Provopoulos discussed the developments that had led Greece into the crisis and took stock of the progress that Greece has made in adjusting its economy.
In May 2010, the government agreed to an adjustment programme with the IMF and Greece’s euro area partners in order to meet its financing needs.This adjustment programme was built around two key pillars:
a. Fiscal consolidation
b. Structural reforms (including privatizations and measures to combat tax evasion)
The government placed more emphasis on the first and less emphasis on the second pillar. Moreover, the fiscal mix relied more on tax increases than on spending cuts. The Bank of Greece had advised that the mix should include 1/3 revenue increases (mainly through broadening the tax base) and 2/3 spending cuts. Fiscal consolidation led to a recession that was deeper than expected, partly because it relied heavily on increases in tax rates and was not combined with structural reforms to boost growth prospects.
Adjustment: fiscal
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 privatisations. 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
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 is also being promoted through structural reforms, which have increased the flexibility of labour and product markets.
As a result of the improvements in competitiveness, a rebalancing of the economy is taking place. The share of exports in GDP rose from 18 per cent in 2009 to 25 per cent in 2012. It will continue to rise. The current account deficit, which reached 15 per cent of GDP in 2008, fell to 3 ½ per cent last year. It will continue to fall.
The banking sector strategy
The result of the “viability assessment” was that the four largest banks, now called “core banks”, were assessed as eligible for recapitalisation with public sector funds. These banks were assessed as the most likely to repay such capital within a reasonable timeframe. The total amount set aside under the adjustment programme for the restructuring of the banking system is €50 billion.
When our exercise started there were 17 commercial banks in operation: four core banks and 13 non-core banks. So far, the resolution framework has been used to resolve eight banks (five commercial banks and three cooperative banks). All core banks have now concluded corporate decision-making processes to increase their capital by the amounts required by the Bank of Greece.
Shortly, we will end up with four well-capitalised core banks and a few non-core banks. As a result, the banking system is becoming more compact and efficient, eliminating excess capacity and exploiting synergies and economies of scale. It is becoming stronger and is well-capitalised.
Full speech
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