19 July, 2010
The International Monetary Fund (IMF) late Friday issues its interim report "Greece Stand-By Arrangement - Review under the Emergency Financing Mechanism", in which it finds that the Greek stability program is broadly on track, with the Greek authorities having made considerable progress in putting the public finances on a sustainable path and have implemented major reforms ahead of schedule.
According to a press release by the IMF, the review "presents the findings of an IMF staff visit to Athens during June 14-18, 2010...conducted in cooperation with the European Commission and the ECB" for the purpose of conducting "an interim review of economic developments and policy implementation, as called for under the Fund’s Emergency Financing Mechanism (EFM)".
"The report confirms the preliminary conclusions of the interim mission. In particular, the program appears to be broadly on track as authorities are making considerable progress in putting public finances on a sustainable path and are implementing major reforms, including of the pension system, ahead of schedule," the report said, adding that a more comprehensive review of the program is scheduled for July 26-August 6, 2010.
"Completion of this comprehensive review by the Fund’s Executive Board -expected in early September- will make the next tranche under the stand-by arrangement of SDR 2.1627 billion (about US$3.27 billion) available to the Greek authorities," the IMF press release said.
According to a five-point Executive Summary of the report: With regard to the overall strategy of the program: "The authorities are making progress to put the public finances on a sustainable path, complemented with structural reforms to boost competitiveness and growth, while seeking an equitable distribution of the adjustment burden across all levels of society and protecting the most vulnerable."
In the second point, the report states that: "Economic activity is declining as expected with the downturn projected to become more acute as the year goes on. The decline is led by cuts in government spending, with some latent buoyancy in private consumption. Inflation is running higher than expected as indirect tax increases are not (even partially) absorbed in margins. Unit labor costs are, however, moderating considerably, and unemployment is rising."
In the third point: "State budget implementation is on track with good expenditure control. However, hospitals and social security funds present clear risks, as do financial pressures in public enterprises. These three areas are not directly controlled by the state budget and require more attention. The pension reform contains significant reductions in future pension costs, even though it is not clear that the authorities can bring them down from 12.5 ppts of GDP before the reform to 2.5 ppts in one step, as aimed in the program. A full actuarial assessment of the reform will take more time than foreseen in the program."
In the fourth point: "Banks face continued liquidity pressures and some solvency erosion but plans are in place to deal with this. Sharp downgrades of the sovereign led to margin calls on collateralized borrowing. Deposits also are quite soft. That said, the European Central Bank (ECB) is assisting Greek banks to tide them over the liquidity crunch. NPLs are rising but banks’ capital remains well above the regulatory minimum and the Financial Stability Fund is nearly in place."
In the fifth point: "Structural reforms are progressing. The authorities announced a privatization program, labor reforms, a local government reform, and initiatives to liberalize closed professions. They are ahead of schedule in setting up a public sector employment and wage census."
The report further notes that the IMF is "encouraged by the progress so far in view of the difficult situation the country faces", noting that the first full review of the program will be conducted during a mission to Athens at end-July, and Board discussion of this review is planned for early September.