Benoît Coeuré: Greece - progress achieved and challenges ahead
Keynote speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central
Bank, at the American-Hellenic Chamber of Commerce conference on "Greece and the global
disruptive environment: A look into the future", Athens, 28 November 2016.
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Ladies and gentlemen,
Thank you for inviting me to this conference.
I am grateful for this opportunity to share with you the ECB's perspective on the third economic
adjustment programme for Greece.
This conference aims to be "a look into the future", and I will indeed try to provide that by
considering the challenges and prospects ahead. Before doing so, let me briefly recall the
circumstances in which the third European Stability Mechanism programme for Greece was
negotiated, as this remains key to understanding where we are now. Against this backdrop, I will
review the progress made in the third programme and discuss the way forward.
I will mainly focus on financial issues, as I believe this is where the ECB's perspective is of
particular relevance.
Challenges for Greece at the start of the third programme
What were the challenges facing Greece in summer 2015 when the programme was
negotiated?
After a severe and long recession, which started back in 2009, the long-awaited rebound of the
Greek economy finally got under way in the second half of 2014. But renewed uncertainty and the
lack of any prospect of continued financial assistance led to a worsening of the economic
environment and of sovereign creditworthiness in early 2015. This in turn had a severe impact on
an already severely weakened financial sector.
Between December 2014 and June 2015, deposit outflows amounted to more than a quarter of
total deposits. Lack of adherence to the second programme barred the ECB, under its rules,
from waiving its minimum credit requirements and accepting Greek government-linked securities
as collateral in its monetary policy operations. Nevertheless, the Eurosystem provided the
liquidity necessary for the Greek economy to function, with adequate safeguards against
monetary financing of the government. As a result, central bank funding rose from €56 billion to
over €125 billion, more than two-thirds of Greece's gross domestic product.
Amid mounting uncertainty, bank holidays and capital controls were introduced in late June 2015,
which eased immediate liquidity pressures in the banking sector. In August 2015 an agreement
was reached on a third programme. One of the immediate priorities at that time was to regain
depositor and market confidence in the Greek banking system.
To this end, ECB Banking Supervision conducted a comprehensive assessment of the four
significant Greek banks between August and October 2015. It was followed by a successful
recapitalisation exercise. The identified capital shortfall of the banks, which amounted to €14.4
billion, was largely covered by private funds, while reliance on public funds was limited to €4.5
billion.
Measuring progress so far
The conclusion of the programme negotiations and the successful recapitalisation of the banking
system led to a stabilisation of economic conditions in the second half of 2015. Benefiting from
the macroeconomic stabilisation, the situation in the Greek banking sector also gradually
improved during the first year of the programme, although it is far from having regained the
ground lost in the first half of 2015.
Since the bank recapitalisation in late 2015, the focus has been on resolving non-performing
loans (NPLs) and on improving bank governance. The non-performing exposure (NPE) ratio of
Greek banks is very high - 49% in June 2016. Reducing it is a key precondition for gradually
restoring an adequate and efficient supply of credit to the Greek economy, and for achieving
sustained growth.
Some important legislative reforms in this direction have already been passed. For instance, the
household insolvency law was amended to ensure that banks can take legal steps against
strategic defaulters and debtors make payments in line with their ability to pay. The authorities
also adopted legislation that liberalises NPL servicing for all loan categories, and provided a
framework for the sale of loans. In addition, banks have set up comprehensive strategies,
including detailed operational measures and actions. The supervisory arm of the ECB in
cooperation with the Bank of Greece recently agreed with banks on operational and financial
targets to significantly reduce their NPE stocks over the coming years.
These policy actions and the gradual macroeconomic stabilisation have already started to work.
And the liquidity position of Greek banks has improved, albeit at a slow pace.
The way forward
The important challenges Greece still faces today can only be addressed by a steady
implementation of the agreed policies and strong political support from all stakeholders.
The reshaping of banks' governance structures in compliance with new requirements is one key
element. Considerable progress has been made this year in the review and reconstitution of the
boards of directors of Greek banks. This process needs to be finalised in the near future. The
banks will face difficult and complex decisions, particularly when resolving the large stock of
nonperforming loans. Thus, bank boards have to have strong and independent directors with a
robust track record who can ensure arm's length decisions in the best interests of their
stakeholders and of the Greek economy.
Bank management needs to be free of political interference and vested interests. With this aim in
mind, we encourage the Hellenic Financial Stability Fund to make every reasonable effort to
finalise the review and reconstitution process within the next few weeks.
On financial sector policy, there are other important elements of the ongoing second review
which seek to further reduce structural impediments to swift and effective NPL resolution. Let me
highlight the reform of the out-of-court workout framework, with its main goal being to provide
sufficient incentives for creditors and debtors to agree on mutually beneficial debt restructuring
arrangements. The framework is intended for viable but distressed firms whose profitability has
been severely hit by the prolonged economic crisis. To be effective, it needs to take into account
the fact that Greek firms have both significant non-performing loans vis-à-vis banks and
significant arrears to the state. Let me add that as of end-2015 total arrears to the state in
respect of taxes and social security contributions were around €110 billion, of which about €79
billion was due from corporations, small and medium-sized enterprises as well as professionals
- the categories eligible for out-of-court frameworks. The stock of non-performing exposures in
Greek banks relative to these same categories amounted to another €55 billion.
Apart from developing effective out-of-court frameworks, the Greek authorities also need to fully
implement the agreed measures to strengthen the judicial system, thereby substantially
shortening legal proceedings and enhancing the competence of the courts. These requirements
are not specific to Greece; experience has shown that NPL resolution requires strong legal
frameworks throughout the euro area. In any case, creditors in Greece have to wait longer to
obtain a court ruling after an insolvency than in any other EU country except the Slovak Republic.
It takes on average about three and a half years, compared with less than six months in Ireland,
the EU's best performer.
Swift progress on NPL resolution will also help banks to support the economic recovery through
credit provision, eventually ending the prolonged period of negative credit growth. So far, credit
developments remain subdued, with credit from monetary financial institutions to the domestic
non-financial sector continuing its downward trend that started in early 2011.
The success of the adjustment programme, however, ultimately rests on its capacity to
reestablish conditions for a path of economic growth that is sustained and sustainable over time.
The success of the out-of-court workouts will provide an input to support the recovery by
contributing to restore the viability of non-financial corporations. Bear in mind that the
indebtedness of Greek non-financial corporations, when measured by debt-to-GDP ratio, rose
from about 52% to approximately 64% between end-2008 and end-2015. Non-residential
investment by the private sector declined by about 50% in the same period.
In this respect, financial sector policy is only one element, but a crucial one, of a much broader
strategy. The strategy is based on decisive action to strengthen competitiveness and investment,
and to restore fiscal sustainability.
Boosting competitiveness and attracting investment are two formidable challenges for the Greek
economy. A lot has been done to improve competitiveness and the gains should not be
unwound. More needs to be done, however, to restore the conditions for a pick-up in investment,
both domestic and from abroad. A business environment more conducive to growth needs to be
established through further structural and product market reforms and a full implementation of
the privatisation programme.
All these efforts need to go hand in hand with policies to alleviate the costs for the most
vulnerable members of society and to help the economy escape the trap of high and long-term
unemployment and increased inequality. The improved targeting and tailoring of the active labour
market policy framework and the rollover of the guaranteed minimum income scheme go exactly
in this direction.
Regarding fiscal sustainability, all stakeholders in the Greek adjustment programme realise that
there are serious concerns about the sustainability of Greek public debt. As you are all well
aware, a discussion is currently ongoing in the Eurogroup on the short-term, medium-term and
long-term measures needed to secure the sustainability of Greek debt. We are looking forward to
a solution that can reassure markets, restore confidence in the sustainability of public debt in an
uncertain macroeconomic environment allow the full involvement of the IMF in the programme -
which would enhance the programme's credibility - and ultimately restore market access for
Greece before the programme ends in July 2018, while not undermining the reform effort.
As regards the potential inclusion of Greek bonds in the Public Sector Purchase Programme
(PSPP), a topic much debated by politicians and the media in Greece in recent weeks, let me be
clear that the Governing Council of the ECB takes decisions on the PSPP in full independence.
Programme developments and, in particular, the debt sustainability assessment of the
institutions are an important input, but they are not the only ones. The Governing Council will
base its assessments also on internal analysis and will take into account other risk management
considerations before making its final decision.
To bring the programme to a successful conclusion and to restore market access for the
sovereign on a lasting basis, it is above all essential that the Greek authorities continue to show a
serious commitment to the goals and measures taken under the programme. Only if this
happens can all stakeholders be confident that reforms will not be reversed and in fact be
strengthened after the programme, therefore further supporting the potential for growth of the
Greek economy.
Conclusions
Let me conclude. I have outlined the progress achieved so far and mapped out the challenges
ahead for the third Greek adjustment programme. In the summer of 2015, European leaders
agreed on a series of measures that will secure Greece's future in the euro. If everyone plays
their part, I am firmly convinced that, by the end, Greece will be better able to reap the benefits of
Economic and Monetary Union - a Union of 340 million people sharing the same currency - and
its economy will be stronger and more resilient.
Thank you for your attention.