TITLE SLIDE
GREECE: A COMEBACK TO THE FINANCIAL MARKETS?
Are we near the finishing line?
Yannis Stournaras, Governor, Bank of Greece
Economist, Frankfurt, May 31, 2017
It is a great pleasure for me to be here with you today and have the opportunity
to share my thoughts on the prospects of the Greek economy. I will focus on
three issues: First, I will present the progress that has been made so far. Second, I
will address to the remaining challenges. Finally, I will discuss the preconditions
for a sustainable return to financial markets.
1. Progress so far
Since the beginning of the sovereign debt crisis, Greece has implemented a bold
programme of economic adjustment that has eliminated fiscal and external
deficits and improved competitiveness.
SLIDE 1
 The general government balance from a deficit of 15.1% of GDP in 2009
turned into a surplus of 0.7% of GDP in 2016. Between 2009 and 2016, the
primary balance improved by about 14 percentage points. In 2016 the
primary surplus was 4.2 percent of GDP outperforming not only the 0.5
percent target for 2016, but also the 3.5 percent target for 2018. Practically,
the required fiscal adjustment until the end of the programme in 2018 has
nearly been made. This represents one of the largest fiscal adjustments ever
undertaken.
 The current account deficit as a percentage of GDP has fallen by 15
percentage points. For the last two years the current account has effectively
been in balance.
 Labour cost competitiveness has been fully restored. Price competitiveness is
almost back at its 2000 level and can be expected to continue to improve
with the implementation of further product market reforms that raise
competition in various sectors of the economy.
 At the same time, sweeping structural reforms have been implemented
covering the pension system, the health system, labour markets, product
markets, the business environment, public administration, the tax system and
the framework in which fiscal policy is conducted, while the privatization
programme is on-going.
 Recapitalisation and restructuring have taken place in the banking
system, enabling it to withstand the crisis and the deterioration of banks'
asset quality. In addition, significant institutional reforms have been initiated
aiming at reducing the volume of non-performing loans.
SLIDE 2
On account of these developments, there is evidence that the economy has been
undergoing a rebalancing towards tradable, export-oriented sectors. A few
figures are indicative of the forces exerted.
 The share of exports in GDP increased from 19% in 2009 to 32% in 2016
with most of the increase stemming from exports of goods. In fact, according
to Eurostat data, Greece's exports of goods have increased by 43% since 2009
in real terms, compared to 42% for the euro area and 47% for Germany,
Europe's export engine.
 Between 2010 and 2015, the relative price of tradables versus non-tradables
rose by about 10%. Whereas both sectors were hit hard by the recession,
tradables performed better than non-tradables as outward-looking
companies increased their exports, taking advantage of the improvement in
competitiveness. As a result, the relative size of the tradables sector,
measured by Gross Value Added, grew by approximately 12% in volume
terms and by about 24% in nominal terms. Finally, in terms of employment,
the size of the tradables sector increased relative to the non-tradables sector
by around 8%.
These figures would improve further if the reforms already implemented were
enhanced by those planned under the ESM programme. Based on estimates of
the OECD, full implementation of all reforms, both those undertaken and those
scheduled, is expected to boost real GDP over a 10-year-horizon by about 13%.
And this figure excludes further positive effects from structural reforms that
cannot be easily quantified such as the modernisation of the public
administration and the judiciary system, the strengthening of insolvency
regulations and the resolution of non-performing loans. In-house work by the
Bank of Greece provides similar estimates of the effects of structural reforms
with the main effect coming from higher total factor productivity (TFP) growth.
2. Challenges remain
In spite of these positive developments, considerable stock disequilibria remain:
 Unemployment, though falling, remains very high (at about 23%); Job
creation, although robust, is dominated by temporary and part-time jobs.
 The general government debt to GDP ratio has risen to unsustainable
levels (179% of GDP).
 The private debt overhang hampers banks' ability to support the recovery
by granting new credit.
In addition, despite the fact that structural competitiveness improved over the
period 2013-2014 (according to a number of indices compiled by the OECD, the
World Bank, and the World Economic Forum), Greece still ranks at the lower end
of advanced economies, and progress has stalled or even retreated slightly in
recent years.
3. Prospects for a sustainable comeback to financial markets
SLIDE 3
In order to address the remaining challenges, to improve the future growth
prospects of the Greek economy, and to ensure a comeback to financial markets
in 2018, several conditions should be met.
a. Implementation of 2nd review reforms
First and foremost, following the closure of the second review, it is necessary
that there is a smooth and timely implementation of the agreed growth
enhancing reforms.
Delayed closing of the second review increased uncertainty and reduced
confidence which, coupled with the high tax burden, reversed the positive course
of economic activity in 2016 Q4. As a consequence, following the mild recession
in 2015, the economy stagnated in 2016. However, a positive medium-term
outlook is still possible, conditional on a smooth implementation of agreed
reforms. Consumption is expected to continue rebound, driven by robust
employment, which is recovering faster than output, pointing to a job-rich
recovery. Investment is projected to increase as confidence is restored and
financial conditions improve. Exports are projected to benefit from the benign
global economic outlook and past improvements in cost competitiveness. Finally,
although the sizeable over-performance in 2016 is assessed to be mainly of a
temporary nature, the 2017 target is expected to be met with a safe margin.
Moreover, rebalancing the budget towards a more growth-friendly composition
would support economic recovery.
b. Implementation of further growth enhancing reforms to boost exports
and attract FDI
Second, further growth enhancing reforms are needed that will boost exports
and attract FDI are needed. The economic adjustment and the structural
improvements during the past six years made Greece more business friendly and
have created significant investment opportunities. However, domestic savings
are insufficient to meet the investment needs of the Greek economy that, after a
long period of very low investment rates, are significant. Thus, besides restoring
access of companies to capital markets, conditions should be encouraged to
attract foreign capital, notably in the form of Foreign Direct Investment.
In order to attract both domestic and foreign investment, further emphasis
should be given to reforms that improve the business environment, enhance
competition and reduce excessive regulation, protectionism, bureaucracy and
complex legislation. For example, investment licensing procedures need to be
simplified, the administrative burden on businesses reduced, the remaining
regulated professions and network industries opened up, the public
administration modernised and strengthened, judicial efficiency enhanced, court
proceedings speeded up and of course personal and corporate taxation lowered.
Additionally, a more effective use of the domestic high-skilled human capital
(and the return of high-skilled scientists and executives who work abroad)
requires the adoption of policies and reforms that encourage research, facilitate
the diffusion of technology and boost entrepreneurship. Policies include
providing incentives to increase investment in research and development (R&D),
strengthening the links between enterprises and the academic/research
community by allowing universities to commercially exploit research results and
ideas, and effectively using available EU funds.
Alongside structural reforms, and in order to facilitate the recovery through a
normalization of financial conditions, as a matter of urgency the private debt
overhang problem is addressed, since it is the greatest challenge the Greek
banking system and the Greek economy faces.
On the one hand, the high stock of NPLs reduces bank profitability and thus
constrains the supply of credit, which primarily affects bank dependent SMEs. On
the other hand, high NPLs delay corporate restructuring and thus thwart the
ability of viable firms to finance new investment projects. According to research
by the OECD, when more industry capital is sunk in non-viable ("zombie") firms,
the average viable firm undertakes less investment than otherwise. Simulations
by the OECD suggest that reducing the share of capital of non-viable firms in
Greece to the minimum across OECD countries would be associated with a gain
in investment for a typical viable firm of 4.7%, improving productivity-enhancing
capital reallocation in the Greek economy.
A series of legislative and regulatory reforms have already been enacted as part
of the strategy to reduce NPLs, such as the operational targets of individual
banks, revisions of the insolvency law and the gradual setup of a secondary
market for NPLs.
In addition, a number of new measures have already been legislated as prior
actions of the second review, such as the introduction of an out-of-court workout
framework, the revision of corporate insolvency law and the launch of a platform
for electronic auctions.
Besides structural reforms and NPL management, growth prospects can also be
improved by acting on the fiscal policy front in two ways:
 First, a growth friendly fiscal policy mix can be adopted. The increased
emphasis on taxation needs to be reduced in favour of policies that focus on
restraining and restructuring non-productive spending and making more
effective and efficient use of the public sector's assets, especially land.
 Second, the medium-term fiscal target can be reduced. According to estimates
by the Bank of Greece, a lowering of the general government primary surplus
target from 2021 onwards to 2 per cent of GDP, from the 3.5 per cent that is
envisaged now, would be consistent with debt sustainability if combined with
some mild debt relief measures and structural reforms to raise potential
growth. The easing of the primary surplus targets, together with the
implementation of the agreed structural reforms, would put the necessary
conditions in place for a gradual lowering of tax rates, with positive
multiplier effects on economic growth.
c. Ensuring debt sustainability
A final condition for return to financial markets is to ensure debt sustainability.
The ratio of general government debt to GDP is still high. In 2008 that ratio stood
at around 110%. It is now around 179%. The debt path has been strongly
affected by the so-called snowball effect - that arises from interest rates on debt
being much higher than growth. Indeed, from 2010 to 2016, the snowball effect
is estimated at some 82% of GDP. But whatever the causes of its rise, it is crucial
that it is put on a sustainable path. In the context of the above proposals in the
area of fiscal policy making, the Bank of Greece recently made specific proposals
to ensure the sustainability and manageability of public debt.
The short-term measures decided at the Eurogroup meeting of December 5,
2016 are a positive step and are expected to reduce public debt as a ratio of GDP
by 20 percentage points by 2060.
However, to ensure the sustainability of public debt going forward, additional
medium-term measures are necessary. When the debt-to-GDP ratio is above
100%, measures that reduce interest payments on debt can improve the ratio
quicker than a rise in the primary balance.
SLIDE 4
The interest burden of Greek public debt is low until 2021 but increases
substantially thereafter because of payments of deferred interest on the EFSF
loans and interest on new debt issued in financial markets. A simulation
performed by the Bank of Greece defers interest on EFSF loans, extending their
Weighted Average Maturity by 8.5 years - Option 1 in the right-hand diagram.
SLIDE 5
If, in addition to interest deferment, we assume a primary surplus target of 3.5
percent in 2018-2020 and a reduction to 2 percent thereafter, we can see from
the left-hand diagram that the debt path is close to that where a primary surplus
of 3.5 per cent for 10 years is assumed. This exercise is indicative of how
admittedly mild debt relief measures can have significant effects on the debt
profile with no cost for the creditors.
However, as the right-hand diagram shows, in terms of gross financing needs,
option 1 makes debt sustainable at the margin. Hence, further debt relief
measures are necessary in order to reduce gross financing needs significantly
below the 20% threshold and bring debt to a sustainable path. Of course, were
the interest smoothing accompanied by higher growth, as a consequence of
lower primary surpluses, then the debt-to-GDP profile and gross financing needs
would be more favourable. Alternatively, if interest rate smoothing were to occur
and the costs shared equally between Greece and the ESM, this would also lead
to more favourable outcomes.
4. Conclusions and final remarks
The economic adjustment and the structural improvements during the past
seven years have made Greece more business friendly, have created significant
investment opportunities, and have generated positive prospects for the Greek
economy.
The realization of these positive prospects requires a consistent and determined
implementation of the reform and privatization programme including tackling
the private debt overhang problem.
These enable the adoption of medium-term measures to ensure the
sustainability of Greek public debt, which will pave the way for the inclusion of
Greek government bonds in the ECB's quantitative easing programme. Such
developments will set in motion a virtuous circle leading to Greece's return to
international financial markets in 2018, the elimination of capital controls, the
return to financial normality and the definite exit from the crisis.
In order to capitalize on the macroeconomic and fiscal adjustment achieved so
far, the institutions and our European partners must act now in a decisive and
bold manner by specifying the medium-term debt relief measures for the
sustainability of Greece's public debt, which, as was agreed last year, will go into
effect at the end of the current programme. This must be done because the
markets on which Greece will need to borrow after the end of the programme in
the summer of 2018 are demanding to know from now whether the debt will be
sustainable or not. We are all aware of the fact that re-gaining access to financial
markets after the end of the current programme is the only way forward. No one,
neither the partners nor Greece, are in any mood for another memorandum.
Sources:
McGowan A. Andrews, M. D. and Millot V. 2017 "The walking dead: Zombie firms
and productivity performance in OECD countries". OECD Economics Department
Working Papers No. 1372.
Stournaras, Y. 2017 "Entrepreneurship, NPL Resolution Policies and Economic
Growth Prospects in Greece" Speech at an event organized by Piraeus Bank in
Athens, 28 March 2017.
http://www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?It
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Stournaras, Y. 2017 "Greece and the euro area going forward" Speech at Delphi
Economic Forum II, in Delphi 4 March 2017.
http://www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?It
em_ID=416&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b
Stournaras, Y. 2017 "Macroeconomic developments and the contributions of
investment, research and innovation of the pharmaceutical sector to the new
growth model" Speech at an event organized by the Confederation of
Pharmaceutical Companies in Athens, 15 March 2017.
http://www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx?It
em_ID=419&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b
Stournaras, Y. 2017 "Towards a new sustainable development model with a
designation of origin" Speech at an event organized by the Hellenic Association of
Industries of Branded Products in Athens, 22 February 2017.
http://www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx?It
em_ID=412&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b