Directorate-General for Internal Policies of the Union Directorate for Budgetary Affairs Policy Department for Budgetary Affairs

Brussels, 31 March 2010

The Political and Economic Situation in

1. Introduction This note aims at summarising the present political and economic situation in Greece. It includes an overview of the Greek political system (the separation of powers, a description of the main political parties and information on the latest and previous parliamentary elections). The economic section comprises Eurostat's analysis of Greek statistical data and recent indicators concerning Greece's economy and its debt crisis. Annexes included:  Annex A- Chronology of the Debt crisis,  Annex B- Information on the Greek National budget and swap transfers,  Annex C- Greece's agricultural expenses and the problems with the IACS system.

2. Overview of the Greek political system Greece is a parliamentary republic. Its current President is , who has been elected for a five-year term. The President of the Hellenic Republic is elected by the parliament for a maximum of two terms in office. When a presidential term expires, the parliament votes to elect a new president for Greece. The country's constitution provides for a separation of powers between executive, legislative and judicial responsibilities. The executive power is exercised by the President and the Government of the Republic. Following the 4th October 2009 general elections, Georges Papandreou, the leader of the Pan-Hellenic Socialist Movement (PASOK), formed a government, which was sworn in on 7th October. He won 160 out of 300 seats in the parliament. The new cabinet is composed of fewer ministers than in the past and responsibilities were modified (the posts of the Vice- President, the Ministry for Economy and Finance, some regional ministries, the Ministry for Transport and Communications, the General Secretariats of Public Order and the Ministry of Culture and Tourism). Legislative powers are exercised by a unicameral Parliament. The Greek Parliament has 300 members, elected for a four-year term by a system of 'reinforced' proportional representation in 56 constituencies, 48 of which are multi-seat and 8 single-seat. The party, receiving the largest number, of votes receives a 40-seat premium, which is filled by candidates from that party not declared elected on the lower rungs (the constituencies). Constituencies in Greece have traditionally been multi-seated, and they mostly coincide with prefectures. Under the current electoral of "reinforced proportionality", any single party must receive at least a 3% nation-wide vote in order to elect Members of Parliament. The law in its current form favours the strongest party to achieve an absolute majority (151 out of 300 parliamentary seats), provided it obtains about 41.5% of the total vote. This is claimed to enhance governmental stability. The previous law (applied in the 2004 legislative elections) was even more favourable for the first party. The current electoral law reserves 40 parliamentary seats for the strongest party or coalition of parties, and apportions the remaining 260 seats proportionally according to each party's total valid vote percentage. By constitutional provision, the electoral law can be changed by simple parliamentary majority, but a law so changed enters into force only for the election following the upcoming one, unless a 2/3 parliamentary super-majority (200 or more votes) is achieved. Only in the latter case is the new electoral law effective immediately. A case in point is the current electoral law, which is roughly similar to the previous one, except it allocates a premium of 50 seats, instead of 40, to the first-past-the-post party. Since this law was passed by simple majority, it will not be used for the upcoming election, but for the one after that. Compulsory voting is the rule, but the law in Greece is not enforced. The civic duty of voting is still considered "mandatory", but there are no sanctions for failing to vote. Turnout is usually high, typically between 70% and 80% for legislative elections and slightly lower for local administrative and European Parliament elections. Greece has a two-party system, which means that there are two dominant political parties, the liberal-conservative (ND) and the socialist PASOK. Coalition governments occur only rarely in two-party systems. The left is mainly represented by the Communist Party of Greece and the Coalition of the Radical Left. Recent years have seen the gradual emergence of a staunchly conservative, populist party, the Popular Orthodox Rally, with a platform based on nationalistic, religious and immigration issues. Greece has had a representation of Members of the European Parliament in the European Parliament since Greek accession to the EU in 1984. Originally, the Greek delegation numbered 25, but after 2004 this number was reduced to 24 (due to the increase of EU member states). In 2009, it was further reduced to 22. Presently, there are six Greek political parties represented in the European Parliament: New Democracy, PASOK, The Communist Party of Greece (KKE), The Coalition of the Radical Left (), The Popular Orthodox Rally (LAOS) and The . New Democracy is the main centre-right political party and one of the two major parties in Greece. It was founded in 1974 by and formed the first cabinet of the . After serving as the from 2004 to 2009, New Democracy is now the main opposition party in the after its defeat in the 2009 Greek elections. After the defeat former president , nephew of the party's founder, resigned and was elected the new president of the party through a leadership election in November 2009. New Democracy is a member of the European People's Party and currently has 8 out of 22 Greek MEPs in the European Parliament.

2 ND is also a member of the International Democrat Union (IDU) and the Christian Democrat International (CDI). From 2003 onwards, ND was consistently leading the PASOK government of in opinion polls. In January 2004 Simitis resigned and announced elections for 7th March, at which Karamanlis faced the new PASOK leader, Georges Papandreou. Despite speculation that Papandreou would succeed in restoring PASOK's fortunes, Karamanlis had a victory in the elections and became Greece's first centre-right Prime Minister after eleven years. On 16th September 2007, Kostas Karamanlis won re-election with a diminished majority in parliament. However, on 2nd September 2009 Karamanlis asked President Karolos Papoulias to dissolve parliament and call an election. Parliament was dissolved on 9th September, and the Greek legislative election 2009 was held on 4th October. New Democracy won only 91 of 300 seats. On 29 November 2009, Member of Parliament and former minister Antonis Samaras was elected the new leader of New Democracy. The Pan-Hellenic Socialist Movement, better known as PASOK is a Greek centre-left political party and the current majority party in the Greek Parliament. It is a member of the Party of European Socialists and of the Socialist International Party. In the European Parliament it has 8 out of 22 Greek MEPs. On 31st January 2006, the party's president, Georges Papandreou, was elected President of the Socialist International, the worldwide organisation of social democratic, socialist and labour parties. Following the 2009 legislative election, PASOK became the majority party and Georges Papandreou became Prime Minister. On 7th January 2004, in order to revitalize PASOK's chances for the next elections, Costas Simitis announced his resignation as leader of PASOK. He was succeeded by , son of . PASOK hoped that Papandreou could reverse the slide in the opinion polls which saw the opposition New Democracy party, under Kostas Karamanlis, 7% ahead at the start of the year. Although Georges Papandreou reduced ND's lead in the polls to 3%, he was unable to reverse the view of a majority of Greek voters that PASOK had been in power too long and had grown lazy and corrupt. ND won comfortably at the 7th March elections, placing PASOK in opposition after eleven years in office with 40.55% share of the vote and 117 seats.On 16th September 2007, the New Democracy party headed by Costas Karamanlis won re-election with a marginal majority of 152 seats in the parliament. The dismal result for PASOK led to a new leadership campaign. During the leadership election of 11th November 2007 Georges Papandreou was re-elected by friends and members of the party as the leader of PASOK. In June 2009, PASOK won the 2009 European Parliament election in Greece. Four months later, the party enjoyed a resounding victory in the October 2009 general elections with 43.92 % of the popular vote to ND's 33.48 %, and 160 parliament seats to 91.

3 Founded in 1918, the Communist Party of Greece better known by its acronym, ΚΚΕ is the oldest party on the Greek political scene. The KKE stands in elections and has representatives in the Greek Parliament, local government, and the European Parliament, where its two MEPs sit with the European United Left - Nordic Green Left. The Coalition of the Radical Left commonly known by its Greek abbreviation SYRIZA is a coalition of left political parties in Greece. In 2007–2009 its parliamentary leader was Alekos Alavanos, former president of , the largest of the parties that form the coalition. SYRIZA currently occupies 13 seats in the Greek parliament. The Popular Orthodox Rally or The People's Orthodox Rally often abbreviated to L.A.O.S. is a Greek right-wing populist and Christian nationalist political party, founded and led by journalist Georgios Karatzaferis who founded LAOS in 2000, a few months after he was expelled from the centre-right New Democracy. Previous Parliamentary elections were held on September 16th 2007, to elect the 300 members of the Greek Parliament. The leading party, for a second term, was New Democracy under the leadership of Kostas Karamanlis with 41.83%, followed by Georges Papandreou and PASOK with 38.10%. New Democracy managed to secure an absolute but narrow majority of 152 out of 300 parliamentary seats. The populist Popular Orthodox Rally entered the parliament for the first time with 10 seats, while the parties of the left, the KKE and SYRIZA, enjoyed a significant increase in their votes. KKE got 8.15% of the votes and secured 22 parliament seats. The Ecologist Greens, participating in its first general election, became the largest extra-parliamentary party. There were concerns that the election could return a hung parliament, mainly due to the recently revised Greek electoral law. Although it preserved the 3% threshold necessary for a party to enter Parliament, it decreased the number of seats automatically awarded to the leading party. Obtaining a parliamentary majority was considered more difficult, especially after the early projection that five parties would cross this threshold. Distribution of Parliament seats after the 2007 elections was: New Democracy - 152 seats, Pan-Hellenic Socialist Movement - 102 seats, Communist Party of Greece - 22 seats, Coalition of the Radical Left - 14 seats, Popular Orthodox Rally - 10 seats. Kostas Karamanlis remained as the country's Prime Minister. On September 17, 2007, PASOK leader Georges Papandreou conceded defeat and Prime Minister Kostas Karamanlis thanked the electorate for granting him and his party a renewed term in office. Georges Papandreou also stated that he will seek his party's direct reaffirmation in his leadership. Papandreou went on and retained his leadership.

The last Parliamentary elections were held in Greece on 4 October 2009. On 2 September Prime Minister Kostas Karamanlis announced he would request President Karolos Papoulias to dissolve Parliament and call an election. Parliament was dissolved on 9th September. A total of 23 parties were participating in the elections: New Democracy, The Pan-Hellenic Socialist Movement, The Communist Party of Greece, The Popular Orthodox Rally, The Coalition of the Radical Left, Ecologists Greens and other.

4 In the new Parliament, the Pan-Hellenic Socialist Movement won 160 seats, New Democracy - 91 seats, Communist Party - 21 seats, Popular Orthodox Rally - 15 seats, The Coalition of the Radical Left - 13 seats. On October 5th 2009, the Speaker of the out-going Parliament notified the President of the Republic about the election results. Immediately afterwards the ex-Prime Minister Kostas Karamanlis tendered his resignation to the President. PASOK leader Georges Papandreou was then summoned by the President and given a mandate to form a Cabinet as the Prime Minister-designate. On the following day, Georges Papandreou was sworn in as Prime Minister and the names of the new ministers were announced. It became known that Georges Papandreou had offered the Eco Greens one of the two positions of Under-secretary for the Environment, but the offer was turned down. The same day, the new Cabinet was also sworn in. The Judiciary is independent of the executive power and the legislature and comprises three Supreme Courts: The Court of Cassation, The Council of State, The Court of Auditors. The Court of Cassation is the Supreme Court of Greece for civil and criminal law. The Court of Cassation's decisions are irrevocable. If the Court of Cassation concludes that a lower court violated the law or the principles of the procedure, then it can order the rehearing of the case by the lower court. It examines only legal and not factual issues and it is the highest degree of judicial resort. The current President of the Court is Romylos Kedikoglou. The court consists of the President and the Attorney General, ten Vice-Presidents, fifty-five Areopagites and fourteen Deputy Attorney Generals. The members of the Supreme Court enjoy functional and personal independence, so do all members of the judiciary, and are members for life, but they are required by law to retire at the age of 67. The Council of State is headed by a President, who is chosen among the members of the Council by the for a term of four years. The court comprises the Presiding Board (the President and 7 Vice-Presidents), 42 Privy Councillors, 48 Associate Judges and 50 Reporting Judges, all graduates of the National School of Judges. The Council executes its jurisdiction in Plenary Session or in six Chambers. The jurisdiction of the Plenary Session is determined by the law, while the competence of the Chambers is determined by the law and the presidential decrees, proposed by the Minister of Justice after an opinion of the Council. The Plenary Session (and not the Chambers) is the only competent body to judge the constitutionality of . The Council could refuse to examine the legality of certain administrative acts, which are called "acts of Government". The Council includes in this limited category acts concerning the relationships between the Government and the Parliament, such as the dissolution of the Parliament or the act proclaiming a referendum, acts connected with the foreign policy of Greece, such as international conventions, acts related to the application of international treaties, acts relevant to the diplomatic protection of Greek citizens abroad. The Court of Auditors also called the Chamber of Accounts or Court of Accounts or Audit Court, in Greece is both an administrative organ (one of the three large bodies of the Greek Public Administration) and a Supreme Administrative Court with a special jurisdiction (opposed to the jurisdiction of the Council of State, which is general). Hence, it has a multiple role: advisory (consultative), auditing and judicial competence.

5 The advisory (consultative) competence is executed by consolatory responses, attached to all bills, which regulate the application of pensions by the state. This competence of the Court may be expanded to more issues with a legislative provision, consolatory responses on various issues, when demanded by the ministers. The auditing competence includes the submission of an annual report about the balance of the State by the Chamber to the Parliament concerning, the audit of any expenditure of the State or of the public entities, the supervision of all the civil servants, who are liable to render accounts, the scrutiny of public revenues, the audit and control of the legality of the procedure of all public procurements and works, whose value surpasses a certain amount of money (over EUR2, 900,000 for public works and over EUR1, 500,000 for public supplies and services). When the Court uses its judicial competence, it operates as a Supreme Administrative Court. Its judicial decisions are final and irrevocable, when it rules in Plenary Session in relation to disputes about the audit of the civil servants, who are liable to render accounts, litigation arising from acts bestowing pensions, except for the pensions of the judges, according to a provision of the Constitution and disputes about the liability of all the civil servants for any damage they caused to the State or to any public entity by fraud or gross negligence. The Chamber of Accounts was created just after the independence of Greece in 1833. It was established based on the French Cour des Comptes model. The Court of Auditors comprises a President, 5 Vice-Presidents, 20 Councillors, 40 Assistant Judges and 50 Reporting Judges. They all have the status of a judge, according to the Constitution. Only graduates of the National School of Judges are appointed to the posts of the Reporting Judges. The President and the Vice-presidents of the Chamber are chosen among its members by the government.

3. An overview of Greece's economic situation

3.1. Overall summary The table bellow shows Greek quarterly economic indicators concerning the period from the fourth quarter of 2007 to the third quarter of 2009. Among the main indicators there is information on revenue, expenditure, balance, industrial production index, unemployment, consumer prices indexes. The financial indicators include business deposit and lending rates, ECB repo rate1, the 3-month Euribor rate2, general stockmarket index and credit growth to households indicator. Other indicators are the manufacturing index, the trade

1 The ECB repo rate represents the interest rate at which member states' central banks can borrow money from the ECB. In order to prevent high inflation rates, the ECB tends to keep the repo rate at high levels. The value of the is greatly influenced by the repo rate changes.

2 Euro Interbank Offered Rate. The Euribor rates are based on the average interest rates at which a panel of more than 50 European banks borrow funds from each other. There are different maturities, ranging from one week to one year. The interest rates provide the basis for price and interest rates for all types of financial products e.g. interest rate swaps, interest rate futures, saving accounts and mortgages.

6 balance index, the merchandise trade balance, the service and the income balances, the net transfer payments indicator and the current-account balance. The major trend of the indicators shows a general positive growth of the economy in the beginning during the 2007 and 2008 years and a fast negative turn starting from the first quarter of 2009.

Greek Quarterly Economic Indicators Economic indicators 2007 2008 2009 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Revenue (€ bn) 16,5 13,2 14,0 15,6 17,6 12,8 12,4 n/a Expenditure (€ bn) 17,3 13,7 22,5 18,1 19,9 20,0 23,0 n/a Balance (€ bn) -0,8 -0,5 -8,6 -2,6 -2,3 -6,9 -10,5 n/a

Industrial production index (2000=100) 103,6 101,0 102,1 103,0 96,4 94,9 90,8 93,1 Industrial production (% change, year on year) 2,3 -2,6 1,1 0,3 -7,0 -6,0 -11,0 -9,6 Unemployment ('000) 396,5 406,5 357,1 355,1 392,7 462,3 442,6 465,1 (to be continued...) Economic indicators 2007 2008 2009 (continued) 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Consumer prices (% change, year on year) 3,6 4,2 4,7 4,7 2,9 1,6 0,7 0,7 EU harmonised consumer price index (% change, year on year) 3,6 4,3 4,8 4,8 3,1 1,8 0,9 0,8

Business deposit rate (av; %) 4,34 4,38 4,67 5,04 5,2 4,07 2,67 1,94 Business lending rate (av; %) 7,2 7,23 7,37 7,61 7,49 6,6 6,12 5,81 ECB repo rate(end- period) 4,0 4,0 4,0 4,25 2,5 1,5 1,0 1,0 3-month Euribor rate (av; %) 4,72 4,48 4,86 4,98 4,21 2,01 1,31 0,87 Athens general stock market index (end- 5 179 3 986 3 440 2 856 1 787 1 684 2 210 2 661 period; Dec 31st

7 1980=100) Credit growth to households (% change, year on year) 22,1 20,9 18,8 16,4 12,8 9,2 6,2 n/a

Manufacturing index (% change, year on year) 1,4 1,7 4,1 0,6 -5,9 -10,9 -12,2 -10,0

Trade balance -13 910 -15 656 -18 615 -16 902 -11 795 -9 656 -9 817 -9 569 Merchandise trade balance -16 872 -16 247 -18 643 -17 140 -13 017 -10 038 n/a n/a Services balance 4 223 2 807 6 875 12 825 3 061 1 585 n/a n/a Income balance -3 253 -2 942 -4 787 -4 532 -3 754 -2 928 n/a n/a Net transfer payments -494 2 255 1 373 470 82 1 797 n/a n/a Current-account balance -16 396 -14 127 -15 182 -8 377 -13 628 -9 584 n/a n/a Source: The Economist Intelligence Unit, Greece: Quarterly economic indicators, 09/02/ 2010

A brief review of Greece's quarterly data for the second quarter of 2009 concerning central government finance showed, on the one hand, a major downturn in revenue, which stood at EUR 12.4 billion, while for the same period in 2008 the amount was EUR 14.0 billion and for the last quarter of 2007 the equivalent was EUR 16.5 billion. On the other hand, the figures for expenditure rose from EUR 17.3 billion for the fourth quarter of 2007, to EUR 23.0 billion for the second quarter of 2009. The balance between the two indicators dropped from EUR -0.8 billion (last quarter of 2007) to EUR -10.5 billion at the end of the second quarter of 2009. Information concerning data for the third quarter of 2009 is unavailable. The industrial production index fell from 103.6 in the last quarter of 2007 to 93.1 in the third quarter of 2009. Industrial production growth fell from 2.3% in the last quarter of 2007 to - 9.6% in the third quarter of 2009. The level of unemployment also rose from 396 500 in the fourth quarter of 2007 to 465 100 in the third quarter of 2009. Growth in the consumer prices index dropped from 3.6% in the last quarter of 2007 to 0.7% in the third quarter of 2009. Growth in the EU harmonised consumer price index also fell from 3.6% to 0.8% in the same period. Amongst the financial indicators, the business deposit rate dropped from 4.34% in the fourth quarter of 2007 to 1.94% in the third quarter of 2009, having reached 5.20% in the fourth quarter of 2008. The business lending rate also fell from 7.20% in the last quarter of 2007 to 5.81% in the third quarter of 2009 after rising to 7.61% in the third quarter of 2008. The ECB repo rate in the last quarter of 2007 was 4%. It reached its highest point in the third quarter of 2008, with 4.25% before dropping to 1% in the third quarter of 2009. The three month

8 Euribor rate started in the last quarter of 2007 with 4.72% and ended in the third quarter of 2009 with 0.87%. The Athens general stock market index started in the last quarter of 2007 with 5,179 and finished in the third quarter of 2009 at 2,661. The Credit growth to households fell from 22.1% in the last quarter of 2007 to 6.2% in the second quarter of 2009. Data for third quarter of 2009 is unavailable. The manufacturing index as a percentage change, year on year, decreased from 1.4% in the last quarter of 2007 to -10.0% in the third quarter of 2009. However, it reached 4.1% in the second quarter of 2008. The trade balance increased from -13,910 in the last quarter of 2007 to -9,569 in the third quarter of 2009. However, its lowest point was in the second quarter of 2008 at -18,615. The merchandise trade balance climbed from -16,872 in the last quarter of 2007 to -10,038 in the first quarter of 2009. For the second and third quarters of 2009 the data is unavailable. The lowest point of the trend was in the second quarter of 2008 at -18,643. The service balance indicator dropped from 4,223 in the last quarter of 2007 to 1,585 in the first quarter of 2009. There is no data available for the second and third quarters of 2009. The highest level, however, for this indictor is 12,825 reached in the third quarter of 2008. The income balance began at -3,253 in the first quarter of 2007 and dropped down to -2,928 in the first quarter of 2009. There is no data available for the second and third quarters of 2009. The biggest drop was in the second quarter of 2008, at -4,787. Net transfer payments increased from -494 in the last quarter of 2007 to 1,797 in the first quarter of 2009. The data for second and third quarters of 2009 is unavailable. The current-account balance started with -16,396 in the last quarter of 2007. It reached its highest point at -8,377 in the third quarter of 2008 and ended with -9,584 in the first quarter of 2009. There is no data available for the second and third quarters of 2009.

3.2. Current position 3.2.1. Eurostat and Greek statistical data During the period 2005-2008, Eurostat published its bi-annual press release on government deficit and debt data for Member States' Euro-area EA16 and EU27. In the press release, Eurostat expressed its reservation on the quality of the Greek data."...due to significant uncertainties over the figures notified by the Greek statistical authorities..." The reservation related mainly to 2008 data, because of the considerable revision of the deficit figure made during the period April 2009-October 2009. The Greek authorities reported twice in October: once on 2nd October and again on 21st October; the latter notification included a significant revision. Due to such a late communication of the figures, the data could not be analysed in detail and Eurostat expressed doubts about the quality of the figures provided.

9 The 21st October case of reporting by Greece's authorities was an exception in terms of procedure, but it was not an isolated occasion:  In November 2004, in a report on the revision of Greek debt and deficit data, Eurostat noted that figures had been misreported in the years preceding 2004 on no less than 11 separate issues.  On five occasions during the period 2005-2009 Eurostat expressed concerns about the quality of the Greek data in its bi-annual press release on deficit and debt data.  Over the last eight years according to 's Report on Greek Deficit and Debt Statistics3, whenever Greek debt and deficit information have been presented without reservations, this was very often the result of Eurostat interventions in order to correct mistakes or inappropriate recording. In its conclusions of 10th November 2009, the Economic and Financial Affairs (ECOFIN) Council expressed regret for problems that arose again with the data reported by the Greek Government and called on the authorities to restore confidence in Greek statistical information and the related institutional setting. Furthermore, the ECOFIN Council also invited the European Commission to produce a report and propose the appropriate measures to be taken in this situation. The quality problems of Greek statistical information were not only linked to public finance data. National account (GDP) figures had also been an object of significant revisions in the past. Considering that the events of October 2009 were not an exception, the report did not only deal with statistical methodological problems. It seemed necessary for Eurostat to look more closely at the governance and institutional framework of the Greek system for the production of statistical information. Over the years Eurostat has drawn up the following reports on Greece:  The 2004 Methodological Report of Eurostat revealed, after a revision of the data from 1997 onwards, an increase in the debt and deficit figures. Eurostat launched an infringement procedure due to Greece's methodological problems in recording taxes, social contributions, the surplus of social security funds, hospitals, debt assumptions and military expenditures. The procedure was closed in 2007. Although closed, the procedure did not reflect the fact that there were still problems with Greek statistical data. It only meant that the instrument was not applicable after its expiration. Eurostat continued to express its reservation about the quality of the data in the next notifications.  In 2005, 2006 and 2007 Greece was investigated over its methodological reporting procedure. After several recommendations from Eurostat an action plan was drawn up with a view to correcting Greek statistical data. However, even after the end of the infringement procedure, the quality of the Greek data was still inadequate. Between 2005 and 2009, in over 10 Excessive Deficit Procedure (EDP) notifications, Eurostat introduced reservations on the quality of the data submitted by the Greek authorities no less than five times, far more than for any other Member State. In the specific case

3 European Commission, (COM(2010)0001), January 2010

10 of Greece, Eurostat had exceptional and permanent access to monitor Greece's debt and deficit data. Greece was the only Member State which had received visits concerning methodology of recording, proceeding and analysing of statistical data. Following these visits, extensive action plans had been put in place based on the analysis of all information made available by the Greek authorities. However even these actions were unable to detect the level of methodological problems in the Greek data. In particular, after the closure of the infringement procedure at the end of 2007, Eurostat issued a reservation on the quality of the Greek data in the April 2008 notification and validated the notifications of October 2008 and April 2009 only after it intervened to correct mistakes or inappropriate recording, with the result of increasing the recorded deficit. As an example, Eurostat's methodological missions in 2008 resulted in an increase of the 2007 deficit figure notified by the Greek authorities, from 2.8% to 3.5% of GDP. After the notification to the Greek authorities in April 2008, Eurostat once again expressed reservations on the published Greek deficit, in particular relating to the recording of EU grants in 2006 and 2007, the existence of a substantial statistical discrepancy in 2007 of 0.6% of GDP and the insufficient information of data for extra-budgetary funds, local government and social security funds obtained for the first estimate of the 2007 balance. This led to another visit related to the methodology of obtaining statistical information in Greece in June 2008, the main aim of which was to clarify the issues on which a reservation was expressed. The visit led to a Eurostat report sent to the Greek authorities in July 2008 containing the agreed recommendations for action. Such actions were integrated into the action plan. In April 2009 Eurostat validated the data the Greek authorities had sent. They reported a deficit of 5% of GDP for 2008. Again there were revisions and corrections because of the surplus in the social security sector, which eventually produced a slight increase in the deficit of the reported data. The correspondence between Eurostat and Greece continued in 2009, including recommendations and new corrections of the figures in the Greek budget, mainly leading to an increase of the deficit. In 2009 there were formal notifications in April and in October. More corrections and exchange of letters discovered weaknesses in Greece's public accounting system and claims for political interference over the provision of figures. As far as possible similarities between the 2004 and 2009 situations were concerned, there were some common methodological features during the different stages. In both cases, in the aftermath of political elections, substantial revisions took place. Eurostat conducted different and frequent missions, methodological visits, expressed reservations and sent notifications to the Greek authorities. The five reservations expressed between 2005 and 2008 on the quality of Greek debt and deficit data, were motivated by the inappropriate recording of EU grants, the existence of important statistical discrepancies, the accounts of social security, doubts on the recording of the amounts of other receivables and payables and the insufficient information of source data for extra-budgetary funds, local government and social security funds. All these issues were subsequently clarified between Eurostat and the Greek authorities and closed accordingly. However, some of these issues (the recording of EU grants, the accounts of social security and the liabilities of hospitals) resurfaced in 2009: In the case of EU grants, there was a significant difference between the situation in 2005–2008

11 and the one in 2009. Between 2005 and 2008, the revision of data undertaken by Eurostat was due mainly to methodological reasons, while on 2nd October 2009 there seems to have been no methodological issue at stake but simply misreporting of the data communicated by the Greek authorities. In the case of social security, the revisions in 2005–2008 were also due mainly to methodological problems. However, it was not yet clear, whether the inflated surplus of social security reported in the April 2009 notification was only the result of methodological uncertainties. In the case of hospitals liabilities, the issue in 2005 referred to past expenditures of hospitals that had never been recorded. Then, it appeared that around EUR 1 billion of hospital liabilities, reported in the survey on hospitals, were ignored by the Greek authorities in the April and 2nd October 2009 notifications, although the misreporting had already started in 2007 with smaller amounts. The methodological issues in general consisted on:  Balance of the State Budget. The problem of recording of revenues and expenditures of the State budget was widely discussed mainly during the 2006 and 2008 missions of Eurostat to Athens. It concerned revisions of previously neglected expenditures for EUR 710 million from the State budget to the social security fund of a state-owned company. However, questions remained whether privatisation proceeds had or had not been included in the working balances of the previous years, whether the transfer to the social security company had been recorded as government expenditure or not and whether other intra-government flows had been properly consolidated in the past.  Revision of Treasury Accounts. The treasury accounts in Greece exist to support specific operations, which do not transit via the budget (military expenses, payments on guarantees called). During the October 2009 notification the amount in other accounts payable of the Greek central government increased with EUR 192 million as a result of revision of these Treasury Accounts and their sub-accounts, which were not included in the notification. Eurostat left it to the Greek authorities to decide whether to include them or not. However, Eurostat was not in a position to assess if the data coming from Greek authorities was accurate because of problems with the classification of the extra-budgetary accounts and the timeliness of the delivery of the data.  Revenues from abolished extra-budgetary accounts. In 2008 the government deficit was increased by EUR 300 million. The amount consists of exclusion from revenue of written-off extra-budgetary accounts, which the government did not include in its working balance. In 2008 the government decided to abolish some of these accounts and to transfer the amounts of funds into the state budget, recording them as revenue. This amount ought not to have been included in the working balance or if it had been included, a corresponding adjustment ought to have been made, which was not the case. Controls of the said adjustment had still not been undertaken, including any revision of a possible record in common in the past.  Swaps write-offs. The issue of the cancellation of swaps and of the treatment of their remaining interest stream was further discussed in greater detail between Eurostat and the Greek authorities, rather than the issue of swaps write-offs. The figures were

12 revised by EUR 210 million for the year 2008, increasing the government deficit, due to a swap cancellation. In short, in the context of swaps cancellations, lump sums received by government should not have been considered in national accounts as government revenue. As such amounts were included in the current balance of the government; a negative adjustment should have been included in the Excessive Deficit Procedure (EDP) tables for the same amount. It was obvious that the Greek Accounting Office (GAO), in April 2009, already knew the amount of the correction to impute and how it should have been neutralised, but did so only on 21st October, underestimating as a result government deficit in the April and in the 2nd October EDP notifications.  Adjustment for interest payments. According to Eurostat, the problem in 2009 related to the fact that figures on accrued interest which constituted government expenditure, although correctly calculated since March 2009 by the Public Debt Division of the Greek Accounting Office (GAO), using its instrument by instrument debt database, were reported incorrectly by the Greek Accounting Office (GAO) in the April and 2nd October Excessive Deficit Procedure (EDP) notifications, where only a negative amount of EUR 45 million was included in the EDP tables sent by the Greek Accounting Office (GAO) to the Greek Statistical Institute (NSSG), instead of the real figure of EUR 495 million, with the effect of reducing incorrectly the Greek government by EUR 450 million. The correct figure was in the end recorded in the 21st October EDP notification.  Debt assumptions and guarantees. Debt assumptions about the call on guarantees was one of the most discussed questions between Eurostat and the Greek authorities. It became clear that the rules for recording them had not been followed, even for the years before 2004. During revisions of the data in two consecutive months it became evident that an amount of EUR 200 million was misreported; therefore, it increased the reported deficit. The reason for it being misreported was that the rules for recording it, were not fully complied with.  Capital injections. Capital injections in public corporations were one of the issues discussed in the 2004 Eurostat report, as it appeared that in the years before 2004 the rules on capital injections had not been applied, with the result that many capital injections - which according to rules should have been considered as capital transfers (increasing the deficit of the Greek government) - had been considered as financial transactions with no impact on the deficit. The Greek authorities considered the capital injection in some public companies as an acquisition of shares without any impact on the deficit, whereas it should have been considered as a transfer of capital, due to the lack of profitability of the corporations in question. The impact on the deficit was an unprecedented increase.  Social security funds. According to Eurostat, the surplus of the Greek social security sector had been overestimated by the Greek authorities by EUR 2.8 billion between 2001 and 2003. After 2004, the issue of the social security data was continuously discussed between Eurostat and the Greek authorities. More reliable annual and quarterly surveys were put in place. On 2nd October 2009, the surplus of social security was revised downwards by EUR 600 million. The considerable decrease of

13 the surplus between the April and 2nd October notifications in 2009 led to questions from Eurostat, given the fact that the coverage of social security funds (in terms of revenue and expenditure) in April had been, according to the Greek authorities, already very good at 90% of the total. The revision, according to the Greek authorities, was due to new questionnaires designed for the social security funds. However, Eurostat continued its revision of the data.  Local government sub-sector. Until 2005, information on municipalities was gathered via an exhaustive annual questionnaire called the “census”, the results of which were available for Excessive Deficit Procedure (EDP) notifications only after 3 or 4 years. During recent years, nevertheless, the Greek authorities had also complemented the census via a quarterly survey, which proved useful to increase the reliability of data for local government. However, the Greek authorities decided to again convert the quarterly questionnaire to an annual one, which was against the advice of Eurostat as it may have caused certain problems with the timeliness of the data to resurface.  Expenditure on military equipment. Although claiming that they knew the exact price of military equipment before 2007, the Greek authorities widely underestimated this expenditure according to Eurostat. Due to the confidentiality of this issue, it was decided to record the expenditure on a cash basis, temporarily, to make sure nothing had been left unrecorded. From 2007 until now, having gathered all the information, Greek government records show military expenditure as intermediate consumption at the precise moment when the equipment is delivered.  Recording of tax revenues. Up until 2003, the Greek authorities used a system based on assessments and declarations, where the amounts recorded should have been adjusted by a coefficient reflecting amounts unlikely to be collected. Nevertheless, in 2003, Eurostat found out that the coefficients used by the Greek authorities were unrealistically low, and as a consequence the amounts of taxes recorded as revenue for the Greek government had been constantly overestimated. As a result, Eurostat asked the Greek authorities to switch to a method based on time adjusted cash flow. That then decreased the data on tax revenue by EUR 650 million. Then it became clear that only insufficient data was available for a certain period of time and that the revenue has to be estimated in full, on the basis of data contained in the reports from the Ministry of Finance. However, more conservative rates were used which proved to be more optimistic than expected and led therefore to a downward revision of tax revenue in 2008.  Extra-budgetary funds and DEKA S.A.4. 385 extra-budgetary funds exist in Greece. Discussions have often been held between Eurostat and the Greek authorities concerning the coverage and reliability of the survey which was the source of information on extra-budgetary funds as well as on DEKA S.A. DEKA S.A. was a unit created in 1997 with the purpose of dealing with the privatisation of enterprises. The structure was reclassified (under the direction of Eurostat) in 2003 as a

4 DEKA S.A. is an enterprise wholly owned by the government that was set up to handle the proceeds of privatized assets and retire outstanding government debt.

14 government unit and its accounts have since been included among the extra-budgetary funds. There were discussions about the issues of the classification of DEKA S.A., of the transactions between DEKA S.A. and government units, some of which had been incorrectly treated at the time as government revenue, and about the capital injections of government in DEKA S.A., also incorrectly treated as an increase in the number of shares. In 2008 the government received a cash facility from DEKA S.A. to pay its obligations. The Greek government then decided to cancel the loan and treat it instead as government expenditure in 2009. According to Eurostat this should have been recorded as an increase in the deficit for 2009. Moreover, DEKA S.A. is part of the general government structure so this debt cancelation should have had no impact at all. It then became obvious that the EUR 230 million received by DEKA S.A. was after all a financial transaction and was therefore recorded as revenue for DEKA S.A., and the correction to increase the government deficit might have had a sound explanation. In this case Eurostat reserved its right to investigate further the situation.  EU grants. Eurostat discovered that when Greece received payments from the EU in favour of institutions outside the government, the transactions were recorded using government accounts. The amounts were entered into these accounts as revenue for the government, therefore had a positive impact on the deficit, and they were exiting them as financial transactions, showing no impact on the deficit, when they ought to have been recorded as expenditure. After a correction undertaken by Eurostat, the government deficit was increased. The data concerning EU grants in the different notifications received by Eurostat in April, on 2nd October and again on 21st October 2009 were also different. The amounts mentioned concerning 2008 were EUR 1636 million, EUR 1450 million and EUR 1666 million respectively. In the first case the Greek authorities decreased the deficit but after the last revision they increased it again considering the bigger amount for EU grants recorded.  Hospital liabilities. In the beginning there were no particular problems with this item. It then became apparent that considerable amounts related to past expenditure by/for hospitals in Greece had never been recorded. The amounts mentioned were EUR 1.3 billion for the period 2002-2004. After assuring Eurostat that this would never happen again, the Greek authorities recorded the liabilities in the year in which they had been incurred. However, after an examination of the October data it was discovered that in spite of a total amount of around EUR 3.3 billion, for the period 2005-2008, of unpaid expenditures of hospitals (which definitely had its impact on the deficit figures) the Greek authorities had recorded only EUR 2.3 billion in liabilities. According to Eurostat, this incorrectly decreased the deficit. Added to this, in the 21st October 2009 notification, under direct instructions from the Ministry of Finance, an amount of EUR 2.5 billion of liability was added to the government deficit on top of the amount of EUR 2.3 billion. The total amount of hospital liabilities remained unknown and there was no reason to introduce this whole amount only in 2008 and not in previous years as well. It also became obvious that the hospitals themselves did not record their liabilities correctly which had an impact on the process of the Greek authorities accounting system from the very beginning.

15 To summarize, the reports from Eurostat state that important Greek financial data "cannot be confirmed" or has been requested but "not received" or is misreported. Moreover Greece's statistical data has become one of the reasons for asking for more audit powers for Eurostat to revise the accounts of national governments.

3.2.2. Debt crisis In a meeting of the countries of the Eurogroup5, the sixteen ministers gave their support to the financial aid mechanism for Greece. The help will consist of participation by the International Monetary Fund (IMF) and of the Eurozone countries through bi-lateral loans. The agreement affirms that most of the Eurozone countries will contribute voluntarily for the largest amount of Greek recovery if the country is unable to deal alone with its economic crisis and can not obtain loans from the financial markets. The Eurozone countries will contribute an amount proportional to their GDP and their total population. The decision to help Greece to recover "must be adopted unanimously by the sixteen euro members, including those which are not taking part in the bailout".6 The European Commission and the European Central Bank will closely monitor Greece's compliance with the full range of conditions and requirements for the different loans it will receive. The agreement also provided for a strengthening of the Stability and Growth Pact (SGP). The new measures suggest fiscal supervision of euro member states and penalties for non- compliance with the conditions of the pact. "I'm happy that the heads of state and government could work out a solution to take coordinated action if needed," Trichet said after EU leaders approved the unprecedented combination between EU and International Monetary Fund to offer loans to Greece as "a last resort."7 "It's a workable solution," Trichet said, expressing the fact that it had also been a "courageous one."8 He added that in light of Greek efforts to reduce its increasing deficit and debt, "I am confident the mechanism worked out ... will not need to be activated and that Greece will regain the confidence of the market."9 However, some Member States in the Euro-area suggested that there is need for an EU 'economic government' to be created. The aim of this 'government' is to prevent a repeat of the debt crisis besetting the euro and to exercise the role of 'economic surveillance'. Contrary to this opinion, other Eurozone Member States expressed their concerns about an erosion of sovereignty and were more likely to settle for the term 'economic governance'.

5 Finance Ministers from Member States of the which have adopted the euro as their official currency 6 Press release of the European Commission on 25.03.2010 7 Agence France Press, Euro rises after Greece debt deal, 26 March 2010 8 Agence France Press, Euro rises after Greece debt deal, 26 March 2010 9 Agence France Press, Euro rises after Greece debt deal, 26 March 2010

16 Regarding the loans, the EU aid would not be provided at an average euro area rate, but at a special interest rate aimed to encourage Greece to return to the markets as soon as possible. According to a statement released by Eurozone leaders, Greece can only draw on the aid fund as a 'last resort' and under strict conditions. Furthermore, "...no decision has been taken to activate the mechanism as the Greek government has not requested any financial support..." said the statement, because it is constructed to be the 'last resort' for action. "...Any disbursement on the bilateral loans would be decided by the euro area member states by unanimity subject to strong conditionality and based on an assessment by the European Commission and the European Central Bank (ECB)...." was also added.10 Having shown the financial markets their determination to help Greece in her debt crisis, the Finance Ministers from the Eurozone countries and the Greek authorities believe that this is a strong signal to the borrowers to lend to Greece at a lower rate in the future. The expectation is that the spreads will fall significantly over the next few weeks. However, Greece is committed to not using the financial instrument designed to save it with the help of the EU and the IMF, unless it is really necessary. In addition, many details still remain unclear. For example how will the Washington-based IMF and the Eurozone work together on a rescue package. The new plan sets up a possible rescue programme for the first time in the Euro-area. All Eurozone nations are pledging to help, although any contribution would be voluntary. "...We hope that it will not have to be activated..." said the President of the European Council, Herman Van Rompuy."... This would be triggered as a last resort...." He said the program should tell markets to "...have confidence that the eurozone will never abandon Greece...."11 The Eurozone leaders have sent a strong "...political signal..." by adopting the plan, Herman Van Rompuy, told a press conference at the end of the first day of the European Union (EU) spring summit. Mr. Van Rompuy said the bailout plan was not only for Greece, but also for the stability of the European economy and the global financial market.12 European Commission President Jose Manuel Barroso also greeted the plan, saying the Eurozone leaders have made "...the right decision..." and created a "...safety net..." for Greece. He said the Eurozone leaders have delivered on their promise made at the informal summit in February, at which they pledged to "...take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole...."13 The differences over Greece have widened divisions in the EU. European Commission President Jose Manuel Barroso, head of the EU Commission, said that involving the IMF had been the only way to reach a consensus.

10 Xinhua News Agency, Roundup: Eurozone members adopt bailout plan for Greece, 26 March 2010 11 Associated Press, 26.03.2010, Eurozone agrees on bailout plan for Greece 12 Xinhua News Agency, Roundup: Eurozone members adopt bailout plan for Greece, 26 March 2010 13 Xinhua News Agency, Roundup: Eurozone members adopt bailout plan for Greece, 26 March 2010

17 "...We have solved this in the European family..." he said."...I think this is the right decision at this time to face what is an exceptional problem...."14 French President Nicolas Sarkozy said Eurozone nations would offer loans totalling some two-thirds of the package with the IMF offering the last third. "...We didn't count up to the last euro..." he said."...It can be adjusted...." and Mr. Juncker, who is a Chairman of the group of Eurozone Finance Ministers, also confirmed they did not agree an amount of a possible bailout for Greece.15 "...A good European is not necessarily one who offers help quickly. A good European is one that respects the European treaties and national rights so that the stability of the euro zone is not damaged..." German Chancellor said.16 Eurozone nations also want to take steps to prevent debt and deficits getting out of control again, calling for tougher rules and sanctions. Mr. Van Rompuy has been asked to draw up possible options to toughen any EU oversight of member's budgets and economic performance. The bailout instrument could also be used to help other vulnerable Eurozone nations such as Portugal and Spain, who also face recession and debt problems. The European Central Bank also took a step to support Greece by extending softer rules on collateral so that Athens does not risk a default at the end of this year. For the moment Greece needs to borrow about EUR54 billion this year and must refinance EUR20 billion in April and May. It has been able to sell bonds but confesses that it can not pay the high interest rates offsetting the possibility of Greek default. Greece needs to sell about EUR 10 billion of bonds in coming weeks. Approximately EUR 8.2 billion of debt matures on April 20th and EUR 8.5 billion on May 19th, with approximately EUR 3.9 billion in bills maturing in April. The Greek government is counting on wage cuts and tax increases to decrease the deficit to 8.7% of this year from 12.7% in 2009, the highest in the 11-year history of the euro. Meanwhile the IMF is watching the developments in “...closely...” spokeswoman Simonetta Nardin said in a statement. “...The fund always stands ready to consider a request from a member country for our financial assistance...” she said.17 Some Eurozone states an the ECB policymakers have previously opposed IMF involvement, saying such a move would be considered as an indication that the single currency area is unable to solve the deepest crisis in its 11-year existence on its own. This fact would appear embarrassing to the rest of the world.

14 euters News, Europe agrees on Greek safety net with IMF role, 25 March 2010 15 Associated Press Newswires, Eurozone nations reach agreement on bailout program for Greece, others, 26 March 2010 16 Reuters News, Europe agrees on Greek safety net with IMF role, 25 March 2010 17 Bloomberg.com, James G. Neuger and Jonathan Stearns, IMF Drafted by EU for Greece in Bid to Support Euro (Update1) 26 March 2010

18 "...If the IMF or some other body exercises the responsibility in lieu of the Eurogroup or instead of governments, it is evidently very, very bad..." ECB President Jean-Claude Trichet told France's Public Senate television in an interview.18 Mr. Trichet had earlier given Athens some good news, announcing that the European Central Bank would extend requirements, due to expire at the end of this year, into 2011. Greece was at risk of having its bonds rejected as collateral for refinancing with the expiry of the relaxed rules, potentially triggering an even deeper liquidity crunch.19 The euro rallied on the news about the agreement, rebounding from a 10-month low against the dollar despite the uncertainty about the situation in other members of the euro bloc like Portugal and Spain, which arises in mid and long term period. The euro advanced 0.9% to US$ 1.3393 at 4.50 p.m. in Brussels from US$ 1.3270 late on the day of agreement as a reaction. The summit sought to bury concerns that European divisions over giving financial aid to Greece would escalate the debt crisis and further undermine the currency after it sank to a 10- month low against the dollar. German Chancellor Angela Merkel said the deal showed Europe's ability to act in unity. "...It is important in the long term that the currency - which has been such a success for freedom and cooperation - stays stable. That is why yesterday was a very important day for the euro..." she said on 25 March 2010.20 “...We had to answer the question: How can people place long- term trust in the euro as a stable currency and how can a currency union combine solidarity and stability?...” German Chancellor Angela Merkel said after a European Union summit in Brussels on 26 March 2010. “...In this context, we really broke new ground....”21

18 Reuters News, Europe agrees on Greek safety net with IMF role, 25 March 2010 19 Reuters News, Europe agrees on Greek safety net with IMF role, 25 March 2010

20 The Economist, Merkel’s deal: Merkel's Greece Deal 'Betrays the Concept of Europe, 26 March 2010

21 The Economist, Merkel’s deal: Merkel's Greece Deal 'Betrays the Concept of Europe, 26 March 2010

19 Annex A

Chronology of the Debt crisis 05 November 2009 - The new government pledged in its 2010 draft budget to cut the 12.7% GDP deficit to 8.7% of the GDP in 2010 to prove its commitment to the markets and its EU Partners to restore Greece’s economy. The draft also noted public debt rising to 121% of GDP in 2010 from 113% in 2009. However, the European Commission predicts a public deficit of12.2 % GDP. 07 December 2009 – Standard & Poor’s (one of the major independent credit agencies in the world - which provide investors who want to make better-informed investment decisions with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions) put the country’s A- sovereign rating on negative watch. The following day Fitch Ratings, which had already cut Greece to an A- rating when the government disclosed the higher deficit, decreased Greek credit rating to BBB+ with a negative outlook. In the last ten years this has never happened to Greece. As a response to this, the Greek authorities confirmed their commitment to restore their country's credibility. 14 December 2009 - Prime Minister Papandreou presented a programme to cut Greece's expanding budget deficit. He announced a ten percent decrease in social security spending in 2010, the abolition of bonuses for state bankers, and a 90% tax on private bankers' bonuses. Mr. Papandreou also promised to implement serious constraints against corruption and tax evasion. Moreover, he announced savings through a reduction of government operating expenditures, consumption costs and a trimming of the public sector. He added that for every five civil servants who retire only one would be hired, that the national tourism offices abroad would be cut, that a third of the short-term contracts in the public sector would be abolished and that, military expenditure would be reduced and supplies to hospitals and other state enterprises closely monitored. The Prime Minister also indicated his intention to protect the vulnerable middle class, and restore competitiveness. The new tax system, according to him, would make the wealthier carry more of the burden. 16 December 2009 – Standard & Poor’s again decreased Greece's rating from A- to BBB+ not believing in the reform undertaken by Greek Authorities. 19 December 2009 - Yield spread between Greek and benchmark German 10-year bonds widened to an average 272 basis points. The markets remained sceptical and continued to sell Greek government bonds and stocks. 22 December 2009 - Moody's, another independent credit rating agency, cut Greek credit rating from A1 to A2. 14 January 2010 - The Greek authorities proposed a stability program revealing the intention to cut the public debt level to 2.8% of GDP in 2012. This decision raised a series of strikes against the austerity plan. 02 February 2010 - The government announced it would extend a public sector wage freeze to those earning below EUR2000 per month for 2010.

20 03 February 2010 - The EU Commission said it would support Greece's plan to decrease its budget deficit below 3% of GDP by 2012 and urged Greece to cut its overall wage bill. 24 February 2010 - A one-day general strike against the austerity measures paralysed the country's transport system but did not stop the measures. 25 February 2010 - EU Representatives along with International Monetary Fund experts arrived in Athens and discovered a situation whereby, far from meeting set targets, a deeper- than-expected recession and higher borrowing costs were evident. According to an official of the Greek Finance Ministry, Greece can cut the deficit by about 2 percentage points, short of the 4% target for 2010, which meant additional economic measures worth EUR 4.8 billion would have to be put in place. 01 March 2010 - during his visit, EU Economic Affairs Commissioner, asked the Greek Authorities to propose further economic contingencies and make more economic decisions to solve the budget crisis as soon as possible. The response has been a new package of sector pay cuts and tax increases, which will save the extra EUR 4.8 billion in question. The measures, to be implemented in 2010, include an increase of 2% in VAT to 21%; a decrease in public sector salary bonuses by 30%; an increase in tax on fuel, alcohol and tobacco and a freezing of the state-funded pension (currently, Greek workers receive a retirement pension of 96% of pre-retirement earnings). 3 March 2010 - In a communication published recently, the European Commission stated that Greece is currently implementing the European Council Decision of 16th February 2010 as well as those measures hi-lighted in its stability programme and that the fiscal measures announced by the Greek authorities on 3rd March 2010, adopted by the Greek authorities on 5th March, and included in the report submitted to the Commission on 8th March 2010, would appear sufficient to reach the 2010 budgetary targets mentioned in the European Council Decision and in the stability programme. European Commission President Jose Barroso stated on March 3rd that the set of additional consolidation measures "...confirms the Greek government's commitment to take all necessary measures to deliver the programme's objectives and in particular to ensure that the four per cent of GDP deficit reduction target for 2010 will be met..." President Barroso also continues "...Greece's ambitious programme to correct its fiscal imbalances was now on track..."22 He added "...The additional measures announced today appropriately include expenditure cuts, and in particular savings in the public wage bill, which are essential for achieving permanent fiscal consolidation effects and restore competitiveness. The announced revenue-increasing measures also contribute to fiscal consolidation...". Full and timely implementation of fiscal measures, along with decisive structural reforms, in compliance with the European Council decision is paramount, according to Mr. Barroso.23 "...This is in the interest of the Greek people, who will benefit from sounder public finances, better growth prospects and job opportunities. It is as well important for the overall financial stability of the euro area...." 24

22 Sofia Echo Daily Bulletin, EU, IMF welcome Greece's revamped recovery plan, 4 March 2010 23 Sofia Echo Daily Bulletin, EU, IMF welcome Greece's revamped recovery plan, 4 March 2010 24 Sofia Echo Daily Bulletin, EU, IMF welcome Greece's revamped recovery plan, 4 March 2010

21 According to President Barroso, the European Commission believes that correcting imbalances and restoring competitiveness were essential to put Greece back on a sustainable path. President Barroso also highlighted that Greece is fully supported by the European Commission in this endeavour and that the Greek Government has provided strong proof of its readiness to fulfil its courageous decisions.25 4 March 2010 - Maria Damanaki, the Greek for Maritime Affairs and said that the EC was working with the Greek government to get Greece "...out of this difficult situation..." Meeting Greek President Karolos Papoulias and Prime Minister Papandreou, Commissioner Damanaki said "...the European Commission is not here to punish Greece..." and "...Greece is confronted with a very difficult situation but the road out if this is strongly embedded in Europe. There is no future, no viable solution for the actual situation beyond the Eurozone and the European Union. The euro is more than a currency alone; it is Europe's answer to globalisation, now strongly linked to Europe's identity. The euro is a great achievement for Greece..." Commissioner Maria Damanaki underlined. 26 25 March 2010 - In a summit meeting the sixteen leaders of the euro area gave their support to the financial aid mechanism for Greece, which involves the participation of the International Monetary Fund (IMF) and the euro area countries through bilateral loans. With this agreement, a 'majority' of Eurozone Member States, volunteering their participation, will contribute the largest share should Greece eventually need help. This will happen in the case where Greece is unsuccessful in obtaining loans from the financial markets. According to the joint statement of the Heads of State and governments of the euro area countries, each country will contribute an amount proportional to its gross domestic product and its total population. The decision to help Greece with these loans must be adopted unanimously by the sixteen euro members, including those which are not taking part in the bailout. The European Commission and the European Central Bank will take the responsibility to monitor Greece's compliance with all the conditions imposed for the different loans it receives. In tandem with this, the agreement provides for a strengthening of the Stability Pact (fiscal supervision of euro member countries, including penalties for non compliance with the conditions of the Pact). The Eurogroup meeting took place during a break in the spring European Council, in which the "Europe 2020" economic growth strategy is being presented.27

25 Sofia Echo Daily Bulletin, EU, IMF welcome Greece's revamped recovery plan, 4 March 2010 26 Sofia Echo Daily Bulletin, Bond and beyond: Greece faces crucial days, 5 March 2010 27 Press release of the European Commission on 25.03.2010

22 Annex B

Information on Greek national budget and swap transfers According to Maastricht28 rules, which are the same rules as those covering the convergence criteria: a) The deficit in general government finances must not surpass 3% of GDP in any year, and b) The public debt-to-GDP ratio must not exceed 60%. These limits were designed to prevent damage to the common currency. Greece has never managed to comply with the 60% debt limit and it has only observed the 3% ceiling by using various investment banks' complex products. This is principally related to military expenditure and to hospital liabilities. A deal struck with a major investment bank in 2002 involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period - to be exchanged into original currencies at a later date. This transaction is normal and frequent for governments, but in the case of Greece, US bankers used a special kind of swap with fictional rates. Therefore, Greece received much higher sums than the actual sums by using the normal rate, equalling an additional credit to Greek economy. This credit was disguised as a swap in Greek statistics and is therefore not recorded in Greek debt data, because Eurostat rules did not comprehensively record transactions involving financial derivatives. The result was that in 2002 the Greek deficit reached 1.2% of GDP and stayed below the 3%-limit. However, when Eurostat included the swap liabilities in the debt figures and recalculated the deficit it was 3.7% and today stands at approximately 5.2%. At a given point, Greece will have to pay for its swap transactions and this will definitely have an impact on its deficit because the maturity of the bonds ranges between 10 and 15 years. To win the trust and confidence of markets again, plus recognition of its willingness to fulfil its debt obligations, Greece has to show willing to cut spending. On the other hand drastic spending cuts could cause civil unrest and entice private funds to flee Greece.

28 The Treaty on European Union (TEU), 7 February 1992

23 Annex C

Greece's agricultural expenses and the problems with IACS system Agricultural expenses are another side of the situation, which is also with significant impact on the Greece's economy. According to the European Commission and regarding the IACS (Integrated Administration and Control System, a system used by Member States to calculate the amount of direct payments to which farmers are entitled, to ensure that the payments are made correctly, to prevent irregularities and to recover amounts that are unduly paid), Greece paid the biggest share of the penalties in the system. According to the 2008 Court of Auditors’ Annual Report on the Implementation of the Budget, in policy group Agriculture and Natural Resources, the Director-General for Agriculture and rural development had lifted his longstanding reservation (six years) relating to the insufficient implementation of IACS in Greece as the relevant authorities had set up a new Land Parcel Identification System and the reservation for Rural Development had been defined in more detail following the verification and validation of control statistics by the Member State certification bodies. However, the Court of Auditors stated that the Director- General provided no assurance that the action plan set up and implemented by Greece was effective for the 2007 claim procedure. Furthermore, in the Court’s opinion, the work done for the validation of control statistics by the Commission and the Certifying bodies in that Member State did not provide the high level of assurance required. The Commission’s answer was that the reservation regarding the insufficient implementation of the IACS in Greece was based on the high reputational risk for the Community institutions, resulting from the persistent nature of these deficiencies in Greece, not on the financial risk for the EAGF, which had always been adequately covered by the financial corrections imposed on Greece through the conformity clearance procedures. The audit missions to Greece up to February 2009 showed that the Greek authorities had, in compliance with their action plan from 2006, set up a new operational Land Parcel Identification System LPIS-GIS by 31 December 2008 which covered the whole of Greece. Thus, at the time of the signature of the Annual activity report 2008 by the Director General all elements of the IACS were in place and the reputational risk for the Commission resulting from the persistent nature of the deficiencies referred to above had disappeared. However, the remaining financial risk is estimated as a whole at less than the material level of error and is covered by the conformity clearance procedures for the claim years 2006-2008. Consequently, according to the Commission the reservations could be lifted.29 However, according to the most recent Commission findings in 2010 the country faces penalties for about EUR 130 million (of EUR 346.5 million penalties in total for all Member states in agriculture only) for "persistent weaknesses in the IACS system" (mainly concerning cotton and area related measures in 2005 and 2006). This compares to total EU expenditure on Greece in 2008 of EUR 8 514 million30.

29 Court of Auditors, 2008 Annual Report on the Implementation of the Budget, Official Journal from 10.11.2009 30 European Commission, EU budget 2008 Financial Report

24 Furthermore, The European Parliament called the Commission to take a firm political decision should the Greek authorities fail to comply with the deadlines set by the action plan for setting up a new operational Land Parcel Identification System (LPIS) -Geographical system, which is also related to IACS. According to the Annual Report on the Implementation of the Budget published by the Court of Auditors, the LPIS in Greece was incomplete and contained errors in the referencing of parcels. The table below indicates the weak points in the financing of Greece's agriculture:

Clearance of accounts of European Agricultural Guarantee Fund and European Agricultural Fund for Rural Development; Decision 32: Corrections by Member State, 2010, (extract) Greece mn EUR Food aid within the Community – ineligible costs resulting from late 8.331 withdrawals and late distribution Fruit and Vegetables – operational programmes – value of marketable production 0.315 wrongly established. Cotton – weak control system, deficiencies in the control of area and environmental measures, overshooting the production quantities permitted by the 105.453 Regulation. Rural Development – persistent weaknesses in IACS system, deficiencies in 18.524 control reports, delayed performance of on-the-spot checks. Olive Oil – consumption aid – reimbursement following judgment of the Court -0.200 of Justice in case T-243/05. Source: Commission to recover € 346.5 million of CAP expenditure from the Member States, IP/10/284, 16/03/2010

The Commission will continue to closely monitor the IACS procedure in Greece, because whereas the Member States are responsible for paying out and checking expenditure under the Common Agricultural Policy (CAP), the Commission is required to ensure that Member States have made correct use of the funds.

25 Bibliography

1. European Commission, Decisions taken by the Commission at its 1908th meeting on 9th March 2010, (COM (2010) 91 final) 2. European Commission, Report on Greek Government deficit and debt statistics, January 2010, (COM (2010)0001) 3. The Observer, Greece's crisis is not about the euro, but Europe, 14 February 2010 4. Economic and Monetary Union, Framework for fiscal policies 5. Spiegel, The Euro Crisis, Greek Debt Crisis, How Goldman Sachs Helped Greece to Mask its True Debt, Beat Balzli, 08 February 2010 6. Reuters, Timeline: Greece's economic crisis, 3 March 2010 7. Reuters, Three-way poker in Greek debt crisis, Paul Taylor, 22 February 2010 8. Guardian, Papandreou unveils radical reforms to salvage Greece's public finances, Helena Smith, 14 December 2009 9. European Commission Agriculture and Rural Development, Fact sheet Managing the Agriculture Budget Wisely, 2007 10. Press release of the European Commission on 25 March 2010 11. Agence France Presse, Euro rises after Greece debt deal, 26 March 2010 12. Irish Independent, Cowen set to pledge 250 million EUR as Ireland's share of Brussels bailout for Greece, 26 March 2010 13. Associated Press Newswires, Eurozone agrees on bailout plan for Greece, 26 March 2010 14. Xinhua News Agency, Roundup: Eurozone members adopt bailout plan for Greece, 26 March 2010 15. Reuters News, Europe agrees on Greek safety net with IMF role, 25 March 2010 16. Dow Jones News Service, Update: EU Summit: Van Rompuy: EU, IMF Aid Only "Last Resort", 26 March 2010 17. Associated Press Newswires, Eurozone nations reach agreement on bailout program for Greece, others, 26 March 2010 18. Bloomberg.com, James G. Neuger and Jonathan Stearns, IMF Drafted by EU for Greece in Bid to Support Euro (Update1) 26 March 2010 19. The Economist Intelligence Unit, Main Economic Indicators, 9 February 2010 20. http://en.wikipedia.org/wiki/Greece

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