##ity assistance from the bank of greece, at a higher cost. following the psi last year, banks took huge one - off losses on their bond portfolios. at the same time, the recession led to a continuous increase in non - performing loans. what started out as a liquidity problem threatened to turn into a solvency problem. the twin crises generated negative feedback loops, creating a general crisis of confidence, compounding the problems faced by the banking system, and exacerbating the contraction in gdp. but a contracting gdp meant a shrinking denominator in the debt - to - gdp ratio. as a result, the debt dynamics worsened, and the crisis became self - reinforcing. last year, greece was said to be on the road to the unthinkable – an exit from the euro! the markets even had a name for it ; grexit. so much for the bad news. is there light at the end of the tunnel? bis central bankers ’ speeches adjustment : fiscal the word “ crisis ” originates from the greek word that means judgment. i believe that historians will judge this crisis to be a positive turning point for the greek economy. why do i believe this? let me explain. consider, first, fiscal adjustment. from 2009 to 2012, the fiscal deficit was reduced by some 9 percentage points of gdp. the primary fiscal deficit was 10½ per cent of gdp in 2009. it is projected to swing into a small surplus this year. what makes these achievements impressive is that they have taken place despite a contracting economy, which creates moving targets for fiscal consolidation. greece ’ s fiscal consolidation is one of the largest ever achieved by any country at any time. additional fiscal measures, amounting to 11½ per cent of gdp, are being implemented in 2013 and 2014. these measures will increase the primary fiscal surplus to 3 per cent of gdp in two years. after many delays, positive signs are also emerging with respect to tax evasion and privatizations. further debt - reducing measures were announced by the eurogroup last november, subject to greece reaching a primary surplus, which the government expects to achieve this year. adjustment : external consider, next, external adjustment. as i mentioned, greece had lost about 30 per cent in terms of cost competitiveness against its major trading partners in the period from 2001 to 2009. since 2010, about 80 per cent of that loss has been recovered. by the end of this year, the entire loss will have been recovered. competitiveness

george a provopoulos : the greek economy and banking system – recent developments and the way forward welcome remarks by mr george a provopoulos, governor of the bank of greece, at the conference “ the crisis in the euro area ”, athens, 23 may 2013. * * * i would like to warmly welcome you to this conference on “ the crisis in the euro area ”. that such a conference is taking place here seems to be especially appropriate. after all, greece is the country where the euro crisis started and which, for much of the past several years, has been at the epicenter of the crisis. what i would like to do is to briefly discuss some developments that led greece into the crisis and then take stock of the progress that greece has made in adjusting its economy. before doing so, let me provide a preview of my main conclusion. although greece has been through some very rough waters, both in terms of its real economy and its banking system, the situation is turning around. considerable progress has been made in addressing the weaknesses of the economy, making it much more competitive. importantly, the country is well on the way to building a strong and competitive banking system. as the governor of the institution responsible for banking supervision and financial stability, i gain special satisfaction from the fact that, after three years of deep crisis, the stability of the banking system has not only been preserved but it has strengthened. it has not, however, always been easy for the bank of greece. let me now turn to the underlying causes, and the policy responses, to greece ’ s sovereign debt crisis. how did this crisis come about? the entry of greece into the euro zone in 2001 was widely seen as marking a transformation in the country ’ s economic performance. entry into the euro area seemed to indeed mark a new regime. between 2001 and 2008, real growth averaged almost 4 per cent a year, inflation fell to the low single digits, and interest - rate spreads between 10 - year greek and german sovereigns dropped to between 10 and 50 basis points, from over 600 basis points in the late 1990s. however, these were years when greece was living dangerously. unsustainable fiscal and external imbalances were building up. by 2009, the fiscal deficit had reached 15½ per cent of gdp and the share of government debt had increased to almost 130 per cent of gdp. moreover, greece ’ s cost competitiveness had deteriorated by 30 per cent, and the current account deficit had peaked at 15