BLACK SEA TRADE AND DEVELOPMENT BANK

GREECE
Country Strategy
2007-2010

THESSALONIKI
DECEMBER, 2006

GREECE COUNTRY STRATEGY

TABLE OF CONTENTS
TABLES:
Table 1:

Basic Macroeconomic Indicators at a Glance

TEXT:
I.

Recent Economic Developments and Outlook

Real Sector
Public Sector and Fiscal Policy
Monetary and Financial Sector
External Sector
Forecast for 2007
II.

Overview of Current BSTDB Portfolio

III.

Review of Country Strategy 2005 - 2006

IV.

Priorities for 2007 - 2010

Table 1:
Basic Macroeconomic Indicators at a Glance
Country Long Term Foreign Currency Sovereign Risk Rating at 1 February 2005:: S&P: A | Moodys: A1 | Fitch: A
1998

1999

2000

2001

2002

2003

2004

2005

Proj. 2006 Proj. 2007

1Population (Million)

10.9

10.9

11.0

11.0

11.1

11.1

11.1

11.1

11.0

11.0

2Avg Exch. Rate (Euro/ US$)

0.89

0.94

1.08

1.12

1.06

0.89

0.81

0.80

0.80

0.73

4.8%

2.6%

3.2%

3.4%

3.6%

3.5%

2.9%

3.5%

3.3%

2.8%

3Inflation (CPI Avg.)

4Average monthly wages (US$)
5GDP (Euro million)

108,724.0 117,844.4 121,701.0 133,105.0 143,482.0 155,543.0 168,417.0 181,088.0 186,151.0 194,855.0

6GDP US$ million

121,957.2 125,366.4 112,451.7 119,108.6 135,035.5 175,550.5 209,117.5 225,200.2 232,726.0 265,489.9

7GDP per capita (US$)

11,219.6

11,469.9

10,241.5

10,808.4

12,220.4

15,858.2

18,842.3

20,252.0

21,195.4

24,157.4

8Real GDP growth, %

3.4%

3.4%

4.5%

4.3%

3.8%

4.7%

4.7%

3.7%

4.0%

3.9%

11.2%

12.1%

11.4%

10.8%

10.3%

9.7%

10.5%

10.4%

9.2%

8.2%

9.0%

1.9%

7.2%

-1.8%

0.8%

0.3%

1.2%

-0.9%

2.0%

1.9%

0.5%

0.4%

-3.0%

-0.2%

-4.0%

0.6%

-2.1%

0.4%

0.4%

5.0%

18.0%

16.4%

11.2%

6.9%

3.7%

9.2%

14.6%

8.0%

8.2%

99.3%

93.0%

94.1%

108.6%

107.7%

103.1%

104.0%

110.9%

116.5%

120.5%

14Foreign Direct Investment - $US million

700.0

567.3

1,083.4

1,585.0

53.1

1,331.7

2,105.0

639.7

575.0

557.8

15FDI/ GDP

0.6%

0.5%

1.0%

1.3%

0.0%

0.8%

1.0%

0.3%

0.2%

0.2%

-4.4%

-3.6%

-4.2%

-4.9%

-5.3%

-6.2%

-7.7%

-5.2%

-2.6%

-2.4%

30,001.5

31,592.3

30,119.0

32,521.0

4,697.0

3,817.0

3,107.9

3,408.7

3,310.5

3,000.0

24.6%

25.2%

26.8%

27.3%

3.3%

2.5%

1.8%

1.9%

1.8%

1.5%

19Exports- $US million (Goods)

6,672.0

8,544.7

10,201.5

10,615.0

9,865.4

12,577.8

15,739.0

17,631.2

23,536.0

29,366.8

20Imports- $US million (Goods)

23,305.0

26,495.6

30,440.4

29,702.0

31,320.6

38,183.6

47,360.0

51,883.8

61,830.0

68,067.3

9Official Unemployment (end of period) %

10Industrial Production Growth, %
11Agricultural Production Growth %
12Domestic Credit Growth %
13Domestic Credit/ GDP

16Consolidated Budget Balance/ GDP, %

17Public External Debt (US$ mn)
18Public External Debt/GDP

21Trade Balance $US mn (Goods)

22Trade Balance/ GDP
23Current Account Balance $US mn
24Current Acct. Bal./ GDP
25Forex Reserves (end period- exc gold) US$ m

-16,633.0 -17,950.9 -20,238.9 -19,087.0 -21,455.2 -25,605.8 -31,621.0 -34,252.6 -38,294.0 -38,700.5
-13.6%

-14.3%

-18.0%

-16.0%

-15.9%

-14.6%

-15.1%

-15.2%

-16.5%

-14.6%

-3,647.0

-7,294.9

-9,819.7

-9,399.9

-3.0%

-5.8%

-8.7%

-7.9%

-7.1%

-7.3%

-6.4%

-7.9%

-9.3%

-7.1%

17,458.4

18,122.3

13,424.3

5,154.2

8,082.8

4,361.5

1,191.0

506.4

1,000.0

1,400.0

-9,581.6 -12,803.5 -13,476.1 -17,879.3 -21,705.0 -18,849.8

Sources: Historical data compiled from the National Statistical Service of Greece, as provided by the Ministry of Economy and Finance. Projections
compiled from the Ministry of Economy and Finance and EIU.

I.

Recent Economic Developments and Outlook

a.

Real Sector

Greece has continued its run of sustained economic growth, which dates back to 1994, even
after the 2004 Olympics held in Athens. Despite fears of a post-Olympic hangover that might
result from the contraction of public investment and expenditure, the Greek economy continued to
grow robustly during 2005 with real GDP growth at 3.7%, while an outturn of 4.0% is projected for
2006. Both these rates are among the highest among Eurozone member countries of the European
Union (EU), well above the average growth of 1.4% in 2005, and 2.1% expected for 2006.
While fixed investment was a key engine of growth prior to the Olympics, private
consumption appears to have driven growth during the last two years. Investment dropped in 2005,
but is expected to recover in 2006 particularly as the government seeks to finalize projects cofinanced by the EU under the Structural Funds of the Community Support Framework and Grants
provided through the Cohesion Fund.
Greece has an open economy in which the state plays a major role, although it has
diminished its share of business assets over the last decade as a result of a sustained privatization
program. In terms of sectors, services continued to drive growth and increase as a share of the
economy, while agriculture has largely remained stagnant and industrial output has only grown
marginally. Agricultures contribution to GDP has declined over the years and currently accounts for
roughly 5% of GDP; industry contributes approximately 20% of GDP, one of the smaller shares in
the EU, and manufacturing and extraction have remained fairly stable, whereas construction
(approximately 9% of GDP) has been buoyant. By way of contrast, services account for nearly 75%
of GDP formation and have increased steadily on the back of strong growth in key sectors such as
shipping, tourism, financial services, and retail trade.

b.

Public Sector

Budget figures were revised as a result of the Governments fiscal audit during 2004, which
in turn triggered a review of Government expenditures by the EUs Eurostat statistical agency which
resulted in revisions to fiscal figures going back to 1997. As a result of these revisions, the general
Government budget deficit was calculated at a higher level relative to the original figures, and above
the -3.0% of GDP threshold required under the European Union Stability and Growth Pact that
underpins the European Monetary Union (EMU). The revised figures show an increase in the
budget deficit in the run-up to the 2004 Olympics, peaking at -7.7% of GDP for 2004.
The Government embarked upon a stabilization program with the intent to rein in the fiscal
deficit to below -3.0% of GDP within two years. In addition to one-off post-Olympics savings (e.g.
for security), general public spending growth was curtailed and off balance sheet accounting was
rationalized in order to improve budget management and control. On the revenue side, value added
taxes were increased, and their scope of coverage was expanded to include new construction, but the
principal strategy to increase revenues was a renewed effort to combat widespread tax evasion and
improve revenue collection. To this end, additional measures were undertaken to upgrade the
capacity of the tax collection service, including modernization and computerization and new
methods of auditing. This accompanies other measures undertaken over the years such as the
establishment of a financial crimes investigation unit, tightening of VAT collection, and the
introduction of presumptive taxation for sectors of the economy in which evasion was rampant
(particularly for the self-employed). While this has resulted in improved tax collection, the informal
economy remains relatively sizeable, and there exists additional scope for revenue enhancement via
3

anti-tax evasion success rather than raising taxes. Indeed, the Government has initiated reductions of
personal income and corporate tax rates in order to diminish incentives to evade, and to spur
investment.

c.

Monetary and Financial Sector

Perhaps the single most important structural change in modern Greeces history has been
entry into the European Monetary Union (EMU) in 2001 and the adoption of the Euro in 2002.
This resulted in the abandonment of the drachma and the loss of sovereign control over monetary
policy, as Greece no longer directly controls its monetary policy, having passed on this task to the
European Central Bank (ECB) in Frankfurt, which is responsible for setting monetary policy for the
12 Euro-zone countries. The ECBs central objective is to maintain the Euro's purchasing power
and thus price stability in the euro area, and basic tasks include the implementation of monetary
policy for the Euro area; the conduct of foreign exchange operations; the holding and management
of the official foreign reserves of Euro area countries; and the promotion of the smooth operation
of payment systems1. As a member, Greece has a voting seat on the Governing Council of the ECB
and the Bank of Greece implements the policy decisions of the ECB.
Entry into EMU has helped to entrench the macroeconomic stability achieved since the
1990s and to boost market confidence. Moreover, entry into EMU has led to a steady decline of
interest rates and the substantial diminution of exchange rate risks, two benefits which have made
Greece more attractive as an investment and business destination. However, since ECB can only set
one monetary policy for the entire Eurozone, and must focus on overall aggregates, it is unable to
fine tune monetary policy to individual country requirements. Thus, Greece has been in the
paradoxical position of having one of the highest inflation rates of Euro member countries,
approximately one percentage point above the average, but enjoying- until 2006- an expansionary
monetary policy that in turn fueled credit expansion and created inflationary pressures which made
more difficult the reduction of inflation domestically. Nevertheless, the gap between Greeces rate of
inflation and that of the Eurozone as a whole is gradually converging, and by any historical measure,
the average annual rates of 2.9% and 3.5% achieved in 2004 and 2005 are low. Moreover, inflation is
expected to reach 3.3% during 2006, despite the higher energy prices.
Banking Sector & Capital Markets
The Greek banking system consists of a Central Bank (the Bank of Greece), and (as at
November 2006) 60 credit institutions, of which: 37 banks headquartered in Greece (including
cooperative banks), 24 foreign banks with branches or representative offices (of which 20 from
other EU countries), and one special credit institution, the Consignments and Loans Fund.
Foreign participation also includes western European banks that have entered into strategic
partnerships with Greek banks, and the presence of foreign institutional investors in major banks
through the stock market. The sector is concentrated, as the top five banks hold approximately
two-thirds of all assets, deposits and loans. Of these, one is state controlled- the National Bank of
Greece (NBG), three are established private banks- Alpha, EFG Eurobank and Piraeus Bank- and
one Emporiki (Commerical Bank) was privatized during 2006 via sale of 100% of its shares to the
French Credit Agricole Bank. NBG remains the largest bank, but has seen its share decline since the
early 1990s when it was the dominant bank in the system. As of 1 January 2005, banks are required
to use International Accounting Standards.

1 See ECB tasks and objectives at: http://www.ecb.int/ecb/orga/tasks/html/index.en.html .

The Greek banking sector has been among the fastest evolving parts of the economy since
the mid 1990s, and has undergone rapid reform and consolidation, including several bank mergers
and bank privatizations. During 2006, this included the aforementioned privatization of Emporiki
Bank as well as the restructuring and partial flotation of two state controlled banks- the Postal
Savings Bank and the Agricultural Bank.
Bank competition has intensified, resulting in squeezed margins, and the introduction of
broader and improved services and products for clients. It has also led to shifts in focus away from
domestic corporate customers who used to represent the core of most activities. Banks have
intensively targeted the retail market, where there have been steep annual increases in demand for all
categories of household credit of between 20% and 40% a year, with mortgage lending, consumer
lending, and credit cards growing rapidly. In addition, growing competition at home has spurred
Greek banks to expand abroad, into the Balkans, the Mediterranean and the Middle East. Greek
banks have either formed subsidiaries or have opened branches in most other BSEC countries, and
in Albania, Bulgaria, and Romania they account for a significant share of commercial bank assets. In
2006, Greek banks also delved into the Turkish market for the first time, led by NBGs 46%
acquisition of Finansbank last April.
According to the IMFs assessment during 2006, The commercial banking system enjoys
high capital and liquidity ratios, and profitability remains robust, driven by rising lending volumes in
Greece and Southeastern Europe. What concerns exist relate to the rapid expansion of credit to
households and fears that they may become overextended and asset quality degraded if growth rates
continue, especially if recession hits or interest rates continue to rise rapidly2.
In contrast to the robust banking sector, the Greek insurance industry is small and growing
slowly, especially if compared with that of other EU-15 countries. There has been some
consolidation in recent years, as the number of firms has dropped to 99, but most remain small, and
a number have faced difficulties meeting new solvency margins imposed by EU directives, and this
has led to the Government closing some for failing to meet reserve requirements. Greece is in the
process of establishing an independent supervisory body for the insurance sector, the Committee for
Supervising Private Insurance Companies, which will possess powers to suspend or close down
companies that fail to meet statutory obligations.
The principal stock market, the Athens Exchange (Athex), was formed in 2002 through the
merger of the Athens Stock Exchange (ASE) and the Athens Derivative Exchange. In December
2005 Athex restructured as a three-tier market: a large-cap board, a mid/small-Cap board and a
special characteristics market for shares that do not fit elsewhere. It is regulated by the independent
Capital Market Commission, which operates under the authority of the Ministry of Economy. The
Exchange was upgraded from an emerging market to a mature or developed market by a number
of capital markets firms that devise indices which serve as benchmarks for investors in 2001,
following entry into EMU. Athex and its predecessor ASE have undergone dramatic changes, rapid
development, and experienced their fair share of turbulence over the last decade, in which time they
have emerged as a key source of capital for companies in Greece. Much progress has been achieved
in recent years in terms of modernization, computerization, and restructuring. Currently,
approximately 350 companies are listed on the exchange.

2 IMF, Greece2006 Article IV Consultation, Preliminary Conclusions of the Mission, October 20, 2006.

d.

External Sector

Debt
Although one of the convergence criteria for entry into EMU was that public sector debt
should be below 60% of GDP, it was applied with great flexibility and restated as public debt
should be declining towards 60% of GDP, because certain EU members in the original
establishment of EMU were well above this threshold, most notably Belgium and Italy. Greece
qualified under the same restatement, since public debt was over 100% of GDP but declining.
However, alongside the budget figures, debt figures were also altered following the 2004 fiscal audit,
and revised upward by approximately 10% of GDP, peaking at 108.5% of GDP for 2004. It appears
to have declined somewhat since, dropping to 107.5% of GDP in 2005 and expected to fall to
104.1% for 2006 as one of the benefits of the fiscal stabilization.
Very little of this debt is classified as foreign debt, since following adoption of the Euro,
debt held in currencies that were discontinued in favor of the Euro (e.g. the German mark) became
no different than drachma debt which was also now Euro debt. Notions of servicing domestic
versus foreign debt ceased to have their previous meaning, and analysis of external debt is not very
meaningful. Thus, despite a general government debt level which remains over 100% of GDP,
foreign currency denominated debt less than 2% of GDP, and declining
In recent years, Greece has substantially improved its debt management and in 1999
established the Public Debt Management Agency to manage government debt. In the last decade,
the average debt profile has lengthened substantially while the cost of servicing the debt has declined
(due to the decline in interest rates), with bonds with up to 20 year duration being issued regularly.
Trade and the Current Account
As with the external debt, with entry into EMU and the adoption of the Euro, the
implications of current account deficits/ surpluses no longer affect a member countrys exchange
rate. Instead, the existence of such a deficit or surplus is more an indicator of the competitiveness of
the economy in question. Greece consistently runs large deficits on the merchandise trade balance
on the order of 15-16% of GDP, with exports amounting to about one-third of the value of
imports. There are structural reasons for this deficit, including (i) real exchange rate appreciation
caused by the hard drachma policy of the 1990s, and the appreciation of the Euro (and the lack of
any possibility of devaluing the currency to support export competitiveness), (ii) the service
orientation of the Greek economy in which tourism (which requires high import volumes) is a
critical sector, (iii) consumption created by remittances, which also play a sizeable- albeit
diminishing- role in bringing in foreign exchange, and (iv) the high dependence of Greece on energy
imports. However, it also connotes structural problems of external competitiveness, since Greeces
main exporting sectors were mainly lower value added items such as textiles, processed foods,
cement, cotton, tobacco, and semi-processed mineral products, many of which now face strong
competition from low wage economies. The Government has embarked on a drive to improve
export performance and to assist Greek exporters with the discovery of new markets and the
establishment and/or expansion of distribution networks. This has resulted in improved export
performance in recent years and diversification of export items in areas such as plastic and rubber
products, electrical appliances, telecommunications equipment and pharmaceuticals. However,
import levels have also grown at a similar rate, fueled primarily by higher energy prices.

Most Greek trade is with other EU members, and for 2004 the EU accounted for about
56% of Greek exports and 59% of its imports 3. However, during the 1990s there was an increase in
trade with Balkan countries in particular, but more broadly with other BSEC countries as well.
Growth in trade with Albania, Bulgaria, Romania, and Turkey has been particularly notable, both in
percentage terms and in absolute terms, and Russia has increased its importance as provider of
energy resources to Greece (especially natural gas). Most of the growth in Greek exports since the
1990s is attributable to this increased trade with neighboring BSEC countries, growing at annual
rates of 20% per annum4.
As a result of the trade deficit, Greece also runs high current account deficits, which reached
-7.9% of GDP in 2005 and is expected be even higher at approximately -9.3% of GDP for 2006,
partly due to recent changes in balance of payments accounting methodology and partly due to
declines in the surpluses in the services and incomes balance. The difference between the trade and
current account deficit is mainly due to these surpluses. The one for services reflects tourism
receipts, which have grown since the Olympics in 2004, and transport receipts from shipping, which
are more volatile and declined while transport costs rose. The largest component of the income
balance is EU transfers to the Greek government, which also decreased during 2006., and are likely
to be lower than the 3% of GDP (or more) they have reached in the past.
Foreign Direct Investment
Historically, levels of foreign direct investment into Greece have been among the lowest in
the EU. Figures fluctuate from year to year, but investment has generally hovered around US$ one
billion annually- a figure less than 1% of GDP and far below the levels attracted elsewhere. The
reasons for this weak performance compared to other EU members include (i) a regulatory system
which has made progress in recent years but needs to develop further in the direction of
liberalization and transparency, (ii) conflicting laws in certain sectors, with various administrative
bodies that overlap in function and generate bureaucracy (iii) a slow moving judicial system, (iv) a
rigid labor code that imposes high non-wage costs on employers and makes the dismissal of
employees difficult, and (v) difficulties and high costs associated with the establishment of a new
business and the continued resistance of numerous professions (lawyers, notaries, etc.) to liberalize
and open up per EU mandates.
The profile of Greece as an investment destination has improved in recent years as a result
of its acceding to developed market status, the macroeconomic stability, and EMU membership.
Moreover, the Greek government encourages foreign investment, and has intensified efforts to
market Greece as an investment destination for the greater region, stretching through the Balkans to
the Black Sea and the greater Eastern Mediterranean region. As further spurs, the Government has
developed legislation for public private partnerships (and a facilitating secretariat), and its
privatization program does not wish solely to maximize revenues, it also seeks strategic foreign
investors to enter the domestic market, bring innovation, and spur competition. This was the logic
behind the sale of the Commercial Bank to Credit Agricole in 2006, as well as the earlier sale of the
(much smaller) General Bank to Societe General, and it also applies to other cases most notably the
search for a strategic investor to take over management of the Hellenic Telecommunications
Organization (OTE), as well as the efforts to attract foreign strategic investors to manage,

3 EIU Country Profile 2006, Page 49.

4

Ibid.

modernize and expand Greek port facilities- including significantly for the two largest ports, Piraeus
and Thessaloniki.
While estimates of cumulative foreing investment into Greece between 1996-2005 are
around US$ 10 billion5, investment by Greek firms abroad, primarily into neighboring Balkan
countries, has continued at a robust pace and is virtually at a similar level6.

Forecast for 2007

The 2005 Update of the Hellenic Stability and Growth Programme: 2005 2008, issued by the
Ministry of Economy and Finance in December 2005, listed as Government priorities (i) the
achievement of fiscal consolidation and enhancement of the quality of public finances, via a strategy
of restraint of public expenditure and its redirection to productive uses, in order to maintain the
momentum of growth, (ii) the improvement of the business environment in order to make room for
private sector led growth, via a combination of economic adjustment measures and structural
reforms in the public sector and the operation of key markets, and (iii) the deepening of the global
integration of the Greek economy, by opening the economy, attracting foreign direct investment and
promoting the expansion of trade ties with the rest of the world.
These priorities remain largely unchanged in the 2006 Update of the Hellenic Stability and Growth
Programme: 2006 2009, issued in December 2006. According to this update, the Government
anticipates growth of 3.9% in 2007, 4.0% in 2008 and 4.1% in 2009, with private sector investment
growth becoming a significant contributor to GDP growth. Restoring public finances within the
limits of the erstwhile Maastricht criteria represents a key component of the program and the
Government intends to bring the general government deficit down to -2.4% of GDP in 2007 and 1.8% in 2008, well below the -3% threshold. Related to this fiscal consolidation is an expected
reduction in debt levels, as the gross general government debt is slated to drop to 100.1% of GDP at
the end of 2007, with further declines to 95.9% of GDP by end 2008 and 91.3% by end 2009. Key
to this effort in the short term is the enhancement of revenues accompanied by constraint (though
not reduction) of expenditures. Projecting further ahead, the Government is seeking to reform the
pension and health systems in order to increase efficiency, establish better control over potentially
explosive contingent liabilities, and ultimately safeguard the viability of these systems.
The Government is also planning to introduce structural measures to free up markets,
reduce public sector waste and bureaucracy, modernize state owned enterprises, simplify business
establishment and registration procedures, and modernize bankruptcy laws in order to improve the
business environment. On the structural reform side, the Government will continue with the
program of gradual privatization of state owned enterprises, including (i) the continued privatization
of the Hellenic Telecommunications Company (OTE) via a strategic partnership with an
internationally established telecommunications company, (ii) partial privatization of the Public Gas
Corporation of Greece (DEPA) via share sale in the stock market, (iii) partial sale of the
Governments stake in the International Airport of Athens, (iv) strategic partnerships with private
firms for the modernization and expansion of key seaports (including Piraeus and Thessaloniki) and
(v) sale or leasing/ strategic partnership of key assets belonging to the Hellenic Tourist

EIU Country Report- Greece, October 2006, Page 31.

6 EIU Country Profile 2006, Page 51. Figure mentioned is 8 billion.

Development Corporation (ETA) (marinas, casinos, golf courses, hotels). This will be
complemented by expansion of the program of public private partnerships (PPPs).
The internal liberalization of the economy is being accompanied by an effort to open it
internationally, attract foreign investors, promote trade and financial ties with other countries, and
establish Greece as an important business crossroads for the Mediterranean, Balkan and Black Sea
Region, becoming a hub for banking activity and energy transport across these Regions. Greek firms
have been active investors in the greater Black Sea Region, primarily in the Balkans, with the
encouragement of the Government. On a Regional level, the Government has promoted the
integration of integrating neighboring states with the European Union. This includes (i) supporting
the accession process of Bulgaria, Romania, and Turkey, (ii) promoting the European perspective
for BSEC members Albania and Serbia-Montenegro as well as the rest of the western Balkans
during the European Councils June 2003 Thessaloniki summit, and (iii) supporting the
improvement of trade and investment linkages between the EU and other BSEC members.
In addition, the Government continues implementation of the Hellenic Plan for the
Economic Reconstruction of the Balkans, a five year 550m development aid program launched in
2002 for the benefit of Greeces Balkan neighbors, as well as new initiatives within the European
Union to enhance the latters role and activities in the Black Sea Region and to establish some sort
of multilateral Black Sea regional dimension in which the EUs links with the Black Sea can develop,
including- significantly- with some sort of institutional linkages with the Organization of the Black
Sea Economic Cooperation (BSEC).
II.

Overview of Current BSTDB Portfolio

As As of 30 November, 2006, the active BSTDB portfolio in Greece amounted to three

operations approved by the Board of Directors (BoD), involving an investment of US$ 67.3 million.
All of these operations are signed (for US$ 67.3 million), while outstanding disbursements amounted
to US$ 59.1 million. Greece ranks sixth as a destination for operations by BSTDB, in terms of BoD
approved operations, with 8.1% of the total portfolio. The Bank has one Special Fund signed with
Greece for provision of technical assistance, for an amount totaling 1.3 million.
Technical Cooperation Special Fund Provided by the Government of the Hellenic Republic
In 2001, Government of the Hellenic Republic and BSTDB agreed to the establishment of a
technical cooperation special fund. An amount of 800,000 was contributed by the Government- to
be administered by the Bank- in order to provide a project preparation facility for enterprises,
sponsors and agencies in the BSEC Region. The objective of the project preparation facility is to
extend technical assistance grants to eligible, prospective clients for the performance of high quality
project preparation documentation including (i) business plans, (ii) feasibility studies, (iii) financial
reporting methods and standards, (iv) collection and presentation of data to facilitate preparation of
accounts and the undertaking of financial analysis, and (v) related technical and operational activities.
In 2003, an the Government contributed an additional 500.000 to the Special Fund. BSTDB plans
to intensify utilization of the fund as it expands operations.
Alumil- corporate loan
The Bank extended financing support to ALUMIL S.A., the largest aluminum-extrusion
company in Greece, in the form of a 20 million term corporate loan to support the capitalexpenditure of Alumil, which involves investments in new equipment and industrial sites in Greece,

Albania, Romania and Bulgaria, among others, and which will result in significant improvement of
Alumils competitive position in the Balkans and Black Sea markets.
Neochimiki- corporate loan
The Bank provided a 18 million long term corporate loan NEOCHIMIKI L.V., a market
leader in the production of detergents for multinationals and private labels as well as the largest
distributor of chemical products in Greece. The loan will support the capital-expenditure plan of
Neochimiki to broaden production capacity of plants in Greece, and to expand into the Balkans.
Shelman- corporate loan
The Bank extended a a 15 million corporate loan to support the modernization program of
SHELMAN S.A, a market leader in the production of wood products for the construction, furniture
and maritime industries. The financing allows Shelman to modernize its production facilities located
in Komotini (Thrace) and Vassiliko (Evia) as well as to perform research and development activities
and to support further expansion of its presence and trade in the Black Sea region, especially in
Bulgaria, Albania and Romania.
III.

Review of Country Strategy 2005-2006

Overall, the reviewed country strategies reflect well the Banks mandate, the priorities in
Greece, as well as the relatively high supply of capital and finance in the country. They all focused
on (i) trade finance (export guarantees/lines, aiming export competitiveness, trade surplus, and
employment); and (ii) project finance (cross-border, corporate finance, infrastructure,
manufacturing, SME, technical cooperation, regional investments, financial sector, municipal
infrastructure, energy).
The strategies reflect the inherent specifics of Greece as a relatively reach and financially
abundant country. While it is acknowledged that it is less easy to identify areas of intervention for
Greece, relative to the rest member countries, the Bank could have adopted a more
elaborate/tailored genuine project finance approach, as opposed to the shift towards full-recourse
corporate finance and plain vanilla.
In conclusion, the strategies responsiveness to BSTDBs mandate and the Greek priorities
was relevant, providing a rather unrestricted room for development interventions in many sectors.
Thus the overall rating on the strategies relevance is satisfactory.
The country portfolio is of middle size, relative to the rest of countries, in terms of
cumulative number of signed operations (11% of all), total cumulative amounts signed (13%, fourth
place), and similar shares in terms of currently active operations (ranking 3rd on outstanding
amounts of 14.5% of the total).
While the cumulative 1999-2006 figures indicate a reasonable relative share of commitments
and disbursements, the 2005-2006 data suggest a sharp decline: only one new operation (Shelman,
experiencing difficulties) was approved under the Country Strategy 2005-2006, compared with 7
operations for the earlier strategy. The evaluation finds that this negative trend is associated with (i)
the 2005 Banks approach towards a risk-averse full recourse corporate lending; (ii) a decline of
product competitiveness; (iii) insufficient response to market developments (lack of innovation); and
(iv) ineffective marketing capability/approach and poor visibility/awareness.
10

The portfolio in Greece is one of the least diverse in terms of sector/product representation:
most operations are of corporate finance nature and in the sector of manufacturing, with no
operations in financial sector. This portfolio was built at the time of the country strategy 2002-2004,
with insufficient maintenance in 2005-2006. Most of the targeted sectors/products were not well
covered. However, this is partly compensated by a number of investments in other countries that
had either a cross-border nature (e.g. Trans-Balkan Gas Pipeline) or benefited Greek investors (e.g.
Florina Bulgaria).
Further to the lack of new operations in 2005-2006, in 2005 two syndicated operations were
prepaid apparently because of better borrowing conditions (bond issuance) on international
markets. Thus the active portfolio includes only corporate lending to manufacturing enterprises
approved mostly in 2002-2004.
7

GREECE: BSTDB STRATEGIES AND PERFORMANCE AT A GLANCE (1999-2006)

CS 1999-00

CS 2002-04

2005-06

Performance

Trade/SME
Finance:

As previous, with
cooperation with the
Greek Export Credit
Insurance Organization
(framework agreement
with banks).

As previous,
with further
focus on
cooperation with
Greek banks.
Utilization of the
Hellenic Fund
(TC)

No operations, no cooperation with the

Greek Export Credit Insurance
Organization (framework agreement with
banks). Same prospects

Project Finance:

As previous. Also
investing in Greek
regions. Low risk
corporate multipurpose
loans to firms with
international operations.
Focus on manufacturing
shipping, transport,
energy/ efficiency,
telecom, municipal
infrastructure.

As previous,
focus on
cooperation with
EU/SME
programs.
Utilization of the
Hellenic Fund
(TC)

Seven operations, mostly in

manufacturing, of which: one pre-paid,
one partially prepaid, one repaid and one
removed at BoD stage. Short in business
follow-up (repeat business, e.g. not able
to respond to AVINs trade finance
application in 2002). Survival rate of 57%
vs. 65% Bank-average. Approvals in
2005/6 are just 14% of all approved in
Greece. Project finance replaced by
corporate finance w/o strong rationale.

guarantees, buyer
credits, focusing
on capital goods
export and
financial
intermediaries
Cross-border,
mainly Greek
investments in
other BSEC
countries,
excluding
investments in
Greece

Given the decline in 2005/06 performance, with one new operation, while the country
strategy envisaged investments in a variety of products and sectors, both efficiency and sustainability
are at risk. The operation abandonment (withdrawals, prepayments) was often associated with
inconsistent marketing and client relationship management, insufficient flexibility and unsustainable
pricing. Bank pricing, even after a recent improvement, remains mis-aligned with pressing market
developments.
Overall, the Bank developed a reasonable but concentrated portfolio that reflects the strategies, but
came short in maintaining that portfolio after 2004. BSTDBs internal practices were often slow to
react to the rapidly changing market, to augment staff resources and skills, and to develop/market
7 A Greek bank and Citibank, Greece as Agents.

11

new competitive products, based on reflection of lessons from the past. While some progress
towards enhanced competitiveness was made in 2005 and 2006 (renewed risk assessment,
provisioning and improved procedures), further work is necessary to ensure that future strategies are
well reflected by team plans and implementation, and that the learning from the past is utilized. A
particular attention should be devoted to the need of increasing operation survival rates, which are
low, relative to other countries and IFIs.

e.

Key conclusions and recommendations

The decline in business generation, in the context of the relatively easy/cheap access to
capital in Greece, calls for a renewed approach. The evaluation of the portfolio developments
concluded that further business generation in Greece will remain constrained by this context, thus
making the Banks additionality difficult to sustain on the basis of a portfolio in Greece.
Furthermore, efforts to maintain a sizable portfolio within the country (as opposed to indirect
financing of Greek businesses through the operations in the rest of countries) may be challenged by
adverse selection and moral hazard as the Bank may attract mostly companies that were not
acceptable for the Greek banking system.
Financing first tear companies expansion in neighboring countries (like operation Alumil, for
example), as well as supporting Greek companies to establish/take over businesses in other member
countries is likely to remain at the core of the Banks interventions, related to Greece. Nevertheless,
the Bank may explore other possibilities, capitalizing on its presence in Greece, as well as its IFI
nature. This would require dedicated marketing efforts, even locally in Thessaloniki. The Bank may
consider devoting a specific attention to the untapped potential of its IFI nature, with a particular
reference to relatively large/strategic cross-border/infrastructure projects, which may not necessary
be originated in/by Greece.
While price competition with Greek banks would remain a challenge, certain improvements
could be achieved through a move from country-based pricing towards giving a higher role to the
borrower profiles and the strength of the adopted risk mitigation measures. Thus, lending to first
tier, often international, companies, could become less dependent on country factors. In addition or
alternatively, the Bank may also consider a market-based pricing (at least in some sectors) as
opposed to the historical risk-based methodology, currently in place. Such an approach is suggested
as bond yield curves in all member countries diverge substantially from the risk curves, implying that
historical loss records are poor price drivers.
The Bank should target an increased efficiency through improving returns from better
economy of scale. This implies work on two self-reinforcing fronts: (i) increased business generation
through better marketing, terms and higher average tenors/amounts; (ii) improved survival rates;
and (iii) enhance the capacity for replication of successful projects, as well as maintenance of
continued client relationship.8
Both overall and sector-specific price improvement could be achieved through a more
dedicated approach towards strategic public sector operations. Such an approach would involve a
8 This conclusion is based on the experience with the AVIN-ship-building project that is the only BSTDB operation that
obtained excellent rating at post-evaluation. This first-tear client entered into a relationship with BSTDB with the intention to
develop a long-term cooperation, which did not take place, mostly because the Bank was not prepared to offer a streamlined
response to an already known client.

12

more tailored pricing along the lines above, as well as increased solicitation of the cooperation of
country directors and governors, so that BSTDB is adequately involved and leveraged in such
projects.
To achieve coverage and impact in strategic areas that remain underinvested, the Bank
should explore more thoroughly the field of genuine project finance as opposed to its blue-chip
corporate finance approach. To this end, the Bank has to proactively address the multiple
dimensions of risk mitigations, in order to successfully add value as a developmental institution of
growing profile and competence. In view of the increased competition, a more secondary role may
be allocated to the required security, in order to emphasize more on project finance cash-flowgenerating capacity and resilience to shocks, among other aspects of financial viability.
IV.

BSTDB Operational Priorities for 2007 - 2010

Based on the 2007- 2010 BSTDB Business Plan, the Bank would expect to approve
approximately two to three new operations per annum during this period, for approximately US$ 29
million per year. Over the four year period, this implies 10 approved operations for approximately
US$ 116 million. With the Bank committing to raising the level of commitments (signed operations)
to approved operations to over 80%, the Bank expects signings for 2007-2010 to be on the order of
8 operations for US$ 99 million (nearly US$ 25 million per annum). It should be noted that these are
indicative targets, and that given appropriate circumstances and sufficient operational opportunities,
the Bank would gladly exceed this level.
The scenario presented above would involve a substantial expansion of activities in Greece
during the 2007-2010 period and would require a reverse of the trend observed over the last couple
of years. The Banks portfolio in Greece has shrunk for reasons which include historically low
interest rates available to Greek firms, the consequent high levels of available liquidity, and the desire
of the Bank to ensure that its financing provides genuine value added and does not displace private
sector activity. Nevertheless, the Bank will need to make a substantially greater effort to marketing
itself to Greek firms and financial institutions, particularly those which are active in other BSTDB
Member Countries. This will entail enriching its current marketing strategy by introducing focused
marketing, and possibly organized public relations activities that would enhance the Banks profile in
Athens, where most of the business generation originates.
The value added of the Bank for Greek firms and financial institutions will not come via
fulfillment of the traditional role of international financial institutions which involves offering long
term access to financing, and/ or helping to mitigate various forms of country risks. The Greek
financial sector is well developed at this point and highly dynamic, meeting most of the financial and
risk mitigation needs of Greek firms. The presence of international institutions in Greece is focused
upon the undertaking of large scale infrastructure projects, the funding for which comes on the one
hand from EU Structural and Cohesion Funds which are provided in grant form, and the European
Investment Bank on the other, which is able to mobilize very large sums of financing for projects at
extremely competitive rates.
Instead, for operations undertaken in Greece, the Bank needs to focus most on fulfillment
of the regional cooperation aspect of its mandate. Promoting regional cooperation is important for
Greece, which borders on countries with which investment and commercial ties had remained at
very low levels for decades. As a result, much remains to be done to interconnect with neighboring
countries in order to improve relative efficiencies, realize economies of scale, and achieve better
13

complementarity. This applies to private economic activities among firms and financial institutions,
as well as public domain activities such as cross-border infrastructure. Moreover, it applies to all
neighbors whether they are potential EU candidates (Albania), accession candidates (Turkey) or new
EU entrants (Bulgaria as of 1 January 2007). There has been impressive growth in commercial and
investment ties between Greece and new EU members Bulgaria and Romania, spurred by the
prospect of the EU accession process of the latter, but even so there exist many further possibilities,
particularly if levels of integration among neighboring EU member countries in western Europe are
taken as standards of comparison.
The Bank will also keep in regular contact with complementary international financial
institutions (IFIs) and organizations to seek ways to coordinate activities and share experiences,
given the opportunities which exist for joint involvement. Greeces level of development, and status
as a developed economy, limits the scope for such cooperation, but there are certain EU programs
which focus on regional and cross-border cooperation, and the Bank will explore cofinancing
opportunities for these areas further, so long as their objectives are consistent with those of the
Bank and procedures required for such cooperation prove workable. A related element which
BSTDB will seek to develop includes participation in projects involving border regions such as
Epirus in the northwest, Macedonia to the north, Thrace to the northeast, and islands of the Aegean
with the western Turkish coast to the east. This will include intensifying efforts to find opportunities
for cooperation in internationally financed programs, as well as to find opportunities for cooperation
with Greece in nationally financed programs such as projects undertaken under the aegis of the
Hellenic Plan for the Economic Reconstruction of the Balkans.
The bankability of an operation- meaning its financial viability or economic feasibilityremains an essential precondition for the Banks participation in an operation. However, fulfillment
of the developmental aspect of the Banks mandate is likely to play a smaller role than in other
Member Countries, while the extent of regional cooperation achieved- defined as involvement of
parties from two or more Member Countries with benefits accruing to two or more Member
Countries- will have to be much greater.

Areas for BSTDB Financing

No major changes are envisioned for the directions of the Banks operational strategy
relative to previous Country Strategies for Greece; rather, the focus will be on better
implementation, the expansion of operations and cooperation with Greek firms, and the renewal of
efforts to find opportunities for cross-border operations that enhance regional cooperation. This
will involve making a greater effort to reach out to Greek firms and financial institutions, particularly
those which are active in other BSEC Countries. In addition, it will require an enhanced, more
sophisticated, and better targeted marketing effort in order (i) to make the Bank better known in the
Greek marketplace, especially in Athens, and (ii) to demonstrate the mutual advantages of
cooperation to Greek firms.
Such a strategy reflects more accurately the nature of demand of Greek firms for BSTDB
financing. Greek firms are continuing to show an interest in expanding into the Black Sea Region,
and while most of the activity to date has taken place in the Balkans, there has been a notable shift in
attention towards Turkey with some high profile acquisitions of financial institutions by Greek
Banks. Moreover, the area of interest of Greek firms appears to be expanding further, including
Ukraine and Russia, two countries in which the presence of Greek firms thus far has been limited.
Experience has shown that Greek firms value the presence of a financial partner who can provide
financing in a flexible manner that facilitates their investment programs in other countries of the
14

Black Sea Region. From the perspective of the Bank this is a desirable trend, for it promotes private
sector development as well as job creation, economic development, and regional cooperation and
integration.
Looking at potential activities by sector, possibilities for financing with Greek firms include
the following:
BSTDB Project Finance Strategy Manufacturing and Transport
One product that has been demanded by Greek firms is the provision of corporate, multipurpose loans and participation in syndicated loans organized by Greek and international
commercial banks that can help to support expansion activities in the Black Sea Region. BSTDB
has successfully identified business opportunities with respected, well established Greek
corporations that either already have an extensive international presence, or are determined to
develop such a presence. These firms tend to be active in the manufacturing sector and view
expansion into the Black Sea Region (mainly the Balkans) as an essential part of their strategy to
move from operating in a market of 11 million people to operating regionally in a market of 60-70
millon people, as this can secure new markets, lower production costs, and provide protection
against intensifying competition from inside and from outside the EU.
Such loans tend to possess a favorable risk profile from the perspective of the Bank and thus
raise the aggregate quality of the Banks assets. From the perspective of the firms, the presence of
BSTDB helps to provide a measure of funding, on a longer term basis than might otherwise be
available on the market, but also a mitigant against certain country risks as a result of the Banks
international status and its regional expertise.
This approach may also be applied to agricultural processing and agribusiness opportunities.
Greece produces top quality agricultural products, is famous for its olive oil, wine and high quality
products such honey, vegetables, sweet smelling fruits, saffron and mastic. Specialized, high value
added agribusiness enterprises are enjoying high growth rates and- together with organic farmingenjoy excellent potential for further growth since export markets are still small. As they als represent
areas that are crucial for rural and regional (non-urban) development in Greece, the Bank will seek
to support such efforts.
There also exist possibilities for cooperation with Greek organizations assisting counterpart
organizations in other BSEC countries, as Greece is already active in providing aid in a number of
sectors to neighboring countries.
An additional development of particular interest is that Greece is increasingly taking
advantage of its geographic location to serve as a business hub for multinational corporations. In
this respect, Greece may become a logistics node for the distribution of products in Europe. Greece
is therefore planning significant restructuring and upgrading of its sea ports in coming years, a
program which includes the main ports of Piraeus and Thessaloniki, but also regional ports ranging
from Igoumenitsa in the west to Alexandroupolis in the east. This represents an area of intervention
for the BSTDB and the Bank will seek to support such activities, or to focus upon specific
components within an overall program where financing may be needed and the presence of the
Bank would generate value added.
It should be noted that BSTDB would also consider involvement in financially viable
investment opportunities in facilities that were used for the 2004 Olympic games and which now
represent assets and properties that may be used for a number of purposes relevant to business
activities, leisure, and the hosting of major sports and cultural events.
15

On the transport side, the Bank will seek to establish contacts and expand its presence in
shipping. Not only does Greeces geographic position make it an important regional transport link,
but the Greek shipping sector is among the most important of the economy, and Greek ship-owners
control the world's largest merchant fleet. Of particular interest would be operations in which Greek
shipping firms invest in the renewal and upgrading of their fleets and consider placing orders with
Black Sea shipyards.
The Bank will also pursue opportunities for cross-border road linkages between Greece and
neighboring countries. While there are alternative sources of finance on grant or concessional terms
which are available for many projects of this type, the Bank will explore possibilities in which there
are funding shortfalls, or where the nature of the operation requires additional co-financiers.
Perhaps most importantly, the Bank intends to participate in the Black Sea Ring Highway
(BSRH) project, a flagship initiative of BSEC to which the Bank will participate in the Steering
Committee of the BSRH, and offer its expertise, financing, mobilization assistance and general
support where needed and demanded in order to help realize this ambitious endeavor.
BSTDB Project Finance Strategy Infrastructure, Energy, Natural Resources, Telecommunications
Generally, there are limited opportunities for BSTDB to finance infrastructure projects, as
most of them are financed by EIB and EU funds, which can be mobilized on a far greater scale and
more cheaply- including in grant form. However, the Bank will seek to become involved in small
scale specific infrastructure ventures that either promote cross-border cooperation, such as tax freetrade and logistics centers or border crossings, or for targeted tourist infrastructure endeavors which
include regional cooperation components. Tourism accounts for over 17% of GDP, and Bank
participation may provide value added for local projects which improve tourism facilities or enhance
cross-border tourism between the Aegean coast of Turkey and the nearby Greek islands, or between
Greece and Albania in the Ionian Sea.
The Bank will seek to participate with other international financial institutions in projects
focusing on the development of oil and gas import and transit transportation infrastructure,
especially components of operations which contribute to the development of cooperation with
energy rich regional neighbors. Greece is seeking to become an energy hub for transport in the
Region, and in this context, the Bank will follow and seek added value involvement in projects under
discussion such as the Burgas-Alexandoupolis Oil Pipeline, gas storage projects, and gas pipelines
connecting Italy, Greece and Turkey as well as one being considered between Greece and Albania.
The Bank will also seek more actively to support the development and upgrading of
regional electricity markets. On the transmission side, this may involve participating in projects
entailing reinforcement of power transmission infrastructure, especially the interconnection with
neighboring BSEC Member Countries. On the generation side, the Bank will seek opportunities to
work with private Greek groups interested in becoming involved in independent power production
schemes. The Bank will be especially keen to participate in operations involving renewable energy
technologies such as wind power and hydroelectric power, as this is an area of increasing priority for
Greece, for which a number of major projects are scheduled.
For the rapidly evolving telecommunications sector, prospects for BSTDB participation in
Greece are very slim. Certain opportunities may exist in helping to finance the purchase of
equipment from other Black Sea Countries. There may also be favorable prospects to work with
Greek telecommunication and telecommunication equipment firms which have been very active in

16

the BSEC region, particularly as neighboring countries open their market and permit the entry of
new competitors.
BSTDB Trade Finance and Financial Sector Strategy
Since BSTDB began operations, the Trade Finance Program has attempted to develop
relationships with Greek banks in an effort to promote close cooperation for co-finance and
BSTDB guarantees in support of Greek exports to the region. It also sought to establish a
framework agreement with the Export Credit and Insurance Organization. However, because the
needs of banks for access to long term financing are not limited to international financial
institutions, BSTDB did not develop a network of local intermediaries through whom to offer its
trade finance products.
Therefore, similarly to its strategy with Greek manufacturing firms, in dealing with Greek
financial institutions, the Banks strategy will seek to help them extend their presence in countries of
the Region, support them in efforts to establish and enhance relationships with other financial
institutions active in the Region, and where necessary facilitate the provision of financing or
guarantees to firms that are involved in commerce with other Regional firms. Such work may take
place either via the parent bank headquartered in Greece, or via the subsidiary, local branch, or
otherwise related financial institution operating in other Member Countries. In the case of dealing
with the Greece-based institution, cooperation would most likely take the form of providing
financing or guarantees to firms for specific transactions, either under a broader framework
agreement, if that proves useful and desirable, or else on a case by case basis. Furthermore, the Bank
will seek to develop co-financing opportunities with Greek banks providing financing for Greek
corporations local and/or cross border projects and/or operations. The Bank will also consider
investing in Private investment/ equity funds investing in Greece and/or other Member Countries.
As far as small and medium enterprise (SME) development is concerned, any activities
considered by the Bank will seek to capitalize upon the existence of EU programs to support SME
development in Greece. The SME sector is fairly large and well developed, but activity near outside
the two major urban centers has been low, despite the existence of considerable Government
incentives. Where Bank involvement can provide genuine value added, BSTDB will seek to assist
SME development, particularly in outlying regions, as this can combine regional cooperation
benefits with developmental benefits, given that unemployment (and out-migration) tend to be
higher in such regions.

17