13 November 2013

BoG/Provopoulos: Where is the Greek economy heading?

Provopoulos spoke on the benefits of the country's adjustments that extend beyond the credibility and competitiveness effects of decreasing macro-economic imbalances. In light of these developments, he expects economic growth to return, starting in 2014.

During the past few years, throughout the contraction, Greece has made important progress in addressing its fiscal and external imbalances. In addition, the country's banking system has been recapitalised and consolidated.

Fiscal adjustment

Greece's fiscal consolidation is one of the largest ever achieved by any country at any time under an IMF programme. From 2009 to 2012 the fiscal deficit was reduced by 10 percentage points of GDP. In 2013 we expect it to be reduced by a further 2.9 percentage points of GDP. The structural fiscal deficit - that is, the deficit corrected for the business cycle - will have shrunk by almost 20 percentage points of GDP by end-2013.

External adjustment

In the nine years, 2001 through 2009, Greece lost about 30 per cent in terms of cost competitiveness against its major trading partners. In just 4 years, 2010 through 2013, the entire loss has been recovered. Competitiveness is also being promoted through structural reforms. As a result of these improvements in competitiveness, a rebalancing of the Greek economy is taking place. The share of Greek exports of goods in world trade has risen by 30 per cent since 2010. The current account, which reached a deficit of 15 per cent of GDP in 2008, has moved into surplus in the first eight months of 2013, and we expect a surplus for the year as a whole.

The banking sector

With the deepening of the crisis a few years ago, the Bank of Greece stepped-in to preserve banking system stability. Our efforts focused on two fronts: preserving banking system liquidity and restoring capital adequacy.

Today we have four well-capitalised viable pillar banks; one of them under state control - but soon to be privatised (Eurobank) - and three privately managed (NBG, Alpha and Piraeus). We also have a few smaller banks, that are also well-capitalised. This situation should be seen in the context of a banking system comprising almost 20 banks a few years ago. However, this is not the end of the story for the transformation of the banking system. The second stage of our strategy is just beginning. This stage will be characterised by efforts to implement a new banking model that will allow banks to exploit synergies and economies of scale, and will, therefore, entail a further elimination of excess capacity. In this way, banks will become more efficient, gradually reducing their reliance on state aid and central-bank funding. Banks also need to refocus their business on their core activities and to manage their loan portfolios in a more efficient way. This involves primarily efficient resolution of non-performing loans. Improvements in the NPL management will lead to lower capital requirements. The reduced capital requirements are expected to free up resources that can be used to finance the new business model of the Greek economy. Thus, banks will play a key role in shifting funds from non-productive to productive businesses. 

Greek banking groups have not engaged in excessive deleveraging and they are not going to do so in the future. In fact, there has been no "home"-bias in the loan deleveraging process, rather the opposite. The need of strategic restructuring does not mean a weaker commitment by Greek banks.

We are now seeing the results of the changes that have been taking place in the Greek economy. Over the past year or so there has been positive news with respect to financial indicators and soft data; recently, there has been positive news in the hard data. The benefits of the country's adjustments extend beyond the credibility and competitiveness effects of decreasing macroeconomic imbalances. In light of these developments, I expect economic growth to return, starting in 2014. 

Full speech

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