EUROPEAN COMMISSION Brussels, 18.11.2020 SWD(2020) 751 final COMMISSION STAFF WORKING DOCUMENT Enhanced Surveillance Report - Greece, November 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION Enhanced Surveillance update - Greece, November 2020 {COM(2020) 751 final}



AIA: Athens International Airport ANFA: Agreement on Net Financial Assets ASEP: Supreme Council for Civil Personnel Selection CRR: Capital Requirement Regulation DEPA: Public Gas Corporation DRU: Dispute Resolution Unit ECB: European Central Bank EFKA: Single Social Security Fund EFSF: European Financial Stability Facility EIB: European Investment Bank EKAPY: National Central Authority of Health Procurements ENFIA: Unified Property Tax EOPYY: National Organisation for the Provision of Healthcare Services ERGANI: Greek Database for Unemployment Registration ERGOSE: Subsidiary company of OSE to implement railways infrastructure projects ESI: Economic Sentiment Indicator ESM: European Stability Mechanism ESOEL: National Coordinating Body for Audit and Accountability ETAD: Public Properties Company

ETEAEP: Supplementary Pension Fund EYATH: Thessaloniki Water Supply and Sewerage Company EYDAP: Athens Water Supply and Sewerage Company FEK: Government gazette GDP: Gross Domestic Product GPS: Global Positioning System GRECO: Group of States against Corruption HCAP: Hellenic Corporation of Assets and Participations HELEXPO: National institution for the organisation of exhibitions, congresses and cultural events HFSF: Hellenic Financial Stability Fund HRADF/TAIPED: Hellenic Republic Asset Development Fund HRMS: Human resources management system IAPR: Independent Authority for Public Revenue ICT: Information and Communication Technologies IEK: Public professional schools IKE: Greek private company IMF: International Monetary Fund JASPERS: Assistance to Support Projects in European Regions KEK: Vocational training centres KEPA: Disability assessment centres

KOMYs: Newly and swiftly deployed medical mobile units KPI: Key performance indicator KTEL: Joint-venture of Regional Transport LCR: liquidity coverage ratio LEPETE: Supplementary Pension Fund of the National Bank of Greece MFIs: Monetary financial institutions NFCs: Non financial corporations NOME: Nouvelle organisation du marché de l’electricité (New organisation of the electricity market) NPEs: Non-performing exposures OAED: Public employment service OASTH: Urban Transport of Thessaloniki OGA: Agricultural Insurance Organisation (former farmers’ fund) OMED: Mediation and arbitration board OSDDY: Integrated Management System for Judicial Cases OSE: Organisation of railways of Greece PMI: Purchasing Managers Index SEPE: Labour inspections directorate SMP: Securities Markets Programme SURE: Support to Mitigate Unemployment Risks in an Emergency SYNERGASIA: Temporary short-time work scheme

TEPIX II: Envelope for co-financing loans to small and medium-sized enterprises TLTRO III: Eurosystem targeted longer-term refinancing operations TOMYs: primary health care units VAT: Value added tax This report is prepared as an enclosed document to the Commission's assessment pursuant Article 3(5) of Regulation (EU) 472/2013 published as Communication from the Commission – Enhanced Surveillance – Greece, November 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 Julia Lendvai, Head of Unit and Milan Lisicky, Deputy Head of Unit. Contributors: Chris Allen, Giuseppe Carone, Christos Daoulas, Fotini Dionyssopoulou, Matteo Duiella, Dolores Gloria Duran Bono, Sotirios Giannoulis, Christos Gofas, Andras Hudecz, Alexander Ioannidis, Eloïse Lecouturier, Vasileios Maroulis, Benedetta Martinelli, Vasilis Nikitas, Zoltan Petrov, Eleni Polemidiotou, Marie-Luise Rud, Alexandros Tavoutsoglou, Andreas Trokkos, Vasiliki Vasilopoulou, Irene Vlachaki, Veli Laine, Rainer Wichern and Alkistis Zavakou. The European Central Bank staff participated in the drafting of this report in accordance with the European Central Bank’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 contributed to the preparation of this report in the context of the European Stability Mechanism's Early Warning System and in accordance with the Memorandum of Understanding of 27 April 2018 on working relations between the European Commission and the European Stability Mechanism. International Monetary Fund staff participated in the context of its Post-Programme Monitoring framework. Comments on the report would be gratefully received and should be sent by post or e-mail to: Julia Lendvai 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 oultook 3.2.Tax policy 3.3.Revenue administration 3.4. Public finance management 3.5.Public investment 4.1.Sovereign financing 4.2.Debt sustainability analysis 5.Social welfare 5.1.Pensions 5.2.Healthcare 5.3.Social safety nets 6.Financial sector 6.1.Financial sector developments 6.2.Financial sector policies 6.3.Hellenic Financial Stability Fund (HFSF) 7.Labour and product markets 7.1.Labour market 7.2.Product markets and competitiveness

8.Hellenic Corporation of Assets and Participations (HCAP) and privatisation 8.1.Hellenic Corporation of Assets and Participations 8.2.Implementation of the Asset Development Plan 9.Public administration and justice 9.1 Public administration 9.2.Digital governance 9.3.Justice 9.4.Fight against corruption ANNEX LIST OF Tables 2.1.Summary of main macroeconomic variables (%) 3.1.Fiscal projections of the Commission 2020 Autumn Forecast and 2021 Draft Budgetary Plan 3.2.Key Performance Indicators of the Independent Authority for Public Revenue, second quarter 2020 3.3.Stock of arrears 4.1.Assumptions in the baseline scenario

4.2.Assumptions under the risk scenarios 4.3.Decomposition of change of results on gross financing needs due to the revised assumptions 4.4.Decomposition of change of results on debt-to-GDP ratio due to the revised assumptions 6.1.Main financial stability indicators 9.1.Evolution of public sector staff (2009-2020) LIST OF Graphs 4.1.Long term real GDP growth (%) 4.2.Debt sustainability indicators (% of GDP) 6.1.Bank deposits (left) and total borrowing from the Eurosystem (right) 6.2.Non-performing loans as a% of total customer loans (left) and changes in their stock in the second quarter of 2020 (right: million EUR) 6.3.Bank credit to non-financial corporations and households, annual % change 6.4.Bank interest rates of new loans to euro area residents, annual percentages, weighted averages LIST OF Boxes 3.1.Revision of the public procurement framework

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 fourth prolongation, enhanced surveillance for Greece is currently in place for six months as from 21 August 2020 (). The implementation of enhanced surveillance for Greece acknowledges the fact that 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) Hellenic Corporation of Assets and Participations and privatisation and (vi) the modernisation of public administration (). This report is based on the findings of a mission held remotely on 19 and 20 October 2020 and regular dialogue with the authorities. The mission was conducted by the European Commission in liaison with the European Central Bank (); the International Monetary Fund participated in the context of its Post-Programme Monitoring framework, 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 and 5-9) and an update on sovereign financing conditions (chapter 4). This report is issued alongside the Commission assessment of Greece’s 2021 Draft Budgetary Plan, 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 instalment 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 transfer of these income equivalent amounts would be made available to Greece in semi-annual tranches of €644 million 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 about €226 million every year. It would be waived on a semi-annual basis until 2022 and permanently after 2022. The third tranche of policy-contingent debt measures was released following the Eurogroup on 11 June 2020, inter alia based on the assessment of the implementation of Greece’s commitments for end-2019 included in the enhanced surveillance report adopted by the Commission on 20 May 2020 () and considering the extraordinary circumstances posed by the coronavirus outbreak. The current report assesses the implementation of Greece’s commitments to the Eurogroup including specific reform completion commitments up to mid-2020, the continuous commitments and its general reform continuity commitment. It thereby provides a basis for the Eurogroup to discuss the release of the next tranche of policy-contingent debt measures, amounting to €767 million. The coronavirus pandemic is taking a strong toll on the Greek economy. After a comparatively mild impact in the first quarter of 2020, the Greek economy contracted by -14.2% in the second quarter as economic activity was restricted to stop the spread of the pandemic. The services sector has been hit particularly hard, due to the importance of international tourism. With travel restrictions for EU countries being gradually lifted from mid-June and travel restrictions for most non-EU countries still in place, tourism receipts in January-August 2020 were 80% below their level in the same period in 2019. Domestic demand suffered due to lower consumption possibilities, lower incomes, and higher uncertainty, with private consumption declining by 11.3% in the second quarter. Due to the global dimension of the crisis, exports have been strongly negatively affected as well, with goods exports excluding oil declining by 4% (13% including oil) in January-August 2020 compared to the same period in 2019 and service exports declining by 44% over the same period according to balance of payments data, largely on the back of the above-mentioned developments in the tourism sector. The recovery is likely to be somewhat slower than previously expected, on account of the resurgence of coronavirus cases and the economic effects of the containment measures. Assuming that the containment measures continue with the stringency levels of September 2020 well into 2021 (i.e. without significant local or national lockdowns), a decline of real GDP of 9% in 2020 followed by a partial recovery of 5% in 2021 and 3.5% in 2022 is expected (). Lasting travel restrictions and shifts in consumer behaviour to limit infection risks are expected to weigh on the pace of recovery in the services sector and in particular in tourism. Private investment is expected to recover only gradually, on account of high uncertainty and diminished profits. Regarding the external sector, the high importance of tourism remains a limiting factor, while transport services and exports of goods are expected to recover faster. Government support schemes that have been extended to, or announced also for 2021 are expected to support the recovery and cushion to some extent the negative impact of the extended containment measures in 2021. The nationwide lockdown for three weeks announced on 5 November could weaken the short-term outlook more than assumed in the projections presented here which were finalised before the announcement of the lockdown. Employment is negatively affected by the crisis, but the authorities have implemented measures to cushion the decline and to facilitate the recovery. Data on hiring and firing from the ERGANI system shows that between March and June 2020 the labour market remained ‘frozen’, with very limited hiring and firing taking place. While these months are traditionally characterised by an increased hiring activity linked to the summer season in the tourism industry, this seasonal hiring largely vanished in 2020. The unemployment rate reached 17.7% in May and decreased to 16.8% in August 2020 mostly due to workers leaving the workforce. The relatively muted increase of unemployment can also be attributed to some extent the success of employment protection schemes. With the gradual return of a more normalised hiring and firing pattern and as the inactive population slowly returns to the workforce, unemployment is expected to increase somewhat and reach close to 18% for the year overall. With a limited recovery of the tourism sector and travel restrictions still in place throughout 2021, the unemployment rate is forecast to recover more slowly than overall economic activity. Consumer price inflation is expected to contract sharply in 2020 and recover partially in 2021 and 2022. Driven by low energy prices, lower demand in the service sector, VAT reductions and the general contraction of economic activity, consumer prices are forecast to fall sharply (by -1.3%) in 2020. Prices are expected to increase moderately in 2021 and 2022 along with the economic rebound, as energy prices and tourism activity recover gradually. Uncertainty and risks surrounding the outlook are very high, due to the uncertain developments of the global health crisis. In view of the recent the developments regarding the pandemic and new nationwide lockdown announced on 5 November, economic activity could be significantly impacted in the last quarter of 2020 and in 2021. Due to the high importance of international tourism for the Greek economy, Greece is also dependent on the developments of the pandemic in other countries, and their restrictions regarding international travel. Downside risks, apart from the risks related to the coronavirus pandemic, are related to the geopolitical tensions in the region and migration pressures. For 2021 and beyond, upside risks are stemming from the support measures adopted at EU level including Next Generation EU, which, if swiftly adopted and implemented, could significantly support demand in 2021 and beyond also strengthening economic fundamentals and resilience going forward. More specifically, the Commission forecast does not incorporate the impact of the Recovery and Resilience Plan as it is still at an early stage of development. Once fully specified, adopted and implemented, the reforms and investments implemented under the Plan are expected to have a positive impact on the growth outlook. Table 2.1:Summary of main macroeconomic variables (%) Source: European Commission 3.1. Fiscal Developments and oultook The fiscal impact of the economic downturn and the cost of emergency measures adopted to address the coronavirus outbreak are expected to result in a large fiscal deficit this year. The primary deficit monitored under enhanced surveillance is forecast to reach 4.4% of GDP in 2020 (). The forecast takes into account the prolongation of existing emergency measures, most importantly: (a) an increase in the total envelope of the repayable advance payment; (b) an extension of the regular and long-term unemployment benefit by two months; and (c) a prolongation of the temporary economic support to wage earners of companies affected by the pandemic based on specific codes of economic activity. The forecast also incorporates the retroactive payment to pensioners amounting to 0.8% of GDP, following the Court of State ruling of July 2020 (). The deficit is significantly affected by the shortfall in revenues triggered by the recession. Finally, the forecast has been aligned with Eurostat’s ‘Draft note on statistical implications of some policy measures in the context of the COVID-19 pandemic’ (). Greece’s fiscal policy is expected to continue to support the recovery throughout 2021. While most of the measures taken in 2020 have targeted the direct impact of the pandemic (health care expenses, support for the lock-down period, tax deferrals etc.), the authorities have also announced temporary measures for 2021 which aim to support the recovery by stimulating demand and employment. Specifically, the authorities have also announced additional temporary measures reducing social security contributions by three percentage points for private sector wage earners and waiving the social solidarity tax for private-sector wage earners and self-employed. These measures aim to reduce the high tax wedge, and as such, they point in the right direction. In addition to the tax measures and in order to support employment, the authorities have introduced a new temporary recruitment subsidy programme that aims to create 100 000 new jobs by subsidising the social security contributions for six months for each new employment contact. The temporary nature of the measures is consistent with the objective of ensuring sustainability of public finances in the medium term. The General Escape Clause will also apply in 2021. In light of the need to support the economic recovery throughout 2021 and of the high prevailing uncertainty both regarding the development of the pandemic and its socio-economic consequences, the General Escape Clause, which was activated in agreement between the European Commission and the European Council in March 2020 and does not suspend the procedures of the Stability and Growth Pact, will remain active in 2021 as indicated in the Annual Sustainable Growth Strategy 2021 (). The General Escape Clause allows for a temporary departure from the budgetary requirements, including Greece’s fiscal targets monitored under enhanced surveillance, provided that this does not endanger fiscal sustainability in the medium term. The 2021 Draft Budgetary Plan expects the primary deficit monitored under enhanced surveillance in 2021 to reach 1.1% of GDP. The Draft Budgetary Plan’s forecast takes into account the new temporary measures described above aiming at supporting the recovery whose fiscal impact is estimated at 1.0% of GDP. Apart from the already announced measures, the Draft Budgetary Plan includes also a special reserve of 0.3% of GDP, which could be used to finance the needs that may arise from the evolution of the pandemic in 2021 such as the further strengthening of the health care system and the additional support of the economy. In addition, the Draft Budgetary Plan incorporates the cost of an ambitious defence-spending programme, which includes the acquisition of aircrafts, weapon systems and the recruitment of 15 000 new professional soldiers. This programme will be implemented over a 7-year period but a big part of the costs is projected to take place already in 2021. The authorities estimate that the additional fiscal impact of the new programme will reach 0.5% of GDP in 2021.

Table 3.1:Fiscal projections of the Commission 2020 Autumn Forecast and 2021 Draft Budgetary Plan (% of GDP) Source: European Commission The authorities’ fiscal projection is more optimistic than the Commission 2020 autumn forecast, which expects a primary deficit of 3.4% of GDP in 2021. Apart from methodological issues explained below, the differences between the two projections are mainly explained by the authorities’ more favourable macroeconomic outlook, which takes into account the Recovery and Resilience Facility. The inclusion of the Recovery and Resilience Facility in the authorities’ projections generates a substantial impact on growth, which then results in a positive impact on the fiscal balance of above 1% of GDP (). In addition, the authorities assume that the €200 million deficit of the Renewable Energy Source account in 2020 will turn into a surplus of equal size in 2021. The assumed improvement is not underpinned by concrete actions, thus the Commission 2020 autumn forecast projects that the same deficit will continue in 2021, deteriorating the balance by 0.2% of GDP compared to the authorities’ estimate. On the other hand, the Commission 2020 autumn forecast assumes a more gradual implementation of the new defence programme, thus improving the fiscal balance by 0.2% of GDP in 2021 with a corresponding reduction in 2022 compared to the Draft Budgetary Plan. The statistical recording of the emergency measures is based on Eurostat’s ‘Draft note’. This note clarified the application of the accrual recording of revenues with respect to measures that constitute only a temporary shift in revenues between years. Accordingly, the Commission 2020 autumn forecast includes as 2020 revenue the tax and social contribution payments deferred and expected to be collected in the coming years. As regards the repayable advance, the Commission forecast accounts only for the amount that is expected not to be returned to have a budgetary impact, while the remaining amount is treated as a loan. In addition, the measure that allows companies to pay only a fraction of their corporate income tax advances in 2020 is assumed to be broadly balance-neutral in accrual terms as it introduces only a temporary time-shift in the tax receipts. By contrast, the Draft Budgetary Plan follows the ‘time-adjusted cash’ method for the above-mentioned measures. The different statistical recording of these measures in the Commission 2020 autumn forecast has a balance-improving impact of 2.5% of GDP in 2020 and a balance-deteriorating impact of 0.9% of GDP in 2021 compared to the Draft Budgetary Plan. The Commission 2020 autumn forecast does not take into account the impact of the new nationwide lockdown announced on 5 November. Following the growing number of cases, the government decided to introduce a general lockdown for at least 3 weeks starting from 7 November. The lifting of the restrictions will be assessed by end-November on the basis of the new epidemiological data. The government has already announced the prolongation of earlier measures in order to support both households and affected businesses. The impact of these prolongations depends on the duration of the lockdown and will be assessed in the context of the next enhanced surveillance report. The inherent uncertainty in the current assessment and forecast is substantial. The magnitude and severity of the economic and fiscal downturn is subject to substantial uncertainty in view of the pandemic. A further escalation of the health crisis could trigger the need for additional fiscal measures which should be both of a targeted and temporary nature to contain the fallout and bolster the recovery in 2021. Other risks relate to a possible activation of state guarantees that have been issued as part of the emergency measures. Further risks refer to the litigation cases against the Public Real Estate Company (ETAD), remaining public service obligation claimed by the Hellenic Post, and potential additional costs related to health care expenditure of individuals without health insurance. Regarding court rulings on pensions, uncertainty around the full extent of the retroactive compensation to pensioners persists, as the 2020 Council of State ruling has not yet been published. So far, only cuts related to the ‘main’ pensions have been compensated and it remains open whether retroactive compensation should be extended to seasonal bonuses and supplementary pensions. On the positive side, Greece is expected to benefit greatly from the Recovery and Resilience Facility, which aims to support convergence and a sustainable economic recovery by providing large-scale financial support to growth-enhancing reforms and investments. 3.2.Tax policy Progress towards completion of the nationwide reassessment of property tax values has slowed down. This was a mid-2020 specific commitment, whose finalisation has now been rescheduled for mid-2021. Inevitable delays occurred earlier in the year due to the coronavirus lockdown and further delays have taken place owing to the quality assessment required by successful appeals to the Council of State. This year’s ENFIA single property tax assessments has therefore been based on the previous property tax values. Nevertheless, the valuation process including an expansion of the number of value zones by some 30% is likely to be finished by March 2021 in time for the ENFIA tax assessment of August 2021. Technical support is provided by the European Commission through a new project to revisit key features of the immovable property valuation system, including a review of commercial properties valuation methodology, as well as to support the steps towards further modernisation and digitalisation of the existing system, in line with best practices. 3.3.Revenue administration The supplementary wage grid legislation for the Independent Authority for Public Revenue, which is a key step towards completing its human resources reform, has been published for public consultation and is expected to be adopted by end-November 2020. The reform is expected to strengthen the Independent Authority’s ability to maintain and attract new high calibre staff, which at the end of the third quarter remained well below the staffing target set for end-2019 (11 947 compared to 12 500) with a slightly downward trend (11 696 at the end of the second quarter). It is expected that the overall human resources reform will become operational by 1 January 2021. It is encouraging that the necessary funds to implement the human resources reform have already been allocated to next year’s budget, while the authorities have confirmed that ongoing hiring procedures at the Ministry of Finance will not have a negative impact on the Independent Authority’s overall capacity. A draft law to strengthen the anti-smuggling framework, including provisions to enhance the capacity of the Operational Coordination Centre, has been published for public consultation. The draft law includes a number provisions aiming to strengthen the anti-smuggling framework and is expected to be adopted by November 2020. Further, the draft law includes provisions to enhance the capacity of the Operational Coordination Centre, which coordinates anti-smuggling efforts, and is part of the Independent Authority. The adoption of these provisions is expected to result in currently vacant posts being promptly filled. It is expected that additional resources will need to be assigned to the Independent Authority, as the implementation of a number of provisions is linked to the development and use of various digital tools. Finally, the new decentralised service of customs controls, including mobile units, which was established in early-2020 is yet to reach its capacity (167 out of 337 posts currently filled) and is expected to be fully operational in 2023. Overall, there is good progress in meeting the targets set for the key performance indicators, including on debt collection, while work to further enhance the Independent Authority’s collection and audit capacity continues. The collection of old debt (KPI 1) for the second quarter yielded impressive results, considering the fact that the targets were set before the pandemic affected the economy (see table 3.1). In addition, the collection ratio of new debts (KPI 2) is higher than in the previous year, suggesting that most taxpayers had the necessary liquidity to cover their obligations on time, thereby also benefitting from the discounts provided for timely payments that were introduced after the pandemic outbreak. On audits, model audit centres are planned to be established in Attica and Thessaloniki by the first quarter of 2021. Finally, as concerns the social security contribution debt, €858 million was collected until end of the third quarter compared to a target of €1 083 million, which implies a slightly lower performance than in the preceding quarter. Table 3.2:Key Performance Indicators of the Independent Authority for Public Revenue, second quarter 2020 Source: Independent Authority for Public Revenue. The authorities adopted settlement schemes for persons and companies benefitting from the tax deferrals that were put in place at the beginning of the pandemic. These liabilities will be allowed to be repaid after April 2021 in up to 24 instalments. The authorities also allowed affected debtors who defaulted on their settlement plans during the pandemic to re-enter them without the need to pay steep penalties as agreed in the context of the 2019 reform. For the remaining settlements that have been arranged before the entry of the 2019 settlement legislation, a similar ‘second chance’ arrangement is yet to be made operational and is expected to subject the debtors to a verification of the reasons of dropping out and compliance history. The precise verification mechanism will be determined through secondary legislation, putting in place safeguards for filtering out strategic defaulters, which, however, remains to be drafted. Such a provision will be key for strengthening payment discipline for future cases as well and it will be closely monitored that the second chance arrangement is not implemented before the provision is adopted. Similar to the above, the authorities have adopted a new settlement scheme of up to 24 instalments for the repayment of social security contributions deferred during the lockdown period. The introduction of the new scheme allows a deadline of end-July 2021 for the applications period. The authorities have also created a settlement scheme for persons who defaulted on a bank loan secured with a state guarantee. These guarantees have been called by the banks and are currently being processed by the authorities, with a view to allowing them being paid by the state on behalf of the original debtor (see section 6.2). In order to bolster payment discipline, the adopted provisions restrict the possibility for reintroducing these liabilities under other settlement schemes in case of dropping out from the new debt-repayment scheme. The developments with regards the existing and new settlement schemes will continue to be closely monitored under the enhanced surveillance framework. 3.4. Public finance management The stock of arrears decreased since the last report but sustained efforts are required to meet the ambitious target for the end of the year. The slippages created early-2020 also due to the pandemic have been recovered, except for the backlog of unprocessed pension claims. Thereby, in September 2020, the stock of arrears amounted to €1.2 billion, which is equivalent to the level observed in December 2019. The set of additional measures designed to bring the implementation of the plan back on track have started to show positive results and the stock of arrears has improved since April 2020 in all areas except for the pension claims (). At the same time, the stock of arrears remains currently €800 million above the renewed target set for December 2020 (), which calls for a sustained effort in the forthcoming months. Table 3.3:Stock of arrears Source: European Commission. The revised clearance plan, updated to reflect the recent surge in unprocessed pension claims, keeps unchanged the December 2020 deadline for eliminating the bulk of the stock of arrears, with pension claims to be cleared by December 2021 instead of June, as previously foreseen. In the revised clearance plan adopted in October 2020, the authorities have reiterated their commitment to eliminate the stock of non-pension arrears by December 2020, which seems challenging. Nevertheless, the most problematic issue concerns delays with processing pension claims, where the stock of arrears increased by more than €300 million since January 2019. This trend was triggered by two factors. An early-2019 legislation that allowed the self-employed to start settling their debts on social contributions in long settlement plans and subsequently apply for pensions on the one hand, and, on the other hand, difficulties with the timely recording of claims submitted manually, an issue that has been addressed since September 2019. The automation of the processing and awarding of the new pension claims, which is crucial for accelerating their clearance, is on track and the additional measures devised to clear the stock of manually processed claims have started to bear fruit. The clearance of pension claims is expected by December 2021. Nevertheless, the new restrictions on movement of people are expected to lead to further increases in arrears, in particular in the area of pensions, as the work cannot be done in a remote way. New arrears continue to be created, which underlines the importance of implementing the Hellenic Court of Auditors recommendations, a mid-2021 specific commitment, amongst which strengthening the internal control system is key. August data shows that new arrears continue to be created, which calls for a swift implementation of the structural reforms recommended by the Hellenic Court of Auditors, which includes the reinforcement of the internal control system in the public finance management area. Such a reform would also be key for the sound management of the projects to be funded through the Recovery and Resilience Facility. A draft law on the conceptual framework regarding the internal control in the public administration is planned to be adopted by the end of the year and is also expected to strengthen integrity and anticorruption mechanisms across public administration (see section 9.4). The National Transparency Authority is substantially contributing to this work stream and has elaborated guidelines in order to operationalise the internal control conceptual framework as to meet actual public finance management needs. The challenge lies now in its full implementation by the financial services units across the public administration as well as in its effective supervision by the Ministry of Finance. At the same time, there are positive steps regarding the implementation and the operationalisation of internal audits units, an outstanding recommendation by the Hellenic Court of Auditors. The Court reinforced awareness by general government entities of their legal obligations, and has adopted a manual for auditing the internal control systems of the entities and services subject to its jurisdiction, with a view to scheduling a programme for auditing the implementation of internal control mechanisms and processes in 2021 (). In addition, the authorities decided to launch work on the simplification of the legal and administrative framework for budget execution and payment procedure, with first results expected by early December 2020 (). This work stream will address the recommendations of the International Monetary Fund technical support report published in March 2020, and the outcomes of the forthcoming technical support provided through the European Commission on lean-management. The mid-2020 specific commitment on establishing the Treasury Single Account system has been successfully completed. The Treasury Single Account system is operational and offers an overview of the cash situation of the state as well as an efficient liquidity-monitoring tool. The general government entities that remain outside of the Treasury Single Account are not material in terms of total liquidity, and a legal provision is being prepared in order to exempt those with insignificant cash reserves from the obligation to join. The volume of electronic payments is growing and an increasing number of entities have joined the e-payment platform offered by the Bank of Greece for this purpose. The Ministry of Finance has set up a dedicated tool for the monitoring of the entities’ cash forecasting. This tool also allows for the surveillance of the rules related to the maximum amount of liquidity that the entities are entitled to hold in commercial banks (). The regularity and quality of the submitted cash forecasts, which cover about 70% of Greece’s liquidity, have improved and are now considered satisfactory. In 2021, the Ministry of Finance plans to extend the cash forecasting project to reach 90% coverage.

The Chart of Accounts reform, including mid-2021 and mid-2022 commitments, is overall on track and its implementation in the Public Investment Budget is starting to advance. The administrative classification of the Chart of Accounts, already implemented for the ordinary budget in 2019, will be complemented with a functional classification, the design of which is currently being developed. The authorities intend to integrate the functional classification with the performance budgeting framework that is being developed. These are welcome and ambitious reforms. Technical support is being provided for the accounting reform through the European Commission and the International Monetary Fund. On the other hand, the full implementation of the Chart of Accounts in the Public Investment Budget is progressing. This is a prerequisite for the interoperability of the e-payment system of the Ministry of Development and Investment () with the central IT system operated by the Ministry of Finance. The digitalisation of the Public Investment Budget execution and payment system and its interoperability with the central IT system are expected to speed up substantially the payment chain and reduce dramatically the scope for building up new arrears. Work on the e-invoicing application for public procurement, which is being developed under the wider framework of the accounting reform, is progressing according to schedule, and is expected to go in operation before the end of 2020 (see section 3.4). In the meantime, the procurement of the upgraded IT system, to support financial, budgetary, and fiscal reporting by the state, which is key for the success of the accounting and wider public finance management’s reforms, is expected to be delivered without substantial delays, by March 2021. The authorities plan to adopt a major public procurement reform by the end of the year (see box 3.1). This would be crucial for ensuring a quick absorption of available financial resources and supporting the recovery. The reform builds on the experience with implementing the rules put in place in 2016. In terms of ensuring a swift resolution of legal claims and avoiding that they burden the judiciary system, the authorities are planning to adjust the enabling provisions of the ‘remedies review body’. It would be important that the planned changes to the review body reinforce the principles of independence and impartiality, and the recruitment follows a transparent selection process for senior management. Progress is being made regarding the digitalisation of public procurement through the e-invoicing project (see section 3.4). In addition, the authorities are preparing a public procurement strategy for 2021‑2025, which is expected to be adopted in February 2021. The strategy will reflect the main recommendations of technical support provided by the World Bank (see section 7.2). It will be built on four strategic pillars and will encompass an anti-corruption component. The authorities also intend to conclude in early-2021 a partnership agreement with the European Commission, with a view to be supported in their endeavour. 3.5.Public investment In anticipation of the large amounts of funds that Greece is expected to receive under the next Multiannual Financial Framework (European Structural and Investment Funds and Recovery and Resilience Facility), the authorities have decided to create a Strategic Projects Pipeline for the selection of large infrastructure projects of national importance. The Strategic Projects Pipeline will be coordinated at the level of the Presidency of the Government, outside the core structure of the line ministries to avoid conflicts of interest. In order to improve and accelerate maturation of investment projects of the strategic project pipeline, the authorities are in the process of establishing a Project Preparation Facility. This is an important and welcome initiative, which aims to address structural obstacles in the preparation and implementation of public investments documented in earlier reports. The Project Preparation Facility is expected to prepare priority investment projects having a budget in excess of €20 million in energy, environment, transport and digital sectors. The authorities expect the total number of projects to reach 40-45 and the median size of the projects to be around €120 million. The Project Preparation Facility is expected to become a new unit in the Hellenic Republic Asset Development Fund. The Fund’s statute will need to be amended in order to add this new mandate and to allow it to prepare projects on behalf of the Hellenic Republic. Other changes to the Hellenic Republic Asset Development Fund law will be needed to safeguard the Hellenic Republic Asset Development Fund’s original mandate related to privatisations and to ensure that the establishment of the Project Preparation Facility does not adversely affect the Hellenic Corporation of Assets and Participations, the Fund’s holding company. An International Financial Institution will be selected as strategic partner. The action plan to enhance the monitoring and forecasting of the Public Investment Budget is broadly on track. The enhanced exchanges of data between the Ministry of Development and the Ministry of Finance, the monthly updates on the total Public Investment Budget allocation of expenditure based on actual payments as well as the quarterly Public Investment Budget revenue forecast updates are conducted as planned. Other actions related to the electronic creation, management and finalisation of payment orders are still in progress, in line with the timetable (see section 3.4). Some delays were observed in the technical implementation of the interoperability of the information systems of the two ministries due to technical problems, which were more serious than initially anticipated. These problems are planned to be resolved by the end of December 2020 with the aim to complete the automatic data exchange by the end of March 2021. In the context of the action plan, technical support is being provided by the European Commission on automating and streamlining implementation procedures, while an additional project to support the collection, handling and reporting of the data related to the Public Investment Budget had started in July 2020. 4.1.Sovereign financing Greek sovereign yields remain low and the government’s cash buffer is back at pre-crisis levels. The recent 15-year bond issuance on 21 October faced no sign of market pressures, with depressed yield and bid-to-cover ratio in line with auctions in previous months. The yield spreads of the long term sovereign bonds of Greece remain at historic lows. On the 10-year tenure, spreads over the German bund are hovering around 150 basis points, which is about 10 basis points below the September average. The general government’s cash reserves were replenished through bond issuances in the previous months, and stood at €34.5 billion at the end of September. The cash buffer account () balance remained at €15.7 billion. The overall general government cash reserves would be sufficient to cover around two years of financing needs even without further bond issuances. Sovereign financing conditions are expected to remain favourable, supported also by liquidity measures agreed at European level, including the European Central Bank’s Pandemic Emergency Purchase Programme, and the availability of the European Stability Mechanism’s Pandemic Crisis Support facility. 4.2.Debt sustainability analysis The European Institutions have carried out a comprehensive revision of the debt sustainability framework for Greece, as announced in the 5th enhanced surveillance report (). The revised framework includes a baseline scenario, which is aligned with the Commission framework applied to assess the debt sustainability for all other Member States (), and a country-specific scenario analysis to assess the risks. As in previous reports, we continue to show results over the extended horizon running up to 2060. The main revisions of macroeconomic assumptions are as follows (): ·Real GDP growth assumptions. The current framework continues to build on the latest Commission forecast in the short term and on the assumption of output gap closure in the fifth forecast year. The long-term growth developments are anchored to the macroeconomic assumptions of the revised 2021 Ageing Report, which reflect the recent reforms affecting the sustainability of public finances in the long run (such as pension reforms, and health and long-term care measures), recent demographic projections with an impact on participation rates and labour market variables, and the assumption of convergence in labour productivity across Member States. The updated long-term growth is on average 0.4 percentage points higher compared to the one assumed before. Graph 4.1. shows an overview of the decomposition of potential growth, and a full description of labour, capital and total factor productivity contributions is provided in the 2021 Ageing Report ( ). The projections do not take into account the potential positive impact on the growth potential of reforms and investments that could be implemented under the Recovery and Resilience Facility, given that plans are at an early stage of elaboration currently. Graph 4.1:Long term real GDP growth (%) Source: Commission services. ·Inflation assumptions. The short-term assumptions for the inflation rate build on the latest Commission forecast. Beyond that, in order to enhance consistency with inflation expectations as reflected by the markets in the sovereign’s financing costs, the country-specific GDP deflator was anchored to euro area inflation expectations measured by the ‘5-year 5-year’ inflation-linked swaps until the fifth forecast year, while assuming a gradual convergence to the 2% inflation target by 2030 (). The inflation differential observed between the euro area and Greece in the last year of the short-term (two-year-ahead) forecast is kept constant until the end of the fifth forecast year, and gradually eliminated by the tenth year. The baseline assumption on medium-term inflation path can be subject to further methodological improvements with the forthcoming 2020 Debt Sustainability Monitor. ·Interest rate assumptions. The revised framework moves away from modelling Greek market interest rates as a sum of the risk-free rate and a risk premium, which relied on two separate sub-models. Instead, the baseline assumption is aligned with the horizontal Commission framework for debt sustainability. Since the 2019 Debt Sustainability Monitor, the horizontal framework uses the forward rates on the short- and long-term interest rates for all Member States to set the interest rate levels on new debt issuances for the following ten years (). This revision to the methodology captures well the current low-inflation and low-interest-rate environment through market-based indicators that are readily available and well understood (). Beyond the tenth forecast year, the new framework builds on the 2021 Ageing Report, which includes converging real interest rate projections across euro area countries in the long term (over a thirty-year horizon transition period). The long-term euro area real interest rate was revised to 2%, downwards from the historical average of 3%, in light of recent economic literature and evidence on the declining trend in interest rates in advanced economies (). This is consistent with the assumption of an average growth rate of (real) potential GDP of 1.5% by the end of the projection period. The re-payment projections for the European Financial Stability Facility and European Stability Mechanism loans have been made consistent with the long-term euro area nominal interest rate that is converging to 4% by the end of the thirtieth forecast year. The 10-year rate for Greece averages 3% between 2020 and 2060. ·Fiscal assumptions. The fiscal path is based on the Commission 2020 autumn forecast up to 2022, and continues to be based on the conclusions reached at the June 2018 Eurogroup on measures to ensure debt sustainability thereafter. In line with the autumn forecast, Greece is expected to reach a primary deficit of 0.8% in 2022. Thereafter, the fiscal path is based on the conclusions reached at the June 2018 Eurogroup, where Greece agreed that its fiscal commitments remain in line with the EU fiscal framework, which, according to the analysis undertaken by the European Commission at the time, would imply a primary surplus of 2.2% of GDP on average in the period from 2023 to 2060. The revised methodology thus reflects the current application of the General Escape Clause. To assess the sensitivity of the baseline assumptions, two alternative scenarios have been developed, which replace the single adverse scenario published in previous reports. The main elements are as follows: ·Higher risk premium scenario. This scenario links risk premia to the level of debt in the medium and long run, similar to past approach. This is captured by replacing the market-based projections for interest rates and their gradual convergence to horizontal levels in the long term, which are used in the baseline scenario, with a model-based projection after the fifth forecast year, building on the euro area ‘AAA’ interest rate and a risk premium. The euro area rate is assumed to gradually converge to 4% by 2050 as in the baseline. The risk premium follows the methodology used in previous enhanced surveillance reports, adjusted for the unique structure of Greek debt that features a large share of official debt (). The 10-year rate for Greece averages 4.1% between 2020 and 2060 in this scenario.

·Lower GDP growth and higher risk premium scenario. In this scenario, growth rates remain below that of the baseline scenario in the long term, which also implies market interest rates remaining higher than the euro area rates in the long term. The refinancing rate on long-term debt would follow the same model-based projections as in the previous scenario, while nominal growth is assumed to remain at 3% once it converges to this level (). This would be consistent with a lower growth rate of GDP per capita, indicating a lower reform effort in the medium term. The risk premium is considered to reflect lower growth and is steadily increasing during the transition to the long-term, as markets progressively start to price in the high level of debt on a different GDP growth path. Table 4.1:Assumptions in the baseline scenario Source: European Commission. Table 4.2:Assumptions under the risk scenarios Source: European Commission. The update of the debt sustainability analysis takes into account the deteriorated near- to medium-term macroeconomic outlook and other regular technical updates, and the risks highlighted by the scenario analysis Similar to previous analyses, the revised methodology continues to assume the full implementation of all medium-term measures agreed in June 2018. In particular, the income equivalents from the SMP-ANFA profits are, on a technical basis, assumed to be disbursed and used for debt service purposes only. The analysis also includes, as under the previous methodology, updated interest and amortisation payments on official and non-official loans, new issuances and plans, an updated privatisation schedule and an updated short-term macroeconomic outlook in line with the autumn forecast. Results of the debt sustainability analysis Despite the deteriorated short-term outlook, the baseline scenario shows a return to declining debt-to-GDP ratio. The pandemic is expected to have a sizeable impact on the Greek government debt, which is projected to increase from 180.5% of GDP in 2019 to over 207% of GDP in 2020. This would a priori increase medium-term sustainability risks. However, as the emergency fiscal measures taken during the pandemic are announced to be temporary and the economy is projected to start recovering in 2021, the debt-to-GDP ratio is expected to set on a declining trend, also supported by the favourable financing conditions (). Nevertheless, until the mid-2040s the debt ratio would remain above 100%. The government gross financing needs are expected to hover around 15% of GDP for the next 20 years, before decreasing to about 13% of GDP by 2060. These long-term results are closely aligned with the projections presented in the 5th enhanced surveillance report. The unfavourable effects of the present increase in government debt and the deteriorated short-run macroeconomic outlook are now expected to be compensated by the assumed favourable financing conditions (Table 4.3). The baseline assumptions are subject to uncertainty, which is increasing over the projection horizon. Financing conditions could turn out less favourable than assumed, in particular beyond the medium-term. Uncertainty is also related to the long-term growth assumptions, which becomes all the more relevant during the current pandemic, given the large uncertainties surrounding its duration and a potential long-lasting impact on economies. If the crisis proves to be more persistent than currently assumed under the baseline, potential growth could be lower than expected. These factors are captured in the alternative scenarios. Table 4.3:Decomposition of change of results on gross financing needs due to the revised assumptions Source: Commission services. Table 4.4:Decomposition of change of results on debt-to-GDP ratio due to the revised assumptions Source: Commission services. The two alternative scenarios suggest that higher refinancing rates would deteriorate the outlook, and more so if combined with low growth underlining the importance of proceeding with an ambitious growth agenda. Under the higher risk premium scenario, the debt ratio, while on a declining path, remains significantly higher than in the baseline projections; the gross financing needs are also higher and remain marginally below 20% of GDP in the long run. However, under the higher risk premium scenario augmented with low-growth, GDP per capita does not converge to the euro area average and thus large spreads emerge and increase progressively over the entire horizon. As a result, the debt level remains high in the long run; the gross-financing-needs ratio is consequently persistently rising in the medium and long term, and is set to exceed 20% by the mid-2030s. The results of this scenario highlight the importance of delivering on the growth agenda whose draft was prepared by the ‘Pissarides Commission’ and published by the authorities in August 2020, especially considering that the long-term economic growth rate is by about ½ a percentage point lower than in the baseline. This underlines the importance of keeping up the reform momentum and continuing with an ambitious reform agenda in the future. The Recovery and Resilience Facility will be a key opportunity in this respect. Graph 4.2:Debt sustainability indicators (% of GDP) Source: European Commission. Additional mitigating/aggravating factors The composition and maturity profile of government debt mitigates debt vulnerabilities, while additional risks could emerge from sizeable contingent liabilities. A large share of debt is financed at low rates by official lenders and the average maturity increased largely over the past years (average residual maturity on medium and long-term debt is about 21 years in 2020), effectively insulating the financing costs from short-term fluctuations and reducing rollover risks. The Recovery and Resilience Facility is also expected to be a mitigating factor that could support growth potential through investments and reforms. Aggregate interest expenditure would remain low in the baseline scenario by historical standards. The large share of government debt held by official lenders and the stable evolution of liquidity buffers also contribute to the resilience of the debt position to global market fluctuations. By contrast, risks stem from the uncertainty related to contingent liability from the private sector, including materialisation of state guarantees to firms and self-employed granted during the pandemic crisis. Finally, a reversal in the currently observed low-interest-environment over the medium-term could also be considered an aggravating factor, if it materialises. 5.1.Pensions The authorities are making good progress in finalising the organisational and institutional setup of the Single Social Security Fund (e-EFKA), an end-2020 specific commitment. The merging of the public sector and supplementary pension functions has already been implemented including the physical move of offices; the remaining move concerns the employees of the former farmers’ fund (OGA) and is expected to be fully completed by the end of the year. The digital processing of pension applications has also progressed according to targets, albeit it is expected to slow down in the coming months. The digitalisation of the processing of survivor pensions and pensions for farmers has already been completed; the next step is to digitalise the processing of disability pensions and of the pensions for medical professionals. The pace of processing is expected to slow down in the coming months due to data availability issues and due to the coronavirus pandemic. The authorities’ target for the digital processing of digitally submitted applications is therefore only 10 percentage points higher by end-March 2021 (40%) compared to the already reached end-June 2020 target. After this, the processing is expected to accelerate again and to reach 75% by end-June 2021. Achieving these targets underpins the December 2021 arrears clearance target on the processing of pension claims (see section 3.4). 5.2.Healthcare Greece is strengthening the preparedness of the health-care system for the current health emergency. Laboratory testing capacity is being strengthened, along with expanding the network of sampling points. In terms of staff, 6 000 new recruitments were made to tackle the coronavirus, including medical, nursing, paramedical and other staff. Approximately 1 400 permanent doctor positions were filled, which will be supported by an additional recruitment of more than 1 200 medical staff, including nurses and other categories. Alongside workforce capacity, physical infrastructure was expanded too. As of early October, 941 intensive care beds are operational, of which 272 dedicated to the treatment of coronavirus patients, with a target to reach the EU average of 1 200 by the end of the year. In terms of prevention, the authorities started influenza vaccinations in mid-October.

Clawbacks are still high but steps are being taken to improve their collection and to curb the generation of new ones. The authorities adopted legislation to complete the collection of the 2019 clawback for the pharmaceuticals and to start the collection of the providers’ clawback for the years 2018 and 2019 (), which remains entirely uncollected so far. The timelines implied for the completion of the collection under the proposed schemes are considerably longer than those originally envisaged, but this may have been affected by the difficulties linked with to the pandemic. The issue of inefficient spending, largely due to supply-driven overconsumption, persists, increasing the financial burden of patients. To tackle this, the authorities focus on measures that are mostly incremental, such as additional therapeutic protocols and stepped-up efforts in negotiation, many being continuations of already existing strategies that have so far been only moderately effective due to weaknesses in implementation and discontinuity of policies. The elimination of the vaccines from the clawback ceiling, the planned shift of public coverage of medicines for the uninsured () outside the budget of the National Organisation for the Provision of Healthcare Services (EOPYY) and a more precise identification of spending for non-permanent residents through social security numbers represent elements of novelty. As stressed by the authorities, the latter does not correspond to any change in the coverage of the uninsured and aims at a better identification of spending for non-permanent residents (). However, at present, no plan is envisaged to include an element of risk sharing in the definition of the clawback (such as a cap to the clawed back amounts), the lack of which represents a weakness in its potential to effectively curb excess spending from a structural, rather than just fiscal, point of view. Centralised procurement of 30% of the total hospital expenditure by the first quarter of 2021 and of 40% by mid-2022, a mid-2022 specific commitment, is moving forward, despite the current situation. The authorities are progressing towards the implementation of centralised procurement, with the intermediate target of 30% of the budget (approximately €305 million) to be centrally procured by the first quarter of 2021. This target is considered to be achievable, and it is reported that reaching the target of 40% by mid-2022 also remains achievable. Equally, the reactivation of the price observatory by January 2021 is in the pipeline. The draft law on the new legal status of the National Central Authority of Health Procurements (EKAPY) is due for adoption by the end of the year. Staffing is still critically low, especially in the key departments in charge of tenders, which implies currently limited capacity and raises concerns regarding set targets. To tackle this, the authorities have expanded fixed term appointments in of the Central Authority. Meanwhile, a new president has been appointed, following the departure of his predecessor shortly after inception. The implementation of a fully-fledged and effective primary health care, which is a specific commitment, is proving a key element to deal with the pandemic. So far, 161 health centres were activated and can receive patients with coronavirus symptoms, which is key to limit unnecessary contact and patient exposure. Meanwhile, additional outpatient clinics were set up in the area of Athens and capacity for quarantine has been created making use of hotel infrastructure. Concerning the roll-out of the primary health care reform, the authorities are currently not fully implementing the 2017 reform (while formally, the legislation remains in place). The intention to reinstate the ‘fee-for–service’ system that existed before the 2017 reform, aiming at reconstituting the full stock of family doctors of the National Organisation EOPYY by re-attracting those who had dropped out and opted for a private regime has been put on hold. While beneficial in expanding the number of public (contracted) staff providing family medicine, this system may have hindered access for the vulnerable groups, as the budget for the fee-for-service system is likely to be exhausted over a few weeks and patients would need to pay extra to access services (). Instead, the authorities are about to launch a third call to staff the existing primary health care units (TOMYs). In the short term, the authorities plan to extend patient registration through the health care centres, that under the current plan complement/integrate the network of primary health care units and they opted for a simplification of the registration procedure. Rather than compulsory registration, the authorities currently envisage a system based on patients’ consent, where patients can choose within a network of providers. While granting patients wider choice, this option has risks as it allows patients to duplicate visits with a view to getting the best prescription/referral. To counter this risk, the authorities intend to exploit the potential of the e-medical record, which they deem as a key component of the new system, although not fully implemented or functional as of now and currently planned by mid-December. Based on the latest reports, the plan is to implement a soft version of gatekeeping based on incentives. The authorities committed to the finalisation of the revisions to the legal framework by the time of the publication of the tenth enhanced surveillance report due in mid-2021. 5.3.Social safety nets Overall, the implementation of social welfare reforms is progressing according to the agreed timelines. For what concerns transport subsidies, a mid-2020 specific commitment, the secondary legislation to allow a regular and objectively-based reimbursement of subsidised public transport tickets for vulnerable groups including disabled persons and members of large families has been adopted in October 2020, while the secondary legislation setting compensation levels for main transport operators is under preparation. Regarding the review of disability benefits, a policy paper is being finalised outlining the development of the new disability assessment process, and a pilot project is to be launched in March 2021. The guaranteed minimum income scheme, the reformed family benefit and the housing benefit continue to play an important role in protecting households’ incomes. Expenditure on these benefits is expected to increase substantially in 2021, as the effects of the pandemic are reflected in the 2020 income tax declarations. There has been little progress, however, with respect to the provision of labour market reintegration services for the beneficiaries of social assistance. The Guaranteed Minimum Income scheme should combine passive income support (first pillar) with the provision of social services (second pillar) and labour market reintegration services (third pillar). This requires, in particular, establishing appropriate interconnections between the benefit-paying institution, the local social services and the public employment service (OAED), as well as enhancing the capacity of the latter to deliver adequate services to jobseekers. During 2019, a pilot project was implemented to test the procedures for providing labour market activation services to Guaranteed Minimum Income beneficiaries. The pilot project was evaluated at the beginning of 2020, and its findings should have guided the national implementation that should have taken place in 2020. The process stalled following the coronavirus outbreak, however, and the national rollout that was expected to begin in the autumn of 2020 has not taken place. According to a revised timeline, the national roll-out is now scheduled to begin in April 2021, after completion of the key preparatory steps. In particular, the new business processes ensuring effective cooperation and communication between the various implementing bodies and the necessary technical adjustments and interconnection of the respective IT platforms should be completed by March 2021 at the latest. 6.1.Financial sector developments Liquidity and cost of funding in the banking sector The accommodative monetary policy conditions have allowed Greek banks to benefit from favourable liquidity conditions at a low cost of funding. The temporary relaxation of collateral requirements for Eurosystem credit operations and conditions for targeted longer-term refinancing operations have led to a sharp increase in the use of Eurosystem funding by banks, which rose from €7.6 billion end-February to €39 billion end-September 2020. This has allowed banks to increase their cash buffers. Deposits in Greek banks exhibit an upward trend since March, despite a general decline in deposit rates. The trend was mainly bolstered by deposits from the private sector, driven by corporates seeking to accumulate liquidity amidst the pandemic and underpinned by a less pronounced but steady upward trend in household deposits. Together, Eurosystem funding and private sector deposits have allowed liquidity conditions to remain favourable. As a result, the four Greek systemic institutions have reached a liquidity coverage ratio higher than 100%. With respect to the cost of long-term unsecured borrowing, although the yields are still elevated, it is gradually returning to the levels seen prior to the pandemic. One Greek bank recently tapped the market with an issuance of €500 million of the first ever six-year green senior bond at a yield of 2.9%. Graph 6.1:Bank deposits (left) and total borrowing from the Eurosystem (right) Source: European Central Bank, International Monetary Fund. Profitability and capital The economic effects of the coronavirus are expected to continue to put pressure on banks’ already low profitability, through lower net interest income and high loan loss provisions, particularly if demand for corporate credit weakens next year. In the first half of 2020, recurring operations continued to generate one of the lowest returns on equity in the euro area, as increasing provisions due to a worsening macroeconomic environment took their toll on profits. Moreover, securitisation of non-performing loans and non-performing loans inflows, which demand high loan loss provisions, are expected to have a major impact on banks’ profitability. Securitisations, despite their positive impact on the banks’ cost-of-risk, will not only result in an initial one-off capital loss but also a recurring loss on net interest income in case of loan de-recognition. Going forward, it is doubtful that the reduced funding cost and the expected income from new loans may fully offset this effect in the short run, particularly if new corporate loan volumes fall short of expectations next year. Low profitability, coupled with the cost of upcoming securitisations and the gradual phasing out of transitional prudential arrangements may pose challenges for the banks’ capital position, while reliance on state-related assets is set to increase. Banks’ average Common Equity Tier 1 ratio on a consolidated basis stood at 14.7% of risk-weighted assets at the end of June 2020, above the minimum capital requirements. However, banks’ capital position is impacted in the short to medium-term by (i) the capital cost of the upcoming non-performing loan securitisations, (ii) the new rules on the treatment of own funds held under Pillar II Guidance () and (iii) the expected phasing out of transitional prudential arrangements (). Moreover, these capital expenses will push up substantially the already high share of deferred tax credits in the banks’ Common Equity Tier 1 capital (€15.4 billion or 60.4% as of June 2020). At the same time, banks have increased their overall sovereign bond holdings in the first half of 2020, in an effort to boost their trading gains. Together with the retained senior notes of the securitisations benefiting from the guarantee under the Hercules asset protection scheme, this implies a tighter sovereign-bank linkage. Table 6.1:Main financial stability indicators Source: ECB - CBD2 - Consolidated Banking data; own calculations. Asset quality trends and non-performing loans deleveraging The reduction of non-performing loans continued in the first half of 2020, albeit at a slower pace than earlier, while the banks’ internal capacity to restructure loans viably remains a challenge. The gradual downward path in non-performing loans was less pronounced in the second quarter of 2020 compared to the previous quarter and 2019, with non-performing loans dropping by €1.2 billion (), reaching €59.7 billion. As a result, the share of non-performing loans to total customer loans fell to 36.7% at the end of June 2020 (), remaining the highest in the euro area. At the same time, write-offs and a sharp reduction in the default rate due to the moratoria in place have led on average to a lower amount of newly created non-performing loans compared to the amount of ‘cured’ non-performing loans, i.e. the rate of non-performing loans for which repayments have re-started. This has offset the fall in liquidations due to court closures and auction suspensions, as well as the banks’ limited organic non-performing loan reduction through effective loan restructuring. Graph 6.2:Non-performing loans as a % of total customer loans (left) and changes in their stock in the second quarter of 2020 (right: million EUR) Source: Bank of Greece. Debt payment moratoria, coupled with the temporary supervisory flexibility in place, have been instrumental so far in shielding the banks’ balance sheet from the impact of the pandemic on the credit risk of their loan book. However, banks have to prepare for a possible cliff effect when these measures expire. According to the data submitted by the Greek systemic banks as of 30 September 2020, €20.2 billion of loans have been covered by the non-legislative moratoria in place by servicers and banks for debtors affected by the coronavirus outbreak (). This amount represents more than 12% of the banks’ domestic loan portfolio, with €10.9 billion granted to households and €9.3 billion to businesses. The moratoria have mitigated so far the impact of the pandemic on the banks’ asset quality, as supervisory guidance allowed public and private moratoria announced and applied before 30 September 2020 not to be automatically classified as forbearance measures (). However, the large share of the performing loan book under moratoria points to a significant risk of future loan reclassifications to non-performing status, leading to increased provisioning needs and deteriorating asset quality ratios when moratoria expire.

Banks have started to adjust their non-performing loans reduction strategies but loan loss provisions booked so far might only partially capture the eventual effect of the pandemic on banks’ asset quality. The banks, in cooperation with the supervisory authorities, are revising their non-performing loan strategies, taking into account the coronavirus impact and their own corporate transformation plans i.e. ‘hive downs’ (). These interim strategies will be further refined and re-submitted to the supervisor at the end of March 2021, as requested by the supervisor for all euro-area banks. Moreover, in line with supervisory expectations communicated to euro-area banks, Greek banks are in the process of identifying and monitoring high-risk pockets within their loan book. The aim is to identify and address credit risk and facilitate a gradual return to normal loan instalment levels in 2021 for viable borrowers. Banks have increased their provisioning, particularly in the first quarter of 2020, to reflect the deteriorating macroeconomic projections. However, they have not incorporated a loan-specific analysis of the potential increase in credit risk or migration to non-performing loan status after the expiry of the moratoria, which implies a downside risk for 2021 credit provisioning and profit projections. A key element of the banks’ strategy to tackle non-performing loans remains to move ahead with delayed securitisations under the Hercules scheme. One systemic bank has recently concluded the first transaction under the scheme (), while the other three systemic banks, after a brief pause due to the pandemic, are now advancing with the securitisations, which are expected to be concluded in the first half of 2021. The result of these planned transactions will be a significant reduction in non-performing loans and an erosion of available capital buffers. However, even in the case of a successful implementation of all planned securitisations, the average non-performing loan ratio of Greek banks will remain in double-digit levels and well above the EU average both as an absolute amount and as a share of total loans. The risk of higher non-performing loan inflows due to the pandemic, combined with the potential capital cost of further securitisations, points to a need for complementary, potentially systemic solutions, that facilitate the resolution of non-performing loans. Financing of the economy The authorities successfully implemented or extended support measures to sustain access to finance for coronavirus affected businesses. The Hellenic Development Bank has launched two schemes, which appear to be successful in supporting bank credit. The first one is a guarantee scheme (), under which €3.4 billion of loans have been approved until end-August, with actual disbursements reaching €2 billion. The scheme is now rolling out its second tranche of €780 million of guarantees, primarily targeted to small and medium-sized enterprises and aiming to leverage an additional €2.5 billion of loans. The second scheme, called TEPIX II, is offering co-financing and interest subsidy for new corporate loans () and has mobilised over the same period another €1.8 billion of approved loans, with €1.5 billion of disbursements. This scheme was expanded by an additional €180 million, aiming to leverage about €0.8-1 billion of new loans, starting from October 2020 (). State support measures reinforce the increase in bank credit to large corporates and, more recently, small and medium-sized enterprises, while bank credit to households is contracting at a slower pace. The net average monthly flow of credit in Greece to non-financial corporations has increased from €110 million in 2019 to €723 million in the period March to September 2020, with a corresponding increase in gross loan flows. This trend has accelerated significantly in July-September on the back of disbursements of the two schemes by Hellenic Development Bank, without any apparent crowding out of normal bank lending flows to corporates. As a result, in September 2020, the annual rate of growth in bank credit to non-financial corporations reached 8.3%, posting for the third consecutive month the highest value attained since mid-2009 (see graph 6.3). Although most of this credit growth is directed to large corporates, there has also been a pick-up in net credit flows to small and medium-sized enterprises. The annual growth rate of household loans remained negative but has gradually improved relative to its recent low point in April 2020, standing at -2.5% in September 2020. This milder decline is due to a return to positive monthly net credit flows in consumer credit and other lending, particularly to owners of non-incorporated businesses. By contrast, mortgage lending has continued to contract, albeit at a more moderate pace relative to recent quarters. Graph 6.3:Bank credit to non-financial corporations and households, annual % change Source: Bank of Greece. Nominal lending rates continued their downward trend, stabilising near historical lows for non-financial corporations. The average nominal lending rate for non-financial corporations in the first nine months of 2020 has been 3.2% compared to 3.9% in 2019 (see graph 6.4), with a similar trend over all loan sizes, as a result of the very accommodative monetary policy, as well as the various state support schemes for credit to households and firms. On the other hand, the average nominal lending rate for household credit has only marginally declined in the first nine months of 2020 and remains at significantly higher levels than for corporate credit. Graph 6.4:Bank interest rates of new loans to euro area residents, annual percentages, weighted averages Source: Bank of Greece. 6.2.Financial sector policies Following the adoption of the insolvency framework reform, the authorities are now focusing on its swift implementation, having introduced legal amendments to accelerate the clearance of the household insolvency backlog and improve the effectiveness of e-auctions. The swift implementation of these measures will provide banks with new tools to tackle legacy non-performing loans and the new challenges implied by the coronavirus pandemic for the banks’ asset quality and for the accumulation of private debt in the economy as a whole. Further reforms, which are in the pipeline, aim to improve the Code of Civil Procedure and the efficiency of the e-auctions framework and should further support a reduction in the cost of credit during the recovery, while contributing to lower non-performing loan inflows. The actions outlined below are monitored and assessed under the enhanced surveillance framework, 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”. Insolvency law reform In view of the upcoming entry into force of the new Insolvency Code (), the authorities are preparing the secondary legislation and the necessary infrastructure. The code foresees the adoption of at least 53 administrative decisions (mostly ministerial and joint ministerial decisions), which are instrumental for the implementation of the framework. The authorities intend to proceed incrementally, aiming at completion of the process by the end of December 2020. Work on the ministerial decisions on the loan subsidy, sale and leaseback mechanism and the algorithm for the computation of restructuring proposals is proceeding and the authorities intend to share advanced draft texts with the European institutions by 15 November 2020. The authorities are aiming at having the electronic platform that will underpin the implementation of the procedures stipulated by the code in working order by the end of November 2020, so that it may be used in the context of the provision of training to magistrates, courts’ clerical staff and legal stakeholders, scheduled to take place in December 2020. The new insolvency framework is an important step forward and its effectiveness will depend on the quality of its implementation. The implementation of the new out-of-court workout (OCW) mechanism for restructuring debt should be closely monitored, especially with regard to its prudential aspects and its potential impact on payment culture, as well as the capacity of credit institutions to perform in a timely manner the relevant due diligence for the applications received under the scheme. The focus should be to ensure that the incentives provided to debtors and creditors (of both public and private sector) are well balanced and to establish whether the restructurings achieved via the mechanism are viable in the medium- and long-term. Moreover, the fiscal and financial effects of the new sale-and-lease-back scheme and the shorter pre-discharge period of one year envisaged under certain conditions, related to the composition and value of the bankruptcy estate, should be followed-up closely. It is crucial that the entire legal framework, including secondary legislation, as well as the necessary infrastructure are in place in time for the new Insolvency Code’s entry into force, so as to ensure the successful operationalisation of the new framework and avert any unintended negative effects on the financial sector and payment culture in general. In view of its low take-up, the authorities extended the deadline for applying for the temporary instalment subsidy scheme for debtors affected by the coronavirus outbreak by a month, following consultation with the European institutions. According to the latest data provided by the authorities, take-up was lower than expected throughout the period up to end-October 2020, with a total of 160 467 submitted applications against an estimate of 300 000 applications. As the extension is only for a short period, the authorities do not expect it to affect their projections materially as to its fiscal impact. It is important that all applications are assessed and fully processed by the time the subsidies are envisaged to start. Clearing the backlog of household insolvency cases The authorities have adopted a set of new provisions () to enable the processing of long-standing backlogs, whose success is dependent on effectively addressing staff shortages and infrastructure challenges. The law stipulates a fixed time schedule for the replacement of distant hearing dates by dates close to the present. Given that the implementation will be carried out in accordance with the internal regulations of individual courts, and will thus be subject to compliance with stipulations on the number of available dockets and the maximum number of cases that may be assigned per judge, it will be up to the administrative councils of the courts to design and take the relevant measures in order to maximise the processing capacity of the latter. The authorities anticipate that the rescheduling of dates and the submission of all relevant documentation and written arguments by the parties will have taken place by 15 September 2021. This would allow for the hearings to take place by the end of October 2021, and for the decisions to be issued within the mandatory six-month deadline, i.e. by the end of April 2022. Close monitoring of the implementation is therefore warranted, especially in courts that have accumulated a significant backlog, to assess whether additional measures will be needed. Regarding staff shortages, the Ministry of Justice is examining, jointly with judicial authorities, the possibilities of proceeding swiftly to the completion of vacancies by means of internal secondments. E-auctions The authorities have adopted the first set of measures aimed at enhancing the functionality and user-friendliness of the e-auctions platform (). As described in the previous report, the adopted measures provide for uploading to the e-auctions platform of the property’s valuation report as well as photographs. Regarding further identified issues, mainly related to the mechanism for adjusting the reserve price and the interoperability of the e-auctions platform with other state databases, the authorities confirmed that these would be considered in the context of the Code of Civil Procedure review (see below). The authorities confirmed that the revised Code will enter into force at the beginning of the next judicial year in September 2021. Clearing the backlog of called state guarantees The implementation of the agreed plan for the clearance of called state guarantees is on track, while the backlog of called guarantees remains considerable. The examination and payment of claims for the third quarter of 2020 has accelerated, following the shortfalls registered during the lockdown, and is in line with targets for natural persons’ loans and only marginally below target for corporate loans. Following the change of the relevant legal framework at the beginning of June, the electronic files repository is operational and credit institutions have already uploaded 60 300 loan files in relation to claims. Creditors are in a position to receive a protocol number automatically from the system, for each claim submitted. Interoperability with local tax offices is in its testing phase and is expected to enter in productive operation by November. The relocation of the State Guarantees and Capital Movement Directorate to its new premises should also be completed in November. Most importantly, 30 employees are currently in the process of being recruited and should become operational in November. They are expected to work on the basis of concrete performance targets to reinforce the two departments dealing with called state guaranteed loans. These important steps are expected to ensure the envisaged significant acceleration in the clearance of guarantees during the remainder of 2020.

Other initiatives Work on the revision of Code of Civil Procedure is ongoing and is expected to be completed, in early 2021 – later than initially foreseen but well in time ahead of September 2021, when it is due to enter into force. Following the reconstitution, in October 2020, of the law-drafting committee and the assignment of drafting tasks to sub-committees, the authorities committed to submit a progress report, including on e-auctions relevant issues, by the end of November 2020. A limited amendment of the primary legislation on deferred tax credits has been voted in September to safeguard the loss-absorbing capacity of the banks’ capital in all cases, including resolution. Work is ongoing on further technical aspects in the form of secondary legislation, in order to operationalise all aspects of the framework, including in the context of resolution and special liquidation. 6.3.Hellenic Financial Stability Fund (HFSF) The Fund continued its efforts to support the systemic banks in meeting their non-performing loans reduction and business enhancement goals in view of the challenges brought about by the pandemic. The Fund supported the systemic banks in the preparation of their updated non-performing loan reduction plans until 2022, submitted to the Single Supervisory Mechanism in September. The Fund is assisting two out of the four systemic banks in the preparations for their corporate transformations (hive-down), to be accompanied by large-scale non-performing loan securitisations, which are envisaged to take place in the coming months. The Fund is in the process of revisiting its shareholder expectations by taking into consideration the various effects stemming from the pandemic – including the moratoria and its consequences on the banks’ profitability, asset quality, capital position and liquidity – as well as the banks’ corporate transformations currently being prepared. The divestment strategy of the Fund needs to be finalised in the near future, including the potential involvement of the authorities in the final stage of the divestment, the legal protection for the governing bodies and staff of the Fund, and with regard to the implications stemming from the banks’ corporate transformations. With respect to the revision of the Relationship Framework Agreements, that became necessary among others due to the banks’ corporate transformations, it is important to preserve all statutory rights of the Fund. Preserving the Fund’s independence remains a cornerstone in the process toward restoring the health of the banking sector. 7.1.Labour market The Greek labour market has proved particularly resilient in the wake of the coronavirus outbreak, but the extended duration of the pandemic poses serious risks in terms of employment. Contrary to the experience of the 2008-2010 crisis, the severe contraction in output has not led to extensive job destruction so far. Employment levels declined mildly between February and May, recovering partially in June-July with the late start of the summer holiday season. The initial fall in employment was matched by an increase in inactivity with the unemployment rate actually falling again in July following a temporary increase during April-June. The swift adoption of emergency measures aimed at supporting businesses and protecting jobs (notably, emergency income support and job retention schemes) contributed to this result. As the pandemic endures, however, restructuring in the most-affected sectors may become unavoidable. The government has presented its proposals to modernise some aspects of the labour legislation. These concern in particular: the simplification and modernisation of the rules concerning working time and annual leave, including the extension of paternity and parental leave and the institutionalisation of telework, the removal of any distinction between blue-collar workers and white-collar employees with respect to employment protection legislation, the introduction of new limits to the reinstatement of dismissed employees, the introduction of an obligation for trade unions to be registered, and the revision of the rights and privileges of trade union members. These reform proposals are currently under consultation with the social partners. The codification of the labour legislation, and end-2020 commitment, has been delayed by the pandemic but it is still expected to be adopted by the end of 2020. While active labour market programmes are being reviewed to improve their efficiency and attractiveness, the system still suffers from capacity constraints. A well-performing public employment service and an effective system of active labour market policies are needed to deliver effective labour market support to jobseekers and help the labour market reintegration of beneficiaries of social assistance (see section 5.3). The initial pilot project of the new delivery model for active labour market policies, implemented in 2018-2020, will be evaluated by the end of 2020. Preliminary results have revealed the need to review the module of training programmes. While the expansion of the pilot project to several other geographical areas is foreseen in the near future, the national rollout of the model is not planned at this stage due to OAED capacity constraints and disruptions caused by the pandemic. Education The authorities continue to pursue their comprehensive education policy plans, and this has been reflected in the government’s growth strategy. In particular: ·The new framework for the operation and autonomy of the higher education institutions is under preparation and will be completed in the next three months. The statute of the university councils will be re-established, whereas the management of the higher education institutions will be overseen by the university councils that will give directions, approve strategies and budgets, and monitor the administration of the universities. Already with previous legislation, greater autonomy was given to the universities to manage their own funds, in particular those related to research. Another legislative act allowed the internationalisation of the universities and restricted the role of the ministry in developing education programmes. The accreditation of degrees is performed by the accreditation agency, the role of which was upgraded. ·The authorities have prepared the new draft law on vocational education and training, which is expected to be adopted by December 2020. Vocational schools ran by the Greek employment agency (OAED) will continue providing training at level 3 of the European Qualifications Framework. Professional Lyceums (EPAL) provide education at level 4 and 5 in case of post-school one-year apprenticeships, while the Institutes of Professional Training (IEK), which are both public and private and provide education at level 5, will be enhanced. Model and experimental Professional Lyceums and Institutes of Professional Training will be created and will start operating in the academic year 2021-22, in line with regional labour needs. The vocational education and training reform will be fully deployed within a horizon of four years. ·Following the introduction of internal evaluation of school units, reforms in school education are giving a particular emphasis to soft skills, such as social empathy, human rights, volunteering, environmental protection, creative thinking, and road safety. The enhancement of digital skills for both, teachers and pupils, is a priority of the current reform efforts. Foreign language teaching has also increased and teaching of English language was introduced for the first time in nursery schools. During the current academic year, the evaluations of school units apply for the first time, starting with setting the objectives in October. The authorities are planning to extend the evaluation to teachers in the academic year 2021-22. This is a major step forward as they faced a strong resistance in the past. 7.2.Product markets and competitiveness The authorities are advancing with most specific commitments under investment licensing and remain committed to implementing a widened reform agenda. All reform areas continue to benefit from technical support provided through the European Commission and delivered by the World Bank. Specifically, the authorities are expected to submit for public consultation a bill to simplify licensing procedures in most remaining sectors of the economy by end-November. They also set concrete timelines for the remaining work, specifically to simplify investment licensing procedures in all remaining sectors by mid-2021, and to implement the inspections framework fully by April 2021. The successful completion of the remaining work critically depends on the timely inputs by all ministries involved and the commitment of all stakeholders. ·Good progress is recorded as regards the simplification of the investment licencing procedures in the agreed remaining sectors, a mid-2020 specific commitment. The remaining work will be completed by mid-2021. Following the adoption of primary legislation on the primary production sector in July 2020, the authorities are proceeding with relevant secondary legislation, with a view to fully adopting it shortly. Further, by end-November, they aim to submit for public consultation a bill that will simplify most of the remaining sectors () by reducing requirements and the extent of ex-ante control currently imposed on businesses. Secondary legislation on these will be adopted by April 2021, along with primary legislation on the simplification of the activities that remain. The commitment is expected to be fully completed by mid-2021, with the adoption of secondary legislation on the latter. In parallel, the authorities continue to simplify and fine-tune areas related to sectors already reformed, assisted by ongoing technical support provided through the European Commission. ·The starting tools concerning the implementation of the inspections framework la