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Bank of Greece Monetary Policy Report 2020-2021

28/06/2021 - Press Releases

Today, in accordance with its Statute, the Bank of Greece submitted its Monetary Policy Report 2020-2021 to the Speaker of the Greek Parliament and the Cabinet.

Improved expectations – The economy set to rebound

The Greek and the world economies are still experiencing the wide-ranging effects of the COVID-19 pandemic. Nonetheless, as shown by available data, recovery has begun at a global level, although it appears to be uneven and asymmetric. This is due to significant disparities across advanced, developing and less developed countries in terms of their access to vaccines and of fiscal and monetary stimulus capacity. Meanwhile, inflation rates are picking up worldwide, reflecting rises in the prices of energy, food and other commodities as well as in dry bulk freight rates, an unwinding of pent-up demand after the lifting of lockdown measures, and supply chain disruptions. The different pace of recovery across economies could lead to divergences in monetary policy stance, which would exacerbate inequalities and increase the risks to global financial stability.

Turning to the Greek economy, the support measures adopted at the national and the European level have had a positive effect and mitigated the impact of the pandemic in the first quarter of 2021. The gradual expansion of the vaccination campaign to more age groups and its acceleration since May 2021 have created positive expectations among consumers and businesses about the economic outlook in the months ahead and are expected to boost domestic demand. The activation of the European recovery instrument Next Generation EU (NGEU) creates prospects for increased investment and a speedier recovery. Nevertheless, the Greek economy and banking system still face considerable challenges, associated with the evolution of the pandemic and progress on the vaccination front, but also with the macroeconomic imbalances that need to be addressed in order to get the economy back on a solid growth path.

A milder-than-expected recession in the first quarter of 2021 – Expectations improving as the vaccination campaign gains momentum

In 2020 and the first quarter of 2021, economic activity declined significantly owing to the pandemic and the associated containment measures. Real GDP contracted by 8.2% in 2020, mainly on account of a decline in services exports and private consumption. On the other hand, resilient goods exports, lower imports and higher public consumption offset some of the losses. The multiple fiscal measures introduced, some of which remain in effect, combined with the policy response of EU institutions, considerably cushioned the impact of the pandemic and enabled the economy to gradually adjust to the new conditions. This gradual adjustment is reflected in the milder impact of the third wave of the pandemic on the real economy, as evidenced by the robust growth of industrial production, a rebound of exports and a strong expansion of e-commerce.

In particular, the extension and tightening of restrictive measures in response to the third wave of the pandemic led to a contraction, year-on-year, of 2.3% in economic activity in the first quarter of 2021. However, this contraction was smaller than expected, partly owing to the continuation and expansion of the support measures and to the robust performance of investment and goods exports.

Based on the available soft data and conjunctural indicators, economic activity is expected to rebound in the second quarter of 2021 and to accelerate in the second half of the year in line with the progress of vaccinations, the further relaxation of containment measures and the receding of the pandemic.

Financial sector – Favourable conditions prevail – Deposits still on the rise, terms and availability of bank credit marginally improving – Positive impact of the fiscal support measures and of ECB interventions

Developments in sovereign and corporate bond markets remain favourable, reflecting the upgrades of Greece’s credit ratings by Moody’s and Standard and Poor’s. Decisive in this respect were the Eurosystem’s decision to launch a Pandemic Emergency Purchase Programme (PEPP) and its decision to grant a waiver of the Eurosystem’s eligibility requirements for Greek government bonds, making them eligible for purchase under the PEPP and as collateral in the Eurosystem’s liquidity-providing operations. As a result, in the past months through June 2021, Greek bond yields have stood at historically low levels, making it easier for the Greek government to tap the markets for substantial amounts through the issuance of long-term debt at historically low cost. In addition, the favourable international monetary and financial conditions have made it easier, from the fourth quarter of 2020 till now, for large Greek non-financial corporations to finance their activities, but also their maturing debt, through the issuance of corporate bonds.

Meanwhile, the ECB’s relaxation of its monetary policy stance, together with the interventions of the Greek government to address the economic impact of the pandemic, especially through the provision of state guarantees, contributed to an increase in bank credit to non-financial corporations, although this increase could have been higher given the banks’ liquidity situation. Credit expansion, the national fiscal measures to support incomes and bolster the liquidity of firms, and household savings, both precautionary and forced on account of the lockdown measures, led to a marked increase in private sector deposits.

Projections: the implementation of the National Recovery and Resilience Plan will speed up the recovery – Deterioration of fiscal position on account of the measures to support the economy

According to the Bank of Greece, economic activity is projected to increase by 4.2% in 2021. The recovery is expected to gain momentum in the second half of 2021, driven by pent-up domestic demand, the launch of projects under the National Recovery and Resilience Plan and an expected increase in tourism receipts relative to 2020. In 2022 and 2023, the growth rate is projected to be 5.3% and 3.9%, respectively.

The increase in savings during the pandemic, either precautionary or forced due to the containment measures, and the release of pent-up demand are expected to support an increase in private consumption expenditure this year. 2022 and 2023 should see a faster increase in private consumption, in line with an expected improvement in labour market conditions and a rise in disposable income.

Investment is expected to pick up significantly over the entire projection horizon. A crucial role should, in this regard, be played by EU resources, which will finance public and private investment geared towards the green and digital transition of the economy. Goods exports are projected to continue to grow, on the back of stronger foreign demand. Services exports are expected to trend upward this year, driven by a rebound in tourism receipts, while demand for shipping services should increase in line with global economic and trade developments. The rise in services exports is expected to continue through the projection horizon. On the other hand, imports should increase too, in line with domestic demand.

Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), is expected to remain negative in 2021, mainly on account of its services component, particularly tourism, and of the lockdown measures imposed during the first months of 2021 which adversely impacted both demand and supply of goods and services. In 2022 and 2023 headline inflation will post positive, albeit low rates.

The third wave of the pandemic at the beginning of 2021 necessitated an extension of the lockdown measures and a continuation and expansion of the fiscal support measures. According to revised projections by the Bank of Greece, the general government primary balance in 2021, calculated using the enhanced surveillance methodology, is expected to turn out a deficit of 7.1% of GDP.

The expansionary fiscal measures of 2020-2021 have weighed on the public debt-to-GDP ratio and government gross financing needs. However, according to Bank of Greece estimates, the long-term sustainability of public debt is not at risk. Whereas the public debt continues to trend downwards, the financing needs for the coming decade remain marginally at the reference level of 15% of GDP, on condition however that cash buffers remain high. This leaves no room for a relaxation of the longer-term primary surplus targets, while there are increasing risks in the event of negative shocks.

Projections subject to risks and uncertainties – Nevertheless, a recovery faster than in the baseline scenario seems feasible

The projections are subject to risks, associated with the evolution of the pandemic at the national and global level. Although the vaccination programme is well on track, the spread of the virus mutations are a source of uncertainty, while a worsening of the pandemic could result in a weak tourism season and delay the return to normality. A withdrawal of the support measures, national and European, could lead to possible business bankruptcies, especially in the sectors hardest hit by the pandemic, to an increase in non-performing loans (NPLs) and to a deterioration in the labour market. An additional risk arises from possible delays in the absorption of NGEU funds.

On the upside, a faster implementation of structural reforms and the full absorption and effective utilisation of EU resources could result in a stronger increase in investment and faster economic recovery over the projection horizon. Meanwhile, given the significant improvement in the consumer confidence index in recent months, households could increase consumption far more than expected, drawing on their accumulated savings, whether precautionary or forced, and unleashing their pent-up demand.

In the medium term, the stronger bank-sovereign nexus at the national and European level (via increased holdings of government bonds by banks, the provision of government guarantees to the banking system, and deferred tax credits) amplifies the risks to financial stability. The re-emergence of the twin deficits and the high private and public debt overhang (as well as the high stock of contingent liabilities of the government due to the provision of guarantees) are risk factors that make the economy more vulnerable to a new negative external shock. An additional risk in the medium term is a possible termination of the ECB emergency pandemic-related monetary policy measures before Greek bonds regain investment grade status. In such an event, Greek bonds would be vulnerable to possible shocks to the global financial system, which could arise from an abrupt tightening of monetary policy in advanced economies in response to a faster than anticipated rise in inflation.

In the external environment, any geopolitical tensions in the wider South-Eastern Mediterranean region would exacerbate the refugee crisis and adversely impact economic sentiment and investment.

Despite the downside risks and uncertainties about the future path of the economy, Bank of Greece estimates suggest that the expected positive results from timely and complete absorption of EU resources should tilt the balance of risks to the upside, over both the short-term and the medium-term horizons. Therefore, a better-than-expected performance of the economy appears feasible for the period 2021-2023.

Banking system – Losses reported in the first quarter of 2021 – Decline in capital adequacy – Capital increases: significant steps in the right direction – The high share of DTCs in bank capital remains a challenge

In the first quarter of 2021, Greek banks, in aggregate, posted losses (as they had in 2020). Despite higher net income, the higher loan loss provisions (mainly reflecting losses from the planned sale of a large volume of NPLs by one systemic bank) resulted in losses for the Greek banking system as a whole. In terms of capital adequacy, both the Common Equity Tier 1 (CET 1) and the capital adequacy ratio on a consolidated basis declined slightly in the first quarter of 2021 relative to 2020, but remained at satisfactory levels (13.6% and 15.6%, respectively, at end-March 2021). Still, both indices remain below the European average. In the last few quarters, capital adequacy ratios were negatively affected by securitisations in the context of the NPL reduction effort and by the phased-in implementation of the International Financial Reporting Standard 9 (IFRS 9). With a fully phased-in IFRS 9 effect, the CET1 and the Capital Adequacy Ratio came to 11.8% and 13.8%, respectively. Roughly 65% of banks’ CET1 capital corresponds to deferred tax credits (DTCs), and this percentage is expected to increase further in the context of the current NPL reduction strategy.

Banks need to strengthen their capital base in terms of quality and quantity, and positive developments have already been seen in this direction. However, the relatively weak capital adequacy positions of certain non-systemic banks are a source of concern.

Marginal rise in non-performing loans in the first quarter of 2021 – A further increase is expected, due to the pandemic – The activation of the new bankruptcy code is a positive development

The stock of NPLs, after declining in 2020, mainly through the sales of loans under the Hellenic Asset Protection Scheme (HAPS) providing Greek State guarantees for NPL securitisations, increased marginally in the first quarter of 2021 to €47.3 billion at end-March 2021. The NPL ratio to total loans remained high (30.3%) at end-March 2021, about twelve times the respective ratio for euro area banks under the direct supervision of the Single Supervisory Mechanism.

The ongoing pandemic and the withdrawal of support measures are expected to worsen the financial condition of certain businesses and households hit by the pandemic, thereby leading to new NPLs. Thus, banks need to reassess the adequacy of their provisions for credit risk, in particular the repayment capacity of borrowers hit by the pandemic, given that the government support measures mask the true picture.

Meanwhile, banks, especially the systemic ones, are pursuing more aggressive NPL reduction policies. As a result, the system-wide NPL ratio could fall to a single-digit level by end-2022, although certain mostly non-systemic banks do not appear to be keeping up with the overall pace of NPL reduction. Moreover, the new bankruptcy code came into effect on 1 June 2021. This is expected to help improve bank asset quality.


The Greek economy still faces significant challenges in the short and the medium-to-long term. In the short term, the primary challenges are to contain the pandemic and get the economy back on a solid growth trajectory.

Turning to the medium-to-long term horizon, the pandemic has brought about new challenges and has exacerbated pre-existing macroeconomic imbalances, associated with chronic weaknesses of the Greek economy. These challenges are the following:

• The re-emergence of the twin deficits, along with a private and public debt overhang, increases the risks and could hamper the achievement of the objectives set in the National Recovery and Resilience Plan.

• A possible termination of the ECB’s Pandemic Emergency Purchase Programme before the Greek economy regains investment grade could result in upward pressure on Greek government borrowing costs.

• Banks are still burdened by a high stock of NPLs, which is expected to increase further when the support measures are withdrawn. Moreover, banks’ capital base is expected to weaken further as a result of the current NPL reduction policies.

• The structural competitiveness of the Greek economy remains comparatively low, despite improving in certain sectors.

• Unemployment remains high and could increase further once the support measures are withdrawn, especially in service sectors adversely affected by the pandemic. As the pandemic induces changes in consumption patterns, recovery in these sectors may occur with some delay, posing the risk of unemployment becoming structural.

• Τhe high investment gap of the previous decade dampens the long-term outlook of the economy.

Prerequisites for a speedier recovery and for a productive transformation of the economy

A return to a solid growth path will hinge upon the containment of the pandemic, the reopening of all activities and the lifting of travel restrictions so that tourism activity can grow in line with expectations. Key to containing the pandemic and ensuring sustainable recovery will be the highest possible vaccination coverage of the population.

The viability of many businesses and jobs could be threatened after the end of the pandemic and the withdrawal of bank moratoria and government support schemes to support businesses and workers. This is why the support measures should be withdrawn gradually and in sync with the recovery gaining traction. As regards the labour market, the withdrawal of support measures should be coupled with active employment policies, so as to avert an increase in structural unemployment and to help workers, discouraged during the pandemic, return to the labour force.

Fiscal expansion will need to remain targeted and temporary, in order to preserve public debt sustainability and prevent the health crisis from turning into a sovereign debt crisis. Furthermore, the cash buffer will need to be kept at high levels, as it contributes to maintaining investor confidence and thereby to reducing the debt refinancing costs, given that Greek government bonds are still below investment grade. In the medium term, the high debt-to-GDP ratio and increased financing needs call for a rapid and credible restoration of fiscal sustainability. With specific regard to public debt, its strong increase despite the low borrowing costs and the favourable repayment schedule eliminates all room for a relaxation of the long-term primary surplus targets and makes it all the more crucial to safeguard fiscal credibility, through a return to realistic primary surpluses and compliance with EU fiscal rules.

The achievement of high and sustainable growth rates, which will also help reduce the public debt-to-GDP ratio, calls for a rapid absorption and effective utilisation of European resources that will provide impetus to growth through an acceleration of public and private investment. The implementation of growth-enhancing high value added projects associated with the green and digital transition of the public and the private sector can be expected to strengthen infrastructures and boost output, employment and private investment.

Meanwhile, the implementation of reforms under the National Recovery and Resilience Plan and an acceleration of the privatisation programme that has stalled during the pandemic, will help increase real GDP and total productivity in the economy over time.

A key factor in the growth effort and in the achievement of the goals of the National Recovery and Resilience Plan will be a well-functioning banking system able to finance healthy businesses post-pandemic. This will call for:

• an addressing of existing NPLs and all new NPLs that emerge once support measures are withdrawn;

• a re-assessment of loan loss provisions;

• active use of the new bankruptcy code, which will help improve bank asset quality and restructure viable businesses;

• a reduction of the high share of deferred tax credits in bank capital; and

• a strengthening of banks’ capital base.


Progress with the vaccination programme, an easing of the pandemic and the gradual relaxation of the associated containment measures, together with the financial support measures, have started to yield their first positive results. Key short-term indicators of economic activity and expectations point to a rebound in the second quarter that is expected to pick up steam in the second half of the year.

The course of the Greek economy in the coming months is closely linked with the evolution of the pandemic, the progress of vaccinations, a release of pent-up demand and a recovery of tourism. Despite the downside risks and uncertainties, improved confidence should lead to an increase in consumption, supported by high levels of savings, especially in expenditure categories that involve services affected by the lockdown measures. Furthermore, the advance disbursement and utilisation of 13% of NGEU funds in the period ahead will boost investment and economic activity.

In the medium term, the outlook for the Greek economy is indisputably positive, in light of the available EU resources. The realisation of investments and reforms under the National Recovery and Resilience Plan will improve the business environment, support the green and digital transition of the public and the private sectors, while also preserving social cohesion, and will make the Greek economy more extroverted and competitive. These changes will enable permanent increases in real GDP, employment, productive capital and overall productivity of the economy. However, the effort to transform the Greek economy into an extroverted, sustainable and inclusive growth model presupposes financing to businesses from a strong banking system.

Despite the positive medium-to long-term prospects, the Greek economy faces significant challenges and imbalances that worsened on account of the pandemic. This calls for vigilance, an alignment of political forces and a stepping-up of efforts towards the productive transformation of the economy. The NGEU provides a unique opportunity in this respect.


The full text of the Report is available (in Greek) here.

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