progress, in particular as concerns the human resources reform and housing issues, while more limited progress has been achieved on the IT-related issues. All three measures are expected to advance further until the end of April 2020. On human resources reform, the supplementary grading legislation has been adopted ( ). The supplementary wage grid legislation, which will define the remuneration framework depending on the official’s grading, is expected to be adopted by the end of April, which should allow for the new system to be implemented as of 1 July 2020. Regarding the IT framework, although five key areas ( ) have been identified where competencies and resources between the Authority and the General Secretariat for Information Services of the Public Administration (Ministry of Digital Governance) will need to be clarified, a timeline has not yet been shared by the authorities. It is expected that the competencies and resource allocation will have been confirmed by April 2020, which should allow for the Service Level Agreement to be agreed by mid-2020. Finally, regarding the move of the Authority’s headquarter services into one location, a detailed roadmap has been defined with the decision for the public entity currently occupying the premises to move out as well the offer for the Authority to secure its lease expected by March 2020. According to the roadmap, the Authority is expected to move into its new premises by April 2021. A swift implementation of these complementary measures would be instrumental in getting the staffing target back on track and underpinning the effectiveness of the Authority. The authorities are planning to adopt a more ambitious plan to combat smuggling, including strengthening the operational capacity of the Operational Coordination Centre (SEK), which has seen its capacity reduced as the secondments have not been renewed and primary legislation to address this issue remains pending. The Centre, which was established as a programme commitment, has the mission to fight the smuggling of excisable products, through the coordination of the services involved in prosecution, and to collect and analyse intelligence in order to optimize the effectiveness of controls carried out by law enforcement authorities in the context of joint actions. The ambitious plan being developed by the authorities would see the membership of the steering committee governing the Centre at the level of deputy ministers of the relevant service ( ) and with the participation of the Authority at the Governor level. This more high-level buy-in is expected to result in a more efficient coordination. The Centre will operationally remain integrated into the structure of the Authority and will see its overall capacity being enhanced. As a first step, legislation to extend the secondments periods allowed and upgrading the Centre’s top management position is expected to be adopted shortly. The authorities are also committed to review the intelligence legislation with technical support provided through the European Commission, in order to bring it closer to best practices.

Work is ongoing on a number of key projects, including an IT system for an end-to-end collection system (a mid-2021 specific commitment) and the ‘model collection office’, while plans for introducing electronic invoicing in 2020 are advancing. The model collection office has been launched as a pilot office for introducing modern collection tools with technical support provided through the European Commission. Secondary legislation on indirect audit methods is expected to be adopted by March 2020. In addition, a successful roll-out of the model collection office by mid-2020 will require appropriate premises to be identified and the needed staff to be transferred. As concerns indirect audit methods, a guideline manual has been finalised, which should allow for the integration of these methods to complement and support the overall audit function. The Independent Authority is also advancing in its digital transformation through the introduction of the Digital Accounting and Tax Application ‘myDATA’ and the implementation of electronic bookkeeping, while electronic invoicing is expected to be introduced during 2020. In addition to developing a robust software, it is important that the analytical capacity of the Independent Authority to process the collected data is further strengthened. Finally, plans are being developed to move towards a system of online cash registers, and primary legislation has been drafted to further strengthen the relevant legal framework, including the legal sanctions foreseen for tampering with the software. The renewal of the mandate of the Governor of the Independent Authority provides for continuity and will facilitate its transformation into an efficient and effective tax authority in line with best practices. Most of the key performance indicators (see table 3.1) of the Independent Authority were met for 2019, in particular targets were met or exceeded on areas linked to the application of modern collection tools, for example prioritizing that no new debt is created. Further, while the target for proportion of fresh tax audit cases compared to the overall number of completed audits (see Key Performance Indicator 4) was not met, significant progress was still made compared to the situation in 2018, although important work remains to be done in this area, such as establishing proper IT systems to facilitate the analytical work. Table 3.1: Key Performance Indicators of the Independent Authority (fourth quarter of 2019) Source: Independent Authority for Public Revenue The Joint Centre for the Collection of Social Security Debt met its debt collection target for 2019. The actual collection exceeded the target by 7.6%, as €1 471 million were collected compared to a target of €1 367 million. New debt was slightly reduced in 2019, but since a significant contributing factor may have been the new 120 instalment scheme, it remains to be seen if this trend reversal will be maintained in 2020. The Joint Centre has also set a more ambitious target for 2020 as it aims to collect €1.38 billion of debt. However, the secondary legislation that would allow the Joint Centre to directly apply the classification of ‘uncollectable’ debt used by the Independent Authority remains pending. The revised basic instalment scheme came into effect on 1 January 2020, while the decision to reopen the 120 instalment scheme for social security contributions has raised serious concerns about further abetting the already weak payment discipline in Greece. In autumn 2019, the Greek government had signalled that the 120 instalment scheme for tax and social security debt would be the final opportunity for debt settlement under such favourable terms. The schemes, which follow a number of similar ad hoc schemes adopted in the past decade, were closed as planned by early October, but the instalment scheme for social security contributions was then re-opened, with the authorities arguing that many debtors had involuntarily dropped out due to an error in the IT system. However, the adopted legal provision that made re-entering possible did not limit the eligibility to debtors that had experienced IT issues, which meant that debtors who genuinely failed to comply with the rules could also re-enter. This implicitly represents an extension of the instalment scheme. The adopted legal provision allows for re-entry up to end-May 2020, which appears disproportionately long to address the underlying technical issues. It is therefore welcomed that the authorities have submitted an amendment to this law that will shorten the window for re-entry from the end of May to the end of March 2020 and will also limit the eligibility to re-enter to those who dropped out due the IT issues mentioned above. The revised basic instalment scheme – assessed in the 4th enhanced surveillance report – is expected to become operational at end-February 2020. The scheme will provide an opportunity, under specific conditions, for tax and social security debt to be repaid in up to 24 monthly instalments, and up to 48 instalments for specific categories of taxes (e.g. the inheritance tax). 3.4. Public Finance Management 3.4.1. Arrears The stock of net arrears reached €1.2 billion at end-2019, €220 million above the targets set in the October 2019 clearance plan. Compared to August 2019, the stock of net arrears decreased by €50 million. On the one hand, some subsectors show encouraging results. The Independent Authority for Public Revenue paid its tax refunds in line with the targets set in the plan. Hospitals fully cleared their net arrears already in October 2019 and they have been decreasing their gross stock since July. Clearance in Social security funds and extra-budgetary funds is broadly on track. On the other hand, problems remain with pension claims, local governments and state arrears. More than half of the €220 million slippage can be attributed to pension claims, which have been increasing between May and December 2019, contrary to the plan. This deviation is due to inefficiencies and complexities in the clearance process and in computing accurately the net stock of arrears ( ); the authorities also report an unforeseen increase in the number of applications due to the instalments scheme ( ). Slippages in local governments and the state account for the other half of the underperformance. The authorities expect part of the local governments’ arrears to be written-off as their limitation period has elapsed. This would reduce the stock, but without injecting liquidity to the private sector through actual clearance. Table 3.2: Arrears clearance plan Source: European Commission The authorities have prepared additional measures to remedy the observed slippages against the clearance targets, focusing in particular on pension arrears, and have already started implementing some of them. In this regard, the recently established Steering Committee, which oversees the implementation of the clearance plan, proved helpful to facilitate the exchange of information and best practises among the subsectors. In addition, the General Accounting Office passed a number of legislative amendments to regulate payments of certain arrears, and implemented a new electronic platform with a view to improving the monitoring and reporting of arrears across general government entities. Moreover, hospital procurement is being redesigned within a medium-term framework that involves a centralization of procurements through the seven regional health organisations ( ). Finally, new actions are being prepared to speed up processing of pension claims, including additional training, setting quantitative targets per employee, sharing of experience between the Health Fund and the Pension Fund, and reallocating personnel. In addition, an increase in the temporary pensions is being considered. With a view to abiding by the clearance targets set in the October 2019 clearance plan, the authorities expect to deploy the new IT system as of June 2020 and that the measures would be sufficient to fully clear the old pension claims by mid-2021. The deployment of the IT system would free up resources to work with the old pension claims. Accelerating the increase or reallocation of personnel before June 2020 would be instrumental in clearing the long outstanding pension claims. Overall, the authorities remain committed to the October 2019 clearance plan, despite the temporary slippage. To achieve this, further mitigations actions may help the subsectors that are lagging behind. While the net stock decreased in 2019, new arrears continue to be created, which points to weaknesses in the payment chain and internal control functions. The steering committee oversees the full implementation of the remaining recommendations suggested by the Hellenic Court of Auditors and monitors the whole clearance process. Additional streamlining of the payment chain would improve the timeliness of payments. Specific recommendations to this effect were provided through a European Commission technical support project delivered by the International Monetary Fund in January 2020. The General Accounting Office committed to carefully examine the recommendations and to adopt mitigation actions when necessary. In the context of establishing timely payment chains, the lack of effective internal control mechanisms is still a cause of concern and a factor slowing down the processing of payments, especially in entities where the ex-ante audits performed by the Court of Auditors have recently been phased out. The Court is conducting a broad survey on internal controls across the government and any other public entity with a view to accelerating the establishment of effective internal control systems in the public sector until the end of the current year, providing guidance if necessary ( ) . 3.4.2. Treasury Single Account The framework for the cash monitoring of the general government Treasury account system has been put in place, while a pilot project on cash forecasting is being implemented (both are end-2019 specific commitments). All significant general government entities have opened accounts at the Bank of Greece, which administers the Treasury account system, and use it to receive state grants or subsidies. However, some small entities have not joined the scheme yet. Even if these entities do not have significant cash reserves, the General Accounting Office is aware of the importance of including them in the scheme and foresee to take steps shortly to ensure full compliance. Excess liquidity of general government entities is being transferred to the Treasury Single Account under the supervision of the Public Debt Management Agency, which is closely monitoring the entities’ accounts in commercial banks. A pilot project on cash forecasting for the entities with a budget of more than €50 million started at the end of 2019. By October 2020, the authorities plan to develop a strategy for rolling out the cash forecasting project to the rest of the entities. In view of its complexity, the project would be assessed based on an interim report due by end-March and a draft roll-out strategy by end-April. In addition, the authorities are progressing with the rationalisation of cash accounts, including the reduction of payment orders in paper form. 3.4.3. Chart of Accounts The overall implementation of the Unified Chart of Accounts is progressing, but its implementation in the Public Investment Budget remains a challenge. The governance structure of the Chart of Accounts project has been considerably reinforced and benefitted from a high-level political commitment. The Chart of Accounts is now regarded as a broad public finance management tool, encompassing procurement and e‑invoicing. Steps are underway to ensure proper staffing of the implementing entity and to enhance the Chart with functional classifications with a view to designing an efficient new budgetary framework that could also be used as a performance budgeting tool. The implementation of the Chart of Accounts in the Public Investment Budget is not showing sufficient progress. The revised plan prepared by the authorities only partially addresses the issues, as it focuses mostly on the execution phase of investment budget, with little attention paid to the budget planning phase and the implementation of accrual accounting principle. 4.1. pensions In order to comply with the Council of State decision on the 2016 pension reform, new (increased) accrual rates for careers above 30 years are set to be introduced retroactively as from 1 October 2019. This adjustment is to ensure that the replacement rates for long insurance periods will be slightly higher than 50% as requested by the Council of State. According to the actuarial projections by the authorities, expenditure should remain virtually unchanged as a share of GDP until 2047 compared with the trajectory before this adjustment. This is because the projected impact of the new measures is below 0.5% of GDP and the authorities plan to finance this by eliminating the annual one-off benefit (i.e. the 13th payment to pensioners introduced in 2019) to finance the additional costs. The measure will lead to very high average replacement rates by European standards. This is especially the case for those with long careers with pensionable earnings at or below the average wage.

In order to comply with the Council of State decision, the authorities are also planning to replace the current system of contributions for the self-employed. The authorities plan to introduce a new system, which will give the self-employed the freedom to choose amongst six levels of contributions unrelated to their actual income. Currently 80% of self-employed are paying the minimum contribution of €130 per month, which is less than the envisaged lowest contribution level (€155 per month). The authorities expect that around 80% of the self-employed will chose the lowest level of contributions, and thus the fiscal impact is likely to be broadly neutral in the short-term. The Council of State also ruled unconstitutional the cut of supplementary pensions introduced in 2014 for persons whose combined supplementary and main pension exceeded €1 300, and the authorities are planning to reinstate the pre-2014 supplementary pension rules. The fiscal cost is estimated at €290 million annually, plus €72 million for retroactive payments for the three last months of 2019. The measure will lead to an overall deficit of the supplementary pension system of some €1.1 billion over the period 2020-2024, which the authorities plan to cover through the sale of a part of the assets of the Supplementary Pension Fund (ETEAEP). The authorities have developed an action plan to remedy the delays with the completion of the setup of the Single Social Security Fund (EFKA), a mid-2020 specific commitment. An ambitious action plan for the digitalisation of the Single Social Security Fund will start to be implemented in the coming months. The authorities’ action plan envisages the unification of the IT systems of all the previous funds and the digitalisation of all services provided by the end of 2020. The digitalisation of pension awards should be completed by June 2021. As for the progress of pending pension applications, the authorities stated that they have missed their end-2019 target, and they committed to taking corrective measures (see also section 3.2.1 on arrears). The authorities have also announced the decision to merge the Supplementary Pension Fund into the Single Social Security Fund in order to improve the efficiency of the pension system also through reduced administrative costs. 4.2. healthcare Administrative procedures for the clawback collection (a continuous commitment) have resumed, but the process will take longer to be finalised, also due to the introduction of a new instalment scheme in 2019. Concerning pharmaceuticals, typically the largest source of clawbacks, for the first semester of 2019 the largest part was collected (€330 million out of €410 million). The second semester of 2019 will have to be collected by June 2020. For providers (private clinics, as well as providers of diagnostic and other health care services), collection has not started for the years 2018 and 2019, but the relevant Ministerial Decision to introduce the 120 instalments scheme should be published soon. The delay is due to a late (end-2019) definition of the expenditure ceilings for 2019 by item of spending. The definition of 2020 spending ceilings for each category of private providers is also still outstanding. The authorities are planning to take structural measures to limit the size of the clawback amounts. The clawback amounts, especially as concerns pharmaceuticals, are still increasing. The estimated amount to be collected for 2019 stands at €1.3 billion, which represents an increase of €200 million (18%) from 2018. For providers, a clawback of €300 million is expected for 2019, in line with the level of 2018. With a view to correcting this trend, the authorities are planning to strengthen the efforts on the implementation of compulsory prescription/treatment protocols, which aim to curb inappropriate prescribing behaviours, and to strengthen their capacity in pharmaceuticals price negotiation. The latter is expected to yield substantial savings considering the current sizeable share of the budget going to high-cost drugs, which is expected to increase in the future due to the arrival of new innovative drugs. To further promote the reduction of the clawback, the European institutions have encouraged the authorities to consider a revision/redesign of the clawback mechanism to strengthen all stakeholder engagement, such as, for instance, by including an element of risk-sharing. Progress in setting up a comprehensive network of primary health care units (a mid-2020 specific commitment) has resumed following the announced redesign of the system. The authorities submitted a new action plan, where the provision of primary health care is based on a network of existing Health Centres and private contracted doctors. According to the new project, the remaining 120 Local Health Units (the ‘TOMYs’) can become operational within the premises of existing Health Centres, which would then offer an expanded set of services. Overcoming the infrastructural issues previously due to the need to find new suitable premises for the Local Health Units, progress may accelerate over the coming months, so the revised strategy is a welcome step that should speed up the achievement of the Eurogroup commitment. However, the recruitment of additional family doctors is still lagging behind schedule, and an adequate number of family doctors to achieve full population coverage is not yet available. This gap still acts as a bottleneck to the full rollout of the primary care network. Fundamental features of the commitment such as compulsory registration and gatekeeping are still only partially implemented. As only 1.6 million citizens have been able to register with a family doctor so far, the completion of the network with full population coverage by mid-2020 will not be possible, but the new strategy addresses some of the key sources of delay thus far and the authorities are confident to be able to finalise the full roll-out of the primary health care system and to fully implement gatekeeping and referral by the end of the year. Reaching the target of a 30% share of centralised procurement (a mid-2020 specific commitment) will be challenging in view of accumulated delays, but the planned launching of decentralised procurement at regional level has the potential to speed up the process. The authorities have submitted a revised strategy for centralised procurement, while in parallel transforming the new central body for health procurement to a private-law legal entity. The new strategy envisages decentralised procurement at regional level, which should make procedures administratively less cumbersome, speed up the tendering process and offer more opportunities to apply. With this new strategy, the commitment to achieve a substantial (30%) share of goods procured by centralised procurement by mid-2020 appears ambitious but authorities are confident to be able to achieve it. It seems that the Price Observatory, a key element of efficient procurement at decentralised level, has not been used consistently in the last years. However, the authorities plan to re-operationalise it to ensure that all avoidable inefficient spending is rectified as swiftly as possible. Having declined over the course of the last decade, health care spending has fallen below the EU average. Careful monitoring of the needs and an increase of the financing of the sector need to be considered by the authorities to ensure that sufficient resources are available. Measured as a share of GDP, public health care spending in Greece currently stands at around 4.9%, having decreased from 2009, when it stood at 6.5% of GDP. Although this data understates the actual expenditure and needs to be adjusted upward with the level of yearly clawbacks, as these are not captured by the official statistics, an overall below EU average spending and reports of operational disruptions in some hospitals may be indicative of a need to increase the financial envelope. The budget of public hospitals has to be of adequate magnitude to continuously meet the needs of the population. With a view to this, the use of future available fiscal space and a redistribution of social spending should be targeted to alleviate this pressure and to ensure uninterrupted patient access to high quality services. 4.3. Social safety nets The reform of the disability benefits framework (a mid-2019 specific commitment) is advancing but with significant delays outside the control of the authorities. While the upgrading and simplification of the administrative processes to determine the disability status is progressing, the new approach based on both medical and functional assessment is still to be adopted. The new methodology should have been developed on the basis of the evaluation of a pilot project. This, however, encountered significant delays for reasons outside the control of the authorities. A first draft final report was delivered in December 2019, while the final evaluation report is pending. Some issues have emerged already from the draft report, which point to potential difficulties in implementing the new methodology (notably, how to ensure the reliability of a self-reported assessment of functionality). In view of these issues, the authorities have agreed to provide a new revised timeline for its national rollout by April 2020. Finally, the authorities have announced their intention to prepare a National Action Plan on Disability shortly, going beyond the revision of disability assessment, to review the whole set of benefits and services for the disabled, in view of strengthening the provision of in-kind benefits and services for the disabled. The reform of disability assessment should be an element of this broader Action Plan. Regarding the review of the system of subsidies for local public transport, the evaluation study (an end-2019 specific commitment) will be completed by end April 2020. The delay is due to the many distinct beneficiaries (ten different population groups receive these types of subsidies) and the involvement of a number of different ministries. Major steps have been taken to improve the efficiency, effectiveness and adequacy of the social welfare system, however poverty remains high (the highest in the EU at 31.8%). According to the latest available data, between 2017 and 2018, the share of people at risk of poverty or social exclusion (AROPE) declined from 34.8% to 31.8%, while the percentage of severe material deprivation decreased from 21.1% to 16.7%. The introduction of a guaranteed minimum income scheme and the housing benefit for rental costs for vulnerable households have been significant measures. Nevertheless, the level of the guaranteed minimum income scheme (at €200 per month) remains low and there is no permanent support for vulnerable homeowners with a mortgage. There is currently a system of protection of primary residences under the Household Insolvency (Katseli) law and therefore covering only non-performing mortgages, which however will expire in April 2020. Therefore, part of the 13th pension could be used for social welfare policies such as an increase in the guaranteed minimum income scheme or a housing scheme for vulnerable homeowners with a mortgage. 5.1. FINANCIAL SECTOR DEVELOPMENTS Following the abolition of capital controls in September 2019, the banking sector continued to strengthen but legacy risks and challenges remain high. Domestic deposits continued their upward trend, growing by 4.8% after the lifting of the capital controls. This has further reinforced the liquidity situation of Greek banks (see graph 5.1), which should facilitate compliance with the Liquidity Coverage Ratio requirement by mid-2020. Banks’ profitability is showing signs of recovery, supported by an improving economy and continuous efforts to reduce recurring operating and headcount costs, reflected in an average cost-to-income ratio comfortably below the EU average (51.4% compared to 64.2%). However, their Return-on-Equity is still among the lowest in the EU (2.9% annualised compared to an EU average of 6.2%) and is partly driven by non-recurrent trading income stemming from the banks’ government bond portfolio. As a result, the profitability outlook of Greek banks remains low and exposed to the current environment of subdued evolution in interest income, given the relatively small contribution of commission income to operating profit. The quality of revenues, in particular, is adversely affected by high amounts of interest income from non-performing loans, which are accrued but may not be collected, implying that sales of non-performing loans also have a negative impact on net interest income. As a result, banks are i) adjusting their business models towards a higher share of fee income, trying to balance client reaction over a recent upward trend in transaction fees with a more sustainable growth of their e-payments, bancassurance and asset management business, while ii) looking at ways to increase lending by expanding their client base. The banks are compliant with their capital requirements but the capital structure is largely dependent on state-related assets, specifically due to the high amount of deferred tax credits. Banks’ average common equity tier 1 ratio on a consolidated basis stands at 15.9% at the end of September 2019, up from 15.6% in June 2019, partly due to the issuance of a Tier 2 capital instrument by one systemic bank in July and an overall reduction of risk-weighted exposures. Deferred Tax Credits of the four systemic banks as of end of September 2019 continue to represent a substantial part (55.5%) of the systemic banks’ Common Equity Tier 1 capital, amounting to €15.5 billion. Deferred tax credits greatly increase the sovereign-bank nexus. More specifically, deferred tax credits may be converted into tax credits, i.e. irrevocable claims towards the Greek state, while in exchange banks would need to issue equity in favour of the State. Moreover, Greek banks are exposed in the near future to the upcoming increase in capital demand ( ) and the implementation of new rules leading banks to gradually write down non-performing exposures ( ), as well as the cost of the non-performing loans’ reduction strategy and the necessary gradual phasing out of beneficial transitional prudential arrangements ( ). At the same time, credit institutions are regaining access to the market for long-term unsecured subordinated debt, while funding costs are declining but are still high. Graph 5.1: Bank deposits (left) and total borrowing from the Eurosystem (right) Source: European Central Bank, International Monetary Fund The pace of reduction of non-performing loans accelerated in 2019 but non-performing loan ratios remain very high. The decline in the stock of non-performing loans has accelerated in 2019, falling by €36 billion from its peak of €107.2 billion in March 2016, reaching €71.2 billion by end-September 2019 (see graph 5.2), representing a ratio of 42.1% of total customer loans, compared to 43.6% in the previous quarter. This was mainly driven by a reduction in the stock of consumer and business non-performing loans by more than 7% in the third quarter of 2019, compared to a more lacklustre performance in residential non-performing loans (-1.5% fall in the stock). The difficulties in tackling the mortgage non-performing loan book partly reflect the effect of restrictions in collateral enforcement and the related strategic defaults. However, the recent rebound in real estate prices, albeit geographically uneven and from very low levels, is a first sign that collateral valuation conditions may improve going forward, when the real estate market gains momentum and depth in terms of transactions. Notwithstanding the progress made, the still very high levels of non-performing loans severely hamper banks’ credit intermediation capabilities, thus preventing them to lend to the economy and consequently support growth.

Sales and write-offs have been the main drivers behind the reduction of non-performing loans so far, while the internal capacity of banks to work out non-performing loans continues to be very low. Sales of non-performing loans have exceeded €7.1 billion ( ) in the first nine months of 2019, while write-offs contributed an additional €3.1 billion of NPL reduction. The secondary market for non-performing loans is expected to grow further on the back of significant sales and securitisations, some of which have already been launched and are expected to be completed within the first half of 2020, supported by the newly adopted asset protection scheme. However, the amount of ‘cured’ non-performing loans, i.e. the rate of non-performing loans for which repayments have re-started, was weaker in the third quarter of 2019 relative to a quarter before, and fell below the amounts of newly created non-performing loans. Moreover, re-default rates on restructured loans with re-negotiated terms remain high, while collections and liquidations remain at low levels. Overall, banks continue to accelerate their efforts to reduce their stock of non-performing loans, mainly through outright sales compared to loan restructuring solutions. Graph 5.2: Non-performing loans as a % of total customer loans (left) and changes in their stock in the third quarter of 2019 (right: million EUR) Source: Bank of Greece The successful and speedy implementation of the Hercules asset protection scheme could accelerate the reduction of non-performing loans of the four systemic banks. The scheme ( ), which will run over an 18-month period with a planned envelope of maximum €12 billion of state guarantees, aims at allowing banks to securitise and transfer non-performing loans out of their balance sheets. Under the scheme, a state guarantee will be provided for the senior notes of the securitisations, against remuneration priced at market terms. All four systemic banks have expressed interest to participate in the scheme and are in the process of updating their strategies for the reduction of non-performing loans. The banks plan to frontload their actions to the extent possible given the implied cost of capital of these transactions and the banks’ current capital position. The focus now falls on the successful and timely implementation of the scheme. The value of the portfolios that are envisaged to be securitised under the Hercules asset protection scheme will also be affected by the progress made in the implementation of the policy actions outlined below. Table 5.1: Main financial stability indicators (1) As % of total loans

(2) Annualised data Source: ECB - CBD2 - Consolidated Banking data; own calculations In 2019, net bank lending to non-financial corporations has further improved, while credit growth to households remained negative, against the background of a further decrease in lending rates. The rebound in net bank lending to companies has continued unabated in 2019, although with a somewhat reduced pace towards the end of the year. According to the Bank of Greece, this recovery in credit growth was driven by loans to large corporations, while the year-on-year change of credit towards small- and medium-sized companies remains negative. However, the Survey on the Access to Finance of Enterprises pointed to an improvement in access to credit for small firms. The growth rate of loans to households continued to remain negative in the same period, particularly for mortgage lending, which reflects to a large extent the evolution of demand, as evidenced by the Bank Lending Survey(Graph 5.3). Bank lending rates followed a mild downward trend in 2019 despite higher loan demand, reflecting overall a decline in risk-free market reference rates on account of further monetary policy accommodation. While the lending spread for non-financial corporations remained unchanged over the course of the year, the one for households declined over the second half of 2019 but remained overall at an elevated level, 109 basis points higher than the one for corporates as of end-December 2019. Normalisation of the banking sector is vital to restore banks’ capabilities to provide credit to the economy. Graph 5.3: Bank credit to non-financial corporations and households Source: Bank of Greece 5.2. FINANCIAL SECTOR POLICIES The authorities are working on reforming the fragmented insolvency framework currently in place, in a way that contributes to a viable reduction in private and public debt in the near term, while accelerating the pace of implementation of the existing tools for the resolution of non-performing loans and improving their effectiveness. The actions outlined below are monitored and assessed under enhanced surveillance as part of the continuous specific commitment to “continue to implement reforms aimed at restoring the health of the banking system, including resolution efforts for the non-performing loans”. Harmonisation of the insolvency framework Preparatory work on the harmonisation and integration of the corporate and personal insolvency regimes is proceeding, and the new framework is planned to be adopted by the end of April 2020, in line with commitments, replacing several of the currently existing mechanisms for facilitating debt restructuring ( ). Further to the elaboration of a concept paper, a draft version of the National Private Debt Resolution Strategy was delivered to the authorities in mid-December 2019, supported through technical support of the European Commission. The Working Group set up by the authorities is currently working on the draft legal text of the new insolvency framework with a view to adopting the legislation by end-April 2020. Independently of the implementation of the new framework, the Primary Residence Protection scheme will also expire by end April. The new integrated insolvency framework should facilitate dealing with the total outstanding debt, amounting to approximately €244.5 billion, by addressing existing legal shortcomings. The total outstanding business debt in the economy amounts to €158.2 billion, while that of individuals to €86.3 billion. The authorities relayed broad outlines of the reforms, although key details about the regime remain to be clarified. In that regard, the new system is expected to tackle current statutory obstacles to dealing with excessive indebtedness, such as the non-availability of a bankruptcy procedure for non-merchants ( ), procedural complexity and inefficiency of the currently existing framework, departure of several of the existing mechanisms from bankruptcy principles, non-complementarity and fragmentation of insolvency mechanisms and the risk of procedural abuses, especially as to judicial suspensions. The new system also aims at addressing general obstacles observed in procedures legislated and used to-date, such as informational asymmetry and limited cooperation among creditors, slow judicial processes, lack of a sound payment culture and disproportionality between profitability/disposable income and overall debt levels. The new framework will be designed to facilitate restructurings and expedite liquidation while ensuring harmonisation with EU Directive 1023/2019 on restructuring and insolvency ( ). A preliminary outline of the draft law has been prepared by the authorities and is currently under assessment by the institutions, pending further elaboration. Based on preliminary information, the authorities are contemplating a framework, which would initially rely on pre-judicial settlement, supported by electronic means, in an attempt to reach an amicable debt restructuring. Failing that, a judicial procedure could automatically be engaged, to define the settlement and mandate the liquidation of assets and the distribution of the proceeds to the creditors by an insolvency administrator. The authorities are aiming to provide tailored mechanisms to address the specific needs and circumstances of each class of debtors: large corporations, small and medium-term enterprises, small traders and non-merchants. The authorities are also considering standardized proposals for creditors with small debts, while large ones would be channelled to a negotiation process with creditors, facilitated by an insolvency administrator. An auditing mechanism would be established to identify strategic defaulters and ex post controls to that end would also be introduced. In general, the design of the pre-judicial phase would aim at avoiding undermining the payment culture with automated solutions, which cannot be objected to by creditors. The authorities relayed that the revamped bankruptcy proceedings, including those for personal insolvency, will ensure that, in line with bankruptcy principles, the right of secured creditors to liquidate assets and enforce on collateral, including primary residences, is not in any way adversely affected. The current situation allows for overly lengthy periods of suspension of enforcement actions, mainly as a result of appointing distant hearing dates for household insolvency cases, a situation very detrimental for the resolution of non-performing loans. The reform will ensure that foreclosure procedures will not be impeded by insolvency proceedings. The claims of all creditors, public and private, will be eligible for a write-off, and their hierarchy in distributing the proceeds of liquidation will be defined according to the Code of Civil Procedure and in line with the provisions of the above-mentioned EU Directive on restructuring and insolvency. Mechanisms incentivising an early start to collective bargaining proceedings will be introduced. Discharge of indebted individuals would ensue within a reasonable timeframe, while safety nets for the most vulnerable debtors will be provided as a matter of social policy, outside the context of the insolvency framework and will not affect the rights of creditors. An insolvency observatory will be created to monitor the implementation of the new framework and identify the need for potential revisions. The successful implementation of the new framework will crucially hinge on effective acceleration and optimization of judicial insolvency processes. Congestion in courts, particularly the largest ones, coupled with lack of financial expertise and insufficient IT skills are the main causes of the slow processing rate of cases (see also below Section 8.2). Dealing with them will be instrumental to safeguarding the unhindered implementation of the new framework. Broadening the use of IT and of a digitised reporting system to collect reliable statistical data from the courts would help to simplify or eliminate unnecessary clerical tasks, assist the bankruptcy court officials (judges, insolvency administrators) in the performance of their duties and accelerate the conduct of proceedings. In addition, the swift creation or expansion of collateral databases, including the cadastre (see also below Section 6.2), would help courts and the insolvency practitioners in locating assets and in identifying fraudulent asset transfers. Clearing of the household insolvency backlog The Greek authorities submitted an update on the state of play of the ongoing efforts to develop an action plan for accelerating the clearance of the household insolvency backlog, which they have committed to present by end-March 2020. According to the Ministry of Justice, 86 174 cases were pending at end-December 2019 ( ), a lacklustre performance compared to a target of 61 910 for December 2019. Moreover, more than 40% of the cases have a hearing date scheduled for after 2020. A comprehensive action plan for accelerating the clearance of the household insolvency backlog was expected by end-December 2019. The authorities have now committed to present it by end-March 2020. Based on preliminary information, the new action plan is expected to make use of different techniques in order to realistically cut the period between the filing of a case and its hearing by the court, and facilitate the eligibility control of presented evidence. These will include the mandatory rescheduling, by means of an electronic platform, for cases with a hearing date beyond January 2021, the electronic servicing of documents and the abolition of the hearing in favour of a trial in chambers, the introduction of a predefined minimum documentary content accompanying petitions, and the introduction of a mechanism for the objective determination of the commercial value of primary residences at the pre-trial stage. Upon finalization of the plan, the relevant software for the electronic platform will be designed and the relevant logistics planned. All legal provisions required for the implementation of the action plan will be drafted and posted for public consultation by end-April 2020, and tabled in Parliament for adoption by mid-May 2020. Recent experience also indicates that the possibility to bring forward court hearings of household insolvency cases through the Primary Residence Protection scheme platform, offered to creditors as of November 2019, failed to meet its envisaged effect. Actions to ensure that the information is appropriately used in ongoing judicial processes could be covered in the context of the action plan to be delivered soon. Clearing the backlog of called state guarantees The authorities have committed to accelerate the implementation of the action plan for the clearance of the backlog of called guarantees, which remains considerable. Existing bottlenecks in the clearance process have resulted in a backlog of unprocessed guarantee claims, which entails 735 912 claims, amounting to approximately €2.1 billion. The backlog of called and not processed guarantees has been gradually building up since 2012, making the solution increasingly problematic, while it may increase further in the future, given that the total stock of outstanding state guarantees in question exceeds €3 billion. As some of the calls are reaching their statute of limitation, the banks tend to take recourse to litigation with a view to preserving their claims. Such a set-up presents high costs for both the banks and the state. Moreover, it puts additional pressure on the already existing court congestion. Notably, the authorities intend to speed-up the processing compared to the October 2019 action plan from seven to four years with a view for a swift clearance of the backlog. The plan foresees the processing of all currently called guarantees for corporate loans by end 2022 and loans for natural person by end 2023. The payment of claims is expected to follow immediately after the examination of each claim has been finalised, except for claims that (i) are subject to litigation and cannot be paid before the court cases are completed and (ii) cases where additional documentation needs to be provided by the creditors. For such cases, the payments are expected to be made in a period of one additional year after the processing of the claim, latest by end 2025. In addition to upgrading the existing IT platform (e-repository), the revised action plan aims to increase the number of staff to deal with the backlog. While the latest plan is a significant improvement, ensuring considerable payments already in 2020, with visible results by mid-year, and further exploring ways to process the guarantees scheduled for 2024 still in 2023 as well as a swift resolution of cases under litigation would enhance the effectiveness of the action plan and send the right signal vis-à-vis future payments from the state towards the financial system. As mentioned in section 3.1, the fiscal cost of the envisaged clearance path is expected to be incorporated in the 2020 update of the Medium-term Fiscal Strategy. The implementation of the action plan for clearance of called state guarantees will be carefully monitored.

Other initiatives The performance of e-auctions by banks to liquidate their collateral continues to have limited impact and to fall short of expectations. The share of e-auctions that were cancelled or unsuccessful in the fourth quarter of 2019, remains at very high levels (above 75%), despite a rebound in the number of conducted e-auctions, following a poor third quarter. Legal issues that impede the success of e-auctions mainly relate to legal challenges available to debtors to suspend enforcement, which usually require court involvement. Moreover, the high percentage of ‘barren’ auctions, i.e. auctions which took place but no bids were placed, which account for around 55% of those conducted, signals that in these cases the initial reserve price is too high to settle in the current market, even by the creditor triggering the auction. A price reduction mechanism comprising elements of automaticity could significantly contribute to the success of the auctions in this respect. In approximately 75% of the cases ( ), the successfully auctioned real estate assets were still acquired (re-possessed) by banks. This is a particular concern, given the growing stock of foreclosed assets of Greek banks. A thorough identification and assessment of impediments leading to the cancellation or suspension of e-auctions has been undertaken. Progress in addressing the impediments to successful e-auctions remains limited, as the authorities have so far not presented a comprehensive analysis of the underlying reasons, including a proposal with possible legislative remedies. The authorities acknowledged the existence of impediments leading to the frequent failures of e-auctions conducted by banks to liquidate their collateral. They commit to implement actions to prevent cases of procedural abuse, including by putting in place an effective procedural mechanism for dealing with price adjustment requests, so as to deal with the high percentage of unsuccessful auctions and avoiding a lengthy process of judicial adjustment of the price. Concretely, the authorities plan to entrust an inter-ministerial working group, involving the Ministries of Finance, Justice and Growth and Investments, real-estate experts and legal practitioners, with proposing amendments to the Code of Civil Procedure, notably in relation to the setting of the reserve price and the conduct of repeat auctions according to the Code of Civil Procedure. The authorities also intend to adopt legislative amendments prescribed by the findings of the working group by end-April 2020. Finally, the authorities plan to enhance the user-friendliness of the platform, notably by uploading photographs of the properties as well as detailed descriptions accessible by non-specialists. These efforts are aimed at accelerating the conduct of successful e-auctions in 2020. A review, and further streamlining, of the legal means available to debtors for suspending or challenging enforcement proceedings, also covering legislation outside the Code of Civil Procedure, could further improve the success rate of e-auctions. The primary residence protection scheme, which is due to expire by end-April 2020, shows little signs of being used by debtors to help start repaying their mortgages. Pursuant to the introduction of a number of amendments to the law, adopted last fall and simplifying the requirements for applying to the platform, the pace of participation has picked up but remains feeble. According to data provided by the Greek authorities on 17 February 2020, 44 924 users have started drafting an application, of whom only 2 218 eventually concluded and submitted it to the relevant bank. Over the same period, banks extended 836 proposals to debtors, 380 of which were accepted by the latter. Only 240 requests for a state subsidy have been accepted, with another 140 pending. The success rate of the long-term restructuring plans envisaged by and provided under the scheme remains unknown. The authorities have reiterated their commitment that the Primary Residence Protection will expire at end-April 2020. The authorities completed their assessment of the implementation of the reformed Code of Civil Procedure, and formulated proposals for the legislative adoption of improvements in line with commitments. The working group that was formed in February 2019 with the mandate for assessing the implementation record of the reformed Code of Civil Procedure issued its comprehensive evaluation report in January 2020, based on the collection of stakeholders’ feedback to questionnaires. The report contains concrete proposals for potentially needed legislative amendments. It will be followed by the formation of a law-drafting committee that will be entrusted with examining the proposals, assessing the need for legislative action and drafting the requisite amendments and accompanying explanatory report by mid-July 2020. The authorities submitted a draft legislative proposal for the creation of a special department for the provision of training magistrate court judges, who are the ones dealing with household insolvency cases. The authorities intend to enact the relevant amendments to the law on the National School of Judges by end-March 2020 and are expected to provide by that time information on the syllabus regarding the financial training of judges, that would include courses on financial and accounting subject matters, with an emphasis on issues frequently encountered in the course of the judicial processing of financial and insolvency cases. The authorities are also proceeding with the appointment of successful candidates for clerical court positions based on recently completed Supreme Council for Civil Personnel Selection competition. An amendment reinstating the favourable tax treatment of loan write-offs that had expired at the end of 2018 has been adopted and will provide an incentive for debt restructurings. The relevant provision ( ) stipulates that the amount of the write-off (for restructurings concluded up to end-2019) will not be considered as an income of the debtor and will thus be exempted from the tax levied on donations. This measure effectively addresses the disincentives to restructurings caused by the expiry of the previous tax treatment. An extension of the treatment to restructurings conducted after 2019 would provide an additional relief. The authorities are considering adjusting the legislative framework on deferred tax credits to ensure smooth operability. Notably, clarifying the use of deferred tax credits in resolution has been an outstanding issue for a long time. Completing and implementing the primary and secondary legislation is very important to help safeguard the loss-absorbing capacity of the banks’ capital. 5.3. hellenic financial stability fund The Fund continued exercising its shareholding rights in the four systemic banks, focusing on improving the banks’ governance, assessing their business models, and progressing with the implementation of its Exit Strategy. During the last months, the Fund (i) has been actively involved with the Ministry of Finance and other stakeholders in the development of the Hercules law; (ii) has been working, as a part of its Exit Strategy, on an initiative to develop and communicate its shareholder expectations for all systemic banks, challenging their strategies and business plans, with the view to promote value-enhancing initiatives, and (iii) continued its efforts to facilitate the management and resolution of the non-performing exposures of the systemic banks. The discussions between the Fund and the Ministry of Finance on the potential involvement of the authorities in the final stage of the divestment and the legal protection for the Fund’s governing bodies and staff have not yet been finalised. Preserving the Fund’s independence remains a cornerstone in the process toward restoring the health of the banking sector. The authorities are preparing a new National Growth Strategy. The new Strategy, which is due to be completed by mid-2020, is expected to introduce a set of measures to be implemented over four years, including on addressing reform priorities, improving framework conditions and developing key economic sectors with a view to addressing competitiveness issues, and boosting exports and investment. Following the adoption of the Development Law in October 2019, the authorities are also working towards the preparation of secondary legislation, as the issuance of relevant ministerial decisions and presidential decrees is a pre-condition to making operational specific provisions of the new framework. 6.1. LABOUR MARKET Labour The authorities committed to safeguard competitiveness, as a continuous commitment, when carrying out an annual update of the minimum wage, based on the ex post assessment of the recent increase in the minimum wage by the World Bank and mindful of the requirement of the Greek legislation to also safeguard purchasing power. The ex post assessment of the 10.9% increase of the minimum wage as well as of the abolition of the sub-minimum wage for youth, which took place in February 2019, is now under preparation with the technical support of the World Bank provided through the European Commission and the report will be completed by end-March. The launch of the consultation process with the social partners and all relevant stakeholders for the next update as prescribed by the Law 4172/2013 took place on 15 February 2020. Following this consultation and a report with recommendations by a committee of independent experts specifically appointed for this purpose, the government shall determine the new level of the minimum wage. The law posits that this should be based on a sound economic analysis taking into account the state of the economy, the growth rate, productivity, prices, competitiveness, employment, unemployment, incomes and wages as well as the findings of the ex post evaluation of the previous increase. The procedure is expected to be concluded in June of 2020 with the issuance of a ministerial decision establishing the new level of the minimum wage. The authorities have completed the implementation of the 2017-2019 action plan to fight undeclared work, an end-2019 specific commitment, and are now in the process of preparing a follow up. The 2017-2019 action plan promoted an integrated approach to undeclared work, including measures to reinforce the cooperation among different institutions and improve the capacity to detect undeclared work. The authorities are now designing a follow-up to it. In January 2020, the fines for undeclared work were revised based on the following criteria: (i) the gravity of the infringement; (ii) the number of employees; (iii) the repeated penalties for similar infringements; (iv) the number of workers affected; and (v) the size the business. The new fines range from €300 for small offences in firms with 1 to 10 employees to €8 000 for very high offenses in firms with more than 250 employees. The authorities are preparing for the first time a code of ethics for inspection as well as training and education of inspectors inspired by best EU practices. A series of workshops are foreseen for the exchange of technical expertise. These measures have been accompanied by a number of additional recent steps to limit the abusive use of part-time work, which often masks undeclared full-time work. These notably include an increase in the overtime remuneration for part-time workers, the recording of working time in a new digital platform as well as an e-registry for no-compliant firms. The authorities have prepared an action plan for the nationwide expansion of a new delivery model for active labour market policies, thus progressing towards completing the rollout of the Social Solidarity Income scheme, which is an end-2019 specific commitment. Historically, active labour market programmes in Greece have consisted mainly of temporary wage subsidy programmes and public work schemes. The updated action plan gives a more strategic focus on promoting long-term and sustainable employment growth by pursuing a more integrated approach, centred on the provision of quality measures (including vocational education and training, reskilling and upskilling programmes) that are targeted to the needs of the local labour markets and are tailored to characteristics of the individual jobseekers. Following an initial pilot project, the authorities are preparing an action plan in collaboration through a European Commission technical support project delivered by the World Bank to expand the new delivery model to three other regions capturing sufficient diversity in the settings (urban, suburban and rural) and sectors (tourism, technology, manufacturing, agribusiness, etc.). These will be targeted to i) older workers, ii) long-term unemployed, iii) female labour force participation, iv) technical professions; v) apprenticeships and the youth to combat brain drain. Given the complexity of the project and the time needed for the implementation of the pilot projects, it was agreed with the previous administration that full rollout of the labour market (re-integration) elements of the Social Solidarity Income scheme by end-2019 is not achievable, and that the nation-wide expansion will take place in July 2020. Education The Greek authorities have embarked on an ambitious agenda for a comprehensive education reform. This goes beyond Eurogroup commitments, but is relevant macroeconomically and from the social policy perspective, as it addresses skill mismatches, enhances growth and helps to reduce poverty and improve the social situation. The reforms aim to address the challenges described in the Country Report 2020, such as the need to enhance the quality of public schools, upgrade vocational education and training and improve the quality of higher education institutions to address the skills gap. Specifically: Greece ranks as one of the bottom of EU countries on the skills matching dimension of the European Skills Index, with one of the highest over-qualification rates of tertiary graduates (31.6%) and qualification mismatches among the EU countries. This is also corroborated by the latest PISA results, according to which Greece ranks significantly below the OECD average in literacy, mathematics and science. With regards to digital education, only 46% of people aged 16-74 appear to have at least basic digital skills, while 31% have no digital skills at all (EU average: 17%).

A new law on higher education has been adopted upgrading the quality assurance agency and linking funding of the universities with performance. The new agency will assess the higher education institutions and the degrees that they offer, and will propose restructuring when needed. 80% of the public funding will be distributed based on quantitative criteria, and 20% will be based on achievement of agreed performance targets. The law also liberalizes research grants, which will bring new sources of income to the universities. The link of research with industry is a matter that requires attention, as only a small portion of the research is turned into new patents. To boost internationalization of the Greek higher education system, legislation is being developed to introduce double and joint degrees with foreign universities as well as to offer study programmes in foreign languages. The authorities plan in the near future to reform the university governance and increase the autonomy and accountability of universities. A number of changes to compulsory education are in the pipeline. The authorities are proceeding with the full implementation of the pre-school mandatory two-year programme. They also announced measures to address the poor educational outcomes of pupils and the wide performance gap between different areas and schools. Model schools will be strengthened to act as a role model for other schools. Regarding soft and digital skills, the authorities plan to promote critical thinking by introducing multiple books, to introduce changes in the curricula and to increase the number of subjects that are examined. School self-evaluation is planned to be implemented as from the next academic year coupled with massive teacher training of 40 000 teachers. The authorities have also embarked on the recruitment of 15 000 permanent teachers over two years to renew the aging teacher population that will replace temporary posts in accordance with the annual hiring plan. The authorities support a higher degree of pedagogical and administrative autonomy for schools and promote extroversion by increasing foreign language courses and exchanges with foreign schools. It will be important to link greater autonomy with the necessary support for educational staff and well-designed accountability. The authorities envisage to use private-public partnerships for school building, and to make a wider use of the private sector when it comes to IT and training. To address the gap between education and actual needs of the labour market the government plans to introduce early career guidance from the beginning of lower secondary education. It also aims to upgrade the status of the vocational pathway, to promote internships for high school students and to encourage the collaboration of universities and companies through the institutionalization of internships. 6.2. PRODUCT MARKETS AND COMPETITIVENESS Competitiveness and export performance have improved over the last years in response to broad-based structural reforms, but the projected deterioration in net exports calls for a stronger focus on boosting productivity and attracting investment. Export levels, in part aided by increased cost competitiveness, reached 36.1% of GDP in 2018. However, with growing wages and domestically driven economic growth, and the economic slowdown in Greece’s export markets, a more pronounced approach to addressing remaining structural weaknesses would enhance non-price competitiveness, leveraging both exports and investments. Economic diplomacy Progress on areas of economic diplomacy and trade facilitation, which are expected to contribute to strengthening Greece’s export performance, has been hampered due to incomplete institutional arrangements. Legislation enlarging the mandate and responsibilities of the Ministry of Foreign Affairs on economic diplomacy – originally planned for end-2019 – is now expected by March 2020. The strategy itself is expected to be completed by April 2020. A solid legal footing for the single authority on all relevant initi