John Iannis Mourmouras: Recent monetary and financial
developments in Greece
Speech by Professor John Iannis Mourmouras, Deputy Governor of the Bank of Greece, at the
Governors' Club, a forum comprising the Governors and Deputy Governors of the central banks
of sixteen Southeast European and Asian countries, 30 October 2016.
* * *
Thank you Madam Chair,
Governors,
Ladies and Gentlemen,
It is an honour to be here with you in the holy city of Jerusalem and I would like to thank the
Governor of the Bank of Israel, Karnit Flug, for inviting me to this high-profile meeting. In the same
Governors' Club meeting in Shanghai in May 2015, I was given the chance to comment on the
latest economic developments in Greece. Then I raised the alarm against the government's
delaying the negotiations with our lenders. Two months after my speech in China, Greece
unfortunately witnessed the cost of backtracking, namely the deposit outflows which destabilised
the banking system, called into question our country's eurozone membership and resulted in the
introduction of capital controls, a bank holiday, bank recapitalisation and, of course, the recession
in 2015 and this year.
A. The real economy
However, it is fair to say that the situation has stabilised since the conclusion of the Third
Memorandum agreement in September last year. Economic activity picked up in the last two
quarters of this year, from a negative growth rate in 2015, to reach positive territory (+0.2%
yearon-year) in 2016 especially if receipts from tourism remain buoyant. Bank of Greece estimates
for next year show an increase in real GDP by 2.5% and 3% in 2017 and 2018 (Figure 1 and
Table 1). The key drivers of growth are expected to be private investment and exports of goods
and services.
Both the economic sentiment indicator (Figure 2) and the industrial confidence indicator (Figure
3) have recovered in the second and third quarter of this year, while in the first half of July 2016
the number of tourist arrivals in airports in Greece increased by 7% and is expected to reach an
unprecedented total of about 25 million visitors in 2016, which is more than double the Greek
population.
The unemployment rate remains elevated (23.2% in July 2016 and 23.1% in the second quarter
of 2016), posing significant threats to social cohesion, while youth unemployment also remains
alarming (at 38.1% in the age category of 15-29 years in the second quarter of 2016),
intensifying the "brain drain" that deprives the economy of high-skilled human capital. Further
deescalation of the unemployment rate and an increase in the employment rate depend to a large
extent on the stabilisation of economic sentiment, economic growth as well as the
implementation of structural changes. Active employment policies and training programmes will
contribute to curbing the unemployment rate (Figure 6). The Greek banking system has
undergone intensified liquidity pressures, following the massive deposit outflows recorded from
October 2014 and until the introduction of capital controls in late June 2015. The completion of
bank recapitalisation in December 2015, whereby private investors subscribed capital of about
€9 billion, as well as the completion of the first review in June 2016 represent important steps
towards the restoration of confidence in the Greek banking system which will facilitate the
gradual recovery of bank deposits. In the period between the June 2015 capital controls and July
2016, a total of €6.8 billion of capital placed by Greek residents (firms and households) in
financial assets abroad, i.e. deposits (worth €4.6 billion) and equities including mutual fund
shares (worth €2.2 billion), has been repatriated. The rise in bank deposits now amounting to
€123.9 billion stems mainly from the corporate sector, while the increase in household deposits
was more contained. In addition, banks' reliance on Emergency Liquidity Assistance (ELA)
progressively declined in the first eight months of 2016, from €77.5 billion in December 2015 to
€47.6 billion in September 2016 (Figure 9). In this context, liquidity conditions are expected to
progressively improve as confidence is gradually restored, following the completion of the first
review and the release of the sub-tranche of €7.5 billion. In view of the above, the decision of the
European Central Bank on 22 June 2016 to reinstate the waiver of the minimum credit rating
requirements for Greek marketable debt instruments, which entered into force on 29 June 2016,
allows Greek banks to obtain funding from the ECB at a lower cost.
However, the brighter outlook is depicted in the improvement of both fiscal and external
imbalances. In particular, 2015 marked a turning point when Greek economy registered a zero
balance in current account, and a primary surplus in the general government (GG) budget, while
the decline in the primary budget deficit in the 2009-2015 period accounted for 10 percentage
points of GDP! Moreover, in 2016 Greece's fiscal balance and external position are both further
improving as the general government primary budget should exceed the target set for the year
(0.63% of GDP according to the draft budget, against a target of 0.5%), while the current account
surplus is expected to stand at 0.9% of GDP (Figure 5). The materialisation of short-term debt
relief measures, already agreed at the May 2016 Eurogroup meeting, is of great significance for
boosting investors' confidence. This is because it signals that the debt servicing burden will be
moderate in the short term, thus releasing available resources needed for economic growth and
alleviating the consequences of a strict fiscal adjustment.
Last but not least, the Greek economy significantly benefited from improved competitiveness. In
part, this development reflects the effect of structural reforms on the labour market, allowing
more flexibility in the process of wage bargaining. More analytically, labour cost competitiveness
has improved by 23.8% from 2009 to 2015 due to substantial labour market reforms and sizable
declines in wage costs due to the prolonged recession. As a result, the cumulative loss in labour
cost competitiveness between 2000 and 2009 has been recovered. Its improvement is estimated
by the Bank of Greece at 3.7% in 2015 and at 0.5% in 2016. Improvements in price
competitiveness are also evident and faster increases in the prices of tradables relative to
nontradables provide incentives for producers to move into tradable sectors. Indeed, price
competitiveness has been gaining momentum from 2012 onwards as the inflation differential with
Greece's main trading partners has been negative. Its cumulative improvement from 2009 to
2015 is estimated at 12.1%. Its improvement for 2015 is estimated at 4.5% by the Bank of
Greece or 5.1% by the ECB (Harmonised Competitiveness Indicators (HCIs)) (Figure 6).
According to ECB-HCIs, the price competitiveness index in 2016: Q1 was still 7.0% above its
2000 level. In 2016 Bank of Greece estimates price competitiveness to remain virtually stable
(0.1% improvement). However Greece still ranks at the lower end of advanced economies and
progress has since stalled or even retreated. In particular, the World Bank Doing Business report
for 2015 ranked Greece 60th among 189 countries (a fall by two places) while according to the
IMD World Competitiveness Yearbook 2016, Greece fell by six places and is ranked 56th among
61 countries. More recently, the World Economic Forum's Global Competitiveness Report 2016-
2017 ranked Greece 86th among 138 nations, which corresponds to a fall by 5 places. But it
should be noted that Greece has achieved high rates of responsiveness to OECD
recommendations consistently since 2011 (OECD, Going for Growth 2013 & Going for Growth
2015).
B. Monetary and Banking Developments
On the other hand, HICP harmonised inflation was marginally negative in September (-0.1%),
having remained negative for the previous fourteen consecutive quarters, despite some
marginally positive monthly spikes (in July and August) as a result of VAT increases in a wide
range of products and services (Figure 7). The convergence of HICP between Greece and the
euro area is mostly attributed to the higher indirect taxes imposed on the Greek economy.
Furthermore, according to Greek banks' latest financial results for the first half of 2016, their
capital adequacy was preserved at 18%, comfortably above the EU average.
At the end of June 2016, non-performing exposures (NPEs) remained relatively flat around
45.1%, about eight times the European average which is around 5.7%, while in absolute terms
the total amount of NPEs reached €108 billion, an 9% increase compared with the end of 2014.
By sector, the highest ratios of non-performing exposures were recorded in the sectors of
agriculture (59%), commercial properties (55%) and tourism (54%). Among the four main loan
segments, the respective ratios for consumer, large business, SMEs and mortgage loans
reached 55.3%, 29.1%, 59.9% and 44.7%, respectively (Figure 8). Loans in delay of more than
90 days accounted for 30% of NPLs, while this evidence is an early warning signal for credit risk
developments in the banking system. Despite the size of the problem, the capital base of the
banking system - as mentioned above - remains strong, while in terms of provision coverage
Greek banks are well placed compared to peers (50.1% vs. 46.1% EU average). If one adds to
this the value of collateral pledged, total risk coverage comes to 101%, one of the highest in the
EU.
Concluding, NPLs represent perhaps the most significant problem for the Greek banking sector
along with liquidity (the two are of course interlinked). The Bank of Greece in its capacity as
supervisor together with the SSM took a set of measures over the last two years including a code
of conduct for banks for the effective and flexible treatment of borrowers facing difficulties in
servicing their debt obligations. Moreover, the Bank of Greece adopted Executive Committee
Acts Nos 82/2016 and 95/2016 detailing the licensing framework for credit servicing firms,
striking a balance between speed, transparency and borrower protection. It also decided to set
binding operational targets for all Greek banks with a view to ensuring a reduction of NPLs over a
horizon of three years. More specifically, according to the targets of the four systemic banks,
NPLs should be reduced by 40% or €41 billion by 2019. This reduction is expected to result from:
firstly, the economic recovery envisaged in the Adjustment Programme and the ensuing return to
profitability for a large majority of businesses and secondly, successful debt
forbearance/restructuring whereby non-performing loans become performing again and a
number of NPLs are sold to funds.
C. One milestone-pending issue
Looking ahead, in terms of economic policy, the steps forward are clear and dictated by the
Memorandum between the Greek authorities and our official international lenders which goes
through the completion of the second review of Greece's Adjustment Programme by the end of
this year, the specification of debt restructuring measures agreed-upon in the Eurogroup meeting
of 24 May 2016 which are the precondition for Greece's participation in the ECB's public sector
asset purchase programme (PSPP), best-known as the "QE programme".
In terms of the mechanics, and applying the ECB's 33% issuer limit and subtracting the
Eurosystem holdings of Greek government bonds, the maximum allowed purchases are €3.8
billion. Some could argue that the above amount is a mere pittance compared with the total
Eurosystem's purchases. Even in this respect, the signaling effect of Greece's inclusion in the
QE programme will be strong enough for GGB prices to recover, accompanied by a significant
fall in volatility, as the overall financial environment is normalised and Greece is no longer an
outlier in the euro area.
D. Political stability as a crucial precondition for a sustainable recovery
First of all, long-lasting political stability, strong governance and leadership are required to regain
the confidence of foreign investors in my country, both in terms of portfolio and Greenfield
investment. There should be no slackening of efforts on reforms and privatisations, but less
austerity, and no complacency by the authorities. They should remain vigilant.
Greece needs a new growth paradigm based on extroversion and innovation as major drivers of
productivity and sustainable economic growth. Let me at this point draw a parallel between my
country and our host country today, Israel, another small, open economy. It is known that during
the period of 1973-1985, Israel had a chronic high inflation, fiscal and external imbalances,
indexed contracts, etc. and an exorbitant public debt of almost 300% of GDP, which has now
been reduced to a record low of 64.8%. It was the emergence of Israel's export-based high-tech
sector in the early 1990s that really put the country's economy on track, with annual GDP growth
accounting for at least 4%. Israel's innovation laurels are several - the highest gross expenditure
on R&D, the biggest number of companies listed on NASDAQ outside of North America, the
highest level of venture capital as a share of GDP. Currently, Tel Aviv has evolved into one of the
world's leading hubs for technology and innovation and is a prime destination for entrepreneurs,
investors, international R&D facilities and innovation centres. Between 1995 and 2004, Israel
increased its spending on R&D, calculated as a percentage of GDP, from 2.7% to 4.6%, a rate
higher than any other OECD country. Despite the brain drain, Greece still has a highly qualified
human capital (mostly educated in UK, European and US universities), which is young and
dynamic. Greece should resemble Israel, for instance, in terms of start-up high-tech companies,
a sector in which Israel has shown the way as a true champion. This may be the solution for the
Greek youth's high unemployment problem, the poor job creation record and the subsequent
problem of a jobless recovery.
In closing, let me look forward into the future and end my speech on a note of optimism. It is less
than five years until the milestone year of 2021, a year with lots of sentiment and symbolism for
the Greek people. It will mark the 200th anniversary of the Greek war of independence against the
400-year Ottoman rule, which led to the creation of the modern Greek state. I am confident that if
we persist with reforms in the next four years and take decisive measures, our country will come
out of the woods and the Greek people will look to the future with confidence, being able to
celebrate this important anniversary within a truly modern European state with jobs, prosperity
and social cohesion that our great nation quite rightly deserves.