In his speech at an event at the LSE, the governor of the Greek economy, Yannis Stournaras, characterized the recovery of the Greek economy as an undeniable success story, pointing out, however, a series of outstanding issues that must be settled in order for the Greek economy to become competitive in the long term.
In detail, the president of the Bank of Greece underlined that the Greek success story is confirmed, among other things, by the recent recovery of credit rating in the investment category. “In fact, bond yield spreads and other parameters were compatible with an investment grade credit rating even before Greece’s official upgrade. In the medium term, the rate of economic growth is expected to be significantly higher than the average rate of the euro area. Serious fiscal problems, debt sustainability, as well as bank restructuring and recapitalization issues, have been successfully addressed,” he noted.
He recalled that “in the second half of the 2000s, imprudent fiscal policy and the loss of competitiveness created huge “twin deficits” and financing problems, as a result of which Greece found itself at the center of the global financial crisis, with markets and analysts predicting, both in 2012 and 2015, the exit of Greece from the euro (Grexit)”
In this light, the Greek success story – according to Giannis Stournaras – was based on the following factors:
Interventions in the financial sector
In the financial sector, the interventions that have been carried out have shaped the following picture:
1) Banks
Banks have seen impressive progress with the NPL ratio falling to 6.6% from 49% in 2016 (compared to 1.8% in the EU). They record increased profitability, capital adequacy ratios move above the minimum supervisory required levels, there is sufficient liquidity and strong supervision, and frequent stress testing exercises are carried out. The BoE governor also noted that interest rate risk is manageable, and exposure to the commercial real estate sector and other market risks limited. There is still support from the RRF and the Hellenic Development Bank, while a large difference is recorded between interest rates on deposits and interest rates on loans.
The disinvestment of the HFSF has made significant progress, with very positive results: the UniCredit-Alpha Bank deal is another sign of a return to normality, and the privatization of NBG was an unexpected success. The strong investment interest facilitated the successful divestment of the HFSF’s participation (27%) in Piraeus Bank. Banks now have full access to the capital markets.
The restructuring and capital increases of the less important institutions are ongoing, with the cornerstone of the merger between Bank of Attica and Bank of Pankritia expected in the third quarter of 2024.
On the other hand, however, there are also problems, such as the drastic tightening of monetary policy, the more restrictive financial conditions, the new Non-Performing Loans, capital quality (definitive and settled deferred tax assets (DTC) 53.6% of CET 1 capital) , the lack of a homogeneous crisis management framework in Europe, the lack of a deposit insurance system (EDIS).
2) Private insurance:
In the private insurance sector the capital base is very strong (solvency capital requirement ‒ SCR: €2.1bn, against eligible equity €3.7bn, SCR ratio 1.8) based on Q4 2023 data .
An important positive factor is the gross written premiums of approximately 2.3% of GDP, compared to 8.0% in the EU, with data from the fourth quarter of 2022.
Challenges include:
– The insurance coverage gap regarding natural disasters (eg earthquakes, floods, fires), health, pensions. The government has already launched measures to cover the natural disaster insurance gap (tax incentives and compulsory insurance for SMEs).
– Climate change, digital transformation and cybersecurity threats.
Investment opportunities
As for Foreign Direct Investments, they amounted to 3.1% of GDP in 2021, 3.6% in 2022 and 2.0% in 2023, up from 1.7% previously (2015-2020). From the Recovery Fund and the Structural Funds of the EU, 65 billion euros are to flow in the five years 2024-2028.
The investment-to-GDP ratio rose to 14.3% in 2023, up from 16.6% in 2010. Business investment has fully recovered and returned to pre-2010 levels. However, the ratio of total investment to GDP still lags behind that of the EU (22.0%), mainly due to the decline in housing investment over the last decade, which is however recovering very quickly. Funding through the RRF will help increase the investment-to-GDP ratio to converge towards the EU average. Full implementation of the RRF investments and related reforms is expected to increase GDP by 10% over the next decade, based on econometrics estimates of the Bank of Greece.
To the question of whether this will create an unsustainable current account deficit, the answer is no, to the extent that drastic reforms will boost productive capacity in the tradable goods and services sectors, competitiveness will continue to improve and there will be sufficient fiscal reserves. security. In any case, it is necessary for FDI to increase further, especially during periods of high current account deficits.
Future challenges:
Regarding the challenges facing the Greek economy, the head of the Bank of Greece pointed out that despite the reduction of relative unit labor costs and relative prices, which implies an improvement in competitiveness, structural competitiveness remains low, due to structural rigidities.
In summary, these are: Delays in the administration of justice, bureaucracy, lag in basic infrastructure, delay in the completion of the national cadastre and spatial planning framework, low participation of women and young people in the labor market and at the same time mismatches between offered/demanded skills, increased narrowness of the market employment, adverse demographic developments, tax evasion, weaknesses in the “knowledge triangle” (education-research-innovation), oligopolies (e.g. food, fuel, banks, private hospital care).
These structural rigidities act as a hindrance to productive capacity, potential growth and the increase in the overall productivity of the factors of production.
As for exogenous factors with negative effects, these are global uncertainty, geopolitical risks, stagflation trends, episodes of financial instability and public debt problems. The interest rate-growth rate differential (snowball effect) will likely play a dominant role globally in the coming period.
On the other hand, the new fiscal framework being formed in Europe has a positive effect.
Policy proposals
At the end of his speech, the BC commander presented a series of policy proposals.
Specifically:
The main objective of the above moves is to achieve real convergence without macroeconomic imbalances. The main challenge for the next period will be the utilization of the credit rating in the investment category and acceleration of the path towards further upgrades.
Source: OT