remaining necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity. overall, euro area economic activity should stabilise and recover in the course of the year, albeit at a subdued pace. this assessment is also reflected in the june 2013 eurosystem staff macroeconomic projections for the euro area, which foresee annual real gdp declining by 0. 6 % in 2013 and increasing by 1. 1 % in 2014. compared with the march 2013 ecb staff macroeconomic projections, the projection for 2013 has been revised marginally downwards, largely reflecting the incorporation of the latest gdp data releases. for 2014 there has been a marginal upward revision. the governing council continues to see downside risks surrounding the economic outlook for the euro area. they include the possibility of weaker than expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries. according to eurostat ’ s flash estimate, euro area annual hicp inflation was 1. 4 % in may 2013, up from 1. 2 % in april. this increase was, in particular, accounted for by a rebound in services prices related to the unwinding of the easter effect and an increase in food prices. bis central bankers ’ speeches more generally, as stated last month, annual inflation rates are expected to be subject to some volatility throughout the year due particularly to base effects relating to energy and food price developments twelve months earlier. looking through this volatility, the underlying price pressure over the medium term is expected to remain subdued, reflecting low capacity utilisation and a modest pace of economic recovery. over the medium term, inflation expectations remain firmly anchored in line with price stability. this assessment is also reflected in the june 2013 eurosystem staff macroeconomic projections for the euro area, which foresee annual hicp inflation at 1. 4 % and 1. 3 % in 2013 and 2014, respectively. in comparison with the march 2013 ecb staff macroeconomic projections, the projection for inflation for 2013 has been revised downwards, mainly reflecting the fall in oil prices, while the projection for 2014 remains unchanged. in the governing council ’ s assessment, risks to the outlook for price developments are broadly balanced over the medium term, with upside risks relating to stronger than expected increases in administered prices and indirect taxes, as well as higher commodity prices, and downside risks stemming from weaker economic activity. turning to the monetary analysis, recent data confirm that the underlying pace of monetary and, in particular, credit expansion

exposures to each of these risk factors. the indirect impact on banks of adverse developments in gdp growth and the aforementioned risk factors on banks mainly consists of an increase in credit risk arising from the effect of such developments on the financial condition of households and enterprises and thus on their debt - servicing ability. at present, the bank makes only a broad qualitative assessment of this indirect impact in its published stability analysis. in order to assess the banking sector ’ s capacity to absorb the impact of adverse disturbances, the bank focuses on a number of developments in banks ’ financial condition and makes use of stress testing. the latter involves the bank asking banks to quantify the impact on their own funds and capital adequacy ratios of pre - specified adverse changes in the values of certain basic risk factors. the risk factors considered are the probability of default and the loss given default, interest rates, share prices and exchange rates. in addition, the bank is working towards developing a macro stress - testing framework, especially for credit risk. let me now move on to discuss issues related to basel ii, which represents a major change in the supervisory framework and a challenge to both supervisors and banks. before considering some implications of basel ii for the stability of the banking sector, i would like to refer to the preparations for basel ii implementation in greece and to the choices greek banks are expected to make between the alternative approaches for calculating capital requirements. a large majority of greek banks are expected to adopt the standardized approach in determining capital requirements for credit risk. however, a number of banks, comprising a share of around 50 % of the total assets of the banking sector, are reasonably expected to adopt the foundation irb approach for a significant part of their total portfolio. the bank of greece is encouraging banks to move to the irb approach because this approach will require an improvement in their risk measurement and management systems. thus, it will strengthen their competitive position and their capacity to successfully adapt to changes in the economic environment. for operational risk, although the majority of greek banks are expected to adopt the basic indicator approach to determine capital requirements, most of the large banks plan to adopt the more refined standardized approach. the bank of greece is working closely with the banks to help them prepare for the implementation of the new rules. in this connection, it has already put out 5 consultation documents dealing with issues where there is national discretion. these documents discuss measures which the bank intends to adopt as well as other matters requiring clarification and supervisory guidance. detailed consultation