Interview of the Bank of Greece Governor Yannis Stournaras with Bloomberg and Francine Lacqua
18/11/2024 - Articles & Interviews
F. LACQUA: Thank you everyone, thank you, Governor, for joining us. I have many questions on banks, inflation, interest rates.
Y. STOURNARAS: It’s a pleasure.
F. LACQUA: You know, there is a lot going on in your world right now. Let’s maybe start with banks and the banking landscape for Greece. Are there too many banks?
Y. STOURNARAS: No, there is an optimum number at the moment. Things are going very well. It is a success story. They follow the development of the Greek economy. Many legacy issues now belong to the past, so they come back to normality, they pay dividends, they deal with the difficult issues, so we are extremely pleased to see this result few years after the crisis actually.
F. LACQUA: It’s incredible actually what has been achieved in quite a short space.
Y. STOURNARAS: It is true.
F. LACQUA: But there is also true mergers, there is a new entrant in the Greek banking landscape.
Y. STOURNARAS: There is a new entrant, yes. We need more competition because as legacy of a crisis now banks, the systemic banks, are only four. There is a very high concentration ratio, so we need new players. We have created a new one, what we call the “fifth pole”. We need to increase competition in the banking system actually.
F. LACQUA: Governor, talk to me a little bit about, you know, the fact that Greek banks keep offering low interest rates on deposits. I mean, is this a concern? Could they actually lose quite a lot of deposits also in this kind of rate environment?
Y. STOURNARAS: The liquidity ratios are extremely high. So, this is one of the reasons why interest rates on deposits are very small but also, the concentration of the banks is also very high. We would like to see high interest rates on deposits, definitely.
F. LACQUA: Will they come?
Y. STOURNARAS: I think so. I think competition will bring improvement here, yes, I’m sure.
F. LACQUA: How quickly do you think that will happen?
Y. STOURNARAS: Very quickly. I think now we have the fifth pole, it will become very aggressive in pricing, so, I think competition will bring results, not administrative measures.
F. LACQUA: Is there anything that the Central Bank can do to actually increase competition?
Y. STOURNARAS: The Central Bank acted quickly to create the fifth pole, to increase competition. But we cannot impose our will on banks, it’s a matter of business model but definitely, along with the government, we have managed to increase the number of players in the banking system.
F. LACQUA: What do you mean?
Y. STOURNARAS: I am very pleased that the government has cooperated very well with us here.
F. LACQUA: What are you most optimistic about when it comes to the banking sector and the fact that you seem very optimistic that there will be more competition?
Y. STOURNARAS: Yes, I am, yes, I am.
F. LACQUA: Where does that optimism come from?
Y. STOURNARAS: Both from stronger Greek banks, the smaller ones and also, foreign banks. Also, you have seen the first signs of cross border transaction bid in Alpha Bank and UniCredit. So, this is one of the reasons that I am optimistic.
F. LACQUA: Are you optimistic?
Y. STOURNARAS: It’s very nice that cross-border transactions started again from Greece, as it was in the past.
F. LACQUA: Are you optimistic that we’ll see more cross-border transactions?
Y. STOURNARAS: In Europe? Well, I hope so. We have a test case in front of us as you know, in Germany. So, yes, I think it will go ahead.
F. LACQUA: Is that a litmus test? Say, if UniCredit is able to buy Commerzbank, does it send a strong message to Europe?
Y. STOURNARAS: To a large extent, of course it’s up to the supervisor, the SSM, to decide but this is not a political issue, there shouldn’t be any political obstacles here. And it is important that we break the fragmentation of the European banking system by allowing cross-border transactions, among European banks after all.
F. LACQUA: Governor, we were hearing that from the four largest banks, I mean, how do you see them dealing with the risks of climate change and cyber security?
Y. STOURNARAS: Now better than before. They get a good score in the SREP scoring regarding climate change and I am sure, of course I’ve heard that views, that the supervisors will take into account both competition and climate change, but climate change is a big issue now, it is one of the biggest dangers on the planet, so everybody has to do something.
F. LACQUA: You’ve also put geopolitical risks and one of the big concerns for the Greek economy and Greek banks, what can be done now to try and mitigate those?
Y. STOURNARAS: Well, we are a small open economy, we cannot affect the geopolitics of the planet. Of course, we have a reasonable voice, we are in favor of peace, we are in favor of open trades, of free capital flows, of free flows of people and commodities and capital, so we can affect the world arena here. But geopolitics is always risk.
F. LACQUA: Is there anything that the Bank of Greece or even the ECB can do to try and mitigate some of the circumstances of geopolitical risk?
Y. STOURNARAS: Well, the central banks cannot intervene in the geopolitics but through a reasonable monetary policy we have shown how we can run a monetary policy during crisis periods. So, we have achieved a soft landing, and I am sure that we’ll continue this way. I hope that the fragmentation will not increase in the future.
F. LACQUA: How does that complicate the life of the ECB and of inflation?
Y. STOURNARAS: Very much so because monetary policy is not well-suited to deal with supply side jobs and these are supply side jobs. But even that, we affected expectations, we affected the labor market, both during the periods that inflation was extremely low and also during periods that inflation was extremely high, we managed to bring some peace in the monetary policy arena.
F. LACQUA: Governor, 25 basis point cut from the ECB for December seems like a done deal.
Y. STOURNARAS: Well, more or less.
F. LACQUA: But is that fair that the markets have priced (…) and they’ve moved on?
Y. STOURNARAS: Well, it is reasonable to expect that.
F. LACQUA: Could it be more?
Y. STOURNARAS: Well, I cannot say now because it depends…
F. LACQUA: No, you haven’t decided yet but…
Y. STOURNARAS: It depends on the decision of the Governing Council. As far as I am concerned, I think 25 basis points is an optimal reduction now.
F. LACQUA: How much more can the ECB cut given what could potentially be…?
Y. STOURNARAS: Now we are in tightened territories still and even if we continue cutting interest rates, until we get to the so-called neutral rates, there’s still a long way to go. So, there is going to be a number of cuts. If nothing changes, right? And something might change.
F. LACQUA: I mean, the neutral, where is the neutral rate, Governor? Is this the hardest question you have to answer?
Y. STOURNARAS: This is a very elusive concept, as you know, in economic theory and policy you cannot have numbers like the gravity number. But according to the estimations in this, on average, it is about 2% now in Europe.
F. LACQUA: Governor, when you talk about a number of cuts that could be possible, nothing changing, so I imagine you’re assuming for some possible Donald Trump policies that could be inflationary, where do you see interest rates at the end of next year? Is it impossible?
Y. STOURNARAS: Yes, well, if inflation continues to fall as we expect, towards the end of next year, it could be close to 2%.
F. LACQUA: And 2% is what the market is looking at.
Y. STOURNARAS: Yes.
F. LACQUA: So, that seems very reasonable.
Y. STOURNARAS: It is a terminal rate, it is a neutral rate, so that’s, let’s say, the steady state rate.
F. LACQUA: What happens if the Trump tariffs come in place? Do they hit growth or inflation first?
Y. STOURNARAS: Now we come to virtual reality.
F. LACQUA: A speculation.
Y. STOURNARAS: So, I don’t want to speculate here. But if, first of all, nobody knows whether what has been said in the preelection campaign in America will be implemented but if it does, but if it is implemented, for Europe that means weaker activity. So, if there are tariffs, European exports will become much more difficult. Nobody knows whether it is going to be retaliation or not, but this is speculation, so I don’t want to enter into speculative environment here.
So, the base line is that now inflation falls more rapidly than we thought in our September forecasts. It seems that we will achieve the 2% on a sustainable basis, 2% inflation in the first or second quarter of 2025 rather than in the last one. So, things are benign as far as inflation is concerned. Growth is a bit weaker also. So, that means that we should continue cutting interest rates.
F. LACQUA: And, Governor, I don’t want to push you too much on tariffs, because you are right, for the moment we don’t know. We don’t know what form, we don’t know when but theoretically, do they hurt growth before inflation or do they actually shoot up inflation? I mean, this is all speculative.
Y. STOURNARAS: You mean tariffs?
F. LACQUA: Tariffs, yeah. If you have 10 – 20% against the EU.
Y. STOURNARAS: Well, in the short term, they are going to shoot up inflation as well, but also growth will be affected. Trade will be curtailed. Production will fall, employment will fall. So, the result will be what we call “stagflation”, at least in the short term. In the medium term, there will be both recession and deflation.
F. LACQUA: But so, it could derail, potentially, again, this aspect, they could derail potentially the ECB’s cutting cycle.
Y. STOURNARAS: Well, it will derail the world economy, not just the ECB’s plans. The ECB will follow. I mean, the most dangerous thing here is about the world economy, is about the welfare of people. In my economic beliefs, I am a liberal economist so I believe in free trade and we have now 200 years of experience and tariffs are never, but never, a first best policy.
What you can achieve with tariffs, you can achieve much cheaper by other means. So, tariffs is never a first best policy. Well, if I can advise our friends in the United States, this is my advice: don’t do it.
F. LACQUA: But, Governor, if they come, does it warrant a 50-basis point cut? I mean again, the difference between 25 basis point and 50 basis point would be that…
Y. STOURNARAS: I cannot tell you because as I told you, if tariffs are imposed in the sort term, it is going to be inflationary as far as prices are concerned. It is going recessionary as far as the economy is concerned. In the medium term definitely it is both recessionary and deflationary. But the ECB reacts meeting by meeting, data-dependent, so, we will wait. But this is very speculative now because we don’t, after all, know whether this will be implemented, whether this is a bargaining chip or whether it is a declared policy. I hope it is not.
F. LACQUA: What is your view on the Greek economy compared to the rest of Europe?
Y. STOURNARAS: The Greek economy now is in a very benign cycle. It grows much faster than the rest of Europe, so it converges in real terms. And this happens at the same time that public debt is falling very very rapidly.
So, we are in a situation, you can call it “Greek goldilocks” now, that the economy is growing relatively fast, I mean relatively to the rest of Europe, but also, debt to GDP ratio also falls very very fast because we have a very benign snowball effect, the difference between the interest rate and the growth rate, and also, we have a very high primary surplus. Europe now is stuck at a debt level, debt to GDP ratio of about 90%, it is stuck for a number of years, while Greece’s debt ratio falls by about ten points every year. So, in a few years’ time, Greece will not have the highest debt ratio in Europe.
F. LACQUA: And what does that tell us? I mean, it is almost like Greece seems to be almost a blueprint of actually how to get your act back in order. Will it be a blueprint?
Y. STOURNARAS: We suffered a lot. We suffered a lot in the past but we have learned our lessons. So, it depends on the political system to continue on this benign scenario. It is not automatic. It needs political stability, it needs a parliament which takes decisions. There are many risks, climatic risks as you said before. Climatic risks require buffers. Buffers in the public sector, buffers in banks, buffers in insurance companies, buffers in households. It is not always easy.
And also, we have to deal with populism. There are demagogues everywhere, so we have to convince people what is good for them because after the event it might be too late.
F. LACQUA: Governor, what makes Greece a success? I mean, you’ve laid out some of the things that they’ve done but what do you think is the secret?
Y. STOURNARAS: Because it has taken the right measures at the right time, despite the political divisions. Because our peers provided us with a huge debt relief. It is the biggest debt assistance ever given in history to any country. And also, because now Greece is doing the right thing. So, it follows a very rational fiscal policy, a very responsible fiscal policy, a very responsible structural policy, a very responsible financial policy. So, all these together make what I call a success story now, which is success both in the economy and in the banking system. I am not saying that everything is perfect. Of course, still we have a high current account deficit for instance. This is partly because we grow faster than our peers but also, because still, despite the fact that we have improved unit labor cost competitiveness, structural competitiveness still is not high for instance, the infrastructure of the public sector still suffers. We have delays in justice. We have labor market mismatches. So, these are the issues now that have a priority for us.
F. LACQUA: What does Greece need from the European Union now?
Y. STOURNARAS: That is a big question. Europe needs to understand that we need to act. We have the Draghi Report, we have the Letta Report, we have two excellent reports, we must take them seriously.
First of all, we need investment. Some people are saying that Europe now lags behind the United States in terms of GDP per head. This is because productivity growth has fallen after the global financial crisis. Up to the global financial crisis, we were moving at the same rate.
Then, suddenly, something changed. What was that? That was investment. So, first of all, we need higher investment. Mario Draghi had said that we need 5% of GDP higher investment every year. Second, we need to cut fragmentation. We are only a fragmented, monetary union. We are not a fiscal union, we are not even a banking union, we are not a capital markets union. So, these are the issues that we need to tackle and very quickly.
F. LACQUA: Do you think that is coming? I mean, the Draghi Report was almost put to one side.
Y. STOURNARAS: Not exactly. Some countries did not like the fact that we need more money on the table, but we do. But they like the deregulation sides, but we should take it all together. We cannot take only one part of Mario Draghi’s Report and not another. We see it all together, both investment, both deregulation, both how to support domestic industry but in a competitive way, not the old industries, how to promote innovation, artificial intelligence, how to train young people. These are the big issues.
F. LACQUA: But I mean, I read the cheater’s version to the 300-page report, I think I read about ten pages of the Report. I mean there is so much in it. What do you think can actually be achieved? Is it the money? I mean, the 5% of GDP is a massive amount of money that the European Union needs. Is that more difficult than a banking union?
Y. STOURNARAS: It is not that horrible as it sounds because Europe now has a huge current account surplus. So, there is both liquidity and excess savings in Europe. So, the money is here. The question is how we can channel it and direct it in the right way.
And also, for instance now, we have a new stability pact, fiscal pact in Europe, it lacks one element: a permanent vehicle, fiscal vehicle. There were some initial discussions about it but at the end of the day, the so-called frugal colleagues rejected it. It was a mistake. Now we have the NGU, we have the RRF. Under the RRF and the NGU, the European South converges now with the European North.
So, we need this to become permanent because we have permanent needs at the center of Europe: climatic change, defence needs for instance, needs in technology. So, we need a permanent instrument like the RRF. So, this is not something illogical. And this is not good only for the South. It is good for Europe as a whole.
F. LACQUA: But, Governor, what are the chances of there actually being signed by and blessed by other countries?
Y. STOURNARAS: I am an optimist. I see this glass as half-full, not half-empty. So I hope and I am sure that we will proceed as we must proceed.
F. LACQUA: What about a banking union, capital markets union? Is that easier to get done in a more timely fashion?
Y. STOURNARAS: I mean, okay, fiscal union is difficult, it is more difficult because you need a treaty change but banking union and capital markets union is trivial, I mean it’s very good. It’s very very small interests that are against now that. For instance, nobody has to fear the banks of the European South.
The banks in the European South now are very healthy. We don’t have skeletons. NPLs now are a thing of the past. So, I don’t see why we can’t have risk reduction and risk sharing at the same time. So, there are some, let’s say, fixed ideas that we need to fight against.
F. LACQUA: Governor, we have about eight minutes left, so let me if there are any questions from the floor because we had a great question in the past, otherwise I have many questions about the banking system and actually how some of the risks should be addressed, including for example, some of the climatic changes. Do we have a question from the floor? Please, do not be shy. There are probably many hands that I can’t see but I do see a gentleman. There on my left.
QUESTION: Hi, Mr. Stournaras, Ms. Francine, I manage an investment fund here in Greece, very active on the investing side. But my question to you is on the regulatory side and probably some of the questions maybe the banks want to ask. You know, there is a lot of legacy issues from the crisis and the way banks operate and invest, and I think now that they have extra capital, extra liquidity, I think especially in Greece, one of the main ways to increase investments is through channels that probably are the banks or the local institutions.
Greece in general, compared to many other markets, lacks a very strong local capital capacity in terms of investing across sectors. So, can you just give us a sense: are there any efforts to relax or encourage, from a regulatory point of view, banks to engage in asset management businesses investing in equity, not only in giving loans or even to lead the way to foreign investors who need sometimes to be hand-held by a local institution that knows what it is doing? And I can see that as a great way for some of the big institutions in Europe, if a local bank says “hey, I am putting 20% of the equity in a project”, I think it could attract a lot of foreign money. After the crisis, I think that is an important element of validation. Thank you.
F. LACQUA: A very targeted question.
Y. STOURNARAS: Yeah. As supervisor, I cannot tell banks what to do, where to expand their business. It is up to them to decide whether they enter into investment banking, into asset management. We encourage them to diversify their sources of income. So, I think they say “way to go” here and Greek banks now, they have better personnel, they have increased transparency, one of the things perhaps that I haven’t heard before is that as far as governance is concerned, Greek banks are now much healthier than before. So, I am optimistic that they will do the right thing, they will diversify their sources of income, and they will go into new business, either alone or with cooperation with foreign peers, as Alpha Bank has done.
F. LACQUA: Governor, are you confident? I mean, you know, Greek banks have done so much and have cleaned up so much and have hit so many milestones. What comes next in terms of milestones? Are you now confident that they are almost on average on par with European banks or is there going to be one other milestone that you are looking for?
Y. STOURNARAS: We should not forget that NPLs have left the banks’ balance sheets but they are still in the economy. They are in the hands of servicers, in the hands of funds. So, private debt resolution is an issue, so we continue along with the government making strenuous efforts in improving the conditions for private debt resolution. This is extremely important.
F. LACQUA: How quickly do you think that will be dealt with?
Y. STOURNARAS: We act as quickly as we can actually here. And we are pleased that there are new rules that servicers are providing the customers with ways out of debt and we continue working on that.
F. LACQUA: Governor, when you look at, you know, again some of the milestones that Greek banks have done, what are you most proud of in the last five to six years that, you know, the role of the Central Bank that other central banks could look at, and again, take a leaf out of your page or say “if I am patient enough, it will come to that”?
Y. STOURNARAS: Well, the Central Bank during the crisis provided emergency liquidity. It made sure that the banking system remained alive during the capital controls era. So, then we are happy that the developments were so nice, so smooth after the crisis, so quickly.
Now, we worked hard to increase competition, to enhance the capabilities of smaller banks in the periphery, local banks because as I said, one of the issues is competition in the banking system.
F. LACQUA: Do you worry about something systemic happening? I know through COVID, it is really quite incredible, how interest rates were able to increase so quickly without anything really breaking and then, everyone was worried about the real estate sector and what that would bring and nothing really huge came to fruition. Is that an anomaly? Are you worried that something big will come?
Y. STOURNARAS: No, actually things were more benign than we thought. We thought that with the increase in interest rates, we are going to have a new generation of NPLs. We had some more new NPLs but not a new generation of NPLs partly because growth was higher. And this is important because if the increase in interest rates coincided with a recession, that would be a problem. But the fact that we retained growth, and that was also partly due to our moderate monetary policy -some people accused that of not acting quickly- but we managed to keep soft landing, and this is extremely important. So, we also had an eye on financial stability and that was very important.
F. LACQUA: How much do you worry about debt levels from countries in Europe and the fact that it is very difficult to see how sustainable they are?
Y. STOURNARAS: Well, I do worry. I cannot say that I do not worry. This is a combination of two things: one is the snowball effect, the difference between the interest rate and the growth rate. This is not in the hands of governments. This is in the hands of markets. It’s billions of decisions. But up to now, we have been lucky because the growth rate was higher than the interest rate.
As interest rates now are falling, that might continue. So, we might be lucky here. The other side is the government side, what the government is doing to prevent a fiscal crisis, I mean. So, the governments that are in a debt spiral, they should take measures to increase the primary surplus or to reduce the primary deficit. So, they need to act, they need to take measures.
So, you need the parliament here, you need decisions. It is a combination of things. It’s a combination of benign market response which determines the snowball effect but also, it has to do with action, with government action, as we did in the past in Greece.
F. LACQUA: Governor, we have 40 seconds left and I feel like I’ve asked what are you worried about, what are you optimistic about, if anything, over the next year? Is there something that we sometimes underestimate?
Y. STOURNARAS: Well, if we manage to have peace in Ukraine and in the Middle East, this is going to be an upside, definitely. That is, I think, where my optimism comes from.
F. LACQUA: Governor, thank you so much for the conversation today.
Y. STOURNARAS: Thanks a lot.