Country Strategy 20072010 Greece

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BLACK SEA TRADE AND DEVELOPMENT BANK

GREECE

Country Strategy

2007-2010

THESSALONIKIDECEMBER, 2006


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I.

Recent Economic Developments and Outlook

a. Real Sec ort

Greece has continued its run of sustained economic growth, which dates back to 1994, evenafter the 2004 Olympics held in Athens. Despite fears of a post-Olympic hangover that mightresult from the contraction of public investment and expenditure, the Greek economy continued togrow robustly during 2005 with real GDP growth at 3.7%, while an outturn of 4.0% is projected for2006. Both these rates are among the highest among Eurozone member countries of the EuropeanUnion (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, privateconsumption 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 co-financed by the EU under the Structural Funds of the Community Support Framework and Grantsprovided through the Cohesion Fund.

Greece has an open economy in which the state plays a major role, although it hasdiminished 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 theeconomy, while agriculture has largely remained stagnant and industrial output has only grownmarginally. Agricultures contribution to GDP has declined over the years and currently accounts forroughly 5% of GDP; industry contributes approximately 20% of GDP, one of the smaller shares inthe 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 asshipping, 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 whichresulted in revisions to fiscal figures going back to 1997. As a result of these revisions, the generalGovernment budget deficit was calculated at a higher level relative to the original figures, and abovethe -3.0% of GDP threshold required under the European Union Stability and Growth Pact thatunderpins the European Monetary Union (EMU). The revised figures show an increase in thebudget 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 fiscaldeficit 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 wasrationalized in order to improve budget management and control. On the revenue side, value addedtaxes 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 andimprove revenue collection. To this end, additional measures were undertaken to upgrade thecapacity of the tax collection service, including modernization and computerization and newmethods of auditing. This accompanies other measures undertaken over the years such as theestablishment of a financial crimes investigation unit, tightening of VAT collection, and theintroduction 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 informaleconomy remains relatively sizeable, and there exists additional scope for revenue enhancement via

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

c. Monetary and Financial Sector

Perhaps the single most important structural change in modern Greeces history has beenentry 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 monetarypolicy, as Greece no longer directly controls its monetary policy, having passed on this task to theEuropean Central Bank (ECB) in Frankfurt, which is responsible for setting monetary policy for the12 Euro-zone countries. The ECBs central objective is to maintain the Euro's purchasing powerand thus price stability in the euro area, and basic tasks include the implementation of monetarypolicy for the Euro area; the conduct of foreign exchange operations; the holding and managementof the official foreign reserves of Euro area countries; and the promotion of the smooth operationof payment systems1.As a member, Greece has a voting seat on the Governing Council of the ECBand the Bank of Greece implements the policy decisions of the ECB.

Entry into EMU has helped to entrench the macroeconomic stability achieved since the1990s and to boost market confidence. Moreover, entry into EMU has led to a steady decline ofinterest rates and the substantial diminution of exchange rate risks, two benefits which have madeGreece more attractive as an investment and business destination. However, since ECB can only setone monetary policy for the entire Eurozone, and must focus on overall aggregates, it is unable tofine tune monetary policy to individual country requirements. Thus, Greece has been in theparadoxical 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 expansionarymonetary policy that in turn fueled credit expansion and created inflationary pressures which mademore difficult the reduction of inflation domestically. Nevertheless, the gap between Greeces rate ofinflation 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 atNovember 2006) 60 credit institutions, of which: 37 banks headquartered in Greece (includingcooperative banks), 24 foreign banks with branches or representative offices (of which 20 fromother EU countries), and one special credit institution, the Consignments and Loans Fund.Foreign participation also includes western European banks that have entered into strategicpartnerships with Greek banks, and the presence of foreign institutional investors in major banksthrough the stock market. The sector is concentrated, as the top five banks hold approximatelytwo-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- andone Emporiki (Commerical Bank) was privatized during 2006 via sale of 100% of its shares to theFrench Credit Agricole Bank. NBG remains the largest bank, but has seen its share decline since theearly 1990s when it was the dominant bank in the system. As of 1 January 2005, banks are requiredto use International Accounting Standards.

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

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The Greek banking sector has been among the fastest evolving parts of the economy sincethe mid 1990s, and has undergone rapid reform and consolidation, including several bank mergersand bank privatizations. During 2006, this included the aforementioned privatization of EmporikiBank as well as the restructuring and partial flotation of two state controlled banks- the PostalSavings Bank and the Agricultural Bank.

Bank competition has intensified, resulting in squeezed margins, and the introduction ofbroader and improved services and products for clients. It has also led to shifts in focus away fromdomestic corporate customers who used to represent the core of most activities. Banks haveintensively targeted the retail market, where there have been steep annual increases in demand for allcategories of household credit of between 20% and 40% a year, with mortgage lending, consumerlending, and credit cards growing rapidly. In addition, growing competition at home has spurredGreek banks to expand abroad, into the Balkans, the Mediterranean and the Middle East. Greekbanks have either formed subsidiaries or have opened branches in most other BSEC countries, andin Albania, Bulgaria, and Romania they account for a significant share of commercial bank assets. In2006, 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 enjoyshigh capital and liquidity ratios, and profitability remains robust, driven by rising lending volumes inGreece and Southeastern Europe. What concerns exist relate to the rapid expansion of credit tohouseholds and fears that they may become overextended and asset quality degraded if growth ratescontinue, 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 growingslowly, especially if compared with that of other EU-15 countries. There has been someconsolidation in recent years, as the number of firms has dropped to 99, but most remain small, anda number have faced difficulties meeting new solvency margins imposed by EU directives, and thishas led to the Government closing some for failing to meet reserve requirements. Greece is in theprocess 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 downcompanies that fail to meet statutory obligations.

The principal stock market, the Athens Exchange (Athex), was formed in 2002 through themerger of the Athens Stock Exchange (ASE) and the Athens Derivative Exchange. In December2005 Athex restructured as a three-tier market: a large-cap board, a mid/small-Cap board and aspecial characteristics market for shares that do not fit elsewhere. It is regulated by the independentCapital Market Commission, which operates under the authority of the Ministry of Economy. TheExchange was upgraded from an emerging market to a mature or developed market by a numberof 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, rapiddevelopment, and experienced their fair share of turbulence over the last decade, in which time theyhave emerged as a key source of capital for companies in Greece. Much progress has been achievedin 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.

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d. External Sector

Debt

Although one of the convergence criteria for entry into EMU was that public sector debtshould be below 60% of GDP, it was applied with great flexibility and restated as public debtshould be declining towards 60% of GDP, because certain EU members in the originalestablishment of EMU were well above this threshold, most notably Belgium and Italy. Greecequalified 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 appearsto have declined somewhat since, dropping to 107.5% of GDP in 2005 and expected to fall to104.1% 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) becameno different than drachma debt which was also now Euro debt. Notions of servicing domesticversus 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 1999established 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, theimplications of current account deficits/ surpluses no longer affect a member countrys exchangerate. 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 balanceon the order of 15-16% of GDP, with exports amounting to about one-third of the value ofimports. There are structural reasons for this deficit, including (i) real exchange rate appreciationcaused by the hard drachma policy of the 1990s, and the appreciation of the Euro (and the lack ofany possibility of devaluing the currency to support export competitiveness), (ii) the serviceorientation of the Greek economy in which tourism (which requires high import volumes) is acritical sector, (iii) consumption created by remittances, which also play a sizeable- albeitdiminishing- role in bringing in foreign exchange, and (iv) the high dependence of Greece on energyimports. However, it also connotes structural problems of external competitiveness, since Greecesmain 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 improveexport performance and to assist Greek exporters with the discovery of new markets and theestablishment and/or expansion of distribution networks. This has resulted in improved exportperformance in recent years and diversification of export items in areas such as plastic and rubberproducts, electrical appliances, telecommunications equipment and pharmaceuticals. However,import levels have also grown at a similar rate, fueled primarily by higher energy prices.

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Most Greek trade is with other EU members, and for 2004 the EU accounted for about56% of Greek exports and 59% of its imports 3.However, during the 1990s there was an increase intrade 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 inpercentage 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 the1990s is attributable to this increased trade with neighboring BSEC countries, growing at annualrates 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 todeclines in the surpluses in the services and incomes balance. The difference between the trade andcurrent account deficit is mainly due to these surpluses. The one for services reflects tourismreceipts, which have grown since the Olympics in 2004, and transport receipts from shipping, whichare more volatile and declined while transport costs rose. The largest component of the incomebalance is EU transfers to the Greek government, which also decreased during 2006., and are likelyto 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 inthe EU. Figures fluctuate from year to year, but investment has generally hovered around US$ onebillion annually- a figure less than 1% of GDP and far below the levels attracted elsewhere. Thereasons for this weak performance compared to other EU members include (i) a regulatory systemwhich has made progress in recent years but needs to develop further in the direction ofliberalization and transparency, (ii) conflicting laws in certain sectors, with various administrativebodies that overlap in function and generate bureaucracy (iii) a slow moving judicial system, (iv) arigid labor code that imposes high non-wage costs on employers and makes the dismissal ofemployees 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 liberalizeand open up per EU mandates.

The profile of Greece as an investment destination has improved in recent years as a resultof its acceding to developed market status, the macroeconomic stability, and EMU membership.Moreover, the Greek government encourages foreign investment, and has intensified efforts tomarket Greece as an investment destination for the greater region, stretching through the Balkans tothe Black Sea and the greater Eastern Mediterranean region. As further spurs, the Government hasdeveloped legislation for public private partnerships (and a facilitating secretariat), and itsprivatization program does not wish solely to maximize revenues, it also seeks strategic foreigninvestors to enter the domestic market, bring innovation, and spur competition. This was the logicbehind 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 thesearch for a strategic investor to take over management of the Hellenic TelecommunicationsOrganization (OTE), as well as the efforts to attract foreign strategic investors to manage,

3 EIU Country Profile 2006, Page 49.

4Ibid.

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modernize and expand Greek port facilities- including significantly for the two largest ports, Piraeusand Thessaloniki.

While estimates of cumulative foreing investment into Greece between 1996-2005 arearound US$ 10 billion5, investment by Greek firms abroad, primarily into neighboring Balkancountries, 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 theMinistry of Economy and Finance in December 2005, listed as Government priorities (i) theachievement of fiscal consolidation and enhancement of the quality of public finances, via a strategyof restraint of public expenditure and its redirection to productive uses, in order to maintain themomentum of growth, (ii) the improvement of the business environment in order to make room forprivate sector led growth, via a combination of economic adjustment measures and structuralreforms in the public sector and the operation of key markets, and (iii) the deepening of the globalintegration 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 Governmentanticipates growth of 3.9% in 2007, 4.0% in 2008 and 4.1% in 2009, with private sector investmentgrowth becoming a significant contributor to GDP growth. Restoring public finances within thelimits of the erstwhile Maastricht criteria represents a key component of the program and theGovernment 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 expectedreduction in debt levels, as the gross general government debt is slated to drop to 100.1% of GDP atthe end of 2007, with further declines to 95.9% of GDP by end 2008 and 91.3% by end 2009. Keyto 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 thepension and health systems in order to increase efficiency, establish better control over potentiallyexplosive 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 businessestablishment and registration procedures, and modernize bankruptcy laws in order to improve thebusiness environment. On the structural reform side, the Government will continue with theprogram of gradual privatization of state owned enterprises, including (i) the continued privatizationof the Hellenic Telecommunications Company (OTE) via a strategic partnership with aninternationally established telecommunications company, (ii) partial privatization of the Public GasCorporation 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 privatefirms 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

5EIU Country Report- Greece, October 2006, Page 31.

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

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Development Corporation (ETA) (marinas, casinos, golf courses, hotels). This will becomplemented by expansion of the program of public private partnerships (PPPs).

The internal liberalization of the economy is being accompanied by an effort to open itinternationally, attract foreign investors, promote trade and financial ties with other countries, andestablish 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 firmshave been active investors in the greater Black Sea Region, primarily in the Balkans, with theencouragement of the Government. On a Regional level, the Government has promoted theintegration of integrating neighboring states with the European Union. This includes (i) supportingthe accession process of Bulgaria, Romania, and Turkey, (ii) promoting the European perspectivefor BSEC members Albania and Serbia-Montenegro as well as the rest of the western Balkansduring the European Councils June 2003 Thessaloniki summit, and (iii) supporting theimprovement of trade and investment linkages between the EU and other BSEC members.

In addition, the Government continues implementation of the Hellenic Plan for theEconomic Reconstruction of the Balkans, a five year 550m development aid program launched in2002 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 sortof 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 BlackSea Economic Cooperation (BSEC).

II.

Overview of Current BSTDB Portfolio

As As of 30 November, 2006, the active BSTDB portfolio in Greece amounted to threeoperations 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 amountedto 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 withGreece 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 atechnical cooperation special fund. An amount of 800,000 was contributed by the Government- tobe 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 toextend technical assistance grants to eligible, prospective clients for the performance of high qualityproject preparation documentation including (i) business plans, (ii) feasibility studies, (iii) financialreporting 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 plansto intensify utilization of the fund as it expands operations.

Alumil- corporate loan

The Bank extended financing support to ALUMIL S.A., the largest aluminum-extrusioncompany in Greece, in the form of a 20 million term corporate loan to support the capital-expenditure of Alumil, which involves investments in new equipment and industrial sites in Greece,

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Albania, Romania and Bulgaria, among others, and which will result in significant improvement ofAlumils 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 marketleader in the production of detergents for multinationals and private labels as well as the largestdistributor of chemical products in Greece. The loan will support the capital-expenditure plan ofNeochimiki 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 ofSHELMAN S.A, a market leader in the production of wood products for the construction, furnitureand maritime industries. The financing allows Shelman to modernize its production facilities locatedin Komotini (Thrace) and Vassiliko (Evia) as well as to perform research and development activitiesand to support further expansion of its presence and trade in the Black Sea region, especially inBulgaria, Albania and Romania.

III. Review of Country Strategy 2005-2006

Overall, the reviewed country strategies reflect well the Banks mandate, the priorities inGreece, as well as the relatively high supply of capital and finance in the country. They all focusedon (i) trade finance (export guarantees/lines, aiming export competitiveness, trade surplus, andemployment); and (ii) project finance (cross-border, corporate finance, infrastructure,manufacturing, SME, technical cooperation, regional investments, financial sector, municipalinfrastructure, 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 forGreece, relative to the rest member countries, the Bank could have adopted a moreelaborate/tailored genuine project finance approach, as opposed to the shift towards full-recoursecorporate finance and plain vanilla.

In conclusion, the strategies responsiveness to BSTDBs mandate and the Greek prioritieswas 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 ofcumulative number of signed operations (11% of all), total cumulative amounts signed (13%, fourthplace), and similar shares in terms of currently active operations (ranking 3rd on outstandingamounts of 14.5% of the total).

While the cumulative 1999-2006 figures indicate a reasonable relative share of commitmentsand 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 7operations 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 ofproduct competitiveness; (iii) insufficient response to market developments (lack of innovation); and(iv) ineffective marketing capability/approach and poor visibility/awareness.

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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 nooperations 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 wellcovered. 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 wereprepaid7 apparently because of better borrowing conditions (bond issuance) on internationalmarkets. Thus the active portfolio includes only corporate lending to manufacturing enterprisesapproved mostly in 2002-2004.

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

CS 1999-00 CS 2002-04 2005-06 Performance

Trade/SME

Finance:guarantees, buyercredits, focusingon capital goodsexport andfinancialintermediaries

As previous, with

cooperation with theGreek Export CreditInsurance Organization(framework agreementwith banks).

As previous,

with furtherfocus oncooperation withGreek banks.Utilization of theHellenic Fund(TC)

No operations, no cooperation with the

Greek Export Credit InsuranceOrganization (framework agreement withbanks). Same prospects

Project Finance:

Cross-border,mainly Greekinvestments inother BSECcountries,excludinginvestments inGreece

As previous. Alsoinvesting in Greekregions. Low riskcorporate multipurposeloans to firms with

international operations.Focus on manufacturingshipping, transport,energy/ efficiency,telecom, municipalinfrastructure.

As previous,focus oncooperation withEU/SMEprograms.

Utilization of theHellenic Fund(TC)

Seven operations, mostly inmanufacturing, of which: one pre-paid,one partially prepaid, one repaid and oneremoved at BoD stage. Short in businessfollow-up (repeat business, e.g. not able

to respond to AVINs trade financeapplication in 2002). Survival rate of 57%vs. 65% Bank-average. Approvals in2005/6 are just 14% of all approved inGreece. Project finance replaced bycorporate finance w/o strong rationale.

Given the decline in 2005/06 performance, with one new operation, while the countrystrategy envisaged investments in a variety of products and sectors, both efficiency and sustainabilityare at risk. The operation abandonment (withdrawals, prepayments) was often associated withinconsistent marketing and client relationship management, insufficient flexibility and unsustainable

pricing. Bank pricing, even after a recent improvement, remains mis-aligned with pressing marketdevelopments.

Overall, the Bank developed a reasonable but concentrated portfolio that reflects the strategies, butcame short in maintaining that portfolio after 2004. BSTDBs internal practices were often slow toreact to the rapidly changing market, to augment staff resources and skills, and to develop/market

7 A Greek bank and Citibank, Greece as Agents.

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

low, relative to other countries and IFIs.

e.

Key conclus ons and recommendationsi

The decline in business generation, in the context of the relatively easy/cheap access tocapital in Greece, calls for a renewed approach. The evaluation of the portfolio developmentsconcluded that further business generation in Greece will remain constrained by this context, thusmaking 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 indirectfinancing of Greek businesses through the operations in the rest of countries) may be challenged byadverse 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 membercountries 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 IFInature. This would require dedicated marketing efforts, even locally in Thessaloniki. The Bank mayconsider devoting a specific attention to the untapped potential of its IFI nature, with a particularreference to relatively large/strategic cross-border/infrastructure projects, which may not necessarybe originated in/by Greece.

While price competition with Greek banks would remain a challenge, certain improvementscould 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 firsttier, often international, companies, could become less dependent on country factors. In addition oralternatively, the Bank may also consider a market-based pricing (at least in some sectors) asopposed to the historical risk-based methodology, currently in place. Such an approach is suggestedas bond yield curves in all member countries diverge substantially from the risk curves, implying thathistorical loss records are poor price drivers.

The Bank should target an increased efficiency through improving returns from bettereconomy of scale. This implies work on two self-reinforcing fronts: (i) increased business generationthrough 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 ofcontinued client relationship.8

Both overall and sector-specific price improvement could be achieved through a morededicated 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 thatobtained excellent rating at post-evaluation. This first-tear client entered into a relationship with BSTDB with the intention todevelop a long-term cooperation, which did not take place, mostly because the Bank was not prepared to offer a streamlinedresponse to an already known client.

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more tailored pricing along the lines above, as well as increased solicitation of the cooperation ofcountry directors and governors, so that BSTDB is adequately involved and leveraged in suchprojects.

To achieve coverage and impact in strategic areas that remain underinvested, the Bankshould explore more thoroughly the field of genuine project finance as opposed to its blue-chipcorporate finance approach. To this end, the Bank has to proactively address the multipledimensions of risk mitigations, in order to successfully add value as a developmental institution ofgrowing profile and competence. In view of the increased competition, a more secondary role maybe allocated to the required security, in order to emphasize more on project finance cash-flow-generating 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 approveapproximately two to three new operations per annum during this period, for approximately US$ 29million 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 of8 operations for US$ 99 million (nearly US$ 25 million per annum). It should be noted that these areindicative 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 Greeceduring the 2007-2010 period and would require a reverse of the trend observed over the last coupleof years. The Banks portfolio in Greece has shrunk for reasons which include historically lowinterest rates available to Greek firms, the consequent high levels of available liquidity, and the desireof the Bank to ensure that its financing provides genuine value added and does not displace privatesector activity. Nevertheless, the Bank will need to make a substantially greater effort to marketingitself to Greek firms and financial institutions, particularly those which are active in other BSTDBMember Countries. This will entail enriching its current marketing strategy by introducing focusedmarketing, and possibly organized public relations activities that would enhance the Banks profile inAthens, where most of the business generation originates.

The value added of the Bank for Greek firms and financial institutions will not come viafulfillment of the traditional role of international financial institutions which involves offering longterm access to financing, and/ or helping to mitigate various forms of country risks. The Greekfinancial sector is well developed at this point and highly dynamic, meeting most of the financial andrisk mitigation needs of Greek firms. The presence of international institutions in Greece is focusedupon the undertaking of large scale infrastructure projects, the funding for which comes on the onehand from EU Structural and Cohesion Funds which are provided in grant form, and the EuropeanInvestment Bank on the other, which is able to mobilize very large sums of financing for projects atextremely competitive rates.

Instead, for operations undertaken in Greece, the Bank needs to focus most on fulfillmentof the regional cooperation aspect of its mandate. Promoting regional cooperation is important forGreece, which borders on countries with which investment and commercial ties had remained atvery low levels for decades. As a result, much remains to be done to interconnect with neighboringcountries in order to improve relative efficiencies, realize economies of scale, and achieve better

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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 allneighbors whether they are potential EU candidates (Albania), accession candidates (Turkey) or newEU entrants (Bulgaria as of 1 January 2007). There has been impressive growth in commercial andinvestment 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 aretaken as standards of comparison.

The Bank will also keep in regular contact with complementary international financialinstitutions (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 statusas a developed economy, limits the scope for such cooperation, but there are certain EU programswhich focus on regional and cross-border cooperation, and the Bank will explore cofinancingopportunities for these areas further, so long as their objectives are consistent with those of theBank and procedures required for such cooperation prove workable. A related element whichBSTDB 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 Aegeanwith the western Turkish coast to the east. This will include intensifying efforts to find opportunitiesfor cooperation in internationally financed programs, as well as to find opportunities for cooperationwith Greece in nationally financed programs such as projects undertaken under the aegis of theHellenic Plan for the Economic Reconstruction of the Balkans.

The bankability of an operation- meaning its financial viability or economic feasibility-remains an essential precondition for the Banks participation in an operation. However, fulfillmentof the developmental aspect of the Banks mandate is likely to play a smaller role than in otherMember Countries, while the extent of regional cooperation achieved- defined as involvement ofparties from two or more Member Countries with benefits accruing to two or more MemberCountries- will have to be much greater.

Areas for BSTDB Financing

No major changes are envisioned for the directions of the Banks operational strategyrelative to previous Country Strategies for Greece; rather, the focus will be on betterimplementation, the expansion of operations and cooperation with Greek firms, and the renewal ofefforts to find opportunities for cross-border operations that enhance regional cooperation. Thiswill involve making a greater effort to reach out to Greek firms and financial institutions, particularlythose which are active in other BSEC Countries. In addition, it will require an enhanced, moresophisticated, and better targeted marketing effort in order (i) to make the Bank better known in theGreek marketplace, especially in Athens, and (ii) to demonstrate the mutual advantages ofcooperation to Greek firms.

Such a strategy reflects more accurately the nature of demand of Greek firms for BSTDBfinancing. 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 inattention towards Turkey with some high profile acquisitions of financial institutions by GreekBanks. Moreover, the area of interest of Greek firms appears to be expanding further, includingUkraine 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 providefinancing in a flexible manner that facilitates their investment programs in other countries of the

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Black Sea Region. From the perspective of the Bank this is a desirable trend, for it promotes privatesector development as well as job creation, economic development, and regional cooperation andintegration.

Looking at potential activities by sector, possibilities for financing with Greek firms includethe following:

BSTDB Project Finance Strategy Manufacturing and Transport

One product that has been demanded by Greek firms is the provision of corporate, multi-purpose loans and participation in syndicated loans organized by Greek and internationalcommercial banks that can help to support expansion activities in the Black Sea Region. BSTDBhas successfully identified business opportunities with respected, well established Greekcorporations that either already have an extensive international presence, or are determined todevelop such a presence. These firms tend to be active in the manufacturing sector and viewexpansion into the Black Sea Region (mainly the Balkans) as an essential part of their strategy tomove from operating in a market of 11 million people to operating regionally in a market of 60-70millon 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 ofBSTDB helps to provide a measure of funding, on a longer term basis than might otherwise beavailable on the market, but also a mitigant against certain country risks as a result of the Banksinternational 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 qualityproducts such honey, vegetables, sweet smelling fruits, saffron and mastic. Specialized, high valueadded agribusiness enterprises are enjoying high growth rates and- together with organic farming-enjoy 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 seekto support such efforts.

There also exist possibilities for cooperation with Greek organizations assisting counterpartorganizations in other BSEC countries, as Greece is already active in providing aid in a number ofsectors to neighboring countries.

An additional development of particular interest is that Greece is increasingly takingadvantage of its geographic location to serve as a business hub for multinational corporations. Inthis respect, Greece may become a logistics node for the distribution of products in Europe. Greeceis therefore planning significant restructuring and upgrading of its sea ports in coming years, aprogram 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 interventionfor the BSTDB and the Bank will seek to support such activities, or to focus upon specificcomponents within an overall program where financing may be needed and the presence of theBank would generate value added.

It should be noted that BSTDB would also consider involvement in financially viableinvestment opportunities in facilities that were used for the 2004 Olympic games and which nowrepresent assets and properties that may be used for a number of purposes relevant to businessactivities, leisure, and the hosting of major sports and cultural events.

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On the transport side, the Bank will seek to establish contacts and expand its presence inshipping. 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-ownerscontrol the world's largest merchant fleet. Of particular interest would be operations in which Greekshipping 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 termswhich are available for many projects of this type, the Bank will explore possibilities in which thereare 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 SteeringCommittee of the BSRH, and offer its expertise, financing, mobilization assistance and generalsupport 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, asmost of them are financed by EIB and EU funds, which can be mobilized on a far greater scale andmore cheaply- including in grant form. However, the Bank will seek to become involved in smallscale specific infrastructure ventures that either promote cross-border cooperation, such as tax free-trade and logistics centers or border crossings, or for targeted tourist infrastructure endeavors whichinclude regional cooperation components. Tourism accounts for over 17% of GDP, and Bankparticipation may provide value added for local projects which improve tourism facilities or enhancecross-border tourism between the Aegean coast of Turkey and the nearby Greek islands, or betweenGreece and Albania in the Ionian Sea.

The Bank will seek to participate with other international financial institutions in projectsfocusing on the development of oil and gas import and transit transportation infrastructure,

especially components of operations which contribute to the development of cooperation withenergy rich regional neighbors. Greece is seeking to become an energy hub for transport in theRegion, and in this context, the Bank will follow and seek added value involvement in projects underdiscussion such as the Burgas-Alexandoupolis Oil Pipeline, gas storage projects, and gas pipelinesconnecting 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 ofregional electricity markets. On the transmission side, this may involve participating in projectsentailing reinforcement of power transmission infrastructure, especially the interconnection withneighboring BSEC Member Countries. On the generation side, the Bank will seek opportunities towork with private Greek groups interested in becoming involved in independent power productionschemes. 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 forGreece, for which a number of major projects are scheduled.

For the rapidly evolving telecommunications sector, prospects for BSTDB participation inGreece are very slim. Certain opportunities may exist in helping to finance the purchase ofequipment from other Black Sea Countries. There may also be favorable prospects to work withGreek telecommunication and telecommunication equipment firms which have been very active in

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the BSEC region, particularly as neighboring countries open their market and permit the entry ofnew competitors.

BSTDB Trade Finance and Financial Sector Strategy

Since BSTDB began operations, the Trade Finance Program has attempted to developrelationships with Greek banks in an effort to promote close cooperation for co-finance andBSTDB guarantees in support of Greek exports to the region. It also sought to establish aframework agreement with the Export Credit and Insurance Organization. However, because theneeds of banks for access to long term financing are not limited to international financialinstitutions, BSTDB did not develop a network of local intermediaries through whom to offer itstrade finance products.

Therefore, similarly to its strategy with Greek manufacturing firms, in dealing with Greekfinancial institutions, the Banks strategy will seek to help them extend their presence in countries ofthe Region, support them in efforts to establish and enhance relationships with other financialinstitutions active in the Region, and where necessary facilitate the provision of financing orguarantees 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, orotherwise related financial institution operating in other Member Countries. In the case of dealingwith the Greece-based institution, cooperation would most likely take the form of providingfinancing or guarantees to firms for specific transactions, either under a broader frameworkagreement, if that proves useful and desirable, or else on a case by case basis. Furthermore, the Bankwill seek to develop co-financing opportunities with Greek banks providing financing for Greekcorporations local and/or cross border projects and/or operations. The Bank will also considerinvesting 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 activitiesconsidered by the Bank will seek to capitalize upon the existence of EU programs to support SMEdevelopment 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 Governmentincentives. Where Bank involvement can provide genuine value added, BSTDB will seek to assistSME development, particularly in outlying regions, as this can combine regional cooperationbenefits with developmental benefits, given that unemployment (and out-migration) tend to behigher in such regions.

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Documents

Country Strategy 20072010 Greece