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Interview of the Bank of Greece Governor Yannis Stournaras to the newspaper “Kathimerini” and Eirini Chrysolora

19/08/2018 - Articles & Interviews

You served as minister of finance in a pro-MoU government. What was the biggest problem you faced back then?

I think that the biggest problem, not only for me, but also for several, if not all, finance ministers throughout this period, was the refusal of a large part of the political system – i.e. the entire opposition but also part of the successive ruling parties – to accept that the Greek crisis had largely been the result of wrong economic policy choices and that the MoUs, with all their mistakes and failures, were part of the solution rather than the problem. This resulted in public opinion being led astray, a lack of consensus on what should be done, a split in society between a pro-MoU and an anti-MoU camp, a surge in populism and a decline in common sense. This also explains, to a significant degree, why it took Greece so many years to exit the MoUs, unlike the other crisis countries of the euro area.

Didn’t you have difficulties with the lenders? We know there had been tensions, in particular with the International Monetary Fund’s former mission chief for Greece, Poul Thomsen.

It is natural to have tensions in such a difficult negotiation, but it was always within the bounds of politeness and civil debate. Poul Thomsen, as head of the IMF mission to Greece at the time, the institution with the toughest stance, had his views, and I, as minister of finance, had mine. We also had some differences much later, in 2017, regarding Greek banks. In the end, however, we always worked them out. Valuable time was lost, of course, but I hope we have all learned our lesson and are now wiser about how we can better shield the euro area by improving its architecture. That is, by completing the banking union and making the euro area a genuine economic and monetary union.

Where would you put the blame for the fact that we did not manage to exit the MoU in 2014-15? Are our lenders partly responsible for the fact that the review was not closed and Greece went to elections?

To be fair and impartial, the answer to this question cannot be complete without knowledge of the intentions and goals of the other side, namely the lenders. Only the historian of the future, who will have all the evidence and records, will be able to give a well-founded answer. However, as far as I can possibly know – because I ceased to be finance minister in June 2014 and became Bank of Greece governor – the differences separating the two sides in the autumn of 2014 were small. They were, in fact, much smaller than the measures adopted and implemented under the third MoU. Therefore, there was a failure, which is certainly due in part to the lenders, who at that time were overly obsessed with austerity measures, also considering the subsequent reversal of the positive developments that had started to emerge in early 2014.

European Commissioner for Economic and Financial Affairs Pierre Moscovici recently argued that the second program could have been completed if the New Democracy-PASOK coalition government had agreed to the social security reform and to the VAT increase for the islands. Instead we went to elections and a new government that led to tensions for six months. What do you think? Could we have avoided the third MoU?

When I left the Ministry of Finance in June 2014 there were no outstanding issues. This is evidenced by the fact that the IMF – which always waited for all outstanding issues to be closed before making a disbursement – did make a disbursement, which was its last to Greece to date. For the next six months leading up to the elections, I do not remember the social security issue being opened. But you had better ask my successor at the Ministry of Finance to confirm this. In any case, I remember very well that the differences between the two sides in the autumn of 2014 were small, far smaller than the measures introduced later under the third MoU. In this sense, and always with the benefit of hindsight and assuming rational and realistic behavior on both sides, the third MoU could have been avoided.

You have said that the events of 2015 cost Greece 86 billion euros. Do you stick to this figure and how do you analyze it?

I have already expressed my position on this matter in a hearing before the Standing Committee on Economic Affairs of the Hellenic Parliament. I think no one today denies that the negotiation of the first half of 2015 had a significant cost on the economy, the banking system, on economic sentiment, as reflected in the relapse of the economy into recession, on the flight of deposits, the need for a new bank recapitalization and the introduction of capital controls. Likewise, no one denies that the government finally had the courage to stop these costly negotiation tactics and start anew, this time respecting European rules but also ultimately safeguarding the interests of the Greek economy. Concerning the cost of the negotiation during the first half of 2015, there have been several methodological approaches. The estimate I provided to the Hellenic Parliament is based on the difference in debt curves (more precisely, the area enclosed between these curves) as derived from the differences between the IMF’s debt sustainability analysis (DSA) in the autumn of 2014, on the one hand, and the ones presented from June 2015 onwards, on the other. I use the IMF as a reference because it publishes debt sustainability analyses at regular intervals. Anyway, what matters here is the differences, not the absolute figures that can be questioned given the more pessimistic IMF estimates of certain parameters of the Greek economy. An example is the debt sustainability analysis of July 14, 2015 (IMF Country Report 15/186), which compares debt sustainability between autumn 2014 and July 2015. More specifically, whereas public debt in 2022 would be between 105 percent and 110 percent of GDP according to the autumn 2014 DSA, this ratio was projected at between 160 percent and 170 percent of GDP in the DSA of July 14, 2015. These projections for 2022 do not change significantly and do not alter this conclusion, even when one uses the IMF’s more recent debt sustainability analyses.

In the past few months you have been advocating the need for a precautionary credit line, which the government is opposed to. Now that Greece has exited the MoU without such a measure, what do you see as the risks?

Despite the undeniable progress of the Greek economy since 2010 and the debt relief measures decided by the Eurogroup, there are still important problems, such as high public debt, the country’s low credit rating, the high stock of non-performing loans, high unemployment and a large investment gap. At the same time, the period of exceptionally low interest rates and exceptionally accommodative monetary policies is coming to an end, whereas there are external disturbances, e.g. in Italy, but also in Turkey, which are having a significant impact on Greek bonds. Under these circumstances, a precautionary credit line would ensure easier access to the markets, protection from international shocks and lower borrowing costs for the country, for Greek banks and eventually for businesses and households. Of course, I do not consider the precautionary credit line to be a panacea; yet, it could help to insulate the Greek economy more effectively from external adverse factors and ensure its financing at a lower cost in the sensitive first period following its exit from the MoUs.

What risks do we face in this “sensitive” period, as you call it?

I think there are mainly two risks. First and foremost, if we renege on our commitments, now or in the future, markets will turn their back on us and we will not be able to refinance maturing debt in a manner consistent with debt sustainability. Second, in the event of a major international shock, either in our neighboring Italy and Turkey or in the global economy, we will have difficulty in accessing the markets given that the sensitivity coefficient of the Greek bonds is relatively high. Clearly, the latter risk is more manageable than the former and it will gradually diminish as the markets become convinced that we are abiding by our commitments and following the right economic policy. We must not forget that the euro area still has gaps in its architecture. For example, the banking union has not yet been completed, with the result that any shock affects the weaker member states the most.

At what cost will the abolition of the waiver and the exclusion from the quantitative easing program come for the country and its banks? How will Greek banks meet their liquidity needs?

The result of this development will be higher borrowing costs for both the country and its banks, and more difficult access to international bond and capital markets. Estimates vary as to how much higher the borrowing costs will be. The inclusion of Greek bonds in the European Central Bank’s quantitative easing program would reduce Greek government borrowing costs by at least 50 basis points. To answer your second question, banks are expected to meet their additional liquidity needs either through the (higher-cost) ELA or through the secondary market.

In its latest Article IV Consultation report, the IMF suggests that Greek banks could face a capital shortfall of 1.3-1.9 billion euros. How do you comment on this?

The IMF has drastically reconsidered its views on Greek banks; its assessments have now become more realistic and more in line with the results of the recent stress test exercise, which do not imply any negative surprises for any of the four systemic banks. The IMF also acknowledges that the capital enhancement Greek banks might need in the future (e.g. for the purpose of reducing the effect of deferred tax assets on their capital) need not dilute existing shareholders’ equity, but can instead be achieved through instruments that do not affect the core of banking business, such as the issuance of various types of bonds or the sale of assets and other capital operations, etc. Finally, the IMF recognizes the progress made by Greek in terms of their corporate governance.

As we exit the MoU, do you believe that the structural weaknesses of the Greek economy, which led us to the MoU in the first place, have been corrected? Many are of the view that, despite the apparent large number of reforms, the underlying structure of the economy has not changed.

I think that many weaknesses have been addressed but several others remain. The huge twin deficits (general government and current account) have been eliminated, unit labor cost competitiveness has improved, banks’ capitalization and corporate governance have also been strengthened, the labor market and, to a significant extent, the product markets have been deregulated and formerly closed professions have been opened up, and measures have been taken to ensure the viability of the social security system. The problems that remain include a very high public debt, non-performing loans, high unemployment, brain drain, a large investment gap, a fiscal policy mix that is skewed towards taxation and high social security contributions, and relatively high poverty rates of population. There are also institutional problems in terms of respect for the independence of institutions, as well as problems related to the knowledge triangle (education, research, innovation), efficiency of public administration, red tape and attracting foreign investment. The underlying structure of the economy, I think, has started to change, to become more competitive, with tradable goods and services gaining a share at the expense of non-tradable goods and services. But undoubtedly, we have still a long way to go.

How do you see growth in the years ahead? Is there a danger of the economy operating in low-growth mode? Is the target for high primary surpluses a cause of concern in this regard?

In the next few years, economic growth can be relatively strong. As a result of the protracted economic crisis, there is a considerable slack in the economy and the labor market and a negative output gap, which allow for a high rate of economic growth, provided of course that appropriate economic policies are pursued. In the longer term, the outlook is not so rosy. The demographic decline in population will exert downwards pressure on economic growth, which can be offset by high investment and total factor productivity growth. However, it will take some time before domestic savings reach a level capable of supporting high investment. This points to a need to attract foreign direct investment. Also, a high growth rate of total factor productivity hinges upon continued reforms and adoption of modern technology across all sectors of the economy, alongside a strengthening of the knowledge triangle (education, research, innovation). Finally, the high primary surpluses required for such a long time will obviously dampen growth, especially if accompanied by relatively high taxation. This is a very serious issue which, in the not-so-distant future, should be discussed with our partners. Solutions exist in the direction of public-private partnerships, but they have to be elaborated.

Do you think that the country will be able to have access to market-based financing on reasonable terms in the coming years? What conditions are necessary for this to happen?

The conditions for this to happen are outlined in my answers to the previous questions. We must prove the following: First and foremost, that we will not slip back to past economic policy mistakes and will not backtrack on agreed policies. In this context, there is also a need to further de-politicize the public administration and promote excellence and evaluation in all aspects of public activity. Second, we need to prove that we will pursue policies to help attract foreign direct investment and foster strong growth of total factor productivity. Third, that we will improve the economic sentiment by strengthening independent institutions. And fourth, that we will further improve the corporate governance of banks, systemic or not, as well as of private and public enterprises.

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