File Photo: The report presents the achievements of the Greek economy in recent years in the framework of the EMS programme. EPA, ARIS OIKONOMOU
The year 2018 was a landmark year for Greece, mostly because of the country’s exit from the memorandum in August 2018, the European Stability Mechanism (ESM) said in its annual report on Greece.
The report, released on Thursday, presents the achievements of the Greek economy in recent years in the framework of the EMS programme and the challenges facing the country in the future.
Under Enhanced surveillance, Greece committed to completing all key reforms adopted under the programme and to specific actions in particular policy areas. To verify Greece’s progress with its commitments and in line with the enhanced surveillance framework, regular missions are conducted by the European Commission in liaison with the ECB, in which the ESM participates under its Early Warning System.
Economic recovery continued for a second year, and Greece outperformed the fiscal target for the fourth successive year. To secure economic and financial sector improvements as well as to reestablish market trust, Greece needs to consolidate and continue the reforms pursued during the programme.
In December 2018, the Public Debt Management Agency announced an up-to-7 billion euros 2019 issuance programme. Between January and March 2019, it raised 5 billion through the issuance of a 5-year and a 10-year bond.
In 2018, Greece progressed further in clearing its stock of arrears to the private sector. Domestic resources and programme funds decreased the overall stock by more than 8 billion euros since the arrears clearance programme started in June 2016. To pay remaining arrears of 1.4 billion in December 2018 and stop creating new ones, Greece has needed to intensify efforts to further modernise its public financial management system.
The government improved the efficiency of the out-of-court workout law and the electronic auction platform for asset sales. It also began assessing how it can further support the banks, for example through an asset protection guarantee scheme. The Hellenic Financial Stability Fund (HFSF) developed a strategy for the sale of its stakes in the systemic banks in the following years.
The conclusion of the ESM programme in 2018 and Greece’s ongoing commitments helped to improve confidence, but challenges to sustainable growth remain. Economic activity rose by 1.9%, driven by net exports and consumption which compensated for weak investments. General government debt is still high at 181.1% of GDP. The primary surplus reached 4.4% of GDP, according to Eurostat.
This implies a primary surplus of 4.3% in programme terms, outperforming the fiscal target of 3.5% of GDP in 2018, the fourth year of outperformance. While income taxes were robust, lower-than-envisaged public investment also boosted the surplus. The authorities legislated a new set of fiscal measures in 2018, cancelling the accelerated recalibration of pensions in line with the pension reform of 2016 that was scheduled to be implemented in 2019.
During these years, Greece implemented substantial reforms to restore sustainability to public finances, strengthen the banking sector’s resilience, and improve the economy’s competitiveness.
During this time, Greece received almost 290 billion in official sector financial assistance and extensive debt relief. To enhance Greece’s long-term growth potential as well as to protect European partners’ large exposure, key programme reform successes must be preserved and prudent policies pursued.
Greece’s still existing vulnerabilities and challenging reform targets will require closer post-programme country monitoring than the other euro area postprogramme countries for some time.
These reforms have contributed to job creation in recent years, reducing the unemployment rate from its peak of 27.8% in 2013 to 18.4% at end-2018.
Since 2008, Greece has lost almost a quarter of its GDP. Over recent years, however, output has stabilised and growth resumed in 2017 and 2018, with a positive outlook.
The ESM said that the Greek banking sector has undergone waves of stress leading to structural change. Four large banks control over 95% of the market as smaller players have been merged or liquidated.
The four systemic banks have received three rounds of recapitalisation, 40% of which came from private investors, in 2013 to restore capital adequacy ratios from losses arising from the write-off of Greek government bonds and again in 2014 and 2015 to cover losses from the increase in NPLs.
The banks also experienced large-scale deposit outflows, which made them reliant on emergency liquidity assistance and even required capital controls to safeguard financial stability. Deposit outflows peaked in 2012 and, after a short period of recovery, peaked again in 2015. Bank deposits stabilised in 2018, enabling the government to relax capital controls gradually.
Greece received substantial debt relief both from private creditors in 2012 and from the official sector in 2011, 2012, 2016 and, just before the end of the third programme, in June 2018. All these debt measures have improved debt dynamics.
“Public finances need to remain on a sustainable path, while incorporating more growth-oriented policies. Already implemented or adopted reforms, such as the labour market reform and the lowering of income taxes in combination with a broadening of the tax base, need to be safeguarded and should not be reversed.
In the event of court rulings overturning key structural reforms, the recurrent fiscal impact should be largely addressed by reforms within the same policy field. Further structural reforms are necessary to boost productivity and enhance competitiveness, complementing the country’s growth strategy.
These institutional reforms, coupled with privatisations and improved management of state assets, are critical to attracting both foreign and domestic investment and strengthening future growth. Furthermore, Greece needs to support banks’ efforts with a comprehensive NPL reduction strategy and improved legislative framework, which will help Greek banks’ ability to lend to the economy and support the economic recovery,” the ESM said.
“An independent evaluation of the financial assistance to Greece is an investment. I look forward to the report that will be prepared under Mr. Almunia’s guidance so that the ESM can draw lessons and be even more effective in fulfilling its mission and addressing future crises,” ESM Managing Director Klaus Regling said.
“Striking the appropriate balance between adjustment, fiscal sustainability and growth objectives is a key challenge for any programme design and implementation. These terms of reference and the good practices of the international institutions will guide this evaluation’s approach,” high-level independent evaluator Joaqu?n Almunia said.
Source: ANA-MPA
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