Greece Facing an Uncertain Future Professor of Finance & Economics, Un. of Piraeus Chief Economist, Eurobank Group November 9, 2012 ECONOMIST CONFERENCE ON CREDIT RISK MANAGEMENT FOR BANKING AND BUSINESS: FINDING LIQUIDITY ATHENAEUM INTERCONTINENTALHOTEL, ATHENS, GREECE 1
MARKET VIEW OF THE CRISIS: BACK TO THE FUTURE BUT DRESSED UP IN EXIT RISK 2800 2400 bps (GR) 10-yr spreads over bunds (September 1992 September 2012) bps 1400 1200 (Greek spreads are measured on the left axis) 2000 1000 1600 Start of Euro Area Greece 800 Portugal 1200 800 Note: Data are monthly averages Source: Eurostat 600 Cyprus Spain 400 400 Ireland Italy 200 0 Sep-92 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 0 Greek spreads on the left axis, twice as large 2
THE UNHOLY TRINITY: THREE INTERELATED LEGS OF THE EMU CRISIS Sovereign Debt Crisis Austerity measures due to sovereign stress weaken economies Weak growth makes certain indebted sovereigns insolvent Real Economy Imbalanced & under Stress Too many bank failures bankrupt sovereigns as they try to support banks Sovereign defaults bankrupt banks with sizable sovereign debt holdings Weak banks will slow growth through reduced lending Weak economy & falling asset prices damage banks balance sheets Crisis is deeper as EMU never adjusted endogenously to an Optimum Currency Area, as it was hoped back in 1999 Banking Crisis Source: BPEA (2012) 3
POLICIES FOR THE SUSTAIBABILITY OF EMU EMU leaders seem to follow rather than lead markets. Yet, for EMU to survive it cannot stay still. It needs bold policies that turn EMU closer to an Optimum Currency Area, implying closer unification i. Proceed with banking union policies beyond a common regulatory framework to also a common resolution scheme with a fiscal backstop ii. Proceed with deeper fiscal integration through Eurobonds in the form of e-bonds and blue-red bonds, through a common unemployment insurance framework, through an increase in the central EMU budget. Fiscal Compact is not enough. iii. Establish policies that improve labor mobility across the Euro Area, e.g. common pension policies, common tax policies, etc. IN ADDITION, i. Follow expansionary fiscal policy in the EMU North (politically difficult) in order to generate demand in the South and resolve the imbalances within EMU ii. Help heavily indebted countries in their debt sustainability efforts a) Allow crisis countries to enjoy positive inflation despite their internal devaluation, hence let ECB interpret price stability as a target inflation of larger than the current 2%, so that Northerners can have inflation > 2% b) Capitalize problematic banks directly from the ESM without raising national debts 4
GREECE: TWO LEGS OF THE UNHOLY TRINITY ARE PARTICULARLY PROBLEMATIC Sovereign Debt Crisis Austerity measures due to sovereign stress weaken economies Weak growth makes certain indebted sovereigns insolvent Real Economy Imbalanced & under Stress Growth is the # 1 concern as recession deepens, the fiscal multiplier is bigger than forecasted in the MoUs, threatening the sustainability of debt Political risk is high as new measures are voted by a narrow margin of 153/300 on Nov 7, with no substantial debate, revealing an appalling lack of maturity in the Greek political system Forecasts of the 2013-2016 Fiscal Adjustment Program are based on a success scenario, yet danger of a major implosion is always present The third leg, the banking crisis, although serious, can be solved endogenously by an economic recovery 5
THE CHALLENGE TODAY: REBALANCE COMPOSITION OF GDP WITHOUT PROLONGING THE RECESSION Greek society overconsumes and underproduces, as evidenced by the large share of private consumption in output and the large gap between exports & imports The reduction in the share of consumption in output is necessary, yet it has to proceed smoothly to avoid an economic crash (2011, % of total GDP) Greece EA-17 Private Consumption 74.6% 57.4% Public Consumption 17.4% 21.6% Private Investment 11.3% 17.1% Public Investment 2.9% 1.7% Exports 25.1% 44.0% Imports 33.1% 42.6% GDP ( bn) - 2011 208.5 9420.6 The investment share is dangerously small, around 14% of GDP from 25% a decade ago. In 2011, depreciation was larger than new investment, resulting in negative net investment and a destruction of capital stock Public investment declined instead of going up to counter the recession Exports ought to continue their rise but liquidity constraints bite 6
HUGE CRISIS YET BANKS CONTINUE TO PROVIDE INTERMEDIATION Loans fell by less than deposits as banks continue to restructure loans, keeping low the NPL increase Deposit withdrawal stopped after June 2012 elections Bank liquidity support from the State around 150bn, mostly in the form of State guarantees (not a cost for the State Budget), utilized (along with other bank assets) for obtaining ca 130bn in Eurosystem liquidity (ECB & ELA facility), so as to cover deposit withdrawals ( > 80bn since 2009) buy Greek government bonds & bills 110 100 Source: BoG 90 80 70 60 Dec-09 Feb-10 Domestic Private Sector ( bn) Loans Deposits Loans Deposits 2007 215.1 197.9 Jan. 2012 248.7 169.0 2008 249.3 227.6 Feb. 2012 246.5 164.4 2009 249.3 237.5 Mar. 2012 244.7 165.4 2010 257.5 209.6 Apr. 2012 242.3 166.0 2011 248.1 174.2 May 2012 241.7 157.4 Domestic Private Sector Deposits & Loans (Dec. 2009 Aug. 2012, Dec. 2009 = 100) Loans Deposits Apr-10 Jun-10 Aug-10 Oct-10 Jun. 2012 239.8 150.6 Jul. 2012 233.9 153.9 Aug. 2012 232.6 153.4 Source: BoG Dec-10 Feb-11 Apr-11 Jun-11 Aug-11-6.7% - 35.4% Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 7
EUROSYSTEM PROVIDES LIQUIDITY SUPPORT BUT NOT A LENDER OF LAST RESORT ECB intervened to provide liquidity to the banking system, thus averted the typical Sudden Stop in financing imports to Greece, which usually accompanies a country crisis Yet ECB does not act as proper lender of last resort as the ELA mechanism is more costly (extra 2pps). Periphery suffers from restrictive monetary policy at a time of restrictive fiscal policy! Bank Borrowing from the ECB EA Greece a b c a * b c Jun-07 464.6 28,026 1.7 4.3 353.4 1.2 Jun-08 483.0 30,839 1.6 11.6 424.7 2.7 Jun-09 896.8 31,804 2.8 54.0 491.2 11.0 Jun-10 870.4 32,578 2.7 94.3 544.7 17.3 Jun-11 497.5 31,736 1.6 103.1 502.5 20.5 Jun-12 1,260.9 34,181 3.7 135.8 437.6 31.0 Aug-12 1,209.8 34,158 3.5 131.8 438.5 30.1 CY 13.3 134.7 9.9 (a) Total Lending from the ECB ( bn) (b) Total Banks Assets ( bn) (c) % ratio a/b * plus lending from the BoG through ELA 8
( bn) 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 LIQUIDITY DEVELOPMENTS ARE NOT ENCOURAGING 6.92 Jan-12 0.32 3.74 1.37 0.32 0.33 0.33 0.33 3.75 3.81 3.83 3.84 3.98 4.29 4.28 4.49 1.47 1.56 1.59 1.61 1.63 1.64 1.71 1.78 0.83 1.08 0.90 0.86 0.78 0.77 0.81 0.84 0.76 0.66 0.74 0.80 0.80 0.84 0.92 0.88 0.92 0.93 Feb-12 General Government Arrears 7.35 7.38 7.41 7.40 7.63 7.95 Mar-12 Apr-12 ` May-12 Jun-12 0.33 Jul-12 8.08 8.29 0.32 0.32 0.33 Aug-12 Sep-12 M inistries Local Goverments Hospitals Social Security Funds Extrabudgetary Funds Items that affect liquidity negatively: 1. General Government Arrears 2. Postponement of the deal with Europeans 3. Foreign companies worried about credit risk and also taking advantage of the weakness of the Greek corporate sector 4. Problems ahead for the banking sector as populist politicians try to strangle it 9
AT TIMES OF AUSTERITY, FOR THE RECESSION TO STOP, A NUMBER OF PREREQUISITES EXIST Political stability & Credibility, which would improve if, Troika gives green signal Reforms proceed at a faster pace, particularly the taxation of self-employed Liquidity, which is a suffocating constraint even for exports, thus front-loading the economy with cash rather than fiscal measures ought to have been a top European policy in the bargaining process Reversal of Sentiment and investment pessimism Increase in Public Investment Restructuring of the State sector 0-10 -20-30 -40-50 -60-70 -80-90 Jan-08 May-08 65 60 55 50 45 40 35 30 Jan-08 May-08 Consumer Confidence (SA) Sep-08 Jan-09 Greece EA May-09 Sep-09 Jan-10 PMI (manufacturing sector, SA) Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Greece EA Series3 Jan-11 May-11 Source: European Commission May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Source: BoG, ECOWIN Sep-11 Jan-12 May-12 Sep-12 10
SUMMARY: GREAT DANGER, BUT IF THERE IS A WILL, THERE IS A WAY The EMU crisis has three interrelated legs: (a) sovereign, (b) competitiveness & (c) banking Greece was originally affected only by the sovereign and the competitiveness crises, yet the Greek PSI and the prolonged recession created a domestic banking crisis as well From the three legs of the crisis, Growth is the # one priority in Greece, which requires a push of the reform effort in order to restructure the economy but not in a abrupt manner, in order not to prolong the recession Stopping the vicious cycle of austerity & recession Requires credibility, liquidity, improved sentiment : Investment & Exports have to fill in the gap in Aggregate Demand as consumption adjusts downward Europeans have to act smartly and front-load the economy with cash, not expenditure cuts (yet seems most likely) Among the structural measures, priority to revamp tax collection mechanism and jump start privatizations, free up product & service markets and re-organize State sector Improved cost competitiveness, a new export-led economic paradigm, a recapiltalized financial sector and structural reforms imply that once recovery starts, growth can take off 11
Thank you for your attention www.hardouvelis.gr www.eurobank.gr/research I wish to thank my colleagues at Eurobank for their comments 12