In the wake of the global financial crisis, markets begin to value the risks for the economies of individual Eurozone member-states differently. Thus, the borrowing
cost, which declined after the adoption of the Euro, soared in early 2010. Chart: Greek government bond spreads (10 year)
Slide 12. Borrowing upon conditionality
The inability of Greece to tap the international financial markets forced the country to seek borrowing from its European partners and the IMF.
Loans are subject to conditionality. The Greek government signs a Memorandum of Understanding, which details the specific fiscal, financial and structural policies to
be implemented, under the supervision of three international organisations:– European Commission– European Central Bank– International Monetary Fund.
1st Programme: 2010 May (2010-2013) (Note: In 2011 it was decided that a second program would be necessary)
2nd Programme : 2012 March (2012-2016)
Loan: €245 billion
- € 198 billion by member-states of the Eurozone
- €47 billion by the IMF
Note: EU finding was to stop on December 2014. IMF would continue until March 2016.
At the end of 2014 the Greek governement requested to disengage from the IMF program, i.e. not to receive the remaining funds (which would be subject to further
conditions). As the final report was pending and elections had to be held an extension of two months was requested to hold elections. Upon the election of the new governement and the submission of
the preliminary reforms a four month extension was granted.
Interest Rate: 3% (IMF) – 2% (Eurozone – after reduction)
–Lower than the country borrows from the markets
–Lower than the rate at which some member-states borrow in order to lend us
Measures are Adopted
Austerity measures as a percentage of GDP: Break-down of adopted measures between cuts in public spending and increases of government revenues.
• Wage reductions
• Pension reductions
• Reduction of total number of civil servants
• Cuts on other expenditures of the public sector
• Decrease of tax-free thresholds
• Increase of VAT rates
• Increase of excise duties
• Solidarity levy
• Real-estate property taxation
. Fiscal deficits are being reduced
During the period 2009-2013:
• The general government deficit is reduced by 13.4 p.p. of GDP
• The primary general government deficit was reduced by 10.8 p.p. of GDP, over-performing the Programme target for 2013 by 0.8
p.p. of GDP.
Biggest Fiscal Consolidation: Highest scores of cyclically adjusted primary balance improvement (% GDP)
Fastest Fiscal Consolidation: Highest rate of average annual cyclically adjusted primary balance improvement (% GDP per
Note: The cases of fiscal adjustment have been defined along the criteria set by the OECD (OECD Economic Outlook 81, May 2007)
* corrigendum for list of countries for chart on the right: Greece, Danemark, Belgium, Germany, UK, Finland, Sweden, Portugal, Irland,
Spain, Austria, Italy, Netherlands, France
. The Greek
economy undergoes a period of recession and high unemployment
2013 was the sixth consecutive year of recession with a cumulative decline of the GDP by 25% until today. The Greek economy is expected to return to positive growth
rates in 2014.
Unemployment has tripled, reaching its peak in 2013 (the labour market adjusts with a lag to the reduction of the GDP).
costs and price developments
: The prices of domestically produced goods and services are decreasing at a lower rate relative to wages. As a result, real incomes are further hurt.
Inflation in Greece was persistently higher than the Eurozone average until July 2011.
Deflation started in March 2013, boosting real incomes but negatively impacting the debt to GDP ratio.
2014 is expected to be the last year of deflation.
60 billion EUR reduction of deposits in Greek banks, during the period 2010-2012
Austerity policies, political instability and fear of possible Grexit lead to the outflow of deposits, thus further reducing the ability of banks to provide credit to
the real economy.Return of deposits after the double elections of summer.
. Greece implements structural reforms
Responsiveness to Going for Growth recommendations across OECD countries, 2011-2012 Responsiveness rate and Responsiveness
rate adjusted for the difficulty to undertake reform
reforms in implementing the Memoranda of Understanding
• Fiscal Consolidation: Medium-term programme, expenditure ceilings for ministries, balanced budgets in local authorities and sanction
mechanisms, sanction mechanisms for state-owned enterprises in cases of infringement.
• Pension Schemes: Increase of retirement age, pensions are linked to lifetime contributions, streamlining rules for severance payments,
revision of list of hazardous occupations and disability criteria.
• Health: Integration of insurance funds, electronic prescribing of medication, increased use of generic drugs, claw-back mechanism.
• Labour Market: Measures to facilitate flexible forms of work, reduction of businesses’ reporting to the Labour Inspectorate, facilitation of
firm-level contracts providing for wages below sectoral agreements, abolition of automatic extension of sectoral collective agreements and reduction of after-effects.
• Combating Tax-Evasion: Compulsory electronic submission of income tax declarations, new information systems interlinking tax offices,
compulsory rotation of directors of tax offices, semi-autonomous general secretary for public revenues.
• Business Environment: Repeal of 30 major barriers to entrepreneurship, simplification of procedures enabling business start-ups in one
• Public Administration reforms: public sector employment cut from over 950.000 in 2009, to less than 750.000 in 2012 and projected to fall by a
further 90.000 (13%) by 2016; introduction of unified wage grid and staffing plans for the entire public sector with evaluation of all employees; establishment of mobility scheme and mandatory exit
• Regulated professions: 74% of restrictions have been abolished in 27 most important occupations/ economic activities.
. Recovering cost competitiveness
2009-2013: Full recovery of cost competitiveness lost during the previous decade.
. Nevertheless, there is
still room for price competitiveness
Although wage costs are declining, prices are affected by tax hikes, high cost of capital and remaining rigidities.
. Reduction of External Deficits
Current account surplus for first time in many decades.
The reduction of interest payments due to the PSI, combined with the buy-back of debt, have significantly reduced the external deficit.
Sustainability of external deficit
The drop in external deficit is largely attributable to the reduction of imports, due to: (i) reduced investments, (ii) reduced consumption
In order to a sustainably reduce external deficit, notable changes are necessary: (i)increase of exports, (ii) substitution of imports with domestically produced
products, (iii) change of consumption pattern(s)
. Debt impairment
Participation of private sector resulted in reduction of public debt by 107 billion EUR via bond swapping (PSI).
Repurchasing of “new” Greek bonds (buy-back) reduced debt by 20 billion EUR.
Interest payments dropped significantly following the PSI and debt buy-back.
·Greek banks were affected and needed help by the Greek government to recapitalise.
·Pension funds holding Greek government bonds were affected.
·Low debt servicing costs for the next 8 years (approx. €6 bn. annually or 3 p.p. of GDP vs 4.6% on average for EA periphery peers)
. Public debt declines
Greek public debt will start decreasing as a percentage of GDP from 2014 onwards, according to official projections.
Unique characteristics of the Greek public debt: Long average maturity (17 years), low average interest rate (2%), 65% of central government debt owned by the EU
Greece has well educated human capital -especially at the upper end- at competitive rates.
More than 63% of young Greeks aged 15-24 years participate in education.
FDI will alleviate the tight liquidity constraints and support growth of the Greek economy
Hewlett Packard – Central European distribution centre (3/2013)
Phillips Morris – European distribution centre (8/2013)
Coca Cola – Consumer interaction centre (11/2013)
Nokia – Research and development centre (11/2013)
. Annex. Performance
in 2013 better than expected:
• -3.9% GDP growth compared to expected -4.2%;
• 0.7% GDP surplus in the Current Account compared to an expected -0.8%;
• Unemployment rate has been declining over the last three months of the year, after more than three years of constant increases;
• General Government balance -3.2% of GDP compared to a target of -4.1%;
• General Government primary surplus 0.8% of GDP compared to a target of 0%;
• 10-year bond yields declined by 298 bps in 2013;
• €6 bn. of public sector expenditure and tax refund arrears to private enterprises and households cleared.
. Annex. Performance in
2014 is also promising:
• -0.3% GDP growth in Q2 2014 compared to -4.0% in Q2 2013;
• € 567 million Current Account surplus in Jan-July 2014, compared to € 398 mn. in Jan-July 2013;
• Unemployment rate remains on a decreasing path (2.4 p.p. cumulative decline since peak);
• GG deficit -0.8 bn Euros in Jan-July 2014, compared to -2.7 bn Eurosin Jan-July 2013;
• GG primary surplus € 3.2 bn in Jan-July 2014, compared to € 1.7 bn in Jan-July 2013;
• 10-year bond yields declined further by 255 bps;
• In April, i.e. four years after having no access to the international capital markets, the Greek sovereign raised €3 billion at a coupon rate
of 4.75%, through the sale of 5-year bonds that was almost seven times oversubscribed;
• Further issuance of €1.5 bn in 3-yr paper in July (3.38% coupon), plus another €1.7 bn (5-yr and 3-yr) in exchange for T-bills in September;
• In Q1 2014, the four systemic banks raised additional capital worth € 8.5 bn., comfortably in excess of the needs identified by the supervisor (€ 6.4 bn.), whereas
two of them have issued medium-term bonds for the first time since 2009, in order to boost their liquidity.
(note: the transcript was derived after curation of
the automatically generated one that is available with the presentation)