Interview of the Bank of Greece Governor Yannis Stournaras by Tom Fairless and Nektaria Stamouli, The Wall Street Journal
11/07/2017 - Speeches
WSJ: Greece reached an agreement with its creditors in June. What do you think about it—doesn't it just kick the can down the road again?
Yannis Stournaras: No, I think it is a good agreement. It was long overdue. It will remove uncertainty regarding the payment of Greece's obligations in July so it is important as such. Of course I would have preferred to have more clarity on debt relief because the expression regarding the extension of maturities of interest payments and amortization from zero to 15 years does not say much and did not allow the European Central Bank and the International Monetary Fund to work out a debt sustainability analysis. So I hope that soon the Eurogroup will say something more about that and preferably closer to the 15 years.
WSJ: So you don't think it gave much clarity regarding Greece's debt?
YS: No it didn't. It gave a direction, we now know the Eurogroup thinks of extending maturities, interest and amortization payments. And the closer this extension is to 15 years the better. As you may know, in the Bank of Greece we have done a study which shows that at a minimum we need about 8.5 years of weighted-average extension of interest payments to secure debt sustainability. But this is only a minimum, this is at the margin. So I prefer something closer to 15 years that the Eurogroup has included in the statement.
WSJ: Does the agreement allow the Greek economy to breathe and to grow?
YS: It means that Greece is not going to have a liquidity problem. Arrears will be paid to the private sector. Uncertainty will be removed, which means that deposits are expected to come back, as they have actually in the last 1.5 months. And in general banks will be able to make more repos in the open market as they are already doing. We already see the first seeds of liquidity improvement.
WSJ: Does it give Greece the ability to tap markets soon?
YS: It remains to be seen. I think it's a bit early. There are steps in the right direction but it is only the beginning. I think it would be even better for instance if Greece proceeds with two or three emblematic privatizations in the period to come. That would be more helpful to tap markets later.
WSJ: Is there something Greece can do for the ECB to consider quantitative easing, or does it totally depend on the creditors?
YS: I think Greece can be more proactive on privatization, on structural reforms, on the liberalization of certain professions, on the independence of institutions, the improvement of the quality of governance. All these would help. The creditors should do the rest, mainly providing more clarity on debt relief.
WSJ: Do you think another Greek bailout is a possibility?
YS: We work on the assumption that after the program ends, Greece will tap markets, so we will not need a further bailout. What matters is to be able to tap markets after the end of the program in a sustainable way. It is immensely important for Greece's partners to clarify their position on debt so that this goal [tapping markets after the end of the program] is achievable.
WSJ: In your last report you mentioned the possibility of another bailout. Why?
YS: What I mentioned in the report is that if Greece's partners fail to clarify their position on debt, and if Greece is not able to tap markets at reasonable interest rates because of this, then I'm afraid that a further bailout is inevitable. But nobody wishes that: neither Greece's partners nor Greece itself.
WSJ: Is there a lot of work to do before Greece could return to markets, in terms of hiring staff or reaching out to investors?
YS: There's a lot of investor interest after the agreement, but I think Greece needs to do something more, especially on planning ahead as well as on privatization. Greece needs to convince markets that it means business. I would prefer to tap markets even before the end of the year if we make two or three emblematic privatizations before.
WSJ: How much confidence do you have in the state of the Greek economy and the banks?
YS: I'm more confident now after the agreement. For this year we expect a positive growth rate of 1.6%; and 2.4% next year. As you know we still have a large output gap, unemployment is still exceeding 20% so there's a lot of scope for a rapid recovery exceeding 2% for a number of years. I think Greece has an opportunity for catching up, which means to grow more than its partners.
WSJ: The IMF says Greek banks need additional capital of around €10 billion. Do you share this view?
YS: Banks now have core Tier 1 capital of close to 17% one of the highest in Europe. They also have high provisions. The challenge for banks is to achieve their non-performing loan targets. Actually they stand or fall on achieving this target. If they do achieve these targets then the tier 1 ratio at the end of the period will go up by almost 2 percentage points. So in that case they will not need any more capital.
WSJ: Will the banks achieve their NPL targets?
YS: I'm quite confident. I can tell you that a small non-systemic bank, Attica Bank, had an agreement in the previous few days with an investor and if this agreement is finalized by end of month then at a stroke it will be able to cut its NPL ratio from 46% to 23%. So it's a huge reduction. Which is perhaps something the bigger banks, the systemic banks, should look at carefully. That is, bold moves to reduce NPLs going beyond the targets.
WSJ: Was it a big discount? Twenty cents on the euro?
YS: Yes but it was only the denounced loans. That is, the worst of all nonperforming loans.
WSJ: Do you think Greece will be included in the ECB's QE program?
YS: Provided the Greek government continues on the right path and its partners in the Eurogroup take a specific position on the extension of maturities, interest payments and amortization, yes I think the executive board of the ECB will bring the issue for discussion in the governing council. I hope this year. I think Greece deserves it after all. There is plenty of time because QE will not end abruptly.
WSJ: In which industries could Greece be competitive in future?
YS: Greece has strong comparative advantages, starting with the agricultural sector but even more in manufacturing, services, tourism, shipping, health, IT. Despite the brain drain due to the crisis, the quality of the scientific personnel in Greece is much higher than the technological component of our exports. That means we have a lot of upside. But we need better cooperation between the private sector and universities and research institutes. The government should modernize the framework governing this relationship. For instance, health: medical tourism. Instead of exporting very good doctors, there could be patients with chronic diseases who could come to Greece, where we have excess capacity in hospitals, many doctors of very high quality. People from Asia, the Middle East, European countries, the U.S. They could combine high-quality treatment with holidays.
WSJ: Do you think the euro has been good for Greece?
YS: The Eurozone is part of our identity, I cannot imagine Greece outside the euro. It would be a disaster. All those in Greece and abroad who thought that Greece would find a solution outside the euro made a huge mistake. They contributed to a delay of recovery and of exiting from our problems.
WSJ: Financial markets reacted strongly to ECB President Mario Draghi's speech in Sintra. How did you understand his remarks?
YS: I think the markets overreacted. Mario Draghi didn't say something which would have led normally to such a reaction. In my opinion, it's true we have stronger growth now for many quarters, but this growth is not robust yet. It's mostly consumption-led, it's not so much investment-based. Second, core inflation remains still very low. So I think we should be patient. It's not the time yet to change our policies.
WSJ: Investors understood Draghi to be arguing that inflation is going to stay low but the ECB is going to go ahead and taper anyway.
YS: Our number one priority in the ECB is inflation, this is our mandate. Growth is important, but if we grow with inflation well below our target, we cannot change our monetary policy. The other reason we shouldn't change it now is that we don't see any serious threats to financial stability.
WSJ: Investors expect the ECB to announce tapering in September or October, and to start to reduce its bond purchases early next year. Is that a reasonable timeline?
YS: We have to be very patient. We have to review the evidence. I do not belong to those who want to trigger a change without conclusive evidence. As the ECB came late to QE, I think it shouldn't move in a way that would risk undermining recovery. And I'm glad the executive board and my colleagues are taking this position up to now, and especially Mario Draghi. I fully agree with him on the issue.
WSJ: Is there a lot of consensus on the governing council about the exit?
YS: There is a huge consensus. We are not dogmatic, we do not use a specific rule, we examine all evidence, all markets: labor market, product markets, output trends, inflation, financial markets, external effects. The atmosphere is very positive. We are pleased that our policy has contributed to the recovery and to the increase in inflation. But this is also one of the reasons that we should not rush to move, because we don't know whether the recovery will continue if we stop this unconventional monetary policy now. So we have to be convinced that the recovery is sustainable. And there isn't enough evidence on that yet.
WSJ: How long will it take to have enough evidence. Another year?
YS: We are flexible and pragmatic. Each time there is a monetary policy meeting, we review the evidence. In my view, this time, in July, is not the time to review our stance. There is still evidence that the recovery is not robust enough. Commodity prices are still down, which is a leading indicator of world recovery. There are also geopolitical risks. There are many external uncertainties. There is a weakness of the dollar which, to a certain extent, implies monetary tightening in the eurozone. Investment in the eurozone is not robust yet. I take into account all these factors, and I'm sure my colleagues in the governing council do too.
WSJ: Might the ECB make a small move in July, such as removing the easing bias on QE?
YS: It's something we haven't discussed yet. I'll tell you my own position—looking at today's evidence, there isn't something on the table that convinces me that we should change our stance.
WSJ: Investors think the ECB can't continue QE for much longer given the constraints on the program.
YS: We have not yet discussed the parameters of QE. There are ways to overcome these constraints if needed by changing the parameters of the program. Of course there are certain sensitive parameters that cannot easily change. But there are many other parameters too that may change if needed. To a certain extent the reason that we continue this expansionary, unconventional monetary policy is that other policies, such as fiscal policy, still have some unused space. For instance, there are member-states with a large current account surplus for a number of years. This is a problem. Germany for instance could invest more. This is good for Germany too, not only for the eurozone. There are many technical problems though because Germany is near to closing the output gap. It should look at its wage policy, at its investment policy. It should perhaps look at its investments abroad, real investment in the European south, or increasing the capital of the European Investment Bank. There are many options to deal with this problem, in a mutually advantageous way.
WSJ: Would it involve fiscal transfers from Germany?
YS: No, I'm talking about real investment. Investment from member-states where the return on capital is low to member-states where it is much higher. And the risks now are much smaller. Now there are queues of investors looking at the prospects for Greece.
WSJ: How much of a risk would it be for Greece and other southern European countries if interest rates started to rise?
YS: Our monetary policy has nothing to do with fiscal policy, but we look at markets of course. We look at excessive market reaction, which we must take into account. This is part of the evidence which we are reviewing.
WSJ: Can the ECB avoid a taper tantrum in Europe?
YS: There is always the right timing and the right pace [of exit]. We shouldn't undermine the recovery by making impatient moves, and there is no need for that. Core inflation is not rising, we do not see any financial stability problems either.
WSJ: Isn't that an argument to keep QE running for another few years?
YS: Our forward guidance is clear. We have to see especially core inflation rising closer to our target. The labor market has changed a lot and the reason inflation is low perhaps has to do with the labor market, perhaps it has to do with outsourcing, with new technologies. This is an example of the evidence we are reviewing, why this is happening. Why we have growth without inflation. This presents certain dilemmas for the central bank.
WSJ: That would suggest the ECB could overlook a slight weakness in core inflation and still taper?
YS: I'd like to be very careful here. My position is that we shouldn't risk any abrupt moves at this moment. There's no need to at this specific moment.
WSJ: But this could change by September, say?
YS: Yes, this could change. If I could repeat, pragmatism and flexibility. We meet every month, so…
WSJ: Some investors have suggested the ECB could reverse its forward guidance and start raising interest rates before ending QE.
YS: We don't see a need to.
WSJ: The ECB's communication says it won't raise rates until well past the end of net asset purchases. How long is well past—are we talking six months, or 12 months?
YS: This needs judgment, I cannot tell you now, it depends on circumstances. We are not dogmatic. If needed to move, we will move.
WSJ: So it could be a relatively short period?
YS: Yes it could.
WSJ: Has the ECB already started exiting its stimulus, by reducing its purchases from €80 billion a month to €60 billion?
YS: I think this movement took into account the improvement we had in the economy. That's an example of pragmatism. Also the slight change in our forward guidance reflects our understanding of the better situation in the real economy.
WSJ: In terms of the side-effects of QE, do you see any dangers in continuing the program?
YS: I think that, if you take the whole package, it was positive for companies, it was positive for the economy, it was positive for banks even. Many people who object should ask themselves what would have happened if we hadn't followed this QE policy. Where would inflation be now, and real growth? Of course there are limits too, which we do not overlook.
WSJ: Some members of the ECB's governing council have argued against certain aspects of the package. Has everyone now agreed that the policies have worked?
YS: Yes. We have a very strong consensus.
WSJ: How do you think the Italian government handled the recent resolution of two Italian banks—what message does it send?
YS: Taking into account that the banking union in Europe is still incomplete because it lacks a pan-European deposit guarantee scheme, what happened was rather a good result.
WSJ: There seemed to be a huge amount of public money involved.
YS: I'm not sure the alternative would be less costly. For instance the alternative could be paying depositors with public money. At least now we know these are the limits of the costs for saving people's deposits and senior bondholders. I think that, overall, the European institutions and Italian authorities acted responsibly.
WSJ: The eurozone seems to be a global bright spot now. Have political risks now disappeared?
YS: It's true. Despite the uncertainties we had at the start of the year, we have a good result. The anti-European spirit was defeated, which is extremely important. Of course we had the most negative result, which was Brexit. But in the eurozone, I think the political developments are benign and they give hope that after the German elections there would be a serious discussion about mending certain flaws in the architecture of the eurozone and making it stronger. We need that.
WSJ: Do you think French President Macron will be able to negotiate a common finance ministry or budget for the eurozone?
YS: Yes I think that President Macron brings something fresh to the eurozone. I agree with most of his ideas and I'm sure that Germany will respond positively. I've discussed it with many German politicians of the two major parties, and they find President Macron's ideas very interesting, that they can discuss with him after the elections.
WSJ: What still needs to be done in the eurozone?
YS: We need more symmetry in the adjustment. Not only deficit countries should adjust, if needed, but also surplus countries should adjust too. And we need more risk-sharing and more common decisions. We need to share risks and responsibilities as well. We need more, not less, integration.
WSJ: How do you get surplus countries like Germany to adjust?
YS: Germany can invest more, for instance. The government in infrastructure and the private sector too. Nobody tells Germany to reduce its exports. But large current account surpluses entail certain risks for financial stability. Actually the EU's macroeconomic imbalances procedures have been violated. This is not only in Germany, it includes other member-states as well. Also, the reason that in the European south it took so long for the internal devaluation to succeed and cut deficits is because the surplus member-states did not reduce their surpluses. Actually they increased their surpluses at the time others tried to reduce their deficits. Hence, more recession resulted in member-states such as Greece, in order to achieve the given primary surplus in the budget.