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The Bank of Greece Interim Report on Monetary Policy 2019

20/12/2019 - Press Releases

Today, in accordance with its Statute, the Bank of Greece submitted its Interim Report on Monetary Policy 2019 to the Speaker of the Greek Parliament and the Cabinet.

The acceleration of reforms creates positive prospects, offsetting the impact from the slowdown of the world economy

The present Interim Report on Monetary Policy is submitted by the Bank of Greece at a time when the Greek economy continues to recover, despite the global economic slowdown. Economic sentiment and expectations indicators have improved significantly and point to a continuation of the growth momentum. Developments in the financial sector have been positive, marked by an increase in deposits and an improvement in bank funding conditions. Confidence in the banking sector has strengthened considerably, and capital controls were fully lifted on 1 September. The improved liquidity situation of the banking system contributed to higher bank lending to non-financial corporations. The yields of Greek government and corporate bonds declined substantially in recent months, especially after the European Parliament elections in May and Greece’s national elections in July. The decline in Greek government bond yields and the early repayment of part of the IMF loan lead to lower interest payments and improve public debt sustainability. The positive developments so far are also reflected in the recent upgrade of Greece’s credit rating by S&P.

Still, the Greek economy continues to face very tight fiscal, monetary and financial conditions compared with its euro area counterparts. Meanwhile, the risks arising from the external environment have increased considerably, on account of the slowdown in global growth. As regards the domestic environment, the government’s ownership of the reform programme and its intention to rapidly carry it out have alleviated earlier risks associated with the implementation of reforms and concerns that they might be cancelled.

The resolute implementation of the enacted reforms and the broadening of their scope to include a speedier delivery of justice, land use regulation, improved public sector efficiency and a fundamental solution to the NPL problem will help to offset the risks associated with the global economic slowdown, address the challenges ahead and bolster investor confidence in the medium-to-long term prospects of the Greek economy.

The Greek economy gained momentum over the first nine months of 2019, despite the global economic slowdown

The Greek economy gained momentum over the period from January to September 2019, despite the global economic slowdown. Growth was driven primarily by exports, mainly of services, on the back of a significant rise in tourism and shipping receipts, but also of goods. Government consumption also made a positive contribution to GDP growth. On the other hand, investment demand remained subdued in the first nine months of the year. The contribution of private consumption to GDP growth was marginally positive.

The recovery of the economy is expected to continue into the fourth quarter of 2019. Despite the less positive signals coming from certain short-term economic indicators (industrial production and retail sales), the Economic Sentiment Indicator is close to its highest level in twelve years and the Purchasing Managers’ Index (PMI) points to strong growth in the manufacturing sector, remaining consistently above the 50 threshold.

At the same time, very encouraging signs are observed, such as a rebounding real estate market, an ongoing recovery of the labour market and accelerating household disposable income growth, a pick-up in non-financial corporate investment, an increase in saving and in bank and capital market financing of non-financial corporations, as well as an upward trend in tourism receipts in recent years. These developments suggest a significant resilience of the Greek economy to the global economic slowdown.

For the year as a whole, the Harmonised Index of Consumer Prices (HICP) headline inflation is expected, on balance, to edge up. The transfer of several items (processed food and restaurant-café services) to a reduced VAT rate of 13% from the standard rate of 24% and the downward path of crude oil prices have exerted a dampening effect on inflation, largely offsetting the overall upward trend of services prices and the limited impact from the increase in the minimum wage and the abolition of the sub-minimum wage.

Forecasts of accelerating growth and achievement of the primary surplus target

According to Eurosystem staff macroeconomic projections, Greek GDP is expected to grow by 1.9% in 2019. However, the latest national accounts data for GDP, released by ELSTAT recently and after the cut-off date for the December 2019 projections, suggest a stronger growth rate for 2019. For 2020 and 2021, growth is projected to accelerate to 2.4% and 2.5%, respectively. The contribution of private consumption to GDP growth is expected to be positive over the entire projection period. However, consumer spending is projected to grow moderately, as households use part of their higher real disposable income towards debt repayment and towards increasing their savings.

Investment is projected to strengthen significantly over the next two years, supported  by consolidated investor confidence, a gradual restoration of liquidity in the financial system, higher public investment expenditure, the fast-tracking of large investment projects and of public-private partnerships (PPPs) and, most importantly, the development of public real estate and the speeding up of the privatisation programme. Furthermore, legislative initiatives, such as the recently enacted investment law and the growth-enhancing measures set out in the 2020 Budget Report are expected to contribute to the financing of new productive investment.

While exports of goods are expected to continue growing, their pace will be slower, affected by weaker foreign demand mainly in 2020 amid a deteriorating international environment. Services exports are projected to increase in line with demand for tourism and shipping services. However, imports are also expected to rise, in line with developments in domestic demand as well as in Greek exports, whose import content remains comparatively high.

HICP inflation is projected to remain at low levels in the period ahead, largely due to the anticipated low crude oil prices, but also as a result of indirect tax cuts, and to pick up slightly by end-2021. Core inflation is expected to hover slightly above the headline index.

According to the latest available data, the Bank of Greece estimates that the primary surplus target of 3.5% of GDP will be met in 2019 and 2020.

Higher risks from the external environment – more favourable domestic conditions

The projected economic outlook is subject to significant downside risks, mainly relating to the external environment. More specifically, these risks are associated with a stronger-than-expected slowdown in global growth and trade in the context of trade protectionism, a no-deal Brexit, a sharp correction in global financial markets, as well as a possible heightening of geopolitical tensions and an intensification of the refugee crisis.

Turning to the domestic environment, a slowdown in recovery on account of the negative international environment would entail a risk of reform fatigue and of delays in implementing the necessary reforms. On the upside, a faster implementation of structural reforms, a direct and/or indirect easing of the primary surplus targets and a quicker-than-anticipated reduction in non-performing loans could result in higher economic growth.

Bank profitability improved, capital adequacy remains satisfactory

In the first nine months of 2019, banks’ net income (operating income less operating expenses) increased and pre-tax profits grew significantly year-on-year. In terms of capital adequacy, the Common Equity Tier 1 (CET1) ratio and the Capital Adequacy Ratio on a consolidated basis remained at satisfactory levels (15.9% and 16.9%, respectively) at end-September.

Reduction in NPLs – the implementation of the Hercules plan is a positive step forward

Non-performing loans (NPLs) fell to €71.2 billion at end-September 2019, down by €10.6 billion from end-December 2018 and by around €36 billion from their peak in March 2016. The reduction in the stock of NPLs in the first nine months of the year was mainly due to sales and write-offs.

The ratio of NPLs-to-total loans remained high in September 2019 at 42.1%. On a positive note, banks have in recent years increasingly shifted to long-term loan restructuring solutions. However, these solutions predominantly involve a maturity extension and less often an interest rate reduction or a split balance. The high re-default rate among restructured loans remains a matter of serious concern. Also worrying is the fact that, despite the improved economic and regulatory environment, the recoveries from active NPL management (i.e. through collection of arrears, loan restructuring, collateral liquidation) remain very limited; as a result, net NPL flows continue to emerge.

As regards the banks’ operational targets for NPL reduction, the overall aim is to bring the NPL ratio below 20% by end-2021. The implementation of the Hercules plan, which is based on an Asset Protection Scheme (APS), is expected to contribute to a faster decrease of the NPL ratio, but it must also be complemented by other measures.


Greece will, in the period ahead, have to address a number of challenges, which weigh on the medium-to-long term outlook of the Greek economy. These challenges involve: high public debt (despite its significantly improved sustainability, ensured in the medium term by the measures approved by the Eurogroup from 2012 to 2018), which creates uncertainty in the long term (post-2032) in the event of external shocks; Greece’s large negative net international investment position; the high rate of long-term unemployment and the projected demographic decline as a result of population ageing; the slow digital transformation of the economy; the large investment gap caused by the protracted recession, and low structural competitiveness.

Prerequisites for speeding up the recovery and addressing external risks

In order to mitigate the risks from slowing global economic activity and to address the challenges ahead, the following policy measures are recommended:

1st A fundamental solution to the challenges facing the banking sector. Apart from the implementation of the Hercules plan, other schemes need to be considered, such as the one currently being developed by the Bank of Greece, which together with NPLs also addresses the issue of deferred tax credits (DTCs). Another major challenge is the modernisation and harmonisation of the insolvency and bankruptcy framework for businesses and households.

2nd A lowering of the primary surplus targets for the years up to 2022 – in consultation and agreement with the European partners – in the context of an acceleration of reforms. Combined with the implementation of the structural reforms needed to boost economic activity, as well as of the privatisation programme, a lowering of the primary surplus target would not jeopardise public debt sustainability. This view is supported by the decline in Greek government bond yields and by the early repayment, in November, of part of the IMF loan.

3rd A strengthening of the “knowledge triangle” (education, research, innovation) through policies and reforms that promote research, facilitate the diffusion of technology, encourage entrepreneurship and foster links between businesses, research centres and universities.

4th Addressing high unemployment. Youth, female and long-term unemployment rates remain high, underscoring the need to preserve labour market flexibility and to implement additional labour market policies targeting these groups.

5th A reversal of the brain drain. The brain drain has had a strong negative impact on the size and quality of the domestic labour force and on Greece’s demographics and has exacerbated the skills mismatch. A reversal of this phenomenon into a brain regain calls for the formulation and credible implementation of a comprehensive national growth strategy, based on a thorough analysis of sectors of production, aimed at identifying the hard and soft skills most in demand. In this context, the “Rebrain Greece” programme, recently announced by the Ministry of Labour and Social Affairs, is expected to have a positive impact, while the introduction of targeted tax-related repatriation incentives should also be considered.

6th The resolute continuation of structural reforms and the broadening of their scope to encompass all areas in which Greece lags behind its European counterparts in terms of international competitiveness indicators. Indicatively, such reforms could include ensuring a faster delivery of justice; accelerating the procedures for registering property and for issuing building permits; and improving access to financing.

Based on the governance indicators compiled by the World Bank, Greece still has a wide scope for improvement, through reforms focusing on the areas of the rule of law, regulatory quality and government effectiveness and control of corruption.


The government has made a strong start and has embarked on a broad programme of reforms and economic policies, with a focus on unfreezing already approved landmark investment projects, speeding up privatisations, attracting investment, overhauling the public administration and reducing taxation. The reform effort has already borne fruit, leading to a decline in government bond yields, and has been welcomed by international investors and Greece’s European partners. The determined implementation of reforms and a faster reduction of non-performing loans will further strengthen investor confidence in the prospects of the Greek economy and will contribute to the Greek sovereign being upgraded to investment grade status. They will also increase productivity and, thereby, the competitiveness and long-term potential growth of the Greek economy, offsetting the impact of adverse demographic developments.

These policies are seen as steps in the right direction and are in line with the proposals put forward by the Bank of Greece in recent years. The reforms will in fact need to continue with the same resolve going forward, while their scope will need to be expanded so as to encompass all of the areas in which Greece lags behind its European counterparts. This would help to offset the risks from a stronger-than-expected global slowdown and to capitalise on the positive expectations that have emerged both domestically and in the international markets. It would also enable the acceleration of domestic and foreign direct investment, an upgrade in the credit rating of Greek government bonds and their inclusion in the ECB’s new quantitative easing programme. Such a development would further lower the borrowing costs for Greek government, businesses and households.

Finally, taking into account the slowdown in economic activity in the euro area and the stand taken by the ECB and the European Commission in favour of a fiscal expansion, but also the very tight fiscal, monetary and financial conditions still facing Greece, compared with the other Member States of the euro area, a case can be made for a lowering of the primary surplus targets, in agreement with Greece’s European partners. Lower fiscal targets would enable a further reduction in tax rates and a strengthening of public investment. This, in tandem with an acceleration and broadening of the scope of structural reforms, would have a favourable impact on potential output and the long-term sustainability of public debt.

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

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