Interview of Governor Yannis Stournaras with Politico
20/09/2021 - Articles & Interviews
Central bank chief: Greece’s roaring rebound paves way for continued ECB support
By Johanna Treeck
FRANKFURT — Greece’s pandemic-battered economy will bounce back even more quickly than its government projects and could return to pre-crisis levels this year, according to Bank of Greece Governor Yannis Stournaras.
The strong rebound, coupled with Athens’ commitment to structural reforms, should pave the way for the European Central Bank to continue to buy Greek debt under its asset purchases even after it ends its pandemic emergency purchase program, or PEPP, Stournaras told POLITICO.
His comments come on the back of the government’s recent upgrade of 2021 growth projections from 3.6 percent to 5.9 percent in what is set to be the strongest growth in two decades. But Stournaras is in fact more optimistic than that, seeing “an even higher” estimate coming soon from the central bank.
“I expect our forecast to be higher than 6 percent,” he said, while declining to give details. “At the end of 2021 we will likely have higher GDP compared to the pre-pandemic one.”
As a prime tourist destination, Greece was hit particularly hard by the pandemic. Last year, economic output tumbled by 8.2 percent, with only Spain, Italy and Malta posting sharper downturns in the eurozone.
But a surge in consumer spending and investment boosted second quarter GDP by 16.2 percent compared with the second quarter of 2020. The third quarter, meanwhile, is expected to benefit from the influx of foreign guests to Greece’s islands over the summer months.
Stournaras also expressed confidence the country will sustain strong growth rates ahead, around “3.5 percent on average for the next 10 years.”
Such solid growth would offer some respite for the country after going through a brutal recession and surging debt levels that precipitated the eurozone crisis. Even once GDP reaches pre-pandemic levels, it’ll still be a quarter smaller than it was before the global financial crisis.
In addition, Greece will get help in coming years from about €40 billion from European structural funds, along with €32 billion from the EU Recovery Fund, and increased foreign direct and indirect investment, Stournaras said. But he still sees the biggest growth drivers coming from ongoing structural reforms — including market liberalization, privatization and more investment in education — as well as digital and green transformation.
In light of stronger than expected growth, Stournaras welcomed Greek government’s recently announced support measures, which will see an additional €4.4 billion flowing into the economy in the second half of this year thanks to increased tax revenue.
Overall, he said, robust growth should help drive down the country’s debt-to-GDP ratio from just below 200 percent this year to 187 percent in 2022.
By 2019, he noted, Greece had managed to trim its debt to GDP ratio to around 180 percent, and its debt “would already be investment grade if it had not been for the pandemic.”
Earlier this month, the rating agency Scope upgraded Greek sovereign debt from BB to BB+, which is one notch below investment grade but still higher than the ratings of the major rating agencies. Last week DBRS Morningstar also lifted its rating.
That weak credit rating has kept the ECB from including Greek bonds in its long-standing asset purchase program, the APP. But Stournaras said it’s his “expectation” that the ECB will continue to hoover up Greek debt even after it phases PEPP by including it in the APP.
“This is not a question of Greece’s ability to service debt, but a question of even transmission of monetary policy,” he said, referencing the ECB’s goal of keeping borrowing costs low throughout the region via continued bond buying. “The ECB Governing Council will ensure that there will not be more fragmentation.”
The ECB owns roughly €4.4 trillion debt under all its programs, of which only about €30 billion is Greek government bonds.
ECB needs ‘patience and persistence’
Looking at the broader currency union, Stournaras cautioned against overconfidence.
“It would be really arrogant on our part to declare victory over the pandemic right now,” Stournaras said. “That’s why it is too early to draw conclusions about the extension or not of the PEPP beyond March 2022.”
That’s the question that the Governing Council will take up at its December meeting, according to ECB President Christine Lagarde.
Stournaras underlined that whatever the outcome of deliberations, the ECB will have to continue providing significant support even after the crisis is over, given that its inflation projections still undershoot its 2 percent target — a key metric for unwinding support.
“The APP, for instance, may need to be recalibrated,” he said. “To avoid any cliff effect, the APP would benefit from higher purchase volumes and from some important flexibility features of the PEPP. Our experience with the PEPP has shown that by being flexible … we’ve achieved significant results with regard to inflation and output at lower purchase volumes.”
Stournaras also acknowledged that inflation may persist longer than expected — and that the ECB might have to upgrade its inflation outlook. But this shouldn’t force the ECB’s hand to change course from its ultra-loose policy, in his eyes.
“We’ve accepted there’s an upside risk regarding inflation,” Stournaras said. “In the past, however, we have over-predicted inflation [on the higher side], expecting that it moves towards 2 percent in the medium term.”
In any case, current inflation forecasts show inflation significantly undershooting the target and are based on the assumption that monetary policy will remain accommodative in the years ahead, he said. Even with inflation slightly faster than currently expected, it would still fall short of the central bank’s target.
Monetary policy accommodation needs to demonstrate “patience and persistence,” as long as markets and consumers’ sentiment remain fragile and uncertainty is still high, he argued. “There is, in my view, still some way to go before price increases raise inflationary concerns,” he said.