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Bank of Greece Monetary Policy Report 2019-2020

29/06/2020 - Press Releases

Today, in accordance with its Statute, the Bank of Greece submitted its Monetary Policy Report 2019-2020 to the Speaker of the Greek Parliament and the Cabinet.

Economic downturn due to the coronavirus pandemic – prospects of recovery in 2021

The present Report on Monetary Policy is submitted by the Bank of Greece at a time of high uncertainty and severe economic disruptions. Towards the end of the first quarter of the current year, the outbreak of the coronavirus (COVID-19), both worldwide and in Greece, reversed the growth prospects of the Greek economy for 2020, which until then had been benign. The pandemic and the measures taken by the Greek government, as by most countries of the world, to contain the health impact led to a sharp decline of economic activity in March and April 2020. The full effects of the imposed social distancing measures and the temporary lockdown of businesses across a broad range of activities are not yet known.

The containment of the pandemic in Greece, the gradual lifting of the lockdown measures since early May, the expansionary fiscal measures taken by the government and the extensive actions of EU institutions including fiscal, monetary and regulatory/supervisory interventions are expected to mitigate the impact of COVID-19 on the economy in 2020 and lead to a recovery in 2021. This recovery would be greatly accelerated by an implementation of the European Commission’s proposal for a new recovery instrument, “Next Generation EU”.

The coronavirus pandemic has halted the upward growth trajectory of the Greek economy

In 2019, GDP grew by 1.9%, driven mainly by exports of goods and services, as a result of a significant rise in tourism and shipping receipts. Positive contributions to GDP growth also came from private and public consumption, as well as investment. However, in the first quarter of 2020, GDP seasonally adjusted and at 2010 constant prices declined by 0.9% year-on-year and by 1.6% relative to the fourth quarter of 2019. The negative year-on-year growth outcome for the first quarter of 2020 was mainly due to lower private consumption and investment. By contrast, the contributions of public consumption and net exports were positive.

The available soft data and conjunctural indicators point to a significant contraction of economic activity in the second quarter and the year as a whole. Furthermore, the COVID-19 outbreak interrupted the positive course of public finances in 2019, due to the need for extraordinary fiscal measures aimed at containing the negative impact of the health crisis on economic activity.

Despite the negative impact of the pandemic on the financial sector, the inclusion of Greek bonds in the ECB’s pandemic emergency purchase programme (PEPP) reinforces market confidence in the Greek economy

The financial conditions that prevailed in 2019 were very favourable, also reflecting the credit rating upgrades of the Greek economy, and remained accommodative into early 2020. However, the rapid deterioration in international financial conditions from mid-February onwards amid growing investor concerns about the fallout of the pandemic inevitably led to an increase in the yields of Greek government bonds, but primarily of Greek corporate bonds, and a sharp drop in share prices. Following the announcement of support measures by the central banks and governments of advanced economies, the effects of the turmoil on share prices and bond yields subsided.

Greece benefited from the decisions adopted by the European Central Bank to address the impact of the pandemic, which granted a waiver of the Eurosystem’s eligibility requirements for securities issued by the Greek government, making them eligible: (a) for purchase under the ECB’s pandemic emergency purchase programme (PEPP) and (b) for use by Greek commercial banks as collateral in the Eurosystem’s liquidity-providing operations. This support contributed to the Greek sovereign’s continued access to capital markets, confirming market confidence in the Greek economy, despite the conditions of heightened uncertainty about the impact of the pandemic on the real economy.



Strong recovery projected for 2021

In the conditions shaped by the pandemic and the upending of the international environment, macroeconomic projections are subject to high uncertainty. This is why the Bank of Greece has, in addition to its baseline scenario, also considered two alternative scenarios, one milder and one more adverse.

According to the Bank of Greece baseline scenario, economic activity in 2020 is expected to contract substantially, by 5.8%, and to recover in 2021, posting a growth rate of 5.6%, while in 2022 growth will be 3.7%. According to the mild scenario, which assumes a shorter period of transition to normality, GDP is projected to decline by 4.4% in 2020 and to increase by 5.8% and 3.8%, respectively, in 2021 and 2022. The adverse scenario, associated with a possible second wave of COVID-19, assumes a more severe and protracted impact of the pandemic and a slower recovery, with GDP falling by 9.4% in 2020, before rebounding to 5.7% in 2021 and 4.5% in 2022.

Private consumption, in the baseline scenario, is expected to decline in 2020 due to a rise in the unemployment rate and a deterioration of real disposable income. In the medium term, and as labour market conditions improve, private consumption would contribute positively to economic activity. Investment is expected to be negatively affected by the pandemic, the surge in uncertainty and the temporary postponement of investment decisions, but should strengthen considerably in 2021-2022, supported by both private and public investment.

Exports of goods are expected to fall in 2020, reflecting weaker external demand as a result of a sharply deteriorating international environment. Tourism receipts in 2020 are expected to contract significantly, as the measures taken to contain the spread of COVID-19 particularly hurt the tourism-related sectors, while demand for the tourism product is also expected to decrease. Shipping receipts will be negatively affected by the world economic downturn and the decline of global trade. Exports of goods and services are expected to post robust growth in the next two years, driven by the recovery of external demand and improved structural competitiveness. Finally, imports can be expected to develop in line with domestic demand and exports over the entire projection horizon.

Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), is expected to post a negative annual rate in 2020, mainly on account of the downward course of international oil prices, but also of the prices of services, and is projected to pick up slightly by the end of the projection period. Core inflation is expected to remain close to, or marginally below, zero this year, and return to a positive, albeit low, rate by 2022.

The package of fiscal measures includes targeted interventions of a temporary nature, aimed at containing the adverse impact of the pandemic on the real economy, without creating permanent primary deficits that would weigh on the medium-term dynamics of public debt

The extraordinary fiscal stimulus measures aimed at containing the economic impact of the pandemic, combined with the decline in economic activity and public revenue, are expected to lead to a deterioration in the general government primary balance and debt, compared with the budget forecasts. According to the baseline scenario of the Bank of Greece, the general government primary balance is projected to record a deficit of 2.9% of GDP in 2020, due to the sharp deterioration of economic activity, as projected by the Bank of Greece, and to the fiscal measures introduced by end-May 2020.

Forecasts are subject to considerable downside risks and uncertainties

The greatest risk is associated with the possibility of a new wave of the COVID-19 pandemic. In addition, the anticipated rise in non-performing loans as a result of the projected recession would limit the provision of credit to businesses and households, thereby delaying the recovery of investment and economic activity. These factors would slow down the recovery, considerably worsen fiscal aggregates and lead to a new increase in the already high public debt. Furthermore, a deterioration of the refugee crisis could have negative repercussions on tourism. Upside risks are associated with a faster implementation of structural reforms and privatisations.

The risks arising from the external environment are associated with a weaker than anticipated recovery of the global and European economies, due to a new surge of the pandemic, and with a deterioration of the financial crisis. The content and timing of an agreement on the future relationship of the United Kingdom with the European Union are an additional factor of uncertainty. Faster progress on the medical front in addressing COVID-19 would reduce uncertainty and quicken the recovery of the global economy.

The recovery path of Greek banks’ profitability has been halted by the pandemic – Capital adequacy and medium-term challenges

Banks’ pre-tax profits in the first quarter of 2020 came to €18 million, down by 87% year-on-year. In terms of capital adequacy, based on March 2020 data, both the Common Equity Tier 1 (CET1) ratio and the Capital Adequacy Ratio on a consolidated basis remained above regulatory requirements (at 14.5% and 16.1%, respectively). With a fully phased-in International Financial Reporting Standard 9 (IFRS 9), the CET1 and the Capital Adequacy Ratio come to 12.1% and 13.8%, respectively. However, more than half of banks’ capital corresponds to deferred tax credits (DTCs), and this proportion is expected to increase in the context of the current NPL reduction strategy.

Non-performing loans continued to decline – this trend is, however, expected to reverse on account of the pandemic

Based on provisional supervisory data of March 2020, non-performing loans (NPLs) came to €60.9 billion, down by €7.6 billion (or 11.1%) from end-December 2019 and by €46.3 billion from their peak in March 2016.

The NPL-to-total loan ratio remained high in March 2020 at 37.4%, despite falling under 40% on a solo basis for the first time in several years. The provision coverage ratio of NPLs remained broadly stable at 43.6%, which is lower than would be expected for a banking sector with considerable asset quality issues.

The outbreak of the pandemic has changed the situation. As a result, banks have revised their securitisation plans in terms of timing and loan perimeter. This will delay the further reduction of the high stock of NPLs. At the same time, despite the positive measures taken by the government and banks, an inflow of new NPLs is expected, especially from early-2021. The volume of this new generation of NPLs will depend on the magnitude of the recession and the rise in unemployment this year, as well as on the subsequent recovery.


The coronavirus pandemic is expected to significantly worsen some of the legacy problems (the high public debt, the high rate of unemployment, the high NPL ratio and the large investment gap) from the debt crisis of the 2010s. These problems only add to the challenges already faced by the Greek economy and which constrain its long-term prospects: low structural competitiveness; the slow digitalisation of the economy; a high level of tax evasion; the brain drain; climate change and the cost of transition to a lower carbon economy; the migrant-refugee crisis; a projected demographic decline on account of population ageing; and the large negative international investment position.

Prerequisites for addressing the challenges and speeding up recovery

Addressing the challenges successfully and getting the economy back on the growth trajectory of recent years will crucially hinge in the short term on the following initiatives:

(a) efficient and wide-ranging utilisation of all available European funding instruments and domestic fiscal resources, so as to maximise their effect on economic activity and minimise the fiscal cost;

(b) the continued provision of direct support through tax and social security relief to businesses and sectors hit hardest by the crisis, so that the impact of the crisis does not become permanent;

(c) the strengthening of the public healthcare and civil protection systems in preparation for a possible second wave of the pandemic;

(d) a rapid revival of economic activity − while safeguarding public health − and especially tourism, the course of which depends not only on the actions of the Greek government but also on external factors.

In the medium term, additional initiatives would need to be taken with a view to:

•    restoring fiscal stability and mitigating the impact on public debt sustainability of the extraordinary measures taken to cope with the pandemic. Meanwhile, the high general government cash buffer needs to be preserved so as not to undermine the capacity to refinance the medium-to-long term borrowing requirements of the Greek State and to avoid a possible pricing-in of debt refinancing risk on the capital markets;

•    supporting banks in meeting tomorrow’s challenges, which concern digital technology and, more importantly, the financing of dynamic sectors and businesses. This will require, as a matter of priority, an immediate answer to the problem posed by the large stock of non-performing loans as well as deferred tax credits (DTCs). There is an urgent need for solutions that would simultaneously deal not only with the high existing stock of NPLs, but also with the new NPLs likely to emerge on account of the pandemic. One such solution is the setting-up of an Asset Management Company, which will operate in complementarity with the “Hercules” plan and undertake the sale of part of the NPLs, while at the same time addressing the problem of DTCs. The Bank of Greece is currently working on a scheme in this direction;

•    boosting public and private investment activity, making use of European funds. To this end, it will be necessary to bolster public investment in the upgrading of public infrastructure; to support high value added investment initiatives and to adjust the privatisation programme to the new, post-pandemic, conditions. At the same time, public-private partnerships (PPPs) for improving infrastructures, especially in the areas of digital health and education, may acquire a new content following the experience of the pandemic;

•    preserving the government’s commitment and credibility as regards the implementation of the reform programme. Emphasis will need to be placed on completing the structural reforms that have strong multiplier effects on economic activity and strengthen potential output. To this end, possible lines of action would be: (a) a targeted reduction of taxation and especially of social security contributions; (b) curbing tax evasion; (c) improving the quality of governance in the public and the private sector; (d) upgrading the healthcare and education systems; and (e) rationalising public expenditure with a reallocation of resources to growth-enhancing actions;

•    enhancing the transition to a sustainable economic growth model utilising the resources available under the new recovery instrument “Next Generation EU”. This model will address the challenges of digitalisation, incorporate the principles of a green and circular economy and rely on continuous investment in human capital. This requires a decisive and rapid implementation of reforms aimed, among other things, to improve operational efficiency and reduce red tape in the public sector, especially in the areas of healthcare, education, justice and digital governance. It also calls for policies that encourage research and innovation, facilitate the diffusion of technology, foster entrepreneurship and promote the digital transformation of public administration. It should be noted that the lockdown conditions triggered digital leaps, e.g. for e-prescribing and online services to citizens, rapidly implemented by public services, as well as widespread teleworking in the private and public sectors;

•    avoiding a permanent increase in unemployment. In order to support the labour market and businesses, additional active employment policies will be needed, utilising the SYN-ERGASIA programme, through incentives to businesses for preserving employment and for supporting workers’ income in the sectors hardest hit. Meanwhile, the measures to protect the unemployed, especially the long-term unemployed, should be continued.


In response to the outbreak of the pandemic, the Greek government promptly put in place lockdown measures, which have so far kept the health impact relatively low. The successful management of the health crisis boosted citizens’ confidence in the State and underscored the importance of individual and collective responsibility in the functioning of society and the economy.

The containment measures, despite safeguarding public health, entail a high economic cost in the short term. The fiscal measures adopted by the government to support the economy and the extensive actions of the European Commission, the ECB and the other EU institutions are expected, to some extent, to offset the impact of the pandemic on growth and employment in 2020 and to lead to a rebound of economic activity in 2021.

However, addressing current and future challenges will require – capitalising on the newfound sense of trust between State and citizens – a continued implementation of the reforms that Greece so crucially needs. Moreover, in the medium term, it is necessary to maintain a sound fiscal position with a general government primary surplus, so as to avoid a rise in public debt refinancing costs on the capital markets and to safeguard public debt sustainability.

In sum, the health crisis, despite its very adverse impact on society and the economy, offers a significant opportunity to push the reform agenda forward, enabling Greece to move into the new digital era, while also addressing the challenges of climate change. At the same time, the recent crisis (just as the debt crisis had led to significant changes such as, for instance, the establishment of the European Stability Mechanism and the Single Supervisory Mechanism) is an opportunity for Europe to take another major step towards economic integration.

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


Photo: Hellenic parliament

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