Warnings for the "day after" - The gradual rise of economic activity will begin in the second quarter - Support measures until growth reemerges

The road to recovery is “paved” with asterisks and dangers and the governor of the Bank of Greece Giannis Stournaras is “sounding alarms” – through his interview with OT. – concerning the need to shield the Greek economy. Economic activity is expected to rise gradually in the second quarter, but the governor warns that “rising business bankruptcies, unemployment” and “widening economic disparities between both countries and households within the countries will affect the global and Greek economy the day after the pandemic “.

Through OT the governor of the central bank outlines a roadmap to mitigate the risk of being trapped in a state of long-term economic stagnation and calls for vigilance and conciliation of the country’s political forces. According to Mr. Stournaras, Greece can be shielded through reforms, a prudent medium-term fiscal policy, by immediately and comprehensively tackling the problem of non-performing loans, by implementing the new bankruptcy code and facilitating the repayment of individuals’ debts, so that we have consolidation of private debt as a whole and strengthening the resilience of the economy to external shocks. The process of withdrawing state support in the next period should be combined with the gradual return to positive and strong growth rates.

The interview in detail:

Governor, what are your latest estimates of the budgetary impact of the pandemic crisis?

Expansionary fiscal policy is needed to mitigate the unprecedented effects of the pandemic. The size of the fiscal support package for the economy is intended to prevent a deep recession, which could have more permanent structural features, without jeopardizing the sustainability of public finances in the medium term.

The fiscal support measures, amounting to 11.2% of GDP, implemented in 2020, and the recession led to a sharp shift of the general government fiscal result from a surplus in 2019 to a deficit and, combined with the sharp decline in nominal output, a significant increase in the ratio of public debt to GDP. More specifically, the BoG estimates that in 2020 the general government deficit – in terms of enhanced supervision – will be 7% of GDP, compared to a surplus of 3.6% of GDP in 2019. For 2021, uncertainty remains high while restrictive measures are maintained and, as a result, fiscal policy has already been complemented by new expansionary interventions, which further burden the projected budgetary outcome. The level of interventions to address the pandemic is now estimated at 7.4% of GDP in 2021 (almost double what was foreseen in the 2021 Budget Report). Therefore, in 2021 the general government deficit is projected to reach 5.3% of GDP, compared to a forecast of 3.9% of GDP in the Report.

Government debt is estimated to have grown to 205% of GDP in 2020, from 180.5% of GDP in 2019, primarily due to the “avalanche effect”, ie the difference between the average interest rate on public debt and the rate of change in nominal GDP. The large increase in public debt is a general phenomenon in all advanced economies due to the recession and deflation, but also due to the large increase in government borrowing to finance expansionary fiscal policies to protect the private economy. However, in over-indebted economies such as Greece, the dynamics of public debt is an issue that in the long run affects growth dynamics and fiscal sustainability. However, the inclusion of Greek government bonds, although still lagging behind the investment tier, in the ECB pandemic extraordinary securities market program and their acceptance as collateral in the refinancing operations of Greek banks by the Eurosystem, as well as the positive developments in international financial markets, contributed to the uninterrupted access of the Greek State to capital markets and to the further reduction of the yields of the Greek government bonds.

The process of withdrawing state support in the next period should be combined with the gradual return to positive and strong growth rates, in order to mitigate the risk of being trapped in a situation of long-term economic stagnation with constant deflationary pressures. However, fiscal expansion should remain temporary and targeted and the cash reserve should be kept high. Given the above and in combination with the favorable debt repayment profile, It is estimated that medium-term debt sustainability is not at risk, despite the fact that in the medium term both the debt-to-GDP ratio and gross financing needs are expected to increase significantly relative to pre-pandemic estimates.

In the aftermath of the pandemic, fiscal policy must once again focus on the gradual reduction of deficits and the restoration of fiscal balance, with growth as the main lever to ensure the long-term sustainability of public finances. Strengthening public investment, as an accelerator of growth, as well as accelerating the promotion of structural reforms, can make a decisive contribution to this end. Utilizing the resources of the Recovery Fund is a great opportunity in this direction and is considered crucial.

Despite the large increase in deposits, loans to households and businesses are given very frugally. When will the banks finally be able to finance the real economy? Is the “Hercules” plan enough to get rid of the onerous red loans? What is the status of the “bad bank” case and why do you insist on it?

During the pandemic, either for welfare reasons or due to forced savings, a strong influx of deposits was indeed observed. More important, however, is the fact that the Eurosystem, ie the European Central Bank and the National Central Banks, including the Bank of Greece, provide ample financing to banks, with a substantially subsidized interest rate, in order to increase financing to the private sector. . So operating under improved liquidity conditions, banks have an increased ability to provide credit and to some extent this is reflected in the amount of financing.

Indicatively, I mention that the annual growth rate of bank financing to the private sector was formed in 2020 at a positive level on average (1.2%) compared to a slightly negative rate in 2019. This development substantially reflects the strengthening of bank financing to non-private sector financial companies, where the annual growth rate reached 5.6% on average in 2020, due to the programs managed by the Hellenic Development Bank. On the contrary, the corresponding rate towards households remained in negative territory in 2020 as well.

However, given the liquidity potential of banks, I would like to see more lending to the economy. Of course, the prospect of future non-performing loan flows works restrictively in providing new bank loans, especially to small and medium-sized enterprises that carry a higher risk. The problem as you understand, becomes bigger from the moment that Greek banks are already burdened with a very high stock of non-performing loans (NPLs). For this reason, the Bank of Greece has been urging for years the use of solutions to clear the balance sheet of Greek banks from “red” loans and to enable banks to further increase lending to the economy.

As I have mentioned before, the ‘Hercules’ plan undoubtedly has a significant contribution to the reduction of NPLs. The Greek State provides the state guarantee for senior notes with a credit rating of BB- at a minimum, and by taking this risk it decisively facilitates the sales of red loans through securitizations. Indicatively, the transaction through ‘Hercules’ of a systemic bank has already been successfully completed with a total loan amount of approximately 7 billion euros against the provision of a guarantee of 2.4 billion euros, while when the other transactions are completed, sales of loans of 31 billion euros with the provision of guarantees amounting to 11.6 billion euros will have been achieved.

Whether or not this plan is sufficient depends on the actual damage caused by the pandemic – when it occurs, especially after the end of state and bank support to borrowers – but also on the progress made in implementing the banks’ business plans. As recently announced by the four systemic banks, they aspire to be in the single-digit MES index by the end of this year or the beginning of next. I wish for everyone that the systemic solution of Hercules will be sufficient, especially after the recent extension it received for another 18 months with a corresponding increase in the amount of state guarantees, and for our banks to achieve the fastest possible consolidation of their balance sheet by achieving an MES index close to European average (2.6% as of 31 Dec. 2020).

Regarding the asset management company (AMC), we have submitted our proposal to the Greek government since the end of last year, which has the final responsibility for the decisions to adopt any systemic solution for the red loans. The reason why we considered our proposal necessary is because it faces the problem of MES at the same time as that of the high percentage of the deferred tax asset on the banks’ capital and thus is the best solution for the Greek taxpayer.

Are credit institutions ready to play their crucial role in harnessing Recovery Fund funds? What is the appropriate recipe in order for them to successfully fulfill their mission?

The role of banks in utilizing the funds of the Recovery Fund will be crucial. This is because the banks will be asked to assess the viability of the investment projects that will be financed from these resources and then to leverage the approximately 12.7 billion euros of loans that will be provided to finance private projects.

I believe that the banks have been significantly reorganized in recent years, have significantly improved their operating structures, and have the appropriate human resources and technological infrastructure to cope with this crucial role.

As an appropriate recipe, since you ask me, I would say that this is just the application of the rules of supervision. That is, the utilization of the resources of the Recovery Fund on the basis of purely banking criteria. And the recent past shows that they can do it and leverage the available resources to a considerable degree. Indicatively let’s mention that during 2020, within the guarantee program of the Hellenic Development Bank, the banks leveraged the available guarantees by about 3.1 times for small and medium enterprises and by about 4.2 times for large enterprises. If these trends are followed in the resources of the Recovery Fund, it is estimated that the Greek economy will receive a significant injection of funding which will obviously have multiplier benefits, especially if we take into account that the resources are expected to be directed to dynamic areas where we as a country need to develop, ie Green Growth, Digital Technology, Innovation.

Do you think that the National Recovery Plan is capable of changing the productive model of the country and curing chronic pathogens? Will the goal of extroversion be achieved? What are the conditions?

The coronavirus pandemic halted the recovery of the Greek economy and led, in 2020, to a deep recession, deflation, postponement of investment decisions, reduction of the labor force, deterioration of its fiscal position and increase of credit risk that may lead to increase of European non-performing loans in 2021. These problems added to the chronic pathogenesis of the Greek economy before the outbreak of the pandemic, ie the widening of the gap with the core of the euro area, the large investment gap. , low structural international competitiveness, high structural unemployment, slow digital transformation, high levels of tax evasion, low efficiency of the public sector, slow administration of justice and the projected demographic decline due to an aging population.

The Recovery Fund resources, amounting to € 30.5 billion in grants and loans for the period 2021-2026, are vital for increasing investment, sustainable recovery, tackling chronic pathogens and strengthening, the economy’s extroversion. The actions outlined in the National Plan for Recovery and Sustainability (ESAS) concerning the green transition, the digital transformation of the public and private sectors, the strengthening of employment, training and social cohesion and the increase of private investment are on the right track. direction and are identified with proposals submitted from time to time by the Bank of Greece through its periodic reports.

According to the Bank of Greece estimates, the full implementation of the National Recovery and Sustainability Plan can increase the level of real GDP by 6.9% by 2026. This implies a positive contribution to the real GDP growth rate by about 1.15 percentage points on average each year for the period 2021-2026. In addition, private investment could increase by about 20% in 2026 and employment by 4%. This translates into the creation of an additional 180 to 200 thousand new jobs by 2026 and an expansion of the tax base leading to an increase in the ratio of tax revenues to GDP by 2.8 percentage points in 2026. As a result, the primary surplus of the General Government improves, thus creating additional fiscal space.

In closing, your comment on the digital reissue of OT.

OT carries a heavy tradition. Under the enlightened leadership of Giannis Marinos it was a beacon of clean, innovative, radical, transcendental for its time, brave view of the local finances. Many times it was criticized for what it wrote. Bu tit was correct. I wish you every success and to continue in the same direction.

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