issues, while local banks and local institutional investors also are active participants (Table 3.8). Investors from North America and Asia absorb a small part of total issues.

In addition to the new instruments that were launched by the authorities, several innovations were introduced by market participants. These included repos, synthetic currency swaps, and so-called Marathon bonds (drachma-denominated bonds issued by foreign entities.) An active repo market emerged in the mid-1980s following the opening of treasury bills to non-bank investors. The growth of repos was stimulated by their freedom from reserve requirements and their flexibility in meeting customized needs. Reserve requirements were imposed on repos in 1992<sup>22</sup> , but their growth continued until income from repo transactions was subjected to tax in 1994. The repo market stagnated after that until they were again exempted from tax in 1998.<sup>23</sup> Mutual funds have been active participants in the repo market, but at some point in the late 1980s and early 1990s repos were also extensively utilized by retail investors seeking to earn a higher yield. The emergence of an active repo market contributed to a substantial deepening of the money market that had been created since the early 1980s but suffered from low activity and high volatility.

A second innovation was the introduction of synthetic currency swaps (Papaioannou and Gatzonas 1997). These exploited the high interest differential between local and foreign currency instruments and the differential tax treatment of investment proceeds from domestic and foreign instruments. They were short-term tax plays involving for the most part three-month placements. Mutual funds became active participants in this market but retail investors were also attracted, causing a disintermediation away from bank deposits and repos.

A third innovation was the issuance of Marathon bonds and notes by some multilateral institutions, such as the World Bank and the European Investment Bank. These provided a supply of fixed-rate drachma-denominated securities when the Greek authorities were still reluctant to make such issues.

An innovation that was supported by the authorities was the creation of an organized exchange for derivatives and the trading of a futures contract based on the 10-year government bonds that started to be issued in 1997. This contract attracted considerable interest in the middle of 2000, but demand for the contract evaporated after the entry of Greece into the euro zone. The contract was terminated in June 2001 (Ministry of Finance 2001:14).

The level of central government debt relative to GDP fell slightly between 1995 and 2001 from 119 to 117 percent of GDP. However, with substantially increased holdings of debt by other government entities, the level of general government debt experienced a larger fall from 110 to 105 percent of GDP.<sup>24</sup>

> 22 Following the harmonization of Bank of Greece reserve requirements with those imposed by the European Central Bank, repos are not subject to reserve requirements since July 2000. Short-term bank deposits are subject to a 2 percent reserve requirement.

> 23 From the beginning of 2002 income from repos is again subject to a 7 percent withholding tax. This resulted in a considerable decline in outstanding repo balances.

> 24 The exact level and form (instruments) of intergovernmental debt is currently under discussion between the Greek authorities and Eurostat (Eurostat 2004).

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