Mission Concluding Statement 

Greece: Staff Concluding Statement of the 2022 Article IV Consultation Mission

March 31, 2022

Washington, DC: An International Monetary Fund mission, led by Dennis Botman, conducted a hybrid mission during March 17-31 in the context of the 2022 Article IV consultation.

1. The Greek economy recovered strongly from the severe COVID-19-induced recession in 2020. Output returned to its pre-pandemic level in 2021, reflecting a faster-than-expected tourism recovery, rising private consumption as households started to unwind pandemic-related savings, and robust private investment supported by surging foreign direct investment. The strong fiscal response, accommodative monetary policy and prudential policies, and sizable EU support have been key to fostering the recovery.

2. Commendable progress has been achieved in addressing crisis legacies despite the challenging environment . Nonperforming loans (NPLs) have declined sharply under the ‘Hercules’ program, and liquidity of the banking system has notably improved. Unemployment has declined steadily. Reforms progressed in several areas, including digitization, privatization, and improving the fiscal policy mix. The authorities are finalizing the early payment of all outstanding IMF credit (€1.8 billion), which will further reduce gross financing needs and rollover risks.

3. Growth is expected to remain robust despite the adverse impact of the war in Ukraine and high inflation. Notwithstanding sizable energy imports from Russia, other direct trade and financial linkages with Russia and Ukraine are limited. Indirect effects through spillbacks from trading partners and the impact of higher inflation on disposable income and consumption are more substantial. Further, elevated risk aversion and weaker consumer confidence are expected to delay investment and dent the tourism recovery. All combined, these factors are expected to reduce growth this year by a full percentage point to 3.5 percent. Stronger and more persistent energy price growth is expected to push up average inflation to 4.5 percent in 2022, before it settles at 1.9 percent over the medium term.

4. Uncertainties and downside risks continue to cloud the outlook. The war in Ukraine could trigger energy shortages and add stronger-than-expected pressures on domestic inflation, tourism, and risk aversion, and prompt a faster tightening of global financial conditions. Other risks include new waves of COVID-19 infections causing economic disruptions and NGEU grant and loan implementation risks. While the continued supportive stance by the ECB is a mitigating factor, spending pressures and unfunded tax cuts could jeopardize the medium-term fiscal adjustment path, increasing public debt and widening spreads.

5. Public debt is expected to decline and rollover risks appear manageable over the medium term. The debt-to-GDP ratio is expected to drop below pre-pandemic levels by 2023, reflecting robust growth, fiscal adjustment, and higher inflation amid the very large share of fixed-rate and long-maturity debt. Though the overall risk of sovereign stress is moderate, considerable uncertainty remains about Greece’s ability to sustain high primary surpluses and the future path of interest rates once Greece starts to replace official financing with market funding. Despite the government’s large cash buffer and active liability management, Greece’s ability to service its debt under a severe shock depends on continued regional support.

6. The mission recommended maintaining an accommodative fiscal stance in 2022 and reaching a primary surplus in 2023. The mission supported phasing out all pandemic‑related temporary measures by end-2022. It suggested targeting a primary deficit below 2 percent of GDP this year, which implies an accommodative underlying fiscal stance. This stance is appropriate given the negative output gap as the handover from public support to private activity remains incomplete. The mission recommended aiming for a primary surplus in 2023 while accommodating downside risks through automatic stabilizers. Support measures for high energy prices should be temporary and targeted at vulnerable groups while allowing a gradual pass-through of higher prices to consumers. Greater priority should be given to addressing coverage gaps in the means-tested Guaranteed Minimum Income scheme and raising its benefit levels at least in line with inflation so that it can become the “go-to” safety net against adverse shocks like the ongoing energy crisis.

7. The fiscal adjustment should be gradual and growth friendly. The mission recommended a gradual consolidation path to achieve a primary surplus of 2 percent of GDP by 2027, underpinned by credible measures. Plans for permanent cuts in social security contributions and in the solidarity tax for all taxpayers should be reversed, as they shift the burden to future generations and are poorly targeted, or at least fully funded through benefit adjustments respectively base‑broadening measures. The mission welcomed improvements in the fiscal mix achieved during the pandemic, notably higher health care spending and public investment, and emphasized that these gains should not be sacrificed to achieve consolidation targets. Instead, spending pressures on pensions and civil service wages should be contained, including by respecting the pension freeze this year and the indexation formula from next year onwards. There remains ample scope to improve the fiscal policy mix further by phasing out transfers to public enterprises and fuel subsidies over the medium term and tackling tax evasion by the self-employed to make room for critical social spending and recurrent investment needs once NGEU funding ends. Accelerating fiscal structural reforms would facilitate these efforts.

8. The mission welcomed the rapid clean-up of the balance sheets of major banks, but challenges remain. Following the successful securitization of NPLs, risks have largely migrated to the non-bank financial sector and to a lesser extent to the state. However, progress in NPL workout has remained limited. Further reduction of the distressed debt overhang and NPLs should come from implementing the new insolvency law, improving banks’ credit risk management frameworks, and developing viable long-term restructurings. The authorities should closely monitor risks stemming from new NPL inflows once policy measures are fully withdrawn, ensure adequate credit classification and provisioning, and supervise risks arising from credit servicers active in the distressed debt market.

9. More efforts are needed to rebuild banking sector resilience. Capital used to absorb losses from NPL securitizations needs to be replenished to ensure adequate buffers to mitigate future shocks. In the short term, this may require share capital increases and stronger structural capital buffers. The authorities should prepare a conditions‑based roadmap to activate cyclical capital buffers and borrower-based measures over the medium term. The authorities should work with European partners to address the high share of deferred tax credits (DTCs) in bank capital. Supervisors should ensure that banks effectively adapt their business models to restore sustainable profitability amid increased Fintech competition and climate-related financial risks and that banks meet their substantial funding needs over the medium term.

10. Past structural reforms have helped Greece weather the COVID-19 crisis and facilitated a job-rich recovery. Resilient goods exports have cushioned the hard‑hit tourism sector, and Greece’s external position recovered in 2021, but remained moderately weaker than a level consistent with medium-term fundamentals and desirable policies. The mission encouraged the authorities to pursue a prudent minimum wage increase that preserves competitiveness gains. The authorities’ Recovery and Resilience Plan offers a good reform blueprint, but implementation will be key to modernize the public employment agency, enhance digital skills, and align vocational education and training with the needs of the labor market. Raising convergence prospects requires more efficient public investment management, sound governance, transparency, and a more business-friendly environment. The mission called on the authorities to protect the independence and credibility of the statistical agency and its staff, making every effort to uphold the “Commitment on Confidence in Statistics” endorsed by the government in 2012.

11. The mission commended Greece’s commitment to climate-friendly policies, which requires strengthening social protection to facilitate the green transition. The draft Climate Law sets ambitious goals supported by a substantial boost in green investment, partially financed by NGEU resources. As climate change and climate policies would disproportionately affect vulnerable groups, the mission considered a strong social safety net as a critical part of the adaptation strategy. Introducing a new carbon tax and gradually increasing it over time could also be considered to finance targeted transfers and green investment.