Greek EconomyTowards the Crisis

& a Plan for Recovery

October 2014

Getting into crisis

Characteristics of the Greek Economy prior to the crisis

High growth based on consumption and borrowing

Reduced competitiveness of the Greek Economy

“Twin Deficits” and high public debt– High public deficit– High current account deficit

High Growth Rates

The Greek Economy grew, for many years, at rates higher than the EU average (3.1% against 2.2%).

Source: European Economy

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

GDP growth rate

EU15 Greece

Unsustainable Fiscal Aggregates

The deficit remains high during the period 2001-2009, whereas public expenditures are increasing.

Source: Eurostat

% G

DP

2001 2002 2003 2004 2005 2006 2007 2008 20090

5

10

15

20

25

30

35

37

39

41

43

45

47

49

51

53

55

4.5 4.85.6

7.5

5.2 5.76.5

9.8

15.645.4 45.1 44.745.5

44.645.3

47.5

50.6

54.0

General government deficit (% GDP) Public expenditures (% GDP)

High Inflation

Source: EURtat

Prices were contained during the process of accession to the Euro, but inflation remained higher than the Eurozone average throughout the period under consideration.

1997 1998 1999 2000 2001 2003 2004 2005 2006 2007 20080

1

2

3

4

5

6

1.7

1.2 1.2

2.22.4

2.1 2.2 2.2 2.2 2.1

3.3

5.4

4.5

2.1

2.9

3.73.4

3.0

3.53.3

3.0

4.2

EA17 Greece

Competitiveness was deteriorating

2001 2002 2003 2004 2005 2006 2007 2008 200990

95

100

105

110

115

120

100.0

108.1 108.8110.3

113.0110.8

112.3

115.9

119.3

Real effective exchange rate(relative to 36 industrial countries)

(2001=100)

Source: Ameco

Since the adoption of the Euro, the prices of Greek products increased in relation to major trading partners. With relatively high prices and without the possibility of currency devaluation, the competitiveness of the Greek economy deteriorated.

While consumption was increasing

Source: Ameco

Since the late 90s, consumption as a percentage of GDP is higher in Greece compared with the EU. By the time of the crisis, Greece consumes 93% of its production (12 percentage points of GDP higher than the EU average)

% G

DP

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 200960

65

70

75

80

85

90

95

79.5

78.2 78.1 78.2 78.6 79.1 79.077.3

80.7

68.3

77.9 78.681.6

88.586.4

87.9 87.4

92.9

Consumption (% GDP)

ΕU (27) Greece

The external debt of Greece is increasing

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-16

-14

-12

-10

-8

-6

-4

-2

0

-2.2-3.3 -3.5

-2.7-3.6

-7.7 -7.2-6.5 -6.5

-5.8

-7.6

-11.4

-14.6 -14.9

Current Account Balance (% GDP)

As a result of the gradual loss of competitiveness and consumption-driven growth that was fueled by imports, the current account deficit shows an upward trend.

Source: Eurostat

% G

DP

The public debt of Greece is also increasing

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

50100150200250300350

49.5 57.5 64.2 84.9 88.7 95 107.7 114.9 115.7 122.3 141 151.9 159.2 168 183.2 195.4224.2 239.3 263.3

299.7(billion EUR)

High consumption, fueling the growth model of Greece, was funded by an increasing public debt.

Source: Ameco

020406080

100120140

71.7 74.0 79.199.2 97.2 97.0 99.4 96.6 94.5 94.0 103.4 103.7 101.7 97.4 98.9 101.2 107.5 107.2 112.9

129.7

Public Debt

(% GDP)

Billi

on E

UR

% G

DP

Borrowing CostIn the wake of the global financial crisis, markets begin to value the risks for the economies of individual Eurozone member-states differently. Thus, the borrowing cost, which declined after the adoption of the Euro, soared in early 2010.

Source: Eurostat

0

500

1000

1500

2000

2500

3000

Greek government bond spreads (10 year) 2nd programme

Revision of deficit to two-digit

Collapse of Lehman Brothers

1st programme

Need for Change

The global financial crisis revealed the chronic problems of the Greek Economy

Structural problems- Bureaucracy, inefficiency and corruption

Growth model based on consumption and borrowing- A large percentage of the production are goods and services which cannot be traded

internationally.

Fiscal derailment and structural problems must now be tackled

Borrowing upon conditionality

The inability of Greece to tap the international financial markets forced the country to seek borrowing from its European partners and the IMF.

Loans are subject to conditionality. The Greek government signs a Memorandum of Understanding, which details the specific fiscal, financial and structural policies to be implemented, under the supervision of three international organisations:

– European Commission – European Central Bank– International Monetary Fund

1st Programme: 2010 May (2010-2013)2nd Programme : 2012 March (2012-2016)

Loan: €245 billion- € 198 billion by member-states of the Eurozone- € 47 billion by the IMF

Interest Rate: 3% (IMF) – 2% (Eurozone – after reduction)– Lower than the country borrows from the markets– Lower than the rate at which some member-states borrow in order to lend us

Austerity Measures are Adopted

EXPENDITURE• Wage reductions• Pension reductions• Reduction of total number

of civil servants• Cuts on other

expenditures of the public sector

REVENUES• Decrease of tax-free

thresholds• Increase of VAT rates• Increase of excise duties• Solidarity levy• Real-estate property

taxation

Source: Ministry of Finance

Austerity measures as a percentage of GDP: Break-down of adopted measures between cuts in public spending and increases of government revenues.

2010 2011 2012 2013 20140%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

4.83% 4.69%

3.11%

1.36%0.22%

3.76% 4.06%

2.84%

4.30%

1.62%

Expenditure Revenue

% G

DP

8,6%

8,8%

6,0%5,6%

2,1%

Fiscal deficits are reducing

During the period 2009-2013:• The general government deficit is reduced by 13.4 p.p. of GDP• The primary general government deficit was reduced by 10.8 p.p. of GDP, over-performing

the Programme target for 2013 by 0.8 p.p. of GDP

Source: IMF, Staff report 6/2014

% G

DP

* Official Projections of the Programme

2009 2010 2011 2012 2013 2014* 2015* 2016*

-20

-15

-10

-5

0

5

10

-15.6

-10.8-9.4

-6.4

-3.2 -2.9 -2.1-0.7

-10.4

-4.9-2.3 -1.3

0.8 1.63.0

4.5

General Government Fiscal Accounts 2009-2016 (% of GDP)

General Government Balance General Government Primary Balance

2009-2013: The largest and fastest fiscal adjustment in the last 35 years

Note: The cases of fiscal adjustment have been defined along the criteria set by the OECD (OECD Economic Outlook 81, May 2007)* Excluding financial sector support

Greece*

Denmark

Germany

Finland Spain* UK

Italy 0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5 4.2

3.3

2.82.5

1.9 1.8 1.8 1.6 1.6 1.5 1.51.3 1.2 1.0

Fastest Fiscal ConsolidationHighest rate of average annual

cyclically adjusted primary balance improvement (% GDP per year)

Greec

e*

Denm

ark

Belgi

um

Germ

any UK

Finla

nd

Sweden

Portu

gal*

Irela

nd*

Spain

*

Austri

a Ita

ly

Nethe

rland

s

Franc

e*0

2

4

6

8

10

12

14

16

18 16.6

11.49.9 9.6 9.0 8.8

7.6 7.46.5 6.5

3.6 3.6 3.3 3.1

Biggest Fiscal ConsolidationHighest scores of cyclically ad-

justed primary balance im-provement (% GDP)

The Greek economy undergoes a period of recession and high unemployment

2013 was the sixth consecutive year of recession with a cumulative decline of the GDP by 25% until today. The Greek economy is expected to return to positive growth rates in 2014

Unemployment has tripled, reaching its peak in 2013 (the labour market adjusts with a lag to the reduction of the GDP).

Source: IMF, Staff report 6/2014* Official Projections of the Programme

2007 2008 2009 2010 2011 2012 2013 2014* 2015* 2016*-10

-5

0

5

10

15

20

25

30

3.5

-0.2

-3.1-4.9

-7.1 -7

-3.9

0.62.9 3.7

8.3 7.79.5

12.5

17.7

24.2

27.325.8

23.8

20.9

GDP growth rate Unemployment

Labour costs and price developments

The prices of domestically produced goods and services are decreasing at a lower rate relative to wages. As a result, real incomes are further hurt.

Source:Eurostat

The reduction of prices does not go hand-in-hand with the reduction of wages, due to: simultaneous tax hikes

which increases production costs

limited competition in markets

rigidities in labour and product markets

delayed realisation that the recession is not temporary

imported goods are used as intermediates, mainly oil

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

-10

-5

0

5

10

15

GDP deflator Nominal unit labour cost

Price developments Inflation in Greece was persistently higher than the Eurozone average until July

2011. Deflation started in March 2013, boosting real incomes but negatively impacting

the debt to GDP ratio.2014 is expected to be the last year of deflation.

Source:Eurostat

2009M02

2009M04

2009M06

2009M08

2009M10

2009M12

2010M02

2010M04

2010M06

2010M08

2010M10

2010M12

2011M02

2011M04

2011M06

2011M08

2011M10

2011M12

2012M02

2012M04

2012M06

2012M08

2012M10

2012M12

2013M02

2013M04

2013M06

2013M08

2013M10

2013M12

2014M02

2014M04

2014M06

2014M08

-4

-2

0

2

4

6

8

Inflation

Euro area (18 countries) Greece

Banking Sector

Source: Bank of Greece

60 billion EUR reduction of deposits in Greek banks, during the period 2010-2012 Austerity policies, political instability and fear of possible Grexit lead to the outflow of deposits,

thus further reducing the ability of banks to provide credit to the real economy. Return of deposits after the double elections of summer 2013.

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09Jan

-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10Jan

-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11Jan

-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12Jan

-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13Jan

-14-17,000

-12,000

-7,000

-2,000

3,000

8,000

Deposit flows (mil. Euros)

Firms and households Total deposits and repos

Rumors that the ministers of Finance dis-cuss in Luxembourg the exit of Greece from the Euro

1st Programme Suspension of the review

1st round of elections

Agreement for the 2nd Programme

Greece implements structural reforms

Source: OECD, Economic Policy Reforms: Going for Growth 2012

Note: The response indicator is based on a score system, according to which every recommendation is assigned value “1” if significant action has been taken during the year following the recommendation; otherwise, it is assigned value “0”. Thus, the indicator is the ratio of the total number of years needed for the implementation of the action, to the total number of years since the recommendation was made.

Icelan

d

Luxe

mbourg

Netherl

ands

Belgium

Norway

Sloven

ia

German

y

Sweden

Japa

n

Switzerl

and

Turkey

United

States

France

Korea

Mexico EU

Chile

Finland

OECD

Canad

a

Euro ar

ea

Austra

lia

Austria

Hunga

ry

Poland

Slovak

Rep

ublic

Czech

Rep

ublic

Denmark Ita

ly

United

Kingdo

mIsr

ael

New Zea

land

Spain

Portug

al

Estonia

Irelan

d

Greece

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Responsiveness to Going for Growth recommendations across OECD countries, 2011-2012

Responsiveness rate Responsiveness rate adjusted for the difficulty to undertake reform

Structural reforms in implementing the Memoranda of Understanding

• Fiscal Consolidation: Medium-term programme, expenditure ceilings for ministries, balanced budgets in local authorities and sanction mechanisms, sanction mechanisms for state-owned enterprises in cases of infringement.

• Pension Schemes: Increase of retirement age, pensions are linked to lifetime contributions, streamlining rules for severance payments, revision of list of hazardous occupations and disability criteria.

• Health: Integration of insurance funds, electronic prescribing of medication, increased use of generic drugs, claw-back mechanism.

• Labour Market: Measures to facilitate flexible forms of work, reduction of businesses’ reporting to the Labour Inspectorate, facilitation of firm-level contracts providing for wages below sectoral agreements, abolition of automatic extension of sectoral collective agreements and reduction of after-effects.

• Combating Tax-Evasion: Compulsory electronic submission of income tax declarations, new information systems interlinking tax offices, compulsory rotation of directors of tax offices, semi-autonomous general secretary for public revenues.

• Business Environment: Repeal of 30 major barriers to entrepreneurship, simplification of procedures enabling business start-ups in one day.

• Public Administration reforms: public sector employment cut from over 950.000 in 2009, to less than 750.000 in 2012 and projected to fall by a further 90.000 (13%) by 2016; introduction of unified wage grid and staffing plans for the entire public sector with evaluation of all employees; establishment of mobility scheme and mandatory exit targets; e-government.

• Regulated professions: 74% of restrictions have been abolished in 27 most important occupations/ economic activities.

Recovering cost competitiveness

2009-2013: Full recovery of cost competitiveness lost during the previous decade.

Source: Ameco

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

80

90

100

110

120

130

140

150

REER based on unit labour cost relative to 36 industrial countries (2001=100)

Greece EU17 Ireland Portugal

Nevertheless, there is still room for price competitiveness

Source: Eurostat

Although wage costs are declining, prices are affected by tax hikes, high cost of capital and remaining rigidities.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201390

95

100

105

110

115

120

125

130

Real Effective Exchange Rate based on HICP relative to 36 industrial countries (2001=100)

Euro area (17 countries) Ireland Greece Portugal

Reduction of External Deficits• Current account surplus for first time in many decades.• The reduction of interest payments due to the PSI, combined with the buy-back of debt, have

significantly reduced the external deficit.

Source: Bank of Greece

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-20

-15

-10

-5

0

5

10

-6.5 -5.8-7.6

-11.4

-14.6 -14.9

-11.2-10.1 -9.9

-2.4

0.7

Current Account (% GDP)

Current Account Balance Current Account Balance (excl. oil) Current Account Balance (excl. oil & GG net interests)

% G

DP

Sustainability of external deficit

The drop in external deficit is largely attributable to the reduction of imports, due to: reduced investments reduced consumption

In order to a sustainably reduce external deficit, notable changes are necessary: increase of exports substitution of imports

with domestically produced products

change of consumption pattern(s)

Source: Eurostat

Billi

on E

UR

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

34.3 34.3 31.4 32.3 37.9 38.9 40.5 43.4 44.2 35.6 37.4 37.6 36.8 43,300

52.9 53.5 52.9 54.4 57.5 56.763.0

72.1 72.7

58.0 54.5 50.543.2 45,606

124.4 129.5136.3 139.6

144.9150.4

156.6163.3 168.0 167.5

156.1144.9

133.7140,552

National Accounts agreggates(constant prices)

Exports of goods and services Imports of goods and servicesFinal consumption expenditure Investment expenditure

Debt impairment• Participation of private sector resulted in reduction of public debt by 107 billion EUR

via bond swapping (PSI).• Repurchasing of “new” Greek bonds (buy-back) reduced debt by 20 billion EUR.

20122013

20142015

20162017

20182019

20202021

20222023

20242025

20262027

20282029

20302031

20322033

20342035

20362037

20382039

20402041

20420

10

20

30

40

50

60

pre- <PSI

Billi

on E

UR

20122014

20162018

20202022

20242026

20282030

20322034

20362038

20402042

20442046

20482050

20522054

20560

10

20

30

40

50

60

post- >PSI

Billi

on E

UR

Debt Repayment Profile

Source: PDMA

Interest payments• Interest payments dropped significantly following the PSI and debt buy-back.

Greek banks were affected and needed help by the Greek government to recapitalise.

Pension funds holding Greek government bonds were affected.

Low debt servicing costs for the next 8 years (approx. €6 bn. annually or 3 p.p. of GDP vs 4.6% on average for EA periphery peers)

Source: Ameco, PDMA

PSI

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

3.94.7

6.4

7.9

9.910.110.310.19.7 9.310.1

9.58.7 8.6 9.0 9.0

9.810.7

11.911.9

13.2

15.0

9.7

7.2

8.4

9.9

Interest payments(bn. Euros)

Public debt declines

Greek public debt will start decreasing as a percentage of GDP from 2014 onwards, according to official projections.

Unique characteristics of the Greek public debt: Long average maturity (17 years), low average interest rate (2%), 65% of central government debt owned by the EU official sector.

Source: IMF, Staff report 5/2013, PDMA

% G

DP

* Official Projections of the Programme

2009 2010 2011 2012 2013 2014* 2015* 2016* 2017* 2018* 2020*0

20

40

60

80

100

120

140

160

180

200

129

148

170157

175 174 171161

152145

135

Public Debt (% GDP)

Human capital

Greece has well educated human capital -especially at the upper end- at competitive rates.

More than 63% of young Greeks aged 15-24 years participate in education.

Source: Eurostat

Malta

Cypru

s

Luxe

mbourg

United Kingd

om

Bulgaria

Croati

a

Austria

Romania

Italy

Slova

kia

France

Spain

Portuga

l

Euro

pean Union (2

7 countri

es)Lat

via

Estonia

Czech Rep

ublic

Greece

Norway

German

y (until 1

990 form

er ter

ritory

of the F

RG)

Hungary

Swed

en

Irelan

d

Denmark

Netherl

ands

Belgium

Lithuan

ia

Finlan

d

Poland

Slove

nia0

1020304050607080

62.1 65.6

Participation rates in education, (2010, students (ISCED 1_6), 15-24)

Foreign direct investment

FDI will alleviate the tight liquidity constraints and support growth of the Greek economy

Hewlett Packard – Central European distribution centre (3/2013)

Phillips Morris – European distribution centre (8/2013)

Coca Cola – Consumer interaction centre (11/2013)

Nokia – Research and development centre (11/2013)

Challenges and risks

• Austerity measures have led a significant proportion of the Greek society to misery – risk of disrupting social cohesion is serious.

• High rates of unemployment that persist in time and could lead to social upheaval, damage the country’s potential output due to depreciation of human capital, and increase the risk of long-term unemployed.

• Delays in important structural reforms, especially in the field of tax administration, with consequent impact on revenues collection, on combating tax fraud as well as on the sense of justice in society (see Social Justice in the EU – A Cross-national Comparison, Social Inclusion Monitor Europe (SIM) – Index Report, November 2014)

• Lack of liquidity, which suffocates the real economy, combined with extensive burdening of businesses and households with debts from previous years.

• Capacity constraints of the public administration in implementing necessary reforms. • The international economic environment remains adverse, making it harder for Greece to

adjust. • Sensitive political balance that gives way to uncertainty regarding the course of the Economic

Adjustment Programme. • Inadequate and delayed response to the crisis by the EU and insistence on a model of

austerity. • Deflation: although it supports real income and enhances competitiveness, it also has a

negative impact on debt

According to official projections, 2013 can be the year when Greece starts overcoming the recession and crisis, as long as necessary conditions are met. However, uncertainties still exist.

Looking into the future

Greece needs a new growth model.

For sustainable growth, the new model needs to be based on robust investments – rather than on consumption and borrowing, which was the case until today!

Broad social and political consensus have to be ensured, so as to allow Greece to consistently plan and implement a new strategy, and to guarantee the long-term prosperity of the country.

The Greek society must also realise the need to change mentality, as well as to support the structural reforms (for which there is broad consensus).

Annex: Latest developments

Performance in 2013 better than expected: • -3.9% GDP growth compared to expected -4.2%;• 0.7% GDP surplus in the Current Account compared to an expected -0.8%;• Unemployment rate has been declining over the last three months of the year,

after more than three years of constant increases;• General Government balance -3.2% of GDP compared to a target of -4.1%; • General Government primary surplus 0.8% of GDP compared to a target of 0%; • 10-year bond yields declined by 298 bps in 2013; • €6 bn. of public sector expenditure and tax refund arrears to private enterprises

and households cleared.

Annex: Latest developmentsPerformance in 2014 is also promising: • -0.3% GDP growth in Q2 2014 compared to -4.0% in Q2 2013;• € 567 million Current Account surplus in Jan-July 2014, compared to € 398 mn. in Jan-July

2013;• Unemployment rate remains on a decreasing path (2.4 p.p. cumulative decline since

peak);• GG deficit -0.8 bn Euros in Jan-July 2014, compared to -2.7 bn Euros in Jan-July 2013;• GG primary surplus € 3.2 bn in Jan-July 2014, compared to € 1.7 bn in Jan-July 2013;• 10-year bond yields declined further by 255 bps;• In April, i.e. four years after having no access to the international capital markets, the

Greek sovereign raised €3 billion at a coupon rate of 4.75%, through the sale of 5-year bonds that was almost seven times oversubscribed;

• Further issuance of €1.5 bn in 3-yr paper in July (3.38% coupon), plus another €1.7 bn (5-yr and 3-yr) in exchange for T-bills in September;

• In Q1 2014, the four systemic banks raised additional capital worth € 8.5 bn., comfortably in excess of the needs identified by the supervisor (€ 6.4 bn.), whereas two of them have issued medium-term bonds for the first time since 2009, in order to boost their liquidity.