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Bank of Greece Economic Bulletin, Issue 58

31/01/2024 - Press Releases

Today, the Bank of Greece published the latest issue of its Economic Bulletin (No. 58 / December 2023).

The articles published in the Economic Bulletin reflect the views of the authors and not necessarily those of the Bank of Greece.

Issue 58 features the following three articles:

Marianthi Anastasatou, Hiona Balfoussia, Zacharias Bragoudakis, Dimitris Malliaropulos, Petros Migiakis, Dimitris Papageorgiou and Pavlos Petroulas:

“Effects of a sovereign credit rating upgrade to investment grade on the Greek economy”

The study investigates the potential effects of a sovereign credit rating upgrade to investment grade on the trajectory of the Greek economy. A cross-country empirical analysis of past upgrades suggests that an economy’s upgrade to investment grade is associated with a reduction in sovereign bond yields and spreads by about 70 basis points. In the long run, such an upgrade boosts real GDP and reduces GDP volatility by 2.5% and 0.48%, respectively. Furthermore, the findings derived from a dynamic factor model indicate that an upgrade to investment grade is expected to reduce Greek sovereign bond yields and pass through to the Greek banking sector by reducing its funding costs and narrowing the spread between Greek and euro area bank bonds.

Subsequently, a DSGE model featuring a rich financial sector, calibrated to the Greek economy, is employed to trace the dynamic responses of key financial and real variables to an upgrade to investment grade. The model suggests that an upgrade to investment grade that reduces bank funding costs has a positive impact on the real and financial sectors of the Greek economy in both the short and the long run. Finally, counterfactual experiments illustrate that a sovereign credit rating upgrade to investment grade has a stabilising effect on both the banking sector and the real economy in the face of adverse shocks.

Maria Flevotomou: The distributional impact of fiscal measures to compensate for consumer inflation in 2022”

The study analyses the distributional implications of consumer inflation in Greece and of the fiscal measures adopted to cushion its adverse impact on households in 2022. The analysis employs the tax-benefit microsimulation model for the European Union (EUROMOD) to study how inflation, income support measures, as well as measures aimed at containing prices affected households’ purchasing power and welfare across the income distribution. The study confirms that the purchasing power of lower-income households was more severely affected by the 2022 inflation surge than that of higher-income households, resulting in the so-called inflation gap. The unequal impact of inflation was further magnified by the high shares of consumption in the income of the poorer, resulting in a welfare loss differential of 9.2 percentage points between the bottom and the top income decile.

The adverse distributional impact of the inflationary shock was largely offset by government policies, with a welfare loss of only 2.9% remaining for the population as a whole. Fiscal measures were shown to close the inflation gap and mitigated the welfare loss differential between the poor and the rich to just 0.7 percentage points. Price measures were dominant vis-à-vis their income counterparts in compensating for welfare losses across the income distribution and, most interestingly, had a significant progressive impact largely driven by the electricity subsidy, as the support provided was inversely related to consumption. However, given that they were not as well-targeted to low-income households, they were relatively cost-inefficient when compared with income measures. Nonetheless, the efficiency advantage of income measures may be severely undermined in the presence of extensive tax evasion, which points not only to the need for a careful design of targeted measures, but also to complementarities with structural reforms fighting tax evasion.

Evangelia Georgiou: Interest rate pass-through to deposit rates in Greece”

 Deposits of firms and households are the main source of bank funding and, thus, interest rates on deposits have a significant impact on banks’ overall funding costs and loan supply, as well as on bank profitability. Since July 2022, when the latest cycle of increases in key ECB interest rates started, deposit rate increases have been rather limited in Greece and the euro area, compared to the corresponding rise in the policy rate, and weaker relative to the previous tightening cycle of 2005-2008.

This article examines the pass-through of ECB policy rate increases to the interest rates on household and corporate deposits in Greece in the light of the fundamental policy and structural changes that have occurred in the Greek banking system since the financial and sovereign debt crisis, as well as due to the pandemic crisis. The empirical results show the relative stickiness of deposit rates for households, compared to those for corporations, especially for term deposits. During the current tightening cycle, overnight deposit rates show a very limited rise – almost zero in the case of households; this development could have been underpinned by the composition of the deposit base of Greek banks, mainly consisting of low-balance household deposits, which are not very sensitive to interest rate changes.

Broadly speaking, factors such as the increased supply of deposits to banks, relative to bank lending to the economy, and imperfect competition in the banking system appear to account for a weaker pass-through of policy rate increases to deposit rates. However, overall, we do not find strong evidence that excess liquidity in the banking system has contributed to a weaker pass-through to deposit rates in Greece, which could be related to the fact that the terms and conditions of unconventional monetary policy tools were often adjusted to support the monetary policy stance.

Related information:

Issue 58 also includes the abstracts of Working Papers published by the Special Studies Section of the Bank’s Economic Analysis and Research Department between August and December 2023.

Related link:

The full text of Issue 58 is available on the Bank of Greece website: Bank of Greece Economic Bulletin, Issue 58.

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