Yannis Stournaras: Sources of financing of the Greek economy
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event organised by the
Foundation for Economic and Industrial Research (IOBE) and the Athens Stock Exchange,
Athens, 19 March 2018.
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Ladies and gentlemen,
It is a great pleasure for me to be here with you today for the presentation of a very
comprehensive IOBE report, which draws on a wealth of information to discuss, among other
things, the impact of the distorted growth model of the past and the pressing need to adjust it. I
am also glad to see that the findings of IOBE and its proposals on how to achieve this
adjustment are in line with the recommendations made by the Bank of Greece in successive
reports. It is also encouraging that, even as a forced response to the crisis and with small steps,
this adjustment has been underway for a few years now.
The protracted and deep crisis that Greece experienced over the past ten years has brought
about three major changes that are relevant to its growth model. First, bank lending, which
used to be the main source of financing for households and businesses, collapsed. Second,
private investment, residential investment in particular, shrank. Third, the production structure
became more extrovert against a background of recession in the domestic economy.
Starting with the changes in the real economy, the transition to a new, more extrovert
Businesses, adapting
growth model has already begun and can be expected to continue.
to the new conditions of declining domestic demand, have strengthened their export orientation
and, as a result, the percentage of output that is exported has increased in all sectors. Exports of
goods and services as a percentage of GDP rose from about 19% in 2009 to 33% in 2017, i.e. by
14 percentage points. This improvement has been driven by goods exports and, to a lesser
extent, by services exports. A case in point is the refinery industry, which has become one of the
most extrovert among manufacturing sectors.
Developments in productive investment as a driver of growth have been less
Overall, gross capital formation in the private sector has declined over the last ten
encouraging.
years, from 22% of GDP in 2007 to 8% in 2017 at current prices. Of this total 14 percentage point
decline, the largest part (11 percentage points) is attributable to a contraction of household
investment, chiefly in housing. Business investment, on the other hand, showed a smaller
decrease, but remains alarmingly low (4.8% of GDP in 2017, compared with 8% in 2007).
Excluding depreciation, net capital investment by businesses has remained negative since 2009,
standing at about €4.3 billion or -2.4% of nominal GDP in the third quarter of 2017. However, in
order for the capital stock and potential growth of the Greek economy to increase, positive net
capital investment is crucial. For this to happen, private investment must rise by 50% in the
coming years. Therefore, the Greek economy needs an with a focus on
investment shock,
productive and extrovert business investment, to avoid output hysteresis and foster a rebalancing
of the growth model in favour of tradeable goods and services.
One of the obstacles to the adjustment of the economy is the scarcity of investment finance.
In recent years, the household saving ratio has been negative. Businesses, on the other hand,
have used up part of their own resources in recent years in order to service liabilities, in the
absence of profitability and access to market-based financing, also as a result of capital controls.
Turning to external financing, i.e. from banks and capital markets, bank credit remains subdued,
while alternative market financing sources are still underdeveloped. Businesses' market-based
financing virtually collapsed during the crisis years and turned negative from 2011 to 2015. It has
since rebounded, but remains well below pre-crisis levels, while it has deteriorated anew since
the last quarter of 2016.
In an environment, post-crisis, of bank lending scarcity and tighter credit standards, businesses
have sought to cover their financing needs through alternative types of external financing, in
addition to their own resources. These alternative types included non-bank loans, i.e. loans from
domestic financial institutions other than banks, as well as foreign borrowing, mostly intragroup
loans and corporate bonds issued on international markets. They also raised unlisted equity
financing, while particularly muted was the domestic issuance of corporate bonds (€600 million
in 2017) and listed shares. Improved economic conditions helped Greek businesses with positive
growth prospects to regain access to international markets, with bond issuance coming to €1.1
billion in 2017, relatively more moderate compared with €6.3 billion in 2012-2014.
Small and medium-sized enterprises, which make up the vast majority of Greek businesses,
were disproportionally hit, compared with large businesses with high credit ratings, by the
continued contraction in domestic bank lending, given their almost exclusive reliance on bank
lending for their external financing.
traditionally a key source of financing for Greek businesses,
The supply of bank credit,
inevitably decreased during the crisis, as banks faced strong pressures on their liquidity,
profitability and capital adequacy from the combined impact of: (a) their inability to access
international markets; (b) continuous deposit outflows; (c) the public debt restructuring; (d) the
recession, as well as strategic default practices, on the quality of their loan portfolios; and (e)
capital controls.
The ECB's interventions were crucial in supporting and restoring smooth monetary policy
transmission to the real economy. At the European level, credit growth turned positive long ago,
whereas in Greece it would have been far more negative in the absence of these measures.
The improvement in confidence in the Greek banking system and the tackling of the
problem posed by the high stock of non-performing loans can be expected to further boost
bank lending. On a positive note, the annual contraction in credit growth observed during the
crisis seems to have eased considerably, in particular with respect to credit to non-financial
corporations, which rose in 2017 relative to 2016, as reflected in disbursements of new loans
with a defined maturity.
The completion of the two pillars of the Banking Union, i.e. the Single Supervisory
Mechanism and the Single Resolution Mechanism, has already contributed significantly to
restoring confidence, as the supervisory authorities uniformly and strictly assess banks'
soundness and require banks to maintain high capital adequacy ratios and, at the same time,
improve the quality of their balance sheets. The completion of the third pillar, the European
deposit insurance scheme, will bolster confidence even further.
Reducing the high stock of non-performing loans will exert a beneficial effect on economic
activity and productivity via two channels: (a) increased supply of bank loans; and (b) the
restructuring of the productive sector. According to Bank of Greece estimates and research, a
reduction in non-performing loans will help reduce banks' financial risk and drive down their
funding costs, while also boosting their capital adequacy.
This will gradually translate into higher loan supply and lower lending rates to businesses
Meanwhile, business and household financial risk will decline as the economy
and households.
recovers, producing valuation gains on their existing assets and higher returns on capital and real
estate property. The creditworthiness of households and businesses will therefore increase,
enabling further support to investment demand. Finally, the resolution of non-performing loans
will free up resources which, if allocated to more productive businesses and sectors, will lead to
higher total productivity. Crucial will be the financial support to business start-ups, which have a
stronger growth potential than well-established businesses and can prove to be big job creators.
Today, the domestic banking system is clearly stronger than at the start of the crisis. Banks'
capital adequacy ratios are satisfactory, higher than the EU average; profitability, ROE and ROA
indicators have improved; and the actions taken to tackle the problem of non-performing loans
seem to be bearing fruit, as the NPL stock is continuously falling in line with the targets set.
During 2017, the outstanding balance of banks' non-performing exposures decreased by some
€11 billion, but still remains high (about €95 billion as at end-2017).
In addition to the NPL-reducing impact of solid recovery, further NPL reduction can also be
expected to come from which will help improve the
the acceleration of real estate e-auctions,
pricing of collateral undergoing liquidation that inevitably loses value so long as its sale is
delayed. These delays hamper the development of a secondary loan market, as well as the
implementation of other measures that would speed up judicial proceedings and facilitate the
active management of at least part of non-performing loans under legal protection, in particular
those presumably owed by strategic defaulters.
It is worth noting that, even in the cases where banks have agreed on multi-creditor workouts,
several months are needed to complete the relevant legal procedures before these workouts can
be implemented, obviously depriving the economy of resources. Following the publication of the
relevant guidelines by the European Commission, the possibility of transferring NPEs to one or
more central entities to be set up for this purpose could be considered.
However, despite the important role that banks will continue to play in Greece and the EU, in
particular for small and medium-sized enterprises, market participants have, for years now,
pointed out the pressing need to expand long-term financing sources.
Apart from the traditional forms of investment financing, e.g. bank credit and guarantee
instruments, more active use could be made of the capital markets or alternative financing
instruments such as the following:
(1) including venture capital, equity crowdfunding and specialised platforms for
equity funding,
public listing of SMEs;
(2) hybrid instruments, such as convertible bonds and mezzanine finance, typically involving
debt instruments that, subject to a trigger, can be converted to equity;
(3) non-bank debt financing, such as corporate bonds, securitised debt and covered bonds.
With the exception of corporate bonds, market-based financing is virtually non-existent
in Greece for small and medium-sized enterprises, as shown by the present IOBE study, and is
also very limited at European level. In the EU, market-based financing of small and
mediumsized enterprises accounts for less than 15% of their total financing, and is very costly. A key
problem is that investors lack information on small and medium-sized enterprises. In this regard,
around 25% of all companies and in Europe
around 75% of owner-managed companies do
not have a credit score, according to the European Commission's Green Paper on Building a
Capital Markets Union.
The extent of the problem across the EU led the European Commission, in 2015, to draw
up and launch an ambitious plan for building a single EU-wide capital market by 2019. The
plan aims to improve access to financing for all businesses across Europe, increase and
diversify the sources of funding, and make markets work more effectively and efficiently, by
removing obstacles that make investor and business access to capital markets harder and
costlier.
Well-developed capital markets deliver considerable benefits to market participants and
economic activity in general. First, they enable businesses to diversify their financing sources,
thereby reducing their reliance on bank credit, and create an environment that is more resilient to
shocks. Second, they help to improve the allocation of capital in the economy and risk sharing,
by offering investors a broader array of options and enabling them to make their investment
decisions in line with their risk appetites and therefore finance even businesses that would have
been seen, by banks, as too risky to lend to. Third, equity financing in particular boosts
investment without necessarily increasing private debt in the economy.
Progress towards the creation of a Capital Markets Union has been steady, but rather
slow. Of the eight legislative proposals submitted by the European Commission before early
March 2018, three have been approved so far by the European Parliament and the Council and
concern: simple, transparent and standardised securitisation as an additional source of financing
in particular for small and medium-sized enterprises and start-ups; the European Venture Capital
Fund and European Social Entrepreneurship Fund Regulations, aimed to facilitate investment in
innovative companies; and the revision of the Prospectus Directive with a view to facilitating the
access of small and medium-sized enterprises' to capital markets. The five remaining proposals
are still being negotiated. Meanwhile, during the past two weeks, the European Commission
released five new proposals on: an Action Plan on how to harness the opportunities presented by
technology-enabled innovation in financial services (FinTech) and crowdfunding; an Action Plan
on sustainable finance for a greener and cleaner economy; common rules on covered bonds as
a stable and cost-effective source of funding for credit institutions, especially where markets are
less developed, which would translate into lower borrowing costs for the economy at large; a
proposed Directive aimed to reduce barriers to cross-border distribution of investment funds,
making it simpler, faster and less costly; and the clarification of the law applicable to
crossborder transactions in claims and securities, promoting cross-border investment.
Once finalised and implemented, this legislative package can be expected to remove barriers to
the geographical diversification of investor portfolios, which reduce market liquidity and
hamper business expansion. Private investors in the EU usually keep their funds in bank
deposits with short-term maturities. Moreover, institutional investors, in particular insurance
undertakings and pension funds, with traditionally long investment horizons, have reduced their
equity investment to 5-10% of their total portfolios. The Capital Markets Union, by facilitating
access to attractive investment on competitive and transparent terms, is expected to encourage
such investors to invest in equity instruments within the EU. This will help tackle the challenges
that population ageing and low interest rates pose to the viability of social security funds, while at
the same time opening up financing opportunities for businesses.
Overall, however, as bank credit and the recourse to alternative financing sources are not
expected - at least in the short term - to increase enough to bring about the quantum leap in
business investment needed for sustainable growth, an aggressive policy for attracting
strategic foreign direct investment is necessary. This need becomes all the more pressing
considering that the saving-to-GDP ratio of the domestic private sector dropped dramatically
during the crisis, from 15.3% of GDP in 2007 to 3.8% in the first three quarters of 2017.
If the country is to attract foreign direct investment, priority must be given to eliminating major
counterincentives, such as red tape, an unclear and shifting legislative and regulatory
framework, an unpredictable tax system, inadequate protection of property rights, and delays in
contract enforcement. Although foreign direct investment in Greece has been on an upward trend
for the past two years, starting, true, from low levels, its share in GDP is still well below that of
Greece's South-eastern European trading partners, as well as the EU and euro area averages.
Emphasis should also be placed on promoting co-financed projects and systematically utilising
the resources of European Structural Funds under the new Strategic Reference Framework
2014-2020, as well as under other programmes such as those of the European Strategic
Investment Fund and the European Investment Bank. The active utilisation of these
innovative financial instruments and of the advantages they present over traditional grants
can maximise the growth impact of EU resources available for investment in the Greek
economy.
These financial instruments provide opportunities for: mobilising and blending funds from various
EU, public or private sources; revolving funds for the financing of other investment; and
leveraging additional public and private resources. In this manner, the final amount of financing
can turn out to be much larger than the initially available EU resources, creating a
multiplier
effect for the real economy. According to a European Commission report published in
December 2017, Greece has committed 9% of the total resources under the European Regional
Development Fund and the Cohesion Fund through financial instruments, compared with 19%
for Slovenia, 18% for Portugal and 8% for the EU as a whole. However, several of these financial
instruments, despite having been activated, remain untapped.
Bank of Greece research also indicates the important role of public investment in boosting
business investment. Higher public investment is expected to have a favourable effect on
aggregate demand and total productivity in the private sector and to create incentives for
investment initiatives.
Most importantly however, what is needed is a continuation of reforms and
privatisations, starting with the elimination of obstacles to large investment projects that have
already been agreed upon, but are lagging. Greece must consolidate investor confidence in the
continuation of reforms and convince that fiscal policy will not relapse once again in the wrong
direction, succumbing to clientelism and to a stifling by the State of private initiative. This would
have a positive impact on the terms of Greece's return to the markets, improve market sentiment
and help attract investment. It would also encourage the return of deposits to banks, thereby
enhancing banks' lending capacity. The above would set in motion a virtuous circle for the
economy and the banking system and create the necessary conditions for investment financing
and a return to sustainable growth.
If consolidating confidence is a sine qua non for the above, i.e. for the increase of both domestic
and total investment,
Greece must also take full advantage of the possibilities arising from
EU and euro area membership to create a financial safety net that would convince of its
ability to cope with any headwinds that could make its financing costs unsustainable, in particular
in an international environment rife with financial and geopolitical challenges.
Ladies and gentlemen,
Today, Greece faces the historic challenge of returning to normality and to a path of convergence
with its European partners. A return to strong and sustainable growth calls for maintaining and
implementing the structural reforms already legislated, as well as further crucial reforms in areas
that are still lagging behind, such as the tax system, public administration, the judicial system,
the link between production, research and education, the legislative and regulatory framework,
especially as regards the use of land, and the goods and services markets. It is obvious that only
on this condition can Greece once again become a friendly place for doing business, effectively
support productive investment and make a successful leap in total factor productivity.
In closing, I would like to underline that, in the long run, increasing investment require an increase
in private sector saving (by households and non-financial corporations), which, as I pointed out
earlier, has declined dramatically, dropping by 11.5 percentage points as a ratio of GDP, in ten
years. The fall in saving was particularly sharp in the years 2015-2016, for households and
businesses alike. Admittedly, the capital controls combined with higher taxation led households
and businesses to tap their savings, in order to meet their current needs.
However, there can be no investment without domestic saving or, alternatively, without continued
foreign financing. This is why it is so important in the long run to restore the saving capacity of
the private sector. In this context, the development of the second and third pillars of the social
security system will not only ensure the system's viability, but will also encourage households to
increase their saving and open up a new channel for the financing of business investment. This
will enable Greece, in a self-reliant manner, to increase its productive capacity and build the new
growth model on sound foundations.