Bank of Greece Economic Bulletin, Issue 59
31/07/2024 - Press Releases
Today, the Bank of Greece published the latest issue of its Economic Bulletin (No. 59 / July 2024).
The articles published in the Economic Bulletin reflect the views of the authors and not necessarily those of the Bank of Greece.
Issue 59 features the following four articles:
Haris Giannakidis, Louis Karathanos, Athanasios Kontinopoulos, Athanasios Lampousis and Petros Migiakis: “The investment grade and funds’ portfolio allocation in Greek assets”
The importance of investment funds for the global economy has increased in the aftermath of the global financial crisis. The study focuses on the case of Greece and the developments in investment funds’ portfolios, with a special emphasis on the period before the sovereign credit rating upgrade of Greece to investment grade.
By means of a differences-in-differences estimator, the analysis finds that in the aftermath of the change in Greece’s sovereign credit rating outlook to positive by the rating agency Standard and Poor’s (S&P), investment funds increased their holdings of Greek sovereign bonds in relation to other comparable euro area sovereign bonds. Using a dynamic panel data model, the study finds that this increase in investment funds’ positions in Greek government bonds (GGBs) explains about 80% of the reduction in Greek sovereign bond spreads.
These results highlight the strong association between investment funds’ portfolio allocation and the underlying assets’ credit ratings, and provide incentives for continuing reforms that may lead to rating upgrades, as a means of increasing demand for Greek sovereign bonds and controlling the cost of debt. This is especially important when the monetary policy environment becomes tighter and interest rates, as well as the cost of funding, increase.
Georgios Gatopoulos, Alexandros Louka, Konstantinos Peppas and Nikolaos Vettas: “Benefits for the Greek economy from resolving bad loans and zombie firms”
The study examines the type and magnitude of negative externalities stemming from “zombie” firms in the Greek economy, focusing on investment, employment and productivity. It uses a panel dataset of Greek firms broken down by size and sector of economic activity for the period 2002-2021.
The descriptive analysis reveals a high positive correlation in the trends between non-performing business loans and the number of “zombie” companies in the Greek economy over the last twenty years. Subsequently, the quantitative analysis uncovers significant direct and indirect effects from the degree of density of “zombie” firms at the total economy and sectoral levels.
The analysis suggests that healthy firms outperform “zombie” firms in terms of investment growth, employment growth and productivity levels. In addition, a high concentration of capital in “zombie” firms negatively affects the rate of investment growth of healthy firms in specific sectors of economic activity and prevents the reallocation of capital to more productive investments across firms and sectors of activity. Finally, younger and larger companies generally perform better in terms of investment and employment growth, and productivity levels. It follows that a faster resolution of “zombie” firms and non-performing corporate loans, both on and off bank balance sheets, allows a more efficient allocation of resources and can boost investment, employment and growth rates in the Greek economy in the medium to long term.
Alexandros Karakitsios, Theodora Kosma, Dimitris Malliaropulos, Georgios Papadopoulos and Pavlos Petroulas: “Price level differences in the euro area: The case of Greece”
The study investigates the persistence and evolution of price level differences for fast-moving consumer goods in Greece compared to other euro area countries. It utilises the results of Dixon et al. (2023), who analysed price level differences across 41 product categories in ten euro area countries and found that the main factors contributing to price level differences include producer market competition, retail market structure, local costs and consumer habits.
Building on these findings, the study constructs counterfactual prices and shows that aligning Greece’s market structures and consumer behaviour patterns with the euro area average could significantly reduce prices, by 17 percentage points on average for the products with the highest share in total sales. The study also finds that, although Greece has become cheaper in relative terms in recent years, it is still, on average, about 10% more expensive compared to euro area countries’ average. These results imply that there is scope for policy action, in particular in areas that increase competition among producers, improve the structure of the retail market and enhance consumer economic literacy.
Finally, the study finds that Greece is among the countries with the lowest prices, as regards locally produced unprocessed foods and services, which are just as important to consumers as branded fast-moving consumer goods.
Anastasia Theofilakou and Melina Vasardani: “Labour market tightness in the post-COVID-19 era”
Since 2020, the labour market in advanced economies has shown resilience against successive supply-side shocks. High job vacancy rates and historically low unemployment, despite a recent weakening of economic growth, imply a lower sensitivity of the labour market to changes in the business cycle, underscoring the need to re-evaluate labour market tightness, as it could increase the risks of wage-price spirals and more restrictive monetary policy.
The study analyses the degree of labour market tightness and its implications for wages, inflation and monetary policy in two large open economies, the US and the euro area, and in a small open economy, Greece, that has undergone substantial labour market reforms, to explore whether post-pandemic labour market developments have common or idiosyncratic features.
The analysis reveals that policy support measures to address the pandemic and the energy crisis have decoupled unemployment from cyclical fluctuations, with the gap narrowing in 2023. Labour market tightness in the post-pandemic era has mainly been driven by a robust increase in labour demand, while labour supply has reverted to or exceeded pre-pandemic levels in the US, the euro area and Greece. Real compensation per employee lags labour productivity levels in all three economies, whereas it remains below its pre-pandemic level in the euro area and Greece. This suggests that the economies in question could tolerate some further catch-up in real wages in the short term without experiencing inflation.
Related information:
Issue 59 also includes the abstracts of Working Papers published by the Special Studies Section of the Bank’s Economic Analysis and Research Department between January and July 2024.
Related link:
The full text of Issue 59 is available on the Bank of Greece website: Bank of Greece Economic Bulletin, Issue 59.