john iannis mourmouras : some reflections on greek and european capital markets text version of a powerpoint presentation by prof. john iannis mourmouras, deputy governor of the bank of greece, at a meeting with international investors and analysts, organised by redburn access, new york, 7 october 2015. * * * this is the text version of the powerpoint presentation used by the author for his meeting with international investors and analysts in new york ( 7 october 2015 ) organised by redburn access. i am delighted to be in new york. today, i would like to share my thoughts and exchange views with you on greek and european capital markets in these particularly volatile times. first of all, i will talk about the third mou in greece, capital controls and the forthcoming bank recapitalisation and, secondly, i will offer some reflections on current developments and future prospects of greek and european capital markets, looking into the main drivers behind them. i. greece 1. basic elements of the third mou the key characteristics of the third mou following months of intense and rather overdue negotiations, the greek authorities signed the third economic adjustment programme, worth €86 billion over the coming three years ( 2015 – 2018 ), out of which €54. 1 billion will cover debt amortisation and interest payments ( €37. 5 billion in amortisation and €16. 6 billion in interest payments ), €25 billion will be disbursed to cover the upcoming bank recapitalisation and resolution costs and the remaining amount will be used for arrears clearance. the hellenic parliament ratified a set of upfront fiscal measures ( a total package of around €8 billion ), which are for the most part ( 80 % ) based on a fair balance between indirect taxation and pension cuts. the above fiscal measures adopted in the context of the third mou are expected to offset the deviation of the 2015 fiscal outcome vis - a - vis the new primary balance targets of – 0. 25 % of gdp in 2015, 0. 5 % in 2016, 1. 75 % in 2017, and 3. 5 % in 2018 and beyond. in addition, greece has to implement more reforms, inter alia, the hellenic statistical authority ’ s full legal independence, reform of the code of civil procedure, the transposition into greek legislation of the eu ’ s bank recovery and resolution directive and the introduction of quasi - automatic spending cuts in case of deviations from the primary surplus target

easing programme, the turmoil in chinese markets together with emes capital outflows, and global geopolitical risks ( ukraine crisis escalation, jihadi terrorist rise, etc. ). as far as qe in the euro area is concerned, some voices in frankfurt call for an increase bis central bankers ’ speeches in the ecb ’ s qe from €60 billion monthly to €80 billion or more. while ecb ’ s policy has been accommodative, it has been much less accommodative than other central banks. a pace of €80 billion per month, it would take until the end of 2017 for the ecb ’ s qe to reach the same levels relative to gdp with the federal reserve and the bank of england. others claim that the qe period should be extended beyond september 2016, implying a second round of qe in europe. ecb president mario draghi himself, when asked at the last press conference in frankfurt said : “ accordingly, the governing council will closely monitor all relevant incoming information. it emphasises its willingness and ability to act, if warranted, by using all the instruments available within its mandate and, in particular, recalls that the asset purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme ”. the effects of divergent monetary paths ( fed rate hike 1 vs. draghi ’ s qe ) would normally strengthen the value of the us dollar against the euro and would also contribute to a fall in the german bund and other european country bond yields and to a rise in euro stocks. the chinese market turmoil 2 together with capital outflows from emerging market economies ( emes ) and the possible escalation of a currency war after the upcoming fed rate hike might work at opposite directions, contributing to further market volatility for european capital markets. the volatility index ( vix ), which measures stock market volatility, surged to 40, its highest level since 2011, while the rise in emes ’ implied equity volatility ( vxeem ) was its highest on record ( see chart 5 ). it should be recalled that the 3 - month correlation between eur / usd and vix has reached its highest level since 2009. chart 5 : implied volatilities in financial markets the dashed horizontal lines represent averages from 1 / 1 / 2012 to 31 / 12 / 2014. 3 chicago board options exchange - traded fund volatility