Not managing an economic crisis

Transcription

1 Not managing an economic crisis Lessons from Greece Presentation to International Consulting Economists Association Dr. Costas S. Mitropoulos February 2016

2 The early signs

3 The early signs Huge double deficits 15 Average CA Balance % GDP GR MT IT SK PT FR DE TWIN DEFICITS EA SI CY AT NL BE Average General Government Balance % GDP IE ES LU TWIN SURPLUSES FI IE, ES: No fiscal problem but real estate bubble and over-extended banks y = x R 2 = 0.45 Source: European Commission (AMECO) 3

4 The early signs A state fuelling the economy through debt General Government Debt vs Budget Balance General Government Debt vs GDP bn % % % -0.5% -2.9% -5.5% -6.0% -7.8% % -8.8% % -1.5% -6.2% -5.9% % GDP 4% 2% 0% -2.2% -2% -5.4% -4% -6.7% -6% % -10% -10.2% -10.1% -12% -15.2% -14% bn % % 105% 101% % 107% 104% % % % 238 % GDP 140% 120% 100% 80% % 40% 20% 0-16% 0 0% General Government Gross Debt Surplus Deficit (% of GDP) Primary Surplus Primary Deficit (% of GDP) Source: European Commission (AMECO) General Government Gross Debt General Government Gross Debt (% GDP) GDP Source: European Commission (AMECO) 4

5 The early signs Receipts / payments mismatch 39.2% 40.5% 44.8% 41.7% 44.1% GAP = 3.1% Entry to the Euro 46.4% 46.6% 45.7% 44.6% 44.9% 44.1% 44.3% 44.4% 43.0% 36.3% 39.0% 37.4% 40.5% 41.3% 45.3% 40.9% 45.0% 40.3% 44.7% 39.0% GAP = 15.4% Greece out of the markets 45.6% 38.1% 43.8% 38.6% 44.9% 39.1% 46.2% 39.8% 49.1% 39.7% 53.2% 37.8% EU Forecasts 49.8% 49.3% 49.2% 41.5% 41.9% 40.2% 34.5% 36.7% 31.8% 33.2% 28.9% 30.8% 28.4% Source: European Commission, Spring 2010 forecasts Revenues (% of GDP) Expenditures (% of GDP) 5

6 The early signs Competitiveness Collapse Global Competitiveness Index (Inverse) Germany United Kingdom Ireland Spain Portugal Greece Source: World Economic Forum, Global Competitiveness Report 6

7 The realisation

8 The realisation Cut off the markets- the story Before the Crisis 2002 January Euro replaces drachma 2004 February Kostas Simitis calls March elections and stands down as Pasok leader 2004 March Conservative New Democracy party led by Costas Karamanlis wins general election, ending over a decade of Pasok government 2004 December European Commission issues formal warning after Greece found to have falsified budget deficit data in run-up to joining eurozone 2007 September Prime Minister Karamanlis wins a narrow majority in the poll. He says he now has a mandate for more reforms but also pledges to make national unity a priority 2009 Greece's 300bn debt plunged the country into crisis in October Opposition Pasok socialist party wins snap election called by PM Karamanlis. George Papandreou takes over as new prime minister The Crisis 2010 May Greece reaches agreement with the International Monetary Fund, the European Commission and the European Central Bank on a 110bn 3-year financing plan( 80bn to be disbursed form EC and 30bn from the IMF) 2011 November George Papandreou announces his resignation. Lucas Papademos, a former head of the Bank of Greece, becomes interim prime minister of a New Democracy/Pasok coalition with the task of getting the country back on track in time for elections scheduled provisionally for the spring of March European Union leaders approve a second major bailout for Greece over its debt crisis by channelling the undispersed amounts of the first programme plus 130bn through the European Financial Stability Facility 2012 May June - Early parliamentary elections see support for coalition parties New Democracy and Pasok slump, with a increase in support for anti-austerity parties of the far left and right. The three top-ranking parties form a working coalition 2014 May Anti-austerity, radical leftist Syriza coalition wins European election with 26.6% of the vote 2015 January Alexis Tsipras of Syriza becomes prime minister after winning parliamentary elections, and forms a coalition with the nationalist Independent Greeks party 2015 June-July European Central Bank ends emergency funding. Greece closes banks, and imposes capital controls. Voters overwhelmingly reject EU bailout terms in July referendum 2015 August Greece and its creditors agree a third bailout package of 86bn, imposing further spending cuts on the country and returns to avoid bankruptcy and exit from the Eurozone 2015 November Elections give Syriza a renewed majority to implement the agreement between the creditors 8

9 bn The realisation Recession at -26% and unemployment at 27.5% % % 27.5% 26.5% 25.1% % % % 7.8% 9.6% 12.7% % 3.3% 4.2% 2.9% -0.3% 1.3% -1.4% -4.3% 4.7% -5.5% -6.8% 3.1% -9.1% 1.0% -7.3% -0.9% -3.2% 0.7% 0.0% -1.4% -1.1% 0% % -20% % -26.5% -25.8% -25.8% % GDP Unemployment Real GDP (%) Cummulative Real GDP (%) Inflation (%) Source: European Commission (AMECO) 9

10 The realisation Investment gap Historically, investment in Greece was close to the European average. From 2008 onwards, there is an increasing divergence 30% 20% Investment Gap ~ 102 bn Investment gap For 2014, the total investment in Greece amounted to 11% of GDP, c.8.4pps (or about 16bn p.a.) lower than the average of The collapse of the construction industry by 70% between 2007 and 2014, which along with the shrinkage of the investment rate in the industry by 39%, explains largely the investment gap in the economy 10% 0% 20% 15% 10% 5% % Investment in Construction (% GDP) Investment in machinery and equipment (% GDP) Source: EL.STAT Investment % GDP avg EU28 Investment % GDP Greece Greek GDP Growth (%) Source: IMF WEO (October 2015) -39% -70% Investment in Construction and Industry 10

11 The realisation NPLs explosion Total NPLs 103bn 49% 42% 35% 38% % % % 5.1 5% % % Source: PwC, European Bank Association Corporate Loans ( bn) Mortgage Loans ( bn) Consumer & Other Loans ( bn) NPL Ratio (%) 11

12 Greece Bulgaria Belgium Czech Republic Romania Italy Slovenia Denmark Finland Cyprus Hungary Iceland Estonia France Latvia Slovak Republic Lithuania Netherlands Norway Portugal Spain Austria Ireland Malta Poland Turkey United Kingdom Germany Luxembourg Sweden The realisation Political instability and economic uncertainty 17 Number of Prime Ministers, Finance Ministers, Central Bank governors since January Economic Sentiment Indicator % 24% Economic sentiment deficit EU 28 Eurozone Countries 60 Greece Ιαν-08 Σεπ-08 Μαϊ-09 Ιαν-10 Σεπ-10 Μαϊ-11 Ιαν-12 Σεπ-12 Μαϊ-13 Ιαν-14 Σεπ-14 Μαϊ-15 Ιαν-16 Source: Eurostat 12

13 The realisation No improvement in tax collection over the years CAGR -2,2% 49,7 20,9% 51,3 22,7% 23,6% 49,0 24,7% 47,2 24,7% 44,6 24,9% 44,2 24,8% 43,5 28,3 31,0 28,6 26,1 24,5 23,8 23,8 21,4 20,2 20,3 21,1 20,1 20,5 19, Source : Ministry of Finance Indirect Taxes ( bn) Direct Taxes ( bn) 2014 Tax Collection (% GDP) 2015 Measures combating tax evasion (broadening the VAT rate, linking household tax obligations to living standards, forcing households to show the means of having accumulated visible wealth) Abolishment of exemptions and special tax regimes, and simplification of tax structures Rebalance of current tax rates (VAT, PIT, other) so as to strengthen the non-evasion incentives 13

14 The response of the official creditors 14

15 The response of the official creditors Greek debt was predominantly in the hands of international institutions and EU had no firewalls in place Saving European and US banks from another default was the prime driver for Eurozone members deciding to have the Eurozone taxpayers acquiring Greek debt Greek banks were holding in bn of Greek government debt and any Greek default would require their recapitalisation to survive EU had no institutions in place in 2009 to handle such a major refinancing (only the EMU). EFSM and EFSF were invented then 301bn 5% 19% 76% bn 13% 34% 8% 16% 4% 7% 18% 2012 >71% is held by Official Creditors 323bn 10% 44% 16% 8% 5% 10% 2015 Source: GS Global ECS Research, Eurobank Global Market Research 7% >77% is held by Official Creditors ECB EFSF IMF Loans Bilateral Loans (GLF) Other Loans T-Bills PSI Bonds Greek Banks Non Greek Institutions Mechanism endorsement procedure EFSM ECOFIN, qualified majority Activation date From 5/2010 8/2010-6/2013 Size of funding 60 bn 440 bn EFSF Eurogroup, approval from member states national parliaments Source of funding/ guarantees EU Budget, bilateral loans Euro Area countries, Issuance of EFSF bonds To whom it applies All EU members All Euro Area members Activation procedure ECOFIN, qualified majority after recommendation from the European Commission and the ECB Eurogroup, unanimous decision after recommendation from the European Commission, the ECB and the IMF Now there are in place also a bank resolution mechanism (SSM), a financial stability mechanism (ESM) and a European Central bank with renewed powers 15

16 The response of the official creditors The official creditors used the MoU (agreement with creditors) as the main tool for pushing and managing the Greek economy The example of the 3rd MoU (225 actions) October December February April August October 2016 August 2015 September 2015 November January March 2016 May June September December The Greek Government must have completed 127 actions up to , and should complete 178 until and 208 until respectively More than 100 actions ( 103) relate to the business environment, financial stability, the regulated business and tax reform 30% of the actions are considered to be key deliverables and will form prior action for each evaluation A huge number of actions for implementation with total lack of focus has led to non ending discussions and little impact on the economy 16

17 The response of the official creditors At the end, all interventions failed to secure Greece s re-financing from the markets or to improve the business climate The trust gap remains large and not closing, with continuing political uncertainty and capital controls leading to it widening Since late December 2014, the trust gap shot back to 2012 levels and rocketed to 18pps during the period prior to the referendum The economic sentiment has declined, located about 24pm lower than in other European countries, reflects the fragile economic environment that prevailed in Yields of 10-years Government Bonds PIGS PSI Greek Government Borrowings from international markets ( ) 30% 25% 20% MARIO DRAGHI WHATEVER IT TAKES Greece issues 3bln of 5y bonds, first issue in 4 years Referendum % 10% Greece 9.2% % 0% Ireland, Italy, Spain 1.0% - 1.6% Portugal 2.9% 8, /1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 Portugal Ireland Italy Greece Spain Amount issued ( bn) Source: Bloomberg Source: PDMA 17

18 How did other countries fare?

19 How did other countries fare? How did other countries supported by EU, ECB and IMF fare? Reasons for asking financial assistance Financial Assistance Programms Date of entering financial assistance Amount Return to the markets Portugal Fund the troubled country s deficits and provide capital for the banks May bn April 2014 Ireland Cyprus The growing reliance of country s banking sector on ECB, and the ballooning government debt (from 25% in 2007 to November bn about 100% of GDP in 2010) after the salvation of the banks Country's banking system accounting for about 8 times the GDP, went bankrupt. Bailin scheme for the restructuring of the May bn banking sector January 2014 March 2016 (expected) Source: World Economic Forum - Global Competitiveness Report 19

20 How did other countries fare? They all fared considerably better than Greece GDP (%) Unemployment 27.5% 1.4% -2.0% -3.0% % -3.9% -5.4% 12.0% % 16.2% 15.9% 13.0% -5.6% 5.4% General Government Debt (% GDP) Primary Budget Balance (% GDP) Competitiveness 145.7% 126.2% 83.6% 61.8% 171.0% 156.5% 175.0% 129.7% -3.5% 120.0% -7.8% 102.2% -12.4% -10.3% 1.0% 0.1% -1.8% -2.0% % Cyprus Ireland Portugal Greece Source: IMF (WEO October 2015), World Economic Forum

21 After 3 MoUs where does Greece stand now?

22 After 3 MoUs where does Greece stand now? Capital controls imposed in early July 2015 still remain in place Corporate transactions are not unduly restricted, with the flow of imports having recovered to 86.2% of the 2014 levels (for the period January September). Capital controls on withdrawals by individuals remain very strict at 420/week per account Exports appeared to have suffered. Tourism receipts were 4.7% higher than 2014 (for the period January September), partly compensating for the loss of goods exports Deposits have not recovered from their June 2015 levels, although the liquidity provided by ELA has been recently reduced from 87bn to 69bn The impact of capital controls was greater for SMEs than larger corporates Jan ELA ECB Greek Banking - Eurosystem Funding Evolution ( bn) Feb Source: Central Bank for Greece SMEs Sales Growth % 107 Mar -15% Source: NBG 113 Apr 116 May 127 Q Q Jun Jul Aug Sep Short-terms problems due to capital controls 5% 8% 87% 119 Oct Nov None Dec Limited Severe 22

23 After 3 MoUs where does Greece stand now? Zero Liquidity The central government runs arrears to suppliers in excess of 4.5bn and has outstanding tax return of 0.7bn State owned enterprises and local authorities suffer from severe liquidity squeeze Deposits have not recovered from their June 2015 levels, although the liquidity provided by ELA has been recently reduced from 87bn to 72bn (16 January 2016) The liquidity of the banking system is at a critical point, completely dependent on the ECB and the ELA, while pledges have fallen to approx. 20 bn. At the same time banks have to manage the "mountain" of 103bn arrears to almost half of their assets Without a positive assessment and releasing of the funds by the institutional investors ( 10.6bn) the economy will be suffering from lack of liquidity and investment activity will be kept to a minimum 23

24 After 3 MoUs where does Greece stand now? Greek debt, as currently structured, is unsustainable over the period Required GDP to Service Debt The IMF and the other institutional creditors are committed to reducing the burden from debt over the early years, providing relief to the State Extra GDP required GDP requirement Primary Surplus 1,5% GDP requirement Primary Surplus 4,5% GDP requirement Primary Surplus 2,5% GDP requirement Primary Surplus 5,5% GDP requirement Primary Surplus 3,5% Projected GDP 24

25 What were the real causes of mishandling the Greek crisis

26 What were the real causes of mishandling the Greek crisis Failure to understand the real problem The Greek government at the time (2009) failed to comprehend that Greece was about to be cut off of the markets and default on its debts The EU and the ECB also failed to notice the inevitable and the magnitude of the problem for Greece and EU The Troika had, and still has, a limited understanding of the Greek economy and politics and as a result most of its prescriptions find difficulties in being implemented Greek politicians showed both very limited understanding and at the same time almost boundless recklessness. The conservative party when in opposition was anti MoU but in government implemented it. The social democratic party dissolved incapable of explaining why they did not move earlier what they were aiming at thereafter. Lesser parties played power games. The party currently in government undermined the implementation of the 1 st and the 2 nd MoUs just to sign and implement the third one No institutions in place Neither Greece, nor the EU had any institutions or mechanisms to cope with this type of emergency. All the then existing EU institutions had neither the mandate and the funding nor the technical skills to purposefully intervene Slow and non commensurate response When EU, ECB and IMF intervened, through the first MoU and the PSI, it was late against the underlying dynamics and the impact of the intervention is small Even when they got really involved the EU, the ECB, the IMF failed to focus on quickly returning Greece to the markets and pursued a dual objective of simultaneous structural reforms and fiscal adjustment 26

27 What were the real causes of mishandling the Greek crisis Continuous negotiation The programme is and have been in continuous negotiations across many dimensions with the Troika relentlessly pushing for implementation along the whole front and all governments evading it These continuous negotiations and the raising of different flags every now and then shunk the prime objectives of the programme, which was to return the country back to the markets Lack of trust The minimum amount of trust which is necessary for any discussion between partners in Europe and between creditors and debtors was never there, with the negative peak reached at the time of the referendum in 2015 The Greek government, unlike the Irish and the Cypriot governments, never saw the crisis as an opportunity and as a result never pushed through the truly necessary reforms or made a believable call for investment 27

28 And what have we all learned?

29 And what have we all learned? But there were a few gains Euro and the Eurozone were threatened in real, but survived in fact through renewed political commitment Firewalls and crisis management mechanisms were put in place in the Eurozone European banks were tested and strengthen their balance sheets and Greek banks were recapitalized The probability of GREXIT has in practice disappeared form the political agenda Certain reforms were implemented in Greece 29

30 And what have we all learned? And coping with the next crisis Institutions Focus and Prioritisation Reading early signal and acting` on them fast Better over than under reacting Little negotiation and a lot of trust Less presumption and more professionalism There must be a set of institutions at county and EU level with the mandate, the skills and the funds to act on any crisis Crises compress time, and it is not opportune during them to address the backlog of problems which created them. First, you need to return to normality and then prioritise actions avoiding future crises Monitoring for parameters getting out of the envelope is the best safeguard against any crisis. Returning them quickly back into the folder is the next best safeguard Given the immense time pressure and the information flooding in a crisis, actions must be commensurate to the magnitude of the threat as projected in the future During crisis you solve the problem of survival and that leaves little room for real negotiation with those offering the lifeline. Trust is required to compensate for the lack of reliable information. When conditions return to normality there will be ample time for find tuning in a trust environment. Morally, the reverse also applies A crisis is by definition an unknown situation. This leaves no margin for fixed ideas and recipes, but it calls for focus, speed, discipline and skills. Fixed ideas come from ideological preconception, which typically fail to meet reality at critical times. Focus, speed, discipline and skills is the definition of professionalism which needs to complement politics in such times 30

31 Thank you 31