IP/10/1033
Brussels, 5th August 2010

Statement by the EC, ECB, and IMF on the First
Review Mission to Greece
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 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 short-term 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.

2