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Governor’s Annual Report 2022

07/04/2023 - Press Releases


After two years of an unprecedented pandemic crisis, 2022 was another year of elevated uncertainty, due to the Russian invasion of Ukraine and a surge in inflation. In such a volatile environment of successive crises, it is important to look for anchors that can strengthen the resilience of the economy and its ability to address the challenges ahead. In the case of Greece, the continued implementation of credible economic policies – especially on the fiscal front –, the safeguarding of the significant achievements of past reforms and the establishment of a new reform programme for the government which will emerge from the upcoming national elections, focused on modernising the public sector, strengthening institutions and upgrading infrastructures, should serve as the beacon guiding us through the troubled waters of the new economic reality.

International environment

Following a strong recovery in 2021, the global economy slowed down significantly in 2022. However, this slowdown was milder than initially projected, despite rising inflation, mainly on the back of: (a) the pandemic-related pent-up demand and accumulated savings, which supported consumption; (b) a strong labour market; and (c) the adoption of temporary policy measures worldwide to contain energy costs.

Global inflation rose sharply in 2022 and proved higher and more persistent than initially projected. Increased inflationary pressures largely stemmed from supply-side factors, notably reflecting rising energy costs, while a significant contribution came also from demand-side factors, due to the dynamic post-pandemic economic recovery and the extensive fiscal support measures.

The dynamic reaction of monetary authorities worldwide, with drastic increases in policy rates, was deemed necessary to signal their determination to both contain aggregate demand and rein in second-round inflationary effects and anchor inflation expectations, thereby minimising the risk of an upward price-wage spiral. In fact, the size of central bank interventions was such that last year saw the most abrupt shift in the monetary policy stance ever recorder in the post-war period, with still uncertain consequences on economic activity.

The single monetary policy

Over the course of 2022, inflation in the euro area rose sharply to historically high levels, forcing the ECB to change its monetary policy stance. The forthcoming normalisation of monetary policy was decided in December 2021, while the start of key interest rate increases was announced in June 2022, only when the ECB’s projections implied that headline inflation would be more persistent than initially expected and would remain at undesirably high levels for an extended period.

Thus, from July 2022 onwards, the ECB successively raised its key interest rates, ending an eight-year period of negative interest rates. Cumulatively to date, the ECB key rates have increased by 350 basis points.

Monetary policy decision-making has also been adjusted to the current conditions of economic uncertainty. In particular, the future path of key interest rates, instead of being signalled through the ECB’s forward guidance, will depend on incoming data and the Governing Council’s evolving assessment of the outlook for inflation and the euro area economy, as well as the strength of monetary policy transmission, following a meeting-by-meeting approach. Throughout this process, the ECB will maintain optionality, gradualism, data-dependence and flexibility in the conduct of monetary policy.

Along with its interest rate increases, the ECB also adopted a number of other measures. Specifically:

  • In March 2022, net asset purchases under the PEPP were terminated, and a flexible reinvestment programme is implemented thereafter, at least until the end of 2024. The possibility of using Greek government securities as collateral in Eurosystem refinancing operations was also extended, for at least as long as PEPP reinvestments continue.

  • In July 2022, the Transmission Protection Instrument (TPI) was established, intended to support the effective transmission of monetary policy.
  • In October 2022, the terms and conditions of targeted longer-term refinancing operations (TLTRO III) became less favourable to ensure consistency with monetary policy normalisation, thus contributing to a contraction of the ECB’s balance sheet.

  • In December 2022, it was decided that, starting from March 2023, the APP portfolio would decline at a measured and predictable pace.

Overall, the ECB’s strategy demonstrates its determination to ensure the return of inflation to the medium-term target of 2% and the smooth functioning of the monetary policy transmission mechanism, standing ready to adjust all of its instruments within its mandate. At the same time, the ECB’s policy toolkit is fully equipped to provide liquidity support to the banking system, if needed, in order to safeguard financial stability in the euro area.

The Greek economy

Amid unprecedented exogenous shocks and pervasive uncertainty, the Greek economy has made significant progress since the debt crisis of the previous decade, exhibiting high resilience, while also enhancing economic policy credibility. Over the past two years, Greece recorded strong economic growth, achieving real convergence to the European average. In particular, the negative output gap of the Greek economy is estimated to have closed in 2022 after 11 consecutive years.

In 2022, the Greek economy maintained its growth momentum, with GDP growing at a rate of 5.9% (well above the European average), despite strong inflationary pressures and a worsening international environment. Real GDP exceeded pre-pandemic levels, driven by private consumption, services exports (travel receipts rebounded to almost their 2019 level) and investment.

In 2021-22, foreign direct investment inflows increased strongly, reaching a 20-year high. Investment capital has been a key tool for financing growth, promoting productivity and employment and introducing innovative technologies. This development was mainly due to the gradual restoration of confidence in the prospects of the Greek economy. The acceleration of the privatisation and the state property development programme, the participation of foreign companies in the equity of domestic businesses and the record merger and acquisition activity observed in 2022 played an important role in boosting investment in recent years.

The surge in headline inflation (to 9.3% in 2022), as a result of higher international energy prices, weighed on real household income and undermined the economic outlook. Over the course of the year, the large and continuous rises in energy and food prices gradually fed into the prices of services and non-energy industrial goods, causing core inflation to rise sharply as well (to 5.7%). 

The improvement in the labour market is now visible, with the unemployment rate falling in 2022 to 12.4% ‒ below its 2010 level ‒, employment growth accelerating and the labour force expanding for the first time since 2009. These developments are largely attributable to the relaxation of labour market rigidities and the reforms implemented in the past decade, which have enhanced flexibility and contributed to employment being more responsive to GDP growth.

The international competitiveness of the Greek economy continued to improve in 2022, despite high inflation. The improvement in competitiveness has been more marked in terms of unit labour costs, especially as the relevant index fell in 2021-22 below its levels observed prior to Greece’s entry into the euro area. These hard-won and sizeable international competitiveness gains are, to a large extent, due to the reform of the wage-setting framework and the deregulation of the labour market. The Greek economy has also made progress in several aspects of its structural competitiveness. This progress, which started with a series of reforms in the post-2010 period and was stepped up in the past few years, contributes to improving the business and investment environment, bringing additional benefits to export-oriented sectors of the economy.

However, the current account deficit widened significantly in 2022, to 9.7% of GDP, as growth in goods exports was outpaced by that in imports, in particular of energy goods. Higher imports of goods were fuelled by stronger consumption, as well as ongoing increases in industrial production and in investment. Rising international fuel prices have also weighed on the current account balance.

Despite the deterioration in the current account deficit in the past few years, which was mostly due to temporary factors associated with the evolution of the pandemic and rising international energy prices, the external sector of the Greek economy has undergone an impressive transformation. Overall, exports of goods and services as a share of GDP have almost doubled relative to 2010, reflecting not only the strong performance of tourism and transport services, but also the significant growth of goods exports, along with an increasing diversification of the Greek economy’s export base.

Fiscal developments

Despite widespread uncertainty and the additional support measures, the 2022 fiscal targets are estimated to have been achieved with a safe margin, thanks to higher growth and inflation than initially projected. The additional interventions did not burden the State Budget, as they were mostly financed by windfall revenues and by using the fiscal space created by better-than-expected economic activity and the overperformance of tax revenues.

According to the Bank of Greece, the primary fiscal deficit for 2022, as a percentage of GDP, is estimated to have been practically eliminated. This outcome would be significantly better than expected, despite the adverse conditions, thereby strengthening Greece’s fiscal credibility. Moreover, it would facilitate the fulfilment of the 2023 primary surplus target, during a period of increased uncertainty and significantly weaker growth.

In 2021-22, Greece managed to achieve one of the largest fiscal consolidations in Europe and the greatest cumulative reduction of public debt, which dropped to below pre-pandemic levels. Compared to 2020, public debt is estimated to have fallen by about 35 percentage points of GDP to 171.4% in 2022, with two-thirds of this decline occurring in 2022. Fiscal sustainability is an important factor in the assessments of credit rating agencies, two of which in 2022 and another one in 2023 upgraded Greece’s credit rating status to one notch below investment grade, while another rating agency has upgraded Greece’s economic outlook to positive.

Banking sector

Bank credit expansion to the private sector accelerated markedly in 2022, remaining at a higher level compared to previous years. Notably, the average monthly net flow of credit almost tripled year-on-year. Stronger economic activity and higher inflation, which had an upward effect on firms’ financing needs due to the input and energy cost hikes, fuelled demand for bank loans. On the supply side, the provision of liquidity by the Eurosystem, the sustained growth in bank deposits and the significant reduction in the ratio of non-performing loans (NPLs) had a positive impact.

Bank deposits continued to rise in 2022, although their annual growth rate moderated. Private sector deposits increased by a cumulative EUR 8.6 billion in 2022, which corresponds to about half of the 2021 flow. Household deposits grew on the back of increases in nominal disposable income, underpinned by higher employment and the fiscal support measures. Higher business deposits reflected a marked recovery in turnover and in tourism receipts. 

The ECB key rate increases were gradually passed through to domestic bank rates. The cost of bank lending increased in 2022 across all types of loans, both to non-financial corporations (NFCs) (+50 bps) and to households (consumer loans: +50 bps, housing loans: +36 bps). On the other hand, deposit rates remained at very low levels in 2022, due to their lagged and smaller response to market interest rates.

In the last few years, extensive restructuring has taken place in the domestic banking sector, making banks less vulnerable to financial market turmoil than in the past:

  • Banks have largely cleaned up their balance sheets, addressing the problem of NPLs mainly using the Hellenic Asset Protection Scheme (HAPS) and the corresponding state guarantees. Nevertheless, the NPL ratio remains one of the highest in Europe, while the bulk of NPLs, which has been removed from bank balance sheets mostly through loan securitisation, continues to be a problem for business and household debtors.

  • Improved bank asset quality and a considerable decline in loan-loss provisions, as well as higher interest rates, have positively impacted bank profitability. The return of banks to profitability in 2022 is a significant development because, among other reasons, it creates the conditions for: (a) further strengthening their capital base; (b) enhancing their ability to finance sound business projects; and (c) improving their capital quality by reducing the share of deferred tax credits in banks’ regulatory capital.

  • Capital adequacy ratios remain at satisfactory levels, above the minimum regulatory requirements. High capital adequacy reflects a bank’s resilience to a shock affecting its balance sheet, as well as its loss-absorbing capacity.

  • Meanwhile, the liquidity conditions have improved, through increased deposits and banks’ ongoing access to funding markets. The Greek banking system exhibits very high liquidity ratios not only relative to the past, but also in comparison with banks in other euro area countries. High liquidity indicates how quickly the banking system can respond to any shocks.

  • The exposure of Greek banks’ balance sheets to interest rate risk is limited, given that the bulk of their government bond holdings is held to maturity and therefore not affected by changes in their prices, but also because banks have been implementing interest rate risk hedging practices.

Overall, the figures show that the Greek banking sector is now in a better position than in the past to absorb international market shocks like those observed recently, while it is also benefiting from continuing ECB support. This is also partly a consequence of the much stricter prudential requirements for bank capital and liquidity. A key difference from the 2008 global financial crisis is the existence, since 2014, of a harmonised euro-area-wide supervisory approach by the Single Supervisory Mechanism (SSM), which strengthens systemic stability in the euro area as a whole. It should be noted that supervised institutions are subject to stress tests on a regular basis and to continuous and thorough inspections.


According to the latest BoG forecasts, the Greek economy is expected to grow at a rate of 2.2% in 2023, far above the euro area average, but significantly lower than in 2022. Consumption and, more importantly, investment will continue to make positive contributions to growth, while the favourable outlook for the tourism sector remains this year as well, despite continued uncertainty. The upward revision of the 2023 growth forecast versus previous estimates is due to last year’s carryover effect, given the economy’s overperformance in 2022.

Headline inflation, while still remaining relatively high, is projected to decline significantly to 4.4% in 2023, reflecting the expected decline in energy prices as well as the negative base effect.

The current account deficit is projected to decline both in absolute terms and as a percentage of GDP, although it will remain at high levels. The expected de-escalation of energy prices, combined with a slowdown in domestic consumption expenditure, should dampen imports of goods. On the other hand, the recovery of the world economy – albeit at a slowing pace – would have a positive impact on Greek exports of goods.

On the fiscal front, the withdrawal of the emergency support measures is expected to restore fiscal sustainability. Taking into account all of the latest available data and the details of the policy interventions announced thus far, the Bank of Greece expects that the general government budget will return to a primary surplus of 0.7% of GDP in 2023, after three consecutive years of deficits. It should also be noted that there will be a primary surplus even in structural terms, i.e. net of cyclical fluctuations and one-off measures. This means that the structure of the budget is such that it can generate primary surpluses without the need for additional discretionary policy measures; this is a result of the structural fiscal adjustment and the implementation of reforms that occurred over the previous years. Greece’s ability to generate permanent structural primary surpluses is an important element of fiscal policy credibility, which, together with the favourable characteristics of public debt, makes the dynamics of the debt-to-GDP ratio very resilient to adverse shocks in the medium term, thereby strengthening international investors’ confidence in the prospects of the Greek economy.

Risks and uncertainties

The unfavourable international macroeconomic environment shadows the outlook for the Greek economy in 2023, calling for continued credible policies. Mitigating the effects of the energy crisis and maintaining the growth momentum in the period ahead are the key challenges facing economic policy. In more detail, downside risks to the outlook for the Greek economy include: (1) a deterioration of the external environment due to unfavourable geopolitical developments; (2) a higher and more persistent inflation; (3) a protracted electoral period, which would exacerbate political uncertainty; (4) a lower-than-expected absorption rate of NGEU funds; (5) a halt of reforms or reversal of past reforms, which would impair productivity growth and business competitiveness; and (6) the emergence of a new generation of NPLs, due to the interest rate hikes and the impact of the energy crisis, after the gradual withdrawal of the government support measures.

Regarding public finances, the increased fiscal challenges call for fiscal prudence and responsibility. In an international environment of higher interest rates, commitment to restoring fiscal sustainability remains crucial. This is so because rising borrowing costs and a slowdown in growth rates limit the positive contribution of the interest rate-growth differential, gradually weakening the initial beneficial effect of inflation on the reduction of the debt-to-GDP ratio. Against this background, fiscal prudence is needed to avoid undermining the constantly declining path of public debt.

Turning to the banking sector, the monetary policy tightening and the slowdown in economic activity are expected to weigh on credit expansion to the private sector in 2023. The increased credit cost will affect the debt servicing capacity of private sector borrowers with floating-rate loans, in particular households, whose real income has already been eroded by inflation. At the same time, the expected slowdown in economic growth in 2023 would increase the credit risk of NFCs and households, due to a deterioration in their financial condition.

In a globalised environment, there are several underlying risks at play and regional shocks can quickly take on global proportions. This highlights the importance of resilient banking systems and the need for supervisors to ensure financial stability. At the euro area level, strong banking supervision and the ECB’s policy toolkit provide safeguards that financial stability will be preserved should the monetary policy tightening affect banks’ bond holdings and the quality of their loan portfolios.

Policy recommendations

The tightening of the monetary policy stance is necessary to achieve the inflation target of 2% over the medium term. The increase in key interest rates and their maintenance above their neutral levels will prevent a de-anchoring of inflation expectations and second-round effects from strong wage-price pressures. However, the relatively higher contribution of supply-side factors to the recent surge in inflation, particularly in the euro area, implies that measures other than monetary policy ones are also necessary, including those relating to energy policy, labour market rigidities and production inputs.

The current economic conjuncture calls for complementarity between monetary and fiscal policies. Ensuring a restrictive stance of fiscal policy during the tightening of monetary policy requires fiscal prudence and discipline. Under the current circumstances, any support measures should be financed by using the available fiscal space and should be: (1) temporary, (2) targeted and (3) tailored to addressing the energy crisis and preserving incentives to consume less energy.

Moreover, a coherent and credible medium-term fiscal framework is needed at a time of elevated uncertainty. Therefore, the reform of the Stability and Growth Pact and the development of new, credible fiscal rules are key prerequisites for making the euro area as a whole more resilient to future shocks.

The credit rating upgrade of the Greek sovereign to investment grade is a very important objective for economic policy in the upcoming period. In this respect, maintaining fiscal credibility by achieving sustainable primary surpluses of approximately 2% of GDP over the medium term is a key factor. Obtaining an investment grade status would lead to a very large expansion of the investor base for Greek government bonds, attracting new high-quality investment funds, thus containing the upward effects of tighter international monetary and financial conditions on sovereign bond yields. It would also have a positive impact on Greek businesses and banks by reducing their borrowing costs and attracting new capital.

Productive investment and the implementation of reforms will strengthen the economy’s resilience, total productivity and potential output. Therefore, the focus should be on vigorously implementing the actions outlined in the “Greece 2.0” plan, which set the economy on a solid path of strong growth. Increasing public and private investment and accelerating structural changes aimed at digital transformation, green transition and higher employment will shield the economy against future crises and solidify sustainable and inclusive economic growth.

Improving the competitiveness of the Greek economy should continue, through wage moderation. At the same time, addressing the current account deficit is an important challenge. The relatively high deficit, even after adjusting for high energy prices, suggests the need for: (a) further improvement in structural, but also wage and price competitiveness; and (b) an even greater inflow of investment capital from abroad that will cover the remaining current account deficit.

In the labour market, upgrading technical education and (re)skilling vulnerable social groups will help to address the problem of labour supply and demand mismatches. Equally necessary are interventions to increase labour force participation in particular of women and youth.

In the banking sector, sustained profitability is important both for safeguarding its soundness and overall financial stability and for banks to provide the necessary credit to the real economy. At the same time, a stronger effort to further reduce the stock of NPLs is needed, especially when the full impact of the energy crisis, inflation and interest rate hikes on the quality of bank loan portfolios has not yet been reflected on bank balance sheets.

Finally, the prospects of the Greek economy are also linked to developments in European integration. The completion of the Banking Union, with the establishment of a European deposit insurance scheme and the development of a common, uniform framework for crisis management in the financial sector within the European Union, is crucial for ensuring financial stability and the smooth transmission of monetary policy across Member States, making the euro a strong international reserve currency.

* * *

Despite the successive and multi-faceted crises of recent years, the Greek economy has shown remarkable resilience. This is due both to the continued implementation of reforms and to the conduct of credible policies.

The support of European institutions to the economic policies pursued in Greece has been a decisive factor in the recovery of the Greek economy and in restoring confidence. For example, the eligibility of Greek government securities for purchases under the ECB’s PEPP programme and the extension of their waiver from collateral eligibility rules for as long as PEPP reinvestments continue have greatly contributed to the smooth transmission of monetary policy. Meanwhile, Greece is among the countries with the highest expected benefits from the utilisation of NGEU resources. The country’s performance in absorbing EU structural and investment funds is also noteworthy. Overall, this European institutional support was a consequence of the design and implementation of credible medium-term fiscal and reform plans, which was recognised by international rating agencies and investors. This active support has improved the economy’s medium-term growth prospects and strengthened the sustainability of public finances.

The benefits of reforms are now visible in the economy, with measurable and undisputable results. Continued implementation of credible economic policies is a prerequisite for further support by the European institutions and for strengthening investor confidence, with the ultimate aim of regaining and maintaining investment grade status. In this regard, the disbursement of NGEU funds is conditional on the implementation of further structural changes and the promotion of sound investment projects. At the same time, the participation of countries in the ECB’s new Transmission Protection Instrument (TPI) is conditional on compliance with fiscal rules and the adoption of prudent and sustainable macroeconomic policies.

The greatest risk to the prospects of the Greek economy, at a time of successive crises and elevated uncertainty, would be the loss of economic policy credibility, which has been so difficult to recoup, and a return to bad practices of the past. It is true that any prolonged political uncertainty could undermine the confidence climate that has been built up in recent years. However, the most significant risk to the economy would be a return to inefficient policies of the past and the halt and/or reversal of reform efforts. The memories of the painful adjustment achieved in previous years are still fresh enough to recall the high economic and social costs needed to correct the chronic imbalances of the economy.

Therefore, given that 2023 is a year of national elections, there is a need for prudence and responsibility on the part of the political forces, as well as ownership of the national economic policy objectives, to maintain confidence in the prospects of the Greek economy. Policymakers should agree on the implementation of key economic policy commitments in order to safeguard the achievements of the Greek economy over the past decade and the sacrifices entailed, for the benefit of future generations.

Greece has the historic opportunity to complete the transformation of its economy, making it more resilient to future crises and converging towards the European average. The experience of the 10-year debt crisis, the awareness of the merit of fiscal responsibility and the recognition of the benefits of reforms have all contributed to the maturity of the Greek society, enabling it to understand the new international economic environment. The political will for fiscal responsibility and credible reform policies is a factor that helps to turn crises into opportunities so that the country can definitively overcome its chronic weaknesses, transform into a modern, sustainable, extrovert and competitive economy and demonstrate responsiveness and resilience in a highly uncertain international environment.

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