Yannis Stournaras: Recent economic and financial developments in
Greece
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 86th Annual Meeting of
Shareholders, Athens, 1 April 2019.
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GREECE IN THE POST-PROGRAMME PERIOD: CHALLENGES AND PROSPECTS
TOWARDS A SUSTAINABLE GROWTH MODEL
2019 marks the beginning of new course for the Greek economy. Following the successful
completion of the last economic adjustment programme in August 2018, the activation of the
enhanced surveillance framework and with Greece now subject to the improved institutional
framework for economic governance in the European Union and the euro area, the Greek
economy is called upon to operate in a new economic policy context. It is our duty, as individuals,
businesses, political and institutional stakeholders, to prove that we have taken ownership of the
lessons of the crisis.
2018 saw the recovery of the Greek economy gain traction, with a GDP growth rate of 1.9%. The
key drivers of growth were a rise in exports of goods and services, reflecting a greater
extroversion of the economy, and a pick-up in private consumption supported by employment
growth and an increase in households' disposable income.
The smooth execution and completion of the economic adjustment programme, improvements
in confidence and the ensuing strengthening of growth led to a return of deposits to banks. This,
in turn, enabled an increase in bank liquidity, a significant reduction and almost elimination of
emergency liquidity assistance (ELA) from the Bank of Greece, a small recovery of bank credit,
as well as a further relaxation of capital controls.
All of the above led to upgrades of the credit rating of the Greek sovereign and enabled Greece to
return to international financial markets a year later, in February 2019, when, taking advantage
and of the favourable global investment climate, the Greek government successfully issued a
five-year bond. The successful issue of a five-year government bond was the first positive step
on the way back to normality.
Moreover, the successful 10-year bond issue in March 2019, for the first time since the start of
the public debt crisis in 2010, marked a more decisive step in the same direction, i.e. towards
reconnecting Greece with the markets. The legal provision recently passed by Parliament on
primary residence protection also contributes in this direction, as it reforms the relevant
legislative framework, incorporating specific eligibility criteria and safeguards.
The debt relief measures agreed in June 2018, together with the increased disbursements from
the European Stability Mechanism (ESM) for the creation of a cash buffer, have significantly
improved the sustainability of public debt in the medium term. However, given that Greek
government bonds are still rated at below investment grade and in the absence of access to a
precautionary credit line, Greek bonds remained ineligible for the ECB's quantitative easing
programme (QE) that would have helped strengthen economic activity and further improve the
credit standing of Greek bonds. Greek government bond yields are still high and volatile. They are
sensitive to potential disturbances in international financial markets and are influenced by
increased uncertainty regarding the maintenance of reform momentum. In fact, the yield spread
of Greek 10-year government bonds remains elevated, at just under 400 basis points, despite the
recent decline in yields. This persistent phenomenon is a matter that needs our serious attention.
In the
2019 will be another challenging year for the Greek economy. external
environment, the slowdown of world trade amid rising protectionism could dampen export
growth.
On the domestic front, increased uncertainty about the continuation of reforms coupled with
credit constraints are weighing on investment. High taxation in recent years has taken a toll on
the growth dynamics of the economy, the competitiveness of Greek enterprises and confidence,
and has caused tax fatigue leading to a contraction of the tax base and an exhaustion of the
taxpaying capacity.
In 2019, the growth momentum of the Greek economy is expected to continue at the same pace
as in 2018, despite a further slowdown of growth rates worldwide and, especially, in the euro
area. However, this forecast is conditional upon the resolute pursuit of structural reforms, the
implementation of the privatisation programme without delays and the strengthening of
productive investment. These conditions are essential to completing a successful transition to a
sustainable and extroverted growth model.
More specifically, according to Bank of Greece forecasts, GDP at constant prices is expected to
grow by 1.9% in 2019, driven mainly by exports and private consumption. However, in order to
make up for the huge losses suffered by the Greek economy in terms of output and employment
during the long period of recession, higher growth rates are needed.
The low level of investment, insufficient domestic savings, the high - albeit declining - stock of
non-performing loans, the large loss of physical and human capital during the recession, as well
as the apparently low expectations regarding medium-to-long term potential output growth as a
result of adverse demographic trends and the sluggish adoption of new technologies in
production processes, all weaken the growth dynamics. Meanwhile, the outlook for the economy
still depends largely on foreign investor confidence and on foreign capital inflows.
Turning to the domestic environment, and the fiscal front in particular, the possible
implementation of Council of State Plenum rulings that earlier pensions cuts and the abolition of
pensioners' bonuses were unconstitutional, poses the greatest fiscal risk in the immediate future.
Furthermore, the fact that Greece is entering an electoral cycle increases the risk of a slowdown
of the reform effort and of fiscal relaxation, compounding economic uncertainty. Thus,
backtracking on agreed policies would undermine the significant progress achieved so far.
DEVELOPMENTS AND PROSPECTS OF THE GREEK ECONOMY IN 2019
Actual GDP developments in 2018 and the outlook for 2019 indicate that the Greek economy is
back on a track of positive growth. The challenge now is to preserve and reinforce the growth
momentum so as to enable strong growth rates over a long period.
The reason for this is that growth has yet to gain sufficient traction, as reflected in a negative rate
of change in investment, a negative household saving rate and a still high - albeit decreasing -
rate of unemployment. The continued underexecution of the Public Investment Programme is
also dampening growth.
The growth prospects for 2019 will, to a large extent, remain conditional on the course of the
global economy and of the euro area economy in particular, as well as on the continuation of the
reform effort.
Economic expansion in the euro area is projected to continue in 2019, but at a significantly more
moderate pace (1.1%), as recent data point to a considerable weakening relative to the strong
growth rates of previous years. In order to avert the risk of a further economic slowdown in the
euro area and to ensure the continued sustained convergence of inflation to levels that are below,
but close to, 2% over the medium term, the Governing Council of the European Central Bank
(ECB) decided in March 2019 to maintain accommodative monetary policy by keeping the key
ECB interest rates unchanged until the end of the year and by launching a new series of quarterly
targeted longer-term refinancing operations (TLTRO-III) with a maturity of two years. This
decision should improve financial conditions in Greece and support the growth effort. The ECB
Governing Council additionally stressed, as it has been doing for some time now, that fiscal
policy in euro area member states with adequate fiscal space should be supportive of economic
growth.
The Greek economy in the current year is forecast to be driven mainly by export growth, albeit at
a slower pace, and a rise in private consumption. Private consumption will be supported by the
continued robust performance of the tourism sector, the ongoing recovery of the labour market
and the improved disposable income of households, while investment will benefit mainly from a
stabilisation of the real estate market.
HICP inflation fell to 0.8% in 2018, from 1.1% in 2017. The absence of significant further
increases in indirect taxation during 2018, the sharp drop in international crude oil prices as from
October 2018 and strong base effects were among the main factors behind weaker inflation
developments. Looking forward, HICP inflation in 2019 is expected to fall to lower levels, as a
result of low international crude oil prices, a slowdown in global activity and trade, as well as
strong competition in the domestic retail food market.
FISCAL POLICY
In 2017, for the third consecutive year, the general government primary balance exceeded the
programme target. An overperformance is also expected for 2018, according both to the
Introductory Report on the 2019 Budget and to Bank of Greece forecasts.
However, the Public Investment Programme was once again underexecuted in 2018. Moreover,
considerable delays were observed in the clearance of general government arrears to suppliers,
despite targeted disbursements under the loan agreement. These developments, which have
been observed repeatedly in recent years, tighten credit supply constraints, thereby depriving the
real economy of much-needed financing resources and weighing on long-term growth, as also
pointed out by the European Commission in its Enhanced Surveillance Report.
For 2019, an expansionary fiscal package amounting to roughly 0.6% of GDP is envisaged, partly
offset by a curtailment of 0.3% of GDP in Public Investment Programme expenditure.
More importantly, possible further fiscal expansion in the run-up to the elections could put public
finances at risk.
THE BANKING SYSTEM
Developments in the Greek banking system during 2018 were marked by an accelerating return
of bank deposits, banks' improved liquidity situation and diversification of funding sources through
access to the interbank market and away from emergency liquidity assistance (ELA) of the Bank
of Greece, a small recovery of bank credit and the maintenance of capital adequacy ratios at
satisfactory levels. However, bank profitability remained weak.
In early 2018, an EU-wide stress test exercise was conducted, including Greece's four systemic
banks, in order to assess bank resilience to hypothetical shocks over the period 2018-2020. The
stress test exercise identified no capital shortfall in any of the participating Greek banks.
Non-performing loans
The high stock of non-performing loans (NPLs) on banks' balance sheets remains the major
challenge for Greek banks and a serious constraint on their lending capacity. Banks are using the
options provided by the improved legal and regulatory framework, which has removed significant
institutional and administrative impediments to NPL reduction. These important reforms have
begun to bear fruit, as indicated by the reduction of the stock of NPLs to €81.8 billion at
endDecember 2018 (or 45.4% of total loans), down from a peak of €107.2 billion in March 2016.
However, the NPL stock is still excessively high.
At the end of March 2019, Greek banks submitted to the ECB and the Bank of Greece their
revised operational targets for NPL reduction, incorporating any recent changes in their
strategies since September 2018 and any revised macroeconomic assumptions. According to
the previous submission in September 2018, the banks aimed to reduce the aggregate stock of
NPLs to €34.1 billion by end-2021, bringing the NPL ratio down to 21.2% of total loans. With the
new submission, the Banks aim to reduce the NPL ratio even further, to slightly below 20%.
Despite the significant reduction, this ratio is still roughly six times the EU28 average, meaning
that the NPL reduction needs to be further accelerated.
The successful resolution of the NPL problem is one of the major challenges facing the Greek
economy in its effort to achieve sustainable growth, given that bank lending is the main source of
financing for non-financial corporations (NFCs), owing to their structure and size, and for
households. Freeing the banks of the NPL burden would help reduce the financial risks and
funding costs faced by banks, thereby improving their internal capital generation capacity on a
sustainable basis and enabling them to resume their intermediation role. In addition, alleviating
the NPL burden would strengthen banks' resilience and shock-absorbing capacity against
potential future shocks; support operating profitability and put the conditions in place for a gradual
increase in loan supply and a decrease in lending rates to enterprises and households, thereby
enabling the smooth financing of the real economy.
The Greek authorities will soon need to decide on new, more systemic tools that would
complement the banks' own efforts. The Bank of Greece has for quite some time now proposed
a systemic solution, which provides for the transfer to Special Purpose Vehicles (SPVs) of a
significant part of NPLs along with part of the deferred tax credits (DTCs) on banks' balance
sheets. This solution has the advantage of addressing two very serious problems at the same
time: NPLs and DTCs. The government and the Bank of Greece are working together towards
the submission for approval of such systemic solutions by the competent European authorities
and their ultimate adoption with a view to successfully tackling the NPL problem.
Furthermore, as mentioned previously, the new legislation on primary residence protection is a
first step towards an overhaul of the personal insolvency framework in pursuit of a holistic
solution to the problem. The implementation of the new framework, which incorporates specific
eligibility criteria and safeguards, aims to protect the more vulnerable social groups, to avoid
creating moral hazard at the expense of non-delinquent borrowers and to ensure that the impact
on bank capital is manageable.
PRIVATE INSURANCE UNDERTAKINGS
As a consequence of Solvency II, the Greek private insurance market matured further in 2018,
with improvements in governance structures and human resources. Risk and solvency
assessment capabilities were also improved, with a view to better capital and risk management
and more effective protection of policy-holders. In 2018, insurers continued their efforts to reduce
the long-term guarantees embedded in their products. In this context, the time horizon of
coverages has been reduced, and the financial guarantees offered reflect more accurately the
prevailing economic conditions. These practices have had a positive impact on the undertakings
themselves, by enhancing their solvency position, and on policy-holders, by ensuring lower
insurance costs and better quality of insurance products. Nevertheless, insurance undertakings
must take care not to lose their long-term perspective.
In the life insurance sector, insurance undertakings are increasingly designing and providing
insurance-based investment products. This business strategy supports the financial strength of
insurance undertakings, while also enabling them to offer higher returns to policy-holders,
although exposing them to higher investment risks. Against this background, it is of crucial
importance that insurers provide accurate and relevant information to prospective customers,
enabling them to understand the risks involved and avoid losses. In addition, with Law 4583/2018,
Directive (EU) 2016/97 on Insurance Distribution was transposed into national legislation, and the
Bank of Greece was entrusted with the supervision of insurance intermediaries and distributors.
The outlook for the domestic insurance market is promising. In particular, based on the recent
proposal for an EU regulation on a Pan-European Personal Pension Product (PEPP), Greek
insurance undertakings could assume a new role and offer personal pension products to
customers seeking to supplement their pension entitlements. Likewise, insurance undertakings
could be part of a broader scheme providing protection against natural disasters, climate
change-related and environmental risks in general.
Moreover, insurance undertakings can take advantage of new technologies, such as big data
analytics, artificial intelligence and machine learning, to improve risk assessment and pricing.
RISKS AND SOURCES OF UNCERTAINTY
Despite the progress made so far, as shown by key economic aggregates, risks remain, both
domestic and external.
On the external front, risks could arise from a possible further slowdown of global economic
activity in 2019 amid increasing trade protectionism, geopolitical risks and vulnerabilities in
emerging market economies. The slowdown of the European economy is also a significant
source of concern, which together with heightened uncertainty over the outcome of the Brexit
process, could negatively affect the growth of Greek exports and tourism.
Turning to the domestic front, the possible implementation of Council of State Plenum rulings
that earlier pensions cuts and the abolition of pensioners' bonuses were unconstitutional, poses
the greatest fiscal risk in the medium term. The associated additional expenditure would weigh
negatively on the public debt sustainability analysis and would feed uncertainty about the fiscal
policy and the financial sustainability of the pension system.
Other domestic risks include the potential implications of high taxation and the overall fiscal
policy mix, as well as the backtracking on reforms or delays in their implementation. In addition,
in the labour market, the increase in the minimum wage, legislated last January, though expected
to bring about short-term gains by supporting disposable income and thereby private
consumption, is expected in the medium term to hurt employment, mainly of youth, and
competitiveness. In any event, any raise of the average wage must be consistent with labour
productivity growth, so as to preserve the gains in competitiveness and employment achieved
through a painstaking reform effort since 2010.
CHALLENGES FOR GROWTH
Greece is confronted with a dual challenge: on the one hand, to achieve strong and sustainable
growth rates and, on the other, to ensure high primary surpluses in order to meet its fiscal
commitments, as defined in the Eurogroup decision of June 2018 and by the broader framework
of European fiscal rules.
During the long period of adjustment, the Greek economy succeeded in correcting several
macroeconomic imbalances. However, Greece continues to face vulnerabilities which can, to a
large extent, be considered a legacy of the crisis, although the multiple and interrelated nature of
these vulnerabilities reveals chronic weaknesses.
In greater detail:
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The permanent return of the Greek State to international financial markets on
sustainable terms is the greatest challenge ahead. The existence of a cash buffer, though
useful, is only a temporary means for refinancing State borrowing requirements, and would prove
rather ineffective in the event of future shocks in international markets. By no means, therefore,
can the cash buffer substitute for a return to the markets at regular intervals and on sustainable
terms.
- The high public debt-to-GDP ratio increases public and private sector borrowing costs and
puts a drag on growth. Although Greece's debt sustainability improved markedly with the
measures adopted by the Eurogroup since 2012 and up, most recently, to June 2018, debt
reduction ultimately hinges upon both achieving the fiscal targets and remaining committed to the
reform effort so as to ensure robust GDP growth.
- The maintenance of large primary surpluses over an extended period of time (3.5% of
GDP annually until 2022 and 2.2% of GDP on average over the period 2023-2060), especially
when accompanied by high taxation, weighs on growth and consequently on debt sustainability.
- on banks' balance sheets hampers the
The high stock of non-performing loans (NPLs)
financing of growth, as it ties up bank capital and financing resources in non-productive activities.
The successful resolution of this problem is absolutely necessary in order to improve the quality
of bank assets. This, in turn, would enhance the access of healthy entrepreneurship to bank
credit.
- but the highest across the European
The rate of unemployment remains not only high,
Union. High unemployment, in particular youth and long-term unemployment, gives rise to
inequalities that threaten social cohesion, devalues human capital, saps away any motivation for
better education and work, and feeds the brain drain.
- Low structural competitiveness, with in fact a trend towards deteriorating.
- The still negative rate of change in investment, considering the need to replenish Greece's
capital stock, especially in the wake of a protracted period of disinvestment. Moreover, continued
underexecution of the Public Investment Programme holds back growth, as it reduces aggregate
demand, leads to a deterioration of public infrastructure and increases businesses' operating
costs.
- Insufficient domestic savings. The rise in nominal disposable income per capita, in particular
in the lower income brackets, supported by employment growth especially among youth and
workers with part-time and intermittent employment contracts, was chiefly channelled into
consumption. Thus, the household saving rate has remained in negative territory.
- Delays in the delivery of justice. According to the Enforcing Contracts Indicator used in the
World Bank's Doing Business report for 2019, compared to the OECD average, the time for trial
and to enforce the judgment is three times longer in Greece, while the time for resolving
insolvency is twice as long. Therefore, the rapid and fair settlement of legal disputes in a
transparent and stable legal framework is crucial to strengthening the rule of law, thereby also
improving investor confidence.
- The quality of institutions and respect for independent authorities. Countries with weak
institutions lack in flexibility and adaptability, making potential economic disturbances more likely
to occur and more difficult to address.
- Adverse demographic developments. Over the past decade, Greece's demographics have
deteriorated dramatically, as evidenced by the decline and rapid ageing of the population and a
very low fertility rate. This trend in demographic data was further exacerbated by the recent wave
of migration of part of the population of reproductive age. The demographic crisis is one of the
most serious challenges that Greece's society and economy will need to address in the
immediate future, as the rapid contraction and ageing of the population adversely impacts
potential output and the pace of economic growth in the medium-to-long term.
- According to the Digital Economy and
The slow digital transformation of the economy.
Society Index (DESI), Greece ranked second to last among the EU28 in 2018, meaning that the
digital transformation of the Greek economy remains slow. As a result, Greece is still considered
'digitally immature'. Consequently, policy action must be taken to eliminate this technological lag
and reduce digital illiteracy.
- Redefining the concept
Climate Change and the challenge of sustainable development.
of growth in a sustainability context and embracing the principles of a circular economy will be
crucial to our future. According to the World Economic Forum's Global Risks Report for 2019,
three of the top five risks for the world economy are environmental and all three relate to climate
change.
PREREQUISITES FOR SUSTAINABLE GROWTH
Addressing the above challenges effectively will require, as a minimum, the following set of policy
actions:
First, a continuation and completion of structural reforms, so as to safeguard the
achievements made so far, reinforce the credibility of economic policy and further improve
Greece's credit standing, paving the way to a
permanent return to international financial
markets on sustainable terms. In this context, top priority must be given to reforms that
enhance public administration efficiency, legal certainty, especially in land use, and the faster
delivery of justice.
Second, so as to free up funds for viable
reducing the high stock of non-performing loans,
businesses, facilitate the restructuring of the business sector and strengthen healthy
competition. Meanwhile, the legal framework reforms currently under way should improve
payment morale.
Third, a change to the fiscal policy mix geared towards lowering the excessively high tax rates,
further rationalising public expenditure and enhancing the Public Investment Programme. Ideally,
this change should be combined with more realistic primary surplus targets, considering that,
with public debt close to 170% of GDP, one additional percentage point increase in GDP
contributes 1.7 times more towards reducing the public debt ratio than does one percentage
point of primary surplus.
Fourth, which
greater focus on attracting foreign direct investment of high value added,
would accelerate technology integration, strengthen Greece's export performance, utilise inactive
human resources, thereby increasing total factor productivity. This presupposes a continuation of
privatisations, along with an encouragement of public-private partnerships and a removal of
disincentives to investors.
Fifth, (education, research, innovation). As shown by
strengthening the "knowledge triangle"
the latest global trends, in modern efforts to reconcile the functioning of a market economy, i.e.
capitalism, with democracy, investing in knowledge and the access opportunities to knowledge
for all are a crucial catalyst both for economic growth and for social justice. The Greek education
system, despite producing a pool of highly-qualified individuals, fails to equip them with the skills
required in today's digital world. The new technologies can generate employment opportunities,
provided that labour can rapidly adjust to a human-centred working environment, in which
knowledge, skills, personal initiative, mobility, flexibility and cooperation will play a key role.
Investing in human capital and fostering entrepreneurship are strategies crucial to the successful
adjustment of the labour market. All levels of the education system must therefore be redesigned
in order to cultivate the skills required by the modern labour market. Closer links between
education and the production process will contribute towards this goal.
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2019 will be a challenging year, as domestic and external risks remain. Therefore, there is no
room for complacency. Greece's successful course in new, post-crisis, European normality
calls for strict commitment to uphold the very important achievements made so far, conduct a
prudent economic policy aimed at eliminating the remaining imbalances and pursue reforms.
The ultimate objective is to complete the Greek economy's safe transition to a sustainable
growth model based on extroversion, entrepreneurship, investment, knowledge and social
cohesion, with social sensitivity and respect for the natural environment. The benefits to be
reaped are substantial: a rapid decrease in the unemployment rate, a reversal of the brain drain,
higher total productivity, higher wages and incomes.