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ISBN: 978-92-79-16545-0
doi: 10.2765/69759

© European Union, 2010
Reproduction is authorised provided the source is acknowledged.

The Economic Adjustment Programme
for Greece
First review – summer 2010

1

2

CONTENTS
Executive summary

7

1.

Introduction

9

2.

Macroeconomic developments

11

3.

Financial markets and financial sector developments

15

4.

Programme compliance and policy discussions
4.1
Fiscal policy
4.2
Structural fiscal reforms
4.3
Financial sector policy
4.4
Other structural reforms
4.4.1 Labour market
4.4.2 Business environment
4.4.3 Energy
4.4.4 Transport
4.4.5 Absorption of structural funds
4.4.6 Public enterprises and privatisation

21
21
27
35
39
41
43
46
49
51
53

5.

Programme financing and treasury management

55

Annex 1

High-frequency indicators

Annex 2

Assessment of compliance with required action for the first review 60

Annex 3

Provision of data requirements

71

Annex 4

Updated macroeconomic forecast

74

Annex 5

Quantitative performance criteria

75

Annex 6

Financing gap projections

76

Annex 7

Statement by the European Commission, the ECB and IMF on

Annex 8

57

the First review Mission to Greece

77

Updated programme documents

79

Letter of intent
Memorandum of Economic and Financial Policies
Memorandum of Understanding on Specific Economic
Policy Conditionality
Technical Memorandum of Understanding

79
81
89
112

LIST OF BOXES
1. The economic adjustment programme for Greece
2. The effect of indirect taxation on inflation
3. Debt restructuring – Are market fears founded?
4. CEBS Stress Tests of Greek banks
5. From cash accounts to ESA95 accounts
6. The tax reform
7. The pension reform law

9
13
16
20
24
32
34

3

8. The Hellenic Financial Stability Fund
9. Potential growth
10. Opening up the electricity sector
11. Restructuring Greece's railway sector
12. State-owned enterprises and privatisation
13. Euro area stability support to Greece: main features

36
40
48
51
53
55

LIST OF TABLES
3.1 Banking sector soundness indicators
4.1 Summary of compliance with policy conditionality for the first review
4.2 Quantitative performance criteria and outcomes (EUR billion)
4.3 State budget execution (January to June 2010, cash data)
4.4 Payment claims

18
21
26
27
52

LIST OF GRAPHS
2. 1 Main macroeconomic indicators
11
2. 2 Correlation of output gap and inflation in Greece and the euro
area (1998-2010)
12
3. 1 Market sentiment indicators
15
3. 2 Loan and deposit developments in Greece
15
3. 3 Bank interest rates on new deposits and loans vis-à-vis euro area
residents
18
4. 1 Budgetary consolidation under the programme (EUR million)
22
4. 2 State budget cash balance (as of end June 2010)
27
4. 3 Developments of general government primary cash balance and
spending compared to the end June performance criterion
28
4. 4 Public employment – Structure (June 2010) and changes (June 2009
to June 2010)
30
4. 5 Long-term change in age related expenditures at unchanged policy,
prior to reform (2007 -2060)
32
4. 6 Long-term scenarios for government debt with and without pension
reform
32
4. 7 Greek banks' borrowings from the ECB
36
4. 8 Strictness of employment protection legislation (OECD indicator)
43
4. 9 World Bank Doing Business 2010 rankings
43
4.10 Barriers to entry in services: composite indicator (1998-2008)
44
4.11 Regulation in professional service indicator (1996-2008)
46
4.12 Composite indicator of product market regulation in the
EU (1998-2008)
46
4.13 Share of the largest electricity generator in the domestic
market (2007)
47
4.14 Road transport – indicator based on the number of (semi-) trailers
indexed to GDP
50

4

ACKNOWLEDGEMENTS
This report was prepared in the Directorate-General of Economic and Financial Affairs under the
direction of Servaas Deroose, acting Deputy Director-General.
Contributors:
Servaas Deroose, Uwe Böwer, Giuseppe Carone, Declan Costello, Leila Fernández Stembridge,
Luis García Lombardero, Loukas Kaskarelis, Filip Keereman, Daniel Kosicki, Paul Kutos,
Sven Langedijk, George Moschovis, João Nogueira Martins, Elena Pavlova, Milda Valentinaitė
and Peter Weiss. Christos Zavos was responsible for the layout.
The report was prepared in liaison with the ECB.
Comments on the report would be gratefully received and should be sent, by mail or e-mail to:
João Nogueira Martins,
European Commission,
Unit ECFIN-F-3
BU-1 01-140
B-1049 Brussels
e-mail: joao.nogueiramartins@ec.europa.eu

5

6

EXECUTIVE SUMMARY
A joint EC/IMF/ECB mission visited Athens between 26 July and 5 August 2010. The aim was to assess
compliance by Greece with the terms and conditions for the first review of the economic adjustment
programme required for the quarterly disbursements of bilateral financial assistance from euro area
Member States. The mission also discussed policy challenges ahead and an update and specification of
the conditionality requirements for the next reviews. This report provides a detailed assessment of
compliance and summarises the main findings of the mission.

Greece has managed impressive budgetary consolidation during the first half of 2010. It has also
achieved impressive progress in major structural reforms which will help to transform the economy.
Some of these reforms have been undertaken ahead of schedule.
While economic activity declined in line with projections, inflation has been significantly higher
than previously forecast. The economy is expected to contract by 4 percent in 2010 and by some 2½
percent in 2011. Large indirect tax increases have pushed up HICP inflation to 4¾ percent in 2010.
Inflation at constant taxes is falling and has declined below the euro-area average for the first time since
Greece joined the euro area. Moreover, there is no evidence of a pass-through of higher prices to wages,
and the recently signed national collective agreement contributes to moderating wage growth and
improving competitiveness.
Fulfilment of obligations under the ambitious and frontloaded programme is found to be largely on
track:
• All budgetary performance criteria for June 2010 have been met. Revenue performed below
programme targets, but was more than compensated by a contraction of state expenditure beyond the
target.
• All fiscal measures foreseen to be taken in 2010 have been adopted. In line with the requirements
set in the Memorandum of Understanding on Specific Economic Policy Conditionality (MoU),
Parliament has adopted in May measures that generate savings for a total amount of 2.5 percent of
GDP in 2010, plus carryovers of 1.1 percent of GDP for 2011. That brings total budgetary measures in
four successive packages to around 8 percent of GDP in 2010.
• Significant progress has been achieved in structural fiscal reforms: Key reforms include the
preparation of the new organic budget law, measures against tax evasion and steps forward in setting
up a single payment authority for public wages. Significant progress has also been made in
strengthening tax administration and in reforming public administration. Preparations are less
advanced in the implementation of a system to monitor and control expenditure commitments.
• Major steps forward have also been made in the broader structural reform agenda. Business
environment reforms, measures to accelerate absorption of structural and cohesion funds and
horizontal legislation to implement the services directive are on track; major labour market and
pension reform laws were adopted ahead of schedule, though they may require some further actions.
The privatisation and restructuring of state-owned enterprises needs to be sped up and in many cases
be more ambitious.

7

European Commission
The economic adjustment programme for Greece

• The Financial Stability Fund has been established and the Bank of Greece is committed to
stengthen banking supervision.
• Efforts to improve the collection and processing of data which is essential for budgetary control
need to be accelerated.
Despite the significant progress made, major challenges and risks remain:
• The main immediate challenge is to safeguard adequate liquidity and financial stability of the
banking sector. In this context, the authorities are committed to adopt legislation enabling a new
tranche of government-guaranteed bank bonds for the amount of EUR 25 billion. Furthermore,
following up on the results of the July 2010 CEBS stress tests, necessary measures will have to be
taken for the bank that did not pass. A strategic vision on the future of the banking sector is also to be
developed.
• Slippages in budgetary execution in the second half of the year have to be avoided. This requires
close monitoring of revenue shortfalls, the accumulation of payables, state guarantees which may be
called as the recession deepens, local governments and social security funds performance, catch up
spending, and hidden deficits and debts in public enterprises. Should fiscal performance fall short of
target, or revenue drop below schedule, the government has to stand ready to take corrective action.
• The structural reform agenda needs to be pressed ahead to unleash the huge potential for
raising growth. While the policy discussion of the interim mission in June focused on fiscal policy,
the July/August mission also paid particular attention to enhancing growth and competitiveness and
strengthening public administration through structural reform. Decisive action on key reforms will
bolster confidence in the adjustment programme, lowering risk premia and underpinning demand
thereby speeding up the recovery. In addition to the pension reform and substantive labour market
reform which are ahead of plans, other reforms that are scheduled for early implementation are
transportation, where important progress has already been made with liberalisation of road haulage,
and energy. Restoring competitiveness and boosting potential growth remains critical to the
programme’s success. The challenge facing the government in this regard will be to overcome
resistance from entrenched vested interests to opening-up of closed professions, deregulation,
implementation of the services directive, and elimination of barriers to the development of tourism
and retail.
Next steps: Subject to approval by the Eurogroup, the overall positive assessment of compliance with the
conditionality up to end June 2010 will allow releasing the next tranche of the loan agreement by midSeptember. The euro-area share in the next disbursement is EUR 6.5 billion; the IMF adds EUR 2.5
billion for a total disbursement in September of EUR 9 billion.

8

1.
1.

INTRODUCTION

This Report assesses compliance by Greece with the terms and conditions for the first
review. (1) The assessment is based on Greece's report on ‘The economic adjustment programme’ (2)
and the findings of the joint EC/IMF/ECB review mission to Athens of 26 July - 5 August 2010. It
presents the progress, challenges and further policy steps towards meeting the objectives of the
economic adjustment program for Greece of securing fiscal sustainability, safeguarding the stability
of the financial system, and boosting potential growth and competitiveness (See Box 1).

Box 1: The economic adjustment programme for Greece
The origin of the crisis
Over the last decade, Greece’s growth performance was based on unsustainable drivers: consumption and residential
investment booms were accompanied by high real wage increases and rapid credit growth; low real interest rates
associated with euro adoption and financial market liberalisation fed the boom. The 2008-2009 global crisis exposed
the vulnerabilities, including:
•

Unsustainable fiscal policies, partly hidden by unreliable statistics and temporarily high revenues;

•

Rigid labour and product markets;

•

Loss of competitiveness and rising external debt;

•

While not at the origin, the banking sector was affected by the economic and confidence crisis.

The extent of the deterioration in the fiscal position was revealed late due to grave deficiencies in Greece's accounting
and statistical systems. This delayed the implementation of corrective measures.
As concerns about Greek fiscal sustainability arose and global risk aversion heightened, market sentiment vis-à-vis
Greece worsened sharply in early 2010. In April 2010, Greece asked for international financial assistance as it was
confronted with sizeable financing needs and not able to access international capital markets.
On 2 May 2010, a joint European Commission/IMF/ECB mission concluded a staff-level agreement with Greece on
an encompassing adjustment programme supported by financial assistance provided by the euro-area Member States
and the IMF amounting to EUR 110 billion. A first tranche was disbursed in mid May 2010: EUR 14.5 billion paid
by the euro-area Member States and EUR 5.5 billion by the IMF.
Programme objective
The overarching objective of the programme is to durably restore Greece's credibility for private investors by
securing fiscal sustainability, safeguarding the stability of the financial system, and boosting potential growth and
competitiveness. To this end, the programme consists of a comprehensive set of ambitious and mutually reinforcing
policies.
Programme design
The fiscal leg of the adjustment programme has been designed to maximise credibility and enforceability by
prudent macroeconomic assumptions, strong frontloading, implementation and legislation of difficult measures
upfront, by fully specifying measures over the programme period and selecting measures of a structural nature. The
(1) The assessment is based on performance criteria and required actions by the Greek authorities to be complied with by end-June
2010 as set out in the Memorandum of Economic and Financial Policies (MEFP), the Memorandum of Understanding on
Specific Economic Policy Conditionality (MoU), the Technical Memorandum of Understanding (TMU) and the Council
Decision (2010/320/EU) of 10 May 2010. This Report is released together with Commission Communication "Follow-up to the
Council Decision of 10 May 2010 addressed to Greece" (COM (2010) 439) of 19 August 2010.
(2) The report submitted to the Council and the Commission by Greece on 6 August is available for download at:
http://ec.europa.eu/economy_finance/sgp/deficit/countries/greece_en.htm.

9

European Commission
The economic adjustment programme for Greece

programme also includes reforms to strengthen the budgeting system and fiscal framework to support the
consolidation strategy for the coming years.
The financial sector policies aim at restoring confidence and ensuring long-run viability of the banking sector.
To this end, the programme includes bank liquidity support in the short-term (approval of an additional EUR 25
billion tranche of government-guaranteed bank bonds), measures to recapitalise banks without prejudice to
competition rules, the establishment of the Financial Stability Fund (FSF) and the need for a restructuring plan of the
banking sector.
The structural reform agenda prioritises those reforms that have a large macroeconomic or budgetary impact
in the short-to-medium run. Reforms to tackle undeclared work will broaden the scope of the formal economy,
thereby increasing tax collection. Labour market reforms will spur job creation and increase wage flexibility. Product
market reforms, namely in the services sector, will step up market contestability, reduce the rents of vested interest
groups and help to curb price pressures. Other than efficiency aspects, reforms are also needed to improve equity, as
they will increase job opportunities for young and long-term unemployed and improve access to services.

10

2.
2.

MACROECONOMIC DEVELOPMENTS
Growth prospects remain largely unaltered. Economic activity is weakening in line with
expectations. The year-on-year decline in real GDP in 2010 Q1 was 2.5 percent (-1 percent quarteron-quarter), reflecting a pronounced contraction in domestic demand, in particular public
consumption and investment (See Graph 2.1). Private consumption was more resilient than expected,
reflecting base effects (very weak 2009 Q1), seasonal factors (pre-Easter spending taking place in
March), anticipation of the VAT increases by consumers (especially in cars and other durables) and
possibly an improvement in retail sales reporting (a first favourable result of measures to tackle tax
evasion). High-frequency indicators (see Annex 1) suggest that the decline in economic activity
continued in 2010 Q2. (3) The annual projection for real GDP growth remains unchanged at –4
percent in 2010. Labour market developments are in line with the macroeconomic scenario of the
programme. The unemployment rate was 11.6 percent (n.s.a) in March 2010, compared to 9.2 percent
in March 2009. The current account deficit-to-GDP ratio declines slightly faster than expected due to
a favourable denominator effect, but remains very large. In 2010 it would tighten to 10.6 percent of
GDP.

Graph 2.1: Main macroeconomic indicators
Exports, imports and current account balance (levels, mn euro)

Real GDP growth and composition (% change, y-o-y)

9000

700

7000

0

5000

-700

3000

-1400

2.0%

1000

-2100

0.0%

-1000

-2800

-2.0%

-3000

-3500

-4.0%

-5000

-4200

-6.0%

-7000

-8.0%

-9000

Imports

Employment and Unemployment rate

May-10

Jan-10

Mar-10

Nov-09

Jul-09

Sep-09

May-09

Jan-09

Mar-09

Nov-08

Jul-08

Sep-08

May-08

Jan-08

-12
-14

Private sector

General Government

Total Economy
2010q1

2009q4

2009q3

2009q2

-16
2009q1

2010q1

2009q4

2009q3

2009q2

2009q1

2008q4

2008q3

2008q2

2008q1

-2.0
2007q4

0.0
2007q3

-1.5

2008q4

-1.0

2.0

2008q3

4.0

-8

-10

2008q2

-0.5

-6

2008q1

0.0
6.0

-4

2007q4

0.5
8.0

2007q2

1.0

0
-2

2007q1

1.5

10.0

2007q2

Mar-08

Net lending/Net borrowing : Sectoral Breakdown

Employment (% change, y-o-y) (rhs)

12.0

2007q1

-4900

Current account balance

2

2.0

Unemployment rate (lhs)

%

% of GDP (accumulated 4 quarters)

14.0

Exports

-5600
Jan-07

2010q1

2009q4

2009q3

2009q2

2009q1

2008q4

2008q3

2008q2

2008q1

2007q4

2007q3

2007q2

2007q1

GDP

2007q3

4.0%

Nov-07

6.0%

Investments
Final Consumption

Jul-07

Net exports

Sep-07

8.0%

May-07

Inventory

Mar-07

10.0%

Source: Commission services.

(3) Flash estimate on 2010-Q2 and revised data on Q1 were published on 12 August 2010 after the cut-off date (6 August) of this
report.

11

European Commission
The economic adjustment programme for Greece

3.

Inflation is revised upwards. Price increases were much stronger than projected. In July, HICP
inflation was 5.5 percent, well above the euro-area average estimated at 1.7 percent. The markedly
higher-than-expected inflation rate reflected mainly the several increases in VAT and excises decided
and implemented in January-July (Box 2). Considering price developments in the first half of the
year, annual inflation in 2010 is now revised to 4¾ percent on average. The tax component exceeds 3
percent. Headline inflation is expected to peak at around 6 percent y-o-y in August; thereafter, price
pressures are expected to ease, as base effects and tax effects fade out, and slack in the economy and
wage moderation start feeding through. Given the impact of the very high annual average inflation in
2010 and the planned re-classification of goods currently subject to reduced VAT rate, the 2011
projection has also been revised upwards to 2.2 percent.

4.

There is little risk that high inflation will be entrenched and spill into wages. Weak activity,
public sector wage cuts and moderate wage developments in the private sector push unit labour costs
down, after a long period of rapid growth. In that context, the 15 July 2010 agreement on limited
increases in minimum wages in 2010, 2011 and 2012 marks an important break with the past. The
agreement on minimum wages provides for a nominal wage freeze in 2010, a 1.5 percent rise in July
2011 and a 1.7 percent increase in July 2012. Though more pronounced wage moderation would
have been desirable in 2011 and 2012, the agreement marks a major step towards wage formation in
line with productivity and competitiveness considerations in the monetary union.

5.

The higher-than-expected inflation should not have a significantly adverse impact on
competitiveness. The taxation component of domestic prices is only partially transferred to export
prices. However, tourism, a very important sector in Greece, is affected by the tax-driven price
increases.

Graph 2.2: Correlation of output gap and inflation in Greece and the euro area (1998-2010)
Greece

Euro area

5

4

4

3

Inflation

Inflation

3

2

2

1

1

0

0
-4

-3

-2

-1

0

1

Output gap

Source: Commission services.

12

y = 0.3x + 1.9
R2 = 0.6

y = 0.0x + 3.2
2
R = 0.0
2

3

4

5

-4

-3

-2

-1

0

Output gap

1

2

3

2. Macroeconomic developments

6.

The stickiness of the constant-tax HICP in face of the ongoing recession signals product market
rigidities. Comparing the apparent responsiveness of inflation to the output gap in Greece and the
euro area confirms the stickiness of prices in Greece (Graph 2.2). There has been no correlation
between output gap and inflation in Greece, while it is positive – as expected - in the euro area as a
whole. In 2012-2015, as the impact of structural reforms in product and labour markets unfold and
price flexibility increases, headline inflation should head much lower in Greece.

Box 2: The effect of indirect taxation on inflation
The recent increase in headline inflation has been largely tax-induced. Taxation has pushed up HICP. The
inflation rate at constant taxes has fallen, but remained positive at 1.2 percent y-o-y in June. The large impact of
taxes on inflation, in the context of a severe recession, provides evidence of inflexible domestic markets. VAT rises
in mid-March have been fully passed through to consumer prices. The m-o-m price increases were even
significantly higher than justified by the tax increase. This may point to ‘menu cost’ effects, with the occasion of the
VAT increase to be used for larger price increases.
In the remainder of 2010 and in 2011, headline inflation will continue to be pushed up by indirect tax
measures. The only small increase in headline HICP in July, VAT increases notwithstanding, provides evidence
that the pass-through of tax measures to consumer prices may be gradually levelling off. The tax component of
HICP is estimated at around 3½ percent in 2010 and 2¾ percent in 2011. The ongoing recession, possibly early
effects of structural reforms and moderate wage agreements are affecting y-o-y constant-tax inflation. For the first
time since 2004, it is expected to head into negative territory in 2010 Q4 and remain slightly negative in the course
of 2011. Albeit unprecedented for Greece, prolonged periods of decreasing prices at constant taxes have been
recorded in several countries at the onset of the financial crisis in 2009 (see Graph below).
High headline inflation favourably affects some programme indicators by the denominator effect. In
particular, projections for government debt-to-GDP and the current account-to-GDP ratio are revised downwards. At
the same time it should not significantly affect competitiveness. Taking into account very low constant-tax inflation
and decreasing labour cost, the underlying competitiveness developments are favourable.

Graph: HICP inflation developments and projections (% change, y-o-y)
7

6

GR-Headline inflation
GR-At constant taxes
EA16-Headline inflation
EA16-At constant taxes

6
5

forecast

Greece

5

4
3

Spain

4

Italy

3

Portugal

2

2

1

1

Apr-10

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Oct-08

Jul-08

Apr-08

Sep-

May-

Jan-11

Sep-

May-

Jan-10

Sep-

May-

Jan-09

-2
Sep-

-2
May-

-1

Jan-08

-1

Jan-08

0

0

Source: Hellenic Statistical Authority and Eurostat.

13

European Commission
The economic adjustment programme for Greece

14

3.

FINANCIAL MARKETS AND FINANCIAL SECTOR
DEVELOPMENTS

7.

Market sentiment has improved markedly since end June. Greek government bond yields
initially fell sharply from their May peak level (Graph 3.1.) as agreement on the economic adjustment
programme and financial assistance package supported investor confidence, with crucial support
from ECB purchase operations. As a result, the benchmark 10-year government bond yields in midMay promptly dropped by 4 percentage points, while credit default swap spreads, a market indicator
of sovereign default likelihood, abruptly narrowed. In mid-June Moody's Investors Service
downgraded Greek sovereign debt rating by four notches, raising worries again and triggering an
automatic exit of investors that could no longer hold securities rated below the investment grade. The
impact of the downgrade started to fade away in July with fiscal data giving some support to the
favourable outlook. Government bond yields stabilised despite shrinking ECB purchases and credit
default swaps narrowed. T-bill auctions in July witnessed strong demand with increasing interest
from foreign investors.

8.

While sovereign bond risk premia have come down, they remain high as markets price in a
high risk of debt restructuring. The programme does not foresee Greece to issue sovereign bonds
until 2012. (4) Still, the high sovereign risk premia may adversely affect economic developments by
spilling over into financial, corporate and household sector risk premia (see Box 3).

Graph 3.1: Market sentiment indicators
5-year CDS spreads

Spread over German bond (’00 basis points)

10 years

1200

2 years

20
18

1000

16
14

800

12
600

10
8

400

6
4

200

2
0
Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

0
Jan-10

Jul-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Source: Commission services.

Graph 3.2: Loan and deposit developments in Greece
300

25%
Mortgage

20%

EUR billion

250

Consumer

200

Corporate

15%

150
10%

Total deposits

ja
nv
-0
m 5
ai
-0
se 5
pt
-0
ja 5
nv
-0
m 6
ai
-0
se 6
pt
-0
ja 6
nv
-0
m 7
ai
-0
se 7
pt
-0
ja 7
nv
-0
m 8
ai
-0
se 8
pt
-0
ja 8
nv
-0
m 9
ai
-0
se 9
pt
-0
ja 9
nv
-1
m 0
ai
-1
0

10

10

M
ay
-

M
ar
-

Ja
n10

N
ov
-0
9

Se
p09

M
ay
-

M
ar
-

Ju
l-0
9

0
09

0%
09

50

Ja
n09

5%

N
ov
-0
8

Sight deposits

100

Source: Commission services.

(4) However, the programme foresees the continuous roll-over of short-term bills.

15

European Commission
The economic adjustment programme for Greece

Box 3: Debt restructuring – Are market fears founded?
Government bond and CDS markets are pricing in a very high probability of Greek sovereign default, despite the
economic adjustment programme. Some fear that the programme may not work as it requires immense fiscal effort
and radical structural reforms, which are difficult to implement and may face fierce opposition by the Greek
authorities or population. Others question Greece's debt sustainability and in particular the country's ability to raise
money in the market after the programme funding ends. Finally, some argue that Greece will have a high incentive
to voluntarily restructure unilaterally once it reaches a primary budget balance. These fears are unfounded:
The programme is robust and Greece is abiding by it.

•

The programme is frontloaded and more than half of the required budgetary consolidation measures up to
2014 have already been adopted by Parliament and are being implemented.

•

Assumptions on the effectiveness of measures and growth are prudent. Over the whole period 2010-2014
the programme even assumes negative average real growth.

•

The authorities are fully committed and closely cooperate with the European Commission, IMF and ECB.
The programme is largely supported by the Greek population, while public discontent remains limited to the
narrow affected groups. Overall, there is broad awareness that a change in the institutional fabric was needed.

•

The programme is on track. The fiscal targets for the first half of the year have been met. Significant advance
has been made in the field of structural reforms with some reforms (pension, labour market) being implemented
ahead of schedule.

The combination of fiscal consolidation, institutional and structural reforms will ensure long-term debt
sustainability.

•

Debt dynamics are sustainable even under a conservative scenario and measures are in place to ensure the fiscal
discipline.

•

The impressive progress with the structural reform agenda will ensure that real GDP growth is likely to be
higher than assumed in the conservative programme’s projections.

•

The pension reform considerably reduces future spending pressures. It can be considered one of the largest
reforms in the EU in terms of reduction of projected expenditure increases.

•

Public administration reforms support the capacity to durably control budgetary implementation.
Graph 1: Debt scenarios
% of GDP

160

135

Scenario 1

110

Scenario 2

85

Scenario 3

60
2005

2010

2015

2020

2025

Note on assumptions: Nominal growth rates: 2.0, 3.5 and 5.0 percent for the scenarios 1, 2 and 3.
Common assumptions: primary surplus: 5.5 percent of GDP; implicit interest rate: 4.8%.

16

3. Financial markets and financial sector developments

With the success of the programme, incentives for debt restructuring will decrease rather than increase.
Sticking to prudent policies and delivering the results will gradually improve investors’ confidence and drive risk
premium down easing debt servicing costs. Moreover, as yields fall, the incentive to renege on the debt disappears.
Risking to unravel years of efforts and reforms and regained credibility would not be rational.
Markets are overestimating the risk of default /debt restructuring and are underestimating the costs. Potential
gains entail savings on debt servicing. The economic and social costs would, however, be enormous. The Greek
authorities are making impressive progress towards putting government debt on a sustainable path avoiding the
social misery that would be associated with the protracted economic disruption and broad financial crisis associated
with debt restructuring. As the program's credibility is further established by meeting performance criteria and
enhanced budgetary statistics, perceived risk of debt restructuring will come down further.
Not only would debt restructuring come at very high costs for Greece, also other euro-area countries would suffer
high costs. EU commercial banks exposure to Greece amounts to EUR 120 billion, including both claims on the
public and the private sector. It has been decreasing from its peak at EUR 140 billion in March 2008. French,
German and British banks are most exposed in nominal terms, although claims on Greece represent a relatively
small fraction of their balance sheets (Graph 2). Banks from other EU countries, including the Netherlands, Ireland
and Italy, also hold a range of Greek assets in their portfolios. Government debt securities provide for a substantial
share of the overall exposure. Finally, reputational damage would be exceptionally high for Greece.
All in all, debt restructuring is not an option.
Graph 2: EU commercial banks exposure to Greece
60

EUR bn

0.70%

Hypo Real Estate Holding AG (DE)

7.9

BNP-Paribas (FR)

5.0

0.50%

Société Générale (FR)

4.2

0.40%

Commerzbank AG (DE)

2.9

ING (NL)

2.4

Royal Bank of Scotland (UK)

2.4

Deutsche Bank AG (DE)

1.7

0.10%

Groupe BPCE (FR)

1.5

0.00%

HSBC Holdings Plc (UK)

1.5

Landesbank Baden-Württemberg (DE)

1.4

0.60%

50

40

30
0.30%
20

0.20%

10

0
AT

BE

DE

FR

IT

Exposure to Greece (lhs)

SE

FI

DK

IE

NL

PT

ES

% of banking sector assets (rhs)

GB

Gross sovereign exposure to Greece by bank
(EUR bn)

Note: Excluding Greek banks

Source: BIS consolidated statistics, immediate borrower basis; data for March 2010. Data on individual banks based on sovereign
risk disclosures published in the framework of the CEBS stress test. Note: for sovereign exposure of Greek banks see Box 4 on the
CEBS stress tests

9.

Loan growth is further decelerating and the deposit outflow slowed down but did not stop.
Against the background of the weak economic environment, credit growth continued slowing down
in 2010 Q2 (Graph 3.2). In particular, consumer borrowing is low, while the decline in mortgage
lending appears to be bottoming out. Loan growth has however remained positive throughout the
crisis as the ECB provided ample liquidity. With the financial situation in Greece remaining fragile,
deposit outflows have continued, albeit at a somewhat reduced pace recently. As previously, mainly
large deposits have been withdrawn with little movement in retail deposits.

10. The interest rate margin of banks is under pressure. The liquidity needs of the banking sector and
the competition for deposits led to an increase of interest rates on new deposits since the beginning of
2010. However, while the average interest on new loans for households remained broadly stable, both

17

European Commission
The economic adjustment programme for Greece

in the housing and consumer lending, it has been increasing for loans to non-financial corporations
(Graph 3.3). All in all, the intermediation margin in the household compartment is declining and
broadly flat in the corporate segment.
Graph 3.3: Bank interest rates on new deposits and loans vis-à-vis euro area residents
Non-financial corporations

Households
%

%

Loans

8

8

7

7

6

6
5

5

Net interest
margin

4

4

3

3

2

2
1

1
Deposits

0
Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

0
Jan-08

May-10

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Source: Bank of Greece

11. The banking sector suffered from losses on impaired loans and trading books. In 2010 Q2, the
banking system capital ratio declined by 0.05 percentage points to 11.7 percent. The non-performing
loans increased from 5 percent in 2008 and 7.7 percent in December 2009 to 8.2 percent in March
2010 (Table 3.1). Banks reacted by accumulating provisions for loan losses. By the end of 2010 Q1,
the average coverage ratio slightly grew after three years of decline. The increase in provisioning,
especially in the domestic lending portfolio, combined with the slump of value of government bonds
held in the trading portfolios, resulted in heavy losses. Profitability (measured by return on assets and
return on equity) fell to -0.6 percent and -8.7 percent, respectively, at the end of March.
Table 3.1: Banking sector soundness indicators
(In percent)
Regulatory capital to risk-weighted assets 1/
Regulatory Tier I capital to risk-weighted assets 1/
Nonperforming loans to total gross loans
Bank provisions to nonperforming loans
Return on assets (after taxes) 2/
Return on equity (after taxes) 2/
Liquid assets to short-term liabilities 3/

2005

2006

2007

2008

2009

Q1 2010

13.2
10.9
6.3
61.9
0.9
15.9
47.0

12.2
9.9
5.4
61.8
0.8
12.7
46.5

11.2
9.2
4.5
53.4
1.0
14.8
48.0

9.4
7.9
5.0
48.9
0.2
3.2
50.0

11.7
10.6
7.7
41.5
-0.1
-1.5
56.9

11.7
10.6
8.2
42.8
-0.6
-8.7
57.4

Source: Bank of Greece.1/ Data on a consolidated basis. 2/ On a non-consolidated basis, in accordance with IFRS. 3/ On an aggregate residentbased approach (i.e. commercial banks, cooperative banks and foreign branches).

12. The six largest Greek banks participated in the stress tests conducted by CEBS. According to
published results, Agricultural Bank of Greece (ATE) would need a capital injection of about
EUR 250 million to maintain the targeted 6 percent Tier 1 ratio under the stress scenario. The other
five banks passed the tests (Box 4). Markets reacted positively and stock prices of Greek banks
initially rose. When publishing the results, the Bank of Greece said it would closely monitor the
situation, while emphasising that scenarios are not forecasts and urging the bank that failed the test to
take the necessary steps to bolster its capital adequacy.

18

3. Financial markets and financial sector developments

13. Prior to the publication of the stress tests results, Piraeus Bank made an unsolicited take-over
bid on two state-owned banks: ATE and TT Postbank. While the move towards consolidation of
the Greek banking sector is welcome, the relatively poor performance of Piraeus Bank in the tests
prompted comments that one of the bid's objective was to turn attention away from the bank’s own
solvency problems. Piraeus Bank's offer of EUR 372 million for ATE and EUR 329 million for TT
translated to about a 30 percent premium over TT Postbank's market value and a 50 percent discount
for ATE. (5) This operation would be financed by a raise of fresh capital targeted at above EUR 1
billion, which should also allow Piraeus Bank to pay back the preference shares received in 2009 and
thus free itself from the EU state aid constraints which impede take-overs. The new entity that would
result from the take-over would be the second largest bank in Greece with EUR 100 billion of assets
and 20-25 percent market share. The acquisition of TT Postbank and ATE with their large and stable
deposit pools would improve the liquidity situation of Piraeus Bank and, according to its own
assessment, it would generate economic synergies in the banking sector of EUR 300 million per year.
The government announced it would consider the offer. According to the EU competition rules, the
sale of the state stakes in ATE and TT Postbank will require an open tender.

(5) The offer excludes preferred shares on ATE held by the Greek government.

19

European Commission
The economic adjustment programme for Greece

Box 4: CEBS Stress Tests of Greek banks
In May-July 2010, the Committee of European Banking Supervisors (CEBS) in cooperation with the European
Commission and the ECB coordinated the stress test of 91 large European banking groups. The main objective was
to estimate capital levels of participating banks at the end of 2011.
The adopted benchmark for passing the test was Tier 1 capital ratio at 6 percent, which is two percentage points
above the EU regulatory minimum. The results published on 23 July revealed seven banks in three EU countries
failing the tests, including Agricultural Bank of Greece (ATE). Apart from their capital estimates, participating
banks also disclosed their total nominal exposures to sovereign risk (See Table).
The focus of the exercise was on the impact of credit risk and market risk on capital adequacy, while liquidity risk
was not directly tested. The downward pressure on capital ratios was stemming mostly from impairment losses and
trading losses. The tests were conducted according to three macroeconomic scenarios: the Base scenario, relying
mainly on the Commission services’ spring 2010 forecasts, the Adverse scenario, developed by the ECB, and the
Extreme scenario, including a sovereign risk shock. For each scenario, a set of key variables, including GDP,
unemployment, inflation, interest rates and real estate prices, was provided on a country-by-country basis.
The six largest Greek banking groups: National Bank of Greece (NBG), EFG Eurobank, Alpha Bank, Piraeus Bank,
ATE and TT Hellenic Postbank participated in the stress test. High capital levels at the end of 2009 allowed four out
of six banks to remain above the 6 percent Tier 1 benchmark even under the most adverse conditions. Piraeus Bank
passed the test with 6 percent Tier 1 ratio and for ATE, the Tier 1 ratio fell to 4.4 percent in the Extreme scenario.
Table: Stress test results for Greek banks
abc

Tier 1 ratio (%)
31.12.2009

NBG
Eurobank EFG
Alpha Bank
Piraeus Bank
ATEbank
Postbank

11.3
11.2
11.6
9.1
8.4
17.1

Exposure to Greek government (EUR bn)

31.12.2011
Gross exposure
Estimate by scenario:
Base
Adverse
Extreme
11.7
9.6
7.4
19.8
11.7
10.2
8.2
7.5
12.3
10.9
8.2
5.1
10.9
8.3
6.0
8.3
10.7
8.9
4.4
10.2
17.0
15.0
10.1
5.4

31.03.2010
of which:
Banking book Trading book
18.1
1.6
7.4
0.1
4.9
0.2
7.2
1.1
9.5
0.7
5.2
0.1

Source: Banks’ websites
While commenting on the stress test results, Bank of Greece emphasised that under the Base scenario all six banks,
which account for more than 90% of the Greek banking sector's assets, were above the 6% benchmark. Furthermore,
it stated that while "the results under the adverse scenario reflect neither the present situation nor the possible
immediate capital needs," it would monitor the situation and ensure that capital adequacy of banks is enhanced
where needed. The EUR 10 billion Financial Stability Fund and EUR 1.2 billion still available from the 2009
recapitalisation scheme were recalled as a safety net being in place for Greek banks.
In a joint press release issued upon publication of stress test results, the CEBS, the EC and the ECB urged those
banks having failed the tests to "reinforce their capital positions by private-sector means and by resorting, if
necessary, to facilities set up by Member State governments."

20

4.

PROGRAMME COMPLIANCE AND POLICY DISCUSSIONS

14. The government has made a vigorous start with implementing its economic program. The fiscal
program is progressing well, financial sector policies are being strengthened, and structural policies
are ahead of schedule in key respects.
15. Annex 2 provides a detailed assessment of compliance with the specific required actions for the first
review (to be completed by 2010 Q2 as set in the MoU). Annex 3 provides an overview of
compliance with data provision requirements.
4.1.

FISCAL POLICY

16. The quantitative budgetary performance criteria for June 2010 have been met. Strong
expenditure restraint compensated for weaker than anticipated state revenue. All cash-based
indicators were above their respective floor or below their ceiling as required by the programme.
Continuing lack of timely, consistent and reliable budgetary accounting beyond central government
renders assessment and control of budgetary developments at general government level problematic.

Table 4.1: Summary of compliance with policy conditionality for the first review
Fiscal policy

Compliance with
conditionality
Observed

Comments
All fiscal measures foreseen to be taken in 2010 have been adopted.
All budgetary performance criteria for June 2010 are met. State and general
government revenue performed below programme targets, but this was
more than compensated by contraction of expenditure at central level
beyond the target.

Largely observed

The new organic budget law, measures against tax evasion and steps
forward in setting up a single payment authority for public wages are on
track.
Preparations are less advanced in the implementation of a system to
monitor and control expenditure commitments.
Progress with improving tax administration efficiency and public
administration in line with the programme. Also the major pension reform
was adopted ahead of schedule, though adjustments will be neecssary in the
course of 2011.

Observed

The Financial Stability Fund has been established and the Bank of Greece
is committed to intensify supervision.

Other structural reforms

Largely observed

Business environment reforms, measures to accelerate absorption of
structural and cohesion funds and horizontal legislation to implement the
services directive are on track.
The privatisation and restructuring of state-owned enterprises needs to be
speeded up and in some cases made more ambitious.
Although a major labour market reform has been adopted ahead of
schedule, there are still some required actions to be followed.

Data provision

Broadly observed

Most data was provided on time; some data was submitted late, while other
data was not available. Efforts need to be intensified to improve the
collection and processing of general government data which is essential for
budgetary control.

Structural fiscal reforms

Financial policy

Source: Commission services.

21

European Commission
The economic adjustment programme for Greece

Graph 4.1: Budgetary consolidation under the programme (EUR million)
Fiscal measures over the period 2010 - 2014

Fiscal measures by budget year (% of total
budgetary adjustment)

24000

2014
11%

Measures taken
prior to May
2010

Measures in the MoU - May 2010

2010
50%

2013
11%
16000

Carry-over from
2010

2012
13%

8000
2.500

5.800

6.650

5.575

4.775

4.700

0
2010

2011

2012

2013

2014

2011
15%

Source: Commission services.

17. All required fiscal consolidation measures for 2010 have been fully adopted in the first half of
the year. In line with the requirements set in the MoU, the government adopted in May 2010
additional fiscal measures that are estimated to generate savings for a total amount of 2.5 percent of
GDP in 2010 and carryovers of 1.1 percent of GDP for 2011. (See Annex 6 with overview of
measures). Total budgetary measures, adopted in four successive packages, are quantified at around 8
percent of GDP in 2010. These measures are projected to reduce the government deficit from 13.6
percent of GDP in 2009 (6) to 8 percent in 2010, while the economy is in recession. This implies that
fiscal consolidation is heavily frontloaded (7) (See Graph 4.1).
18. State budgetary quantitative performance criteria for end-June were met. According to the June
2010 cash data by the General Accounting Office (GAO), the state cash deficit shrunk by 46%, as
compared to the respective period in 2009, compared to a targeted annual contraction of 40%. This
sharp reduction beyond target was mainly the result of sharply lower-than-expected expenditure,
which more than offset lower-than-expected revenue. Total state cash expenditure were reduced by
almost 17% compared to the first half of 2009, while the official target reduction of expenditures for
the year as a whole is 5.3%. This contraction mainly reflects primary expenditure cuts (including
public wages) and squeezing capital expenditure, on the back of the implementation of the
consecutive fiscal packages, while some additional expenditure savings adopted in May have not
(6) Eurostat has not yet validated the 2009 government deficit and debt data notified by Greece. On 22 April 2010, Eurostat
informed that, following completion of the investigations that Eurostat is undertaking in cooperation with EL.STAT on several
issues (in particular, the sectoral classification of a number of public enterprises and the accounting of off-market swaps, as well
as the need of more detailed and accurate date on social security revenue and expenditure), the 2009 government deficit ratio
could be revised upwards by 0.3 to 0.5 percent of GDP, and the debt by 5 to 7 percent of GDP (see Eurostat News Release
N° 55/2010).
(7) The size of the required fiscal consolidation measures over the period 2010-2014 – 18 percent of GDP, including measures
announced before May 2010 – exceeds by far the required reduction in the government deficit as the deficit would continue
increasing at unchanged policies, reflecting, inter alia, negative real GDP growth, an increase in interest expenditure and
unemployment benefits, and a higher public wage bill and pensions.

22

4. Program compliance and policy discussions

been fully reflected in the available data. Interest expenditure (on a cash basis) in turn, remains below
budgeted targets, having to do with the calendar of interest payments and should return to normal, as
reflected in the target, in the coming months. Total cash revenue increased by 5.9 percent in the first
half while an annual increase of 15.6 percent is targeted for the year as whole. A considerable pickup can be expected in the second half, as the full effect of the VAT and excise increases will feed
through. However, it is likely that the revenue target will not be reached. The shortfall from revenue
projections is however at odds with higher than projected nominal GDP growth and a tax-favourable
growth composition. This suggests that reforms in tax administration and the fight against tax
evasion have not yet given tangible results and need to be accelerated.
19. Despite slippages, the performance criteria for the general government have also been met,
thanks to the overachievement of state-level targets. According to monetary statistics-derived data
provided by the Bank of Greece for the first half of the year, local government cash balance remained
at a surplus, albeit slightly smaller than previously projected; the social security funds' cash balance
remained at deficit, instead of a surplus targeted. Moreover, there has been an accumulation of
accounts payable in some cases beyond their due dates (arrears) in public hospitals, but also in
transfers and other payments within general government units. The combined balance of the sectors
other than state is on balance in the first half of the year, instead of an initially projected surplus of
some ¼ percent of GDP.
20. The overall stock of central government debt in end-June 2010 stands at EUR 317 billion, (8)
thus meeting the relevant performance criterion. The trajectory of the debt-to-GDP ratio is
significantly lowered in the macro-projections in line with the higher level of nominal GDP due to
larger than expected price increases. General government debt – under the current definition of
general government – is now projected to peak at 145 percent of GDP in 2013 rather than just below
150 percent of GDP. (9)
21. However, there are significant budgetary risks during the remainder of 2010, with the revenue
side being more vulnerable. The government is committed to tight expenditure control, also
stepping up efforts to enhance revenue collection, in order to consolidate under-spending and avoid
revenue slippages. Fiscal risks may arise particularly in the following areas:
• State revenue: Tax revenue has been performing below targets over the first half of the year,
although the efforts to improve tax compliance and fight tax evasion have been intensified. Tax
revenue in the second half of the year is expected to recover on the back of the full implementation
of the revenue enhancing measures already legislated, such as the second VAT rate increase.
Nevertheless, as the economy is deepening in the recessionary phase, the anticipated recovery
might not be sufficient for the annual state revenue to meet the programme’s targets.

(8) Note that the general government consolidated gross debt (the ‘Maastricht debt’) is slightly smaller than the central government
debt as part of the central government debt is held by social security funds and thus consolidated.
(9) See footnote 6 on the expected reclassification of a number of public enterprises under general government leading to an
increase in government debt which is projected in the range of 5 to 7 percentage points of GDP.

23

European Commission
The economic adjustment programme for Greece

• Accounts payable: The cash balance for the general government, which has been over-performing
in the previous months, can be easily distorted by arrears or accounts payable accumulation (both
to the private sector and other government entities like social security funds), which are not
recorded as payments. As in the past, risks for the accumulation of accounts payable concerns
mainly health spending but also other sectors are affected.
• Called Guarantees: Guarantees may be called at an accelerated pace when the economy deepens
in recession and some public enterprises encounter difficulties rolling over their debt. The
authorities have estimated the amount of guarantees to state-owned enterprises’ debts (and to a
smaller extent private sector’s) which are likely to be called in 2010 at 1.5 billion.
• Local governments and social security funds. So far performance of local governments has
fallen short of program projections. The same applies to the fiscal performance of the social
security funds. Upcoming local elections and deepening recession might induce further slippage.
The fact that there is no consistent infra-annual data for these entities hampers a more detailed
assessment of developments in those sectors. The underperformance of these sectors may,
however, be related to delays in transfers to be paid by the state.
• Catch-up spending. Catch-up spending in the second half is anticipated, including for operating
expenditure. While monthly spending has been much lower than planned in the first half of 2010,
on the back of the restraining expenditure efforts by the authorities, there are obligations generated
that will be settled in the second half of the year, as they take longer to be executed.
• Public enterprises. Government needs to speed up efforts to establish cost recovery in public
enterprises, to reduce the risk of increased subsidies or other transfers with negative fiscal impact.

Box 5: From cash accounts to ESA95 accounts.
The target for the annual general government deficit (EUR 18 508 million for 2010) is defined according to ESA95,
the European System of National and Regional Accounts. For each of the EU Member States, ESA95 data are only
available after relatively long lags: the first notification of actual data for a complete year takes place at the end of
March and data are then scrutinised and validated by Eurostat during the third week of April. ESA95 data are then
subject to revision for a number of years. There are also quarterly ESA95-based government accounts. However,
given the lag in their publication (3 months) and frequent revisions, those data are not adequate for a close monitoring
of fiscal developments in real time.
The quantitative fiscal performance criteria (primary balance and state spending) under the economic adjustment
programme for Greece are defined in a cash basis; they take into account a set of entities that does not cover the full
general government, as defined in ESA95. There are relatively detailed monthly data for state revenue and
expenditure. These data are published by the Ministry of Finance’s General Accounting Office. For local government
and social security funds, the balance concept that is monitored in a monthly basis is derived from the Bank of
Greece’s banking and monetary statistics.
To extrapolate the ESA95-based government deficit from the available cash figures, one needs to take into
consideration a number of adjustments. Although they are usually referred to as cash-accrual adjustments, they also
include other adjustments, like extending the sector to include extra-budgetary funds, and including a number of
financial transactions like the takeover of liabilities by the state because guaranteed have been called.

24

4. Program compliance and policy discussions

Table 1 summarises the adjustment from the ‘cash’ accounts to the ESA95 accounts for the year 2010 as whole as
estimated by the Commission services. The deficit-increasing adjustments (i.e. adding to the cash balance to approach
the ESA95-based government deficit) concern the projected balance for extra-budgetary funds, the difference
between cash outflows and deliveries in relation to military equipment procurement, guarantees called (these refer
mainly debts owed by public enterprises, but the accounting would be identical for guarantees to private enterprises’
liabilities) and accounts payable. The accounts payable at the end of the year have been explicitly projected for
healthcare-related spending only. It assumes that all payables in relation to procurement of pharmaceuticals and other
medical supplies past their due date (arrears) will be settled by the end of 2010; therefore, the payables correspond to
the normal lag in payments to suppliers of around 3 months. The deficit-decreasing adjustments (i.e. reducing the
ESA95-based government deficit) refer to taxes pending collection (by convention a number of taxes collected in
January and February 2011 are allocated to the 2010 accounts; one needs also to subtract the corresponding amounts
of January and February 2010). A similar adjustment applies to structural funds-related flows, taking into account the
usual lag between submission of payment claims to Brussels and the actual payments by the EU budget. Other than
differences in the payment and accruing of interest on government debt, one should also consider that the settlement
of accounts payable at the beginning of 2010 is included in the ‘cash’ data, but should be excluded from the ESA95
accounts. (*)
Table 1: Annual adjustment from cash accounts to ESA95 accounts
(estimate of end-July 2010)
in EUR million
Extra-budgetary funds (balance)
Military procurement (difference between deliveries and cash)
Guarantees called
Accounts payable
Health (public hospitals)
Health (private clinics and suppliers)
Local government

500
300
1500
1000
600
400
0

Deficit increasing sub-total
Tax-related time adjustment (accounts receivable)
Direct taxes
Indirect taxes
Social contributions
Structural funds time adjustment
Hospitals spending, accrued in 2009 and paid in 2010
Interest
Deficit decreasing sub-total

3300
1132
427
705
0
650
245
0
2027

Total (deficit increasing)

1273

Table 2: Required cash balance and
maximum state primary spending to reach the ESA95 target (2010)
in EUR million
Ceiling for general government deficit (ESA95)
18508
Estimate for cash-to-ESA95 adjustment
1273
Required ceiling for cash balance to respects the ESA95 target
17235
Performance criterion (ceiling) for state primary spending
Required state primary spending to reach ESA95 target
Difference
(required underexecution of state primary spending to respect the ESA95defined government balance)

67000
63106
3894

Table 2 shows that to reach the ESA-95 defined balance target, the cash balance should not exceed
EUR 17 235 million; this is below the end-year cash balance performance criterion. In other words, the ESA95defined balance ceiling is more stringent than the cash-defined performance criterion.

25

European Commission
The economic adjustment programme for Greece

Moreover, given the likely revenue shortfalls in revenue and slippages in local government and social security
accounts, respecting the ESA-95 defined balance target requires the state to spend almost EUR 4000 million less than
the state primary spending performance criterion.
(*) In the course of 2010, the Greek government has settled EUR 5.36 billion in long-due arrears to healthcare suppliers. This
amount has been recorded as deficit-increasing in the accounts of 2009 and earlier years. By convention, it has not been included in
the ‘cash’ accounts that are subject to monthly monitoring, and therefore no adjustment in relation to this payment is necessary
when going from ‘cash’ to ESA95 accounts.

22. The government is committed to keep state budget primary spending below the annual ceiling
by about EUR 4 billion, focusing on operating expenses – and if need be investment – while making
all required transfers to the social security funds and local governments to allow them to become
current in their payments (Jan-June state budget primary spending was EUR 5.6 billion below target).
In addition, should performance run short of target, or revenue drop below schedule, the government
stands ready to take corrective action, including if necessary curtailing domestically-financed
investment. In addition to controlling for these budgetary risks, cash-budgetary performance criteria
will have to be significantly overachieved in 2010 to meet the accrual-based criteria (defined
according to the ESA95 rules). The ceiling for the ESA95-based accrual deficit is EUR 18.508
million. On the basis of the initial projections, this corresponds to 8% of GDP. Given a higher-thanprojected nominal GDP on the back of higher prices, this deficit ceiling corresponds to 7.8% of GDP.

Table 4.2: Quantitative performance criteria and outcomes (EUR billion )
Quantitative performance criteria and outcomes (billions of euros)
Actual data end June
2010

QPC June 2010

General government primary cash balance

-4.26

-5.0 (floor)

State budget primary spending

28.4

34 (ceiling)

Overall stock of central government debt

316.7

342

New guarantees granted by the central government

0.3*

2.0

Accumulation of external payment arrears on external debt contracted or guaranteed by
general government from multilateral or bilateral official creditors

0

0

* excludes guarantees to EIB loans.
QPC: Quantitative performance criteria.
Source: Commission services.

26

4. Program compliance and policy discussions

Table 4.3: State budget execution (January to June 2010, cash data)
2009
Jan - June

on cash basis (EUR million)
Total revenues
Revenue before refunds
Tax refunds
Capital revenue
Other
Total expenditures
Primary expenditure
Interest
Capital expenditure
Other
State Budget balance

2010
Jan - June

%∆

2009
Data

2010
Programme

%∆

22831
24639
2450
642

24180
26062
2266
384

5,9%
5,8%
-7,5%
-40,2%

50509
53420
4952
2041
0

58382
60224
5100
3258
0

15,6%
12,7%
3,0%
59,6%

40697
27945
6612
6140
0

33824
24398
5731
3695
0

-16,9%
-12,7%
-13,3%
-39,8%

81390
57975
12325
9588
1502

77318
54856
13017
9200
245

-5,0%
-5,4%
5,6%
-4,0%
-83,7%

-17866

-9644

-46,0%

-30881

-18691

-39,5%

April

M ay

Source: Commission services.

Graph 4.2: State budget cash balance (as of end June 2010)

35000

25000

15000

Cash state expenditure
(target)
Cash state expenditure
(actual)
Cash state revenue
(target)
Cash state revenue
(actual)

5000
579
-903

-5000

Cash state balance (target)
Cash state balance (actual)
-15000
January

February

M arch

June

Source: Commission services.

27

European Commission
The economic adjustment programme for Greece

Graph 4.3: Developments of general government primary cash balance and spending compared to
the end June performance criterion
General Government Primary cash balance
(cummulative, mn euro)

General Government Primary cash spending
(cummulative, mn euro)

1500

40000

500

35000
30000

-500

Ta rge t J une
(EUR 43
000 m illio n)

Ac tua l J une
(EUR 28
400 m illio n)

25000

-1500

20000
-2500
-3500
-4500

15000
Ta rge t J une
(EUR -5 000
m illio n)

10000

Ac tua l J une
(EUR -4 255
m illio n)

5000
0

-5500
January February March

April

May

June

January February March

April

May

June

Source: Commission services.

23. Lack of timely and reliable budgetary data and accounting beyond state level renders
assessment and control of budgetary developments at general government level problematic.
Ongoing implementation of reforms – helped by technical assistance programmes - to strengthen
public financial management as required under the programme should improve the availability of
data and budgetary control in the near future.
24. Improving the public financial management and revenue administration is critical for the
success of the large fiscal consolidation without recurring excessive risks of slippages and
adverse fiscal surprises. The new organic budget law will contribute by strengthening the legal
basis for budget preparation, approval, and control also at general government level. Its
implementation should contribute to improved budgetary procedures from the 2011 budget process.
This is all the more important considering that the measures in the 2011 budget are of a less certain
and robust nature than those in 2010. In particular, savings related to the reform of the local
governments (the so-called Kallikratis reform) and additional revenues as a result of enhanced tax
administration cannot be projected with precision. Against this background, enhanced expenditure
control and stepped-up efforts to strengthen tax collection will be essential for safeguarding fiscal
targets.

4.2.

STRUCTURAL FISCAL REFORMS

25. Modernising public administration and increasing transparency is essential for a sustainable
improvement in public finances. In the short run, successful programme implementation relies on
enhanced tax collection and expenditure control, based on better reporting and monitoring. In the
medium run, it allows also delivering cost effective public services for businesses and citizens.

28

4. Program compliance and policy discussions

26. Structural fiscal reforms are progressing in line with the ambitious programme requirements.
Progress has been made with improving tax administration efficiency and public administration,
including:
• Several initiatives have been taken to improve the efficiency of the tax administration, to fight
tax evasion and improve tax compliance. Further efforts are needed to fully implement the antievasion strategy comprising a package of immediate intensified actions by specialist task forces to:
(i) implement the new anti-evasion laws; (ii) collect large tax arrears; (iii) secure control over the
largest 1 000 taxpayers; (iv) tackle evasion of high income self-employed and high wealth
individuals; and (v) enforce tax return filing and payment; and a medium-term structural reform
program to modernise the tax administration by: (a) establishing a risk-management framework
and developing a comprehensive tax compliance strategy; (b) introducing modern taxpayer
services; (c) re-building the tax audit function; (d) establishing a full-service large taxpayer office;
and (e) introducing proven strategic and operational management practices and streamlining of the
organisational structure (see Box 6).
• A new organic budget law requires multi-year top-down budgeting with expenditure ceilings for
the state budget and deficit targets for the general government. The 2011 budget should be
prepared accordingly, containing detailed information on outturn and plans of the entire general
government sector, as well as key figures on the financial performance of the largest public
enterprises. Significant challenges in the area of public finance management need to be addressed
urgently, most notably in respect to the monitoring and control of expenditure commitments,
where little progress has been made so far. The introduction of timely and detailed monthly cashbased general government fiscal reports and commitment controls by establishing commitment
registers in all line ministries and public-law entities in order to prevent the accumulation of
arrears is an important step forward.
• More effective control and management of public sector employment and wages is a key
challenge. A single authority for the payments of wages for the public sector has been set up
through which wages to all civil servants in central government should be paid by end 2010 and
for the general government by March 2011. A census of public employment in the general
government has been completed which will contribute to the work of the single payment authority,
and plans to move in 2011 towards a simplified remuneration system covering basic wages and
allowances. The first results from the census show that the total number of permanent staff
amounted to more than 768 000 on 30 June 2010 (see Graph 4.4). It also showed that the number
had been reduced already by more than 11 000 in the first half of the year.
• Functional reviews of the central administration and social security are scheduled to begin in
the second half of 2010. These reviews which will identify operational policy recommendations to
rationalise the organisation of public administration, including the reorganisation of human
resources against the background of a decline in overall public sector employment.

29

European Commission
The economic adjustment programme for Greece

Graph 4.4: Public employment – Structure (June 2010) and changes (June 2009 to June 2010)
1%

Central Administration (391.825)
11%

Other Entities excl hospitals (47.508)

9%

Local authorities (83.664)

10 %

52%

State Owned Enterprises (77.561)
Security officers (64.967)

11%

Churchmen (10.811)

6%

Military personnel (81.159)
1,0%
0,5%
0,00%

0,0%
0,10%

-0,5%

-0,47%

-1,0%
-1,29%

-1,5%
-1,53%
-2,0%
-2,5%

-2,32%

-3,0%
-3,5%
-3,64%

-4,0%
Central
Other Entities excl Local authorities
Administration
hospitals

State Owned
Enterprises

Security officers

Churchmen

M ilitary
personnel

Source: Ministry of Finance

•

Improvements are needed to public procurement systems in the Greek administration with a
view to achieving better value for money and to facilitate the absorption of EU structural funds.
The Greek authorities have committed to present an action plan in September 2010 leading to the
creation of a central public procurement authority and to a fully fledged electronic procurement
system. Progress is also being made in the transposition of two directives on public procurement.

• Legislation reforming local public administration has been adopted in May in the context of the
so-called Kallikratis reform. This is a merger of local governments and a major reorganisation of
relations across different levels of government which offers the potential for large budgetary
savings and efficiency gains. Its success, however, hinges upon the effectiveness of a large number
of implementing measures and actions. Moreover, there is a need to ensure that efficiency gains
lead to effective savings that are cashed as a reduction in the deficit of the general government as a
whole.
27. A major pension reform has been adopted ahead of the September 2010 schedule. Parliament
approved two pension reform bills, on 8 and 15 July 2010 (for the private and public sectors,

30

4. Program compliance and policy discussions

respectively). The phase-in periods for increasing retirement ages and contributory periods are very
short and the parametric changes should significantly improve the long-term sustainability of the
pension system. The contribution of the reform to the long-term sustainability of the system shall be
assessed by an overall set of long-term (2009-2060) pension projections to be provided by the
National Actuarial Authority over the coming months. Before the reform, the projected increasing
pension-related expenditure in Greece was one of the highest in the EU (see Graph 4.5).
28. However, some important aspects of the pension systems may have to be revisited over the
coming months. In particular, the modernization of the pension system has not yet involved the
functioning of the supplementary/auxiliary public pension funds. Information on the functioning of
the many supplementary funds is scarce. The new law introduces a provision that obliges the funds to
provide the basic information to the National Actuarial Authority (NAA) in order to allow a proper
assessment of the budgetary implications of these funds. According to the law (and the updated
MoU), shortly after the publication of the long-term projection by the NAA, the main parameters of
the funds, in particular the level of benefits paid, will be adjusted in order to stabilize pension
expenditure and to guarantee the long-term sustainability of these funds. In addition, the revision
(and significant reduction) of the list of heavy and arduous professions covering all current and future
workers is also forthcoming (by 1 July 2011). Box 7 provides an overview.
29. The reform will have a significant impact on public finances already within the next two
decades. Graph 4.6 shows debt scenarios based on the medium-term budgetary developments from
the programme until 2014, which are then extended with the baseline macroeconomic scenario of the
European Commission's 2009 Ageing Report. Without the pension reform, debt resumes increasing
after initial stabilisation at around 100% GDP. If the reform is completed to meet its objective of
curbing growth in pension expenditure below the euro-area average, public debt may keep declining.

31

European Commission
The economic adjustment programme for Greece

Graph 4.5: Long-term change in age related expenditures at unchanged policy, prior to reform
(2007-2060)
25
Old age pensions

Other pensions

20

15

10

5

2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060
2007
2060

0

EE

LV

PL

UK

DK

SE

SK

NL

CZ

BG

IE

LT

DE

FI

MT

PT

NO

IT

AT

HU

FR

BE

ES

RO

CY

SI

LU

EL

Source: Commission services

Graph 4.6: Long-term scenarios for government debt with and without pension reform
% of GDP
400
350
300
250
200

programme without pension reform
150
100

programme with pension reform
50
0
2007

2012

2017

2022

2027

2032

2037

2042

2047

2052

2057

Source: Commission services

Box 6: The tax reform
A broad and ambitious tax reform was adopted by Parliament on 14 April 2010. The aim of the reform is to introduce
a fairer and more efficient tax system, which is intended to simultaneously improve or even eradicate the weaknesses
and defects in the tax system which has prevailed in Greece over many years in the past. It is expected to start
generating additional tax revenue after the 2nd half of the year. In particular, efforts to widen the tax base for
household and corporate income taxation (through the imposition of a unique taxation scale and elimination of

32

4. Program compliance and policy discussions

income tax exemptions) are expected by the authorities to increase tax revenue by some ½% of GDP, already in
2010. (*)
The following findings have paved the way and have been decisive for Government to proceed with a major tax
reform in Greece:

•

Low public revenue, disproportionate to government expenditure; (**)

•

Low tax revenue-to-GDP ratio vis-à-vis the EU average; (***)

•

The unfairness of the system;

•

Pervasive tax evasion and tax avoidance;

•

The conflicts in Greece’s tax system (aimless tax exemptions, non-uniform taxation, etc.);

•

Defective control mechanisms;

•

Absence of strong motives and incentives for tax-payers to disclose their actual taxable incomes;

•

Limited progressiveness in taxation scales;

•

Factors which lead to falling tax awareness, e.g. transparency, complexity and complicated nature of the system,
low quality public assets and services.

The main aim of the tax system reform is to tackle major shortcoming as identified by the authorities and
international organisations, with a view to set-up a fair, redistributive, efficient, simple, transparent and sustainable
tax system. To this end the areas that are subject to reform, are the following:
Personal income taxation
i.

Introduction of a single, progressive tax scale geared to the cost-of-living index for all incomes;

ii.

Abolition of uniform taxation and tax exemptions;

iii. Taxation of corporate dividends according to the tax scales for personal income;
iv. Generalization of proof of assets (origin principle) in tax returns;
v.

Accounting determination of income, for self-employed;

vi. Introduction of a system to deduct receipts for goods and services from taxable income;
vii. Taxation of the added value of long-term stock market transactions (speculation gains) through simultaneous
offsetting of capital losses incurred.
Corporate taxation
i.

A distinction is made between distributed and retained profits;

ii.

Abolition of tax exemption/tax breaks for companies;

iii. Imposition of the obligation to keep business accounts with banks, connection to the tax authorities’ data
systems and creation of an access option for the tax authorities;
iv. Taxation of transactions with offshore companies;
v.

Monitoring of all transactions within a group of companies.

Property taxation
i.

Implementation of progressive taxation for major property owners from 2010;

ii.

Reintroduction of inheritance tax and tax for the so-called parental gifts, with a higher tax-free sum;

iii. Enhanced monitoring and taxation on offshore properties.
In the context of the tax system reform, the government has launched a number of administrative actions with a view
to intensifying the fight against tax and social contributions evasion, improving collection and to increasing
compliance. The government expects to increase public revenue by more than ½% of GDP, already in 2010, as a

33

European Commission
The economic adjustment programme for Greece

result of the fight against tax evasion. A similar amount is also expected to come from the fight against social
contribution evasion.
i.

Upgrade of software for purposeful auditing and execution of tax audits on the basis of known data;

ii.

Verification of the origin of assets for all tax officials and introduction of measures against officials whose assets
cannot be justified by their income. These measures will extend to suspension or dismissal of the official from
office;

iii. Electronic tracking and monitoring of the fuel market for the purposes of combating the black market;
iv. Electronic and technological support for tax management;
v.

Expansion of services and systems for electronic administration on the Internet for the purpose of providing
additional services for taxpayers;

vi. Publication of the income and taxes of businesses and freelances in Internet.

(*) Note however that for prudence reasons, the additional receipts from the fight against tax evasion have not been included in the
currently available projections for government accounts for 2011 or later years.
(**) Whilst revenue (as a percentage of GDP) has steadily declined in recent years, from 40.9% in 2001 to 36.9% in 2009, public
expenditure increased from 45.3% in 2001 to 50.4% in 2009.
(***) Tax revenues and social security contributions represent the largest, permanent source of public revenue. Greece's revenue
from taxes is amongst the lowest in the EU (32.6% of GDP, compared with 39.3% of GDP on average in the EU-27). See Eurostat
(2009), Taxation Trends in Europe–Main Results.

Box 7: The pension reform law
A comprehensive pension reform was adopted by Parliament, through two laws covering both the private
sector and the public sector. The reform simplifies the current highly fragmented pension system; enhances
transparency and fairness, postpones the retirement age and decreases the generosity of benefits, while preserving an
adequate pension for the low-middle income earners.
The new universally binding rules on entitlements, contributions, accumulation rules and indexation of pension rights
applies to the main pension funds (IKA, OGA, OAEE, public sector scheme, Bank of Greece scheme). The pension
reform will be applied pro-rata to all current and future workers since the beginning of 2011.
The main elements of the reform are:
(i) The introduction of a new basic pension of EUR 360/month (12 yearly payments). For those with less of 15 years
of contributions, and thus not eligible for the contributory pension, the basic pension is means-tested, and provides an
important social safety net.
(ii) The accrual rates in the old system varied significantly across pension funds. The new system introduces accrual
rates with the same profile for all workers that depend only on the length of the career (ranging from 0.8 to 1.5
percent of earnings). The new accrual rates are significantly lower than those in the old system (ranging from 2 to 3
percent), reducing the system's over-generosity. Taking into account the top up of the basic pension, this is
particularly the case for medium- and high-wage earners.
(iii) The old system allowed retirement on a full pension at age 60 and in some cases even earlier. The reform
increases the statutory retirement age to 65. The minimum age for retirement is set at 60. If a person retires
between 60 and 65 without having a full contributory period, their pension will be reduced by 6 percent per year
before reaching 65 years of age.
(iv) The full contributory period will increase from the current 35 years (or even lower, for some categories) to 40
years.

34

4. Program compliance and policy discussions

(v) As from 2021, the minimum and statutory retirement ages will be adjusted in line with changes in life expectancy
every three years.
(vi) Equalisation of retirement age of men and women in both the private and public sector by 2013.
(vii) Indexation of benefits will not exceed HICP inflation.
(viii) Pensionable earnings will be calculated based on the full-earnings history. In the old system only five years
(with the best earnings) of the 10 last years before retirement were used to determine pensionable earnings.
(ix) A substantial revision of the list of heavy and arduous professions is forthcoming, aiming at reducing
substantially the coverage to no more than 10% of the employees. The new list of difficult and hazardous occupations
will apply with effect from 1.7.2011 to all current and future workers.
Sustainability clause
The new legislation includes a sustainability clause, which stipulates that if long-term projections show that the rise
in public pension expenditure between 2009 and 2060 will be over 2.5 percentage points of GDP, then relevant
parameters of the pension system will be changed to bring the increase of expenditure below the targeted threshold.

4.3.

FINANCIAL SECTOR POLICY

30. The banking sector is under significant strain and actions are needed to restore confidence and
effective functioning. A stable, well-capitalised and well-functioning financial sector allowing
continuous financial intermediation without state support is crucial for growth and thus for the
success of the economic adjustment programme.
31. The liquidity situation of Greek banks remains tight and several measures were taken. The
combination of deposit outflows and the closure of the money market made the banks very dependent
on the ECB for their liquidity provision. Borrowing from the ECB increased to about EUR 90 billion
(May 2010) representing 18 percent of the banks' liabilities (Graph 4.7). Access to the ECB recently
became more difficult for Greek banks because of the reduced availability of collateral due to the
sovereign downgrade. In response to these difficulties, the ECB decided on 3 May 2010 to accept
Greek government debt or other liabilities guaranteed by the Greek State as collateral, regardless of
its rating. The government guarantee scheme under which banks can issue debt for collateral
purposes was further increased by EUR 15 billion on 12 May following Commission approval in line
with state aid rules. Most of the additional EUR 15 billion has already been used and on 18 June
Greece requested an extension of the scheme until 31 December 2010 and a further increase of the
ceiling of the guarantees by EUR 25 billion. The Commission approved the request in an emergency
procedure on 30 June 2010. However, the government sent to Parliament draft legislation on an
additional tranche of government-guaranteed bank bonds only on 4 August; this implies that final
adoption is delayed until September after the end of Parliament summer recess. The law has a high
priority in order to ease the funding stress of Greek banks. The government scheme to guarantee
bonds issued by the Greek banks precisely aims at supporting bank's efforts in meeting their funding
needs. By so doing, the scheme will support the provision of credit to the economy and will
contribute to the overall stability of the Greek financial system.

35

European Commission
The economic adjustment programme for Greece

32. On 13 July, the Greek parliament adopted the law establishing the Financial Stability Fund.
The European Commission received the respective notification, as required under state aid rules, on
23 July. With the creation of the Financial Stability Fund a major step was set to ensure that there is
an institutional framework to deal with the recapitalisation and restructuring of financial institutions,
if need be. There is still an implementing decree expected from Greece for the appointment of the
members of the Board of Directors. From the operational side, care has already been taken of a
building to host the FSF staff, and the Bank of Greece will provide the IT service, while
remuneration and the number of personnel still have to be clarified. The financial resources of the
Fund will amount to EUR 10 billion and be gradually disbursed, staring with the September tranche
of financial assistance.

Graph 4.7: Greek banks' borrowings from the ECB
90

%

bn EUR

80

Borrowing from the ECB (l.h.s)

70

18
16

ECB liquidity as % of liabilities (r.h.s)

60

20

14
12

50

10

40

8

30

6

Jan-10

Sep-09

May-09

Jan-09

Sep-08

May-08

Jan-08

Sep-07

May-07

Jan-07

Sep-06

May-06

Jan-06

Sep-05

0
May-05

0
Jan-05

2
Sep-04

10
May-04

4

Jan-04

20

Source: Commission services.

Box 8: The Hellenic Financial Stability Fund
The purpose of the Financial Stability Fund is to safeguard the financial stability of the Greek banking system by
strengthening its equity base including the subsidiaries of foreign credit institutions. Liquidity support is
explicitly excluded as this may conflict with ECB objectives concerning monetary policy.
The Fund has a strong governance structure to make it independent of the politics and ensure transparency and
accountability. It is set up for a limited duration, up to 30 June 2017, and operates under private law. Its Board of
Directors comprises seven members: the President and two Vice-Presidents as executive members, and four nonexecutive members of which two are ex officio, namely the Director of the Financial Stability Department of the
Bank of Greece and the Secretary General of the Ministry of Finance. The European Commission and the ECB each
have an observer who can attend the monthly Board meetings without voting rights. Activity reports will be
prepared monthly and shared with the Ministry of Finance and the Bank of Greece and a bi-annual report is to be
submitted as well to the Greek Parliament, European Commission, IMF and ECB.

36

4. Program compliance and policy discussions

The Fund's capital is EUR 10 billion stemming from the euro-area/IMF financial assistance. The capital will be
gradually paid to a deposit held by the Fund with the Bank of Greece, readily available and remunerated at a rate
between the Eurosystem deposit facility and the EONIA rate.
The activation of the Fund can occur according to three triggers determining the modalities of the capital
injection:
Graph 1: The remuneration range of FSF’s deposits
with the Bank of Greece
6
%
5

4

3

EO NIA

2

1
EC B deposit
0
99

00

01

02

03

04

05

06

07

08

09

10

1. If on the basis of stress tests Pillar II capital requirements are likely to be breached, a bank on its own
initiative, or on instruction of the Bank of Greece, may turn to the Fund when a market solution could not be
found.
2. When the capital ratio actually falls below the Pillar II level which is different for each bank, and capital could
not be raised in the market, addressing the Fund becomes obligatory.
3. The consequence of a bank not complying with the minimum 8 % Pillar I ratio and not finding the capital
in the market, leads a further tightening of the conditions under which the Fund provides help.
The capital is injected in banks in the form of preference shares, carrying a remuneration determined by the Fund
in accordance with EU rules (at present 10%). In the case of the third trigger common shares have to be used,
which leads to an immediate dilution of the present share holders. The Fund provides the capital on presentation of
an emergency business plan including a time table and in accordance with EU state aid rules. Within six month
from granting the capital, the Ministry of Finance notifies a recapitalisation plan to the European Commission, as
competition authority.
The issue price of the shares shall reflect the fair value or market price based on the valuations by two or three
independent audit firms, while redemption is set at the highest price between the original issue or the price at the
time of the shareholder meeting deciding on redemption. If redemption cannot occur within five years, a 2 percent,
surcharge is imposed. In the event the targets of the restructuring plan are not met or the capital ratio falls below the
Pillar I level of 8 percent, the preference shares are converted into common transferable shares at a price determined
at the time of the capital injection defined by the Fund and the bank taking into account the assessment of the
independent audit firms and EU state aid rules.
The rights attached to the preference shares include voting in the general shareholders’ meeting and participation in
the banks’ boards of directors. The Fund representative has large powers, including the suspension of the board of
directors’ meeting for three days. Moreover, he or she can veto (i) any actions jeopardising the liquidity, solvency or
smooth operation of the bank decisions and (ii) decisions regarding distribution of dividends and remuneration
policy. In any event the top management of the banks receiving capital from FSF cannot earn more than the
Governor of the Bank of Greece. Furthermore, the Fund representative has free access to the books and records of
the bank.

37

European Commission
The economic adjustment programme for Greece

The law being adopted, the practical implementation started with the Fund contracting office
space. The Bank of Greece offers its IT platform and a website (http://www.hfsf.gr) has been
created where the logo of the Fund and the announcement of the vacancies can be found.

33. The legislation on the restructuring of household and corporate debt has been adopted by
Parliament. The January 2010 law on "restructuring of business and professional debts owed to
credit institutions" provided for one-off temporary measures of limited material scope aimed at
supporting liquidity for business, professional and agricultural activity. Applications for
arrangements for debts should have been submitted by the 15 April 2010. Thus, essentially the law is
no longer in force and its application has been completed. The impact of the law on the position of
credit institutions has been assessed to be very limited. The amendments to the law on "regulation of
debts of over-indebted natural persons" adopted on 28 July 2010, aim at a stronger protection of the
interests of creditors and particularly those of mortgage lenders or secured creditors. In addition, the
revised law has reinforced the necessary safeguards to avoid any moral hazard. In this context the
automatic stay of individual proceedings provided in the initial draft has been abolished. Under the
old procedure a debtor could request a stay of proceedings that would automatically be approved
allowing debtors to delay their obligations. As per the amended law, new stringent conditions are in
place, inter alia, requiring debtors to prove their inability to meet their obligations. Secured creditors
create a separate voting class whose consent is required for the approval of the settlement plan and
the rights of mortgage lenders are not restricted.
34. Most of the initiatives to enhance quality of supervision are well on track. The frequency and
speed of data reporting has been increased: the key financial stability indicators (CAR, NPLs,
external exposure) are available on a monthly basis and liquidity on a daily basis, while the delay
between the release date and the period covered has been shortened. The framework for stress testing
on a regular (quarterly) basis is being set in place. Concerning staffing, the Bank of Greece claimed
to need an additional 30 posts for banking supervision, about equal numbers for insurance
supervision and the pension funds summing up to 80-85 extra personnel. The new obligation to
recruit all personnel through public sector exams and being subject to the all-embracing public
administration rule of one new recruitment for every five departures, requires shifting personnel
within the Bank.
35. The Bank of Greece has reassured about its proactive approach to enhance coordination with
home and host country supervisors within the EU framework. Recently, communication has been
intensified and the Greek supervisor has informed the host supervisory authorities about the financial
health of the parent banks and how their tight liquidity situation is addressed. The Bank of Greece is
aware of Greece’s commitments under the European Banking Coordination Initiative and the role
Greek subsidiaries play in the region. The EBRD initiative for supporting lending in the region by
targeting Greek subsidiaries was welcomed as an additional confidence boosting measure. A number
of bilateral and multilateral memoranda of understanding have been signed. Currently under
negotiation are memoranda with Poland, Russia and Egypt as well as memoranda establishing

38

4. Program compliance and policy discussions

Colleges of Supervisors for EFG Eurobank and Piraeus Bank groups. The first meetings of the new
Colleges for NBG and Alpha Bank are scheduled for October.
36. The Ministry of Finance has launched a strategic study on the future of the Greek banking
sector. The initiative was undertaken in reaction to the Piraeus Bank take-over bid on ATE and TT
Postbank. The study will present options for all stat-owned banks, including ATE, and a strategic
vision for the government involvement in the banking sector. The Ministry of Finance started the
process of hiring three international investment banks as consultants to carry out the study, which is
due by mid-September. In this context, the Commission extended the deadline for ATE and other
concerned banks to submit restructuring plans, or viability reviews, until 1 October. The European
Commission, ECB and IMF discussed with the Minister of Finance a plan for the troubled ATE
including:
• a reaffirmed public commitment by the Government to take all necessary steps;
• the strategic study on the banking sector;
• a vendor due diligence of ATE and other financial entities in which the state has a significant
stake, involving external auditors; and
• a possible sale to be carried out in an open, transparent and non-discriminatory tender in
compliance with the EU state aid rules.
Before strategic decisions on the future of ATE are taken, the bank will continue to implement interim
restructuring measures, such as cleaning the loan portfolio, cutting costs and selling non core assets,
under enhanced supervision by the Bank of Greece.

4.4.

OTHER STRUCTURAL REFORMS

37. The potential for raising productivity and output growth in Greece is substantial. Many sectors
are sheltered or subject to distorted competition due to state aid and implicit or explicit barriers to
entry. Business start-up and operating costs are high and obstacles to increasing firm size are
numerous, preventing economies of scale. As a result, mark-ups are amongst the highest in the EU.
The obstacles to company development also induce a complex business structure that inhibits
investment in, and developments of, exporting sectors. Labour is underutilised and there is a
disproportionally large informal economy.
38. The programme sets out a very ambitious agenda that prioritises a number of reforms that will
strengthen the supply-side and will contribute both to potential growth and budgetary
objectives. Successful reforms strengthen the supply-side of the economy already in the short run.
They can contribute to addressing competitiveness concerns without economy-wide deflationary
pressures. By supporting higher sustainable growth and by facilitating budgetary consolidation,
productivity-enhancing reforms induce more favourable debt dynamics and a more rapid reduction of

39

European Commission
The economic adjustment programme for Greece

the debt burden. Decisive action on key reforms should bolster confidence in the adjustment
programme in the short run, lowering risk premia and underpinning demand thereby helping to
speed up recovery.
39. The implementation of the structural reform agenda up to June 2010 is broadly positive and on
track with the timetable set down in the Memorandum of Understanding. Following past delays,
efforts are now underway to improve compliance with EU law in the area of services, energy, and
road and rail transport. Looking forward, these reform efforts need to be sustained, in order to lay the
strongest possible foundations for future potential growth and job creation.
Box 9: Potential growth
Potential growth in Greece has fluctuated between 7% and ¼% since 1970 (see Graph 1). After peaking at 7.2% in
1972, potential decreased steadily until its trough at 0.2% in 1985. After the re-establishment of democracy in 1975
and EU accession in 1981, the Greek economy underwent fundamental structural change. During the late 1980s and
the late 1990s, potential growth picked up substantially, peaking at 4% in 2000. The financial market liberalisation
of the EU single market, introduced in 1992 as well as the interest rate convergence related to the euro area entry in
2001 and the preparation of the Olympic Games in 2004 induced major capital inflows. Heavy investments have
been made in the construction sector which, however, have only limited impact on future production capacity.
During the first decade of the new century, potential growth decreased to 0.8% in 2010.
Graph 1: Potential growth (in percent)
8
EU accession

7

Euro
introduction

6
5

EU single market

Olympics

4
3
2
1

Re-establishment
of democracy

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

0

Source: Commission services.
The increase in potential growth during the last two decades was only to a lesser extent related to capital
accumulation and labour contributions. Graph 2 shows that the bulk of potential growth increase during the late
1990s and early 2000s was induced by the residual element of total factor productivity (TFP). The smaller role of
capital accumulation shows that large parts of resources were not allocated to enhance the productive capacity of the
Greek economy. Indeed, the Greek economy was largely demand-driven in the presence of low interest rates and
rapid credit expansion. Private consumption reached around 70% of GDP which is the highest level in the euro area
(average 58%), contributing to high external deficits and external debt.
Empirical evidence suggests that growth based on economic fundamentals was below the estimated potential growth
during the last decade. Based on growth regressions using a wide range of growth determinants in 62 countries over
50 years, the estimated growth predictions can be interpreted as those growth rates which can be justified by longrun economic fundamentals and not by cyclical fluctuations or other short-term, non-structural influences. (*) Graph

40

4. Program compliance and policy discussions

3 shows that these predicted growth rates are largely below potential growth, most notably during the potential
growth boom between the early 1990s and the late 2000s. Hence, the high rates of potential growth during that
period may have overestimated the actual growth potential of Greece based on economic fundamentals, as measured
in an extensive regression model based on a cross-country panel.
Graph 2: Potential growth contributions (in %)
5
TFP

4

Capital accumulation
Labour hours

3

Potential grow th

2
1

0

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

-1

Source: Commission services
Graph 3: Potential growth and growth based on economic fundamentals
7
Potential grow th

6

Grow th based on economic fundamentals

5
4
3
2
1
0
-1
1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04 2005-09

Source: Commission services
(*) See Böwer and Turrini (2010), ‘EU Accession: A Road to Fast-Track Convergence?”, Comparative Economic
Studies, 52(2).

4.4.1. Labour market
40. Employment Protection Legislation has been hampering the functioning of the labour market.
For instance, severance payments have been biased in favour of white collars, in detriment of blue
collars. The minimum threshold on collective dismissals (especially for larger companies) has been

41

European Commission
The economic adjustment programme for Greece

too low (below 2 percent of total dismissals). There have also been obstacles to temporary and parttime work. The probationary period for new jobs has been too short (just two months). In addition,
there has been an excessive centralization of contractual arrangements and in the private sector wage
bargaining system; and there have been far too many minimum wages, varying across economic
sectors.
41. Major labour market reforms are now advanced well ahead of the December 2010 deadline.
The reform was enacted in the New Insurance Scheme and Related Provisions and Arrangements for
Labour Relations (Law 3862/2010), approved by Parliament on 15 July 2010. The law is a step in the
right direction as it:
• eases employment protection legislation, including provisions aimed to modernise the process of
severance payments and collective dismissals;
• reduces the overtime premium and introduces a sub-minimum wage to be applied to newly
recruited workers younger than 25 years old (84 percent of minimum wage). Overtime also
becomes cheaper (it has gone down by 15 percent);
• older workers beyond 55 years old should not be more than 10 percent of total lay offs (special
provisions have been included for them).
42. These initiatives will increase adjustment capacity of firms, ultimately boosting employment.
Despite progress made, labour market rules could be brought further into line with best practices in
other European countries and the common principles on flexicurity. For this, there is a need to:

42

•

extend probationary periods for new jobs from two months to one year;

•

facilitate the use of temporary and part-time contracts, as well as increase flexibility in working
hours: this can encourage the entry to the formal labour market for groups such as women and
the young. EU funding can help promote security in the labour market through training and other
activation programmes;

•

clarify the legal framework for collective bargaining to ensure that there is a clear legal
framework for firm level agreements. The Greek authorities aim to adopt new legislation by late
August, in particular by allowing firm-level agreements to prevail over other levels; this should
be a positive step;

•

reform the arbitration system, which should operate according to transparent and objective
principles, guaranteeing non-interference from the government.

4. Program compliance and policy discussions

Graph 4.8: Strictness of employment protection legislation (OECD indicator)
4
3,5
1998

3

2008

2,5
2
1,5
1
0,5

N

Au
st
ria
et
he
rl a
O
EC
nd
D
s
co
un
tri
es
Fi
C
nl
ze
an
ch
d
R
ep
ub
li c
H
un
Sl
g
ov
ar
ak
y
R
ep
ub
lic
D
en
m
ar
k
Ire
U
ni
la
te
nd
d
Ki
ng
U
do
ni
m
te
d
St
at
es

ed
en

Po
la
nd

Sw

Ita
ly

Sp
ai
n
Po
rtu
ga
l
Fr
an
ce
G
re
ec
e
Be
lg
iu
m
G
er
m
an
y

Lu
xe
m
bo
ur
g

0

Source: OECD

4.4.2. Business environment
43. Despite a high propensity towards entrepreneurship (mainly due to the importance of self
employment), Greece has been performing badly in terms of business environment. The 2010
‘Doing Business’ indicator of the World Bank (109th out of 183, see Graph 4.9) points to a large
number of lengthy procedures needed to enforce contracts, to register property and to obtain licences.
In addition, the business environment also suffers from obstacles to starting a business, the overall
rigidity of employment, the little protection given to investors and the difficulty to access finance.
Graph 4.9: World Bank Doing Business 2010 rankings

120

109

100

Austria

France

64

Luxembourg

Latvia

55

62

Spain

Lithuania

40

53

Romania

31

48

Slovenia

28 30

44 47

Portugal

27

Slovak Republic

26

Germany

18

24 25

Estonia

Ireland

16

Sweden

7

22

Belgium

6

Finland

5

Denmark

20

United Kingdom

40

42

Cyprus

60

Hungary

80

72

74 78

Italy

Greece

Czech Republic

Poland

Bulgaria

Netherlands

0

Source: World Bank

43

European Commission
The economic adjustment programme for Greece

44. Mark-ups and gross profit margins have been particularly high in Greece. The reasons behind
higher mark-ups in services are linked to the insufficient degree of competition in the sector, which
remains to a large extent sheltered. As regards the barriers to entry in services, Greece ranks at the
second position across EU Member States. Professional services, which represent 7 percent of
employment, face strict licensing requirements and restrictions on fees or prices charged. Licensing
requirements are also high in the retail distribution sector.
Graph 4.10:

Barriers to entry in services: composite indicator (1998-2008)

6,00
5,00
4,00
3,00

2008
1998
2003

2,00
1,00

Ita
ly
Fr
an
ce
A
Lu us t
ria
xe
m
bo
ur
g
H
un
ga
r
Po y
rtu
ga
D
l
U enm
ni
ar
te
k
d
St
at
e
Be s
lg
i
G um
er
m
an
y
Sp
ai
n
C
ze Fin
la
ch
R nd
Sl
ov epu
ak
b
R li c
ep
N
et ub l
ic
he
rl a
nd
s
U
Ir e
ni
te
la
nd
d
Ki
ng
d
Sw om
ed
en

Po
la
nd
G
re
ec
e

0,00

Source: OECD

45. Progress with the implementation of the programme requirements for June 2010 as regards
enhancing competition in open markets is being made. More specifically:
• Progress has been made to improve business environment with the adoption of a law that
achieves a significant reduction in costs and time of start-ups, though the law will only become
operational at the end of November after the approval of a number of joint ministerial decisions
and the setting up of GEMI: the general electronic commercial registry. Progress is also underway
in the revision of the institutional framework for the licensing of manufacturing firms. The
deadline in the MoU for these and other actions – such as the revision of the spatial plan – is
December 2010. Lastly, a new Investment Law, which would simplify procedures, is being
prepared.
• As part of the implementation of the Services Directive, horizontal legislation has been adopted.
Steps are underway to ensure that the points of single contact become operational in the secondhalf of 2010, and priority should be given to ensuring that common features can be completed by
electronic means for the most important sectors and professions. A critical challenge is now to
complete the screening exercise as to adopt sectoral specific legislation that removes unnecessary
or prohibited restrictions in service sectors, so as to facilitate cross-border provision of services

44

4. Program compliance and policy discussions

and the freedom of establishment. In particular this process should be completed by end-2010 in
keys fields of tourism, retail and education.
• Similarly, under the Services Directive Greece is required to remove all unnecessary restrictions in
a wide range of closed professions. This is essential to promote competition and improve the
business climate. The MoU identifies six professions (lawyers, pharmacies, notaries, architects,
engineers and auditing services) where there is a requirement to present legislation by the end of
2010. Related to this, Greece has adopted a Presidential Decree to implement the EU Directive on
the Mutual Recognition on Professional Qualifications and has set up the administrative body
competent for dealing with the applications under the general system. It is now important that the
Government takes all necessary measures to ensure the effective application of the legislation
adopted and compliance with ECJ rulings in particular in relation to franchised diplomas. All
pending applications for recognition of franchised diplomas should be immediately dealt with. The
Greek government is also invited to present a timetable for dealing with pending applications.
• Legislation is being proposed to strengthen the effectiveness of the Hellenic Competition
Commission by end 2010. An expert committee has provided its suggestions, and the Greek
government is planning to adopt legislation in coming months. It is important that the legislation
adheres to the main thrust of the recommendations of the expert group, especially regarding the
capacity of the Authority to effectively prioritise its work. Efforts should also be made to ensure
that adequate levels of qualified staff are available to enable the Authority to swiftly upgrade the
scale and quality of its work.

45

European Commission
The economic adjustment programme for Greece

Graph 4.11:

Regulation in professional service indicator (1996-2008)

4,5
2008

4

1996

3,5

2003

3
2,5
2
1,5
1
0,5

Ita
ly
un
ga
r
G
er y
m
an
G y
re
ec
e
Po
la
n
Au d
st
ria
P
Sl
ov ort
ug
ak
al
R
C
e
ze
ch pub
l
R
ep ic
ub
l
Be i c
lg
iu
m
Fr
an
ce
Sp
a
Au in
st
ra
D li a
e
n
U
m
ni
ar
te
k
d
St
at
e
Fi s
nl
an
d
U
Ire
ni
te
la
nd
d
Ki
ng
do
Sw m
ed
en
H

Lu
xe
m
bo
ur
g

0

Source: OECD

Graph 4.12:

Composite indicator of product market regulation in the EU (1998-2008)

4,50
4,00

2008

3,50

1998

3,00

2003

2,50
2,00
1,50
1,00
0,50

Ita
ly
er
m
an
Sw y
ed
en
H
un
ga
ry
Fi
nl
an
d
D
en
m
ar
k
Sp
N
a
et
he in
rl a
nd
s
U
I
re
ni
la
te
nd
d
Ki
ng
do
m
G

G

re
ec
e
Sl
ov Pol
an
ak
d
R
C
ep
ze
u
ch
bl
ic
R
ep
ub
Lu
li c
xe
m
bo
ur
g
Fr
an
ce
Au
st
ri
Po a
rtu
ga
l
Be
lg
iu
m

0,00

Source: OECD

4.4.3. Energy
46. Reforms that bring competition to the monopolised energy sector are essential for improving
the efficiency and competitiveness of the Greek economy and for ensuring long-term security of

46

4. Program compliance and policy discussions

supply while assuring the achievement government’s environmental targets (see Box 10). Progress is
being made in adjusting the regulated electricity tariffs so as to better reflect wholesale market prices
and protect vulnerable customers. Moreover, measures are foreseen to strengthen the powers and
independence of the regulator. Progress is less clear regarding the creation of fully-independent
transmission system operators for electricity and gas (ownership unbundling) which is important to
create a truly competitive market with fair treatment of all market participants.
Graph 4.13:

Share of the largest electricity generator in the domestic market (2007)

120
100 100 97

100
80

92 87 87

80

73 72 72
56 53

60
40

49 46 45
42
31 30 28
24 22
19 15

20

C

yp
ru

s
M
al
Es t a
to
ni
G a
re
ec
Fr e
an
ce
La
tv
C
ze Bel ia
ch giu
m
R
ep
ub
Sl lic
ov
a
Li kia
th
ua
D nia
en
m
ar
Sl
k
ov
en
Po ia
rtu
ga
Ire l
la
Sw nd
ed
H en
un
ga
ry
G It al
y
er
m
a
n
R
om y
an
i
Fi a
nl
an
d
Sp
ai
U
n
ni
te Pol
d
an
Ki
ng d
do
m

0

Source: OECD

47

European Commission
The economic adjustment programme for Greece

Box 10: Opening up the electricity sector
The electricity wholesale and retail markets of Greece are highly monopolised. The Public Power Corporation
(PPC) holds 80 percent of the wholesale and 97 percent of the retail electricity market in Greece. Compared to other
Member States, Greece is among the few countries with only one large player in both the wholesale and retail
markets (see Graph 1). PPC controls 100 percent of Greek lignite and oil-fired capacity and around 95% of hydro
power capacity, 83 percent of gas-fired power plants and 9 percent of renewables. Greece operates no nuclear
power.
Graph 1: Electricity wholesale and retail market position
(Number of companies with more than 5 percent of electricity generation capacity in the wholesale market and number companies
with more than 5 percent of electricity retail sales, respectively (2008)
9
Wholesale market

8

Retail market

7
6
5
4
3
2
1
0

UK AT BG ES HU IT PL RO DE FI

IE NL LT LU SE

SI BE DK PT CY CZ EE FR GR LV SK

Source: Regulators data.
A comprehensive approach is suggested for opening up the energy market in Greece, in line with existing EU
legislation. First, it is proposed to ensure balanced portfolios for competitors of PPC by granting access to lignitefired and hydro capacity. For lignite, there are two options which involve selling existing plants and/or granting
exploitation rights on new deposits. Second, it is recommended to straighten up the framework for competition and
investment by reinforcing the regulator, fully unbundling monopoly network activities, and rationalising regulated
retail tariffs.
The economic rationale of opening up the wholesale electricity market in Greece aims at spurring investment and
jobs, avoiding bankruptcy and job losses of independent producers, reaping the competition benefits of improved
resource allocation and more efficient prices as well as safeguarding the long-run security of supply.

48

•

Investment and jobs: Granting access to the exploitation of additional lignite deposits will spur major
investment and create new jobs. According to preliminary estimate, adding 40 percent or 2GW of the existing
5GW of lignite-fired capacity could imply investments in new plants of around EUR 4 billion and investments
in mine exploitation and related infrastructure of around EUR 400 million. In total, an estimated 1 500 new
jobs would be created.

•

Avoid bankruptcy and job losses: Independent power producers in Greece are likely to go bankrupt in the
absence of rapid structural change, putting jobs and existing investments of around EUR 1 billion at risk.
Without access to other energy sources, independent power producers will not be able to compete with PPC.

•

Competition: Opening up the energy sector is an opportunity for major structural reform in a key sector.
Giving competitors a fair chance to compete against the incumbent monopolist is likely to improve the
allocation of resources by exerting competitive pressure on PPC and by making prices more cost-reflective.
Given that energy prices are set to increase, due inter alia to CO2 and renewables charges, it is essential to limit
price increase by ensuring competition.

4. Program compliance and policy discussions

•

Security of supply: Opening up the energy sector is going to improve long-term security of supply. In the past,
PPC has not always been able to ensure sufficient energy generation capacity due to its operative inefficiency;
the Greek state repeatedly had to subsidise the construction of new plants which has never happened in other
Member States.

Budgetary incentives of wholesale market liberalisation depend on whether the government chooses to sell existing
plants or grant exploitation rights to new lignite deposits.
•

Revenue of selling existing PPC plants: Should the Greek government decide to sell 40 percent of PPC’s
lignite-fired power plants with the related lignite deposits would generate around EUR 2 billion. Given the
51% government stake in PPC, the resulting state revenue amounts to EUR 1 billion.

•

Higher tax revenue from increased profits: Allowing for competition will enable competitors to run
profitable businesses and improve the efficiency of PPC’s operation, thereby generating higher tax revenue
from both sides. The long-term tax revenue will be even higher in the case of expanding capacity by allowing
competitors to exploit new deposits and run additional power plants.

Environmental goals of the government will not be affected by opening up the wholesale market.
•

Lignite will remain as part of the energy mix in Greece like in a number of other member states. It is
expected to represent at least one third of electricity in Greece's own energy forecasts for 2020 in the scenario
with the highest development of renewables.

•

New lignite exploitation and plants have to abide by environmental rules in Greece like anywhere else in
the EU and investments will have to be made in a more environmentally-friendly manner. New technologies
are being developed to emit less and to capture and store CO2 and these will be applied to new lignite-fired
capacity. This is already taken into account by PPC in its two new power plant projects and is the case for
other generators elsewhere in the EU (Germany, Czech Republic etc).

4.4.4. Transport
47. Reform of the transport sector is a key structural milestone for the sustained success of the
programme. It is essential for effective and low-cost domestic and international trade and mobility
of resources. Reform includes opening up of the road freight transport sector and developing a
sustainable business plan for railways, which also aims at reducing the drain on public finances.
Similar measures for occasional road passenger transport are to be elaborated."
48. Road freight transport accounts for the bulk of transportation of goods. Licensing restrictions
have constrained the potential of the sector to grow (see Graph 4.13). The government has recently
put forward legislation to ensure compliance with EU Directives. The new law provides for the
opening of the sector, through the removal of license restrictions that have been severely constraining
road haulage capacity. It also leads the road freight transport sector to have a more positive impulse
to cost competitiveness and growth capacity.

49

European Commission
The economic adjustment programme for Greece

Graph 4.14:

Road transport – indicator based on the number of (semi-)trailers indexed to GDP

7
6
5

2003

4

2007

3
2
1

Au
st
ria
Sw
C
ze
ed
ch
en
Re
pu
bl
ic
G
er
m
an
N
y
et
he
rla
nd
s
H
un
ga
ry
Li
th
ua
Lu
ni
a
xe
m
bo
ur
g
C
yp
ru
s
Fr
an
ce
G
re
ec
e

Fi
nl
an
d
Po
la
nd

La
tv
ia

0

Indicator: Number of trailers and semi-trailers divided by GDP in EUR million.
Source: Commission services

49. The Greek railways currently account for only a small share of passenger and freight transport
in spite of low tariffs. Only a fraction of expenses is recovered and the railway company has
recorded persistent heavy losses which eventually fall on the government public finances (See Box
11).
50. The government is now preparing a business plan for full restructuring of the railways sector.
The MoU deadline for submission of a restructuring plan by 30 June has not been observed, but the
process is underway. The aim is to break even the railway operator (TRAINOSE) and prepare it for
privatization, to suspend the group’s loss-making lines, to streamline its management, to cut costs by
selling its land and other assets, by downsizing its staff, by cutting all allowances and overtime. Last
but not least, the restructuring aims to open the railways market, by facilitating track and terminal
access for new entrants, liberalizing its licensing procedure, and having future acquisitions and
maintenance concessions at market rates.

50

4. Program compliance and policy discussions

Box 11: Restructuring Greece’s railway sector
Greece’s railway sector is currently in the hands of the State and is organized into two groups:
1.

OSE Group (OSE+EDISY) is the network infrastructure manager and has two subsidiaries: ERGOSE (railway
network construction); GAIAOSE (real estate development);

2.

TRAINOSE is the railway operator (passenger and freight transport).

The railway sector has an accumulated debt of circa EUR 10 billion, deriving from:
1.

Pricing policy and service supply



in passenger transport: lack of price increase in passenger tickets since 2000, inadequate control over revenues
leading to significant revenue leakage, low demand in certain routes; an estimated 20 percent of total
passengers enjoy free travelling;



in freight transport: low market share (circa 1¼ percent of total freight transport), high discounts policy (70%80%).

2.

Excessively high personnel costs



TRAINOSE: overtime and allowances amount to circa 50 percent of base salary (30 percent of total personnel
costs). In 2009, TRAINOSE had 1 762 employees and personnel costs added to EUR 116.5 million;



OSE: overtime and allowances amount to circa 25 percent of base salary (20 percent of total personnel costs).
In 2009, OSE had 4 817 employees and personnel costs added to EUR 270.7 million.
Graph: Costs per staff member/passenger transport by operators (selected countries)

80

74,1

70
60

51,9

50
40
30,4
30
20

25,5

25,6

LV

PT

11,7

10
1,4

2,1

FR

IT

4,1

6,5

0
BG

ES

AT

FI

SI

EL

Note: Unit is cost per staff member (1 000 euros) divided by passenger transport (1 000 mio passengers per km.).
Country selection reflects availability of data.
Source: Commission services

4.4.5. Absorption of structural funds
51. Progress has been made to address regulatory and organisational obstacles to absorb structural
and cohesion funds, but further steps are needed to ensure an increase in the quality and pace of
projects. A Ministerial Decision to shorten the deadlines at each step of the approval and

51

European Commission
The economic adjustment programme for Greece

implementation of projects has been issued. A task force to improve the absorption of EU structural
and cohesion funds will operate from the Deputy Prime Minister's office and a special bank account
has been opened at the Bank of Greece to ring-fence the budgetary appropriations of national cofinancing. The government appears to be on target to meet the payment claims targets, although
efforts should be made to gradually reduce the recourse to non-targetted de minimis state aid projects,
which is a suboptimal use of resources and may distort competition.
52. Table 4.4 presents the payment claims for structural and cohesion funds made by Greece to the
European Commission from January through June 2010. Compared to the annual targets
foreseen by the MoU, European Regional and Development Funds and Cohesion Funds taken
together amount to a share of 27 percent of the annual target. The share of submitted European Social
Funds claims stood at 43 percent. The combined share of nearly 30 percent highlights that the Greek
authorities need to accelerate the submission of payment claims to reach the annual target.
Table 4.4:

Payment claims
MoU targets for 2010

Payment claims
submitted by end
June 2010
ERDF + CF
2330
638.7
ESF
420
215.0
Total
2750
853.7
ERDF: European Regional Development Fund; CF: Cohesion Fund: ESF: European Social Fund.
Source: Commission services

52

Share (%)
27.4
44.4
31.0

4. Program compliance and policy discussions

4.4.6. Public enterprises and privatisation
53. Privatisation plans have been rather vague so far, lacking a clear time planning. In early June
2010, the Greek government announced a wide ranging privatization program, spanning rail and road
transport, airports and ports, utilities, gaming and public real estate holdings. Measures include
outright sales to strategic investors, initial public offerings, new and extended public-private
partnerships and the creation of private holding companies intended for eventual listing on the
Athens Stock Exchange. It remains unclear whether all privatisations in the various sectors
announced will effectively take place in the next months and how much privatisation will be in 2011
(see Box 12)

Box 12: State-owned enterprises and privatisation
Several State-owned enterprises have been running losses over many years. The biggest deficits originate in
public transportation enterprises, particularly in OSE, ETHEL, HLPAP, HSAP, OASA, where payroll alone tends to
exceed total revenues.
Table : Greece’s largest loss-making SOEs (2009)

Hellenic Railways (OSE S.A.)
Thermal Buses Corporation (ETHEL S.A.)
TRAINOSE S.A. (Operating Railway Company)
Railway Infrastructure Manager (EDISY S.A.)
Hellenic Defense Systems (EVO-PYRKAL)
Athens Piraeus Electrical Railways (ISAP S.A.)
Trolley Buses Corporation (ILPAP S.A.)
Tourism Development Co.
Hellenic Horse Racing Org.
National Highways Fund (TEO S.A.)

Total losses
before income
tax (mn euros)
-481.8
-316.4
-231.1
-173.8
-164.7
-93.3
-69.3
-47.7
-27.9
-15.1

Number of
employees
(units)
187
6.733
1.784
4.737
1.575
1.337
1.564
473
343
347

Average wage
per employee
(euros)
41.426
37.526
50.414
40.621
41.794
57.584
36.408
33.946
48.626
28.771

Current state
budget subsidy
(mn euros)
0.00
75.23
0.00
0.00
0.00
26.15
21.56
0.00
0.00
0.00

Source: Greek Ministry of Finance, according to the Greek General Chart of Accounts (not IFRS).
Due to the continuous accumulation of losses and bad management, SOEs will need to be restructured and follow
adequate corporate governance guidelines. Most SOEs have not been receiving current subsidies (or payments for
public service obligations) from the State, therefore leading to the accumulation of hidden fiscal costs and regularly
requiring debt takeovers or capital injections.
By end-September 2010, the government has committed to:
• publish financial statements (certified by external auditors) of the ten largest loss makers in order to increase
transparency and reduce fiscal uncertainties;
• draw up a timetable and action plan for improving the financial performance of main loss-makers (especially the
railways and other public transportation companies);
• review the scope for divesting assets (including land) and for improving corporate governance in SOEs.

53

European Commission
The economic adjustment programme for Greece

Specific quantitative targets in relation to public enterprises include:
• a privatization plan for divesting state assets raising at least EUR 1 billion per year in the period 2011-2013. This
plan should be prepared by end-December 2010;
• a cut in capital injections to public enterprises of EUR 1.5 billion (0.7 percent of GDP) in 2012.
Financial advisers will be selected to conduct a study on privatisation objectives and to provide options on strategic
solutions. Based on these studies, the government will make a strategic decision on what to do with the particular
object under consideration.
As of today, progress has been made in banking, partially due to political perception that redesign of the financial
sector is needed. The study prepared by consultants on the financial sector is expected by end September.
Consultants have also been hired for railways restructuring. For the privatization of other objects, consultants will be
selected in September-October and results are expected towards the end-2010. Preference will be given to privatize
those that can be sold at a high price and have a high level of demand, i.e., motorways, airports, maritime ports.
As the privatization plan remains vague, the Ministry of Finance is expected to provide an updated list of assets by
end-September. The authorities will also be providing an estimate of 2011 quarterly profile of privatization revenue,
including information from which object the revenue will come.

54

5.

PROGRAMME FINANCING AND TREASURY
MANAGEMENT

54. On 18 May 2010, the euro-area Member States disbursed their first instalment of EUR 14.5
billion of a pooled loan to Greece, following a disbursement of EUR 5.5 billion from the IMF.
Subject to programme implementation, further disbursements are scheduled quarterly until mid 2013
(see Annex 6).
Box 13: Euro area stability support to Greece: main features
Euro area Member States provide financial support to Greece through pooled bilateral loans, managed by the
Commission on their behalf. On 2 May, the Eurogroup agreed on a financing package of up to EUR 80 billion over
three years to meet Greece's financing needs, in conjunction with an IMF stand-by arrangement of up to EUR 30
billion. The assistance is provided in quarterly instalments, whose respective size reflects the forecasted profile of
financing needs. Disbursements are made pari passu by the euro area and the IMF based on their shares in the total
assistance package (8:3). The ECB acts as paying agent for the euro-area stability support.
The framework is set up in a way that foresees participation by all euro area Member States. The share of each
Member State in the total loan is calculated using the ECB paid capital key.
Table: Member States' contributions to the support package for Greece
ECB paid capital key (% of
EA-15 total)
Contribution to support
package (EUR billion)

BE

DE

IE

ES

FR

IT

CY

LU

3,58

27,92

1,64

12,24

20,97

18,42

0,20

0,26

2,861 22,336

1,310

9,794 16,774 14,739

0,161

0,206

MT

NL

AT

PT

SI

SK

FI

0,09

5,88

2,86

2,58

0,48

1,02

1,85

0,075

4,704

2,290

2,065

0,388

0,818

1,479

Note: The Kreditanstalt für Wiederaufbau (KfW) acts as lender on behalf of Germany.

Stringent conditionality is an integral element of the support package, so as to ensure that Greece effectively
tackles underlying fiscal and macroeconomic imbalances. The key elements of policy conditionality have been
enshrined in a Council Decision under Articles 126(9) and 136 TFEU. (*) The specific conditions for the release of
loan instalments are further detailed in a Memorandum of Understanding agreed with the Greek authorities.
Conditionality is consistent across the euro area and IMF programmes.
Compliance with policy conditions is reviewed by the Commission, in liaison with the ECB, on a quarterly basis.
Close co-ordination with the IMF is maintained. Based on a report by the Commission, the contributing Member
States decide unanimously on the release of each instalment.
The loans are priced with a view to providing an incentive to return to market-based financing as soon as
feasible. They carry a variable interest rate, calculated as the three-month Euribor rate plus a charge of 300 basis
points. For amounts outstanding for more than three years, the charge rises to 400 basis points. To cover operational
costs, a one-off service fee of 50 basis points is also charged for each drawing.
Given the need for Greece to address underlying imbalances so as to restore orderly market access, the financial
support is medium-term in nature. The euro area loans are envisaged to carry the same maturities as IMF lending, i.e.
a three-year grace period and subsequent repayment of principal in eight equal quarterly tranches.
(*) Council Decision of 10 May 2010 addressed to Greece with a view to reinforcing and deepening fiscal
surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the
situation of excessive deficit (OJ L 145, 11.6.2010, p. 6).

55. In July, the Greek Treasury successfully issued EUR 4.5 billion of short-term bonds. Auctions
attracted strong demand including from international investors. While the yield was somewhat higher
for 6-months maturity (4.05%) compared to the previous auction, it remained broadly unchanged for
3-months bills (4.65%).
56. Improved treasury management should contribute to reducing borrowing costs on T-bills. In
particular, T-bill auctions could be planned monthly rather than quarterly. Stronger liquidity buffers

55

European Commission
The economic adjustment programme for Greece

at the Treasury to deal with risks associated to potential contingencies could also contribute to
reducing risk premia on short-term paper.

56

Annex 1: High-frequency indicators
Leading indicators
Consumer Industrial production, new orders and
PMI

120

-20

110

-30

100

-40

30

levels

and

20

-50

0

48

-60

-10

44

NOII(lhs)

36

PMI(rhs)
A pr-10

Jan-10

Jul-09

Oct-09

A pr-09

Jan-09

32
Jul-08

-40

Jan-07

Jul-10

Jan-10

Apr-10

Jul-09

Oct-09

Jan-09

Apr-09

Jul-08

Oct-08

Jan-08

Apr-08

Jul-07

Oct-07

Jan-07

Apr-07

-30

Oct-08

-80

40

IPI (lhs)

A pr-08

60

-20

Jan-08

-70

Jul-07

70

Oct-07

CCI (rhs)

y-o-y % ch.

52

ESI (lhs)
80

56

10

A pr-07

90

60

Source: DG ECFIN

Source: Hellenic Statistical Authority

Capacity utilization in manufacturing (%)

Volume index in retail and car sales

80

40

Jul-10

Economic Sentiment
Confidence Indicators

78

20

76
74

0

72
70

-20
Volume Index (y-o-y % ch.)

68

-40

Source: ECOWIN

Car sales (y-o- % ch. ma3)

A p r-1 0

J a n -1 0

J u l-0 9

O c t-0 9

A p r-0 9

O c t-0 8

J a n -0 9

J u l-0 8

A p r-0 8

O c t-0 7

J a n -0 8

J u l-0 7

A p r-0 7

-60
J a n -0 7

2010q3

2010q1

2009q3

2009q1

2008q3

2008q1

2007q3

2007q1

66

Source: Hellenic Statistical authority

57

European Commission
The economic adjustment programme for Greece

Tourist activity (travel receipts in 2005 Construction activity and new building
permits (% change, y-o-y)
prices, % change y-o-y, 12mma)
-8

10

5

5

0

-10

0
-12

-5

-5

-10

-14

-15
-16

-20

Source: Bank of Greece

2010q1

-18
2009q4

2009q3

2009q2

2009q1

2008q4

2008q3

2008q1

2007q4

2007q3

2007q2

2007q1

A p r-10

Ja n-10

Ju l-0 9

O ct-09

A p r-09

O ct-08

Ja n-09

Ju l-0 8

A p r-08

Ja n-08

Ju l-0 7

O ct-07

A p r-07

Ja n-07

-15

58

Investment in construction (lhs)
Building permits (rhs)

-25

2008q2

-10

Source: Bank of Greece and EUROSTAT

Inflation developments
Inflation and GDP growth (% change, y-o-y)
Real GDP growth (quarterly, rhs)
Headline inflation (lhs)
Core inflation (lhs)
EA-16 Headline inflation

6
5
4

Services sector inflation (% change, y-o-y)
5

12

4

10

3

8

2
1

2
1

6
4
2

0

0

-1

-2

-2

-4

-3

-6

Mar-10
May-10

Nov-09
Jan-10

Jul-09
Sep-09

Mar-09
May-09

Nov-08
Jan-09

May-08
Jul-08
Sep-08

Jan-08
Mar-08

0

Housing
Recreation

J an-08
M ar-08
M ay -08
J u l- 0 8
Sep-08
N ov -08
J an-09
M ar-09
M ay -09
J u l- 0 9
Sep-09
N ov -09
J an-10
M ar-10
M ay -10

3

Transport
Communication
M iscellaneous

Source: EUROSTAT

Source: EUROSTAT

Main drivers of inflation (% change, y-o-y)
20
18
16

Headline inflation (lhs)
Transport (lhs)
Alcohol, tobacco (lhs)
Energy (rhs)

14

50
40
30

12

20

10

10

8

0

6

-10

4

-20

0

-30
J an-08
M ar-08
M ay -08
J ul-08
Sep-08
N ov -08
J an-09
M ar-09
M ay -09
J ul-09
Sep-09
N ov -09
J an-10
M ar-10
M ay -10

2

Source: Hellenic Statistical Authority

59

Annex 2: Assessment of compliance with required action for the first review
Table A2-1: Overview of fiscal measures for the first review
Measures in the MoU (by end-June 2010)

Assessment and comments

Increase in VAT rates, with a yield of at least EUR 1800 million for a full year
(EUR 800 million in 2010);
Increase in excises for fuel, tobacco and alcohol, with a yield of at least EUR 1050
million for a full year (EUR 450 million in 2010);

Observed

Reduction in the public wage bill by reducing the Easter, summer and Christmas
bonuses and allowances paid to civil servants, with net savings amounting to EUR
1500 million for a full year (EUR 1100 million in 2010);

The relevant law (Law 3845/2010, ΦΕΚ 65Α / 06.05.2010) was adopted by Parliament
in May 2010.

Elimination of the Easter, summer and Christmas bonuses paid to pensioners,
while protecting those receiving lower pensions, with net savings amounting to
EUR 1900 for a full year (EUR 1500 million in 2010);
Cancel budgetary appropriations in the contingency reserve with the aim of saving
EUR 700 million;
Reduce the highest pensions with the aim of saving EUR 500 million for a full year
(EUR 350 million in 2010);
Abolish most of the budgetary appropriation for the solidarity allowance (except a
part for poverty relief) with the aim of saving EUR 400 million;
Reduce public investment by EUR 500 million compared to plans;

60

Parliament adopts, as planned in the stability programme of January 2010, a Law
introducing a progressive tax scale for all sources of income and a horizontally
unified treatment of income generated from labour and assets;
Parliament adopts, as planned in the stability programme of January 2010, a Law
abrogating exemptions and autonomous taxation provisions in the tax system,
including income from special allowances paid to civil servants. The law applies
retroactively from January 1, 2010.

Observed
The relevant law (Law 3842/2010, ΦΕΚ 58Α / 23.4.2010) was adopted by Parliament
in April 2010.

Table A2-2: Overview of structural fiscal measures for the first review
Measures in the MoU (by end-June 2010)
Government adopts by end-June 2010 a law that requires the monthly publication
by the General Accounting Office (GAO) of timely monthly statistics (on a cash
basis) on revenue, expenditure and financing for the State, as well as on spending
pending of payment, including arrears.

Assessment and comments
Partially observed
The relevant law was adopted by Parliament on 12 July 2010. Greece has been
regularly publishing detailed cash data on revenue, expenditure and financing of the
state since January. Data on spending pending payment is not yet available.

Table A2-3: Overview of structural reforms for the first review
Measures in the MoU (by end-June 2010)

Assessment and comments

To reform and modernise public administration
Parliament adopts legislation reforming public administration at the local level,
notably by merging municipalities, prefectures and regions with the aim of reducing
operating costs and wage bill.

Observed
Law approved by Parliament on 27 May. The entry to force of this law will require
around one hundred implementing decrees by the end of 2010.
Observed

Parliament adopts legislation requiring online publication of all decisions involving
commitments of funds in the general government sector.
Law adopted by Parliament on 5 July.

61

To strengthen labour market institutions
Government starts discussions with social partners in order to revise private sector
wage bargaining and contractual arrangements.

Observed
The government has started labour market discussions with social partners.

To enhance competition in open markets
Government adopts law to simplify the start-up of new businesses.

Observed
Law adopted by Parliament on 17 June 2010 on simplifying the start-up of companies.
The goal of the law is to reduce the number of steps needed to create a company and to
be able to complete all the procedures in one day. The law will become fully
operational by end November 2010, as there are two Joint Ministerial decisions
(between the Ministry of Economy and the Ministry of Interior) pending. The system
also relies on the connexion of the one-stop shops with the tax authorities and the
Social Security Registry, as well as on GEMI –the General electronic commercial
registry- becoming fully operational.
Once in place, the new regime will reduce the time and cost to set up a business,
though some fees are still in place –e.g., the fee to the Competition Commission and
the contributions to the lawyers' social fund, which still apply to the start up of limited
and general partnership enterprises.

Government adopts the horizontal legislation on the Services Directive.

Observed
The horizontal legislation was adopted on 29 April 2010. The horizontal framework
law closely mirrors the Directive, including the provisions concerning the point of
single contact, the provisions for establishment related requirements and for the
freedom to provide services as well as the rules concerning administrative cooperation.
Some provisions –such as those regulating the relationship with other rules or the rule
on data protection- may be legally not in full compliance with the Directive. However,
these provisions may not have any effects in practice. In addition, the real challenge
will be the amendments of sectoral legislation.

62

Government adopts a recovery plan for the railway sector with a timetable for
measures which: (i) specifies how operational activities will be made profitable,
including by closing loss-making lines; (ii) ensures the effective implementation of
EU Directives allowing for competition amongst providers of railway services; (iii)
provides for the restructuring of holding company, including the sale of land and
other assets.

Ongoing
A draft working document was circulated to the Commission services at the end of
June.

To raise the absorption rates of Structural and Cohesion Funds
Government will put in place measures, including the implementation of Law
3840/2010, the establishment of a "fast-track project production”, to achieve the
six-monthly targets for payment claims targets in the absorption of Structural and
Cohesion Funds set down in the table below. Compliance with the targets shall be
measured by certified data. The government will take steps to achieve an annual
target of submitting 10 major projects applications to Commission services.

Government establishes a technical task force in direct contact with Commission
services, to ensure rapid implementation of a) major projects in transport sectors, b)
environmental projects; c) financial engineering instruments and d) public
administration reform, relying on increased technical assistance.

Government shall have completed steps to ensure that budgetary appropriations for
the national co-financing of Structural and Cohesion Funds are channelled to a
special central account that cannot be used for any other purposes and which should
be available to provide co-financing to all entities in the general government.

Observed
On 30 June, the Greek government passed a ministerial decision to fast track project
production. This ministerial decision shortens deadlines for the completion of the
various procedural stages in the evaluation, approval and inclusion of a project in an
operational programme co-funded by structural and cohesion funds, as well as for the
execution of payments. However, there are many other sources of delay, which this
ministerial decision cannot tackle, stemming from lengthy judicial procedures, studies
of environmental impact and that should be addressed by further legislative work.
Ongoing
It has been agreed that this task force will be chaired by Deputy Prime Minister to
accelerate absorption rates and to improve the coordination of NSRF actions. The task
force will consist of one European Commission official and three other experts
recruited by the EIB, all of them with sufficient and proven technical knowledge in the
specified sectors.
Observed
The bank account at the Bank of Greece was created on 30 June to ring-fence the
budgetary appropriations of national co-financing. A Joint Ministerial decision, which
specifies procedural details, is yet to be issued (as of July 30th 2010).

63

Ongoing

Payment claims to be submitted between
Programming period 2007-2013

2010-13

(in million of euro)

2010

2011

2012

2013

European Regional Fund and Cohesion Fund

2330

2600

2850

3000

European Social Fund

420

750

880

890

Target of first half of the year

1105

1231

1284

Target of second half of the year

2245

2499

2606

3350

3730

3890

Total annual target

2750

Regarding the MoU targets on payment claims (see table), the Greek authorities have
submitted payment claims of EUR 825 mn in the first half of 2010, corresponding to
30% of the 2010 annual targets (27% as regards European Regional and Cohesion
Funds, 44% as regards European Social Funds).
However, a full assessment of compliance with the payment claims targets can only be
made at the end of 2010.

Table A2-4: Overview of financial sector regulation and supervision measures for the first review (to be completed by Q2-2010)
Measures in the MoU (by end-June 2010)
The Bank of Greece, on behalf of the Government, establishes an independent
Financial Stability Fund, with a strong governance structure, to deal with potential
solvency issues and to preserve the financial sector’s soundness and its capacity to
support the Greek economy, by providing equity support to banks as needed.
Start implementation of intensified supervision of banks, including by allocating
more human resources, also with a view to the take-over of insurance supervision,
frequent reporting under tighter deadlines and quarterly solvency stress tests.

64

Comments
Observed
The relevant law was adopted by Parliament on 13 July 2010.
Ongoing
The Bank of Greece has increased the frequency of data reporting. The absorption of
the insurance sector into the Bank of Greece has started and is expected to be finalised
by October 2010. A comprehensive framework for regularly stress-testing financial
institutions has been further developed and the capacity has been stepped up.

Review the private sector bankruptcy law to ensure consistency with ECB
observations.

Observed
Amendments incurred to the draft law on the "Restructuring of business and
professional debts owed to credit institutions" pursuant to the ECB’s Opinion have
been taken into consideration and the respective sections of the draft law have been
amended before its adoption by Parliament in January 2010 (Law 3816/2010).
The revised law for the "Regulation of debts of over-indebted individuals" was
adopted on 28 July 2010.

65

Table A2-5: Overview of measures taken ahead of schedule (to be completed beyond Q2-2010)
Measures in the MoU (after first review deadline)

Comments

To reform and modernise public administration
Government completes the creation of a Single Payment Authority for the payment
of wages in the public sector. The Ministry of finance publishes a detailed report,
based on information and in collaboration with the Single Payment Authority, on
the structure and levels of compensation and the volume and dynamics of
employment in the general government.

The government has proceeded with the set up of the single payment authority ahead
schedule. It already covers wages paid to almost 80 percent of the total number of the
civil servants in central government.
The census of public employment concluded in July 2010 should contribute to widen
the coverage to the whole general government by the end of the year.

(By December 2010)
Parliament adopts legislation to improve the efficiency of the tax administration
and controls, implementing recommendations provided by the European
Commission and IMF. In particular, they put in place an effective project
management arrangement (including tight MOF oversight and taskforces) to
implement the anti-evasion plan to restore tax discipline through: strengthened
collection enforcement and recovery of tax arrears (coordinated with the social
security funds) of the largest debtors; a reorganized large taxpayer unit focused on
the compliance of the largest revenue contributors; a strong audit program to defeat
pervasive evasion by high-wealth individuals and high income self-employed,
including prosecution of the worst offenders; and a strengthened filing and
payment control program.
(By September 2010)

66

Several initiatives have been taken to improve the efficiency of the tax administration,
to fight tax evasion and improve tax compliance. So far the authorities have put in
place the new tax law (already adopted by Parliament) which in several respects
reforms the current tax system, introduces stronger enforcement of income and VAT
filling and payment processes, widens the tax base by cancelling deductions and
exemptions and introduces the presumptive taxation. The authorities have started
developing a compliance risk management framework and building strategic
management capacity in tax and customs authorities, through the reorganization of the
relevant services.
The set-up of five specialist task forces at the Ministry of Finance and the tax
administration has also been launched and should to be concluded by end-September
2010.

Parliament adopts modifications to the organic budget law, if necessary, to ensure
that the draft budget law for 2011 onwards contains detailed information on outturn
and plans of the entire general government sector – including local government,
social security, hospitals and legal entities. An annex to the budget will present key
graphs on the financial performance of the largest public enterprises, concomitant
budgetary and tax expenditures, and related fiscal risks.

(By September 2010)

According to the MoU, the adoption of the new organic law was an obligation to be
observed by end September 2010. The government proceeded ahead of targets and the
draft law on public finance management framework, medium-term fiscal framework
and personal responsibility in fiscal policy, as part of the new organic budget law, was
submitted to Parliament on 30 July 2010 and should be adopted shortly.
Although a number of elements in law might need clarifications, they can be addressed
with ministerial decisions and acts, such as the binding nature of the budgets for local
governments and social security funds, as well as the budget law's interaction with the
annual updates of the stability programme. According to the government, the new
organic budget law will be put into effect immediately and the 2011 budget will be
prepared accordingly, containing detailed information on outturn and plans of the
entire general government sector, as well as key data on the financial performance of
the largest public enterprises.

67

Pension reform
Parliament adopts a reform of the pension system to ensure its medium- and longterm sustainability. It should limit the increase of public sector spending on
pensions, over the period 2010-2060, to under 2.5 percent of GDP. The reform will
be designed in close consultation with European Commission, IMF and ECB staff,
and its estimated impact on long-term sustainability will be validated by the EU
Economic Policy Committee. The parameters of the system will ensure long-term
actuarial balance, as determined by the National Actuarial Authority. The reform
should include the following elements:
- Simplification of the fragmented pension system by merging the existing pension
funds in three funds and introducing a unified new system for all current and future
employees. The new universally binding rules on entitlements, contributions,
accumulation rules and indexation of pension rights shall be applied pro rata to
everybody from 1 January 2013;
- Introduction of a unified statutory retirement age of 65 years, including for
women in the public sector (phased in immediately after adoption), to be completed
by December 2013;
- Gradual increase in the minimum contributory period for retirement on a full
benefit from 37 to 40 years by 2015;
- Amendment of the pension award formula in the contributory-based scheme to
strengthen the link between contributions paid and benefits received, with accrual
rate limited to an average annual rate of 1.2%, and pensions indexed to prices;
- Introduction of an automatic adjustment mechanism that, every three years and
starting in 2020, will increase the (minimum and statutory) retirement age in line
with the increase in life expectancy at retirement;
- Extend the calculation of the pensionable earnings from the current last five years

68

Important progress ahead of the September 2010 schedule has been made in the area of
pension reform. Parliament approved two pension reform bills, on 8 and 15 July 2010
(for the private and public sectors). The reform has been designed in close consultation
with European Commission, IMF and ECB staff and reflects most (but not all) of
specific reform parameters included in the MoU.
In the absence of complete long-term projections, the pension reform law may have to
be adjusted, based on its estimated impact on long-term sustainability to be provided
by the National Actuarial Authority and validated by the EU Economic Policy
Committee. A specific ‘contingency clause’ has been inserted in the pension law to
that end.
The MoU is revised to that respect and reiterate the overarching objective of reducing
the projected long-term increase in pension expenditure up to 2060. The deadline for
the availability of complete long-term projections should be 2011Q1, while the
adjustment in the law on the basis of those data should take place in 2011Q2. Note that
this adjustment of the pension law will have no impact on budgetary data up to 2013.

to the entire lifetime earnings (while retaining acquired rights);
- Reduction of the upper limit on pensions;
- Introduction of a means-tested minimum guaranteed income for elderly people
(above the statutory retirement age), to protect the most vulnerable groups,
consistent with fiscal sustainability;
- Measures to restrict access to early retirement. In particular, increase the
minimum early retirement age to 60 years by 1st January 2011, including for
workers in heavy and arduous professions and those with 40 years of contributions.
Abolish special rules for those insured before 1993 (while retaining acquired
rights). Substantial revision of the list of heavy and arduous professions;
- Reduction of pension benefits (by 6% per year) for people entering retirement
between the ages of 60 and 65 with a contributory period of less than 40 years;
- Introduction of stricter conditions and regular re examination of eligibility for
disability pensions.

(By December 2010)

69

To strengthen labour market institutions
Following dialogue with social partners, the government proposes and parliament
adopts legislation to reform wage bargaining system in the private sector, which
should provide for a reduction in pay rates for overtime work and enhanced
flexibility in the management of working time. Allow local territorial pacts to set
wage growth below sectoral agreements and introduce variable pay to link wages to
productivity performance at the firm level.
Government amends regulation of the arbitration system, (Law 1876/1990), so that
both parties can resort to arbitration if they disagree with the proposal of the
mediator.
Following dialogue with social partners, government adopts legislation on
minimum wages to introduce sub-minima for groups at risk such as the young and
long-term unemployed, and put measures in place to guarantee that current
minimum wages remain fixed in nominal terms for three years.
Government amends employment protection legislation to extend the probationary
period for new jobs to one year, to reduce the overall level of severance payments
and ensure that the same severance payment conditions apply to blue- and whitecollar workers, to raise the minimum threshold for activation of rules on collective
dismissals especially for larger companies, and to facilitate greater use of temporary
contracts and part-time work.
(By December 2010)

70

Regarding the labour market legislation deadlines of December 2010, the Greek
authorities have made progress ahead of time and reforms are going in the right
direction. The reform was enacted in the New Insurance Scheme and Related
provisions and Arrangements for Labour Relations (Law 3863/2010) approved by
Parliament on 15 July 2010.
Further measures are required, in particular reform of the wage bargaining system,
extension of probationary period to one year, facilitating the use of temporary and
part-time contracts and increasing flexibility in working hours. These remaining
measures can be grouped in an additional single act or bound in a consistent package.
Based on the outcome of the parliamentary work on the first stream of measures and
the dialogue amongst social partners, the MoU has been adjusted while keeping intact
the spirit of the initial version.

Annex 3: Provision of data requirements

To be provided by the Ministry of Finance
Preliminary monthly data on the state budget execution (including functional breakdown
by main categories of revenue and expenditure and by line ministry)

Monthly, 15 days after the end of each
month; these data should also be included in
subsequent transmissions in case of revision

Updated monthly plans for the state budget execution for the remainder of the year,
including functional breakdown by main categories of revenue and expenditure and by line
ministry

Monthly, 30 days after the end of each
month

Preliminary monthly cash data on general government entities other than the State

Monthly, 30 days after the end of each
month, these data should also be included in
subsequent transmissions in case of revision

PROVIDED

NOT YET PROVIDED

PROVIDED

Monthly data on the public wage bill (of general government, including a functional
breakdown in nominal wage and allowances paid to government employees per line
ministry and public entity), number of employees (including a functional breakdown per
ministry and public entities outside the central government) and average wage (including
the relative shares of the base wage, allowances and bonuses). A functional breakdown of
these data into the main public entities will be added.

Monthly, 30 days after the end of each
month (starting in June 2010)

Quarterly data on general government accounts, and general government debt as per the
relevant EU regulations on statistics

Quarterly accrual data, 90 days after the end
of each quarter

PROVIDED

Weekly information on the Government's cash position with indication of sources and uses
as well of number of days covered as well as information on the main government
spending and receipt items

Weekly on Friday, reporting on the previous
Thursday

PROVIDED

Data on below-the-line financing for the general government

Monthly, no later than 15 days after the end
of each month, ; these data should also be
included in subsequent transmissions in
case of revision

NOT YET PROVIDED

PROVIDED

71

Data on expenditure pending payment (including arrears) of the general government,
including the State, local government, social security, and legal entities

Quarterly, within 55 days after the end of
each quarter

NOT YET PROVIDED

Data on expenditure pending payment (arrears) of the State and hospitals

Monthly, 30 days after the end of each
month

NOT YET PROVIDED

Public debt, and new guarantees issued by the general government to public enterprises and
the private sector
Income and expenditure statement and balance sheets of 30 largest public enterprises by
total expenditures

Monthly, within one month
Quarterly, three months after the end of the
quarter

NOT YET PROVIDED

Data on EU project grants (reimbursements and advances), capital expenditures and
subsidies covered by EU advances or eligible for EU reimbursement on EU supported
projects specifically agreed with the EU
Monthly statement of the transactions through off-budget accounts
Monthly statements of the operations on the special account

Monthly, within three weeks of the end of
each month

NOT PROVIDED

72

Monthly, at the end of each month
Monthly, at the end of each month

PROVIDED

PARTLY PROVIDED
PARTLY PROVIDED

To be provided by the Bank of Greece
Assets and liabilities of the Bank of Greece
Assets and liabilities of the Greek banking system - aggregate monetary balance sheet of
credit institutions
Evolution of the external funding provided by Greek banks to their subsidiaries abroad10

External funding flows for the banking, corporate and government sector, including also
expected developments in the 12 months ahead

Monthly, 30 days after the end of each
month

Report on banking sector liquidity situation
Report on the evolution of financial stability indicators

Weekly, next working day
Quarterly, 15 days after the end of each
quarter depending on data availability
Quarterly, 15 days after the end of each
quarter depending on data availability

Report on results from the regular quarterly solvency stress tests
Detailed report on the balance sheet of the Financial Stability Fund with indication and
explanation of changes in the accounts

10

Weekly, next working day
Monthly, 30 days after the end of each
month
Monthly, 15 days after the end of each
month

Weekly, next working day

PROVIDED
PROVIDED
PARTLY PROVIDED
(only quarterly data, last data
for 2010 Q1; without
breakdown)
PARTLY PROVIDED
(without forward-looking
component)
PROVIDED
PROVIDED WITH DELAY
PROVIDED
(last available results for 2010
Q1)
NOT RELEVANT

All forms of debt instruments and capital, as well as net deposits provided to subsidiaries abroad.

73

Annex 4: Macroeconomic forecast
May 2010 and update of August 2010
2010
August
May
GDP
4,5
2,0
-2,0
-4,0
-4,0
Private consumption
3,3
2,3
-1,8
-3,5
-3,8
Public consumption
8,4
0,6
9,6
-9,0
-8,2
Gross fixed capital formation
4,6
-7,4
-13,1
-7,3
-7,3
Exports (goods and services)
5,8
4,0
-18,1
1,3
1,5
Imports (goods and services)
7,1
0,2
-14,1
-10,3
-10,3
Contribution to GDP growth : Domestic demand
4,8
0,1
-2,5
-5,5
-5,6
Inventories
0,8
1,0
-0,1
-1,9
-1,9
Net exports
-1,1
0,8
0,7
3,5
3,5
Employment
1,4
0,1
-1,2
-2,6
-2,6
Unemployment rate (a)
8,3
7,7
9,5
11,6
11,6
Compensation of employees/head
6,6
5,9
5,5
-1,0
-1,0
Unit labour costs whole economy
3,5
3,9
6,3
-0,6
-0,6
GDP deflator
3,0
3,5
1,0
3,5
1,2
Harmonised index of consumer prices
3,0
4,2
1,3
4,6
1,9
Trade balance (c)
-17,7
-16,6
-14,0
-12,0
-12,1
Current account balance (c)
-14,7
-13,8
-13,1
-10,6
-10,8
Net lending(+) or borrowing(-) vis-à-vis ROW (c)
-12,5
-12,4
-12,3
-9,8
-9,9
General government balance (c)
-5,1
-7,7
-13,6
-7,8
-8,0
General government gross debt (c)
95,7
99,2
115,1
130,2
133,2
(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.
Annual % change

74

2007

2008

2011

2009

August
-2,6
-4,5
-8,0
-7,0
6,1
-6,6
-5,9
0,1
3,2
-3,0
14,5
0,1
-0,4
1,3
2,2
-10,4
-8,0
-7,0
-7,6
139,8

2012
May
-2,6
-4,5
-8,0
-7,0
6,1
-6,6
-5,9
0,1
3,2
-3,0
14,5
0,1
-0,4
-0,5
-0,4
-10,7
-8,4
-7,4
-7,6
145,2

August
1,1
1,0
-6,0
-2,6
5,7
-1,5
-0,7
0,0
1,7
-0,4
15,0
0,1
0,0
0,4
0,5
-9,7
-6,6
-5,6
-6,5
144,4

2013
May
1,1
1,0
-6,0
-2,6
5,7
-1,5
-0,7
0,0
1,7
-0,4
15,0
0,1
0,0
1,0
1,2
-9,9
-6,9
-5,8
-6,5
148,9

August
2,1
1,1
-1,0
1,1
7,3
1,5
0,8
-0,1
1,4
0,8
14,6
0,1
-0,4
0,7
0,7
-9,3
-5,4
-4,2
-4,9
145,3

2014
May
2,1
1,1
-1,0
1,1
7,3
1,5
0,8
-0,1
1,4
0,8
14,6
0,1
-0,4
0,7
0,7
-9,5
-5,6
-4,4
-4,9
149,7

August
2,1
1,2
-0,3
1,2
6,7
2,1
1,0
0,0
1,1
0,8
14,1
0,3
-0,4
1,0
1,0
-9,0
-4,4
-3,1
-2,6
143,9

May
2,1
1,2
-0,5
1,2
6,7
2,1
1,0
0,0
1,1
0,8
14,1
0,3
1,0
0,9
-9,3
-4,6
-3,3
-2,6
148,4

Annex 5: Quantitative Performance Criteria
(in EUR billion, unless otherwise indicated)

Performance Criteria

Indicative Targets

juin-10
Progr. 1/

sept-10
Progr. 1/

déc-10
Progr. 1/

déc-11
Progr. 2/

déc-12
Progr. 3/

déc-13
Progr. 4/

1. Floor on the modified general government primary cash balance

-5.0

-4.0

-5.7

-2.1

2.4

7.4

2. Ceiling on State Budget primary spending

34

50

67

67

68

69

3. Ceiling on the accumulation of new domestic arrears by the general government 5/

..

..

..

0

0

0

4. Ceiling on the overall stock of central government debt

342

342

342

365

..

..

5. Ceiling on the new guarantees granted by the central government

2.0

2.0

2.0

1.0

0.0

0.0

6. Ceiling on the accumulation of new external payments arrears on external debt contracted or
guaranteed by general government from multilateral or bilateral official creditors 5/

0

0

0

0

0

0

1/ Cumulatively from January 1, 2010 (unless otherwise indicated).
2/ Cumulatively from January 1, 2011 (unless otherwise indicated).
3/ Cumulatively from January 1, 2012 (unless otherwise indicated).
4/Cumulatively from January 1, 2013 (unless otherwise indicated).
5/ Applies on a continuous basis from April 30, 2010 onward.

75

Annex 6: Financing gap projections
Greece - financing gap, quarterly profile, bn euro 1

A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.

GG deficit
GG deficit (adjusted to cash basis and PE borrowing)
GVT debt amortization (bonds & T-bills)
of which short-term debt
of which long-term debt
Public sector financing need (B+C)
Rollover of short-term debt
Rollover of long-term debt
Gross GVT debt issuance

P.
Q.
R.

Loan disbursements/repayments
of which IMF
of which EU

2

of which short-term borrowing (D*G)
of which long-term borrowing (E*H)

Privatisation receipts
PE net borrowing
Bank support scheme
Financing gap (F-I-L-M+N)

2010
May-Jun
Q3
3,6
3,6
11,4
2,1
9,3
15,0
0%
0%
2,0
2,0
0,0
0,0
0,0
0,0
13,0
20,0
5,5
14,5

2011
Q1

Q4

Q2

Q3

2012
Q1

Q4

Q2

Q3

2013
Q1

Q4

Q2

5,3
7,7
4,1
3,3
0,8
11,8
167%
0%
5,5
5,5
0,0
0,0
0,0
2,5
8,8

5,3
1,8
5,6
5,5
0,1
7,4
36%
0%
2,0
2,0
0,0
0,0
0,0
2,5
7,9

4,2
3,7
13,3
3,7
9,7
17,1
136%
0%
5,0
5,0
0,0
0,0
0,0
1,0
13,1

4,2
4,4
13,1
4,0
9,1
17,5
253%
0%
10,0
10,0
0,0
0,0
0,0
1,0
8,5

4,2
7,2
15,9
9,0
6,9
23,0
100%
0%
9,0
9,0
0,0
0,0
0,0
1,0
15,0

4,2
2,1
10,3
9,0
1,3
12,5
67%
0%
6,0
6,0
0,0
0,0
0,0
1,0
7,5

3,7
3,7
23,0
8,0
15,0
26,7
63%
75%
16,3
5,0
11,3
0,0
0,0
0,0
10,5

3,7
3,9
13,4
4,0
9,4
17,3
250%
75%
17,1
10,0
7,1
0,0
0,0
0,0
0,3

3,7
5,1
17,5
9,0
8,5
22,6
89%
75%
14,4
8,0
6,4
0,0
0,0
0,0
8,2

3,7
2,1
9,8
9,0
0,8
11,8
56%
75%
5,6
5,0
0,6
0,0
0,0
0,0
6,3

2,8
3,1
9,8
4,0
5,8
12,9
100%
100%
9,8
4,0
5,8
0,0
0,0
0,0
3,1

2,8
3,1
15,6
4,0
11,6
18,7
100%
100%
15,6
4,0
11,6
0,0
0,0
0,0
3,1

9,0
2,5
6,5

9,0
2,5
6,5

15,0
4,1
10,9

12,0
3,3
8,7

8,0
2,2
5,8

5,0
1,4
3,6

10,0
2,7
7,3

6,0
1,6
4,4

6,0
1,6
4,4

2,0
0,5
1,5

6,0
1,6
4,4

2,0
0,5
1,5

Source: GAO, Commission Services and IMF staff estimates
1. Data in this table are subject to revision
2. Schedule is based under conservative assumptions that only 3 and 6 months securities will be issued in 2010 and 2011, which increases the roll-over needs.

76

Annex 7: Statement by the European Commission, the ECB and IMF on
the First Review Mission to Greece
IP/10/1033
Brussels, 5th August 2010

Staff teams from the European Commission (EC), the European Central Bank (ECB), and the
International Monetary Fund (IMF) visited Athens during July 26-August 5 for the first quarterly
review of the Greek government’s economic program, which is being supported by a EUR 80 billion
loan from Euro area countries and a EUR 30 billion Stand-By Arrangement with the Fund. The
strategy and key policies remain as described in the May 2010 Letter of Intent and Memorandum of
Economic and Financial Policies..
Our overall assessment is that the program has made a strong start. The end-June quantitative
performance criteria have all been met, led by a vigorous implementation of the fiscal program, and
important reforms are ahead of schedule. However, important challenges and risks remain.
The contraction in the economy is in line with May program projections: GDP is expected to decline by 4
percent in 2010 and some 2½ percent in 2011. Inflation is higher than expected - we have revised our
estimate for 2010 to 4¾ percent - pushed up by indirect tax increases. With no signs of second-round
effects, inflation is expected to decline rapidly.
In the fiscal area, the authorities have kept spending significantly below budget limits at the state level.
This has offset slippages caused by problems in controlling expenditures at the sub-national level (local
governments, hospitals, social security funds), and the overall deficit target for end-June was met. Going
forward, to address potential risks to fiscal targets, it is critical to tighten expenditure control and
monitoring, in particular at sub-national levels. Another key challenge is to further strengthen tax
administration, including to reduce tax evasion by high-income and wealthy individuals. This is essential
to secure tax revenues and to promote the overall fairness of the adjustment program.
In the financial sector, there has been a moderate deterioration in capital adequacy as nonperforming
loans have increased in line with expectations. Recently, the CEBS stress tests covered more than 90
percent of Greek banking system assets and all but one state-owned bank passed, thus helping to reduce
market volatility. We welcome that the government has commissioned a strategic review for the banking
sector and a due diligence for state banks. The Financial Stability Fund (FSF), which is soon to become
operational, will provide an important backstop to deal with potential capital shortfalls. In our view, the
10 billion euro earmarked for the FSF under the program remains adequate. Continued close monitoring
of the financial sector will be important in the period ahead.
Impressive progress is being made on structural reforms. The mission welcomes Parliament’s approval
of the landmark pension reform, which is far-reaching by international standards. Substantive labor
market reform is also well underway. Implementation of recent tax reform and budget reform is key in
order to consolidate fiscal consolidation. Other reforms that are scheduled for early implementation are
transportation, where important progress has already been made with liberalization of road haulage, and
energy. Restoring competitiveness and boosting potential growth remains critical to the program’s
success. The challenge facing the government in this regard will be to overcome resistance from

77

entrenched vested interests to opening-up of closed professions, deregulation, implementation of the
services directive, and elimination of barriers to development of tourism and retail.
The Greek government is still unable to access international capital markets except for placement of shortterm T-bills. However, market sentiments appear now to be improving. Taking advantage of the breathing
space afforded by the large-scale international financial support, the key challenge facing the Greek
authorities remains to establish a strong track record of policy implementation in order to regain access to
international capital markets.
Next Steps. The staff-level agreement reached with the Greek authorities will pave the way for the
conclusion of the first review under the loan facility agreement (euro area) and Stand-By Arrangement
(IMF), subject to approval by the Commission, the Eurogroup, and the IMF’s management and Executive
Board. Such approval will allow the disbursement of EUR 9 billion (EUR 6.5 billion by the euro area
Member States, and EUR 2.5 billion by the IMF).
The mission for the next program review is scheduled for October, 2010.

78

Annex 8: Updated programme documents
Athens, 6 August 2010
Mr. Jean-Claude Juncker
President
Eurogroup
Mr. Olli Rehn
Commissionner for Economic and Monetary Affairs
European Commission
Mr Jean-Claude Trichet
President
European Central Bank
Dear Messrs. Juncker, Rehn and Trichet,
In the attached update to the Memorandum of Economic and Financial Policies (MEFP) and
the Memorandum of Understanding on Specific Economic Policy Conditionality of 3 May
2010, we describe the progress and further policy steps towards meeting the objectives of the
economic program that is being supported by financial assistance provided by the euro-area
Member States in the context of the loan facility agreement. The policies of the government
of Greece remain fully oriented toward securing fiscal sustainability, safeguarding the
stability of the financial system, and boosting potential growth and competitiveness.
We have made a vigorous start with our economic program. The fiscal program is progressing
well, financial policies are being strengthened, and structural policies are ahead of schedule in
key aspects:
•

The end-June quantitative performance criteria have all been met, led by a strong
implementation of the fiscal program. Not unexpectedly, it has proven difficult to fully
control expenditures at some entities, and in anticipation of such problems we
significantly under-executed budget implementation at the state level, thereby
ensuring that targets for the general government were met. Going forward, we are
redoubling our efforts to strengthen controls at all levels of government and are
determined to continue to over-perform at the state level until such controls become
fully effective.

•

Reflecting the weaknesses in expenditure controls at some entities, the indicative
target on the non-accrual of domestic arrears has not been observed as the monitoring
system for general government commitments, accounts payable, and arrears is still
being developed and implemented. We commit to bringing these arrears down to zero
by year-end, so that only a normal level of accounts payable is carried over into 2011.

•

While the financial system continues to feel the effects of tight liquidity, sentiment
indicators are gradually beginning to improve, and policy progress has been made by
79

establishing the Financial Stability Fund to backstop any capital needs that banks
might have in the future owing to an expected increase in impaired loans as the
recession runs its course. Stress tests suggest that the funds allocated by the authorities
for the FSF remain adequate.
•

The government has made significant progress in structural reforms with far-reaching
pension and labor market reforms being approved ahead of schedule. Parliament has
also already adopted important budgetary reform and reforms of local government.
Other major reforms that are at an advanced stage aim at liberalizing the trucking
industry and restructuring the railroad system, while reforms of the energy sector,
protected professions, the licensing and business regulatory framework and
preparations for implementation of the services directive are gaining momentum, as
foreseen in our program.

On this basis and the completion of the prior action, we request the disbursement of the
second instalment of financial assistance by the euro-area Member States in the amount of
EUR 6 500 million, in line with the loan facility agreement.
We believe that the policies set forth in the 3 May 2010 Letter of Intent, MEFP and MoU, and
the attached updates, are adequate to achieve the objectives under the program. We stand
ready to take any corrective actions that may become appropriate for this purpose as
circumstances change. We will consult with the European Commission and the ECB, as well
as with the IMF, on the adoption of any such actions and in advance of revisions to the
policies contained in this letter.
We are copying this letter to Mr. Strauss-Kahn, Managing Director of the IMF.
Sincerely,

/s/
______________________________
George Papaconstantinou
Minister of Finance

80

/s/
_______________________________
George Provopoulos
Governor of the Bank of Greece

Athens, August 6, 2010
Greece—Memorandum of Economic and Financial Policies
1.
The government has made a vigorous start at implementing its economic
program. The fiscal program is progressing well, financial policies are being strengthened,
and structural policies are ahead of schedule in key respects. The May 2010 Letter of Intent
(LOI) and Memorandum of Economic and Financial Policies (MEFP) describing the 3-year
economic program remain fully in force. This update to the MEFP combined with the updated
MoU presents a review of achievements and policy steps toward the second review scheduled
for late 2010.
2.
The growth outlook remains unaltered; short-run inflation is revised up. The
government continues to envisage a contraction of activity by about 4 percent in 2010 and
some 2½ percent in 2011. However, because the government frontloaded a number of large
indirect tax increases, which have been passed on as a step up in the price level, the rate of
consumer price inflation and the implicit deflator have increased. The high pass through of
indirect tax increases to final prices is indicative of a lack of competition and the prevalence
of oligopolistic market structures. HICP inflation is now expected to approach 4¾ percent for
the year. Inflation at constant taxes is falling and has declined below the euro-area average for
the first time since the creation of the euro. Moreover, there is no evidence of pass through of
higher prices to wages, and the national collective agreement just signed contributes to
moderating wage growth and improving competitiveness.
Fiscal Policies
3.
The fiscal program is making good progress. The cash state budget is leading the
consolidation effort with an impressive cut in its deficit by over 40 percent in Jan-Jun (y/y).
Current revenue has increased in the Jan-Jun period by 7 percent, despite the deepening
recession, and current expenditure and transfers have been cut by some 10 percent. Local
governments, hospitals, and social security funds have also taken steps but their progress is
more gradual as controlling their expenditures is more difficult, as was expected. Through
June, the large margin under the targets created in the state budget has offset the overruns to
date in subnational entities. However, there has been some undesirable buildup in accounts
payable/arrears in hospitals and social security funds and, as described below, steps are
underway to gain a firmer grip on risks for the targets going forward.
4.
Looking to the second half of the year and consistent with the May program, the
government will limit the annual general government fiscal deficit (on accrual terms) to
€18.5 billion:
•

Continuing implementation of the measures: The fiscal measures (VAT and
excises, and particular the benefits from the pension and wage cuts) will be fully
realized in the second half of the year and should generate substantial resources to
allow all payments and the amortization of any mid-year arrears by end-2010.

•

Under-execution of spending: In the January-June period, the government underexecuted state budget primary spending by €5.6 billion. The government intends to
maintain this overperformance through September, and to end the year by a margin of
overperformance of €4 billion to cover risks coming from other parts of general
government. The expenditure containment will focus on operating expenses while
81

making all required transfers to the social security funds and local governments to
allow them to become current in their payments. At any time, should performance run
short of these objectives, or revenue drop below schedule, the government stands
ready to take corrective actions.
5.
The government achieved an important milestone in end-July by passing a new
budget law that strengthens the fiscal management framework. This implies that the
budget for 2011 will be part of a three-year rolling medium-term framework, and that the
Minister of Finance will be able to set top-down expenditure ceilings for line ministries, local
governments and social budgets so as to broaden the scope of fiscal policy to general
government. Also, the budget will now contain standard contingency margins to facilitate
absorbing shocks, and the government will set up commitment registers in the line ministries
(a structural benchmark for end-September) to manage better accrual spending—beyond cash
outlays. In addition, the government is also developing monthly fiscal reporting for general
government entities (a benchmark by end-September).
6.
The preparation of general government budgets for 2011 in line with the new
budget law commitments is underway. The budgets will be prepared under the new law and
the government will present the pre-budget to parliamentary committees in early October
together with the consolidated draft local government and social budgets and consistent with a
general government fiscal deficit target (in ESA95 terms) of €17 billion in 2011. The
government will take into account the sustainability of discretionary spending cuts, and if
needed replace them with permanent savings. At the same time, the government will put in
place the 2011 fiscal measures that were agreed in May.
7.
In line with the original Memorandum, the government will focus on bolstering
tax administration and fighting tax evasion in the months ahead. Improving tax
administration is essential for fairness in the adjustment program and to facilitate broadening
the tax base, with moderate average tax rates. The government will kick-start the improved
tax administration by implementing the recommendations received from technical experts. By
end-September, the government will set up five dedicated task forces to:
•
•
•
•
•

Ensure prompt implementation of the new tax legislation,
collect tax arrears,
reorganize the large tax payers unit,
strengthen the audits for high-wealth and income individuals,
strengthen filing and payment controls, and improving tax payer services.

Meanwhile, the government will make intensive use of payments receipts to bolster tax
compliance, and cross-check tax information with data on wealth and spending habits to
reduce tax abuse and evasion in particular of high-income and wealthy tax payers, while also
reviewing the existing legal processes to ensure timely and effective prosecution of tax
offenders.
8.
Public administration reform is advancing. The government is setting up a single
payment authority through which wages of civil servants in central government will be paid
by end 2010 and for general government by March 2011. Plans to move in 2011 to a
simplified remuneration system are facilitated by the completed public employment census. A
functional review of central administration, beginning in the second half of 2010, will seek to
identify operational steps to rationalize and make more efficient the public administration.

82

9.
The government envisages specific efforts to limit risks to its program, in
particular to help strengthen expenditure control in subnational entities.
•

Health sector. In the hospital sector the government will accelerate payments to avoid
the buildup of arrears and to limit the carryover of obligations into 2011. Further, the
government has reduced procurement prices of pharmaceuticals by 20 percent by
implementing price caps for approved drugs lists, and improved profiles and
benchmarking for patients and doctors to avoid unnecessary prescriptions, which
should yield important savings during the second half of this year. Indeed, the
government stands ready to reduce pharmaceutical costs further (where there is room
to expand the drugs lists, the use of generics, and by introducing e-prescriptions). The
government will enforce the €3 for regular outpatient services in public hospitals and
extend the “all day” operation of hospitals (afternoon shift) in order to develop and
improve healthcare services and increase hospital revenues, including with increased
copayments of outpatient and diagnostic services. The government has placed
accounting firms in state hospitals to improve their financial management to gain
control over spending and accounts payable

•

Local governments. The recently passed Kallikratis bill for local government reform
will sharply reduce the number of local administrations, entities, and elected and
appointed officials. The government will tightly implement the bill, in particular the
targeted employment reduction and efficiency-enhancing reforms to secure improved
budgetary results of €500 million subsequently in each of the three years during 201113. To ensure that those savings contribute to the overall fiscal consolidation of
general government, the government will limit borrowing, reduce transfers, and
control local government budgets consistent with the medium-term fiscal strategy.

•

State enterprises. The government will strengthen performance of the major lossmaking public enterprises in order to reduce contingent risks to the budget, including
by enhancing efficiency, increasing tariffs in public transportation, and further
reducing excessive allowances and overtime. In particular, the government will
restructure the loss-making railroad enterprise as described below. Under the
restructuring plan operating PSO’s (public service obligation—subsidies) will be
limited to €50 million per year, and no new debt guarantees by the state will be
provided to the restructured rail enterprise, which has to break with a long history of
large losses. The 10 largest loss-making enterprises will have their financial
statements through 2009 published on the web before end-September (structural
benchmark) to enhance transparency in their financial condition.

10.
Parliament approved a substantial pension reform ahead of schedule. It
introduces a new system consisting of a contributory pension to top-up a non-contributory,
means-tested, basic pension, aiming to control the increase in pension spending. The National
Actuarial Authority will complete an assessment of the effects of the reform on the main
pension funds by end-December 2010, and of the largest auxiliary pension funds by endMarch 2011. These assessments will determine whether further adjustments to the parameters
of the pension system would be needed to contain the increase in pension spending to 2.5 ppts
of GDP between 2009 2060. Any further adjustments, if needed, will be completed by end of
June 2011 in consultation with pension experts, as foreseen in Law 3863.
11.
Financing and cash management. The latest assessment confirms that the state
financing need in 2010-11 remains fully financed from the loans of the Euro-area member
83

states and the IMF, with the government able—as foreseen in the program—to roll over its
relatively small stock of T-bills. However, the tight liquidity position will require careful cash
management. In this light, the public debt management agency will start monthly T-bill
auctions beginning in September (from quarterly placements) to improve cash management
and smooth maturity profiles.
Financial Sector Policies
12.
The Greek banking system continues to face a challenging environment. In the
first quarter of the year the banking system capital ratio declined by 0.05 percentage points to
11.7 percent as non performing loans grew to 8.2 percent from 7.7 percent at end 2009.
Increases in provisions and revaluation losses in the trading book generated a loss for the
system on a consolidated basis. All banks remained in compliance with the minimum capital
adequacy requirement of 8 percent. The recent CEBS stress tests covered more than 90
percent of banking system assets and all but one bank passed. The results contributed to
reduce market volatility.
13.
Liquidity conditions have remained strained although market volatility has
declined. The Greek banks have not regained access to wholesale markets to fund their
operations and maturing interbank liabilities put pressure on their liquidity positions. The
sovereign downgrade by Moody’s in June put further pressure on collateral valuations and, to
preserve adequate liquidity buffers in the sector, the authorities are committed to the adoption
of the legislation enabling a new tranche of government guaranteed bank bonds in the amount
of €25 billion (a prior action to proceed to the IMF Board meeting on September 10). Such
guarantees will ensure sufficient loan provision from the ECB/Eurosystem to the Greek banks
and economy, as well as to withstand possible further market turbulence.
14.
The FSF law was passed establishing a new backstopping facility for a sound
level of bank equity. On July 13 the Parliament enacted the Financial Stability Fund Law.
Steps needed for the FSF to become operational by mid-September are well on course and it
will receive its first tranche of funding at that time.
15.
Banking supervision is being strengthened. Reporting requirements have
heightened and reporting lags are being reduced. However expanding supervisory resources is
slow, especially taking into account the transfer of insurance supervision to the Bank of
Greece. The necessary flexibility to address this issue will be provided.
16.
The government has commissioned an in-depth study on the strategic options for
the banking sector. In addition, the government has requested a preliminary due diligence
analysis for those financial entities in which the state has a significant stake. Both the study
and the due diligences will be completed by mid-September. Taking into account the outcome
of the study and the due diligences, the Government, in consultation with experts, will
formulate a program to preserve financial stability and enhance efficiency in the banking
system.
17.
The authorities are following up on the result of the July 2010 CEBS stress tests.
While expecting the results of the due diligence, the single bank that did not pass the most
stringent scenario will continue to implement interim restructuring measures under enhanced
supervision by the BoG. The government has reaffirmed its full support to this bank and will
ensure that it complies with the requirement of implementing a restructuring plan under the
EU rules for state aid, including compliance with the 1 October 2010 deadline for submission.

84

18.
The Bank of Greece will maintain close coordination with home and host country
supervisors. Regular communications with regulators in SEE regarding risk assessments and
liquidity contingency plans have intensified and participation in colleges of supervisors will
continue. The authorities have also made good progress on their commitments under the
MEFP and the personal insolvency law has been adopted after amending it to ensure that
creditor’s rights are adequately protected.
Structural reform policies
19.
Consistent with the May Memorandum, the government is making headway on
structural reforms that promote growth, competitiveness, and reduce budgetary risks.
The potential for raising productivity and output growth is large. Unleashing growth potential
requires pursuing a genuine competition culture and ensuring collective bargaining
institutions that deliver wages commensurate with productivity. Also, the reform agenda aims
at developing open markets in a business-friendly environment. Finally, measures are needed
to remove restrictions that hamper activity, innovation, and reforms in state-owned
enterprises, and to promote the absorption of structural funds.
20.
Labor market reform is almost completed. Substantive legislative changes were
introduced in July easing employment protection legislation and collective dismissals,
reforming minimum wages, reducing overtime premia, and allowing firm-level agreements to
prevail over other levels. Alongside reforms in public employment to reduce labor-market
distortions, these will increase adjustment capacity of firms, ultimately boosting employment.
Further measures will be taken to reform collective bargaining, including the elimination of
the automatic extension of sectoral agreements to those not represented in the negotiations.
Finally, the government will adopt legislation to introduce symmetry in the arbitration system
while strengthening its independence and transparency.
21.

The government will reform and/or privatize state-owned enterprises:

•

Railways. The draft enabling law to restructure the railway sector will be discussed in
parliament by end-September and, in parallel, the government will approve a business
plan with time-bound actions. Cost reductions aim at significantly reducing fiscal
pressures from the enterprises, while making the train operator profitable for the fiscal
year 2011. The business plan will include a clear strategy to render the infrastructure
manager economically viable over the medium term in line with EU law. If necessary,
further measures will be implemented to ensure that financial objectives are achieved.

•

Energy. The government will enable the effective liberalization of the wholesale
electricity market and proceed with the rationalization of tariffs while ensuring
vulnerable groups are protected.

•

Other state-owned enterprises. Privatization could boost domestic and foreign direct
investments and stimulate growth. Thus, a list of privatization projects has been
identified and a fully elaborated plan will be prepared before end-December.

22.

Efforts are underway to increase competition and achieve a rebound in growth:

•

Restricted professions. Pervasive restrictions to entry in a number of important
professions impose high costs on the economy. As a first step, the government will
remove barriers in the legal, pharmacy, notary, architecture, engineering, and auditing

85

professions. This will include reducing licensing requirements, geographic
restrictions, and regulated tariffs.
•

Services sectors. An ambitious and strategic implementation of the Services Directive
will be pursued. In road freight transport, by end-September the government will seek
approval for the law that removes restrictions on licenses and liberalizes prices.

•

Business environment. The government will take measures to facilitate start-ups by
making fully operational one-stop shops and eliminating unnecessary fees. On
licensing, legislation will be adopted to simplify and accelerate the authorization for
enterprises, industrial activities, and professions. Remaining restrictions to business
activity and innovation will be identified and an action plan (“business friendly
Greece”) will be formulated to remove the most important ones.

•

Tourism and retail. The government will also commission a report analyzing the
potential contributions of tourism and retailing to growth and jobs, and follow up with
pointed actions and legislation.

•

HCC. The government will amend the Greek Competition Act to strengthen the
independence of the Hellenic Competition Committee and increase its effectiveness.

23.
The absorption of structural funds will be raised. To enhance the growth impact of
funds, recourse to non-targeted de minimis state aid measures will be gradually reduced. The
government will adopt legislation to tackle delays related to environmental, archeological and
expropriation impediments. A task force has been established to address these and other
implementation bottlenecks.
Safeguards Assessment
24.
The Bank of Greece safeguards assessment has been completed by the IMF. A
Memorandum of Understanding between the Minister of Finance and the Bank of Greece
Governor has been signed regarding the management and use of Fund disbursements.

86

87

Table 2: Greece: Structural Conditionality for 2010 1/
Measures

Date

Status

Remarks

1 Establish FSF

Observed

Law for FSF approved in parliament on
July 13, 2010

2 Adopt Kallikratis law

Observed

Kallikratis Law approved in parliament
on June [ ], 2010

Observed

New budget law approved in
parliament on July 29, 2010

Incomplete

Rescheduled to end-December 2010 for
main social security funds, and endMarch 2011 for remaining
supplementary funds, in recognition of
size of task and to allow more data
collection

Structural benchmarks

End-June

Adopt new Financial Management Law,
amending the budget Law of 1995, and
3 including:
- 3-yr fiscal strategy
- Top down budgeting with exp ceilings for
state budget and expenditure estimates by line
ministries
- standard contingency margins
- supplementary budget for overspending
- commitment controls
- effective for 2011 budget

4 NAA to produce actuarial report

Prior action for First Review Board Meeting
1 Enactment of €25 billion bond guarantee tranche

1 Adopt comprehensive pension reform
2

To support bank liquidity
End-September 2010
Well advanced;
and mostly
observed, with
follow up at endDecember 2010
and end-March
2011

- Establish commitment register
- Publish monthly data on GG
- Report all arrears monthly

Pension reform law was adopted in
parliament on July 8, 2010. Incremental
pension costs now estimated at slightly
above 2.5 percent of GDP. Safeguard
clause to be triggered in June 2011
pending full actuarial report.
ongoing
ongoing
ongoing

Publish financial statement of 10 largest loss3 making SOEs

ongoing

Kick-off the tax administration plan and set up
4 five task forces
- collection of tax arrears
- Reorganize large tax payers unit
- Strengthen audits for high-wealth and income
individuals
- Start prosecuting worst offenders
- Strengthen filing and payment controls

Progress underway ;TA received with
follow-up planned
ongoing
ongoing
ongoing
ongoing
ongoing
End-December 2010

Report with single payment authorities on
1 public sector remuneration structures

Work has begun; employment census
has been completed

2 Adopt new regulations for Statistical Action Plan

Work has begun; MOUs are being
drafted; Greece has received resident
expert; new President of ELSTAT in
place

Work has begun; potential privatization
Present detailed privatization plan with dates
list has been drawn up; details need to
3 and revenue guidelines
be fleshed out
1/ Benchmarks for 2011 to be set in reviews for end-September and end-December 2010 (second and third review).

88

GREECE
Updated Memorandum of Understanding
on
Specific Economic Policy Conditionality
August 6, 2010
The quarterly disbursements of bilateral financial assistance from euro area Member States
will be subject to quarterly reviews of conditionality for the duration of the arrangement. The
release of the tranches will be based on observance of quantitative performance criteria, and a
positive evaluation of progress made with respect to policy criteria in the MEFP and in this
Memorandum, which specifies the detailed criteria that will be assessed for the successive
reviews, up to the end of 2011. Detailed criteria for the structural reform requirements in 2010
and 2011 have been updated and further specified during the summer 2010 mission.
The authorities commit to consult with the European Commission, the ECB and the IMF
staffs on adoption of policies falling within the scope of this Memorandum allowing sufficient
time for review. They will also provide them with all requested information for monitoring
progress during program implementation and the economic and financial situation (Annex 1).
Government provides quarterly a report in line with Article 4 of Council Decision
2010/320/EU.1

1. Actions for the second review (actions to be completed by end Q32010)
i. Fiscal consolidation
Rigorously implement the budget for 2010 and the fiscal consolidation measures announced
afterwards, including those in this Memorandum (including its previous version).
The Ministry of Finance ensures tight supervision of expenditure commitments by the
government departments, and effective tax collection, to make certain that the general
government deficit targets in cash and ESA95 bases (cumulative quarterly deficit ceilings in
the Memorandum of Economic and Financial Polices (MEFP) including the Technical
Memorandum of Understanding (TMU); and Article 1 of Council Decision 2010/320/EU) are
achieved.
The 2011 budget will provide information and reliable projections on the entire general
government sector and target a further reduction of the general government deficit in line with
the original MEFP. It includes a detailed presentation of fiscal consolidation measures
1

OJ L 145, 11.6.2010, p. 6.

89

amounting to at least 3.2% of GDP (4.3% of GDP, if carryovers from measures implemented
in 2010 are considered), and detailed information on the situation of public enterprises.
The budget will include the following measures, as planned in the original version of this
Memorandum (in exceptional circumstances, measures yielding comparable savings could be
considered in close consultation with European Commission, IMF and ECB staffs):
− Implement the rule of replacing only 20 percent of retiring employees in the public
sector (central government, public companies, local governments, state agencies
and other public institutions);
− Reduction in intermediate consumption of the general government by at least EUR
300 million compared to the 2010 level, on top of savings envisaged in the context
of reforming public administration and the reorganisation of local government
(see next measure);
− Government starts implementing legislation reforming public administration and
the reorganisation of local government with the aim of reducing costs by at least
EUR 1500 million from 2011 to 2013, of which at least EUR 500 million in 2011.
− Freeze in the indexation of pensions, with aim of saving EUR 100 million;
− Reduction in domestically-financed investments by at least EUR 500 million, by
giving priority to investment projects financed by EU structural and cohesion
funds;
− Temporary "crisis levies" on highly profitable firms, yielding at least EUR 600
million in additional revenue per year in 2011, 2012 and 2013;
− Incentives to regularise land-use violations, yielding at least EUR 1500 million
from 2011 to 2013, of which at least EUR 500 million in 2011;
− Enforce the presumptive taxation of professionals, with a yield of at least EUR 400
million in 2011 and increasing returns in 2012 and 2013;
− Broaden the VAT base by including services that are currently exempted and
move a significant proportion (at least 30%) of the goods and services currently
subject to the reduced rate to the normal rate, with a yield of at least EUR 1000
million, or a measure of the same yield to be agreed with the EC/IMF/ECB staffs;
− Start phasing in a "green tax" on CO2 emissions, with a yield of at least EUR 300
million in 2011;
− Collect revenue from the licensing of gaming: at least EUR 500 million in sales of
licences and EUR 200 in annual royalties;
− Expand the base of the real estate tax by updating asset values to yield at least
EUR 400 million additional revenue;
− Increase taxation of wages in kind, including by taxing car lease payments (at least
EUR 150 million);
− Initiate the collection of a special tax on unauthorised establishments (at least EUR
800 million per year);
− Increase taxes on luxury goods by at least EUR 100 million;
− The budget will establish detailed expenditure ceilings for each line-ministry, local
governments, and social security funds consistent with the general government
deficit target. This also pertains to the medium-term fiscal framework for 20122013;
− The budget will contain indicative information on monthly revenue per category,
and expenditure per Ministry. Updated figures will be regularly made available
online.

90

Government implements the new organic budget law, and ensures that the draft budget law
for 2011 onwards contains detailed information on outturn and plans of the entire general
government sector – including local government, social security, hospitals and legal entities.
An annex to the budget will present key figures on the financial performance of the largest
public enterprises, concomitant budgetary and tax expenditures, and related fiscal risks.

ii. Structural fiscal reforms
Tax administration
Parliament adopts legislation to improve the efficiency of the tax administration and controls,
implementing recommendations provided by the European Commission and IMF staffs. In
particular, they put in place an effective project management arrangement (including tight
oversight by the Ministry of Finance and taskforces) to implement the anti-evasion plan to
restore tax discipline through:
− strengthened collection enforcement and recovery of tax arrears (coordinated with
the social security funds) of the largest debtors;
− a reorganized large taxpayer unit focused on the compliance of the largest revenue
contributors;
− a strong audit program to defeat pervasive evasion by high-wealth individuals and
high income self-employed, including prosecution of the worst offenders; and
− a strengthened filing and payment control program.
Accounting and control
Government implements the reform of the general accounting office (GAO), including the
following elements:
− Strengthening of the role of the GAO in budget planning and control;
− Provision of the necessary resources in terms of high-level personnel,
infrastructure and equipment support, managerial organisation and informationsharing systems;
− Provision of safeguards for GAO staff against political interference, and personal
accountability in the provision of reliable data;
− Strengthen the institutional mechanisms for providing reliable and plausible
official budgetary forecasts that take into account available recent execution
developments and trends; to this end, the official macroeconomic forecasts should
be reviewed by external experts.
Government takes the following measures to ensure timely provision of reliable fiscal
accounts and statistics:
− GAO starts, in June 2010, the publication of timely monthly statistics (on a cash
basis) on revenue, expenditure and financing and accounts payable for the
"available general government" and its sub entities (state, social security, hospitals,
local governments and legal entities);
− Government adopts a detailed time-bound action plan, agreed with Eurostat, to
improve collection and processing of general government data required under the
existing EU legal framework, in particular by enhancing the mechanisms that
ensure the prompt and correct supply of these data, and ensure personal
responsibility in cases of misreporting; and receive appropriate resident technical
assistance to ensure rapid progress;
91

− Government starts to publish timely information on the financial situation in public
enterprises (at least the 10 largest loss-making ones) and other public entities not
classified in the general government (including detailed income statements,
balance sheets and data on employment and the wage bill). To this end, a regular
and timely reporting mechanism is introduced.
The Ministry of Finance establishes a comprehensive central registry for public enterprises.

iii. Financial sector regulation and supervision
The Bank of Greece and the Government ensure that the Financial Stability Fund is fully
operational.
Government makes available an in-depth study on the strategic options for the banking sector
as well as a preliminary due diligence analysis for those financial entities in which the state
has a significant stake.
Following up on the result of the July 2010 CEBS stress tests, the bank which did not pass the
test implements interim restructuring measures under enhanced supervision by the Bank of
Greece. Government provides its full support to this bank and ensures that it complies with
the requirement of implementing a restructuring plan under the EU rules for state aid,
including compliance with the 1 October 2010 deadline for submission.
The Bank of Greece commits to reduce remuneration of its staff in light of the overall effort
of fiscal consolidation.

iv. Structural reforms
To strengthen labour market institutions
Following dialogue with social partners, Government adopts and implements legislation to
reform wage bargaining system in the private sector, which should provide for a reduction in
pay rates for overtime work and enhanced flexibility in the management of working time. .
Government ensures that firm level agreements take precedence over sectoral agreements
which in turn take precedence over occupational agreements. Government removes the
provision that allows the Ministry of Labour to extend all sectoral agreements to those not
represented in negotiations.
Government amends employment protection legislation to extend the probationary period for
new jobs to one year, and to facilitate greater use of temporary contracts and part-time work.
Government amends regulation of the arbitration system, (Law 1876/1990), so that each of
the parties can resort to arbitration if they disagree with the proposal of the mediator without
exceptions on subject or coverage, according to the provisions of Law 3863/2010. It should
provide for an arbitration procedure that operates according to transparent objective criteria,
and with an independent committee of arbitrators with decision making capacity free from
government influence. The objectives of the arbitration should ensure that due attention is
paid to cost competitiveness, thereby supporting job creation.

92

To modernise public administration
Public sector wages and human resource management
Government launches the process, including the principles and timetable, for establishing a
simplified remuneration system covering basic wages and allowances. It shall apply to all
public sector employees, and be part of an overall reform of Human Resource management.
This should lead to a system where remuneration reflects productivity and tasks. As a general
principle, it should avoid increases in remuneration for employees as a result of the transition
process.
Functional reviews
Government launches independent functional reviews of the public administration at central
level and of existing social programmes. It is to be conducted by internationally renowned and
external experts. The Terms of Reference for the reviews will be agreed with the European
Commission, IMF and ECB staffs. To ensure ownership, participation shall inter alia include
the office of the Prime Minister, the Ministry of Interior, the Ministry of Finance, the Ministry
of Labour and Social Security and the Ministry of Health and Social Solidarity.
The objectives of the review on public administration at central level are:
o To take stock of the use of resources, including human resources, to carry out
government functions (e.g., employment, goods and services) in the central
government and subordinated public institutions;
o To identify actions to rationalize the organisation of public administration and
generate productivity gains, and quantify possible fiscal savings from
implementation of these actions. The review shall encompass horizontal issues
related to planning, organisation, staffing and control functions (including internal
audit), and shall include specific studies for all main ministries and key public
bodies.
The objectives of the review on existing social programmes are:
o To assess effectiveness and appropriateness of existing social programmes and
make proposals for reform or cancellation of the least effective ones, while
quantifying possible fiscal savings from implementation of these actions.
o To assess the options for reform of the overall health care system (both public and
private) with the aim of securing more efficient use of public resources and
delivery of better quality health care services.
Public procurement
Government agrees an action plan, with a timetable for concrete actions, leading to the
creation of a central procurement authority, involving a swift implementation of the electronic
platform for public procurement and introducing the use of an e-auctioning system. It should
ensure a common approach across government authorities for tendering procedures, ex ante
and ex post controls.

93

To strengthen competition in open markets
Services Directive
Under the Services Directive, the government finalizes the review (screening) of existing
sectoral legislation, and provides a list of restrictions that are being abolished or amended as a
result.
The Government also ensures that the electronic point of single contact is operational with a
user-friendly internet portal which:
o lists all relevant information for the specific service;
o for each service activity provides an overview of procedures to be complied
with, distinguishing between the requirements that apply in establishment
cases and for cross-border service provision;
o allows common procedures (including for the most important regulated
professions and in the areas of tourism, retail, education and construction) to
be completed by electronic means with the necessary forms available on-line
and recognising electronic signatures in accordance with Decision
2009/767/EC.
Transport
Government adopts a law on road freight transport that removes restrictions not provided for
in Directive 96/26/EC of 29 April 1996 on admission to the occupation of road haulage,
including minimum fixed prices.
The government adopts legislation, proposed by the Ministry of Infrastructure, Transport and
Networks, establishing the necessary enabling conditions for the development and the
implementation of a business plan in the railway sector and submits it to Parliament for
voting. The legislation should inter alia:
o ensure compliance with all relevant EU legislation on the railway sector to
effectively ensure market opening, employment and social policies, as well as
competition and state aid policy
o establish an upper limit of EUR 50 million for the annual Public Service
Obligation (PSO) contribution from the general government for the period 20112013 and establishes the principle that the State provides no additional explicit or
implicit support to TRAINOSE;
o provide for any future changes to the level of PSO transfers to the railway
operators to be approved only after an independent and transparent assessment by
the Hellenic Competition Commission and to be fully in line with all legislation
related to budgetary control and execution;
o provide certainty that the managing boards of TRAINOSE and OSE have the legal
authority to negotiate new collective agreements covering remuneration and
employment conditions and to take staffing decisions that assure a viable business;
o ensure that decisions on the transfer of debt to the State become effective only
after the implementation of key actions in the approved business plan;
The government adopts a business plan, proposed by the Ministry of Infrastructure, Transport
and Networks, with a detailed timetable for concrete actions, which inter alia:

94

o specifies how operational activities will be made profitable, including covering
depreciation costs, as from 2011 including by closing loss-making lines, by
increasing tariffs and by reducing wages and staffing;
o provides a detailed sensitivity analysis on the implications for wage costs of
various scenarios for the outcome of collective agreement. This provides
information on several options concerning staff;
o ensures the effective implementation of EU Directives, including EU Directives
2007/59/EC and 20078/57/EC on the Train Driver Certificate and on the
Interoperability of the Rail System, respectively, allowing for competition amongst
providers of railway services;
o provides for the restructuring of the holding company, including the sale of land
and other assets.

To promote investments and exports
Government takes measures, in line with EU competition rules, to facilitate FDI and
investment in innovation in strategic sectors (green industries, ICT, etc...), the adoption of
measures to facilitate public private partnerships (PPPs), action to fast-track large FDI
projects and measures to strengthen export promotion policy. These actions focus on
removing rigidities and administrative constraints and must be fully in line with the fiscal
requirements of the Memorandum of Understanding.

2. Actions for the third review (to be completed by end Q4-2010)
i. Fiscal consolidation
Government achieves the programme target for the 2010 general government deficit.
Parliament adopts the budget for 2011 targeting a further reduction in the general government
deficit and including the required consolidation measures including those specified in this
Memorandum.
The Ministry of Finance ensures tight supervision of expenditure commitments by the several
government departments, and effective tax collection, to make certain that general
government deficit target in cash and ESA95 bases (see respectively Table 2 of MEFP and
Article 1 of Council Decision 2010/320/EU) are achieved.
Government prepares a privatization plan for the divestment of state assets and enterprises
with the aim to raise at least EUR 1 billion a year during the period 2011-2013. The
restructuring and privatization programme will span the state’s holdings in rail, road transport,
airports, ports, utilities, the gaming industry and public real estate; leverage private
investment so as to restructure the economy, foster economic growth and contribute to fiscal
consolidation; use the know-how of the private sector through outright sales of government
holdings, concession agreements, initial public offerings, strategic public-private partnerships
and the establishment of new holding companies.

95

Accounting and control
Government ensures that the central registry for public enterprises is operational.

ii. Structural fiscal reforms
The fiscal framework
Government implements legislation to strengthen the fiscal framework. The following
elements should be part of the reform:
− Introduce a medium-term fiscal framework covering the general government based
on rolling three-year expenditure ceilings for the State, social security entities and
local governments;
− Strengthen the position of the Finance Minister vis-à-vis line ministries in both
budget preparation and execution phases (giving him/her veto power on spending
decisions and execution);
− Introduce a compulsory contingency reserve in the budget, corresponding to 10
percent of total appropriations of government departments other than wages,
pensions and interest; the use of the contingency reserve will be decided by the
Finance Minister;
− Ensure that Parliament does not modify the overall size of the budget at the
approval stage, and focus on the composition of public expenditure and revenue,
and reliability of projections for expenditure and revenue;
− Introduce stronger expenditure monitoring mechanisms, particularly by
implementing an appropriate control of spending commitments, through which
spending entities (line ministries, local authorities, social security funds, hospitals
and legal entities) will report on a regular basis to the Treasury on their
outstanding expenditure commitments against their authorised appropriations in
the budget law;
− Introduce a revenue rule for the general government, according to which the
allocation of higher-than-expected revenues should be specified ex-ante in the
budget law;
− Creation of a fiscal agency attached to Parliament providing independent advice
and expert scrutiny on fiscal issues, and reporting publicly on the budgetary plans
and execution of the spending entities of the general government, and on
macroeconomic assumptions used in the budget law.
Parliament adopts the reform of the public wage legislation consistent with this
Memorandum.
To complete the pension reform
The National Actuarial Authority provides by 1 December 2010 interim long-term projections
of pension expenditure up to 2060 under the July 2010 legislation covering the main pension
schemes (IKA, OGA, OAEE, public sector scheme).

96

iii. Financial sector regulation and supervision
Taking into account the outcome of the strategic study and the due diligences of banks, the
Government formulates a programme to preserve financial stability and enhance efficiency in
the banking system.

iv. Structural reforms
To reform and modernise public administration
Local administration
Government adopts all necessary legislation and decrees for the full entry into force of the
local administration reform (Kallikrates) and ensures that it achieves savings of EUR 500
million in 2011 and additional EUR 500 million per year in 2012 and 2013 for the general
government as a whole. Government shall adopt a decree disallowing local governments to
run deficits at least until 2014.
Public sector wages and human resource management
The Ministry of Finance together with the Ministry of Interior completes the establishment of
a Single Payment Authority for the payment of wages in the public sector. The Ministry of
Finance publishes a detailed report, in collaboration with the Single Payment Authority, on
the structure and levels of compensation and the volume and dynamics of employment in the
general government. The report should present plans for the allocation of human resources in
the public sector for the period up to 2013 that inter alia specifies plans to reallocate qualified
staff to areas necessary to implement the Memorandum of Understanding, including the tax
administration, GAO, the labour inspectorate, regulators and Hellenic Competition
Commission.
Government presents a detailed action plan with timeline to complete and implement a
simplified remuneration system.
Better Regulation
Government adopts legislation and measures needed to implement the Better Regulation
agenda.
To modernise the health care systems
Government adopts legislation on the institutional framework for health supplies (Law
3580/2007, as revised in May 2010 by Law 3846/2010), establishes new systems for the
management of drugs that favour more use of generic medicines, including a new system for
the electronic monitoring of doctors' prescriptions. The aim is to move to the average EU
generic drug penetration rate, including by procurement of pharmaceutical products by
hospitals and doctors' prescriptions on the basis of drastic substances.
Government enforces the payment of EUR 3 for regular outpatient services in public hospitals
and extends the 'all day' functioning of hospitals (afternoon shift) in order to develop and
improve healthcare services and increase revenue, including by increasing co-payment of
outpatients and diagnostic services.

97

Government completes the programme of hospital computerisation, upgrading hospital
budgeting systems, and the reform of management, the accounting (including double-entry
accrual accounting) and financing systems.
Government ensures greater budgetary and operational oversight of health care spending by
the Finance Minister, the publication of audited accounts and improvement in pricing and
costing mechanisms.
Government seeks technical assistance from independent international experts on all aspects
of the efficiency and effectiveness of the health procurement system and management of
hospitals, aiming at enhancing efficiency and reducing waste.
To enhance competition in open markets
Government makes the General Commercial Registry (GEMI) fully operational.
Services directive
Government adopts changes to existing (sectoral) legislation in key services sectors such as
tourism, retail and education services. New legislation should:
o facilitate establishment, in particular, by
 abolishing or amending requirements which are prohibited by the
Services Directive; and
 significantly reducing requirements, including those relating to
quantitative and territorial restrictions, legal form requirements,
shareholding requirements, fixed minimum and/or maximum tariffs and
restrictions to multidisciplinary activities.
o facilitate the provision of cross-border services so that service providers
providing cross-border services only have to comply with specific
requirements laid down in Greek legislation in exceptional cases (when
admitted by Articles 16 or 17 of the Services Directive).
o provide legal certainty for service providers providing cross-border services
by clearly setting out in the respective (sectoral) legislation which
requirements can and which requirements cannot be applied to cross-border
services.
Government specifies, a limited number of priority service sectors, which are key for growth,
a timetable for adopting sectoral legislation by end Q2 2011 that ensure full compliance with
the requirements of the Services Directive.
Restricted professions
Government proposes legislation to remove restrictions to competition, business and trade in
restricted professions including:
− the legal profession, to remove unnecessary restrictions on fixed minimum tariffs,
the effective ban on advertising, territorial restrictions on where lawyers can
practice in Greece;
− the pharmacy profession, covering limits on the number of pharmacies and
minimum profit margins;

98

− the notary profession, covering fixed tariffs, limits on the number of notaries,
territorial restrictions on where notaries can practice and the effective ban on
advertising;
− architects, covering fixed minimum tariffs;
− engineers, covering fixed minimum tariffs;
− auditing services, covering fixed tariffs.
Government adopts legislation and takes all necessary measures to complete the effective
transposition of EU rules on recognition of professional qualifications, including compliance
with all ECJ rulings (inter alia, related to franchised diplomas), the setting up of the
administrative structures responsible for the application of the rules of recognition of
professional qualifications as well as timely information of citizens about their pending
requests for recognition.
Sectoral growth drivers
Government presents a report analysing the potential contribution of the tourism sector to
growth and jobs in the Greek economy. It should identify all legislative, administrative and
other obstacles hindering competition and market entry to the realisation of the potential.
Government presents a report analysing the potential contribution of the retail sector to price
flexibility, growth and jobs in the Greek economy. It should identify all legislative,
administrative and other obstacles hindering competition and market entry to the realisation of
the potential.
Business environment
Government adopts legislation to simplify and accelerate the process of licensing enterprises,
industrial activities and professions, which inter alia revises Law 3325/05, makes the spatial
plan and Law 3333/05 for business areas operational.
Government adopts an 'action plan for a business friendly Greece' that presents a timetable for
the removal of 30 of the most important remaining restrictions to business activity, investment
and innovation.
Government accelerates the completion of the land registry and prepares a progress report,
including an action plan.
Government adopts a law modifying the existing institutional framework of the Hellenic
Competition Commission (HCC) with the aim of abolishing the notification system for all
agreements falling within the scope of Article 1 of Law 703/1977/, to give the HCC the power
to reject complaints, to increase the independence of HCC members, and to establish
reasonable deadlines for the investigation and issuance of decisions.
Energy
Government presents its detailed plans for the liberalisation of the energy market, including
opening up lignite-fired electricity generation to third parties in line with EU requirements.
Government adopts plan for phased transitory cost-based access to lignite-fired generation,
taking into account the decommissioning of the power plants scheduled under the

99

Government's Energy Plan to meet the 20-20-20 target. This access will remain in place until
effective implementation of the liberalisation has taken place.
Government adopts a plan to either award the hydro reserves management to an independent
body or to assign this role to the independent system operator.
Government adopts a mechanism to ensure that the energy component of regulated tariffs
reflects, gradually and at the latest by June 2013, wholesale market prices, except for
vulnerable consumers. Government adopts a revised definition of vulnerable consumers and a
tariff for this category of consumers.
In order to ensure that network activities are unbundled from supply activities as foreseen in
the second and third energy liberalisation packages, Government identifies the assets and
personnel associated with the electricity transmission system and the electricity distribution
system.
To promote investments and exports
Government carries out in depth evaluation of all R&D and innovation actions, including in
various Operational Programmes, in order to adjust the national strategy and limit the use of
government subsidies and guarantees.
Government creates an external advisory council financed through the 7th R&D programme,
to consider how to foster innovation, how to strengthen links between public research and
Greek industries and the development of regional industrial clusters.
To raise the absorption rates of Structural and Cohesion Funds
Government meets targets for payment claims in the absorption of Structural and Cohesion
Funds set down in the table below. Compliance with the targets shall be measured by certified
data. In addition, Government achieves an annual target of submitting 10 major projects
applications to the Commission services. In meeting absorption rate targets, recourse to nontargeted de minimis state aid measures should be gradually reduced.
Government presents a report on the activities of the task force assessing progress in ensuring
the rapid implementation and absorption of structural funds, and proposing improvements
when necessary.
Programming period 2007-2013
(in EUR million)
European Regional Fund and Cohesion
Fund
European Social Fund
Target of first half of the year
Target of second half of the year
Total annual target

100

Payment claims to be submitted
between 2010 and 2013
2010
2011
2012
2013
2330
420

2750

2600
750
1105
2245
3350

2850
880
1231
2499
3730

3000
890
1284
2606
3890

Without prejudice to the Greek Constitution, Government adopts legislation to tackle delays
in the implementation of public works and investment projects in general. Legislation should
inter alia:
o shorten and simplify judicial procedures challenging contract awards or land
expropriation decisions;
o shorten deadlines to get permits by the Central Archaeological Council in Athens;
o simplify and shorten procedures to complete studies on environmental impact and
to get the approval of environmental terms for infrastructure projects.

3. Actions for the fourth review (to be completed by end Q1-2011)
i. Fiscal consolidation
Government rigorously implements the budget for 2011 in line with this Memorandum.
Progress is assessed against the (cumulative) quarterly deficit ceilings in the MEFP (including
the TMU).

ii. Structural fiscal reforms
Parliament adopts legislation to strengthen the fiscal framework, consistent with this
memorandum.
To complete the pension reform
The National Actuarial Authority submits comprehensive long-term projections of pension
expenditure up to 2060 under the adopted reform; the projection will be peer-reviewed and
validated by the EU Economic Policy Committee and the European Commission, IMF and
ECB. The projections shall encompass the supplementary (auxiliary) schemes, based on
comprehensive set of data collected and elaborated by the National Actuarial Authority.

iii. Structural reforms
To reform and modernise public administration
Public procurement
Government completes effective transposition of Directive 2007/66/EC on public
procurement regarding remedies, and at the same time ensures that responsibility for the
review of award procedures be vested with the administrative courts. Government completes
the transposition of Directives 2009/81 on defence and security expenditure.
Reforms to improve the business environment:
Restricted professions
Government adopts specific legislation on restricted professions including for the legal
profession, the pharmacy profession, the notary profession, architects, engineers and auditing
services.

101

Sectoral growth drivers
Government adopts legislation and takes other structural actions to implement the findings of
the report analysing the potential contribution of the tourism sector to growth and jobs in the
Greek economy.
Government adopts legislation and takes other structural actions to implement the findings of
the report analysing the potential contribution of the retail sector to price flexibility, growth
and jobs in the Greek economy.
To enhance competition in open markets
Energy
Government commences implementation of plan for opening up lignite-fired electricity
generation to third parties.
Government implements its decision to either award the hydro reserves management to an
independent body or to assign this role to the independent system operator.
Government starts to implement the mechanism to ensure that the energy component of
regulated tariffs reflects, gradually and at the latest by June 2013, wholesale market prices,
except for vulnerable consumers.
In order to ensure that network activities are unbundled from supply activities as foreseen in
the second and third energy liberalisation packages, the following measures are implemented:
o Government adopts decision on the modalities of unbundling of the
transmission system operator in line with the third energy liberalization
package and adopts necessary legislation to ensure the creation of fully
unbundled electricity and gas transmission system operators by March 2012.
o Government ensures the creation of an independent Distribution System
Operator, in line with the third energy liberalisation package.
Government transfers to RAE (Regulatory Authority for Energy) all regulatory powers
assigned to EU energy regulators in the third energy liberalisation package (licensing,
network access, network charges, market monitoring, etc).
Government adopts measures to ensure the independence of RAE (impartial and transparent
nomination of board, management authority with regard to budget and personnel, etc. in line
with the third energy liberalisation package).

4. Actions for the fifth review (to be completed by end Q2-2011)
i. Fiscal consolidation
Government rigorously implements the budget for 2011 in line with this Memorandum, and
the fiscal consolidation measures in the budget. Progress is assessed against the quarterly
deficit ceilings in the MEFP (including the TMU).

102

ii.

Structural fiscal reforms

To complete the pension reform
Government revises the main parameters of the pension system provided by Law 3863/2010,
if the projections by the National Actuarial Authority show that the projected increase in
public pension expenditure would exceed the limit of 2.5 percentage points of GDP over
2009-60. The revision should be designed in close consultation with the European
Commission, the IMF and the ECB staffs.
Government implements an in-depth revision of the functioning of supplementary/auxiliary
public pension funds. The aim of the revision shall be to stabilise pension expenditure and
guarantee the budgetary neutrality of supplementary/auxiliary schemes.
Government substantially revises the list of heavy and arduous professions, and reduces its
coverage to no more than 10% of the labour force. The new list of Difficult and Hazardous
Occupations shall apply with effect from 1 July 2011 to all current and future workers.
The Bank of Greece commits not to grant pension privileges to its staff and to revise the main
parameters of its pension scheme to align them with those of IKA.

iii. Structural reforms
To modernise public administration
Public sector wages and human resource management
Government adopts legislation establishing a simplified remuneration system covering basic
wages and allowances that applies to all public sector employees ensuring that remuneration
reflects productivity and tasks: this reform should be part of an overall reform of Human
Resource management in the public sector.
Functional reviews
Government assesses the results, including operational policy recommendations, of a first
phase of the independent functional review of public administration at central level are
presented by the external experts. This should include the results of studies applied to a
number of core ministries. The functional review of existing social programmes is finalised.
Public procurement
Government implements the reform of the public procurement system, as defined in the action
plan.
To strengthen labour market institutions
Government completes the reform to strengthen the Labour Inspectorate, which should be
fully resourced with qualified staff and has quantitative targets on the number of controls to
be executed.
Government adapts the legislation on tackling undeclared work to require the registration of
new employees before they start working.

103

Review the scope for improvements in the targeting of social expenditures to enhance the
social safety net for the most vulnerable.
To strengthen competition in open markets:
Services Directive
Government adopts legislation on a limited number of priority service sectors identified in Q4
2010. Government specifies, for a limited number of priority service sectors, a timetable for
adopting sectoral legislation by end Q4 2011 that ensure full compliance with the
requirements of the Services Directive.
Business environment
Government presents an impact assessment evaluating Law 3853/2010 on simplification of
procedures for the establishment of personal and capital companies in terms of the savings
achieved in time and cost to set up a business.
Government ensures that the point of single contact is fully operational and completion of
procedures by electronic means possible in all sectors covered by the Services Directive.
Energy
Government removes regulated tariffs for customers except households and small enterprises
(as defined in the second and third energy liberalisation packages).
To raise the absorption rates of Structural and Cohesion Funds
Government meets targets for payment claims to be measured against certified data.
Government presents a report on the activities of the task force assessing progress in ensuring
the rapid implementation absorption of structural funds, and proposing improvements when
necessary.

5. Actions for the sixth review (to be completed by end Q3-2011)
i. Fiscal consolidation
Government rigorously implement the budget for 2011 in line with this Memorandum.
Progress is assessed against the quarterly deficit ceilings in the MEFP (including the TMU).
Government adopts the draft budget for 2012 aiming at a further reduction of the general
government deficit in line with the programme and including the detailed presentation of
consolidation measures amounting to at least 2.2% of GDP, including the following measures
(in exceptional circumstances, measures yielding comparable savings could be considered in
close consultation with European Commission, IMF and ECB staffs):
− Reduce public employment on top of the rule of 1 recruitment for each 5
retirements in the public sector; the reduction in public employment on top of the
5-to-1 rule should allow savings of at least EUR 600 million;
− Establish excises for non alcoholic beverages, for a total amount of at least EUR
300 million;
104

− Continue the expansion of the base of the real estate tax by updating asset values
to yield at least EUR 200 million additional revenue;
− Continue the reorganisation of local government, to generate at least EUR 500
million in savings;
− Nominal freeze in pensions;2
− Continue to increase the effectiveness of the presumptive taxation of professionals,
with the aim of collecting at least additional EUR 100 million;
− Reduction of transfers to public enterprises by at least EUR 800 billion following
their restructuring;
− Make unemployment benefits means-tested (aiming at savings of EUR 500
million);
− Collect further revenue from the licensing of gaming: at least EUR 225 million in
sales of licences and EUR 400 in annual royalties;
− Further broadening of VAT base with the aim of collecting at least additional EUR
300 million.

ii. Structural reforms
To modernise public administration
Government ensures full operation of the Better Regulation Agenda to reduce administrative
burden by 20% compared with 2008 level, and sends report to the European Commission.
To improve the business environment
Government changes legislation to mitigate tax obstacles to mergers and acquisitions such as
the non-transfer of accumulated losses, together with the company and the complex
computation of "excessive benefit" (Law 3522/2006, Article 11) in the transfer of private
limited companies.
Government takes decisions to simplify the process to clear customs for exports and imports
and give larger companies or industrial areas the possibility to be certified to clear cargo for
the customs themselves; Government abolishes the requirement of registration with the
exporter’s registry of the chamber of commerce for obtaining a certificate of origin.

6. Actions for the seventh review (to be completed by end Q4-2011)
i. Fiscal consolidation
Government achieves the programme targets for the 2011 general government deficit.
Parliament adopts the budget for 2012 a further reduction of the general government deficit
and including consolidation measures amounting to at least 2.2% of GDP, in line with
Memorandum.

2

Adjustments may be needed in case of negative inflation.

105

ii. Structural reforms
To modernise public administration
Functional reviews
Government assesses the results of a second phase of the independent functional review of
public administration at central level are presented by the external experts The government
adopts legislation and measures to implement the first set of operational recommendations of
the functional review of public administration at central level and the review of existing social
programmes.
To strengthen competition in open markets
Energy
Government removes regulated tariffs for customers except households and small enterprises
(as defined in the second and third energy liberalisation packages).
To raise the absorption rates of Structural and Cohesion Funds
Government meets targets for payment claims (to be measured against certified data).
Government introduces web-based open-access monitoring tool of procedures for approval of
project proposals and for implementation of public projects.
Government ensures that the managerial capacity of all Managing Authorities and
Intermediate Bodies of operational programmes under the framework of the National Strategy
Reference Framework 2007-2013 has been certified by the International Organization for
Standardization according to the standard ISO 9001:2008 (Quality Management).
Government presents a report on the activities of the task force assessing progress in ensuring
the rapid implementation absorption of structural funds, and proposing improvements when
necessary.

106

Annex 1. Provision of data
During the programme, the following indicators and reports shall be made available to the
European Commission, the ECB and the IMF staffs by the authorities on a regular basis.
To be provided by the Ministry of Finance
Preliminary monthly data on the state budget execution (including
functional breakdown by main categories of revenue and expenditure
and by line ministry)

Monthly, 15 days after the end
of each month; these data should
also be included in subsequent
transmissions in case of revision

Updated monthly plans for the state budget execution for the remainder
of the year, including functional breakdown by main categories of
revenue and expenditure and by line ministry

Monthly, 30 days after the end
of each month

Preliminary monthly cash data on general government entities other
than the State

Monthly, 30 days after the end
of each month, these data should
also be included in subsequent
transmissions in case of revision

Monthly data on the public wage bill (of general government,
including a functional breakdown in nominal wage and allowances
paid to government employees per line ministry and public entity),
number of employees (including a functional breakdown per ministry
and public entities outside the central government) and average wage
(including the relative shares of the base wage, allowances and
bonuses).

Monthly, 30 days after the end
of each month (starting in June
2010)

Quarterly data on general government accounts, and debt as per the
relevant EU regulations on statistics

Quarterly accrual data, 90 days
after the end of each quarter

Weekly information on the Government's cash position with indication
of sources and uses as well of number of days covered

Weekly on Friday, reporting on
the previous Thursday

Data on below-the-line financing for the general government

Monthly, no later than 15 days
after the end of each month;
these data should also be
included in subsequent
transmissions in case of revision

Data on expenditure pending payment (including arrears) of the
general government, including the State, local government, social
security, hospitals and legal entities

Quarterly, within 55 days after
the end of each quarter

Data on expenditure pending payment (arrears) of the State and
hospitals

Monthly, 30 days after the end
of each month

Public debt, and new guarantees issued by the general government to
public enterprises and the private sector

Monthly, within one month

Income and expenditure statement and balance sheets of 30 largest
public enterprises by total expenditures

Quarterly, three months after the
end of the quarter

107

Data on EU project grants (reimbursements and advances), capital
expenditures and subsidies covered by EU advances or eligible for EU
reimbursement on EU supported projects specifically agreed with the
EU

Monthly, within three weeks of
the end of each month

Monthly statement of the transactions through off-budget accounts

Monthly, at the end of each
month

Monthly statements of the operations on the special account

Monthly, at the end of each
month

Report on progress with fulfilment of policy conditionality

Monthly, at the end of each
month

To be provided by the Bank of Greece

3

Assets and liabilities of the Bank of Greece

Weekly, next working day

Assets and liabilities of the Greek banking system - aggregate
monetary balance sheet of credit institutions

Monthly, 30 days after the end
of each month

Evolution of the external funding provided by Greek banks to their
subsidiaries abroad3

Monthly, 15 days after the end
of each month

External funding flows for the banking, corporate and government
sector, including also expected developments in the 12 months ahead

Monthly, 30 days after the end
of each month

Report on banking sector liquidity situation

Weekly, next working day

Report on the evolution of financial stability indicators

Quarterly, 15 days after the end
of each quarter depending on
data availability

Report on results from the regular quarterly solvency stress tests

Quarterly, 15 days after the end
of each quarter depending on
data availability

Detailed report on the balance sheet of the Financial Stability Fund
with indication and explanation of changes in the accounts

Weekly, next working day

All forms of debt instruments and capital, as well as net deposits provided to subsidiaries abroad.

108

Annex 2. Financial Stability Fund
General
-

-

-

The purpose of the Financial Stability Fund (the ‘Fund’) is to maintain the stability of the
Greek banking system by providing equity capital in case of a significant decline of
capital buffers.
The Fund will not provide liquidity support, which will be provided under existing
arrangements.
The equity will be provided in the form of preference shares to credit institutions
authorised to operate in Greece by license from the Bank of Greece. The preference shares
will be convertible into ordinary shares at a later stage under certain conditions to be
further specified in the legislation establishing the Fund.
Participation in the Fund will be mandatory, based on a trigger linked to the minimum
required level of capital adequacy requirements, as established for specific credit
institutions by the Bank of Greece, in its capacity as the competent supervisory authority,
if no private solution has been found.
If banks are then not able to expeditiously raise additional capital on their own and repay
the Fund, a restructuring process will take place under the lead of the Fund, in line with
EU competition and state aid requirements
The Fund will be established by specific Greek legislation.
An initial lifespan of seven years will be set for the Fund. After the end of the lifespan of
the Fund, the ownership of the Fund rests with the Greek state to the extent of its
shareholding in the Fund

Legal status
-

The Fund will be established as a private law legal entity in order to enhance its flexibility
and efficiency (e.g., to facilitate the recruitment and remuneration of appropriately
qualified staff).
The legal structure of the Fund should allow for private participation.

Funding
-

The FSF will be fully funded by the government out of the resources available under the
EU-IMF program for this purpose in the amount of EUR 10 billion. This implies that the
risk of losses arising out of the Fund’s operations would lie exclusively with the Greek
Government, as the primary shareholder in the Fund. The purchase of preference shares
by the Fund shall be made in cash.

Organizational issues
-

The Fund will be managed by a Governing Council composed of (1) a Chairperson, a
Chief Executive and three directors appointed by the Governor of the Bank of Greece and
(2) two ex officio directors who represent the Minister of Finance and the Governor of the
Bank of Greece. The European Commission and the ECB will each nominate an observer
who would have a right to participate, without voting, in meetings of the Governing
Council (without prejudice, in the case of the Commission observer, to the application by
the Commission of state aid and competition rules).

109

-

The Chairperson, Chief Executive and the non-ex officio directors will be required by law
to be persons of recognised standing in banking or financial matters in Greece, the EU or
internationally.
Each of the Chairperson and the non-ex officio directors will be appointed to a five year
term of office, renewable for a further two years, and may only be compulsorily removed
from office by an appropriate Greek court on application of either the Governor of the
Bank of Greece or the Governing Council of the Fund where (1) no longer capable of
fulfilling the conditions required for the performance of the duties of office or (2) guilty of
serious misconduct.
No member of the Governing Council may be represented on the board of directors of any
credit institution.
The legislation establishing the Fund will provide that, when exercising the powers and
carrying out the tasks and duties conferred upon them under the legislation, neither the
Governor of the Bank of Greece nor the members of the Governing Council of the Fund
shall seek or take instructions from the Greek Government or any other State entity,
institution, body or undertaking.
The Governing Council will present a semi-annual report to the Greek Parliament, the
European Commission, the ECB and the IMF.
The operating expenses will be covered by the Fund.

-

-

Powers of the Fund
-

In order to fulfil its purposes the Fund will enjoy certain powers over credit institutions
receiving capital from the Fund, to be exercised following consultation of the BoG. These
powers will be without prejudice to the supervisory powers of the Bank of Greece, and
will include, without limitation, the power:
o to require the BoG to provide the Fund with all information on financial
institutions necessary for it to fulfil its tasks;
o to appoint a member of the Board of Directors of a credit institution;
o to require a credit institution to present a restructuring plan;
o to veto key decisions of a credit institution (e.g., business strategy, dividend
distributions, salary caps, liquidity and asset-liability management, etc.);
o to call a general shareholders’ meeting for a credit institution in accordance with
Greek company law;
o to require conversion of preference shares into ordinary shares insofar as a credit
institution fails to meet (1) the minimum required level of capital adequacy
requirements established for credit institutions generally under applicable
regulatory requirements or (2) certain financial conditions to be established in the
restructuring plan for the credit institution; the legislation establishing the Fund
will further specify an objective procedure to be followed in establishing a marketbased conversion price, taking account of the impact of the Fund’s intervention,
the rights of shareholders under Greek law and EU state aid requirements; and
o to conduct diagnostic studies and special audits with the help of outside
consultants to assess the solvency of a credit institution where the Fund considers
this necessary.

-

Each of the Bank of Greece, in its capacity as the competent authority for the supervision
of credit institutions, and the Fund will be authorised to exchange confidential information
with one another to the fullest extent permitted by EU law.

110

Conditions applicable to capital increases
-

-

-

-

The conditions applicable to any capital increases should be aligned with the Commission
Decision of 19.11.2008 (N 560/2008 support measures for the credit institutions in
Greece). The granting of equity capital is made subject to the following conditions in
particular.
The credit institutions will be expected to pay a market-oriented, non-cumulative
remuneration unless an analysis of the restructuring plan warrants an alternative approach.
A market-oriented, non-cumulative remuneration can either be 10% as stipulated in the
above decision or depending on the risk profile of the credit institution and the quality of
the capital, between 7% and 9.3%, whereas core tier 1 capital for fundamentally sound
credit institutions should normally be remunerated at not less than 9%.
The credit institutions will not pay dividends or coupon on hybrid capital, unless they are
legally obliged to do so, which is typically the case when a credit institution is profit
making (the credit institution should however not be allowed to use reserves to book a
profit).
Preference shares shall be repurchased by the credit institution for an amount that is
equivalent to the amount originally invested in the credit institution. After five years the
shares shall be repurchased or be remunerated at penal rates. If they cannot be repurchased
because the capital adequacy requirements are not fulfilled, the preference shares shall be
converted into ordinary shares.

Approval of restructuring plan by European Commission
-

Any restructuring plan needs to be in accordance with State aid rules and approved by
decision of the European Commission ensuring that the credit institutions will restore
viability at the end of the restructuring period, burden sharing of shareholders is achieved
and distortion of competition is limited.

111

GREECE: TECHNICAL MEMORANDUM OF UNDERSTANDING
August 6, 2010
1.
This Technical Memorandum of Understanding (TMU) sets out the understandings
regarding the definitions of the indicators subject to quantitative targets (performance criteria
and indicative targets), specified in the tables annexed to the Memorandum of Economic and
Financial Policies. It also describes the methods to be used in assessing the program
performance and the information requirements to ensure adequate monitoring of the targets.
We will consult with the Fund, European Commission and ECB before modifying measures
contained in this letter, or adopting new measures that would deviate from the goals of the
program, and provide the European Commission, ECB and the Fund with the necessary
information for program monitoring.
2.
For program purposes, all foreign currency-related assets, liabilities, and flows will be
evaluated at “program exchange rates” as defined below, with the exception of the items
affecting government fiscal balances, which will be measured at current exchange rates. The
program exchange rates are those that prevailed on April 30, 2010. In particular, the exchange
rates for the purposes of the program are set €1 = 1.3315 U.S. dollar, €1 = 125.81 Japanese
yen, €1.135 = 1 SDR.
General Government
3.

Definition: For the purposes of the program, the general government includes:
•

The central government. This includes:
o The entities covered under the State Budget as defined in Chapter 2 of the Law
2362/1995 regarding “Public Accounting, Auditing of Government
Expenditures and Other Regulations.”
o Other entities or extra-budgetary funds (EBFs) not part of the State budget, but
which are, under European System of Accounts (ESA95) rules (“ESA95
Manual on Government Deficit and Debt”), classified under central
government.

•

Local government comprising municipalities, prefectures, and regional governments
including their basic and special budgets, including all agencies and institutions
attached thereto, which are classified as local governments according to ESA 95.

•

Social security funds comprising all funds that are established as social security funds
in the registry of the National Statistical Service.

•

This definition of general government also includes any new funds, or other special
budgetary and extra budgetary programs that may be created during the program
period to carry out operations of a fiscal nature. The government will inform IMF,
European Commission and ECB staff of the creation of any such new funds,
programs, or entities immediately. The general government, as measured for purposes

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of the program, shall not include entities that are re-classified from outside general
government into general government during the course of 2010.
4.
Supporting material: The Ministry of Finance (MoF) will provide to the European
Commission, ECB and IMF detailed information on monthly revenues and expenditures,
domestic and foreign debt redemptions, new domestic and foreign debt issuance, change in
the domestic and foreign cash balances of the central government at the central bank of
Greece, all other sources of financing including capital transactions, and arrears of the general
government. Data will be provided within 30 days. The Bank of Greece will provide detailed
monthly data on assets and liabilities of local authorities and social security funds in line with
monetary survey data.
I. QUANTITATIVE PERFORMANCE CRITERIA, INDICATIVE CEILINGS, AND CONTINUOUS
PERFORMANCE CRITERIA: DEFINITIONS AND REPORTING STANDARDS
A. Floor of the Modified General Government Primary Cash Balance
(Performance Criterion)
5.
Definition: The modified general government primary cash balance (MGGPCB) is
defined as the modified general government cash balance (MGGCB) minus interest payments
by the state budget. The MGGCB is defined as the sum of the cash balances of the ordinary
state budget, the cash balance of the public investment budget, the change in net financial
assets of local government, the change in net financial assets of social security funds, and the
change in net financial assets of extra-budgetary funds. Privatization receipts will be excluded
from cash receipts. Net lending operations by the state budget will be recorded as cash
expenditures.
•

The cash balance of the ordinary state budget. The cash balance of the ordinary
state budget will be measured from above the line, based on ordinary budget revenues
(recurrent revenue plus non-recurrent revenue minus tax refunds) minus ordinary
budget expenditures (ordinary budget expenditures will exclude amortization
payments but include salaries and pensions; grants to social security funds, medical
care and social protection; operational and other expenditure; returned resources;
payments in exchange of claims of insurance fund for the personnel working in the
Public Electricity Company; interest payments; payments for military equipment
procurement on a cash basis; and NATO expenses net of NATO revenues) of the
ordinary state budget as published monthly on the official website of the General
Accounting Office of the Ministry of Finance, and in line with the corresponding line
items established in the ordinary state budget. Primary spending of the ordinary state
budget shall also include capital transfers to social security funds by bonds, and called
guarantees where the state or central government assumes payments on behalf of
entities outside of the general government.

•

The cash balance of the public investment budget. The cash balance of the public
investment budget will be measured from above the line, based on investment budget
revenues minus investment budget expenditures of the investment state budget as
published monthly on the official website of the General Accounting Office of the
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Ministry of Finance, and in line with the corresponding line items established in the
investment state budget.
•

The change in net financial assets of local governments is defined on a transactions
basis, as the change in the total of financial assets minus financial liabilities of local
authorities adjusted for valuation changes by the Bank of Greece.
o Financial assets include (but are not limited to) deposits of local governments
in the Bank of Greece and deposits of local governments in the commercial
domestic banking sector and in the Consignment Fund. Deposits will be
measured at face value excluding accrued interest in line with recording for
monetary survey data.
o Financial liabilities include (but are not limited to) short and long term loans
from the domestic banking system and in the Consignment Fund to local
governments, measured at face value, consistent with recording for monetary
survey data.

•

The change in net financial assets of social security funds is defined on a
transactions basis, as the change in the total of financial assets minus financial
liabilities of social security funds, adjusted for valuation changes by the Bank of
Greece; minus the change in the stock of accounts payable of public hospitals to the
private sector.
o Financial assets include

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

Deposits of social security funds in the Bank of Greece and direct
deposits of social security funds in the domestic commercial banking
system and indirect deposits held by the IKA mutual fund. Deposits are
measured at face value excluding accrued interest, consistent with
reporting requirements for monetary survey data.



Holdings of direct shares or indirect shares (through the IKA mutual
fund), held by social security funds quoted on the Athens Stock
Exchange.



Direct or indirect holdings of Mutual Fund units issued by Greek
management companies (other than the IKA mutual fund).



Holdings of central government bonds, including short and long-term
securities issued domestically, long-term securities issued abroad
operated from Bank of Greece accounts, and indirect holdings through
the IKA mutual fund. Holdings will be measured at nominal value.



Bank bonds issued abroad.

o Financial liabilities include the short and long term loans from the domestic
banking system to the social security funds, measured consistently with
monetary survey data.
o The change in the stock of accounts payable of public hospitals to the private
sector.
•

The change in net financial assets of extra-budgetary funds (EBFs) is defined on a
transactions basis, as the change in the total of financial assets minus financial
liabilities of extra-budgetary funds, adjusted for valuation changes by the Bank of
Greece. EBFs shall exclude ELGA and OPEKEPE.
o Financial assets include


Deposits of EBFs in the Bank of Greece and deposits of EBFs in the
commercial domestic banking sector. Deposits will be measured at face
value excluding accrued interest in line with recording for monetary
survey data.



Holdings of shares, held by EBFs quoted on the Athens Stock
Exchange.



Direct or indirect holdings of Mutual Fund units issued by Greek
management companies.



Holdings of central government bonds.



Bank bonds issued abroad.

o Financial liabilities include the short and long term loans from the domestic
banking system to EBFs, measured consistently with monetary survey data.
6.

Other provisions.
o For the purpose of the program, the primary expenditure of the central
government that is monitored excludes payments related to bank support, when
carried out under the program’s banking sector support and restructuring
strategy. Transactions that may be excluded from the balance include loans to
financial institutions and investments in equity of financial institutions
(requited recapitalization); unrequited recapitalization; and purchases of
troubled assets. However, any financial operation by central government to
support banks, including the issuance of guarantees or provision of liquidity,
will be immediately reported to IMF, European Commission and ECB staff.
o For 2010, capital transfers to social security funds by bonds and called
guarantees will be excluded from primary spending. Similarly, during 2010,
changes in the stock of accounts payable of public hospitals to the private
sector will be excluded from the change in net financial assets of social

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security funds; the change in net financial assets of EBFs will also be excluded
from the modified general government primary cash balance during 2010.
However, from the 2011 fiscal year onward, these factors will be included.
7.
Revenue adjuster. Further, this performance criterion will be adjusted upward for any
possible revenue over-performance in the central government against the current projection as
indicated below: Central government revenue (Cumulative from January 1, 2010)
o June 2010: €25,056 million
o September 2010: €41,232 million
o December 2010: €58,382 million.
8.

Supporting material.
•

Data on cash balances of the ordinary and state budgets will be provided to the
European Commission, ECB and IMF by the General Accounting Office in the
Ministry of Finance within three weeks after the end of the month. Data will include
detailed information on revenue and expenditure items, in line with monthly reports
that are published since January 2010 on the official website of the Ministry of
Finance. Data will also include data on capital transfers to social security funds in
bonds, and called guarantees.

•

Data on net financial assets of local authorities and social security funds, and extrabudgetary funds will be provided to the IMF, European Commission and ECB by the
Statistics Department of the Bank of Greece within four weeks after the end of the
month. Data on accounts payable of public hospitals will be provided by the Ministry
of Health.
B. Ceiling of State Budget Primary Spending (Performance Criterion)

9.
Definition: The state budget primary spending consists of state budget spending
(spending of the ordinary state budget plus spending of the public investment budget) minus
interest expenditures paid by the state budget, in line with the definitions provided above.
Primary expenditure of the central government that is monitored for the Performance
Criterion excludes any cash payments related to bank restructuring, when carried out under
the program’s banking sector restructuring strategy. Costs that may be excluded from the
balance include loans to financial institutions and investments in equity of financial
institutions (requited recapitalization); unrequited recapitalization; and purchase of troubled
assets. However, any financial operation by central or general government to support banks,
including the issuance of guarantees or provision of liquidity, will be immediately reported to
European Commission, ECB and IMF staff.
10.
Other provisions. Capital transfers to social security funds by bonds and called
guarantees will be excluded from primary spending during 2010. However, from the 2011
fiscal year onward, such exclusion will no longer apply.

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11.
Supporting material. The General Accounting Office of the Ministry of Finance will
provide monthly expenditure data of the ordinary and investment state budget, as defined
above.
C. Non-accumulation of Domestic Arrears by the General Government
(Continuous Indicative Target)
12.
Definition. For the purpose of the program, domestic arrears are defined as accounts
payable to domestic suppliers past due date by 90 days. In case no due date is specified on the
supplier contract, the due date is assumed to be 90 days of the initiation of the billing invoice.
Data will be provided within four weeks after the end of the month. The continuous nonaccumulation of domestic arrears is defined as no accumulation of arrears at the end of every
month during which quarter the indicative target is being monitored.
13.
Supporting material. The Ministry of Finance will provide data on monthly
expenditure arrears of the general government, as defined above. Data will be provided within
four weeks after the end of the month.
D. Ceiling on the Overall Stock of Central Government Debt (Performance Criterion)
14.
Definition. The overall stock of central government debt will refer to debt that
corresponds to the activities of the state budget and will be defined for the purposes of the
program as the total outstanding gross debt liabilities of the central government. It will
include, but not be limited to, liabilities in the form of securities and loans. It will exclude
accounts payable. Debt will be measured at nominal value. The program exchange rate will
apply to all non-euro denominated debt. Inflation indexation will apply to inflation indexed
debt, using the relevant index as specified in the debt instrument. For the purposes of the
program, the ceiling on the stock of central government debt will exclude debt arising from
payments for bank restructuring, when carried out under the program’s banking sector
restructuring strategy. This includes loans to financial institutions and investments in equity
of financial institutions (requited recapitalization); unrequited recapitalization; and purchase
of troubled assets. However, any financial operation by the central government to support
banks, including the issuance of guarantees or provision of liquidity, with the exception of
Hellenic Republic intermediation in repos between foreign and domestic financial institutions
will be immediately reported to IMF, European Commission and ECB staff.
15.
Adjusters. The ceiling on the overall stock of central government debt will be
adjusted upward (downward) by the amount of any upward (downward) revision to the stock
of end-December 2009 central government debt. In addition, the ceiling on the overall stock
of central government debt will also be revised upward by the amount of debt assumed by the
central government following the railway sector restructuring.
16.
Supporting material. Data on the total stock of central government debt will be
provided to the European Commission, ECB and IMF staff by the General Accounting Office
consistent with the debt published in the public debt bulletin no later than 30 days after the
end of each month.

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E. Ceiling on New Central Government Guarantees (Performance Criterion)
17.
Definition. The ceiling on the new central government guarantees shall include new
guarantees granted by the state, as well as new guarantees granted by any other entity that is
classified under ESA95 under central government. Guarantees issues by TEMPME shall be
included in the ceiling. The ceiling shall exclude guarantees to support banks and exclude
guarantees related to EIB financed loans. New guarantees are guarantees extended during the
current fiscal year. The latter shall include also guarantees for which the maturity is being
extended beyond the initial contractual provisions.
18.
Other provisions. The end-September 2010 PC on new central government
guarantees shall exclude any new guarantees extended by entities (including TEMPME) other
than the state. For the end-December 2010 PC on new central government guarantees, these
factors shall be included on a cumulative basis starting October 1, 2010.
19.
Supporting material. All new central government guarantees will be reported in
detail, identifying amounts and beneficiaries. The General Accounting Office will provide the
data on a monthly basis within three weeks after the end of each month. Non-state entities
classified under the central government shall report the new guarantees they extended to the
General Accounting Office on a monthly basis within three weeks after the end of each
month.
F. Non-accumulation of External Debt Payments Arrears by the General Government
(Continuous Performance Criteria)
20.
Definition. For the purposes of the program, an external debt payment arrear will be
defined as a payment on debt to non-residents contracted or guaranteed by the general
government, which has not been made within seven days after falling due. The performance
criterion will apply on a continuous basis throughout the program period.
21.
Supporting material. The stock of external arrears of the general government system
will be provided by the General Accounting Office with a lag of not more than seven days
after the test date.
G. Overall Monitoring and Reporting Requirements
22.
Performance under the program will be monitored from data supplied to the EC, ECB
and IMF by the Ministry of Finance, the General Accounting Office, and Bank of Greece. The
authorities will transmit to the IMF, EC and ECB staff any data revisions in a timely manner.
H. Monitoring of Structural Benchmarks
23.
Pension reform. Parliament adopted separate laws reforming pensions for the public
and private sector in mid-July, ahead of the end-September deadline under the program. An
actuarial evaluation of this law is currently underway. The National Actuarial Authority will
complete an assessment of the effects of the reform on the main pension funds by the end of
December 2010, which will be expanded to include the largest auxiliary pension funds by end
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of March 2011. This actuarial assessment will determine whether further adjustments to the
pension system would be needed to contain the increase in pension spending 2010-2060 at 2.5
percentage points of GDP. Any needed adjustments to the parameters of the main pensions
will be completed by end of June 2011 in consultation with the EC/IMF/ECB; and a full
review of the auxiliary and welfare funds would be completed by end of December 2011.
24.
Financial information of the ten largest loss-making public enterprises. The ten
largest loss-making public enterprises will be defined based on the 2009 net income, after
state budget subsidies. Net income will be defined based on financial statements that are
compiled in line with Greek accounting standards. Published information on financial
statements, however, will include the IFRS financial statements.

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