Undersanding the Greek Crisis

1. Greek Economy
Towards the Crisis
& a Plan for Recovery
October 2014

2. 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

3. 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
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
GDP growth rate
EU15 Greece

4. Unsustainable Fiscal Aggregates
The deficit remains high during the period 2001-2009, whereas public expenditures
are increasing.
Source: Eurostat
%GDP
4.5 4.8
5.6
7.5
5.2 5.7
6.5
9.8
15.645.4 45.1 44.7
45.5
44.6
45.3
47.5
50.6
54.0
35
37
39
41
43
45
47
49
51
53
55
0
5
10
15
20
25
30
2001 2002 2003 2004 2005 2006 2007 2008 2009
General government deficit (% GDP) Public expenditures (% GDP)

5. 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.
1.7
1.2 1.2
2.2
2.4
2.1 2.2 2.2 2.2 2.1
3.3
5.4
4.5
2.1
2.9
3.7
3.4
3.0
3.5
3.3
3.0
4.2
0
1
2
3
4
5
6
1997 1998 1999 2000 2001 2003 2004 2005 2006 2007 2008
EA17 Greece

6. Competitiveness was deteriorating
100.0
108.1 108.8
110.3
113.0
110.8
112.3
115.9
119.3
90
95
100
105
110
115
120
2001 2002 2003 2004 2005 2006 2007 2008 2009
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.

7. 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)
%GDP
79.5
78.2 78.1 78.2 78.6 79.1 79.0
77.3
80.7
68.3
77.9 78.6
81.6
88.5
86.4
87.9 87.4
92.9
60
65
70
75
80
85
90
95
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Consumption (% GDP)
ΕU (27) Greece

8. The external debt of Greece is increasing
-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 -14.9-16
-14
-12
-10
-8
-6
-4
-2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
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
%GDP

9. The public debt of Greece is also
increasing
49.5 57.5 64.2 84.9 88.7 95 107.7 114.9 115.7 122.3 141 151.9 159.2 168 183.2 195.4
224.2 239.3
263.3
299.7
0
100
200
300
400
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(billion EUR)
High consumption, fueling the growth model of Greece, was funded by an
increasing public debt.
Source: Ameco
71.7 74.0 79.1
99.2 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
0
50
100
150
Public Debt
(% GDP)
BillionEUR%GDP

10. Borrowing Cost
In 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
1/9/1992
1/4/1993
1/11/1993
1/6/1994
1/1/1995
1/8/1995
1/3/1996
1/10/1996
1/5/1997
1/12/1997
1/7/1998
1/2/1999
1/9/1999
1/4/2000
1/11/2000
1/6/2001
1/1/2002
1/8/2002
1/3/2003
1/10/2003
1/5/2004
1/12/2004
1/7/2005
1/2/2006
1/9/2006
1/4/2007
1/11/2007
1/6/2008
1/1/2009
1/8/2009
1/3/2010
1/10/2010
1/5/2011
1/12/2011
1/7/2012
Greek government bond spreads
(10 year) 2nd programme
Revision of deficit to
two-digit
Collapse of Lehman
Brothers
1st programme

11. 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

12. 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

13. 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.
4.83% 4.69%
3.11%
1.36%
0.22%
3.76% 4.06%
2.84%
4.30%
1.62%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2010 2011 2012 2013 2014
%GDP
Expenditure Revenue
8,6 8,8%
6,0%
5,6%
2,1%

14. 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
%GDP
* Official Projections of the Programme
-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 1.6
3.0
4.5
-20
-15
-10
-5
0
5
10
2009 2010 2011 2012 2013 2014* 2015* 2016*
General Government Fiscal Accounts 2009-2016
(% of GDP)
General Government Balance General Government Primary Balance

15. 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
4.2
3.3
2.8
2.5
1.9 1.8 1.8 1.6 1.6 1.5 1.5
1.3 1.2
1.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
FastestFiscalConsolidation
Highest rate of average annual
cyclically adjusted primary balance
improvement (% GDP per year)
16.6
11.4
9.9 9.6
9.0 8.8
7.6 7.4
6.5 6.5
3.6 3.6 3.3 3.1
0
2
4
6
8
10
12
14
16
18
Greece*
Denmark
Belgium
Germany
UK
Finland
Sweden
Portugal*
Ireland*
Spain*
Austria
Italy
Netherlands
France*
BiggestFiscal Consolidation
Highest scores of cyclically
adjusted primary balance
improvement (% GDP)

16. 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
3.5
-0.2
-3.1
-4.9
-7.1 -7
-3.9
0.6
2.9 3.7
8.3 7.7
9.5
12.5
17.7
24.2
27.3
25.8
23.8
20.9
-10
-5
0
5
10
15
20
25
30
2007 2008 2009 2010 2011 2012 2013 2014* 2015* 2016*
GDP growth rate Unemployment

17. 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
-10
-5
0
5
10
15
GDP deflator Nominal unit labour cost

18. 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
-4
-3
-2
-1
0
1
2
3
4
5
6
7
Inflation
Euro area (18 countries) Greece

19. 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.
-17,000
-12,000
-7,000
-2,000
3,000
8,000
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Deposit flows
(mil. Euros)
Firms and households Total deposits and repos
Rumors that the ministers of Finance
discuss in Luxembourg the exit of Greece
from the Euro
1st Programme Suspension
of the review
1st round of elections
Agreement for the 2nd Programme

20. 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.
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

21. 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.

22. Recovering cost competitiveness
2009-2013: Full recovery of cost competitiveness lost during the previous decade.
Source: Ameco
80
90
100
110
120
130
140
150
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
REER based on unit labour cost relative to 36 industrial countries (2001=100)
Greece EU17 Ireland Portugal

23. 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.
90
95
100
105
110
115
120
125
130
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Real Effective Exchange Rate based on HICP relative to 36 industrial countries
(2001=100)
Euro area (17 countries) Ireland Greece Portugal

24. 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
-6.5
-5.8
-7.6
-11.4
-14.6 -14.9
-11.2
-10.1 -9.9
-2.4
0.7
-20
-15
-10
-5
0
5
10
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
%GDP
Current Account (% GDP)
Current Account Balance Current Account Balance (excl. oil) Current Account Balance (excl. oil & GG net interests)

25. 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
BillionEUR
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 56.7
63.0
72.1 72.7
58.0 54.5 50.5
43.2 45,606
124.4
129.5
136.3 139.6
144.9
150.4
156.6
163.3
168.0 167.5
156.1
144.9
133.7
140,552
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
National Accounts agreggates(constant prices)
Exports of goods and services Imports of goods and services
Final consumption expenditure Investment expenditure

26. 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.
0
10
20
30
40
50
60
BillionEUR
pre- <PSI
0
10
20
30
40
50
60
BillionEUR
post- >PSI
Debt Repayment Profile
Source: PDMA

27. 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
3.9
4.7
6.4
7.9
9.910.110.310.1
9.7 9.3
10.1
9.5
8.7 8.6
9.0 9.0
9.8
10.7
11.911.9
13.2
15.0
9.7
7.2
8.4
9.9
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
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
Interest payments
(bn. Euros)

28. 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
%GDP
* Official Projections of the Programme
129
148
170
157
175 174 171
161
152
145
135
0
20
40
60
80
100
120
140
160
180
200
2009 2010 2011 2012 2013 2014* 2015* 2016* 2017* 2018* 2020*
Public Debt (% GDP)

29. 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
62.1
65.6
0
10
20
30
40
50
60
70
80
Participation rates in education,
(2010, students (ISCED 1_6), 15-24)

30. 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)

31. 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.

32. 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).

33. 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.

34. Annex: Latest developments
Performance 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 Eurosin 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.