GREECE. Macro Outlook. Greece: With the 2 nd review concluded, improved confidence and a lower fiscal drag should support activity.

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1 NATIONAL BANK OF GREECE GREECE Macro Outlook June 7 Greece: With the nd review concluded, improved confidence and a lower fiscal drag should support activity NBG Economic Analysis Division Greece Macroeconomic Analysis 8 Eolou Str., Athens, Greece NBG Greece - Macro Analysis September p.

2 State of play The stage is set for a strong recovery in activity, following the completion of the nd review of the programme and the achievement of a large fiscal adjustment in. The latter exceeded even the most optimistic estimates -- with the Greek primary surplus the highest in the EU. In addition to the direct economic effect, it also resulted in policy implementation credibility. The Greek economy is expected to exit recession in 7, capitalizing on the ongoing business rebalancing, the reduced fiscal drag, resilient consumption and supportive external demand conditions. Indeed, the economy already returned to positive growth in Q:7 (+.% ), following a sharp weakening in Q:, with domestic demand showing remarkable resilience to the relatively high uncertainty arising from the lengthy negotiations on the completion of the nd review. Healthy export-oriented corporate activity is gaining momentum, with the more competitive subsectors of manufacturing and services leading the way, supported by favorable tourism trends and increased efficiency following a multi-year restructuring. The fiscal overperformance continued in M:7, mostly from the expenditure side, while revenue trends are in line with the targets of the Medium Term Fiscal Strategy (MTFS 8-). Forward-looking indicators presage a further improvement in Q:7, when the direct and indirect support from tourism will come to the fore, boosting business activity and employment creation. The completion of the nd review of the economic support programme will provide positive confidence and liquidity effects related, inter alia, to a resumption in clearing government arrears through programme funding. The effective fiscal drag is also expected to be significantly lower than in (an estimated.% of GDP in 7 compared with.% of GDP in ), which far exceeded initial estimates (c..8% of GDP in ). Nonetheless, still tight liquidity conditions, partly due to a very gradual easing of capital controls, continue to weigh on business conditions, especially for less efficient, domestically-oriented business units, which struggle to service their fiscal obligations and bank debt. Despite positive growth in private consumption in and Q:7, a significant share of households continue to be negatively affected by fiscal conditions, cash shortages and a further toll on disposable income from an energy-driven increase in inflation during the first months of 7 (to.% in M: from -.8% in FY:). Some of these pressures are expected to ease over the course of the year on the back of improving labor market conditions (estimated average employment growth of.% in FY:7), which are expected to be accompanied by a pick-up in average working hours and hourly wages the first in 7 years and a stabilization in oil prices. Nonetheless, the financial position of the more stressed households and less efficient enterprises is unlikely to improve in the near term. The implementation of short-term debt relief measures in early 7 have smoothed somewhat the long-term repayment profile and lowered future interest rates on Greek debt. A further specification of the medium-term measures so as to reduce longer-term debt servicing costs will support economic sentiment and contribute to a faster reduction of country risk premia, and thus an improvement in financial conditions. In the event, the Greek State s debt servicing needs are limited until July 8 and programme conditionality has been frontloaded, with the most demanding policy measures already legislated and implemented under the st and nd reviews of the ESM programme. Thus, the completion of the nd review and the disbursement of related funding is expected to be followed by a period of stability, which will support economic recovery, translating into average GDP growth of.7% in FY:7 (an estimated +.% in H:7). NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

3 :Q :Q :Q :Q :Q :Q :Q :Q :Q 7:Q :Q :Q :Q :Q :Q :Q :Q :Q :Q 7:Q The economy returned to positive growth in Q:7 and is expected to gain further strength in the following quarters Composition of output growth by expenditure component Consumption Investment Growth contributions in pps Sources: ELSTAT, EU Commission, NBG estimates Net Exports Inventories Economic sentiment and real GDP growth Sources: EL.STAT., EU Com. GDP growth (left axis) index EC Economic sentiment indicator (right axis) GDP increased by.% in Q:7 (+.%, q-o-q, s.a.), following stabilization in FY: and a contraction of.% in Q:, which primarily reflected high fiscal obligations during this period, combined with high uncertainty. Notably, domestic demand has proved very resilient to the relatively high uncertainty in Q:7 due to the protracted negotiations for finalizing the nd review. In Q:7 private consumption growth accelerated to.7%, from an improved.% in FY:, and fixed capital formation increased by.% (.% in FY:), indicating that the improvement in domestic spending that started in could gain further steam in 7 as economic sentiment and liquidity conditions improve. Net exports were a drag on growth in Q:7 (-. pps, ) -- the largest since Q: -- reflecting a sharp acceleration in import volumes, mainly of industrial inputs and transportation equipment (including ships), which was more than double export growth of.8% during this period. The pick-up in import spending was expected, in view of the severe compression of related spending categories in previous years and the high dependence of Greece on imported industrial inputs, equipment and other investment goods, as well as on imports of discretionary consumer goods. GDP growth is expected to accelerate over the course of the year supported, inter alia, by a declining fiscal drag, stabilizing oil prices and a normalization in public spending (including the clearance of government arrears), financed by EU structural funds and Programme funding. 7f Q Q Q Q Q Qf Qf Qf GDP (real, %, s.a.),, -,,,7 -,8 -,, -,,,,8, GDP (real, % q-o-q, s.a. ) -,,,7 -,,,,, Domestic Demand () -,, -,,, -,,,9 -,,,,,8 Final Consumption (),, -,,, -, -,9,,,7,,,9 Private Consumption () -,7, -,,, -,7 -,7,,,7,,, Fixed Capital Formation () -8, -, -,, 9, -, 7,8, -,8,,,, Residential construction,, -, -, -7, -7,,,, -, Total GFCF excluding residential -,9,,,9, -9,,8,7 -,,8 Inventories * (contribution to GDP) -,, -,9, -,,, -,, -, -, -, -, Net exports (contribution to GDP), -,,8 -,7 -,, -, -,8, -, -,,, Exports (), 7,7, -,7, -, -9,9,8,9,8 7,, 7,9 Imports (), 7,,, 7, -, -,,8,,9 7,9,,8 *also including other statistical discrepancies / Source: ELSTAT, NBG estimates Greece: Growth Outlook 7f NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

4 :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q 7:Q May- Nov- Employment growth & private consumption May- Q:8 Nov- Q:8 May- Q:9 Q: Q: Nov- Q: Energy prices & headline inflation May- Q: Nov- Q: May- Q: Q: Q: Q: Q:7 Jul- Nov- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan-7 Mar-7 May-7 Private consumption showed remarkable resilience and is expected to benefit from improving labor market conditions CPI inflation (left axis) Employment growth May- Energy Prices (right axis) Nov- Private consumption () May Private consumption increased by.7% in Q:7, following a healthy.% in, showing significant resilience to fiscal pressures and the increase in inflation due to higher energy prices during the first months of 7. Notably, this improvement occurred in a period when consumer sentiment was low reflecting, inter alia, uncertainty related to the lengthy negotiations for the completion of the nd Programme Review, which included new fiscal measures. Household spending has been supported by a pick-up in employment growth in Q:7 (+.7% ), following a decline to.% in Q: (from.% in 9M:), with the unemployment rate down to a -year low of.% in March 7. Nonetheless, a significant share of new jobs continue to reflect lower-paying flexible time contracts (½ of new job openings in Q:7, marginally lower than in ). This job creation is primarily driven by increasing employment of wage earners, especially in export-oriented sectors, with selfemployment declining. Labor market conditions are expected to improve in the following months, as indicated by the dynamism of net job openings for wage earners recorded by the ERGANI system in April-May, which signal a strong rebound in seasonal hiring (about 8.% higher than in the same period in ), especially in the tourism sector. As wage adjustment appears to be nearing an end (-% cumulatively during 9-, with hourly wages stabilizing in according to NBG estimates) and there are some first signs of a pick-up in average working hours, employment creation is expected to increasingly support disposable income % Economy-wide nominal wage index & unemployment rate q m.a. index 7= Labor market thousand persons - - Unemployment rate (%, left axis) Index of wages (index, q m.a., right axis) Net hiring (monthly flow, ERGANI data, thsnd persons) Employment (monthly flow, LFS data, thsnd persons) Sources: ELSTAT, Greek Ministry of Labor NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

5 Sep- Jan- May- Sep- Jan- May- Sep- Jan- May- Sep- Jan- May- Sep- Jan-7 May-7 Apr- Nov- Jun- Jan- Aug- Mar- Oct- May- Dec- Jul- Feb- Sep- Apr-7 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan-7 Feb-7 Mar-7 Apr-7 Business activity recovers, driven by larger, more competitive firms, with manufacturing and export services leading the way in pps % Key sectoral contributions in industrial production growth Fabricated metals (in pps, left axis) Oil products (in pps, left axis) Non-metallic minerals (in pps, left axis) Food (in pps, left axis) Beverages (in pps, left axis) Basic metals (in pps, left axis) Chemicals (in pps, left axis) Manufacturing production (, right axis) Capacity utilization and manufacturing production Capacity Utilization (right axis) index 9 7 Manufacturing production, (m m.a. left axis) Greece: main sectoral confidence indicators (ESI components) EC sectoral onfidence indicators, index level Industrial Retail Services Consumer Construction Manufacturing production increased by +.%, in M:7, maintaining the strong momentum of when it posted the strongest increase in 9 years. This performance is mainly driven by the more competitive medium-to-large sized enterprises, which have succeeded in business restructuring and improving their competitive position in the domestic market and/or their export orientation. Indeed, export-oriented sub-sectors, along with industries supplying tourism (such as food, basic metals, chemicals, oil refining and non-metallic minerals), are the best performers. Similarly, survey data from the services sector indicate that the subsectors of food and beverage services and accommodation overperform in terms of current activity trends and business prospects. A strong rebound in fixed capital formation (+.% in Q:7 from -.8% in Q:) mainly reflected purchases of transportation equipment (mostly merchant ships) that led to a similar increase in imports. Capital accumulation in other productive categories, such as investment in equipment, machinery and business construction, remained subdued (a decline of 9.% in Q:7), suggesting that uncertainty and tight liquidity conditions weighed on investment decisions. Notably, survey data point to an acceleration in investment spending over the course of the year. This rebound is expected to primarily reflect a resumption of investment projects deferred during - due to high uncertainty. A significant share of this investment reflects replacement of worn out capital, as well as investment in new capacity by firms which improved their competitive position and have reached relatively high levels of capacity utilization. Indeed, although industrial capacity utilization at an economy-wide level remains below its -year average, in specific subsectors such as in manufacturing of food, beverage and tobacco products, capacity usage is supportive of new investment decisions. Public investments of about 7.7bn (including those cofunded by the official institutions EIB, EBRD), as well as investments arising from privatizations, are estimated to amount to.% of GDP in 7-8 (about.% of GDP higher than in ). Financial conditions are improving for larger and more competitive firms as indicated by the decline in the weighted average yield of Greek corporate bonds by almost bps between March and May 7 to.7% (BoG composite index of Greek corporate bonds). Sources: ELSTAT, Bank of Greece, EU Commission NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

6 Q: Q:7 Q:8 Q:8 Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 H:9 H: H: H: H: H: H: H: H: H: H: H: H: H: H: Q:7 Q: Q: Q: Q:7 Q:8 Q:9 Q: Q: Q: Q: Q: Q:7 Q:8 Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Construction activity weakened further in Q:7, while the property price adjustment slowed Construction activity (national accounts) Other construction (, left axis) Residential construction (, right axis) Gross fixed capital formation residential and total investment % GDP Residential investment (%GDP) Business investment (%GDP).%.% Non-residential construction contracted by.% in Q:7, following an increase -- from a very low base -- of.% in FY:. Non-residential construction remains closely related to public investment activity, which weakened in Q:7 (a decline in PIP disbursements of.9% ), while private sector order books remain limited. The share of residential construction in GDP declined to a historical low (.% of GDP in Q:7), while the very low issuance of new residential permits (-.9% in FY:) indicates that residential construction activity is unlikely to bottom in 7. The sharp decrease in the supply of newly-built houses has not compensated for the supply of existing non-primary residences and previously rented properties, due to the significantly increased property and income taxation. Demand is estimated to have bottomed in, from a very low base, with banking system data possibly under-reporting the actual number of transactions, which continue to correspond to a very small fraction of average annual issuance during the period The pace of adjustment in house prices slowed significantly during, to -.% in Q: from -.% in Q:, albeit recording a small acceleration to -.8% in Q:7, showing high sensitivity to uncertainty and tight liquidity conditions. Prices of prime commercial spaces tend to stabilize (.%, on average, in H:, latest available data), with a marginal increase in rents in premium spaces recorded during this period. Near-term risks for the real estate market mainly relate to its high taxation, adding to the risk of new supply, and thus price declines, from accelerating foreclosures for tax arrears or for non-serviced private debt under the stricter legal framework. The prospective operation of a web-based auction platform by mid-7 is expected to speed up foreclosures, possibly exerting additional pressures on prices, but could also mobilize new demand as it would make it easier for potential buyers (including foreigners) to bid on Greek properties Cement production, other construction & construction confidence index Residential & commercial prices Other construction (, left axis) Cement production (, left axis) Construction confidence (index, right axis) House prices (total, ) Office prices (Athens, ) Retail prices (Athens, ) Sources: ELSTAT, Bank of Greece, EU Commission NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

7 Aug- Nov- Feb- May- Aug- Nov- Feb- May- Aug- Nov- Feb- May- Aug- Nov- Feb-7 May e Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan-7 Apr-7 The current account remains broadly balanced despite the widening in the fuel trade deficit and higher imports of productive inputs Tourism receipts and arrivals change Goods trade (excluding oil and ships) Exports (, m m.a.) Imports (, m m.a.) Source: Bank of Greece Non-resident arrivals (left axis) Tourism receipts (gross, right axis) Transportation revenue & freight prices %, Transportation revenue, net Transportation revenue, gross Freight prices (dry & tankers) Increasing non-oil goods exports (+.% in M:7,.% of GDP higher than in M:), along with a.% of GDP increase in the services surplus in the same period, driven by a sustained rebound in shipping revenue and other services exports, offset the increase in the oil deficit (up by.% of GDP in this period). Thus, the current account deficit decreased marginally to.% of GDP in M:7 from.8% in M:. Greek goods exports (excl. oil) are exhibiting healthy growth of.% in M:7 (.% in FY:), but remain highly dependent on international commodity price fluctuations, demand conditions in the euro area and have a low differentiation/technology content that makes most Greek firms price takers. In contrast, Greece remains highly dependent on imports of capital goods, production inputs, energy and discretionary consumer goods, which tend to increase quite rapidly during the recovery phase following several years of extraordinary compression. This tendency is already evident in import growth in and early 7, and creates some upside risks for Greece s external deficit in the near term. Moreover, there are some signs of weakening in tourism revenue trends, mainly due to changes in booking patterns (e.g. online booking and rental platforms, international operators, etc.), which gained ground since the imposition of the capital controls. In this respect, the indirect effect of tourism on the economy is likely to exceed the official data for tourism revenue. In FY:7, the current account deficit is expected to remain close to its level of.% of GDP, as the prospective improvement in tourism revenue in the core months of the season -- as indicated by the increase in international arrivals at major Greek airports of % in M:7 and buoyant bookings data for Q:7 -- along with supportive developments in shipping freight prices (+.% in April- May 7) and favorable demand conditions for Greek exports in the euro area, are expected to counteract the significant increase in imports. 7f 7 Q Q Q Q Q Current Account, -, -, -, -,, -, -, Non-oil Trade Balance -7, -7,8-7,9 -, -, -,9 -,9 -, Non-oil Exports,,,,,,,7, Non-oil Imports 7,7 8, 8,,,7,,,7 Oil Balance -, -, -,8 -, -, -, -,7 -,7 Services Balance 9, 8,7 9,,,,9,, Primary Income Balance,,,,, -,,, Secondary Income Balance -, -, -,,, -, -,, Capital account,,,,,,,, Source: Bank of Greece Balance of Payments (as % GDP) Sources: Bank of Greece, Bloomberg, NBG estimates NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.7 7

8 e Mar- Aug- Jan- Jun- Nov- Apr- Sep- Feb- Jul- Dec- May-7 Jan- May- Sep- Jan- May- Sep- Jan- May- Sep- Jan- May- Sep- Jan-7 May-7 9:Q :Q :Q :Q :Q :Q :Q :Q 7:Q Gains in labor cost competiveness are maintained despite the gradual reflation, which is mainly driven by energy prices CPI inflation - Core inflation - GDP deflator %, Headline inflation Core inflation GDP deflator Headline & core inflation Contribution of fuel in CPI (in percentage points, left axis) CPI inflation ( change, right axis) Core inflation ( change, right axis) CPI inflation increased to.%, on average, in M:7, marking the end of a -year period of negative inflation. Fuel prices added almost.7 pps to inflation in M:7, while the net contribution of the increase in indirect taxes in mid- and early 7 is estimated at +. pps, on average, during this period. Core inflation entered positive territory in March, increasing by.%, on average, in March-May, from -.7% in January-February 7 and Q:, indicating that pricing power of firms in the domestic market remains relatively low. Similarly, the GDP deflator accelerated to.% in Q:7, compared with a marginal increase of.% in FY:. The pace of reflation is expected to slow in H:7, provided that a higher pass-through to final prices of higher input costs will be largely offset by the elimination of base effects from indirect tax increases in mid- and the stabilization of international energy prices in euro terms. Importantly, high unemployment and flexible employment forms are constraining hourly compensation growth. Similarly, the increase in productive efficiency of more competitive Greek firms, following several years of restructuring, also limits inflation risks. A further decline in country risk premia will contribute further to a containment in financial costs, in conjunction with extensive loan restructurings. Accordingly, the significant gains in relative cost competitiveness in previous years -- a cumulative decline in average wages of % and in relative unit labor costs by almost 7% in - -- are estimated to be sustainable in the following years. Greece: HICP measures of inflation Real effective exchange rate, based on unit labor costs Index = HICP (y-oy) HICP excl energy & seasonal food () HICP excl. energy & seasonal food, at constant prices () Sources: ELSTAT, OECD, NBG estimates Ireland Portugal Greece Spain Germany NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.8 8

9 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 9 7* 8* 9* * * FR ES FI SK BE EE EU AT EA LV NL LT IT IE LU SI DE PT MT CY GR A strong fiscal overperformance in boosts the credibility of Greece s economic rebalancing General government primary balance as % of GDP - % GDP Source: Eurostat *excluding banking system support Gen. Gov. Primary balance as % of GDP* General Government balance % GDP Gen. Gov. total balance Gen. Gov. primary balance Primary balance (Programme target) Primary balance (MTFS 8- targets) Greece - State Budget Primary balance % GDP *excluding SMP & ANFA revenue 9 Sources: Ministry of Finance, Eurostat, MoU August, MTFS * * * Greece made much greater-than-expected progress in improving its fiscal position in. The primary surplus of General Government recorded an annual improvement of.% of GDP (+. bn), reaching.% of GDP from.% in eight times the Programme target for and the total fiscal balance recorded a surplus of.% of GDP for the first time since the availability of harmonized fiscal data for Greece by Eurostat. A strong rebound in tax revenue of 9.% (+. bn) has been the key determinant of this improvement and, according to NBG estimates, corresponds to a sustainable aspect of the fiscal adjustment, looking forward. Efficiency gains reflect, inter alia, an increase in cashless payments and elevated pressure for compliance (e.g. a notable acceleration in inspections and confiscations for tax delinquencies), in conjunction with a bottoming-out in activity. State budget implementation in M:7 bodes well for an achievement of the medium-term fiscal strategy target (MTFS 8-) for an annual primary surplus in general government budget of.9% of GDP and a respective Programme target for a primary surplus of.7% of GDP. The primary surplus in the State budget in M:7 reached.% of GDP, mainly reflecting tighter-thanbudgeted restraint in primary spending (-.7% of GDP below the M target). Revenue trends are broadly in line with MTFS targets, recording a small decline of -.%. The underlying formation of new government arrears in this period -- before the completion of planned payments through Programme funding following the completion of the second review -- is estimated at.% of GDP. The acceleration in economic activity during the rest of the year is expected to provide a further impetus to the fiscal adjustment, which, together with the improving financial position of other government entities, is expected to support the achievement of fiscal targets for 7 and further underpin the credibility of the fiscal strategy for 8-. An ambitious post-programme fiscal package, comprising income tax reform and a new round of interventions in the pension system, was legislated in May 7 in the context of prior actions for the nd review. This package delivers net savings of % of GDP, which are planned to underpin the credibility of fiscal targets post-8. This package also contains a set of contingent expansionary measures aiming to support economic efficiency, tax competitiveness and an enhancement of the social safety net, provided that the agreed medium-term targets are met. NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.9 9

10 Apr- Jun- Aug- Oct- Dec- Financial markets valuations are starting to reflect a more optimistic assessment of Greece s prospects, supported by the potential provision of further concessions on official debt Feb- Apr- Jun- Aug- Oct- Dec- Feb- Apr- Jun- Elections Aug- Oct- Dec- Feb- Apr- Jun- Aug- Oct- Dec- Feb- Apr- Jun- Aug- Oct- Feb- Apr- Jun- Aug- Oct- Dec- Feb- Apr- Jun- Aug- Oct- Dec- Feb-7 Apr-7 Jun-7 Dec- Feb- Apr- Jun- Aug- Oct- Dec- Feb- Apr- Jun- Aug- Oct- end Dec- Feb-7 Apr-7 Jun-7 end Greek sovereign bond valuations showed a notable improvement in Q:7 (a decline of bps in -year GGB yield between end-march and end-june 7 to.%), reflecting the fiscal overperformance and progress on the completion of the nd review. The completion of the review and the provision by Eurogroup on June, 7 of further detail on the medium and longer-term strategy for ensuring sovereign debt-servicing sustainability led to a further improvement in sovereign debt valuations, especially at the short-end of the curve. In this regard, the Eurogroup of June, 7, repeated the assessment of debt sustainability on the basis of gross financing needs ( GFN ) -- which should remain below % of GDP in the medium term and below % of GDP thereafter and stated that it stands ready to implement a second set of debt measures to the extent needed to meet the GFN objectives. These measures will be implemented at the end of the Programme in 8, conditional upon its successful implementation and their exact calibration will be confirmed at the end of the Programme by the Eurogroup on the basis of an updated DSA. These measures will permit, inter alia, the transfer of ANFA and SMP profits to Greece, liability management operations within the current ESM programme, extension of the weighted average maturities and a further deferral of EFSF interest and amortization by up to years. In order to take into account possible differences between GDP growth assumptions and actual growth developments over the post-programme period, the EFSF reprofiling could be recalibrated according to an operational growth-adjustment mechanism to be agreed. This mechanism will be fully specified as part of the medium-term debt relief measures, following the successful implementation of the ESM programme. According to the Eurogroup statement, these additional measures shall not lead to additional costs for other beneficiary Member States, while future liability management operations within the current ESM Programme shall take due account of the exceptionally high burden of some Member States. For the long term, the Eurogroup recalls the May agreement that in the case of an unexpectedly more adverse scenario, a contingency mechanism on debt could be activated. The activation of this mechanism would be considered, subject to a decision by the Eurogroup, and could entail measures such as a further EFSF re-profiling and capping and deferral of interest payments. Source: Eurogroup Statement, June, 7 % st Program for Greece Deauville meeting Preliminary agreement on PSI PSI completion & nd Program Draghi OMT yr sovereign bond spread over bund Successful completion of nd Program review & decisions on Debt relief Crisis in Cyprus Greek GGB issuance Presidential & Parliamentary election Capital controls & Referen dum rd Program Elections Completion of st Review, Brexit & waiver reinstatement Completion of nd Review Greek Sovereign yield curve* % m y y y y y 7y y y July st, January th, 7 June rd, 7 *Bloomberg & NBG Research Interpolation/curve fitting Portugal Spain Greece Sources: Bloomberg, NBG estimates Non-financial corporate & Greek Gov. bond yields & FTSE Large Cap Index Capital controls & rd MoU ECB's CSPP FTSE/ATHEX Large Cap (left axis) yr Greek Government bond yield (right axis) Greek non-financial corp. bond yield based on the BoG Composite Index (right axis) % 9 7 NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

11 Q: Q: Q: Q: Q:7 Q:7 Q:7 Q:7 Q:8 Q:8 Jul- Aug Greek public debt servicing has become more manageable, but a clarification of future interventions would boost market sentiment Greek public debt servicing terms improved considerably following several rounds of intervention on debt stock, maturity and effective interest rate. These interventions were initially engineered through the PSI and complemented by the debt buyback in and the implementation of the short-term measures for reducing further official debt servicing costs in early 7. As a result of these interventions, the average maturity of Greek debt has been extended to nearly 7 years in from.7 years in, the effective interest rate has been lowered to.8% in (and to an estimated.7% in 7) and the long-term debt redemption schedule has been smoothed substantially (especially through the latest round of ALM transactions conducted by the ESM). Following the prospective disbursement of about 7.7bn under the tranche related to the nd review of the ESM Programme, the official sector (including SPM/ANFA holdings) will hold about 8% of Greek debt or bn. Taking into account that Greece remains on track to meet its budget targets for a surplus of.9% of GDP in 7, the Greek State s financing needs are estimated to be entirely covered for the rest of 7 and for the first months of 8 by the above tranche and domestic fiscal resources, while the remaining funding (excluding unused funds for bank recapitalization), until the Programme expiration in mid-8, is estimated to exceed Greece s financing needs in this period by more than bn. Greek public debt is expected to peak in gross terms at c. 78% of GDP by mid-7 and subsequently follow a declining trend. Assuming the application of a supplementary set of medium-term interventions in 8- by the ESM that: i) stabilize interest rate costs on official loans close to the current effective interest on Greek debt, through their deferral, as well as through interest rate swaps arrangements and funding at longer maturities and fixed rates by the ESM, and ii) extend EFSF loan maturities by up to years, the speed of decline is highly dependent on: i) the average level of primary surplus; and ii) GDP growth. Assuming an average GDP growth of.% and an average level of primary surplus of c. % of GDP in -, the annual debt servicing costs are expected to remain below the % annual sustainability threshold (including T-bills) set by the EU Commission and the IMF, for most years until even without a further extension of official loan maturities. However, further improvements will be needed by to smooth out the debt serving profile and compensate for potential future setbacks related to macros, market conditions and/or slippages in privatizations. IMF;,% Structure of Greek debt holders as of June 7 (post reprofiling in early 7) GLF;,9% EFSF ;,% ESM; 9,% euro bn Hellenic Republic debt amortization profile as of June 7 (post 7 reprofiling under the short-term measure package) Other loans;,% Other bonds;,% Amortization, interest of Greek sovereign debt & programme financing euro bn T-bills;,7% ANFA & SMP;,% % % % Other loans EFSF&ESM GLF IMF Other bonds ANFA&SMP T-bills Total Debt amort. (prior to 7 reprofiling under short-term debt measures) Debt servicing costs as % of GDP (NBG estimate including 7 reprofiling and assuming long term annual GDP growth of.% and average primary surplus of.% in -) % % Interest payments Amortization & maturing debt Remaining funding under rd Programme (excl. bank recap.) Programme disbursements * EU nd Review Compliance &NBG estimates of remaining funding under the rd programme envelope (excl. bank recap Sources: PDMA, ESM, EU Commission, Bloomberg, NBG Econ.Analysis estimates % % Official debt amortization Interest payments Market debt & other loans Tbills NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

12 Nov- May- Nov- May- Nov- May- Nov- May- Nov- May- Nov- May- Nov- May-7 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan-7 Feb-7 Mar-7 Apr-7 Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan-7 Apr-7 Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr-7 Greek banks reduce their Eurosystem dependence, despite sluggish deposit recovery, while the pace of deleveraging is slowing % % -% -% -% -8% -% % % % % -% -% -% -8% Bank credit to private sector Total private sector Non-financial corporations Households Sole proprietors Bank credit to export-oriented sectors Industry (left axis) Tourism (left axis) Trade (left axis) Storage & Transportation (right axis) % % -% -% -% -8% -% % % % % -% -% -% -8% Deleveraging continues at a slower pace, with credit to the private sector declining by.9% in April 7, the lowest pace in 7 years, supported by an increase in lending to non-financial corporates of +.%, which offset the decline in household lending by.%. Increasing loans to more export-oriented sectors, such as tourism, trade, storage and transportation services, has been the major driver of this improvement. The cumulative reduction in outstanding credit to the private sector between 9 and April 7 reached.7%. Private sector deposits increased by.bn in, supported by increasing business activity, a reduction in cash hoarding, clearance of government arrears and some loosening in capital controls. However, a substantial amount of revenue from exporting activity of Greek firms is not repatriated, due to the capital controls, and the outstanding balances of private deposits remain.% below their level in December and 9.% (or.8bn) lower than in December 9. A decline in deposits has been recorded in M:7, reflecting the drag from high fiscal obligations and limited seasonal support in liquidity created by tourism-related activities. The notable decline in the Greek banking system s total financing from the Eurosystem, of 9.bn between June and May 7 -- with ELA dependence declining to.7bn in May 7 -- reflects the combined outcome of a re-opening of the interbank market (an increase of 8 bn in net financing) and deleveraging. 8 8 Greek banks' borrowing from the Eurosystem bn capital controls % of total assets - - monthly flows in bn Private sector deposits ELA (left axis) ECB (left axis) Eurosystem funding (% of total assets, right axis) Non-EA residents Non-financial corporations Households Private sector deposits (incl.non-ea residents) Source: Bank of Greece NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

13 Greek Economy: Selected Indicators Q Q Q Q year aver. Q Q Q Q 7 7f GDP,, -,,7 -, -,8 -,, -,,, Q:7,,7 Domestic demand, -, -,, -, -,,,9 -,,, Q:7,, Final Consumption,,7 -,, -, -, -,9,,,,7 Q:7,7, Gross fixed capital formation, -, -,,9 -, -, 7,8, -,8,, Q:7, 9, Exports of goods and services,, -7,7 -,8, -, -9,9,8,9 -,7,8 Q:7,8, Imports of goods and services,, -, -,7, -, -,,8,,,9 Q:7,9 7, Retail sales volume (),, -, -, -,, -,,,7 -,,8 Mar -, Retail confidence (-yr. average: -,), -, -, -, -,,9,,8,,8,8 May, Car registrations () 9,, -,,,8 -, 9,,8,,7 7,8 Mar, Consumer confidence (-yr. average:,) 7,, -, -, -,7-7, -7, -8, -, -8, -7,8 May -9,7 Industrial production (), -,,,, -,,,,8, 9, Apr, Manufacturing production (),7 -, -,,,8, 7,8,,,, Apr, Capacity Utilization (-yr. average: 7,8) 7, 7,,,,,9, 7, 9, 7, 8, Apr 8, Industrial confidence (-yr. average: -,) -9, -, -, -, -, -9, -9, -, -, -7,8 -, May -, PMI Manufacturing (base=) 8, 7, 7, 8,, 9, 9, 9, 8,7 9, 7, May 9, Construction permits () 9, -, -,,9 -, -,9,9 8, -9, -,9,7 Mar 7, Construction confidence (-yr. average: -,9),9 -,8 -,9-8, -7, 7, -, -,9 -, -7, -, May -7, PIP Disbursements () -,9-7, -,,9 -,8 7, 8,,7 -,8 -,8,9 Apr -, Stock of finished goods (-yr. average:,),, 7,,,,,,9,,7,7 May,7 Current account balance (% of GDP) -,8 -,, -,, -, -,, -, -, -, Apr -, -, Current account balance (EUR mn) Apr - Services balance, net (EUR mn) Apr 8 Primary Income Balance, net (EUR mn) Apr 9 Merchandise exports-- non-oil ( cum.), 7,,,9,9 -, -,,,, 8, Apr, Merchandise imports-- non-oil ( cum.), -, -7, -7,8-7,8, -,8,8,, 7, Apr,8 Gross tourism revenue () 9, 9,,,9,, -9,7-7,8 7, -, -,8 Apr, International tourist arrivals (),,, -, 7, -, -,,,9, -,8 Apr, Unemployment rate,8,,8,,,,,,,,8 Mar,, Employment growth (),9,,,8,,,,,,,7 Mar,9 Headline inflation -, -, -,8 -, -,7 -,9 -,9 -, -, -,8, May,, Core inflation -,7 -,9 -,, -,,, -, -,7 -, -, May,, Producer prices excl.energy -,,, -,, -, -,8 -,9 -, -,7, Mar, Gov. balance/gdp (Programme definition, according to MTFS 8/) year aver.,, -, Government debt/gdp (according to State Budget 7) 77, 79, 77, Revenues--Ordinary budget (cum. % change) -,8 -,7 -,7 -,8 -,8,,9 9,7 7, 7,, May, Expenditure--Ordinary budget (cum. % change) -, -,7 -,,, -,,7,,7,7 -,8 May, Total private deposits (adjusted for the reclassification of the Consignment Deposits and Loan Fund) -, -,9 -,9 -, -, -,9 -, -,,9,9, Apr, Loans to private sector (incl. sec. & bond loans) -, -,7 -, -, -, -, -, -, -, -, -, Apr -,9 Mortgage loans (including securitized loans),,,,,,,,,,, Apr, Consumer credit (including securitized loans) -, -, -,8 -, -, -,7 -, -,7 -,8 -,8 -,7 Apr -,7 -year government bond yield,,,8 7,9, 9, 8, 8, 7, 8, 7, May,9 Spread between year and bunds (bps) May 8 USD/euro,,,,,,,,,8,,7 May, Sources: BoG, NSSG, MoF, ASE,NBG,Bloomberg Greek Economy: Selected Indicators Real sector ( period average, constant prices) Coincident and leading indicators (period average) External sector (period average) Employment Prices ( period average) Fiscal policy Monetary sector (, end of period) Interest rates (period average) Exchange rates (period average) Q Most recent NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

14 Greece: Macro indicators heatmap Sources: NBG, BoG, ELSTAT, EU Commission, IOBE Rapid contraction Moderate contraction Slow contraction Stabilization Slow expansion Moderate expansion Rapid expansion Color map scale NBG Composite Index of cyclical conditions, -,8 -, -, -9, -, -, -, -9, -9, -7,, -,7 -,9 -,, -, -, -,7 -, -8, -9,8-9, -, -,8-9, -7,7 -, -, Imports (other (excl.oil&shipping) m mov.avg Exports (other (excl.oil&shipping) m mov.avg,9,9, 7,9 9, 9,7, 9, 7,8,,, -, -,9 -, -, -, -, -, -, -,,,9,,,,8,, Economic sentiment index (EU Commision, Euro area),,,7,,,,8,9,,9,8,,9,8,8,8,,,,,7,, 7,8 7, ,7 9, Interest rate on new time deposits (households, CPI deflated),,,,,9,,,,7,9,,7,,7,,,,7,,9,8,8,,,7 -, -, -, -,9 Private sector deposits () -, -7, -, -, -, -8, -,9 -,7 -, -,9 -, -8, -, -,7 -,7 -,9 -, -,8 -, -, -,8 -,,,7,9,,8,, Credit to private sector () -,7 -, -, -, -, -,8 -,9,,7,,,7, -, -,8 -, -,,, -, -,7 -,7 -,8 -, -, -,7 -, -,7 -, Interest rate on new private sector loans (CPI deflated) 7, 7,9 7, 7, 7, 7,,9 7,,,,,7,,7,,,,7,,,9,7,,7,8,7,,8, Employment (),7,9,,7,,,9,8,,,7,7,,7,,,,,,,8,8,,7 -,,,,9 Construction confidence (index level) -, -9,8,9 -, -,9 -, -8, -, -7, -,8-9, -7, -9, 7,9 7,,9 -,9 9, 9,8 -, -, -9, -7,,8 -, -, -9,7-9,8, -7, House prices (yoy, quarterly series) Construction Permits (yoy),,,,,, -, -, -8, -, 8, -, 7, -, 8,,7-7, 9,8 -, 8,, 8,,7 9, -,9 -, -, 7, Retail trade volume (yoy) -,, -,7, -,8, -, -7, -,, -, -,, -,7 -,8 -, -, -,, 9, -,,,, -, -, 9,9 -, Retail confidence (index level),7 -,,9 -, -,,, -,9, -, -, -,8 -,,,,,,,7 8, 9,,,7,9 9,8,9,9,7,, Consumer confidence (index level),9-9,, -,, -,8 -,9 -,8 -, -9, -, -,,9 -,8-7,9-7,7-7,9-8 -9, -7, -,9, -,9 -, -7,8-7, -7, -7, -9,7 Services confidence (index level), 9, -, -, -, -9, -7, -,8 -, -, -, -, -,, -7, - -, -7, -8, - -,9,,,,,9, 8,9, Industrial production (yoy) -,7,,,9,8 -, -, -,,, -,7,,9, -,9,,7, 8,,, -,,9,, 7,,,, Manufacturing production (yoy),,8, 9,, -,8, -7,,7,7 -,,,,, -,7 7, 7, 8,9,8,,9 7,, -,8,9, 8,, Industrial confidence (index level) -7,9-9, -, - - -, -,,, -9, -, -, -, -, -7,8-7,8 -, -9, -7, -, -, -,7-7,8 -,7 - -, -,7 -, -, PMI (index level) 9, 8, 8, 8,9, 8,9, 9,, 7, 8,, 8, 9 9,7 8,, 8,7, 9, 8, 8, 9,, 7,7,7 8, 9, Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan-7 Feb-7 Mar-7 Apr-7 May-7 NBG NBG Greece Economic - Macro Analysis Analysis Division September June 7 p.

15 NATIONAL BANK OF GREECE P. Mylonas, Deputy CEO, Head of Research, Contributors: Nikos S. Magginas ǀ Senior Economist, Head of Greece Macro Analysis ǀ Effrosyni Alevizopoulou, ǀ Aikaterini Gouveli, ǀ This report has been produced by the Economic Analysis Division of the National Bank of Greece, which is regulated by the Bank of Greece and is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on its contents, effecting their own independent enquiry from sources of the investors sole choice. The information contained in this report does not constitute the provision of investment advice and under no circumstances is it to be used or considered as an offer or an invitation to buy or sell or a solicitation of an offer or invitation to buy or sell or enter into any agreement with respect to any financial asset, service or investment. Any data provided in this bulletin has been obtained from sources believed to be reliable but have not been independently verified. Because of the possibility of error on the part of such sources, National Bank of Greece and/or its affiliates does not guarantee the accuracy, timeliness or usefulness of any information. The National Bank of Greece and its affiliate companies accept no liability for any direct or consequential loss arising from any use of this report. The final investment decision must be made by the investor and the responsibility for the investment must be taken by the investor. This report is not directed to, nor intended for distribution to use or use by, any person or entity that is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to any law, regulation or rule. The report is protected under intellectual property laws and may not be altered, reproduced or redistributed, to any other party, in whole or in part, without the prior written consent of National Bank of Greece NBG Greece Economic -Analysis Macro Analysis Division September p.