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Governor’s Annual Report 2020

06/04/2021 - Press Releases




2021: Beginning of the end for the pandemic, and transition to a new economic reality

2021 marks the beginning of the end for the COVID-19 pandemic and a gradual transition to a new normal. The mass rollout of vaccines is a milestone in the global effort to contain the spread of the virus and resolve the public health crisis. Accelerating the vaccination programmes will be crucial to curbing the pandemic and to reopening the economies.

Until then, the pandemic continues to pose, at least in the short term, serious risks to public health and to the rebound of economic activity. Various factors are prolonging the uncertainty, fuelling negative expectations, disrupting economic activity and delaying the recovery, in particular: (a) the difficulty in controlling the pandemic; (b) the fear of coronavirus variants; and (c) the delays in vaccine deliveries and in the implementation of national vaccination programmes across Europe.

Nonetheless, a rebound of global demand and the extension of fiscal stimulus packages provided by the large developed economies, including the new European recovery instrument Next Generation EU (NGEU), in combination with the maintenance of favourable financial conditions, support expectations for a solid recovery in the EU from the second half of 2021 onwards.

The outbreak of the pandemic in early 2020 was a major shock to the world economy. Countries were hit by an unexpected and deep crisis, both health-related and economic. Values, rights and constants were tested. Past certainties about the functioning of societies and economies and about the conduct of economic policy were called into question. The human toll worldwide has been enormous. The world economy experienced its worst peacetime recession in almost 100 years, with global GDP contracting by a historic 3.5%.

The end of the pandemic, however, will form a new social and economic reality. A new world, predominantly digital, is emerging, in which knowledge, scientific research, technology and innovation will be the key drivers of economic prosperity. There is growing awareness of the need for global solidarity and cooperation in order to improve collective resilience to symmetric shocks. The crisis has also reaffirmed the need to proactively address the impacts of climate change and protect the natural environment as an essential condition for a safe coexistence of man and nature.

The pressing issues on the global and European policy agenda once the coronavirus crisis is over will be the following: (a) a rise in business failures; (b) the resulting higher unemployment rate, on top of the loss of mainly low-skilled jobs amid rapid automation and digitalisation; (c) rising poverty as well as social and economic inequalities both across and within countries. Dealing with the pandemic-induced surge in private and public debt worldwide will be another major concern for economic policymakers in the years ahead. Equally important policy priorities will be the strengthening of public health systems and managing the risks associated with ever more frequent extreme weather events, as well as the challenges of digital transition. These major issues call for the effective cooperation of governments on matters of economic policy (including tax policy) and climate change, as well as for scientific collaboration to protect public health and promote research on how to address pandemics.

Currently, new economic policy instruments and financing mechanisms are being deployed to counter the losses. At the EU level, the coordinated response with the suspension of the Stability and Growth Pact and of state aid rules to enable loan and guarantee support to businesses, and more importantly the unprecedented initiative of the EU leaders to finance the economic recovery in Europe through a common bond issue, all pave the way to a reform of the overall EU economic governance framework with a view to making it more realistic, flexible and effective.

The experience from the management of the pandemic crisis could serve as a blueprint for establishing some form of permanent central fiscal capacity in the EU, including the use of common bond issues as a tool for financing productive investment, and for a better monitoring of structural policy implementation. First and foremost however, the pandemic has highlighted the need to reform the temporarily suspended Stability and Growth Pact in two main directions: (a) towards a simplification of the fiscal rules to make them more flexible, realistic and operational; and (b) towards an enhanced implementation of credible countercyclical fiscal policies and parallel strengthening of automatic stabilisers, with a greater focus on debt sustainability. The revision of the fiscal rules is a challenging topic to debate. The new rules should be credible, so as to strengthen market confidence, and should not require complex and time-consuming treaty amendment processes, but only political support at the level of EU leaders.

Increased uncertainty and the need to adapt to the new normal

The second wave of the pandemic across Europe in the autumn and winter of 2020 necessitated renewed containment measures. This halted the rebound that had begun to emerge in the third quarter of 2020. The quarter-on-quarter decline in activity was considerably milder than expected, but year-on-year the euro area economy contracted by 4.9% in the fourth quarter of 2020 and by 6.6% in the year as a whole.

One key factor behind the rather moderate economic losses during the second wave of the pandemic was the less stringent lockdowns imposed, resulting in relatively higher citizen mobility compared with the first wave, a strong growth of industrial production, a rebound of global demand and a gradual operational adjustment of the economy to the exceptional circumstances. The extension and, in particular, the tightening of lockdown measures in response to the third wave of the pandemic in the first quarter of 2021 are expected to lead to a further contraction, albeit moderate, of economic activity.

Greece has experienced periodic surges of the pandemic, leading to a new round of lockdown and containment measures as from early November 2020, which were further tightened in mid-February and again in early March 2021. Compared with the ones imposed during the first wave, the new containment measures are clearly less strict, as evidenced by relatively higher citizen mobility and by continued industrial and construction activities. However, the fact that the measures have been in place for a prolonged time, combined with uncertainty regarding the dynamics of the pandemic and the pace of vaccinations worldwide, fuels economic uncertainty and delays the recovery.

Nevertheless, the recovery of the euro area is projected to begin later this year, more specifically from the second quarter of 2021, to gain momentum in the second half of the year and to continue in 2022. According to the baseline scenario of the latest ECB staff macroeconomic projections (March 2021), euro area GDP, after contracting by 6.6% in 2020, is expected to grow by 4.0% and 4.1%, in 2021 and 2022 respectively. This projection is subject to four important assumptions: (a) a faster implementation of national vaccination programmes; (b) an unwinding of containment measures; (c) a continued expansionary stance of national fiscal policies; and (d) the maintenance of favourable financing conditions, as well as the timely utilisation of NGEU funds.

The continuation of the accommodative stance of the single monetary policy, along with its flexibility so that no Member State is excluded from the benefits of this policy, ensures favourable financing conditions for all countries, businesses and households. The announcement on 11 March 2021 that the net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) will continue to be conducted, in fact at a significantly higher pace, keeps borrowing costs at low levels.

Meanwhile, the NGEU recovery instrument and especially the new funding mechanism under the Recovery and Resilience Facility, provides all EU countries with adequate fiscal space not only for a faster recouping of losses but also for more resilient growth via digital transformation, green transition and implementation of structural reforms. The NGEU functions indirectly as a fiscal transfer mechanism, with the countries most hit by the pandemic shock benefiting the most from the available subsidies and loans.

Still, the return to growth is expected to be uneven across countries and sectors. Although the pandemic has been a symmetric shock affecting all economies and sectors, its economic and social impact is asymmetric, with the services sector hit worse by the containment measures and the slump in demand than other sectors, such as industry.

Furthermore, the need to prevent the spread of the pandemic has spurred new trends in consumer behaviour and demand, but also in the organisation and operation of businesses. Remote working, virtual meetings, e-commerce, livestreaming and online education are some examples of the increased penetration of new technologies into economic and social structures. The pandemic has also accelerated e-globalisation, making location irrelevant for a number of businesses, most notably software companies.

In light of these new trends, enterprises across all sectors need to rapidly adjust to the new types of demand and to the new ways of operating and doing business. The lack of, or unequal access to, technology and the knowledge-based economy, but also possible delays, policy failures or even lack of willingness to adapt could slow and dampen growth and, consequently, exacerbate inequalities across countries and across sectors.

The Greek economy, as an economy highly dependent on services with a high share of tourism and retail trade in its GDP, was hit harder than other EU countries by the shocks to external and domestic demand. The recession in 2020 came to 8.2%. Yet, despite the heavy losses, the Greek economy has shown remarkable resilience and ability for operational adjustment to the new situation.

In this respect, the timely and effective conduct of a countercyclical fiscal policy by the Greek authorities with the adoption of measures of unprecedented size and scope (amounting to 11.2% of GDP) aimed to preserve jobs, protect entrepreneurship and boost domestic demand has been crucial. In fact, together with credit expansion, moratoria on loans and other payments and other relief measures, the emergency policy measures, despite their significant fiscal cost, have managed to ease the negative impact on disposable income and employment, create positive expectations and reduce exceptionally high uncertainty. The objective was to prevent a temporary recession from turning into a lasting depression. Ultimately, the recession turned out to be significantly less pronounced than initially forecast by domestic and international institutions.

Prospects of the Greek economy in 2021

The rebound of demand is projected to pick up later this year, specifically from the second quarter onwards, leading the Greek economy to strong positive growth. According to the Bank of Greece, the real GDP growth rate in 2021 is forecast at 4.2%. This, however, is subject to uncertainty due to risks associated with the epidemiological developments and the feasibility of lifting many of the containment and lockdown measures soon, but also with the economy’s structural characteristics.

The speed at which the Greek economy will recover will depend on the following three crucial factors:

First, the acceleration of vaccine rollout schemes at a domestic and global level. A widespread immunisation of the population would boost public confidence in an eventual resolution of the health crisis and make a return to normality possible, through a lifting of travel and other restrictions, thereby contributing to a recovery of external demand, mainly for services. At the same time, it will enable an increase in domestic consumption and investment.

Second, the maintenance of the fiscal expansionary measures and the emergency measures from the banking system, targeting those categories of workers and sectors worst hit, yet still economically viable, until the coronavirus crisis is over and the recovery gains momentum.

Third, the speed of activation of the National Recovery and Resilience Plan. Utilisation of NGEU funds from the second half of 2021 onwards will strengthen the growth dynamics and, through a rise in national output, facilitate a restoration of fiscal sustainability, without the need to resort to severe austerity policies that, in the past, had trapped the economy in a vicious circle of recession and stagnation.

Besides, commitment to continue implementing structural reforms is a sine qua non to not only bridging the output gap, but also – and more importantly – to stimulating aggregate supply and raising total factor productivity, increasing productive capacity and ultimately enhancing potential output growth.

Thus, in the aftermath of the pandemic, the medium-term priorities of economic policy need to be centred around three key areas: (a) restoring fiscal sustainability to ensure Greece’s creditworthiness; (b) a more growth-oriented fiscal policy; and (c) faster implementation of the national reform programme, including a clean-up of bank balance sheets from impaired assets.

Fiscal policy

The fiscal support measures and the recession led to a sharp reversal of the general government primary budget surplus into a deficit in 2020 and, combined with a substantial drop in nominal output, to a significant increase in the debt-to-GDP ratio. Revised projections by the Bank of Greece place the 2020 general government primary budget deficit at 7.0% of GDP and public debt at 205% of GDP.

The inclusion of Greek government bonds, though still lacking an investment grade rating, in the ECB’s Pandemic Emergency Purchase Programme (PEPP) and their eligibility as collateral in the refinancing of Greek banks from the Eurosystem, as well as the positive financial market developments, have contributed to the uninterrupted access of the Greek State to international markets on particularly favourable terms.

Nevertheless, as uncertainty remains elevated, fiscal policy for 2021 has already been complemented with new expansionary measures, which will further weigh on the fiscal balance. The general government primary deficit in 2021 is projected to reach 5.3% of GDP.

The banking system

The ECB support package, including the acceptance of Greek government bonds in refinancing operations and its supervisory relief measures, has substantially improved the liquidity situation of the Greek banking system. At the same time, government interventions, mainly through programmes of the Hellenic Development Bank, have set the stage for an accelerated bank credit expansion to non-financial corporations. The annual rate of growth in bank credit to the private sector averaged 1.2% in 2020, compared with a negative rate (-0.4%) in 2019. Banks have increased their lending mainly to large corporations and, to a lesser extent, to small and medium-sized enterprises.

Private sector deposits increased by €20.6 billion in 2020 on the back of a build-up of liquidity and increased savings, either precautionary or forced, due to the containment and lockdown measures.

The impact of the pandemic on the banking sector is expected to intensify in 2021, mainly in the form of a new wave of NPLs, as well as an anticipated worsening of the Deferred Tax Credits (DTCs) as a share of total prudential own funds. The Bank of Greece has estimated that new NPLs in 2021 will amount to €8-10 billion. In addition to the twin problem of NPLs and DTCs, Greek banks face a number of serious challenges, common to most euro area banks, such as low core profitability, increased competition from non-banks, challenges stemming from the incomplete banking union, and others associated with the impact of climate change and cyberattacks.

Non-performing loans

Non-performing loans (NPLs) stood at €47.4 billion at end-December 2020, down by about €21 billion from end-December 2019. The NPL ratio to total loans remains high, at 30.2%, compared with an EU average of just 2.6%. However, compared with its March 2016 peak, the stock of NPLs has declined by roughly €60 billion, mainly through loan sales and write-offs, and much less through recoveries from active NPL management.

By the time the Hercules plan is completed in the course of 2021, the NPL ratio will likely have fallen to about 25% and the average capital adequacy ratio to below its current levels, with a simultaneous increase in the share of DTCs. These estimates do not take into account the new NPLs that are expected to be added to the current stock as a result of the pandemic shock.

Against this background, additional measures need to be taken to facilitate the frontloaded recognition of credit losses on account of the pandemic, as well as the fast repair of bank balance sheets together with addressing the DTC problem. To this end, the Bank of Greece has proposed to the government, as a complement to the Hercules plan currently underway, the establishment of an Asset Management Company (AMC). Importantly, the Bank of Greece proposal simultaneously addresses the problem of DTCs. The government is examining the advisability of establishing an AMC, as proposed by the Bank of Greece, and has applied to the European Commission’s DG Competition for an extension of the Hercules plan. Should the proposal of the Bank of Greece not be selected by the authorities, an alternative way of addressing the problem of DTCs will need to be found that is compatible with the applicable capital requirement legislation. The commitment of sizeable public funds in the form of state guarantees, to support NPL securitisation through the Hercules plan, which was a decision in the right direction, should ensure a definitive and comprehensive solution to the twin problem of NPLs and the high share of DTCs in banks’ regulatory own funds.

Sources of uncertainty and risks

Soaring uncertainty has been a salient feature of the current pandemic period worldwide. The exceptionally volatile global economic environment has been weighing on expectations and reduced the effectiveness of economic policy.

With the pandemic continuing unabated around the world, delays in the production and delivery of vaccines pose the greatest risk. Under the current emergency circumstances, vaccination is a global public good that must be equally accessible to everyone without discrimination. An uneven distribution of vaccines across countries would hamper the international effort to tackle the health crisis and to support global recovery, and so would antagonisms and rivalries between industrialised countries. The sooner vaccinations are rolled out, the sooner we will be able to end the health crisis and the sooner economies can resume normal functioning.

On the day-after, one major risk relates to the growing economic and social gaps across groups of countries, geographical regions and social groups.

The pandemic accelerated structural changes in the labour market. Hardest hit were the more vulnerable categories of workers in sectors relying on face-to-face interaction and in intermediation services, which are increasingly digitalised. In contrast, high-technology industries have posted faster growth than the more traditional sectors.

Labour market changes spur changes in the educational systems, as curricula are adapted to respond to the new patterns of labour demand. They also bring about changes in cities, as the widespread use of remote working, e-learning and virtual meetings reduces the need to commute, thus slowing or reversing urbanisation trends.

Countries and sectors with a higher adoption of new technologies and operational adjustment capabilities will attract investment, create jobs and recover faster.

Another significant risk relates to the surge in private debt, the management of which poses perhaps the greatest challenge going forward. An equally serious risk arises from the dynamics of global public debt, which has soared to a post-WWII high. On the other hand, historically low borrowing rates make public debt manageable in the medium term. There is, however, concern that the large and prolonged fiscal stimulus may cause economies to overheat. The recent upward pressures on long-term bond yields confirm this concern. The risk of a major correction in international capital markets must also be taken into consideration, as valuations in certain stock exchanges have reached historically high levels. In this respect, an abrupt increase in the cost of financing could undermine global recovery. This highlights the need to preserve and extend, for as long as necessary, monetary policy accommodation, including asset purchase programmes by central banks.

Greece is directly affected by the surge in global uncertainty and risk. But it also faces additional risks associated with idiosyncratic characteristics of the economy, as well as legacy issues from the previous crisis.

In the post-pandemic period, the Greek economy will need to address two significant risks: a large number of failures of non-viable firms and the loss of many jobs, especially in intermediation services and in low-skilled labour-intensive sectors.

The possible failure of a large number of ultimately non-viable firms would entail significant credit risks (new wave of NPLs) and fiscal risks (calling-in of state guarantees, write-offs of debt to government, higher unemployment benefits), which would negatively affect the financial sector and delay the return to fiscal sustainability.

Challenges and prerequisites for recovery

Due to the impact of the pandemic, the Greek economy is confronted with two major challenges: (a) the acceleration of its total transformation, aiming at increasing productivity and fostering its green and digital transition; and (b) the resolution, in a definitive and comprehensive manner, of the twin problem of NPLs and DTCs.

As regards the first challenge, proper utilisation of European funds available under the NGEU provides a unique opportunity to implement the policies needed to change Greece’s production model. As for the second challenge, the expiration of support measures could increase credit risk with a renewed build-up of NPLs. Banks will need to take action to facilitate the frontloaded recognition of credit losses and a swift clean-up of their balance sheets through systemic solutions, such as the ones specified in the relevant press release of the European Commission on 16 December 2020. A very positive development in this regard is the strengthening of the regulatory own funds of certain Greek banks.

Given that the key challenge will be how to bring the Greek economy back on track, economic policy will need to pursue active employment policies and facilitate the reallocation of funds towards dynamic sectors and businesses with better growth prospects.

In particular, it is necessary to maintain selective economic support measures targeting the sectors of the economy and categories of workers that were worst-hit by the pandemic. These support measures need to be well targeted in order to prevent the risk of a credit crunch for viable businesses facing temporary liquidity constraints. At the same time, there is a need to strengthen a culture of prompt payment, which would normalise the service of debt obligations, as well as for a safety net for workers in non-viable businesses. In addition to the above, the stepped-up implementation of structural reforms and growth-oriented policies remains essential.

The challenge for economic policy is therefore to achieve high growth rates, enabling a faster recouping of losses; to get the economy onto a solid growth trajectory; to restore fiscal sustainability; and to set the debt-to-GDP ratio on a declining path.

For this to happen though, minimum prerequisites must be met, including:

•           the effective utilisation of EU funds;

•           a definitive and comprehensive solution to the twin problem of NPLs and DTCs;

•           the completion of the tax reform towards an alleviation and a more equitable distribution of the tax burden;

•           the rebalancing of public expenditure towards productive spending;

•           an increase in public investment;

•           the completion of the digital transformation of the economy and society;

•           building resilience against future infectious diseases and the impacts of climate change.


The pandemic has dealt a severe blow to Greece’s society and economy. At a societal level, it has taken a huge toll on public health, resulting in a heavy loss of life. Regarding the economy, it has had major macroeconomic, financial and fiscal repercussions, the fiscal costs of which are unevenly distributed. At the same time, however, the pandemic has served as a catalyst for change, accelerating nascent trends and prompting fundamental reforms within just a few months. It has revealed the importance of structural policies in strengthening the adaptability and resilience of the economy. It has also made clear that global and European solidarity and cooperation, through the conduct of pragmatic economic policies, is the way forward for collectively addressing symmetric shocks.

Post-pandemic, consistent policies and strategies should enable Greece to enter a solid growth path, taking full advantage of the unique opportunity provided by the coordinated action from the European Commission and the ECB, so as to rapidly recoup the economic losses and tackle its long-term structural weakness.


Related link: Annual report (in Greek)


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