yannis stournaras : greek economy – current developments, challenges and prospects speech by mr yannis stournaras, governor of the bank of greece, at the hellenic observatory of the london school of economics, london, 25 march 2015. * * * ladies and gentlemen, it is a great pleasure to be with you tonight. i will share with you my thoughts on the prospects of the greek economy and i will focus on four issues : first, the achievements so far during the difficult years of the economic adjustment. second, current developments in the greek economy and future challenges and prospects, in view of the 20 february 2015 eurogroup agreement and the 20 march high level agreement between the greek government and the eu partners. third, the reasons why grexit is not an option. fourth, issues related to the sustainability of greek public debt. a ) economic adjustment during the past five years since the beginning of the crisis, five years ago, greece has come a long way in adjusting its fiscal and external imbalances and has implemented a bold programme of structural reforms. first, there has been unprecedented fiscal consolidation. in 2013, greece returned to a primary surplus in the general government for the first time since 2002. moreover, by achieving a primary surplus ( as defined in the programme ) of 1. 2 % of gdp, it outperformed the programme target of a balanced primary result in the general government. fiscal consolidation achieved a more than 11 percentage point improvement in the primary budget as a percentage of gdp over the period 2009 – 2013, despite the deepening recession. adjusting for the effect of recession, the improvement in the “ structural ” primary budget balance over the period 2009 – 2013 reached 18 percentage points of gdp, at least twice as much as the adjustment in other programme member - states. second, competitiveness has been restored. greece has now recovered all of the cost competitiveness it had lost relative to its trading partners since joining the euro area. cost competitiveness has improved by more than 25 per cent since 2009. according to the ecb ’ s harmonized competitiveness indicators, greece has been one of the best performers in improving labour cost competitiveness over the period 2000 – 2014. this development reflects the effect of structural reforms in the labour market, which have allowed more flexibility in the process of wage bargaining, as well as the impact of the sharp rise in unemployment on labour costs. structural competitiveness is also showing signs of significant improvement, as suggested by indicators compiled by the oec

drive higher inflation as import prices rise. as a result, the gains from depreciation would be only temporary. finally, de - anchoring of inflation expectations would imply substantially higher inflation, requiring a tightening of monetary policy. hence, leaving the euro would not allow the country to run an independent monetary policy, as the primary goal of the central bank would be to stabilize the value of the currency. grexit would also risk the elimination of eu - budget related inflows to greece ( cohesion and structural funds, agricultural subsidies ). overall, grexit would imply huge costs for the greek people, firms and the greek financial system. imf and official debt would run in arrears, while foreign law bonds would force greece into a lengthy litigation process in international courts. in the event of such actions, it is uncertain how long it would take until greece would regain access to financial markets and would depend on the eventual resolution of official foreign law debt. on top of all, a grexit scenario could also have negative contagion effects on weak euro area countries, by introducing a permanent convertibility risk premium into sovereign bond yields and financial asset prices. last but not least, grexit might entail very substantial geopolitical risks. d ) actions to improve debt sustainability turning to public debt sustainability, some points are worth - highlighting : nearly 80 % of greece ’ s general government debt is held by the official sector, i. e. bilateral loans by eu countries under the glf, imf and efsf loans, as well as debt securities held by the ecb and ncbs. up until now, greek debt has benefited from the lowering of the interest rate and the extension of maturities on the glf loans. the interest rate charged on bilateral loans from euro - area partners is euribor plus 50 basis points, which is currently about 0. 56 % per year. glf loans have an average maturity of about 16 years. in addition, the lending rate from the european financial stability facility ( efsf ) is a mere 1 – 10 basis points over the average borrowing cost of the efsf. the average maturity of efsf loans is over 25 years with the last loan expiring in 2051, while greece benefits also from the deferral of principal payments on glf and efsf bis central bankers ’ speeches loans by 10 years and a 10 - year grace period for interest payments on most efsf loans