Friday, August 20, 2010

The Memorandum of Economic and Financial Policies - Greece

"Dear Messrs. Juncker, Rehn and Trichet,

In the attached update to the Memorandum of Economic and Financial Policies (MEFP) and the Memorandum of Understanding on Specific Economic Policy Conditionality of 3 May 2010, we describe the progress and further policy steps towards meeting the objectives of the economic program that is being supported by financial assistance provided by the euro-area Member States in the context of the loan facility agreement.

The policies of the government of Greece remain fully oriented toward securing fiscal sustainability, safeguarding the stability of the financial system, and boosting potential growth and competitiveness.

We have made a vigorous start with our economic program. The fiscal program is progressing well, financial policies are being strengthened, and structural policies are ahead of schedule in key aspects:

The end-June quantitative performance criteria have all been met, led by a strong implementation of the fiscal program. Not unexpectedly, it has proven difficult to fully control expenditures at some entities, and in anticipation of such problems we significantly under-executed budget implementation at the state level, thereby ensuring that targets for the general government were met. Going forward, we are redoubling our efforts to strengthen controls at all levels of government and are determined to continue to over-perform at the state level until such controls become fully effective.

Reflecting the weaknesses in expenditure controls at some entities, the indicative target on the non-accrual of domestic arrears has not been observed as the monitoring system for general government commitments, accounts payable, and arrears is still being developed and implemented. We commit to bringing these arrears down to zero by year-end, so that only a normal level of accounts payable is carried over into 2011.

While the financial system continues to feel the effects of tight liquidity, sentiment indicators are gradually beginning to improve, and policy progress has been made by establishing the Financial Stability Fund to backstop any capital needs that banks might have in the future owing to an expected increase in impaired loans as the

The government has made significant progress in structural reforms with far-reaching pension and labor market reforms being approved ahead of schedule. Parliament has also already adopted important budgetary reform and reforms of local government. Other major reforms that are at an advanced stage aim at liberalizing the trucking industry and restructuring the railroad system, while reforms of the energy sector, protected professions, the licensing and business regulatory framework and preparations for implementation of the services directive are gaining momentum, as foreseen in our program.

On this basis and the completion of the prior action, we request the disbursement of the second instalment of financial assistance by the euro-area Member States in the amount of EUR 6 500 million, in line with the loan facility agreement.

We believe that the policies set forth in the 3 May 2010 Letter of Intent, MEFP and MoU, and the attached updates, are adequate to achieve the objectives under the program. We stand ready to take any corrective actions that may become appropriate for this purpose as circumstances change. We will consult with the European Commission and the ECB, as well as with the IMF, on the adoption of any such actions and in advance of revisions to the policies contained in this letter.

We are copying this letter to Mr. Strauss-Kahn, Managing Director of the IMF."

For the full text of the memorandum click here

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