The International Financial Crisis and Greece

Transcription

1 The International Financial Crisis and Greece Gikas A. Hardouvelis* Athens, November 18, 28 ECONOMIA CONFERENCE Athens, Karantzas Megaron * Chief Economist, Eurobank EFG Group Professor, Department of Banking and Financial Management, Un. of Piraeus 1

2 I. Will Greece keep converging to the EU-15 average despite the crisis? 6 % Real growth rates, Source: European Commission Investment: the main driver of growth, with growth rates higher than those of consumption Until 25, investment in equipment higher than investment in residential construction Is the party over now? Greece 4.2 EA EU forecasts for GDP per capita PPS, EU-15=

3 I. Greece at a crossroads Greece s problems are long-term, with competitiveness carrying a large blame Surprisingly, Greece can withstand the crisis better than its European counterparts, thanks to its relatively strong banking system, with a projected 29 rate of growth slightly above 2% Yet, if officials remain sluggish to the elevated demands for active policy, the crisis may also bring a nightmare scenario of negative growth If the recession scenario prevails, then subsequently the lack of policy tools and the long-run problems are bound to depress the economy for a long time 3

4 II. Competitiveness: The Greek Economy s Deepest Problem 4

5 II. Competitiveness and Ease of Doing Business Competitiveness is the deepest thorn in the Greek economy World Bank - Doing Business 29 report: Greece ranks 96 th in 28 among 181 economies in the ease of doing business, rising 1 places from the 16 th in 27. Greece remains last among EU-27 countries 28 Ease of Doing Business Rankings (rankings in reverse order) No. 181: Congo Improvement Greece (+1) Source: WEF No 1: Singapore Deterioration Ease of... Doing Business 28 rank Change in rank from 27 Doing Business Starting a Business Dealing with Construction Permits Employing Workers Registering Property 11-5 Getting Credit 19-7 Protecting Investors Paying Taxes Trading Across Borders 7-4 Enforcing Contracts 85-1 Closing a Business 41 5

6 ΙI. Competitiveness is way below Greece s level of development Competitiveness Rankings, (reversed order) Based on its standard of living, Greece should have ranked 42 nd instead of 96 th Thailand Georgia New Zealand Greece Gap: 54 places Singapore Brunei y = 31,13Ln(x) - 18,36 R 2 =, Norway GDP per capita, in $ PPP Source: WEF, IMF 6

7 ΙI. Greece is expensive relative to its trading partners 1994 = REER ULC REER CPI 1/1994 1/1995 1/1996 1/1997 1/1998 1/1999 1/2 1/21 1/22 1/23 1/24 1/25 1/26 1/27 1/28 Real Effective Exchange Rates have worsened since 2 The higher CPI inflation in Greece points to lack of competition in product & service markets. Unit labor costs are increasing faster in Greece Source: IMF 7

8 II. hence, Greece s current account is getting worse CA deficit has tripled relative to the pre-emu period, while the growth in aggregate demand is the same as before CA deficit can lead to an abrupt future recession % GDP % GDP Income Services Goods Transfers Current Account Balance -26 Source: Bank of Greece 8

9 III. The global financial crisis and the relative position of the Greek financial system 9

10 III. How large is the short-run correction? The two problems of the global crisis The next 15 months will provide a stress test of the Greek economy Two problems underpin the global financial crisis: 1) Insolvency 2) Lack of liquidity Which may lead to de-leveraging, i.e. the transmission of the crisis to the real economy Fortunately, structural reforms did occur in the Greek banking sector and Greek banks are very strong and healthy relative to their European peers, i.e., are well-capitalized Yet, Greek banks are affected by the second factor, lack of liquidity 1

11 bn USD III. Insolvency: Getting better The gap between total write-downs and capital increases has declined sharply in recent weeks due to governments recapitalizations IMF: Estimates write-downs for all FIs to reach $1.4 trillion Total Write-downs: $ 78.5 Total Capital Raised: $ Total Gap: $ Nov.18, US Europe Asia Banking sector only bn USD Total Writedowns: $ 59.2 Total Capital Raised: $ Total Gap: $ Sept. 3, US Europe Asia 2 Writedowns Capital Raised Gap Writedowns Capital Raised Gap Source: Bloomberg 11

12 III. Insolvency: Greek banks better capitalized than most European banks % Germany Switzerland Capital / Asset Ratio France Sweden Denmark UK Belgium Iceland 3/6/28 Spain Portugal Norway Ireland Finland Austria Italy Greece US Ranking of individual banks Best: EFG Intern/al 13.52% in Switzerland Worst: DEXIA 1.67% in Belgium 12

13 III. Liquidity: Worsening not yet solved in Europe Euro Area U.S.A. Uncovered minus covered 1-month inter-bank rates 1/1/28: m Euribor - EONIA 17/11/28: m Libor - OIS 1/1/28: /11/28: May-7 Jun-7 Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Jun-8 Jul-8 Aug-8 Sep-8 Oct-8 Nov-8 May-7 Jun-7 Jul-7 Aug-7 Sep-7 O ct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Jun-8 Jul-8 Aug-8 Sep-8 O ct-8 Nov Uncovered minus covered 1-week inter-bank rates 8/1/28: w Euribor - EONIA 17/11/28: /1/28: w Libor - OIS 17/11/28: May-7 Jun-7 Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Jun-8 Jul-8 Aug-8 Sep-8 Oct-8 Nov-8 May-7 Jun-7 Jul-7 Aug-7 Sep-7 O ct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Jun-8 Jul-8 Aug-8 Sep-8 O ct-8 Nov-8

14 III. Liquidity: European banks are hoarding cash EUR Billion 3 Deposit Facility /11/28: bn /9/28: 1.8 bn 5 14 Jun-7 Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Jun-8 Jul-8 Aug-8 Sep-8 Oct-8 Nov-8 Source: ECB

15 ΙII. Liquidity: Less of a problem in Greece relative to Euro Area % Loans to Deposits Ratio August 28 (Total Loans to Total Deposits, MFIs excluding Eurosystem) Malta Greece Slovenia Lux/rg Belgium Cyprus Germany Austria EA Ireland Spain France Portugal Netherlands Italy Finland Source: ECB, Balance Sheet Items data 15

16 III. Rescue measures Package Amount % of 29 GDP Partial Adoption Italy 4 bn 2.5% Belgium 9.7 bn 2.7% US $ 7 bn 4.8% Greece 28 bn 1.8% NO Portugal 2 bn 11.6% Spain 15 bn 13.4% France 36 bn 18.% Germany 5 bn 19.5% UK 5 bn 33.8% Austria 1 bn 34.2% NO Netherlands 22 bn 36.3% Sweden SEK 1,5 bn 47.7% Ireland 4 bn 214.8% Total EU-27 2,58 bn 2.% Greece has offered half the EU-27 package Measures have to be voted into Laws to be operational. Laggards as of 17/11/28: Greece & Austria Then, we hope to see renewed liquidity in the inter-bank market 16

17 III. related to the size of the problem Ranking of rescue measures/gdp* Germany HIGH PROBLEM HIGH PACKAGE France Sweden Belgium Netherlands Portugal Spain UK Italy Ireland Greece Austria LOW PROBLEM LOW PACKAGE Capital / Asset Ratio (%) US y = x R 2 = 2% * Sorted from largest (=1) to smallest (=13) 17

18 IV. How much will Greece be affected by the crisis in 29? Growth slowdown A nightmare scenario can be avoided only through active policy intervention 18

19 ΙV. Greece: Channels of negative influence 1) Lower economic activity abroad less exports, lower tourist receipts, less foreign buying of property, lower shipping rates 2) Higher interest rates due to liquidity considerations less credit expansion, lower consumption & investment Greece will avoid: Large bank failures and abrupt restriction of credit due to solvency reasons to the same degree observed abroad Billions , 11,5 11, 1,5 1, 9,5 9, bn Μαϊ-4 Αυγ-4 Νοε-4 Φεβ-5 Μαϊ-5 Αυγ-5 Νοε-5 Φεβ-6 Μαϊ-6 Αυγ-6 Νοε-6 Φεβ-7 Μαϊ-7 Jan 28 - Aug 28: 5% yoy Tourist receipts Baltic Dry Index Αυγ-7 Νοε-7 Φεβ-8 Μαϊ-8 Αυγ-8 2/5/28: /11/28: 856 Νοε-9 9 Μαρ- Ιο υ λ - Νοε- Μαρ- 1 Ιο υ λ - 1 Νοε- 1 Μαρ- 2 Ιο υ λ - 2 Νοε- 2 Μαρ- 3 Ιο υ λ - 3 Νοε- 3 Μαρ- 4 Ιο υ λ - 4 Νοε- 4 Μαρ- 5 Ιο υ λ - 5 Νοε- 5 Μαρ- 6 Ιο υ λ - 6 Νοε- 6 Μαρ- 7 Ιο υ λ - 7 Νοε- 7 Μαρ- 8 Ιο υ λ - 8 Νοε- 8 19

20 b.p IV. Bearish markets are harsh on Greece 29/6/27 1-y Gov. Bond Spread: Greece-Germany May-7 29/7/27 Jul-7 29/8/27 29/9/27 Sep-7 29/1/27 17/3/28: 71. b.p. 29/6/27: 25. b.p. 29/11/27 Nov-7 29/12/27 29/1/28 17/11/28: b.p. Jan-8 Banking Stock indices since 29/6/27 29/2/28 Greece EuroArea USA Mar-8 29/3/28 29/4/28 May-8 29/5/28 29/6/28 Jul-8 29/7/28 29/8/28 Sep-8 29/9/28 29/1/28 Nov-8 Recent increase in gov. bond spread is consistent with historical behavior (thus not due to the package): It is explained by similar increases in other EA spreads plus EMBI+ Markets do not see the better position of Greek banks: Banking stocks hard hit Nov 17: GR 33.4 EA USA

21 IV. Greece: Will the good scenario prevail? YES, if: 1. Loan expansion resumes by year-end 2. Investment growth fills in the slack 3. Consumption growth declines and imports decline for a longer period than the current global recession THE GOOD SCENARIO: yoy growth in constant prices Weights (27) EU 28 EU 29 GH 29 GDP 1.% Pr. Consumption 71.2% Pub. Consumption 16.7% Investment 22.5% Exports 23.% Imports 33.5% HCPI Budget deficit (% GDP) Public debt (% GDP) Unemployment rate Current account (% GDP)

22 V. Conclusions The current crisis has delayed affecting Greece because of the health of its financial sector. Is the worst in front of us? Two possibilities for 29: I. Good scenario of growth slightly > 2%, II. Nightmare scenario of growth <, as past experience shows that Greek recessions are the worst ones in the OECD, with a total mean output loss of -6.45% of GDP (2 times bigger the mean OECD country loss and 3 times the median loss) Two main risk drivers will determine which scenario will unfold: I. The liquidity issue, as Greece & Austria remain the two countries with no government measures that have become Law II. The need for aggressive fiscal expansion, mainly though investment projects co-financed with the EU In a future environment of low growth, it may be more difficult to carry on with those structural reforms needed to improve competitiveness. In a possible nightmare scenario, our limited macro-economic tools and the long-run imbalances imply that once in a recession A long period of stagnation may follow 22

23 THANK YOU FOR YOUR ATTENTION!! My thanks to the Research department of Eurobank EFG for able research assistance and support For more info, please consult the Eurobank website: New Europe: Οικονομία & Αγορές: Global Economic & Market Outlook: A quarterly analysis of the countries of New Europe Μηνιαία έκδοση με θέματα για την ελληνική και παγκόσμια οικονομία A quarterly in-depth analysis of major market and economic trends across the globe with our detailed forecasts 23