BoG gov. Stournaras: “We should preserve the achievements and sacrifices of the last decade”

A message to the political forces of the country for prudence and responsibility with the aim of maintaining the climate of confidence in the prospects of the Greek economy, which is a condition for the return to investment grade, is sent by the governor of the Bank of Greece, Giannis Stournaras, a few weeks before the upcoming parliamentary elections .

Speaking to “Vima” newspaper, he noted that in this way what the country has achieved so far, as well as the sacrifices of the previous period, will be preserved for the benefit of future generations.

The country has entered a pre-election period. Do you want to send a message to political staff about the economic recipe the next government should follow?

“Greece is trying to establish its credibility with the international investment community due to the debt crisis of the previous decade. Therefore, the continuation of credible economic policies, particularly in the area of fiscal policy, and the safeguarding of the important achievements of past reform efforts must be the beacon that will guide us through the troubled waters of the new economic reality characterized by successive and multi-layered crises, such as those we experienced recently (health crisis, war in Ukraine, energy crisis, etc.). Therefore, prudence and responsibility of the political forces as well as support of the national goals are required in order to maintain the climate of confidence in the prospects of the Greek economy. Policymakers should agree to implement the key economic policy commitments, so as to preserve what the Greek economy has achieved in the last decade and the sacrifices of the previous period for the benefit of future generations.”

Analysts link Greece’s return to investment grade with political stability and continued reforms. When do you think the upgrade might come and under what conditions?

“The goal of returning to the investment category is completely achievable for 2023. The expected achievement of a primary surplus, the better than expected performance of the Greek economy, the continuation of reforms, the reduction of the stock of non-performing loans and the improvement in the structure of the public debt significantly contribute to this. Inevitably, meeting key economic policy commitments is facilitated in an environment of political stability, something that rating agencies take into account, but the fact that the economy has shown exceptional resilience in the face of significant international shocks, while promoting important reforms. Of course, in the final evaluations, the houses also take into account certain quality factors. For example, in the current tightening environment of monetary and financial conditions they have already signaled that the number of downgrades internationally will be greater than the number of upgrades. So the forecasts for the performance of the economy should first be confirmed before the upgrade to the investment category takes place.”

What will be the benefits for the Greek economy from this development?

“The upgrade of the Greek economy to the investment category will signal the eligibility of government bonds from large institutional investment funds whose portfolios are structured in an overwhelmingly large percentage of bonds issued by issuers of this category. Thus, the immediate benefit is expected to be the large expansion of the investment base, which will strengthen the resilience of Greek bonds to exogenous disturbances and incidents of volatility. The importance of resilience was seen recently in the episode of volatility after the US bank collapse, when yields on Greek government bonds fell, suggesting they were a “safe haven” for investors, like other eurozone government bonds. At the same time, the upgrade of the credit rating of the Greek State will provide the possibility for a gradual upgrade, in the investment category, of the banks and also of large Greek companies that issue bonds in international markets. Such an eventuality will further strengthen the resilience of the Greek economy, will limit the cost of raising capital for the public and private sectors and will facilitate the realization of investments”.

What is your assessment of the course of the Greek economy and inflation in the coming two years?

“The Greek economy registered a growth rate of 5.9% in 2022, considerably higher than that of the Eurozone which recorded 3.6%. In 2023, according to the basic projection scenario of the Bank of Greece, growth in Greece is expected at 2.2%, while in the Eurozone it is estimated that it will fluctuate close to 1%. The forecast for a lower growth rate compared to that of 2022 is linked to the expected slowdown in economic activity in the eurozone, the tightening of monetary policy and the lifting of fiscal support measures for households and businesses adopted due to the pandemic and the energy crisis. In 2024, the growth rate of the Greek economy is expected to reach 3% under the following conditions: the geopolitical crisis de-escalates, energy prices continue their downward trend and the tightening of monetary policy by the ECB does not leave permanent scars in the eurozone economy. In the medium term, the prospects for the course of investments are particularly favorable, despite the increase in interest rates, due to the financing from the available European resources, i.e. from the Recovery and Resilience Fund and from the NSRF 2021-2027. In addition, in this period, on top of the increase in investments in monetary terms, their qualitative upgrade is also foreseen, given that an increasingly large percentage will concern infrastructure (especially in the production of green energy) with a high added value. As for inflation, based on the Harmonized Index of Consumer Prices, it was particularly high in 2022, at 9.3%, mainly due to the upward trend in the prices of energy goods but also food prices. A gradual slowdown is expected in 2023, to 4.4%, and 2024, to 3.4%, mainly due to falling energy commodity prices and negative base effects. In contrast, inflation in food items, non-energy industrial goods and services is expected to contribute incrementally to inflation dynamics due to the persistence displayed by these categories.

The crisis that erupted after the bank failures in the US quickly spread to Europe, highlighting the ever-present risks to financial stability. What are the defenses of Greek banks in the current conditions of uncertainty?

“Both Greek and European banks have sufficient capital and liquidity reserves and are in a much better position than in the past to deal with shocks such as those we have experienced recently. Greek banks in particular have made huge strides in recent years and have significantly shielded their balance sheets. I would also like to point out the high-quality supervision of the banking sector in Greece and the eurozone, which contributes to ensuring financial stability.”

The banks achieved a net profit of 3.6 billion euros in 2022. However, as you have highlighted several times, their organic performance should improve. What is your position today?

“The banks did indeed achieve significant profitability in 2022, but most of this was one-off and non-recurring income. At the same time, however, banks were positively affected in the second half (and especially the fourth quarter) by the increase in interest rates, as the interest margin on both new and existing loans widened significantly. Necessary factors that will make banks’ profitability sustainable in the coming years are the further increase of bank assets, mainly through credit expansion, the diversification of revenue sources, the additional improvement of cost efficiency and asset quality. I am optimistic that under these conditions the banks are able to achieve significant returns for their shareholders and organically strengthen their own capital.”

Two systemic groups have submitted a request to the SSM to reward their shareholders through dividends and share buyback programs. Do you think the time is right for this or do the times call for more defensive policies?

“The distribution of dividends or share buyback programs have a special meaning for Greek banks and signal a return to normality. However, given the recent turmoil in the banking system worldwide and the challenges posed by the current economic environment, amid a tightening of monetary policy, prudence in dividend policy and “building” sufficient capital margins is recommended.

Interest rates and inflation – “We are very close to the end of the cycle of increases”

Interest rates in the eurozone have risen significantly since last summer. When do you think monetary policy tightening will stop?

“Indeed, we have already covered most of the interest rate hike necessary to tame the rate of increase in prices. According to recent data and the ECB’s latest forecasts, inflation is expected to continue to decline in the coming period. As this reduction will be achieved, approaching the medium-term target of 2%, a gradual de-escalation of interest rates will become possible. However, many factors continue to affect the economic environment and uncertainty remains high. Our future decisions at the ECB Governing Council on policy rates continue to be determined based on the outlook for inflation, assessing economic data and financial developments, with a view to safeguarding financial stability. While the end point of the growth cycle is difficult to determine in time, I believe we are very close. This is supported by both the significant de-escalation of inflation compared to October 2022 and the outlook for inflation in the medium term, as the effects of our policy tightening become even more visible.”

What do you think will be the effect of rising interest rates on banks’ asset quality?

“Undoubtedly, the rise in interest rates combined with high inflation affects the majority of borrowers with variable rate loans and especially vulnerable households. In a basic scenario we expect a negative impact on the asset quality of Greek banks. However, this impact will be limited, given the resilience of businesses, but also the measures taken by the banks and – in particular – the state to strengthen the real economy and the weaker sections of society.”

The government is in discussions with bank managements to design relief solutions for borrowers hit by rising rates. How do you think bank customers can be supported given the regulatory constraints?

“I will start with the last one, namely the supervisory restrictions. It is a fact that after the global financial crisis of 2008-09 the supervisory framework for non-performing loans became extremely strict. At the same time, it is worth noting that Greek banks have made huge progress in improving their asset quality (down from the historically high levels of March 2016 by 88% or €95 billion). Already the four important banks have a single-digit ratio of bad loans with a tendency to further converge towards the average of the Eurozone banks. It is understood that borrower relief solutions will have to meet specific criteria, i.e. be within the supervisory frameworks and not derail the effort that has been made to date to consolidate the banks’ balance sheets. In this light, the measures announced by the banks to support vulnerable borrowers (especially after the recent expansion of the relevant criteria by the government) are in the right direction, while any additional measures should be guided by the above Criteria”.

And one last question… The increase in borrowing costs also makes new financing more expensive. Do you expect demand to decline because of this in 2023?

“Recent increases in policy rates continue to feed through to domestic corporate and household borrowing rates. Despite all this, the annual growth rate of business loans accelerated significantly during 2022. According to the results of the Bank Lending Survey conducted by the Bank of Greece as a member of the Eurosystem, the demand for business loans in Greece continued to strengthen throughout duration of 2022, supported both by the needs of businesses for working capital and by the necessity of financing fixed investments. In another field survey, the SAFE survey on Greek SMEs’ access to finance, conducted by the ECB in cooperation with the EU, for the period April – September 2022, SMEs in Greece reported an improvement in the availability of bank credit and a shrinking of the financing gap they face. However, the expected slowdown in GDP growth in 2023 is expected to have a negative impact on the demand for new loans. However, it should not be overlooked that economic activity in Greece will continue to strengthen at a remarkable rate in the coming years. The outlook remains strong especially if combined with the achievement of investment grade. In addition, at least until 2026, a significant boost to investment, support to domestic bank financing and containment of the financing costs of domestic enterprises will ensure the loans of the Recovery and Resilience Fund (RRF), as well as other financing tools by leveraging resources of the new NSRF (2021-2027)”.