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Governor’s Annual Report 2023

08/04/2024 - Press Releases


Speech by Bank of Greece Governor Yannis Stournaras at the Annual General Meeting of Shareholders


This year is a milestone for the euro area central banks, as it marks 25 years since the creation of the euro, which was unquestionably the most important step towards European integration. Over these years, the single monetary policy has faced multiple challenges. Yet, the experience gained has offered valuable lessons, which we should use to shield against future crises. In a world hit by successive supply-side shocks, mainly due to geopolitical tensions, effective risk management should be a top policy priority.

In an environment of heightened global uncertainty, the upgrade of the Greek sovereign credit rating to investment grade status last year signals a restoration of confidence in the prospects of the Greek economy. The positive assessments of the Greek economy over the past few years, amidst multiple crises, demonstrate the credibility of the policies pursued, as well as the resilience of the economy to negative shocks. However, the fact that it took thirteen years for the country to return to investment grade suggests that confidence and economic policy credibility are crucial factors that, once lost, are very difficult to recoup. Political stability, fiscal stability and financial stability are public goods to be valued and preserved, especially in Greece that just a few years ago exited from the worst economic crisis in its recent history. 

International environment

Global economic growth slowed further in 2023. In the euro area in particular, the slowdown was more marked due to: (1) subdued international demand; (2) high input costs, despite the unwinding of pandemic-related supply chain disruptions; (3) tight financial conditions, mainly negatively affecting investment; and (4) a further decline in real incomes owing to a faster rise in inflation, despite emergency fiscal support. Nevertheless, the world economy seems to be heading for a soft landing, exhibiting high resilience to the recent crises, while the risk of stagflation has receded following decisive and timely interventions by monetary and fiscal authorities.

Global inflation declined in 2023, driven by falling energy prices, as well as by the timely and ‒ to a significant extent ‒ coordinated response of central banks. In the euro area, the main factors behind the decline in inflation were: (1) improved supply conditions, with an easing of constraints observed since the beginning of the year; (2) lower energy commodity prices; (3) the continued tightening of monetary policy; (4) weaker aggregate domestic demand; and (5) firms’ limited capacity to raise prices by increasing profit margins, in the face of lower demand. However, core inflation remained on an upward path, despite signs of a deceleration in the second half of the year, due to more persistent services inflation and rising wage costs.

Monetary policy tightening continued in 2023, albeit at a slower pace in most economies, due to a faster-than-expected fall in inflation and concerns about a further weakening in aggregate demand. Interest rate hikes by major central banks helped keep inflation expectations anchored at low levels, with no significant impact on the labour market, which has generally remained resilient. However, tighter monetary policy had a dampening effect on investors’ expectations about the economic outlook (especially in the euro area).

Single monetary policy

The Governing Council of the European Central Bank (ECB) continued to raise key interest rates until the third quarter of 2023. The key rates were increased six times during 2023, bringing the deposit facility rate to 4% as of September 2023. Interest rate decisions continued to follow a data-dependent and meeting-by-meeting approach.

In addition, measures were adopted to gradually reduce the Eurosystem’s balance sheet. After mid-2023, reinvestments under the Asset Purchase Programme (APP) were discontinued. It should be noted that from March to June 2023, APP reinvestments portfolio was declining at a steady pace of EUR 15 billion per month on average. It was also decided to phase out reinvestments under the Pandemic Emergency Purchase Programme (PEPP) during the second half of 2024 by an average of EUR 7.5 billion per month until year-end and to discontinue them thereafter.

Finally, as of late September 2023, the remuneration of banks’ minimum reserves held with national central banks (NCBs) was set at 0%. This decision ensures the full pass-through of interest rate decisions to money market rates and enhances the efficiency of the single monetary policy.

As a result of monetary policy tightening, excess liquidity in the banking system was gradually reduced in 2023. This reduction largely reflected voluntary early repayments and the maturing of TLTRO III operations.

Monetary policy tightening had an adverse side effect on the profitability of the ECB and the NCBs, including the Bank of Greece (which however remained in profit). It should be stressed though that central banks are public institutions, with the specific mandate of ensuring price stability and financial stability, and are not profit-oriented. The projected losses are expected to be temporary and to be soon recouped by future profits. The credibility of central banks mainly hinges on their ability to fulfil their primary objective and contribute to macroeconomic and financial stability, while any temporary losses do not prevent them from fulfilling their mandate.

The Greek economy

During the second half of 2023, three of the four credit rating agencies recognised by the Eurosystem upgraded the Greek sovereign’s credit rating to investment grade. This is an important milestone that signals recognition of the credibility of the economic policies pursued in recent years and the resilience of the Greek economy, despite the deterioration of the international environment and increased uncertainty. Key factors behind these upgrades were a steadily improving fiscal performance, supported by positive and strong economic growth rates above the European average, as well as rating agencies’ assessment that the clear election outcome led to political stability with prospects for maintaining the reform efforts.

In 2023, the Greek economy grew at a slowing but robust rate of 2%, significantly higher than the euro area average. Exports, private consumption and investment were the main drivers of growth.

Headline inflation fell substantially to 4.2%, below the euro area average. On the other hand, core inflation followed an upward trend and averaged 5.3% in 2023, although a gradual easing can be observed since mid-2023.

The labour market continued to strengthen, albeit at a more moderate pace, with the unemployment rate falling to 11.1%. Compared with the recent past, signs of a labour market tightening are increasingly evident, as firms in several sectors find it difficult to hire workers matching their needs, despite a significant increase in wages in 2023.

The international competitiveness of the Greek economy, after the significant improvement seen during the previous years, seemed to stagnate or even decline in 2023, amid a deteriorating international trade environment. However, it is worth noting that competitiveness in terms of unit labour costs continued to improve as nominal labour cost growth in Greece was much lower than in the euro area. In terms of structural competitiveness, Greece’s ranking in the relevant composite indicators shows stagnation or even decline, following strong progress in the previous period (2020-22). Greece seems to lag behind in the areas of government efficiency, a speedier delivery of justice and cutting red tape.

The current account deficit narrowed significantly in 2023 to 6.3% of GDP. This was driven by (1) the improved balance on fuels and other goods, mainly reflecting lower international energy prices; and (2) a higher surplus in the travel balance, owing to buoyant tourism performance.

Foreign direct investment (FDI) flows were lower in 2023 year-on-year, mainly reflecting (1) global economic uncertainty; (2) high interest rates; (3) increased energy costs; (4) foreign investors’ limited participation in capital increases, mergers and acquisitions of domestic companies; and (5) stagnation of the Greek economy’s competitiveness according to relevant indicators.

Turning to capital markets the Greek sovereign’s credit rating upgrades shaped developments in Greek securities. Greek government bond yields declined more strongly than those of other euro area government bonds. As a result, the spread of the Greek 10-year bond over its German counterpart fell significantly in 2023, well below the spread of the Italian bond. Regarding the equity market, the Athens Exchange share price index far outperformed the respective US and euro area indices, amid a large increase in average daily trading volume. These trends were mainly associated with the Greek sovereign rating upgrade to investment grade, as well as with banks’ higher profitability and credit rating upgrades.

Fiscal developments

Overall, the fiscal management of the exceptional circumstances of the past four years has highlighted the benefits of past fiscal-structural reforms, particularly in terms of designing the support measures, but also in terms of State Budget monitoring, execution and control.

According to the Bank of Greece, the primary surplus is expected to turn out at 1.4% of GDP in 2023 or higher, significantly exceeding the budget forecast. The increase in the primary surplus in 2023 is attributed to the timely withdrawal of pandemic- and energy-related fiscal measures, as well as to the overperformance of tax revenue. It is worth noting that large fiscal space was created in 2023, enabling the financing of extraordinary fiscal interventions without jeopardising the fiscal path. Overachieving the fiscal targets in yet another year strengthens the country’s fiscal credibility and helps to meet the primary budget target in 2024 with a safe margin, at a time of heightened uncertainty and reactivation of the ‒ now reformed ‒ EU fiscal rules.

The reduction of public debt continued in 2023, outperforming most euro area countries. According to Bank of Greece estimates, general government debt is expected to decline by 10.7 percentage points of GDP relative to 2022 and reach a post-2010 low of 161.9% of GDP.

Greece is one of the top performers in Recovery and Resilience Facility (RRF) funds disbursements in the EU; such funds provide a significant fiscal impulse to the economy. In total, Greece has received 41% of the available funds (EUR 15 billion, of which EUR 7.7 billion in grants and EUR 7.3 billion in loans) and is one of the few countries to have received three tranches of grants and loans, after fulfilling 26% of the agreed targets and milestones of its programme. However, there are delays in the disbursement of grants to firms, reflecting administrative hurdles. Disbursements of loans to firms also remain relatively low, despite growing amounts of signed contracts. This limits the expected growth benefit of RRF funds.

Banking sector

Bank interest rates rose further in 2023, in line with the tightening of the single monetary policy stance. Lending rates increased more markedly for business loans (+230 bps) (partly due to a dominance of variable rates), and less so for loans to households (consumer loans: +78 bps, housing loans: +96 bps). Across both sectors though, the growth of nominal lending rates was, on average, more moderate in Greece than in the euro area. Bank deposit rates also increased in 2023, especially for fixed-term deposits (+160 bps). The low pass-through of ECB policy rate hikes to fixed-term deposits is also due to Greek banks’ ample liquidity conditions. Thus, for the first time since 2003, the interest rate on fixed-term deposits in Greece is, from mid-2022 onwards, lower than the corresponding euro area average.

Annual bank credit expansion to the private sector slowed in 2023, after a significant acceleration in 2022. This mainly reflected a slower increase in lending to businesses and a stronger decline in housing loans to households, as rising bank interest rates and weaker economic growth dampened demand for new borrowing. On the other hand, the growth rate of consumer loans picked up, in line with the upward trend in private consumption.

Private sector deposits continued to grow, yet at a more moderate pace than in 2022, amid a shift away from overnight deposits into fixed-term deposits. In particular, bank deposits of the private sector increased by a cumulative EUR 5.8 billion in 2023 to EUR 194.8 billion, the highest level since mid-2011. The slowdown in the growth of household deposits was due to lower real income growth in 2023 (compared with 2022) and high household consumption expenditure, also given the level of inflation. For business deposits, slower growth reflected a decline in credit expansion to non-financial corporations.

The fundamentals of domestic banking groups improved in 2023. In more detail:

- Profitability strengthened year-on-year, reflecting a significant increase in net interest and fee income, as well as reduced loan-loss provisions due to a decrease in the stock of non-performing loans (NPLs).

- Liquidity ratios rose, remaining higher than those of euro area banks, despite the reduction in Eurosystem funding.

- Capital adequacy ratios improved, yet still below of the euro area average.

- The quality of the loan portfolio improved further, but the ratio of NPLs to total loans is still significantly higher than the euro area average.

Overall, the favourable domestic environment is making it easier for banks to effectively address the challenges. The resilience of the Greek economy and the upgrade to investment grade have lowered banks’ funding costs from capital markets, enabling them to meet the minimum requirement for own funds and eligible liabilities (MREL).

The year 2023 also saw the disinvestment of the Hellenic Financial Stability Fund (HFSF) from the Greek significant banks, with the participation of credible institutional long-term investors. This reflects the progress that the banking sector has made in addressing its past weaknesses and signals its return to normality. At the same time, it facilitates banks’ access to capital markets and helps attract investors’ funds, thereby ensuring the financing of sound investment projects, while it highlights market confidence in the prospects of the Greek economy. It should be noted that the timing of the HFSF’s successful disinvestment from the four systemic banks was particularly favourable, given the positive investor sentiment towards Greece, despite an international environment of heightened uncertainty and increased geopolitical risks.


According to the latest Bank of Greece estimates, the Greek economy is projected to grow by 2.3% in 2024, well above the euro area average. Private consumption and investment will continue to be key drivers of growth, while the contribution of the external sector will be marginally negative, as strong investment activity will significantly boost imports. The outlook for tourism is once again positive this year, despite international uncertainty.

Headline inflation is expected to fall further in 2024 to 2.8%, as all its components are trending downwards, despite the uncertainty caused by geopolitical developments.

On the fiscal front, the Bank of Greece estimates that in 2024 the primary surplus will increase to 2.1% of GDP. This improvement is mainly explained by a projected rise in tax and social security contribution revenues on the back of strong economic growth.

Public debt is projected to decrease further to 152.3% of GDP in 2024, at a slower pace than in the previous three years, as declining inflation is expected to offset both the acceleration in real GDP and the dampening effect of the widening primary surplus. In addition, public debt is projected to decline in nominal terms for the first time since 2019.

Monetary policy in 2024 will remain tight, keeping interest rates at sufficiently high levels for as long as necessary to bring inflation back to the medium-term target of 2%.

Regarding the outlook for the financial sector:

- In 2024, as inflation gradually recedes and the ECB starts cutting key interest rates, the conditions for a decline in domestic bank interest rates will be favourable.

- Credit growth will initially continue to be adversely affected by past increases in bank lending rates. In the course of the year, with ECB rates kept unchanged or lowered, credit growth should pick up, but only gradually, given the estimated time lags.

- The expected strengthening in economic activity and deceleration of inflation, together with the expansion of credit to businesses and a possible stronger pass-through of increased policy rates to domestic deposit rates, should contribute to a further rise in bank deposits.

- Finally, the outlook for banks’ fundamentals is positive. A further improvement in banks’ performance is expected to be supported by the containment of their funding costs amid continued bank bond issuance, which also helps sustain bank profitability.

Sources of risk and uncertainty

Achieving a satisfactory growth rate is the most important challenge for the Greek economy. The risks surrounding the GDP growth forecast are mainly tilted to the downside and relate to: (1) a further slowdown in the European economy; (2) growing uncertainty due to adverse geopolitical developments in Ukraine and the Middle East and its impact on the global economic environment; (3) possible delays in the implementation of the projects under the National Recovery and Resilience Plan “Greece 2.0” and slower absorption of relevant funds; (4) reform fatigue, with negative implications for productivity and competitiveness; and (5) the impact of potential natural disasters related to the climate crisis. At the same time, increased uncertainty arising from recent geopolitical turbulence represents an upside risk to the inflation outlook.

As regards public finances, fiscal prudence and responsibility are needed, given the major fiscal challenges in the long term. In a high interest rate environment globally, focusing on achieving a fiscal position that ensures long-term sustainability is crucial, as rising borrowing costs (relative to the pre-pandemic period) and slowing growth rates limit the debt-reducing impact of the interest rate-growth differential (“snowball effect”). Fiscal prudence is therefore necessary so as not to undermine the downward path of public debt.

Concerning the banking sector, the significant improvement in asset quality over the past few years should not lead to complacency. The NPL ratio, despite its considerable decline, remains well above the average of euro area banks. Meanwhile, there is a high private debt overhang, reducing the scope for new borrowing and dampening investment.

Policy recommendations

In light of the experience from managing past crises, the need to strengthen the resilience of economies calls for a countercyclical fiscal policy. In this context, it is estimated that a cyclically adjusted primary surplus of 2% of GDP is required in order to build the necessary fiscal buffer.

The new EU economic governance framework requires prudent medium-term fiscal planning with constraints on the adoption of extraordinary measures. Making the expenditure rule an operational rule for monitoring and compliance implies that any fiscal space will be used to build up buffers and/or reduce public debt, while any extraordinary fiscal measure on the expenditure side should be financed by a revenue-increasing measure of an equal size. In such an environment of budgetary constraints, clear priorities should be set before the adoption of any new targeted support measures for the most vulnerable income groups.

Priority should also be given to broadening the tax base by combatting tax evasion and reviewing existing tax exemptions. This would also enable better targeting of social policy and, more generally, would promote tax fairness.

The observed labour market tightness calls for initiatives to ensure that the ongoing recovery of the economy is not disrupted. Such initiatives would focus on: (1) increasing labour force participation of men and women and especially youth; (2) continuous upskilling of workers throughout their working lives, and reskilling of the long-term unemployed; (3) integration of immigrants and introduction of incentives to attract skilled immigrants; (4) establishing mechanisms to match the skills of the labour force with the needs of the labour market; (5) reversing the brain drain and achieve brain regain through incentives and well-paid jobs; (6) reforming the tax system and reducing incentives for early retirement to facilitate the reintegration and retention of more workers in the labour market.

Pressing ahead with reforms, particularly in areas with chronic weaknesses (such as the delivery of justice), and further improving the business environment will help attract more investment. Cutting red tape, promoting digitalisation in public administration, simplifying the tax system and eliminating oligopolistic practices are just some of the areas where action is urgently needed. At the same time, it is necessary to accelerate the absorption and effective use of RRF funds, with a view to closing the investment gap, raising potential output and structural competitiveness, thereby improving the resilience of the economy.

Wage increases should take into account medium-term developments in labour productivity, as well as the prevailing high uncertainty. This would avert second-round effects on inflation, which would worsen the competitiveness of the Greek economy and ultimately reduce the real incomes of workers.

For the banking sector, the challenges of the economic environment require a further strengthening of banks’ resilience. A challenge for the sector remains a further improvement of the capital base of Greek banks, both quantitative and qualitative, as deferred tax credits (DTC) continue to account for a large share of regulatory own funds. Moreover, efforts need to be stepped up for further reducing the NPL ratio towards the euro area average. Also, both systemic and non-systemic banks should further increase their capital buffers taking advantage of their increased core profitability, which creates favourable conditions for internal capital generation. The creation of the so-called “fifth pillar” in the domestic financial system comprising well-capitalised non-systemic banks is expected to improve competition and the financing conditions of SMEs.

Addressing the high level of private debt which is held outside the banking sector will facilitate access to bank finance for businesses and households. Providing sustainable forbearance solutions for “viable” borrowers and the liquidation of collateral for the remaining cases, as well as improvements in the out-of-court settlement mechanism could contribute to this end.

Finally, the prospects of the Greek economy closely depend on the resilience of the euro area and its financial system to future shocks. The important competitiveness challenges of the European economy in the medium-to-long term call for rapid steps to reform the EU architecture, which in turn requires faster progress towards deeper European integration and better policy coordination. The creation of a full-fledged Capital Markets Union, the completion of the Banking Union (through the establishment of a European Deposit Insurance Scheme) and the development of a strategy towards a Fiscal Union are priorities, with a view to more prosperity for Europe and its citizens. Further delays in taking action towards full integration of Europe will lead to a marginalisation of the region and loss of prosperity for its citizens. Policymakers should act in a proactive manner, with decisive, balanced and well-designed reforms at the euro area level, in a spirit of cooperation and mutual concessions.


Despite the continuous positive assessments of the Greek economy in recent years, the restoration of fiscal sustainability and high fiscal awareness among policymakers, there is no room for complacency. There is still a long way to go for Greece’s credit rating to converge to the average rating of euro area countries. Maintaining investment grade status and obtaining further upgrades require prudent economic policies, characterised by consistency, medium-term rational planning and measurable targets. Continued reforms, in particular to bolster institutions and the structural competitiveness of the economy, are also essential.

In an international environment where new uncertainties are piling up, reform fatigue is the biggest challenge to further strengthening the resilience of the Greek economy. Geopolitical instability, technological challenges, the green transition and the productive use of artificial intelligence are just some of the areas that call for strengthening the economy’s resilience to exogenous shocks and necessitate sustained high growth rates in the medium term. To this end, economic policy should focus on maintaining the reform momentum, with strong national ownership of planned changes.

Implementing the necessary reforms is a prerequisite for increasing welfare and further strengthening institutions. Greece has a historic opportunity to complete the transformation of its economy, converging to the European average. The proposed reforms aim at enhancing total factor productivity, potential output growth and structural competitiveness, leading to higher economic growth, a strong labour market, social cohesion and, ultimately, higher standards of living.

The benefits of the reforms are now visible in the economy, with measurable and unquestionable results. The experience of the 10-year debt crisis and the awareness of the merits of fiscal responsibility and reforms have made the Greek society more mature, helping it understand the new international economic environment. Political will to implement credible reform policies is a factor that helps turn crises into opportunities, so that the country can definitively overcome its chronic weaknesses and transform into a modern, sustainable, extrovert and competitive economy.

Related link:

Annual Report of the Bank of Greece (in Greek)

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