Greek economy 2014

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Undersanding the Greek Crisis

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Greek economy 2014

  1. 1. Greek Economy Towards the Crisis & a Plan for Recovery October 2014
  2. 2. Getting into crisis Characteristics of the Greek Economy prior to the crisis  High growth based on consumption and borrowing  Reduced competitiveness of the Greek Economy  “Twin Deficits” and high public debt – High public deficit – High current account deficit
  3. 3. High Growth Rates The Greek Economy grew, for many years, at rates higher than the EU average (3.1% against 2.2%). Source: European Economy -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 GDP growth rate EU15 Greece
  4. 4. Unsustainable Fiscal Aggregates The deficit remains high during the period 2001-2009, whereas public expenditures are increasing. Source: Eurostat %GDP 4.5 4.8 5.6 7.5 5.2 5.7 6.5 9.8 15.645.4 45.1 44.7 45.5 44.6 45.3 47.5 50.6 54.0 35 37 39 41 43 45 47 49 51 53 55 0 5 10 15 20 25 30 2001 2002 2003 2004 2005 2006 2007 2008 2009 General government deficit (% GDP) Public expenditures (% GDP)
  5. 5. High Inflation Source: EURtat Prices were contained during the process of accession to the Euro, but inflation remained higher than the Eurozone average throughout the period under consideration. 1.7 1.2 1.2 2.2 2.4 2.1 2.2 2.2 2.2 2.1 3.3 5.4 4.5 2.1 2.9 3.7 3.4 3.0 3.5 3.3 3.0 4.2 0 1 2 3 4 5 6 1997 1998 1999 2000 2001 2003 2004 2005 2006 2007 2008 EA17 Greece
  6. 6. Competitiveness was deteriorating 100.0 108.1 108.8 110.3 113.0 110.8 112.3 115.9 119.3 90 95 100 105 110 115 120 2001 2002 2003 2004 2005 2006 2007 2008 2009 Real effective exchange rate (relative to 36 industrial countries) (2001=100) Source: Ameco Since the adoption of the Euro, the prices of Greek products increased in relation to major trading partners. With relatively high prices and without the possibility of currency devaluation, the competitiveness of the Greek economy deteriorated.
  7. 7. While consumption was increasing Source: Ameco Since the late 90s, consumption as a percentage of GDP is higher in Greece compared with the EU. By the time of the crisis, Greece consumes 93% of its production (12 percentage points of GDP higher than the EU average) %GDP 79.5 78.2 78.1 78.2 78.6 79.1 79.0 77.3 80.7 68.3 77.9 78.6 81.6 88.5 86.4 87.9 87.4 92.9 60 65 70 75 80 85 90 95 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Consumption (% GDP) ΕU (27) Greece
  8. 8. The external debt of Greece is increasing -2.2 -3.3 -3.5 -2.7 -3.6 -7.7 -7.2 -6.5 -6.5 -5.8 -7.6 -11.4 -14.6 -14.9-16 -14 -12 -10 -8 -6 -4 -2 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Current Account Balance (% GDP) As a result of the gradual loss of competitiveness and consumption-driven growth that was fueled by imports, the current account deficit shows an upward trend. Source: Eurostat %GDP
  9. 9. The public debt of Greece is also increasing 49.5 57.5 64.2 84.9 88.7 95 107.7 114.9 115.7 122.3 141 151.9 159.2 168 183.2 195.4 224.2 239.3 263.3 299.7 0 100 200 300 400 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 (billion EUR) High consumption, fueling the growth model of Greece, was funded by an increasing public debt. Source: Ameco 71.7 74.0 79.1 99.2 97.2 97.0 99.4 96.6 94.5 94.0 103.4 103.7 101.7 97.4 98.9 101.2 107.5 107.2 112.9 129.7 0 50 100 150 Public Debt (% GDP) BillionEUR%GDP
  10. 10. Borrowing Cost In the wake of the global financial crisis, markets begin to value the risks for the economies of individual Eurozone member-states differently. Thus, the borrowing cost, which declined after the adoption of the Euro, soared in early 2010. Source: Eurostat 0 500 1000 1500 2000 2500 3000 1/9/1992 1/4/1993 1/11/1993 1/6/1994 1/1/1995 1/8/1995 1/3/1996 1/10/1996 1/5/1997 1/12/1997 1/7/1998 1/2/1999 1/9/1999 1/4/2000 1/11/2000 1/6/2001 1/1/2002 1/8/2002 1/3/2003 1/10/2003 1/5/2004 1/12/2004 1/7/2005 1/2/2006 1/9/2006 1/4/2007 1/11/2007 1/6/2008 1/1/2009 1/8/2009 1/3/2010 1/10/2010 1/5/2011 1/12/2011 1/7/2012 Greek government bond spreads (10 year) 2nd programme Revision of deficit to two-digit Collapse of Lehman Brothers 1st programme
  11. 11. Need for Change  The global financial crisis revealed the chronic problems of the Greek Economy  Structural problems - Bureaucracy, inefficiency and corruption  Growth model based on consumption and borrowing - A large percentage of the production are goods and services which cannot be traded internationally.  Fiscal derailment and structural problems must now be tackled
  12. 12. Borrowing upon conditionality  The inability of Greece to tap the international financial markets forced the country to seek borrowing from its European partners and the IMF.  Loans are subject to conditionality. The Greek government signs a Memorandum of Understanding, which details the specific fiscal, financial and structural policies to be implemented, under the supervision of three international organisations: – European Commission – European Central Bank – International Monetary Fund 1st Programme: 2010 May (2010-2013) 2nd Programme : 2012 March (2012-2016) Loan: €245 billion - € 198 billion by member-states of the Eurozone - €47 billion by the IMF Interest Rate: 3% (IMF) – 2% (Eurozone – after reduction) – Lower than the country borrows from the markets – Lower than the rate at which some member-states borrow in order to lend us
  13. 13. Austerity Measures are Adopted EXPENDITURE • Wage reductions • Pension reductions • Reduction of total number of civil servants • Cuts on other expenditures of the public sector REVENUES • Decrease of tax-free thresholds • Increase of VAT rates • Increase of excise duties • Solidarity levy • Real-estate property taxation Source: Ministry of Finance Austerity measures as a percentage of GDP: Break- down of adopted measures between cuts in public spending and increases of government revenues. 4.83% 4.69% 3.11% 1.36% 0.22% 3.76% 4.06% 2.84% 4.30% 1.62% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 2010 2011 2012 2013 2014 %GDP Expenditure Revenue 8,6 8,8% 6,0% 5,6% 2,1%
  14. 14. Fiscal deficits are reducing During the period 2009-2013: • The general government deficit is reduced by 13.4 p.p. of GDP • The primary general government deficit was reduced by 10.8 p.p. of GDP, over-performing the Programme target for 2013 by 0.8 p.p. of GDP Source: IMF, Staff report 6/2014 %GDP * Official Projections of the Programme -15.6 -10.8 -9.4 -6.4 -3.2 -2.9 -2.1 -0.7 -10.4 -4.9 -2.3 -1.3 0.8 1.6 3.0 4.5 -20 -15 -10 -5 0 5 10 2009 2010 2011 2012 2013 2014* 2015* 2016* General Government Fiscal Accounts 2009-2016 (% of GDP) General Government Balance General Government Primary Balance
  15. 15. 2009-2013: The largest and fastest fiscal adjustment in the last 35 years Note: The cases of fiscal adjustment have been defined along the criteria set by the OECD (OECD Economic Outlook 81, May 2007) * Excluding financial sector support 4.2 3.3 2.8 2.5 1.9 1.8 1.8 1.6 1.6 1.5 1.5 1.3 1.2 1.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 FastestFiscalConsolidation Highest rate of average annual cyclically adjusted primary balance improvement (% GDP per year) 16.6 11.4 9.9 9.6 9.0 8.8 7.6 7.4 6.5 6.5 3.6 3.6 3.3 3.1 0 2 4 6 8 10 12 14 16 18 Greece* Denmark Belgium Germany UK Finland Sweden Portugal* Ireland* Spain* Austria Italy Netherlands France* BiggestFiscal Consolidation Highest scores of cyclically adjusted primary balance improvement (% GDP)
  16. 16. The Greek economy undergoes a period of recession and high unemployment  2013 was the sixth consecutive year of recession with a cumulative decline of the GDP by 25% until today. The Greek economy is expected to return to positive growth rates in 2014  Unemployment has tripled, reaching its peak in 2013 (the labour market adjusts with a lag to the reduction of the GDP). Source: IMF, Staff report 6/2014* Official Projections of the Programme 3.5 -0.2 -3.1 -4.9 -7.1 -7 -3.9 0.6 2.9 3.7 8.3 7.7 9.5 12.5 17.7 24.2 27.3 25.8 23.8 20.9 -10 -5 0 5 10 15 20 25 30 2007 2008 2009 2010 2011 2012 2013 2014* 2015* 2016* GDP growth rate Unemployment
  17. 17. Labour costs and price developments The prices of domestically produced goods and services are decreasing at a lower rate relative to wages. As a result, real incomes are further hurt. Source:Eurostat The reduction of prices does not go hand-in-hand with the reduction of wages, due to:  simultaneous tax hikes which increases production costs  limited competition in markets  rigidities in labour and product markets  delayed realisation that the recession is not temporary  imported goods are used as intermediates, mainly oil -10 -5 0 5 10 15 GDP deflator Nominal unit labour cost
  18. 18. Price developments  Inflation in Greece was persistently higher than the Eurozone average until July 2011.  Deflation started in March 2013, boosting real incomes but negatively impacting the debt to GDP ratio. 2014 is expected to be the last year of deflation. Source:Eurostat -4 -3 -2 -1 0 1 2 3 4 5 6 7 Inflation Euro area (18 countries) Greece
  19. 19. Banking Sector Source: Bank of Greece 60 billion EUR reduction of deposits in Greek banks, during the period 2010-2012 Austerity policies, political instability and fear of possible Grexit lead to the outflow of deposits, thus further reducing the ability of banks to provide credit to the real economy. Return of deposits after the double elections of summer 2013. -17,000 -12,000 -7,000 -2,000 3,000 8,000 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Deposit flows (mil. Euros) Firms and households Total deposits and repos Rumors that the ministers of Finance discuss in Luxembourg the exit of Greece from the Euro 1st Programme Suspension of the review 1st round of elections Agreement for the 2nd Programme
  20. 20. Greece implements structural reforms Source: OECD, Economic Policy Reforms: Going for Growth 2012 Note: The response indicator is based on a score system, according to which every recommendation is assigned value “1” if significant action has been taken during the year following the recommendation; otherwise, it is assigned value “0”. Thus, the indicator is the ratio of the total number of years needed for the implementation of the action, to the total number of years since the recommendation was made. 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 Responsiveness to Going for Growth recommendations across OECD countries, 2011-2012 Responsiveness rate Responsiveness rate adjusted for the difficulty to undertake reform
  21. 21. Structural reforms in implementing the Memoranda of Understanding • Fiscal Consolidation: Medium-term programme, expenditure ceilings for ministries, balanced budgets in local authorities and sanction mechanisms, sanction mechanisms for state-owned enterprises in cases of infringement. • Pension Schemes: Increase of retirement age, pensions are linked to lifetime contributions, streamlining rules for severance payments, revision of list of hazardous occupations and disability criteria. • Health: Integration of insurance funds, electronic prescribing of medication, increased use of generic drugs, claw-back mechanism. • Labour Market: Measures to facilitate flexible forms of work, reduction of businesses’ reporting to the Labour Inspectorate, facilitation of firm-level contracts providing for wages below sectoral agreements, abolition of automatic extension of sectoral collective agreements and reduction of after-effects. • Combating Tax-Evasion: Compulsory electronic submission of income tax declarations, new information systems interlinking tax offices, compulsory rotation of directors of tax offices, semi- autonomous general secretary for public revenues. • Business Environment: Repeal of 30 major barriers to entrepreneurship, simplification of procedures enabling business start-ups in one day. • Public Administration reforms: public sector employment cut from over 950.000 in 2009, to less than 750.000 in 2012 and projected to fall by a further 90.000 (13%) by 2016; introduction of unified wage grid and staffing plans for the entire public sector with evaluation of all employees; establishment of mobility scheme and mandatory exit targets; e-government. • Regulated professions: 74% of restrictions have been abolished in 27 most important occupations/ economic activities.
  22. 22. Recovering cost competitiveness 2009-2013: Full recovery of cost competitiveness lost during the previous decade. Source: Ameco 80 90 100 110 120 130 140 150 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 REER based on unit labour cost relative to 36 industrial countries (2001=100) Greece EU17 Ireland Portugal
  23. 23. Nevertheless, there is still room for price competitiveness Source: Eurostat Although wage costs are declining, prices are affected by tax hikes, high cost of capital and remaining rigidities. 90 95 100 105 110 115 120 125 130 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Real Effective Exchange Rate based on HICP relative to 36 industrial countries (2001=100) Euro area (17 countries) Ireland Greece Portugal
  24. 24. Reduction of External Deficits • Current account surplus for first time in many decades. • The reduction of interest payments due to the PSI, combined with the buy-back of debt, have significantly reduced the external deficit. Source: Bank of Greece -6.5 -5.8 -7.6 -11.4 -14.6 -14.9 -11.2 -10.1 -9.9 -2.4 0.7 -20 -15 -10 -5 0 5 10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 %GDP Current Account (% GDP) Current Account Balance Current Account Balance (excl. oil) Current Account Balance (excl. oil & GG net interests)
  25. 25. Sustainability of external deficit The drop in external deficit is largely attributable to the reduction of imports, due to:  reduced investments  reduced consumption In order to a sustainably reduce external deficit, notable changes are necessary:  increase of exports  substitution of imports with domestically produced products  change of consumption pattern(s) Source: Eurostat BillionEUR 34.3 34.3 31.4 32.3 37.9 38.9 40.5 43.4 44.2 35.6 37.4 37.6 36.8 43,300 52.9 53.5 52.9 54.4 57.5 56.7 63.0 72.1 72.7 58.0 54.5 50.5 43.2 45,606 124.4 129.5 136.3 139.6 144.9 150.4 156.6 163.3 168.0 167.5 156.1 144.9 133.7 140,552 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 National Accounts agreggates(constant prices) Exports of goods and services Imports of goods and services Final consumption expenditure Investment expenditure
  26. 26. Debt impairment • Participation of private sector resulted in reduction of public debt by 107 billion EUR via bond swapping (PSI). • Repurchasing of “new” Greek bonds (buy-back) reduced debt by 20 billion EUR. 0 10 20 30 40 50 60 BillionEUR pre- <PSI 0 10 20 30 40 50 60 BillionEUR post- >PSI Debt Repayment Profile Source: PDMA
  27. 27. Interest payments • Interest payments dropped significantly following the PSI and debt buy-back. Greek banks were affected and needed help by the Greek government to recapitalise.  Pension funds holding Greek government bonds were affected. Low debt servicing costs for the next 8 years (approx. €6 bn. annually or 3 p.p. of GDP vs 4.6% on average for EA periphery peers) Source: Ameco, PDMA PSI 3.9 4.7 6.4 7.9 9.910.110.310.1 9.7 9.3 10.1 9.5 8.7 8.6 9.0 9.0 9.8 10.7 11.911.9 13.2 15.0 9.7 7.2 8.4 9.9 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Interest payments (bn. Euros)
  28. 28. Public debt declines  Greek public debt will start decreasing as a percentage of GDP from 2014 onwards, according to official projections.  Unique characteristics of the Greek public debt: Long average maturity (17 years), low average interest rate (2%), 65% of central government debt owned by the EU official sector. Source: IMF, Staff report 5/2013, PDMA %GDP * Official Projections of the Programme 129 148 170 157 175 174 171 161 152 145 135 0 20 40 60 80 100 120 140 160 180 200 2009 2010 2011 2012 2013 2014* 2015* 2016* 2017* 2018* 2020* Public Debt (% GDP)
  29. 29. Human capital  Greece has well educated human capital -especially at the upper end- at competitive rates.  More than 63% of young Greeks aged 15-24 years participate in education. Source: Eurostat 62.1 65.6 0 10 20 30 40 50 60 70 80 Participation rates in education, (2010, students (ISCED 1_6), 15-24)
  30. 30. Foreign direct investment  FDI will alleviate the tight liquidity constraints and support growth of the Greek economy Hewlett Packard – Central European distribution centre (3/2013) Phillips Morris – European distribution centre (8/2013) Coca Cola – Consumer interaction centre (11/2013) Nokia – Research and development centre (11/2013)
  31. 31. Challenges and risks • Austerity measures have led a significant proportion of the Greek society to misery – risk of disrupting social cohesion is serious. • High rates of unemployment that persist in time and could lead to social upheaval, damage the country’s potential output due to depreciation of human capital, and increase the risk of long-term unemployed. • Delays in important structural reforms, especially in the field of tax administration, with consequent impact on revenues collection, on combating tax fraud as well as on the sense of justice in society (see Social Justice in the EU – A Cross-national Comparison, Social Inclusion Monitor Europe (SIM) – Index Report, November 2014) • Lack of liquidity, which suffocates the real economy, combined with extensive burdening of businesses and households with debts from previous years. • Capacity constraints of the public administration in implementing necessary reforms. • The international economic environment remains adverse, making it harder for Greece to adjust. • Sensitive political balance that gives way to uncertainty regarding the course of the Economic Adjustment Programme. • Inadequate and delayed response to the crisis by the EU and insistence on a model of austerity. • Deflation: although it supports real income and enhances competitiveness, it also has a negative impact on debt  According to official projections, 2013 can be the year when Greece starts overcoming the recession and crisis, as long as necessary conditions are met. However, uncertainties still exist.
  32. 32. Looking into the future  Greece needs a new growth model.  For sustainable growth, the new model needs to be based on robust investments – rather than on consumption and borrowing, which was the case until today!  Broad social and political consensus have to be ensured, so as to allow Greece to consistently plan and implement a new strategy, and to guarantee the long-term prosperity of the country.  The Greek society must also realise the need to change mentality, as well as to support the structural reforms (for which there is broad consensus).
  33. 33. Annex: Latest developments Performance in 2013 better than expected: • -3.9% GDP growth compared to expected -4.2%; • 0.7% GDP surplus in the Current Account compared to an expected -0.8%; • Unemployment rate has been declining over the last three months of the year, after more than three years of constant increases; • General Government balance -3.2% of GDP compared to a target of -4.1%; • General Government primary surplus 0.8% of GDP compared to a target of 0%; • 10-year bond yields declined by 298 bps in 2013; • €6 bn. of public sector expenditure and tax refund arrears to private enterprises and households cleared.
  34. 34. Annex: Latest developments Performance in 2014 is also promising: • -0.3% GDP growth in Q2 2014 compared to -4.0% in Q2 2013; • € 567 million Current Account surplus in Jan-July 2014, compared to € 398 mn. in Jan-July 2013; • Unemployment rate remains on a decreasing path (2.4 p.p. cumulative decline since peak); • GG deficit -0.8 bn Euros in Jan-July 2014, compared to -2.7 bn Eurosin Jan-July 2013; • GG primary surplus € 3.2 bn in Jan-July 2014, compared to € 1.7 bn in Jan-July 2013; • 10-year bond yields declined further by 255 bps; • In April, i.e. four years after having no access to the international capital markets, the Greek sovereign raised €3 billion at a coupon rate of 4.75%, through the sale of 5-year bonds that was almost seven times oversubscribed; • Further issuance of €1.5 bn in 3-yr paper in July (3.38% coupon), plus another €1.7 bn (5- yr and 3-yr) in exchange for T-bills in September; • In Q1 2014, the four systemic banks raised additional capital worth € 8.5 bn., comfortably in excess of the needs identified by the supervisor (€ 6.4 bn.), whereas two of them have issued medium-term bonds for the first time since 2009, in order to boost their liquidity.

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