George A Provopoulos: Overview of recent developments in the Greek
economy
Speech by Mr George A Provopoulos, Governor of the Bank of Greece, at the 80th Annual
Meeting of Shareholders, Athens, 25 February 2013.
* * *
The outlook is improving - efforts should continue in order to ensure that the
sacrifices are not in vain
The improvement in Greece's economic prospects is visible
The ten months since the last General Meeting of Shareholders have seen important
developments, which are now shaping a new and clearly improved economic environment.
A year ago many analysts anticipated that a Greek default and exit from the euro area was
almost inevitable. Today, such an eventuality is significantly reduced and the economy can
look forward to a gradual exit from the crisis.
The turnaround in sentiment has been due to a number of factors, which helped the Greek
economy to avoid the risk of collapse and get back onto the track of rebalancing and
stabilisation.
The among these factors was the affirmative answer of the Greek people to the historic
first
dilemma concerning Greece's continued participation in the euro area. The coalition
government explicitly stated its determination to safeguard the country's European path. This
key choice, along with progress in making up for the major delays associated with the two
consecutive national elections, made it possible for the Eurogroup to decide to support
Greece financially. These developments had a beneficial effect on economic sentiment.
On the domestic front, pessimistic expectations have dissipated considerably and confidence
is improving. The Economic Sentiment Indicator stood at a two-year high in
December 2012-January 2013. An improvement in confidence is also evidenced by the fact
that domestic banks are now less reliant on refinancing from the Eurosystem. This is
attributable to a reversal of the downward trend of deposits (which have increased by EUR
15 billion since the elections of last June), while it also partly reflects the first successful
attempts of Greek banks to regain access to international money markets.
Abroad, the climate as far as Greece is concerned is also turning around. Negative
references to Greece are less frequent, while EU officials express unequivocally their desire
to support Greece. The changed climate is reflected in a sharp narrowing of the yield spread
between Greek and German ten-year government bonds.
The factor which has contributed to this improvement is the progress made in the
second
implementation of the adjustment programme, particularly in addressing the twin deficits -
fiscal and external. This progress is a sign of incipient rebalancing and restructuring in the
economy.
• fiscal
In the domain, deficit reduction has been remarkable. Between 2009 and
2012, both the general government deficit and the corresponding primary deficit
were reduced by 9 percentage points of GDP, while the fall in the structural deficit,
at 15 percentage points, was even larger.
•
Regarding the external sector, the current account deficit shrank to 2.9% in 2012,
down from a peak of almost 15% of GDP in 2008. More importantly, between 2010
and 2012, Greece recovered more than 75% of the loss in cost competitiveness
incurred over the 2001-2009 period.
A crucial factor was the success in safeguarding financial stability and confidence in the
third
banking system. Today we would not be talking about the prospect of recovery, had the
banking system collapsed making Greece's exit from the euro area inevitable. This risk was
averted. In a period marked by record levels of uncertainty, not one depositor suffered the
slightest loss. Not only was systemic stability fully preserved, but the groundwork was also
laid for a robust banking system.
The fourth factor behind the improvement in confidence has been the continued financial
support from official lenders, which gives Greece time for the structural transformation of its
economy to proceed
smoothly. This support, provided on favourable terms, is unprecedented
by international standards.
A fifth factor that also bolsters confidence are the steps being taken towards supplementing
the institutional architecture of both the European Union and the euro area. The ongoing
discussions and decisions taken in this direction have helped to turn the international climate
around; in turn, this affected sentiment in Greece favourably. For instance, the adoption of
the proposal to move to a banking union will lead to a deepening of economic and monetary
union. The announcement of "Outright Monetary Transactions" by the Eurosystem in
September 2012, which by itself helped to restore relatively normal conditions in euro area
financial markets, was of particular importance.
In conclusion, the risk of collapse has been averted, the possibility of a Greek exit
from the euro area is now significantly reduced, and confidence is gradually being
restored. Yet, these encouraging developments leave no room for complacency.
2013 will be another year of recession and unemployment will continue to rise
The Greek economy is still going through a deep crisis, and the risk of a derailing has not
been completely eliminated.
In 2012, GDP contracted for the fifth year in a row, bringing the cumulative decline for the
five-year period 2008-2012 to 20.1%. This percentage will be bigger for 2008-2013, as the
recession is expected to continue, albeit at a slower pace.
The recession led to a dramatic decline in employment and pushed the unemployment rate
up to a historically high annual average of 24.5% in 2012; a further rise is expected in 2013.
This crisis, unprecedented in magnitude and duration, has multiple adverse effects as it:
•
reduces per capita income and living standards;
•
leads physical and human capital to become obsolete;
•
causes savings and banks' deposit base to shrink, thereby leading to liquidity
constraints;
•
feeds uncertainty and discourages investment;
•
hampers fiscal consolidation, as lower incomes mean less revenue for government.
This fuels a vicious circle of deficits and recession that leads to repeated revisions of
deficit and debt targets, undermining the credibility of the consolidation programme.
The deeper-than-expected recession makes a faster pace of structural reforms
imperative
Over the last few years, the recession has turned out to be deeper than initially forecast. The
reasons behind this should be sought in the way the adjustment programme was
implemented: in the wavering, the mistakes and omissions and, above all, the lag in
implementing structural reforms. This lag prevented the contractionary effects of fiscal
consolidation from being mitigated and hindered the return of confidence. The same reasons
also explain the unfavourable financial conditions that prevail. By contrast, if the structural
reforms envisaged in the programme had been implemented consistently and from the
programme's inception, their favourable effects would already have made themselves felt
and would have reduced the duration and severity of the recession. On a positive note, the
depth of the recession and its implications have, in fact, been taken into account as shown
by the revisions to the programme: the implementation horizon, the cost of borrowing and the
maturities of the loans provided to Greece, the size of financial support and the measures to
reduce the level of sovereign debt.
In any event, the recession cannot be used as an excuse for not honouring the commitments
made and, particularly, for any relaxation in the effort to promote the necessary reforms. If
this were to happen, it would seriously undermine the gains in confidence that have come at
the cost of painful sacrifices.
2013 will be a difficult year, but recovery will be visible in the course of 2014
As long as the prospect of an exit from the crisis is not clearly in sight, the continuing
recession creates an unfavourable climate and feeds social tensions. Nevertheless, we are
now at a turning point. There is no doubt that 2013 will be a difficult year, mainly due to the
continuing recession and high unemployment. But we can expect recessionary forces to
weaken gradually and the Greek economy to return to positive growth rates in the course of
2014. Positive effects are expected from:
•
a boost to liquidity and confidence as a result of the recapitalisation of banks and the
return of deposits to the banking system;
•
a further improvement in cost competitiveness - expected in 2013 to more than
offset the competitiveness losses of 2001-2009 - and a resulting increase in
exports;
•
a speeding-up of the privatisation process, leading eventually to investments several
times larger than the initial ones;
•
progress in the deregulation of markets;
•
the restarting of major infrastructure projects such as highways;
•
the implementation of private investment projects, with the support of the National
Strategic Reference Framework (NSRF) and European Investment Bank funds;
• the planned repayment of public sector arrears.
In order to ensure that the above factors will deliver the expected results, it is necessary to
safeguard the recent improvement in confidence. Any extreme or untimely demands put
forward by different social groups would be counterproductive. Society as a whole stands to
make a lasting gain when the economy gets back on its feet again. It also goes without
saying that unlawful incidents against business operations - no matter how isolated - are
particularly harmful to the investment environment and undermine the prospect for a
recovery in employment.
Pressing ahead with the implementation of the programme is a prerequisite for
recovery
Where we stand today bodes well for the future. It can be reasonably expected that real
economic recovery will come fairly soon, provided that certain conditions are fulfilled. The
most important is the continued implementation of the adjustment programme, with
strict adherence to the targets and timetables set. This will ensure continued funding and
eliminate once and for all the risk of exit from the euro area, consolidate confidence in the
economy's future, attract new investment and convey a clear message that the worst is
behind us and an exit from the crisis is in sight.
Implementation of a new model of outward-looking growth
The rebasing of the country's productive capacity on new foundations must be driven by
strengthening its export orientation. This, in turn, requires shifting resources towards the
production of competitive, internationally tradable goods and services. But if we are to
succeed in transforming the economy, we must realise that the adjustment programme
highlights only the minimum changes that need to be made. Thus, in no way does the
programme relieve us from our primary responsibility as a nation to implement a broader
national action plan for growth, incorporating policies for the transition to a new model of
sustainable growth. Now that public finances are stabilising, it is essential that we proceed
faster with fundamental reforms that will ensure:
•
an efficient public sector, both citizen- and business-friendly;
•
modern infrastructure; and
•
open, competitive markets.
Effective use of EU funds
Following the recent European Council decision, the Structural Funds available to Greece for
2014-2020 will total EUR 18.3 billion. These resources can play a decisive role in bringing
the recovery forward and in implementing a long-term strategy for the transformation of the
economy's productive base.
Under current circumstances, EU resources could help to address serious gaps in the
financing of new investment projects. So far, EU funds, despite their positive contribution,
have not been used to maximum advantage. This is precisely why such resources will
function at this time as powerful tools for growth, provided they are integrated into a broader
national plan for growth.
Creating the conditions for lightening the tax burden of those who already pay taxes
The central goals of the tax reform agenda should be to broaden the tax base and curb tax
evasion. Indeed, fiscal adjustment should focus, first, on cutting down those expenditure
items that are not conducive to growth and increasing the return on other items of
expenditure and, second, on modernising tax administration in order to effectively tackle tax
evasion. Action along these lines will create scope for reducing the heavy tax burden that
has, increasingly in the last few years, been shouldered by those who already pay taxes.
This will help foster a sense of equity in tax matters and will generate positive expectations
that will partly offset the contractionary impact of spending cuts.
The reform of the banking sector is key to restoring normal liquidity conditions
Since the onset of the crisis, Greek banks have borne the brunt of the repeated downgrades
of Greek sovereign debt. They were cut off from international markets, while the prevailing
uncertainty led to large deposit outflows and a loss of more than one third of the banks'
deposit base in less than three years.
The banking system's funding constraints impaired its capacity to finance the real economy,
causing problems for production, investment and export activity.
Liquidity tensions were significantly eased by Greek banks' recourse to the monetary policy
operations of the Eurosystem and to emergency liquidity assistance (ELA) from the Bank of
Greece. Thanks to the ample provision of liquidity from these sources, the decline in bank
credit to households and businesses was much milder than the shrinking of the banks'
deposit base. Thus, the Bank of Greece contributed to mitigating the adverse impact of the
sovereign debt crisis on economic activity.
Heightened uncertainty in the first half of 2012 posed major risks to the banking
system
In the January-September 2012 period, the banking groups listed on the Athens Exchange
recorded losses of EUR 5.1 billion. These losses reflected, on the one hand, additional
writedowns on their Greek government bond holdings as a result of PSI and, on the other,
impairment charges on loans to the private sector. Accumulated losses led to a sharp decline
in banks' capital adequacy; thus, their recapitalisation became necessary. The NPL ratio for
the banking system as a whole rose to 22.5% by end-September 2012, from 16% at
endDecember 2011.
Despite the adverse conditions, the risk of instability was averted
The uncertainties that prevailed during the prolonged election period led to successive
surges in cash outflows from banks, requiring the latter to be supplied with an exceptionally
large amount of banknotes to banks. The banks' needs for banknotes were fully and
efficiently met by the Bank of Greece. Even in the direst of circumstances, there was not the
slightest doubt as to the banks' ability to repay customer deposits. Otherwise, there would
have been a collapse in confidence, with devastating consequences for financial stability and
Greece's membership of the euro area. Despite the extremely adverse conditions, action
taken by the government and the Bank of Greece ensured that the banking system
weathered the shock and that not one depositor lost a single euro of their savings. This
response averted a collapse in confidence in the banking system and ultimately an exit from
the euro area.
The recapitalisation of banks is under way
In May and December 2012, the four big banks identified as viable by the Viability
Assessment Exercise of the Bank of Greece received an advance payment from the Hellenic
Financial Stability Fund (HFSF) to replenish their capital above the regulatory minimum. The
next steps of the recapitalisation process involve the issuance of contingent convertible
bonds and the completion of capital increases by the end of April 2013. Private shareholders
will retain control of HFSF-supported banks, provided that they subscribe no less than 10%
of the new common shares to be issued. According to the Memorandum, the other banks will
have to raise private capital by the end of April 2013. If they fail to do so, the Bank of Greece
will activate the steps envisaged in the resolution framework, at the latest by June 2013, in a
manner that will safeguard financial stability.
Considerable progress to date in the consolidation of the banking system
In 2012, despite the deep crisis, the groundwork was laid for the banking system to turn the
page. Banks are already taking their first steps towards internal reorganisation, by adapting
their business models. The entire banking sector is being reshaped through mergers. The
size of the Greek economy and the excess capacity prevailing in the banking system call for
fewer and stronger banks, which in the long run will be more resilient to exogenous shocks.
This process of consolidation will be to the benefit of depositors and borrowers alike. Larger
banks typically have easier access to international markets and, given their greater
efficiency, have fewer incentives to undertake high-risk investments.
At the onset of the crisis, there were 17 banks in operation. There were also 16 cooperative
banks, with a combined market share of just 1%. The resolution and restructuring process is
well under way, as evidenced by the following facts and data:
•
So far, the resolution framework has been used to resolve seven banks - four
commercial banks and three cooperative banks.
•
At present, a merger between the two largest banks, the National Bank of Greece
and Eurobank, is in the process of being completed.
•
Alpha Bank, the third largest bank, has absorbed Emporiki Bank, a subsidiary of
Crédit Agricole.
•
Piraeus Bank has absorbed Geniki Bank, a subsidiary of Société Générale, as well
as the sound assets and the deposits of the state-owned ATEBank; it is currently
negotiating the acquisition of Millennium Bank.
It is therefore expected that, in a few months from now, when the process is completed, the
banking system will comprise three large, strong groups, as well as a few smaller banks. The
market shares of these smaller banks, along with the presence of foreign banks, will ensure
competition. The Greek banking system is clearly becoming more compact and efficient, as
conditions are being put in place to enable it to exploit synergies and economies of scale. It
is becoming stronger and better-capitalised. At the same time, it has retained its significant
presence in south-eastern Europe.
A robust banking system capable of financing economic recovery
The restructuring and recapitalisation of the banking system are pivotal reforms that
contribute to strengthening confidence in the prospects of the Greek economy. The gradual
return of deposits is a first sign that developments in the banking sector are being positively
assessed. The continued return of deposits and the successful completion of the
recapitalisation process will help Greek banks to gradually regain access to international
money and capital markets. We are already witnessing an incipient return of Greek banks to
the international markets. On a more general note, the relaxation of banks' capital and
liquidity constraints is creating conditions for stronger credit flows to finance production,
investment and exports. Having navigated through very troubled waters, the banking system
is emerging stronger, more resilient, and able to finance growth.
Challenges and opportunities
The economic crisis has brought about not only acute problems, but also significant
opportunities.
The two most important opportunities, which pose a challenge for Greece, are:
•
First, to restructure the economy towards high-productivity and high-value-added
sectors that would produce internationally tradable goods and services that can
prove competitive both in the external and in the domestic market.
•
Second, to modernise public administration and rationalise the boundaries and the
management of the public sector, while making it more citizen- and
businessfriendly.
The ability to rise to these major challenges hinges on building and strengthening social
consensus as regards the implementation of the appropriate policies, so as to bring the
recovery forward and create the conditions for sustainable growth.
Comparing the current situation with the one prevailing just a few months ago, it is clear that
much has changed for the better. Most importantly, the risk of default and exit from the euro
area is now remote. Thus the main factor that had fuelled unprecedented market uncertainty
with debilitating effects on the Greek economy is weakening. We can now expect, with
reasonable certainty, that the steps made so far are indeed leading Greece out of the crisis
and onto a path of growth. As this expectation is consolidated, sentiment in Greece will
continue to improve, setting in motion a virtuous circle. For this to happen, though, the
implementation of the adjustment programme must continue without deviations or delays.
Commitment to achieving the targets, and where possible, overshooting the targets, will
remove any remaining uncertainties and strengthen positive prospects, with very beneficial
effects on social cohesion and the country's economic development.
We have already come most of the way on a long and difficult road at tremendous cost to
Greek citizens and businesses. The distance still to be covered, though shorter, will be
equally difficult, as it will require additional effort on top of the earlier sacrifices. However, the
groundwork for dealing with the long-standing problems of the Greek economy has been laid.
Now that the end of this difficult road is finally in sight, we need to intensify our efforts and
quicken our pace in order to cover whatever distance remains and ensure that the citizens'
sacrifices will not be in vain and that, better yet, a promising future lies ahead.