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IMF Country Report No. 14/151GREECE June 2014FIFTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, AND REQUEST FOR WAIVER OF NONOBSERVANCE OF PERFORMANCE CRITERION AND REPHASING OF ACCESS; STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR GREECE In the context of the fifth review under the Extended Arrangement under the Extended Fund Facility, and request for waiver of nonobservance of performance criterion and rephasing of access, the following documents have been released and are included in this package: The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on May 30, 2014, following discussions that ended on March 18, 2014, with the officials of Greece on economic developments and policies underpinning the IMF arrangement under the Extended Fund Facility. Based on information available at the time of these discussions, the staff report was completed on May 16, 2014.A Press Release including a statement by the Chair of the Executive Board.A Statement by the Executive Director for Greece.The following documents have been or will be separately released. Letter of Intent sent to the IMF by the authorities of Greece* Memorandum of Economic and Financial Policies by the authorities of Greece* Technical Memorandum of Understanding* Letter of Intent to the European Commission and the European Central Bank* Memorandum of Understanding on Specific Economic Policy Conditionality* *Also included in Staff Report The publication policy for staff reports and other documents allows for the deletion of marketsensitive information. Copies of this report are available to the public from International Monetary Fund  Publication Services PO Box 92780  Washington, D.C. 20090 Telephone: (202) 623-7430  Fax: (202) 623-7201 E-mail: publications@imf.org Web: http://www.imf.org Price: $18.00 per printed copyInternational Monetary Fund Washington, D.C. ©2014 International Monetary Fund GREECEGREECE May 16, 2014FIFTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, AND REQUEST FOR WAIVER OF NONOBSERVANCE OF PERFORMANCE CRITERION AND REPHASING OF ACCESSEXECUTIVE SUMMARY Extended Arrangement. On March 15, 2012, the Executive Board approved a four-year arrangement in the amount of SDR 23.79 billion (2,159 percent of quota; €28 billion). Purchases totaling SDR 7.2 billion (€8.1 billion) have been made so far, and a purchase in the equivalent of SDR 3 billion (€3.5 billion) is proposed to be released on the completion of the review. Euro area countries have so far disbursed €139.9 billion since this program’s approval (of €144.6 billion committed), of which €48.2 billion was for bank recapitalization. Developments. Significant progress has been made toward rebalancing the economy. The fiscal primary and external current account balances are in surplus. Investor sentiment has improved, and the government successfully placed a medium-term bond. The economy is poised to grow in 2014, after six years of deep recession. All this bodes well for a potentially virtuous cycle of recovery to take hold. But a number of challenges remain to be overcome before stabilization is deemed complete and Greece is on a sustained and balanced growth path. The real exchange rate remains overvalued, and non-tourism exports are relatively weak. Banks face a mountain of bad loans that will require adequate capital and oversight to clean up, absent which the prospects are of a prolonged deleveraging antithetical to the assumed recovery. Fiscal gaps are projected for 2015–16, and public debt remains very high. Policies. The authorities over-performed significantly on their 2013 fiscal primary balance target, achieving a surplus of 0.8 percent of GDP. Although the carryover of the overperformance to 2014 is small, the authorities are on track to achieve this year’s target. They are implementing a number of structural reform commitments, with a notable acceleration of product and service market liberalization, where progress has lagged. However, in the area of labor market reforms, where Greece has made important progress in the past, the program is now falling short of targets. Following the Bank of Greece’s stress tests, the HFSF buffer has been set aside to safeguard financial stability, and ambitious steps are planned to strengthen the private debt resolution framework. Reforms to tax codes have been legislated, aimed at simplifying the system and making tax administration easier and, thus, addressing longstanding weaknesses. But at the same time, the authorities need to guard against pressure to rollback progress. On public administration reform, progress is mixed as Greece is struggling to introduce performance-based management and address the taboo against mandatory dismissals. GREECEApproved By Reza Moghadam and Hugh BredenkampDiscussions for the review were held during September 17–29, November 5–20, December 4–5 and 11–16, 2013, and February 24– March 18, 2014. The mission met with the Minister of Finance, Governor of the Bank of Greece, other cabinet ministers, and staff in these and other ministries. The mission also met with private banks, think tanks, and employer associations. The staff team comprised, at various times, P. Thomsen (head), R. Goyal, J. Bersch, G. Gottlieb, N. Hobdari, A. Kangur, W. Maliszewski and M. Shamloo (EUR); I. Petrova and H. Jin (FAD); B. Rayner (SPR); O. Frecaut and D. Monaghan (MCM); W. Bergthaler, G. Esposito, A. Gullo, N. Rendak and A. Rosha (LEG), and M. Alves (STA). W. McGrew, S. Eble, M. Athanasopoulou, G. Gatopoulos, and M. Kalimeri (IMF resident representative office) assisted the mission. J. Manning and C. Piatakovas (EUR) assisted from headquarters. T. Catsambas (OED) participated in some meetings.CONTENTS CONTEXT _________________________________________________________________________________________ 4  RECENT DEVELOPMENTS ________________________________________________________________________ 4  DISCUSSIONS ____________________________________________________________________________________ 9  A. Outlook __________________________________________________________________________________________9  B. Economic Policies ________________________________________________________________________________9  PROGRAM MODALITIES ________________________________________________________________________ 20  STAFF APPRAISAL ______________________________________________________________________________ 22    BOXES 1. Magnitude and Quality of Greece’s Fiscal Adjustment_________________________________________ 25  2. Stress Test _____________________________________________________________________________________ 27  3. Findings of Privatization Review _______________________________________________________________ 29  4. Exceptional Access Criteria ____________________________________________________________________ 30  FIGURES 1. Demand Indicators, 2007–14 __________________________________________________________________ 31  2. Supply Indicators, 2007–14 ____________________________________________________________________ 32  3. Labor Market Developments, 2007–13 ________________________________________________________ 33  4. Inflation Developments, 2005–14 ______________________________________________________________ 34  5. Major Components of Tradeables and Nontradeables in HICP Inflation, 2007–14 ____________ 35  6. Competitiveness Indicators, 2005–14 __________________________________________________________ 36  7. Balance of Payments, 2005–14_________________________________________________________________ 37  8. Revenue and Expenditure Trends, 2000–13 ____________________________________________________ 38 2INTERNATIONAL MONETARY FUND GREECE9. Financial Indicators, 2007–14 __________________________________________________________________ 39  10. Money and Banking Developments, 2007–14 ________________________________________________ 40  11. Household Balance Sheet, 2007–14 __________________________________________________________ 41  12. Corporations’ Balance Sheet, 2005–14 _______________________________________________________ 42  TABLES 1. Selected Economic Indicators, 2010–15 _______________________________________________________ 43  2. Summary of Balance of Payments, 2011–19 ___________________________________________________ 44  3. General Government Operations, 2011–17 ____________________________________________________ 45  4. Modified General Government Cash Balance, 2012–17 ________________________________________ 46  5. General Government: Statement of Operations (GFSM 2001, flows), 2011–16 ________________ 47  6. Monetary Survey, 2011–15 ____________________________________________________________________ 48  7. Monetary Financial Institutions (excl. BoG)—Uses and Sources of Funds, 2011–16____________ 49  8. Core Set of Financial Soundness Indicators for Deposit-Taking Institutions, 2009–13 _________ 50  9. Financial Balance Sheet (GFSM 2001, stocks), 2010–13 ________________________________________ 51  10. Implementation of Structural Reforms _______________________________________________________ 52  11. Medium-Term Macro Framework, 2012–19 __________________________________________________ 53  12. Selected Structural Reforms Ahead, 2014 ____________________________________________________ 54  13. Schedule of Proposed Purchases under the Extended Arrangement, 2012–16 _______________ 55  14. State Government Financing Requirements and Sources, 2013–16 __________________________ 56  15. External Financing Requirements and Sources, 2011–19 _____________________________________ 57  16. Indicators of Fund Credit, 2012–26 ___________________________________________________________ 58  ANNEX I. Debt Sustainability Analysis ____________________________________________________________________ 59 APPENDIXES I. Letter of Intent _________________________________________________________________________________ 70 Attachment I. Memorandum of Economic and Financial Policies ________________________ 72 Attachment II. Technical Memorandum of Understanding______________________________ 107 II. Letter of Intent to the European Commission and the European Central Bank _______________ 132 Attachment I. Memorandum of Understanding on Specific Economic Policy Conditionality ___________________________________________________________________________ 134INTERNATIONAL MONETARY FUND3 GREECECONTEXT 1. Greece has continued to make significant progress in rebalancing the economy. The scale of pre-crisis imbalances and indebtedness—an overall fiscal deficit of 15½ percent of GDP at end-2009, an external current account deficit of 11 percent of GDP, and public debt of nearly 130 percent of GDP—meant that Greece had no option but to undertake a sizeable adjustment, when the capital inflows that financed them came to a sudden stop in early 2010. By end-2013, the primary fiscal and external current account balances were in surplus. To have reached a surplus so swiftly is an extraordinary adjustment by any international comparison. 2. But Greece has lagged on productivity-enhancing reforms. Political turmoil in 2011– 12 and questions in Europe about Greece’s place in the euro area exacerbated uncertainty and emboldened vested interests opposed to reforms. As a result, adjustment has been through recessionary channels (compression of real spending and income) rather than productivity gains. Real output has declined by close to 25 percent since 2007. Unemployment has risen to around 26½ percent, of which over two-thirds are long-term unemployed. The share of the population at risk of poverty increased from 20 to 23 percent over 2009–12, and the income distribution deteriorated slightly (the Gini coefficient rose from 33 to 34 percent over 2009–12). 3. Political support for the EFF-supported program is fragile. Adjustment fatigue has set in, and the coalition government has a reduced majority of just two seats in the 300-member parliament. This is making it difficult to move forward boldly and swiftly with needed reforms, and contributed to significant delays in reaching understandings on a policy package sufficient to warrant completion of this review.RECENT DEVELOPMENTS 4. There are initial signs of economic stabilization (Table 1 and Figures 1–3). Real GDP fell by 3.9 percent in 2013, better than the 15 15 Contributions to GDP (Percent) 4.2 percent contraction projected at the last 10 10 review, as stronger-than-expected tourism receipts 5 5 mitigated the impact of ongoing fiscal adjustment 0 0 and private wage correction. The latest activity and -5 -5 confidence indicators suggest some further improvement in economic conditions in early 2014; -10 -10 Imports Exports e.g., the PMI in manufacturing has exceeded 50, -15 -15 Fixed investment for the first time since mid-2009, and Public consumption -20 -20 Private consumption unemployment, which is the highest in the EU, has Real GDP growth (y-o-y percent change) -25 -25 declined slightly in recent months. The Q1 GDP 2007 2008 2009 2010 2011 2012 2013 2014 flash estimate was -1.1 percent year-on-year. 5. Internal devaluation is underway, but the REER remains over-valued (Figures 4–6). Private sector nominal wages have fallen by about 16 percent since 2009. As a result,4INTERNATIONAL MONETARY FUND GREECEcompetitiveness measured by the ULC-based real effective exchange rate (REER) has improved considerably. The wage decline has put downward pressure on consumer prices, especially nontradables, and the GDP deflator, which are clearly falling. But price declines have not been commensurate with wage declines, reflecting rigidities in product and service markets, and improvements in the CPI-based REER have been much more limited. The CPI-based REER remains over-valued by about 10 percent, which in the context of the currency union implies the need for continued lower inflation relative to trading partners. 115Wages and Prices, SA (2007=100)115130130 REER (2000=100)1101101051059590HICP at constant taxes GDP deflator Average compensation of employees 2007 2008 2009 2010 2011 2012 2013 2014120110 10012011010095CPI-based100GDP deflator-based100ULC-based 909090 2000200220042006200820102012Sources: European Central Bank; Eurostat; Elstat; Haver Analytics; and IMF staff calculations.6. The external current account registered a surplus in 2013, for the first time in decades, but non-tourism exports continue to perform poorly (Table 2, Figure 7). Last year, strong tourism receipts and oil exports, as well as large EU transfers, contributed to the improved balance. However, Greece’s export performance remains generally weak, and most of the 140 140 adjustment since 2009 is due to a contraction Exports Excluding Oil and Tourism (2007=100, of imports. For example, exports excluding 12-month rolling average) 130 130 rds Greece tourism and oil (which comprise about 2/3 Ireland of total exports) have lagged significantly 120 120 Portugal Spain other euro area “periphery” countries. This 110 110 reflects inter alia sluggish improvements in price competitiveness and limited financing. 100 100 Commensurate with the over-valued REER, the 90 90 underlying structural external current account position remains relatively unfavorable, at an 80 80 estimated deficit of 4 percent of GDP in 2013. 2008 2009 2010 2011 2012 2013 2014 Sources: Bank of Greece; and IMF staff calculations.7. The government achieved a significant primary fiscal surplus in 2013, well above target and ahead of schedule (Tables 3–5, Figure 8). The surplus reached 0.8 percent of GDP compared to a zero target, reflecting underspending of the budget, one-off adjustments, and higher revenue outturns toward end-INTERNATIONAL MONETARY FUND5 GREECE2013.1 State spending was lower than budgeted by €0.8 billion, and state revenues were higher than expected, including from frontloading EU funds of €0.7 billion. As such, the carryover of the over-performance to 2014 is small. Greece now has the highest cyclically-adjusted primary balance in the euro area. The adjustment has generally shielded the vulnerable, although improved tax administration would have resulted in a fairer distribution of the burden (Box 1). 8. Financial conditions have improved significantly since mid-2012 (Tables 6–7, Figures 9–10). Overall, staff calculations of a financial conditions index2 point to easier financial conditions, but still tighter than neutral. Reliance on central bank funding declined by over €95 billion from its peak in 2012 to €62 billion at end-April 2014. In particular, emergency liquidity assistance declined to just €3 billion, reflecting an increase in banks’ eligible collateral, interbank repo transactions, and recent share capital increases. Beyond an initial recovery, deposits have not been returning. But deposit rates have declined from their peak of 3 percent in 2012 by 120 bps. Average lending rates have declined by 80 bps over the same period, and now stand at 5.5 percent. While the resulting rise in the spread has increased banks’ core profitability, bank deleveraging has continued and credit is contracting at an annual rate of 4 percent. 1.51.51.0301.0Financial Conditions Index (6-month moving average)250.50.50.00.0-0.5-0.5-1.0-1.0-1.520 15Credit (Year-on-year percent change) Corporate Housing Consumer30 25 20 151020052007200920112013500-5-5-2.0 20035-1.5-2.010-10-10 2007 2008 2009 2010 2011 2012 2013 2014Sources: Bank of Greece; and IMF staff calculations.9. Investor interest has increased, and the government re-accessed markets for the first time in four years. Yields on long-term Greek government bonds have fallen to below preprogram levels. The government raised €3 billion in 5-year bonds at a yield of 4.95 percent in mid-April, providing a benchmark yield for banks and corporate seeking to re-access markets. Two pillar banks, Alpha and Piraeus, raised capital from the private sector, to cover not only relatively small baseline capital needs identified by the stress test (see below) but also the preference shares held by the government since 2009. The two other pillar banks, NBG and 1The surplus is smaller than the estimate reported in the April 2014 WEO and Fiscal Monitor owing to statistical adjustments made by Elstat and Eurostat on the timing of recording certain items. 2The index is computed using a principal component analysis to capture in a single variable the information content of several financial indicators, such as interest rates, asset prices, and credit (see Manning, Jonathan, and Maral Shamloo, 2014, “A Financial Conditions Index for Greece,” IMF mimeo).6INTERNATIONAL MONETARY FUND GREECEEurobank, also raised their substantial baseline capital needs from the private sector. Moreover, Piraeus borrowed from the markets in March 2014, the first issuance by a Greek bank in four years, followed by NBG in April. 10. Bank balance sheets remain fragile with very high nonperforming loans (NPLs) and low quality capital (Table 8, Figures 11–12). Although financial stability has been maintained through this fiscal crisis by substantial injections of public capital and massive central bank liquidity support, the precipitous decline in output has inflicted a severe toll on private sector balance sheets. NPLs and restructured loans (which according to Blackrock’s asset quality review have a high risk of renewed default) reached 40 percent of total loans by end2013, the coverage ratio (provisions over NPLs) was 49 percent, and NPLs net of provisions exceeded banks’ capital (138 percent). Collateral values continue to fall apace, adding to the debt burden of the private sector. Further, part of banks’ capital is of low quality, consisting of negative goodwill and deferred tax assets that cannot absorb losses if their financial conditions were to deteriorate. 11.404010-Year Government Bond Yield (Percent)3535Greece Ireland 1/ Italy Portugal Spain30 25 2030 25 2015151010550 20070 2008200920102011201220132014Sources: Bloomberg; and IMF staff calculations. 1/ Shorter maturities from Oct., 2011 to Mar., 2013.50HouseholdsNPLs (Percent of total loans)Corporations Total (including restructured loans)405040Total 30302020101000 201020112012 '13Q1 '13Q2 '13Q3 '13Q4Sources: Bank of Greece; and IMF staff calculations.There has been progress, albeit uneven, on fiscal institutional reforms.Tax administration. Key performance indicators (KPIs) improved in 2013 relative to 2012 (TMU Annex Table I.1), but fell short of the targets owing to delays in transferring experienced staff from other public bodies and completing new recruitments, continued political interference in operations, and slow roll-out of reforms to local tax offices.Public financial management. Legislative and IT improvements have reduced delays in payment processes and reduced discrepancies in reporting (TMU Annex Table I.2). But arrears clearance has been delayed. According to the program definition, the stock of general government arrears fell from €8.2 billion at end-2012 to €3.9 billion at end-2013, compared with targeted elimination, due in part to a lack of funds from delayed program reviews and reflecting €3.4 billion in new arrears accumulation (importantly from the social budget, including hospitals). As a consequence, the end-2013 performance criterion on the narrowlydefined domestic arrears and the indicative target on the broadly-defined stock were missed.INTERNATIONAL MONETARY FUND7 GREECEPublic administration. The overall headcount has been reduced by 161,000 since 2010 (19 percent reduction).3 On the mobility and exit scheme, which is aimed at helping rejuvenate the administration by bringing in motivated workers with needed skills and tackling the legacy of patronage hiring, the end-March 2014 exit and end-2013 mobility targets were reportedly met as prior actions. Exits were mostly from narrow groups, including the closure of the public broadcasting company, doctors in the public healthcare system who chose to exit rather than accept full-time public sector jobs, school guards, and disciplinary cases. But beyond these focused one-offs, exits have not been based on performance and constitutional restrictions against mandatory, performance-based dismissals remain an impediment. The authorities have undertaken other initiatives, such as passage of a new annual performance system to limit the share of employees receiving a top grade.12. Key structural reform commitments are being implemented, but with delays, while some others are being re-phased (Table 10). Greece has had one of the largest improvements since the crisis on the World Bank’s Doing Business indicator and the OECD’s overall Product Market Regulations index. However, the improvements are from a low base, and under both indicators, Greece remains far from the euro area average. Key program commitments targeted for the second half of 2013 were implemented as prior actions, such as the OECD competition assessment (“toolkit”) to liberalize four key sectors, the reduction in social security contribution (SSC) rates to lower the high tax wedge, nuisance tax reform, and opening regulated professions. Others related mainly to the labor markets are being re-phased to late 2014. 9080Doing Business Indicators: Distance to Frontier 1/ (Percent) 2013903.0 2.5Product Market Regulation (Lower values correspond to more competition-friendly policies)802009 70602.52013 2.0703.02.0200860SVNGRCIRLESPBELFRAESTPRTSVKITAFIN0.0 AUT0.0 DEU0.5NLDGRC ROU HUN CZE LUX ITA BGR SVK SVN ESP POL FRA BEL EST PRT LVA LTU NLD AUT DEU FIN IRL GBR DNKSource: World Bank, Doing Business. 1/ Shows how far is an economy's average score of doing business indicators from that of the best performer. Ranges from 100 (best) to 0 (worst).1.00.5 501.51.0501.5Source: OECD.13. All but one end-2013 program performance criteria were met, but all indicative targets and most structural benchmarks were missed (MEFP Tables 1 and 2). The authorities have requested a waiver of nonobservance for the missed quantitative performance criterion on 3Of this reduction, 87,000 were permanent public sector staff (12 percent reduction) and 75,000 were contractual (66 percent reduction). The reduction is not comparable to the MEFP target of 150,000 between 2010 and 2015 because changes in coverage increased the starting base by 105,000 which now also includes state enterprise workers. There has been a further significant increase in the hiring of EU-financed temporary workers. Nonetheless, Greece appears on track to meet the 150,000 target.8INTERNATIONAL MONETARY FUND GREECEdomestic arrears clearance. Several of the missed structural benchmarks are being implemented as prior actions or re-phased, or corrective actions are being taken (MEFP Tables 3 and 6).DISCUSSIONS A. Outlook 14. With economic developments broadly in line with the program, the macroeconomic framework is largely unchanged (Table 11). Growth is projected to pick up to about ½ percent in 2014, as the economy benefits from less fiscal adjustment this year, strong tourism bookings, and improving market access for Greek banks and corporates. Over the medium term, reflecting a rebound from very compressed levels, growth is projected above the estimated long-term potential growth of about 2 percent per year, assuming strong reform implementation. Given ample spare capacity and recent developments, inflation and GDP deflator projections have been revised down to -0.8 and -0.7 percent for 2014. With the output gap not projected to close before 2019, price dynamics in Greece are expected to trail those of its trading partners. The external current account should remain strong in 2014 on the back of another good tourism season and a recovery in shipping, but will likely face headwinds in 2015 as imports rebound with domestic demand, official interest payments increase, and EU funds fall with the new cycle. 15. Growth risks could be tilting to the upside for 2014, but are tilted to the downside over the medium term. An upside risk in the near term is a faster improvement in investor interest, boosting investment. But several downside risks could derail the expected recovery or weigh on growth, especially over the medium term: domestic political instability, including from adjustment fatigue; slippages in reform implementation, as vested interests push back; the failure to deal effectively with bank balance sheet vulnerabilities; longer than expected deflation that will be a further drag on private balance sheets; and external factors such as lower euro area growth, monetary tightening that reduces global risk appetite, and a potential escalation of the crisis in Ukraine that could hit Greece through the trade channel. 16. Public debt dynamics remain broadly unchanged (Annex I). After peaking at about 174 percent of GDP this year, debt is expected to decline to 128 percent in 2020 and 117 percent of GDP in 2022, before additional contingent relief measures from Greece’s European partners. This rapid decline is predicated on primary surpluses of over 4 percent of GDP being achieved and sustained for several years as well as relatively high nominal GDP growth. Sustainability remains subject to notable downside risks, in particular, to fiscal slippages, delayed structural reforms that slow competitiveness gains, and higher than expected deflation.B. Economic Policies 17. Discussions focused on policies to bring the program back on track, notably reforms to underpin economic growth. The priorities are ensuring the financial sector is adequately capitalized to start extending credit and supporting the economy (rather thanINTERNATIONAL MONETARY FUND9 GREECEcontinue deleveraging), and implementing structural reforms to improve the investment climate and boost productivity. Amid limited progress on labor market reform commitments for this review, discussions emphasized redoubling efforts on product and service markets, where progress has thus far lagged. Absent an acceleration of these reforms, wage adjustment is likely to overshoot to compensate for the limited price adjustment, and Greece faces a risk of remaining stuck in a low-growth trap over the medium term. On fiscal policies, discussions centered on ensuring an adequate basis for meeting fiscal targets in line with the agreed debt sustainability framework, and modernizing the tax system and fiscal institutions.Fiscal policy 18. The authorities are on track to achieve the 2014 primary surplus target of 1.5 percent of GDP (MEFP ¶4). They are distributing a one-off “social dividend” at a gross cost of €525 million, comprising largely well-targeted cash transfers to low-income households as well as €38 million for the homeless and uninsured and €37 million for security personnel. They are also lowering SSC rates and eliminating some nuisance charges (¶22 below) at a net cost of about ¼ percent of GDP. The (limited) fiscal space for these actions comes from a number of measures that the authorities are implementing to meet the target, including: (i) locking in part of the under-execution of the 2013 spending by revising spending ceilings in the 2015–18 Medium-Term Fiscal Strategy (€320 million); (ii) taking other structural measures worth about Fiscal Policies, 2014–15 €220 million, such as reducing spending ceilings 2014 2015 2014 2015 of extra-budgetary funds Billions of euros Percent of GDP (€100 million) and scaling Primary fiscal balance target 2.7 5.6 1.5 3.0 back military procurement Baseline (excluding new measures and re-quantification) 1.1 2.1 0.6 1.1 (about €50 million); Select measures to achieve target (iii) continuing Marginal effect of 2013 measures 1.7 1.3 1.0 0.7 implementing the new Income tax reform 0.4 0.4 0.2 0.2 Withholding tax on pensions 0.4 0.4 0.2 0.2 Income Tax Code (over Extension of claw-back on health spending 0.4 0.4 0.2 0.2 €350 million) that, inter alia, Untaxed reserves 0.3 0.0 0.2 0.0 Revised spending ceilings 0.3 0.2 0.2 0.1 tightens depreciation rules 2014 measures 0.1 0.3 0.0 0.1 and shifts professionals and Reduction in SSC rates -0.4 -0.7 -0.2 -0.4 small businesses under a Elimination of nuisance taxes 0.0 -0.1 0.0 0.0 Social dividend -0.5 0.0 -0.3 0.0 new tax status; and Court decision on judges -0.2 -0.1 -0.1 0.0 (iv) applying a withholding Reductions in OAED family and training allowances 0.1 0.2 0.1 0.1 Savings in Public Investment Budget 0.2 0.0 0.1 0.0 tax on pensions (over Strengthen SSC collections and broaden the base 0.4 0.4 0.2 0.2 €400 million) that brings Administrative actions 0.3 0.3 0.2 0.2 Other (structural) 0.2 0.2 0.1 0.1 forward tax collection to -0.2 2.0 -0.1 1.1 yield one-off revenue gains Residual primary fiscal gap phased over two years. Source: IMF staff estimates and projections of net effects of fiscal measures. Risks to the 2014 fiscal outlook are broadly balanced. Upside risks include higher19. than-projected tax buoyancy as the economy recovers. The track record of under-executing the10INTERNATIONAL MONETARY FUND GREECEbudget also points to the possibility of over-performance. Downside risks include adverse court rulings on past wage cuts and property levies, the uncertain impact of new tax policy initiatives, notably those introduced in the income tax code, potential shortfalls in property taxes (the new regime became effective only earlier this year), and health sector spending. The authorities reaffirmed their commitment to take compensating measures if downside risks materialize. 20. Additional measures are needed to close projected gaps in 2015–16, reflecting the ambitious medium-term targets to restore debt sustainability (MEFP ¶5). Preliminary staff estimates indicate a gap of around 1 percent of GDP in 2015 relative to the primary surplus target of 3 percent of GDP—the projected pickup in revenues with the cycle is, in staff’s view, insufficient to deliver the targeted increase in the primary surplus. Moreover, expiring measures add to the gap. If the 2015 gap were to be closed with permanent measures, there would be a further gap of around ¾ percent of GDP in 2016 relative to the 4.5 percent of GDP target. But the authorities estimate smaller gaps, given more optimistic projections of tax administrative gains. They and staff agreed to re-visit the projections at the time of the 2015 budget preparations. Nevertheless, the authorities reaffirmed their commitment to implement the necessary policies to achieve the fiscal targets, including by extending expiring measures as needed. 21. Modernization of tax policy and the tax system is underway, but the authorities must guard against pressures to roll back progress. Income tax and tax procedures codes (MEFP ¶9). The authorities amended the codes, aimed at simplifying policy, broadening the base, making tax administration easier, and combating evasion. But there already are pressures to roll back progress, including through new exemptions (e.g., revamping the capital gains tax on properties to exempt most of the base and reinstating or introducing further exemptions to target specific groups), and inefficient procedures that over-burden the tax administration and hinder tax debt recovery. Besides resisting pressures, in the coming months, the authorities need to close remaining loopholes, overhaul incentives, and address the remaining significant procedural bottlenecks.New property tax (MEFP ¶11). The authorities introduced a new property tax at end-2013, on a broader base (than previously collected via the utility bill) that includes commercial buildings, non-urban land, and industrial and agricultural properties. The tax includes a progressive wealth tax component, levied on the total value of property rights above €300,000. They reduced the distortionary transaction tax on properties from 10 to 3 percent.VAT reform (MEFP ¶7). The VAT system is riddled with preferential rates and exemptions that distort consumption choices and provide poorly-targeted subsidies; this is reflected in a sizeable policy gap. The authorities committed to reform VAT policy and administration.22. To promote growth, the authorities are reducing the labor tax wedge, which is one of the highest in the OECD.INTERNATIONAL MONETARY FUND11 GREECECutting SSC rates (MEFP ¶6). The authorities are cutting rates in one step, rather than over 2014–16—employers’ non-pension contributions (to IKA) by 2.9 pp and employees’ nonpension contributions by 1 pp. They will review the need for further cuts in mid-2015. The authorities are broadening the base and strengthening collections through mandatory declarations, penalties, and reminders, which should yield about €400 million annually.Nuisance charges (MEFP ¶7). Moreover, to improve efficiency and transparency, the authorities have abolished a number of small nuisance charges on particular transactions that were earmarked for use by certain groups. However, more work is needed to identify the full set of charges, including those that are excessive and have important fiscal implications.50Average Tax Wedge, 2012 (One family earner with two children in percent)5040403050Average Rate for Social Security Contributions, 2012 (One family earner with two children in percent)60 5030206020Employees 40Employers4020 1000NZL IRL CHL CHE LUX ISR AUS CAN USA KOR MEX CZE ISL SVN JPN SVK OECD PRT DNK GBR POL NOR NLD EST HUN DEU ESP TUR FIN SWE AUT ITA BEL GRC FRA10Source: OECD.30 20101000 NZL DNK AUS CHL ISL ISR CHE MEX IRL USA KOR CAN GBR NOR NLD LUX OECD JPN FIN TUR POL PRT ESP EST SVN SWE DEU GRC 1/ SVK ITA BEL CZE GRC 2/ HUN AUT FRA30Source: OECD. Sources: OECD; and IMF staff calculations. 1/ As of July 1, 2014. 1/As of July 1, 2014 2/ Prior to September 2012. 2/Prior to September 2012.CYP IRL EST LTU LVA GBR CZE NOR DNK MLT LUX NLD SWE E.U. HUN POL SVN DEU FIN PRT FRA AUT GRC '13 1/ GRC '12 ITA23. The authorities will review the need to further reform pensions to ensure viability and increase actuarial fairness (MEFP ¶6). The progressive cuts since 2010, which were targeted at the higher pensions, have helped to contain the long-term increase in pension spending. But a 20 20 number of concerns remain unaddressed: at Pension Spending, 2012 (Percent of GDP) around 17 percent of GDP, spending is among 15 15 the highest in the EU, requiring very large state subsidies; the link between contributions and 10 10 benefits of individuals is weak, resulting in diminished incentives to contribute; and the 5 5 pension system is fragmented with varying contribution payment and benefit rules, 0 0 especially in the self-employed fund. The authorities committed to address these Sources: Eurostat; and IMF staff calculations 1/ Data for 2013 based on IMF staff projections. concerns in the coming months. The strengthening of the social safety net has been subject to delays (MEFP ¶8). The 24. pilot project on a means-tested income support scheme is expected to start in September 2014, as opposed to early 2014 targeted initially. To ensure that the national rollout of the pilot can take place in 2015 as targeted, the authorities will conduct by end-June 2014 a review of their social protection and assistance systems, and identify savings to create fiscal space for additional12INTERNATIONAL MONETARY FUND GREECEtargeted support to the most vulnerable. The social community work program that targets the long-term unemployed in jobless households is being expanded by another 50,000 persons.Public Health Expenditure (Percent of GDP)25. The authorities are taking steps to increase the transparency of government financial operations and reduce fiscal risks (MEFP ¶12). This includes restructuring stateowned enterprises (ELVO, HDS, and LARCO). In the energy sector, arrears are being cleared; financial sustainability is being restored to the renewable energy sector; energy prices will be adjusted to ensure full cost recovery and reduce cross-subsidies; and structural measures are being taken to reduce costs (¶42). Although public spending in the health sector is broadly in line with GDP per capita (albeit somewhat low 10 10 NLD Public Health considering the relatively older population), DNK 9 9 Expenditure FRA FIN CZE and Nominal GDP 8 8 GBR BEL AUT structural inefficiencies persist, e.g., the low usage Per Capita, 2012 SVN ITA 7 7 SWE and high prices of generics, which are being SVK PRT DEU IRL 6 LTU 6 ESP addressed through reforms, such as reducing EST MLT GRC 5 5 HUN LUX excessive profit margins of pharmacies, reducing POL 4 BGR 4 LVA prices of medicine and diagnostic tests, and 3 3 CYP ROU setting prescription budgets for doctors. The 2 2 budgetary ceiling has been increased by 1 1 €100 million to accommodate additional 0 0 0 20 40 60 80 100 120 spending on vaccinations and medicines for the Nominal GDP Per Capita (Thousands of U.S. dollars) uninsured. Sources: Eurostat; and IMF, World Economic Outlook. 26. On public administration reform, the authorities are opposed to setting further quantitative targets for exits (MEFP ¶13). They consider such targets as distracting attention from other reforms. With exits so far coming mostly from one-offs (¶11), staff’s concern relates to whether the taboo on dismissals has fundamentally been broken and therefore whether the efforts are durable to rejuvenate a public sector with a legacy of patronage hiring. The authorities committed to several steps in the coming months, including to: determine the appropriate size of the wage bill and employment within the public sector; decompress the wage distribution in a fiscally-neutral way (as high-skilled and high-performance workers are paid less well, while lowskilled workers are relatively well paid compared to the private sector); align non-wage benefits with best practices in the EU; undertake exits to meet this year’s target of 11,000 workers as well as an indicative estimate of 2,000 exits in Q1 of 2015, and review whether to formally set targets going forward; and outsource some activities at lower cost to the private sector.Fiscal institutional reforms Revenue administration 27. Progress is gradually being made in bolstering the autonomy and effectiveness of the revenue administration, but gains are fragile (MEFP Annex I ¶2). The authorities adopted a new organizational structure and grading and promotion systems. But inadequate staffing, insufficient budgetary autonomy, an incomplete legal framework for merit-based and openINTERNATIONAL MONETARY FUND13 GREECEhirings of senior managers, and diversion from core activities remain problematic. For example, the large taxpayers’ unit has many fewer staff than intended, and their work has been diverted to transfer pricing cases rather than generally targeting large taxpayers. Political interference remains a problem. Effectiveness is also hampered by a lack of clarity on the potential personal liabilities of tax officials. 28. Steps are being taken to tackle tax evasion, improve debt collection, and better process tax refunds, among others (MEFP Annex I ¶3). Amendments were adopted to facilitate information exchange between the revenue administration and the Financial Intelligence Unit that can investigate possible money laundering related to tax evasion and freeze assets. The joint SSC debt collection center is operational, but lacks a full complement of staff and social security funds need to transfer collectible debt. The authorities committed to address these issues and resist continuing pressures to weaken payment installment schemes. They are also improving the processing of tax refund claims, including taking a risk-based approach to audits of refunds. 29. New targets for key performance indicators (KPIs) have been established (MEFP Annex I ¶4). The 2014 targets maintain the positive momentum from 2013. Full-scope audits of large taxpayers have been re-defined to direct scarce resources to the audit of major taxes only. New KPIs in tax refunds and anti-money laundering will track performance on servicing taxpayers and tackling tax evasion. New KPIs have also been established to monitor progress in improving SSC collection capacity and the information infrastructure.Public financial management 30. The authorities are strengthening the budget framework, streamlining payment processes, and improving reporting (MEFP Annex I ¶5). On the budget framework (organic budget law), binding multi-year expenditure ceilings are being set for line ministries and the health sector, binding balanced budget targets are being introduced for local governments, and performance targets are being set for state-owned enterprises. Later this year, the organic budget law will be amended to bring it further in line with best international practice. The public investment budget will also be reformed, to develop integrated monitoring with the ordinary budget over the medium term. On further streamlining payment processes, the authorities committed to enhance support for line ministries, modernize information systems, and reduce ex-ante audit volumes. On improving reporting, the first monthly fiscal report with complete above-the-line data for all subsectors of general government was recently published. Next steps are to reduce the discrepancies between the above- and below-the-line items. 31. Arrears in the social sector are a particular challenge (MEFP Annex I ¶5). Although the health-insurance fund, EOPYY, has launched external audits on claims of private entities (such as hospitals, clinics and diagnostic centers), EOPYY has not been paying claims to public hospitals on time. This is due to a lack of funding that in turn is partly a result of unclear rules of health insurance premium transfers from the social security funds to EOPYY. Public hospitals have thus been dis-incentivized to submit claims, as they expect lump-sum grants from the government to14INTERNATIONAL MONETARY FUND GREECEcover their losses ex post. To rebuild the normal validation and payment process, the authorities are developing a comprehensive action plan, including a new law to ensure electronic submission of claims from all hospitals to EOPYY starting 2015. 32. To focus on the more challenging areas of public financial management, the KPIs have been re-designed (MEFP Annex I ¶6). A new KPI has been established on the timely payment of invoices. Three social sector KPIs have been introduced to monitor the timeliness of the health insurance premium transfer from the social security fund IKA to EOPYY, public hospitals’ submission of claims to EOPYY, and EOPYY’s audits of private entities’ claims.Financial sector policies 33. Greece faces a major challenge in resolving its private sector debt overhang. The crisis has, thus far, been a fiscal crisis. But six years of deep recession, ongoing deflation of wages and prices, rising tax burdens, and shrinking credit have severely strained private sector balance sheets. The payment culture has been weakened, including through repeated moratoria on auctioning foreclosed assets. And the insolvency framework has been unable to deal with either the rehabilitation of viable entities or the liquidation of non-viable entities. Unless resolved upfront, this overhang of debt will dampen growth, as resources remain trapped in unproductive or inefficient activities. For, unlike others, Greece does not have the luxury of waiting for growth to lift the overhang: Greece has one of the highest levels of NPLs globally (far above levels that resulted in systemic crises in a number of other countries); the economy is not competitive (the REER is overvalued and non-tourism exports are stagnant); and price adjustment will take time, especially given piecemeal and hesitant structural reforms, with added risks of debt deflation. 34. The banking sector will likely require additional capital, if it is to deal robustly with high NPLs and pave the way for economic recovery (MEFP ¶15). Stress test. In its stress test results, the Bank of Greece estimated capital needs at €6.4 billion under the baseline scenario and €9.4 billion under the adverse scenario. Staff sees upside risks to these estimates, particularly from higher credit loss projections in the adverse scenario (Box 2) and from weaknesses in the payment culture.Low end of the range. The common practice is to recapitalize banks to the adverse scenario, which ensures they have sufficient capital to cope with difficult circumstances and not have to deleverage. But in Greece’s case, following the SSM, the baseline scenario is used to determine capital needs. In effect, the lower end of capital needs estimates—or, equivalently, a favorable view of growth and institutional reform—is being taken to recapitalize banks.Not a robust strategy. This approach should be sufficient to ensure there is no acute crisis risk (banks currently exceed prudential solvency requirements). But it is unlikely to be robust enough to ensure NPLs are written down and prolonged deleveraging is avoided, as growth cannot simply be assumed to materialize exogenously in an economy with a long-standing competitiveness gap and weak track record on reforms.INTERNATIONAL MONETARY FUND15 GREECERegulatory forbearance. In practice, NPL resolution can be spread over many years through regulatory forbearance, and banks may make oligopolistic profits by imposing high loan spreads and fees. But this would come at the expense of the real economy.First step. Staff preferred a more robust approach—with larger upfront recapitalization of banks—to ensure that the banks have enough capital to write-down NPLs expeditiously and soon become able again to extend new credit to growing and more efficient sectors. Nevertheless, staff considers the authorities’ approach to be a first step in the right direction that allows Greek banks to get a head start on recapitalization ahead of the SSM comprehensive assessment in late 2014.35. Capital needs will be revisited in the context of the forthcoming SSM assessment; meanwhile, the authorities committed to intensify supervision and preserve the HFSF buffer. The authorities have set aside the resources expected to remain in the HFSF after the completion of the current recapitalization round and potential resolutions of some small noncore banks, to deal with contingencies that may arise during the program or from any additional capital needs identified by the SSM assessment later this year. This reinforces the stability of the sector, and the SSM assessment provides another opportunity to review the adequacy of bank capital. The authorities also committed to strengthen supervision (MEFP ¶18), including reviewing the appropriateness of banks’ loan forbearance practices and recognition of income from NPLs and monitoring banks’ progress in reducing their large NPLs. The Bank of Greece may need to go beyond the minimum accounting standards for provisioning and NPL income recognition and require banks to adhere to a more conservative interpretation, given the systemic nature of NPLs. 36. Improving the private debt resolution framework and arresting the deterioration of asset quality are major focus areas going forward. The approach includes: Framework for private debt resolution (MEFP ¶19). Three key reforms are foreseen: (i) designing an out-of-court debt restructuring framework, based on international best practices, to complement the formal in-court system and facilitate the early rehabilitation of viable yet debt distressed firms; (ii) introducing a new code of conduct to regulate banks’ engagement with debtors and type of restructuring tools; and (iii) reviewing the household and corporate insolvency laws to identify and close gaps that inhibit rapid rehabilitation of viable entities and quick liquidation of non-viable entities. In addition, the institutional setting needs to be strengthened, including by establishing a profession of insolvency practitioners that is adequately supervised, monitored, and appropriately incentivized.Banks’ strategies and capacity to work out debt. Following BlackRock’s Troubled Asset Review of September 2013, banks are improving their internal organization through specialized units to manage NPLs. Efforts in the pipeline include improvements in affordability assessment techniques and the development of new products for long-term loan restructuring. As a major shareholder, the HFSF is seeking to employ staff with commercial banking and NPL resolution experience that will enable it to engage more actively through their presence in key committees (MEFP ¶20).16INTERNATIONAL MONETARY FUND GREECE37. The HFSF law was amended to allow for further official assistance to banks and to improve the effectiveness of the HFSF (MEFP ¶15, 20). To normalize the state’s involvement with the financial sector, the new recapitalization law provides for full voting rights with new state investments (private sector management rights associated with the previous recapitalization were specific to the circumstances of large capital injections in banks with negative equity). It also implements European state-aid rules on burden sharing. Moreover, the law better reflects the HFSF’s status. While the HFSF was initially set up with a strong degree of autonomy to insulate management of banks from political interference, the setup has not worked as intended, in part because of the need for political involvement and accountability in major decisions. Changes to the law reflect the responsibilities of the institution in maintaining financial stability by making it explicitly bound by MEFP commitments within its remit.Privatization 38. Performance on privatization continues to fall short of expectations. Receipts for 2013 were just over €1 billion, short of the €1.6 billion indicative target (the target had been lowered in the fourth review). Several factors underpin the delays, including: de facto lack of control of the privatization agency (HRADF) over some of its assets; gaps in its tools for the sale of minority stakes; hurdles to preparing real estate for sale (clearing land titles and granting permits); lengthy regulatory processes; the need for regulatory structures for network industries; and the need for sustained support from different ministries, which is often not assured. Many factors lie beyond the HRADF’s competence, and offer opportunities for resistance by vested interests. Despite the challenges, there has been some notable progress, including the conclusion of the tender for the old Hellenikon airport and the launching of the tender process for Piraeus port, while other tender processes appear to be nearing completion (regional airports and the Thessaloniki water company). Nonetheless, a more focused and coordinated effort is essential. 39. The authorities committed to remedial actions (MEFP ¶23). These actions are focused on three areas—corporate governance, real estate, and stronger government support (Box 3). Key objectives in corporate governance include strengthening the control of the HRADF over its corporate assets to ensure alignment of management with privatization objectives, and augmenting the HRADF’s independence and tools. In real estate, the authorities will launch a review of land use policies (and take near-term actions such as reforms of the forestry and spatial planning laws), and are strengthening the public property management company to accelerate the maturing and transfer of properties to the HRADF. Government support initiatives are intended to increase government ownership and accountability in actions under its control; this includes the completion of 8 government actions as a prior action under the review. 40. Although the strengthened privatization process should help the HRADF meets its targets over time, the 2014 target has been revised down (MEFP ¶24). Several corporate asset sales are now expected to be finalized only in 2015, including the concessions for the Athens and Thessaloniki ports and Athens International Airport. As a result, the target for 2014 has been scaled down from €2.7 billion to €1.5 billion, with most of this reduction expected to beINTERNATIONAL MONETARY FUND17 GREECErecovered in 2015–16. New monitoring tools agreed with the authorities will provide for continuous tracking of progress towards meeting the revised targets. Overall projections through 2022 were lowered by €3.9 billion to €22.4 billion.Structural reforms 41. This review emphasized product and service market reforms, where progress so far has been slower, to develop a critical mass of reforms for sustained growth (Table 12, MEFP ¶25). The design and monitoring of conditionality on growth-critical reforms continues to benefit from collaboration with other institutions, including the OECD and the World Bank. Promoting competition. The authorities committed to address nearly all 329 recommendations of the OECD regarding the liberalization of four key sectors—tourism, retail trade, building materials, and food processing (see “OECD Competition Assessment Reviews: Greece”)—with benefits from higher efficiency and lower prices. Many were adopted as prior actions; others are to be adopted during 2014. A number of measures that the OECD estimated would yield significant benefits to consumers are being implemented only partially, such as the elimination of advertising charges, removal of excessive restrictions on milk, liberalization of prices and channels of distributions of over-the-counter drugs and food supplements, and liberalization of Sunday trading. The authorities committed to review the impact of these reforms during 2014, and take steps as needed to achieve the intended benefits by Q1 2015. The authorities also committed to review restrictions in four other sectors in a similar exercise and liberalize them as needed in late 2014.Reducing red tape. The authorities committed to simplify the current burdensome and highly discretionary regime of investment licensing. They also adopted some recommendations of an OECD team to reduce administratively burdensome procedures in 13 sectors (the overall recommendations aim at reducing burdens by about 25 percent), such as simplifying labor reporting requirements, and will implement the remainder by end-June.Liberalizing rentals. The authorities reduced excessive restrictions on commercial and tourist rentals. They reduced the minimum contract duration of commercial rentals (binding only for owners) from 16 years to 3 years, which should help clear the market. To facilitate short-term tourist rentals and reduce informality, they reduced restrictions on the duration of leases, and committed to take additional measures as needed in the coming months to align the framework with EU best practice.Liberalizing transport. The authorities are taking steps to reduce excessive operating costs in maritime and air transport, which are important segments of the tourism sector. Reforms in maritime include suspending sectoral labor agreements while strengthening firm-level agreements to allow for greater competition (as was done for other sectors in 2012). On air transport, measures are to be adopted to cut costs (limiting public sector obligations only to the non-tourist season) and increase competition (leveling the playing field for entry in the domestic market by non-domestic airlines).18INTERNATIONAL MONETARY FUND GREECE42. Wide-ranging reforms in the energy sector are aimed at reducing costs, improving competition and efficiency, and providing better incentives for investment (MEFP ¶26). The electricity transmission company ADMIE, which has already been split off from the Public Power Company (PPC), will be privatized. This should facilitate investment to connect the islands to the mainland system and reduce costs. PPC will be split into two generation and retail companies. The “small PPC” (which will take about 30 percent of PPC assets) will be privatized, which should stimulate private investment and competition. The government will also sell 17 percent share in the legacy PPC, which will reduce its holdings to 34 percent. The “capacity payment” system for gas-fired producers is being reformed to facilitate a more efficient production mix (peak demand is met by expensive gas-fired producers, who received excessively generous payments at the expense of higher user costs). Finally, the gas market is being liberalized. Gas consumption in Greece is among the lowest in the EU in per capita or per GDP terms, indicating scope for increased consumption to reduce costs and provide cleaner energy. The three local gas distribution monopolies will be opened to competition, and the gas transmission company has been sold (the deal is awaiting regulatory approval). 43. The authorities are taking further steps to open up regulated professions (MEFP ¶27). These include opening up the mediation profession (which will help reduce the high inflow of new cases in courts), eliminating remaining excessive restrictions relating to lawyers, eliminating excessive reserved activities for engineers, and adopting secondary legislation on a number of important professions and activities (including electricians, actuaries, and chartered valuers). Future steps include a follow-up review of professions that have not been fully liberalized, with identified restrictions to be addressed in the context of the next review. 44. The authorities were unable to deliver on most labor market reform commitments, given political realities (MEFP ¶28–9). Although significant reforms were adopted in this area earlier in the program, excessive restrictions remain that raise the cost of doing business and inhibit the establishment or expansion of larger-sized firms. The authorities committed to take up legislative reforms on collective dismissals and industrial actions in the next review. Collective dismissals. Disputed collective dismissals are de facto not allowed. They require the approval of the Minister of Labor, but no such approval has been granted since 1982, forcing companies to offer very high voluntary severance packages or resort to bankruptcy. Aligning the framework with good international practice requires legislative change to establish simple and easily verifiable statutory requirements, remove the required approval of the Minister of Labor, and ensure that the employer internalizes the social cost of its actions. The authorities have adopted administrative changes by moving the approval from the Minister of Labor to the Secretary General. But it is to be seen whether these changes can durably resist political pressures once the spotlight on the issue has shifted.Industrial action. The rules for strikes by unions have remained unchanged for over three decades, and Greece is an outlier in the EU in prohibiting lockouts, even as a defensive tool for employers during labor negotiations. The rules for trade union operations will be reviewed in the coming months and brought in line with EU best practices by end-October. INTERNATIONAL MONETARY FUND19 GREECEMinimum wage. The statutory minimum wage consists of a base wage and maturity allowances that add from 10 percent for 3 years of experience up to 30 percent for employees with 9 or more years of experience. This effectively brings the minimum wage for employees with at least 9 years of experience to a level that is higher than most of Greece’s peers. While these maturity allowances will not be part of the statutory minimum wage from 2,000 2017, the current system is particularly 2,000 Statutory Minimum Wage in Selected Countries 1/ (Euros per month) problematic for less-educated, long1,500 1,500 term unemployed with previous work experience. Full removal of these 1,000 1,000 maturity allowances at least for the long-term unemployed would reduce 500 500 distortions, but as a transitory step to 0 0 their removal in 2017, the authorities are cutting the maturity allowance for long-term white-collar unemployed Source: Eurostat. 1/ In Greece, the statutory minimum wage varies from €684/month for employees workers by 50 percent. without work experience to €889/month for those with more than 9 years of work BGR ROU LVA LTU CZE EST HUN SVK POL HRV TUR PRT GRC (base) MLT ESP SVN GRC (max) USA GBR FRA IRL NLD BEL LUXexperience.45. Judicial reform and anti-corruption efforts are starting to yield results (MEFP ¶30). The administrative courts’ backlog (including tax cases) is being reduced steadily, although the civil courts’ backlog continues to increase. To address the structural problems that are preventing civil courts from working efficiently, the authorities are committed to adopt by end-May 2014 a new and modern Code of Civil Procedure. In addition, court fees will be increased selectively (while upholding access to justice principles). The authorities recently adopted new anticorruption legislation, aligning the legal and regulatory framework with international standards.PROGRAM MODALITIES Program Monitoring 46. The authorities have implemented 14 prior actions to set the stage for Board consideration of the much-delayed fifth review (MEFP Table 3). These measures are geared to ensure that the program remains on track towards achieving its objectives: Restoring fiscal sustainability. Prior actions cover: (i) revising expenditure ceilings in the 2015–18 MTFS (MEFP ¶4); (ii) restoring fiscal sustainability of the RES account (MEFP ¶12); and (iii) placing 25,000 staff into the mobility scheme and achieving 5,000 exits (MEFP ¶13).Strengthening fiscal institutions. Prior actions cover: (i) adopting secondary legislation on the ITC and TPC (MEFP ¶10); (ii) taking steps to implement the new structures for the revenue administration (MEFP Annex I ¶2); and (iii) implementing a repo borrowing framework with general government entities to help alleviate financing constraints in 2014 (MEFP Annex I ¶5).20INTERNATIONAL MONETARY FUND GREECEPreserving financial stability. Prior actions cover: (i) adopting legislation governing the injection of public resources into banks through the HFSF (MEFP ¶15); and (ii) improving the debt resolution framework (MEFP ¶19).Supporting privatization. A prior action covers adopting legislation to strengthen HRADF’s control in companies in which it is the majority shareholder, implementing pend
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