“Our overall assessment of the program is that it is broadly on track,” said Servaas Deroose, a senior European Commission official. He added that Greece was making a strong effort to narrow its fiscal deficit to a targeted 7.5 per cent of GDP by the end of 2011, despite a contracting economy.
The teams were in Athens to conduct the second review of Greece’s economic reform program, which is being supported by a €80 billion loan from Euro Area countries and a €30 billion Stand-By Arrangement with the IMF.
“The program is off to an impressive start, but it is now at a crossroads, where further progress will depend on difficult structural reforms,” said Poul Thomsen, head of the IMF’s team.
Fiscal adjustment on track
The ambitious fiscal adjustment is well underway, Thomsen told journalists at a November 23 press conference in Athens. The deficit is falling from 15½ per cent to 9½ per cent of GDP in 2010, and the government remains committed to reducing the deficit to below 3 per cent of GDP by 2014.
Because of recent data revisions for 2009 and weaker-than-projected revenue collection, the government will need to make an extra effort to meet the agreed deficit target for next year.
New measures have been agreed to broaden tax bases and eliminate wasteful spending, particularly in the areas of:
• Health spending—which is inefficient relative to other eurozone countries;
• State enterprises—which are a heavy burden on the economy with perennial losses for Greek taxpayers; and
• Tax administration—which has instruments now coming into place to strengthen compliance.
Financial sector stability
In the financial sector, the program has been effective in supporting stability. The activation of the €25 billion expansion of the government program to guarantee bank bonds, which was adopted in August, will contribute to support the liquidity position of Greek banks.
Some private banks have had some success recently in raising funding as well as capital in the markets. While the banking system remains under some pressure, capital is adequate and, as envisaged under the program, the Financial Stability Fund is now available to provide support, if needed. The government has analyzed options for banks under its control and devised a program to address their stability and efficiency. Banking and insurance supervision are also being strengthened.
© International Monetary Fund
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