EUROPEAN COMMISSION

Brussels, 24.11.2021

COM(2021) 916 final

COMMUNICATION FROM THE COMMISSION

Enhanced Surveillance Update - Greece, November 2021

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BACKGROUND

Economic developments and policies in Greece are monitored under the European Semester for economic policy co-ordination and under the enhanced surveillance framework according to Articles 2 and 3 of Regulation (EU) No 472/2013 ( 1 ). The implementation of enhanced surveillance for Greece ( 2 ) acknowledges the fact that Greece needs to continue implementing measures to address the sources or potential sources of economic and financial difficulties, while implementing structural reforms to support a robust and sustainable economic growth.

Enhanced surveillance provides a comprehensive framework for monitoring economic developments and the pursuit of policies needed to ensure a sustainable economic recovery. It allows for a regular assessment of recent economic and financial developments in Greece, as well as for monitoring sovereign financing conditions and updates of the debt sustainability analysis. Enhanced surveillance also provides the framework for assessing the general commitment given by Greece to the Eurogroup of 22 June 2018, to continue and complete reforms adopted under the European Stability Mechanism programme and to ensure that the objectives of the important reforms adopted under the financial assistance programmes are safeguarded. In that context, enhanced surveillance monitors the implementation of specific commitments to complete key structural reforms started under the programme, in six key areas by agreed deadlines up to mid-2022, namely: (i) fiscal and fiscal-structural policies, (ii) social welfare, (iii) financial stability, (iv) labour and product markets, (v) Hellenic Corporation of Assets and Participations and privatisation, and (vi) the modernisation of public administration ( 3 ).

This is the twelfth enhanced surveillance report for Greece. The report is based on the findings of a mission held in Athens on 19-20 October 2021 and regular dialogue with the authorities. The mission was conducted by the European Commission in liaison with the European Central Bank ( 4 ); the International Monetary Fund participated in the context of its Post Financing Assessment framework, while the European Stability Mechanism participated in the context of its Early Warning System and in line with the Memorandum of Understanding of 27 April 2018, on working relations between the European Commission and European Stability Mechanism. The current report assesses the implementation of Greece’s commitments to the Eurogroup regarding reform completion due up to mid‑2021.

This report could serve as a basis for the Eurogroup to decide on the release of the next set of policy-contingent debt measures worth €767 million. These measures were agreed with the Eurogroup on 22 June 2018 and include the transfer of income equivalent amounts stemming from central banks’ holdings of Greek government bonds under the Securities Markets Programme and the Agreement on Net Financial Assets and a waiver for the step-up interest margin for certain loans provided by the European Financial Stability Facility. The fifth tranche of policy-contingent debt measures was released following the Eurogroup on 17 June 2021.

The commitments given by Greece to Eurogroup partners in June 2018, which are the basis for the release of additional debt relief measures, were established up to mid-2022 and thus Greece has entered the final year of this arrangement. The authorities expressed an intention to focus their efforts on delivering on outstanding commitments by mid-2022. The decisions on the release of the remaining debt relief measures as well as the ending of enhanced surveillance will need to take account of the progress towards completion of commitments as well as the wider economic policy environment.

OVERALL ASSESSMENT

The recovery of the Greek economy is gaining traction, despite the ongoing pandemic. Following a strong first half of the year and the better-than-expected tourist season, the Commission autumn forecast expects growth in 2021 to reach 7.1%, thus practically reaching the pre-pandemic level of economic activity. Real GDP is forecast to grow by 5.2% in 2022. While still very intense, the impact of the pandemic is expected to gradually diminish with the ongoing vaccination campaign. The accommodative fiscal and monetary policy, coupled with the expected strong boost from the implementation of Greece’s recovery and resilience plan, are set to sustain the momentum going forward. The labour market remains resilient, thanks also to the government support schemes which continued protecting jobs in vulnerable sectors. The 2022 Draft Budgetary Plan confirmed that the existing emergency support measures are expected to be largely phased out by the end of 2021, with those that remain active in the following year being adapted to the evolving needs of the economy. This, along with the economic rebound, is set to support the reduction of the general government deficit going ahead.

The authorities successfully completed a further set of specific commitments:

·As part of the chart of accounts reform, which introduces a common economic, administrative and functional classification for budgetary and accounting purposes, the authorities finalised the first level of the functional classification for both ordinary and public investment budget, which will be presented in November as part of the 2022 Budget. This fulfils a specific commitment in the area of public financial management on completing the chart of accounts for the central administration. The development of the second level of the functional classification (a mid‑2022 specific commitment) is on track.

·The measures adopted by the authorities under the antitrust remedy allow the competitors of the Public Power Corporation (PPC), the Greek state-owned electricity incumbent, to purchase more electricity on a longer-term basis, which closes this long-standing anti-trust case. This completes the reform of the energy sector, which was a specific commitment ( 5 ).

In addition, reform implementation progressed well across a broad range of specific commitments, according to the agreed timelines. In particular:

·Substantial progress was recorded in terms of simplification of investment licensing legislation, with the majority of the pending elements now in place. The last agreed element, i.e. the enabling secondary legislation for the simplification of licensing procedures for economic activities in the education sector, is expected to be completed by January 2022.

·The Hellenic Corporation of Assets and Participations finalised the work on the update of its strategic plan, which sets out its goals and strengthens its role as an active shareholder in the companies in its portfolio. Within the framework of the update of its strategic plan, the Corporation also progressed well in the area of legal changes that will be needed for state-owned enterprises to become higher-performing companies. As the Corporation continues its evolution and moves into the implementation of the updated plan, it remains critical for all parties to uphold the independence of the Corporation in line with its founding Law as this will contribute to the achievement of its mandate and the continued positive performance in terms of value creation of the assets of the Greek state. Further, a performance contract for the Athens Urban Transport Organisation (OASA), including the specific methodology for the estimation of the amount of public sector obligation to be received by the Organisation, was agreed, whereas the pending actions for its execution are expected to be completed by end‑November.

·There was overall good progress with the ongoing privatisation transactions over the past months. Firstly, following the selection of the preferred investor for the long-term concession of the Egnatia motorway on 26 August 2021, for a financial offer comprising of an upfront payment of almost €1.5 billion and an annual payment amounting to 7.5% of the annual total gross revenue of the concessionaire, the authorities prepared a timetable for the completion and operation of the toll stations and the licensing of all tunnels. Secondly, following the selection of the preferred investor for the sale of Public Gas Corporation (DEPA) Infrastructure on 9 September 2021, the file was submitted and approved by the Court of Audit. Thirdly, progress was made on the tender process for a number of transactions on the regional ports and binding offers were submitted for Gournes Heraklion in Crete (development of part of the former American military base of Gournes) on 15 October 2021. The authorities also endorsed the updated Asset Development Plan, which constitutes the privatisation programme and lays down the next steps for the transactions included in it.

·As regards social welfare reforms, the authorities adopted primary legislation to apply the new approach for disability determination to personal assistance benefits, with secondary legislation for its initial trial implementation period to follow in early 2022, somewhat later than expected in the 11th report. The opening of remaining directorates of the Single Social Security Fund (e-EFKA) over the territory of Greece is progressing well, however the IT infrastructure is not yet mature.

·In the area of public administration, the efforts to complete the integrated human resources management system are progressing well, with job descriptions completed for 81% of all posts, with full completion due in January 2022. The legal provisions to facilitate the appointment of the Permanent Secretary at the Ministry of Education and Religious Affairs are expected to be adopted by end‑November 2021, while ensuring consistency with the delegation of signature powers in line with the Executive State Law. The authorities have also progressed well with implementing measures to address the remaining recommendations by the Group of States against Corruption (GRECO), which concern prevention of corruption with respect to members of parliament, judges and prosecutors, as well as bribery of public officials.

·Cadastral mapping and establishment of the new cadastral entity progresses well, in line with the agreed roadmap.

·The authorities confirmed their commitment to go ahead with a reform of the ENFIA property tax based upon the new wider property tax base with payments starting in March 2022 and provided a timetable for the next steps.

Nevertheless, some specific commitments have seen delays compared with the timelines agreed in the context of the 11th report. Notably:

·Clearance of arrears has seen only a marginal improvement compared with the 11th report, on account of delays in implementing policy actions agreed in the March 2021 clearance plan, accumulation of new arrears and a higher-than-expected inflow of new pension applications. The actions to accelerate clearance are now in place and the authorities currently expect that non-pension arrears should be cleared by December 2021 and the stock of unprocessed pension applications by mid-2022. The authorities agreed to start as of October 2021 monitoring progress on policy implementation on a monthly basis to prevent further delays. Implementation of the recommendations of the Hellenic Court of Auditors and the simplification of fiscal procedures continued as planned.

·In the area of reforming the Public Revenue Agency, whereas the testing phase for the end-to-end IT collection system has been completed, the actual operationalisation is now expected to be fully achieved only by April 2022, compared with the end-2021 target agreed in the 11th report.

·Setting up of the primary health care system, a specific commitment, has been further delayed by the pandemic and the recent government reshuffle. The authorities committed to presenting a draft law by December 2021, with a view to adopting it by February 2022, together with the secondary legislation needed to deliver on the principles of gatekeeping and patient registration, in time for the 13th enhanced surveillance report. Collection of the clawback, i.e. spending over and above the legislated ceiling for public spending on pharmaceuticals and other healthcare services that is due to be collected back from healthcare providers, continues well for the recent amounts but has seen important delays for amounts to be collected for 2020. As regards health procurement, the new legislative framework is expected to be adopted by 10 December 2021 and procurement activities are progressing towards the mid-2022 milestone to achieve a 40% share of centralised procurement in total hospital expenditure.

·In the area of justice, the preparatory stage for the launch of the call for bids for the integrated case management system has incurred an additional delay, making the previous target for awarding the project in the first quarter of 2022 unattainable. This is of concern, given the importance of the project and its long envisaged implementation period. As regards electronic filing, further progress has been made in the areas of both civil and administrative courts, with actions to be completed by April 2022.

·While the authorities made welcome steps on the reform of the inspections framework for the supervision of economic activities and product markets, in areas monitored under the enhanced surveillance commitment, its completion remains pending. Specifically in the last remaining area of environmental protection the authorities adopted primary legislation to amend the framework on sanctions and enforcement powers of inspecting authorities, aiming to make environmental inspections more transparent, friendly to businesses and conducive to self-compliance. The elaboration of an enforcement management model to facilitate a harmonised approach in the application of the enforcement system is needed to complete this reform. 

·The completion of the specific commitment on the ratification of forest maps, which is necessary for the completion of the cadastre project, has encountered further delays, partly on account of the forest fires earlier this year. While these factors are acknowledged, the repeated horizontal extensions of the deadline for ratification of the maps, put the timely completion of the cadastre at risk. The authorities indicated that the maps could be ratified by mid-2022, which is subject to significant implementation risks.

In addition to the progress with specific commitments, the report welcomes that the authorities advanced on a number of broader structural reforms initiated in the context of enhanced surveillance. Notably:

·The new Project Preparation Facility, a unit within the privatisation agency dedicated to the maturation of investment projects and the provision of broader support for the acceleration of projects of strategic importance, including projects included in Greece’s recovery and resilience plan, has become fully operational. The first set of contracts that are considered to be of strategic importance, and therefore to be included in the Strategic Projects Pipeline and receive priority attention, has been provided to the Facility on 8 November 2021. Moreover, the authorities progress steadily to operationalise the new regulatory framework for public procurement, also in the wider context of the recently adopted strategy. Adoption of the remaining secondary legislation for the public procurement law has encountered a short delay and is now expected to be completed by end-November 2021. All these steps are critical for the successful implementation of investments presented in Greece’s recovery and resilience plan.

·Wider reforms in the area of justice are also progressing well, including the completion of setting up of special court chambers, progressing towards the adoption of the revised Code for the Organisation of Justice and operationalisation of the JustStat department, which aims to improve the quality of data on the judiciary.

·The implementation of new digital services and applications progresses steadily, underpinned by enabling actions to enhance system interoperability and data exchange within the public administration.

·With a view to addressing the sizeable increase in temporary staff in the public administration since 2018, the authorities adopted a ceiling for temporary staff to be hired in 2022, which is welcome. Due to unforeseen developments, such as unexpectedly high retirements of teachers and increased demand for special support to pupils, it was however, not possible to reach the expected reduction to fully offset the conversion of 10 500 temporary teachers’ contracts to permanent contracts that took place ahead of the start of the current school year. The authorities have committed to carry out a needs assessment of permanent and temporary education personnel as well as to ensure that the new hirings of 3 000 temporary teachers will be offset for the next school year.

The European institutions welcomed the authorities’ intention to carry out an assessment of the staffing needs in the public administration and how to attract competent personnel, while stressing the importance of maintaining the overall cost of the public administration stable so as to help preserve prudent fiscal policy in the medium term. Overall, the number of staff in the public administration increased by 2.6% since Greece exited the financial assistance programme in August 2018, mainly on account of temporary staff, the headcount of which increased by 24.5%. This has been reflected in the wage bill, which is expected to increase by 6% in the period 2018-2022. As a ratio to GDP, the wage bill is forecast to increase to 9.5% in 2022, up from 9.3% in 2018 ( 6 ). Continued close monitoring and reinforcing the efforts to strengthen the central control over hiring procedures and tackling the remaining inefficiencies ( 7 ) will help ensure that the size and cost of the public administration remains stable. At the same time, the authorities are encouraged to exploit the flexibility inbuilt in the unified wage bill to ensure that the public sector remains an attractive work place.

The banking sector recorded a strong decrease in non-performing loans, although vulnerabilities remain. Thanks to securitisation transactions, the non-performing loans ratio reached 20.3% in June 2021 ( 8 ), i.e. half of the ratio recorded at end-2019. The securitisations of non-performing loans result in increased provisioning needs, which weigh on banks’ profitability and their capital positions in the short-term, but will allow banks to reduce their cost-of-risk going forward and free up space in their balance sheets for new lending. The ratio of deferred tax credits in the banks’ capital remains high. Successful capital enhancing actions have taken place over the summer and further are planned in the coming months. The risk of a cliff effect following the expiry of the moratoria has not materialised so far but downside risks remain. 

The implementation of agreed policy actions in the financial sector has seen improvements but catching up with previous delays remains challenging. The functioning of the insolvency framework is now supported by the relevant electronic infrastructure. The concessionary process for the setup of the sale and lease-back entity has been further delayed, but this does not seem to have affected the implementation of the insolvency framework. As regards the specific commitment to clear the backlog of household insolvency cases, there is progress but the pace remains slow. A large number of cases remains pending, of which only about 19.5% have received a new hearing date, in some cases for beyond 2022. The authorities are preparing to take relevant steps, inter alia to improve their processing in specific courts, with a view to clearing the backlog largely within 2022, which remains challenging. Despite an acceleration of payments with regards to the backlog of called state guarantees in the third quarter of 2021, the pace of clearance still falls short of expectations. The authorities have committed to provide monthly updates on the progress with the clearance of both backlogs (household insolvency cases and called state guarantees). The recent adoption of an extensive revision of the Code of Civil Procedure is welcome, as it is expected to accelerate the delivery of Justice and increase the efficiency of enforcement proceedings, including the conduct of e–auctions. Work is also ongoing regarding the introduction of enhancements to the e-auctions platform.

Discussions are progressing on the future of the Hellenic Financial Stability Fund. The reform of the Fund’s legal framework is expected to focus on the duration, governance, divestment strategy and special rights of the Fund. The Greek authorities now expect the legal amendment to be adopted later this year.

Overall, this report concludes that Greece has further progressed towards achieving its specific commitments, despite delays encountered in some areas, partly linked to the challenging circumstances caused by the pandemic or the catastrophic fires in August 2021. The authorities delivered on specific commitments in the energy sector and public financial management, while making important and welcome steps towards completion of most of its specific commitments by April 2022. The European institutions welcome the close and constructive engagement in all areas and encourage the authorities to keep up the momentum and remedy the delays in particular as concerns financial sector reforms, arrears clearance, health care and justice.

MACROECONOMIC DEVELOPMENTS

Recovery is gaining traction. The economy grew by 4.5% and 3.4% (quarter-on-quarter) in the first and second quarter of 2021 respectively. The external sector is expected to have markedly improved in the third quarter of 2021 in light of good preliminary tourism data following the opening of the country to tourism in May and the lifting of mobility restrictions across the EU during the summer. In parallel, goods’ exports have recorded market share gains during the first half of 2021 and thereby contributed to growth over the same period. Real GDP growth in 2021 is also expected to be supported by the implementation of investments under Greece’s recovery and resilience plan and other government support measures. Net foreign direct investments in Greece increased substantially during the second quarter of 2021, but their stock expressed as a share of GDP remains well below the EU average. Driven by the global inflationary pressures, inflation continued rising over the summer months.

Employment continued growing over the summer, supported by government schemes which continued protecting jobs in vulnerable sectors, while the recovery of the economy and the high demand for seasonal workers in tourism have accelerated job creation. According to the latest data from ‘Ergani’ information system, the net flow of employees to the private sector was positive during the third quarter of 2021, with hirings up by 6.7% compared to the previous year. The short-time work scheme (‘Synergasia’) continued to provide support to about 37 800 employees in 3 560 enterprises in September 2021. The unemployment rate in September stood at 13.3%, 3 percentage points below its September 2020 level, thanks to the recovery, notably in the tourism sector. Youth unemployment decreased to 38.5% in the second quarter of the year, but remains 2.3 percentage points higher compared to the respective rate in the second quarter of 2020. According to the latest available data, in 2020 the share of people at risk of poverty or social exclusion fell to 27.5%, 1.5 percentage points below the respective level in 2019.

According to the Commission 2021 autumn forecast, GDP is forecast to rebound by 7.1% in 2021 and record strong growth of 5.2% and 3.6% in 2022 and 2023 respectively. Overall, the implementation of the recently adopted Greece’s recovery and resilience plan is set to sustain momentum in 2022 and 2023 and strengthen private and public investment going forward. With international tourist arrivals gradually recovering part of their losses with respect to 2019 levels, tourist receipts are forecast to remain an important driver of growth in the coming years. Despite the hike in energy prices, headline inflation is forecast to be mildly above zero in 2021, on account of the negative inflation rates recorded in the first half of the year. The current forecast expects that the increase in energy inflation is of a transitory nature. Inflation is projected to reach 1.0% in 2022 and 0.4% in 2023.

The wholesale electricity price pressures that emerged in the third quarter of 2021, on the back of the global gas and oil price developments, represent an additional burden for households and businesses. Electricity prices in Greece increased by 14% in September 2021, compared to the previous month. When compared with the rest of the EU, residential energy prices in Greece stand around 14% above the respective EU average ( 9 ). The government has adopted measures to cushion the impact ( 10 ). The relatively high price of electricity renders additional risks for the energy poor and the low and lower-middle-income households. Based on the latest available data (2020), about 16.7% of the Greek population were unable to keep their homes adequately warm, some 8.5 percentage points above the EU average. The increase in electricity prices is a result of international developments coupled with domestic factors, such as the dependence on natural gas, while full integration in the pan-European electricity energy markets and demand response participation ( 11 ) in the electricity markets is still an ongoing process. Nonetheless, Greece’s recovery and resilience plan includes additional interventions in the area of renewable energy sources generation, energy efficiency, storage and grid investments, electricity market reforms, as well as connection of non-interconnected islands to the mainland. As the implementation of these projects progresses, this is expected to increase protection of final consumers against future shocks in the medium term. 

Initial evidence suggests that the government support measures have helped safeguard the dynamism of the corporate sector during the pandemic. Based on business demographics data ( 12 ), the balance of new business ‘births’, i.e. establishments of new businesses minus closures of existing ones, remained positive during 2020 and exceeded pre-pandemic levels in the first two quarters of 2021. This outcome was supported also by the recovery in demand during 2021, which accelerated the creation of new businesses, especially in the service sector. These data should nevertheless be interpreted with caution since Greece traditionally records low rates of business dynamics ( 13 ); the impact of the pandemic could therefore be underestimated.

Uncertainty and risks surrounding the outlook remain high. The impact of the pandemic on economic activity has diminished over the last quarters, however, the recovery remains exposed to a potential worsening of the pandemic, both domestically and internationally, and strong vulnerabilities remain. In addition, the phasing out of the support measures towards the private sector and in the labour market will need to be closely monitored and carefully timed to avoid cliff effects. The pick-up in energy prices and the presence of supply-chain bottlenecks are adding to the uncertainty regarding the inflation outlook. The external geopolitical factors and the potential resurgence of the migration crisis once the pandemic subsides remain a source of uncertainty. On the upside, the recent increase in households’ savings of could facilitate a realisation of part of the purchases delayed from the previous year and provide an additional boost to private consumption.

Table 1:    Summary of main macroeconomic variables (%)

Source: European Commission

FISCAL DEVELOPMENTS

Fiscal policy is set to remain accommodative in 2021 and to continue supporting the recovery throughout 2022. The Commission and the authorities’ forecasts are broadly aligned and project a substantial narrowing of the primary deficit in 2022. The Commission 2021 autumn forecast expects the primary deficit monitored under enhanced surveillance to improve from 7.6% of GDP in 2021 to 1.2% of GDP in 2022 ( 14 ). This compares to a deficit forecast of 1.0% of GDP in Greece’s 2022 Draft Budgetary Plan. The improvement in the balance projected for 2022 reflects the ongoing recovery and the phasing out of most of the emergency measures. At the same time, the Recovery and Resilience Facility is expected to generate a substantial impact on growth, which then results in a positive impact on public revenues. The deficit forecast by the Commission for 2022 is somewhat higher than it was projected in spring 2021. The revision reflects the cost of additional measures (see below) and higher defence spending in 2022 on account of an earlier-than-planned delivery of military equipment, with a balance-deteriorating impact of 0.1% of GDP in 2022.

Most of the pandemic-related measures will be phased out by the end of 2021, but additional measures were taken to address the impact of the fire damages, and minor permanent measures were also adopted. Most of the measures adopted to support households and businesses affected by the crisis are expected to be gradually lifted by the end of 2021. The support measures are expected to have a budgetary impact of 6.4% of GDP in 2021 and 1.4% of GDP in 2022. The measures which will remain in place in 2022 aim to support recovery by stimulating aggregate demand and employment and further support the healthcare system ( 15 ). They include:

·a reduced rate of social security contributions and a waiver of the social solidarity tax for the private sector; 

·an extended recruitment subsidy programme to create 50 000 new jobs by subsidising social security contributions for six months for each new employment contact;

·reduced value added tax rates for transport, beverages and cinema tickets until June 2022;

·increased healthcare expenditure partly linked to the vaccination campaign.

The 2022 draft budget includes measures to address the impact of the devastating fires from summer 2021. They include grants and loans, deferrals of tax and debt obligations, a suspension of the real estate tax (ENFIA) for 2021-2023 for the affected households and businesses and reconstruction costs for the affected regions.

Finally, the draft budget includes a number of new minor measures to support the economy worth 0.1% of GDP, the cost of which is partly matched with the elimination of unused reserves in the social budget ( 16 ). The measures include:

·reduction of the mobile subscription fees;

·suspension of tax on donations below €800 000 between first-degree relatives;

·50% reduction of the tax on capital accumulation;

·incentives to increase youth employment.

In response to the recent increase in energy prices, Greece announced measures to counteract its economic and social impact. Following the sharp increase in electricity prices, the authorities introduced a new subsidy scheme that will offer a discount of 60€/MWh for the first 300 kWh consumed per month until the end of the year for all low voltage consumers with variable price contracts while the most vulnerable households will benefit from a subsidy of 80€/MWh ( 17 ). If energy prices remain high longer than expected, the measures might be prolonged. The authorities informed that should future developments require additional support, it would be targeted to vulnerable households and an automatic adjustment mechanism would be set up to cater for such unexpected fluctuations in the future. The authorities also increased the heating benefit granted to low income households. These measures are worth 0.2% of GDP for 2021 and will be fully matched with increased revenues of the emissions trading system account earmarked to energy-related spending. These measures seem broadly in line with Commission Communication ( 18 ) on tackling rising energy prices as they are temporary and broadly targeted with increased benefit to more vulnerable consumers. The developments on the energy markets are closely monitored by the European Commission.

Graph 1: Sources of the change in the budget balance between 2021and 2022

Source: European Commission Note: The chart shows a decomposition of the improvement of the general government balance monitored under enhanced surveillance from a primary deficit of 7.6% of GDP to a primary deficit of 1.2% of GDP to contributions from the revenue and expenditure side

The current assessment and forecast are subject to substantial risks. Part of the risks relate to the evolution of the pandemic, most notably to the need for additional support measures in case of a further escalation of the health crisis and the possible activation of state guarantees ( 19 ) issued as part of the support measures. The developments on the energy markets could also trigger additional support measures. The recent or planned financial policy arrangements, including the sale and lease-back scheme for properties owned by vulnerable debtors, may entail a deficit- and debt-increasing impact depending on their final statistical classification. Pending legal cases pose additional uncertainty to the forecast and include a case on the retroactive compensation for cuts in the supplementary pensions and seasonal bonuses and litigation cases against the Public Real Estate Company (ETAD). On the upside, based on the preliminary corporate income tax data, corporate profitability may have suffered a smaller hit in 2020 than currently assumed, which would lead to higher tax revenues this year.

SOVEREIGN FINANCING

Cash reserves remain high. Cash reserves of the general government stood close to €40 billion at the beginning of October 2021, which is the highest level since late 2019 ( 20 ). The increase in cash buffer is partly due to the €4 billion pre-financing received from the Recovery and Resilience Facility and to the bond issuances in September 2021. Financing conditions remain favourable, and despite the recent increases, yield spreads on the 10 year maturity have remained between 110 and 150 basis points since end-August 2021.

The Public Debt Management Authority is considering to repay early another part of Greece’s debt to institutional creditors, following similar steps undertaken in spring 2021 and before. In particular, it is considering to repay approximately €5.3 billion of the Greek Loan Facility due in 2022 and 2023 ahead of schedule, and also to fully repay its outstanding loans of €1.8 billion to the International Monetary Fund in the coming months. While this package of pre-payments has a negligible impact on debt sustainability in the long run, it is welcome, since it sends a positive signal to the market about the financial position of the Greek state, it lengthens the average maturity of the Greek debt, and it generates savings on the interest expenditure and reduces foreign exchange risk.

DEBT SUSTAINABILITY ANALYSIS

The update of the debt sustainability analysis indicates that risks remained broadly unchanged compared to the 11th report but uncertainty remains high. Short-term risks to debt sustainability remain contained, whereas risks are more significant over the longer run in the ‘low growth’ and ‘higher risk premium scenarios’. In the baseline scenario, debt decreases from 203% of GDP in 2021 to around 54% of GDP in 2060, while gross financing needs remain below 15% of GDP in the long run. In the higher risk premium scenario, debt decreases to 90% of GDP by 2060, and gross financing needs hover around 18% of GDP from the 2030s. In the low growth scenario, the debt level does not stabilise, and gross financing needs permanently surpass 20% of GDP as of 2050. The alternative scenarios show that potential changes in the currently observed low-interest-environment over the medium-term and weaker economic growth could negatively affect debt sustainability.

The updated DSA is based on the following assumptions: 

·The assumptions on real GDP growth continue to build on the latest short-term Commission forecast for the years 2021-2023. For the period 2024-2031 the projections now include the expected growth impact of the investments under the Recovery and Resilience Facility based on the Commission’s standard T+10 simulations adjusted on the basis of the QUEST model. This simulation is carried out simultaneously for all Member States, hence it also includes spill-over effects. Before this update, the macroeconomic projections for Greece were based on Commission’s calculations until T+6 and on the 2021 Ageing Report thereafter. They included the impact of the Recovery and Resilience Facility until T+6. Long-run growth remains consistent with the 2021 Ageing Report.

·Inflation assumptions beyond the short term build on market expectations measured by the ‘10-year 10-year’ inflation-linked swaps ( 21 ) until the tenth forecast year, hence they are fully consistent with the market expectations on sovereign financing costs. Beyond the 10th forecast year, a linear convergence to 2% is assumed by the 30th forecast year. Before this update, the inflation expectations were taken into account only until the fifth forecast year. 

·The primary balance assumptions continue to follow the methodology established in the 8th enhanced surveillance report. In particular, the primary balance is aligned with the latest Commission forecast, which covers years 2021-2023 and is made under the ‘no-policy-change’ assumption, and assumes 2.2% of GDP primary balance thereafter.

As a result of these methodological adjustments, gross financing needs decreased by 0.8 percentage points in 2060 in the baseline scenario and up to 2.5 percentage points in the other scenarios.

Graph 2:    Results of the debt sustainability analysis

Source: European Commission

Table 2:    Main assumptions and results of the baseline scenario

Source: Commission services

Table 3:    Main assumptions of the scenarios

Source: Commission services

FINANCIAL SECTOR DEVELOPMENTS

Increased provisioning needs due to securitisations of non-performing loans continue to weigh on banks’ profitability. Only two of the four systemic banks have shown positive results. Profitability in the first half of the year was supported by a number of factors including lower loan impairments, higher net interest income on the back of lower cost of funding, higher fees and lower operating costs. High provisions in the course of major securitisations of non-performing loans have adversely affected two other banks. As a result, the banking sector has continued to record aggregate losses in the second quarter of 2021. The overall quality of banks’ net interest income is improving as, with ongoing securitisations, it becomes less dependent on accrued interest of non-performing loans. Profitability for the whole year 2021 will be highly influenced, on the one hand, by the remaining securitisations of non-performing loans, which will increase provisioning needs and reduce net interest income ( 22 ), and, on the other hand, the pick-up of economic activity, which should increase the demand for new loans, boosting income generation. However, going forward, non-performing loan securitisations should allow banks to reduce their cost-of-risk and free up space in their balance sheets for new lending, supporting their long-term profitability.

The capital position of Greek banks continues to be affected by the cost of the sizeable clean-up of the banks’ balance sheets but is being supported by capital enhancing actions. Banks’ average Common Equity Tier 1 and Total Capital ratios stood, at the end of the second quarter of 2021 and on a consolidated basis, at 12.5% and 15% of risk-weighted assets, respectively. This implies a decline with respect to the previous quarter (13.6% and 15.6% respectively), which was already affected by the phasing out of transitional prudential adjustments ( 23 ) and the yearly amortisation of deferred tax assets, most of them guaranteed. However, the successful completion in early July of a €800 million capital increase by one systemic bank, following an earlier share capital increase by another systemic bank in early May 2021, together with a series of upcoming capital enhancing actions will provide support going forward, enabling the Greek systemic banks to move forward with their ambitious non-performing loan reduction strategies. These efforts will be further facilitated by the recent adoption of a legislative amendment, which aims to provide more flexibility with respect to the amortisation path of deferred tax assets related to sales and securitisations of non-performing loans. While the capital position remains above the regulatory requirement, it remains one of the lowest in the EU. The poor quality of capital continues to be a concern in view of the high share of deferred tax credits in banks’ capital, reaching 74% of Common Equity Tier 1 capital in the second quarter of 2021, up from 59% at end-2020.

The banking sector recorded a strong decrease in non-performing loans, although vulnerabilities remain significant. Thanks to securitisation transactions, at the end of June 2021, the non-performing loans ratio declined strongly to 20.3% on a solo basis, from 30.1% at end-2020 and 40.6% at end-2019. Nonetheless, it remains the highest in the euro area. This corresponds to a reduction in the stock of non-performing loans from €68.5 billion at end-2019 and €47.2 billion at end-2020 to €29.4 billion in June 2021. Further securitisations transactions are anticipated until the end of the year, together with sales of non-performing loans portfolio. As a result, all four systemic banks expressed confidence to meet the target of single-digit non-performing loans ratios at the latest by the end of 2022. As regards the scale of inflows of new non-performing loans, three of the four systemic banks continued to record net inflows ( 24 ) of non-performing loans in the second quarter of 2021, mainly in the corporate and mortgage loans portfolios. 

Graph 3:Evolution of the non-performing loan ratio of Greek banks

(*)The figure for 2021 concerns data up to June 2021 Source: Bank of Greece Note: Gross non-performing loans as a share of total customer loans, for on-balance-sheet loans in accordance with European Banking Authority’s definitions.

The risk of a significant adverse impact on asset quality following the expiry of the moratoria has not materialised so far but downside risks remain. Banks are currently reporting a 7% re-default rate for loans after exiting moratoria, well below the initial expectations. Although the vast majority of moratoria expired at the end of 2020, there are still various measures in place: mainly the two Gefyra schemes (see below), and, to a lesser degree, the banks’ ‘step up’ products offered to viable customers facing temporary difficulties and the remaining payment moratoria granted to the hospitality sector. The implementation of the two temporary instalment subsidy schemes set up by the authorities for performing or restructured coronavirus-affected debtors (the “Gefyra” and “Gefyra II” schemes) is on-going ( 25 ). As a result, the full impact of the pandemic on the banks’ asset quality may materialise only in 2022. As downside risks remain, banks may need to maintain their provisioning levels.

The deceleration of net credit flows to non-financial corporations has continued. In September 2021, the annual rate of growth of net credit to non-financial corporations fell to 2.8% from 6.7% in April and 10.0% in December 2020, mainly driven by negative net credit to large corporates. The respective figure for households remains negative (-2.7%) and broadly unchanged over the past 12 months. The decreasing trend for non-financial corporations reflects an unfavourable comparison with last year’s above average performance, which was boosted at the time by the launch of financial instruments offered by the Hellenic Development Bank to support businesses in the aftermath of the pandemic (the Covid-19 enterprise guarantee fund ( 26 ) and ‘Tepix II’ schemes). The budget of these schemes is now gradually being exhausted ( 27 ), as more targeted schemes take their place. Latest credit flow developments reflect a relatively muted credit demand, as businesses can rely on significant precautionary liquidity buffers built up over previous quarters. The current performance is also influenced by large loan repayments by some of the largest corporates, which are substituting bank lending with cheaper funding through corporate bond issuances. With respect to the cost of credit to non-financial corporations, it has edged downwards in September (2.7% as compared to 3.0% at end-2020) and remains at historically low levels and substantially less than the cost of credit for unincorporated businesses (5.1%) or households (4.9%) ( 28 ).

The Hellenic Financial Stability Fund has received a majority stake in a less-significant institution in the context of the conversion of part of the bank’s deferred tax credits. The authorities adopted the necessary legislation allowing for the operationalisation of the deferred tax credits’ conversion process, including the relevant remuneration of the state with an equivalent value of shares, after the bank reported net losses in 2020. In addition, the authorities have adopted a legal modification to avoid the triggering of a mandatory public offer by the Fund for the remaining shares, as it will have passed the threshold of a 1/3 shareholding set by current legislation. The Fund is currently assessing ( 29 ) its potential participation in the bank’s share capital increase alongside private investors, which aims to address current and future capital needs stemming from the upcoming clean-up of its balance sheet. The former Deputy Chief Executive Officer of the Fund has been appointed Chief Executive Officer on 21 May 2021. The new Deputy Chief Executive Officer was appointed on 16 November.

(1)

()    Regulation (EU) No 472/2013 of the European Parliament and the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability, OJ L140, 27.5.2013, p. 1.

(2)

()    Commission Implementing Decision (EU) 2021/1279 of 28 July 2021 on the prolongation of enhanced surveillance for Greece.

(3)

()     https://www.consilium.europa.eu/media/35749/z-councils-council-configurations-ecofin-eurogroup-2018-180621-specific-commitments-to-ensure-the-continuity-and-completion-of-reforms-adopted-under-the-esm-programme_2.pdf .

(4)

()    ECB staff participated in the review mission in accordance with the ECB’s competences and thus provided expertise on financial sector policies and macro-critical issues, such as headline fiscal targets and sustainability and financing needs. The review mission was preceded by a technical mission, held remotely, from 11 to 15 October 2021.

(5)

()    As reported in the fourth enhanced surveillance report (November 2019), following the cancellation of the NOME (Nouvelle Organisation de Marché de l’Electricité), which was a specific commitment for end-2019, the Greek authorities committed to put in place additional structural measures in the context of an alternative remedy for the anti-trust case, which have herewith been completed.

(6)

()    The calculation caters for ad hoc factors such as the wage refunds paid in 2018, the increase in social security contributions, which is fiscally neutral, and the temporary increase in healthcare wages due to the pandemic.

(7)

()    The inefficiencies include for instance the low educational attainment level of public sector employees, the lack of performance assessment in Human Resource management and the perceived low integrity in the public service. These were identified using the public administration assessment framework based on OECD (2017): SIGMA, Methodological Framework for the Principles of Public Administration.

(8)

()    Source: Bank of Greece, on a solo basis.

(9)

()    Data are adjusted for Purchasing Power Standards (PPS), which eliminates general price level differences between countries. Data refer to September 2021. Source: Household Energy Price Index for Europe, VAASAETT, October 1, 2021.

(10)

()    Please see below for an assessment of the support measures following the increase in energy prices.

(11)

()    As defined in point (20) of Article 2 of Directive (EU) 2019/944, ‘demand response’ is the change of electricity load by final customers from their normal or current consumption patterns in response to market signals, including in response to time-variable electricity prices or incentive payments, or in response to the acceptance of the final customer's bid to sell demand reduction or increase at a price in an organised market as defined in point (4) of Article 2 of Commission Implementing Regulation (EU) No 1348/2014 (17), whether alone or through aggregation.

(12)

()    Source: ELSTAT,  https://www.statistics.gr/en/statistics/-/publication/SBR05/- .

(13)

()    In-Depth Review for Greece in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances, 2 June 2021, SWD(2021) 403.

(14)

()    The headline balance of 2020 has been revised by ‑0.4 percentage points of GDP, from ‑9.7% of GDP to ‑10.1% of GDP in the 2021 October EDP notification. The updated adjustment linked to EU flows accounts for ‑0.2 percentage points of the revision and derives from the updated information about claims that are not any more expected to be submitted to the EU. The updated data sources on military deliveries account for ‑0.1 percentage points of the revision.

(15)

()    See also the assessment of 2022 Draft Budgetary Plan presented in Commission opinion on Draft Budgetary Plan of Greece, C(2021)9503 and SWD(2021)915. Note that the general escape clause, which remains active in 2022, allows for a temporary departure from the budgetary requirements, provided that this does not endanger fiscal sustainability in the medium term. It was initially activated in March 2020 for 2020 and extended to 2021 as indicated in the Annual Sustainable Growth Strategy 2021. On the basis of the Commission’s 2021 spring forecast, on 2 June the Commission considered that the conditions for the continued application of the general escape clause in 2022 and its deactivation as of 2023 are met. Country specific situations will continue to be taken into account after the deactivation of the general escape clause.

(16)

()    The draft budget also includes measures that were included in Greece’s June 2021 Medium-term Fiscal Strategy and the Commission 2021 spring forecast, including a reduction of the corporate income tax rate from 24% to 22% from the 2021 tax year onwards. See the tenth enhanced surveillance report for assessment of these measures: COM(2021) 528 final.

(17)

()    Following the presentation of Greece’s Draft Budgetary Plan and the cut-off date of the Commission 2021 autumn forecast, the authorities announced an increase in the electricity subsidy for November and December to 130€/MWh for the first 300 kWh for all low voltage consumers and to 150€/MWh for the most vulnerable households. The additional cost of 0.1% of GDP will be covered by the increased revenues of the emissions trading system account.

(18)

()    COM(2021) 660 final: Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions - Tackling rising energy prices: a toolbox for action and support, Brussels, 13.10.2021.

(19)

()    No guarantee has been called so far. The deficit in 2020 includes a provisioning of €85 million to cover the eventual guarantee calls.

(20)

()    The cash buffer account balance remained at €15.7 billion. The cash buffer account was built also through disbursements under the third financial assistance programme and is dedicated to debt service. Greece may use this amount for other purposes as well, following an approval of the European Stability Mechanism’s governing bodies.

(21)

()    The 10-year forward swap rate 10 years ahead refers to the ten-year inflation expectations ten years from now.

(22)

()    Securitisations of non-performing loans lead to a recurrent loss of net interest income, as they result in the loss of the accrued interest income from the transferred non-performing loan portfolios. However, as accrued interest income is interest income earned but yet to be received, the average quality of the bank’s recurrent net interest income improves.

(23)

()    These transitional arrangements refer to the phasing in of the new accounting standards on impairments of financial assets and the implementation of new rules leading banks to more quickly write down non-performing exposures, according to Regulation (EU) 2019/630 amending Regulation (EU) No 575/2013 and relevant supervisory guidance.

(24)

()    The term ‘net inflows’ refers to the difference between the amount of new non-performing loans and the volume of previously generated non-performing loans that have been cured or whose collateral has been liquidated in a given period of time.

(25)

()    All the applications for the Gefyra I scheme have been processed with 101 962 eligible debtors, corresponding to €8.6 billion of loans, predominantly performing (86.6%). For Gefyra 2, 40 315 applications have been submitted with only 13 787 being found eligible by end-September corresponding to €6.7 billion of loans, mostly (86%) performing. The authorities have also adopted a 3-month extension of the first scheme, at a reduced subsidy rate, to allow for a more gradual return to normal payments of Covid-stricken debtors.

(26)

()    At the end of August 2021, the scheme had granted €1.7 billion of guarantees (source: Table C.2, General Government Monthly Data Bulletin, August 2021, General Accounting Office). No guarantee calls have been reported so far.

(27)

()    It is indicative that in the first eight months of 2021, loan disbursements related to the two financial instruments offered by the Hellenic Development Bank amounted to €1.3 billion as opposed to €6.4 billion for the whole of 2020. Source: Hellenic Development Bank.

(28)

()    Source: Bank of Greece, annual percentages excluding charges.

(29)

()As of 16 November 2021.