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Interview with Bank of Greece Governor Yannis Stournaras for the Sunday edition of “Kathimerini” newspaper and Eirini Chrysolora

14/07/2019 - Articles & Interviews

- In your opinion, how can the growth dynamics of the Greek economy be immediately strengthened?


The nascent consolidation of investor and market confidence is the only window of opportunity for the new government. Confidence improves the business environment, galvanises healthy entrepreneurship, boosts investment and sets the economy on a growth trajectory. Robust growth, in turn, reinforces the credibility of economic policy and leads to credit rating upgrades. Therefore, success in rebooting the Greek economy after ten years of recession and stagnation will depend on whether the new government will take advantage of market confidence and adopt policy measures to attract new investment. If these measures are front-loaded and credible, the Greek economy will soon enter a self-fuelling, virtuous circle of credibility-confidence-growth. Consequently, economic policy credibility through an acceleration and deepening of the reform effort is key to consolidating market confidence, which will in turn ensure ample and low cost financing of the economy. The benefits to be reaped are many and extend to all of society. Strong growth rates will enable job creation and a rapid reduction of the high unemployment rate, especially among the highly skilled younger generation, as well as a boost in both incomes and government tax revenue, thereby contributing to reducing public debt.





- What rates of growth do you consider feasible?


In the short term, higher growth rates, roughly double the current 1.9%, could be achieved through increased investment, considering that the Greek economy still has a significant negative output gap. This presupposes that the new government succeeds in immediately signalling that Greece is turning the page and is committed to creating an environment friendly to investors and healthy entrepreneurship. This could be achieved by speeding up privatisations and unblocking emblematic investment projects, such as the redevelopment of Hellenikon, the former Athens international airport site. Furthermore, a full execution of the Public Investment Programme would significantly boost growth through synergies between the public and the private sector.


- Do you agree that the tax burden needs to be eased and, if so, in which direction?


High taxation during recent years, while halting the upward course of public debt by delivering very large primary surpluses, has dampened the growth dynamics of the economy, reduced the competitiveness of Greek businesses, created a disincentive to work and invest, and caused tax fatigue, leading to a contraction of the tax base and an exhaustion of taxpaying capacity. Changing the fiscal policy mix by reducing the tax burden (including high social security contributions) on workers and businesses is imperative. For enterprises, lower average production costs and lower product prices would provide an incentive for productive investment. For workers, higher net wages would provide an incentive to supply labour and increase consumption.

Based on estimates released in the recent Bank of Greece reports, a lower tax burden on workers and businesses, when combined with the implementation of structural fiscal measures that improve tax compliance and the efficiency of the tax collection mechanism, leads to increases in aggregate active demand, national product, nominal wages, employment and government tax revenue, thereby helping to achieve fiscal targets.


The challenge of achieving the 3.5% target


- In the Monetary Policy Report released last week, you estimate that the primary surplus will end up at 2.9% of GDP, falling short of the 3.5%-of-GDP target by 0.6% or €1.1 billion. In your view, will the new government be asked to take fiscal consolidation measures in order to achieve the target? Might something similar be required in 2020, considering the recent repeal of the reduction of the tax-free personal income allowance?


The Bank of Greece estimate reflects, among other things, the impact of a set of expansionary fiscal measures adopted in May, containing an increase in expenditure and decreases in tax revenue, with a combined fiscal cost of 0.7% of GDP. Assuming full budget execution on the expenditure side, these measures would entail a fiscal gap of roughly 0.6% of GDP based on the Bank’s current estimate of a growth rate of 1.9%. Therefore, achieving the primary surplus target of 3.5% of GDP in 2019 poses a serious challenge for the new government, given that this target was agreed upon in the context of enhanced surveillance. Stepping up the effort to rationalise non-productive public spending and stimulating economic activity in the second half of the year, via increased investment, would help achieve this target.


- How can Greece’s creditors be convinced of the need to lower the primary surplus target? Is there room for a compromise solution?


The Bank of Greece has for years been making a case in favour of lowering the primary surplus targets, so as to give the economy the room it needs to grow. As a fundamental condition for a review of the primary surplus targets, always in consultation with the institutions, economic policy credibility must be enhanced, thereby strengthening confidence among investors and Greece’s partners, and leading to an upgrade of Greece’s credit rating to investment grade status.

There are three sides to the need for lower primary surpluses. The first has to do with the manner in which the fiscal adjustment achieved so far has been accomplished, that is its disproportionate reliance on higher tax revenue. High taxation, without a parallel broadening of the already narrow tax base, exhausts taxpaying capacity and puts at stake the sustainability of the current primary surpluses.

The second has to do with the need to close the investment gap, given that the maintenance of large primary surpluses deprives the real economy of much-needed financing resources. Finally, the third has to do with the need to make the most of the favourable environment of low borrowing rates. With a public debt-to-GDP ratio of 180%, a 1 percentage point-higher growth rate and/or 100 basis points-lower borrowing costs would be 1.8 times more effective in reducing the debt ratio than an additional GDP percentage point of primary surplus.

The fact that borrowing rates today are lower than under the baseline scenario in the European Commission’s debt sustainability analysis provides leeway for easing the fiscal targets without compromising debt sustainability. Thus, there is room for a compromise solution, in which primary surpluses would be lowered in exchange for an acceleration of reforms. Such a decision should, in any case, be made in agreement with the institutions. It should be noted, in this regard, that the Stability and Growth Pact allows for fiscal flexibility so long as additional reforms increase potential growth.


Greece’s participation in a new ECB programme is feasible


- Is there hope of Greece participating in a quantitative easing (QE) programme, all but announced by Mario Draghi, and on what conditions? Does Greece need a precautionary credit line?


Let me start from that last question. At the end of 2017, when the yield on the ten-year Greek government bond was around 4.5% (by the way, in 2018 as well, it never fell below 4.2% on average), the Bank of Greece had taken the view, in its Interim Monetary Policy Report, that a precautionary credit line would support the Greek economy, lowering borrowing costs for the Greek State, banks and non-financial corporations, as it would secure the access of the State and banks to financing once the programme was completed in August 2018. This would not come at the cost of additional surveillance, as Greece already is and for many years will continue to be under enhanced surveillance.

In the absence of a precautionary credit line, and given that the rating of Greek government bonds remained well below investment grade (BBB-), Greece was not eligible to participate in the ECB’s QE programme, which would have further boosted economic activity and improved Greek sovereign’s rating. Instead, the public debt rose to €317.5 billion at end-2017 and €334.6 billion at end-2018 as a result of the build-up of a cash buffer, the solution opted for in the end in lieu of a precautionary credit line.

The current juncture is affected by two new factors: first, expectations of a credible implementation of growth-friendly policies and an acceleration of reforms by the new government, as reflected in the recent considerable decrease in borrowing costs for the Greek State; and second, the fact that the single monetary policy will remain accommodative for a long time, following the recent decisions by the ECB. Moreover, the availability of a substantial cash buffer, built however at a relatively high cost, which the Greek economy will continue to pay, is a financial safety net that was chosen, as mentioned previously, instead of a – cheaper – precautionary credit line.

According to international credit rating agencies, further upgrades crucially hinge, among other things, on the improvement of macroeconomic aggregates and the continuation of reforms; a substantial reduction in banks’ non-performing loans (NPLs); new Greek government bond issues; and the complete lifting of capital controls.

Although it is difficult to estimate precisely how long it will be before Greek government bonds are upgraded three notches to investment grade status (BBB-), Greece should soon be able to participate in the ECB’s current reinvestment programme and in a new asset purchase programme, very likely to be launched in the future, and therefore to reap immediate additional benefits.


- And what about the capital controls?


In the view of the Bank of Greece, capital controls are no longer of any use. Thus, we will recommend to the new government and the institutions that they be fully lifted as soon as possible. So, to sum things up: conditions today are different and appear to be favourable, the cost of not choosing a precautionary credit line when – in the Bank of Greece’s opinion – it should have been done so, has already been borne by the Greek economy in the form of an expensive cash buffer. Thus, resorting to a precautionary credit line today would effectively be unnecessary.


I was victim of a coordinated character assassination attempt


- You were often targeted by the previous government for your positions and were recently accused of indirectly supporting the New Democracy party. Would you like to comment on the SYRIZA government stance?

“Targeted” is unfortunately too mild a term to convey the vileness of the situation. Ample light needs to be shed by the competent authorities on what happened, not for the sake of vindication, but to uphold the rule of law. The instigators, within but also outside the government, orchestrated a character assassination attempt against me, my wife and our daughters, in a move to prevent me from performing my duties, as set out in the Statute of the Bank of Greece, the laws of the Hellenic Republic and the rules of the Eurosystem, of which Greece is a member under the Treaty on European Union. I was able to withstand the assault and protect the independence of the Bank of Greece for the simple reason that I am absolutely clean, that the orchestrators of this scheme have found absolutely nothing against me, and also because I had the support of my family, the directors and staff of the Bank of Greece, the European Central Bank, and the general public, both in Greece and abroad. Others in my situation might have folded, in which case the consequences would have been unpredictable. I am ready to give my account of the events to the competent authorities, should they decide to investigate the matter and summon me to testify. There is nothing further to add.


- Will you continue to sound the alarm and warn the new government in the same way?


Under its Statute, the Bank of Greece is responsible for the implementation of the Eurosystem’s monetary policy in Greece and for safeguarding the stability of the Greek financial system. In the performance of its tasks, the Bank enjoys institutional and functional independence, and is accountable to Parliament. Therefore, it is my institutional role and obligation to provide reliable and timely information and issue early warning of any risks and challenges to the Greek economy, regardless of which party is in power.


The markets expect a systemic solution to the NPL problem


- Now that Greece has exited the economic adjustment programmes, are you worried that the reform effort could be halted or reversed?


The credibility of economic policy is key to consolidating market confidence in the growth prospects of the Greek economy. Boosting investor confidence will allow robust growth. In order for this to happen, the reform effort needs to be accelerated and deepened. It is precisely with this agenda that the new government was elected. Furthermore, we should not lose sight of the fact that all three of the economic adjustment programmes required the implementation of measures to correct the macroeconomic imbalances combined with a far-reaching reform programme across the Greek economy. The continuation of reforms is an obligation to which Greece is bound in the context of enhanced surveillance as well as a condition for the activation of the medium-term debt relief measures. Only if the reform effort is continued and completed will the economy become able to absorb potential shocks at a lesser cost in output and employment terms.


- As you pointed out in your report, banks have a high NPL ratio (45.2% at end-March) and meagre profitability. What are the chances of the Bank of Greece proposal for NPL reduction being implemented? And is there hope of banks’ profitability improving, and if so when?


All the available data suggest that a drastic reduction in NPLs is crucial for banks’ profitability to improve, as well as for banks to contribute to economic growth. It is a fact that banks have made a serious effort and continue to work hard in this direction. A systemic approach to the problem, such as the proposal we put forward at the end of 2018 and which was exclusively worked out by the Bank’s staff, could hugely bolster this effort and create conditions for satisfactory profitability on a sustainable basis. The markets want to see tangible results in this area and will reward us if we are resolved to move in this direction. The new head of the SSM, Andrea Enria, expressed his warm support of our proposal during our recent meeting.



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