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04/06/2018 - Bank of Greece Governor Yannis Stournaras interview with the newspaper NIKKEI (Japan) conducted by Shogo Akagawa
Speaker: Yannis Stournaras

How would you describe the current macroeconomic situation in Greece?

According to Bank of Greece estimates, the real growth rate this year will be around 2%, up from 1.4% last year, and slightly higher next year, depending on the successful completion of the financial assistance programme currently in place. The unemployment rate at its peak was very high; it was close to 28%. Now it is close to 20%. The fiscal situation has improved significantly, with a primary surplus in 2017 exceeding 4% of GDP. The current account deficit, which used to be as high as 15% of GDP in 2008, has also disappeared. Hence, overall, I would say the economic situation has improved a lot.

What is the driving force behind this strong economic growth?

On the demand side, it is mostly investment, but also exports. On the supply side, the Greek economy has strong comparative advantages. Tourism, manufacturing and industrial production all seem now to perform well. The fact that the unemployment rate is still high and the economy works well below full capacity implies that there is a long way to go before we reach capacity constraints or full employment. That is, the Greek economy can grow at rates higher than the underlying trend for a number of years. However, for this to happen the reform effort should continue unabated after the completion of the financial assistance programme.

What is the explanation behind Greece’s comeback as a tourism destination?

We have become more competitive in tourism. Quality has improved. The hotel sector is booming: Many high-quality hotels have been built around the country, especially in Athens. But competitiveness has also improved because prices have fallen, both due to reforms as well as the crisis, which has kept wages and prices down.

Isn’t that view too optimistic? In most European countries – not only in Greece – people still feel insecure and doubtful about the economic recovery.

No, I do not think that this is entirely true. Eurozone has recovered above expectations in recent years. In the first quarter of this year there were some signs of a slowdown, but a few observations do not make a trend. We expect robust growth in the Eurozone in 2018, similar to that in 2017.

But what about surrounding risks? For example, current China-US relations.

We find rising protectionism a risky prospect worldwide, and for the Greek economy, too. As we are part of the European Union, Greek agricultural products, for instance, might be affected. Other sectors may be affected even more. A trade war will reduce trade and welfare. And it is going to have a negative impact on growth worldwide.

Could you give us your analysis of the current situation in the banking sector in Greece?

We have just finished a stress test, ahead of all other Eurozone Member-States, because we wanted to know the capital ratios of Greek banks under an adverse scenario before the exit of the financial assistance programme. All four systemic Greek banks have shown no negative surprises under the adverse scenario. However, with a high Non-Performing Loan (NPL) ratio as a legacy of the crisis we continue to be cautious and prudent and we have set ambitious targets to banks in order to achieve a significant reduction of this ratio until the end of 2019.

Do you think that Greek government can go back to the bond market?

There is a lot of volatility in the bond markets in the European South these days following political developments in Italy. Also, and despite the progress in the Greek economy described above, there are still a number of vulnerabilities such as a very high debt ratio and the fact that Greek Government bonds are still rated five notches below investment grade. In order to facilitate bond market access, the Greek Government has decided to build a domestic cash buffer using ESM (European Stability Mechanism) disbursements, limited bond issues abroad, as well as repo operations with domestic entities. This is a useful tool which can help Greece tap financial markets after the end of the financial assistance programme. The Bank of Greece has suggested that it would be also prudent to ask for an ESM precautionary credit line. For example, when Mexico and Poland had a flexible credit line from the IMF, they managed to tap financial markets successfully even without resorting to the credit line. Just the fact that they had a flexible credit line helped them tap financial markets. These are few of the reasons (but not the only ones) why the Bank of Greece advises that a precautionary credit line is also a useful tool under current circumstances. However, this is a decision that the Greek Government has to take. The two tools (cash buffer, precautionary credit line) should not be considered as mutually exclusive, but as complements.

Would you also want to have access to the collateral of the ECB?

Yes, beyond any doubt. A precautionary credit line allows Greek Government bonds to be used as collateral in the refinancing operations of Greek banks with the ECB, despite the fact that these bonds are currently rated five notches below investment grade (waiver). On top of this, with the waiver, the borrowing cost of the State will also fall because Greek Government bonds could participate in the Public Sector Purchase Programme (PSPP) of the ECB provided of course that public debt is being rendered sustainable through appropriate Eurogroup debt relief decisions.

Have you made any proposals regarding the exit programme in the ECB Governing Council?

According to ECB Governing Council previous decisions, the only way to get access to the waiver when existing financial assistance programmes end, is to ask for a precautionary credit line. The ECB does not grant the waiver in any other case.

Greece tried to go back to the bond market in the past, but was unsuccessful. Is the recovery of the Greek economy credible enough for the investors now?

In 2014, as well as in 2017 and the beginning of 2018, Greece tapped financial markets successfully. Currently, bond market volatility is hindering a return to markets as explained before. When the Eurogroup specifies debt sustainability measures in detail (in June or immediately after and in any case before the end of the financial assistance programme in August), the return to financial markets will become much easier.

What is the biggest difference between 2015 and now? What has changed?

The difference is that now, and in contrast to what happened in the first semester of 2015, the Greek Government is negotiating with the international lenders in good faith and with full respect of the European Treaty. It has also made all the necessary efforts to keep Greece in the Eurozone.

Did the political mood change after the 2015 referendum?

Yes. After the referendum, the Government behaved in a way which was dictated by its self-interest, but, above all, by the interest of the country. The interest of the country and the survival of the Government dictated a U-turn, and it was a very positive development that such a U-turn occurred.

But the Greek crisis was not purely an economic crisis, but also a crisis of trust and credibility.

This is definitely true. Contrary to what has happened in other crisis-hit Eurozone Member-States, where the crisis started from the banking sector and the flow of financial capital to non-traded good and services sectors, in Greece it was a fiscal crisis due to an overly expansionary fiscal policy, and a crisis of governance and institutions.

How far was Greece able to recover this credibility, in your opinion?

The results are mixed. We definitely see substantial improvements in a number of directions. For example, we have learned how to collect taxes, we have achieved primary fiscal surpluses, we consolidated and recapitalized banks, we liberalized markets, especially labour and product markets. We need further progress in the liberalization of the energy sector, we need to improve public sector quality, we need to improve our innovation and research and development system and we also need more privatizations. But we are still weak in institutions. We need to build institutions which inspire trust and to respect their independence; and we need to take ownership of what we are doing: I do not think it is positive for a number of politicians to claim that all these changes have taken place just because lenders imposed them onto us. Without ownership, I am afraid that we may fall back to the old bad habits, like irresponsible fiscal policies.

The ECB is currently considering an exit from the QE. Can Greek economy cope with these changes in monetary policy?

In order for Greece to cope with the normalization of monetary policy, debt sustainability is catalytic. In addition, Greece should implement all the remaining necessary reforms in order to increase the potential growth rate of its economy.

Currently, the media are focusing increasingly on the potential crisis in Italy, fearing that perhaps it hasn’t learned the lesson from the Greek crisis.

Indeed, the situation now looks quite precarious and, as I explained before, bond markets have already started reacting in an adverse way, taking into account that public debt in Italy as a percent of GDP is very high, only second to Greece’s. I very much hope that at the end of the day Italy will not resort to policies that may jeopardize its participation in the Euro. I am sure that Italy will examine its fiscal policy carefully, since risks will be very high if fiscal discipline is relaxed. If this happens, markets will punish Italy as they punished Greece in 2010 and 2015.

The last debt crisis spread out from Greece. Do you see now similar danger of contagion spreading out of Italy?

As I said before, I think that Italy will behave in a careful way and will not jeopardize its participation in the Eurozone. In the unlikely event that Italy will not behave like this, the results would be very damaging, both for the Eurozone, but especially for Italy and the European South. But thinking rationally, the probability of this event is in my view quite low, as Italy will certainly study the Greek example of the first semester of 2015, and will see that Greece came very close to disaster.