12 August 2010

The Economic Adjustment Programme for Greece - First review

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.

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.

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 per cent of GDP in 2010, plus carryovers of 1.1 per cent of GDP for 2011. That brings total budgetary measures in four successive packages to around 8 per cent 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.
• The Financial Stability Fund has been established and the Bank of Greece is committed to strengthen 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.

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 mid-September. The euro area share in the next disbursement is €6.5 billion; the IMF adds €2.5 billion for a total disbursement in September of €9 billion.

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