description
stringlengths 27
553
| text
stringlengths 0
341k
⌀ | bank
stringclasses 118
values | Year
int64 2k
2.03k
| Month
int64 1
12
|
|---|---|---|---|---|
Speech by Mr Theodoros Mitrakos, Deputy Governor of the Bank of Greece, at the 38th meeting of the Central Bank Governors' Club of the Central Asia, Black Sea Region & Balkan countries, Bank of Russia, Moscow, 29 September 2017. | Theodore Mitrakos: Normalisation of the monetary policy of major central banks and possible implications for the Club members' economies - the case of Greece Speech by Mr Theodoros Mitrakos, Deputy Governor of the Bank of Greece, at the 38th meeting of the Central Bank Governors' Club of the Central Asia, Black Sea Region & Balkan countries, Bank of Russia, Moscow, 29 September 2017. * * * It is a great pleasure for me to be here with you today and have the opportunity to exchange thoughts on the potential impact of the normalisation of monetary policy in our respective economies. My intervention comprises three parts. Part I provides an overview of non-standard monetary policy measures across the major central banks and looks at alternative paths to the normalisation of monetary policy. Part II sketches the benefits for Greece from the accommodative monetary policy. Part III presents the recent economic developments in Greece and some thoughts on the potential impact of monetary policy normalisation. Part I: Normalisation of monetary policy across the major central banks I.1 An overview of non-standard monetary policy measures It has been almost 10 years since major central banks were forced to confront a worldwide financial crisis that ushered them into a new world of central banking. In response to the extraordinary environment, central banks have engaged in a range of ambitious unconventional/non-standard monetary policy measures, unprecedented in nature, scope and magnitude, including: large-scale asset purchases of government and private sector assets; near-zero or negative policy rates; forward guidance on both. Asset purchases have resulted in a huge expansion of central bank balance sheets. Since the onset of the crisis in 2007, the Bank of England’ s (BoE) balance sheet has grown seven-fold; the Federal Reserve’s (Fed) five-fold, while that of the European Central Bank (ECB) has more than tripled. Combined, the balance sheets of the Fed, the Bank of England and the ECB now exceed $15 trillion, equivalent to almost 45 percent of their GDP. 1/9 BIS central bankers' speeches 2/9 BIS central bankers' speeches I.2 ECB measures: Quantitative easing and other programmes The European Central Bank (ECB) began its large-scale purchases of assets later than its peers. In March 2015, the ECB increased the degree of monetary policy accommodation by adding public sector securities to its purchase programmes (PSPP), which at the time encompassed covered bonds (CBPP3) and Asset-Backed Securities (ABSPP). In 2016, the programme was extended to include corporate bonds (CSPP). Purchases of marketable debt instruments through the expanded asset purchase programme (EAPP) amounted, at the end of August 2017, to € 2.1tn. The largest part (€ 1.7 tn) is attributed to the public sector purchase programme (PSPP), while the amounts attributed to the third covered bond purchase programme (CBPP3), the corporate sector purchase programme (CSPP) and the asset-backed securities purchase programme (ABSPP) stood at € 227 bn, € 107 bn and € 24 bn, respectively. Furthermore, to stimulate bank lending to the real economy, the ECB also conducted a series of Targeted Longer-Term Refinancing Operations (TLTROs). The take-up in the two series of the TLTRO operations has also been significant: total TLTRO drawings from euro area banks now stand at about €760 bn. Looking at the breakdown of debt securities under PSPP by country, 60% of the cumulative monthly net purchases are accounted for by Germany, France and Italy. Also, around 11% of total purchases concern supranational bonds. Regarding the effectiveness of the ECB stimulus programmes, they have: - Contributed to a robust and rather broad based recovery: Eurozone growth is projected to reach 2.2 percent this year, its fastest rate in 10 years. Economic expansion has been ongoing for 17 consecutive quarters. The recovery is having a profound effect on the labour market: around 6.4 million jobs have been created since 2013. - Added strong downward pressures on financing costs Rates have fallen steeply across asset classes, maturities and countries, as well as across different categories of borrowers. - Lowered cross-country heterogeneity Dispersion of GDP and employment growth rates among euro area member states have fallen to record lows. Nonetheless, the economic recovery has yet to translate into higher inflation: Euro area inflation has undershot 2 percent for the fifth consecutive year. It is expected to continue to undershoot the ECB target for some time — possibly through 2019. Measures of underlying inflation remain overall subdued and have yet to show convincing signs of a pick-up. The stronger euro is also exerting downward pressure on consumer prices. Since the start of the year, the euro has risen by about 14 per cent against the dollar. 3/9 BIS central bankers' speeches I.3 Alternative paths to normalization and potential impact Overall, the policies aiming to contain deflationary pressures have been effective in stabilising the financial system and thereby preventing a deep economic downturn. Some ten years later, the world economy has entered a synchronised growth phase. All three of the world’s economic powerhouses – North America, Europe and China – are growing in unison. With the global recovery firming up and global inflation rising, some major central banks might now be looking to gradually reverse course. The key challenge for monetary policy is how to unwind this accommodation in the least disruptive manner in terms of inflation, output and financial market stability. In terms of the broader alternative strategies to normalisation, the following paths could be envisaged: First seeking to guide policy rates higher, before initiating downward balance sheet adjustments (as in the United States); Starting to downsize the balance sheet before initiating a tightening of interest rates; Undertaking both in tandem. The sequence in the implementation of balance sheet and interest rate measures, as well as the relative weights, could have a differing impact on the domestic economies, as well as crossborder spillovers, including through exchange rates and other financial channels. Looking at specific central banks, the continued discrepancy between strengthening economic activity and subdued inflation dynamics poses a puzzle for the monetary policy of the ECB. In the absence of sufficient evidence of progress towards a durable and self-sustaining convergence in the path of inflation, a scaling-back of the exceptional degree of monetary policy accommodation is not warranted. Deliberations on the future course of the ECB monetary policy are ongoing, especially regarding considerations about its asset purchase strategy beyond December 2017. Adjustments in the monetary policy stance should be prudent and gradual, so as to ensure that any withdrawal of stimulus does not undermine the recovery amid the lingering uncertainties. In this vein, clear and timely communication of the Governing Council’s assessment is of utmost importance. Given that markets can be sensitive to incoming information, timely communication is key to avoiding an extreme reaction, or “taper tantrum", as experienced following the first announcements by the FED that it would taper its QE purchases back in 2013. The recent experience warrants caution. Even hints at policy normalisation may cause an unwarranted tightening in financial conditions, as evidenced by the market movements after the speech of President Draghi in Sintra on 27 June 2017. Across the Atlantic, the Federal Reserve, has advanced in normalisation with four rate rises in 18 months, which have brought the target rate on the federal funds to 1.25 per cent, from a target of 0-0.25 per cent in the seven-year period to December 2015, and an announcement to cautiously start the normalisation of its balance sheet already in October this year.. Despite the – somewhat reluctant– tightening of the Fed, the US monetary policy could actually be assessed as still being rather loose. The global capital flows from the emerging markets that are invested in the US contribute to this easing. Turning now to the Bank of England, in the aftermath of the Brexit referendum (summer 2016), the Bank cut its interest rate to a record low of 0.25% after more than 7 years of static interest rates. It also boosted its QE scheme, while committing extra funds to encourage banks to lend. The rhetoric however has become more aggressive over the past few months, notably due to 4/9 BIS central bankers' speeches surging inflation – brought on by the weakened pound since the referendum – despite a slowdown in the economy as the country prepares to leave the European Union. With respect to normalisation strategy, the Bank of England has in the past given indications that rate rises would precede any asset sales. According to Governor Carney back in 2013, the first move would be to tighten conventional monetary policy, for some time, or to some degree, before considering adjustments to the size of the balance sheet. Overall, in the context of the ongoing global economic recovery, the major central banks can adjust the parameters of their policy stance at a rather small cost in terms of market disruption/dislocation. As markets anticipate the first tightening steps from the major central banks, a channel that is likely to show some volatility is the exchange rate channel. This adds to uncertainty, as –among other things- it has implications for the medium-term outlook for price stability. In addition, a possible overshooting in the foreign exchange market could lead to fluctuations in the trade imbalances, including those of the euro area. The outcome of the normalisation process is likely to be determined by the interplay and the relative stance of the policies of major central banks as they move towards a less accommodative stance in the coming years, as well as by several structural features of the different economies. In any case, appropriate communication is vital to limiting any possible disruptions in the markets. Part II: The benefits for Greece from the accommodative monetary policy In Greece, the transmission mechanism had become fragmented and the accommodative monetary policy was not being transmitted fully. In part, the transmission problems reflected the significant liquidity squeeze that Greek banks experienced as they lost access to international markets and found the value of their collateral falling, as yields on Greek government bonds rose and collateral rules were tightened on a number of occasions. Furthermore, given the specific circumstances prevailing in the Greek economy, Greek government bonds are not eligible for the the purchase programme of public sector securities (PSPP ). Purchases of Greek private sector assets that could, in principle, be eligible for the Covered Bonds, ABS and Corporate Sector purchase programmes have so far been close to zero due to constraints relating to the rating of the available assets. Nonetheless, Greece benefited indirectly. Positive spillovers from the accommodative monetary policy have been at play, and have worked through various transmission channels: The signalling channel: forward guidance by the ECB to maintain low interest rates and purchase assets into the future has helped lower overall interest rates that influence the financing cost of businesses and households. The portfolio rebalancing channel: the sellers of sovereign bonds to the ECB may replace these bonds with other securities (for example debt of other sovereigns or bank / corporate debt) resulting in lower yields for a broader range of riskier assets not participating in the programme. This includes Greek assets, and is illustrated by the recent successful issuance of a Greek government bond as well as of bonds of several corporates. The confidence channel: the decisive and unprecedented interventions across markets by the ECB improved confidence in the sustainability of the euro area, leading to a steep decline of tail risks. By safeguarding the euro, the policies have provided an anchor of economic as well as social stability in Greece. Specifically, Greece benefited from: Low interest rates and forward guidance have served the Greek banks and the Greek economy. Besides the regular monetary policy operations, Greek banks also participated in the TLTROs (targeted longer-term refinancing operations) incentivising banks to lend to the real economy. TLTROs also ensure the provision of liquidity at very low interest rates over long 5/9 BIS central bankers' speeches periods of time, thereby safeguarding the stability of the financial sector. Furthermore, Greek banks obtained liquidity through the ELA mechanism, thus preserving financial stability and avoiding disruptions of the transmission mechanism in times of stress. The aforementioned monetary policy measures were reflected in the evolution of the Bank of Greece balance sheet. Regular monetary policy and ELA refinancing and, more recently, its holdings of assets in the context of the EAPP (Expanded Asset Purchase Programme) have accounted for the bulk of the increase in the Bank of Greece balance sheet. It should be noted that the Bank of Greece purchases securities from supranational organisations in the context of the PSPP and securities of other euro area countries in the context of the CBPP3 according to its capital key. Based on the latest figures (August 2017), the securities held for monetary policy purposes by the Bank of Greece amount to around €55 bn. In July this year, the balance sheet was four times its pre-crisis level, after having grown almost fivefold in February 2012 and again in June 2015 following the two episodes of strong volatility in markets. Part III: Recent economic developments in Greece and the potential impact of monetary policy normalisation III.1 Greek economy: Recent developments and prospects Confidence about Greece’s economic prospects in general, and about the Greek banks in particular, has been gradually restored. This is reflected in the following: Successful return of the sovereign to the markets with the issuance of a new 5-year government bond. A sharp decline in the Greek government bond yields and their spread versus core countries’ bonds, while the slope of the Greek Government Bonds yield curve turned positive and became steeper, implying improved investor perceptions for the outlook of the Greek economy — in line with the assessment of the rating agency Fitch which upgraded the rating of Greece — as well as a repricing of risks. Improvement in the liquidity conditions of Greek banks, as banks have improved their access 6/9 BIS central bankers' speeches to the interbank market, while deposits show signs of improvement. This is illustrated by banks’ declining recourse to central bank funding (including to ELA) in the past two years. Improved bank profitability and comfortable capital adequacy ratios. Lower bank lending rates for firms, and slower deleveraging of banks’ loan portfolios. Improved external financing conditions, as bank credit to non-financial corporations (NFCs) has stopped declining since early 2016 and market financing of NFCs has increased. These are positive signs that Greek companies are gradually getting access to market financing. This can substitute for part of the lack of bank credit and help finance investment. The improved confidence in the Greek economy and the banking system allowed for significant relaxations of the capital controls in place since June 2015, and is evident in the increase of private deposits by about € 6 billion since then. Following a prolonged period of recession, the Greek economy has once again a real chance to embark on a new growth path (see Figure 4). After the headwinds at the end of 2016 due to delays in the implementation of the adjustment programme, the economy moved into expansionary territory in the first two quarters of 2017, with real GDP growth amounting to 0.4% y-o-y and 0.8% y-o-y, respectively. The completion of the second review in June 2017 allowed the positive momentum to continue. Recent soft data indicate a rebound in confidence. Economic sentiment continued to increase in August (to 99) on the back of an improvement in consumer confidence which reached a two-year high, as well as in business expectations in the services sector. The Manufacturing PMI has been in expansionary territory in the last three months, remaining above the threshold of 50; notably, in August the PMI reached an 8-year high (52.2), signalling strong growth in the Greek manufacturing sector. Following these developments, it is expected that for the whole of 2017 GDP will rise by around 1.7%. The prospects for 2018 and 2019 are also positive, with GDP growth being projected at 2.4% and 2.7%, respectively. On the employment side, over the past three years the private sector has been creating on average more than 100,000 new jobs per year, while the employment sub-index of the PMI in August suggested a record increase in employment (the highest since May 2002). However, the unemployment rate, although on a declining trend, still remains very high (June 2017: 21.1%). Turning to prices, deflationary pressures were contained in 2016, while in the first seven months of 2017 prices recorded a mild increase. Over the period 2017 to 2019, inflation is expected to be around 1%. 7/9 BIS central bankers' speeches The abovementioned outlook is subject to both downside and upside risks: Some downside risks to the economic outlook relate to delays in the conclusion of the third review of the adjustment programme, the impact of increased taxation on economic activity and reform implementation, and the effect from global geopolitical uncertainty. On the other hand, upside risks are related to a quick completion of the third review, the further and sustainable access to international markets and the final exit from the programme in a year’s time. Finally, the debt relief measures to ensure sustainability of public debt must be specified as soon as possible, eliminating possible new sources of uncertainty. This would facilitate access to international financial markets in a sustainable way and would help towards abolishing capital controls and returning to financial normalcy. Postponing the decision on debt relief further down the road does not serve the purpose of a sustainable comeback to financial markets and a sustainable recovery of the Greek economy. III.2 Potential impact of monetary policy normalisation on the Greek economy The continuation of the highly accommodative monetary policy stance in the euro area fosters an economic environment conducive to growth. However, given that the channels through which the non-standard measures were transmitted to Greece were either indirect or related to sentiment, the impact of normalisation can be expected to be smaller in Greece than that in other countries of the euro area. Indeed, financial conditions have recently been improving in Greece, as government bond yields have fallen, banks and nonfinancial companies have regained market access, and deleveraging has slowed. A tightening of the monetary stance of the ECB is unlikely to stand in the way of continued improvements in 8/9 BIS central bankers' speeches financial conditions. Moreover, the Greek economy has already entered a phase of accelerating growth, and this should also help limit the detrimental effects of normalisation. One possible channel through which normalisation might affect growth is via exchange rate fluctuations exerting a negative impact on exports. The effect of exchange rate fluctuations cannot be quantified at this stage. The extent to which we are likely to see a strong appreciation of the euro will depend on the pace of normalisation in the euro area relative to the pace of normalisation in other countries. The fact that around half of Greek exports are to non-euro area countries does imply that the exchange rate matters. However, the potential negative impact will be mitigated by the positive dynamics that have developed over the past years, as bold reforms in the labour and product markets helped to restore competitiveness, supporting the share of exports in GDP, and the rebalancing of the economy towards tradable, export-oriented sectors. Thank you very much for your attention. 9/9 BIS central bankers' speeches | bank of greece | 2,017 | 10 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event organized by Credit Suisse, Athens, 11 October 2017. | Yannis Stournaras: Greece and the global economy - prospects and main challenges ahead Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event organized by Credit Suisse, Athens, 11 October 2017. * * * Ladies and Gentlemen, It is a great pleasure for me to be here with you tonight and have the opportunity to share my thoughts on the prospects for the Greek economy against the backdrop of brighter prospects for the global and euro area economy. I will focus on the following issues: First, I will say a few words about the international environment. Second, I will present the progress that has been made in Greece since the start of the crisis. Third, I will discuss the outlook for the economy and outline the main risks and remaining challenges that must be addressed. Fourth, I will discuss the preconditions for a sustainable recovery of the Greek economy. Finally, I will make some remarks about the need to improve the EMU architecture. 1. The international environment The global economy is maintaining a solid pace of expansion. Business and consumer confidence indicators suggest that sentiment remains upbeat, while financial conditions in advanced economies remain supportive, underpinned by accommodative monetary policies. Financial markets in emerging market economies remain resilient and capital flows towards these economies are robust. Looking ahead, global economic activity is expected to accelerate moderately. Improving activity in advanced economies is underpinned by monetary and fiscal policies. In emerging market economies, growth is expected to remain resilient in commodity importers, while activity in commodity exporters will bottom out after deep recessions in these economies. World trade is projected to expand in line with global activity over the medium term. Nevertheless, there are several medium to long-term challenges affecting the prospects of the global economy. First, productivity growth has slowed across advanced, emerging market, and low-income countries at a time of significant innovation and technological change. Second, income inequality has increased in advanced economies, leading to growing dissatisfaction among electorates and a sharp swing in sentiment against globalization. Third, the generally low level of global inflation and wage growth, especially in advanced economies, is linked, inter alia, to globalization, labour market slack and labour’s weakened bargaining position, the growing importance of services, increases in labour supply and more work of a temporary and part-time nature. These, difficult to predict, changes have affected the position and the slope of the Phillips curve in these economies, that is the relationship between labour market slack and inflation, and pose a number of dilemmas for monetary policy. These dilemmas would have been lighter if other policies, such as fiscal policy and structural reforms, had been more responsive to the needs of the real economy. Closer to home, the economic expansion in the euro area is continuing and becoming increasingly resilient. The euro area economy has enjoyed 17 consecutive quarters of growth, and the latest data indicate continued momentum in the period ahead. The accommodative monetary policy stance is supporting domestic demand. Employment growth and the slight increase in employee compensation are supporting households’ disposable income. These, coupled with increasing household wealth, are benefiting private consumption. The recovery in investment is supported by improvements in corporate profitability and the very favorable financing conditions. Buoyant foreign demand supports euro area exports, though the recent appreciation of the euro represents a source of uncertainty for the overall contribution of net trade to economic growth. 1/9 BIS central bankers' speeches Headline inflation is expected to decline in the short term, driven mainly by base effects in the energy component. Looking further ahead, headline inflation is expected to remain clearly below a level that is consistent with the ECB inflation aim over the next two years, averaging 1.5% in 2019. Furthermore, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability. Developments in core inflation still do not show convincing signs of a sustained upward trend. For this reason, the Governing Council of the ECB has recently confirmed the need for monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2%. 2. Progress since the start of the crisis Let me now turn to Greece. Since the beginning of the sovereign debt crisis, Greece has implemented a bold programme of economic adjustment that has eliminated fiscal and external deficits and improved competitiveness. The general government balance turned into a surplus of 0.7 percent of GDP in 2016 from a deficit of 15.1 percent of GDP in 2009. Between 2009 and 2016, the primary balance (according to the programme definition) improved by about 14 percentage points. In 2016 the primary surplus was close to 4.0 percent of GDP outperforming significantly the target of 0.5 percent. This represents one of the largest fiscal adjustments ever undertaken by any country. Based on this progress, on 25 September 2017, the European Council repealed its 2009 decision on the existence of an excessive deficit. For 2017 it is projected that the primary balance target of 1.75 percent of GDP will be reached with a safe margin. The current account deficit as a percentage of GDP has fallen by 15 percentage points since the beginning of the crisis, with the current account effectively being in balance over the last two years. Labour cost competitiveness has been fully restored and price competitiveness is almost back at its level of 2000 and can be expected to continue to improve with the implementation of further product market reforms that raise competition in various sectors of the economy. It is worth noting that this has been achieved through the painful process of internal devaluation, that is, through outright reductions in nominal wages and salaries. At the same time, a bold programme of structural reforms has been implemented covering the pension system, the health system, labour markets, product markets, the business environment, public administration, the tax system and the budgetary framework. Its implementation, alongside the privatization and real estate development programme, is on-going. Finally, the banking system has been restructured and consolidated. Significant recapitalization, following stringent stress tests along with in-depth asset quality reviews, now ensures that Greek banks are among the best capitalized in Europe. This fact, along with an NPE coverage ratio of 47 percent and good collateral will play a considerable role in allowing banks to address the pressing issue of the stock of non-performing loans. In addition, significant institutional reforms have been initiated aiming at providing banks with a variety of means of reducing non-performing loans. As a result of these efforts, the economy has already started to rebalance towards tradable, export-oriented sectors. A few numbers are indicative of this trend: 2/9 BIS central bankers' speeches First, the share of exports of goods and services in GDP increased from 19% in 2009 to 30.2% in 2016 with most of this increase stemming from exports of goods. In fact, according to Eurostat data, Greece’s exports of goods have increased by 43% since 2009 in real terms, compared to 42% for the euro area and 47% for Germany, Europe’s export engine. Second, between 2010 and 2015, the relative price of tradables versus non-tradables rose by about 10%. As a result, the relative size of the tradables sector, measured by Gross Value Added, grew by approximately 12% in volume terms and by about 24% in nominal terms. Finally, in terms of employment, the size of the tradables sector increased relative to the non-tradables sector by around 8%. Whereas both sectors have been hit hard by the recession, tradables have performed better than non-tradables as outward-looking companies increased their exports, taking advantage of the improvement in competitiveness. Overall, this increased openness implies that Greece is better placed to take advantage of improved global growth prospects. 3. The short and medium term outlook of the Greek economy The economic recovery continues and growth is gathering pace following the completion of the second review and the positive impact it had on confidence and liquidity. The consolidation of growth dynamics is reflected not only in GDP figures, but also in the improvement in various short-term indicators: Following the rebound of economic activity in the first quarter of 2017, real GDP increased at a faster rate in the second quarter. Positive drivers of growth were exports of goods and services, government consumption and private consumption, while gross fixed capital formation declined, mainly due to the significant fall in disbursements from the Public Investment Programme. Industrial production performed exceptionally well in the first eight months of 2017. Retail sales volume in the first seven months of 2017 increased. Employment has been growing at healthy rates since mid-2014 despite the stagnation of economic activity. The rebound is largely driven by greater job-market flexibility due to past structural reforms. As a result, the unemployment rate has now fallen to just above 21 percent, down from its peak of over 27 percent. The improved outlook for the economy and the completion of the second review contributed to the decline in Greek government bond yields to late-2009 levels and facilitated the return to international markets on July 25. Moreover, the slope of the yield curve steepened, implying improved investor perceptions for the outlook of the Greek economy. Corporate bond yields have also fallen to historically low levels. Finally, Fitch recently upgraded Greece’s credit rating on account of the sustained recovery and the decline in political risk. On top of the above, the following developments are worth highlighting: The successive reductions in the ELA ceiling, the increase in deposits, FDI inflows and the rise of soft data indicators like the PMI and economic sentiment. At the same time, there has been progress since the beginning of the year in the area of banks’ Non Performing Exposures (NPE). At end-June 2017, the stock of Non-Performing Exposures (including off balance sheet items) was 3.2% lower than at end-December 2016. Following the pattern of previous quarters, the outflow of NPEs coming from collections, liquidations and sales of loans was rather limited. Instead, the key driver for the reduction in the stock of NPEs over the past quarter has been loan write-offs, especially in the business and 3/9 BIS central bankers' speeches consumer portfolios which reached €3.3 billion for the first half of 2017. Finally, there is progress in reforms despite the recurrent delays in programme implementation. According to a recent Lisbon Council report (EuroPlus Monitor, September 2017 Update), Greece is still ranked first among the 28 countries of the European Union on the basis of the Adjustment Progress Indicator . This implies that Greece has put the worst of the first half of 2015 slippage behind it and has started to improve again. 3.1 Growth forecasts for 2017–2019 Overall, in 2017 the Bank of Greece estimates that GDP will increase by approximately 1.7%. For 2018 and 2019, growth is projected to accelerate to 2.4% and 2.7% respectively. Consumption is expected to rebound modestly, driven by robust employment which is recovering faster than output on account of the previously implemented labour market reforms and the active labour market programmes in place. Investment is projected to increase as confidence is restored and financial conditions improve. Exports are projected to continue their positive trend, benefiting not only from the benign global economic outlook but also past improvements in cost competitiveness. These projections are based on the assumption that the reform and privatization programme will be implemented smoothly and according to the set timetable. 4. Risks and major challenges ahead Despite the positive signs that are being recorded today and the progress achieved, there are still downside risks to the outlook of the Greek economy. The most significant and immediate risk is a delay in the completion of the third review of the programme. This should be avoided as it would fuel a new cycle of uncertainty that would lead to the suspension of investment plans, it would delay the repayment of government arrears and would not facilitate a normalization of financial conditions. In such a case economic recovery and the return to international financial markets will prove to be short-lived. In addition, there are significant external risks associated with the strengthening of the euro and the likelihood of economic growth slowing in the euro area. There are also significant geopolitical risks that could increase the risk aversion of international investors as well as exacerbate the refugee crisis. Besides the downside risks, there are also upside opportunities related to the inclusion of Greek sovereign debt in the ECB’s quantitative easing programme (QE), which will improve liquidity and confidence and will result in a more benign than currently projected economic outlook. 4.1 Medium and long-term challenges In addition to these risks to the recovery, there are also some medium to long-term challenges that need to be addressed in order to strengthen the positive outlook. In particular, The currently high long-term unemployment increases the risk that human capital is destroyed, affecting long-term potential growth. Potential growth is also negatively affected by the emigration of young and highly-qualified professionals. Moreover, persistent unemployment has negative effects on life satisfaction and health, undermining trust in public institutions and posing a risk for social cohesion. Despite the progress made so far, banks continue to be burdened with the large stock of non-performing loans and are, thus, unable to provide sufficient credit to the private sector in order to support economic activity. 4/9 BIS central bankers' speeches Investment remains at a very low level, and this is not only due to delays in the disbursement of the Public Investment Programme and the lack of bank lending, but also to the fact that the business environment is not yet considered as friendly as it should be towards private investment. The general government debt-to-GDP ratio has risen to unsustainable levels. This implies that for many years to come a significant amount of public resources will have to be directed to the servicing of debt-related obligations. This can be done either by compressing spending and scaling down the public sector or by increasing revenue. However, raising revenue by maintaining the currently exceptionally high tax rates constitutes a drag on longterm growth. High tax rates are a disincentive for launching new investment plans because companies know that on a permanent basis a substantial part of their future profits will be transferred to the state. In addition, high tax rates are a disincentive to work and create incentives for tax evasion for both businesses and households, increasing the size of the underground economy. At the limit, high taxes and social contributions force businesses to move their businesses to countries with more favorable tax regimes. Despite substantial progress in various areas, qualitative indices reflecting the business environment suggest that Greece is still ranked low relative to other European countries. For example, according to the Global Competitiveness Index of the World Economic Forum, competitiveness slightly deteriorated in 2017–2018. The most problematic factors for doing business in Greece are considered by the above Forum to be the following: high tax rates, inefficient government bureaucracy, tax regulations, policy and government instability, access to finance and corruption. The authorities need to continue to put emphasis on improving non-price competitiveness and public sector efficiency. These challenges must be tackled urgently in order to avoid hampering the strengthening recovery and the long-term prospects of the Greek economy. 5. Preconditions for a sustainable recovery In the medium to long-term the growth prospects of the Greek economy are positive because the structural reforms implemented raise total factor productivity and consequently potential growth. According to estimates by the OECD, the full implementation of all reforms, both those undertaken and those scheduled as part of the ESM programme, is expected, ceteris paribus, to boost real GDP over a 10-year-horizon by about 13%. And this figure excludes further positive effects from structural reforms which cannot be easily quantified such as the modernisation of the public administration and the judiciary system, the strengthening of insolvency regulations and the resolution of non-performing loans. In-house work by the Bank of Greece points to similar estimates of the effects of structural reforms. However, in order to reap these potential gains, a number of conditions should be satisfied. a. Create the conditions to encourage investment The economic adjustment and the structural improvements during the past seven years have rendered Greece more business friendly and have created significant investment opportunities. However, domestic savings are insufficient to meet the investment needs of the Greek economy which, after a long period of very low investment rates, are significant. Thus, besides restoring access of companies to capital markets, conditions should be encouraged that will attract foreign capital, notably Foreign Direct Investment. This presupposes the smooth and timely implementation of the agreed reforms and privatization programme in order to further improve the business environment and cut red-tape. In addition, the Bank of Greece favours a more growth friendly fiscal policy mix. More emphasis has to be placed on cutting non-productive expenditures and managing state property effectively. This is important since, according to OECD estimates, state property in Greece is among the 5/9 BIS central bankers' speeches highest as a percent of GDP in OECD member-states. The scaling down of an oversized and inefficient public sector will facilitate the reduction of the excessively high tax rates benefiting the private economy and facilitating the return to growth. Besides improving the business environment and lowering taxation, it is necessary to remove decisively and definitively the obstacles arising from various small or large vested interests and groups, which exacerbate the business climate and hamper the materialization of new investment and the implementation of reforms and privatizations, even those already approved. Last but not least, the removal of capital controls would be a manifestation of the improving confidence both in the stability of the banking system and the sustainable recovery of the Greek economy. This will, in turn, facilitate the improvement of the investment climate and help attract foreign direct investment. b. Speed up the implementation of the privatization and reform programme Despite the progress achieved so far, there is still a lot to be done in the areas of privatization and structural reforms. Privatisations which are at a mature stage need to be completed quickly. Other reforms have to be completed before the end of the programme, including, for example, the liberalization of the energy market and the opening of the remaining professions. In addition, universities and research institutes should be encouraged to cooperate with the private sector, in order to promote innovation and the transition to a knowledge-based economy. These initiatives will increase productivity and reduce costs for consumers. c. Tackle the NPL problem In the banking sector, the large volume of non-performing loans and the problem of strategic defaulters prevent the banking system from financing economic growth. All the necessary measures have now been legislated and the regulatory framework has been reformulated in order to be able to address the NPL problem in an efficient and expeditious manner. Banks need to follow faithfully the targets agreed with supervisors. Particular emphasis should be placed on the restructuring of companies and the closure of non-viable businesses. This will release resources to support new and existing sound investment and business initiatives, thereby supporting the economic recovery. d. Address debt sustainability concerns Decisive and concrete actions are needed to ensure the sustainability of Greek public debt, while, according to the Bank of Greece, there is also a strong case for a more realistic adjustment of medium-term fiscal targets. The Eurogroup reaffirmed in June its commitment to the principles contained in the May 2016 statement and specific mention was made of measures that could be taken, if necessary, regarding public debt reprofiling. The Bank of Greece has put forward a specific proposal for extending the weighted average maturity of interest payments on EFSF loans by at least 8.5 years. The calculations show that this could make a significant contribution to debt sustainability, even if primary surpluses were to fall to 2 percent of GDP from 2021 onwards rather than from 2023 as envisaged in the Eurogroup agreement. If adopted, such a proposal would certainly support both the recovery of the economy and the country’s creditworthiness, especially, if the fiscal space created by the reduction of fiscal targets is used to reduce taxes on labour and capital. This mild debt reprofiling proposal is vital for debt sustainability in Greece, while it involves only a negligible cost for its partners. It would pave the way for the inclusion of Greek government bonds in the ECB’s quantitative easing programme, which in turn will facilitate sustainable market access. This will set in motion a virtuous circle: greater investor confidence in Greece’s 6/9 BIS central bankers' speeches economic prospects will encourage the return of more deposits to banks, allow for a smooth exit from the current programme, and, ultimately, the full abolition of capital controls. 6. Some remarks about the future of the Economic and Monetary Union (EMU) Last but not least, given that the recovery is accelerating in the euro area, now is the right time to consider the future of Europe and in particular possible ways to strengthen the Economic and Monetary Union. A lot has been done in recent years to enhance the functioning of the EMU. Policy actions have focused on addressing institutional weaknesses, structural fragilities and excessive risk taking that led to the sovereign debt crisis and the negative feedback loop between sovereigns and banks, which in turn undermined euro area stability. Some key initiatives were the provision of intergovernmental loans to Greece, the establishment of the EFSF, and its successor the ESM, the creation of a banking union and the application of stricter rules on banking regulation and supervision, the establishment of the European Systemic Risk Board and the creation of appropriate macro-prudential instruments which allowed greater emphasis on identifying and addressing system-wide risks. Moreover, various monetary policy interventions by the ECB played a pivotal role in supporting the euro area economy and safeguarding price and financial stability. Despite these changes, the new institutional setting of the EMU is far from being appropriate to address a future crisis. The changes made so far mainly aim at closing loopholes rather than strengthening EMU. Euro area policy makers cannot rely solely on the ECB and expect that it will keep monetary policy loose indefinitely. Efforts should focus on improving the resilience and potential growth of our economies and on reinvigorating real convergence as the way of improving the well-being for all euro area citizens. The time for action is now, because the euro area economy is on a stable footing. First, the economic rebalancing mechanisms (i.e. the Macroeconomic Imbalance Procedure) should be reinforced and operate symmetrically, i.e. both for countries with external deficits and for countries with external surpluses. Second, the institutional reforms proposed by the Five Presidents’ Report and the European Commission are in the right direction because they will improve economic policy coordination, facilitate convergence and allow for risk reduction and greater private and public risk sharing. The key institutional reforms for the new EMU architecture are the following: the creation of a framework for incentivizing structural reforms and aligning national and EMU priorities by placing more emphasis on the links between financing via European Union (or euro area) instruments and initiatives, on the one hand, and reform implementation, on the other; the completion of the Banking and Capital Markets Union; the creation of a central fiscal-macroeconomic stabilization function; the adoption of a European Safe Asset; the transformation of the ESM into a European Monetary Fund; the creation of a euro area Treasury; and an increase in the accountability of European Institutions to the European Parliament. Moving forward in this direction would safeguard the monetary union’s resilience, its viability and the long-term prosperity of its citizens. 7/9 BIS central bankers' speeches 7. Conclusions Over the past seven years, Greece has gone a long way in adjusting its major macroeconomic imbalances, reforming its economy and restoring competitiveness. The economy is now recovering and growth is gathering pace. An important factor behind this improvement was the emergence of a strong political consensus in favour of keeping Greece in the euro area. In their majority, Greek political parties are not only in favour of the euro, but also have supported measures in Parliament, sometimes with heavy political and social cost, to ensure that Greece remains in the euro area. This new political reality resolves, once and for all, any future uncertainty regarding the course of the country and ensures the implementation of the reforms required for the Greek economy to prosper in the context of a deepened and completed Economic and Monetary Union. Building on this political consensus, the Greek authorities must pursue the remaining reforms forcefully in order to improve the investment climate, take full advantage of the brighter global prospects and put the economy on a sustainable growth path. Such policies will address the three stock imbalances that remain (high unemployment, high public debt and a large volume of non-performing loans), attract foreign direct investment and facilitate the reallocation of productive resources towards tradable and exportable goods and services. This, in turn, will boost financial markets’ confidence about the prospects for the Greek economy and will signal the exit from the crisis. Nevertheless, despite the progress achieved so far, we still have some way to go in order for Greece to tap the financial markets on sustainable terms after August 2018. This will happen if the country can achieve a credit rating enabling it to refinance its debt at interest rates compatible with debt sustainability and if banks have appropriate and adequate collateral to have full access to the ECB’s refinancing operations (and not only to ELA). To this end, the reform effort has to be stepped up to close the third review. Adequate and timely specification of the medium-term debt relief measures in the context of the decisions taken in the Eurogroup is also necessary, as is constructive dialogue between the Greek government and the institutions on the type of support for the Greek economy after the end of the programme in August 2018. In this way, we can ensure a return to financial normality after seven years of significant sacrifices by the Greek people. Sources: Draghi, Mario, 2017. Introductory statement, www.ecb.europa.eu/press/pressconf/2017/html/ecb.is170907.en.html September. Draghi, Mario, 2017. Building on the achievements of post-crisis reforms, 21 September. www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170921.en.html Draghi, Mario, 2017. Youth unemployment in the euro area, www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170922_1.en.html September. Draghi, Mario, 2017. Introductory statement. Hearing of the Committee on Economic and Monetary Affairs of the European Parliament. www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170925_2.en.html ECB, 2017. September 2017 ECB staff macroeconomic projections for the euro area, Frankfurt.www.ecb.europa.eu/pub/pdf/other/ecb.ecbstaffprojections201709.en.pdf? a13047040af5611b7e0cda69c6a88bf2 ECB, 2017. Economic Bulletin, Issue 6, Frankfurt. www.ecb.europa.eu/pub/economicbulletin/html/eb201706.en.html European Commission, 2015, “Completing Europe’s Economic and Monetary Union”, Report by Jean-Claude Junker in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi 8/9 BIS central bankers' speeches and Martin Schulz, 22 June. European Commission, 2017, Reflection paper on the Deepening of the Economic and Monetary Union, 31 May, Brussels. OECD, 2016, Greece, OECD Economic Surveys, Paris. OECD, 2016, Statistical Insights: Government assets matter too, not just debt. Praet, Peter, 2017. Karl-Otto Pohl Lecture, September 2017. www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170913.en.html Stournaras, Yannis, 2017. “Greece: A comeback to the financial markets? Are we near the finishing line? ” Speech at an event organized by The Economist in Frankfurt, 30 May. Stournaras, Yannis, 2017. “The Greek economy: challenges and prospects” Speech at an event organized by the British Hellenic Chamber of Commerce in Athens, 28 September. Zhang, Tao, 2017. Global economic challenges and opportunities, Speech to the 59th Annual Meeting of the National Association for Business Economics, 25 September. www.imf.org/en/News/Articles/2017/09/25/sp092517-global-economic-challenges-andopportunities?cid=em-COM-123–35930 9/9 BIS central bankers' speeches | bank of greece | 2,017 | 10 |
Welcome address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 1st Annual Workshop of ESCB Research Cluster 3 "Financial stability, macroprudential regulation and microprudential supervision", Athens, 2 November 2017. | Yannis Stournaras: Financial stability, macroprudential regulation and microprudential supervision Welcome address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 1st Annual Workshop of ESCB Research Cluster 3 “Financial stability, macroprudential regulation and microprudential supervision”, Athens, 2 November 2017. * * * It is with great pleasure that I would like to welcome you to this first workshop of the ESCB Research Cluster looking at issues related to financial stability, macroprudential regulation and microprudential supervision. Since 2008, the global financial crisis and the European sovereign debt crisis have had profound implications for how central banks think about financial stability and the toolkits which are employed in its defense. In the past, emphasis was placed on supervising individual institutions – so-called microprudential supervision. The most obvious example of such supervision is that of capital adequacy regulations which are harmonised across countries and have through the years become ever more complex. However, discussions about how much capital banks should hold and what counts as capital are still the subject of on-going research. Moreover, other supervisory tools are being examined such as rules surrounding bank leverage and liquidity. Perhaps, however, the most important challenge facing European banks is that of nonperforming loans. There are two broad areas where research is needed. First, how do we deal with the legacy NPLs, those that built up during the crisis? Questions which arise include: what is the best way to reduce NPLs quickly? To what extent are there issues of strategic default? What institutional reforms are required in the wider economy to facilitate the smooth work-out of NPEs? What are the implications for financial conditions of NPEs and the smooth transmission of monetary policy? The second broad area is how we treat new NPLs going forward. Here I consider it important to have some research input to issues such as appropriate provisioning policies and balancing the need for provisions whilst at the same time not interfering too much with banks’ ability to do their job, namely, oiling the wheels of the real economy. In addition to microprudential supervision, we can now add macroprudential regulation. This type of regulation focuses on the stability of the financial system as a whole. Tools are used to try to understand the build-up of systemic risk in order to provide early warnings and prevent systemic crises. Interlinkages between financial institutions are mapped out in order to understand how vulnerable the system is to a specific shock and the extent to which the shock will be contagious. The input of research has been invaluable in guiding central banks and the output of the Macroprudential Research Network (or MaRs as it was known) was surely vital in helping central banks get macroprudential regulation up and running. At the same time as research has been progressing, the institutional structure of regulation and supervision has also undergone considerable reform. The European Systemic Risk Board was created in the wake of the global financial crisis following the recommendations of the High Level Group chaired by Jacques de Larosiere. The de Larosiere Report focused on the need to move beyond microprudential supervision and give due attention to ensuring the stability of the financial system as a whole. As part of the process of implementing its recommendations, macroprudential regulation became a central bank core task. The research conducted in fora such as this one provides valuable inputs to this work. We have also seen major changes in the area of microprudential supervision with agreement on 1/2 BIS central bankers' speeches the goal of European Banking Union and the creation of the Single Supervisory Mechanism and the Single Resolution Mechanism. The Single Supervisory Mechanism seeks to provide a consistent method of supervising 120 significant European banks. Once again research input is crucial to building up that method. To reap the full benefits of these institutional changes, it is important that the Banking Union be completed by creating a common Deposit Insurance Scheme and setting up a credible common fiscal backstop to the Single Resolution Fund that underlies the Single Resolution Mechanism. Perhaps strengthening the financial resources of the ESM could provide a way forward in this respect. Research Clusters were only recently set up by the Heads of Research in order to encourage interaction and collaboration between ESCB researchers working on fields of common interest. It is planned that each research cluster will have an annual workshop where papers, selected on the basis of academic quality, will be presented and discussed. The workshops will provide an opportunity for researchers from national central banks and the ECB to get together and discuss advances in their respective fields – something that will have particular benefits for researchers who work in smaller central banks. I trust that you will find the atmosphere at the first workshop of this cluster conducive to encouraging such cooperation in order that policy in this area can move forward. If the global financial crisis has taught us anything it is surely that we, as central bankers, have a duty to preserve financial stability. Otherwise the costs for the real economy and, ultimately, our fellow citizens are significant. 2/2 BIS central bankers' speeches | bank of greece | 2,017 | 11 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 2nd EU-Arab World Summit on "The Greek economy: Prospects and main challenges", Athens, 10 November 2017. | Yannis Stournaras: The Greek economy - prospects and main challenges Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 2nd EU-Arab World Summit on "The Greek economy: Prospects and main challenges", Athens, 10 November 2017. * * * Ladies and Gentlemen, It is a great pleasure for me to be with you today. The EU-Arab Summit is a forum that improves communication and fosters cooperation between Europe and the Arab World. Regular dialogue between the two parties improves understanding, builds trust, addresses concerns and challenges, and removes barriers. These positive effects are reflected in improved cooperation at both regional and global level, in the context of multilateral institutions and international fora. This promotes cross-border trade and investment flows, which, in turn, raise economic growth and prosperity in both areas. In the last two days in Frankfurt I had the benefit of participation in the High-Level Policy Dialogue between the Eurosystem and Gulf Countries’ central banks and monetary agencies. In my intervention today I will focus on the Greek economy: First, I will present the progress that has been made in Greece since the start of the crisis. Second, I will discuss the outlook for the economy and the main risks and remaining challenges that must be addressed. Third, I will underline the preconditions for a sustainable recovery of the Greek economy. Finally, I will point out the advantages of investing in Greece. 1. Progress since the start of the crisis Despite past mistakes, occasional delays and even serious backtracking, economic adjustment in Greece has been one of the largest ever undertaken by any country. Since the beginning of the sovereign debt crisis in 2010, Greece has implemented a bold programme of economic adjustment that has fully eliminated fiscal and external deficits and improved competitiveness. The general government balance turned into a surplus of 0.5 percent of GDP in 2016 from a deficit of 15.1 percent of GDP in 2009. The primary surplus (that is, the general government balance net of interest payments) was 3.7 percent of GDP in 2016, from a 10.1 percent of GDP deficit in 2009. This represents one of the largest, if not the largest, fiscal adjustments ever undertaken in economic history. Based on this progress, on 25 September 2017, the European Council repealed its 2009 decision on the existence of an excessive deficit. The current account deficit has fallen by 15 percentage points of GDP since the beginning of the crisis, with the current account effectively being in balance over the last two years. Labour cost competitiveness has been fully restored and price competitiveness is almost back at its level of the year 2000. It is worth noting that this has been achieved mainly through the painful process of internal devaluation, that is, through reductions in nominal wages and salaries. A bold programme of structural reforms and privatizations has been implemented. Reforms cover the pension system, the health system, labour markets, product markets, the business environment, public administration, the tax system, and the budgetary framework. According to a recent Lisbon Council report (EuroPlus Monitor, September 2017 Update), Greece is ranked first among the 28 countries of the European Union on the basis of the Adjustment Progress Indicator. 1/9 BIS central bankers' speeches As a result of these efforts, openness has improved substantially and the economy has started to rebalance towards tradable, export-oriented sectors. For example, the share of total exports in GDP increased from 19.0% in 2009 to 30.2% in 2016. Exports of goods and services, excluding the shipping sector, have increased by 41% in real terms since their trough in 2009. Finally, the banking system has been restructured and consolidated. Significant recapitalization, following stringent stress tests along with in-depth asset quality reviews, now ensures that Greek banks are among the best capitalized in Europe. This fact, along with an NPE coverage ratio of 47 percent and good collateral, play a catalytic role in allowing banks to address the pressing issue of reducing significantly the stock of non-performing loans. In addition, significant institutional reforms have been initiated aiming at providing banks with a variety of means of reducing non-performing loans. According to incoming data, there has been progress since the beginning of the year in the area of banks’ Non Performing Exposures (NPE). At end-June 2017, the stock of NPEs (including off balance sheet items) was 3.2% lower than at end-December 2016. 2. The short and medium-term outlook of the Greek economy The economic recovery continues and growth is gathering pace following the completion of the second review and the positive impact it had on confidence and liquidity. The consolidation of growth dynamics is reflected not only in GDP figures, but also in the performance of several short-term indicators of economic activity, such as: industrial production, retail sales, dependent employment flows in the private sector, and real exports of goods, tourist arrivals and receipts. The improved outlook for the economy boosted economic sentiment, increased bank deposits, improved Greece’s credit rating and led to successive declines in the banks’ dependence on central bank financing: for example, Emergency Liquidity Assistance (ELA) for Greek banks now stands at €26.9 billion, down from its peak of €90 billion in July 2015. In addition, yields of Greek government bonds declined to late-2009 levels, which allowed the Greek government to return to international markets, after a period of three years, on July 25. Moreover, the slope of the yield curve steepened, implying improved investor perceptions for the outlook of the Greek economy. Corporate bond yields have also fallen to historically low levels. Meanwhile, Greek banks have made their way back to international financial markets by selling covered bonds. Looking forward recent soft data, such as the manufacturing PMI and the economic sentiment indicator, point to a sustained recovery in the coming months. Overall, in 2017 the Bank of Greece estimates that GDP will increase by approximately 1.7%. For 2018 and 2019, growth is projected to accelerate to 2.4% and 2.7% respectively. These projections are mainly based on the assumption that the reform programme will be implemented smoothly and according to the existing timetable. 3. Risks and major challenges ahead Despite the positive signs that are being recorded today and the progress achieved, there are still downside risks to the outlook of the Greek economy. In the short-term, the main risk is a delay in the completion of the third review of the programme, which will fuel a new cycle of uncertainty. In such a case economic recovery and the return to international financial markets will prove to be short-lived. In addition, there are external risks associated with developments in global financial markets and geopolitical factors. There are also some medium-term challenges that need to be addressed in order to strengthen the positive outlook. In particular: 2/9 BIS central bankers' speeches The currently high and persistent long-term unemployment raises inequality, posing a risk for social cohesion and increases the risk that human capital is destroyed, affecting longterm potential growth. Banks continue to be burdened with the large stock of non-performing loans and are, thus, unable to provide sufficient credit to the private sector. Investment remains at a very low level, due also to the fact that, despite considerable progress, the business environment is not yet considered as friendly as it should be towards private investment. For example, according to the Global Competitiveness Index of the World Economic Forum, competitiveness slightly deteriorated in 2017–2018. According to this Index, the most problematic factors for doing business in Greece are considered to be high tax rates, inefficient government bureaucracy, tax regulations, policy and government instability, access to finance and corruption. The general government debt-to-GDP ratio has risen to unsustainable levels. 4. Preconditions for a sustainable recovery To address the existing risks and challenges and to remain on a sustainable recovery path, economic policy must focus on the following eight issues: i. Attract FDI and increase openness As already mentioned, the economic adjustment and the structural improvements in Greece during the past seven years have been one of the largest ever undertaken by any country. Among other benefits, this has minimized the various risks, has rendered Greece more business friendly and created significant investment opportunities. However, domestic savings are insufficient to meet investment needs which, after a long period of very low investment rates, are significant even though capacity utilization remains low in some sectors. Thus, besides restoring access of companies to capital markets and to bank funding, conditions should be encouraged that will attract foreign capital, notably Foreign Direct Investment (FDI). FDI, besides closing the investment gap, promotes greater trade ties with countries and companies with cutting edge-technologies. This facilitates the participation in global value chains (GVCs). FDI and participation in GVC improve both physical and human capital, spur innovation and contribute to the development of new products and services in high value added sectors, thus boosting productivity. Domestic and foreign investment and the integration in GVC will increase openness and improve both the quantity and quality of Greek exports. This, in turn, will accelerate the reallocation of productive resources towards exports and will raise the long-term potential output. At the same time, the production of high technology goods and the provision of high technology knowledgeintensive services will improve the capacity of the country to retain and attract talents. ii. Pursue privatizations, reforms and improve institutions Despite the progress achieved so far, there is still a lot to be done in the areas of privatizations, structural reforms and the quality of institutions. Privatizations, which are at a mature stage, need to be completed quickly. In order to attract both domestic and foreign investment, further emphasis should be put on reforms that foster competition in product and services markets, which in turn raises productivity and employment. At this point I want to emphasize that well-functioning institutions matter for economic growth and enable countries to address significant challenges, because they affect incentives for people and businesses to invest in physical and human capital, technology and the organization of production. As pointed out in the seminal work of Acemoglu and Robinson (2012), institutions 3/9 BIS central bankers' speeches can increase both aggregate economic growth and improveincome distribution, because they guarantee property rights and enforce contract law, providing incentives for people and businesses to invest and innovate, while at the same time the State provides adequate education and a sufficient level and quality of public infrastructure, allowing people and businesses to thrive. Hence, good institutions enable growth and poverty reduction. At the same time economic and social progress also facilitates better institutions. Well-functioning institutions improve non-price competitiveness, enhance business confidence and reduce the country risk, leading to more domestic and foreign investment. Therefore, besides macroeconomic and fiscal adjustment, more economic flexibility via the adoption of structural reforms and sound institutions lead to more resilience, faster recovery after an adverse shock and higher long-term growth. Institutions have improved in a number of cases over the course of the years. For example, the independence of the Hellenic Statistical Authority (EL.STAT) and the new Tax Revenue Authority has been established by law. In addition, over the course of the crisis, new institutions and regulatory authorities have been established. For example, the creation of the Parliamentary Budget Office and the Fiscal Council improves oversight on public finances. However, much more needs to be done in a number of areas. According to the Global Competitiveness Index 2017–2018 of the World Economic Forum, Greece ranks in the 87th position out of 137 countries in terms of institutions. Greece ranks quite low in terms of the efficiency of government spending, the burden of government regulation, and the efficiency of the legal framework in settling disputes and in challenging regulations. Moreover, according to the World Bank’s “Ease of Doing Business” ranking on the conditions for setting up a business, Greece’s position has improved significantly in 2011–2017 (from 148 in 2011 to 37 in 2017), but remains low relative to its European peers. Therefore, particular emphasis should now be placed on upgrading the education system, improving public administration, cutting red tape, lowering the regulatory burden and ensuring the predictability and stability of legislation, reducing entry barriers into network industries, retail trade and professional services as well as in enhancing judicial efficiency. With regard to independent authorities, it is important to strengthen the role and administrative and financial autonomy, as well as accountability towards the Parliament, of the authorities responsible for regulating, supervising and maintaining a level playing field in the markets. It should be taken into account that most of the reforms to be implemented entail fewer shortterm costs relative to those implemented earlier on in the programme (i.e. labour and pension reforms). However, taking into account the synergies with the already implemented reforms, upcoming reforms are expected to yield immediate net gains in terms of faster economic recovery. Moreover, flexible economic structures and better institutions not only lead to higher long-term growth but also reduce the probability of severe recessions. iii. Tackle the NPL problem In the banking sector, the large volume of non-performing loans and the problem of the strategic defaulters prevent the banking system from financing economic growth. All the necessary measures have now been legislated and the regulatory framework has been reformulated in order to be able to address the NPL problem in an efficient and expeditious manner. As I mentioned earlier, incoming data point to a reduction in NPEs and this is mainly driven by loan write-offs. However, banks should utilize all the available toolbox to reduce troubled assets, and in particular speed up the sale of NPLs. To accelerate the reduction of the NPL stock, the 4/9 BIS central bankers' speeches new electronic auctions platform should become fully operational as soon as possible. Particular emphasis should also be placed on the restructuring of viable companies and the liquidation of non-viable ones. This will release resources to support new and existing sound investment and business initiatives, thereby supporting the economic recovery. The recent modernisation of the institutional framework allows the co-operation of banks with loan servicers and various non-bank entities and private investors, such as private equity funds, in order to restructure the underlying business. iv. Adopt a growth friendly fiscal policy mix The Bank of Greece has proposed the adoption of a more growth friendly fiscal policy mix. More emphasis has to be placed on cutting non-productive expenditures and increasing the public sector efficiency, including the management of state property. This is important since, according to OECD estimates, state property in Greece is among the highest as a percent of GDP in OECD member-states. The scaling down of an oversized and inefficient public sector and the improvement in tax administration will lead to a fairer distribution of the fiscal burden and will facilitate the reduction of the excessively high tax rates. According to the Global Competitiveness Index 2017–2018, Greece ranks last and second to last as regards the adequacy of the tax system to provide incentives to invest (137th out 137 countries) and to work (136th out of 137 countries). v. Support Small and Medium Enterprises (SMEs) SMEs1 are the backbone of the Greek economy in terms of employment and gross value added (GVA). In 2015, they accounted for 75.1% of total GVA and for 87.3% of employment in non-financial corporations. Very small or micro SMEs (employing less than 10 people) accounted for 59.1% of total employment and for 35.9% of GVA in the non-financial corporate sector. The larger share of SMEs in total employment relative to their share in GVA suggests that there is a problem of low productivity, which is more pronounced for very small SMEs. Given the prevalence of SMEs in the Greek economy, policy efforts should also be targeted towards providing incentives for cluster development, alongside with measures to provide affordable funding via the banking sector, the capital markets and the official sector through various EU initiatives. These concerted efforts will allow SMEs to adopt new technologies and benefit from economies of scale as they will gain access to international distribution channels and to foreign markets. vi. Remove various barriers to investment Besides improving the business environment and lowering taxation, it is necessary to remove decisively and definitively the obstacles arising from various small or large organized interests and groups, which exacerbate the business climate and hamper the materialization of new investment and the implementation of privatizations, even those already approved. The removal of capital controls as a result of the gradual improvement of the economy and the return of full confidence will improve the investment climate and help attract foreign direct investment. vii. Promote innovation and a more effective use of human capital Innovation-driven growth, supported by knowledge-based capital (or intangible assets), is critical to improving living standards. The efforts of previous years, mainly through the use of resources from the European Structural Funds, have led to a partial improvement in the country’s performance in many areas, with the 5/9 BIS central bankers' speeches expenditure in research and development (R&D) being on an upward trend over the period 2011– 2016. R&D expenditure reached €1,733 billion or 0.99% of GDP in 2016 from €1,391 billion or 0.67% of GDP in 2011. Despite the continuing rise, Greece records one of the lowest R&D intensities compared to its euro area peers (2.0% of GDP). However, innovation-based growth is based on a much wider range of elements than just R&D spending, such as employee skills and training, investment in information and communication technologies (ICT), organizational know-how, databases, design, brands and various forms of intellectual property. A more effective use of domestic high-skilled human capital requires the adoption of policies and reforms that encourage research, facilitate the diffusion of technology and boost entrepreneurship. Companies should be incentivized to increase investment in R&D in order to improve their capacity to innovate. Universities and research institutes should be encouraged to cooperate with the private sector to commercially exploit research results and ideas. These initiatives will promote innovation, increase productivity and facilitate the transition to a knowledge-based economy. The improvement in institutions and the implementation of the reform and privatization program will provide incentives for the initiation of new investment projects. New investment goes hand-inhand with job creation and is, thus, expected to facilitate the reduction of the unacceptably high unemployment rate. However, certain aspects of structural reforms and the stabilisation of the economy might have negative distributional effects. Hence, it is essential to provide immediate support to the unemployed and those marginally attached to the labour market by employing active labour market policies and targeted social transfers to counter the temporary income loss and to shorten job-transitions. In the medium-term, emphasis should be placed on skill upgrading and retraining policies to get people back to work as well as improvements in education, given that investment in human capital is a prerequisite to an inclusive and sustainable growth model. viii. Address the public debt overhang Decisive and concrete actions are needed to ensure the sustainability of Greek public debt. The Eurogroup reaffirmed last June its commitment to the principles contained in the May 2016 statement, and specific mention was made of measures that could be taken, if necessary, regarding public debt reprofiling. The Bank of Greece has put forward a specific proposal for extending the weighted average maturity of interest payments on EFSF loans of at least 8.5 years. If adopted, such a proposal would support both the recovery of the economy and the country’s creditworthiness. This is more so if it is combined with a lower fiscal target, that is a primary surplus of 2.0 percent of GDP instead of 3.5 percent, and more privatisations. This mild debt reprofiling proposal is vital for debt sustainability in Greece, while it involves only a negligible cost for its partners. It would also pave the way for the inclusion of Greek government bonds in the ECB’s quantitative easing programme, which in turn will facilitate sustainable market access, the return of more deposits to the Greek banks and, ultimately, the full abolition of capital controls. 5. Greece has the potential to become an attractive investment destination I will now briefly refer to some factors and structural features that make Greece an attractive place to invest. First, the policy changes that have taken place over the past seven years, coupled with the decisive implementation of the remaining reforms, improve confidence, enhance business climate and generate positive growth prospects providing incentives for the 6/9 BIS central bankers' speeches initiation of new domestic and foreign direct investment. Second, economic policy is and will remain prudent. The most crucial factor that ensures the implementation of the reforms required for the Greek economy to prosper in the context of the Economic and Monetary Union is the emergence of a strong political consensus in Parliament and society in favour of keeping Greece in the euro area. In addition, adherence to the EU macroeconomic and fiscal rules and the strict monitoring by the EU as part of postprogramme surveillance which is already envisaged for programme member-states with relatively high public debt, precludes the emergence of new imbalances. Third, Greece benefits from a large amount of EU funds which aim at boosting growth and jobs. In particular, the EU funds programmed to be disbursed to Greece for the period 2014 to 2020 amount to €35.9 billion, or 20% of Greece’s 2016 GDP. Fourth, Greece is both a European Union and a euro area member state. Hence, enterprises located in Greece enjoy the benefits of currency and price stability and have access to the EU Single Market. They face a stable institutional environment, enjoy investor protection, and have access to a sound banking system which is under the oversight of the European Central Bank. Fifth, there are several non-price competitiveness features that make Greece an attractive place to invest. Greece has a highly skilled human capital by international standards. According to the 2017–2018 Global Competitiveness Report of the World Economic Forum, Greece ranks relatively high in higher education and training (44th out of 137 countries) and, in particular, in the tertiary and the secondary education enrollment rates. Moreover, Greece also receives a relatively good ranking in technological readiness (50nd) and in some innovation and business sophistication factors like the application for patents (PCT patents: 37th), and particularly in the availability of scientists and engineers (10th). In addition, Greece receives a relatively good ranking in terms of the strength of investor protection (41th) and in terms of its infrastructure (38th) as well as the number of procedures to start a business (36th) and the degree of customer orientation (48th). Sixth, one of Greece’s most important advantages is its geographical location in Southeastern Europe. Being at the crossroads of three continents and in close proximity with the MiddleEast and the Arab world, Greece provides significant investment opportunities as a transport and energy hub. Given that Greece is a major tourist destination country, there are significant investment opportunities in tourism conditional on expanding the capacity and quality of tourism infrastructure. Investment opportunities also exist in sectors such as logistics, networks, shipping, trade, pharmaceutical, manufacturing, and mining and quarrying. Since many Arab countries seek to diversify their investment base, these sectors in Greece provide a mutually beneficial opportunity for doing so. Seventh, it has already been mentioned that Greece has a sizeable state real estate property that is available for utilization by private investors under the privatization programme. Both the current privatization programme and the private investment needs generate profitable investment opportunities for foreign investors. Despite some missteps, there is already encouraging evidence. FDI inflows reached almost €2.8 billion in 2016 (1.6% of GDP). It is the biggest FDI inflow recorded since 2010 and was mainly directed to services sectors (i.e. hotels and restaurants, transportation, financial intermediation and real estate activities). In the first eight months of 2017 the total inflow has already reached €2.7 billion. The increased FDI flow and the continuation of the privatization programme (e.g. the recent sale of the train operator Trainose S.A. to Trenitalia, the extension of the Athens International Airport Development Agreement for 20 additional years) indicate that major foreign investors see positive prospects on the future of the Greek economy. 7/9 BIS central bankers' speeches Last but not least, Greece, being a member of the EU, NATO and other international multilateral organizations, enjoys peace, security and enhanced cooperation with its partners. 6. Conclusions The ongoing reform and fiscal adjustment effort is bearing fruits. The fiscal and current account imbalances have now been corrected, important and long-needed reforms have been implemented, competitiveness has improved and the banking sector is adequately capitalized. The economy is now recovering and growth is gathering pace. However, more needs to be done. Greece is now facing three stock imbalances, namely a high rate of unemployment, a high public debt and a high stock of NPLs in bank portfolios. These three crisis legacies, coupled with the significant investment requirements in order to improve the economy and modernize its public and private infrastructure, will remain the major challenges for Greece over the coming years. In addition, we still have some way to go in order for Greece to tap the financial market on sustainable terms after the end of the current programme in August 2018. To this end, the Greek authorities must pursue the remaining reforms forcefully and close the 3rd review before the end of the year, in order to improve the credit rating of the country. At the same time our European partners should specify in more detail the medium-term debt reprofiling measures according to the Eurogroup agreement and, in close cooperation with the Greek authorities, provide more clarity on the post-programme support for the Greek economy. These actions will improve the investment climate and attract foreign direct investment. This, in turn, will facilitate the return to financial normality after seven years of significant sacrifices by the Greek people. More flexible economic structures coupled with sound institutions and macroeconomic fundamentals will accelerate the reallocation of productive resources towards tradable and exportable goods and services, making the economy more resilient to future shocks and raising long-term potential growth. Sources: Acemoglu D. and J. Robinson, 2012 Why Nations Fail: The Origins of Power, Prosperity, and Poverty, Publisher: Crown Business. Bank of Greece, 2017. Monetary Policy Report 2016–2017, July. Draghi, M., 2017. Structural reforms in the euro area. Introductory remarks, 18 October. www.ecb.europa.eu/press/key/date/2017/html/ecb.sp171018.en.html Draghi, M. 2017, Introductory Statement October.www.ecb.europa.eu/press/pressconf/2017/html/ecb.is171026.en.html European Commission, 2017. A new start for job and growth in Greece – almost two years on, situation as of 10 June 2017.Brussels. European Commission, 2017. Investment in the EU Member States: An analysis of drivers and barriers, Institutional paper 062, October. National Documentation Centre, www.ekt.gr/el/news/21148. 2017. R&D expenditure in Greece in 2016. OECD, 2016, Greece, OECD Economic Surveys, Paris. OECD, 2016, Statistical Insights: Government assets matter too not just debt. 8/9 BIS central bankers' speeches IMF, 2017, Global prospects and policies, World Economic Outlook, October. Lisbon Council 2017, EuroPlus Monitor, September Update Sondermann, D., 2016. Towards more resilient economies: the role of well-functioning economic structures, ECB Working Paper No 1984. Stournaras, Y. , 2016 “Partners for Growth and Development” “Prospects of the Greek economy after six years of adjustment” Speech at the EU-Arab World Summit in Athens, 3 November. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=384&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y., 2017. “Greece: A comeback to the financial markets? Are we near the finishing line? ” Speech at an event organized by the Economist in Frankfurt, 31 May. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=441&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y., 2017. “The Greek economy: challenges and prospects” Speech at an event organized by the British Hellenic Chamber of Commerce in Athens, 28 September. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=472&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y., 2017. “ Greece and the global economy: Prospects and main challenges ahead” Speech at an event organized by Credit Suisse in Athens, 11 October. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=476&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y., 2017. “Seeking reform in modern and contemporary Greece” Speech at an event organized by the Hellenic American Union in Athens, October. www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx? Item_ID=479&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b World Economic Forum, 2017. The Global Competitiveness Index 2017–2018 edition. 1 Employing less than 250 people. 9/9 BIS central bankers' speeches | bank of greece | 2,017 | 11 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Union of Greek Shipowners, Athens, 4 December 2017. | Yannis Stournaras: The world economy and Greece - prospects and challenges with a focus on the role of shipping Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Union of Greek Shipowners, Athens, 4 December 2017. * * * Ladies and Gentlemen, It is a great pleasure for me to be with you today, especially since this year has been proclaimed “Year of Shipping” for the EU and marks the entry of the Union of Greek Shipowners into its second century, after it celebrated its centennial last year. I will start my speech with an overview of international economic developments. Then I will give an account of recent developments and describe the prospects of the Greek economy. I will go on to discuss the importance of Greek shipping and the challenges facing it. I will conclude by highlighting the preconditions for sustainable recovery of the economy. 1. The international environment The world economy is on a stable upward trajectory. Business and consumer confidence indicators suggest that sentiment remains positive, while financial conditions in advanced economies remain supportive, assisted by accommodative monetary policies. In emerging market economies, financial markets remain resilient and capital inflows are strong. Economic recovery is broadly based both across developed and emerging economies and in terms of GDP composition. 2017 is expected to be the first year since 2010 to see all large economies grow in synch. There are also growing signs of a recovery in investment worldwide. Looking forward, world economic activity is expected to pick up moderately. The improvement in activity in advanced economies is supported by the monetary and fiscal policies pursued. Among emerging economies, growth is expected to remain robust in commodity-importers, such as China, while in commodity-exporting economies the downturn will bottom out after the deep recessions observed in the last two years. World trade is recovering and over the medium term is expected to expand as world economic activity gathers pace. A significant boost to world trade could come from the recent multilateral or bilateral trade agreements, such as the WTO Trade Facilitation Agreement and the EU-Canada Trade Agreement. However, there are several risks surrounding the short-term outlook for the world economy, trade and – therefore – sea transport. Specifically, in addition to geopolitical risks, there also downside risks related to rising protectionism, the impact of gradual monetary policy normalisation on international financial conditions, a possible sharp correction of asset (especially equity) prices, the sustainability of growth in emerging markets (most notably China), and the implications of Brexit for trade. In the euro area, economic growth is increasingly gaining traction. The euro area economy has been posting positive growth rates for 18 quarters in a row and the latest data suggest that this momentum will be maintained in the period ahead. The accommodative stance of monetary policy bolsters domestic demand. Employment growth and some pick-up in wage growth support households’ disposable income. Combined with a progressive increase in household wealth, these have a benign effect on private consumption. Investment recovery is assisted by improved corporate profitability and very favourable financing conditions. Robust external demand supports euro area exports, although the recent appreciation of the euro is a source of uncertainty regarding the overall contribution of net trade to economic growth. 1/7 BIS central bankers' speeches Inflation is expected to decline in the short term, mainly reflecting base effects in the energy component. Over the next two years, inflation is expected to remain well below a level compatible with the ECB’s inflation target. Moreover, developments in core inflation have yet to show convincing signs of a sustained upward trend. Against this background, the ECB Governing Council, with the recent recalibration and extension of its asset purchase programme until September 2018 or beyond, if necessary, confirmed that a substantial degree of monetary accommodation is still needed to ensure a sustained return of inflation to rates of below but close to 2%. 2. Developments and prospects of the Greek economy Since the onset of the sovereign debt crisis in 2010, Greece has implemented an economic adjustment programme that has eliminated the fiscal and external deficits and has improved international (especially labour cost) competitiveness. At the same time, a bold reform programme has been implemented in the pension system, the health system, labour and product markets, the business environment, public administration, the tax system and the budgetary framework. Its implementation, alongside a privatisation and a public asset development programme, is ongoing. According to a recent Lisbon Council report (EuroPlus Monitor, September 2017 Update), Greece ranks first in the EU-28 on the basis of the Adjustment Progress Indicator. Moreover, on the basis of the World Bank’s “ease of doing business” index (“Starting a business” subindex), Greece’s ranking has improved considerably between 2011 and 2017 (from 148th in 2011 to 37th in 2017), although there is still significant room for improvement. As a result of these efforts, openness has improved substantially and the economy has started to rebalance towards tradable, export-oriented sectors. Specifically, the share of total exports in GDP increased from 19.0% in 2009 to 30.2% in 2016, while between 2010 and 2016 the relative prices of tradables versus non-tradables rose by about 9%. As a consequence, the size of the tradables sector relative to that of the non-tradables, measured by gross value added, grew by approximately 11% at constant prices and by about 21% at current prices, while in terms of employment it increased by around 7%. Despite any missteps and conflicting signals, there are encouraging signs also regarding foreign direct investment (FDI). FDI inflows reached a post-2010 record of almost €2.8 billion in 2016 (1.6% of GDP), and were mainly targeted at services sectors (i.e. hotels and restaurants, transportation, financial intermediation and real estate activities). In the first nine months of 2017 the cumulative inflow already reached €3.0 billion, and as was the case in 2016, continued to target the services sectors. Increased FDI inflows indicate the positive assessment of major foreign investors about the prospects of the Greek economy. Turning to the banking system, significant recapitalisation, following stringent stress tests along with in-depth asset quality reviews, now ensures that Greek banks are among the best capitalised in Europe. This fact, along with an NPE coverage ratio of 47% and good collateral, will play a catalytic role in allowing banks to address the pressing issue of reducing the high stock of non-performing loans. In addition, significant institutional reforms have been initiated aiming at providing banks with a variety of means of reducing non-performing loans, such as the creation of a secondary market for distressed assets, an out-of-court settlement mechanism and e-auctions. According to incoming data, there has been progress since the beginning of the year in the area of banks’ non-performing exposures (NPE). At end-June 2017, the stock of NPEs (including off-balance-sheet items) was 3.2% lower than at end-December 2016. 2.1 Prospects of the Greek economy 2/7 BIS central bankers' speeches The economic recovery continues and growth is gathering pace following the completion of the second review and the positive impact it had on confidence and liquidity. Further positive effects are expected from the staff-level agreement on the third review that was reached last Saturday. The consolidation of growth dynamics is reflected not only in GDP figures, but also in the performance of several short-term indicators of economic activity, such as industrial production, retail sales, dependent employment flows in the private sector, exports of goods and services, as well as soft data such as the manufacturing PMI and the economic sentiment indicator. With particular regard to exports, over the first nine months of 2017: real exports of goods rose by 3.5% year-on-year; and tourist and shipping receipts grew, in nominal terms, by 10.3% and 22.1%, respectively. The improved outlook for the economy boosted economic sentiment, increased bank deposits, led to a slowdown in the negative rate of change in bank credit to non-financial corporations, improved Greece’s credit rating and led to successive declines in banks’ dependence on central bank financing: for example, the ceiling of Emergency Liquidity Assistance (ELA) for Greek banks now stands at €25.8 billion, down from its peak of €90 billion in July 2015. In addition, yields of Greek government bonds declined to late-2009 levels, which allowed the Greek government to return to international markets, after a period of three years, on 25 July 2017. More recently, the Public Debt Management Agency conducted an exchange operation of twenty PSI bonds maturing from 2023 to 2042, with a total face value of €29.7 billion, for five new fixedcoupon bonds maturing in 5 to 25 years, in order to enhance the liquidity of the market for Greek debt and normalise the yield curve of sovereign bonds, thus facilitating Greece’s next bond issuance programme on international markets. At the same time, the slope of the yield curve steepened, implying improved investor perceptions about the outlook of the Greek economy. Corporate bond yields have also fallen to historically low levels. Meanwhile, Greek banks have made their way back to international financial markets by selling covered bonds. The above data support the assessment that recovery will gain momentum in the coming months. For 2017 as a whole, the economy is expected to return to positive, albeit relatively low growth rates. The recovery will be supported by higher exports of goods and services, and the continued, foreign-demand-driven increase in industrial production, which contributes to job creation. Exports of goods have been on a strong upward trend since 2014, as a result of improvements in the international competitiveness of the economy. Regarding exports of services, their rise in 2017 is attributable to buoyant travel receipts as well as higher shipping receipts, as a result of both a recovery in global trade and sea transport and the fact that the impact of capital controls has weakened. Growth is expected to pick up in 2018 and 2019, with private consumption and investment as its key drivers. Consumption is expected to recover, mainly on the back of higher household real disposable income as a result of increased employment. The contribution of investment is expected to be positive, chiefly due to stronger business investment, reflecting the gradual restoration of confidence and liquidity in the financial system, as well as the acceleration of privatisations. Exports are expected to remain robust, reflecting higher foreign demand and the restoration of the international competiveness of the economy. Employment is expected to rise in line with the upturn of economic activity. The benign 3/7 BIS central bankers' speeches outlook for employment, in particular dependent employment, is supported mainly by the positive performance of manufacturing and tourism, low labour costs, and labour flexibility ensured by the institutional framework. These forecasts are based on the assumption that the reform and privatisation programme will be implemented smoothly and according to the agreed time schedule. 2.2. Risks and challenges However, despite the positive forecasts, there are still downside risks that need to be addressed. The most important domestic risks are: any delays in the implementation of the recently agreed measures under the third review; any delays in the fourth (and last) review signalling the end of the programme; a higher than expected negative impact from high tax rates on economic activity; and uncertainty about the Greek government’s financing conditions after the end of the programme. In addition, there are external risks associated with developments in international financial markets and geopolitical factors, such as the refugee crisis. At the same time, the protracted economic crisis has left a number of stock imbalances that must be addressed over the medium term if the Greek economy is to return to sustainable growth, most notably: high and persistent long-term unemployment; the high stock of non-performing loans; the investment gap; the public debt overhang. These challenges need to be tackled in order to safeguard social cohesion, preserve Greece’s high-quality human capital, facilitate the financing of the Greek economy, entrepreneurship and FDI inflows, and strengthen the medium- to long-term potential growth of the Greek economy. 3. The importance of shipping for the Greek economy Greek shipping, an extrovert activity by definition, has traditionally been a key driving force of the Greek economy, despite the challenges it has faced at both the international and the national level. Shipping receipts have always been essential for covering a large part of the country’s external financing needs. Over the 2002–2014 period, inflows from shipping accounted, on average, for roughly 44% of total receipts from services and offset about 43% of Greece’s goods deficit. However, according to Bank of Greece balance-of-payments data on shipping inflows on the basis of bank transactions data, a considerable drop in inflows has been recorded since the second half of 2015. This drop is primarily due to the imposition of the capital controls and may therefore be reversed once the controls are fully removed. In 2016 in particular, as a result of the capital controls and low freight rates, receipts from sea transport services accounted for a mere 23% of total receipts in the services balance and financed 35% of the goods deficit, while net receipts (receipts less payments) accounted for 29% of the surplus of the services balance. As I have already pointed out, available data for the January-September period suggest a partial return, during 2017, to the pre-2015 situation. This upturn may improve further in view of the anticipated relaxation of the capital controls, as well as on the back of higher freight rates in 4/7 BIS central bankers' speeches international markets, mainly in the dry bulk sector. It should be noted that the Greek shipping industry and maritime cluster can play a pivotal role in the effort of the Greek economy to recover, contributing to GDP growth both directly and indirectly. According to a study conducted by IOBE (2013), the (direct and indirect) contribution of the Greek shipping industry to the economy’s total value added was estimated at more than 6% of GDP in 2009, while its contribution to total employment came to about 200,000 jobs. In 2016 shipping receipts declined to 3.3% of GDP, from 6.4% of GDP in 2014, i.e. one year prior to the imposition of the capital controls. In any event, the expected relaxation and the ultimate abolition of the capital controls, coupled with the pick-up in global economy and trade, should increase the shipping industry’s share in GDP and enhance the openness of the Greek economy. 4. Challenges facing the shipping industry It is indeed a remarkable achievement for a small country like Greece to be a leader in global shipping. On the basis of recently published data by the United Nations (UNCTAD), Greece remains the largest ship-owning nation in terms of cargo carrying capacity (dead weight tonnage – dwt), even though only 22% of the merchant fleet under Greek control and/or management is Greek-flagged. Greek shipping has good track record in overcoming challenges. Today, it is confronted with a number of new challenges: 1. World trade and shipping: The expansion of the global economy is a key factor behind the increase in demand for seaborne trade. Nevertheless, this increase – although it is expected to accelerate in the years ahead – is not always sufficient to match the increased supply of transportation services on account of rapid fleet growth. Overall, freight rates, as captured by the ClarkSea Index, have risen by about 15% so far in 2017. However, this development was driven by a sharp rise in dry bulk freight rates from their 2016 historic lows, while tanker freight rates have declined markedly, despite a short-lived – as it turned out – recovery in late 2016. In the near future, the balance between new ship deliveries and demolitions, given the upward trend of world trade, will determine the path of freight rates. Over the medium term, the development of infrastructure projects in the context of the Chinese One Belt One Road Initiative should also play an important role in strengthening demand, mainly for the dry bulk and container sectors. 2 . Tax regime : It is now generally accepted that one of the key factors contributing to the success of Greek shipping has invariably been the stable tax regime for shipping. In December 2015 the European Commission invited Greece to better target its tonnage tax and related support measures in the maritime sector, as the Commission found that certain current provisions on the taxation of ships (for instance, Law 27/1975) may breach EU state aid rules, as specified in the Maritime Guidelines. Today, two years on and after many efforts, a mutu ally accepted and workable solution has been found for the vast majority of the identified issues, while there is good progress in addressing the remaining ones. At this point, let me say a few words about the voluntary contribution of the Greek shipping community in support of the Greek economy during the crisis, as provided for in Article 42 of Law 4301/2014, ratifying a relevant Memorandum of Understanding signed between the Greek government and the Union of Greek Shipowners in summer 2013. The initial duration of the MoU was three years (2014–2016). Subsequently, it has been extended twice, in summer 2014 and 2017, to ultimately cover a total period of five years (2014–2018), with the additional revenue for 2018 estimated at €107 million. 5/7 BIS central bankers' speeches 3 . The capital controls: As I mentioned earlier, the imposition of the capital controls was followed by a significant fall in shipping receipts, partly due to a loss of confidence in the domestic banking sector, which led to a shift of shipping receipts towards foreign banks. However, today, two years later, the Greek banking system is fully recapitalised, measures for the relaxation of capital controls have been taken, some of which are targeted to the shipping industry, while a roadmap on the full removal of the capital controls has been published. Against this background, trust in the Greek banking system is being restored rapidly and financial normalcy is gradually returning. 4. Domestic bank financing: In recent years, the financing of oceangoing shipping by the Greek banking system has dropped sharply, with outstanding loans to shipping now standing at €8.2 billion, against over €18 billion in mid-2010. This trend is not specific to Greece, since sizeable reductions in the portfolios of traditional shipping lenders have also been observed in the rest of Europe as well. Part of this gap was covered, through various types of financing, by Asian financial institutions. Besides, Greek shipping should adapt to the new environmental requirements of the international regulatory framework for shipping (e.g. management of ballast water, use of lowsulfur-content fuels, participation of the shipping industry in the greenhouse gas emissions trading system, etc.). 5. Conclusions Over the past seven years, Greece has gone a long way in adjusting its major macroeconomic imbalances, reforming its economy and restoring competitiveness. The Greek economy now has the potential and the prospect to return to a sustainable growth path, by embracing a new, extrovert growth model. Still, as I have already mentioned, risks and challenges remain for the Greek economy and the Greek maritime sector and must be addressed, in order to ensure that the economy remains on a sustainable growth track and to increase the contribution of shipping to GDP. To this end, economic policy must from now on focus on the following areas: 1 . Speed up the implementation of reforms and privatisations. Such actions foster competitiveness in goods and services markets, improve the business environment and help to attract domestic and foreign investment. 2 . Improve the quality of institutions and ensure their proper functioning and independence. With regard to independent authorities, it is important to strengthen their administrative and financial autonomy, ensure respect for their independence and increase their accountability towards Parliament. Well-functioning institutions improve structural competitiveness and promote economic growth, as they affect incentives for individuals and businesses to invest in physical and human capital, technology and the organisation of production. 3. Tackle the problem of non-performing loans (and strategic defaulters), which prevents the banking system from financing economic growth. Banks should utilise all the available toolbox to reduce troubled assets, and in particular speed up the sale of NPLs. Particular emphasis should also be placed on the restructuring of viable companies and the liquidation of non-viable ones. This will release resources to support new and existing sound investment and business initiatives, thereby supporting the economic recovery. 4. Adopt a growth-friendly fiscal policy mix. 5. Gradual relaxation of the capital controls in tandem with the return of confidence. 6/7 BIS central bankers' speeches 6. Address the public debt overhang. Decisive and concrete actions are needed to ensure the sustainability of Greek public debt in line with the Eurogroup decisions of June 2017. The Bank of Greece has put forward a specific mild debt reprofiling proposal, which involves only a negligible cost for Greece’s partners and consists in extending the weighted average maturity of interest payments on EFSF loans by at least 8.5 years. Last but not least, in order for Greece to tap the financial markets on sustainable terms after the end of the current programme in August 2018, t he Greek authorities must close the 4th (and last) review on time, with a view to significantly improving the credit rating of the country. At the same time, our European partners, apart from specifying in more detail the medium-term debt reprofiling measures, which would enable the refinancing of public debt from the markets on sustainable terms, should, in close cooperation with the Greek authorities, provide more clarity on the post-programme support for the Greek economy. These actions will improve the investment climate, attract domestic and foreign direct investment and facilitate the return to financial normality and positive GDP growth rates after seven years of sacrifices, recession and stagnancy, which have taken a toll on economic and social cohesion. References: Draghi, M. (2017), “Monetary policy and the outlook for the economy”, November, www.ecb.europa.eu/press/key/date/2017/html/ecb.sp171117.en.html. Praet, P. (2017), “Recent economic developments in the euro area”, November, www.ecb.europa.eu/press/key/date/2017/html/ecb.sp171116_1.en.html. ΙΟΒΕ (2013), The contribution of ocean-going shipping to the Greek economy: performance and outlook, iobe.gr/docs/research/en/RES_05_F_07012913REP_ENG.pdf. IMF (2017), Global prospects and policies, World Economic Outlook, October. Lisbon Council (2017), EuroPlus Monitor, September Update. Stournaras, Y. (2017a), “Greece and the global economy: Prospects and main challenges ahead”, Speech at an event organised by Credit Suisse, Athens, 11 O c t o b e r , www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=476&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b. Stournaras, Y. (2017b), “The Greek economy: Prospects and main challenges”, Speech at the 2nd EU-Arab World Summit, Athens, N o v e m b e r , www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=482&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b. UNCTAD (2017), Review of Maritime Transport, unctad.org/en/pages/PublicationWebflyer.aspx? publicationid=1890 World Economic Forum (2017), The Global Competitiveness Index 2017–2018 edition. 7/7 BIS central bankers' speeches | bank of greece | 2,018 | 1 |
Speech by Professor John Iannis Mourmouras, Deputy Governor of the Bank of Greece, on the occasion of the launch of his book entitled "Speeches on Monetary Policy and Global Capital Markets, 2015-2017", OMFIF City Lecture, London, 6 December 2017. | John Iannis Mourmouras: Monetary policy and global markets Speech by Professor John Iannis Mourmouras, Deputy Governor of the Bank of Greece, on the occasion of the launch of his book entitled "Speeches on Monetary Policy and Global Capital Markets, 2015-2017", OMFIF City Lecture, London, 6 December 2017. * * * Your Excellency, Ambassador Tziras, Sir Christopher, Professor Pissarides, Distinguished panellists, Ladies and Gentlemen, Let me first of all thank David Marsh and the OMFIF team for the organisation of the event and today’s strong panel: two distinguished Governors, former President of Deutsche Bundesbank Ernst Welteke and former Governor of the Czech Central Bank, Miroslav Singer, two renowned Professors, policy makers and market gurus, Charles Goodhart, LSE Professor and former Monetary Policy Committee Member at the Bank of England, and Vittorio Grilli, former Italian Minister of Economy and Finances and Chairman of JP Morgan EMEA, for kindly accepting the invitation and taking the time to speak today. I am truly honoured by their presence, I thank you all and each one personally, and I am also very grateful to all of you for being here today. I will restrict myself today to offering brief remarks on the global outlook for 2018 and the risks ahead, as well as current developments in terms of global monetary policy and the prospects for capital markets, the latest on Europe, including my own country, Greece. There is evidence which makes me feel optimistic, after the 8-year Greek saga, and I would like to share my optimism with you today. 1. Introduction The upswing in global economic activity has continued well into the second half of 2017, and the upturn has become more synchronised across countries. The recovery is supported by significant increases in trade, investment and industrial production, along with strengthened business and consumer confidence. The short-term risks are broadly balanced, but mediumterm risks are still tilted to the downside. Furthermore, wage growth has been disappointing, keeping inflation at low levels. According to the IMF’s latest forecasts, global GDP growth is expected to accelerate to 3.6% in 2017, and reach 3.7% in 2018, while global inflation will reach 3.1% this year and 3.3% in 2018. 2. The eurozone’s current economic outlook In the eurozone, we can say with confidence that we are going through a solid economic expansion. Indeed, GDP has risen for 18 straight quarters. The increase in growth in 2017 mostly reflects acceleration in exports in the context of the broader pickup in global trade and continued strength in domestic demand growth supported by accommodative financial conditions amid diminished political risk and policy uncertainty. Overall, growth is expected to average 2.2% in 2017 to the highest level since 2007. The positive momentum will continue going forward mainly because the drivers of growth are increasingly endogenous, rather than exogenous, which used to be falling oil prices and accommodative monetary policy. Now, there are indicators that growth is “feeding on itself”, that is, spending multipliers and endogenous propagation are once again supporting economic activity. This is most evident in private consumption, which has remained robust even 1/8 BIS central bankers' speeches as oil prices have risen by about 30 dollars since the start of 2016. Consumption is being supported by a virtuous circle between rising labour income and rising employment. Employment in the euro area has reached its highest level ever, while unemployment has fallen to its lowest rate since January 2009. As consumption has strengthened and spending multipliers have taken hold, investment has also followed with a lag. Since 2016, investment has contributed almost 45% to annual GDP growth, compared with under 30% in the two years previously. However, inflation developments across the euro area still remain subdued. Indeed, annual HICP inflation decelerated to 1.4% in October 2017, down from 1.5% in September, while core inflation fell to 0.9% in October from 1.1% in September. Two indicators are important for assessing the durability of inflation. The first is the outlook for growth, since this helps us assess whether inflation will continue to rise. The second is underlying inflation. This assesses whether inflation will stabilise around the ECB’s target of 2% once the effects of volatile factors, such as oil and food price swings fade away. As I already mentioned, the growth outlook is now solidly improved (1.8% in 2018), but the underlying inflation trend remains subdued. A key issue here is wage growth. Since the trough in mid-2016, growth in compensation per employee has risen, recovering around half of the gap towards its historical average. But overall trends still remain subdued and are not broad-based mainly because the effects of past low inflation are continuing to weigh on wage growth while the relationship between wage growth and traditional measures of slack has weakened in the post-crisis period. Hence, the outlook for inflation based on Eurosystem staff projections has been revised downward, to 1.5% for 2017 and 1.4% for 2018 and 1.6% for 2019. In sum, the inflation target cannot be restored without the ECB’s accommodative policy and as ECB President Draghi stated recently “an ample degree of monetary stimulus remains necessary” for underlying inflation pressures to build up and support headline inflation over the medium term. 3. Global economic outlook The largest economy in the world, the US economy, has been expanding for eight years in a row, which is one of the longest periods on US record. Output growth is projected to reach 2.4% in 2017 and 2.1% in 2018 (1.6% in 2016), much lower than the Trump administration’s plan to get the economy growing at 3%, while CPI inflation is projected by the Federal Reserve (Fed) at 1.6% in 2017 before increasing to 1.9% in 2018. In the United Kingdom, Brexit is having a negative effect on growth via both weaker consumption (thanks to the FX-induced rise in inflation) and heightened uncertainty negatively affecting investment. On the inflation front, the UK is one of the few developed countries where inflation has surprised on the upside at around 3% in the current quarter as a result of past falls in the sterling’s value. UK growth is expected to stand around 1.5% in 2017 from 1.8% in 2016 and 1.7% in 2018 with downside risks on the back of the slow progress in Brexit negotiations. According to the Bank of England, inflation should remain elevated to 3% in 2017, before falling back to 2.4% in 2018. In Japan, real GDP growth is projected to decelerate to 1.0% in 2018 from 1.5% in 2017. As far as inflation is concerned (as you know Japan is an outlier in terms of persistently low inflation despite its full employment), core inflation is projected to stand at 0.8% for 2017 and 1.4% for 2018 and that is why the Bank of Japan, among all other central banks from developed countries, is likely to maintain its quantitative easing policy for the longest period. Finally, with Brazil and Russia exiting recession and China stabilising at growth rates above 6%, emerging economies real GDP is projected to be expanding roughly near to 4.6% in 2017 from 4.3% in 2016 and to 4.9% in 2018. 2/8 BIS central bankers' speeches 4. Potential risks ahead Among the major downside risks I would like to focus on the so-called “trade risk”, namely how a shift towards protectionism driven mainly by the new US administration could disrupt global supply chains reducing trade and cross-border investment flows harming global growth. The decision to pull the US out of the Trans-Pacific Partnership and threats to leave NAFTA are signs of a fierce protectionist stance by one of the world’s major trading blocks that could have a destabilising effect on the WTO and world trade relations in general. At his speech before the United Nations General Assembly last September, US President Trump repeatedly argued in favour of “strong sovereign nations”, attacking globalism and putting allegiance to the national state ahead of international institutions. The Chinese and US policy appear to converge in this regard against a “one-size-fits-all universal order”. This stance also finds followers among the lines of “international nationalists” or anti-globalists also include leaders such as Vladimir Putin, Viktor Orban in Hungary or Duterte in the Philippines. The argument goes that strong sovereign nations should be the basis of a stable, international order that cuts back on the excesses of globalism, which is seen as elitist. Another risk that is not so probable, one that I would like to take a moment to mention nonetheless: A bad revival of Reaganomics of the 1980s, for which I will simply remind you that during President Reagan’s first administration, loose fiscal policy collided with a tight monetary stance by the Fed under Chairman Paul Volcker, in an effort to squeeze inflation out. This combination resulted in a seriously overvalued dollar, which for many analysts is the primary cause that sunk a large number of Latin American economies into a decade of stagnation. Underlying vulnerabilities remain for some large emerging markets still today. High corporate debt, weak balance sheets and thin policy buffers mean that these economies are exposed to tighter global financial conditions and capital flow reversals. A closer look at the numbers may provide some reason to be slightly apprehensive: today we are experiencing a stronger dollar than in the strong dollar period of the eighties. Indeed, the US dollar’s annual rise over the last two years was 11% annually, compared with 7% in the 1980s between November 1978 and March 1985. It would be extremely interesting if Vittorio Grilli, either with his professorial hat or in his current position as J.P. Morgan Europe Chairman, could share his views on whether he considers this dollar overvaluation is a real possibility, and more importantly, if we face it, how long it would last. A repeat of the eighties? Other risks include exogenous shocks such as geopolitical tensions, political turbulence and large-scale involuntary migration especially from Africa. 5. Central banks’ monetary policies: A cautious transition to a less expansionary monetary policy European Central Bank goes for a dovish tapering in 2018 In my own turf of central banking now, at the October Governing Council, the ECB has decided the official start of QE tapering by a combination of the following decisions: The ECB has, on the one hand, decided to scale back its purchases of new securities (from €60 billion to €30 billion per month) and, on the other hand, to extend the horizon of purchases until the end of September 2018 and beyond, if necessary. Up to now, the ECB has bought around €2.2 trillion under the APP programme. The ECB also decided to strengthen its forward guidance on the reinvestment of already purchased securities “for an extended period” after the end of net QE purchases and “in any case for as long as necessary” and will publish the monthly profile of reinvestment flows twelve months ahead, which means a rough amount of €120 billion, or 12 billion per month. 3/8 BIS central bankers' speeches This means that the ECB’s gross purchases over the period until September 2018 will average €41 billion per month. In this context, during the period of net asset purchases, PSPP principal redemptions will be reinvested in the jurisdiction in which the maturing bond was issued. As regards the private sector programmes, there is no strict allocation of the total volume to jurisdictions, but purchases are broadly oriented towards market capitalisation of eligible securities, while also paying due consideration to market conditions. Therefore, for the private sector programmes, the maturing amount in a jurisdiction in a specific month does not necessarily determine the amount to be purchased in this jurisdiction during the month, leaving ECB with flexibility and degrees of freedom to intervene in the euro area’s bond markets in case of any absurd movements domestically. The ECB’s monetary policy tends to influence long-term yields through both its main components: by compressing the term premium, and by anchoring the expected path of policy rates in the future. By accumulating a portfolio of long-duration assets, the central bank can compress term premia by extracting duration risk from private investors and thus lowers term premia and yields across a range of financial assets. Asset purchases do matter also for the signals they entail about the path of future policy rates: the so-called “signalling effect”. In the euro area, this effect is reinforced by the sequence in which our instruments are ordered. Specifically, the length of the horizon of our net asset purchases, and the forward guidance that our policy interest rates are expected to remain at their present levels “well past” the end of those net purchases (but they are unrelated to the time guidance on reinvestments), mechanically affect the time of the first expected rate hike, anchoring the path of expected policy rates over the lifespan of the APP and beyond. The positive evidence from the ECB’s QE programme can be found in many areas, including the growth rate of loans, the decline in bank lending rates including the growth rate of loans, the cross-country heterogeneity in bank lending rates, which implies a less fragmented banking sector, a compression of intra-euro area spreads and a flattening of yield curves across all markets. In my keynote address in Valencia at the BBVA Annual Congress last spring (Chapter 11 of my book), I tried using a Taylor rule framework to provide tentative answers on a number of important future ECB monetary policy issues including timing and sequencing. In addition, I then raised and tried to answer there a number of pending issues like, for instance, should the scaling back of a national central bank’s balance sheet be discretionary or rule-based? It would be extremely interesting to hear the views on the policy dilemma about sequencing, namely rate hikes first and then the start of tapering or vice versa, of Professor Goodhart, the best monetary economist in Britain and continental Europe. It is fair to say that for many years to come, bonds will remain in central banks’ balance sheets. How quickly central banks reduce their bond portfolio will depend on macroeconomic and financial developments over the next several years. In such expanded balance sheets, central banks have to resolve the following growing maturity mismatch: on the asset side, one can find long-term items like government bonds as a result of the QE programme, while central banks liabilities have remained of very short maturity, typically bank reserves, currency and government deposits. Clearly, the fundamental question that has to be addressed by macroeconomists and central bankers is how durable the existing environment of low and stable inflation and low real interest 4/8 BIS central bankers' speeches rates will be. Let me elaborate a bit on this. With a Nobel laureate and leading macroeconomist in the audience, Professor Pissarides, by whom I had the privilege to be taught graduate macroeconomics, I can’t resist the temptation to say one word on this. We all see that the link between the economic cycle and inflation is rather weak; if you like, inflation is not behaving the way our economic models predict in the short run. We don’t see stronger wage and inflation dynamics when the average unemployment rate falls from 9% to 6% (and the numbers are real). Instead, we witness that inflationary pressures are largely absent and inflation expectations are subdued because there is more slack, as some claim, in the economy? Or is it at the end of the day, an inflation measurement issue, and that’s it? (quite convenient!) There is a large body of academic literature on both disputed issues of low inflation and low real interest rates, but unfortunately there is no strong consensus on the findings to the extent that these could be adopted straight away by monetary policy makers. More academic research is needed here as I strongly believe that this sort of research will be useful and have a forceful impact on real-world monetary policy making. US monetary policy In terms of US monetary policy, the Fed has signalled its intention to carry out the third hike of the year at next week’s meeting (and by the way, the Bank of England has, for the first time in a decade, raised its base rate from 0.25% to 0.5%) and there is consensus in the market to expect two more rate hikes in 2018 in the US. The Fed’s new Chairman, Mr. Jerome Powel, for the first time a non-economist, is facing a number of challenges including: shrinking the Fed’s balance sheet, the classic dilemma coming from a buoyant labour market in the US (4.1% unemployment rate), which might warrant a faster pace of tightening, versus modest wage growth and inflation that has been below target for 5 years, but also new ones like, for instance, how the Republicans’ tax reform bill (approved with a slim majority by the US Senate following its approval by the House of Representatives), which could affect the projected interest rate path, particularly if it stimulates faster economic growth. 6. Prospects for global capital markets in 2018 A few words now on prospects for global capital markets in 2018 based on our own predictions at the Bank of Greece. Bond markets Starting with the bond markets, the four-decades-long bull market seems to be coming to a close, and we expect interest rates to continue rising at the short and, to a lesser extent, at long ends, resulting in a flattening yield curve (this is especially true for the US). Hence, 10-year Treasury note yields may gradually rise to 2.7% by end-2018 [today 2.3%]. In the eurozone, the hunt for yield will remain strong, and alternatives to core government bonds, such as corporate debt, high-yield and European periphery bonds, should remain in big demand. We expect the German 10-year Bund to yield around 0.7% at the end of 2018 [today 0.33%]. Foreign exchange markets The story of 2017 so far has been the weak US dollar versus a strong euro, as the euro area’s economy picks up, the ECB winds down its QE programme and political risks subside. However, US higher budget deficit, the prospect of accelerating growth and inflation and consequently further monetary tightening by the Fed, would favour a stronger dollar, most likely in the first months of 2018. Nevertheless, as soon as the ECB probably terminates its bond purchase programme towards the end of the year and possibly give rise to more formal talks about rate hikes, market participants could assume that the ECB will pursue a more restrictive monetary policy. As a result, the euro will pick up against the dollar towards 1.22 (today 0.88) by the end of the first half of 2018. 5/8 BIS central bankers' speeches Finally, an expected range for the exchange rate of the sterling pound against the US dollar is between 1.26 and 1.36, while the euro against the sterling pound should be between 0.86 and 0.96 and against the yen could climb towards 140. 7. The dynamics of European integration Moving on to the situation in Europe now (Part II of my book), December 2017 marks 18 months since the referendum on the UK’s exit from the EU and 18 years since the introduction of the single currency, the euro. These two milestones have drastically altered the dynamics of the European Union. However, my belief is that eurozone membership will remain unchanged at 19 countries in the foreseeable future, as I do not see a possible entry, say, of Poland or the Czech Republic, Governor Singer, my good friend Miroslav, I hope you agree, but there are also slim chances today of an exit referendum in a eurozone country because the political message from recent key elections for instance in the Netherlands and France shows a straight defeat of the populist, anti-European political forces (I refer to Marine LePen’s defeat in France, the win of Mark Rutte in the Netherlands, the Italian Five Star Movement has mitigated its anti-European rhetoric, while in Spain the Catalunya issue seems to have been addressed and Prime Minister Rajoy has come out stronger). This is not to deny an escalation of the anti-euro sentiment in Europe in the near future triggered perhaps by another turn in the migrant crisis, which remains dormant at the moment. In Germany, growing euroscepticism is reflected in the unusual political instability following the recent general elections. Probably you are aware it was indeed on a European issue – the issue of extending the powers of the European Stability Mechanism (ESM), the EU’s rescue fund – that Merkel’s coalition talks with FDP liberal leader Christian Lindner stumbled. I hope this deadlock is resolved sooner rather than later. The best hope for getting serious EMU reform back on the agenda is a successful conclusion for the talks Christian Democrats and the Social-Democrats. A “Grand Coalition” between Germany’s two largest parties would be the most stable and market-friendly outcome, as opposed to the other two scenarios: a minority government or another general election in Germany. However, if such a “Grand Coalition” is formed, then the main opposition party at the Bundestag will be the fiercely eurosceptic Alternative for Germany (AfD). In the United Kingdom, and in particular on the Brexit front, there is cautious optimism that a December summit breakthrough is still possible, as the UK accepts EU financial settlement demands, removing one of the biggest obstacles to a Brexit divorce settlement. In France, modernisation is at the forefront of President Macron’s agenda, who has put forward proposals for reforms that will reshape the EU. Of course, Macron needs to establish his credentials as a reformer first in his own country. An initial successful step was taken with the reform of France’s labour law, which must now be followed by the tricky reforms of France’s taxation and vocational training system. In parallel, President Macron has placed deepening the European project at the heart of his agenda. His address on Pnyka Hill last September, as part of his visit to Athens, his first ever official trip abroad as France’s President, but also his speech at Sorbonne University a few weeks later were intended to send a clear message about France’s European ambitions, covering everything from common defence to harmonisation of tax policy, including a Finance Minister for the eurozone. As a Southern pro-European myself, I strongly believe that the urgency in Europe is not to be complacent and leave the populists dictate the agenda. Southern European countries must stick with reforms (including the mother of all reforms, namely the privatisation agenda), and, on the other hand, leading eurozone countries must make sure to build the missing pieces of the EMU incomplete architecture, including a financial union among eurozone countries through the 6/8 BIS central bankers' speeches completion of the Banking Union – I have no doubt that there will be another European compromise on the long-mooted proposal for a European deposit insurance scheme (EDIS) – and the Capital Markets Union. There is also the recent proposal in the field of fiscal policy from the European Commission on a European Safe Bond (ESB), which is also the subject of a study by a high-level group at the ECB, chaired by Bank of Ireland Governor Philip Lane. The idea is that sovereign debt across the eurozone could be bundled into a new financial instrument, the ESB, and sold, if you like, as a European brand, to investors. This is a different idea from pooling national government debt issuance, known as the common Eurobond, which, I know, remains a political taboo in Germany. And I want to assure the esteemed President of the Deutsche Bundesbank, Mr. Welteke, that I make no personal value judgement on this. As ECB President Mario Draghi rightfully said two weeks ago at the annual European Banking Congress in Frankfurt, this is the right moment for the euro area to address the remaining gaps in the institutional architecture of the EMU and, if I could add, that would help the benefits of growth in Europe reach not only the countries of the North, but also the countries of the europeriphery. 8. Greece Finally the latest on my own country (Part III of my book). This is a fortunate moment for Greece. After 8 years of economic hardship, we can say with confidence that there is light at the end of the tunnel for the Greek economy. This is not the right place to ask what went wrong in Greece or put the blame. What is important today is to look forward. Based on this year’s economic performance, namely a solid primary budget surplus of 2.5%, a growth rate of about 1.5%, albeit modest and cyclical, it is the highest over the last 10 years, quite necessary to stabilise expectations. The country also recorded a current account surplus of 0.4% and an unprecedented 30 million tourists visited Greece this year, and, in light of the above evidence, next year’s prospects are even more promising, with official forecasts of 2.5% economic growth rate and a primary budget surplus of 3.8% of GDP. On top of that, two more signs make me really optimistic about the future: Firstly, there is evidence of the rebalancing of the Greek economy towards the external sector: a 9% increase in the share of export of goods and services as a percentage of GDP (up from 19% to 28%). Secondly, a tentative but successful return to international capital markets through a €3-billion bond issue last July and a €30-billion voluntary bond swap last week aiming at building a proper sovereign bond yield curve and providing depth into the Greek secondary bond market. The takeup reached 86% of bondholders, with more than half of participants being international investors. I conclude here with one final remark about the state of Greek banks and two further points or messages, if you like, addressed at several recipients. After three recapitalisations during the last 5 years, the financial position of the Greek banking sector is progressively stabilising. As Greek banks are the outlier on the non-performing loans’ European map, efforts must be stepped up beyond the existing performance targets set by the Bank of Greece. Moreover, new stress tests as part of a pan-European exercise next spring are widely expected not to hold any negative surprises for the capital position of Greece’s systemic banks. A gradual return to normal bank funding conditions, less dependence from the Eurosystem and a steady increase in deposits will ultimately encourage new bank lending to healthy businesses, restoring Greek banks’ profitability, thus allowing Greek banks to face the modern-day challenges, together with their European counterparts, such as green financing, smart technologies, including fin-tech and cybersecurity, etc. I turn now to the two messages I promised earlier. Message #1: Firstly, a permanent return to international capital markets and a drastic drop in the cost of sovereign borrowing, comparable to that of Portugal are within reach, after the timely completion of the Third Adjustment Programme in August next year, subject to one or two 7/8 BIS central bankers' speeches preconditions. There is so much liquidity out there and the hunt for yield never stops. Greece can offer right now government bonds with high yields and safety. May I also remind you that fourfifths (4/5) of Greece’s public debt now lies in the hands of the official sector, with a very low cost of servicing (1-1.5%), with long maturities and indeed long-deferred amortisation payments. One such necessary, but not sufficient, precondition is the following: a cash buffer of €15 billion for the first year after the end of the programme, which requires three new timely bond issues (with 7-, 3- and 10-year maturities) during the first half of next year, worth €6 billion in total, plus another €9 billion from the ESM, agreed already, to be followed of course by some sort of conditionality (others might include: entry to ECB’s QE, some further debt relief and one or two credit rating upgrades, etc.). My second message is more political and is addressed to various competent stakeholders, starting with the imperative of political stability and continuing with no complacency, no slackening of effort, and a requirement to stick to reforms and indeed to the mother of all reforms, namely the privatisation agenda for a slim and efficient public sector. The above are all prerequisites for incentivising foreign direct investment (FDI) but also domestic investment, which are the key drivers behind sustainable growth and indeed job creation, which should be the ultimate objective. Thank you very much for your attention. 8/8 BIS central bankers' speeches | bank of greece | 2,018 | 1 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event organized by the Hellenic Spanish Chamber of Commerce, Athens, 12 February 2018. | Yannis Stournaras: The future of the Greek economy Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event organized by the Hellenic Spanish Chamber of Commerce, Athens, 12 February 2018. * * * Ladies and Gentlemen, It is a great pleasure for me to be with you today. I will share with you some thoughts on the developments, the risks, the challenges and the future prospects of the Greek economy. First of all, I would like to emphasize that Greece and Spain are connected by close ties of friendship and constructive cooperation within the European Union and the Eurozone. Existing strong economic ties are reflected in our bilateral trade in goods and services. 1. There is scope for further increasing the Greek-Spanish bilateral trade in goods and services In more detail, Greece’s trade balance with Spain is negative (at about 1 billion euro in JanuaryNovember 2017) and has been gradually worsening over the last five years. Exports of goods to Spain account for about 2.5% of Greek exports of goods and have increased by 29.4% in nominal terms in 2012–2016. Imports of goods from Spain account for 3.5% of Greece’s total imports of goods and have increased by about 20.9% in nominal terms in 2012–2016. The services balance with Spain is positive, albeit too small to cover the trade deficit1. The total net inflows for foreign direct investment coming from Spain reached 3.5% of the total in 2016. The figures I have just mentioned are a testimony of our good economic relations, but provide room for further increasing bilateral trade and investment flows, which, in turn, will raise economic growth and prosperity in both countries. On the last point, let me highlight that the policy changes that have taken place over the past eight years in Greece, coupled with the decisive implementation of the remaining reforms and privatizations, have rendered Greece an attractive place to invest and provide opportunities for expanding the activities of Spanish businesses in Greece in both goods and services sectors. 2. Progress over the past eight years The Greek crisis was the result of major macroeconomic imbalances which have accumulated over a long period of time, leading to the outbreak of the sovereign debt crisis in 2010. To a large extent, these imbalances have now been addressed, although major challenges remain, as I will explain later. Over the past eight years, Greece has implemented a bold economic reform and adjustment programme that has fully eliminated fiscal and external deficits and improved competitiveness. In more detail: • The general government balance turned into a surplus of 0.5 percent of GDP in 2016 from a deficit of 15.1 percent of GDP in 2009. The primary surplus (i.e., the general government balance net of interest payments) showed a surplus of 3.8 percent of GDP in 2016 (programme definition), from a deficit of 10.0 percent of GDP in 2009. • The current account deficit has fallen by 15 percentage points of GDP since the beginning of the crisis, with the current account effectively being in balance over the last three years. • Labour cost competitiveness has been fully restored and price competitiveness has recorded substantial gains since 2009. • The reforms implemented cover the pension system, the health system, labour market, product market, the business environment, public administration, the tax system, and the 1/7 BIS central bankers' speeches budgetary framework. As a consequence, openness has improved substantially and the economy has started to rebalance towards tradable, export-oriented sectors. • The share of total exports in GDP increased from 19.0% in 2009 to 33.1% in JanuarySeptember 2017. Exports of goods and services, excluding the shipping sector, have increased by 47% in real terms since their trough in 2009, similar to euro area exports. • The share of tradables goods and services in the economy has increased by 10% relative to non-tradables in terms of real gross value added since 2010. Also, relative prices and net profit margins of tradables’ sectors have increased, facilitating the rebalancing process of the Greek economy towards tradable goods and services. T he banking system has been restructured, consolidated and recapitalized, following stringent stress tests along with in-depth asset quality reviews. Greek banks are now among the best capitalized in Europe. In September 2017 the CET1 ratio came to 17.1% (December 2016: 16.9%) and the CAR to 17.2% (December 2016: 17%). Moreover, the accumulated provisions cover half of banks’ total NPEs, while the other half is covered by the value of the underlying collateral, resulting in an overall coverage ratio of almost 100%. Significant institutional reforms have been implemented, aiming at providing banks with a variety of means of reducing non-performing loans. These reforms, among other things, include the authorization of credit servicing firms, operation of an electronic platform for out-of-court settlement, and electronic auctions of real estate. In addition, banks have set operational targets to reduce the stock of non-performing exposures (NPEs) by 37% by end-2019. According to the relevant reports published by the Bank of Greece, progress towards the achievement of targets is satisfactory. In September 2017 nonperforming exposures stood at €100.4 billion or 44.6% of total exposures, having declined by 7.6% (or €8.2 billion) from the March 2016 peak. The improvement during the period JanuarySeptember 2017 resulted mainly from sales and loan write-offs. 3. Short and medium-term outlook Progress in the implementation of the adjustment programme and in particular the completion of the 3rd review is having a beneficial impact on confidence, liquidity and economic activity. The economy is recovering. This is reflected not only in GDP figures, but also in several key indicators of economic activity, such as industrial production, private sector employment flows, exports of goods and services, and foreign direct investment, as well as soft data such as the manufacturing PMI and economic sentiment indicators. Improvements are also visible in the financial sector: bank deposits of the non-financial private sector have increased and bank credit to non-financial corporations has stabilized. Nevertheless, financial conditions remain tight and bank lending rates are high compared to other euro area countries. Since October 2017, all four systemic banks returned to the international capital markets with covered bond issues for the first time since 2014. Banks’ dependence on central bank financing has declined significantly. The ELA ceiling stands now at €19.8 billion euro, down from 90 billion euro in July 2015. The reduction reflects an improvement of the liquidity situation of Greek banks, taking into account flows stemming from private sector deposits, banks’ liquidations of non-core assets and banks’ access to wholesale financial markets. Yields of Greek government bonds have declined to pre-crisis levels and the yield curve has largely normalised. The Greek government returned to international bond markets, for the first time since 2014, with a new five-year issue in July and, towards the end of 2017, conducted 2/7 BIS central bankers' speeches an exchange operation of PSI bonds in order to enhance the liquidity of the market for Greek debt. Investors’ participation in this operation came to 86%. Following the swap of old bonds for new ones, yields have fallen substantially (especially on shorter-term notes). Last week and despite market turbulence Greece issued a seven-year bond through which it borrowed €3 billion at a yield of 3.5%. Moreover, yields on corporate bonds fell, while share prices rose, reflecting a gradual recovery of investor confidence in connection with steady progress in the implementation of the economic adjustment programme. On the fiscal front, in January-November 2017, the general government cash primary surplus improved, reaching 4.0% of GDP, compared to 3.7% of GDP in the same period last year. Based on the above, the incoming ESA-2010 data and the execution of the 2017 state budget, the 2017 primary balance target of 1.75% of GDP is expected to be reached with a significant margin. For 2018 the primary balance target of 3.5% of GDP is considered achievable. According to Bank of Greece estimates, economic activity is expected to pick up in the medium term, with GDP growing by 1.6%, 2.4% and 2.5% in 2017, 2018 and 2019, respectively. Growth is projected to accelerate in 2018 and 2019, supported by exports, private consumption and investment. Consumption is expected to recover, primarily on the back of higher household real disposable income as a result of increased employment. The contribution of investment is expected to be positive, mainly due to stronger business investment, reflecting the gradual restoration of confidence and liquidity in the financial system, as well as the acceleration of privatisations. Exports are expected to remain robust, reflecting higher foreign demand and the restoration of international competiveness. 4. Risks and challenges The above forecasts are based on the assumption that the reform and privatization programme will be implemented smoothly and according to the agreed time schedule. The recovery of the economy remains fragile and subject to risks and vulnerabilities, both internal and external. Delays or backtracking on reforms would weaken the positive outlook and impact negatively on investors’ confidence in the future course of the Greek economy. Therefore, economic policy should remain focused on the implementation of the remaining programme measures and the preparation for the timely conclusion of the fourth and final review, which will mark the end of the ESM programme. There are also external risks to the forecast, which are linked, among other things, to the sudden increase in investors’ risk aversion due to disturbances in international financial markets (such as the recent mini-crash in Wall Street), tensions in foreign exchange markets and broader geopolitical factors. 5. Major challenges looking forward: Putting the economy on a sustainable growth path As a result of the painful economic adjustment over the past eight years, macroeconomic flow disequilibria have now been eliminated and reforms have contributed to a substantial improvement of competitiveness. Hence, this is a good starting point for the Greek economy to embark on a sustainable growth trajectory. However, stock disequilibria — such as the high public debt, the high burden of NPLs and high unemployment — persist or have even increased during the years of the crisis, acting as a drag on long-term growth. Furthermore, a large number of legislated reforms need to be fully implemented and the fiscal policy mix is not supportive of growth. The high level of public debt reduces long-term growth prospects because it increases the cost of capital and generates expectations that future taxes will remain high in order for the sovereign to service the debt, lowering investment. High NPLs in banks’ balance sheets reduce the ability of the banking system to provide credit to healthy firms because capital is trapped in non-viable 3/7 BIS central bankers' speeches firms. High long-term unemployment leads to depletion of human capital whereas the collapse in investment has contributed to a decline in the stock of productive capital with negative consequences for long-term productivity growth. In order to address the abovementioned challenges the focus of economic policy should be on the following: 1. Addressing the public debt overhang. Decisive and concrete actions are needed to ensure the sustainability of Greek public debt, on the basis of the Eurogroup’s decision of June 2017. The Bank of Greece has put forward a mild debt re-profiling proposal, which entails only a negligible cost for our partners and provides for, among other things, extending the weighted average maturity of interest payments on EFSF loans by at least 8.5 years. This, along with a long-term commitment to structural reforms, could bring Greek debt back to a sustainable level in gross financing needs terms, allowing for a smooth return of the country to the international capital markets. 2. Implementing the remaining reforms and improving the quality of institutions. Academic research on the drivers of long-run growth shows that well-functioning institutions, high regulatory quality and good governance matter for economic growth and enable countries to over-perform in the long run2. This is because institutions and regulatory quality affect incentives for people and businesses to invest in physical and human capital, technology and the organization of production. Therefore, particular emphasis should now be placed on improving the public administration, implementing the land registry, strengthening institutions, cutting red tape, lowering the regulatory burden and ensuring the predictability and stability of legislation, reducing entry barriers into network industries, retail trade and professional services as well as on enhancing judicial efficiency. Moreover, with regard to independent authorities, it is important to strengthen their administrative and financial autonomy and ensure respect for their independence, as well as accountability towards Parliament. 3. Adopting a growth-friendly fiscal policy mix. The over-performance relative to the fiscal policy targets over the past three years strengthened fiscal policy credibility, but it came at a cost, i.e., lower economic growth. This is due to the high reliance of the fiscal policy mix on tax policy measures and tax rate hikes. According to the Global Competitiveness Index 2017–2018, Greece ranks last and second to last as regards the adequacy of the tax system to provide incentives to invest (137th out 137 countries) and to work (136th out of 137 countries). High tax rates actions encourage the shift of activities towards the shadow economy and provide incentives for tax evasion. Hence, the fiscal mix is not sustainable and must change. More emphasis has to be placed on cutting non-productive expenditures, increasing the public sector efficiency, including the management of state property and improving the tax administration. These actions will lead to a fairer distribution of the fiscal burden and will facilitate the reduction of the excessively high tax rates. 4. Tackling the problem of non-performing exposures/loans (NPEs/NPLs) and strategic defaulters which constrains the banking system’s ability to finance economic growth. The NPE reduction targets for the next two years are ambitious compared to last year, implying that banks will need to step up their efforts and make full use of the available toolkit for private debt resolution. Moreover, banks will be facing new challenges in 2018, most notably the implementation of IFRS 9, stricter treatment of loan-loss provisions, as well as the EU-wide stress test to be conducted by the ECB. Thus, banks need to step up their efforts to attain their operational targets for reducing their NPLs and, ideally, over-achieve them now that the economy has returned to positive growth. In this context, they need to broaden the scope of the workouts they offer to borrowers and make more drastic decisions, in particular with respect to the restructuring of viable businesses, identification of strategic defaulters and the liquidation of nonviable businesses. 4/7 BIS central bankers' speeches 5. Improving further the business environment and the insolvency framework to enable faster reallocation of productive factors to more productive opportunities. Rebalancing of the economy towards tradables heavily relies on the ability to freely and quickly move capital from less profitable to more profitable sectors. An efficient insolvency framework is crucial in restructuring companies that are viable and liquidating companies that are not. Despite streamlining the insolvency framework over the past four years, insolvency proceedings remain slow and asset recovery rates are low. Indicatively, according to the OECD, a typical insolvency process in Greece lasts on average 3.5 years, double the time of the OECD average and the recovery rate is 35%, half the level of the OECD average. According to OECD research, Greece has the highest share of capital (and labour) trapped in non-viable companies among OECD countries (27%). This suggests that there is a high degree of capital misallocation in the economy, which contributes to lower productivity. 6. Promoting innovation, education and knowledge-based capital. A necessary condition for sustainable growth is the achievement of higher TFP growth. In order to foster TFP growth, policy must focus on improving the quality of labour (i.e. skills), attracting investment in new technologies and improving the quality of capital through the creation of an institutional framework that supports innovation. Given the decline in the cost of labour relative to the cost of capital and the tight financing conditions of companies, the major risk looking forward is that investment will be concentrated in labour-intensive, low-productivity sectors. This, however, would trap the economy in a state of low productivity and low growth. Hence, innovation, ICT investment and technological progress are important in order to boost productivity in the long run. 7. Speeding up privatizations to attract FDI. Given the decline in disposable income due to the recession and the increased tax burden due to fiscal consolidation, domestic savings are insufficient to meet investment needs which, after a long period of very low investment rates, are significant even though capacity utilization remains low in some sectors. Thus, conditions should be established to attract Foreign Direct Investment (FDI). One way to do that is by completing quickly privatization projects which are at a mature stage, as well as stepping up the pace of the overall privatization and real estate development programme. FDI, besides closing the investment gap, promotes greater trade ties with countries and companies with cutting edgetechnologies. This will allow integration of Greek companies into global value chains, increasing openness of the economy and improving both the quantity and quality of Greek exports. 8. Supporting the unemployed and enhancing employment and training programmes. With unemployment at very high levels, it is essential to provide immediate support to the unemployed and those marginally attached to the labour market by using active labour market policies and targeted social transfers to counter temporary income losses and shorten job transitions. In the medium term, emphasis should be placed on skill upgrading and retraining policies to get people back into work. 6. Final remarks A major issue in the coming months is the consolidation of confidence and the improvement of the country’s creditworthiness, which will allow the return of the Greek sovereign to financial markets on sustainable terms after the end of the programme in August 2018. The steps that will make an effective contribution in this direction are: • First, the implementation of the reform and privatization programme and the preparation for the timely conclusion of the fourth and final review, which will mark the end of the programme; • Second, the specification of medium-term debt re-profiling measures, which will enable Greece’s access to bond markets on sustainable terms and will facilitate the inclusion of Greek government bonds in the ECB’s quantitative easing programme. 5/7 BIS central bankers' speeches • Third, the complete lifting of capital controls, in connection with the improvement of the economic outlook and depositors’ confidence in the Greek banking system. New bond issuances, while still in the ESM programme, coupled with the forthcoming ESM disbursements (in line with the June 2017 Eurogroup commitment) could be used to build up a cash buffer to support investors’ confidence and facilitate Greece’s market access. Such a cash buffer would be particularly useful in the event that Greece’s credit rating has not improved to investment grade by the end of the programme in August 2018 (currently, five notches lower). However, notwithstanding the existence of a cash buffer to consolidate confidence over the medium term, it is important to clarify the environment in which the Greek economy will move after the end of the ESM programme. Under the EU legal framework, Greece will be under surveillance at least until it repays 75% of the official loans received from euro area countries, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). Therefore, it remains to be clarified first, the form of supervision in the conduct of economic policy and, second, whether and on what conditions precautionary financial support from the partners will be available after the completion of this program. According to the Bank of Greece, such a precautionary support framework could assist the Greek economy by further driving down borrowing costs, as it will provide assurance of Greece’s access to financing after the end of the programme in August 2018, especially if international financial market conditions deteriorate. It will also allow the ECB to maintain the waiver on Greek government bonds after the end of the programme and eventually include Greek government bonds in its asset purchase programme in the normal or/and in the reinvestment period. Maintaining the waiver is, in the Bank of Greece’s view, important for the smooth financing of Greek banks as long as Greece’s credit rating remains lower than investment grade, as even repo operations are facilitated by the waiver. *** The ongoing reform and fiscal adjustment effort is bearing fruits. The macroeconomic imbalances have now been corrected, important and long-needed reforms have been implemented, competitiveness has improved and the banking sector is adequately capitalized. The economy is recovering. However, we still have some way to go in order for Greece to tap the financial markets on sustainable terms after the end of the programme in August 2018. I am confident that the actions I have just described will improve Greece’s creditworthiness, boost the investment and business climate, facilitate the return to financial normality, and will contribute to the sustainable recovery of the economy after many years of recession and stagnation. Sources: Bank of Greece (2017), The Bank of Greece Interim Report on Monetary Policy 2017, December. www.bankofgreece.gr/BoGAttachments/Inter_NomPol2017.pdf Masuch, K., Moshammer, E. and Pierluigi, B. (2016): Institutions and Growth in Europe”, CEPS Working Document No 421. OECD, 2016, Greece, OECD Economic Surveys, Paris. Stournaras, Y. (2017b), “The Greek economy: Prospects and main challenges”, Speech at the 2nd EU-Arab World Summit, Athens, November. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=482&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2017a), “Greece and the global economy: Prospects and main challenges 6/7 BIS central bankers' speeches ahead”, Speech at an event organised by Credit Suisse, Athens, 11 October. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=476&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b 1 It is about 30 million euro in January-November 2017. Services receipts from Spain account for approximately 1.0% of total Greek exports of services (and have declined by 11% in nominal terms in 2012–2016), while payments to Spain account for about 2.2% of total Greek imports of services (and have increased by about 9% in nominal terms in 2012–2016). 2 (2) For an overview of the literature and an empirical analysis of the role of institutional factors in long-term growth in the EU, see Masuch, K., Moshammer, E. and Pierluigi, B. (2016): Institutions and Growth in Europe”, CEPS Working Document No 421. 7/7 BIS central bankers' speeches | bank of greece | 2,018 | 2 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 85th Annual Meeting of Shareholders, Athens, 26 February 2018. | Yannis Stournaras: Recent economic and financial developments in Greece Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 85th Annual Meeting of Shareholders, Athens, 26 February 2018. * * * TOWARDS THE COMPLETION OF THE THIRD PROGRAMME AND A RETURN TO THE MARKETS The successful completion of the third programme in August 2018 will signal the end of a long period of economic adjustment, allow a return to normality and could, under the right conditions, prove to be a starting point for strong and sustainable growth. The crucial issues which, from now on, will have a decisive impact on the course and prospects of the Greek economy are the following four: (a) Public debt sustainability The high level of public debt feeds uncertainty, undermines confidence in the prospects of the economy, weighs on Greece’s credit rating and hinders the smooth exit from the current programme. The debt sustainability report by the institutions and the adoption of the medium-term debt restructuring measures by the Eurogroup need to be made as soon and as clearly as possible, so as to further strengthen financial markets’ confidence and ensure a smooth exit from the programme. (b) Consolidating confidence In order to ensure its return to the markets on favourable terms, Greece must consolidate investor confidence in the continuation of reforms and convince that fiscal policy will not relapse once again in the wrong direction. The commitments made must be kept and decisive steps must be taken to continue reforms and privatisations, starting with the removal of obstacles to large investment projects that have already been agreed to, but are lagging. Land-use legislation should play an important role in this area. The formulation of a national strategy integrating the fiscal and structural targets already agreed for the post-programme period, will boost confidence. It will have a positive impact on the terms of Greece’s return to the markets, improve market sentiment and help attract investment. It will also facilitate the return of deposits to banks and will enhance their lending capacity. The above will set in motion a virtuous circle for the economy and the banking system and will create the necessary conditions for a full lifting of capital controls. (c) A smooth return to the markets After the end of the programme, Greece will have to secure the funds required to cover its financing needs by resorting to international financial markets on sustainable terms. As already mentioned, the consolidation of confidence is a sine qua non. At the same time however, a financial safety net will need to be put in place to assure that Greece is able to weather adverse developments that could temporarily drive borrowing costs up to unsustainable levels. The envisaged “cash buffer” is one such safety net, that would enable Greece to avoid a recourse to the markets at times of heightened volatility and high refinancing costs. This cash buffer is currently being built up with the trial bond issues before the end of the programme, as 1/7 BIS central bankers' speeches well as with disbursements from the European Stability Mechanism (ESM). At the current stage, the first trial return to the markets took place in July 2017 with a five-year bond issue, while in November 2017 a bond exchange was conducted for an amount of €25.8 billion. Subsequently, after the completion of the third review, a seven-year bond issue was launched, as part of the government’s plan for Greece’s return to international markets before the end of the programme. This issue, which took place amid turbulence in international financial markets, was successful. However, episodes of turmoil such as the recent ones appear to have a greater impact on countries with poor credit ratings and a weaker economy. These countries saw the yields on their government bonds rise considerably. This suggests that, in the present uncertain conditions, the Greek State’s return to the markets, as necessary as it may be for a return to normality, must proceed with caution. International experience has shown that trial bond issues for the purpose of creating a sound cash buffer prior to the expiry of a programme helps bolster confidence and paves the way to the exit from the programme. Nevertheless, the need for a complementary precautionary assistance programme must also be considered. The possibility of a recourse to a precautionary support programme, especially if financial market conditions call for one, must not be overdramatised, as the European mechanisms are there to be used if needed. Such a precautionary assistance framework can be expected to support the Greek economy, by helping to reduce borrowing costs, since it will provide assurance of the Greek government’s and banks’ access to funding beyond the end of the current programme in August 2018. Under an ESM precautionary credit line, funds would become available, without necessarily having to be raised beforehand, whereas the build-up of a cash buffer necessarily entails additional borrowing, which would increase the annual debt service costs. Moreover, this precautionary financial assistance framework would ensure that the waiver on Greek government bonds stays in place, so that the latter remain eligible as collateral in Eurosystem monetary policy operations until Greece regains an investment grade credit rating. Furthermore, in such case, the buffer for systemic banks should remain available beyond August 2018. Finally, the maintenance of the waiver, along with the debt sustainability measures, would enable the purchase of Greek government bonds by the European Central Bank under its public sector purchase programme either in its regular duration or during the reinvestment period, thereby exerting a downward effect on the borrowing costs of Greek government. (d) The post-programme surveillance framework According to the European institutional framework, the end of the Greek programme in August 2018 does not relieve Greece of its obligations vis-à-vis its lenders. What changes is the form of the surveillance framework for Greece, which must conform to the general surveillance terms and regulations in force in the European Union. Regulation (EU) No. 472/2013 of the European Parliament and of the Council provides for automatic post-programme surveillance until the country repays 75% of the loans it has obtained from other Member States, the European Financial Stability Fund (EFSF) and the European Stability Mechanism (ESM). Furthermore, the European Commission reserves the right to subject a Member State to enhanced surveillance, if it judges that this is warranted by the circumstances. Apart from these provisions, already in force, the European Commission has proposed changes to the economic governance of the euro area, some of which could be relevant for the type of post-programme surveillance that the Greek economy would be subject to, and will be discussed by the European Council within the first half of 2018. The aspects of potential relevance to Greece concern the enhanced role of the ESM and the possible support to Member States for the implementation of structural reforms. Therefore, it is clear that Greece’s smooth exit from the programme and its successful course in 2/7 BIS central bankers' speeches new post-crisis European normality entail a commitment to safeguard the achievements made so far, to pursue sound economic policies and to continue and complete the structural reforms. Rebalancing and adjustment of the economy from 2009 to 2017 The positive indications of a sustainable return to growth are the result of a long-standing and painful economic adjustment effort. The progress made since the beginning of the debt crisis in 2009 is remarkable and unprecedented by international standards. More specifically, Greece achieved: The full elimination of the twin deficits, i.e. the very high fiscal deficit and the large current account deficit. The full recouping of competitiveness in terms of labour costs and its considerable improvement in terms of prices. It is worth noting that this was achieved through a painful process of internal devaluation, involving significant reductions in nominal wages and salaries, mainly in the private sector. At the same time, a bold reform, privatisation and economic modernisation programme is being implemented in areas such as the labour and product markets, the healthcare and social security systems, the fiscal framework, the tax system and public administration. As a result of all these major reforms during the eight years of the crisis, the economy has become more extrovert and the production model has begun to rebalance towards exportoriented sectors. Finally, the restructuring and consolidation of the banking system, characterised first and foremost by significant recapitalisation, following stringent stress tests and in-depth asset quality reviews, ensure high capital adequacy ratios (Common Equity Tier 1-CET1), higher than the European average, which, along with a satisfactory NPE coverage ratio, enable Greek banks to effectively manage their high stock of NPEs. It should however be noted that, despite the progress made, the crisis has had significant costs in terms of output and employment losses and a marked decline in household wealth. Between 2008 and 2016, Greece lost over one fourth of its GDP at constant prices, and unemployment rose by nearly 16 percentage points. Furthermore, per capita GDP in purchasing power parity in 2016 came to merely 68% of the EU average, down from 93% in 2008. Meanwhile, a large brain drain has taken place, depriving Greece’s society and economy of one of its productive parts, with devastating demographic, economic and social consequences. DEVELOPMENTS AND PROSPECTS OF THE GREEK ECONOMY IN 2018 2017 marked the return of the Greek economy to positive growth after several years of recession, with the exception of 2014. GDP growth is expected to come to 1.6% in 2017 and to pick up further to 2.4% and 2.5%, respectively, in 2018 and 2019. Therefore, there are reasonable grounds to anticipate that, after a protracted and very painful economic adjustment, growth is now taking hold, on the back of favourable domestic developments and a positive European context. The improved prospects for the domestic economy have bolstered the economic climate and led to an increase in bank deposits, to upgrades of the credit ratings of the Greek sovereign and to successive reductions in Greek banks’ dependence on Emergency Liquidity Assistance (ELA). These better prospects also resulted in sovereign bond yields falling to January 2016 levels, thereby allowing the Greek government to return to the markets in July 2017 for the first time in three years. Corporate bond yields also fell and Greek banks returned to international financial markets with covered bond issues. Against this background, it is reasonable to anticipate a pick-up in growth for 2018, with GDP 3/7 BIS central bankers' speeches growing by 2.4%, driven by: (a) the solid performance of tourism; (b) stronger manufacturing output, reflecting the improved business environment and heralding a rise in business investment; (c) increased exports; and (d) favourable global economic conditions. HICP inflation returned to positive territory in 2017, posting an average annual rate of 1.1%, compared with 0% in 2016. The weakening of deflationary pressures is mainly attributed to the sharp upswing of international oil prices, particularly in the first five months of the year, and to the inflationary impact of new indirect taxes, effective from early 2017. In 2018, domestic inflation is expected to be determined largely by base effects, which will keep inflation in positive territory, but lower than in 2017. It is, however, worth noting that the favourable projections rely crucially on the assumption that the fourth and last review of the current economic adjustment programme will be completed smoothly and according to schedule, without delays or setbacks, and that the implementation of reforms will continue unabated in the post-programme period. FISCAL POLICY In 2016, Greece’s general government primary balance – as defined in the Economic Adjustment Programme – overshot the target set in the programme, for the second consecutive year. More specifically, the general government primary balance, according to the programme definition, turned out at a surplus of 3.8% of GDP in 2016, against a target of 0.5% of GDP. This overachievement reflected the better-than-expected performance of direct and indirect tax revenue, as well as the containment of social expenditure and of public investment. In the course of 2017 and in the context of the second review of the programme, a number of fiscal measures were adopted aimed at bolstering tax revenue, curbing tax evasion and, in the medium term, rebalancing the current fiscal policy mix. Legislation of fiscal measures continued into 2018 with the enactment in January of Law 4512/2018 in the context of the completion of the programme’s third review. According to the Introductory Report to the 2018 Budget, the primary surplus for 2017 is projected to reach 2.44% of GDP, against a target of 1.75%. However, based on the available fiscal data, it is estimated that the 2017 primary budget balance will exceed this forecast. Nevertheless, budget execution data for 2017 indicate that the overachievement of the fiscal target for 2017 is mainly driven by increased revenue from tax arrears (forced collection, additional taxes from the voluntary disclosure of income, tax arrears settlement), which are in large part conjunctural, but also by public expenditure cuts. On the other hand, the increase in direct and indirect tax revenue is marginal, despite higher tax rates and the introduction of new taxes. This confirms the view that the tax-paying capacity of the country’s productive forces has been exhausted and points to a need for change in the fiscal policy mix. THE BANKING SYSTEM AND PRIVATE INSURANCE UNDERTAKINGS The main developments in the domestic banking sector in 2017 were a gradual recovery of operating profitability; the maintenance of capital adequacy at satisfactory levels; a diversification of banks’ funding sources; and a small decline in the stock of non-performing exposures (NPEs) in line with the targets set, although this stock remains high (€100.4 billion in September 2017). It is worth noting that, according to December 2017 provisional data, there was a substantial pickup in the pace of NPE reduction in the fourth quarter of 2017 (with the NPE stock amounting to roughly €95 billion). Bank deposits by non-financial corporations and households increased in 2017, as a result of the economic upturn and the gradual recovery of public confidence in the banking system. Furthermore, the slowdown in credit growth observed during the crisis years now seems to have abated. Bank deposit rates continued to fall, albeit at a slower pace, and lending rates to nonfinancial corporations continued to decline. 4/7 BIS central bankers' speeches Non-performing exposures The effective management of NPEs is the most crucial legacy problem that banks now have to tackle, if they are to fully consolidate their loan portfolios and become capable of increasing their lending. To this end, the legal and regulatory framework has been strengthened, and banks have taken important action. Specifically, electronic platforms for out-of-court settlement of debts and e-auctions of real estate were launched; the authorisation framework for credit servicing firms was simplified; and the first sales of loan portfolios were conducted. Moreover, new legislation now protects bank officers involved in bad loan restructuring against criminal prosecution, and the rights of secured creditors have been enhanced. The progress achieved in removing the obstacles to the management of NPEs and, in particular, the impact on strategic defaulters’ behaviour from the launch of e-auctions was a main factor behind the favourable picture in the fourth quarter. Banks are complying with a specified time schedule to gradually reduce the stock of NPEs, with a view to driving down the total outstanding stock of NPEs by about 37% from June 2017 to December 2019. Furthermore, the coverage ratio of NPEs by accumulated provisions is satisfactory, and the Common Equity Tier 1 (CET1) ratio was 17.1% in September 2017, higher than the EU average of 15%. In the period immediately ahead, banks must step up their efforts to attain their NPE operational targets. The targets for the next two years are high and ambitious, yet feasible, now that the economy has returned to positive growth. Banks must, as soon as possible, broaden the scope of workouts offered to borrowers and move towards more drastic decisions, in particular with respect to the restructuring of viable businesses, the conclusion of multi-creditor workouts, the identification of strategic defaulters and the implementation of definitive solutions in the case of non-viable businesses. After the publication of relevant guidelines by the European Commission, the possibility of transferring NPEs to one or more central entities to be set up for this purpose could be considered. Moreover, banks should revise their business plans with an emphasis on developing new operations and further cost-cutting. However, there is no room for complacency. The domestic financial system remains vulnerable to macroeconomic and financial shocks. Banks will be facing new challenges in 2018, most notably the implementation of International Financial Reporting Standard 9 (IFRS 9), the stricter treatment of loan-loss provisions for new NPEs, as well as the EU-wide stress test to be conducted by the ECB. Against this background, it is important that a cash buffer be available under the third support programme, to ensure financial stability by supporting the banking sector if need be. Insurance undertakings According to the new framework of Solvency II for insurance undertakings and with a view to increased transparency and consumer protection, as from 2017 Greek insurance undertakings publish an annual report on their solvency and financial condition. The industry’s key financial indicators for 2017 remained stable, whereas solvency ratios are expected to improve. With a view, however, to mitigating the risks stemming from the low interest rate environment and the resulting search for yield, insurance undertakings have adjusted their investment strategies and modified their traditional life products by offering reduced interest rate guarantees and by focusing on promoting mostly unit-linked products. RISKS AND SOURCES OF UNCERTAINTY Despite the progress made so far, as reflected in key economic indicators, domestic and external risks remain, which could jeopardise the course of the Greek economy. In the short term, the main risks relate to a delayed implementation of the measures agreed in 5/7 BIS central bankers' speeches the third review, which would in turn delay the completion of the fourth and last review of the current programme, as well as to an underachievement of the fiscal targets. In addition, the absence of a timely specification of the debt relief measures could rekindle uncertainties. Equally significant is the risk of a reversal of the so far downward trend of Greek government bond yields. The recent upgrading of the country’s credit rating is a positive development towards a restoration of investment grade ratings for Greek bonds; also, 2017 saw a significant decline in the high yields of Greek government bonds. The fact, however, that Greece still has the lowest credit rating in the euro area, five notches below investment grade, means that, as soon as Greece exits the programme, Greek bonds will no longer be eligible as collateral for access to low-cost refinancing from the ECB. Considering that the yield on the 10-year Greek government bond currently exceeds 4%, compared with 2% for the Portuguese and Italian counterparts, the risk to the debt dynamics is all too clear. This problem could be further exacerbated, as the factors behind the favourable conditions of 2017 appear to be reversing. There are also external risks, which give rise to concerns about the preservation of the very favourable global economic conjuncture and global stability. More specifically, some of the matters pending at the EU level that could hinder the smooth development of the EU economy are: the Brexit preparations after the agreement of 15 December 2017 for an orderly exit, and the need to reach a mutually acceptable agreement on how to address the refugee crisis ahead of the revision of the Dublin Regulation in June 2018. Furthermore, at the euro area level, significant changes to its architecture are expected to be carried out this year, such as the setting up of the European Monetary Fund and the completion of the banking union. Any delays to the scheduled changes could stoke uncertainties. Turning to the global level, the deterioration of relations between the United States and both North Korea and Iran has given rise to turmoil. Finally, the surge of populism in several countries across the globe erodes public trust in democratic institutions and the rule of law. A STRATEGY FOR SUSTAINABLE GROWTH: THE NEW PRODUCTION MODEL Today, Greece faces the historic challenge of returning to normality and to a path of convergence with its European partners. A return to strong economic growth calls for maintaining and implementing the structural reforms already legislated, as well as further crucial reforms in areas still lagging behind, such as the tax system, public administration, the judicial system and the goods and services markets. For all of the above to materialise and for Greece to once again become a friendly place for doing business and an attractive destination for productive investment, the end of the current adjustment programme will have to mark the launch of a comprehensive national plan of economic restructuring, whose authorship and ownership will lie with the Greek government. Economic policy planning for the ‘day after’ Greece’s exit from the economic adjustment programmes will have to focus not only on actions to smooth out cyclical shocks, but also, and more importantly, on a medium-to-long-term growth policy geared towards the dual goal of fully utilising the economy’s productive potential and safeguarding fiscal stability. This plan must aim for high and sustainable growth rates by encouraging private initiative, extroversion and broader social engagement. The success of such a plan will require radical changes in the fabric of the economy. The implementation of these changes requires effective and broader consensus and consultation across all social groups as well as across Europeanoriented political forces in the country. Today, at this critical juncture for the Greek economy, it is important to avoid a halt of the positive momentum or, worse yet, a situation where the lack of social consensus or a polarised political climate could jeopardise what has been achieved after nine years of great sacrifices. More specifically, what is needed is: First, a drastic overhaul of public administration with clear delimitation of state intervention in private initiative. The state’s role should be to regulate the institutional framework governing the private economy and provide oversight of performance and monitoring capacity rather than 6/7 BIS central bankers' speeches acting as an entrepreneur-producer. Furthermore, the use of public-private partnerships in a wide range of administrative procedures and in the delivery of public services would shift costs from taxpayers onto users, while at the same time enabling care to be taken to support the weaker groups of the population. Second, speeding up the privatisation programme and the development of public property. With government intervention under the new productive model being limited to the role of overseerregulator, privatisations will increase public revenue, while also strengthening competition to the benefit of the consumer. Third, changes in the tax system with a view to creating a clear and stable tax regime with lower tax rates for households and businesses and to broadening the tax base. Fourth, expanding the use of electronic transactions to all types of economic activity, so as to effectively reduce the informal economy and increase public revenue with a fairer distribution of the tax burden. The success of this endeavour will crucially hinge upon citizens’ familiarisation with digital technology applications, as well as upon building a taxpaying culture. Fifth, emphasis on the “knowledge triangle” (education-research-innovation), with evaluation of higher education and linking research to funding and to the production process. This is so because linking higher education with the production process promotes innovation and the country’s competitive advantages. Sixth, and most important, strengthening the operational independence of key institutions and the rule of law. For this to become possible, society and the political forces must understand that strong and sound inclusive institutions, which do not serve the interests of specific groups at the expense of others, promote the welfare of society as a whole. For the restart of the economy to be a success, the status of institutions – which is synonymous of confidence –needs to be elevated in future. Weak and closed institutions generate uncertainty and disorientation, whereas strong, open and socially accepted institutions are necessary for a return to normality. *** Today, the Greek economy is close to an exit from the crisis and a return to normality. The economic fundamentals, as recorded, so far, in the evolution of economic indicators, are encouraging. However, making the most of these favourable conditions calls for a comprehensive plan for the future, within a climate of social consensus and normality, capable of convincing the productive forces and the international markets that Greece has broken once and for all with past practices and is back on track to its convergence with Europe. Related link: Annual Report of the Bank of Greece (in Greek). 7/7 BIS central bankers' speeches | bank of greece | 2,018 | 3 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Delphi Economic Forum, Athens, 3 March 2018. | Yannis Stournaras: Greece - achievements, challenges, risks and a strategy for the future Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Delphi Economic Forum, Athens, 3 March 2018. * * * The progress made since the beginning of the debt crisis in 2009 is remarkable and unprecedented by international standards. More specifically, Greece achieved: The full elimination of the twin deficits, i.e. the very high fiscal deficit and the large current account deficit. The full recouping of competitiveness in terms of labour costs and its considerable improvement in terms of prices. It is worth noting that this was achieved through a painful process of internal devaluation, involving significant reductions in nominal wages and salaries, mainly in the private sector. At the same time, a bold reform, privatisation and economic modernisation programme is being implemented in areas such as the labour and product markets, the healthcare and social security systems, the fiscal framework, the tax system and public administration. (However, there has been considerable backtracking, according to World Bank indices, regarding the rule of law, the quality of governance and institutions.) As a result of all these major reforms during the eight years of the crisis, the economy has become more extrovert and the production model has begun to rebalance towards exportoriented sectors. Finally, the restructuring and consolidation of the banking system, characterised first and foremost by significant recapitalisation, following stringent stress tests and in-depth asset quality reviews, ensure high capital adequacy ratios (Common Equity Tier 1-CET1), higher than the European average, which, along with a satisfactory NPE coverage ratio, enable Greek banks to effectively manage their high stock of NPEs. It should however be noted that, despite the progress made, the crisis has had significant costs in terms of output and employment losses and a marked decline in household wealth. Between 2008 and 2016, Greece lost over one fourth of its GDP at constant prices, and unemployment rose by nearly 16 percentage points. Furthermore, per capita GDP in purchasing power parity in 2016 came to merely 68% of the EU average, down from 93% in 2008. Meanwhile, a large brain drain has taken place, depriving Greece’s society and economy of one of its productive parts, with devastating demographic, economic and social consequences. Challenges ahead (a) Public debt sustainability The high level of public debt feeds uncertainty, undermines confidence in the prospects of the economy, weighs on Greece’s credit rating and hinders the smooth exit from the current programme. The debt sustainability report by the institutions and the adoption of the medium-term debt restructuring measures by the Eurogroup need to be made as soon and as clearly as possible, so as to further strengthen financial markets’ confidence and ensure a smooth exit from the programme. 1/5 BIS central bankers' speeches (b) Consolidating confidence In order to ensure its return to the markets on favourable terms, Greece must consolidate investor confidence in the continuation of reforms and convince that fiscal policy will not relapse once again in the wrong direction. The commitments made must be kept and decisive steps must be taken to continue reforms and privatisations, starting with the removal of obstacles to large investment projects that have already been agreed to, but are lagging. Land-use legislation should play an important role in this area. (c) A smooth return to the markets After the end of the programme, Greece will have to secure the funds required to cover its financing needs by resorting to international financial markets on sustainable terms. As already mentioned, the consolidation of confidence is a sine qua non. At the same time however, a financial safety net will need to be put in place to assure that Greece is able to weather adverse developments that could temporarily drive borrowing costs up to unsustainable levels. The envisaged “cash buffer” is one such safety net, that would enable Greece to avoid a recourse to the markets at times of heightened volatility and high refinancing costs. This cash buffer is currently being built up with the trial bond issues before the end of the programme, as well as with disbursements from the European Stability Mechanism (ESM). However, episodes of financial markets turmoil such as the recent ones appear to have a greater impact on countries with poor credit ratings and a weaker economy. These countries saw the yields on their government bonds rise considerably. This suggests that, in the present uncertain conditions, the Greek State’s return to the markets, as necessary as it may be for a return to normality, must proceed with caution. International experience has shown that trial bond issues for the purpose of creating a sound cash buffer prior to the expiry of a programme helps bolster confidence and paves the way to the exit from the programme. Nevertheless, the need for a complementary precautionary assistance programme should not be neglected. The possibility of a recourse to a precautionary support programme, especially if financial market conditions call for one, must not be overdramatised, as the European mechanisms are there to be used if needed. Such a precautionary assistance framework can be expected to support the Greek economy, by helping to reduce borrowing costs, since it will provide assurance of the Greek government’s and banks’ access to funding beyond the end of the current programme in August 2018. Under an ESM precautionary credit line, funds would become available, without necessarily having to be raised beforehand, whereas the build-up of a cash buffer necessarily entails additional borrowing, which would increase the annual debt service costs. Moreover, this precautionary financial assistance framework would ensure that the waiver on Greek government bonds stays in place, so that the latter remain eligible as collateral in Eurosystem monetary policy operations until Greece regains an investment grade credit rating. Furthermore, in such case, the buffer for systemic banks should remain available beyond August 2018. Finally, the maintenance of the waiver, along with the debt sustainability measures, would enable the purchase of Greek government bonds by the European Central Bank under its public sector purchase programme either in its regular duration or during the reinvestment period, thereby exerting a downward effect on the borrowing costs of Greek government. (d) The post-programme surveillance framework According to the European institutional framework, the end of the Greek programme in August 2018 does not relieve Greece of its obligations vis-à-vis its lenders. What changes is the form of the surveillance framework for Greece, which must conform to the general surveillance terms and regulations in force in the European Union. 2/5 BIS central bankers' speeches Regulation (EU) No. 472/2013 of the European Parliament and of the Council provides for automatic post-programme surveillance until the country repays 75% of the loans it has obtained from other Member States, the European Financial Stability Fund (EFSF) and the European Stability Mechanism (ESM). Furthermore, the European Commission reserves the right to subject a Member State to enhanced surveillance, if it judges that this is warranted by the circumstances. Apart from these provisions, already in force, the European Commission has proposed changes to the economic governance of the euro area, some of which could be relevant for the type of post-programme surveillance that the Greek economy would be subject to, and will be discussed by the European Council within the first half of 2018. The aspects of potential relevance to Greece concern the enhanced role of the ESM and the possible support to Member States for the implementation of structural reforms. Therefore, it is clear that Greece’s smooth exit from the programme and its successful course in new post-crisis European normality entail a commitment to safeguard the achievements made so far, to pursue sound economic policies and to continue and complete the structural reforms. (e) Banks – Non-performing loans The effective management of NPEs is the most crucial legacy problem that banks now have to tackle, if they are to fully consolidate their loan portfolios and become capable of increasing their lending. In the period immediately ahead, banks must step up their efforts to attain their NPE operational targets. The targets for the next two years are high and ambitious, yet feasible, now that the economy has returned to positive growth. Banks must, as soon as possible, broaden the scope of workouts offered to borrowers and move towards more drastic decisions, in particular with respect to the restructuring of viable businesses, the conclusion of multi-creditor workouts, the identification of strategic defaulters and the implementation of definitive solutions in the case of non-viable businesses. Banks are facing new challenges in 2018, most notably the implementation of International Financial Reporting Standard 9 (IFRS 9), the stricter treatment of loan-loss provisions for new NPEs, as well as the EU-wide stress test to be conducted by the ECB. Risks and sources of uncertainty Despite the progress made so far, as reflected in key economic indicators, domestic and external risks remain, which could jeopardise the course of the Greek economy. In the short term, the main risks relate to a delayed implementation of the measures agreed in the third review, which would in turn delay the completion of the fourth and last review of the current programme, as well as to an underachievement of the fiscal targets. In addition, the absence of a timely specification of the debt relief measures could rekindle uncertainties. Equally significant is the risk of a serious and sustainable reversal of the Greek government bond yields. Considering that the yield on the 10-year Greek government bond was yesterday 4.48%, compared with 1.93% for the Portuguese and Italian counterparts, the risk to the debt dynamics is all too clear. There are also external risks, which give rise to concerns about the preservation of the very favourable global economic conjuncture and global stability. More specifically, some of the matters pending at the EU level that could hinder the smooth development of the EU economy are: the Brexit preparations after the agreement of 15 December 2017 for an orderly exit, and the need to reach a mutually acceptable agreement on how to address the refugee crisis ahead of the revision of the Dublin Regulation in June 2018. Furthermore, at the euro area level, significant changes to its architecture are expected to be carried out this year, such as the setting up of the 3/5 BIS central bankers' speeches European Monetary Fund and the completion of the banking union. Any delays to the scheduled changes could stoke uncertainties. Turning to the global level, the deterioration of relations between the United States and both North Korea and Iran has given rise to turmoil. Finally, the surge of populism in several countries across the globe erodes public trust in democratic institutions and the rule of law. A strategy for sustainable growth Today, Greece faces the historic challenge of returning to normality and to a path of convergence with its European partners. A return to strong economic growth calls for maintaining and implementing the structural reforms already legislated, as well as further crucial reforms in areas still lagging behind, such as the tax system, public administration, the judicial system and the goods and services markets. For all of the above to materialise and for Greece to once again become a friendly place for doing business and an attractive destination for productive investment, the end of the current adjustment programme will have to mark the launch of a comprehensive national plan of economic restructuring, whose authorship and ownership will lie with the Greek government. Economic policy for the ‘day after’ Greece’s exit from the economic adjustment programmes will have to focus not only on actions to smooth out cyclical shocks, but also, and more importantly, on a medium-to-long-term growth policy geared towards the dual goal of fully utilising the economy’s productive potential and safeguarding fiscal stability. This plan must aim for high and sustainable growth rates by encouraging private initiative, extroversion and broader social engagement. The success of such a plan will require radical changes in the fabric of the economy. The implementation of these changes requires effective and broader consensus and consultation across all social groups as well as across Europeanoriented political forces in the country. Today, at this critical juncture for the Greek economy, it is important to avoid a halt of the positive momentum or, worse yet, a situation where the lack of social consensus or a polarised political climate could jeopardise what has been achieved after nine years of great sacrifices. More specifically, what is needed is: First, a drastic overhaul of public administration with clear delimitation of state intervention in private initiative. The state’s role should be to regulate the institutional framework governing the private economy and provide oversight of performance and monitoring capacity rather than acting as an entrepreneur-producer. Furthermore, the use of public-private partnerships in a wide range of administrative procedures and in the delivery of public services would shift costs from taxpayers onto users, while at the same time enabling care to be taken to support the weaker groups of the population. Second, speeding up the privatisation programme and the development of public property. With government intervention under the new productive model being limited to the role of overseerregulator, privatisations will increase public revenue, while also strengthening competition to the benefit of the consumer. Third, changes in the tax system with a view to creating a clear and stable tax regime with lower tax rates for households and businesses and to broadening the tax base. Fourth, expanding the use of electronic transactions to all types of economic activity, so as to effectively reduce the informal economy and increase public revenue with a fairer distribution of the tax burden. The success of this endeavour will crucially hinge upon citizens’ familiarisation with digital technology applications, as well as upon building a taxpaying culture. Fifth, emphasis on the “knowledge triangle” (education-research-innovation), with evaluation of higher education and linking research to funding and to the production process. This is so because linking higher education with the production process promotes innovation and the country’s competitive advantages. 4/5 BIS central bankers' speeches Sixth, and most important, strengthening the operational independence of key institutions and the rule of law. For this to become possible, society and the political forces must understand that strong and sound inclusive institutions, which do not serve the interests of specific groups at the expense of others, promote the welfare of society as a whole. For the restart of the economy to be a success, the status of institutions – which is synonymous of confidence –needs to be elevated in future. Weak and closed institutions generate uncertainty and disorientation, whereas strong, open and socially accepted institutions are necessary for a return to normality. 5/5 BIS central bankers' speeches | bank of greece | 2,018 | 4 |
Keynote speech by Professor John Iannis Mourmouras, Deputy Governor of the Bank of Greece, at a conference jointly organised by the Society of International Economic Law and the European University of Cyprus, Nicosia, 14 April 2018. | John Iannis Mourmouras: Some reflections on post-globalisation and Trump's trade war Keynote speech by Professor John Iannis Mourmouras, Deputy Governor of the Bank of Greece, at a conference jointly organised by the Society of International Economic Law and the European University of Cyprus, Nicosia, 14 April 2018. * * * Your Excellency, Ambassador Mavroyiannis, Former Minister, Professor Flogaitis, Esteemed colleagues, Dear students, Ladies and Gentlemen First of all, I would like to thank the organisers, the Society of International Economic Law and the European University of Cyprus for the kind invitation to address a conference that features such a dynamic group of participants, comprising distinguished Professors, but also young scholars from the legal profession with promising futures. It is the second time in the recent past that I am addressing a law conference. The first time was a speech on the future of the Economic and Monetary Union (June 2016) addressed to members of the Committee on International Monetary Law of the International Law Association (MoComILA) upon the invitation of my good friend, Professor Christos Gortsos, Chair of the Board of Directors of the ILA’s Greek branch. In my keynote speech today, I will discuss the issue of globalisation and its diminishing role in today’s world, an era that has become known as post-globalisation and also talk about the worrying prospect of a global trade war and its implications. After a brief introduction presenting the waves of globalisation throughout history, I will present my hypothesis on the future of globalisation and whether it has come to an end. The third section of my speech relates to the economic aspect of post-globalisation, that is, its economic effects with particular emphasis on trade and finance. The fourth section addresses the aspect of politics and security in the new multipolar world as regional poles thrive. The fifth section discusses the adverse distributional effects of globalisation. The sixth section takes a closer look into the populist phenomenon as a reaction to globalisation, particularly in our continent, Europe. In the final section of my speech, I discuss the prospect of a global trade war being triggered by the latest unilateralist moves and shift in the United States’ trade policy under President Donald Trump. 1. Introduction In order to set the background for my speech today, we are now at an inflection point for the process of globalisation, which started in the late 19th century. A lot has been said about globalisation. Some consider it a curse, others a blessing. Two noteworthy quotes are the following: “The US basically wrote the rules and created the institutions of globalisation.” (Joseph Stiglitz) “It has been said that arguing against globalisation is like arguing against the laws of gravity.” (Kofi Annan) To begin with, a little bit of history: The first wave of globalisation, from 1870 to 1913, was linked to colonialism, industrialisation and substantial gains in productivity from cross-border linkages 1 / 26 BIS central bankers' speeches with steam-powered rail and shipping, which considerably lowered trade costs and eased the movement of goods. This wave collapsed abruptly as the world descended into war. In the interwar period with the 1929 Great Depression, economies resorted to inward-focused measures, erecting trade barriers; isolationism and protectionism were responsible for about half of the decline in global trade. The second wave followed after the end of World War II, when a new rules-based global order based on multilateral agreements and financial institutions such as the General Agreement on Tariffs and Trade, the OECD, NATO, and the European Economic Community, which united the old enemies of the war, France and Germany. The US dollar gained a dominant role as an anchor after the 1944 Bretton Woods conference, where the Allies decided that the US dollar, backed by gold, would be the international reserve currency to which exchange rates would be fixed. The third and last wave of globalisation dates from the early 1990s, as shown in Figure 1. This wave of globalisation following the end of the Cold War and the collapse of communism has been marked by increased international integration, economic growth driven by increased global trade flows, and the predominance of supranational institutions, such as the World Trade Organisation (WTO), the North American Free Trade Association (NAFTA), and the World Bank, in the global multilateral order based on the rule of law. Trade liberalisation has been a key driver of global GDP growth over the past decades, allowing countries to import goods that are relatively more expensive to produce. During the same period, there were dramatic policy shifts in advanced countries such as the US and the UK with tax cuts and deregulation packages implemented by President Reagan and Prime Minister Thatcher, respectively. Emerging countries such as China and India experienced rapid economic growth and entered the global trade system. The European Union became the world’s largest single market for goods, services, capital and workers, while Japan witnessed an economic stagnation driven by its rapidly ageing population. 2 / 26 BIS central bankers' speeches 3 / 26 BIS central bankers' speeches 2. My hypothesis on the future of globalisation The world economy has now entered a new era known as ‘post-globalisation’, which has the following features: higher rates of unemployment (which has been particularly acute in the European continent), a surge in migration flows, and rising income inequality. These may be attributed to the uneven distribution of the income gains of globalisation across different parts or countries of the world and, most importantly, different segments of the population within the same country. My hypothesis with regard to the future of globalisation rests on two pillars: Firstly, its adverse distributional effects are behind the rise in populism, albeit sporadically (thankfully not everywhere in the world), with a leading example being the US under the sui generis populism of its President, Donald Trump. Populism is unfortunately not a US exception; it has been on the rise also over this part of the little pond, not least in the UK (with the Brexit vote) and Italy (and the win of two populist parties at the latest elections), but also in European countries like Poland, Hungary, Austria, etc. The second pillar of my maintained hypothesis is that we are not facing an end of globalisation, or ‘deglobalisation’ as some may call it, but a new kind of globalisation with new regional poles or centres that will start to take the place of the existing multilateralist rules-based global order. The shift towards a multipolar world with strong regional spheres of influence, by definition, implies a reduced role for globalisation, but I will go into that later. Right now I will focus on specific aspects of the post-globalisation era; first of all, on the uneven distribution of the benefits of globalisation which has led to the strong rise of anti-globalist forces of populism in various countries around the world. I will also discuss the surge in regional blocs to the detriment of existing global alliances that have so far helped to stabilise the world and maintain the rules-based global order, and, finally, the prospect of a global trade war, in light of the latest international developments. 4 / 26 BIS central bankers' speeches 3. The economic aspect of post-globalisation 3.1 Distinction between the dimensions of trade and finance Globalisation is a multidimensional process that affects all aspects of economic, political and social life. For the purposes of this speech, I would like to make the distinction between two different dimensions of globalisation: trade and finance (these are also referred to in the relevant literature as the de jure and de facto dimensions of globalisation), on which I will provide some evidence later on. The first relates to economic liberalisation in the sense of increased volumes of trade through the removal of (de jure) barriers to imports, customs tariffs, etc. The second is related to (de facto) cross-border capital flows, foreign direct investment, portfolio investment and income payments to non-residents, liberalised through lower taxes on commercial transactions and the removal of capital account restrictions. 5 / 26 BIS central bankers' speeches 3.2 On the reduced role of globalisation (evidence) The dimension of trade An increasing body of evidence suggests a slowing trend in globalisation for the past decade or so, at least in terms of trade flows, which are the most basic representation of globalisation. As shown in Figure 4 above, according to World Bank and OECD national accounts data, global flows of trade in goods and services measured as a share of gross domestic product (GDP) had been on a steady rise until 2008, when they reached their upper limit at about 61% of GDP and have remained sluggish, having fallen further to 56% in 2016 (from 58% in 2015). 6 / 26 BIS central bankers' speeches 7 / 26 BIS central bankers' speeches The dimension of finance The emergence of information and communication technology, or ICT, in banking and financial markets, along with the liberalisation of financial and capital accounts that allows foreign investors into more countries, unleashed a huge wave of foreign capital movements starting in the 1980s. Now the rapid pace of financial integration has slowed down, but continues. In order to get the full extent of the slowdown in globalisation, we also need to take into account the dimension of finance, through indicators such as capital flows and FDI. Cross-border capital flows show that today globalisation is in retreat. Having reached their peak at 12.4% of GDP in 2007, that is, before the onset of the global financial crisis, global crossborder capital flows have been following a steady downward trend, to 4.3% in 2016 (see Figure 6 below). 8 / 26 BIS central bankers' speeches Indeed, the flow of new cross-border investment has been declining relative to GDP, which shows that globalisation might be slowing down. But the stock of (existing) foreign direct investment (or FDI) relative to global GDP shows that globalisation has not come to a halt. Financial globalisation is becoming more stable, given that the more stable FDI flows account for a larger share of capital flows today than they did a decade ago, and the more volatile crossborder lending flows, principally short-term interbank lending and other purchases of complex debt securities that were behind the global credit bubble, have declined since 2007. More countries are participating in capital reallocation and risk-related regulation has become stricter, reducing the risk of a balance-of-payments crisis. Between 1990 and 2000, the stock of foreign investment liabilities relative to GDP more than doubled, from 42% of world GDP to 96%. Having almost doubled between 2000 and 2007, to 185% of GDP (the ‘financial market peak’), the stock of foreign investment liabilities as a share of GDP fell only slightly after the global financial crisis, to $132 trillion or 183% of world GDP (see Figure 7 below). 9 / 26 BIS central bankers' speeches Especially with regard to financial services which follow the rapid pace of technological innovations, known under the generic term ‘Fintech’, we should expect more integration. Already available digital technologies reduce transaction costs and increase the ease of capital transfers (signalling a trend towards perfect capital mobility). Just like the Internet revolutionised communications and the way we work, travel and do business, blockchain technologies, to be discussed in this afternoon’s session, are expected to transform finance by enabling direct international money transfers without intermediaries and high transaction costs. The emergence of global value chains through intangible flows of services and data and the transfer of technology from developed to emerging economies and vice versa should change the speed of financial globalisation. In the post-globalisation era, a country’s technological capabilities should be the most important determinant of its long-term development and its ability to reap the benefits of the broader financial interconnectedness around the world. As a result of the rapid knowledge-driven technological change, the face of globalisation will be very different in the following decades. In the figure below, one can see that global flows of data have outpaced traditional trade and financial flows (see Figure 8). 10 / 26 BIS central bankers' speeches 3.3 An increased role for regional poles The rise of powerful regions is visible in economic terms, as the centre of gravity of the economy has been moving to the east. This new multipolarity leads to new relationships of interdependence between nations, widening their common interests and creating new regional blocs around the world’s major superpowers. The rise of China is certainly indicative of the shift to a multipolar world away from a world exclusively dominated by the economic power of the US, along with its western European allies. China has already become an economic superpower and the economies comprising the Association of Southeast Asian Nations (ASEAN), now the world’s fourth largest trading bloc in terms of GDP, have significantly benefited from the China’s rise, given that China is ASEAN’s most important trade partner. Trade volume between China and ASEAN countries hit a record high in 2017 at US $514.8 billion, having recorded the fastest growth pace (13.8%) year-on-year between China and any of its major trading partners. Total ASEAN trade has increased by about US$1 trillion between 2007 and 2014, with intra-ASEAN trade comprising the largest share of ASEAN’s total trade by partner. China’s exports to ASEAN countries reached US $279.1 billion in 2017, up by 9% year-on-year, while imports grew by 20% year-on-year to stand at US $235.7 billion. China is also Africa’s largest economic partner in terms of goods trade, infrastructure financing and new FDIs. 11 / 26 BIS central bankers' speeches Trade regionalism is also evident in our own continent. Figure 10 shows that half of eurozone cross-border investment is within the region! 12 / 26 BIS central bankers' speeches 4. The aspect of politics and security Globalisation has multiple benefits. It contributes to economic growth, creates export-oriented jobs, helps the transition of more countries to capitalism and democracy, which in turn has a potential to enhance growth and improve the well-being of people suffering from tyranny and civil war, but also reducing the number of weak or failed states that host terrorists and criminal cartels. It has also linked potential adversaries in mutually beneficial relationships, thus making the prospect of war less appealing and creates hopes for a more peaceful world. In the post-globalisation era, the universal push towards democratisation seems to have reached its limits. Some of the most striking examples of the stronger focus on isolationism are the UK vote in favour of its exit from the EU and the Trump Presidency in the US. Donald Trump won the US presidential elections by countering his opponent’s more globalist approach with a campaign built on the principle of “America first”, a slogan which was initially used by Congressman Charles Lindbergh for promoting the case for the US to stay out of the war against Nazi Germany. In the Brexit campaign, the “Leave” camp appealed to voters by promising to take back control of their national destinies and sovereignty previously relinquished to the “technocratic” European Union. Post-globalisation also has the potential to affect the existing global governance system comprising institutions, rules and alliances, which have underpinned global prosperity since World War II. One such institution is the 164-member World Trade Organisation, the cornerstone of the multilateral trading system. The WTO has seen its stature diminish lately and now faces an uncertain future, partly also as a result of rising protectionist trade practices and interventionist economic policies (as opposed to free market policies) that are even adopted by some of the world’s great powers, circumventing the multilateral system’s rules and bypassing the WTO’s central role as an arbitrator in global trade conflicts. Yesterday’s sessions on contemporary issues in the WTO and the institutions and governance of international economic law offered some useful insights into the future of the organisation, that are particularly poignant at this turning point for globalisation. The economic and political expansion of regional poles such as China has marked a shift away from the conventional US hegemony and towards authoritarianism around the world, e.g. in Turkey. The third globalisation era following the end of the Cold War has indeed been a time of unprecedented stability under America’s primacy. China has already demonstrated that it seeks a more visible role on the world stage and wants to put itself at the heart of globalisation – as 13 / 26 BIS central bankers' speeches outlined in President Xi’s speech to the World Economic Forum in Davos a year ago. This rhetoric has been supported by China’s ‘Belt and Road Initiative’, which has received more than $50 billion in financing since its inception in 2013. Another major project is China’s ASEAN Silk Road, the high-speed rail line expected to run from Kunming to Singapore and run through Laos, Thailand, Malaysia and Singapore. Despite geopolitical tensions arising from China’s claims over the South China Sea and the authoritarian regime in North Korea, ASEAN unity has largely been restored as more countries have either warmed to China or at least indicated a greater acceptance of its clout against the background of reduced US commitment and the latest unilateralist decisions by President Trump. It is clear that the modern distortions in the world economy and disruptions in the global order need to be addressed through close cooperation and maintained regional balances of power, rather than bilaterally. Just a quick note here on the alarming increase in Chinese military spending: it has now exceeded US$400 billion dollars, i.e. it has doubled in ten years, and to give you a point of reference: Russia’s military spending is estimated at around $200 billion and that of the United States at US$600 billion. Looking at the other major geopolitical pole, tensions between Russia and the West (US, Canada, EU) are as high as they have been for years. A fortnight ago, we saw the largest coordinated expulsion of Russian diplomats since the Cold War from more than twenty countries, members of NATO and the EU, as a retaliatory measure against the use of a Russian nerve agent in the UK, violating the prohibition of chemical weapons under the 1997 Chemical Weapons Convention, an international convention that Russia had agreed to and signed. Or the recent blow-for-blow developments unfolding in Syria, a joint attack of the US, the UK and France was launched last night and the rest of the world is following with grave concern about what comes next. 5. On the adverse distributional effects of globalisation Before coming to perhaps more boring economic data and figures, let me make a short pause here for a joke, which actually shows that economists and lawyers have lots in common! A university committee was selecting a new dean. They had narrowed the candidates down to a mathematician, a statistician and a lawyer. Each was asked this ‘tricky’ question during this interview. How much is ‘two plus two’? The mathematician immediately answered, “Four”. The statistician also answered almost immediately, “Four, plus or minus two percent (the statistical error)”. Finally, the lawyer stood up and motioned silently for the committee members to gather close to him and in an emotional tone he replied: “How much do you want ‘two plus two’ to be?” By the way, this could also be an economist’s answer to the same question! 5.1 World income inequality The globalisation process has brought prosperity to large parts of the world’s population, lifting more than 500 million people out of poverty in developing countries. But the world has concurrently experienced a significant rise in inequality. Since 1980, income inequality has increased rapidly in North America and Asia, increased more moderately in Europe, and stabilised at very high levels in the Middle East, Africa and Brazil, as shown in the following figure (see Figure 12). 14 / 26 BIS central bankers' speeches In other words, the distribution of the benefits of globalisation has been uneven and unbalanced between various parts of the world. Rising inequality is obviously a global phenomenon, with wide variability despite similar experiences with globalisation and technology. Even in advanced countries, there have been parts of the population that have not been able to reap the rewards of globalisation, also known as the ‘left-behind’. Strong income growth for a large share of the world’s population in poor countries, and especially the recent growth of a wealthier middle class in China, has been accompanied by the stagnation of incomes across the lower and middle classes in some advanced countries, e.g. the US. According to World Inequality Lab (WID) data, the United States has become the most unequal country, surpassing in 2007 the inequality peak recorded in 1928. The ‘superrich’ of the US, or the group of people belonging to the top 1% of income in the US, now hold 20% of the country’s national income up from 11% of the national income in 1980. At the same time, there has been a dramatic collapse in the income share of the bottom 50%, which had 21% of income in 1980, falling to 13% in 2016 (see Figure 13). 15 / 26 BIS central bankers' speeches 5.2 Persistent economic divergences in Europe The European Economic and Monetary Union (EMU) was expected to foster greater macroeconomic convergence on the basis of nominal and fiscal indicators of harmonisation, that is, inflation, long-term interest rates, exchange rate stability, the fiscal deficit, and the government debt to-GDP-ratio. However, the euro area sovereign debt crisis has exposed trends of economic divergence. While there has been nominal convergence of inflation and interest rates, there is still evidence of divergence in relation to GDP per capita, unemployment rates, and current account balances. Real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. In contrast with countries in the core of the eurozone with high GDP per capita and relatively low unemployment led by Germany, countries in the periphery, of which four have had to undergo year-long economic adjustment programmes, have large debt burdens, high unemployment rates and experienced drastic declines in their standards of living as a result of austerity measures which dampened economic activity and increased social hardship undermining economic and political stability. Germany, the Netherlands and Luxembourg record sizeable and persistent current-account surpluses, while periphery countries have had a tendency for currentaccount deficits, as shown in Figure 14. 16 / 26 BIS central bankers' speeches The convergence machine has brutally stopped in the southern part of the EU and has moved into reverse in Greece, Portugal and Spain, whereas in Italy it has been falling behind since the early 1990s. Regional unemployment rates since 2008 show that labour markets in the Spanish and Greek regions have been hardest hit. According to Eurostat data as at April 2017, five Greek regions (Ipeiros, Dytiki Ellada, Thessalia, Sterea Ellada and Kriti) experienced falls in their employment rates between 2006 and 2016 that were greater than 10 percentage points; the largest was 11.9 percentage points in Kriti. Among all 28 EU regions where the fall exceeded 4 percentage points, 20 were in Greece and Spain (10 each), while five others were also in euro-periphery countries: two in Italy, one in Portugal, one in Ireland and there was also one here in Cyprus. Germany was the only country where unemployment rates have declined in all regions since 2008. 17 / 26 BIS central bankers' speeches 6. The rise of pupulism 6.1 Populism and economic globalisation The existing version of globalisation is a very easy scapegoat and has often been seen as synonym to job losses, income inequality, social injustice, the erosion of national identities and local traditions, as well as low standards in terms of the protection of the environment, labour safety and personal data (privacy) and lax fiscal policies, with the pre-dominance of all-powerful multinational corporations aiming at maximum profit. At this point, I have a few remarks as a macroeconomist in favour of free trade. Trade and commercial exchanges in general are associated by their very nature with job displacement and have an impact on the distribution of income that may result in the loss of income for some population groups. As part of the process of globalisation, international trade may come in contrast to established norms in a domestic economy. Popular discontent has been targeted at economic globalisation, choosing to disregard the economic benefits arising from the globalisation process. It is true that it is very easy to blame trade for effects that in reality may be more attributed to technological advances and the spread of automation. According to the IMF, only around a quarter of the overall decline in the labour share of income that occurred in advanced economies between 1990 and 2015 was due to increased globalisation, while around half can be attributed to technological change. The picture is different when it comes to emerging economies, where participation in global value chains was the key driver of declines in labour shares. As shown in the following figure (Figure 15), populism is not a recent phenomenon, but has been on the rise 18 / 26 BIS central bankers' speeches over the past decades. The populist phenomenon has been particularly triggered by the discontent of the so-called “leftbehind” of the globalisation process, i.e. those who have failed to fully benefit from past economic growth. In Europe, the populist phenomenon is mainly fed by immigration fears and the shock caused by the massive refugee influxes from war-torn countries bordering the European Union. Especially with regard to the migration crisis, it is one of the most contentious aspects of globalisation. The share of international migrants among residents of more developed countries rose from less than 10% in 2000 to 14% in 2017. In Germany, international migrants now account for 15% of the population according to UN data (see Table 4 below). Table 4 Number of international migrants (millions) and migrant share of global and national populations in listed countries 19 / 26 BIS central bankers' speeches 20 / 26 BIS central bankers' speeches Such rapid migration can have disruptive effects without the appropriate policies that would address the new challenges. Given the rise of inequality and the emerging cleavage between the “losers” and the “winners” of globalisation, the political balance of power has changed in many countries in Europe. Public opinion, which has been turning more towards new political parties created across Europe, offering a mix of xenophobia and populism, with a notable example being the Alternative for Germany (AFD), which won 13.3% at the German Federal elections, as the third biggest party. The populist phenomenon has been reinforced by public opinion dissatisfaction with traditional political parties, a strong decline in trust in the EU and a generalised lack of interest in politics as indicated by the very low voter turnout in elections over the past decades. As shown in Figure 16 below, the rise in populism in Europe over two decades has been more than four-fold, from below 5% in the late 1980s to more than 20% in 2011–2015. 6.2 Recent examples of European populism As populist parties win a rising share of the electorate, but not the overwhelming majority of votes in national elections, there has been a repeated pattern of inconclusive electoral results in many EU countries over the past few years. As a result, government formation has become even more difficult, but even in countries with a strong tradition of coalitions such as Germany! Italy Following the unprecedented long-drawn negotiations for the formation of a coalition in Berlin, Italy is now at a political standstill, facing a drawn-out period of political consultations between the 21 / 26 BIS central bankers' speeches President of the Republic and the parliamentary groups to form a coalition. The lack of clarity around governments’ actions particularly in terms of their fiscal and trade policies has increased downside risks to trade and growth. Two Eurosceptic and strongly anti-establishment parties have come out as the two biggest parties, the centre-right League (having won up to 50% in the wealthy north) and the 5 Star movement (winner of more than 50% in the troubled south, where poverty rates have increased by half since the crisis). The classic political division between ‘rightwing’ and ‘left-wing’ variants of populism does not apply in this case. The League’s opposition to globalisation mostly focuses on resentment against foreigners, whereas the 5 Star movement mostly appealed to voters by proposing a universal basic income for all. Despite their major political and economic differences, the two parties might form an all-populist government and ultimately manage to completely wipe mainstream parties off the electoral map of Italy. We should not take this prospect lightly, as Italy can be seen as a miniature representation of Europe. UK Another disguised version of populism taking advantage of the Brexit prospect can be seen in the promise for broad-scale renationalisation, which would mean a return to the 1970s, by the British opposition party leader, who has announced his intention to return to the model of nationalisation of banks, water industries, transport etc. through the back door. Based on the pretext of market failures identified in their privatisation, full government control of such industries would be disastrous for the UK economy and the world, with a ‘megatone’ effect, 10 times bigger than Brexit. In Austria, a far-right party forms part of the government coalition and in Hungary, the right-wing eurosceptic, populist Viktor Orban has been elected once again to lead his country. Mr Orban has focused on a message against migration and the need to protect Hungary’s interests from what he perceives as outside interference from the EU and the UN, for instance! In Poland, the populist President has caused trouble with ignoring the rule of law and trampling on democratic principles. In light of all the above, it is clear that populism is no longer a marginalised trend, but is coming increasingly into the mainstream. Section 7 Trump’s trade war 7.1 Some figures on Trump’s trade war Coming now to the prospect of a global trade war, on 23 March, the US President decided to impose tariffs on imports from some countries, including China, of steel at 25% and of aluminium at 10% on national security grounds which are estimated by the Peterson Institute to cover $46.2 billion of US imports from China in 2017 (see Figure 18a). This justification is carefully chosen given that national security considerations are explicitly exempted from trade issues over which the WTO dispute settlement mechanism is competent. The US also threatened tariffs on other Chinese products estimated to be worth US $150 billion. US moves have already provoked retaliatory measures by China, which announced it will impose retaliatory tariffs targeting a limited number of American goods, which would cover an estimated $49.8 billion of US exports to China (see Figure 18b). 22 / 26 BIS central bankers' speeches At the moment, the proposed tariffs will apply to less than 7% of total US imports and, according to calculations by Fitch, their impact on China’s economy will knock a mere 0.3% off China’s GDP growth rate (China’s GDP growth target this year is 6.5%). An escalation into a trade war is thus a real danger and it could likely have significant negative effects on global activity, raise price pressures given that trade wars are stagflationary (meaning that they simultaneously damage growth and stimulate inflation) and could spill over into broader 23 / 26 BIS central bankers' speeches international tensions, and there is always danger of an intensification in trade frictions in the next downturn (be it US or global). Both countries’ lists are, for now, just threats. Over the next two months, America’s list will be open for public consultation (there is no deadline for the tariffs to come into force). China has said that it will wait for America to move. China’s President Xi seems to have offered an olive branch to the US President. In a speech at a high-profile event last Tuesday he promised increased imports, accelerated access to China’s insurance and other financial sectors, lower tariffs (e.g. on imported cars) and greater protection for intellectual property, which is the hot potato in the US-China trade fight. 7.2 The reasons behind President Trump’s decisions and why he is wrong President Trump’s decisions confirm his long-standing protectionist ‘America First’ agenda, based on a desire to protect US workers and specific US industries. He also claims that the US tariff list was drawn up in response to China’s alleged theft of American firms’ intellectual property from outsourcing the production of myriads of goods to China. Take for instance my iPhone: it has been designed and developed by Apple in California, but its assembly takes place in China. Now the Americans accuse China of stealing the design of their technology. But the question is why do they outsource their production in the first place? Copying technology is not new in world history. It is how Japan became a global force in car production, copying Mercedes and Ford production and now produces better cars than the Germans and the Americans (Toyota). And that was an era when there was no outsourcing from either Germany or the US. So why is the Trump Administration really introducing such protectionist measures? Trump is the first post-war US president to challenge the conventional wisdom that the global economy has enjoyed unprecedented prosperity thanks to free trade and the free movement of capital. To be more precise, President Trump is pursuing two irreconcilable objectives: on the one hand, he wants to eliminate the US trade deficit in general and, in particular, its US$375 billion trade deficit with China and, on the other hand, he is also pursuing an expansionary budget policy. President Trump has introduced tax cuts that will increase the budget deficit by US$1.5 trillion over the next decade and approved a congressional bill that will increase public spending by US$300 billion over the next two years, according to the Congressional Budget Office (CBO). Trump seems to think that trade wars are easy to win, but the history of trade wars has shown us that they have no winners. The most famous example of the self-defeating effects of protectionism is the Tariff Act of 1930, which raised tariffs on over 20,000 goods [average tariffs went up from 38% to 45%, and the effective tariff rate rose from 14% to 20%]. It was first conceived when the US economy was still growing and had full employment, but entered into effect a year after the economic downturn had begun. The US’s trade partners were quick to respond with their own tariffs and a global trade war broke out in 1931. World trade fell by a third, with dire effects on the global economy. In the case of the US, American exports fell by 60% from 1929 to 1933 and this exacerbated the Great Depression. The tariffs were repealed in 1934. After this catastrophic experience, the US became a strong supporter of free trade, helping to create and strengthen the WTO rules-based system. Another analogy is when Germany and France imposed tariffs on US chicken imports in the early 1960s, starting what became known as the ‘chicken wars’. The United States retaliated by imposing tariffs on an array of goods, including French brandy, light trucks and Volkswagen buses. Despite pressures, the Europeans did not give in, and the US was thus considered the loser of that war. A more recent tariff episode was under the Obama Administration. In 2009, President Obama phased in increased tariffs on imports of Chinese car and light truck tires (35% in the first year, 30% in second, 25% in third). China’s WTO complaint against them was rejected, so China retaliated with tariffs on US chicken imports (ranging from 50–105%), which reduced US poultry 24 / 26 BIS central bankers' speeches exports by $1 billion (a 90% collapse). And as regards the argument on jobs and the domestic industry, the winners from the 2009 tire safeguards were alternative foreign exporters (in Asia and Mexico), while domestic US tire producers were secondary beneficiaries. That is why the liberal consensus is that trade wars are bad for everybody. Another reason why Trump is wrong is his misleading focus on trade deficits; it overlooks the fact that the total trade deficit reflects the shortfall in savings by households, businesses and the government, i.e. the excess of their combined spending over their income. A necessary condition, therefore, for narrowing the US trade deficit is to achieve a higher savings rate relative to the US investment rate. At a time when the level of savings is very low, the prospective deterioration in the US current account deficit of around US$150 billion a year (due to the spending bill signed into law last month) will almost inevitably reduce the overall level of savings. This will also cause the trade deficit to widen, bringing to mind the Reagan Administration, under which the US experienced twin deficits, i.e. a fiscal and a current account deficit. If tariffs are imposed to a large extent and they are persistent, a trade war will break out, which may lead to competitive devaluations between the US and China. We’ve seen all this before through currency wars and beggar-thy-neighbour policies. In economic theory and history, rising twin deficits may only be resolved by a stronger currency, as was the case of the stronger dollar in the 1980s under President Reagan and post-German reunification with a stronger Deutschmark (see Figure 18). Today, economic theory and investment portfolio developments point to a strong US dollar, but measures of protectionism (the opposite pole to globalisation) focusing on the domestic economy self-interest and not taking account of the interconnections in a global economy, negatively affect the US dollar exchange rate. The US current account deficit can be funded by countries with large current-account surpluses coming from private sector investors in Japan and Europe, who have been pushed out of their domestic markets as a result of extensive quantitative easing programmes by their respective central banks. But, as central banks start tapering their asset purchases and wind down their unconventional easing monetary policies, there is little prospect for increased demand. At the moment, markets seem to expect that the US President’s trade threats will be negotiated down in the end. But if the situation escalates and markets start to believe a serious trade war is 25 / 26 BIS central bankers' speeches imminent, US stock prices could fall further, hurting the US economy, even if President Trump ultimately doesn’t follow through with his plans. Conclusion The US President’s decision to impose higher trade tariffs represents a significant change in US trade strategy. It has caused widespread fears that a trade war might go unchecked, but markets seem to hope that further escalation will be avoided. The heightened risk of a transatlantic trade war, as a result of rising protectionism, is mainly US driven and it is up to President Trump to show his willingness to compromise and up to China to keep taking actions to address US grievances. It would be a collective policy failure if the multilateral trade system were to collapse. As discussed earlier, this multilateral global order is already undergoing a major transition with the emergence of strong regional poles. In light of the evidence provided above, I hope that my maintained hypothesis has convinced you that we are not facing an end of globalisation, but a new kind of globalisation with new regional poles or centres emerging already. In any event, the rivalry between the 20th century’s superpower, the United States, and the 21st century’s emerging superpower, China, both economically and politically, will shape the post-globalisation era and decide the future of the entire world. Thank you very much for your attention! 26 / 26 BIS central bankers' speeches | bank of greece | 2,018 | 4 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event on the occasion of Accenture's 25th anniversary in Greece "Greece and the global economy - prospects and main challenges ahead", Athens, 28 March 2018. | Yannis Stournaras: Greece and the global economy - prospects and main challenges ahead Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event on the occasion of Accenture’s 25th anniversary in Greece "Greece and the global economy - prospects and main challenges ahead", Athens, 28 March 2018. * * * Ladies and Gentlemen, It is a great pleasure for me to be here tonight and share my thoughts on the prospects of the Greek economy against a backdrop of brighter prospects for the global and euro area economy but also against the headwind of higher uncertainty due to a rise in protectionism worldwide. 1. The international environment T h e global economy continues to strengthen, underpinned by the investment and international trade recovery, on account of favorable financial conditions, supporting monetary policy, improving confidence and low international commodity prices. This favorable momentum is expected to continue in 2018. 1 World trade in goods and services has recovered and its volume is now estimated to have increased by 4.7% in 2017, compared with 2.5% in the previous year. The upward revision of growth rate of international trade is not only due to a faster recovery in world GDP but also to an increase in income elasticity that has fallen in recent years due to the sluggishness in fixed capital investments which are to a large extent “trade-intensive”. Regarding the euro area, economic expansion is strong and broad-based.2 The recovery is accompanied by solid employment gains, reflecting also past labour market reforms. The unemployment rate continues to decline despite an increase in labour force participation. Private consumption is supported by rising employment and growing household wealth. The investment outlook is positive, on account of rising corporate profitability, easing financing conditions and solid demand, as well as the need for capital stock replacement after several years of underinvestment. The broad-based global expansion is providing impetus to euro area exports. Overall, in the euro area, GDP in 2017 grew by 2.3% – the highest post-crisis growth rate – and is expected to increase by 2.4% in 2018 and 1.9% in 2019. Positive consumption and investment developments have been fostered and reinforced by the pass-through of the ECB’s monetary policy measures, that eased funding conditions for households and firms3. The contribution of the ECB easing measures to annual euro area GDP growth was estimated at half a percentage point in 2017 and still is expected to be around one-third of a percentage point in 2018.4 Inflation in the euro area reached 1.5% in 2017 and is expected to decline slightly to 1.4% in 2018, largely a reflection of developments in international oil prices. Inflation is expected to move gradually up thereafter to 1.7% in 2020, reinforced by the ECB’s accommodative monetary policy, robust economic activity and projected labor cost increases, as the level of underemployment of the workforce will decrease.5 The Governing Council of the ECB is more confident that inflation will reach a level of below, but close to, 2% over the medium term. At the meeting of March 8, the Governing Council of the ECB introduced a further gradual adjustment to the monetary policy stance, removing from the official communication the so-called APP easing bias 6. However, the Governing Council still needs to see further evidence that inflation dynamics are moving in the right direction. So monetary policy, as President Draghi and other members of the Executive Board of the ECB have put it, will 1/9 BIS central bankers' speeches remain patient, persistent and prudent. T h e risks surrounding the forecasts for the global and European economies appear to be balanced in the short term, under the positive effect of accommodative monetary policy in advanced economies and the recovery of international trade. However, they are tilted to the downside in the medium term as interest rate hikes as a result of the normalization of monetary policy in advanced economies (which is under way) are expected to burden the service of high total public and private debt and to dampen growth dynamics. Downside risks relate to: - Rising protectionism and in particular the possible spillovers of the new trade measures announced by the US administration. An escalation of trade tensions, the intensity of retaliation and their potential negative confidence effects, would weigh on world trade. These measures already affect stock markets. - The possibility of tighter global financial conditions as well as potential sharp correction in financial markets, triggered by a faster than expected tightening of US monetary policy and/or a reassessment of investors’ risk appetite. In this context, talking down currencies exacerbates exchange rate volatility which is harmful for global and euro area growth. - The outcome of Brexit negotiations. - Geopolitical tensions in the Middle East, the Korean peninsula and Iran, as well as a possible resurgence of the refugee crisis. - The possibility of anti-euro attitude by populist governments in Eurozone Member States. Moreover, there are several medium-term challenges for the global economy. Productivity growth has slowed across advanced, emerging market and low-income countries at a time of significant innovation and technological change. This is expected to negatively affect the long-term potential output. The generally low level of global inflation and wage growth, especially in advanced economies despite the fact that the output gap is closing, is a puzzle for monetary policy makers. – This development could be linked to globalization and the increasing role of China in the global economy, labour market slack and labour’s weakened bargaining position on account of labour market reforms, increases in labour supply and more work of a temporary and part-time nature, the opening up to competition of product and services markets coupled with the growing importance of services, as well as e-commerce which dampens price inflation. These changes – some of which are here to stay for long – have affected the position and the slope of the Phillips curve (the relationship between labour market slack and inflation) in these economies, and pose a number of dilemmas for central banks regarding the continuation of the accommodative monetary policy stance. 2. The future of the Economic and Monetary Union (EMU) A Euro Area specific challenge relates to the fact that, despite the robust recovery and the policy changes taken in recent years, the EMU architecture remains incomplete, making the region vulnerable to future financial crises. Euro area policy makers cannot rely solely on the ECB and expect that it will keep monetary policy loose indefinitely. A well-functioning monetary union 2/9 BIS central bankers' speeches requires: flexible markets for goods, services, labour and capital to facilitate adjustment and reduce both the likelihood and the impact of any future shock7. At the same time, national fiscal positions should be soundto cater the stabilization needs over the business cycle and create fiscal space that could be used in a recession. Notwithstanding the above actions which are based on national responsibility, euro area wide policy instruments are necessary to provide risk-sharing and enhance solidarity in order to cope with large shocks. Building on the Five Presidents’ Report and the European Commission 8 proposal, the key institutional reforms for the new EMU architecture should be the following: o The completion of the Banking Union through the establishment of a European Deposit Insurance Scheme and a common fiscal backstop for the Single Resolution Mechanism to stop the still strong bank-sovereign links. o The creation of a true Capital Markets Union to increase harmonization towards best practices in securitisation, accounting, insolvency law, company law, as well as property rights and to enhance private risk-sharing. The creation of a centralised fiscal stabilisation tool in order to enhance public sector risk-sharing. This tool will provide effective protection against asymmetric shocks triggered by regional disturbances. Various proposals have been put forward, i.e., a common investment fund of EU resources to finance investment projects conditional on reform implementation, the establishment of a European unemployment insurance scheme, the issuance of European “safe” bonds (ESBies) and, later on, Eurobonds by the European Stability Mechanism. The transformation of the European Stability Mechanism into a fully-fledged European Monetary Fund that would act as lender of last resort for Member States. T h e appointment of a Euro Area Finance Minister , accountable to the European Parliament. Increasing accountability of all European institutions to the European Parliament, and Reinforcing the macroeconomic rebalancing mechanisms (i.e. the Macroeconomic Imbalance Procedure), which must operate symmetrically. Up to now, the burden of adjustment falls on Member States with current account and budget deficits, while Member States with current account surpluses continue to augment even higher surpluses. This creates a “recessionary” bias in the Eurozone. Moving forward in this direction would safeguard the monetary union’s resilience, its viability and the long-term prosperity of its citizens. These changes will also reinvigorate real convergence in the euro area. Recent IMF work has shown that since 2010 there is real divergence among the original euro area countries9, while in-house work by the Bank of Greece has shown that the real divergence persists even if Greece is excluded from the sample.10 3. Greek economy: Progress over the past eight years The Greek crisis was the result of major macroeconomic imbalances which have accumulated over a long period of time, leading to the outbreak of the sovereign debt crisis in 2010. To a large extent, these imbalances have now been addressed, although major challenges remain, as I will explain later. Over the past eight years, Greece has implemented a bold economic reform and adjustment programme that has fully eliminated fiscal and external deficits and improved competitiveness. As a consequence, openness has improved substantially and the economy 3/9 BIS central bankers' speeches has started to rebalance towards tradable, export-oriented sectors.11 T he banking system has been restructured, consolidated and recapitalized, following stringent stress tests along with in-depth asset quality reviews. Greek banks are now among the best capitalized in Europe.12 The ratio of Non-Performing Exposures to total Exposures remains quite elevated (44.6% of total exposures or €100.4 billion in September 2017). But banks have set operational targets to reduce the stock of non-performing exposures (NPEs) by 37% by end-2019. And they have accumulated provisions covering about half of their total NPEs, while the other half is covered by the underlying collateral. According to December 2017 provisional data, there was a substantial improvement in the pace of NPE reduction in the fourth quarter of 2017 (with the NPE stock amounting to roughly €95 billion). Significant institutional reforms have been implemented, aiming at providing banks with a variety of means for reducing non-performing loans. These reforms include, among others, the authorization of credit servicing firms, operation of an electronic platform for out-of-court settlement, and electronic auctions of real estate. The progress achieved in removing the obstacles to the management of NPEs and, in particular, the impact on strategic defaulters’ behaviour from the launch of e-auctions was a main factor behind the favourable picture in the fourth quarter. 4. Short and medium-term outlook Progress in the implementation of the adjustment programme is having a beneficial impact on confidence, liquidity and the real economy. Real GDP in 2017 increased by 1.4% on account of the positive contribution of exports of goods and services and gross fixed capital formation. By contrast, private consumption remained flat, while public consumption contributed negatively to growth. Positive developments are not only reflected in economic activity indicators, but also in soft data such as the manufacturing PMI and the economic sentiment indicator which have reached and at times surpassed previous peaks pointing to continuing economic expansion. Improvements are also visible in the financial sector: bank deposits of the non-financial private sector have increased by about 10 billion euro since mid-2016 and bank credit to nonfinancial corporations has stabilized. Capital controls have been relaxed and banks’ dependence on central bank financing has declined significantly. Nevertheless, financial conditions remain tight and bank lending rates are high compared to other euro area countries. Yields of Greek government bonds have declined to pre-crisis levels, despite recent turbulence in financial markets, and the yield curve has largely normalised. The Greek government returned to international bond markets, for the first time since 2014. A five-year bond was issued in July, an exchange operation of PSI bonds was conducted towards the end of 2017, in order to enhance the liquidity of the market for Greek debt, in early February 2018 (and despite market turbulence) the Greek government raised €3 billion from a new seven-year bond, at a yield of 3.5 percent. Fitch and Moody’s recently upgraded the Greek sovereign. However, GGBs are still five notches below investment grade. Looking forward, the Bank of Greece expects economic activity to pick up in the medium term, with GDP growing above 2.0% in 2018 and 2019. Growth will be driven by robust export performance, benefiting from the global expansion and competitiveness gains, solid private consumption growth, supported by rising employment, and robust investment spending, 4/9 BIS central bankers' speeches reflecting the realization of new investment projects, benefiting from the gradual improvement in both confidence and funding conditions. These forecasts are based on the assumption that the reform and privatization programme will be implemented smoothly and according to the agreed time schedule. Domestic downside risks are related to reform implementation, as well as the impact of excessive taxation on economic activity. There are also external risks to the forecast, which are linked, among others, to a slowdown in global economic activity, an increase in investors’ risk aversion due to disturbances in international financial markets, tensions in foreign exchange markets, and the rise in protectionism worldwide, as well as a possible resurgence of the refugee crisis. Finally, there are upside risks too. The most significant one is related to the announcement of further debt relief measures. 5. The return to financial markets on sustainable terms The key issue in the coming months is the improvement of the country’s creditworthiness, which will allow the return of the Greek sovereign to financial markets on sustainable terms after the end of the programme in August 2018. This requires strengthening the confidence of international investors in the prospects of the Greek economy. This, in turn, can be achieved by implementing the following actions: First, economic policy should focus on the preparation for the timely conclusion of the fourth and final review, which will mark the end of the programme; Second, our European partners should specify in more detail the medium-term debt reprofiling measures. This will enable Greece’s access to bond markets on sustainable terms and will facilitate the inclusion of Greek government bonds in the ECB’s quantitative easing programme. Third, capital controls should be lifted after the end of the current ESM programme. Fourth, build up a cash buffer using new bond issuances coupled with ESM disbursements. Such a cash buffer would be particularly useful in the event that Greece’s credit rating has not improved to investment grade by the end of the programme, and if volatility in financial markets remains elevated. Nevertheless, in order to fully resolve uncertainty over the medium term prospects of the economy the Greek authorities alongside with our European partners should clarify both t h e type of post-programme surveillance and whether any post-programme support arrangement would be available after the completion of this programme in August 2018. Under the EU legal framework, Greece will be under surveillance at least until it repays 75% of the official loans received from euro area countries, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). According to the Bank of Greece, the decision to establish a post-programme support arrangement should reflect the need to ensure smooth financing of Greek banks (including the continuation of the waiver) and the Greek economy in the event that Greece’s credit rating remains lower than investment grade and especially if international financial market conditions deteriorate. 6. The transition to a new outward–oriented growth model As the result of the painful economic adjustment over the past eight years, macroeconomic flow disequilibria have now been eliminated and reforms have contributed to a substantial improvement of competitiveness. Hence, this is a good starting point for the Greek economy to 5/9 BIS central bankers' speeches embark on a sustainable outward-oriented growth model. However, stock disequilibria — such as the high public debt, the high burden of NPLs and high unemployment — persist or have even increased during the years of the crisis, acting as a drag on long-term growth. In order to address the abovementioned challenges and to ensure that the economy will move towards a sustainable export led growth model, the focus of economic policy should be on the following: Implementing the remaining reforms, improving the quality of and safeguarding the independence of institutions, because institutional quality is a key determinant of longterm growth. Addressing the public debt overhang. Decisive and concrete actions are needed to ensure the sustainability of Greek public debt, on the basis of the Eurogroup’s decision of June 2017. The Bank of Greece has put forward a mild debt re-profiling proposal, which entails only a negligible cost for our partners and provides for, among other things, extending the weighted average maturity of interest payments on EFSF loans by at least 8.5 years. Adopting a growth-friendly fiscal policy mix. High tax rates and the over-reliance on taxes are a disincentive on the willingness to invest and to work. Moreover, high tax rates encourage the shift of activities towards the shadow economy and provide incentives for tax evasion. Tackling the problem of non-performing exposures (NPEs) which constrains the banking system’s ability to finance economic growth. Banks need to step up their efforts to attain their operational targets for reducing their NPEs. In this context, banks should facilitate the restructuring of viable businesses, the identification of strategic defaulters and the liquidation of non-viable businesses. Due attention should be paid on the implementation of IFRS 9, stricter treatment of loan-loss provisions, as well as the EU-wide stress test to be conducted by the ECB. Promoting innovation, education and knowledge-based capital in order to raise TFP and long-term growth. Attracting FDI to close the investment gap and to increase the openness of the Greek economy, because FDI promotes greater trade ties with countries and companies with cutting edge-technologies. Supporting the unemployed by using employment and training programmes and targeted social transfers. 7. Final remarks Over the past eight years, Greece has gone a long way in adjusting its major macroeconomic imbalances, reforming its economy and restoring competitiveness. The economy is now recovering. Overall, I believe that 2018 is a landmark year for Greece’s return to normality. I am convinced that the actions I have just described will lead to a sustainable return to the financial markets. This will mark the final exit from the crisis and the transition to a sustainable export led growth model after many years of painful adjustment, social tensions, recession and economic stagnation. Sources: Bank of Greece (2018). Governor’ Annual Report, February . www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=505&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Berger, H, Dell’Ariccia, G and Obstfeld, M. (2018). The Euro Area Needs a Fiscal Union, IMF blog 21/2/2018. blogs.imf.org/2018/02/21/the-euro-area-needs-a-fiscal-union/ 6/9 BIS central bankers' speeches Coeure, B. (2018). Making our monetary union stronger and more resilient. Speech at the at the Finanzmarktklausur of the CDU Wirtschaftsrat. Berlin, March www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180314_4.en.html Draghi, M. (2018). Introductory Statement. 2018. www.ecb.europa.eu/press/pressconf/2018/html/ecb.is180308.en.html March Draghi, M. (2018). Monetary Policy in the Euro Area. Speech at the ECB and Its Watchers XIX Conference, organized by the Institute for Monetary and Financial Stability. 14 March 2018, www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180314_1.en.html ECB (2018). Economic Bulletin No 2. 22 March 2018. www.ecb.europa.eu/pub/economic-bulletin/html/eb201802.en.html European Council (2018). Remarks by President Donald Tusk following the informal meeting of the heads of state or government on February 2 0 1 8 , www.consilium.europa.eu/en/press/press-releases/2018/02/23/remarks-by-presidentdonald-tusk-following-the-informal-meeting-of-the-27-heads-of-state-or-government-on-23february-2018/ European Commission (2018). Winter 2018 (Interim), INSTITUTIONAL PAPER 073 | FEBRUARY 2018. ec.europa.eu/info/sites/info/files/economy-finance/ip073_en_upd2.pdf European Commission (2017). Commission sets out Roadmap for deepening Europe’s Economic and Monetary Union, 6 December 2017 europa.eu/rapid/press-release_MEMO-17– 5006_en.htm European Commission (2015), Completing Europe’s Economic and Monetary Union. Report by Jean-Claude Junker in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz. 22 June. Franks, JR, Barkbu BB, Blavy R, Oman W, Schoelermann, H. (2018). Economic Convergence in the Euro Area: Coming Together or Drifting Apart? IMF working paper 2018/10. IMF (2018). World Economic Outlook Update, January 2018. Malliaropulos, D. (2018). Real convergence in the euro area or the lack thereof. Presentation at the 7th BBVA Seminar for Public Sector Investors and Issuers, Bilbao, 26 February – 2 March 2018. www.bankofgreece.gr/BogDocumentEn/Real_Convergence_in_the_Euro_Area_Malliaropulos_28_02_2018.pd Praet, P. (2018). Assessment of quantitative easing and challenges of policy normalization. Speech at The ECB and Its Watchers XIX Conference, Frankfurt am Main. 14 March 2018 www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180314_2.en.html Stournaras Y. (2018). The future of the Greek economy, Speech at an event organized by the Hellenic Spanish Chamber of Commerce, Athens. 12 February 2018. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=499&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2017a). Greece and the global economy: Prospects and main challenges ahead. Speech at an event organised by Credit Suisse, Athens, O c t o b e r , www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? 7/9 BIS central bankers' speeches Item_ID=476&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b. Stournaras, Y. (2017b). The Greek economy: Prospects and main challenges. Speech at the 2nd EU-Arab World Summit, Athens, 10 November, www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=482&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b. Stournaras, Y. (2017c). The future of the euro area and Greece. – Article by the Governor of the Bank of Greece Yannis Stournaras published in the newspaper “Ta Nea”. 11 September. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=469&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b 1 Global GDP growth is estimated by the IMF (2018) to have accelerated to 3.7% in 2017 from 3.2% in 2016 and is expected to reach 3.9% in 2018. 2 See Draghi, Mario Introductory Statement, www.ecb.europa.eu/press/pressconf/2018/html/ecb.is180308.en.html March 2018. 3 See Draghi, Mario (2018) Monetary Policy in the Euro Area , Speech at the ECB and Its Watchers XIX Conference, organised by the Institute for Monetary and Financial Stability 14 March 2018, www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180314_1.en.html Coeure, Benoit (2018) Making our monetary union stronger and more resilient. Speech at the at the Finanzmarktklausur of the CDU Wirtschaftsrat, Berlin, March www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180314_4.en.html 5 See Draghi, Mario (2018) Monetary Policy in the Euro Area, Speech at the ECB and Its Watchers XIX Conference, organised by the Institute for Monetary and Financial www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180314_1.en.html Stability March 2018, 6 That is a sentence in which – since December 2016 – we had expressed our readiness to increase the monthly pace and/or extend the horizon of our net asset purchases if certain unfavourable macroeconomic or financial conditions materialized. Draghi, Mario (2018) Introductory Statement, 8 March 2018. www.ecb.europa.eu/press/pressconf/2018/html/ecb.is180308.en.html. Praet, Peter (2018), Assessment of quantitative easing and challenges of policy normalization, Speech at The ECB and Its Watchers XIX Conference, Frankfurt am Main, March www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180314_2.en.html 7 Coeure, Benoit (2018) Making our monetary union stronger and more resilient. Speech at the Finanzmarktklausur of the CDU Wirtschaftsrat, Berlin, www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180314_4.en.html. March 8 European Commission 2017, Commission sets out Roadmap for deepening Europe’s Economic and Monetary Union, 6 December 2017 europa.eu/rapid/press-release_MEMO-17–5006_en.htm 9 Franks, Barkbu, Blavy, Oman, and Schoelermann (2018) Economic Convergence in the Euro Area: Coming Together or Drifting Apart? IMF working paper 2018/10. 10 Malliaropulos, Dimitris (2018), Real convergence in the euro area or the lack thereof, Presentation at the 7th BBVA Seminar for Public Sector Investors and Issuers, Bilbao, 26 February – 2 March 2018. www.bankofgreece.gr/BogDocumentEn/Real_Convergence_in_the_Euro_Area_Malliaropulos_28_02_2018.pdf 11 The share of total exports in GDP increased from 19.0% in 2009 to nearly 32% in 2017. Exports of goods and services, excluding the shipping sector, have increased by 50% in real terms since their trough in 2009, similar to euro area exports. The share of tradables goods and services in the economy has increased by 10% relative to non-tradables in terms of real gross value added since 2010. Also, relative prices and net profit margins of tradables’ sectors have increased, facilitating the rebalancing process of the Greek economy towards tradable 8/9 BIS central bankers' speeches goods and services. 12 Based on September 2017 data the CET1 ratio came to 17.1% (December 2016: 16.9%) and the CAR to 17.2% (December 2016: 17%). 9/9 BIS central bankers' speeches | bank of greece | 2,018 | 5 |
Speech by Professor John Iannis Mourmouras, Deputy Governor of the Bank of Greece, at the 2nd International Conference, organised by the Economic Chamber of Greece, Athens, 31 May 2018. | “Post-MoU Greece: Five proposals” Speech by Professor John (Iannis) Mourmouras Bank of Greece Deputy Governor Former Deputy Finance Minister at the 2nd International Conference organised by the Economic Chamber of Greece at the Stavros Niarchos Foundation Cultural Center Athens, 31 May 2018 Your Excellency, Mr. President of the Hellenic Republic, Ladies and Gentlemen, Introduction After 8 years of hardship and thanks, on the one hand, to the big sacrifices of the Greek people and, on the other hand, to the solidarity of our European partners as this is manifested by the unprecedented amount of loans given to our country on truly concessional terms (very low rates and long maturities), Greece is finally coming out of the tunnel with optimism. Although the international economic environment and indeed the situation in our neighbourhood is pretty unstable right now, I believe the Greek case is manageable for an exit from the MoUs in late August without a precautionary credit line – which would be effectively a mini-fourth MoU. Such an exit, after all, would be similar to the cases of Portugal, Ireland and Cyprus. I will seize the opportunity of this conference organised by the Economic Chamber of Greece, thriving under the leadership of Konstantinos Kollias, taking place in this magnificent masterpiece of world architecture named after a global business leader, Stavros Niarchos, to make 4 new proposals, and repeat an old one, towards achieving this sort of exit and beyond, and the emphasis is on the “beyond”. Then I will briefly ask what went wrong in the case of Greece. I have written extensively on this subject during the period 2010-2014 with my previous hats, including the professorial one. The important thing is to look forward, but history matters and the lessons drawn with regard to member countries of monetary unions are of paramount importance. And finally I will look at the significant role that the ECB played in the adjustment programmes in the four countries and, more generally, in the South of Europe (including Spain and Italy), among other things in providing liquidity and effectively saving the euro, because, as you know, that was at stake in the end. Before coming to the main topic of my speech, five proposals on post-MoU Greece, a digression may be in order on Italy. Italy What’s happening in Italy right now is not a surprise for some. For a lot of analysts it has the potential to trigger the next global financial crisis after 2008, markets’ first reaction was really dramatic, although the following days they seem to be calming down a bit. US and European equity markets fell by around 2% on the very first day, the Italian 2-year government bond rose by 230 basis points, the Italian 10-year government bond rose by 70 basis points, a trend not seen since the euro area crisis in 2012 and dragging down all other europeriphery government bonds. The unstable political situation caused by populists, which has left the country without a government since March, goes back to two major root causes. First of all, it may be attributed to the failure of globalisation to reach some segments of the population, which have been left behind in terms of its economic benefits, for instance through chronic unemployment of around 11%, with youth unemployment at a devastating 35%. Italy’s per capita income is lower today than on the eve of the country’s euro adoption in 1999 and over the past decade, the country has experienced a triple-dip recession. It is expected to be at the bottom of the euro area’s growth league this year. It is no wonder that the 5 Star movement won more than 50% of votes in the troubled south, where poverty rates have increased by half since the crisis.Secondly, increased migration flows in the last three years, triggered a strong anti-European sentiment and broader support for populist forces. Italy is too big to ignore. Its GDP is 10 times bigger than the Greek one. Italy is the eurozone’s third-largest economy and it has systemic importance to the world economy. Italy has the world’s third largest sovereign debt market, after the US and Japan, with total public debt of more than €2.3 trillion, of which more than 36% is held by foreigners, so contagion is really an issue here. It also has the worst public debt-to-GDP ratio (133%) in the eurozone after Greece and a weak banking system, poorly capitalised, troubled also by the high level of nonperforming loans (more than €250 billion, 15% of the total). No matter what happens with the current political and constitutional crisis in Italy, the problem with Italy was there: life after QE, namely what happens with the end of QE this year when the ECB will stop its large-scale purchases of Italian government bonds. I don’t want to think what would be happening if political developments were to lead Italy to lose its investment grade (currently at BBB). A. Greece today and beyond A.1 The real economy: positive short and medium-term outlook Greece’s economic recovery is finally gaining traction after an unprecedented depression. Real GDP in 2017 increased by 1.4% with positive contributions from exports of goods and services (2 percentage points contribution) and gross fixed capital formation (1.2 percentage points contribution) (see Chart 1). This positive outcome creates a strong carryover effect of +0.5% for GDP growth in 2018, which supports the outlook for a GDP growth rate of around 2% and 2.5% in 2018 and 2019, respectively. Figure 1 Growth has resumed Positive developments are not only reflected in economic activity indicators, but also in soft data such as the manufacturing PMI which has been in expansionary territory for the last ten months, by far the longest period since 2007. Economic sentiment has been on an upward trend since mid-2015, reached a 3-year high in 2017 and further improved in the first quarter of 2018. Industrial production has been expanding at healthy rates since mid-2015 and performed exceptionally well in 2017. The unemployment rate dropped to 21% in 2017, falling by around 6 percentage points from its peak in 2013. This trend continued in the first four months of 2018, which supports the outlook for an unemployment rate of around 19% and 18% in 2018 and 2019 respectively. Employment increased by 2.2% in 2017, and the number of unemployed declined by 9.2%, while the youth unemployment rate (in the 20-29 age category) declined to 35% in 2017 from 38% in 2016, and long-term unemployment also dropped by 3 percentage points (see Figure 2). Figure 2 Total, youth unemployment rate and share of the long-term unemployed (in percentages) Source: ELSTAT, Labour Force Survey. The Greek banking sector is strengthening Turning now to the Greek banking sector, first allow me to make some comments in the wake of the stress test results. All four systemic banks successfully concluded the 2018 stress test conducted by the ECB, pointing to no capital shortfall. Therefore, for the first time since 2010 and after three rounds of capital injections in the last five years, the Greek banks will not need additional capital in the near future. More analytically, the tests revealed a 9 percentage point impact on banks CET1 ratio under the adverse scenario, equivalent to €15.5 billion, but left all banks’ CET1 higher than the 5.5% implicit hurdle (although one bank is relatively close and is expected to continue its current capital plan). Moreover, the continued improvement in the banking sector can also be seen on their reduced reliance on the central bank funding, which is diminishing steadily and is now below the levels of end-2014 (see Figure 3). Figure 3 Bank deposits and reliance on central bank funding (Q1 2008 to end-February 2018) Banks’ dependence on the ELA emergency lifeline has declined significantly to around €8.6 billion during this month, from €70 billion at the end of 2015 and is expected to be terminated before the end of the year. Another visible improvement in the Greek banking sector was the increase of the total deposits between end-June 2015 and March 2018 by €13 billion (or 8.0%) to €143 billion. Last but not least, a major pending issue is the tackling of the problem posed by the high stock of non-performing loans, the ‘Achilles heel’ of the Greek banking system. On a positive note, for the first time since 2014, net NPEs follow a downward trend. However, the NPE ratio of 42% in Greece remains the highest across euro area countries, against 14% in Portugal and 10% in Italy and Ireland (see Figure 4), while before the crisis the NPL ratio in Greece was 4.5% (in 2007), against 3% for the euro area average. Figure 4 Ratio of non-performing exposures (NPE ratio) in the euro area (December 2017) Source: European Banking Authority (2018), “Risk Dashboard, data as of Q4 2017”. A.2 Post-MoU Greece: the way forward First of all, as shown in the following table, Greece has outperformed – with the exception of NPEs and public debt, in terms of all other macroeconomic indices – i.e. in terms of growth, primary and fiscal surplus, current account surplus, the spread of Greek bonds vs. the German Bund – the other 3 countries during the corresponding exit periods. This is obviously comforting to both our lenders and the markets for the future of Greece after the MoUs. Table 1 Macroeconomic and Financial Data during the exit period General General Government Government Real GDP Country Primary Fiscal (% change) Surplus/Defic Surplus/Deficit it (% of GDP) (% of GDP) General Government Debt (% of GDP) Current Account balance (% of GDP) 10-Year Government NPLs Amount Bond Yield & Spread (% of Total Loans) vs 10-year Bund Greece 2,5 3,9 0,9 178,0 0,4 46,6% (as of Q3 2017) Feb 2018: 4,11% 336 bps Ireland 1,6 -1,8 -6,1 119,4 2,1 25,7% (as of Q4 2013) Jun 2013: 4,13% 240 bps Portugal 0,9 -2,3 -7,2 130,6 -0,3 11,6% (as of Q2 2014) Dec 2013: 6,04% 410 bps Cyprus 3,0 3,0 0,5 107,1 -4,9 48,5% (as of Q1 2016) Nov 2015: 4,02% 345 bps Source: Bank of Greece. I intend to skip here the latest heated debate on cash buffers vs. a precautionary credit line, for 2 reasons. Firstly, they are both short-term solutions, maximum one plus one year, but the real question remains what comes next after the first post MoU-year. This is the question I propose to focus on, namely: what needs to be done in order for the country to achieve a permanent sustainable return to the capital markets, like the pre-2008 status. It will be the sequel question to either cash buffer or precautionary credit line the country will inevitably have to face in a year or so. I want to open this debate from here today by making a number of proposals that will make such a return feasible in the foreseeable future. Secondly, this economic debate has turned into a saga, it’s a politically controversial issue, as it is quite often the case in Greece, some have called it ‘sour grapes’ – and I don’t want to go into that territory. The truth of the matter is that we have in our hands a Eurogroup decision of 15 June 2017, which is an agreement between the government and our lenders in view of the ending of the current programme in August 2018 and I quote: “Europe commits to provide support for Greece’s return to the market …” and “to further build up cash buffers to support investors’ confidence and facilitate market access”. Right now we have this agreement. If this changes, we are here to discuss it. Before coming to my proposals, let me list a number of undeniable facts about post-MoU Greece: 1. The fourth and final programme review has been concluded successfully last week. So the last disbursement from the ESM is only a matter of time and, as of today, there will be no extension of the third adjustment programme, which ends on 20 August later this year. 2. Any prior actions left will be dealt with during the post-MoU period, known as the Post-Programme Surveillance (PPS). We know the name, but not what it will entail. This is the big known-unknown today, be patient and we will know all about it in a few weeks’ time. 3. What is clear, however, have no doubt about it, is that Greece will be exiting the 3rd MoU, but will be entering something new, not a 4th MoU, but something hybrid with conditionality since debt relief, according to all evidence, will be given in tranches. 4. Finally, it seems that austerity will stay with us at least for another 4 years as primary surpluses of 3.5% are required until 2022. Before turning to my own proposals for Greece, one word about the IMF. It is not clear yet what role the IMF holds for itself. Any IMF decision about its future role will be fully respected. There is a proposal already, which I endorse, that Greece’s remaining loan obligation to the IMF of €10 billion which comes at a gross interest rate of 3.8%, much higher than European loans interest rate of about 1%, should be repaid immediately (the money can be found). Such an early repayment of the IMF loan would contribute to an improvement of the sustainability of public debt, making also possible a more balanced management of payments. Figure 5 Greece public sector outstanding debt (in billion euro) Sources: HSBC and Greek Public Debt Management Authority (PDMA), January 2018. Then all past grave mistakes by the IMF (e.g. on the value of fiscal multipliers, assumed at 0.5, when the correct value was 1.5), the over-optimistic forecasts about growth and fiscal surpluses under the 1st MoU, turned into overpessimistic forecasts under the 3rd MoU, etc. and the most recent ones, like e.g. that the Greek banks will need at least €10 billion capital injection as a result of the 2018 stress tests, will be “all forgiven and forgotten”, as they say. Of course, a key prerequisite for a permanent return to the capital markets is the sustainable recovery of the Greek economy with growth levels of above 2%. On top of that and from my point of view, the following four proposals are also required: Proposal #1: Further increasing the cash buffer The government’s strategy - agreed with our lenders - makes sense: to fully cover the country’s financing needs for the first post-MoU period. This is after all what all the other three countries did. For instance, in the case of Ireland, it was a cash buffer of €25 billion, in Portugal it was around €20 billion, in both cases around 13% of their GDP. Greece’s gross financing needs for the next two years amount to €45 billion, of which €18 billion will be covered by the primary surplus and the privatisation agenda, and there is an existing cash buffer already from the 2018 debt issues and from repos. My personal view is that due to: a) adverse capital market conditions globally, the return of volatility and higher oil prices, inverted US yield curves as a result of monetary policy tightening, the widening Libor-OIS spreads, which exert pressure on the US dollar money market, the recent US dollar strength vis-à-vis other main currencies. All the above might have a greater impact on vulnerable countries with low credit ratings and weaker economies. Name it, Italy as described above or Trump’s trade war with China and other major economies, the fog of uncertainty has thickened. b) Also due to political developments in Greece as next year will be the year of European elections and also national and regional elections. Plus there are also geopolitical risks in our neighbourhood (our unpredictable eastern neighbour in connection with the drilling of gas in the Aegean and Cyprus). All the above make a strong case for increasing the buffer as much as possible for shielding the economy. Large cash buffers boosted investor confidence and have aided market re-entry in Ireland, Portugal and Cyprus. The extra money could come from either the bank recapitalisation amount remaining from the 3rd programme, or from new issues in the markets over the next 3 months, provided that the dust in capital markets settles down. If things turn nasty in Italy and the europeriphery, in the next few weeks, there is plenty of time for the Greek government to negotiate with our European partners, a negotiation which I would suggest to be made at the highest level, at Prime Minister level, for Greece to exhaust all the remaining amount, which is more than €25 billion, from the €86 billion of the 3rd programme, leaving not even a single euro in the account. This amount has already been approved by the national parliaments in eurozone countries, if we face an extraordinary situation due to external factors, it is only prudent for Greece and our lenders to secure the maximum reserve amount for a rainy day in order to shield the country. There is still plenty of time for the government to look at this. Just keep a cool head! Proposal #2: From debt sustainability… to obtaining the investment grade for Greek public debt We have every confidence that our lenders will keep their word on providing Greece with further debt relief - pacta sunt servanda applies to both lenders and borrowers - and deliver on what they promised since November 2012. The debt relief measures described in the Eurogroup statement of 15 June 2017 need to be clarified and specified with a clear timetable to be considered credible by investors. It will be along the lines of the 1st package of short-run measures, i.e. extending maturities and lowering interest rates which, given the new debt metric “gross financing needs below 15% of GDP for the medium term and below 20% of GDP thereafter” would make sure that the Greek public debt is sustainable. The new debt metric that focuses on gross financing needs (GFNS) – rather than the old one of nominal debt-to-GDP ratio – captures adequately the concessional terms of loans to Greece by the EFSF and the ESM (more than €180 billion with maturities up to 32.5 years and a fixed rate close to 2% directly or indirectly taking as a basis a near-zero borrowing rate from the markets by the ESM). Reducing public debt in present value terms puts the profile of Greek debt in an advantageous position among two thirds of eurozone countries and four fifths of EU countries. With the end of the programme in August and the specification of debt relief measures in June or July Eurogroup meetings, and a positive DSA report – I open brackets here (recalling that “the one who pays the piper calls the tune”, the ESM from which we borrowed more than €180 billion as of today naturally prepares a debt sustainability analysis (DSA), which will most likely be signed by Dr. Strauch, Chief Economist of the ESM, whom we have the pleasure to have with us today – close brackets) one should normally expect at least a twonotch improvement in the country’s credit ratings by the relevant agencies. This would still be far from the investment grade of BBB-, but, here is my proposal: a new advisory Task Force with senior figures from the Public Debt Management Agency (PDMA), the General Accounting Office and the Bank of Greece, headed by an established figure with an international reputation, would join forces to help obtain the investment grade asap by lobbying the analysts, making roadshows abroad to investors, etc. Clearly, with the permanent removal of the capital controls (I’ll say more on this in a minute) and the elimination of ELA at the end of the year for our commercial banks, that would give another notch up in ratings, plus perhaps an overshooting of the target primary surplus - first evidence from Q1 suggest that this may reach 5% of GDP this year (from a target of 3.5%) and/or a better-than-expected growth performance due say to another record of tourist arrivals, etc. Then, the investment grade may be within reach during the next 12 months or so. I dare say this: For the country to move forward and avoid setbacks in the future, the importance of getting the investment grade in a reasonable time ahead is as important as meeting the Maastricht nominal criteria was in the 1990s, prior to Greece’s entry in the eurozone. We managed to do so then with a delay of two years. It may sound a bit optimistic today, but my motivation is to open up the discussion on this and make it a central part of the policy debate in post-MoU Greece. I believe it is feasible, and it is only fair for the country. Proposal #3: Greece’s participation in the ECB’s QE programme during the re-investment period With 3-4 notches up in the next 8 to 12 months and the investment grade for Greece within reach, the ECB may potentially examine the purchase of Greek government bonds under its public sector purchase programme during the reinvestment period, which will last for at least two years (end-2020). Even though the potential purchase volumes of Greek debt today (around €3-4 billion) under the ECB’s asset purchase programme cannot be compared with those of Portugal, currently around €33 billion or Ireland’s €27 billion, yet, Greece’s inclusion in the ECB’s QE programme would yield a major boost in terms of confidence and send a positive signal to investors that Greece is not anymore an outlier, it is included in President Draghi’s umbrella with clear benefits in terms of the cost of borrowing of both sovereign and bank and corporate debt, as it was the case for post-MoU Ireland and Portugal. Note that if, as part of the upcoming debt relief measures, there will be a buy-out of ANFAs and SMP bonds by the ESM, releasing a total amount of €13 billion, then the volume potentially to be purchased under the QE programme could increase to €16 billion, which is more than one third of marketable debt, triggering a drop of even 150 basis points in the secondary market. We bought at the Bank of Greece - more than €50 billion - as part of QE, mainly supranational, hopefully the time of buying also GGBs is also near. Proposal #4: Towards a permanent lifting of capital controls No return to the markets can be permanent and hence credible with capital controls still imposed on the economy. The government, in cooperation with the Bank of Greece would have sooner than later, and definitely close to the end of the programme, publish a roadmap detailing the specific measures and set dates for the full lifting of capital controls, signalling also the end-date. This would be the catalyst for the full recovery of trust of depositors and the return of around €20 billion hoarded in mattresses and safety deposits, but also boost investor confidence in the prospects of the economy. B. What went wrong in Greece? Let me now turn briefly to the four adjustment programmes that took place in the eurozone, by focusing on the question “what went wrong in Greece”. The distinguished panellists of the previous session have debated at length and elaborated on the very significant question of their countries’ experiences with adjustment programmes. The Table below summarises a number of characteristics of these programmes in the europeriphery (see Table 2). Table 2 Overview of the Financial Assistance Programmes in Greece, Ireland, Portugal and Cyprus Overview of the Financial Assistance Programmes in Greece, Ireland, Portugal and Cyprus Country Type of Crisis Date of approval Greece Sovereign Debt/Competitiveness May 2010 Ireland Banking/Real Estate Bubble Portugal Sovereign Debt/Competitiveness May 2011 Cyprus Banking April 2013 EFSF/ESM Amount in LoansWeighted € (bn) Average maturity (52,9+20,7)+ August 2018 172,6 30,2 (141,8+11,6) +86(40,2) Date of expiration Review Average Duration Number of governments Capital Controls 6,7 From June 2015 Type of Exit 67,5 20,8 3,0 No "Clean" (Post-programme surveillance without precautionary credit line) June 2014 (50,3+26,5) 20,8 3,4 No "Clean" (Post-programme surveillance without precautionary credit line) March 2016 10 (6,3+1) 14,9 4,9 From April 2013 to April "Clean" (Post-programme surveillance without precautionary credit line) December 2010 December 2013 Source: Bank of Greece. With a naked eye, one can see in the following table that Greece has received about €240 billion from all three programmes up to now, while the other countries have received much lower amounts, Ireland €67.5 billion, Portugal €76.8 billion and Cyprus €7.3 billion. While it is widely believed that the euro area crisis started from Greece, incidentally the first sign of crisis within the euro area appeared in Ireland after Bear Sterns was rescued in March 2008, whereby Irish sovereign spreads started to diverge noticeably. Nine months later, in December 2009, there was heightened pressure on GGBs. Greece was the first country though within the euro area to sign a financial assistance programme, and unfortunately the last one to exit from such a programme. Figure 6 Ten-year government bond yields in euro area crisis countries vis-à-vis German Bund yields (September 2008-December 2014, in percentage points) Source: Haver Analytics. During this period, Greece experienced a dramatic fall in output (more than 25%), the unemployment ratio almost tripled from 9% in 208 to 26% in 2015, a huge fall in the standards of living and valuations of assets (real and financial) and another mountain of private debt had been built up (around €220 billion in 7 years). So, what went wrong in Greece? There are several reasons for this, let me name just a few: the starting-point argument (a huge deficit that required a bold adjustment effort); errors in the design of the programme that include the mix of adjustment measures (a greater reliance on tax increases than public spending cuts), the value of fiscal multipliers that we show above, etc., the slow pace of implementation of structural reforms (due to a lack of programme ownership on behalf of Greek authorities); the fact that Greece is a relatively closed economy and, hence, internal devaluation may contribute negatively, in net terms, to economic activity, the fact that debt restructuring in 2012 should have occurred much sooner, i.e. at the beginning of the first MoU in 2010, a directionless economic governance in the first half of 2015 and the ensuing huge cost of the economy’s backtracking, we lost valuable time then, which led to the imposition of capital controls, a severe distortion upon the economy; the wrong sequencing of reforms: product market reforms should come first, followed by labour market reforms, the exact opposite took place in Greece (Hardouvelis). On top of the above reasons which are more or less commonly accepted, I would add a couple of other - rather technical and more subtle - reasons and this is my contribution to the relevant debate. Firstly, as we know, fiscal consolidation took place through the targeting of a nominal variable, i.e. the overall fiscal deficit which is cyclical. Taking permanent austerity measures to reduce the cyclical deficit only deepens and prolongs a recession, it results in excessive austerity and overtaxation which is self-defeating (it raises less government revenues). Instead, the structural deficit should be the appropriate target variable, and the cyclical deficit would correct itself through the economy’s automatic fiscal stabilisers, provided that growth-enhancing measures supplement fiscal consolidation (Mourmouras, FT, 2012). Secondly, there is a certain misperception in the MoUs about how reforms would work in the economy. I identify two grey areas here: (i) reforms take time to unlock their growth potential and their results are also country-specific. A recent study by the OECD (2014) indicates that the above time period may extend to five years or more; (ii) structural reforms work better and quicker when there is investment to capitalise on them and, more generally, demand in the economy because the more the recession lingers on, the harder it is to achieve positive results by implementing structural reforms. Such a demand element can be incorporated into an adjustment programme in monetary unions through the adoption of a broader concept of conditionality, namely that of investment conditionality, along with fiscal and structural conditionalities (Mourmouras, WSJ, 2012). These are important lessons to be drawn from the Greek experience, and hopefully this will be taken into account in the design and implementation of future adjustment programmes in monetary unions. Truly, in the last year or so, we have witnessed a revival of the Greek economy through the stabilisation of expectations and the gradual restoration of confidence. Looking forward now, we all agree that given the prolonged fiscal consolidation and private disinvestment that took place (2007: investment was 27% of GDP, today it is 11% of GDP, the lowest level since 1960), the country needs an investment shock. Reviving domestic and foreign investment is crucial to supporting the economic recovery. That is why it is important for the government to speed up the privatisation agenda, not so much as a revenue exercise, but as a great opportunity to attract FDI in key sectors of the economy, such as transport, energy, logistics and tourism. In this respect, let me come back to an old proposal of mine, as my fifth proposal today, made back in the summer of 2014, before joining the Central Bank (see Mourmouras, The Double Crisis – Volume 2, Chapter 18: first of all, we should all agree on the limits of overtaxation. For instance, with regard to corporate taxation in Greece, 29% corporate tax (plus a 10% tax on dividends), tax competition from other countries is very intense, e.g. from the Iberian peninsula with an average tax rate of 20% (Spain and Portugal), the Baltic countries with an average tax rate of 15% (Lithuania, Latvia, Estonia) and the Balkans with an average of 10% (Turkey 20%, Romania 20%, Albania 15%, Cyprus 12.5%, Bulgaria 10% and FYROM 10%). Hence, there is a strong case to be made in Greece in favour of a drastic gradual reduction of corporate tax rates starting in 2020, but to be announced fairly soon, ultimately reaching a flat tax rate of 15% and remain locked at the same level for another five years. The drastic reduction in corporate tax rates and the commitment to leave them unchanged for a period of five years will be the best signal to Greek and foreign investors that the Greek authorities are now seeking to change the country’s growth paradigm and move towards a dynamic economy based on private investment and exports. This drop in taxes could be financed by the fiscal space achieved through a decrease in primary surpluses, say, to 2.5% from 2020 onwards, bringing effectively forward a year or two the agreed-with-our-lenders lower primary surpluses, or from a persistent overshooting of agreed surplus targets of 3.5% of GDP until 2022. Much to my delight, the above proposal that links lower corporate taxes to lower primary surpluses has been adopted by the Bank of Greece in May 2016 and by the main opposition leader at DETH in Thessaloniki in September 2016. C. The role of the ECB in countries under adjustment programmes As the euro area crisis was triggered by either a weak fiscal position in some cases or a weak banking system in others, it led to the “negative feedback loop” between banks and sovereigns, which the ECB emerged as the institution best equipped to tackle. It has used all the appropriate instruments at its disposal in order to ensure its primary priorities: price and financial stability across the euro area. C.1 The role of the ECB on price stability 1. Reducing base rates First of all, and since the emerging of the financial crisis in 2008, the ECB has reduced its main refinancing rate from 4.25% to 0%, the largest cut ever decided over such a short period in Europe, and also brought the interest rate paid on banks’ deposits of excess reserves with the Eurosystem to negative territory, -0.40% today. 2. SMP programme Furthermore, as sovereign bond markets in some euro area jurisdictions were becoming increasingly dysfunctional, in May 2010 the ECB approved the Securities Market Programme (SMP) worth €210 billion. Its main effect was to cut refinancing costs for countries whose bonds were sold at unsustainable interest rates on international markets, leaving at the same time the money supply unchanged through sterilisation. 3. LTROs and TLTROs In December 2011, the ECB revived the longer-term refinancing instrument making the central bank liquidity available to banks for up to three years at a fixed annual interest rate of about 1%. The total allotted amount to the euro area banks was €1 trillion. In 2014, the ECB announced two more series of targeted long-term refinancing operations with a maturity of up to four years with practically zero interest rate, amounting to more than €700 billion, affecting directly borrowing conditions of enterprises in the euro area. 4. Outright Monetary Transactions (OMT) As the crisis progressed and became more intensive at the beginning of 2012, spreads in the euro area government bond markets continued to widen, i.e. Spain’s 10-year government bond rose from 5% in March 2012 to 7.6% in July 2012. In the summer of 2012, President Draghi in his speech in London declared that the ECB, within its mandate, was prepared to do whatever it takes in order to preserve the euro, repeating the irreversibility of the euro currency, the three famous words “whatever it takes” that made him the second most influential Roman ever, after Julius Caesar with his three famous words “veni, vidi, vici”! Following that speech, the ECB developed a more structured policy of the sovereign bonds market announcing the Outright Monetary Transactions programme (OMT). How much money the ECB spent for this OMT programme so far? Zero euro!!! It is the powerful impact of credible policy announcements. 5. Quantitative Easing (QE) Due to the headwinds coming primarily from the international economy, the inflation outlook in the euro area continued to deteriorate in the summer and autumn of 2014 something that threatened to destabilise long-term inflation expectations, putting the forbidden letter “D”, “D” for deflation, in the mouths of international investors. As a result, in January 2015 the Governing Council announced the expanded asset purchase programme (APP), which included a large-scale purchase programme targeting government securities (PSPP) of €60 billion each month until September 2016. Currently, the Eurosystem holdings under the expanded asset purchase programme amount to around €2.4 trillion or 20% of euro area GDP (PSPP is worth almost €2 trillion, the remaining amount concerns covered bonds and asset-backed securities). The positive effects of QE are mostly reflected in sovereign bond yields, the growth rate of loans and bank lending rates, and of course avoiding deflation in the euro area (see Mourmouras, Speeches on Monetary Policy and Global Capital Markets, 2017, Chapter 4). 6. Emergency Liquidity Assistance (ELA) Also, Emergency Liquidity Assistance (ELA) has been provided by national central banks in order to help domestic banks with liquidity shortages and prevent a domino effect. Hence, between 2010 and 2014, ELA had been extended to banks in Ireland, Greece, Cyprus, and Portugal, with the Eurosystem borrowing to these countries through ELA, surpassing €200 billion. In Greece, ELA has been provided by the Bank of Greece over the last eight years and reached its peak of €120 billion in March 2012. 7. The Eurosystem Resolution Liquidity (ERL) tool Last but not least, the ECB is considering now a new policy tool, the Eurosystem Resolution Liquidity (ERL) tool that would allow it to inject cash into banks under resolution, in other words, when are being rescued from the threat of insolvency. The ERL should be seen as a monetary policy tool, ensuring the banking system can transmit official interest rates to the real economy. C.2 The role of the ECB on financial stability On June 2012, the European Council reached an agreement about the creation of the European framework for banks’ supervision through the Single Supervisory Mechanism (SSM), which forms the first pillar of the Banking Union. The ECB has been assigned specific tasks to be carried out through the SSM like for instance, to ensure the safety and soundness of the European banking system, increase financial integration and stability and ensure consistent supervision. Currently, the ECB is directly supervising 118 “systemically significant banks”, representing almost 82% of total banking assets in the euro area and indirectly supervises less significant banks in the participating countries, which number approximately 3,500 in the euro area! It’s the same SSM, chaired by Danièle Nouy, which conducted the latest stress tests in Greek banks, the results of which came out last month. Two weeks ago, during her recent visit at the Bank of Greece, Chair Nouy emphasised to us that Greek banks need to do more to reduce their very high stock of non-performing loans (NPLs), highlighting that this is the biggest challenge facing the banking sector in the country exiting its third bailout programme in August. D. Concluding remarks Instead of an epilogue, I would like to close my speech with a question from the future, “back to the future”: So with all the above crisis-management tools available, is the euro area today in a better position vis-à-vis 2008 to tackle the next crisis, which, by the way, may be just around the corner? I already talked about Italy in my introduction. With monetary policy reaching its limits, namely, negative rates (in 2008, the base rate was +4%, today it is negative) and the trillions bought by the ECB through its QE programme, and the scarcity issue which naturally arises, clearly, monetary policy can’t be the “only game in town” during the next crisis. In that eventuality, there will be hopefully a more active role for fiscal policy with more fiscal backstops to be implemented, moving also towards more risk-sharing in the euro area. Many people, including myself, feel that we need to strike a balance in the classic struggle between solidarity and national responsibility, or the ‘new wine in the same old bottle’, namely risk-sharing (namely mutualisation of costs) versus risk reduction. Especially in the South of Europe, there is a strong feeling that this balance is unstable and in order to make it more stable and more symmetrical, what is needed are stronger European institutions, for instance, a full-blown Banking Union and the ESM being turned into a proper European Monetary Fund. It is important to bring forward the date of the establishment of the European Deposit Insurance Scheme (EDIS), the Banking Union’s third pillar, which is scheduled for 2025, providing stronger and more uniform deposit insurance cover. Even the announcement of the entry into full operation of EDIS will have a strong confidence-building effect on depositors, in the sense of avoiding risks of selffulfilling prophecies on bank runs. The Jean Monnet principle is inter-temporal and applies at all times: “Europe is the sum of the solutions adopted to address the crises it is faced with.” The European clock is ticking down and the EU must take action at the June Council in two weeks’ time or at the latest at the December Summit, otherwise the European electorate will punish its politicians for their slow reflexes at the European elections in a year’s time, leading to a generalised crisis of confidence in the European Union. Over its long history, Europe has traditionally managed to find consensus on the burning issues facing it, even at the very last minute. As a true European myself, I only hope that this time will not be different! Thank you very much for your attention. | bank of greece | 2,018 | 6 |
Keynote speech by Professor John Iannis Mourmouras, Deputy Governor of the Bank of Greece, at the National Bank of Romania - OMFIF Economists Meeting entitled "The state of the euro area and conditions for accession: lessons from the past, tasks for the future", Bucharest, 22 May 2018. | “THE EU (ONCE AGAIN) AT THE CROSSROADS: THIS TIME MAY BE DIFFERENT?” Keynote speech by Professor John (Iannis) Mourmouras* Bank of Greece Senior Deputy Governor Former Deputy Finance Minister at the National Bank of Romania - OMFIF Economists Meeting entitled “The state of the euro area and conditions for accession: lessons from the past, tasks for the future” Bucharest, 22 May 2018 Your Excellencies, Ladies and Gentlemen, Allow me first of all to thank the Governor of the National Bank of Romania, Mugur Isarescu, and the OMFIF Board of Directors for the kind invitation to deliver the keynote speech at today’s National Bank of Romania-OMFIF Economists Meeting. It is a great pleasure and honour to be in Romania, a country in which the 1821 Greek Independence Revolution has its roots. Prominent Greeks originating from here helped to free Greece from four hundred years of Ottoman rule. Your country today hosts a vibrant Greek business community, which I will be addressing at the Greek-Romanian Chamber of Commerce at a dinner event tonight. In its history of six decades, the EU has been faced with multiple crises; it came close to breaking point, but managed to overcome, for instance, the ‘empty chair crisis’, when De Gaulle refused to take part in Council meetings, the rejection of the Maastricht Treaty by the Danes or the Nice Treaty by the Irish. The solution then and now is to move continuously pedalling forward, for instance, with the adoption of the single currency, the enlargement to Central and Eastern Europe after the end of the Cold War, and the completion of EMU today. My speech today will be structured in four sections. After a brief introduction presenting the current economic juncture around the world, I will very briefly discuss the state of the euro area economy. In the second section, I will take a look into the incomplete architecture of the Economic and Monetary Union (EMU) and where we stand today, highlighting the downside risks of the lack of progress on the necessary reforms and, more particularly, the populist rise. The third section will be focused on the countries of Central and Eastern Europe (CEE) as candidates for euro area accession and also present the benefits of EU membership, taking a look into the EU funds received under the current EU budget and how EU financing will evolve under the European Commission’s new proposals on the new budget for 2021-2027. I will also offer my view there on Romania’s prospective euro area accession. In the final section, I will offer some remarks about my own country, Greece, which seems to be finally coming out of the woods after three adjustment programmes within the eurozone. * Disclaimer: Views expressed in this speech are personal views and do not necessarily reflect those of the institutions I am affiliated with. 1. Introduction and a few remarks on the state of the euro area economy At a global level, as I was the official representative of the Bank of Greece to IMF/WB Spring Meetings last month in Washington DC, I would like to share with you my takeaways: caution and scepticism are the two catchwords I got from the Meetings. For instance, the heightened fears about an escalation of tensions between the US and China, in light of the US decision to impose tariffs on imports on national security grounds and the US stance in the negotiations over the revision of the North American Free Trade Agreement (NAFTA), more specifically, the US demands to limit imports from Canada and Mexico. Markets are sceptical about the upturn since, on top of the threat of a global trade war, there are important risks (including geopolitical ones, breeding again in the US and I am referring to the US Administration’s decision to pull out of the Iran nuclear deal undermining global stability and threatening to disrupt the global order – the oil price has risen by almost 15% in the last month). Trade wars may be avoided, but trade tensions have been having an impact on market sentiment, posing risks for the upturn in the global economy. In Europe, expectations for near-term euro area reforms are now very low. France has been putting pressure on Germany to come to concrete decisions on deepening EMU at the June European Council, including on the Banking Union. I will come back to EMU reform in more detail shortly. Turning now to the state of the economy in the euro area, headline inflation was 1.3% in March, while core inflation was just 1%. Euro area GDP is expected to grow at 2.4% in 2018 and 2% in 2019 and to slow down to 1.6% in 2020 and this is worrying of course for the dynamics of output growth in the eurozone. Nothing lasts for good! The unemployment rate was 8.5% in February, the lowest since December 2008. The April 2018 Bank Lending Survey for the euro area concluded that credit standards eased considerably for loans to enterprises and housing loans, and loan demand increased across all categories, thereby continuing to support loan growth. As far as the ECB’s QE programme is concerned, ECB holdings amount to €1.96 trillion under the Public Sector Purchase Programme (PSPP), while total purchases under the Asset Purchase Programme (APP) amount to €2.39 trillion, and the APP is expected by the majority of economists to come to a close by year-end. The pace of APP purchases was reduced to €60 billion per month as of April 2017 (from €80 billion previously) and to €30 billion per month as of January 2018. 2. EMU reform and the risks from the lack of progress 2.1 EMU reform I would now like to discuss the concerns about the EMU setup, especially in the aftermath of the euro area debt crisis. The crisis brought to the surface major flaws in the euro area’s functioning, which had been building up over time and did not emerge overnight. The eurozone remains a job half-done and, without a doubt, the completion of the EMU architecture could further facilitate and motivate Member State reforms in view of euro area accession. On the positive side, one has to mention the establishment of a permanent rescue fund, the European Stability Mechanism, which provides financial assistance to euro area countries experiencing, or threatened by, severe financing problems, which can no longer borrow money on financial markets as a result. A Banking Union is on track to be completed, ensuring centralised supervision of systemically significant credit institutions subject to a single rulebook applicable across the European Union and also ensuring centralised resolution in the event of failure of such a credit institution. A Capital Markets Union is also under way, creating a new financial system that is less dependent on bank financing with the potential to increase risk-sharing via the private sector and address economic shocks. Although the EMU is now stronger, it is not yet fully shock-proof. Table 1 Elements to complete an Economic and Monetary Union Source: European Commission. I will stay a bit longer on the Banking Union which is of direct interest also to noneuro area EU Member States. It is currently still lacking key components that would ensure risk-sharing across the euro area and break the vicious circle between banks and sovereigns. A reflection paper by the European Commission on deepening the Economic and Monetary Union proposed concrete steps that could be taken by the time of the European Parliament elections in 2019, but progress has fallen short of the European Commission’s ambitions. Figure 1 The three pillars of the Banking Union Source: Single Resolution Board. There is still no agreement on the Commission’s proposal for its third pillar, consisting of a European Deposit Insurance Scheme (EDIS), a banking union-wide scheme to be introduced by 2025, pooling funding from banks across the Banking Union to provide stronger and more uniform insurance cover for all retail depositors in the euro area. Figure 2 The evolution of EDIS Source: European Commission (2017), Factsheet “A stronger Banking Union”, p. 4. The existing Directive (2014/49/EU) on national Deposit Guarantee Schemes guaranteeing deposits of up to €100,000 also covers CEE Member States. Of course later, once EDIS is in place, a single deposit insurance fund would be of interest to CEE countries to offer deposit guarantee also through their national schemes, supported by a common pot. As you understand, this is a strong incentive to join the euro ultimately. Table 2 Deposit Guarantee Schemes in the EU and the US (EU 2012 figures in euro, US 2014 figures in US dollars) Source: European Commission, “Towards a European Deposit Insurance Scheme”, 9 November 2015. EDIS requires only €12 billion on behalf of Germany to create the common pot of €38 billion, a country that is dragging its feet on the issue. French banks account for the largest contributions to EDIS, as France – keen to the idea – has the largest banking sector in the euro area, followed by Germany. If we look at these sums, we should see them as a tiny hedging against the risk of systemic bank runs. Remember that what is at stake is a mass withdrawal of deposits in the case of a bank failure, which can create systemic financial instability. Even the announcement of establishing this common pot, would have a strong confidence-building effect on European depositors in the sense of avoiding risks of self-fulfilling prophecies on bank runs. It is one example par excellence showing how risk sharing may contribute to risk reduction. But, of course, EDIS approval is ultimately a question of political will, subject to national sensitivities. This number (€38 billion) is not even half of the one percent of the total eurozone deposits (worth more than €10 trillion today). 2.2 The risks arising from the lack of progress on reforms There are significant risks posed by the lack of progress towards completing the EMU architecture. So far, actions have not matched the rhetoric on completing EMU with the risk of missing what may be a limited window of opportunity to introduce fundamental reforms at a time of prosperity. The euro area recorded its fastest growth rate for a decade and has been expanding robustly for more than five years, but the fog of uncertainty thickens, when it comes to growth prospects in the years ahead. The Jean Monnet principle applies: “Europe is the sum of the solutions adopted to address the crises it is faced with”. If the flaws in the design of the euro area are not addressed at this opportune time, given that the next crisis may be around the corner and the job of fixing the EMU remains unfinished, this will come with a heavy price for the single currency. The collective memory tends to remember the costs rather than the benefits of European integration. Many people, including myself, feel that we need to strike a balance in the classic struggle between solidarity and national responsibility, or the ‘new wine in the same old bottle’, namely risk-sharing (namely mutualisation of costs) versus risk reduction. Especially in the South of Europe, there is a strong feeling that this balance is unstable and in order to make it more stable and more symmetrical; what we need are stronger European institutions. To quote Winston Churchill, a great European, “to do our best is not enough; sometimes we must do what is required”. The ultimate risk is a rise in populism and anti-Europeanism. There is a rising populist trend across the world, as the following Figure (Figure 3) shows. Populism is no longer a marginalised trend, but is coming increasingly into the mainstream. Figure 3 The global rise of populism Source: Rodrik, D. (2018), Populism and the economics of globalisation. We can identify two major root causes of populism in Europe. First of all, it may be attributed to the failure of globalisation to reach some segments of the population, which have been left behind in terms of its economic benefits, for instance in Europe through chronic unemployment. Secondly, increased migration flows which triggered immigration fears and a stronger anti-euro sentiment and broader support for populist forces. In Italy, the eurozone’s third-largest economy, two anti-establishment parties, the 5 Star Movement and the Northern League, which won 55% of the popular vote at the March general election, defeating the country’s traditional centrist political parties, have struck a deal to form an all-populist government with an anti-European sentiment. We should not take this prospect lightly, as Italy can be seen as a miniature representation of the whole of Europe. Another disguised version of populism taking advantage of the Brexit prospect can be seen in the promise for broad-scale renationalisation, so-called Corbynomics, which would mean a return to the 1970s, by the British main opposition party leader, who has announced his intention to return to the model of nationalisation of banks, water industries, transport, etc., through the back door. Based on the pretext of market failures identified in their privatisation, full government control of such industries would be disastrous for the UK economy and the world, with a ‘megatone’ effect: 10 times bigger than Brexit. Despite all this, a majority of EU citizens harbour a favourable opinion of EU membership, which has recovered to levels close to those recorded prior to the crisis. 57% of respondents to the European Parliament’s Parlemeter survey feel that the EU membership is a good thing for their country, almost as many as before the crisis (see Figure 4 below). Figure 4 Public opinion on EU membership Source: European Parliament, “Parlemeter 2017 – A stronger voice. Citizens’ views on Parliament and the EU”, p. 17. In view of the upcoming European Parliament elections in June 2019, there are heightened fears of a further surge in populism in the form of protest votes, amidst the ongoing migration crisis. As the clock ticks down to the critical June European Council, European leaders must rise up to the challenge of introducing brave reforms and give to the people more reasons to trust the European Union as an endeavour and especially its institutions, because ultimately what the people want is jobs, growth and stability. 3. The candidate countries for euro area membership and the benefits from EU membership 3.1 The candidate countries Following the accession of Lithuania on 1 January 2015, the process of euro area enlargement has stalled and none of the 8 EU non-euro area Member States (see Figure 5 above) has so far actively pushed EMU accession. Out of the two Member States, whose national currencies are linked to the euro, Bulgaria has stated its intent to join the interim Exchange Rate Mechanism (ERM2) and Denmark has opted out of euro area accession. Figure 5 Euro area and non-euro area member countries Source: European Commission, COM (2017) 821 final, “Further steps towards completing Europe’s Economic and Monetary Union: a roadmap”, p. 2. We do not expect any proposal for eventual euro area membership to be made in the ECB’s new Convergence Report, due to be published tomorrow (23 May), despite the progress made with regard to compliance with the five economic indicators, wellknown as the “Maastricht criteria”, designed to ensure nominal economic convergence between interested non-euro area countries with the Member States of the euro area (see Table 3 below). Table 3 Maastricht convergence criteria Source: European Commission. The ECB publishes convergence reports every two years, or when there is a specific request from a Member State to assess its readiness to join the euro area. The new Convergence Report should point out that none of the countries under review, that is, Bulgaria, the Czech Republic, Hungary, Croatia, Poland, Romania and Sweden (given that Denmark has an “opt-out”), is under an excessive deficit procedure and point out that progress has been made in addressing imbalances in their economies and further improvements of their fiscal positions. As you are aware, crucial to the ECB’s Convergence Report is the notion of “sustainable convergence”, which is not automatic upon fulfillment of nominal convergence criteria prior to the adoption of the euro, but also requires policy efforts and appropriate national reforms following the entry into the euro area. President Juncker said in his State of the Union speech on 14 September 2017 that: “Member States that want to join the euro must be able to do so.” This is why he proposed the creation of “a Euro-Accession Instrument, offering technical and even financial assistance”. As shown in the following table, some of the CEE countries outperform the euro area average, for instance on the government budget deficit or general government debt thresholds of 3% and 60% respectively (see Tables 4 and 5 below). Table 4 Table 5 Government finance indicators for non-euro area EU CEE Member States, EU-28 and euro area General government net lending/borrowing (as a % of GDP) General government gross debt (as a % of GDP) Bulgaria 0.9 -1 23.9 23.6 Croatia 0.6 -0.5 78.4 75.5 Czech Republic 1.3 1.1 34.7 32.9 Hungary -2 -2.1 69.9 67.4 Poland -1.7 -1.9 51.4 50.8 Romania -2.8 -3.6 36.9 37.8 EU-28 -1.1 -0.8 83.2 81.1 Euro area -0.9 -0.6 91.3 84.2 Country Source: IMF World Economic Outlook (April 2018). 3.2 The benefits of EU membership for CEE countries 3.2.1 EU as a soft power The benefits of EU membership should be clear by now to governments and citizens of CEE countries: considerable economic progress as part of the European Single Market, the gradual convergence of living standards with those in other European Member States, and of course progress towards modernity, including the move towards a market economy, the opening up of the labour market, free movement and free trade, a business-friendly environment and undistorted competition, etc. There is no doubt that we are all part of the big European family. Unlike some autocratic leaders (no names please) who want to be lonely riders in an era of globalisation and also want to rule their central bank and make decisions on interest rates: just look at what has happened with the Turkish lira last week. The European Union is a soft power and a community of values that has become a strong regional pole promoting shared prosperity, democracy, independent institutions, the rule of law and transparency across the European continent. Following the CEE countries’ EU accession, reform efforts have had to be sustained, as the EU has the potential to act as an external constraint by imposing common rules on its Member States and discipline on profligate politicians, through the transposition of the European acquis (for instance, combatting corruption). 3.2.2 EU financing to CEE Member States CEE Member States have been net recipients from the EU budget, as shown in Figure 6, and also in per capita terms, as shown in Figure 7. Figure 6 Net contributions to the EU budget by Member State (2016, in billion euro) Source: European Commission, EU expenditure and revenue 2014-2020. Figure 7 Per capita net contributions to EU budget by Member State (2016, in euro) Sources: European Commission, EU expenditure and revenue 2014-2020, and Eurostat. After EU accession and entry into the Single Market of 500 million consumers, the region has been recording rapidly improving economic growth rates offering an attractive environment for foreign investment, stronger demand, easy financing conditions and of course making the most of available EU funding, mainly through the EU’s structural and cohesion funds. Under the current EU budget (formally known as the Multiannual Financial Framework or MFF) for the period 2014-2020, the 6 CEE EU Member States (that are not members of the euro area) are allocated €157 billion or 45.4% of the total amount earmarked for the EU’s two structural funds (European Regional Development Fund ERDF and the European Social Fund - ESF), and the Cohesion Fund. Among 6 CEE Member States, Poland is by far the largest recipient of EU structural and cohesion funds (22% of total allocations), followed by Romania (6.4% of total allocations). By way of comparison, Greece has been allocated €15.8 billion, which represent 4.6% of total allocations. The CEE economies enjoy around 4% of GDP gross inflows from the cohesion and CAP funds on average during the current 2014-2020 EU budget cycle. Table 6 EU funds allocated to CEE Member States and Greece under the Multiannual Financial Framework (MFF) 2014-2020 Country In € As % of total allocations 15,774,066,781 4.6 Greece 7,312,413,787 2.1 Bulgaria 8,245,993,253 2.4 Croatia 21,501,038,980 6.2 Czech Republic 21,444,582,271 6.2 Hungary 76,345,205,832 22.0 Poland 22,283,994,996 6.4 Romania Total 346,289,772,498 Note 1: The figures refer to the two structural funds, namely the European Regional Development Fund (ERDF) and the European Social Fund (ESF), as well as the Cohesion Fund (CF). Note 2: EU funds allocated to other countries are estimated at about €160 billion. Source: European Commission. This may drop by 0.2%-0.7% of GDP during the next seven-year period. Under the new MFF 2021-2027, for which the European Commission presented its proposal to the Council of Ministers on 14 May. The total budget is worth €1.28 trillion and amounts to 1.11% of EU gross national income, which is about 1/50th of most EU Member State government spending. The aim is for the new budget to be approved by spring 2019, but the proposal has several contentious parts and difficult and longdrawn negotiations are expected between the Member States especially given the large budget gap to be left by the UK’s exit from the EU which may be addressed through additional funding from the EU-27, on which there is already strong opposition. 3.2.3 Current status on Romania’s prospective accession into the euro area Romania has repeatedly pushed back its target dates for euro area accession from 2014 to 2015, then to 2019 and now to 2022. Between 2009 and 2013, the country had been subject to an excessive deficit procedure. Romania is currently experiencing an economic boom, with real GDP recording a post-crisis peak growth rate of 6.9% in 2017. This growth rate was driven by a boom in private consumption boosted by an expansionary fiscal policy and is expected to remain robust in the current year. According to the ECB’s previous Convergence Report, Romania now also meets the convergence criterion of price stability, which it did not fulfil according to earlier reports, along with the criteria on public debt and government deficit. So far, no decision has been made for the Romanian leu to enter the ERM2. I am not here to advise when would be the right time to enter the euro area. Any decision to adopt the single currency is up to the people and their democratic institutions. But I would like to give you a word of caution concerning the conversion rate between your currency and the euro and my remarks apply to all candidate countries for euro area membership, not only to Romania. This conversion rate is the key to euro area accession and, once fixed, it is irrevocable for each participating currency. With the benefit of hindsight, I could share with you the Greek euro area accession experience, where it is debatable even today if the entry to the euro back in 2001 was made on the valid conversion rate (overvalued); also many people claim that the country needed more time to put its economy in order. Ex post, this is evident by the country’s economic devastation triggered by the global financial crisis back in 2008, which turned into a full-blown double crisis, namely sovereign and banking crisis, in my country. In the case of Romania, things are quite simple. You don’t have to look at EU forecasts or Convergence Reports to find out. All you have to do is listen to the wise man that you are very lucky to have in this country: ask your Central Bank Governor Mugur Isarescu who, as you are aware, is widely regarded as one of a handful top central bankers in the world! 4. Post-MoU Greece Finally, a few words about my country: Greece’s economic recovery is finally gaining traction after an unprecedented depression, where the country lost 25% of GDP in the space of 10 years. Real GDP in 2017 increased by 1.4% with strong positive contributions from exports of goods and services (2 percentage points) and gross fixed capital formation (1.2 percentage points). This positive outcome creates a strong carryover effect of 0.5 percentage point for GDP growth in the current year, which supports the outlook for a growth rate of around 2% and 2.5% in 2018 and 2019 respectively. Indeed, this is a fortunate moment for Greece. After 9 years of economic hardship, we can say with confidence that there is light at the end of the tunnel for the Greek economy. The economy’s progress during the last eight years of adjustment has been really impressive, both in terms of fiscal and external adjustment of more than 15 percentage points of GDP. The huge twin deficits turned into surpluses. Last year, the primary surplus was 4.2% of GDP, outperforming the target of 0.5%. The current account during the last two years had effectively been in balance, from a 15% deficit eight years ago. And last year: an all-time record of 30 million tourists visited the country. Throughout this period, sweeping structural reforms have been implemented, covering the pensions system, the health system, labour markets, product markets, the business environment, public administration, etc. Moreover, there is evidence that the economy has been undergoing a rebalancing towards the tradable, export-oriented sector: the share of exports of goods and services in GDP increased from 19% in 2009 to 28% in 2016, with most of the increase coming from exports of goods. Two weeks ago the results of the Greek banks’ 2018 stress tests conducted by the ECB were published, pointing to no capital shortfalls. Of course, despite the positive outcome of the stress tests, the major challenges are still there: for instance the drastic reduction of the non-performing loans and the ability to provide liquidity to the Greek real economy (new loans to businesses). In view of the end of the current programme in August 2018 and a return to European normality, the Greek people look into the future with optimism, which I also share, provided that there is no complacency, no slackening of effort, and authorities do not let up on reforms, especially in the public sector, cutting red tape, etc. The overwhelming majority in Greece still want to be within the core of Europe. This is our legacy as a nation that goes back to our history and our tradition. After all, the name of our continent Europe comes, in the first place, from an ancient Greek mythological figure, a beautiful young lady with whom Zeus, the father of the twelve Greek Gods, fell in love, but since she was refusing his advances, he decided to transform himself into a bull to catch her and bring her to Mount Olympus, the mountain of Gods in northern Greece, where I come from! Concluding remarks In closing, I understand that public sentiment in Central and Eastern European countries is not very strong right now in favour of joining the single currency and that euro area accession is seen by some as a byword for the loss of sovereignty. The crisis has certainly made the euro area look less attractive for future members. In my view, the issue is ultimately, on the one hand, for the eurozone to persist with completing the EMU project and, on the other hand, for candidate countries to be at a par with the rest of the eurozone on all fronts (sustainable convergence). After all, CEE Member States have considerable discretion over the timing of their accession into the euro area. Amid the uncertainty about the euro area’s architecture, a wait-and-see approach for final outcomes is perhaps the safe-bet policy, given that any decision to adopt the single currency, once made, is irreversible, since the costs of exit by far outweigh the benefits. Thank you very much for your attention. | bank of greece | 2,018 | 6 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event organised by the Foundation for Economic and Industrial Research (IOBE) and the Athens Stock Exchange, Athens, 19 March 2018. | Yannis Stournaras: Sources of financing of the Greek economy Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event organised by the Foundation for Economic and Industrial Research (IOBE) and the Athens Stock Exchange, Athens, 19 March 2018. * * * Ladies and gentlemen, It is a great pleasure for me to be here with you today for the presentation of a very comprehensive IOBE report, which draws on a wealth of information to discuss, among other things, the impact of the distorted growth model of the past and the pressing need to adjust it. I am also glad to see that the findings of IOBE and its proposals on how to achieve this adjustment are in line with the recommendations made by the Bank of Greece in successive reports. It is also encouraging that, even as a forced response to the crisis and with small steps, this adjustment has been underway for a few years now. The protracted and deep crisis that Greece experienced over the past ten years has brought about three major changes that are relevant to its growth model. First, bank lending, which used to be the main source of financing for households and businesses, collapsed. Second, private investment, residential investment in particular, shrank. Third, the production structure became more extrovert against a background of recession in the domestic economy. Starting with the changes in the real economy, the transition to a new, more extrovert growth model has already begun and can be expected to continue. Businesses, adapting to the new conditions of declining domestic demand, have strengthened their export orientation and, as a result, the percentage of output that is exported has increased in all sectors. Exports of goods and services as a percentage of GDP rose from about 19% in 2009 to 33% in 2017, i.e. by 14 percentage points. This improvement has been driven by goods exports and, to a lesser extent, by services exports. A case in point is the refinery industry, which has become one of the most extrovert among manufacturing sectors. Developments in productive investment as a driver of growth have been less encouraging. Overall, gross capital formation in the private sector has declined over the last ten years, from 22% of GDP in 2007 to 8% in 2017 at current prices. Of this total 14 percentage point decline, the largest part (11 percentage points) is attributable to a contraction of household investment, chiefly in housing. Business investment, on the other hand, showed a smaller decrease, but remains alarmingly low (4.8% of GDP in 2017, compared with 8% in 2007). Excluding depreciation, net capital investment by businesses has remained negative since 2009, standing at about €4.3 billion or –2.4% of nominal GDP in the third quarter of 2017. However, in order for the capital stock and potential growth of the Greek economy to increase, positive net capital investment is crucial. For this to happen, private investment must rise by 50% in the coming years. Therefore, the Greek economy needs an investment shock, with a focus on productive and extrovert business investment, to avoid output hysteresis and foster a rebalancing of the growth model in favour of tradeable goods and services. One of the obstacles to the adjustment of the economy is the scarcity of investment finance. In recent years, the household saving ratio has been negative. Businesses, on the other hand, have used up part of their own resources in recent years in order to service liabilities, in the absence of profitability and access to market-based financing, also as a result of capital controls. Turning to external financing, i.e. from banks and capital markets, bank credit remains subdued, while alternative market financing sources are still underdeveloped. Businesses’ market-based financing virtually collapsed during the crisis years and turned negative from 2011 to 2015. It has 1/6 BIS central bankers' speeches since rebounded, but remains well below pre-crisis levels, while it has deteriorated anew since the last quarter of 2016. In an environment, post-crisis, of bank lending scarcity and tighter credit standards, businesses have sought to cover their financing needs through alternative types of external financing, in addition to their own resources. These alternative types included non-bank loans, i.e. loans from domestic financial institutions other than banks, as well as foreign borrowing, mostly intragroup loans and corporate bonds issued on international markets. They also raised unlisted equity financing, while particularly muted was the domestic issuance of corporate bonds (€600 million in 2017) and listed shares. Improved economic conditions helped Greek businesses with positive growth prospects to regain access to international markets, with bond issuance coming to €1.1 billion in 2017, relatively more moderate compared with €6.3 billion in 2012–2014. Small and medium-sized enterprises, which make up the vast majority of Greek businesses, were disproportionally hit, compared with large businesses with high credit ratings, by the continued contraction in domestic bank lending, given their almost exclusive reliance on bank lending for their external financing. The supply of bank credit, traditionally a key source of financing for Greek businesses, inevitably decreased during the crisis, as banks faced strong pressures on their liquidity, profitability and capital adequacy from the combined impact of: (a) their inability to access international markets; (b) continuous deposit outflows; (c) the public debt restructuring; (d) the recession, as well as strategic default practices, on the quality of their loan portfolios; and (e) capital controls. The ECB’s interventions were crucial in supporting and restoring smooth monetary policy transmission to the real economy. At the European level, credit growth turned positive long ago, whereas in Greece it would have been far more negative in the absence of these measures. The improvement in confidence in the Greek banking system and the tackling of the problem posed by the high stock of non-performing loans can be expected to further boost bank lending. On a positive note, the annual contraction in credit growth observed during the crisis seems to have eased considerably, in particular with respect to credit to non-financial corporations, which rose in 2017 relative to 2016, as reflected in disbursements of new loans with a defined maturity. The completion of the two pillars of the Banking Union, i.e. the Single Supervisory Mechanism and the Single Resolution Mechanism, has already contributed significantly to restoring confidence, as the supervisory authorities uniformly and strictly assess banks’ soundness and require banks to maintain high capital adequacy ratios and, at the same time, improve the quality of their balance sheets. The completion of the third pillar, the European deposit insurance scheme, will bolster confidence even further. Reducing the high stock of non-performing loans will exert a beneficial effect on economic activity and productivity via two channels: (a) increased supply of bank loans; and (b) the restructuring of the productive sector. According to Bank of Greece estimates and research, a reduction in non-performing loans will help reduce banks’ financial risk and drive down their funding costs, while also boosting their capital adequacy. This will gradually translate into higher loan supply and lower lending rates to businesses and households. Meanwhile, business and household financial risk will decline as the economy recovers, producing valuation gains on their existing assets and higher returns on capital and real estate property. The creditworthiness of households and businesses will therefore increase, enabling further support to investment demand. Finally, the resolution of non-performing loans will free up resources which, if allocated to more productive businesses and sectors, will lead to 2/6 BIS central bankers' speeches higher total productivity. Crucial will be the financial support to business start-ups, which have a stronger growth potential than well-established businesses and can prove to be big job creators. Today, the domestic banking system is clearly stronger than at the start of the crisis. Banks’ capital adequacy ratios are satisfactory, higher than the EU average; profitability, ROE and ROA indicators have improved; and the actions taken to tackle the problem of non-performing loans seem to be bearing fruit, as the NPL stock is continuously falling in line with the targets set. During 2017, the outstanding balance of banks’ non-performing exposures decreased by some €11 billion, but still remains high (about €95 billion as at end-2017). In addition to the NPL-reducing impact of solid recovery, further NPL reduction can also be expected to come from the acceleration of real estate e-auctions, which will help improve the pricing of collateral undergoing liquidation that inevitably loses value so long as its sale is delayed. These delays hamper the development of a secondary loan market, as well as the implementation of other measures that would speed up judicial proceedings and facilitate the active management of at least part of non-performing loans under legal protection, in particular those presumably owed by strategic defaulters. It is worth noting that, even in the cases where banks have agreed on multi-creditor workouts, several months are needed to complete the relevant legal procedures before these workouts can be implemented, obviously depriving the economy of resources. Following the publication of the relevant guidelines by the European Commission, the possibility of transferring NPEs to one or more central entities to be set up for this purpose could be considered. However, despite the important role that banks will continue to play in Greece and the EU, in particular for small and medium-sized enterprises, market participants have, for years now, pointed out the pressing need to expand long-term financing sources. Apart from the traditional forms of investment financing, e.g. bank credit and guarantee instruments, more active use could be made of the capital markets or alternative financing instruments such as the following: (1) equity funding, including venture capital, equity crowdfunding and specialised platforms for public listing of SMEs; (2) hybrid instruments, such as convertible bonds and mezzanine finance, typically involving debt instruments that, subject to a trigger, can be converted to equity; (3) non-bank debt financing, such as corporate bonds, securitised debt and covered bonds. With the exception of corporate bonds, market-based financing is virtually non-existent in Greece for small and medium-sized enterprises, as shown by the present IOBE study, and is also very limited at European level. In the EU, market-based financing of small and mediumsized enterprises accounts for less than 15% of their total financing, and is very costly. A key problem is that investors lack information on small and medium-sized enterprises. In this regard, around 25% of all companies and around 75% of owner-managed companies in Europe do not have a credit score, according to the European Commission’s Green Paper on Building a Capital Markets Union. The extent of the problem across the EU led the European Commission, in 2015, to draw up and launch an ambitious plan for building a single EU-wide capital market by 2019. The plan aims to improve access to financing for all businesses across Europe, increase and diversify the sources of funding, and make markets work more effectively and efficiently, by removing obstacles that make investor and business access to capital markets harder and costlier. 3/6 BIS central bankers' speeches Well-developed capital markets deliver considerable benefits to market participants and economic activity in general. First, they enable businesses to diversify their financing sources, thereby reducing their reliance on bank credit, and create an environment that is more resilient to shocks. Second, they help to improve the allocation of capital in the economy and risk sharing, by offering investors a broader array of options and enabling them to make their investment decisions in line with their risk appetites and therefore finance even businesses that would have been seen, by banks, as too risky to lend to. Third, equity financing in particular boosts investment without necessarily increasing private debt in the economy. Progress towards the creation of a Capital Markets Union has been steady, but rather slow. Of the eight legislative proposals submitted by the European Commission before early March 2018, three have been approved so far by the European Parliament and the Council and concern: simple, transparent and standardised securitisation as an additional source of financing in particular for small and medium-sized enterprises and start-ups; the European Venture Capital Fund and European Social Entrepreneurship Fund Regulations, aimed to facilitate investment in innovative companies; and the revision of the Prospectus Directive with a view to facilitating the access of small and medium-sized enterprises’ to capital markets. The five remaining proposals are still being negotiated. Meanwhile, during the past two weeks, the European Commission released five new proposals on: an Action Plan on how to harness the opportunities presented by technology-enabled innovation in financial services (FinTech) and crowdfunding; an Action Plan on sustainable finance for a greener and cleaner economy; common rules on covered bonds as a stable and cost-effective source of funding for credit institutions, especially where markets are less developed, which would translate into lower borrowing costs for the economy at large; a proposed Directive aimed to reduce barriers to cross-border distribution of investment funds, making it simpler, faster and less costly; and the clarification of the law applicable to crossborder transactions in claims and securities, promoting cross-border investment. Once finalised and implemented, this legislative package can be expected to remove barriers to the geographical diversification of investor portfolios, which reduce market liquidity and hamper business expansion. Private investors in the EU usually keep their funds in bank deposits with short-term maturities. Moreover, institutional investors, in particular insurance undertakings and pension funds, with traditionally long investment horizons, have reduced their equity investment to 5-10% of their total portfolios. The Capital Markets Union, by facilitating access to attractive investment on competitive and transparent terms, is expected to encourage such investors to invest in equity instruments within the EU. This will help tackle the challenges that population ageing and low interest rates pose to the viability of social security funds, while at the same time opening up financing opportunities for businesses. Overall, however, as bank credit and the recourse to alternative financing sources are not expected – at least in the short term – to increase enough to bring about the quantum leap in business investment needed for sustainable growth, an aggressive policy for attracting strategic foreign direct investment is necessary. This need becomes all the more pressing considering that the saving-to-GDP ratio of the domestic private sector dropped dramatically during the crisis, from 15.3% of GDP in 2007 to 3.8% in the first three quarters of 2017. If the country is to attract foreign direct investment, priority must be given to eliminating major counterincentives, such as red tape, an unclear and shifting legislative and regulatory framework, an unpredictable tax system, inadequate protection of property rights, and delays in contract enforcement. Although foreign direct investment in Greece has been on an upward trend for the past two years, starting, true, from low levels, its share in GDP is still well below that of Greece’s South-eastern European trading partners, as well as the EU and euro area averages. Emphasis should also be placed on promoting co-financed projects and systematically utilising the resources of European Structural Funds under the new Strategic Reference Framework 2014–2020, as well as under other programmes such as those of the European Strategic 4/6 BIS central bankers' speeches Investment Fund and the European Investment Bank. The active utilisation of these innovative financial instruments and of the advantages they present over traditional grants can maximise the growth impact of EU resources available for investment in the Greek economy. These financial instruments provide opportunities for: mobilising and blending funds from various EU, public or private sources; revolving funds for the financing of other investment; and leveraging additional public and private resources. In this manner, the final amount of financing can turn out to be much larger than the initially available EU resources, creating a multiplier effect for the real economy. According to a European Commission report published in December 2017, Greece has committed 9% of the total resources under the European Regional Development Fund and the Cohesion Fund through financial instruments, compared with 19% for Slovenia, 18% for Portugal and 8% for the EU as a whole. However, several of these financial instruments, despite having been activated, remain untapped. Bank of Greece research also indicates the important role of public investment in boosting business investment. Higher public investment is expected to have a favourable effect on aggregate demand and total productivity in the private sector and to create incentives for investment initiatives. Most importantly however, what is needed is a continuation of reforms and privatisations, starting with the elimination of obstacles to large investment projects that have already been agreed upon, but are lagging. Greece must consolidate investor confidence in the continuation of reforms and convince that fiscal policy will not relapse once again in the wrong direction, succumbing to clientelism and to a stifling by the State of private initiative. This would have a positive impact on the terms of Greece’s return to the markets, improve market sentiment and help attract investment. It would also encourage the return of deposits to banks, thereby enhancing banks’ lending capacity. The above would set in motion a virtuous circle for the economy and the banking system and create the necessary conditions for investment financing and a return to sustainable growth. If consolidating confidence is a sine qua non for the above, i.e. for the increase of both domestic and total investment, Greece must also take full advantage of the possibilities arising from EU and euro area membership to create a financial safety net that would convince of its ability to cope with any headwinds that could make its financing costs unsustainable, in particular in an international environment rife with financial and geopolitical challenges. Ladies and gentlemen, Today, Greece faces the historic challenge of returning to normality and to a path of convergence with its European partners. A return to strong and sustainable growth calls for maintaining and implementing the structural reforms already legislated, as well as further crucial reforms in areas that are still lagging behind, such as the tax system, public administration, the judicial system, the link between production, research and education, the legislative and regulatory framework, especially as regards the use of land, and the goods and services markets. It is obvious that only on this condition can Greece once again become a friendly place for doing business, effectively support productive investment and make a successful leap in total factor productivity. In closing, I would like to underline that, in the long run, increasing investment require an increase in private sector saving (by households and non-financial corporations), which, as I pointed out earlier, has declined dramatically, dropping by 11.5 percentage points as a ratio of GDP, in ten years. The fall in saving was particularly sharp in the years 2015–2016, for households and businesses alike. Admittedly, the capital controls combined with higher taxation led households and businesses to tap their savings, in order to meet their current needs. 5/6 BIS central bankers' speeches However, there can be no investment without domestic saving or, alternatively, without continued foreign financing. This is why it is so important in the long run to restore the saving capacity of the private sector. In this context, the development of the second and third pillars of the social security system will not only ensure the system’s viability, but will also encourage households to increase their saving and open up a new channel for the financing of business investment. This will enable Greece, in a self-reliant manner, to increase its productive capacity and build the new growth model on sound foundations. 6/6 BIS central bankers' speeches | bank of greece | 2,018 | 6 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the International Conference "The Future of Money: Trend-Alternatives-Potentials", The American School of Classical Studies (Gennadius Library), Athens, 24 May 2018. | Yannis Stournaras: The future of money Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the International Conference "The Future of Money: Trend-Alternatives-Potentials", The American School of Classical Studies (Gennadius Library), Athens, 24 May 2018. * * * Ladies and Gentlemen, Thank you very much for the kind invitation to this event. I am very happy to be here today and address such a distinguished audience. Most people assume that all issues pertaining to “money” are an easy task for a Central Bank Governor. On the contrary. Some issues are very challenging, including present emerging technologies in the field of finance and mushrooming cryptocurrencies. Addressing such issues presents a great opportunity for all interested to revisit the fundamental concepts surrounding money and how best to shape the monetary space in the future. More than 20 years ago Bill Gates stated: “Banking is essential, banks are not”. Please, allow me to disagree. Banks are of utmost importance, but what is true about this quote is that the distrust that emerged towards some banking systems after the 2008-2009 global financial crisis and the development of a society-wide taste for decentralized, peer-to-peer, facebook-type, interactions across powerful computer networks, has dramatically altered the landscape in the financial services. And central banking in the age of digitalization is an interesting issue for reflection in the realm of monetary economics. In my speech I will try to explore some key issues in how money evolves, what is the key innovation in private digital currencies, what would a central bank digital currency be like and what might be the impact of introducing one for the central bank monetary policy. *** “Monetary space” To assess the possible paths that means of payment, and consequently monetary policy, may take in the coming decades, discussions often focus on the definition of money, its functions and forms. So what is money? A simple answer would probably involve Adam Smith’s example of “the butcher, the brewer and the baker”, where money is a solution that arose to address the inefficiencies of the barter economy. Money is quite simply an asset that everyone wants. The Greek word for money, “chríma”, means something that one uses or needs. So money as a means of payment must be efficient and safe to use. Money, as we know it today, is the result of a long process. The world’s first coins were produced in Lydia over 2500 years ago. They were made from electrum, an alloy, and a roaring lion head was engraved on one side, a symbol of the ruling dynasty. This innovation quickly spread to the city-states of ancient Greece. During the classical period, Greek coinage reached an exceptional technical and artistic level. As anyone who has visited the Numismatic Collection at the Bank of Greece knows that money has evolved to meet society’s needs. As economic activity increased, it became apparent that money supply needed to expand beyond the limits of holding precious metals. Centuries later, with the circulation of paper money, minting of metal 1/6 BIS central bankers' speeches coins was restricted to lower values. In classical economic theory, money fulfils three functions. First, it is a means of payment and therefore has a key role in all financial transactions. Second, it forms a unit of account. Third, it is a store of value. People will only accept money as a means of payment if they believe it can be used again in the future. For all these to work, money assumes a broad trust in the issuing institution. The first central bank was founded to build additional trust in the currency, since the issuance by private entities led to an unstable system. Hence, the role of the central bank is related to trust. There are three types of money in the economy: a) physical cash, i.e. banknotes and coins. Banknotes is the form of central bank money that can be held by the general public. b) The second is electronically recorded deposit account liabilities on the ledgers of commercial banks. c) The third is reserves, that is, deposits of commercial banks with the central bank. Cash nowadays is displaced in many ways and the “demonetization” of transactions has become a commonplace. However, the question arises: Will there be an increased need for cash in the near future? The answer is clearly positive. For, here is the paradox of the coming “cashless economy”. According to the ECB, in 2016 around 79% of all payments at Points of Sale (PoS) in Europe were made with cash1. Therefore, although nowadays most money has been already digitized, cash is still world’s quintessential means of payment. Cash still remains an important and a very popular component of money supply. Digital Currencies Preserving the two distinguishing attributes of cash, namely anonymity and peer-to-peer exchangeability within a digitized platform, had proven to be significantly challenging until the distributed ledger technology offered in 2008 the key to assure in a decentralized way than one could never spend twice her withholding (the “double spending problem”). There is a lot of excitement in the air about cryptocurrencies. Everyone has heard about Bitcoin, whose market capitalization as of the first quarter of 2018 exceeded 110 billion US$, increasing by a factor of ten within a year. The above observation raises many questions, while it is true that cryptocurrencies represent only a negligible fraction of all world payments. There has been a raging debate about the effects on the financial system of introducing virtual currencies, digital currencies and related innovations. The IMF has recently recognized that digital currencies might offer potential benefits, including greater speed and efficiency in making payments and transfers – particularly across borders2. Offsetting the promised benefit of low payment processing costs, which is expected when the technology in this field matures, is the extreme volatility of cryptocurrencies’ prices. “Crypto” means anonymity and anonymity can be abused in a world of crime, terrorism and evasion. The ECB has been considering monetary policy implications resulting from the introduction of cryptocurrencies since at least 2012. In its recent study, it suggested that due to its high price volatility and low acceptance rate, the bitcoin could not be regarded as a full form of money from an economic perspective3. More recently, the issue has been discussed in the G-20 meeting and in the latest communiqué of Finance Ministers and Central Bank Governors (Buenos Aires 19-20 March 2018) where it was stated that crypto-assets lack the key attributes of sovereign currencies, although at some point they could have financial stability implications. So, in the current state, digital currencies leave monetary transmission mechanisms largely unaffected. 2/6 BIS central bankers' speeches However, it is almost a cliché to say that the only certainty about the future of cryptocurrencies is uncertainty. Risks to financial stability may eventually emerge since the impact of the digital currencies on the monetary transmission mechanism ultimately depends on whether firms and households broadly accept them. Therefore, supervisory authorities are monitoring all developments in the crypto-ecosystem, occasionally issuing warnings for crypto-exchanges and brokers, Initial Coin Offerings, futures, exchanged traded funds etc. To this date, some countries have tried to ban crypto-assets altogether (e.g. Morocco) while others are fostering their development (e.g. Malta). On the other hand, the distributed ledger technology (DLT) underlying some digital currencies schemes, offers potential benefits that go far beyond digital currencies themselves. A distributed ledger technology is used as a decentralized minting and transaction processing platform, with copies of all the transactions ever performed distributed on a public network of computing servers. A transaction on such a network is completed when the majority of the servers in the network achieve consensus that it is valid, using cryptographic identification techniques (privatepublic keys and hash functions), thus eliminating the need for a trusted party (e.g. central bank). DLT is likely to change mainly securities clearing and settlement operations. A key feature of distributed ledger networks as payment platforms is that the entire history of transactions – which is immutable - is available to all transactions verifiers in real time. A copy of the transaction ledger is stored in all participating agents Data Centers and thus cannot be easily compromised; at the same time it is easily verifiable and readily auditable. Bank of Canada experimented on a DLT-based wholesale payment system (the so called “Project Jasper”) and concluded that core wholesale payment systems function quite efficiently but there could be some benefits from the interaction with a larger DLT ecosystem of financial market infrastructures, including cross-border transactions4. In a recent speech, the IMF states that DLT could be applied to various processes in cross boarder payments and gains would be most evident in efficiency5. Bank of England has expressed the view that there is scope for central banking and the financial system more broadly to benefit from the settlement technology6. But many colleagues stress that the DLT is not perfected yet as technology and it has not been adequately tried. To central banks it remains at an experimental stage at present. Central Bank Digital Currencies (CBDC) I will now move to an interrelated discussion that focuses on the desirability of central banks to provide digital currencies through distributed ledger technologies in a decentralized fashion. Lately, the prospect of central bank cryptocurrencies is attracting attention. Central banks are drawn to the idea of issuing a fast, efficient, digital currency that does not carry the cost of securing, distributing and processing physical banknotes and coins and that can be tracked in real time as it moves through the financial system. The development of DLT in recent years now provides the possibility of a supplement to physical cash in the form of central bank digital currencies. The Bank of England was among the first central banks to take notice of the feasibility of a central bank digital currency, and other monetary authorities have since followed7. CBDC is a potential new form of digital central bank money. In the current banking system, only commercial banks hold digital money in deposit at the central bank, i.e. reserves. By introducing an universally accessible CBDC, every household and business would be enabled to hold direct claims against the central bank. In practice, the central bank would guarantee free convertibility at par (i.e. 1:1). This practice would make the digital currency a secure store of value, incentivizing individuals and businesses to hold the CBDC. One major issue, however, is whether the CBDC should be an interest bearing asset or not. 3/6 BIS central bankers' speeches There are two cases: A) CBDC pays no interest, just like paper currency. In this case, households and companies would be incentivized to hold most of their liquid funds in interest bearing deposit accounts at commercial banks, keeping the use of the digital currency fairly modest. However, this form of digital currency would constrain the ability of central banks to push interest rates below zero during periods of weak aggregate demand and deflation because depositors would swiftly move their funds into digital currency paying zero interest. Thus, the effective zero lower bound on interest rates would become a more binding constraint for monetary policy. B) CBDC is introduced as an interest bearing currency. In this case, the central bank would pay interest for digital currency accounts held at the central bank by individuals, companies and banks, similar to the deposit facility for commercial banks. If the digital currency bears interest, it will likely affect the demand for physical cash out of circulation, at least to a large extent. In a recent working paper of Bank of England, CBDC is defined as “a central bank granting universal, electronic, 24x7, national-currency-denominated and interest-bearing access to its balance sheet”8. Furthermore, with an interest bearing CBDC, still only if we assume that zero-interest bearing paper currency eventually disappears, the constraint of an effective lower bound will be removed and thereby there will be no need for alternative monetary tools such as quantitative easing or fiscal interventions9. Introducing CBDC as an interest bearing security has its merits, as explained above, but it comes also with great risks. One major question is the following: if money users have access to risk free central bank money, why would they hold risky commercial bank deposits? This gives rise to Gresham’s law, namely that “bad money drives out good money”, particularly during periods of banking crises. Therefore, the impact on the balance sheets of the commercial banks would be the same as in a classical bank run. Banks would increasingly lose the ability to attract deposits, creating a potential for more destructive financial crises. Moreover, without the ability to attract deposits, banks would lose their ability to provide credit; hence they would lose their core function as financial intermediaries in the economy. There are other reasons why some central banks, for example in the Scandinavian countries, might view CBDC particularly favourably. At a time of rapidly declining paper currency circulation, this could maintain the central bank’s seignorage revenues while preserving some public, trustenhancing, element in money. The advent of digital currencies can help increase financial inclusion and thereby expand the size of the formal economy. On the other hand, the real-time traceability of digital ledger transactions can combat effectively money laundering, fiscal and social fraud and help in the expansion of the tax base. Payment system efficiency seems to be also an objective in considering CBDC. Money and payment systems are intrinsically linked. They evolved together and this connection remains evident in the responsibility of the central banks to ensure the stability of the payment systems. Some potential benefits include a) less concentration of liquidity in payment systems which make large banks less systemically important and b) enhanced stability for the overall payment ecosystem, depending on the type of the distributed ledger technology. *** Innovation is something that powers development in the financial sector, has contributed to the 4/6 BIS central bankers' speeches high standard of living we now enjoy and has made finance more “democratic”. For example, crowdfunding has enabled access to finance to a greater part of the society, while using smartphone apps we can now make mobile payments. Yet, digital currency is something else. I am not sure whether digital currency will become a substitute of cash in the near future since many important questions remain unanswered. Cryptocurrencies have no intrinsic value, only value in exchange. Their value derives from the hope, to quote Yves Mersch, “of finding a greater fool to sell to before the inevitable crash”10 . There is also the crucial point which Augustin Carstens makes11 that usage of crypto-assets “relies on the oxygen provided by the connection to standard means of payments and trading apps that link users to conventional bank accounts… [We must] not allow such tokens to rely on much of the same institutional infrastructure that serves the overall financial system and freeload on the trust that it provides...”. Today, banks face a strategic dilemma with the emergence of DLT. Just as the Internet decentralized the flow of information, so has the emergence of crypto instruments decentralized value. And just as postal services have not disappeared, banks are not about to disappear either. DLT might have many positive outcomes for banks, from reducing settlement risk and associated capital costs, to reducing costs associated with back office functions, to the possibility of reducing core banking system costs as the DLT may replace much of the need for a banking general ledger in the future. But we remain still far from this point. Digitalization in finance opens up bewildering opportunities. Central banks should capitalize on them but without losing sight of the potential risks. The Bank of Greece and the ECB have several reasons to be interested in developments in digital currencies. We cannot predict the exact direction the innovations will take but we will certainly continue to monitor developments and assess their implications. 1 (1) Esselink, H. and L. Hernandez (2017), “The Use of Cash by Households in the Euro Area”, No201, European Central Bank. 2 (2) Lagarde, C. (2017), “Central Banking and FinTech – A Brave New World?”, Speech at the Bank of England Conference, London. 3 (3) ECB (2015), Virtual Currency Schemes – A Further Analysis, European Central Bank. 4 (4) Chapman, J., Garrat, R., McCormack A. and W. McMahon (2017), “Project Jasper: Are Distributed Wholesale Payment Systems Feasible yet?”, Financial System Review, Bank of Canada. 5 (5) Dong, H. (2017), “FinTech and Cross-Border Payments”, Speech at the Ripple – Central Summit, New York. 6 (6) Carney M. (2018), “The Future of Money”, Speech to the Inaugural Scottish Economics Conference, Edinburgh. 7 (7) Ali, R., Barrdear, J., Clews, R. and J. Southgate (2014), “Innovations in payment technologies and the emergence of digital currencies”, Bank of England Quarterly Bulletin, Vol. 54, No. 3, pages 262–75. 8 (8) Barrdear, J. and M. Kumhof (2016), “The Macroeconomics of Central Bank Issued Digital Currencies”, No. 605, Bank of England. 9 (9) Agarwal, R. and M. Kimball (2015), “Breaking Through the Zero Lower Bound”, International Monetary Fund Working Paper, No 15/224. 10 (10) Mersch, Y. (2018), “Virtual or Virtueless? The Evolution of Money in the Digital Age”, Speech at the Official Monetary and Financial Institutions Forum, London. 11 (11) Carstens A. (2018), “Money in the Digital Age: What Role for Central Banks?”, Speech at the Goethe 5/6 BIS central bankers' speeches University. 6/6 BIS central bankers' speeches | bank of greece | 2,018 | 6 |
Address by Professor John Iannis Mourmouras, Deputy Governor of the Bank of Greece, at the launch of the second edition of his book at the NYU Stern School of Business, New York City, 28 September 2018. | John Iannis Mourmouras: Monetary policy and global capital markets - an update Address by Professor John Iannis Mourmouras, Deputy Governor of the Bank of Greece, at the launch of the second edition of his book at the NYU Stern School of Business, New York City, 28 September 2018. * * * Introduction Dear Vice Dean, Dear President Barroso, Dear Governor King, Distinguished panellists and esteemed Professors of NYU, Yale and Princeton, Ladies and Gentlemen, I am very delighted to be here at NYU. I would like first of all to thank Stern Business School for hosting my book launch event and all the team who worked and made this happen. I am truly honoured by the presence of Prime Minister Barroso, a true European statesman with a long tenure as President of the European Commission, the government of the European Union, who left his mark on Europe in unprecedented and difficult times. He personally worked hard to keep my country within the eurozone, quite often at a personal cost for him against stiff opposition by a number of core European countries. President Barroso, the whole Greek nation, including myself, will always be grateful to you for this. The presence of such a strong panel is a great honour for me as a central banker and academic. Professor the Lord King, one of the world’s leading central bankers of modern times, among only a handful, still sets the standards high for all those involved with global monetary affairs, wellknown also for his passion for cricket! Both these two distinguished gentlemen, Barroso and King, have something in common: their common feature, although one was in politics and the other in central banking, is, by pure coincidence, that they both held the top position in their field for two full successive terms, a total of ten years each, Barroso from 2004 to 2014, and King from 2003 to 2013, in the same turbulent period. History pays tribute not only to achievements, what one has done after all during one’s tenure, but also to the longevity of one’s time in office. I would also like to thank Professor Robert Engle for finding time to be here with us, a leading figure in finance, a Nobel laureate who has rightfully gained a place in the pantheon of great men and women in Economics for his work of modelling time-varying volatility, his famous ARCH model is used extensively not only by academics, but also by analysts of financial markets who use it in asset pricing and in evaluating portfolio risk. And of course, I am very grateful to the two colleagues, one from finance and one from economics, Professor Richardson and Professor White, both distinguished experts in their respective fields, for being here today. I will focus only on monetary policy and capital markets. I fully subscribe what President Barroso said in his opening remarks on European developments. He said it all! Instead, I will make a short reference to my own country, Greece. This is a fortunate moment for my country. After 8 years of hardship and 3 adjustment programmes, Greece is emerging with renewed optimism from this difficult time and is finally returning to European normality. 1/5 BIS central bankers' speeches A. Monetary policy Global economic activity in advanced economies has expanded in a robust manner in recent years, however, due to a persistently low inflation, most of the unconventional tools of monetary policy are more or less still in place, especially in Europe. To give you an idea of the extraordinary circumstances that we experienced since 2008, in Britain, the Bank of England’s base rate had historically remained above 2 per cent for 315 years, from its foundation in 1694 until 2009. It was in response to the severity of the crisis that Governor King had to cut the base rate below 2 per cent and to take it even to the level of half a percentage point in March 2009 in an MPC meeting which also launched the BoE’s QE programme (amounting to $575 billion or 22% of the UK’s GDP). Today, although much of the excitement comes from the uncertainty surrounding the timing of the expected rate hikes by the Fed, and developments in emerging economies (Argentina, Turkey, etc.), I propose to focus, as a Eurosystem central banker, on ECB’s monetary policy. The global monetary policy outlook continues to diverge. At one end of the spectrum is the US Federal Reserve, which is likely to continue to tighten policy (only two days ago we had another quarter rate hike) ; at the other end, is the People’s Bank of China, likely to keep gradually easing monetary conditions, and the Bank of Japan, which is expected to stick to its yield curve control for the foreseeable future. At the same time, the European Central Bank and the Bank of England are somewhere in the middle. Both seem to want to normalise policy gradually. In the euro area, following 21 consecutive quarters of expansion, including the last five with vigorous GDP growth, economic momentum moderated in the first half of the year. The euro area is expected to grow at a modest rate of 2.1% this year (down from 2.4% in 2017) and to moderate to 1.9% in 2019. Headline inflation is forecast to an average of 1.7% over both 2018 and 2019. Core inflation is estimated to remain around 1%. Recent Phillips curve analysis by the IMF indicates a strong backward-looking element in the euro area inflation process, suggesting significant sluggishness in the face of what will be a positive euro area output gap. At the Governing Council in Frankfurt two weeks ago, the ECB continued its enhanced forward guidance towards normalisation of its monetary policy and confirmed that it will reduce the monthly pace of its net asset purchases to €15 billion starting next month and until December 2018, and then end them. Up to now, the ECB has bought around €2.5 trillion under the APP programme. It is estimated that the APP purchases will rise near 23% of euro area’s GDP in December 2018 [this compares to the quantitative easing programmes of the US Fed: $4.2 trillion or 21% of GDP, of the Bank of Japan: $5 trillion or 97% of GDP, and of the Bank of England: $575 billion or 22% of GDP]. So the excitement most likely left for the Governing Council meeting on 25 October, where it is widely expected that the so-called QE reinvestment policy will be discussed and announced. Here are my own insights on the ECB’s reinvestment policy. QE reinvestments have already started in the euro area. In 2017, the ECB re-purchased about €47 billion this way. With the ECB conducting only reinvestments, its gross asset purchases will fall from €465 billion in 2018 to €165 billion in 2019. The ECB has clarified that during the period of net asset purchases, principal redemptions of public sector securities will be reinvested in the jurisdiction in which the maturing bond was issued. An open issue remains – and this is my own personal view – that is, whether the ECB would reinvest maturing bonds introducing a new twist while respecting the capital key? Let me explain. Maintaining a high maturity would ensure that the term premium and yields for 2/5 BIS central bankers' speeches longer-dated bonds stay low. By investing cash from maturing bonds into bonds with a maturity of, say, at least ten years, such an operation twist could be potentially useful during the reinvestment period, since it can be used as a vehicle for differential stimulus across countries. This fine-tuning of the maturity of assets is nothing unprecedented. In 1961, the Fed sold shortterm T-bills and replaced them with longer-dated government bonds, while in the period between September 2011 and December 2012, the Fed replaced $667 billion in securities with maturities below three years with longer-dated assets. In terms of challenges ahead, beyond the reinvestment period i.e. beyond 2020, let me focus on a pivotal issue. Question: Is there an optimal central bank’s balance sheet size? An important issue is how long it will take for the ECB to reduce the balance sheet to its original – or another predetermined – level. My personal view is that there is no need for the ECB to rush to reduce the size of its balance sheet, as one needs to take into account the uncertainty created among market participants and to avoid any potential market disruptions. There are other (conventional) tools to use if tightening is deemed necessary, including: raising interest rates even with a large balance sheet, increasing reserve requirements, using reverse repo operations to drain excess liquidity. What is important is to make sure predictability is safeguarded by presenting a normalisation sequencing roadmap, which allows the balance sheet to shrink passively by holding the assets purchased to maturity. There are pros and cons of a large central bank balance sheet (from the standard monetarist argument that points to excess liquidity originating a rapid inflation to financial stability considerations). No matter what this optimal size is, it is important for the central bank to communicate with the markets what will be the new ‘normal’ balance sheet size. In other words, central banks should define clearly the framework, in which they intend to implement monetary policy at the end of the normalisation period. Let me now briefly turn to developments in and prospects for financial markets. B. Global markets Our Research and Financial Operations Department and the Asset Management Committee, which I chair, at the Bank in Athens, share the widely held view that the US dollar will remain strong in the months ahead [by midyear about 6% above its low point against other currencies in February], vis-à-vis other major global currencies, while in the fixed income, again the US will continue to offer one of the highest interest rates in the developed world. For example, US 2-year Treasury yields are the most attractive among the G10 economies, a situation highly unusual and unprecedented since the turn of this century. The main driver behind this is US economic policy, which – if you allow me to use a catch phrase– may be described as follows: “Fed up, with tariffs”, plus of course the drop in tax rates. In the eurozone financial markets, the normalisation of ECB’s monetary policy remains the main driver of the still fragmented euro area government bond market. The core euro area countries form a rather homogeneous group; the europeriphery, by contrast, is less homogeneous. The diversity is due to recent developments in Italy, headed by a fragile, populist coalition government. Indeed, as a result of the latest political turmoil over immigration and the budget debate, the Italian 10-year yield has reached 3% and remains in this area since August. Other peripheral countries such as Spain and Portugal remain resilient and contagion remains limited. Italy is not Greece. It is too big to ignore, as the eurozone’s third largest economy and the world’s third largest, after the US and Japan, sovereign debt market with total public debt of more than €2.3 trillion, of which more than 36% is held by foreigners, and the political uncertainty could generate severe spillover effects to the global sovereign markets. There is a nightmare scenario which I do not share, of which markets are of course aware and already factor it in. This political tit-for-tat between the populist government of Italy and Brussels may escalate into a genuine 3/5 BIS central bankers' speeches diplomatic war (for some people, what is at stake here is the next Italian Prime Minister) and this would lead to a downgrade of Italy’s credit rating (currently at BBB), and a potential loss of its investment grade, which would force the ECB not to accept Italian bonds as collateral for the provision of liquidity and to stop buying Italian government bonds under its PSPP. Taking into account that QE ends next December, borrowing costs in some euro area countries could surge to more than 5%, near 2013 levels. The worry then would be that this could perhaps trigger the next eurozone crisis: a remote, unthinkable scenario. Enter Italy’s most famous personality after Julius Caesar (as you know, famous for his quote “veni, vidi, vici”), with his world-famous quote, “whatever it takes”; it is far from clear that the “only game in town” WOULD be enough to save the euro this time. Before closing with my comments on my country, Greece, only a very brief comment on populism. Next May’s elections for the new European Parliament are going to be a big test of populist strength in Europe. If populist/nationalist parties do well next year, they might be setting the agenda in European politics as an unofficial alliance against pro-European forces. Populism may have disastrous effects for independent institutions and civil peace. The rise in populism might have significant effects on growth, as populists opt for protectionist and anti-market measures and less prudent economic policies having the potential to lead to slowing or backtracking of growth-promoting reforms. Lacking the pragmatism of mainstream parties, populists risk shifting away from the pro- business, pro-market policies towards some form of “big government”. C. Greece Greece, last month, exited successfully an 8-year strict surveillance period, during which it has received about €240 billion from our European partners and the IMF in the context of three adjustment programmes. During this period, Greece experienced a dramatic fall in output (more than 25% in GDP), the unemployment ratio almost tripled from 9% in 2008 to 26% in 2015, a huge fall in the standards of living and valuations of assets (real and financial) and another mountain of private debt had been built up (around €220 billion in 7 years). This is not the venue and time to ask what went wrong in Greece. I have written extensively on this topic with my two previous hats. What is more important is that the country is finally out of the woods and we have to make sure that past mistakes are not repeated and to create the conditions so that the Greek people are in a position to look into the future with optimism. Now that expectations have been stabilised and public debt dynamics are under control, it is important for the Greek authorities to focus on the agenda to achieve a sustainable return to capital markets. I have recently proposed elsewhere what could make such a return feasible in the near future. Briefly, (a) No return to the markets can be permanent and hence credible with capital controls still imposed on the economy. The full lifting of capital controls, signalling also the end-date (which could be Q1 next year) would be the catalyst for the full recovery of trust of depositors, but also boost investor confidence in the prospects of the economy. (b) Regaining the investment grade held in 2008 is as important as ensuring debt sustainability. This should be at the top of Greece’s policy agenda over the next year or so, we are only two notches far away. Its significance is comparable to meeting the Maastricht nominal criteria that allowed the country to enter the euro area. (c) Given the prolonged fiscal consolidation and private disinvestment that took place (2007: investment was 27% of GDP, today it is 11% of GDP, the lowest level since 1960), the country needs an investment shock. Reviving domestic and foreign investment is crucial to supporting 4/5 BIS central bankers' speeches the economic recovery. That is why it is important for the government to speed up the privatisation agenda, not so much as a revenue exercise, but as a great opportunity to attract FDI in key sectors of the economy, such as transport, energy, logistics and tourism. I would recall a proposal I made in the summer of 2014, which links reduced primary surplus targets with a drastic gradual reduction of corporate tax rates in line with the fiercely competitive corporate tax rates applied by Greece’s neighbours in the Balkans. If such steps are taken and there is no slackening of effort, no reform fatigue, no complacency, etc., I am pretty confident that my country will soon no longer bean outlier of the eurozone and become a normal south European country. Thank you very much for your attention. I am really honoured to be here today among such clever people! 5/5 BIS central bankers' speeches | bank of greece | 2,018 | 10 |
Keynote address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Second Sustainability Summit for South-East Europe and the Mediterranean "Challenges and prospects for sustainable growth", Athens, 1 October 2018. | Yannis Stournaras: Challenges and prospects for sustainable growth Keynote address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Second Sustainability Summit for South-East Europe and the Mediterranean "Challenges and prospects for sustainable growth", Athens, 1 October 2018. * * * It is a great pleasure for me to be here with you today and to have the opportunity to share my thoughts on the challenges and prospects of sustainable growth. The reason why central banks today have an interest in sustainable growth is, in my view, selfevident: because financial stability without a sustainable growth model is simply inconceivable. Economic growth has come at a growing cost to the environment. It is characteristic that 1 August 2018 marked the Earth Overshoot Day1, by which humanity had exhausted all the natural resources that ecosystems can renew in a year. At the current juncture, sustainability is highly relevant for our generation as well as for generations to come, as the three pillars of sustainable development, i.e. society, the economy and, of course, the environment, increasingly come under pressure. Therefore, redefining the concept of growth in a sustainability context will be crucial to our future path. According to the United Nations, a sustainable future hinges on the achievement of 17 goals by 2030. In particular, goals such as global prosperity with no poverty and zero hunger, quality education, equality, decent work, access to clean water, affordable energy, justice, strong institutions and climate action feature prominently on the sustainable development roadmap. Global prosperity should be a priority for all, and the goals concern all nations, not only the less developed ones. At a time when we are more interconnected than ever, the welfare of nations and their citizens is also interdependent and requires a holistic approach to achieving the common sustainable development goals. Sustainability challenges, especially those relating to climate change, are of a global nature and require cooperation from all countries. Unwillingness to cooperate in climate action is totally unjustified and illogical, given that climate change affects the entire planet. The cooperation of all is crucial to the achievement of the goals, while public and private sector synergies are necessary to finance this process, which entails considerable cost2 but also huge value. There are many challenges and risks along the way, as established growth models will need to be adjusted in order to ensure long-term sustainability. Under conditions of depletion of natural resources worldwide, a focus on more efficient use and minimisation of waste emerges as the only and urgent option. The model of a “linear” economy prevailing today (sourcing – manufacturing – usage – disposal), on which most economies since the Industrial Revolution have relied, is no longer sustainable. Just like nature, which operates in a “circular” manner, business activity can become sustainable by switching from the “linear” model to a “circular” one. Circular economy means that the value of products, materials and resources is maintained in the economy for as long as possible and waste generation is minimised. The transition to a circular economy requires interventions on the supply side, such as ecodesign and longer life cycles of products, as well as on the demand side, through a change in consumption and dietary patterns and a more efficient management of waste, with appropriate financial incentives and community engagement. This transition is expected to have a positive effect on production, employment, climate, nature, natural resources and social well-being3. For 1/4 BIS central bankers' speeches example, our dietary habits have a devastating effect on the planet’s natural resources, land and water reserves. A lower consumption of meat and dairy products would bring substantial savings on cultivated land and water resources, reduce carbon emissions and gradually restore forests and wildlife. One major challenge in achieving the sustainable development goals relates to decarbonisation, i.e. the removal or reduction of carbon dioxide from energy sources. The current and future impacts on society and sustainable development are such that make the use of fossil fuels prohibitive. Climate change and global warming are linked to anthropogenic activity, in particular the use of fossil fuels and carbon emissions. We need to mitigate climate change by rapidly and drastically reducing emissions, adopting the right energy management and high efficiency practices, by financing green energy, fostering energy-saving investment and promoting a zeroemission economy in the context of the respective European policies. Indeed, it seems that we are rapidly approaching the point of no return, after which even a drastic reduction of carbon emissions will no longer be enough to reverse the trend and stop a global tragedy, for example the accelerated melting of polar ice caps. Along the road, there are clearly risks, as well as opportunities: physical risks arising from the impacts of climate change, but also transition risks arising from the adjustment to a low-carbon economy. In the process, businesses may face costs, valuation losses and disruptions. Yet, a careful and timely transition will also open up opportunities, associated with the development of new renewable energy and innovative products, investment in energy saving, new infrastructure and new jobs. The transformation of the global economy towards decarbonisation cannot but have a positive net outcome. Long-term value creation is a matter of effective climate risk management and transition to a zero-carbon economy4. For this reason, central banks support transparency and the disclosure of data that will enable markets to lead the transition5 so that, with the right information, they can price in the cost of doing business, the climate risk, and, most importantly, evaluate new business opportunities. The proper assessment and supervision of the financial risks stemming from the transition to a zero-carbon economy are important factors in promoting sustainable development and safeguarding the smooth functioning of the financial system6 . In addition, commercial banks can play an important role in moving towards a low-carbon economy by reducing their exposures to high-carbon investment, while banking supervisors could take into account sustainability considerations in the calculation of bank capital requirements7. The transformation of cities represents another significant challenge from the perspective of sustainability. As put by Amina Mohammed, UN Deputy Secretary-General, “It is clear that it is in cities where the battle for sustainability will be won or lost”8. Today, over 80% of the global GDP is generated in urban areas, which are hubs of collaboration and progress, innovation, culture, science, productivity, exchange of ideas, goods and services, and societal development. Urban development in a manner that cities can continue to generate jobs, prosperity, social and economic gains without drying up land and resources, is a crucial bet as it is projected that twothirds of the world’s population will be living in urban or suburban areas by 2050. This concentration will exacerbate the existing problems and add new ones, unless best practices are adopted that will make our cities sustainable and inclusive, with highly interconnected networks and “smart” infrastructures, quality services and low environmental and energy footprint. The advances in technology, innovation and science, which are the driving force of growth through total factor productivity, as well as a catalyst for a sustainable future, also pose a significant challenge. Technological progress and the digital age have created a new landscape, that of the 4th Industrial Revolution, in which digital technology helps to raise productivity, 2/4 BIS central bankers' speeches reduces the costs of production – parts of which are now dematerialized, e.g. printed books are replaced by e-books – increases accessibility and supports urban governance. Although the impact of modern technology on employment and prosperity is expected to be overall positive9, there are issues that need to be tackled, mainly relating to the structure of work and to social cohesion. In this regard, policies to ensure that the benefits of technology are equitably shared across society will be key to the achievement of sustainability goals in the long run. Last but not least, on the path to sustainable development lies the environmental challenge, which is now more important than ever. According to the World Economic Forum’s report 10 for 2018, among the top five global risks, three are environmental and all three are associated with climate change11. In this light, the Bank of Greece is committed to invest significantly in UN sustainability goal no. 13, i.e. climate action, a horizontal goal that contributes to the achievement of all other goals. Thus, over the past ten years, the Bank of Greece has been actively involved in research, in-depth dialogue and the provision of scientific documentation through the activities of the interdisciplinary Climate Change Impacts Study Committee (CCISC). Ecosystem goods and services form the basis of the global economy. Awareness of their economic value and measuring that value in financial terms promotes the sustainable utilisation of natural resources and management of natural systems. Within the CCISC, environmental and energy economists, in collaboration with climatologists, physicists, biologists, engineers and social scientists, study the impacts of climate change on the Greek economy, analyse the economic, social and environmental consequences of climate change in Greece, and suggest ways for the transition of the Greek economy to sustainable growth models. Overall, the studies highlight the wealth of Greece’s natural resources, but also the risks to the country’s natural and human environment, and find that the impact of climate change on all sectors of the national economy is adverse to extremely adverse. Under an inaction (“business as usual”) scenario, the Greek GDP could, ceteris paribus, fall by 2% annually by 2050 and even further by 2100, while the total cost to the Greek economy could reach a cumulative €701 billion by 2100.12,13 According to a vulnerability assessment14, which quantifies and ranks the expected climate risks for Greece, agriculture is the sector projected to be the most strongly hit by climate change in Greece, while the impact on tourism and coastal systems will significantly affect household income and the economy as a whole. Of particular importance are water reserves, on which both agriculture and water supply depend. The work so far undertaken by CCISC has highlighted the importance of a concrete adaptation policy as a necessary damage control measure. For this reason, under a Memorandum of Understanding signed with the Ministry of Environment and Energy and the Academy of Athens, we have drafted the National Climate Change Adaptation Strategy (NCCAS) and we are currently elaborating on its implementation. This strategy sets out the general objectives, guiding principles and implementation tools for an effective and growth-oriented adaptation strategy, in line with European directives and international experience. Moreover, it is the first step in a continuous and flexible process for planning and implementing the necessary adaptation measures at national, regional and local levels and aspires to leverage the capabilities of Greece’s public authorities, economy and society at large, in an aim to address the impacts of climate change in coming years. More recently, last June, the Bank of Greece released a book entitled “The Economics of Climate Change”, which provides a comprehensive, state-of-the-art review of the economics of climate change and a literature review in the emerging area of environmental macroeconomics and focuses on the design of economic policy aimed at controlling the climate externality. With this publication, the Bank of Greece aims, among other things, to lay the foundations for addressing the role of monetary policy under conditions of global warming and exploring the link between 3/4 BIS central bankers' speeches monetary policy and climate change, a topic that remains high on our research agenda. It acknowledges, of course, that monetary policy is not the primary tool for tackling climate change but rather plays a supplementary role alongside fiscal, environmental and structural policies. Scientific research and current developments confirm the need for a dynamic strategy and an action plan to address sustainability challenges. I am sure that the presentations during this first day of the conference, and even more so tomorrow, will shed light on crucial aspects of the path towards achieving the sustainable development goals by 2030 and beyond. I would like to congratulate the organisers for taking this initiative and wish them the best of success in this conference. 1 See www.overshootday.org/newsroom/press-release-july-2018-english 2 According to the United Nations Conference on Trade and Development (UNCTAD), the achievement of sustainable development goals will cost between 5 and 7 trillion US dollars per annum. 3 European Commission, Implementation of the Circular Economy Action Plan, 2018 Circular Economy Package, available at: ec.europa.eu/environment/circular-economy/index_en.htm και Europa, EU law and publications, Document 52017DC0623, available at: eur-lex.europa.eu/legal-content/EL/ALL/?uri=CELEX:52017DC0623 4 Carney, M., “A transition in thinking and action”, speech at the International Climate Risk Conference for Supervisors, De Nederlandsche Bank, Amsterdam, 6 Αpril 2018, available at: www.bankofengland.co.uk//media/boe/files/speech/2018/a-transition-in-thinking-and-action-speech-by-mark-carney.pdf? la=en&hash=82F57A11AD2FAFD4E822C3B3F7E19BA23E98BF67 5 According to Mark Carney (Governor of the Bank of England) and Michael Bloomberg (chair of the Task Force on Climate-related Financial Disclosures), “… financial disclosure is essential to a market-based solution to climate change. A properly functioning market will price in the risks associated with climate change and reward firms that mitigate them. As its impact becomes more commonplace and public policy responses more active, climate change has become a material risk that isn’t properly disclosed..”, The Guardian, 14.12.2016, available a t : www.theguardian.com/commentisfree/2016/dec/14/bloomberg-carney-profit-from-climate-change-rightinformation-investors-deliver-solutions 6 www.ecb.europa.eu/pub/pdf/other/ecb.mepletter171010_Urtasun.en.pdf? utm_medium=email&utm_source=nefoundation&utm_content=8+-+response&utm_campaign=banks-22Nov&source=banks-22-Nov 7 Financing a sustainable European Economy, Interim Report, EU High-Level Expert Group on Sustainable Finance, July 2017, available at: ec.europa.eu/info/sites/info/files/170713-sustainable-finance-report_en.pdf 8 See “Battle for Sustainability Will Be Won or Lost in Cities, Deputy Secretary-General Tells High-Level General Assembly Meeting on New Urban www.un.org/press/en/2017/dsgsm1080.doc.htm Agenda, UN-Habitat”, available at: 9 Interview of Yannis Stournaras, Governor of the Bank of Greece, with Christos Chomenidis for the newspaper Ta Nea, 17/03/2018, available at: www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx? Item_ID=513&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b (in Greek) 10 World Economic Forum, The Global Risks Report 2018, 13th Edition, available at: wef.ch/risks2018 11 These risks are: (1) extreme weather events; (2) major natural disasters; and (3) failure to mitigate and adapt to climate change (3). 12 GDP contraction relative to base year GDP at constant 2008 prices. 13 CCISC (2011), The environmental, economic and social impacts of climate change in Greece, Bank of Greece, pp. 453–457, available at: www.bankofgreece.gr/BogEkdoseis/ClimateChange_FullReport_bm.pdf 14 Τhe vulnerability analysis is included in CCISC (2015), National Climate Change Adaptation Strategy (NCCAS), pp. 7-13, available at: www.bankofgreece.gr/BogDocumentEn/National_Adaptation_Strategy_Excerpts.pdf 4/4 BIS central bankers' speeches | bank of greece | 2,018 | 10 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, in the governors' panel discussion at the Bank of Greece Economic History Conference "The birth of inter-war central banks: building a new monetary order", Athens, 2 November 2018. | Yannis Stournaras: Monetary policy and bank supervision in Europe after the last financial and sovereign debt crisis and challenges for the future Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, in the governors' panel discussion at the Bank of Greece Economic History Conference "The birth of inter-war central banks: building a new monetary order", Athens, 2 November 2018. * * * Since the onset of the global financial crisis in 2007, major central banks have resorted to unconventional monetary policy measures, such as ample liquidity provision to commercial banks and large-scale asset purchases, while short-term interest rates hit the zero lower bound. The purpose of these measures was to help alleviate tensions in financial markets and to lower long-term interest rates, thus supporting the real economy and avoiding a deflationary downward spiral. In addition, supervisory authorities have tightened regulatory standards in order to avoid a repeat of the crisis in the future. In my introductory remarks to this session, I will first focus on the monetary policy measures of the Eurosystem and then turn to the supervisory measures adopted in response to the financial and sovereign debt crisis. Domestic issues of particular interest will be touched upon at the end. Non-standard monetary policy measures of the Eurosystem The first episode of volatility in early August 2007 was associated with waves of downgrades of securities based on US subprime mortgages and concomitant acute difficulties faced by some financial institutions. The crisis intensified with the collapse of Lehman Brothers a year later. As a response, several policy actions were initiated by central banks around the globe. In this context, the Eurosystem started to provide liquidity without any quantitative limit and at a fixed interest rate, i.e. adopting the so-called fixed rate full allotment policy, and conducted additional refinancing operations with longer maturities. Key interest rates were cut in several steps and the list of eligible collateral was expanded. In 2010 the focus of concern switched to the euro area, which was facing an escalating sovereign debt crisis that led to dysfunctions in the transmission mechanism of monetary policy. Therefore, the Eurosystem introduced the Securities Markets Programme (SMP) in May 2010, acquiring securities issued in the vulnerable Member States. By the summer of 2012, the contagion had spread further. To counter the unwarranted worries relating to the eventuality of a redenomination back to national currencies, the Governing Council of the ECB intervened by unveiling, late in the summer of 2012, a new instrument, termed “Outright Monetary Transactions (OMTs)”. With the OMTs, the Eurosystem would undertake large-scale purchases of government debt under strict conditionality. Although in fact it never became necessary to activate this instrument, its mere announcement led to much calmer conditions in euro area financial markets and to receding fragmentation, demonstrating the commitment of the ECB to do “whatever it takes” – to use the famous phrase of President Draghi earlier that summer – to save the euro. Subsequently, the euro area faced very low inflation rates, far below 2%. Again, the Eurosystem initiated a multidimensional policy reaction, aiming to counter the fragmentation of financial markets in the euro area, which was fed by the sovereign debt crisis, as well as to revive the lending activities of banks. The Eurosystem carried out targeted long-term refinancing operations (TLTROs), on favourable lending terms for those banks with the strongest credit expansion to the real economy, continued to cut key interest rates, and employed forward guidance. Additionally, a large-scale purchase programme of private and public sector securities (APP) was initiated in late 2014 and is unprecedented in scale at €2.5 trillion last month. Purchases 1/5 BIS central bankers' speeches under the APP are expected to run until the end of the current year, after which time the Eurosystem will continue to reinvest the proceeds from securities maturing in its portfolio. To a large extent, these measures have helped improve financial conditions and the inflation outlook, and boost the recovery in the euro area1, while potential side-effects from the monetary policy easing, in the form, say, of excessive asset valuations or excessive risk-taking by market participants do not seem to have materialised. Given that inflation pressures continue to be moderate in the euro area, substantial monetary policy stimulus shall continue to be provided in several ways, until the Governing Council assesses that developments regarding inflation are compatible with the Eurosystem’s mandate. Challenges for the future Looking ahead, one main challenge relates to the formulation of monetary policy strategies by central banks in the aftermath of the crisis. Will the strategies eventually converge to the pre-crisis status quo or will the “new normal” reflect some of the lessons learnt over the previous years? • According to the first approach, central banks may gradually wind down the non-standard policy measures and return to the pre-crisis consensus of an as lean balance sheet as possible. • The second approach includes the incorporation of unconventional policies into the standard central bank toolkit in normal times, thus leading to a ‘permanently’ larger balance sheet. Other aspects of monetary policy strategies also feature in this debate, including, inter alia, calls for revisions of central bank mandates to encompass, for instance, financial stability objectives. Moreover, there have been voices pointing to the need to adopt a higher inflation target so as to reduce the likelihood of hitting the zero lower bound, even after large adverse shocks. However, the difficulty of managing the transition to the new target without losing credibility should not be underestimated. Furthermore, recent academic research2 has suggested that policy makers should target the price level and not inflation, but only when the zero lower bound is binding, i.e. any low-inflation episode would be compensated by a period of relatively high inflation. However, the practical difficulties of implementing this policy could prevent markets and the public from fully understanding it, and could render it ineffective3. Another future challenge relates to the evolution of the equilibrium real interest rate, the “natural rate”. There are reasons to believe that the natural rate has declined substantially over the past few decades due to productivity slowdown, population aging and other structural forces affecting the global economy. The Global Financial Crisis seems to have accelerated the downward trend of the natural rate due to deleveraging of the private sector, higher risk aversion and the lack of supply of risk-free assets. The policy rate set by the central bank would have to keep track of the evolution of the equilibrium real rate, otherwise monetary policy would be too tight, dampening both economic activity and inflation4. The natural interest rate is, however, unobservable in the real world and is merely measured using various models which provide different results. Thus, it is challenging to use estimates when formulating monetary policy. Overall, as far as the setting of the new monetary policy framework is concerned, the prevailing pre-crisis orthodoxy has served well in achieving price stability, while also contributing to favourable growth and financial stability outcomes. At the same time, the positive experience so far with unconventional measures − from longer-term refinancing operations to large-scale asset purchases − speaks in favour of including some of these measures to a certain extent in the standard toolkit. Further developments in this regard are still subject to debate, and policy makers look forward to relevant research that will help inform future decisions. 2/5 BIS central bankers' speeches The response of supervisory authorities to the crisis The response of the Eurosystem to the global and European financial crisis has been effective, despite the initial lack of crisis mechanisms and the challenging external environment. As outlined above, the initial response came in the form of a significant easing of the monetary policy stance. However, deeper institutional reforms had to be established. In response to the strong negative feedback loops between banks and sovereigns, as well as contagion among national financial markets, European leaders, in 2012, initiated the creation of a Banking Union. Its three pillars consist of the Single Supervisory Mechanism, the Single Resolution Mechanism and the still-to-be-completed European Deposit Insurance Scheme (EDIS). Apart from the elements of the Banking Union, a number of other important regulatory initiatives have been taken, covering almost all aspects of the financial sector and activities (the Bank Recovery and Resolution Directive, an updated Capital Requirements Regulation and Directive for the banking sector, Solvency II for Insurance, the European Market Infrastructure Regulation for financial markets and infrastructure, to name a few). The establishment of the European Systemic Risk Board (ESRB), coupled with the creation of appropriate macroprudential instruments, allowed policy makers to place greater emphasis on identifying and addressing system-wide risks and to prevent the incipient build-up of financial imbalances. The Banking Union, however, must be completed, by creating a common European Deposit Insurance Scheme and by setting up a credible common fiscal backstop to the Single Resolution Fund that underlies the Single Resolution Mechanism. Such steps are necessary to improve confidence in the banking system and break the bank-sovereign feedback loop. Moreover, a genuine Capital Markets Union (CMU) can be promoted through legislation changes that impose harmonisation towards best practices on securitisation, accounting, insolvency and company law, property rights, etc. Such changes will allow for deeper integration of bond and equity markets and will ensure that companies (in particular SMEs) can gain access to capital markets on top of bank funding. The Capital Markets Union will enhance cross-border investment and consequently strengthen private sector risk-sharing across countries as returns on assets and access to credit become less correlated with domestic economic conditions in each Member State. Moreover, in view of the creation of the CMU and in order to preserve financial stability, particular emphasis in the future should be placed on the risks and vulnerabilities of the rapidly expanding non-bank financial sector5. In addition, further steps to enhance data quality and availability are necessary, including by harmonising data definitions and promoting greater standardisation at global level (e.g. financial and real estate transactions data). Issues related to Greece Let me now turn to a few key domestic issues. Throughout the crisis, the Bank of Greece has been the guardian of financial stability, fully protecting all deposits and supporting the economy and serving the public interest. The Bank focused on two major fronts: ensuring adequate provision of liquidity, and managing and assisting recapitalisation, resolution and restructuring of the banking sector. With respect to liquidity provision, the Bank has been critical in ensuring continuous liquidity provision to banks in its role as the lender of last resort. On various occasions, the Bank of Greece has provided ELA to the banking system. This has helped preserve financial stability and contributed to the avoidance of a banking crisis. With respect to managing and assisting recapitalisation, resolution and restructuring, the Bank, in the context of the adjustment programmes, aimed to strengthen viable institutions and resolve non-viable ones, whilst safeguarding financial stability. To this end, viability assessments and 3/5 BIS central bankers' speeches capital needs assessments were undertaken. Those banks deemed non-viable were resolved and absorbed by systemic banks. With 14 such resolutions having successfully taken place since 2011, this process has also facilitated the considerable consolidation of the banking sector. Following three rounds of recapitalisation, Greek banks now have among the highest capital ratios of banks in the euro area and maintain buffers sufficient to absorb additional credit losses, as the recently completed pan-European stress test indicated. They have also markedly improved their liquidity position, reducing their reliance on central bank funding, regaining access to the interbank market and issuing covered bonds. Concurrently, customer deposits have been gradually increasing. However, the ratio of Non-Performing Exposures (NPEs) to total exposures remains quite elevated and constitutes the most significant challenge for the Greek banking sector. Banks have set operational targets to significantly reduce the stock of NPEs by end-2019. At the same time, significant reforms have been implemented, aimed at removing administrative, legal and judicial impediments to NPE resolution, as well as establishing a secondary market for NPL servicing and sales. These efforts have started to bear fruit: according to end-June 2018 data, the stock of NPEs reached €88.6 billion (47.6% of total exposures), i.e. it decreased by 17.3% or €18.6 billion from its March 2016 peak. The key driver of NPE reduction so far has been write-offs. Going forward, NPL sales and securitisation will play a more important role, coupled with collections, collateral liquidation and curing of loans. The pace of NPE reduction is anticipated to accelerate based on the more ambitious revised banks’ NPE targets covering the period up to 2021. Efficient NPE management will also underpin the operating profitability and internal capital generation capacity of banks, contributing to the restoration of their credit intermediation function and the establishment of a sustainable business model. This, in turn, is of utmost importance for the financing of innovative and export-oriented investment projects and companies in the context of the rebalancing of the Greek economy. Conclusion The recent financial crisis has been the most severe in seventy-five years. A key question not only for all of us in this room but also for those who study it or act as policy makers is “Will it happen again?” My answer is − if and when it does happen − next time will be different. First, a long absorbed lesson is that, while things may work well if left to the invisible hand, during periods of stress that hand seems to lose its grip, in the words of Ahamed Liaquat in his Pulitzerwinning “Lords of Finance”. Policy makers around the world have learned their lessons from the Great Depression: a financial system in distress requires active central bank intervention. Central banks thus acted quickly and forcefully. They equipped their toolkit with a combination of more flexible, effective and innovative measures and enormous firepower. Given the success of these policies, some of these instruments may be permanently included in the new standardframework, and thus equip policy makers with the tools to engage in proper and timely action. Second, we as central bankers have gained a much better understanding of how the financial system operates and how risks to the stability of the financial system may develop. A lot has been done to make the system much safer than it was 10 years ago and as resilient as possible. Such work has progressed in various directions, including not only better regulation but also higher capital and liquidity buffers for banks, early warning systems and the development of macroprudential tools to increase resilience to shocks when they occur. Third, we have also taken bold steps to strengthen Europe. At the national level, euro area 4/5 BIS central bankers' speeches countries have stepped up structural reform efforts in the labour and product markets to boost productivity and in the fiscal sector to make public finances more effective. The Banking Union (with a single supervisor, a Single Resolution Mechanism and – a yet-to-be-established but of utmost importance – shared European Deposit Insurance Scheme) has helped create a better integrated, more efficient and well capitalised European banking sector. Coupled with the completion of the capital market union, it can support the single market and fund investment and growth. At the same time, many challenges remain and a lot still needs to be done. The financial system continuously innovates and the work of regulators comes with a lag. In fact, certain large financial institutions that conduct activities similar to banks but have no banking license – what we call non-banks – remain insufficiently monitored and under-regulated. Challenges also remain outside the financial system, with for instance geopolitical risks remaining elevated, trade disputes or cyber-risks. As central banks, we have to be prepared for all contingencies. For someone like me, with deep interest in economic history, it is clear that “those who can’t remember the past are condemned to repeat it”. We need not only the ability to learn from the mistakes of the past, but also the vision to avert repeat mistakes. At the same time, it is our duty to strengthen our safety net and be better prepared for all contingencies and, as I just discussed in my remarks today, a lot has been done on that front 1 Since the announcement of policy measures in June 2014, lending rates for non-financial corporations and households have dropped by around 130 basis points and 110 basis points, respectively. Rates on very small loans (a proxy for loans to SMEs) have declined by more than 210 basis points. Heterogeneity of lending rates across countries has fallen sharply. See Mersh, Y. (2018), “Monetary policy in the euro area – a brief assessment”. MNI Connect Roundtable, Singapore, October 2018. (www.ecb.europa.eu/press/key/date/2018/html/ecb.sp181010.en.html) 2 Bernanke, B. (2017), “Monetary Policy in a New Era”, conference on Rethinking Macroeconomic Policy, Peterson Institute for International Economics, 12–13 October 2017. 3 See, for example, Constancio, V. (2018), “Past and future of ECB monetary policy”, speech at the Conference on “Central Banks in Historical Perspective: What Changed After the Financial Crisis?”, organised by the Central Bank of Malta, Valletta, 4 May 2018 (www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180504.en.html). 4 Setting short-term interest rates above the natural rate puts downward pressure on activity and inflation. Setting them below the natural rate has the opposite effect. See, for example, Cœuré, B. (2016), “Assessing the implication of negative interest rates”, Yale School of Management, New Haven, 28 July. (www.ecb.europa.eu/press/key/date/2016/html/sp160728.en.html). Cœuré, B. (2017), “Outlook for monetary policy in the euro area”, Association d’ Économie Financière, Paris, 2 February (www.ecb.europa.eu/press/key/date/2017/html/sp170202_2.en.html) 5 The shadow banking sector accounts for around 40% of the EU financial system. See Draghi, M. 2018, Welcome remarks at the 3rd annual conference of the (www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180927.en.html) 5/5 ESRB, Frankfurt, October. BIS central bankers' speeches | bank of greece | 2,018 | 11 |
Welcome remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Bank of Greece Economic History Conference "The birth of inter-war central banks: building a new monetary order", Athens, 2 November 2018. | Yannis Stournaras: The birth of inter-war central banks - building a new monetary order Welcome remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Bank of Greece Economic History Conference "The birth of inter-war central banks: building a new monetary order", Athens, 2 November 2018. * * * Ladies and Gentlemen, It is my great pleasure to welcome you to this international conference, devoted to the Birth of inter-war central banks, organised by the Bank of Greece, itself one of the offspring of this institutionally fertile period. It was 1926 when the Greek government first approached the Financial Committee of the League of Nations, seeking its help to settle old debts and raise a new loan on international markets. The money was needed quite urgently. After a decade of wars, which had culminated in the abortive Asia Minor campaign and the forced population exchange of 1922, the Greek economy needed an injection of capital to heal its wounds, settle its refugees and build up its economic infrastructure. Yet its international credit standing lay in tatters; wartime obligations remained unsettled; expenditures far outstripped public revenues; inflation was soaring, and the drachma had lost more than 90% of its value. The League of Nations, relying heavily on input from the Bank of England and the Treasury, promptly dispatched a group of experts to study the Greek situation and report back to Geneva. Their report was published in 1927. Along the inevitable admonitions about fiscal prudence and administrative reform, the foreign experts highlighted the absence of a modern central bank: an institution charged solely with the conduct of monetary policy, free from political or business interference. The sole note-issuing authority at the time was the National Bank of Greece (or Ethniki, as most in this audience know her). But Ethniki also happened to be the country’s largest commercial bank, with strong ties to business and politics. If Greece were to re-join the gold standard and thus return to the fold of ‘stable’ countries, the National Bank would have to give up its commercial operations and focus exclusively on central banking – or so the League argued, at least. The report was not well received. Neither by Greek politicians, who lamented foreign interference in the country’s domestic affairs; nor by the National Bank itself, which faced the prospect of giving up its most profitable line of business. After several months of acrimonious negotiations, a compromise was finally struck: the National Bank would maintain its commercial activities and cede responsibility for monetary policy – along with all corresponding assets and liabilities – to a new institution, which would simply be called the Bank of Greece. And so it was. With a League of Nations Protocol as its birth certificate, the new bank began its operations in the spring of 1928. The product of an unpalatable deal to obtain much needed foreign credit, the bank was greeted with scepticism, if not outright animosity at first. As Horace Finlayson, the British consultant appointed to monitor the agreement in Athens would explain in a letter to Sir Otto Niemeyer, the Director of the Bank of England: “the private banks still assume an attitude of sullen hostility […]. This is bound to continue so long as the Bank of Greece continues to work in a position of semi-complete isolation. For the time being, it is nobody’s child and its real activities are little more than those of a rather pretentious exchange-shop.”1 Those lines were written in October 1928. A year later, stock markets in the City of London and 1/3 BIS central bankers' speeches Wall Street would crash, heralding a series of events that would bring inter-war central bank cooperation and the gold standard crashing down with them. Greece’s stabilisation proved shortlived: by 1932, the country was off gold and back in default. As a newly born orphan, the Bank thus took its first steps in the years of the Great Depression. It spent its early childhood navigating the treacherous waters of the thirties, tangled in the web of barter agreements and foreign exchange controls that had become the norm. Interestingly enough, it was these very dire circumstances that helped transform the “rather pretentious exchange-shop” into a powerful agent of economic policy. On the one hand, the advent of the crisis forced commercial banks to come knocking to the door of their lender of last resort. On the other, the sudden retreat of the economic liberalism signalled the triumph of discretion over automaticity: as economic policy became more interventionist, the authority of the Bank of Greece expanded. On the eve of the Second World War, the orphan had emerged as a fully-fledged banking institution, albeit one closer to the state than originally envisaged. The war brought further loss of independence, along with crippling hyperinflation, before stability was gradually restored in the fifties and sixties. Yet through these many trials – if not because of them – the Bank of Greece gradually regained its independence and earned its place at the heart of the financial system, only to become one of the principal pillars of economic stability in the country. This was the very role it was called upon to confirm during the recent financial crisis, whilst maintaining its independence from political or business interference. Today, safeguarding the independence of central banks from undue political and business influence is once again an issue that draws much attention. Defending the independence of Central Banks is not only an issue of price stability but also long-term economic sustainability and financial stability. I am sure that all those here today participating in the Conference are keenly aware and sensitive to this issue. Such had been the founding principles of the Bank of Greece back in 1928. 90 years have passed since those principles were first laid down. The Bank of Greece is no longer young. More importantly, however, it is no longer an orphan – despite the occasional attempts to make it appear so. It belongs to a large European family with strong institutional ties and a common purpose. On this, the 90th anniversary since we first opened our doors to the public, we are revisiting our past and contemplating our future. But we have chosen to do this through a comparative and international lens. For the Greek experience was hardly unique: the 1920s and 1930s witnessed the creation of a string of new central banks, across several countries. More often than not, their birth was midwifed by ‘money doctors’ from the Bank of England, the Banque de France or the Federal Reserve: people such as Niemeyer, Siepmann or Strakosh, whose names litter the archives of many inter-war central banks, including that of the Bank of Greece. Some of the new institutions were established to exorcise wartime inflation and restore access to credit; others were born out of the dissolution of empires, or the weakening of ties to imperial colonies; all of them reflected an attempt to ‘return to normalcy’, by rebuilding an international monetary order and restoring cooperation in the aftermath of a devastating world war. This ‘return to normalcy’ proved an illusion. The Great Depression soon challenged the viability of this order and forced many of the new-born institutions to re-evaluate their priorities and their relationship to the state and with each other. The questions facing each one were similar; the answers they gave – less so. Over the next two days, fifteen prominent scholars from eleven countries will present their work on different institutional or national experiences in the inter-war years; I thank them for being here and look forward to listening to their contributions. I would also like to thank the Centre for Culture, Research and Documentation of the Bank of 2/3 BIS central bankers' speeches Greece, and its Director, Mr. Panagiotis Panagakis. Our economic historian and Scientific Advisor to the Historical Archive, Mr. Andreas Kakridis, who is the heart and soul of the conference. The staff at my Office, our valuable Communication Section, the security officers, as well as numerous other colleagues at the Bank of Greece, without whom this conference would not be possible. The Bank of Greece is committed to promoting historical research, particularly research in economic history. Yet the past is most interesting when it informs our understanding of the present and future. Policy reactions to the recent financial crisis were shaped by perceptions – and often misperceptions – of the past, particularly the inter-war years. In this context, I am also pleased to welcome several of my esteemed colleagues from other European central banks, who are joining us for this conference. Their presence honours us and underlines the connection to the present and future of central banking. We will have much more time to talk about this later today, during our panel discussion. But first, let us turn our gaze to the past and start our journey through the inter-war years. I wish everyone a fruitful conference and look forward to stimulating discussions! 1 Page 8 of memorandum by Η. Finlayson, Relations between the State and the Central Bank of issue, dated 10.10.1928, as found in the Bank of England Archive, Niemeyer Papers, OV9-206/2. 3/3 BIS central bankers' speeches | bank of greece | 2,018 | 11 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at a lecture organized by the International Center for Monetary and Banking Studies (ICMB), Geneva, 13 November 2018. | Yannis Stournaras: Lessons from the financial crisis and challenges for the Greek banking sector Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at a lecture organized by the International Center for Monetary and Banking Studies (ICMB), Geneva, 13 November 2018. * * * Ladies and gentlemen, Introduction I am honoured to be here today and have the opportunity to share my thoughts on the lessons from the international financial crisis. I would also like to touch upon Greece’s experience over the past eight years and the key challenges for achieving a successful turnaround of the Greek economy in general, and the banking sector, in particular. However, before we move on, it is crucial that I stress the importance of financial stability as a necessary condition for achieving prosperity and sustainable growth, common goals for all market participants and central bankers. I shall begin this lecture by briefly commenting on the lessons from the international financial crisis and the response of monetary and supervisory authorities. I will then outline the unfolding of the Greek sovereign crisis and its impact on the domestic economy and the banking sector. Subsequently, I will present the authorities’ response, before proceeding to the core of my intervention and the lessons from the Greek banking crisis. Lessons from the international financial crisis The recent financial crisis has been the most severe in seventy-five years. A key question, not only for all of us in this room but also for those who study it or act as policy makers, is “Will it happen again?” My answer is that − if and when it does happen − it will be different. First, a valuable lesson is that, while things may work well if left to the invisible hand, during times of stress that hand seems to lose its grip, in the words of Ahamed Liaquat in his Pulitzer – award “Lords of Finance”. Policy makers around the world have learned their lessons from the Great Depression: a financial system in distress requires active central bank intervention. Central banks thus acted quickly and forcefully. They developed their toolkit with a combination of more flexible, effective and innovative measures and enormous firepower. Given the success of these policies, some of these instruments may be permanently included in the new standardframework, and thus equip policy makers with the tools to engage in proper and timely action. All in all, there is no strong case for a fundamental change in the monetary policy framework. Central banks are expected to continue to use the asset side of their balance sheets, as well as other tools such as forward guidance, in addition to their standard interest rate policies, as the effective lower bound will likely continue to be a binding constraint on interest rate policy in a low inflation, low interest rate environment. Going forward, central banks are likely to proceed to the downsizing of their balance sheets in gradual and cautious steps. In any case, even taking into account the hazards, sustaining the present high levels of central bank assets creates benefits for the economies and financial markets alike. These benefits relate to the maintenance of accommodative liquidity conditions for banks and the economy, as well as the avoidance of financial turbulence in the event of a sudden rise in interest rates in the markets. Second, we as central bankers have gained a much better understanding of how the financial system operates and how risks to the stability of the financial system may develop. A lot has been done to make the system much safer than it was 10 years ago and as resilient as possible. 1/7 BIS central bankers' speeches Such work has progressed in various directions, including not only more effective regulation but also higher capital and liquidity buffers for banks, early warning systems and the development of macroprudential tools to increase resilience to shocks when they occur. This was evident in the results of the 2018 EU-wide stress tests which show that banks have become more resilient to financial shocks over the past two years. Third, we have also taken bold steps to strengthen the Eurozone. At the national level, euro area countries have stepped up structural reform efforts in the labour and product markets to boost productivity and in the fiscal sector to make public finances more robust. The Banking Union (with a single supervisor, a Single Resolution Mechanism and – a yet-to-be-established but of utmost importance – common European Deposit Insurance Scheme) has helped create a better integrated, more efficient and well capitalised European banking sector. Coupled with the completion of the Capital Markets Union, it can support the single market and fund investment and growth. Fourth, many challenges remain and a lot still needs to be done. The financial system continuously innovates and the work of regulators comes with a lag. In fact, certain large financial institutions that conduct activities similar to banks but have no banking license – what we call shadow banks – remain insufficiently monitored and under-regulated. Challenges also remain outside the financial system, with for instance geopolitical risks still elevated, trade disputes or cyber-risks. As central banks, we have to be prepared for all contingencies. Fifth, an important lesson is the need to safeguard the independence of central banks both with respect to political influence but also with respect to business interests, which sometimes attempt to capture the supervisory as well as other activities of central banks. Central banks have also a duty to speak the truth to the public, to explain the situation of economies as well as to present their forecasts free from any outside influence. After all this should be part of their communication policy. For someone like me, with deep interest in economic history, it is clear that “those who can’t remember the past are condemned to repeat it”. We need not only the ability to learn from the mistakes of the past, but also the vision to avert repeat mistakes. At the same time, it is our duty to strengthen our safety net and build the tools to reduce the effects and the length of downturns, should risks materialize. The Greek sovereign debt crisis and its repercussions on the real economy and the banking sector Unlike other national crisis-related experiences, the origins of the Greek crisis were not in the banking sector. The Greek crisis was the result of major macroeconomic imbalances, which had accumulated over a long period of time, leading to the outbreak of the sovereign debt crisis in 2010. In an unfavourable international economic and financial landscape, the macroeconomic and fiscal deterioration, coupled with increased investor uncertainty, led to a loss of confidence and capital market access for the Greek sovereign. As a consequence, recourse to external financial assistance was necessary. To tackle the ensuing sovereign crisis, three Memoranda of Economic and Financial Policies (MEFP) including, inter alia, substantial sovereign debt restructuring (the so-called Private Sector Involvement – PSI in 2012) were required. The unprecedented fiscal consolidation that followed, contributed to the magnification of the initial economic shocks, resulting in a cumulative real GDP decline of over 25%, historic high (postwar) unemployment levels and a substantial drop in gross disposable income. In a nutshell, one could say that, at a national level, the Greek crisis has been more severe than the Great Depression. 2/7 BIS central bankers' speeches As anticipated, the banking sector took a heavy toll. A large-scale deterioration of Greek banks’ fundamentals, in general, and asset quality ratios, in particular, took place. The domestic sector recorded an NPE ratio of approximately 45% in 2016, severely limiting banks’ capacity to internally generate capital. Due to a liquidity squeeze, the intermediary role of banks has been undermined and the channels for financing the real economy have been impaired. In addition, deposits fell substantially by some €117 billion (a 49% decline), between September 2009 and December 2015, in part because of depositors’ uncertainty about the macroeconomic environment and the prospects of Greece within the euro area. In this context, it is worth mentioning that the ability of financial institutions to provide liquidity to the real economy was further constrained by procyclicality. During prolonged recessions the capital base is used as a safety margin to deal with unexpected risks. As a consequence, even higher capital adequacy levels have to be met, thus rendering it even more difficult for banks to finance the real economy. The protracted recession, coupled with austerity measures, resulted in a significant increase of non-performing loans and impairments, thus undermining profitability. The banking system began experiencing losses in the first quarter of 2010, and the capital base started to be eroded. Despite efforts to support operating profitability, the high level of loan loss provisions resulted in a series of loss-making results at least up until the end of 2015. Moreover, due to the unfavourable macroeconomic environment, there has been a significant credit contraction since the end of 2010, with an accumulated decrease of the outstanding credit to the private sector of about €54bn (or a decline of more than 20%) for the period December 2010 to December 2015. Demand for credit by enterprises has been dropping as business risk increased; households also reduced their demand due to uncertainty about their future economic situation and debt servicing capacity. In addition, the imposition of capital controls at end-June 2015 hampered economic activity. The effects appear to have been less severe than initially expected, due to the positive contribution of net exports and lower-than-expected decline in consumer spending; however, adverse effects were observed in the business environment and particular sub-sectors such as shipping and financial services. The authorities’ response Over the past eight years, the economic adjustment programmes that have been implemented in Greece aimed at addressing the twin deficits (i.e. fiscal and current account) and structural weaknesses from which the economy has suffered for decades. The achievements so far have been remarkable: • Unprecedented fiscal consolidation: Over the period 2013–2017, the primary deficit of the general government was eliminated and, for the first time since 2001, general government primary surpluses were recorded for five consecutive years. • Gains in external competitiveness: The current account deficit, which exceeded 15% of GDP in 2008, was all but eliminated, underpinned by a recouping of the sizeable cumulative loss in labour cost competitiveness vis-à-vis our trading partners and an increase in the share of exports to 33.2% of GDP from 19% of GDP in 2009. As a consequence, openness has improved substantially and the economy has started to rebalance towards tradable, export-oriented sectors. • Structural reforms, notably in the labour market, but also in product and services markets, as well as in public administration, have been undertaken. Important reforms of the tax system, tax administration as well as in the social security system, have been also implemented. In a similar vein, the Bank of Greece has taken prompt and effective action to safeguard financial stability. The banking system has been restructured, consolidated and recapitalized, following 3/7 BIS central bankers' speeches stringent stress tests along with in-depth asset quality reviews. This enabled the banking sector to withstand the crisis and the flight of deposits. In particular, the authorities’ response to tackle the issue of non-performing loans comprised of three pillars: • Enhancement of the supervisory framework for the management of non-performing exposures (NPEs). The Bank of Greece, in cooperation with the ECB Banking Supervision (the SSM), has issued supervisory guidelines for the internal management of NPEs and has agreed NPE operational targets with banks for the period June 2017 – December 2019, entailing a reduction of NPEs by 37%. The Bank of Greece monitors the implementation of NPE targets and related key performance indicators through an enhanced prudential reporting framework. This framework has been revised to take banks up until end-2021 and fully align Greek banks with the NPE guidance provided by the SSM. • Removal of legal, judicial and administrative impediments to Non-Performing Loan (NPL) management. The household insolvency framework has been improved, legal proceedings have been simplified and accelerated, secured creditor rights have been enhanced, legal protection of bank and public sector employees has been established, the tax treatment of provisions and write-offs is favourable, out-of-court workout and electronic auction platforms have been introduced. • Establishment of a secondary market for NPL servicing and sales. The Bank of Greece has already authorized 14 non-bank NPL servicers, with some portfolios being transferred for servicing either by banks or by purchasers of NPLs. The sale of loans has also been largely liberalized and €12 billion of NPE balances (nominal value) have been sold to third party investors. These developments make it clear that the domestic banking sector has experienced a sea change in the way it is structured, monitored and supervised. Some of these changes were costly and painful: for instance, resolving more than a dozen banks was never going to be pleasant; neither were three rounds of recapitalization, with substantial effects upon private and public equity holdings. However, these initiatives helped both systemic banks and less significant institutions in Greece to build significant capital adequacy reserves and buffers. Moreover, one of the effects of the crisis in the Greek banking sector has been the fact that it has been subjected to a series of tests. In fact, since 2010, Greek banks have been subjected to stress tests six times, four of them accompanied by full blown asset quality reviews. These exercises have been cumbersome and substantial amounts of time and resources have been consumed. These exercises have nonetheless had a few major advantages: First, credit losses have been calculated and recalculated and the possibility of having unanticipated losses is now smaller than ever. Secondly, as a result of a mandatory adverse scenario, buffers for potential additional loan losses have been specified and banks have raised high-quality regulatory capital to support these buffers. Moreover, it is not surprising that Greek banks’ provisioning policies have been radically changed since the Asset Quality Review (AQR) methodology was implemented and total losses were recalculated according to anticipated loss drivers. Lessons learned from the Greek banking crisis Thucydides, the great ancient Greek historian, considered his writings as “a possession for all time” for as long as human nature remains the same. In this vein, we ought to carefully consider what we have learned from the deep and prolonged Greek banking crisis. The first lesson is that a well-designed and decisive policy response can mitigate the impact of 4/7 BIS central bankers' speeches shocks. The Bank of Greece along with other Greek authorities and the European Institutions was involved in the establishment of the Hellenic Financial Stability Fund (HFSF) and in securing the appropriate financial envelope (initially €10 billion and subsequently €50 billion in total) for the recapitalisation and restructuring of the Greek banking sector. The Bank of Greece also conducted in-depth diagnostic studies of the banks’ asset quality as well as stress tests, engaging international consultants with the objective of estimating the impact of the crisis on Greek banks. Moreover, the Bank of Greece developed a comprehensive strategy to implement efficiently the newly established resolution framework for banks and conducted a viability assessment, enabling the smooth resolution of non-viable banks without any depositor losing his/her money. Lastly, the Bank of Greece developed an enhanced supervisory framework for the management of non-performing exposures, including an NPE operational targets framework, acknowledging asset quality as the key driver for banking sector performance. In a nutshell, financial stability was preserved thanks to policies that were commensurate to the underlying risks and that were enacted promptly. The second lesson is the importance of rigorous implementation. For example, the Bank of Greece did not hesitate to resolve non-viable banks, both commercial and cooperative, thus contributing to the consolidation and restructuring of the Greek banking sector. The four systemic banks, managed to attract private capital in three consecutive recapitalisation rounds. This allowed the downsizing of the Greek banking sector via personnel, network and cost rationalisation commensurate to the reduction of domestic economic activity. Furthermore, the Bank of Greece set up a comprehensive reporting mechanism and conducted troubled asset reviews and on-site examinations to closely monitor the implementation of the enhanced supervisory framework for non-performing exposures, thus ensuring that balance sheet repair is the top priority for the management of all Greek banks. Concurrently, the Bank of Greece contributed to the effort of establishing a secondary NPL market via the licensing of NPL servicers and the monitoring of NPL sales and securitisations. We should bear in mind that reforms and initiatives bring about tangible results only if implemented appropriately. Throughout the crisis, the Bank of Greece has been the guardian of financial stability, protecting fully all deposits (regardless of type and size) and supporting the economy and the public interest. Our response was focused upon two major fronts: ensuring adequate provision of liquidity and managing and assisting recapitalization, resolution and restructuring of the banking sector. With respect to liquidity provision, the intervention of the Bank of Greece has been critical in ensuring continuous liquidity provision to banks using one of the oldest tools available, that of the lender of last resort. On various occasions, the Bank of Greece has provided Emergency Liquidity Assistance (ELA) to the banking system. This has helped preserve financial stability and contributed to the avoidance of a banking crisis. With respect to managing and assisting recapitalization, resolution and restructuring, the Bank, in the context of the adjustment programmes, aimed at strengthening viable institutions and winding down non-viable institutions, whilst safeguarding financial stability. To this end, viability assessments and capital needs assessments were undertaken. Following an assessment by the Bank of Greece of each bank on the basis of specific regulatory and business criteria, those banks deemed non-viable were resolved and eventually absorbed by systemic banks. The resolution tool used had to meet two main criteria. First, resolution had to be done in such a way as to ensure continued stability of the financial system. To that end, as a rule, deposits from resolved banks were transferred to systemic banks. This process also ensured a minimum of disruption for customers of resolved banks. With 14 such resolutions having successfully taken place since 2011, this process has also facilitated considerable restructuring of the banking system, eliminating excess market capacity. 5/7 BIS central bankers' speeches Those banks deemed viable were recapitalized. The first round of recapitalization, following, inter alia, the impact incurred from the Private Sector Involvement (PSI), was completed in June 2013. A combination of both private capital and resources from the Hellenic Financial Stability Fund were used. The second recapitalization took place in 2014, following a macro-prudential stress test, but involved only private equity capital injections. A further recapitalization took place at the end of 2015. Following agreement on the third adjustment programme, a financial envelope of €25 billion was provided for the banking system. In August 2015, the ECB launched an Asset Quality Review and stress-test exercise for the four systemic Greek banks. The result of this exercise was the identification of capital needs under both a baseline and an adverse macroeconomic scenario. The actual amount of capital raised was that identified under the adverse scenario, namely €14.4 billion. Thanks to the coordinated efforts of the Greek authorities, including the Bank of Greece, successful rights issues resulted in the full coverage of the shortfall by December 2015, with private investors subscribing €9 billion. These efforts minimized HFSF participation and helped to restore confidence in the longer-term viability of Greek banks. Following three rounds of recapitalization, Greek banks now have relatively high capital ratios and maintain buffers sufficient to absorb additional credit losses, as the 2018 pan-European stress test indicated. They have also markedly improved their liquidity position, reducing their reliance on central bank funding, regaining access to the interbank market and issuing securitizations and covered bonds, three of which have already been assigned with an investment grade rating. Concurrently, customer deposits have been gradually increasing. Challenges for the banking sector going forward Towards the road to recovery the Greek banking sector faces the following closely interlinked challenges: • Reducing the elevated stock of non-performing loans. • Restoring the intermediation role of banks. • Developing a sustainable business model. The efficient management of NPEs is of utmost importance for banking sector stability, economic growth and social cohesion. As of June 2018, the NPE stock stood at €88.6 billion, reduced by 6.1% since December 2017 and by 17.3% from its peak (March 2016). So far, NPE reduction has been mainly driven by write-offs and to a lesser extent by loan sales. This partly explains the stickiness of the domestic NPE ratio at 47.6%, which remains one of the highest in the euro area. Despite the progress so far, we still have a long way to go. Greek banks have already submitted revised NPE operational targets covering the period up to 2021. Loan sales, collections, collateral liquidation and curing are anticipated to contribute more extensively towards NPE reduction, at ratios around or lower than 20% of total non-performing exposures. Balance sheet repair will bring many benefits to banks. Firstly, it will reduce credit risk cost, which remains far higher than pre-crisis levels and consumes most of banks’ pre-provision income. The prohibitively high credit risk cost feeds into lending spreads, increasing the funding cost of non-financial corporates and households and thus reducing loan demand and competitiveness. Secondly, it will underpin banks’ net interest income, since impaired assets are typically not interest bearing. Thirdly, it may reduce the funding cost of banks alleviating concerns regarding their asset quality and long-term resilience. Fourthly, it will reduce the administrative burden and operating cost for handling non-performing assets. Last but not least, the elevated stock of NPLs diverts management attention from the pursuit of profitable growth opportunities. After all, banks are not supposed to be distressed-assets managers. 6/7 BIS central bankers' speeches Moreover, one of the main channels through which high NPLs can have a feedback effect on the macroeconomic environment is through their impact on bank lending capacity to the economy. NPLs can weigh negatively on the supply of credit by locking in bank capital and funding in the financing of non-productive assets. In addition, high NPLs distort credit allocation, as non-viable firms are kept artificially alive in an attempt by banks to avoid or delay loss recognition on these loans at the expense of firms that are competitive and have better growth prospects. This brings us to the necessity of restoring the intermediation role of banks in an economy that is suffering from a significant savings – desirable investment gap as well as continuous deleveraging. It is well documented that a credit-less recovery is weaker, mainly because the lack of bank credit affects investment. Yet such a recovery can hardly be tolerated given other drags on potential output growth, such as the high public debt ratio and the negative demographic trends. The improvement in the liquidity position of banks on the back of gradually increasing deposits, enhanced access to the secured interbank market and a handful of covered bond and securitization transactions is encouraging. Crucially, the elimination of the recourse to ELA will allow banks to design and implement credible medium-term credit expansion plans. Against this backdrop, financing of non-financial corporates for working capital or investment projects would be given priority. That said it is also important to restore the access of the household sector to credit after a protracted period of almost a complete standstill. That brings us to the challenge for bank managers to come up with a sustainable business model for Greek banks. In the midst of the crisis, Greek banks were obliged to reduce substantially their international operations as well as non-core domestic activities, as part of their restructuring plans agreed with DG Competition in the context of State aid support approval. As a result, domestic traditional banking activities contribute the bulk of their operating profitability and will continue to do so in the foreseeable future. Undoubtedly, banks face a challenging, to say the least, operating environment in Greece, while some of their best customers, i.e. large extrovert non-financial corporates, can tap the international bond markets directly at relatively favourable terms. Against this backdrop, a digitalization drive coupled with other cost containment efforts can further improve banks’ efficiency, which already compares favourably with their European peers. The development of fee-based businesses (e.g. asset management, bankassurance etc.) could also contribute to the diversification of their revenue sources. Needless to say, restoring credit intermediation is a “sine qua non” for long-term sustainability. Concluding remarks Ladies and gentlemen, I feel we have gone a long way towards facing a series of challenges and tasks. For us, the ultimate goal in meeting these challenges is to shape a competitive economy, attractive to foreign direct investment, with its income per head gradually converging to the rest of the Eurozone, fully sustainable public finances not only in the short run, but also in the medium and long term, full access to international financial markets under sustainable terms, and a banking sector which will be in a position to undertake efficiently its main task, namely the financing of the real economy. I will conclude by saying that the improvement of the Greek banking sector landscape, the restoration of confidence and the elimination of certain risk factors are positive elements that are expected to be a prime driver for growth of the Greek economy. 7/7 BIS central bankers' speeches | bank of greece | 2,018 | 11 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at The Economist: Southeast Europe-Germany Business and Investment Summit "Reassessing Europe's priorities", Berlin, 3 December 2018. | Yannis Stournaras: What lies in store for the eurozone? An assessment of the Greek bailout programmes: has EU become wiser? Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at The Economist: Southeast Europe-Germany Business and Investment Summit "Reassessing Europe's priorities", Berlin, 3 December 2018. * * * Over the past eight years, Greece has implemented a bold economic reform and adjustment programme that has eliminated flow macroeconomic imbalances, namely the large twin deficits, and has improved sharply wage and price competitiveness. In addition, it consolidated and recapitalized the banking system. Still, stock imbalances remain, such as high public debt and a high non-performing loans ratio. Also, despite the successful conclusion of the third adjustment programme in August, Greek government bonds are still below investment grade and bond spreads remain close to 400 basis points. Moreover, the cost of the adjustment programme in terms of output and unemployment losses has been much higher than in the other euro area Member States that also implemented adjustment programmes. I will start today by providing a brief overview of the progress achieved so far. I will then discuss the current economic conditions and prospects, as well as the challenges ahead. Next, I will highlight what, in my opinion, went wrong during the programme implementation in spite of overall success, and I will also refer to certain weaknesses of the EMU architecture. Before concluding, I will present a number of proposals for enhancing the functioning of the EMU. 1. Progress since 2010 Over the past eight years, Greece has implemented a bold economic reform and adjustment programme that has eliminated fiscal and external deficits and improved competitiveness. However, some crisis legacies remain unaddressed, as I will explain later. In more detail: • The general government balance recorded a small surplus for a second consecutive year in 2017 (0.8% of GDP) from a deficit of 15.1% of GDP in 2009. The primary fiscal balance as a percentage of GDP has improved by about 14 percentage points since the beginning of the sovereign debt crisis outperforming the ESM programme’s fiscal target for three years in a row. The 2017 primary fiscal outcome (according to ESM programme definition) recorded a surplus of 4.1% of GDP, well above the target of 1.75% of GDP. • The current account deficit has fallen by 13 percentage points of GDP since the beginning of the crisis. • Labour cost competitiveness has been fully restored and price competitiveness has recorded substantial gains since 2009. This outcome was mainly driven by labour market reforms, which liberalised employment protection legislation and facilitated a more flexible and decentralised wage bargaining system. • A bold programme of structural reforms and privatisations has also been implemented. Reforms cover various areas, such as the pension system, the health system, goods and services markets, the business environment, the tax system, the budgetary framework and public sector transparency. As a consequence of the above, openness has improved substantially and the economy has started to rebalance towards tradable, export-oriented sectors. The share of total exports in GDP increased from 19.0% in 2009 to 34.2% in 2017. Exports of goods and services excluding the 1/8 BIS central bankers' speeches shipping sector have increased by 54% in real terms since their trough in 2009, outperforming euro area exports as a whole. The share of tradable goods and services in the economy has increased by 10% relative to non-tradables in terms of real gross value added since 2010. On account of improving economic conditions and the reforms implemented, the unemployment rate, although still quite elevated, declined to 19.0% in the second quarter of 2018from 27.8% at the end of 2013. The banking system has been restructured and recapitalised and its corporate governance has been enhanced. Following three rounds of recapitalisation, Greek banks have capital ratios above the euro area average and maintain buffers sufficient to absorb additional credit losses, as the recently completed pan-European stress test indicated. They have also markedly improved their liquidity position, regaining access to the interbank market and issuing covered bonds; as a consequence, they have reduced their reliance on central bank funding. However, nonperforming exposures (NPEs), one of the most important legacies of the crisis, remain banks’ most significant challenge. A number of important reforms have been implemented, aiming to provide banks with a variety of tools to meet this challenge. These reforms include, among other things, the establishment of a secondary market for non-performing loans (NPLs) and the subsequent licensing of fourteen credit servicing firms, the operation of an electronic platform for out-of-court settlement, and electronic auctions of real estate collateral. These efforts have started to bear fruit: According to end-September 2018 data 1, there is continued progress in the pace of NPE reduction - the stock of NPEs decreased by 4.7% compared to end-June 2018, reaching €84.7 billion or 46.7% of total exposures. Despite the fact that this is a very high ratio the reduction amounts to 21% or €22.5 billion compared to March 2016, when the stock of NPEs reached its peak. The key driver of NPE reduction so far has been write-offs. Going forward, NPL sales (incl. securitisations) will play a more important role, coupled with collections, collateral liquidation and curing of loans. The pace of NPE reduction is anticipated to accelerate based on the revised and more ambitious NPE targets submitted by banks and covering the period up to 2021. 2. The current state and the outlook of the economy have both improved Following the stagnation of 2015-2016, GDP growth turned positive in 2017 (1.5%) and accelerated to 2.2% (y-o-y) in the first half of 2018. GDP growth in the first half of 2018 was driven, primarily, by exports of goods and services and, secondarily, by private consumption. The continued economic expansion is reflected not only in GDP figures, but also in the performance of several key indicators of economic activity, such as: industrial production, retail sales and dependent employment flows in the private sector as well as in several soft data indicators such as manufacturing PMI, economic sentiment and consumer confidence2. The Eurogroup decision of 21 June 2018 had a positive effect on confidence as it ensured the sustainability of Greek public debt, at least in the medium term. Moreover, the improved outlook for the economy boosted economic sentiment leading to an increase in bank deposits by the non-financial private sector, improved Greece’s credit rating and led to a reduction in banks’ dependence on central bank financing. Despite these positive developments, several other banking and financial indicators provide a mixed picture. For example, the annual change of bank credit to the non-financial private sector remains negative and bank lending rates edged up in September. Moreover, government bond yields have been volatile and rose further, amid broader investor concerns related to political risks in Italy and increased volatility in emerging markets, as well as concerns about possible reversal of legislated measures in Greece after the end of the programme. Thus, Greek 2/8 BIS central bankers' speeches businesses and households still face overly high borrowing costs, suggesting that the Greek economy has still not fully overcome the crisis. Looking forward, the Bank of Greece expects economic activity to pick up in the medium term. Growth will be driven by robust export performance, benefiting from continued global expansion and competitiveness gains; solid private consumption growth, supported by rising employment and gradually rising compensation per employee; and increased investment spending, reflecting the realisation of new investment projects, thanks to the gradual improvement in both confidence and financing conditions. The outlook is subject to downside risks relating to delays in reform implementation and privatisations and a possible backtracking from previous commitments, including, in particular, court decisions on previous pension reforms. There are also external risks related to the increased volatility and tensions in international financial markets, an increase in global interest rates due to monetary policy normalisation, spillover effects from Italy, a slowdown of the global economy due to the rise in trade protectionism worldwide, geopolitical developments and a possible resurgence of refugee flows. 3. Crisis legacies and challenges ahead Despite the progress of the Greek economy since 2010 and the debt relief measures decided by the Eurogroup, there are still important crisis-related legacies, such as high public debt, the high stock of non-performing loans, high unemployment, a brain drain, a large investment gap, and relatively high poverty rates in the population. Moreover, non-price or structural competitiveness is still low compared with our European peers and has receded over the past two years, according to the Doing Business report of the World Bank and the Global Competitiveness index of the World Economic Forum3. Domestic saving is insufficient to meet the investment needs of the Greek economy; hence, it is crucial to attract foreign direct investment by cutting red tape and accelerating the privatisation programme. In the long term, the projected demographic decline (due to population ageing and outward migration) will exert downward pressure on potential growth, which could, however, be offset by high investment and total factor productivity growth, as well as by raising labour force participation (especially female) and reducing structural unemployment. It is therefore crucial to continue implementing the necessary structural reforms to boost TFP growth. Nonetheless, the main challenge for the Greek economy in the immediate future is the sustainable return to financial markets. Despite the successful conclusion of the ESM programme last August and the Eurogroup debt relief measures, Greek government bonds have still not obtained investment grade status and yields remain elevated and volatile, affected by the recent turbulence in international financial markets and in Italy in particular. 4. Missteps and delays Greece had to remain in an adjustment programme for eight years, unlike Cyprus, Ireland and Portugal, that completed their respective programmes much earlier, despite having entered these programmes later than Greece. Moreover, despite the implementation of three economic adjustment programmes over the past eight years, Greece has still not managed to return to international financial markets on sustainable terms. In addition, the economic cost of the adjustment effort is unprecedented during peacetime. Between 2008 and 2016, Greece lost over one fourth of its GDP at constant prices, and the unemployment rate rose by nearly 16 percentage points. Furthermore, GDP per capita at 3/8 BIS central bankers' speeches purchasing power parity declined to 68% of the EU average in 2016, down from 93% in 2008. A number of Greek-specific and European factors account for this large economic cost and the lagging behind other euro area countries: First, the size and speed of the fiscal consolidation were unprecedented, explaining why the recession was so deep compared with other programme countries. This primarily had to do with the fact that the initial macro imbalances were much higher in Greece than in those other countries. Second, the fiscal multipliers turned out to be higher than initially anticipated, implying that the reduction in primary deficits had a larger recessionary impact on the economy. As a result, the economy soon became trapped in a vicious circle of austerity and recession. Third, there were certain mismatches in the design of the economic adjustment programmes. Given the size of the fiscal imbalances back in May 2010, when the first economic adjustment programme was initiated, more emphasis was placed on tax rate increases, pension reform, streamlining budgetary procedures, increasing fiscal transparency, as well as on financial sector restructuring. Less emphasis was placed on growth-enhancing reforms, tax collection and tax evasion, and on reorganising the public sector. Fourth, the idiosyncratic sequencing of structural reforms led to real wages declining more than initially planned, deepening the recession. In particular, more emphasis was placed on labour market than on goods and services market reforms. Hence, prices declined both at a slower pace and by a smaller degree than nominal wage costs did. As a result, households experienced a massive drop in purchasing power, which had not been foreseen. This, in turn, constrained personal consumption and deepened the recession. Fifth, the non-performing loans (NPL) problem proved more difficult that initially anticipated. It was mainly the outcome of economic contraction, but it was also propagated by legislative changes such as the blanket moratorium on auctions and the abuse of protection law 3869/2010. Several other legal and judicial impediments exacerbated the NPL problem 4. A more forceful reaction during the first years of the crisis by implementing the required legislative changes much earlier and introducing a centralised asset management framework for NPEs as other Member States had done could have reduced the problem we are facing today. The Bank of Greece believes that there is still ample scope for introducing such a systemic solution now and has recently presented a scheme to deal with the high volume of NPEs, in addition to banks’ endogenous efforts, in order to achieve a rapid convergence of the Greek NPE ratios to the European average. Sixth, certain reforms fell behind the agreed time schedule due to several factors, including: insufficient ownership of the necessary reforms; populist rhetoric, rivalry and failure to reach an understanding among political parties; and the various – small and large – vested interests that resist reform. Seventh, at the same time, political economy deliberations in the euro area have played their part in delaying the recovery of the Greek economy. The Eurogroup decision of November 2012 to grant further debt relief was put off for several years and was actually implemented only in June 2018. This was partly due to delays and to mixed signals occasionally received from Greek political parties on the commitment to reform. However, and rather more importantly, it also reflects forthcoming elections and populist voices in a number of euro area Member States. Overall, this development undermined the growth prospects of the Greek economy and extended the duration of the crisis. Eighth, at the start of the Greek sovereign debt crisis in 2010 the euro area authorities objected to any type of intervention to contain the rapidly rising Greek government debt. Instead, emphasis 4/8 BIS central bankers' speeches was placed on drastically correcting fiscal imbalances. Hence, on account of all this, the much larger than initially anticipated recession over the programme years and the rather unorthodox negotiations of the first half of 2015 that led to the third economic adjustment programme, the Greek debt rose to 176.1% of GDP at the end of 2017 from 126.7% of GDP in 2009, thus requiring further debt relief, which was actually provided in June 2018. If, for instance, this kind of debt relief was given in the beginning of the first adjustment programme, it would have had a more positive impact on the economy, possibly limiting output and employment losses. Last, but not least, the Stability and Growth Path (SGP) failed to avert the soaring public debt in the pre-crisis period. Furthermore, there was no monitoring and control over macroeconomic imbalances, such as the evolution of the current account and the private debt. When the Greek crisis broke out in 2010, euro area crisis management and resolution tools were rather non-existent on account of moral hazard concerns and in the absence of the appropriate institutional setting. Moreover, there was no provision for risk-sharing in the initial EMU architecture. Instead, the ECB stepped in to contain the spill over risk to the rest of the euro area. 5. EMU: past reforms and some proposals for improving the euro area architecture A lot has been done in recent years following the Greek crisis to improve the functioning of EMU. Key initiatives were the provision of intergovernmental loans to Greece, the establishment of the EFSF, and its successor the ESM, the creation of the (still incomplete) Banking Union and the application of stricter rules on banking regulation and supervision, the establishment of the European Systemic Risk Board and the development of appropriate macro-prudential instruments which allowed greater emphasis on identifying and addressing system-wide risks. The ECB developed new monetary policy instruments to deal with the very low inflation and growth, and the SSM assumed responsibility for all systemic banks, thus addressing the home bias issue in supervision. More recently, the European Commission, in view of the Multiannual Financial Framework for the period 2021-2027, tabled proposals to establish a Reform Support Programme and a European Investment Stabilisation Function. The new EU budgetary tools aim at supporting stability in times of stress through investment continuity and providing incentives for domestic structural reforms. Nonetheless, the architecture of EMU is still incomplete in many respects and euro area policy makers cannot rely solely on ECB interventions. It is essential to ensure that the economic rebalancing mechanism (i.e. the Macroeconomic Imbalances Procedure) operates more symmetrically, i.e. both for member-states with external deficits and for those with external surpluses. Up to now, the burden of adjustment has fallen, to a very large degree, on Member States with current account and budget deficits (like Greece on the eve of the crisis), while Member States with high (compared to the Macroeconomic Imbalances procedure limits) current account surpluses could have responded more appropriately. After the crisis, we have seen a home bias in investment and a flow of euro area excess savings towards the rest of the world rather than within the EU (from higher to lower GDP per capita countries). This has also led to a reversal of the degree of financial integration and income convergence among the euro area Member States. Therefore, there is a priority to complete the Banking Union with a European Deposit Insurance Scheme and the Capital Markets Union in order to restore intra-European financial flows, to improve stability in the banking sector and to promote private risk-sharing in the EU. In this context, the role of the ESM could be further enhanced, and among other things, to support Banking Union with a backstop facility. EMU should also enhance public sector risk-sharing by creating a centralised fiscal stabilisation tool. The European Investment Stabilisation Function, once fully and efficiently operative, could 5/8 BIS central bankers' speeches be transformed into such a tool. Other proposals involve a European unemployment insurance scheme and the issuance of European “safe” bonds. These proposals deserve our attention. As regards Member States, national ownership and credible implementation of country-specific recommendations is crucial both for promoting economic policy coordination and for risk reduction. Therefore, national policies should focus on: a) structural reforms aimed to improve the flexibility of domestic markets and to reduce vulnerabilities in the financial sector in order to facilitate the adjustment of the economies to future shocks; and b) sound pro-growth fiscal policies that allow for stabilisation over the business cycle and, at the same time, ensure debt sustainability. 6. Conclusions and policy lessons In conclusion, the main policy messages from the Greek crisis are the following: • Delaying the needed adjustment only magnifies the problem, which will then have to be addressed later on less favourable terms. • The proper sequencing of the reform programme as well as ownership mainly by the government but also the main opposition parties, is key to its success. • Greater risk-sharing in the euro area to address large asymmetric shocks and political solidarity in the EU to help countries in difficulty rather than pointing the finger at them (which in fact propagates populist voices in both camps) are of utmost importance in order to ensure the success of our common European endeavour. • In this regard, private and public risk-sharing should be enhanced by moving forward with the Banking and the Capital Markets Union, and by creating a centralised fiscal stabilisation tool. To avoid moral hazard, risk-sharing should go hand-in-hand with risk reduction and close economic policy coordination. Moreover, we need to improve income convergence and to ensure that economic rebalancing operates symmetrically. • Last but not least, a final point on Greece: in order to bolster investors’ confidence in the prospects of the Greek economy and to be able to refinance maturing debt on sustainable terms, Greek governments must continue the implementation of reforms and avoid reneging on programme-related commitments. Sources: Bank of Greece (2018), Monetary Policy 2017-2018. https://www.bankofgreece.gr/Pages/en/Bank/News/PressReleases/DispItem.aspx?Item_ID=6112& 57fb-4de6-b9ae-bdfd83c66c95&Filter_by=DT. Bank of Greece, (2018), Report on Operational Targets for Non-Performing Exposures, 6 September. www.bankofgreece.gr/Pages/en/Bank/News/PressReleases/DispItem.aspx? Item_ID=6170&List_ID=1af869f3-57fb-4de6-b9ae-bdfd83c66c95&Filter_by=DT Cahen, D & de Larosière J. (with the support of Lucie Truchet) (2018) “Ensuring a viable EMU: are we on the right track?” Eurofi Regulatory Update, September 2018. www.eurofi.net/wpcontent/uploads/2018/09/EUROFI_REGULATORY_UPDATE_VIENNA2018.pdf. 6/8 BIS central bankers' speeches Cœuré, B., (2018), Interview with the newspaper Kathimerini (Eirini Chrysolora), 5 September 2018. www.ecb.europa.eu/press/inter/date/2018/html/ecb.in180905.en.html Draghi, M., (2018) “The Benefits of European Supervision”, Speech at the ACPR Conference on Financial Supervision, Paris, September 2018. https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180918.en.html Draghi, M., (2018) “Monetary policy in the euro area”, Speech at the ECB Forum on Central Banking, Sintra, June 2018. https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180619.en.html Draghi, M., (2018), Introductory Statement, Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 9 July 2018. www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180709.en.html Draghi, M., and L. de Guindos, (2018), Introductory Statement to the press conference. 13 September 2018. www.ecb.europa.eu/press/pressconf/2018/html/ecb.is180913.en.html de Guindos, L., (2018). “The euro area: current status and challenges ahead, Speech at La Granda courses, Asturias, August 2018.https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180831.en.html European Commission (2018), Deepening Europe’s Economic and Monetary Union, Commission Note ahead of the European Council and the Euro Summit of 28-29 June 2018. https://ec.europa.eu/commission/sites/beta-political/files/euco-emu-booklet-june2018_en.pdf European Commission (2017). Commission sets out Roadmap for deepening Europe's Economic and Monetary Union, 6 December 2017 europa.eu/rapid/press-release_MEMO-175006_en.htm European Commission (2015), Completing Europe’s Economic and Monetary Union. Report by Jean-Claude Junker in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz. 22 June. Juncker, J.C., 2018. The hour of European sovereignty, State of the Union Address, 2018. 12 September 2018. ec.europa.eu/commission/sites/beta-political/files/soteu2018-speech_en.pdf OECD (2013, 2015, 2017), Going for Growth, Paris. http://www.oecd.org/eco/going-for-growth2017/ http://www.oecd.org/eco/growth/going-for-growth-2015.htm http://www.oecd.org/eco/growth/going-for-growth-2013.htm Stournaras Y., (2018) Monetary policy and bank supervision in Europe after the last financial and sovereign debt crisis, and challenges for the future, Speech at the Economic history conference: “The birth of inter-war central banks: building a new monetary order” Athens, November 2-3 2018. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=547&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b Stournaras Y., (2018) Interview with the newspaper “Fileleftheros” (Konstantinos Mariolis), 14 September 2018. 7/8 BIS central bankers' speeches www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx? Item_ID=537&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b Stournaras Y., (2018) Interview with the newspaper “Kathimerini” (Eirini Chrysolora), 19 August 2018. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=536&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b Stournaras, Y., (2018) Interview with the Japanese newspaper NIKKEI (Shogo Akagawa), 4 June 2018. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=531&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b Stournaras, Y., (2018), “ Greece and the global economy: Prospects and main challenges ahead”, Speech at an event on the occasion of Accenture’s 25th anniversary in Greece ", 28 March 2018. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=517&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b 1 Greek commercial and cooperative banks on a solo basis. 2 The Greek manufacturing PMI has been in expansionary territory over the past seventeen months, by far the longest period since 2007. Economic sentiment has been on an upward trend since mid-2015, reaching a 3year high in 2017, and it now stands close to pre-crisis levels. Consumer confidence has been increasing since early 2017, reaching in October 2018 its highest level since March 2015. 3 According to the latest Doing Business Report of The World Bank (31 October 2018) Greece ranked 72nd among 190 countries, down from 67th in 2017 and 61st in 2016. According to the latest Global Competitiveness Index of World Economic Forum (17 October 2018), Greece ranked 57th among 140 countries down 4 positions from the previous year. 4 Legal and judicial obstacles relate to the lengthy legal procedures, issues related to the legal liability of bankers, the preferential claims of the State, the absence of specialised courts, the lack of adequate corporate insolvency procedures. 8/8 BIS central bankers' speeches | bank of greece | 2,018 | 12 |
Welcome speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the event "Crisis and structural reforms", organized on the occasion of the publication of the study on "Structural reforms in Greece during the crisis (2010-2014)", commissioned by the Bank of Greece and executed by ELIAMEP, Athens, 27 November 2018. | Yannis Stournaras: Welcome speech - "Crisis and structural reforms" Welcome speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the event "Crisis and structural reforms", organized on the occasion of the publication of the study on "Structural reforms in Greece during the crisis (2010-2014)", commissioned by the Bank of Greece and executed by ELIAMEP, Athens, 27 November 2018. * * * It is my great pleasure to welcome you to today’s event, where we will examine the key findings of the study on “Structural reforms in Greece during the crisis (2010–2014)”, commissioned by the Bank of Greece and executed by ELIAMEP. The study attempts to provide a well-documented assessment of the impact of reforms that Greece implemented during the first two adjustment programmes. In more detail, it provides an overview of the planned and adopted reforms, followed by an assessment of the Single Wage System i.e. the first attempt to create a long-overdue unified wage structure for public servants. It then explores the economic impact of selected product market reforms and examines the impact of labour market reforms on unemployment. It concludes with policy recommendations. *** During the crisis, Greece implemented a number of structural reforms that helped bridge the competitiveness gap and create a favourable investment environment. Reforms have been implemented in almost all areas of economic activity, and most importantly in the labour market, the pension system, healthcare, public and tax administration and the financial sector. It is worth noting that over the past several years, according to OECD, Greece ranks as the member country that had the highest response rate to reform recommendations, even more so when adjusting for the difficulty to undertake these reforms in a recessionary environment and in such a short time span. Indeed, when embarking on the reforms, Greece faced two major challenges: (i) its economy was already in recession, whereas difficult reforms should be best undertaken during upswings [especially if they have adverse short-term effects]; and (ii) the timeframe envisaged for the implementation of significant reforms was very tight. Due to the complexity of these reforms, their spillover effects, and the stakeholder consultation, governments usually require many years of preparation to assess the potential impact of such reforms on the economy and choose the best possible policy instruments. Moreover, prioritizing was not given sufficient consideration, resulting in a lack of focus in the reform agenda and a difficult relationship with stabilization policies. For example, strong emphasis was put on reducing fiscal deficits via tax increases while neglecting reforms to the tax administration, to support the fight against tax evasion and broaden the tax base, both of which are admittedly of utmost importance in the case of Greece. Last but not least, sequencing of reforms played a crucial role, in the sense that labour market reforms were prioritized over product and services market reforms, contrary to analysis that suggested that reforms in product markets tend to facilitate or drive reforms in the labour market1. According to OECD, the existing reforms, along with those envisaged in the programme, are expected to lead to a cumulative increase in real GDP of around 13% within a decade. This effect mainly works via an increase in the total factor productivity. However, there is a fundamental inconsistency relating to time when it comes to the cost-benefit analysis of reform measures: cost is immediate, whereas benefits are only realized in the long 1/2 BIS central bankers' speeches term. Thus, the time horizon over which reforms yield measurable outcomes usually exceeds a government’s time horizon. This is a major disincentive for reforms internationally and has played a major role in Greece in recent years. This also explains why some reforms, although legislated, were effectively not fully implemented. In addition, the cost is beared by few but the benefits are reaped by many. However, those few that are directly affected from a reform are vocal in their opposition, while those who benefit in the long run do not advocate the benefits with the same tenacity. These opposing forces may explain the inertia of the status quo. *** Greece completed the financial support and adjustment programmes with a favourable legacy of adopted reforms. And although many things have changed, several reforms still need to be reinforced, given the poor initial conditions. In other words, the performance has been impressive in terms of first differences but, given the initial low level of structural competitiveness, Greece still lags behind its peers. Hence, the reform process must be pursued until the final goal is achieved, i.e. a competitive and dynamic economy that is able to stand on its own two feet. Political and social awareness that the Greek economy cannot return to the previous status quo is widely accepted, after the implementation of three adjustment programmes. I hope that this will suffice to bring about sustained support to reforms among Greek policy makers and Greek citizens. Before giving the floor to the distinguished speakers, please allow me to thank the researchers who have worked for this study, ELIAMEP and its President, Professor Loukas Tsoukalis, and last but certainly not least, Professor Jean Pisany Ferry, who is the keynote speaker today. 1 See, among other, Blanchard and Giavazzi 2003, Boeri 2005,Fiori et al. 2007. 2/2 BIS central bankers' speeches | bank of greece | 2,018 | 12 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event "Tackling NPLs within the Greek Banking System", hosted by the Hellenic Bank Association and facilitated by PwC, Athens, 24 January 2019. | Yannis Stournaras: A systemic approach towards improving asset quality of Greek banks Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at an event "Tackling NPLs within the Greek Banking System", hosted by the Hellenic Bank Association and facilitated by PwC, Athens, 24 January 2019. * * * It is a real honour for me to participate in this event and to be given the opportunity to discuss the crucial issue of dealing with non-performing loans (NPLs), by far the most significant legacy of the crisis and a major constraint on the efforts of the real economy to achieve faster and sustainable growth. The completion of Greece’s third financial support programme signaled the end of a long period of adjustment for the Greek economy. In this context, several structural reforms have been implemented, although further changes will be needed in the years ahead. This is our only option if we are to ensure that the progress achieved thus far will not be reversed. The protracted and deep crisis that Greece experienced over the past ten years has brought about three major changes that are relevant to its growth model. First, bank lending, which used to be the main source of financing for households and businesses, has declined dramatically. Second, private investment has shrunk. Third, the production structure has become more outward-oriented, although this has occurred against a background of recession in the domestic economy. Starting with the changes in the real economy, the transition to a new, more extrovert growth model has already begun and can be expected to continue. However, developments in productive investment, as a key driver of growth, have been less encouraging, pointing to a need for more progress in this area. In 2017, net capital investment of enterprises, i.e. gross investment less depreciation, stood at – 2.8 billion euros or 1.6% of nominal GDP; this disinvestment trend has since strengthened, with net capital investment amounting to –3.7 billion euros or –2.0% of nominal GDP in the second quarter of 2018 in annualised terms. However, in order to increase the capital stock and thus the potential output of the Greek economy, positive net capital investment is indispensable. For this to happen, private investment must grow by about 50% within the next few years. In other words, the Greek economy needs an investment shock, with a focus on the most productive and extrovert business investment, to avoid output hysteresis and foster a rebalancing of the growth model in favour of tradeable goods and services. In an environment of domestic bank lending scarcity and tighter credit standards, businesses have sought to cover their financing needs through alternative types of external financing, in addition to their own resources. At the same time, the domestic banking sector was faced with severe liquidity problems, as banks for a long period of time had limited market access and difficulties, due to lack of eligible collateral, to get financing through the Eurosystem’s main refinancing operations and could only raise funds through the Emergency Liquidity Assistance of the Bank of Greece. In addition, during the adjustment period, credit institutions faced strong pressures on their profitability and capital base, with the combined effect of: (a) continuous outflows of deposits; 1/6 BIS central bankers' speeches (b) the recession, but also the “strategic” choice of non-repayment of loans by a rather significant percentage of borrowers, effectively deteriorating the quality of loan portfolios; (c) the restructuring of public debt; (d) the inability to access international markets; and (e) capital controls. Policy response by the European Central Bank (ECB) and the Bank of Greece was crucial to restoring and strengthening monetary policy transmission to the real economy. At the European level, credit growth has returned to positive territory for some time now, while in Greece it would have been much more negative without the interventions to support the domestic banking system and liquidity. Moreover, the domestic banking sector has undergone a major transformation, characterised by unprecedented consolidation, significant rationalisation of the cost structure and cost-cutting, and a re-orientation of banks’ business model through deleveraging and increased focus on domestic banking activities. Restoring confidence in the Greek banking system crucially hinges upon a successful tackling of the high stock of non-performing loans (NPLs), which are mainly a result of the protracted crisis and its adverse impact on businesses and households. On a positive note, the decline in credit contraction, on an annual basis, which characterised the Greek crisis, appears to have eased, particularly as regards non-financial corporations. In particular, the amount of new originated loans to non-financial corporations with an agreed maturity increased in 2017, and this trend is confirmed for the first eleven months of 2018. Overall, credit to the private sector has contracted by 1.4% on average, slightly more intensely relative to the previous year. Improving asset quality, through effective management of non-performing loans, is the most important challenge for the banking industry today. This will not only ease the burden on borrowers but will also enable credit institutions to free up funds that could be channeled to the most dynamic and extrovert businesses, thereby contributing to the overall restructuring of the economy in favour of the tradable goods and services sectors and raising total productivity and potential growth. The rapid resolution of “bad loans” has been recognised as a matter of paramount importance for restarting the economy and restoring significant and sustainable growth rates. The benefits stand to be even greater in a small and open economy, such as Greece, where bank lending is the predominant source of corporate and household finance. Greek banks have already made substantial progress in reducing their NPLs. I will refer to this substantial progress later. However, and despite the fact that Greek banks fully achieve the targets set by the supervisor, individual bank loan sales, write-offs and curing will not lead to a rapid convergence of their NPL ratio to the European average, which is already less than 4%. If we think that it is desirable for the NPL ratio to converge rapidly to the European average, the Greek authorities must quickly form a consistent and coordinated approach to address the issue of NPLs in a systemic way, on top of banks’ individual efforts. I believe that the Bank of Greece proposal, about a sizable NPL&DTC carve-out, is effective since it systematically addresses two major problems in one go: NPL and DTC reduction. However, if the government decides to adopt the Asset Protection Scheme (APS), we will support it, since it is a step in the right direction. Ideally, both schemes should be assessed and banks should be provided with any alternative consistent with state aid rules and supervisory guidelines. Before proceeding to a brief presentation of the Bank of Greece systemic proposal, I would like to clarify once more that banks have individual plans to reduce NPLs aggressively, and are 2/6 BIS central bankers' speeches executing them with tangible results. The two additional tools under discussion are supporting banks’ efforts aiming at a rapid convergence of their NPL ratio to the European average without diluting private shareholders. The Bank of Greece recently outlined its proposal aimed to rapidly reduce the stock of NPLs through the setting up of several privately managed Asset Management Companies (AMCs) as well as through market-based funding. The proposal is intended to provide a systemic solution to this problem, without imposing any additional burden on the Greek taxpayer. As said before, this proposal effectively addresses two key issues faced by Greek banks: NPLs and deferred tax credits (DTCs), currently accumulated on banks’ balance sheets. At present, capital adequacy ratios remain satisfactory and significant capital buffers are in place, although the probability of posting additional losses is limited by the possibility of triggering legislation on deferred tax credits. Under the current legal framework, a credit institution which in a given financial year records losses as a result of transfer, write-off or impairment of NPLs must increase its capital in favour of the State, by an amount equal to the share of the deferred tax asset, i.e. 29%. In effect, the State receives compensation in the form of new equity, thus diluting private shareholders. It is therefore understood that there is a limitation on credit institutions as regards the effective use of their own funds for the purpose of improving the quality of their balance sheets. Possible conversion of a sufficient portion of these credits into shares would cause the drastic reduction of the participation of private shareholders and the acquisition of an overwhelming majority of equity by the State. Instead, a move along the lines proposed by the Bank of Greece would bring about a direct and drastic reduction in the ratio of non-performing loans and would allow, under certain conditions, to target a single-digit ratio within three years. Moreover, it would establish favourable conditions for supporting operating profitability and internal capital generation, because of improved asset quality and resilience to shocks in the event of a future crisis. Finally, it would enable the reshaping of the business model of banks and alleviate the uncertainty regarding their mediumterm prospects. It should also be noted that the implementation of such an initiative would benefit the sector by correcting what is currently perceived as a large share of DTCs in capital adequacy ratios, while it would allow banks to access market opportunities through a different investment case. The main elements and characteristics of the Bank of Greece proposal are as follows: The proposed scheme envisages the transfer of a significant part of non-performing loans (NPLs) along with part of the deferred tax credits (DTCs), which are booked on the banks’ balance sheets, to a number of Special Purpose Vehicles (SPVs). Loans will be transferred to the net book value (net of loan loss provisions). The amount of the deferred tax asset to be transferred will match additional loss so that the valuations of these loans will approach market prices. Subsequently, legislation will be introduced in order to transform the transferred deferred tax credit to an irrevocable claim of the SPVs against the Greek State with a predetermined repayment schedule (according to the maturity of the transaction). To finance the transfer, the Special Purpose Vehicles will proceed with a securitization issue where (indicative) there will three classes of notes (senior, mezzanine, subordinated junior/equity). The valuation of the loans to be transferred will be carried out by independent third parties and the final structure of the transaction (including the tranches of the three classes of notes) by the arrangers subject to market conditions. It is anticipated that private investors will absorb part of the upper class of securities (senior) and the vast majority of the 3/6 BIS central bankers' speeches intermediate part (mezzanine). The scheme will be managed exclusively by private investors (servicing companies for loans and credits) and apparently there will be an asset class separation for each transaction and management operation (business, housing, consumer, etc.). It is understood that the mandates to managers will arise following a competitive process and the management framework will be in line with international transparency and supervision practices. It must be noted that, before completion of the transaction, banks are expected to proceed, in consultation with the supervisory arm of the European Central Bank (SSM), to a restatement of targets for NPL reduction, with the ultimate goal of achieving a single digit rate within three years. An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs. In particular, it is estimated that (according to 1st half 2018 data) the following results are expected: Reduction in the stock of NPLs by 47%. Reduction of the coverage ratio to 41% from 49%. Double digit capital adequacy ratios for all systemic banks. Those estimates have not taken into account benefits from staff transfer, strengthening of pre-tax income and possible adjustment of risk weights for risk undertaken upon completion of the transaction. Limit contribution of DTCs to regulatory capital to 30% from 57%. Improvement of NPL management as the Special Purpose Vehicles receive and manage mostly denounced loans. It is certainly positive that very important steps have been taken in recent years in terms of legislation, regulation and actions of credit institutions, towards the effective management of nonperforming loans. The strategy for NPL reduction has so far moved along three lines of action. The first line of action is associated with the strengthening of the existing legislative and regulatory framework governing the management of NPLs. At an operational level, Greek banks now have: set up specialized units for the management of non-performing loans; established clear criteria for the transfer of non-performing loans to these units; adopted the necessary internal procedures and manuals; finalised proper segmentation of non-performing loan portfolios; developed a range of short- and long-term loan restructuring options. It must be noted however that, until recently, a rather disproportionate part of NPL restructurings were of a short-term nature, which, far from offering a real solution to the problem, simply postpones a final decision to the future. Effective management of common borrowers is also a challenge, requiring coordinated action and good cooperation among the multiple creditors involved. The second line of action is associated with the removal of obstacles to active management of non-performing loans. The Bank of Greece, in cooperation with the State, proposed a series of legislative initiatives that aimed at lifting various obstacles to the effective management of NPLs. In particular, by amendments to the Code of Civil Procedures and the Bankruptcy Code, Greek 4/6 BIS central bankers' speeches authorities were able to: (1) enhance the seniority of the rights of secured creditors in the distribution of NPL liquidation proceeds; (2) set up a framework for electronic auctions; (3) introduce an out-of-court workout (OCW) framework in order to accelerate restructuring of all types of debt (owed both to private and public entities); (4) simplify procedures for filing bankruptcy claims for small businesses; (5) establish, under the auspices of the Hellenic Bank Association, a special platform to address the issue of common borrowers; (6) provide legal protection from civil and criminal liability for public sector and bank employees involved in loan restructuring and write-offs. Moreover, the Bank of Greece, in cooperation with the Ministry of Finance, took certain initiatives aimed at removing tax obstacles to the active management of non-performing loans. In particular, differences between the treatment of IFRS (International Financial Reporting Standards) and Greek GAAP (Generally Accepted Accounting Principles) were addressed through relevant legislation in order to allow for proper reporting of accounting losses resulting from loan write-offs and sales. With the latest amendment, deferred tax assets, converted into DTCs, can be offset against the income tax due for a period of 20 years. The same period is also provided for the gradual depreciation of losses due to write-offs and disposals of non-performing loans, provided that the origin of the losses is clearly identified. The third line of action is associated to the development of a secondary market for the management of non-performing loans. Greek authorities established a comprehensive legislative and regulatory framework for the licensing and supervision of servicing companies for NPLs. Specifically, the law lays down different provisions for companies that intend to exercise only loan management and for those who intend to engage in refinancing of such obligations. It should be noted that, based on this framework, there are now sixteen licensed companies operating in Greece, which are supervised by the Bank of Greece and subject to strict rules regarding consumer protection. The development of this secondary NPL market will also facilitate portfolio sales, providing prospective investors with multiple options for effective management. As mentioned before, thanks to the administrative and legislative measures under the three lines of action outlined above, coupled with the significant efforts of supervised banks, substantial progress has been made, as reflected in a reduction in the volume of non-performing loans. NPLs reached €84.7 billion at end-September 2018, down by about €9.7 billion from December 2017 and by around €22.5 billion from their March 2016 peak. The decline in the stock of NPLs during 2018 was mainly due to write-offs (€4.4 billion) and sales (€5.2 billion). The ratio of nonperforming loans to total loans remained high in September 2018 at 46.7%. Greek banks have already submitted revised operational targets for NPLs covering the period until 2021. In the period ahead, loan sales, collections, collateral liquidation and curing are anticipated to be the key drivers for the NPL ratio to drop below 20% by the end of 2021. This figure, however, although significantly lower than today, will still be well above the European average, which, as already mentioned above, is currently less than 4%. The Bank of Greece has repeatedly stressed the importance of a systemic solution to the problem of the high stock of NPLs, if Greek banks are to converge to the EU average in the 5/6 BIS central bankers' speeches foreseeable future. If these targets are achieved, the drastic reduction of the high stock of NPLs will have a major effect on economic activity and productivity, through two channels: (a) an increase in loan supply; and (b) the effective restructuring of major productive sectors. According to Bank of Greece research, the decrease of the NPL ratio would help to reduce financial risks and funding costs for banks, thus improving their internal capital generation capacity. Moreover, it is estimated that a significant reduction of the NPL ratio would improve core profitability on a sustainable basis. Greek banks continue to accumulate loan loss reserves of about 2% of their risk-weighted assets on average on an annual basis. These costs cannot be reduced as long as the NPL ratio is around 40%. Additionally, considering the minimum capital requirements under Pillar 2, there appears to be no reasonable scenario that these requirements will fall, unless there is a significant improvement on the NPL front. This improvement would enable a gradual increase in loan supply and a decline in borrowing costs for businesses and households. At the same time, we can expect a reduction in business and household financial risk as the economy recovers, thus increasing the valuation of their existing assets and their collateral value, due to higher net returns on capital and real estate. As a result, households and businesses will gradually become more creditworthy, and more likely to obtain bank credit to finance their investments. Ladies and gentlemen, A wide array of measures and policies has been successfully implemented so far and we are clearly in a much better position than we were in previous years. However, it cannot be stressed enough that, despite all the reforms completed to address the issue of non-performing loans, the stock of NPLs remains very high compared with the European average. In fact, even if the operational targets are fully attained by the end of 2021, the NPL stock will continue to be significantly higher than any European average benchmark. Therefore, it is of utmost importance that all relevant authorities, Greek and European, take additional policy initiatives, in order to support the banking sector and address the NPL problem in a decisive and systematic way. This will allow banks to focus on what really matters for the future: modern business models, finding new profitable growth opportunities and activities, exploiting digital technologies, and above all, financing the real economy. 6/6 BIS central bankers' speeches | bank of greece | 2,019 | 2 |
Keynote speech by Professor John Iannis Mourmouras, Senior Deputy Governor of the Bank of Greece, at the OMFIF-CAMRI Panel "Trade, China and Brexit: Global Economic Challenges for 2019", Singapore, 25 January 2019. | “Global risks and prospects for 2019” Keynote speech by Professor John (Iannis) Mourmouras Senior Deputy Governor Bank of Greece Former Deputy Finance Minister at OMFIF-CAMRI Panel in Singapore “Trade, China and Brexit: Global Economic Challenges for 2019” Singapore, 25 January 2019 1. Introduction Dear Professors, Distinguished panellists, Ladies and Gentlemen, I would like to thank the Centre for Asset Management Research and Investments at the National University of Singapore and OMFIF for the kind invitation and say that I am very happy to be back in Singapore. I was here in March 2016 upon an invitation from the Lee Kuan Yew School of Public Policy to discuss the role of negative interest rates in terms of the transmission of monetary policy and its impact. Today, my focus is on the main risks for the financial markets this year, which could result in heightened uncertainty across the global economy, prompting certain Cassandras to foretell a global economic downturn and even a recession. The synchronized global expansion of 2017 gave way to a disparate growth picture in 2018. Growth in the United States has remained solid (2.9%), bolstered by fiscal stimulus. In contrast, activity in the euro area has been somewhat weaker than previously expected near 1.7%, owing to slowing net exports. In the emerging economies, growth edged down to an estimated 4.6% in 2018, as a number of countries with elevated current account deficits experienced substantial financial market pressures and appreciable slowdowns in activity. All in all, global growth is projected to moderate from 3.7% in 2018 to 3.5% in 2019, before picking up slightly to 3.6% in 2020, as economic slack dissipates, monetary policy accommodation in advanced economies is removed, and global trade gradually slows. According to IMF estimates, advanced-economy growth will gradually decelerate toward potential, falling to 2% in 2019 as monetary policy is normalized and capacity constraints become increasingly binding. Softening global trade and tighter financing conditions will result in a more challenging external environment for emerging economies with EMEs’ growth expected to tick down at 4.5% in 2019. In China, GDP growth slowed to 6.6% in 2018, its lowest annual rate since 1990. A further moderate slowdown in Chinese growth is expected this year (at 6.2%), as increased trade tensions could offset the positive effects of the stimulus package. Before coming to the analysis of global risks for this year, which is the main topic of my lecture today, a short digression may be in order on the allegedly reduced role of globalisation. Global inflation has generally remained contained in recent months in advanced economies (IMF estimate: 2.0% in 2018), while in emerging market economies, inflationary pressures are easing as a result of lower oil prices (IMF estimate: 4.5% in 2018). According to World Bank and OECD national accounts data, global flows of trade in goods and services measured as a share of gross domestic product (GDP) had been on a steady rise until 2008, when they peaked at about 61% of GDP and have remained sluggish, having fallen to 56.2% in 2016. Similarly, cross-border capital flows show that today globalisation is in retreat. Having reached their peak at 21.4% of GDP in 2007, global capital flows have been following a steady downward trend to 6.9% in 2017. However, and this is my belief, there is a visible rise of powerful regions in economic terms, as the centre of gravity of the economy has been moving to the East, creating new regional blocs around the world’s major superpowers, e.g. China. China has already become an economic superpower and the economies comprising the Association of Southeast Asian Nations (ASEAN), now the world’s fourth largest trading bloc in terms of GDP, have significantly benefited from its rise, given that China is ASEAN’s most important trade partner. Total ASEAN trade has increased by about US$1 trillion between 2007 and 2017, with intra-ASEAN trade comprising the largest share of ASEAN’s total trade by partner (see Figure 1 for China’s rising trade share with ASEAN countries, which hit a peak in 2017). Figure 1 China’s trade share with ASEAN and total trade for the top five countries Source: Estimates from CEIC database. So we are not talking about a reduced role of globalisation, but a new kind or form of globalisation, on the back of the digital revolution (or the 4th industrial revolution), the emergence of blockchain in banking and financial markets and the predominance of information and communication technology, or ICT, with a significant impact of big data on trade and capital flows around the world. It is obvious from Figure 2 below, an enormous surge in big data flows, which increased seven-fold, outpaced the flows of trade and finance, which dropped since the last global financial crisis. Figure 2 Global flows of data have outpaced traditional trade and financial flows Source: McKinsey Quarterly - April 2017, p. 4. 2. Two major risks for 2019 2.1 Trade war: Where do we stand now? Let me start with the trade war between the United States and China, which for many is the key risk for the year ahead (see Table 1). Even though this has not led to a significant slowdown in world trade, thanks in particular to the robustness of US demand, the negotiations are expected to remain a key topic in 2019. The latest round of actions (10% tariffs on US$200 billion of US imports from China and 5-10% tariffs on US$60 billion of China’s imports from the US) are set to make a more material economic impact than previous ones [insert Table 1]. More recently, on 1 December 2018, the presidents of the US and China reached a 90-day truce on the raising of tariffs, conditional on efforts made by Beijing with regard to demands from the US. If no significant progress is made, the increase of 10% to 25% on US $200 billion of imports from China would take effect on 1 March 2019. Estimates from the Peterson Institute in Washington DC suggest that the US now has tariffs on 12% of its total imports, while the combined trading partner retaliation covers 8% of total US exports, with the latest round having a bigger impact on households as more consumer goods have become subject to tariffs. A further increase in the tariffs that the US applies to Chinese imports − from 10% to 25% in early 2019 – could negatively affect business and financial market sentiment. As a recent ECB publication1 shows, an escalation to a more generalised trade war could lead to a significant drop in asset prices (see Figure 3). Table 1 Timeline of trade tensions since January 2018 S ource: Bloomberg. European Central Bank, The resurgence of protectionism: potential implications for global financial stability, 27/11/2018. Figure 3 Full trade war impact on asset prices across the globe In this scenario, US equity prices would fall by about 10% and US corporate bond spreads would increase by up to 100bps in the first year. In the euro area, equity prices would fall by 15% and corporate bond spreads would increase by 150bps in the first year. However, since the start of the year an apparent progress in the US-China negotiations has been made as the rhetoric around them has appeared to soften, but the outcome is still hard to predict. 2.2 Uncertainty over global monetary policies Last year global monetary policy stances diverged. At one end of the spectrum was the US Federal Reserve which raised its key interest rates 4 times from 1.50% to 2.50% confirming its gradual approach to monetary tightening. At the other end, the People’s Bank of China, and the Bank of Japan continued their ultra-loose monetary policies, while European Central Bank concluded its quantitative easing via PSPP. 2019 seems to be a different story from a central bank perspective as a “risk management” approach seems to prevail. Let me give you briefly my own insights on the global policy outlook: Starting with the Fed: After the dovish speech by the Fed Chair Jerome Powell earlier this month at the Economic Club of Washington D.C., which set the record for a data-dependent monetary policy, following the Fed’s projection for a GDP growth rate of 2.3% in 2019, the market participants no longer price in any hike in the Fed Funds rate this year. Most likely though, we might have one rate hike until the end of the 1st half of 2019. Turning to the ECB, the ECB will continue reinvesting the principal payments from maturing securities purchased for an extended period of time, contributing to accommodative monetary policy and favourable liquidity conditions. Moreover, markets expect the ECB to extend its long-term loan programme to the banking sector (TLTRO). At yesterday’s GC meeting, the ECB left its key interest rates unchanged, while it said it intends to continue reinvesting maturing securities under its asset purchase programme for an extended period of time past the date when it starts raising the key interest rates. The ECB also left its forward guidance unchanged, but moved to describing growth risks “on the downside” and did not take any decision on TLTROs. Regarding the BoE, monetary policy remains subject to the outcome of Brexit. The high level of uncertainty forces the status quo to prevail in the short run. Hence, the basis for the Bank’s ‘hawkish’ policy signalling seems more doubtful. In Japan, the BoJ maintained its deposit rate at -0.10% and its 10-year target yield close to 0.00%. It also announced that it would extend this policy on a long-term basis due to low inflation, so there is no monetary tightening in sight. However, in order to pursue this exceptional policy, the BoJ has decided to grant increased flexibility for the 10-year yield compared to target. Last but not least, the People’s Bank of China (PBoC), continues its accommodative monetary policy expanding the liquidity offered to the banking system in 2019 by strengthening the measures put in place in 2018. Furthermore, earlier this month, PBoC decreased by 100 basis points in its reserve requirement rate, bringing it to 13.5% for big banks. One last comment for global monetary policy outlook. The lack of significant monetary tightening in large advanced economies in 2019 does not mean that liquidity will return, since global liquidity will tighten, as central banks continue in their normalisation process. 3. Other risks 3.1 The US $247 trillion global debt mountain Another alarming feature for the global growth outlook is the global debt levels which have reached new records both in dollar terms and in relation to GDP. Total global debt owed by households, governments, non-financial corporates and the financial sector - reached 318% of gross domestic product, while excluding the debt of financial companies like banks, total gross world public and private debt reached a record 246% of GDP exceeding the previous record of 213% in 2009 (see Figure 4). Figure 4 Debt rises across the globe A higher proportion of the debt has accumulated in China and other emerging markets. Indeed, China’s total non-financial debt has risen over the past 10 years from 141% of GDP in 2008 to 261% in the first quarter of 2018. It has risen above the ranks of other emerging markets to exceed that of the US and match the eurozone’s. Moreover, China’s household debt hit a record high at almost 50% of GDP in the March quarter of 2018, according to the BIS (see Figure 5). Figure 5 China’s household debt run-up Elsewhere, Japan and the US account for more than half of that global debt, while in the euro area, government debt remains at very high levels, around 85%. Finally, public debt in the emerging markets has increased by 11% of GDP over the past five years, reaching 51% in 2018, approaching levels last seen during the 1980s debt crisis driven mainly by sizeable fiscal deficits and the domestic currency depreciations vis-à-vis the US. 3.2 Brexit As far as Brexit is concerned, with the deadline approaching, financial services firms have no choice, but to continue preparing for the worst outcome ("no deal"), hoping for the best. The closer we get to 29 March without a deal, the more business from the City of London will be transferred and staff either hired locally or relocated. Many companies have already confirmed they are moving or adding staff and/or operations elsewhere. It has been projected that up to 7,000 jobs may relocate from the City to Dublin and Paris, and more firms will relocate to New York, so why not also to Singapore? Following the heavy defeat of PM May’s EU Withdrawal Agreement at the House of Commons on Tuesday 15/1, there are now four possible Brexit scenarios: 1. A delayed Brexit 2. No-deal Brexit 3. A second referendum and 4. A general election. I am probably not the ideal person to project on the final outcome, although I have lived in the UK for more than a decade. The British are probably the most sophisticated electorate in Europe, but for me as a pro-European, all I can say is that even great nations sometimes make mistakes. Having said that, I have confidence in British diplomacy and UK institutions, so no matter what, the UK will face economic hardship in the short-term, but in the medium-term the country, including the City of London as a major financial center, will not only sail through, but also thrive. 3.3 European elections 2019 is a year of multiple elections in the EU, the most significant of which is the vote for the new European Parliament, without the UK. There are three risks arising, first of all, from the electoral uncertainty and what kind of a parliamentary formation will come out of the European elections, from migration, a risk which is also linked with the general situation in terms of geopolitics in our continent and beyond and, last but not least, populism. Next May’s elections for the new European Parliament are going to be the litmus test of populist strength. If the ruling class and mainstream political parties do not show evidence that they have truly heard the message from ordinary people on the street (who are worried about migrants and jobs), the electorate will want to “punish” the political and technocratic elites with their vote. In the event of much broader support for populist/nationalist parties at next year’s elections, the populists might be setting the agenda in European politics as an unofficial alliance against pro-European forces. Lacking the pragmatism of mainstream parties, populists risk shifting away from the pro-business, pro-market policies towards some form of “big government”. Some other notable parliamentary elections in Member States are in Belgium in May 2019, Denmark in June 2019, Estonia in March 2019, Finland in April 2019, Portugal in October 2019 and also in my own country, Greece by October 2019 (see Table 1). Table 2 Some European countries heading to the polls in 2019 Belgium Denmark Estonia EU Finland Greece Lithuania Portugal federal and regional election general election parliamentary election European Parliament election parliamentary election parliamentary and regional election presidential election parliamentary election 4. FX and fixed income markets outlook Both the start and end of 2018 were characterized by market turbulence due to uncertainty on the sustainability of synchronized global economic growth and accommodative monetary policies, while many of last year’s problems remaining to be addressed. Taking into account the abovementioned risks, sharp bouts of risk-off will be a recurrent theme in 2019 and could catch markets by surprise. Hence, 2019 will require investors to embrace a more prudent approach, and the sustainability of future returns will be the name of the game in 2019. In particular: In the foreign exchange market, US dollar strength was a predominant theme in 2018, thanks to US outperformance amid a strong procyclical fiscal stimulus, especially through tax cuts. Looking forward, trade war uncertainties, risks of a no-deal Brexit and Italian debt woes may keep the dollar underpinned. But as the Fed is shifting to a much more data-dependent approach there is high probability of a monetary pause. Elsewhere, the pound sterling is in the hands of politics and the terms of the impending Brexit. Uncertainties will weigh near term, but an orderly ‘deal’ exit from the EU leaves scope for a visible rebound of sterling in the first half of the year. Finally, further escalation in the trade war will weigh on the Chinese currency. Turning now to the fixed income markets, in 2018 the US government bond yields moved higher for much of the year, while the other global bond yields remained low. The 2-year Treasuries offered around 90% of the 10-year yield with only one-fifth of the duration risk. Looking into 2019, a further flattening of the yield curve is expected, with the long end of the curve moving up less than the short end and the US 10-year government bond yield is expected to remain within its recent trading range, moving gradually higher, near the area of 3%. Turning to the euro area, and given that the correlation between US Treasuries (USTs) and German Bunds has remained high (70%), the latter should follow USTs, but only drift slightly higher from their low levels given modest inflation expectations, the euro area’s weak economic momentum and enhanced political risks. Thank you very much for your attention! | bank of greece | 2,019 | 2 |
Keynote speech by Professor John Iannis Mourmouras, Senior Deputy Governor of the Bank of Greece, at the 2nd Annual Investors' Conference on Greek & Cypriot NPLs, Athens, 13 February 2019. | “Recent developments in tackling the Greek nonperforming loans problem” Keynote speech by Professor John (Iannis) Mourmouras Senior Deputy Governor Bank of Greece Former Deputy Finance Minister at IMN’s 2nd Annual Investors’ Conference on Greek & Cypriot NPLs Athens, 8 February 2019 1. Introduction Good morning, Ladies and Gentlemen, It is my pleasure to deliver the keynote speech at the second Annual Investors’ Conference on Greek and Cypriot NPLs, a very welcome initiative that draws the attention of all the relevant stakeholders on the NPL issue, of great interest to the local regulator too, which justifies my presence here in front of you. I would like to start by thanking the organisers, the Information Management Network and Jade Friedensohn, for the kind invitation, and all of you for being here so early in the morning. Because of the criticality and the multidimensional aspects of the issue and a sense of urgency, some have called it the Achilles’ heel of the Greek banking system; others the elephant in the room. I personally call it a problem, a problem that can be resolved and I see that the time has come. Over the last decade, the European Union and its Member States `1 have worked hard to reduce risk in the banking sector. Indeed, the European banks average CET1 ratios are 15%, the highest level since 2014, while according to the latest ECB’s stress tests results published last Monday, all banks improved capital basis with higher capital buffers than in 2016. Despite that, according to the recent SSM risk map for 2019, NPLs continue to pose risks to economic growth and financial stability with further efforts necessary to ensure that the NPL issue in the euro area is adequately addressed, while the ongoing search for yield, due to very low and negative interest rates, increases the potential for a buildup of future NPLs (Chart 1). Chart 1. SSM risk map for 2019 As you can see from the chart above, NPLs rank higher than cybercrime and IT disruptions, and are second only to geopolitical uncertainties both in terms of risk impact and risk probability. The average NPL ratio in the EU stands at 3.4% and this compares with average NPL ratios of 1.3% and 1.5% in the United States and Japan, respectively. In what follows, I would like to highlight the European dimension to the NPL issue including the current situation of NPL secondary markets across the euro area, in other words, that NPLs is not only a Greek problem, but it is also a concern to other South European countries, `2 including Cyprus, Italy, Portugal, etc. My focus will then be the recent developments in tackling the Greek non-performing loans problem including the two recent systemic proposals, one by us at the Bank and one by the HFSF. 2. NPLs: The broader context across the European banking sector a. Recent developments NPL ratios continued to decline last year across the European Union, confirming the overall trend of improvement over recent years. The latest figures show that the gross NPL ratio for all EU banks further declined to 3.4% (Q3 2018), to the lowest level since 2014, indicating that the NPL ratio is approaching pre-crisis levels again (Chart 2). The coverage ratio has also further improved and has risen to 46% (Q3 2018), up 3 percentage points since 2014. Chart 2. EU bank total non-performing loans Source: EBA, Risk Dashboard, Data as of Q3 2018. However, the situation continues to differ significantly between Member States as 12 EU Member States have NPL ratios of below 3%, while there are still some with considerably higher ratios – 9 Member States have ratios above 5% (Chart 3). in Member States with relatively high NPL ratios, there is encouraging and sustained progress in most cases `3 due to a combination of policy actions and the growth impact. For instance, in Cyprus, NPLs have continued to fall since the end of 2015 with the NPL ratio around 34% and are expected to decline more sharply this year. In Italy, where the NPL ratio is currently around 9.7%, the securitisation scheme supported by state guarantees (known as GACS) was introduced in 2016 and extended for another six months in September 2018. Several other market infrastructure initiatives are also helpful towards tackling NPLs. For example, in Portugal that has an NPL ratio of 12.4%, initiatives targeted at promoting smooth coordination among creditors (to accelerate credit restructuring, NPL sales, etc.) are a welcome addition to the existing policy mix. Chart 3. NPL ratios in EU Member States Source: EBA, Risk Dashboard, Data as of Q3 2018. In this context, last December, the European Council Presidency and the European Parliament agreed on a new framework for banks to deal with new NPLs and thus to reduce the risk of their accumulation in the future. The framework provides for requirements to set aside sufficient own resources when new loans become non-performing and creates appropriate incentives to address NPLs at an early stage. In particular, the new rules introduce a "prudential backstop", i.e. common minimum loss coverage for the amount of money banks need to set aside to cover losses caused by future loans that turn non-performing, which increases gradually over a period of 9 years. The full coverage of 100% for NPLs `4 secured by movable and other CRR (Capital Requirements Regulation) eligible collateral will have to be built up after 7 years, while for the unsecured NPLs the maximum coverage requirement would apply fully after 3 years. b. Current situation of NPL secondary markets in Europe Let me now turn to the current situation of NPL secondary markets in Europe. These remain underdeveloped, given that: Markets for NPLs tend to be characterised by comparatively small trade volumes. Indeed, between 2014 and 2017, transaction volumes in secondary markets for loans in the EU were estimated by industry sources to reach between €100-150 billion per annum. 2. The NPL market has been highly concentrated on the buy side with a few large transactions involving a limited number of active investors. The 10 largest transactions during the period 2015-2016 accounted for one third of the transaction volume, while the rest was spread over about 480 transactions. Moreover, almost 40% of the transaction deals was accounted for by the biggest five buyers, while about 70% of the market share in the EU is controlled by 20% of investors. 3. Transactions have been strongly clustered in four countries: Spain, Ireland, Italy and the United Kingdom. In the first three, NPL sales have contributed substantially to reducing high NPL ratios. There have been few transactions in other countries with high NPL ratios (Greece, Cyprus, Italy, Portugal, Slovenia) and sizeable market activity in countries with low NPL ratios (Germany, Netherlands). More precisely, of the 103 banks that disclosed transactions, only 40 had multiple transactions. The loan portfolios that banks sell include different asset classes and according to market sources, some buyers are specialised in specific asset classes. The chart below gives a snapshot of market shares by asset class based from a sample of 365 NPL transactions signed in 2015-2017 (Chart 4). 1. `5 Chart 4. Loans and NPLs on bank balance sheets per asset class and country (June 2018) Source: EBA. There is lack of transparency of market prices and volumes with large bid-ask spreads when counterparts enter negotiations. Industry sources estimate that prices vary strongly depending on the type of debt and the quality of the underlying collateral (Chart 5). 4. Chart 5. Average price on face value of NPL portfolio transactions An optimal and sustainable solution that has the potential to address the current sources of market failure in the secondary market for NPLs in Europe, including asymmetry of information between sellers and buyers `6 and high transaction costs, is the establishment of a European Unionwide NPL transaction platform where holders of NPLs – banks and nonbank creditors – and interested investors can exchange information and trade, increasing competition, harmonising information and data availability. This could be turned into a permanent channel through which future NPLs could be efficiently disposed of. 3. A glance at the Greek economy Before analyzing Greek banks’ NPL issue, allow me look into the recent developments on the Greek economy. For the first time in 10 years, economic activity returned with solid growth at 1.5% in 2017. Indeed, this is the first time Greece has achieved 6 consecutive quarters with positive GDP change since 2006. GDP growth is mainly export-driven, as improved external competitiveness combined with solid external demand has underpinned export growth. GDP growth is estimated at 2.1% and around 2% in 2018 and this year respectively. The unemployment rate declined further to 18.3% in the third quarter of 2018, remaining on a downward path, the lowest level since August 2011. On the fiscal front, the 2018 general government primary surplus target of 3.5% was outperformed by a strong margin (4%) and according to the 2019 budget, it is projected to reach 3.6% of GDP. Looking forward, there should be no complacency or slackening of effort on behalf of the national authorities especially this year, a multiple election year in Greece. The government must commit to the implementation of growth-enhancing reforms and not lag behind its post-bailout commitments, particularly in the public sector, including administrative reforms and speeding up of judicial procedures. As I keep saying in the last eight years, on every opportunity I get, the country needs an investment shock. Reviving domestic and foreign investment is crucial to supporting the country’s economic recovery. This is why it is `7 important for the government to speed up the privatisation agenda, not so much as a revenue exercise, but as a first-class opportunity to attract FDI in key sectors of the economy, such as transport, energy, logistics and tourism. All the above, will enhance the country’s credibility in the eyes of international capital markets and credit rating agencies, making the investment grade within reach. Evidence on reduced sovereign risk Last week, the Hellenic Republic raised €2.5 billion issuing a 5-year government bond at a yield of 3.6% and an annual fixed coupon for investors of 3.45%. This was Greece's first attempt to tap the international money markets after the country's exit from the third bailout programme last August. The issue was four times oversubscribed as offers, amounting to over €10 billion with the foreign investors’ participation exceeding 85%, with many real money investors and not only hedge funds. As the Greek government yield curve has been rebuilt, its slope has been steepened for the first time since 2015, implying improved investor perceptions about the outlook of the Greek economy. In short, Greece is already in the markets with the only exception of the 10-year benchmark new issue. Since the start of the year the trading volume in the secondary securities market has been raised substantially from €5 million to €20 million on a daily average and the repo transaction volume has reached €22 billion from 0 three years ago. As far as the benchmark is concerned, the 10-year GGB is currently trading at a yield of around 3.9%, i.e. near the March 2006 – the precrisis levels. Just to remind you that the 10-year GGB yield was 7.3% at the beginning of 2017. In my view, it is only a matter of time for a new 10-year government bond issue. Apart from its obvious importance for the Greek economy, it is also of direct interest to all of you, in terms of the pricing of future NPL securitisation products, since their guarantees are calculated on the basis of a basket of Greece’s sovereign CDS premium on the state guarantor. `8 4. Greek banking sector: Recent developments and their NPL issue Turning now to Greek banking sector: For the first time since 2010, and after three rounds of capital injections in the last five years, amounting in total to €64 billion cumulatively, all four systemic banks successfully concluded the 2018 stress test conducted by the ECB, without any need for additional capital increases. In this context, according to their latest announced financial results for the third quarter of 2018, they remained in profitable territory with their capital ratios remaining at comfortable levels near 16% on average. However, the figures remain weak, as net interest income continues to decrease. Banks’ dependence on the ELA emergency lifeline has been terminated. Another visible improvement in the financial sector was the increase of the total deposits between end-June 2015 and January 2019 by €20 bn (or 13%) to €150 bn. Greece’s four systemic banks’ covered bonds of 3 and 5-years maturity have been upgraded to BBB-. Last but not least, since last October capital controls on domestic transactions have been fully lifted. They are still in place though for money transfers abroad. Reminding ourselves that 2019 is a year of multiple elections in Greece, it goes without saying that there are downside risks by definition during electoral periods. I believe caution is the word here. Having said that, I would argue that it wouldn’t do any harm if the authorities preannounce the end-date for the full lifting of capital controls, say, by the end of this year, signaling that the country is on the steady path towards fully restoring confidence. `9 Greek banks’ NPLs: Where we stand now However, the most important pending issue for the Greek banking industry today remains the high stock of non-performing exposures, as Greece remains the outlier for NPEs with a ratio of 46.7% or €84.7 billion, the highest level across both the European Union and the eurozone. Compared to March 2016, when the Greek banks’ stock of NPEs reached its peak, there is significant reduction of around 21% mainly due to write-offs and loan sales, which reached the amount of €17 billion. More analytically, at end-September 2018, the NPE ratio was 44.7% for residential (amounting to €27.5 billion), 53% for consumer (€8.8 billion) and 46.9% (€48.2 billion) for the business portfolio (Chart 6). A major improvement has been made only on the consumer loans portfolio on the back of the latest sales. On the other hand, exceptionally high remain the NPE ratios in SMEs and SBPs (60.9% and 68.6% respectively). Chart 6. Greek banks NPE ratio per asset class (%) as of end September 2018 Source: Bank of Greece. On the other hand, the NPE provisions coverage ratio has dropped at 47% from 49% previously (Chart 7). `10 Chart 7. Greek banks total coverage as of Q3 2018 Source: Bank of Greece. Examining the reasons behind this substantial surge in NPEs in Greece, this can be attributed to three factors: a. First of all, the severity of recession that wiped out 25% of GDP in just five years and the subsequent rise in unemployment from around 8% in 2008 to 28% in 2013. b. Bad bank practices. Imprudent lending with high leverage and dubious practices of lending on undeclared income, and high LTV ratios. c. Overborrowing by consumers and businesses following the introduction of the euro currency due to the sharp drop in interest rates. Greek banks have already submitted revised operational targets for NPLs at ratios around or lower than 20% of total non-performing exposures by the end of 2021. Loan sales, collections, collateral liquidation and potential asset protection schemes are anticipated to contribute more extensively towards NPE reduction. In this context, Bank of Greece (BoG) has designed a toolkit for the Greek NPLs including the following: • Setup of a secondary market for NPLs. Seventeen AMCs have already received licenses, while another 11 companies are in the queue for a license, either by submitting a file or by preparing it. • Out-of-court settlements law ffocused on standardized procedures for SMEs and electronic auctions. `11 • The Bank of Greece issued a Code of Conduct for interaction of banks with borrowers in arrears. However, all banks have net NPE inflows for the third quarter of 2018, of around €1.8 billion mostly coming from re-defaults (Chart 8). Also, the quarterly cure rate remains near 1.8% and the default rate is 2.1%, thus further demonstrating the negative performance already observed in the first two quarters of 2018. Chart 8. Flow of NPEs in Q3 2018 at system level ALL BANKS NPEs Build Up 100.000 90.000 80.000 70.000 60.000 50.000 40.000 30.000 20.000 10.000 1.838 (1.594) (3.145) (1.041) 88.955 84.720 Source: Bank of Greece. Hence, despite the genuine effort on the part of Greek commercial banks, more drastic solutions are needed in the foreseeable future with a handson approach. The speed up of efforts by both Greek banks and authorities is more than essential for a rapid convergence of the domestic NPL ratio to the European average. Looking at the various strategies put forward for the effective resolution of the Greek NPL issue, from my point of view, securitisation schemes are probably the silver bullet for the Greek NPL problem. It’s an attractive, market-friendly idea because it converts bad quality assets to marketable securities, which could be of interest to a larger set of buyers, `12 including foreign institutional buyers. The advantage of securitization is that there is significant diversification of risk away from a single credit name, and with the issue of tranches, investors can choose the riskreward combination that best reflects their preferences. Securitisation also generally achieves a lower average cost of funding and, if guarantees are provided to the securitised assets, can result in higher NPL prices than direct sales. Recently, two proposals are under discussion in order to address the issue of NPLs, one by the Bank of Greece and the other by the HFSF, which have both as a common ground, the ideas of securitisation and a systemic approach to the problem. They could be seen as complements, rather than substitutes. More analytically: The Bank of Greece’s proposal - Main characteristics The proposed scheme envisages the transfer of a significant part of non performing exposures (NPEs) worth of around €40 billion along with part of the deferred tax credits (DTCs) worth of around €8 billion, which are booked on bank balance sheets, to a Special Purpose Vehicle (SPV). Subsequently, legislation will be introduced enabling to turn the transferred deferred tax credit into an irrevocable claim of the SPV on the Greek State with a predetermined repayment schedule. To finance the transfer, the SPV will proceed with a securitisation issue, comprising three classes of notes (senior, mezzanine, and junior). It is anticipated that private investors will absorb part of the upper class of securities (senior) and the vast majority of the intermediate part (mezzanine). The scheme will be voluntary and will be managed exclusively by private investors (servicing companies for loans and credits) and apparently there will be an asset class separation for each transaction and management operation (business, housing, consumer, etc.). `13 Turning now to the HFSF’s proposal: main characteristics It is based on the Italian solution, the so-called GACS scheme, introduced in the beginning of 2016, which was conceived to help the country’s banks offload their bad loans. At the heart of the GACS programme is a state guarantee that protects buyers of the safest - or most senior - tranche in the securitisation. The guarantee will be available only after a) the senior tranche gets a certain rating by rating agencies (possibly in the area of BB) and b) at least (50% +) of the junior tranche is sold to private investors. The scheme will be voluntary again. Each participating bank will sell selected, relatively homogeneous portfolios of NPLs to the SPV, which will issue the asset-backed security notes. After all, guarantee certificates are not something new in Greece, but have been used extensively by the banking sector since 2012 for central banking liquidity provision purposes (e.g. MROs and ELA), the socalled GGGBBs, which amounted to around €30 billion. These guarantee certificates can be considered as a sort of credit enhancement device with the following advantages: they do not put any capital pressure upon banks, they do not mix complicated tax, legal and regulatory issues. With all the above firepower initiatives put in place, plus the existing toolkit of liquidation, restructuring and outright sales, the new ambitious target lower than 20% NPE ratio for Greek banks within the next three years is within reach. `14 Epilogue Ladies and Gentlemen, In closing, I would say the following. Being a macroeconomist by training, I can see a macro dimension in a drastic solution of the NPEs problem: to me, this is a unique opportunity, • Not only for restructuring business bad debt, but also rebalancing the Greek economy towards export-oriented sectors, while contributing to long-term growth. • For reducing financial risks of the Greek banking sector, restoring their profitability and improving their internal capital generation capacity, and • Increasing loan supply to healthy and productive enterprises and enabling banks to focus on the new technological challenges ahead, including fintech, blockchain and the digital transformation of payment systems. Thank you very much for your attention. I wish you all a productive conference and networking! `15 | bank of greece | 2,019 | 2 |
Keynote speech by Professor John Iannis Mourmouras, Senior Deputy Governor of the Bank of Greece, at Cornell University, New York City, 28 February 2019. | “Fin-RegTech: Regulatory challenges with emphasis on Europe” Keynote speech by Professor John (Iannis) Mourmouras Senior Deputy Governor Bank of Greece Former Deputy Finance Minister Former Chief Economic Advisor to the Prime Minister New York, Cornell University, 28 February 2019 Introduction It is a great pleasure for me to be in New York upon the invitation of Citigroup to speak at Cornell University’s “Tech Day”, at such a ground-breaking seminar, entitled “Big Data and FinTech Innovation”. As you know, the University which hosts us today was founded 150 years ago by Ezra Cornell, the inventor of the electric telegraph and founder of Western Union. His motto – which became the University’s founding principle, “an institution where anyone can find instruction in any study” – has formed the basis for Cornell University’s countless contributions across all fields of knowledge, prioritising public engagement to help improve quality of life worldwide. At this University, founded by such a revolutionary spirit, I have the opportunity to share my thoughts and exchange views with you on what economists have called a major catalyst in the “fourth industrial revolution”, the FinTech industry, due to its significant transformative impact on financial services. And let me draw your attention to another parallel: the term FinTech first appeared in the public domain, introduced in the early 1990s by Citigroup, the main organiser of today’s event! My speech today will be structured as follows: After offering some introductory remarks to clarify technical jargon and some remarks on FinTech’s current landscape, I will then move on to an overview of FinTech’s current state-of-play in the European Union (EU), focusing on its potential impact on the established financial sector, as well as the risks and challenges ahead. Finally, I will take a look into the regulation gap as far as FinTech activities are concerned and possible ways to fill this gap. 2. The FinTech landscape today 2.1 What is Fintech? Despite its widespread usage, FinTech does not have a broadly and formally accepted definition. In general terms, FinTech stands for Financial Technology and describes technologically enabled financial innovations that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services. A term associated with FinTech is RegTech, a commonly recognised term for technologies that can be used by market participants, to follow regulatory and compliance requirements more effectively and efficiently, and by competent authorities, for supervisory purposes. RegTech is not entirely new, but is rapidly developing (in line with other technological applications), fuelled by growing computing power, emerging technology’s diminishing cost and the data explosion. In 2018, RegTech investment reached the amount of US $2 billion and is forecasted to exceed $ 76 billion by 2022. RegTech provides senior executives with an opportunity to introduce new capabilities that are designed to leverage existing systems and data to produce regulatory data and reporting in a cost-effective, flexible and timely manner without taking the risk of replacing / updating legacy systems. Having said this, my intention today is to focus on the regulatory challenges surrounding FinTech and how to close the regulatory gap I mentioned earlier. 2.2 FinTech landscape The global FinTech landscape can be mapped across eight distinct categories: payments, insurance, financial planning, lending and crowdfunding, blockchain, trading and investment, data and analytics, and cybersecurity (see Chart 1). Chart 1 FinTech landscape used by IOSCO (International Organization of Securities Commissions) In more detail, blockchain, also known as distributed ledger technology or DLT, became widely known as the technology that underlies Bitcoin, which holds 60% of the cryptocurrency market. Of course, numerous potential applications of DLT to financial services other than digital currencies are lately becoming apparent such as roboadvice and peer-to-peer insurance. Another category in the FinTech landscape is data & analytics. As you know, advances in digital technology such as Artificial Intelligence (AI) and Big Data have greatly increased the usability of advanced analytics in the financial services sector. This development can lead to better suited products and services, but it also poses the question whether a limit should be put on the profiling of individuals. In this respect, the expanded availability and broader use of consumer data raises issues relating to data ownership and data usage and their implications for consumer privacy. A small digression on AI may be in order here. It is said that the world’s most valuable resource is no longer oil, but data and AI has the capability to unlock and leverage data, transforming our lives. I don’t have to mention the list of world “firsts” AI has already achieved. AI ferryboats, AI hearing aids, aI toothbrush, AI ski instructor, financial reports, video games, etc. and in the near future autonomous driving which e.g. could reshape the trucking industry, resulting in fewer accidents, smart cities with less pollution and energy usage, smart farms with better quality products and so on. A final category in the FinTech landscape is cybersecurity. While increased reliance on digital technology may heighten the risk of cybersecurity being compromised, digital technology also presents numerous opportunities to improve security of digital financial services. Data encryption to protect digitally stored data is improving with technological advances. Data analytics can be used to detect irregular patterns and fraud. DLT could increase the transparency of transactions, making them easier to track and control, improving Anti-Money Laundering (AML) regulations. 3. A look into the rise of FinTech in the EU Over the last couple of years, global FinTech investment activity has been recording robust growth. While in 2012 total investment in this sector was less than US $12 billion, in 2018 global investment in FinTech companies reached approximately US $112 billion (with 2,200 deals), more than double its 2017 level of around US $51 billion (as you can see in Chart 2). Moreover, 2018 was a year in which Fintech investment, including Venture Capitals (VC), Mergers and Acquisitions (M&A) and Private Equities (PE), recorded a series of peaks. Emerging Fintech subsectors have seen the number of new startups rise rapidly, while highly mature sectors such as payments experienced a certain degree of consolidation. Chart 2 Global investment and banks’ activity in FinTech The US and Silicon Valley remain the world's biggest hubs for FinTech companies and have the lion’s share in terms of financing. In 2018, US FinTech investment reached US $55 billion across 1,245 deals. Europe’s FinTech sector has been catching up with US FinTech investment growth, with investment following an upward path since 2008, having reached US $34 billion with 536 deals in 2018, driven by big mergers and acquisitions (M&As) (see Chart 3). Venture Capital investment remains high in Europe and in 2018, it attracted the second largest amount ever of VC investment in FinTech. Chart 3 Total investment activity (VC, PE and M&A) in FinTech in Europe (2013–2018) Despite concerns about Brexit, the UK remained a leader in FinTech in 2018 (see Chart 4 for the number of companies established in individual EU countries). The UK accounts for half of the region’s top VC deals, with last year’s total investment activity amounting to US $21 billion. Throughout 2018, the UK government continued to build FinTech bridges with other jurisdictions, so as to reduce regulatory barriers and support growth in a post-Brexit world. Ireland saw increasing interest from global FinTech companies and financial institutions, spurred by Brexit-related concerns. More precisely, 55 FinTech or financial services companies opted for establishment in Ireland last year, and their move is expected to bring more than 4,500 new jobs to the country (IDA, Ireland). Around 50 applications for authorization were submitted to the Central Bank of Ireland by year-end covering almost the entire spectrum of financial services including banking, insurance, asset management and payments. Multinational companies seem to be concerned about a no-deal Brexit and these moves in 2018 suggest their efforts to mitigate its impact. Chart 4 Fintech sector development across European Union Sources: Ernst and Young, Crunchbase, Digital Agenda Scoreboard, and European Central Bank. This year, we are expecting more FinTech consolidation driven both by FinTech companies looking to buy in order to achieve greater scale and by conventional banks looking to buy FinTech in order to drive their own strategic objectives. Over the next few quarters, Fintech activity is expected to rise in terms of open banking, RegTech, the acquisition of FinTech by banks, insurance tech, and the creation of start-ups, given that Europe offers a start-up friendly regulatory environment that encourages young entrepreneurs to experiment with innovative FinTech services. 4. FinTech’s impact upon and interaction with the conventional financial system and monetary policy transmission mechanism But what is FinTech’s estimated impact of and interaction with the conventional financial system? All the above developments of the financial technology infrastructure have non-negligible implications. Therefore, it is interesting to briefly discuss the main effects of FinTech revolutions on customers, competition among market players and, overall, the financial industry’s operation and structure. Currently, five main drivers appear to be shaping and are expected to bring changes to the established financial sector: The first driver is reduction of information asymmetry. The ability of new technology to capture and process a high amount of data in real time is improving the price discovery mechanism in several areas of the financial system such as the credit gap between borrowers and lenders, to the extent that clients’ information history becomes more transparent, improving borrower’s behaviour through competition and resilience. The second driver is improvement of Communication Efficacy and the third is supporting lending for small- and medium-sized enterprises (SMEs). The fourth is supporting a sharing economy: Fintech facilitates sharing economy through digital platforms that enable the matching of buyers and sellers. Finally, the fifth driver is increasing financial inclusion. In other words, the sustainable provision of affordable financial services (mainly bank accounts) to more vulnerable people with limited economic means, as well as population groups living in underdeveloped areas and countries. Last but not least, in terms of the transmission mechanism of monetary policy (this is the transmission of monetary policy to the real economy), FinTech has the potential to alter some of the transmission channels, thus affecting economic variables and inflation, mainly through two channels, firstly, the credit channel and secondly, the bank lending channel. On the one hand, an expansion of FinTech firms in the credit market could alter the functioning of the credit channel, mainly through softening information asymmetries in the credit market, when pricing borrower’s risk. On the other hand, FinTech companies have the potential to affect the pass-through of monetary policy to bank lending rates. In 2018, in the US the overall loans originated via alternative lending platforms reached about 5% of the value of newly issued consumer credit. Worldwide, the total value of transactions through alternative lending platforms climbed to an amount of US $196 billion, expected to grow by an annual rate of 10.7% in the period between 2019-2023, resulting in a total amount of $363 billion (Statista, 2018). China, and, to a minor extent, the US and Europe, fuelled the expansion of alternative lending, accounting for around 93% of the total value of transactions in 2018. The increasing importance of FinTech firms could threaten the informational content of money aggregates and credit supply, lessening potentially the ability of central banks to gather reliable information for conducting monetary policy and also affecting the interest rate pass-through. 5. Regulating FinTech 5.1 Risks from a regulatory point of view Regulators and supervisors need to follow market developments to understand how the emergence of new players, infrastructures, products and distribution channels is going to transform the financial system. In this regard, a significant proportion of EU FinTech companies is not subject to any regulatory regime (31%) or is only subject to a national authorisation or registration regime (14%). From a prudential and regulatory point of view, I will try to briefly summarise the associated risks by order of importance: First, risks arise when automating customer and investment services as competition becomes stronger with the entrance of new firms into the financial sector. The challenge for regulation is to keep a level-playing field between existing and new companies which promotes innovation and fosters competition, and, at the same time, preserves financial stability. In this context, since January 2018, the application of PSD2 1 and the related set of guidelines and technical standards for the security of payment and investment services in the EU facilitate innovation, and efficiency preventing regulatory arbitrage and promoting equal competition. Furthermore, while a number of new propositions on automated investment recommendations have been launched in the recent years using extensively algorithms not many have been identified as offering automated investment advice in the context of MiFID/MiFID II. Second, FinTech growth increases the financial system’s susceptibility operational and cyber risks. Higher reliance on third-party provision of services – such as communications and cloud storing – could entail higher Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC. operational risks. As far as cyber risks are concerned, as the technological systems of financial institutions are more interconnected, there are more possible entry points for potential attacks with more significant consequences. Finally, information use and storage by FinTechs raises important data privacy and security issues. Third, the issue of risk misallocation arises here, because micro-transactions provide a layer of diversification, credit risk from the borrower to the creditor still passes through under-regulated and under-controlled channels compared to conventional financial services. The first principle of risk management applies to all banks, but also to high-flying FinTech companies: “if you owe 1 dollar to your lender, it’s your debt, if you owe 1 million, then it’s the lender’s problem”! For example, Ye’e Bao (translated as ‘hidden treasure’), associated with the biggest Chinese online retailer, is in practice the largest money market fund in the world, whose assets under management are worth close to US $265 billion, but the regulations affecting dedicated money market funds are not entirely binding Ye’e Bao, as it is not owned by, and does not legally constitute, a financial institution. Fourth, another major issue in the debate regarding FinTech revolves around the risks it entails in terms of increasing financial discrimination through the extensive use of algorithms based on consumers’ demographic and personal information available online (collected by big tech companies) and, as a result, having the potential to give rise to greater income inequality. With the expansion of FinTech, it may become even harder for population groups of lower income, ethnic minority background, younger age, women or people with disabilities, etc. may be discriminated against in terms of consumer finance, so that only those financially better off, i.e. the richer ones, are chosen to have access to loans, investment products, etc. Unlike regulated banks, FinTech companies are not subject to strict rules on consumer protection, e.g. to compensate consumers, offer deposit insurance and meet standards in order to prevent misleading vulnerable consumers into buying unsuitable or harmful financial products. We, therefore, need to pay particular attention to the risk that those who trust FinTech products lacking such a safety net are currently running, by relying on big FinTech providers to regulate themselves. 5.2 Existing regulatory framework in the US and the EU Taking stock of the existing US and EU regulatory framework, it should be pointed out that there is no singular regulatory framework for FinTech companies. In the US, Fintech companies are generally regulated at the state level. For example, many states have enacted legislation governing the extension of credit and money transmission in their jurisdictions, combined with licensing requirements for such activities. Similarly, in the EU, Fintech companies operate under passportable licenses. In the EU, certain services provided by FinTech companies, such as retail banking, payment services and financial market services, are subject to the panEuropean ‘passporting’ regime: a company licensed in one EU Member State (home state) may provide such services in another EU Member State (host state), e.g. via a local branch, using its home-state license as a sort of “European passport”. Moreover, in both the United States and the EU, cybersecurity-related regulations and Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) regulations apply to FinTech companies. We may argue that the EU has expanded the scope of its rules to include services that EU FinTech companies offer to consumers. Moreover, the European Banking Authority (EBA) recognises the benefit in protecting consumers when they use financial services offered by firms outside the conventional financial services sector. It recommends defining consumers' rights in the FinTech space, creating effective procedures for processing consumer complaints, improving the quality of disclosures to consumers in a digital environment, and increasing consumer financial literacy. In light of the potentially inconsistent regulatory regimes to which EU FinTech companies are subject, the European Commission published last year an action plan for the implementation of an EU-wide framework dedicated to FinTech companies aimed at “a more competitive and innovative European financial sector”. The Commission's Action Plan proposes 23 steps to enable innovative business models to scale up and support the uptake of new technologies, and to enhance cybersecurity and the integrity of the financial system, including an EU Fintech Laboratory where European and national authorities will engage with technology providers and an EU Blockchain Observatory and Forum, which will report on the challenges and opportunities of crypto-assets. 5.3 Filling in the regulatory gap From the aforementioned regulatory frameworks, we all agree that risks related to regulation and compliance arise from FinTech’s rapid growth and it is reasonable to expect that new or evolving risks will emerge for the system and for individual institutions. It appears that the main challenge is to implement legislation governing FinTech companies in order to protect users and markets, while offering an environment favourable to growth. In the context of financial regulation, it is of utmost importance to strike a balance between the following three fundamental elements: 1. Manage the trade-off between efficiency gains associated with technological innovation and the protection of stakeholders in the financial industry. On the one hand, regulation must not be too stringent to the point it preempts the creation and development of new technologies that generate efficiency and savings in transaction costs; on the other hand, regulation must not be too lax, so as to make sure that investors and users of financial services are adequately protected and that regulatory frameworks are continuously adapting to technological advances, rather than falling behind the curve. 2. Ensure an adequate regulatory level playing field for banks and FinTechs, fundamental to achieve appropriate competition. First, activities involving the same risks in terms of financial stability, consumer protection and the integrity of the financial system should receive the same regulatory treatment (this is the number one principle or regulation). Therefore, any difference in regulation and supervision should be based on the risks posed by different products and services. Second, there should not be unnecessary barriers to competition in the market beyond those justified by risk considerations. In relation to this, authorities should further assess the implications of prudential regulation, which often leaves banks in a situation of competitive disadvantage vis-a-vis other players, and work towards eliminating existing loopholes in regulatory frameworks. 3. Given the global dimension of most technological innovations and the increased interconnectedness of the financial system, regulatory frameworks need to be internationally co-ordinated and upgraded. The work of the Financial Stability Board (FSB) and other international standard-setting bodies (SSBs) will be crucial in this endeavour. However, as pointed out by the FSB, regulatory and supervisory approaches to FinTech are becoming increasingly fragmented, undermining the effectiveness of financial institutions' efforts to address the ensuing risks. We, first of all, need to determine the legitimate uses and purposes of FinTech innovations and then define guiding principles at global level that serve to avoid fragmentation across countries’ regulatory approaches. In other words, we do not want to overregulate. We must first see whether there is a fundamental economic case for regulating specific products/functions (which, in some cases, might ultimately be proven useless) and then regulate in a coordinated manner. Epilogue In closing, we are at the beginning of the “fourth industrial revolution”, which is transforming the way we live, work and interact. As the FinTech sector grows, it is important that all parties involved not only pay close attention to technical, regulatory, policy, and legal considerations, but also monitor its growth and better understand its impact. Regulatory trends become increasingly complex and regulators demand ever larger amounts of granular data from firms, as a result, there is substantial scope for big data analytics and machine learning to help both market participants follow regulatory and compliance requirements and supervisory authorities assess compliance and measure risk. One thing is for sure: no matter what, human intervention to provide a final arbitration will always be required! One final comment, with my professorial hat: More generally and in more philosophical terms, as new technologies evolve and become more accessible, naturally more ethical issues will arise, but I believe the foundation on which everything must be built is quite simple: putting humans and their needs first. Plato the famous ancient Greek philosopher who lived in Athens 2,500 years ago said: the purpose of humanity is to obtain knowledge. In today’s world this could be translated as follows: knowledge for innovation to improve the human condition. The symbiotic relationship between human creativity and computational creativity is still in its infancy. Ultimately, the question is not about what new technologies can create, but rather what humans can create with new technologies to empower the future of humanity. Thank you for your attention! | bank of greece | 2,019 | 3 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 87th International Atlantic Economic Conference "Lessons from the Greek Crisis: Past, present, future", Athens, 28 March 2019. | Yannis Stournaras: Lessons from the Greek crisis - past, present, future Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 87th International Atlantic Economic Conference "Lessons from the Greek Crisis: Past, present, future", Athens, 28 March 2019. * * * Ladies and gentlemen, It gives me great pleasure to be here today to share my thoughts on the lessons from the Greek crisis. First, I would like to give you an overview of the Greek crisis and a recap of the progress made since 2010, and outline the challenges that Greece still faces. I will then discuss the prospects of the Greek economy and the pre-conditions that need to be met to achieve sustainable growth. Finally, I will put forward some proposals for enhancing the EMU architecture. 1. Brief overview and lessons from the Greek crisis At the onset of the crisis, a deterioration in the macroeconomic environment, the downgrades of sovereign debt and rising sovereign spreads on account of large macroeconomic and fiscal imbalances cut off the Greek sovereign and Greek banks from international capital and money markets. Extremely tight liquidity conditions ensued, and pressure on the banking sector grew, amid substantial deposit withdrawals. An unprecedented fiscal consolidation was undertaken to correct the fiscal imbalance. The crisis has taken a heavy toll on output, incomes and wealth. Between 2008 and 2016, Greece lost over one fourth of its GDP at constant prices, and the unemployment rate rose by nearly 16 percentage points. Furthermore, GDP per capita at purchasing power parity declined to 67% of the EU average in 2017, down from 93% in 2008. Meanwhile, there was a large brain drain, depriving Greece’s society and economy of a highly productive segment of its population, with immeasurable demographic, economic and social consequences. The deterioration in the macroeconomic environment and the slide of the GDP growth rate into negative territory raised the debt-to-GDP ratio to unsustainable levels despite the fiscal consolidation and caused debt-servicing problems for households and businesses. As a result, non-performing loans (NPLs) rose substantially, weakening the banks’ asset quality, thus making it difficult for banks to finance the real economy. Resolving the Greek crisis took eight years, three economic adjustment programmes, one major debt restructuring and three rounds of banks recapitalisation. Several factors can explain the length and depth of the Greek crisis: First, the size and speed of fiscal consolidation were unprecedented. This primarily had to do with the fact that the initial macroeconomic imbalances were much higher in Greece than in other countries. Second, the fiscal multipliers turned out to be higher than initially anticipated (see Blanchard and Leigh, 2013, 2014). Furthermore, the focus of fiscal policy on higher taxes led to an increase in the informal sector of the economy, a loss of tax revenue due to tax evasion and additional measures in order to meet the fiscal targets (Dellas et al., 2017). As a result, the economy was soon caught in a vicious circle of austerity and recession. Third, there were certain flaws in the design of the economic adjustment programmes. Given the size of the initial fiscal imbalances, more emphasis was placed on fiscal consolidation, 1/8 BIS central bankers' speeches streamlining budgetary procedures and increasing fiscal transparency, at the expense of growthenhancing reforms, tackling tax evasion and reorganising the public sector. Fourth, the idiosyncratic sequencing of structural reforms led to real wages declining more than initially planned, deepening the recession. The reform effort focused more on the labour market than on goods and services markets (see Berti and Meyerman, 2017, on the ‘sequencing’ and ‘packaging’ of reforms). Hence, nominal wages declined faster and more strongly than prices. Households experienced a massive drop in purchasing power, which, in turn, constrained personal consumption and deepened the recession. Fifth, the non-performing loans (NPL) problem proved more difficult to manage than initially anticipated. Mainly the result of economic contraction, it was further exacerbated by legislative changes such as the blanket moratorium on primary residence auctions and the abuse of foreclosure protection under Law 3869/2010, as well as several other legal and judicial impediments. A more dynamic response during the first years of the crisis, by implementing the necessary legislative changes much earlier and introducing a centralised asset management framework for NPLs as other Member States have done could have reduced the problem we face today. Sixth, certain reforms fell behind the agreed time schedule due to several factors, including: insufficient ownership of the necessary reforms; populist rhetoric, rivalry and failure of the political parties to reach an understanding; and the resistance of various – small and large – vested interests to reform. The biggest manifestation of this political rivalry and polarisation was the failure to elect a President of the Republic at the end of 2014, which led to early elections in 2015 and to the unfortunate negotiations of the first half of 2015. These, in turn, led to the signing of the third adjustment programme, capital controls, another bank recapitalisation round and two years of economic stagnation. Seventh, political economy deliberations in the euro area also played their part in delaying the recovery of the Greek economy. The Eurogroup decision of November 2012 to grant further debt relief was put off for several years and was implemented only in June 2018. This undermined the growth prospects of the Greek economy and prolonged the duration of the crisis. Last, but not least, when the Greek crisis broke out, the EMU lacked the tools to avert and contain the crisis (see Katsimi and Moutos, 2010). The EU fiscal rules (Stability and Growth Pact − SGP) failed to avert the soaring public debt, and there was no monitoring and control over macroeconomic imbalances. Moreover, euro area crisis management and resolution tools were practically non-existent due to moral hazard concerns. Instead, the ECB stepped in to contain the spillover risk to the rest of the euro area. 2. Significant progress has been made since the beginning of the debt crisis Despite the missteps and delays, significant progress has been made since the beginning of the sovereign debt crisis in 2010. The implementation of a bold economic adjustment programme has eliminated the root causes of the Greek crisis (see Stournaras, 2019a, 2018a,b and Malliaropulos, 2019). It is particularly worth noting that: • The fiscal adjustment was unprecedented, turning a primary deficit of 10.1% of GDP in 2009 into a primary surplus of 3.9% of GDP in 2017. • The current account deficit has been reduced by more than 12 percentage points of GDP since the beginning of the crisis. • Labour cost competitiveness has been fully restored and price competitiveness has recorded substantial gains since 2009. 2/8 BIS central bankers' speeches • A bold programme of structural reforms was implemented, covering various areas, such as the pension and healthcare systems, goods and services markets, the business environment, the tax system, the budgetary framework and public sector transparency. Meanwhile, the role of the Bank of Greece was pivotal in the restructuring and the recapitalization of the banking system as well as in the enhancement of its corporate governance. Today, banks’ capital adequacy ratios stand at satisfactory levels, and their loan-loss provisions are sufficient to address potential credit risks. However, the banking system still faces a very high stock of non-performing loans (NPLs). A number of important reforms have been implemented in this regard, aiming to provide banks with an array of tools to tackle this challenge, including a strengthening of the supervisory framework by setting operational targets for NPL reduction, the creation of a secondary NPL market and the removal of various legal, judicial and administrative barriers to the management of NPLs (see Bank of Greece, 2018). These actions have started to bear fruit, as shown by the continued reduction of the NPL stock in line with the targets set. Non-performing loans amounted to EUR 81.8 billion at the end of December 2018, down by EUR 25.4 billion from their peak in March 2016. However, the NPL ratio remained high, at 45.4% in December 2018. On account of the reforms implemented since the beginning of the crisis and the effort of enterprises to make up for declining domestic demand by exporting to new markets, openness has improved substantially, and the economy has started to rebalance towards tradable, exportoriented sectors. • The share of total exports in GDP increased from 19.0% in 2009 to 37.7% in 2018. Exports of goods and services, excluding the shipping sector, have increased in real terms by 53% since their trough in 2009, outperforming euro area exports as a whole. • The volume of tradable goods and services in the economy increased cumulatively between 2010 and 2017 by 14% relative to non-tradables in terms of gross value added. The rebalancing of the economy towards the internationally tradable sectors was facilitated by increases in the relative prices and net profit margins of tradable goods and services. It is worth underlining the fact that, in 2017, the estimated net profit margins of tradables were three times higher than those of non-tradables. Thanks to improved economic conditions and to the reforms implemented, the unemployment rate, though still high, fell to 18.7% in the fourth quarter of 2018, from 27.8% at the end of 2013. 3. The Greek economy continues to face major challenges Despite the progress made so far, the Greek economy continues to face major challenges and crisis-related legacies. The European Commission, in its report for the European Semester of 2019 (see European Commission, 2019), points out that Greece faces excessive macroeconomic imbalances. Particular mention is made of the following challenges: • the high public debt (whose sustainability has improved significantly in the medium term with the measures adopted by the Eurogroup in June 2018); • the high stock of non-performing loans (NPLs), which impairs banks’ lending capacity and delays the recovery of investment and economic activity (see Abiad et al., 2011); • Greece’s negative net international investment position and still negative current account balance; • high unemployment, which generates inequalities that threaten social cohesion and increases 3/8 BIS central bankers' speeches the risk of depreciation of human capital (see Blanchard and Summers, 1986, and Moller, 1990); and • the low potential growth rate, due to the loss of human and physical capital during the crisis (see Bhagwati and Hamada, 1974, on the effect of brain drain), coupled with population ageing and a very low investment rate. Without ignoring the effect of still relatively weak domestic demand and the funding constraints hampering new investment, the business environment can still not be considered investment friendly and discourages investment with high tax rates, extensive bureaucracy, limited access to bank financing and delays in court proceedings and rulings. In this context, it should be noted that non-price or structural competitiveness is not only low compared with our European peers but it has in fact receded over the past two years, according to the Doing Business report of the World Bank (2018) and the Global Competitiveness Index of the World Economic Forum (2018). On top of all this, maintaining large primary surpluses over a prolonged period (e.g. 3.5% of GDP until 2022) impacts negatively on GDP growth. The restrictive effect of large primary surpluses is even more pronounced when accompanied by very high taxation which increases the informal sector of the economy (see Dellas et al., 2017). 4. The pre-conditions for sustainable growth To address the challenges facing the Greek economy, speed up the recovery and strengthen investor confidence in Greece’s long-term economic prospects, the following ten policy actions should be considered: 1st Reducing the high stock of NPLs with the timely implementation of the two systemic solutions proposed by the Bank of Greece and the Ministry of Finance, which will supplement the banks’ own efforts. 2nd Reducing the primary surplus target for the period up to 2022 to 2.0% of GDP compared with the current target of 3.5%. 3rd Changing the fiscal policy mix, with an emphasis on lower tax rates and higher public investment, so as to boost the growth impact of fiscal policy. 4 r d Implementing more structural reforms (including those agreed as part of the enhanced post-programme surveillance) to safeguard the fiscal achievements made so far and to enhance policy credibility. This would have a positive impact on Greece’s attempt to return to international financial markets on a sustainable basis. 5th Broadening the scope for public-private cooperation, in line with best international practices, for example, by strengthening public-private partnerships in investment, social security and healthcare. 6th Improving the quality and safeguarding the independence of public institutions. Independent and properly functioning institutions enhance long-term economic growth (see Acemoglu and Robinson, 2012). In this context, a speedier delivery of justice, legal certainty and a clear and stable legal framework are essential conditions for strengthening the public sense of fairness and justice, for improving the investment climate and for accelerating economic growth. 7th Implementing a more focused policy for attracting foreign direct investment (FDI), by reducing the tax burden, improving public administration efficiency and removing major disincentives, such as bureaucracy, legislative and regulatory ambiguity, especially land use, delays in litigation, and remaining restrictions on capital movements. FDI is crucial as domestic savings are insufficient to cover the investment needs of the Greek economy. In addition to 4/8 BIS central bankers' speeches helping to reduce the investment gap, FDI promotes closer trade links with countries and companies with state-of-the-art technologies and facilitates participation in global value chains. This would increase extroversion and improve both the quantity and quality of Greek exports (see Kinoshita, 2011). This, in turn, would accelerate a reallocation of production resources towards exports and increase Greece’s long-term potential output (see Olosfdotter, 1998, and Reisen and Soto, 2001). 8th Maintaining labour market flexibility and supporting the long-term unemployed, so as to avoid losing the gains in competitiveness and employment growth from the painstaking reform effort of the period 2010–2017. 9th Enhancing the so-called ‘knowledge triangle’, i.e. education, research and innovation, and the digitalisation of the economy by adopting policies and reforms that support research, technology diffusion, entrepreneurship and foster closer ties between businesses, research centres and universities. This would contribute to further increasing R&D spending and the ICT sector’s share in GDP. However, exploitation of ICT calls for continuous development and training in new technologies, the adoption of innovative products and the enhancement of start-up entrepreneurship. Overall, serious efforts are required to foster innovation and R&D spending in order to boost Greece’s digital transformation. 10th Targeting policy efforts on providing incentives for cluster development, so as to help SMEs overcome their small size and exploit economies of scale, given the very significant role of SMEs in the Greek economy. Incentives should also be provided to improve the technology and knowledge content of their output, while emphasis should be placed on facilitating their access to foreign markets through export promotion strategies and the establishment of common distribution channels. It is well documented that financial development boosts the growth of small firms more than it does large firms and hence fosters aggregate economic growth (see Beck et al., 2004). Furthermore, policy action is needed to provide funding via the banking sector, the capital markets as well as through various EU funds, while financial technology (FinTech) could offer alternative finance options to SMEs. The Bank of Greece has an active interest in FinTech and has, in fact, recently set up a FinTech Innovation Hub (see Bank of Greece, 2019) aiming to offer support and information to firms and individuals who are introducing or considering the adoption of innovative, technology-driven financial products, services or business models. 5. The EMU dimension A lot has been done in recent years to improve the functioning of EMU. Nonetheless, the architecture of EMU is still incomplete in many respects, and euro area policy makers cannot rely solely on ECB interventions (see European Commission, 2018d; Stournaras, 2019b). The following improvements are considered necessary: First, it is essential to ensure that the economic rebalancing mechanism (i.e. the Macroeconomic Imbalance Procedure) operates more symmetrically, i.e. both for Member States with external deficits and for those with external surpluses. Up to now, the burden of adjustment has fallen, to a very large degree, on Member States with current account deficits. Member States with high current account surpluses could have responded more appropriately. Second, it is a priority to complete the Banking Union with a European Deposit Insurance Scheme and the Capital Markets Union in order to restore intra-European financial flows, improve stability in the banking sector and promote private risk-sharing in the EU. Third, the ESM could be transformed into a European Monetary Fund to act as a lender of last 5/8 BIS central bankers' speeches resort for Member States, when they cannot access financial markets on sustainable terms. Fourth, the EMU should also enhance public sector risk-sharing by creating a centralised fiscal stabilisation tool (based on investment and/or unemployment insurance) and by allowing for the issuance of European “safe” bonds. Fifth, it is crucial to improve the accountability of European institutions to the European Parliament, for European citizens to have their say (through their European MPs) on euro area developments as a way of combatting populist and anti-European voices. 6. Conclusions Despite some missteps and delays and political resistance to the implementation of the required reforms, Greece has made notable progress since the start of the crisis in 2010. The implementation of a bold economic adjustment programme has eliminated several macroeconomic imbalances. Moreover, the economy is now recovering and has started to rebalance towards the tradable, export-oriented sectors. Nevertheless, significant challenges and crisis-related legacies remain (e.g. a high public debt ratio, a high NPL ratio, and high long-term unemployment), while the brain drain and underinvestment weigh on the long-term growth potential. To address these challenges, emphasis must now be placed on implementing the reforms described above. These reforms would facilitate the sustainable return of the Greek State to the international government bond markets and the rebalancing of the economy towards a knowledge-based and export-led growth model. Finally, it is high time to take bold steps towards the completion of EMU, promoting greater political solidarity and fostering private and public risk-sharing. The next crisis should not find us unprepared and we should not rely solely on the ECB’s monetary policy to deal with it. (1) For example, according to Alesina (2015a,b), revenue-based consolidations are more harmful for output dynamics than expenditure-based consolidations. The more benign effect of the latter type of consolidations works through their positive impact on business confidence and private investment. Moreover, Kasselaki and Tagkalakis (2016), using Greek data, have found that a government spending-based fiscal consolidation improves financial markets and boosts economic sentiment. This, in turn, mitigates the direct negative impact of fiscal consolidation on private investment and output, leading to a more rapid recovery. (2) R&D spending in 2017 rose to 1.14% of GDP from 0.67% of GDP in 2011, but still lags behind the euro area average of 2.13% in 2016. The ICT share in GDP in Greece was 3.1% in 2015 and lags behind the EU average of slightly above 4%. Indicatively, Ireland recorded an ICT sector share in GDP of 11.6% in 2014 (see European Commission, 2018a). References D Abiad, A., J. Dell’ Ariccia and G.B Li (2011), “Creditless recoveries”, IMF Working Paper 11/58. Acemoglu, D. and J. Robinson (2012), Why Nations Fail: The Origins of Power, Prosperity, and Poverty, Publisher: Crown Business. Alesina, A., O. Barbiero, C. Favero, F. Giavazzi, and M. Paradisi, M. (2015a), Austerity in 2009– 13, Economic Policy, 30(83): 383–437. Alesina, A., C. Favero and F. Giavazzi (2015b), “The output effects of fiscal consolidation plans”, Journal of International Economics, 96 (Supplement1), pp. 19–42. Bank of Greece (2018). Monetary Policy, www.bankofgreece.gr/BogEkdoseis/Inter_NomPol2018.pdf 6/8 Interim Report, December. BIS central bankers' speeches Bank of Greece (2019), FinTech Innovation Hub. www.bankofgreece.gr/Pages/en/Bank/InnovationHub/FinTechHub.aspxBeck, Th., A. DermirgucKunt, L. Laeven, and R. Levine (2004), “Finance, Firm Size, and Growth”, Journal of Money, Credit and Banking, Vol. 40, No. 7, pp. 1379–1405. Berti, K. and E. Meyermans (2017), “Maximising the impact of labour and product market reforms in the euro area – sequencing and packaging”, Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 16(2), pp. 7-19, October. Bhagwati, J. and K. Hamada (1974), “The brain drain, international integration of markets for professionals and unemployment: a theoretical analysis”, Journal of Development Economics 1(1-2): 19–42. Blanchard, O. and D. Leigh (2013), “Growth forecast errors and fiscal multipliers”, American Economic Review Papers and Proceedings, vol. 103(3), pp. 117–120. Blanchard, O. and D. Leigh (2014), “Learning about fiscal multipliers from growth forecast errors”, IMF Economic Review, Vol. 62, No. 2. Blanchard, O.J., and L.H. Summers (1986), “Hysteresis and the European unemployment problem”, in: S. Fischer (ed.), NBER Macroeconomics Annual (MIT Press, Cambridge): pp. 15– Dellas, H., D. Malliaropulos, D. Papageorgiou and E. Vourvachaki (2017), “Fiscal policy with an informal sector”, Bank of Greece Working Paper, No. 235. European Commission (2018a), Digital Economy and Society Index Report 2018 The EU ICT sector and its R&D performance. https://ec.europa.eu/digital-single-market/en/research-development-scoreboard European Commission (2018b), The Digital Transformation Scoreboard 2018, EU business go digital: opportunities, outcomes, and uptake. https://ec.europa.eu/growth/tools-databases/dem/monitor/sites/default/files/Digital%20Transformation European Commission (2018c), The Digital Economy and Society Index 2018, Country Report: Greece, ec.europa.eu/digital-single-market/en/scoreboard/greece European Commission (2018d), “Deepening Europe’s Economic and Monetary Union”, Commission Note ahead of the European Council and the Euro Summit of 28–29 June 2018. ec.europa.eu/commission/sites/beta-political/files/euco-emu-booklet-june2018_en.pdf European Commission (2019), 2019 European Semester, Country Report: Greece 2019 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances, B r us s els , ec.europa.eu/info/sites/info/files/file_import/2019-european-semester-country-reportgreece_en.pdf Kasselaki, M. and A. Tagkalakis (2016), “ Fiscal policy and private investment in Greece”, International Economics, vol.146, pp53–106. Kinoshita, Y. (2011), “ Sectoral Composition of Foreign Direct Investment and External Vulnerability in Eastern Europe”, IMF Working Paper 11/123. Katsimi, M. and Th. Moutos (2010), “EMU and the Greek Crisis: Are There Lessons to Be Learnt?”, European Journal of Political Economy, Vol. 26, No. 4, p. 568. Malliaropulos, D. (2019), “The Greek economy in 2019 – Outlook, risks and major challenges”, 7/8 BIS central bankers' speeches Presentation at the FitchRatings www.bankofgreece.gr/Pages/en/Bank/News/Speeches/Default.aspx? Item_ID=578&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Seminar, Möller, J. (1990), “Unemployment and deterioration of human capital”, Empirical Economics, vol.15, pp. 199–215. National Documentation Centre (2018), Basic Indices for Research and Development in Greece in 2017. Olofsdotter, K. (1998), “Foreign direct investment, country capabilities and economic growth”, Review of World Economics 134 (3): 534-47. Reisen, H., and M. Soto (2001), “Which types of capital inflows foster developing country growth?”, International Finance 4 (1): 1-14. Stournaras, Y. (2019a), “International economic developments and prospects of the Greek economy”, Speech at an event of the Federation of Industries of Northern Greece, Thessaloniki, 15 March. www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx? Item_ID=582&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019b), Article published in the 100th edition of The Bulletin (OMFIF): Addressing reversal of financial integration. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=560&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019c), New Year Speech to the Bank of Greece staff, Athens, January 9. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=559&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2018a), “Investment Opportunities in Greece −Investment opportunities in Greece”, speech at the “Repositioning Greece” event of Ekali Club, 17 December. https://www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?Item_ID=556&List_ID 4166–9f09-e1b26a1c6f1b Stournaras, Y. (2018b), “What lies in store for the eurozone? An assessment of the Greek bailout programmes: Has the EU become wiser?”, speech at the Economist’s event: Southeast Europe–Germany Business and Investment Summit: Reassessing Europe’s priorities, Berlin, 3 D e c e m b e r . www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx? Item_ID=553&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b World Bank (2018), Doing Business 2019: A Year of Record Reforms, Rising Influence , 31 October. www.worldbank.org/en/news/immersive-story/2018/10/31/doing-business-2019-a-yearof-record-reforms-rising-influence World Economic Forum (2018), The Global Competitiveness http://reports.weforum.org/global-competitiveness-report2018/?doing_wp_cron=1553010986.3554461002349853515625 8/8 Report 2018. BIS central bankers' speeches | bank of greece | 2,019 | 4 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 86th Annual Meeting of Shareholders, Athens, 1 April 2019. | Yannis Stournaras: Recent economic and financial developments in Greece Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 86th Annual Meeting of Shareholders, Athens, 1 April 2019. * * * GREECE IN THE POST-PROGRAMME PERIOD: CHALLENGES AND PROSPECTS TOWARDS A SUSTAINABLE GROWTH MODEL 2019 marks the beginning of new course for the Greek economy. Following the successful completion of the last economic adjustment programme in August 2018, the activation of the enhanced surveillance framework and with Greece now subject to the improved institutional framework for economic governance in the European Union and the euro area, the Greek economy is called upon to operate in a new economic policy context. It is our duty, as individuals, businesses, political and institutional stakeholders, to prove that we have taken ownership of the lessons of the crisis. 2018 saw the recovery of the Greek economy gain traction, with a GDP growth rate of 1.9%. The key drivers of growth were a rise in exports of goods and services, reflecting a greater extroversion of the economy, and a pick-up in private consumption supported by employment growth and an increase in households’ disposable income. The smooth execution and completion of the economic adjustment programme, improvements in confidence and the ensuing strengthening of growth led to a return of deposits to banks. This, in turn, enabled an increase in bank liquidity, a significant reduction and almost elimination of emergency liquidity assistance (ELA) from the Bank of Greece, a small recovery of bank credit, as well as a further relaxation of capital controls. All of the above led to upgrades of the credit rating of the Greek sovereign and enabled Greece to return to international financial markets a year later, in February 2019, when, taking advantage and of the favourable global investment climate, the Greek government successfully issued a five-year bond. The successful issue of a five-year government bond was the first positive step on the way back to normality. Moreover, the successful 10-year bond issue in March 2019, for the first time since the start of the public debt crisis in 2010, marked a more decisive step in the same direction, i.e. towards reconnecting Greece with the markets. The legal provision recently passed by Parliament on primary residence protection also contributes in this direction, as it reforms the relevant legislative framework, incorporating specific eligibility criteria and safeguards. The debt relief measures agreed in June 2018, together with the increased disbursements from the European Stability Mechanism (ESM) for the creation of a cash buffer, have significantly improved the sustainability of public debt in the medium term. However, given that Greek government bonds are still rated at below investment grade and in the absence of access to a precautionary credit line, Greek bonds remained ineligible for the ECB’s quantitative easing programme (QE) that would have helped strengthen economic activity and further improve the credit standing of Greek bonds. Greek government bond yields are still high and volatile. They are sensitive to potential disturbances in international financial markets and are influenced by increased uncertainty regarding the maintenance of reform momentum. In fact, the yield spread of Greek 10-year government bonds remains elevated, at just under 400 basis points, despite the recent decline in yields. This persistent phenomenon is a matter that needs our serious attention. 2019 will be another challenging year for the Greek economy. In the external 1/8 BIS central bankers' speeches environment, the slowdown of world trade amid rising protectionism could dampen export growth. On the domestic front, increased uncertainty about the continuation of reforms coupled with credit constraints are weighing on investment. High taxation in recent years has taken a toll on the growth dynamics of the economy, the competitiveness of Greek enterprises and confidence, and has caused tax fatigue leading to a contraction of the tax base and an exhaustion of the taxpaying capacity. In 2019, the growth momentum of the Greek economy is expected to continue at the same pace as in 2018, despite a further slowdown of growth rates worldwide and, especially, in the euro area. However, this forecast is conditional upon the resolute pursuit of structural reforms, the implementation of the privatisation programme without delays and the strengthening of productive investment. These conditions are essential to completing a successful transition to a sustainable and extroverted growth model. More specifically, according to Bank of Greece forecasts, GDP at constant prices is expected to grow by 1.9% in 2019, driven mainly by exports and private consumption. However, in order to make up for the huge losses suffered by the Greek economy in terms of output and employment during the long period of recession, higher growth rates are needed. The low level of investment, insufficient domestic savings, the high – albeit declining – stock of non-performing loans, the large loss of physical and human capital during the recession, as well as the apparently low expectations regarding medium-to-long term potential output growth as a result of adverse demographic trends and the sluggish adoption of new technologies in production processes, all weaken the growth dynamics. Meanwhile, the outlook for the economy still depends largely on foreign investor confidence and on foreign capital inflows. Turning to the domestic environment, and the fiscal front in particular, the possible implementation of Council of State Plenum rulings that earlier pensions cuts and the abolition of pensioners’ bonuses were unconstitutional, poses the greatest fiscal risk in the immediate future. Furthermore, the fact that Greece is entering an electoral cycle increases the risk of a slowdown of the reform effort and of fiscal relaxation, compounding economic uncertainty. Thus, backtracking on agreed policies would undermine the significant progress achieved so far. DEVELOPMENTS AND PROSPECTS OF THE GREEK ECONOMY IN 2019 Actual GDP developments in 2018 and the outlook for 2019 indicate that the Greek economy is back on a track of positive growth. The challenge now is to preserve and reinforce the growth momentum so as to enable strong growth rates over a long period. The reason for this is that growth has yet to gain sufficient traction, as reflected in a negative rate of change in investment, a negative household saving rate and a still high – albeit decreasing – rate of unemployment. The continued underexecution of the Public Investment Programme is also dampening growth. The growth prospects for 2019 will, to a large extent, remain conditional on the course of the global economy and of the euro area economy in particular, as well as on the continuation of the reform effort. Economic expansion in the euro area is projected to continue in 2019, but at a significantly more moderate pace (1.1%), as recent data point to a considerable weakening relative to the strong growth rates of previous years. In order to avert the risk of a further economic slowdown in the euro area and to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term, the Governing Council of the European Central Bank 2/8 BIS central bankers' speeches (ECB) decided in March 2019 to maintain accommodative monetary policy by keeping the key ECB interest rates unchanged until the end of the year and by launching a new series of quarterly targeted longer-term refinancing operations (TLTRO-III) with a maturity of two years. This decision should improve financial conditions in Greece and support the growth effort. The ECB Governing Council additionally stressed, as it has been doing for some time now, that fiscal policy in euro area member states with adequate fiscal space should be supportive of economic growth. The Greek economy in the current year is forecast to be driven mainly by export growth, albeit at a slower pace, and a rise in private consumption. Private consumption will be supported by the continued robust performance of the tourism sector, the ongoing recovery of the labour market and the improved disposable income of households, while investment will benefit mainly from a stabilisation of the real estate market. HICP inflation fell to 0.8% in 2018, from 1.1% in 2017. The absence of significant further increases in indirect taxation during 2018, the sharp drop in international crude oil prices as from October 2018 and strong base effects were among the main factors behind weaker inflation developments. Looking forward, HICP inflation in 2019 is expected to fall to lower levels, as a result of low international crude oil prices, a slowdown in global activity and trade, as well as strong competition in the domestic retail food market. FISCAL POLICY In 2017, for the third consecutive year, the general government primary balance exceeded the programme target. An overperformance is also expected for 2018, according both to the Introductory Report on the 2019 Budget and to Bank of Greece forecasts. However, the Public Investment Programme was once again underexecuted in 2018. Moreover, considerable delays were observed in the clearance of general government arrears to suppliers, despite targeted disbursements under the loan agreement. These developments, which have been observed repeatedly in recent years, tighten credit supply constraints, thereby depriving the real economy of much-needed financing resources and weighing on long-term growth, as also pointed out by the European Commission in its Enhanced Surveillance Report. For 2019, an expansionary fiscal package amounting to roughly 0.6% of GDP is envisaged, partly offset by a curtailment of 0.3% of GDP in Public Investment Programme expenditure. More importantly, possible further fiscal expansion in the run-up to the elections could put public finances at risk. THE BANKING SYSTEM Developments in the Greek banking system during 2018 were marked by an accelerating return of bank deposits, banks’ improved liquidity situation and diversification of funding sources through access to the interbank market and away from emergency liquidity assistance (ELA) of the Bank of Greece, a small recovery of bank credit and the maintenance of capital adequacy ratios at satisfactory levels. However, bank profitability remained weak. In early 2018, an EU-wide stress test exercise was conducted, including Greece’s four systemic banks, in order to assess bank resilience to hypothetical shocks over the period 2018–2020. The stress test exercise identified no capital shortfall in any of the participating Greek banks. Non-performing loans The high stock of non-performing loans (NPLs) on banks’ balance sheets remains the major challenge for Greek banks and a serious constraint on their lending capacity. Banks are using the 3/8 BIS central bankers' speeches options provided by the improved legal and regulatory framework, which has removed significant institutional and administrative impediments to NPL reduction. These important reforms have begun to bear fruit, as indicated by the reduction of the stock of NPLs to €81.8 billion at endDecember 2018 (or 45.4% of total loans), down from a peak of €107.2 billion in March 2016. However, the NPL stock is still excessively high. At the end of March 2019, Greek banks submitted to the ECB and the Bank of Greece their revised operational targets for NPL reduction, incorporating any recent changes in their strategies since September 2018 and any revised macroeconomic assumptions. According to the previous submission in September 2018, the banks aimed to reduce the aggregate stock of NPLs to €34.1 billion by end-2021, bringing the NPL ratio down to 21.2% of total loans. With the new submission, the Banks aim to reduce the NPL ratio even further, to slightly below 20%. Despite the significant reduction, this ratio is still roughly six times the EU28 average, meaning that the NPL reduction needs to be further accelerated. The successful resolution of the NPL problem is one of the major challenges facing the Greek economy in its effort to achieve sustainable growth, given that bank lending is the main source of financing for non-financial corporations (NFCs), owing to their structure and size, and for households. Freeing the banks of the NPL burden would help reduce the financial risks and funding costs faced by banks, thereby improving their internal capital generation capacity on a sustainable basis and enabling them to resume their intermediation role. In addition, alleviating the NPL burden would strengthen banks’ resilience and shock-absorbing capacity against potential future shocks; support operating profitability and put the conditions in place for a gradual increase in loan supply and a decrease in lending rates to enterprises and households, thereby enabling the smooth financing of the real economy. The Greek authorities will soon need to decide on new, more systemic tools that would complement the banks’ own efforts. The Bank of Greece has for quite some time now proposed a systemic solution, which provides for the transfer to Special Purpose Vehicles (SPVs) of a significant part of NPLs along with part of the deferred tax credits (DTCs) on banks’ balance sheets. This solution has the advantage of addressing two very serious problems at the same time: NPLs and DTCs. The government and the Bank of Greece are working together towards the submission for approval of such systemic solutions by the competent European authorities and their ultimate adoption with a view to successfully tackling the NPL problem. Furthermore, as mentioned previously, the new legislation on primary residence protection is a first step towards an overhaul of the personal insolvency framework in pursuit of a holistic solution to the problem. The implementation of the new framework, which incorporates specific eligibility criteria and safeguards, aims to protect the more vulnerable social groups, to avoid creating moral hazard at the expense of non-delinquent borrowers and to ensure that the impact on bank capital is manageable. PRIVATE INSURANCE UNDERTAKINGS As a consequence of Solvency II, the Greek private insurance market matured further in 2018, with improvements in governance structures and human resources. Risk and solvency assessment capabilities were also improved, with a view to better capital and risk management and more effective protection of policy-holders. In 2018, insurers continued their efforts to reduce the long-term guarantees embedded in their products. In this context, the time horizon of coverages has been reduced, and the financial guarantees offered reflect more accurately the prevailing economic conditions. These practices have had a positive impact on the undertakings themselves, by enhancing their solvency position, and on policy-holders, by ensuring lower insurance costs and better quality of insurance products. Nevertheless, insurance undertakings must take care not to lose their long-term perspective. In the life insurance sector, insurance undertakings are increasingly designing and providing 4/8 BIS central bankers' speeches insurance-based investment products. This business strategy supports the financial strength of insurance undertakings, while also enabling them to offer higher returns to policy-holders, although exposing them to higher investment risks. Against this background, it is of crucial importance that insurers provide accurate and relevant information to prospective customers, enabling them to understand the risks involved and avoid losses. In addition, with Law 4583/2018, Directive (EU) 2016/97 on Insurance Distribution was transposed into national legislation, and the Bank of Greece was entrusted with the supervision of insurance intermediaries and distributors. The outlook for the domestic insurance market is promising. In particular, based on the recent proposal for an EU regulation on a Pan-European Personal Pension Product (PEPP), Greek insurance undertakings could assume a new role and offer personal pension products to customers seeking to supplement their pension entitlements. Likewise, insurance undertakings could be part of a broader scheme providing protection against natural disasters, climate change-related and environmental risks in general. Moreover, insurance undertakings can take advantage of new technologies, such as big data analytics, artificial intelligence and machine learning, to improve risk assessment and pricing. RISKS AND SOURCES OF UNCERTAINTY Despite the progress made so far, as shown by key economic aggregates, risks remain, both domestic and external. On the external front, risks could arise from a possible further slowdown of global economic activity in 2019 amid increasing trade protectionism, geopolitical risks and vulnerabilities in emerging market economies. The slowdown of the European economy is also a significant source of concern, which together with heightened uncertainty over the outcome of the Brexit process, could negatively affect the growth of Greek exports and tourism. Turning to the domestic front, the possible implementation of Council of State Plenum rulings that earlier pensions cuts and the abolition of pensioners’ bonuses were unconstitutional, poses the greatest fiscal risk in the medium term. The associated additional expenditure would weigh negatively on the public debt sustainability analysis and would feed uncertainty about the fiscal policy and the financial sustainability of the pension system. Other domestic risks include the potential implications of high taxation and the overall fiscal policy mix, as well as the backtracking on reforms or delays in their implementation. In addition, in the labour market, the increase in the minimum wage, legislated last January, though expected to bring about short-term gains by supporting disposable income and thereby private consumption, is expected in the medium term to hurt employment, mainly of youth, and competitiveness. In any event, any raise of the average wage must be consistent with labour productivity growth, so as to preserve the gains in competitiveness and employment achieved through a painstaking reform effort since 2010. CHALLENGES FOR GROWTH Greece is confronted with a dual challenge: on the one hand, to achieve strong and sustainable growth rates and, on the other, to ensure high primary surpluses in order to meet its fiscal commitments, as defined in the Eurogroup decision of June 2018 and by the broader framework of European fiscal rules. During the long period of adjustment, the Greek economy succeeded in correcting several macroeconomic imbalances. However, Greece continues to face vulnerabilities which can, to a large extent, be considered a legacy of the crisis, although the multiple and interrelated nature of these vulnerabilities reveals chronic weaknesses. 5/8 BIS central bankers' speeches In greater detail: – The permanent return of the Greek State to international financial markets on sustainable terms is the greatest challenge ahead. The existence of a cash buffer, though useful, is only a temporary means for refinancing State borrowing requirements, and would prove rather ineffective in the event of future shocks in international markets. By no means, therefore, can the cash buffer substitute for a return to the markets at regular intervals and on sustainable terms. – The high public debt-to-GDP ratio increases public and private sector borrowing costs and puts a drag on growth. Although Greece’s debt sustainability improved markedly with the measures adopted by the Eurogroup since 2012 and up, most recently, to June 2018, debt reduction ultimately hinges upon both achieving the fiscal targets and remaining committed to the reform effort so as to ensure robust GDP growth. – The maintenance of large primary surpluses over an extended period of time (3.5% of GDP annually until 2022 and 2.2% of GDP on average over the period 2023–2060), especially when accompanied by high taxation, weighs on growth and consequently on debt sustainability. – The high stock of non-performing loans (NPLs) on banks’ balance sheets hampers the financing of growth, as it ties up bank capital and financing resources in non-productive activities. The successful resolution of this problem is absolutely necessary in order to improve the quality of bank assets. This, in turn, would enhance the access of healthy entrepreneurship to bank credit. – The rate of unemployment remains not only high, but the highest across the European Union. High unemployment, in particular youth and long-term unemployment, gives rise to inequalities that threaten social cohesion, devalues human capital, saps away any motivation for better education and work, and feeds the brain drain. – Low structural competitiveness, with in fact a trend towards deteriorating. – The still negative rate of change in investment, considering the need to replenish Greece’s capital stock, especially in the wake of a protracted period of disinvestment. Moreover, continued underexecution of the Public Investment Programme holds back growth, as it reduces aggregate demand, leads to a deterioration of public infrastructure and increases businesses’ operating costs. – Insufficient domestic savings. The rise in nominal disposable income per capita, in particular in the lower income brackets, supported by employment growth especially among youth and workers with part-time and intermittent employment contracts, was chiefly channelled into consumption. Thus, the household saving rate has remained in negative territory. – Delays in the delivery of justice. According to the Enforcing Contracts Indicator used in the World Bank’s Doing Business report for 2019, compared to the OECD average, the time for trial and to enforce the judgment is three times longer in Greece, while the time for resolving insolvency is twice as long. Therefore, the rapid and fair settlement of legal disputes in a transparent and stable legal framework is crucial to strengthening the rule of law, thereby also improving investor confidence. – The quality of institutions and respect for independent authorities. Countries with weak institutions lack in flexibility and adaptability, making potential economic disturbances more likely to occur and more difficult to address. – Adverse demographic developments. Over the past decade, Greece’s demographics have deteriorated dramatically, as evidenced by the decline and rapid ageing of the population and a 6/8 BIS central bankers' speeches very low fertility rate. This trend in demographic data was further exacerbated by the recent wave of migration of part of the population of reproductive age. The demographic crisis is one of the most serious challenges that Greece’s society and economy will need to address in the immediate future, as the rapid contraction and ageing of the population adversely impacts potential output and the pace of economic growth in the medium-to-long term. – The slow digital transformation of the economy. According to the Digital Economy and Society Index (DESI), Greece ranked second to last among the EU28 in 2018, meaning that the digital transformation of the Greek economy remains slow. As a result, Greece is still considered ‘digitally immature’. Consequently, policy action must be taken to eliminate this technological lag and reduce digital illiteracy. – Climate Change and the challenge of sustainable development. Redefining the concept of growth in a sustainability context and embracing the principles of a circular economy will be crucial to our future. According to the World Economic Forum’s Global Risks Report for 2019, three of the top five risks for the world economy are environmental and all three relate to climate change. PREREQUISITES FOR SUSTAINABLE GROWTH Addressing the above challenges effectively will require, as a minimum, the following set of policy actions: First, a continuation and completion of structural reforms, so as to safeguard the achievements made so far, reinforce the credibility of economic policy and further improve Greece’s credit standing, paving the way to a permanent return to international financial markets on sustainable terms. In this context, top priority must be given to reforms that enhance public administration efficiency, legal certainty, especially in land use, and the faster delivery of justice. Second, reducing the high stock of non-performing loans, so as to free up funds for viable businesses, facilitate the restructuring of the business sector and strengthen healthy competition. Meanwhile, the legal framework reforms currently under way should improve payment morale. Third, a change to the fiscal policy mix geared towards lowering the excessively high tax rates, further rationalising public expenditure and enhancing the Public Investment Programme. Ideally, this change should be combined with more realistic primary surplus targets, considering that, with public debt close to 170% of GDP, one additional percentage point increase in GDP contributes 1.7 times more towards reducing the public debt ratio than does one percentage point of primary surplus. Fourth, greater focus on attracting foreign direct investment of high value added, which would accelerate technology integration, strengthen Greece’s export performance, utilise inactive human resources, thereby increasing total factor productivity. This presupposes a continuation of privatisations, along with an encouragement of public-private partnerships and a removal of disincentives to investors. Fifth, strengthening the “knowledge triangle” (education, research, innovation). As shown by the latest global trends, in modern efforts to reconcile the functioning of a market economy, i.e. capitalism, with democracy, investing in knowledge and the access opportunities to knowledge for all are a crucial catalyst both for economic growth and for social justice. The Greek education system, despite producing a pool of highly-qualified individuals, fails to equip them with the skills required in today’s digital world. The new technologies can generate employment opportunities, provided that labour can rapidly adjust to a human-centred working environment, in which 7/8 BIS central bankers' speeches knowledge, skills, personal initiative, mobility, flexibility and cooperation will play a key role. Investing in human capital and fostering entrepreneurship are strategies crucial to the successful adjustment of the labour market. All levels of the education system must therefore be redesigned in order to cultivate the skills required by the modern labour market. Closer links between education and the production process will contribute towards this goal. *** 2019 will be a challenging year, as domestic and external risks remain. Therefore, there is no room for complacency. Greece’s successful course in new, post-crisis, European normality calls for strict commitment to uphold the very important achievements made so far, conduct a prudent economic policy aimed at eliminating the remaining imbalances and pursue reforms. The ultimate objective is to complete the Greek economy’s safe transition to a sustainable growth model based on extroversion, entrepreneurship, investment, knowledge and social cohesion, with social sensitivity and respect for the natural environment. The benefits to be reaped are substantial: a rapid decrease in the unemployment rate, a reversal of the brain drain, higher total productivity, higher wages and incomes. 8/8 BIS central bankers' speeches | bank of greece | 2,019 | 4 |
Keynote address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Symposium on "Climate Change - Threats, Challenges, Solutions for Greece", The American College of Greece, Athens, 3 April 2019. | Yannis Stournaras: Climate change - threats, challenges, solutions for Greece Keynote address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Symposium on "Climate Change - Threats, Challenges, Solutions for Greece", The American College of Greece, Athens, 3 April 2019. * * * It is a great pleasure for me to be here with you today and have the opportunity to share my thoughts on climate change: the threats, the challenges and the solutions for Greece. Climate change is gradually shaping a new environment. Research so far confirms that the current and projected implications of climate change pose such threats to society and to sustainable development that we cannot continue with a “business as usual” scenario. We need to address challenges and to work on solutions, shifting to a low-carbon economy, managing the risks and adapting to the changing climate. During the past decade, environmental risks have progressively dominated the global risks landscape. It is telling that in the World Economic Forum’s report1, in 2019 for the third consecutive year, three of the top five global risks, in terms of both likelihood and impact, are environmental and all three are associated with climate change. Historically, climate change can be attributed primarily to the actions of the large, industrialised countries. However, its impacts are diffused to all countries, whether small or large, developed or developing. This global nature of climate change means that cooperation and action at international level is important. Therefore, the international community, through long negotiations, has succeeded in reaching global agreements, such as the Kyoto Protocol and the more recent Paris Climate Agreement, in order to address the problem on a global scale. Greece, along with other small countries in the climate-sensitive Mediterranean region, is expected to incur adverse effects from climate change. Acknowledging this fact, the Bank of Greece has been one of the first central banks worldwide to actively engage in the issue of climate change and invest significantly in climate research. Over the past ten years, the interdisciplinary Climate Change Impact Study Committee (CCISC) of the Bank has been working on all aspects of climate change, from climate science to environmental macroeconomics, highlighting climate change as a key factor that should be horizontally integrated into policymaking as it affects almost all sectors of the Greek economy. Awareness of the economic value of ecosystem goods and services, which form the basis of the global economy, promotes the sustainable utilisation of natural resources and good management of natural systems. Within the Climate Change Impact Study Committee, environmental and energy economists, working with climatologists, physicists, biologists, engineers and social scientists, study the issue of climate change, analyse the economic, social and environmental consequences for Greece, and advise on the way forward. The studies highlight the wealth of Greece’s natural resources, but also the risks to the country’s natural and human environment. Climate change appears to be a major threat, as the impact on almost all sectors of the national economy is expected to be adverse. Under an inaction (“business as usual”) scenario, the Greek GDP could, ceteris paribus, fall by 2% annually by 2050 and even further by 2100, while the total cost to the Greek economy could reach a cumulative €701 billion by 2100.2,3 Furthermore, according to a vulnerability assessment4 that quantifies and ranks the expected climate risks for Greece, agriculture is the sector expected to be most severely hit by climate 1/5 BIS central bankers' speeches change in Greece, while the impact on tourism and coastal systems will also considerably affect household income and the economy as a whole. Moreover, the adverse impact of climate change on the water reserves sector is also of particular significance, given its implications for agriculture and water supply. Recognising the importance of well-informed economic policymaking, the Bank of Greece released last year the book The Economics of Climate Change, which provides a comprehensive, state-of-the-art review of the economics of climate change and the emerging area of environmental macroeconomics, focusing on the design of economic policy aimed at controlling the climate externality. This publication aims to lay the foundations both for addressing the role of monetary policy under conditions of global warming and for exploring the link between monetary policy and climate change, a topic that remains high on our research agenda. It acknowledges, of course, that monetary policy is not the primary tool for tackling climate change but rather plays a supplementary role alongside fiscal, environmental and structural policies. Decarbonising the energy system and financing the transition to a low-carbon economy, consistent with the “well below 2 Celsius degrees” goal set out in the Paris Climate Agreement, are among the major challenges of our time. Climate change and global warming are linked to anthropogenic activity, in particular the use of fossil fuels and carbon emissions. Current and future impact on society and sustainable development is such that renders the use of fossil fuels prohibitive. We need to mitigate climate change by rapidly and drastically reducing emissions, adopting appropriate energy management and high efficiency practices, financing green energy, fostering energy-saving investment and promoting a low-carbon economy. Along these lines, the adoption of policies and technologies leading to a low-carbon Greece, in the context of European policies for climate change, can accelerate a transformation of the Greek economy that offers opportunities for economic activity. Likewise, efficient adaptation programmes, necessary as a damage control measure that has been found to reduce the cost of climate change by almost 30%5, could provide a promising opportunity for Greece to boost its growth performance and competitiveness, while implementing climate policies. In this process, there are certain transition risks arising from the adjustment to a low-carbon economy, for example potential stranded assets, business costs and disruptions. Yet, a careful and timely transition will also open up opportunities, associated with the development of innovative and renewable energy products, investment in energy saving, new infrastructure and new jobs. The transformation of the economy towards decarbonisation cannot but have a positive net outcome, as long-term value creation is a matter of transition to a low-carbon economy and effective climate risk management6. Since January 2019, the Bank of Greece has been a member of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS)7. The NGFS brings together central banks and supervisors and comprises 34 members and six observers with the common objective of strengthening the global response required to meet the goals of the Paris Agreement and enhancing the role of the financial system in managing risks and mobilising capital for green and low-carbon investments, in the broader context of environmentally sustainable development. The members of the network aspire to exchange experiences, share best practices, contribute to the development of environment and climate risk management in the financial sector and mobilise mainstream finance to support the transition to a sustainable economy. NGFS members acknowledge that climate-related risks8 are a source of financial risk. It is therefore within the mandates of central banks and supervisors to ensure that the financial system is resilient to these risks. This is why central banks further support transparency and the disclosure of data that will enable markets to lead the transition to a low-carbon economy so that, with the right information, they can price in the cost of doing business, the climate risk and, most importantly, evaluate new business opportunities. The proper assessment and supervision of the 2/5 BIS central bankers' speeches financial risks stemming from the transition to a low-carbon economy are important factors in promoting sustainable development and safeguarding the smooth functioning of the financial system9. In this context, the banking sector can also play an important role in addressing the threats and challenges of climate change. The United Nations, through the Environment Programme Finance Initiative (UNEP FI), sets out sustainability principles in the framework of contemporary banking practice. Currently under consultation, the Principles for Responsible Banking10 aim to define the role and the responsibilities of the banking sector in a sustainable future, where banks align their business practices with the global community goals and create value for society. The Principles set out the criteria for responsible and sustainable banking, through a holistic evaluation of risks and opportunities stemming from banks’ activities. Furthermore, they encourage banks to identify and assess the effect of their asset allocation decisions and be transparent on the resulting positive and negative impacts on society and the environment. As part of a roadmap towards sustainability, the Principles support and accelerate the fundamental changes needed to achieve shared prosperity for current and future generations. If we are to meet the Sustainable Development Goals of the United Nations and the objectives of the Paris Climate Agreement, the banking sector needs to maximise its contribution and align itself with these goals. Last month, the Bank of Greece officially endorsed the Principles for Responsible Banking and, in its capacity as the national central bank, strongly urges all banks within its remit to do the same and set ambitious targets. Towards a sustainable future, scientific research and current developments confirm the need for a dynamic strategy and an action plan to adapt to the changing climate. Climate change adaptation, as a process of adjusting to climate effects in order to moderate the negative and enhance the potential positive impacts of climate change, is a crucial issue spanning across multiple economic, social and environmental policy areas. Therefore, under a memorandum of understanding signed with the Ministry of Environment and Energy and the Academy of Athens, the Climate Change Impact Study Committee drafted in 2015 the National Climate Change Adaptation Strategy, setting out the general objectives, guiding principles and implementation tools for an effective and growth-oriented adaptation strategy, in line with European directives and international experience. Furthermore, fostering the adaptation process, the Committee is currently working, alongside the Ministry of Environment and Energy and other key national actors, on the Life IP programme “AdaptInGR − Boosting the implementation of adaptation policy across Greece”. The programme aims at advancing the implementation process of the National Climate Change Adaptation Strategy of Greece by addressing specific objectives such as the systematisation and improvement of decision making for climate change adaptation, the promotion of adaptation policies and actions in all sectors, the establishment of monitoring mechanisms for the evaluation and review of adaptation policies and the strengthening of the adaptive capacity of the Greek society through awareness and dissemination actions. Apart from public policies, the process of addressing climate change can undoubtedly be accelerated if established growth models are adjusted in order to ensure long-term sustainability. Under conditions of depletion of natural resources worldwide, a focus on more efficient use of resources and minimisation of waste emerges is the obvious solution. The model of a linear economy prevailing today (sourcing – manufacturing – use – disposal), on which most economies since the Industrial Revolution have relied, is no longer sustainable. Just like nature, which operates in a circular manner, business activity can become sustainable by switching from the linear model to a circular one. Circular economy means that the value of products, materials and resources is maintained in the economy for as long as possible and waste generation is minimised. 3/5 BIS central bankers' speeches This transition to a circular economy requires interventions on the supply side, such as ecodesign and longer life cycles of products, as well as on the demand side, through a change in consumption patterns and a more efficient management of waste, with appropriate financial incentives and community engagement. This transition is expected to have a positive effect on production, employment, climate, nature, natural resources and social well-being (11). Along these lines, consumers can modify their behaviour and favour more sustainable practices, as consumer demand can be a powerful driver, encouraging companies to switch to more sustainable production practices and environmentally-friendly products. Another example is our dietary habits that have a devastating effect on the planet’s natural resources, land and water reserves. A lower consumption of meat and dairy products would bring substantial savings on cultivated land and water resources, reduce carbon emissions and help to gradually restore forests and wildlife. Focusing further on solutions, probably the most important thing we can do is educate the youth. Education is a vital element of the global response to climate change, as it supports young people to understand the impact of global warming, inspires changes in their behaviour and increases climate literacy, limiting the scope for controversy over this serious issue. It is for these reasons that the Bank of Greece, through the work of the Climate Change Impact Study Committee, addresses climate literacy and has in the past decade organised a large number of conferences, workshops, seminars and round-table discussions, as well as a public consultation on climate and energy issues, ahead of the Paris Convention in 2015. Furthermore, the Bank of Greece and the Goulandris Museum of Natural History signed in 2018 a memorandum of cooperation for the design and the implementation of an educational programme for young students, based on the research work of the CCISC. By educating the youth we are empowering the next generation, the one that will be facing most of the impact of climate change, to act and address climate-related problems and to build a new sustainable society. This focus, in part, explains my presence here at the American College of Greece, an educational institution that acknowledges the importance of climate change and is committed to develop a sustainability culture throughout its educational practices. Today’s symposium, exploring how Greece can tackle climate change, offers an opportunity for all, and especially for the students, to be exposed to a variety of actors on climate change issues, stakeholders and best practices. I would like to congratulate the organisers for taking this initiative and wish them the best of success. 1 The Global Risks Report 2019, 14th Edition, www3.weforum.org/docs/WEF_Global_Risks_Report_2019.pdf World Economic Forum, 2 GDP contraction relative to base year GDP at constant 2008 prices. 3 CCISC (2011), The environmental, economic and social impacts of climate change in Greece, Bank of Greece, pp. 453–457, available at: www.bankofgreece.gr/BogEkdoseis/ClimateChange_FullReport_bm.pdf 4 Τhe vulnerability analysis is included in CCISC (2015), National Climate Change Adaptation Strategy (NCCAS), pp. 7-13, available at: www.bankofgreece.gr/BogDocumentEn/National_Adaptation_Strategy_Excerpts.pdf 5 CCISC (2011), The environmental, economic and social impacts of climate change in Greece, Bank of Greece, pp. 453–457, available at: www.bankofgreece.gr/BogEkdoseis/ClimateChange_FullReport_bm.pdf 6 Carney, M., “A transition in thinking and action”, speech at the International Climate Risk Conference for Supervisors, De Nederlandsche Bank, Amsterdam, 6 Αpril 2018, available at: www.bankofengland.co.uk//media/boe/files/speech/2018/a-transition-in-thinking-and-action-speech-by-mark-carney.pdf? la=en&hash=82F57A11AD2FAFD4E822C3B3F7E19BA23E98BF67 4/5 BIS central bankers' speeches 7 www.banque-france.fr/en/financial-stability/international-role/network-greening-financial-system 8 According to Mark Carney (Governor of the Bank of England) and Michael Bloomberg (chair of the Task Force on Climate-related Financial Disclosures), “… financial disclosure is essential to a market-based solution to climate change. A properly functioning market will price in the risks associated with climate change and reward firms that mitigate them. As its impact becomes more commonplace and public policy responses more active, climate change has become a material risk that isn’t properly disclosed..”, The Guardian, 14.12.2016, available at: www.theguardian.com/commentisfree/2016/dec/14/bloomberg-carney-profit-from-climate-change-rightinformation-investors-deliver-solutions 9 www.ecb.europa.eu/pub/pdf/other/ecb.mepletter171010_Urtasun.en.pdf? utm_medium=email&utm_source=nefoundation&utm_content=8+-+response&utm_campaign=banks-22Nov&source=banks-22-Nov 10 www.unepfi.org/banking/bankingprinciples/ 5/5 BIS central bankers' speeches | bank of greece | 2,019 | 4 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the ACCIS (Association of Consumer Credit Information Suppliers) Conference 2019 "Enabling Trust through the Consumer Decision Journey", Athens, 14 June 2019. | Yannis Stournaras: A new European landscape towards a unified credit market and the role of the credit bureau Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the ACCIS (Association of Consumer Credit Information Suppliers) Conference 2019 "Enabling Trust through the Consumer Decision Journey", Athens, 14 June 2019. * * * It is a great pleasure to be here today and have the opportunity to share with you my thoughts on the importance of the European financial services ecosystem and the steps we need to take in order to strengthen consumer trust. Firstly, I will briefly outline the importance of credit bureaus in building such a trust by increasing the efficiency of both lending and borrowing as well as by minimizing information asymmetries and moral hazard. Secondly, I will outline the social responsibility dimension of consumer-focused credit activities in the framework of a well-functioning EU consumer credit market, whereby creditors and intermediaries should act accordingly. Thirdly, I will touch upon the issues of smart and sound innovation in the credit bureau’s industry, whereby a credit bureau should act beyond the traditional boundaries and have the ability to connect new customers to all existing financial services. Fourthly, I will talk about the necessity of ensuring a level-playing field, for all credit bureau participants by minimizing the monopolistic elements that exist in the credit bureau industry. Finally, I will argue that a better regulated credit industry will facilitate an efficient and cost effective credit risk assessment, as credit bureaus can evaluate credit risk accurately and consistently through the use of appropriate tools. A. The importance of credit bureaus in building trust in the financial system Building trust is equivalent to the fulfillment of expectations by market participants. Credit bureaus have a very important role to play in building trust in the financial system, as they are responsible for managing and providing credit data to consumers, while at the same time simplifying the complexity of credit data usage in consumer financial markets. The benefits of credit bureaus into building trust in the financial system are the following: 1. They improve the performance of the financial sector and stimulate economic growth by increasing the efficiency of lending and borrowing. Borrowers, having registered a positive past credit history, may seek loans at better and more competitive terms and conditions. Lenders, on the other hand, can utilize the collateral history – stored in centralized collateral registries—to assess borrowers’ creditworthiness. 2. They address the problem of moral hazard that is the behavioral unwillingness of a consumer to repay. Credit bureaus support borrower discipline since a failure to repay a creditor may result in penalties imposed by other creditors. 3. They address the problem of information asymmetries, as borrowers and lenders may share the same information regarding risks and pricing. Increased transparency will result in more informed credit decisions, which will ultimately increase the volume of credit. 4. They enable the functioning of a competitive financial system, as loan processing becomes simpler, collateral information is being properly utilized and streamlined and, in the end, lenders are able to offer new products at competitive interest rates due to the availability of 1/5 BIS central bankers' speeches information on customers’ credit risk profiles. B. Social responsibility of consumer-focused credit activities As the core business of credit reporting involves the flow of information through a network of stakeholders, credit reporting activities touch upon sensitive issues, such as the privacy rights of consumers as well as their protection and security. We should not forget that, due to the many functions and usages of credit data, sharing of credit data from credit bureaus raises issues of social responsibility of the credit industry or private credit bureaus. It necessitates appropriate prudential supervision, and the need for well-functioning institutions, which are to be entrusted with the exercise of such a social function. If credit data are not used within a proper framework, they can result in dysfunctional markets, market abuse, lack of trust and, in some cases, abuse of fundamental rights. All these can reduce the volume of credit. Therefore it is of utmost importance to set the policy goals correctly both in terms of the institutional or legal form of the organizations managing the data, as well as with regard to the design and use of databases under the provisions of the law. C. Challenges from smart and sound innovation In many ways, the Open Source Credit & Big Data Bureaus that have recently emerged, connect new customers to existing financial services at a lower cost. Innovative lenders are reshaping business models, underwriting criteria, and customer experience. Their innovations reflect an understanding of demographic changes, borrower needs, and how to connect to borrowers through new technological channels. As a result, the transition from business-driven to data-driven decision-making should revolutionize the way the credit bureaus operate. By relying more on Big Data, Neural Networks, Artificial Intelligence and Machine Learning, agencies will have the opportunity to approve loans for consumers in markets whereby access to the banking sector has been limited so far. In this way, a credit history will be created from scratch at a much lower cost compared to the credit history databases that exist today. At the same time, creditors may get access to such databases on a fee basis, allowing them to receive a list of customers that have already been accessed. In order to get the borrower’s profile, no physical appearance may be needed nor any documents that usually accompany a loan application. Credit scoring techniques may access data even from the consumer’s smartphone and the system will be able to identify potential credit risks with a significant level of accuracy. As certain confidentiality issues may arise, all appropriate technical and legal safeguards should be employed in order to assure all stakeholders of the confidentiality of the provided information. D. Competition and level-playing field The establishment of a level playing field, regarding the competition of financial institutions may demand that they are equipped with similar tools, and no relevant restrictions or barriers exist within the EU Member States. In turn, this means that credit-risk data may require a high degree of standardization. However, this is far from being the case today, as we are currently facing a fragmented system of national credit data sharing. Apart from operating at a national level, a number of challenges arise for calculating and comparing data coverage figures on customers across countries, as each credit bureau does not necessarily collect information on the same population across countries. The European Credit Research Institute has conducted a survey commissioned by 2/5 BIS central bankers' speeches ACCIS(1) which provides a list of credit bureaus operating in European countries and underlies the aforementioned challenges. As a result, competition in the information industry within the EU is almost absent. The market for credit data remains national and hence, commercial credit bureaus do not face competition. The EU should have been the relevant market for credit data by ensuring a level-playing field for all credit bureau participants. Conditions may improve through the interlinkage of information flows to the various credit bureau stakeholders. More specifically, as information flows between suppliers andand users of information increase, the interlinkage between the national credit bureaus should increase as well, by incorporating more information from customers. In such an interconnected network, all stakeholders would find it more attractive to join. The more sources are connected to the network, the more detailed credit knowledge becomes the more useful it become for risk-management purposes. E. Regulatory and supervisory initiatives – policy actions Given the dispersion of sources, the need for the integration of credit markets raises questions on how to measure over-indebtedness and assess household creditworthiness in similar ways. This will improve micro and macro financial surveillance and enable a more comprehensive assessment of financial stability risks. In effect, this calls for a harmonized system of measuring credit data in the EU. Nevertheless, regulatory and institutional experience vary amongst EU member states, as National Credit Registries do not exist in certain member-states, while various interests in the credit industry have dictated how the data centralization systems would be set up (i.e. credit bureaus, credit reference agencies, public credit registers etc). The good news is that the European Central Bank has made significant steps for the setting-up of a centralized infrastructure for the collection and sharing of granular credit-risk data within the banking sector on a EU-wide scale, called “Analytical Credit Dataset” (‘AnaCredit’). Anacredit will impose new reporting requirements for lenders and credit bureaus in the Euro Area, which will enable the harmonization of credit data that credit bureaus have in their databases. In this vein, all stakeholders (credit bureaus, lenders, borrowers, consumers) may be obliged to use the same set of indicators and harmonized definitions which, eventually, will allow for a panEuropean comparison of the levels of indebtedness levels. Having said that, our problems will not disappear automatically with an integrated pan-European Database. The relevant supervisory activities should be enhanced in order to ensure that credit bureaus implement best practices in data collection processing and submission. Supervisors should ensure that appropriate procedures are in place so that the rights of customers can be protected, while the protection of security and confidentiality of data should remain high on the agenda. Best practices indicate that credit reporting systems should benefit from a legal and regulatory framework that is transparent, predictable, proportionate and supportive of consumer rights. The legal and regulatory framework should allow more than one credit bureau license in order to avoid the creation of a monopoly. Credit bureaus should be allowed to operate under an institutional framework that could regulate its specific activities, including the receipt and processing of consumer information, its database updates, as well as the means for compiling information and assessing consumers’ creditworthiness. Since the level of information is expected to be harmonized, private credit bureaus that have obtained a license could then compete on the pricing and the quality of their services. Finally, the most recent financial crisis unveiled a number of data gaps that hindered effective supervision and regulation of the financial system. Credit bureaus, as suppliers of data, can 3/5 BIS central bankers' speeches partly bridge the gap, as long as they employ innovative technology and change their business models by exploiting information from alternative data sources, so as to adapt to the new credit usage behavior of customers. Sources: Marc Rothemund, Maria Gerhardt, “The European Credit Information Landscape: An analysis of a survey of credit bureaus in Europe”, ECRI Industry Survey, (February 2011). Federico Ferrett, “The Never-Ending European Credit Data Mess”, Study commissioned by BEUC, Brunel University London (October 2017). Olegario R, “Credit Reporting Agencies: A Historical Perspective”, in Miller M (ed.), Reporting Systems and the International Economy (MIT Press, 2003), 115–159 Jappelli T. and M. Pagano (2003) “Public Credit information: A European Perspective.” In Credit Reporting Systems and the International Economy ed. Margaret Miller. Boston: MIT Press. Dan Khomenko, Australian Government Officer, MicroMoney’s advisor “MicroMoney: The Future of the Credit Bureau’s industry” (October 2017) Michael Turner For The Straits Times, “Credit bureau scene could do with more competition” (October 2014) Pagano M. and Jappelli T., “Information Sharing in Credit Markets", 48(5) Journal of Finance (1993), 1693–1718 Miller MJ, “Credit Reporting Systems around the Globe: The State of the Art in Public Credit Registry and Private Credit Reporting Firms”, in Miller MJ (ed.), Reporting Systems and the International Economy (MIT Press 2003 b), 25–79 De Almeida AM and Damia V, “Challenges and prospects for setting-up a European Union shared system on credit”, IFC Bulletin No. 37 (January 2014) Damia V and Israel JM, “Standardised granular credit and credit risk data”, Seventh IFC Conference on “Indicators to support Monetary and Financial Stability Analysis: Data Sources and Statistical Methodologies” (Basel, 4 and 5 September 2014) Regulation (EU) 2016/867 of the European Central Bank of 18 May 2016 on the collection of granular credit and credit risk data (ECB/2016/13), OJ L 144/44. European Commission, Opinion of 7 August 2015 on the Draft Regulation of the ECB concerning the collection of granular credit and credit risk data (2015/C 261/01). Bank of England, “Should the availability of UK credit data be improved?”, Discussion Paper (May 2014) Banque de France, Étude des Parcours Menant au Surendettement (September 2014) Ferretti F and Livada C, “The over-indebtedness of European consumers under EU policy and law”, in Ferretti F (ed.), Comparative perspectives of Consumer Over-indebtedness – A view from the UK, Germany, Greece and Italy (Eleven, 2016), 11–39 Andrew Powell, Nataliya Mylenko, Margaret Miller, and Giovanni Majnoni, “Improving Credit Information, Bank Regulation and Supervision: On the Role and Design of Public Credit Registries”, 4/5 BIS central bankers' speeches World Bank Policy Research Working Paper 3443, November 2004. International Committee on credit reporting: “The role of credit reporting in supporting financial sector regulation and supervision”, World Bank Financial Infrastructure Series, Credit Reporting Policy And Research, January 2016. Almeida, A. and Damia V. (2014), “Challenges and prospects for setting-up a European Union shared system on credit”, Bank for International Settlements, IFC Bulletin 37 – Proceedings of the Porto Workshop, 20–22 June 2013. Gutierrez, M. and J. Hwang (2011), “Public Credit Registries as a Tool for Bank Regulation and Supervision”, Policy Brief, Western Hemisphere Credit and Loan Reporting Initiative. Available online at www.whcri.org/PDF/PublicCreditRegistriesPolicyBrief.pdf Min, B. (2014), “Use of Consumer Credit Data for Statistical Purposes: Korean Experience”, preliminary draft distributed to participants to the IFC Biennial conference, September 2014. Cf. I. Ramsay, ‘Consumer Credit Regulation after the Fall: International Dimensions’ (2012) 1 Journal of European Consumer and Market Law, p. 33; I. Ramsay, ‘Changing Policy Paradigms of EU Consumer Credit and Debt Regulation’, in D. Leczykiewicz & S. Weatherill (eds), The Images of the Consumer in EU Law: Legislation, Free Movement and Competition Law, (Oxford: Hart Publishing), p. 159, 162. Barron J., and M. Staten, (2003), “The Value of Comprehensive Credit Reports: Lessons from the U.S. Experience.” In Credit Reporting Systems and the International Economy ed. Margaret Miller. Boston: MIT Press. Zhang B et al, Sustaining Momentum, the 2nd European Alternative Finance Industry Report, Cambridge Centre for Alternative Finance (Cambridge University, September 2016 a); Zhang B et al, The 2015 UK Alternative Finance Industry Report, Cambridge Centre for Alternative Finance (Cambridge University, February 2016 b) World Bank. 2011a. General Principles for Credit Reporting. Washington DC: World Bank. www.worldbank.org/en/topic/financialsector/publication/general-principles-for-credit-reporting International Finance Corporation 2012. Credit Reporting Knowledge Guide, Washington DC: World Bank. (1)Source: page 1 – “The European Credit Information Landscape: An analysis of a survey of credit bureaus in Europe” aei.pitt.edu/33375/ 5/5 BIS central bankers' speeches | bank of greece | 2,019 | 8 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the European Court of Auditors, Luxembourg, 28 June 2019. | Yannis Stournaras: The Greek economy 10 years after the crisis and lessons for the future both for Greece and the Eurozone Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the European Court of Auditors, Luxembourg, 28 June 2019. * * * Ladies and gentlemen, It gives me great pleasure to be here today. The European Court of Auditors (ECA), representing the interests of the European taxpayer, has a key role to play. It is responsible for checking whether the European Union spends its money in accordance with the rules and regulations of the EU budget and for the purposes for which this money is intended. To this end, besides its other activities, the 2017 ECA special report on the Commission’s intervention in the Greek financial crisis provided us with invaluable lessons about the design of such support programmes and about the remaining challenges for the Greek economy. Benefiting from the insights of this report, I will present to you my own views on the state of play in the Greek economy 10 years after the crisis and on the lessons to be learned for Greece and the Eurozone. 1. Brief overview and lessons from the Greek crisis In Greece, the sharp deterioration in the fiscal and the macroeconomic environment in 2008 and 2009, and the subsequent downgrades of sovereign debt and rising sovereign spreads, cut off the Greek sovereign and banks from international capital and money markets. Substantial deposit withdrawals and extremely tight liquidity conditions put strain on the banking sector. An EU-IMF financed economic adjustment programme was initiated in 2010, aimed to correct the imbalances. The crisis has taken a heavy toll on output, incomes and wealth. Between 2008 and 2016, Greece lost over one fourth of its GDP at constant prices, and the unemployment rate rose by nearly 16 percentage points. Furthermore, GDP per capita at purchasing power parity declined to 67.4% of the EU average in 2018, down from 93.3% in 2008. Meanwhile, there was a large brain drain and massive underinvestment, with immeasurable economic and social consequences. The deterioration in the macroeconomic environment and the slide of the GDP growth rate into negative territory raised the debt-to-GDP ratio to unsustainable levels despite the fiscal consolidation and caused debt-servicing problems for households and businesses. As a result, non-performing loans (NPLs) rose substantially, weakening banks’ asset quality, thus making it difficult for banks to finance the real economy. Resolving the Greek crisis took eight years, three economic adjustment programmes, major debt restructuring and three rounds of bank recapitalisation. Several factors can explain the length and depth of the Greek crisis: First, the size and speed of fiscal consolidation were unprecedented. This primarily had to do with the fact that the initial macroeconomic imbalances were much higher in Greece than in other Member States under financial stress. Second, the fiscal multipliers turned out to be higher than initially anticipated, aggravating the recession. As a result, the economy was soon caught in a vicious circle of austerity and recession. Third, given the size of the initial fiscal imbalances, more emphasis was initially placed on tax hikes rather than expenditure cuts, growth-enhancing reforms, privatisations, tackling tax evasion 1 / 11 BIS central bankers' speeches and reorganising the public sector. Fourth, the idiosyncratic sequencing of structural reforms led to real wages declining more than initially planned, deepening the recession. The reform effort focused much more on the labour market than on goods and services markets. Hence, nominal wages declined faster and more strongly than prices. Households experienced a massive drop in purchasing power, which, in turn, constrained personal consumption and deepened the recession. Fifth, the non-performing loans (NPL) problem proved more difficult to manage than initially anticipated. Mainly the result of economic contraction, it was further exacerbated by legislative changes such as the blanket moratorium on primary residence auctions and the abuse of foreclosure protection (under Law 3869/2010), as well as several other legal and judicial impediments. A more dynamic response during the first years of the crisis, by implementing the necessary legislative changes much earlier and introducing a centralised asset management framework for NPLs as other Member States have done, could have reduced the problem we face today. Sixth, certain reforms fell behind the agreed time schedule due to several factors, including: insufficient ownership of the necessary reforms; populist rhetoric, rivalry and failure of the political parties to reach an understanding; and the resistance of various – small and large – vested interests to reform. Seventh, political economy deliberations in the euro area also played their part in delaying the recovery of the Greek economy. The Eurogroup decision of November 2012 to grant further debt relief was put off for several years and was implemented only in June 2018. This undermined the growth prospects of the Greek economy and prolonged the crisis. 2. Progress since the beginning of the debt crisis Despite the missteps, occasional backsliding and delays, significant progress has been made since the beginning of the sovereign debt crisis in 2010. The implementation of a bold economic adjustment programme has eliminated the root causes of the Greek crisis. It is particularly worth noting that: The fiscal adjustment was unprecedented, turning a primary deficit of 10.1% of GDP in 2009 into a primary surplus of 4.3% of GDP in 2018 (according to the enhanced surveillance definition). The primary surplus exceeded the programme target for the fourth year in a row. The current account deficit has been reduced by 12 percentage points of GDP since the beginning of the crisis. Labour cost competitiveness has been fully restored, and price competitiveness has recorded substantial gains since 2009. A bold programme of structural reforms was implemented, covering various areas, such as the pension and healthcare systems, goods and services markets, the business environment, the tax system, the budgetary framework and public sector transparency. The banking system has been restructured. Only four large banks control today over 95% of the market, as more than ten other banks have been merged or liquidated. Meanwhile, the role of the Bank of Greece was pivotal in the restructuring and recapitalisation of the banking system, as well as in the enhancement of its corporate governance. Today, banks’ capital adequacy ratios stand at satisfactory levels, and their loan-loss provisions are sufficient to address potential credit risks. Furthermore, a number of important reforms have been implemented, aiming to provide banks with an array of tools to tackle the problem of non-performing loans (NPLs), including a strengthening of the supervisory framework by setting operational targets for NPL reduction, the 2 / 11 BIS central bankers' speeches creation of a secondary NPL market and the removal of various legal, judicial and administrative barriers to the management of NPLs. These actions have started to bear fruit, as shown by the continued reduction of the NPL stock in line with the targets set. Non-performing loans amounted to €80 billion at the end of March 2019, down by €27.2 billion from their peak in March 2016. However, the NPL ratio remains high, at 45.2% in March 2019. On account of the reforms implemented since the beginning of the crisis and the effort of enterprises to make up for declining domestic demand by exporting to new markets, following the improvement in competitiveness, openness has increased substantially, and the economy has started to rebalance towards tradable, export-oriented sectors. The share of total exports in GDP increased from 19.0% in 2009 to 36% in 2018. Exports of goods and services, excluding the shipping sector, have increased in real terms by 60% since their trough in 2009, outperforming euro area exports as a whole. The volume of tradable goods and services in the economy increased cumulatively between 2010 and 2017 by approximately 14% relative to non-tradables in terms of gross value added. The rebalancing of the economy towards the internationally tradable sectors was facilitated by increases in the relative prices and net profit margins of tradable goods and services. It is worth underlining the fact that, in 2017, the estimated net profit margins of tradables were three times higher than those of non-tradables. Thanks to the improved economic conditions and the reforms implemented, the unemployment rate, though still high, fell to 19.2% in the first quarter of 2019, from 27.8% at the end of 2013. 3. The outlook of the Greek economy Following the stagnation of 2015–2016, GDP growth turned positive in 2017 (1.5%) and pickedup to 1.9% in 2018. Recent real GDP data point to continued, albeit decelerating, expansion in the first quarter of 2019 (1.3% y-o-y). Looking forward, the Bank of Greece expects that economic activity will remain on a positive growth trajectory, growing by 1.9% in 2019 and 2.1% in 2020. The catching-up effect from a long depression is projected to counterbalance the negative effect of the global slowdown. Growth will be driven by robust, though decelerating, export performance; solid private consumption growth, supported by rising employment and gradually rising compensation per employee; and increased investment spending, reflecting the implementation of new investment projects, thanks to the gradual improvement in both confidence and financing conditions, as the acceleration in NPL reduction is expected to improve bank lending. The outlook is subject to downside risks, related both to the external and domestic environment. The global growth and trade slowdown could affect export growth more markedly, while a disorderly Brexit is also a significant downside risk to the forecast. A possible sharp correction in global financial markets could increase the cost and reduce the availability of funding. There are also downside risks on the fiscal front due to ongoing court rulings on pensions cuts, which could weigh on debt sustainability. Additional risks for the budget outcome in 2019 arise from the recently implemented (May 2019) expansionary fiscal package. However, there are also upside risks relating to a possible acceleration of NPL reduction, which would improve financing conditions for companies and households, as well as to an acceleration of investment. 4. The Greek economy continues to face major challenges Despite the progress made so far, major challenges and crisis-related legacies remain. For example, the European Commission, in its 2019 report for the European Semester, points out that Greece faces excessive macroeconomic imbalances. In particular, the main challenges 3 / 11 BIS central bankers' speeches are: Τhe high stock of non-performing loans (NPLs), which impairs banks’ lending capacity and delays the recovery of investment and economic activity. The high public debt (whose sustainability improved significantly in the medium term with the measures adopted by the Eurogroup in June 2018) creates uncertainty about the country’s ability to service its debt in the long term, raising the cost of borrowing both for the public and for the private sector, and hampering growth prospects. On top of all this, maintaining large primary surpluses over a prolonged period (e.g. 3.5% of GDP until 2022) impacts negatively on GDP growth. The restrictive effect of large primary surpluses is even more pronounced when accompanied by very high taxation, which increases the informal sector of the economy, and public investment spending under-execution. The still negative current account balance and the negative net international investment position. The slow digital transformation of the economy. Based on the Digital Economy and Society Index of the European Commission, Greece for the year 2019 is ranked 26th among the 28 EU countries, which implies a high risk of technological lag and digital illiteracy. The still high unemployment rate, which generates inequalities that threaten social cohesion and increases the risk of human capital erosion. The projected demographic decline (due to population ageing and outward migration), which exerts downward pressure on potential growth. The multi-year recession has left an extremely large investment gap and risks permanently impairing the productive capacity of the Greek economy through a hysteresis effect. Inhouse estimates of the Bank of Greece indicate that the net capital stock of the Greek economy (at constant 2010 prices) declined by €65.1 billion in the period 2010–2016. In order to raise the net capital stock over the next decade to pre-crisis levels, gross fixed capital formation at constant prices needs to increase by about 10% per year by 2029. Excluding residential investment, gross fixed capital formation at constant prices needs to increase by about 5% per year by 2029. Without ignoring the effects of relatively low domestic demand, the higher cost of capital and funding constraints that hinder new investment, the business environment cannot be considered investment-friendly and discourages investment. This is due to the high tax rates, excessive red tape, the existence of barriers and obstacles that have proven to hamper investment, and delays in court proceedings and rulings. In this context, it should be noted that non-price competitiveness, so-called “structural competitiveness", is not only low compared to the European partners, but has in fact fallen in recent years, according to the ease of doing business index of the World Bank (October 2018), the global competitiveness index of the World Economic Forum (October 2018) and the global competitiveness ranking for 2019 of the IMD World Competitiveness Center. 5. The prerequisites for sustainable growth To address the challenges facing the Greek economy, speed up the recovery and strengthen investor confidence in Greece’s long-term economic prospects, economic policy should focus on the following policy actions: 1st Reducing the high stock of NPLs with the timely implementation of the systemic solution proposed by the Bank of Greece, as well as the solution proposed by the Ministry of Finance, which will supplement banks’ own efforts. 2nd Reducing the primary surplus target from 3.5% of GDP to 2.2% until 2022 as well as changing the fiscal policy mix, with an emphasis on lower tax rates and higher public investment, 4 / 11 BIS central bankers' speeches so as to boost the growth impact of fiscal policy. With a public debt-to-GDP ratio of 180%, higher growth (or lower interest rates) is 1.8 times more effective in reducing the debt ratio than a higher primary surplus. 3rd Broadening the scope for public-private cooperation, in line with best international practices, for example by strengthening public-private partnerships in investment, social security and healthcare. 4th Improving the effectiveness of public administration and the efficiency of state-owned enterprises. 5th Stepping up the pace of the privatisation programme and improving the management of state assets. 6th Implementing a more focused policy for attracting foreign direct investment (FDI), as domestic savings are insufficient to meet the investment needs of the Greek economy. Emphasis should be placed on reducing the tax burden, improving public administration efficiency and removing major disincentives, such as bureaucracy, legislative and regulatory ambiguity, especially regarding land use, and the remaining capital controls. 7th Maintaining labour market flexibility and pursuing structural reforms in the goods and services markets in order to boost competition and increase innovation and productivity growth. 8th Improving the quality and safeguarding the independence of public institutions. Independent and well-functioning institutions enhance long-term economic growth. In this context, a speedier delivery of justice, legal certainty and a clear and stable legal framework are essential conditions for strengthening the public’s sense of fairness and justice, for improving the investment climate and for accelerating economic growth. 9th Enhancing the so-called “knowledge triangle”, i.e. education, research and innovation, as well as the digitalisation of the economy by adopting policies and reforms that support research, technology diffusion, entrepreneurship and foster closer ties between businesses, research centres and universities. This would contribute to further increasing R&D spending and the ICT sector’s share in GDP. However, exploitation of ICT calls for continuous development and training in new technologies, the adoption of innovative products and the enhancement of start-up entrepreneurship. Overall, sustained efforts are required to foster innovation and R&D spending in order to boost Greece’s digital transformation. 6. The EMU dimension 6.1 Progress over the past 20 years The euro area was quite successful during its first ten years. Real GDP per capita grew on average at par with the US, there was substantial nominal and real convergence, and the ECB was able to credibly bring inflation close to target. During the first decade of Economic and Monetary Union (EMU), the number of EMU members increased from the original 11 to 15. Moreover, the euro immediately became the second most important world currency. The euro’s share in foreign currency reserves has remained broadly stable at 20% since its creation. The low interest rate environment and easy access to credit slowed down structural reforms and led to excessive public and private borrowing. The financial crisis of 2007–2009 and the euro area sovereign debt crisis that followed, brought to the surface the flaws in the initial design of EMU. EMU lacked the tools to avert and to contain the crisis. The Stability and Growth Pact (SGP) failed to control the build-up of public debt in the pre-crisis period. There was no sufficient monitoring and control over macroeconomic imbalances, such as the evolution of the current account and private debt. The sovereign-bank “doom loop” amplified the financial crisis and the 5 / 11 BIS central bankers' speeches recession. Euro area crisis management and resolution tools were poor or non-existent on account of concerns about moral hazard, and due to the lack of the appropriate institutional setting. There was no provision for risk-sharing in the initial EMU architecture. In this context, the ECB forcefully stepped in to restore market confidence, to contain the sovereign debt crisis and to support the euro area economy, by safeguarding price and financial stability. The ECB’s response provided the time required for euro area governments to take the actions necessary to strengthen the EMU. Policy actions have focused on addressing institutional weaknesses, structural fragilities and excessive risk-taking that led to the sovereign debt crisis and the negative feedback loop between sovereigns and banks, which in turn undermined euro area stability. The key initiatives were the provision of intergovernmental loans to Greece; the establishment of the EFSF, and its successor the ESM; the creation of a banking union with a Single Supervisory Mechanism and a Single Resolution Mechanism and the introduction of stricter rules on banking regulation and supervision; the establishment of the European Systemic Risk Board and the development of appropriate macro-prudential tools, which allowed greater emphasis on identifying and addressing system-wide risks; the strengthening of the SGP; the initiation of the Macroeconomic Imbalance Procedure and the European Semester. As a result of the above initiatives, all Member States that received EU-IMF assistance are back on their feet, macroeconomic imbalances have been corrected to a large extent, and growth has been restored. Economic expansion in the euro area as a whole continues, albeit at a slower pace, and EU banks have become more resilient to financial shocks over the past two years, as reflected in the results of the recent EU-wide stress tests. Moreover, EMU admitted four additional Member States in the course of the crisis years. Notable progress was made in the June 2019 Euro Summit, where a broad agreement was reached a) on the budgetary instrument for convergence and competitiveness (BICC) for the euro area (and for ERM II Member States on a voluntary basis) and b) on revising the ESM treaty text to allow for a common backstop for bank resolution and an instrument of precautionary financial assistance. The Eurogroup will continue its work on both issues as a matter of priority. 6.2 Remaining challenges Despite the progress achieved so far and the good overall economic situation, the euro area faces several challenges ahead. The recovery of the euro area from the financial crisis lags behind the recovery of global competitors. This reflects weak productivity performance and a lagging behind in innovation and digital technologies. Moreover, population ageing and climate change pose serious concerns about the longer-term outlook of the euro area economy. After the crisis, we have seen a home bias in investment and a flow of euro-area excess savings towards the rest of the world rather than within the EU (from higher to lower GDP per capita countries). This has also led to a halt in financial integration, which weakens private risk-sharing in the euro area. It is striking that in the euro area only 20% of shocks to GDP growth can be smoothed via capital markets, compared with 40% in the United States. Economic convergence in terms of real GDP per capita among the 12 old euro area countries (EA12) has stopped since 2010. There is real divergence even if Greece is excluded. Only the new euro area Member States have showed sustained convergence. Divergence has widened also in terms of unemployment rates and in terms of income inequality indicators, such as the share of population at risk of poverty or social exclusion or the ratio of total income received by the 20% of the population with the highest income to that received by the 20% of the population with the lowest income (S80/S20 income quintile ratio), in particular among the 12 old euro area Member States. Real divergence, the weakening of social convergence and the North-South divide due to the 6 / 11 BIS central bankers' speeches sovereign debt crisis, coupled with the effect of globalisation and the digital revolution on the lowskilled and the rise in migration, have created social tensions, sparked anti-EU rhetoric and propagated mistrust towards European policies and institutions. The greatest manifestations of these have been Brexit and the rise of populist anti-EU voices and political parties across Europe. Nevertheless, according to recent surveys, more than two thirds of the euro area citizens have positive views about the euro, and trust in EU institutions at the EU-28 level has improved relative to the past. Last but not least, the financial system continuously innovates, the work of regulators comes with a lag and shadow banks remain insufficiently monitored and under-regulated. Further challenges arise from geopolitical risks, trade disputes or even trade wars, or cyber-risks. As central banks, we have to be prepared for all contingencies. 6.3 Policy actions needed to deepen EMU Central banks are expected to continue to use the asset side of their balance sheets, as well as other tools such as forward guidance, in addition to their standard interest rate policies, as the effective lower bound will likely continue to be a binding constraint on interest rate policy in a low inflation, low interest rate environment. However, monetary policy alone cannot stabilize the economy in perpetuity. Fiscal policy should also be active in Member States with sufficient fiscal and current account space. To address the remaining challenges and to be better prepared for a future crisis, we must also take action now in order to further deepen EMU. At the moment there is no appetite for a fully-fledged political and fiscal union. However, there are important steps that we can take in order to enhance the functioning of EMU. In the financial sector, it is a priority to complete the Banking Union by creating the European Deposit Insurance Scheme (EDIS), and the Capital Markets Union (CMU). The completion of the Banking Union will improve the stability of the banking sector by cutting the still strong banksovereign link. More developed and integrated capital and banking markets will improve the financing of the real economy by diversifying the sources of financing, and will facilitate private risk-sharing through the capital and credit channels. Moreover, the more risk is shared through the private channel, the less fiscal risk-sharing is needed1. Ηowever, we should make sure that the expansion of the non-bank sector does not endanger financial stability. The integration and connection of European financial centres in the context of the Capital Markets Union becomes even more important in view of Brexit. The emphasis on sustainable finance and, recently, on the pan-European personal pension product (PEPP), and possibly the development of occupational pensions or investment savings accounts, may be a way forward in order to boost the demand for the CMU. However, the cross-border portability of these instruments is key to their success. Besides harmonisation towards best practices in securitisation, accounting, insolvency law, company law and property rights, we need to take steps that address the debt-equity bias, to improve financial literacy and revive the equity investment culture. We must take steps to enhance public sector risk-sharing in EMU by creating a centralised fiscal stabilisation tool. The recent agreement on the new budgetary instrument is expected to enhance the resilience and adjustment capacities of euro area economies as well as the mechanisms of economic governance and strengthen potential growth. A fully-fledged central fiscal capacity could provide effective protection against asymmetric shocks triggered by regional disturbances. Building on the agreement for an instrument of precautionary financial assistance, the European Stability Mechanism could be further enhanced and eventually transformed into a European Monetary Fund that would act as lender of last resort for Member States. Besides that, the issuance of a European Safe Asset could be a promising idea as it will break the sovereign-bank nexus and strengthen the international role of the euro. A euro-denominated Safe Asset will allow the efficient functioning of the EU financial system and the development of EU capital markets, 7 / 11 BIS central bankers' speeches reducing financing costs for the euro area economies. Such a policy will also increase the global relevance of European financial regulation and of the EU-based payment systems. At the euro area level, it is essential to ensure that the economic rebalancing mechanisms (i.e. the Macroeconomic Imbalance Procedure) operate symmetrically, i.e. both for countries with external deficits and for countries with external surpluses. Symmetric adjustment to imbalances helps real convergence in a currency union. Instead, the burden of correcting external imbalances in the aftermath of the crisis was incurred primarily by “deficit countries”, mainly via the income channel and “internal devaluation”. This asymmetry in external rebalancing has contributed to the great divergence of GDP per capita between the North and the South after 2010. Therefore, the countries with large current account surpluses could consider taking steps to limit their excessive surpluses. For example, by increasing clean energy public investment, they could both increase potential growth and address climate change, and at the same time generate positive spillover effects on previously “deficit countries”. Both at the EU and at the Member State level, action is required in order to address weak longterm growth and the lack of real convergence. Emphasis should be placed on increasing productivity growth by investing in public infrastructure, innovation, R&D and in the digital transformation of our economies. Growth policies should address climate change (e.g. by means of carbon taxes, subsidies to green innovation and targeting public procurements at “green” products), while at the same time ensuring social cohesion (by offsetting the impact on low-income households and the unemployed). Fiscal policy should promote sustainable and inclusive growth. However, fiscal positions should remain sound in order to ensure public debt sustainability and to allow for fiscal stabilisation in difficult times. A sound fiscal position would imply that both automatic stabilisers and discretionary fiscal policies could be used in a recession. Climate change will increasingly gain prominence as a factor of relevance to monetary policy due to its potential to exert multiple impacts on firms, households, banks and, eventually, on the economy at large. It is therefore within the mandates of central banks and supervisors to ensure that the financial system is resilient to such risks. At the present time, several central banks, including the Bank of Greece and the ECB, participate in the Network for Greening the Financial System (NGFS), aiming to enhance the role of the financial system in managing climate and environmental risks, analyse the macro-financial impact of climate change and strengthen the global response to the threat of climate change. Over the past ten years, the Bank of Greece has been actively engaged and investing in research related to climate change. A well-functioning EMU requires flexible markets for goods, services, labour and capital in order to strengthen economic resilience, i.e. to reduce vulnerability to shocks, and to prevent economic shocks from having significant and persistent effects on income and employment levels. In the context of economic policy coordination and with a view to fostering real convergence, improvements should be made in institutional quality and good governance across euro area Member States. National ownership of reforms and credible implementation of the country-specific recommendations are crucial for promoting economic policy coordination and for risk reduction – for example, the reduction of non-performing loans or national discretions in supervisory and resolution rules for banks. The latter will facilitate greater public risk-sharing. In my view, what we urgently need today in the Eurozone is to promote simultaneously risksharing and risk-reduction measures. It is only in this way that we can transform what is, in effect, an almost non-cooperative zero-sum negotiating game into a cooperative win-win one. References 8 / 11 BIS central bankers' speeches Bank of Greece (2019), Monetary Policy Report, July (forthcoming). Bank of Greece (2018), Monetary Policy, www.bankofgreece.gr/BogEkdoseis/Inter_NomPol2018.pdf Interim Report, December. Buti, M., M. Jolles and M. Salto (2019), “The euro – a tale of 20 years: The priorities going forward”, VoxEU 19 February. voxeu.org/article/euro-tale-20-years-priorities-going-forward Codogno, L. and P. van den Noord (2019), “The rationale for a safe asset and fiscal capacity for the Eurozone”, LSE’ Europe in Question’ Discussion Paper Series, No 144/2019 May. Dabrowski, M. (2019), The Economic and Monetary Union: Past, Present and Future, Study requested by the ECON Committee European Parliament. Demertzis, M., A. Sapir and G. Wolff (2019), “Promoting sustainable and inclusive growth and convergence in the European Union”, Bruegel, Contribution to the Informal Ecofin Meeting, Bucharest 5 April. Eurogroup (2019), Letter by the President Centeno to President Tusk on the deepening of the Economic and Monetary Union, Brussels, 15 June. www.consilium.europa.eu/media/39769/eurogroup-president-letter-to-euro-summit-president.pdf European Commission (2018), The Digital Economy and Society Index 2018, Country Report: Greece. ec.europa.eu/digital-single-market/en/scoreboard/greece European Commission (2018), “Economic Resilience in the EMU”, Quarterly Report on the Euro Area, Institutional Paper 086, vol. 17, no 2, July. European Commission (2018), Sustainable convergence in the euro area: A multi-dimensional process, Quarterly Report on the Euro Area, Institutional Paper 072, vol.16 no 3, February. European Commission (2019), Spring 2019 Economic Forecasts: Growth continues at a more moderate pace, Brussels. ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economicforecasts/spring-2019-economic-forecast-growth-continues-more-moderate-pace_en. European Commission (2019), 2019 European Semester, Country Report: Greece 2019, Including an In-Depth Review on the prevention and correction of macroeconomic imbalances, Brussels. ec.europa.eu/info/sites/info/files/file_import/2019-european-semester-country-reportgreece_en.pdf European Court of Auditors (2017), The Commission’s intervention in the Greek financial crisis, Special Report No 17, Luxemburg. publications.europa.eu/webpub/eca/special-reports/greek-crisis-17–2017/en/ de Guindos, L. (2019), “Building the EU’s Capital Markets: what remains to be done”, speech at the Assosiation for Financial Markets in Europe Conference, Supervision and Integration Opportunities for European and Banking and Capital Markets, Frankfurt am Main, 23 May. www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190523~b1245030d5.en.html 9 / 11 BIS central bankers' speeches de Guindos, L. (2019), “Deepening EMU and the implications for the international role of the euro:, speech at the joint conference of the European Commission and the European Central Bank on European financial integration and stability, Brussels, 16 May. www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190516~1c0d48c7d8.en.html de Guindos, L. (2019), “Euro at 20 years: the road ahead”, address at the European Parliamentary Week, 19 February. www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190219~6f4c9be85b.en.html IMD World Competitiveness Center (2019), World Competitiveness Ranking 2019, Lausanne. www.imd.org/wcc/world-competitiveness-center-rankings/countries-profiles/ Montoya, L.A. and M. Buti (2019), “The euro: From monetary independence to monetary sovereignty”, voxeu, 1 February. voxeu.org/article/euro-monetary-independence-monetary-sovereignty Stournaras, Y. (2018), “Investment Opportunities in Greece −Investment opportunities in Greece”, speech at the “Repositioning Greece” event of Ekali Club, 17 December. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=556&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2018), “What lies in store for the eurozone? An assessment of the Greek bailout programmes: Has the EU become wiser?”, speech at the Economist’s event: Southeast Europe–Germany Business and Investment Summit: Reassessing Europe’s priorities, Berlin, 3 December. www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx? Item_ID=553&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), “A Retrospective on Euro Area Monetary Policy during and after the Recent Financial Crisis”, Speech at the 23rd International Conference on Macroeconomic Analysis and International Finance, University of Crete, Department of Economics, Rethymno, 31 May. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=596&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), “Climate Change: Threats, Challenges, Solutions for Greece”, keynote address at the Symposium on “Climate Change: Threats, Challenges”, Solutions for Greece, April. (www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=589&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b) Stournaras, Y. (2019), “Lessons from the Greek Crisis: Past, present, future”, speech at the 87th International Atlantic Economic Conference, Athens March. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=583&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), “International economic developments and prospects of the Greek economy”, speech at an event of the Federation of Industries of Northern Greece, Thessaloniki, 15 March. www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx? 10 / 11 BIS central bankers' speeches Item_ID=582&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), “Addressing reversal of financial integration”, aArticle published in the 100th edition of The Bulletin (OMFIF). www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=560&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), New Year Speech to the Bank of Greece staff, Athens, January 9. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=559&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b World Bank (2018), Doing Business 2019: A Year of Record Reforms, Rising Influence, 31 October. www.worldbank.org/en/news/immersive-story/2018/10/31/doing-business-2019-a-yearof-record-reforms-rising-influence World Economic Forum (2018), The Global Competitiveness Report 2018. reports.weforum.org/global-competitiveness-report-2018/? doing_wp_cron=1553010986.3554461002349853515625 1 For example, in the US 80% of the adjustment to asymmetric shocks is taken care of by private market flows, with the remaining 20% of the adjustment coming from fiscal transfers from the federal government. 11 / 11 BIS central bankers' speeches | bank of greece | 2,019 | 8 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Belgian Business Club (BBC), Athens, 5 September 2019. | Yannis Stournaras: Greek economy - current developments Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Belgian Business Club (BBC), Athens, 5 September 2019. * * * A. General outlook and developments in the real economy The Greek economy continues το recover, although with relatively moderate growth rates due to the global slowdown. Economic sentiment has increased to multiyear highs, bank funding and liquidity conditions have improved, property prices started to increase and bond yields have declined significantly in recent months, particularly following the May European Parliament elections and the July national elections. Confidence in the banking sector has improved substantially and capital controls were fully lifted on September 1st. he new government has been elected on a reform agenda and a platform of business-friendly economic policies with a focus on attracting investment, particularly foreign direct investment, by improving the investment climate, accelerating reforms, speeding up privatizations, unfreezing large investment projects and reducing taxation, while at the same time maintaining fiscal discipline and the agreed fiscal targets. Short-term economic indicators suggest that the economy shows significant resilience to the global slowdown. This is due to the strengthening of domestic demand as the economy emerges from a long-lasting recession, which, to a large extent, counterbalances the negative effect from the global slowdown. In particular: – Economic sentiment of both consumers and businesses has reached a twelve-year high. Consumer confidence is at its highest level since September 2000. - PMI remains firmly above the threshold of 50 for twenty-seven months in a row, suggesting robust growth in the industrial sector. - The recovery in the labour market continues for the fifth year, with net inflows of new jobs in the private sector exceeding 280 thousand in the first eight months of the year. - Revenues from tourism in real terms increased at double-digit numbers during the first six months of the year despite a slight decline in tourist arrivals compared to last year, suggesting a geographic rebalancing of tourist arrivals from countries with relatively higher per capita income compared to previous years. - In the external sector, exports of goods decelerated slightly in the first six months of the year, driven by the decrease in oil exports, while exports of all other goods registered positive growth rates. Exports of services continued to grow strongly with an improvement in both the travel and the transport balances. - Second quarter 2019 data suggest that the recovery of the Greek economy continues with a growth rate of 1.9%, while GDP in the first semester of 2019 grew by 1.5%. The main drivers of GDP growth in Q2 were net exports and public consumption. According to forecasts by the Bank of Greece, economic activity is projected to increase by 2.3% in the second semester of 2019 and by 1.9% in the year as whole. Financial indicators have also improved substantially, suggesting increased confidence in the prospects of the Greek economy. In particular: 1/6 BIS central bankers' speeches – Government bond yields have declined sharply since the start of the year. For example, 10year yields came down to 1.56% at the end of August from nearly 4.5% in the beginning of January 2019. - Deposit inflows have continued. €12.3 billion of domestic private deposits have returned to banks since the start of 2018. - Bank credit to non-financial corporations recorded an annual rate of growth of 2.9% in July 2019, which is the highest rate since mid-2010. - House prices have increased for six quarters in a row after suffering significant declines since the start of the crisis. Nevertheless, Greece faces a number of challenges looking forward: - Given the country’s poor demographic outlook and tight budget constraints, achieving economic growth significantly higher than the current levels of 2% in the long term is a demanding task and requires structural reforms to boost productivity as well as investment, in particular foreign direct investment. - Tackling the problem of non-performing loans, which still represent 43.6% of total loans, is critical to the health of the banking system and to its ability to finance investment and support the real economy. In order to contain future risks and address the remaining challenges and crisis legacies, the government must quickly implement its business-friendly reform agenda it was elected to. Moreover, the continuation of reforms is an obligation to which Greece is bound in the context of enhanced surveillance as well as a precondition for the activation of the medium-term debt relief measures. Strengthening the credibility of economic policy through the implementation of reforms, the speeding up of privatizations, and the unblocking of already approved investment plans will increase market confidence in the growth prospects of the Greek economy. B. Non-performing loans (NPLs) and developments in the banking sector With about €75 billion in non-performing loans (NPLs) as of mid-2019, equivalent to 43.6% of all loans, Greece remains a crucial testing ground for the strategy of “risk reduction” in the euro area. Although economic activity resumed in 2017, higher and sustainable growth rates require the end of banks’ deleveraging. This will need to be backed by a comprehensive transfer of bad loans from bank balance sheets, combined with private debt restructuring. The high ratio of NPLs in Greek banks has been an early and highly visible effect of the financial and economic crisis in the country. Over the past three years to mid-2019, the absolute stock of NPLs fell by about €30 billion, largely through write-offs and sales. Moreover, several reforms have also enhanced the framework for private debt resolution: • acceleration of the sale by banks of collateral in defaulted loans through electronic auctions; • simplification of the sale of NPLs through the liberalisation of the loan-servicing regime and the introduction of a secondary loan market; • an out-of-court debt restructuring framework, which also included a write-down of tax arrears, though only a few cases up to now have been concluded under this procedure; • a reform of the insolvency regime for households and enterprises. Ambitious targets for NPL reduction have been agreed between the four largest banks and the ECB/SSM, and under a similar framework by the Bank of Greece for smaller banks. NPL ratios 2/6 BIS central bankers' speeches are to fall to 35% by the end of this year, and close to 20% by the end of 2021. It should be noted however that even if these targets are met, Greek banks will have more than five times higher NPL ratios that the EU average. In this regard, it is important that a truly systemic solution, resembling an Asset Management Company, is implemented in order to complement the individual efforts of each bank to swiftly improve asset quality. Greece has been dealing with asset quality issues for many years and now it is the time to speed up efforts in order to approach EU averages within a reasonable amount of time. Over the next few months, adequate instruments should be established for an orderly and swift debt resolution, while the European Commission should provide the necessary authorisation without undue delays, taking into account the probability of external, worldwide downside risks. It should be reminded that all Member States under financial stress have made use of similar systemic solutions, in the form of Asset Management Companies. Greek banks have maintained satisfactory capital adequacy ratios and this has been extremely significant for financial stability considerations. Going forward, it will be up to each individual bank and their equity-holders to assess their business models and growth prospects. At present, legacy NPLs impose a major constraint upon Greek banks’ profitability. In particular, first half 2019 results produce a Return on Equity (RoE) for systemic banks of only 2.1%, despite the satisfactory increase of pre-provisioning income compared to the same period last year. Net interest margin declined to 2.2% in the first half of 2019, compared to 2.4% in the same period of 2018, while the cost of risk continues to be close to 2%. These trends indicate that unless NPLs are removed from bank balance sheets very quickly, Greek banks will not be able to generate enough capital internally. Moreover, such a high level of NPLs blocks Greek banks from extending much needed credit to the real economy. As already mentioned, rapid growth cannot be achieved unless the banking sector can finance investment at an adequate level and at a reasonable cost. A substantial reduction of NPLs will lead to improved rating scores for the banks, thus allowing access to private funding at a lower cost, which translates to lower interest rates for the borrowing entrepreneur. Although sales, primarily through securitizations, and loan write-offs are the main drivers of NPL reduction, this should not lead banks to relax their efforts to successfully restructure the loans that are still in their portfolios. On this front, progress is rather slow and the Bank of Greece in cooperation with the SSM will increase pressure to improve the performance of long-term loan modifications so that the observed high rate of redefault is contained. Foreclosed real estate assets, obtained by the banks via auctions or otherwise, is another challenge but also an opportunity. Currently they amount to €2.3 billion and are expected to rise as the real estate market improves. Such assets may lead to significant capital gains for the banks. More work is needed to further improve the regulatory framework so as to remove bureaucratic obstacles and legal loop holes that delay the utilization of the recently established policies. The new regime of primary residence protection must fit into a single and permanent legal framework for the insolvency of physical persons, while the out-of-court work out regime must be radically reviewed. High expectations have also been created with respect to the performance of the newly developed NPL servicing market. It is still too early to draw conclusions, but the Bank of Greece will closely monitor the results achieved by independent servicers, in order to ensure that there is real value added for banks and the economy as a whole. The liquidity conditions of the Greek banking system have substantially improved, as reflected in the elimination of ELA (as of March 2019) and the overall, significant reduction in total central 3/6 BIS central bankers' speeches bank funding (at end August it stood at €8.2 billion). The decrease in central bank financing is a result of the following positive developments: First, domestic private sector deposits have been on a constant upward path since their lows in May 2016, registering at the end of July a cumulative increase of around €24 billion and reaching their highest level since February 2015. Deposits are expected to continue increasing steadily, reflecting positive developments in terms of economic growth and confidence in the stability of the financial system. Second, Greek banks have improved considerably their access to the interbank market and have increased their funding from other sources (issuance of debt securities, loan-sales and securitization). Specifically, Greek banks have increased their funding from the secured market under improved terms, against an expanded set of international counterparties and collateral. Moreover, they have returned to the capital markets with the successful placement of, initially, covered bonds starting in late-2017. In 2019 further positive steps have been made, including issuances of Tier II bonds, aiming to improve their capital. Another positive factor for the banks, was the considerable increase of the available eligible collateral for ECB monetary policy operations, following the upgrade of Greek banks’ covered bond programmes to investment grade. It is noteworthy that for the first time since 2012, all Greek covered bond issuers have investment grade rated programmes. Last, but not least, the valuation of assets held by the banks increased considerably. Most prominently, as it has already been said, Greek government bonds exhibited an outstanding performance throughout 2019, with the 10-year bond yield reaching the historical low of 1.56% at the end of August. Positive sentiment has also been reflected in the Athens Stock Exchange price index, which briefly rose above 900, the highest since March 2015, before correcting to 868 at the end of August, an increase close to 45% in 2019. The sustained progress in the liquidity conditions was a contributing factor to the recent abolition of capital controls. This positive development, in conjunction, inter alia, with the reduction of NPLs, is expected to trigger further upgrades in the rating of the banks, along with the expected upgrades in the rating of the sovereign. In turn, this would support their efforts to further improve their liquidity and, in line with the decrease in the sovereign’s cost of funding, to issue unsecured bonds. Against this background, one can be confident that the liquidity of the Greek banking system will be further strengthened in the coming months. C. Fiscal developments in 2019 and projections The legislation of an expansionary fiscal package in May 2019 put at stake the attainment of the primary surplus target of 3.5% of GDP agreed in the context of the enhanced surveillance. According to Bank of Greece estimates, with end of June fiscal data, a fiscal gap of about 0.6% of GDP was projected for 2019. This development necessitated an adjustment of expenditure in order to fulfill the fiscal targets in the context of the enhanced surveillance. Indeed, latest (August) cash fiscal data indicate, according to the Bank of Greece, that the 2019 fiscal target will be met. This outcome is driven by adjustment of expenditure as well as by revenue over-performance (mainly VAT) in the last two summer months. However, fiscal risks are tilted to the downside and mainly relate to the yield of the latest instalment scheme. Another downside risk relates to the pending court decisions reversing past pension cuts. This would entail a one-off expenditure in retroactive payments. There is, furthermore, an additional risk of a permanent increase in expenditure on a yearly basis in case the Council of State rules that the provisions of the 2016 pension reform are unconstitutional too. Although the latter decision is expected by October, any development is unlikely to affect the 4/6 BIS central bankers' speeches 2019 budget year. The general government debt is projected to decline, driven mainly by primary surpluses, and a favourable interest-growth rate differential. The debt sustainability analysis of the Bank of Greece shows that the debt relief measures agreed by the Eurogroup on 21 June 2018 considerably improve debt sustainability in the medium term, but risks remain elevated beyond the early 2030s. Further revenue gains could be generated from wider use of non-cash transactions. Bank of Greece research estimates that an increase by one percentage point in the share of private consumption spent through payment cards increases VAT revenue by 1% through increased compliance. The gradual relaxation of cash restrictions experienced so far does not appear to be reversing the use of cards, albeit the increase in the share of consumption spent through cards appears to have halted. Another challenge to be faced is related to the revenue-heavy fiscal mix. The Bank of Greece has repeatedly stressed the need to shift the current fiscal policy mix away from distortionary taxation, with a view to making fiscal policy more growth-friendly and sustainable. For example, in the latest Monetary Policy Report (July 2019), research carried out at the Bank of Greece showed that a lower tax burden on labour income can generate considerable permanent gains in economic activity. Furthermore, a lower tax burden on labour could become self-financed already in the medium term, if combined with fiscal structural reforms that improve tax compliance. It is a positive development that the government stated, right from the beginning of its term, that it will respect the agreed fiscal targets. At the same time, and as the Bank of Greece has been arguing for a number of years, the government is negotiating with the institutions a reduction, directly or indirectly, of the primary surplus target. A lower, more realistic, primary surplus target compared to the current one of 3.5% of GDP through 2022, if combined with more reforms and privatisations, would very probably imply lower, rather than higher public debt. This is so because, with a public debt-to-GDP ratio of 180%, a one percentage point-higher growth rate (likely to mateliarise if the lower primary surplus target is achieved through lower taxes and social contributions, combined with more privatisations and reforms) and/or 100 basis points-lower borrowing costs (already materialised, relative to the European Commission’s baseline scenario) are 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 much 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. Moreover, the Stability and Growth Pact allows for fiscal flexibility so long as additional reforms increase potential growth. Overall, there are plenty of arguments in favour of lower primary surplus targets and ample room for a compromise solution. In such a solution, primary surpluses could be lowered in exchange for an acceleration of reforms; the outcome will be a win-win situation for both Greece and its EU partners, given that Greece will be able to return faster to a high growth path that safeguards fiscal sustainability and the repayment of bail-out funds. Downside risks related to external, worldwide factors also justify the reduction of the primary surplus fiscal target. In this context, Christine Lagarde’s comments yesterday in the European Parliament arguing for a lower primary surplus in Greece are fully justified. D. Conclusions The above mentioned economic developments along with the recent elimination of capital controls, are expected to facilitate the reinstatement of Greek government bonds to investment grade status soon, which will pave the way for their inclusion in the ECB’s Asset Purchase 5/6 BIS central bankers' speeches Programme. This, in turn, will further lower borrowing costs for the Greek economy, thereby boosting growth and improving debt sustainability. In such a benign scenario, higher growth rates than currently projected, that is a growth rate close to 3%, could be achieved through increased investment, taking also into account the still negative output gap. Having said all the above, Greece at the moment has a narrow window of opportunity given the global conditions of still positive growth rates and the current low interest rate environment. The government should proceed with its reform programme as quickly as possible to deal with the medium and long-term risks of the Greek economy and address challenges such as low productivity growth, demographic trends and low investment, as these favourite conditions might be reversed anytime in the future, given the downside risks in the world economy. 6/6 BIS central bankers' speeches | bank of greece | 2,019 | 9 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 30-year Anniversary Conference, IMD World Competitiveness Center "30 years of competitiveness: The challenges ahead", Lausanne, 4 October 2019. | Yannis Stournaras: Building public-private partnerships Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 30-year Anniversary Conference, IMD World Competitiveness Center "30 years of competitiveness: The challenges ahead", Lausanne, 4 October 2019. * * * Ladies and Gentlemen, It is my great pleasure to take part in this highly interesting discussion on the subject of building public-private partnerships at the 30-year Anniversary Conference held by the IMD World Competitiveness Center. In my speech today, I will briefly talk about the importance of establishing effective partnerships between the public and the private sector and how governments can create the conditions for their success. But first let me highlight some of my own views on the key features of Greece’s performance and its current state of play. *** As I will outline, the 2019 IMD World Competitiveness Yearbook makes for sobering reading as far as Greece is concerned, given the indications that the country so far failed to make headway in areas on which sustainable economic growth increasingly depends. Greece also has so far shown signs of slippage in key dimensions against a group of advanced high-income economies that have already managed to make a transition to a development that is based more on factors related to efficiency and productivity. And all these, despite the impressive progress that Greece has made since the beginning of the crisis in 2010 in the fiscal front, in the banking sector, in social security reform, in unit labour cost competitiveness, and in labour and product market liberalization. Looking at the 2019 Yearbook, my first observation is that little appears to have changed in the last five years. In all five main pillars covered by the IMD Competitiveness index, Greece has been trending downwards, falling by a cumulative 8 ranks in the overall index, from 50th place in 2015 to 58th place in 2019. At the same time, the country continues to lose ground in the “knowledge”, “technology” and “future readiness” dimensions, as reported in the IMD World Competitiveness Digital Ranking 2018. These three factors are considered key to meeting long term objectives. Still, there is room for optimism, given (a) the strength of Greece’s “skilled workforce” and “high educational level”, as reported in the Executive Opinion Survey and in the IMD World Talent Ranking 2018, and (b) the fact that a new government was elected last July with a programme to invest in the so called “knowledge triangle” (education-research-innovation), to liberalise further product and services markets, to promote Public-Private Partnerships (PPPs), to attract foreign direct investment, to promote privatisations, to bring back to life large investment projects that had been “frozen” for a number of years and to tackle the problem of Non-Performing-Loans (NPLs), which is one of the most serious legacies of the crisis. The 2019 Yearbook and other similar reports show that, despite the progress made so far, Greece still needs to address major challenges and crisis-related legacies. The multi-year recession has left an investment gap and risks permanently impairing the productive capacity of the Greek economy through a hysteresis effect. Estimates by the Bank of Greece indicate that the net capital stock of the Greek economy (at constant 2010 prices) declined by €67.4 billion in the period 2010–2016, to €622.2 billion in 2016. In order to raise the net capital stock over the next decade to pre-crisis levels, gross fixed capital formation at constant prices, excluding residential investment, needs to increase by about 5% per year. Although this is a high growth rate, it is deemed achievable for the Greek economy based on 1/5 BIS central bankers' speeches historical experience, so long as suitable investment and business-friendly policies are pursued. Foreign direct investment (FDI) is necessary, as domestic savings are insufficient to match the investments needed for high growth rates. Up to now, the business environment had not been considered investment-friendly, in fact it had discouraged investment. This was mainly the result of high tax rates, weak public sector efficiency, red-tape and delays in court proceedings and rulings. If Greece wants to attract more FDI, it must step up the pace of structural reforms and privatisations. Meanwhile, an important conclusion that can be drawn from the international rankings concerns innovation, supported by investment in human capital. Factors related to human capital can be divided into the ability to attract talent, the determination to maintain and enrich it, and the capacity to disseminate knowledge. So it is not hard to see where Greece’s main problems lie. Greece has high-quality human resources and enclaves of excellence both in public research institutes and in the private sector. However, Greece lags behind in its transition to a knowledgebased economy. The high-quality research output does not translate into growth output, leading to a paradox of non-commercialisation. Strengthening the linkages between industry and universities would enhance the so-called “knowledge triangle” and lead to the digital transformation of the economy, an increase in the stock of knowledge and productive capital, the development of outward-oriented sectors and, more generally, to a knowledge economy and society. *** Public-Private Partnerships Four decades ago, inequality started to rise in the OECD member-states. The 21st century ushered in new challenges like the prospects of powerful new technologies that gave rise to higher productive capacity but, also, concentration of economic power and inequality of opportunities. The key role of governments was to create a well-functioning market economy, which can be perceived as synonymous with a competitive economy. The top priority was, and still remains, to restore economic dynamism through appropriate supply and demand policies as well as to ensure equality of opportunity for all. In this vein, establishing partnerships with the private sector is no longer a matter for theoretical discussion, it must become common practice. Greece, in the past ten years has had a rather good track record in building PPPs. Across a range of sectors, PPPs have played a significant role in facilitating the delivery of important projects. Currently, Greece is involved in 14 public-private partnerships of various types and sizes, which translate into an investment of €822 million over the years 2009 to 2019, of which €318 million financed by EU grants and €504 million by private resources. Let me elaborate on some of these projects. The “Attica Urban Transportation Telematics System” project, signed in June 2014, involved 1,000 smart bus and trolley stops, providing passengers with real-time information on the schedules and routes of 2,500 vehicles. The social and economic benefits of the project were significant: (a) upgrading of public transport infrastructure; (b) improvements of passenger experience and quality of life; (c) reductions in traffic congestion, fuel consumption and, therefore, air pollution. In December 2014, another partnership was signed to provide broadband infrastructure coverage and affordable connectivity services to the residents of remote, disadvantaged and border areas of Greece with no connection to the digital world and corresponding to roughly 45% of Greek territory. This particular project was the winner of the European Broadband Awards 2017. In June 2015, a new public-private partnership was established to develop the first integrated waste management system in Greece. This new waste treatment unit encompasses the previously existing waste management system of Western Macedonia, and creates a waste 2/5 BIS central bankers' speeches management model in full conformity with the environmental strategy of the EU. All 14 public-private partnerships adhere to high standards, as regards both financial reporting standards and technical features, and have received wide recognition, not to mention a number of international awards. Importantly, they have been evaluated by Eurostat and classified as ‘offbalance sheet’ (meaning that they do not affect the government deficit and public debt) due to the good risk-sharing between the entities.1 An additional 12 public-private partnerships are presently in the pipeline and have already been approved. Their emphasis is on areas of high social priority for local communities, such as waste management, energy saving (for example, street lighting projects), social infrastructure (for example, schools and hospitals) and ICT (for example, the “Ultrafast Broadband” project) and on concession projects that do not burden the Public Investment Programme. But even more important could turn out to be in the future PPPs that have to do with large investment projects. The Greek state, for historical reasons, owns land to a much larger extent than other OECD or European member-states. This land could be used to initiate large investment projects (and attract foreign direct investment) where the state leases the land for long periods and private investors develop it. For example, the “Hellinikon” project, an 8 bl euros giga project, concerns the development of a large area (three times the size of Monaco) in the southern suburbs of Athens by the sea, which used to be the national airport of Greece. The ambition is to create there a new “Riviera” with large multiplier effects through the construction of luxury residencies, hotels and a casino. The benefits of PPPs. First, public-private partnerships enable the public sector to leverage more financial resources. And since there is no immediate disbursement of public funds, this in turn allows government funds to be redirected to other important uses. Second, in any public-private partnership scheme, the private sector assumes a significant part of the risks involved. Thus, it has a keen interest in ensuring the project’s diligent and efficient design and implementation. The use of private funds, complementary to public ones, can then contribute to a faster completion of the project and provision of services. Third, the private entity involved is responsible for the proper maintenance of the work or service. Specific performance indices are used to monitor the projects and are linked with the terms and conditions of payment specified in the contracts. In other words, if certain performance targets are not met on time, the penalty typically entails payment reductions, retentions, or credit to the owner, thus ensuring a strong incentive for the long-term maintenance of a sound technical project and high-quality services. Fourth, the long-term nature of contracts has the indirect effect of creating financially stable firms. The objective is to secure not only additional funding but also to leverage on private sector’s know-how, human resources, innovative approach and ability to efficiently manage complex projects for the public benefit. Last but not least, public-private partnerships have the potential to play a fundamental role in achieving the United Nations Sustainable Development Goals. According to the United Nations, a sustainable future hinges on the achievement of 17 goals by 2030, including global prosperity with no poverty and zero hunger, quality education, equality, decent work, access to clean water, affordable energy, justice, strong institutions and climate action. Achieving these goals will, however, require substantially more investment, both public and private, and a reorientation of that investment. In particular, it is estimated that the financing required to achieve the sustainable development goals by 2030 amounts to about $5-7 trillion per 3/5 BIS central bankers' speeches year globally. Global infrastructure (water, road and rail transportation, airports and ports, energy) could require up to $94 trillion of investment by 2040, which corresponds to 3.5% of global GDP.2 Given the limited government resources, a considerable amount of private finance will be required to fill the gap. More importantly, to meet the Sustainable Development Goals, partnerships at every level will be required. The 2030 Agenda for Sustainable Development calls for a new partnership or a “revitalized global partnership for sustainable development” and, as Goal 17 states, “effective public, public-private and civil society partnerships” will be required to strengthen the means of implementing the Sustainable Development Goals. I would like to seize this opportunity to stress how strongly Greece is committed to the implementation of the 2030 Agenda for Sustainable Development and its Goals, while ensuring that “no one is left behind” is a high policy priority. In 2017, Greece endorsed eight National Priorities for adapting the 17 Sustainable Development Goals to national needs and circumstances. The 8th priority was “enhancing open, participatory, democratic processes and promoting partnerships”. Given that on the path to sustainable development lies the environmental challenge, the Bank of Greece has committed to invest significantly in Goal 13, i.e. climate action, a horizontal goal that contributes to the achievement of all others. As addressing the challenge of climate change calls for coordinated efforts, the Bank of Greece, through its Climate Change Impacts Study Committee (CCISC), is currently involved in an eight-year programme with the Greek Ministry of Environment and Energy and other partners for the implementation of the national adaptation strategy for Greece. The Bank of Greece is also building a stakeholders’ network to bring together academia, the public and the financial sectors in stepping up the collective effort to address issues of climate change and adaptation. Let us now examine what makes a public-private partnership successful. Public-private partnerships need to be commercially viable schemes in order to attract private sector investment, and there is already good guidance on how public-private partnerships can deliver the value-for-money approach when selecting projects. Public-private partnerships are just one way to deliver public infrastructure and services. This means that they should not be seen as a “deus ex machina”, only stepping in to make up for limitations in public funds to cover investment needs, but also as a way to increase the quality and efficiency of public services. When well designed and implemented, public-private partnerships increase access to capital, foster innovation and produce more efficient public services. They also bring into the projects a business culture oriented towards efficiency, quality and economic viability. Public-private partnerships are gaining a solid foothold, but face quite a few impediments and challenges. According to the United Nations, public-private partnerships serve as an instrument for financing key economic infrastructure projects and deliver value for money, but only if countries have in place the institutional capacity to create, manage, evaluate and monitor them. These four interrelated capacities ensure that public-private partnerships are undertaken for the “right” reason.3 The design of a proper legal framework and of contractual arrangements is crucial to make public private partnerships live up to their potential. This brings me to the next question: what actions can governments take? Ultimately, building successful partnerships is equivalent to building trust between public and private entities. It is often said that successful partnerships require both parties to have “shared goals”. However, since this is very hard to achieve when it comes to public-private partnerships, the focus should rather be on “complementary goals”. Misalignment, which includes conflicting goals and incentives, is identified as one of the three major reasons for failure of strategic 4/5 BIS central bankers' speeches partnerships.4 This is where governments have an important role to play. Governments must create the enabling environment in which partnerships can emerge, and moreover, they must develop sufficient regulatory and assessment capacity to ensure that projects actually provide a public good. The more transparent the objectives, targets, and impacts of the projects are, the more effective the partnership will be. In this context, policy actions should focus more than ever on good governance, sound institutions, respect for property rights and legal predictability. It is the responsibility of the public sector to establish a reliable and credible institutional framework. All around us, we see the power of technology to challenge, disrupt and improve the status quo. Today, the use of Information and Communication Technology (ICT) is expanding public-private partnerships beyond all previous limitations and boundaries. The relationship between publicprivate partnerships and ICT can be described as symbiotic. The deployment of ICT has the power to improve the services that matter most to people’s lives: education, transportation, public safety, healthcare and social services. In order to transform the way these public services are delivered, governments can collaborate with private corporations to develop such initiatives as e-government, remote healthcare, and intelligent transport. A transformative innovation policy is essential to sustainable growth. Fostering linkages in the national innovation system has in recent years become a major policy focus, and public-private partnerships can become a major policy instrument. Providing education services and improving learning outcomes is just one area where the public and private sectors can join forces to complement each other’s strengths. For one, making high-quality education accessible to all, calls for innovative programmes and initiatives, in addition to public resources and leadership. In higher education in particular, partnerships with the private sector can, when undertaken properly, benefit all parties. For instance, the curriculum, which is at the core of higher education, when developed by education experts and with input and feedback from the social partners, stands a better chance of leading to better career prospects. As a final remark, I would like to stress that SMEs are the backbone of the European economy and that the 2030 agenda places micro, small and medium-sized enterprises (SMEs) at the heart of the partnership debate. Not only do they employ the vast majority of people in most EU countries, but also their role as incubators of innovation and inclusive growth is increasingly recognised. These SMEs need support to build their competitiveness. *** In closing, isolationism is not a viable option. The interdependence of economies, value chains, production processes and the increased use of technology have made obsolete the notion of going it alone. Collaboration with the private sector will be critical to bringing additional capacity and transformation on the ground. It can also play an important role as a source of innovative technologies, management and organisational skills and enhanced capabilities. Private sector, the academia and institutions are all needed to build a compact of active partnerships. Smart partnerships can bring multiple wins for all involved in the medium and long term, where efforts of today can create opportunities for tomorrow. 1 Eurostat (2019), “Manual on Government Deficit and Debt — Implementation of ESA 2010”. 2 Global Infrastructure Outlook, Oxford Economics. 3 United Nations (2016), “Public-Private Partnerships and the 2030 Agenda for Sustainable Development: Fit for Purpose, DESA Working Paper No 148. 4 Henderson, J., Dhanaraj, C., Perrinjaquet, M. and Avagyan, K. (2019). Strategic Partnerships. [online] IMD business school. Available at: www.imd.org/research-knowledge/articles/strategic-partnerships. 5/5 BIS central bankers' speeches | bank of greece | 2,019 | 10 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Annual Stavros Niarchos Foundation Lecture, Yale University, New Haven CT, USA, 19 September 2019. | Yannis Stournaras: Greece in Europe - reasons for optimism Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Annual Stavros Niarchos Foundation Lecture, Yale University, New Haven CT, USA, 19 September 2019. * * * Ladies and gentlemen, It is a great honour for me to be invited to deliver the Annual Stavros Niarchos Foundation Lecture. The Hellenic Studies Program at the Yale Macmillan Center does an excellent job in studying and promoting contemporary Greek culture and history. In my talk today, I will first present the lessons to be drawn from the Greek crisis. I will then discuss the progress made in recent years and the outlook for the Greek economy, and highlight the crisis legacies and the challenges that lie ahead, both for Greece and the euro area. Finally, I will put forward policy proposals for addressing these challenges. 1. Overview and lessons from the Greek crisis From 2000 to 2007, Greece experienced benign macroeconomic conditions characterised by high rates of GDP growth (well above the euro area average), relatively stable consumer price inflation and a gradually decreasing unemployment rate. The expansion was driven by rapid credit growth and low borrowing costs following financial liberalisation and Greece’s EMU entry in 2001. The Maastricht criteria for joining EMU were based solely on nominal convergence, and therefore failed to incentivise the structural reforms in the product and labour markets and in the functioning of the public sector needed to enhance real convergence, raise potential growth and safeguard the sustainability of public finances. On the contrary, employer and employee interest groups opposed reforms that would have increased competitiveness. Although Greece’s GDP per capita increased during the boom period, approaching the EU average, the institutional gap relative to the euro area did not narrow. Thus, Greece continued to lag significantly behind its euro area partners in various indicators of governance and structural competitiveness. The sharp deterioration of the fiscal and macroeconomic environment in 2008 and 2009, and the subsequent downgrades of sovereign debt and rising sovereign spreads, cut off the Greek sovereign and banks from international capital and money markets. Substantial deposit withdrawals and extremely tight liquidity conditions put strain on the banking sector. An EU-IMF financed economic adjustment programme was initiated in 2010, aiming to correct the imbalances. The crisis has taken a heavy toll on output, incomes and wealth. Between 2008 and 2016, Greece lost over one fourth of its GDP at constant prices, and the unemployment rate rose by nearly 16 percentage points. Furthermore, GDP per capita at purchasing power parity declined to 67.4% of the EU average in 2018, down from 93.3% in 2008. To this, one must add the large increase of non-performing loans (NPL) ratio to about 50%, the large brain drain and massive underinvestment, with their immeasurable economic and social consequences. The slide of the GDP growth rate into negative territory raised the debt-to-GDP ratio to unsustainable levels despite the fiscal consolidation, and caused debt-servicing problems for households and businesses. This was the main, but not the exclusive, reason why NPLs rose dramatically, weakening banks’ asset quality, thus making it difficult for banks to finance the real economy. It took no less than eight years, three economic adjustment programmes, major debt restructuring and three rounds of bank recapitalisation to resolve the Greek crisis. The length and depth of the Greek crisis can be explained by seven factors: 1 / 14 BIS central bankers' speeches · First, the size and speed of fiscal consolidation were unprecedented. This primarily had to do with the fact that the initial fiscal and external imbalances were much higher in Greece than in other Member States under financial stress. In addition, emphasis has, on average, been placed, over the three adjustment programmes, more on tax hikes rather than expenditure cuts, growthenhancing reforms and privatisations. · Second, the fiscal multipliers turned out to be higher than initially anticipated, and the economy was soon caught in a vicious circle of austerity and recession. · Third, the sequencing of structural reforms led to real wages declining more than initially expected, exacerbating the recession. In other words, the reform effort focused much more on the labour market than on the goods and services markets. Hence, nominal wages declined faster and more strongly than prices. Households experienced a massive drop in purchasing power, which, in turn, constrained personal consumption and deepened the recession. · Fourth, the non-performing loans (NPL) problem proved very difficult to manage. Mainly the result of economic contraction, it was further exacerbated by legislative changes such as the blanket moratorium on primary residence auctions and the abuse of foreclosure protection, as well as several other legal and judicial impediments. With the benefit of hindsight, it could be said that a more dynamic response during the first years of the crisis, implementing the necessary legislative changes much earlier and introducing a systemic solution via a centralised Asset Management Company for NPLs as other Member States had done, could have reduced the problem we face today. · Fifth, certain reforms fell behind the agreed time schedule on account of a number of factors, including: insufficient ownership of the necessary reforms; populist rhetoric, political rivalry; and the resistance of various vested interests to reform. This had serious consequences: the signing of a third economic adjustment programme, the introduction of capital controls mainly to stem the outflow of bank deposits, another bank recapitalisation round and two years of economic stagnation. · Sixth, political deliberations in the euro area also played their part in delaying the recovery of the Greek economy. The Eurogroup decision of November 2012 to grant further debt relief was put off for several years and was only implemented in June 2018. This undermined the growth prospects of the Greek economy and prolonged the crisis. Had this form of debt relief been given at the beginning of the first economic adjustment programme, alongside the implementation of ambitious growth-enhancing structural reforms and an Asset Management Company to deal with NPLs, it would have had a more positive impact on the economy, possibly limiting output and employment losses. · Seventh, when the Greek crisis broke out, EMU lacked the tools to prevent or contain the crisis. The Stability and Growth Pact (SGP) failed to control the build-up of public debt in the precrisis period. There was insufficient monitoring and control over macroeconomic imbalances, such as the evolution of the current account and private debt. The sovereign-bank “doom loop” amplified the financial crisis and the recession. Euro area crisis management and resolution tools were poor or non-existent on account of highly exaggerated concerns about moral hazard, and due to the lack of an appropriate institutional setting. There was no provision for risk-sharing in the initial EMU architecture. It was the ECB’s response, especially after mid-2012, which provided the time required for euro area governments to take the actions necessary to safeguard the stability of the financial system and strengthen EMU. 2. Progress since the beginning of the crisis Despite the missteps, occasional backsliding and delays, significant progress has been made since the beginning of the sovereign debt crisis in 2010. The implementation of economic adjustment programmes has eliminated the root causes of the Greek crisis. More specifically: 2 / 14 BIS central bankers' speeches · The achieved fiscal adjustment was unprecedented, turning a primary deficit of 10.1% of GDP in 2009 into a primary surplus of 4.3% of GDP in 2018 (according to the enhanced surveillance definition). The primary surplus in 2018 exceeded the programme target for the fourth year in a row. · The current account deficit has been reduced by 12 percentage points of GDP since the beginning of the crisis. · Labour cost competitiveness has been fully restored, and price competitiveness has recorded substantial gains since 2009. · A bold programme of structural reforms was implemented, covering such areas as the pension and healthcare systems, goods and services markets, the business environment, the tax system, the budgetary framework and public sector transparency. · The banking system has been restructured. Today only four systemic banks control over 95% of the market, as more than ten other banks were merged or liquidated. The role of the Bank of Greece was pivotal in the restructuring and recapitalisation of the banking system, the enhancement of its corporate governance and the provision of liquidity all over Greece during the crisis. Today, banks’ capital adequacy ratios stand at satisfactory levels, and their loan-loss provisions are sufficient to address potential credit risks. A number of important reforms have been implemented, aiming to provide banks with an array of tools for tackling the problem of non-performing loans (NPLs), including a strengthening of the supervisory framework, by setting operational targets for NPL reduction, the creation of a secondary NPL market and the removal of various legal, judicial and administrative barriers to the management of NPLs. These actions have started to bear fruit, as shown by the continued reduction of the NPL stock in line with the targets set. Non-performing loans amounted to €75.4 billion at the end of June 2019, down by €31.9 billion from their peak in March 2016. However, the NPL ratio remains high, at 43.6% in June 2019. As a result of the reforms implemented since the beginning of the crisis and the effort of enterprises to make up for declining domestic demand by exporting to new markets, openness has increased substantially and the economy has started to rebalance towards tradable, exportoriented sectors. · The share of total exports in GDP increased from 19.0% in 2009 to 36% in 2018. Exports of goods and services, excluding the shipping sector, have increased in real terms by 60% since their trough in 2009, outperforming euro area exports as a whole. · The volume of tradable goods and services in the economy increased cumulatively between 2010 and 2017 by approximately 14% relative to non-tradables in terms of gross value added. 3. The outlook for the Greek economy Following the stagnation of 2015–2016, GDP growth returned to positive territory in 2017 (1.5%) and picked up to 1.9% in 2018. Recent real GDP data point to continued expansion in the second quarter of 2019 (1.9% y-o-y). Thanks to the improved economic conditions and to the reforms implemented since 2010, the unemployment rate, though still high, fell to 16.9% in the second quarter of 2019, from 27.8% at the end of 2013. Looking forward, the Bank of Greece expects that economic activity will remain on a positive growth trajectory, expanding by 1.9% in 2019 (that is by 2.3% year-on-year in the second semester of 2019) and above 2% in 2020. 3 / 14 BIS central bankers' speeches The outlook is subject to downside risks, related both to the external and the domestic environment. The global growth and trade slowdown due to the imminent trade war could affect export growth more markedly, while the disorderly Brexit, geopolitical tensions and the recent increase in oil prices are further significant downside risks. A possible sharp correction in global capital and financial markets could increase the cost and reduce the availability of funding, particularly for the private sector. There are also downside risks on the fiscal front, associated with ongoing court rulings on pension cuts, which could weigh on debt sustainability. In addition, an exacerbation of the refugee crisis could hurt tourism and trade. However, there are also domestic opportunities, relating to a rapid implementation of structural reforms in Greece and the reduction (both direct and indirect) of the primary surplus fiscal targets. The fact that Greece still lags behind its peers and competitors in almost all indices of structural competitiveness, is a huge opportunity for a rapid catch-up which should be exploited. 4. Future challenges Despite the progress made so far, major short- and medium- to long-term challenges and crisisrelated legacies remain. A) Medium- to long-term challenges The main medium- to long-term challenges are the following: · The high public debt (whose sustainability improved sign ificantly in the medium term with the measures adopted by the Eurogroup from 2012 to 2018) creates uncertainty about Greece’s ability to service its debt in the long term, raising the cost of borrowing both for the public and the private sector, and hampering growth prospects. · Greece’s negative current account balance and large negative net international investment position. · The high long-term unemployment rate, which generates inequalities threatening social cohesion and increases the risk of human capital erosion. · The projected demographic decline (due to population ageing and outward migration), which exerts downward pressure on potential growth and puts at risk the long-term sustainability of the pension system. · The slow digital transformation of the economy. Based on the Digital Economy and Society Index of the European Commission, Greece for the year 2019 ranks 26th among the 28 EU countries, which implies a high risk of technological lag and digital illiteracy. · The multi-year recession has left an investment gap and risks permanently impairing the productive capacity of the Greek economy through a hysteresis effect. In more detail, gross fixed capital formation (at current prices) fell from 26% of GDP in 2007 to 11.1% of GDP in 2018. The largest proportion of this decline (10.1 out of 14.9 percentage points) is due to shrinking residential investment, which fell from 10.8% of GDP in 2007 to 0.7% of GDP in 2018. · Fixed capital investment net of depreciation has been negative since 2011. Specifically, in 2018, net fixed capital investment amounted to roughly -€8.8 billion or –4.8% of nominal GDP. Positive net investment is a prerequisite, if the capital stock and thus the potential output of the Greek economy are to increase. · Estimates by the Bank of Greece indicate that the net capital stock of the Greek economy (at constant 2010 prices) declined by €67.4 billion in the period 2010–2016, to €622.2 billion in 2016. In order to raise the net capital stock over the next decade to pre-crisis levels, gross fixed capital formation at constant prices needs to increase by about 10% per year. Excluding 4 / 14 BIS central bankers' speeches residential investment, which accounts for about 50% of the capital stock, gross fixed capital formation at constant prices needs to increase by about 5% per year by 2029. Although a business investment growth rate of 5% per year over the next decade is high, it is deemed achievable for the Greek economy based on historical experience, so long as suitable investment and business-friendly policies are pursued. · Investments need to accelerate in order to bridge the investment gap in a timely manner and avoid the so-called hysteresis effect. As recently pointed out by the European Commission, Greece needs additional public and private investment in transport, solid waste and industrial sewage treatment, water supply, infrastructure and energy network connectivity, mainly between island regions and mainland Greece, in information and communication technology (ICT), and in innovation, education and training. · Many of the above investments would align Greece’s environmental protection standards with those of the rest of the EU, something particularly important given the risks of climate change. Addressing the challenge of climate change calls for coordinated efforts. Incidentally, the Bank of Greece has been playing an active role in this area through its Climate Change Impacts Study Committee (CCISC) and its various publications on the topic. Moreover, the Bank participates in the Central Banks and Supervisors Network for Greening the Financial System (NGFS), aiming to enhance the role of the financial system in managing climate and environmental risks, analyse the macro-financial impact of climate change and strengthen the global response to the threat of climate change. B) Short-term challenges Apart from the medium- to long-term challenges, the Greek economy also faces major challenges in the immediate future, which need to be dealt with as a matter of urgency: · Greek government bonds have yet to regain investment grade status, despite the substantial decline in their yields after the new government took office and the recent successful issuance of a new 7-year Greek government bond at a yield of 1.9% with significant participation from foreign institutional investors. Recently, Greek 10-year government bond yields fell below 1.4%, and, what is even more important, the corresponding spread fell below 200 basis points. It is estimated that investment grade status could cut further the spread by 60 basis points. · The Greek economy continues to face very tight fiscal and monetary conditions compared to all the other Member States of the euro area, which negatively affects its growth prospects and overall competitiveness. - Primary surpluses in recent years have been very large. The high primary surplus targets and their systematic overachievement in recent years through the curtailment of public investment spending and high taxes have 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. - The monetary policy easing by the ECB has indirectly benefited Greek businesses and households, but not to the extent that it would have, if Greek government bonds had been eligible for the Asset Purchase Programme (APP). The fact that all the other Member States enjoy much more favourable financing conditions for their businesses has an indirect negative effect on Greece’s overall competitiveness. - The high stock of non-performing loans (NPLs) impairs banks’ lending capacity and increases lending costs. This is yet another reason, on top of the previous one, why Greek businesses continue to face higher financing costs than their European counterparts, which undermine their competitive position, despite the significant drop in unit labour costs following the wide range of reforms that were implemented in recent years. It is indicative that, according to the most 5 / 14 BIS central bankers' speeches recently available data, the average bank lending rate for businesses in Greece is still slightly below 5%, compared to slightly above 2% in the euro area. · Up to now, the business environment had not been considered investment-friendly and in fact discouraged investment. Non-price competitiveness, so-called structural competitiveness, is low compared to Greece’s EU partners. This is mainly due to high tax rates, weak public sector efficiency and delays in court proceedings and rulings. Here are some numbers: - According to the World Economic Forum (October 2018) 1 Greece ranked 103rd out of 140 countries in Checks and Balances (which refers to budget transparency, judicial independence, efficiency of legal framework in challenging regulations and freedom of the press), 115 th in Public Sector Performance (which refers to the burden of government regulation, efficiency of legal framework in settling disputes, e-Participation index, future orientation of government), 119 th in Property Rights Protection (which refers to property rights, intellectual property protection and quality of land administration), and 119 th as regards the Strength of Auditing and Reporting Standards. - According to the World Bank’s Doing Business Report for 2019, Greece ranks 132 nd out of 190 countries in terms of Enforcing Contracts. Specifically, it takes 1,580 days for a case to be heard by the competent court of first instance and for the ruling to be enforced, compared to 582.4 days in the OECD high-income economies. Resolving insolvency takes 3.5 years, compared to 1.7 years in the OECD high-income economies. Thus, the recovery rate is 33.2% in Greece against 70.5% in the OECD high-income economies. 5. Policy actions to address short- and medium- to long-term challenges The reformist policy agenda of the new Greek government, elected last July, is viewed positively by the international financial markets, as indicated by the rapid decline in Greek government bond yields, which, as already said, currently stand at below 1.4%. The government is swiftly implementing its planned investment and growth-friendly policies, which involve lowering business taxes and placing more emphasis on reforms and privatisations, as a means to address short- and long-term challenges and reinforce the credibility of economic policy. Meanwhile, the substantial improvement in budget execution, according to recently published Bank of Greece cash data, between end-June and end-August 2019, indicate that the primary surplus fiscal target for 2019 will be met. This should support the efforts of the Greek government to achieve an upgrade of government bonds to investment grade status by international credit rating agencies. Should this happen, Greek bonds would then be allowed to participate in the ECB’s recently-enhanced Asset Purchase Programme (APP), and, therefore, to reap substantial benefits in terms of lower borrowing costs for the Greek economy. To this end, economic policy should follow a three-pronged approach, aimed at: (a) achieving the agreed fiscal targets; (b) drastically reducing NPLs; and (c) stepping up the pace of structural reforms and privatisations. (a) Achieving the agreed fiscal targets The fact that the new government immediately announced that it will respect the agreed fiscal targets is a welcome development. At the same time, in line with what the Bank of Greece has repeatedly stressed in recent years, the government is negotiating a reduction (both direct and indirect) of the primary surplus target with the institutions. A lower, more realistic, primary surplus target compared to the current one of 3.5% of GDP 6 / 14 BIS central bankers' speeches through 2022, if combined with more reforms and privatisations, would probably imply lower, rather than higher public debt. This is so because, with a public debt-to-GDP ratio of 180%, a one percentage point-higher growth rate (likely to materialise if the lower primary surplus target is achieved through lower taxes and social contributions, combined with more privatisations and reforms) and/or 100 basis points-lower borrowing costs (already materialised, relative to the European Commission’s baseline scenario) are 1.8 times more effective in reducing the debt ratio than an additional GDP percentage point of primary surplus. The fact that government borrowing costs today are much 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. Moreover, the Stability and Growth Pact allows for fiscal flexibility so long as additional reforms increase potential growth. In a nutshell, there appear to be sufficient grounds for lowering the primary surplus targets and ample room for a compromise solution. In such a solution, primary surpluses could be lowered in exchange for an acceleration of reforms. The outcome will be a win-win situation for Greece, as well as for its EU partners, given that Greece will be able to return faster to a high growth path that safeguards fiscal sustainability and the repayment of bailout funds. Downside risks related to external factors also justify a reduction of the primary surplus fiscal target. (b) Drastically reducing NPLs Priority must continue to be given to reducing the high stock of non-performing loans (NPLs), which impairs banks’ profitability and lending capacity and delays the recovery of investment and economic activity. As I mentioned earlier, the ratio of NPLs to total loans remains very high (43.6% in June 2019). According to the operational targets for NPL reduction, the aim is to bring the NPL ratio down to 35% by end-2019 and to below 20% by end-2021. Overall, despite the progress in this regard, the pace of NPL reduction has not been fast enough to bring the Greek NPL ratio close to the European average of 3.1% as of March 2019. The activation of a truly systemic solution to the NPL problem, which resembles an Asset Management Company (AMC), would — alongside the banks’ own efforts — be key for cleaning up the balance sheets of banks, for bank lending to increase and for investment to recover. After all, similar solutions have been implemented in almost all Member States under financial stress. (c) Stepping up the pace of structural reforms and privatisations Foreign direct investment (FDI) is necessary, as domestic savings are insufficient to match the investments needed for high growth rates. If Greece is to attract more FDI, it must speed up privatisations, which mobilise additional private investment, promote private-public partnerships in various sectors and focus on removing major disincentives, such as red tape; the lack of a clear and stable legislative and regulatory framework; an unpredictable tax system; weaknesses in property rights protection; limited access to financing and high borrowing costs, and delays in legal dispute resolution. The lifting of capital controls on September 1st is an important step towards attracting foreign direct investment. In addition to helping reduce the investment gap, FDI promotes closer trade links with countries and companies with state-of-the-art technologies and facilitates participation in global value chains. This would increase openness and improve both the quantity and quality of Greek exports. Greater emphasis must also be placed on improving public sector efficiency through the modernisation and digitisation of public administration and state-owned enterprises, with a redesigning of procedures and responsibilities, and the evaluation and development of staff capacities and infrastructures. 7 / 14 BIS central bankers' speeches Legal certainty and clarity and a stable legal framework as well as the speedy and reliable resolution of legal disputes would be fundamental to strengthening the rule of law, improving the investment climate and accelerating economic growth. Moreover, international experience has shown that robust economic growth is achieved by countries with good governance and strong, independent institutions. Finally, it is necessary to strengthen the “knowledge triangle” (education, research and innovation) through policies and reforms that promote research, technology diffusion, entrepreneurship and foster closer ties between businesses, research centres and universities. Strengthening the knowledge triangle and ICT would lead to the digital transformation of the economy, an increase in the stock of knowledge and productive capital, the development of outward-oriented sectors and, more generally, to a knowledge economy and society. 6. The need to strengthen EMU (a) Progress and remaining challenges Greece belongs to the euro area and is directly affected by its economic and financial conditions. Hence, Greece has a very strong interest in promoting and supporting policies that strengthen the euro area economy. Policy makers around the world have learned their lessons from the Great Depression: a financial system in distress requires active central bank intervention. Thus, when the need arose, and in the absence of an appropriate policy response by the governments, the ECB stepped in decisively to restore market confidence, contain the sovereign debt crisis and support the euro area economy, by safeguarding price and financial stability. The ECB used the asset side of its balance sheet, as well as other tools such as forward guidance, in addition to its standard and non-standard interest rate policies. Given the success of these policies, some of these instruments will be permanently included in the new standard framework, as the effective lower bound will likely continue to be a binding constraint on interest rate policy in a low inflation, low interest rate environment. Indeed, earlier this month, following subdued inflation, a downward revision of inflation forecasts and weakening euro area growth, the Governing Council of the ECB decided to adopt an even more accommodative monetary policy with an even lower deposit facility rate, a new net Asset Purchase Programme (APP), more favourable terms for TLTRO-III and a new forward guidance. Euro area governments took a number of necessary actions to safeguard the stability of the financial system and to strengthen EMU. Policy actions have focused on addressing institutional weaknesses, structural fragilities and excessive risk-taking that led to the sovereign debt crisis and the negative feedback loop between sovereigns and banks, which in turn undermined euro area stability. Other steps taken involved not only more effective regulation, but also higher capital and liquidity buffers for banks, early warning systems and the development of macroprudential tools to increase resilience to potential shocks. The eruption of the Greek crisis as well as the crisis in other Member States acted as a catalyst for key initiatives such as the provision of intergovernmental loans to Greece; the establishment of the EFSF (European Financial Stability Facility), and its successor the ESM (European Stability Mechanism). Other initiatives, which stemmed mainly from the world banking crisis, included: the creation of the Banking Union with the Single Supervisory Mechanism, the Single Resolution Mechanism and the – yet to be created – European Deposit Insurance Scheme; the introduction of stricter rules on banking regulation and supervision as well as the establishment of the European Systemic Risk Board (ESRB). Finally, the European Commission proceeded with the development of appropriate macro-prudential tools, which allowed for greater emphasis on identifying and addressing system-wide risks; the strengthening of the Stability and Growth Pact; the initiation of the Macroeconomic Imbalance Procedure and the European Semester. As a result of the above initiatives, all Member States that had received EU-IMF assistance are 8 / 14 BIS central bankers' speeches now back on their feet, macroeconomic imbalances have been corrected to a large extent, and growth has been restored. Economic expansion in the euro area as a whole continues, albeit at a slower pace, and EU banks have become more resilient to financial shocks over the past two years, as reflected in the results of the EU-wide stress tests. Moreover, four additional Member States were admitted to EMU during the crisis years. Despite the progress achieved so far, the euro area faces several challenges ahead. The recovery of the euro area from the financial crisis lags behind the recovery of its global competitors. This reflects weak productivity performance and a lagging behind in innovation and digital technologies. Population ageing and climate change raise serious concerns about the longer-term outlook of the euro area economy. Post-crisis, we have seen a halt in financial integration, which weakens private risk-sharing in the euro area. According to a recent IMF discussion note, and in accordance to what has already been said, businesses in Greece pay a 2.5 percent higher rate of interest on their debt than similar businesses in the same industry in France. Moreover, for every one percentage point drop in national GDP growth, consumption drops by 0.75 percentage points, on average, in the euro area Member States, compared to only 0.18 percentage points, on average, in the United States. Economic convergence in terms of real GDP per capita among the 12 old euro area countries (EA12) has stopped since 2010. Only the new euro area Member States have showed sustained convergence. Divergence has widened also in terms of unemployment rates and income inequality indicators. b) Further policy steps to deepen EMU Bold steps need to be taken to strengthen the euro area. In the financial sector, it is a priority to complete the Banking Union by creating the European Deposit Insurance Scheme (EDIS). The Banking Union will help to create a better integrated, more efficient and well-capitalised European banking sector. Coupled with the completion of the Capital Markets Union, a single rulebook for banks and capital markets, convergence in taxation frameworks, in capital market supervision, in insolvency procedures and with EU rules allowing pension funds and insurance companies to participate in long-term market investments, it can be expected to support the single market and to fund investment and growth. More developed and integrated capital and banking markets will reduce funding costs, improve the financing of the real economy by diversifying the sources of financing and facilitate private risk-sharing through the capital and credit channels. For example, as recently flagged by the IMF, if Greece were to improve its insolvency practices to best-in-class standards, it could reduce its businesses’ average debt funding costs by about 50 basis points. More developed and integrated capital and banking markets will also support the international role of the euro through the creation of more integrated and liquid capital markets. However, we need to make sure that the expansion of the non-bank sector does not endanger financial stability. Increased risk-sharing is highly desirable, but we should not forget that greater public risk-sharing is only possible with less, and not more, sovereignty. Risk-sharing, whether in the form of a safe asset, a central fiscal stabilisation tool, a fund to insure against unemployment, or a truly European deposit insurance scheme, should proceed simultaneously with risk reduction, such as the reduction of non-performing loans or national discretions in supervisory and resolution rules for banks. It is only in this way that we can transform what is in effect today in the euro area a non-cooperative zero-sum game into a cooperative, win-win one. In addition, in a monetary union such as the euro area, the adjustment of current account imbalances should be as symmetric as possible. Not only Member States with excessive current account deficits, but also Member States with excessive current account surpluses should adjust. Monetary policy alone cannot stabilise the economy. Fiscal policy should also be active in those Member States where fiscal space exists and public debt remains sustainable. In particular, the euro area urgently needs investment in new technologies in order to catch up with its 9 / 14 BIS central bankers' speeches competitors and investment necessary to face the challenges of climate change. Part of this investment will be public or in the form of private-public partnerships. Moreover, euro area Member States need to step up structural reform efforts in the labour and product markets to make them more flexible, which is necessary in a single currency area, and boost productivity, and to make public finances more robust. However, the sequencing of domestic structural policies is important: for instance, goods and services market flexibility is best achieved before, or simultaneously with, labour market flexibility. Otherwise, large real wage reductions might occur, which are unnecessary and undesirable both from an economic and a social perspective. In the context of economic policy coordination and with a view to fostering real convergence, improvements should be made in institutional quality and good governance across euro area Member States. 7. Conclusions Despite some missteps and delays in the implementation of the required reforms, Greece has made notable progress since the start of the crisis in 2010. The implementation of economic adjustment programmes has eliminated several macroeconomic imbalances. The economy is now recovering and has started to rebalance towards the tradable, export-oriented sectors. The Bank of Greece expects that economic activity will remain on a positive growth trajectory, expanding by 1.9% in 2019 (that is by 2.3% year-on-year in the second semester of 2019) and above 2% in 2020. The catching-up effect from a long depression is projected to counterbalance the negative effect of a global slowdown. However, significant challenges and crisis-related legacies remain (e.g. a high public debt ratio, a high NPL ratio and high long-term unemployment), while the brain drain and underinvestment weigh on the long-term growth potential. In order to contain future risks and address the remaining challenges and crisis legacies, the government should implement its reform agenda as soon as possible. Moreover, the continuation of reforms is an obligation to which Greece is bound in the context of enhanced surveillance, as well as a precondition for the activation of the medium-term debt relief measures. Increased policy credibility through the implementation of reforms, the speeding up of privatisations and unblocking already approved investment plans will increase market confidence in the growth prospects of the Greek economy. An acceleration of NPL reduction through the adoption of a truly systemic solution will improve financing conditions for businesses and households as well as market confidence, and will accelerate investment and GDP growth. The conditions described above will facilitate Greek government bonds regaining investment grade status, thus paving the way to the inclusion of Greek bonds in the ECB’s recentlyenhanced Asset Purchase Programme (APP). This, in turn, would further lower borrowing costs for the Greek economy, thereby boosting growth and improving debt sustainability. In such a benign scenario, growth rates higher than currently projected, above 3%, could be achieved through increased investment. Last but not least, in order to enhance real convergence and strengthen the international role of the euro, we must take steps to deepen EMU. The only realistic way forward is to simultaneously promote risk-sharing and risk-reduction measures, to improve policy coordination and to make sure that economic rebalancing operates symmetrically. I am optimistic that Greece, despite occasional failures and backtracking, having survived an acute and long economic crisis once more in its history, and contrary to almost all pessimistic forecasts, has now a great opportunity to close the institutional, investment and structural competitiveness gap with its peers and competitors, and catch up fast. My optimism is not based on technocratic arguments only, but, also, on historical ones. Please allow me to conclude by quoting the historian Roderick Beaton in his great book: “Greece: A biography of a Modern Nation”: 10 / 14 BIS central bankers' speeches “Two hundred years ago, during the 1820s, Greeks were the pioneers who first mapped out the route that would lead from the old Europe of great empires to the Europe of nation states that we know today. No one should take it for granted that Greece and Greeks in future will always align with the values, traditions and politics that we tend to lump together and call ‘Western’. Geography, and to some extent also history, may pull the other way. But as they prepare to celebrate the two-hundredth birthday of the Greek nation state in 2021, Greeks can take pride in an achievement that by its very nature, and from the very beginning, has been won not through isolation, but in partnership, every difficult step of the way, with other Europeans. It could not be otherwise. Because ‘Greece’, however understood, or misunderstood, has always been part of the modern identity of Europe too.” References d Abiad, A., G. Dell’ Ariccia and G.B. Li (2011), “Creditless Recoveries”, IMF Working Paper, No. 58. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Creditless-Recoveries-24707 Bank of Greece (2019), Monetary July. www.bankofgreece.gr/BogEkdoseis/NomPol20182019.pdf Policy Bank of Greece (2018), Monetary Policy – December. www.bankofgreece.gr/BogEkdoseis/Inter_NomPol2018.pdf 2018–2019, Interim Report, Beaton, R. (2019), Greece: A biography of a Modern Nation, Allen Lane. Bhatia, A.V., S. Mitra and A. Weber (2019), A Capital Market Union for Europe: Why it’s needed and how to get there, IMF blog, 10 September. Bhatia, A.V. et al. (2019), “A Capital Market Union for Europe”, IMF Staff Discussion Note 19/07. Buti, M., M. Jolles and M. Salto (2019), “The euro – a tale of 20 years: The priorities going forward”, VoxEU 19 February. voxeu.org/article/euro-tale-20-years-priorities-going-forward Codogno, L. and P. van den Noord (2019), “The rationale for a safe asset and fiscal capacity for the Eurozone”, LSE’ Europe in Question’ Discussion Paper Series, No 144/2019 May. Dabrowski, M. (2019), “The Economic and Monetary Union: Past, Present and Future”, study requested by the ECON Committee of the European Parliament. Draghi M. and L. de Guindos, Introductory Statement, 25 July, Frankfurt am Main. www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190725~547f29c369.en.html Demertzis, M., A. Sapir and G. Wolff (2019), “Promoting sustainable and inclusive growth and convergence in the European Union”, Bruegel, Contribution to the Informal Ecofin Meeting, Bucharest, 5 April. Eurogroup (2019), Letter by the President Centeno to President Tusk on the deepening of the Economic and Monetary Union, Brussels, 15 June. https://www.consilium.europa.eu/media/39769/eurogroup-president-letter-to-euro-summit-president European Commission (2019) Structural reforms in Greece, 2010–2018, Final Report prepared by the Centre of Planning and Economic Research (KEPE), March. publications.europa.eu/en/publication-detail/-/publication/9e68a55f-a129–11e9-9d01– 01aa75ed71a1/language-en/format-PDF/source-100971872 11 / 14 BIS central bankers' speeches European Commission (2018), The Digital Economy and Society Index 2018, Country Report: Greece. ec.europa.eu/digital-single-market/en/scoreboard/greece European Commission (2018), “Economic Resilience in the EMU”, Quarterly Report on the Euro Area, Institutional Paper 086, vol. 17, no 2, July. European Commission (2018), “Sustainable convergence in the euro area: A multi-dimensional process”, Quarterly Report on the Euro Area, Institutional Paper 072, vol.16 no 3, February. European Commission (2019), Spring 2019 Economic Forecasts: Growth continues at a more moderate pace, Brussels. ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economicforecasts/spring-2019-economic-forecast-growth-continues-more-moderate-pace_en. European Commission (2019), 2019 European Semester, Country Report: Greece 2019, Including an In-Depth Review on the prevention and correction of macroeconomic imbalances, Brussels. ec.europa.eu/info/sites/info/files/file_import/2019-european-semester-country-reportgreece_en.pdf European Court of Auditors (2017), The Commission’s intervention in the Greek financial crisis, Special Report No 17, Luxemburg. publications.europa.eu/webpub/eca/special-reports/greek-crisis-17–2017/en/ de Guindos, L. (2019), “Building the EU’s Capital Markets: what remains to be done”, speech at the Assosiation for Financial Markets in Europe Conference, Supervision and Integration Opportunities for European and Banking and Capital Markets, Frankfurt am Main, 23 May. www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190523~b1245030d5.en.html de Guindos, L. (2019), “Deepening EMU and the implications for the international role of the euro:, speech at the joint conference of the European Commission and the European Central Bank on European financial integration and stability, Brussels, May. www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190516~1c0d48c7d8.en.html de Guindos, L. (2019), “Euro at 20 years: the road ahead”, address at the European Parliamentary Week, 19 February. www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190219~6f4c9be85b.en.html IMD World Competitiveness Center (2019), World Competitiveness Ranking 2019, Lausanne. https://www.imd.org/wcc/world-competitiveness-center-rankings/countries-profiles/ Igan, D., H. Moussawi, A.F. Tieman, A. Zdzienicka, G. Dell’Ariccia and P. Mauro (2019), The Long Shadow of the Global Financial Crisis: Public Interventions in the Financial Sector, IMF Working Paper No 164. www.imf.org/en/Publications/WP/Issues/2019/07/30/The-Long-Shadow-of-the-Global-FinancialCrisis-Public-Interventions-in-the-Financial-Sector-48518 Montoya, L.A. and M. Buti (2019), “The euro: From monetary independence to monetary sovereignty”, voxeu, 1 February. 12 / 14 BIS central bankers' speeches voxeu.org/article/euro-monetary-independence-monetary-sovereignty Stournaras, Y. (2019), Interview for the Sunday edition of “Kathimerini” newspaper and Eirini Chrysolora, 14 July. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=606&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), “The Greek economy 10 years after the crisis and lessons for the future both for Greece and the Eurozone” Speech at the European Court of Auditors, Luxemburg, 28 June. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=604&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), “A Retrospective on Euro Area Monetary Policy during and after the Recent Financial Crisis”, Speech at the 23rd International Conference on Macroeconomic Analysis and International Finance, University of Crete, Department of Economics, Rethymno, 31 May. www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=596&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), “Climate Change: Threats, Challenges, Solutions for Greece”, keynote address at the Symposium on “Climate Change: Threats, Challenges”, Solutions for Greece, April. (www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=589&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b) Stournaras, Y. (2019), “Lessons from the Greek Crisis: Past, present, future”, speech at the 87th International Atlantic Economic Conference, Athens M a r c h . www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=583&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), “International economic developments and prospects of the Greek economy”, speech at an event of the Federation of Industries of Northern Greece, Thessaloniki, 15 March. www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx? Item_ID=582&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), “Addressing reversal of financial integration”, Article published in the 100th edition of The Bulletin (OMFIF). www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx? Item_ID=560&List_ID=b2e9402e-db05–4166–9f09-e1b26a1c6f1b Stournaras, Y. (2019), New Year Speech to the Bank of Greece staff, Athens, 9 January. https://www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?Item_ID=559&List_ID 4166–9f09-e1b26a1c6f1b Stournaras, Y. (2018), “Investment Opportunities in Greece −Investment opportunities in Greece”, speech at the “Repositioning Greece” event of Ekali Club, 17 December. https://www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?Item_ID=556& 13 / 14 BIS central bankers' speeches 4166–9f09-e1b26a1c6f1b Stournaras, Y. (2018), “What lies in store for the eurozone? An assessment of the Greek bailout programmes: Has the EU become wiser?”, speech at the Economist’s event: Southeast Europe–Germany Business and Investment Summit: Reassessing Europe’s priorities, Berlin, 3 December. https://www.bankofgreece.gr/Pages/el/Bank/News/Speeches/DispItem.aspx?Item_ID=553&List_ID 4166–9f09-e1b26a1c6f1b World Bank (2018), Doing Business 2019: A Year of Record Reforms, Rising Influence, 31 October. www.worldbank.org/en/news/immersive-story/2018/10/31/doing-business-2019-a-yearof-record-reforms-rising-influence World Economic Forum (2018), The Global Competitiveness Report 2018. reports.weforum.org/global-competitiveness-report-2018/? doing_wp_cron=1553010986.3554461002349853515625 A similar picture in terms of weak government efficiency is painted by IMD’s 2019 World Competitiveness Ranking, where out of 63 countries Greece ranks 60th in public finance and tax policy, 57th in institutional framework, 52nd in business legislation and 51st in societal framework. 14 / 14 BIS central bankers' speeches | bank of greece | 2,019 | 10 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Foundation for Economic & Industrial Research, Konrad Adenauer Stiftung (KAS) in Greece & Cyprus, Athens, 3 February 2020. | Yannis Stournaras: European and Greek economic developments and prospects Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Foundation for Economic & Industrial Research, Konrad Adenauer Stiftung (KAS) in Greece & Cyprus, Athens, 3 February 2020. * * * Ladies and gentlemen, It is a great pleasure for me to be here today among esteemed colleagues and friends, the VicePresident of the European Central Bank Luis de Guindos and the Minister of Finance Christos Staikouras, and to share my thoughts on the European and Greek economy developments and prospects. 1. Global and euro area economic developments The global economy is experiencing a synchronised slowdown; however, some signs of stabilisation have recently emerged, somewhat boosting market sentiment. The IMF recently revised down its forecasts, but still projects a modest expansion for 2019–2021: global growth is projected to rise from 2.9% in 2019 to 3.3% in 2020 and to 3.4% in 2021. Despite some positive news on trade (i.e. the US-China “phase one” trade deal), diminishing concerns of a no-deal Brexit and the continuation of accommodative monetary policies across the globe, the projected recovery is uncertain and the risks to the global economy remain on the downside. Geopolitical risks, as well as a likely intensification of trade tensions, could decrease confidence in international markets, increase risk aversion and worsen financial conditions, especially for the most vulnerable emerging market economies. Stressed valuations in a number of assets in certain jurisdictions according to some benchmark metrics also add to the risks of a possible correction. Finally, the outbreak of the coronavirus poses a new risk. As regards the euro area, growth remains weak, driven by the negative effect of the world trade slowdown on manufacturing and investment. Recent macroeconomic data for the final quarter of 2019 for a number of euro area meber-states are a source for concern. According to the December 2019 Eurosystem staff macroeconomic projections, a mild expansion is projected for the euro area over the period 2020–20211, while annual HICP inflation in the euro area will remain at the present low levels in 2020 and will increase only marginally in 2021. 1.1 Monetary and fiscal policy in the euro area The Governing Council of the ECB recently reiterated the need for monetary policy to remain accommodative until it sees inflation move in a sustainable way closer to its inflation aim. At its last meeting on January 23, it kept monetary policy implementation unchanged, and noted that incoming data during the previous month were in line with baseline scenarios of ongoing but moderate growth in the euro area. It further concluded that risks remain tilted to the downside, but that some of the downside risks in the global economy have become somewhat less pronounced. It finally stated that it stands ready to adjust its instruments as appropriate. The Governing Council of the ECB launched a monetary policy strategy review, as a response to profound changes in the economic environment. The review will be broad and open-minded, encompassing a number of issues, and is expected to be completed by the end of 2020. The issues to be examined indicatively include: (i) the quantitative formulation of the price stability target, (ii) the incorporation of non-standard instruments into the standard toolkit, (iii) the economic and monetary analyses, through which the risks to price stability are assessed, and 1/5 BIS central bankers' speeches (iv) finally, communication practices. Monetary policy measures are thus supporting the euro area economy. However, monetary policy alone cannot achieve a sustainable recovery. Fiscal policy should also play an enhanced role, while structural policies need to be substantially stepped up to boost productivity and growth potential. The very low – or even negative – financing costs facilitate fiscal expansion in Member States with ample fiscal space and large current account surpluses. The more coordinated fiscal expansion is, the more effective it will be in stimulating economic growth. Fiscal expansion could include higher public investment in human and physical capital, digital technologies and energy based on clean sources, in order to boost overall demand in the short term and productivity and potential output in the medium-to-long term, as well as to counter the risks stemming from climate change. Member States without fiscal space should continue fiscal consolidation, but could adopt a more growth-friendly fiscal policy mix involving higher public investment and lower taxation. 1.2 The EMU dimension In the course of the sovereign debt crisis, euro area Member States took a number of actions to safeguard the stability of the financial system and to strengthen EMU. However, more recently, progress in deepening EMU along the lines of the proposals of the Five Presidents’ Report has rather stalled, and we have seen a halt in financial integration and in real convergence. Such issues have been replaced on the policy agenda by other urgent considerations relating to climate change, immigration and global competition. This could weaken the euro area economy even further, if global conditions were to deteriorate. In my view, it remains a high priority to complete the Banking Union by creating the European Deposit Insurance Scheme (EDIS). Renewed efforts should also be made to complete the Capital Markets Union, especially in view of Brexit. More developed and integrated capital, financial and banking markets will reduce funding costs, improve the financing of the real economy by diversifying the sources of financing, and facilitate private risk-sharing through the capital and credit channels. This will also support the international role of the euro. At the same time, risk-sharing, whether in the form of a safe asset and/or a central fiscal stabilisation tool, should proceed simultaneously with risk reduction, such as the reduction of non-performing loans or national discretions in supervisory, resolution and liquidation rules for banks. It is only in this way that we can transform what today in the euro area is in effect a noncooperative zero-sum negotiation into a cooperative, win-win one. In addition, at the euro area level, it is essential to ensure that fiscal rules become simpler and more effective, but also that the macroeconomic imbalance procedure operates symmetrically, both for Member States with external deficits and for Member States with external surpluses. In the aftermath of the crisis, the burden of correcting external imbalances was incurred primarily by deficit Member States, mainly via the income channels and internal devaluation. This has contributed to a divergence of GDP per capita among Member States after 2010. Finally, it is of utmost importance to strengthen the single market, in particular in services and in digital technologies, in order to boost competition, investment, innovation and technology diffusion and productivity in the EU. 2. Greece: progress, challenges and prospects in the economy and the banking system Significant progress has been achieved in Greece since the beginning of the sovereign debt crisis in 2010. The main causes of the crisis, namely the very large “twin” deficits (i.e. the general government and current account deficits) have been eliminated, competitiveness has been restored in terms 2/5 BIS central bankers' speeches of unit labour costs (but less so in terms of prices and even less so in structural terms), the banking system is adequately capitalised and liquidity conditions have improved substantially, while significant reforms have been implemented in such areas as the pension and healthcare systems, the goods and services markets, the business environment, the tax administration system, the budgetary framework and public sector transparency. Recently, two credit rating organisations, S&P in October 2019 and Fitch in January 2020, upgraded the Greek economy by one notch, while Transparency International recently upgraded Greece seven notches regarding the perception of corruption index. Finally, the issuance just recently of a 15-year bond with a coupon of 1.875% is clear indication of the progress made. The Greek economy is currently recovering and has started to rebalance towards tradable, export-oriented sectors. According to the Bank of Greece estimates, the Greek economy grew at a rate of 2.2% in 2019 while projections point to growth accelerating to 2.5% in 2020 and 2021, as the catching-up effect, after a long period of recession, through rises in investment and disposable income is projected to counterbalance the effect of the global and euro area slowdown. Despite the progress achieved so far, the Greek economy continues to face tight fiscal, monetary and financial conditions compared to all the other euro area Member States as a legacy of the debt crisis, as well as a number of challenges, such as: • The high volume on Non Performing Loans (NPL) which restricts the ability of banks to finance new investments and to support the real economy • the large investment gap • the high long-term unemployment rate; • the projected demographic decline; • the slow digital transformation of the economy; • the large underground economy; • low structural competitiveness. I will concentrate in the NPL problem which concerns directly the Bank of Greece and the ECB/SSM. Developments in the Greek financial system are positive, with improving capital adequacy ratios, profitability before provisions and liquidity. The continuous increase in bank deposits and the improvement in liquidity allowed the elimination of capital controls as from 1st September 2019, while conditions continue to improve ever since. The most serious problem for Greek banks is the high volume of NPLs. The high NPL ratio of Greek banks was one of the first and most obvious consequences of the financial and economic crisis in Greece. In the last three years and until September 2019, the NPL volume fell significantly by about 36 billion euros from a maximum of almost 107 billion euros in March 2016,, mainly through write-offs and sales of loans. In addition, the institutional framework for private debt management has improved via a number of reforms such as: • the acceleration of liquidation of banks’ collateral via electronic auctions • the simplification of the process of loan sales via the liberalisation of the NPL management regime and the creation of a secondary market for NPLs 3/5 BIS central bankers' speeches • the out-of-court workout (OCW) of private debts, including the possibility of tax obligation writeoffs (up to now, however, only few cases have been resolved using this method) • the modernisation of the insolvency regime for households and firms which is under way and is expected to be applied by the government in the first semester of 2020 According to available data for the first nine months of 2019, NPLs were 71 billion euros or 42,1% of total loans. Despite the fact that the economy returned to positive growth rates in 2017, positive credit expansion is necessary for higher and sustainable growth rates. A presumption for this is to clear the banks’ balance sheets from NPLs, in addition to the restructuring of private debt. The four systemic banks have agreed with the ECB/SSM ambitious targets for the reduction of NPLs, while the less systemic ones have agreed similar targets with the Bank of Greece. According to these targets, the NPL ratio is expected to fall below 20% until the end of 2021. However, even if these targets are achieved, the NPL ratio in Greece will be five times higher than the corresponding European average. Hence, it is imperative to apply additional systemic solutions, complementary to the efforts of banks, for the rapid improvement of the quality of their assets. In this context, DG Comp approved project Hercules, which is based on an Asset Protection Scheme (APS) through state guarantees to the senior tranche of the ensuing securitization of about 30 billion of banks’ NPLs. This scheme which has been approved by Parliament last December, is an important step forward. However, given the size of the NPL problem, more schemes are expected to follow, later on and after project Hercules has produced results. Such a scheme could be the one proposed in the recent past by the Bank of Greece, which, along with the NPL problem, it also deals with the issue of capital quality due to the high share of Deferred Tax Credit (DTC) in Greek banks’ capital. Capital ratios (Common Equity Tier 1) of Greek banks are satisfactory, close to 16 percent. Their most pressing current problem is the high volume of NPLs, which restricts their profitability and their ability to generate internal capital and extend credit to the real economy. Hence, there is an overriding need to tackle this problem with all available means, including the systemic solutions mentioned above, and to be seen in this way by the competent european institutions. References European Central Bank (2019), Economic Bulletin No 8. 27 December. Bank of Greece (2019), Interim Report on Monetary Policy, December. Coeure, B. (2019), Monetary policy: lifting the veil of effectiveness. Speech at the ECB colloquium on “Monetary policy: the challenges ahead” held in his honour, December 18. www.ecb.europa.eu/press/key/date/2019/html/ecb.sp191218~12a0385d3b.en.html IMF (2020), World Economic Outlook Update, January 20. Stournaras, Y. (2019), article in “To BHMA” newspaper, “Lessons from the crisis and Greece’s future economic prospects.”, December 29. www.bankofgreece.gr/enimerosi/grafeiotypoy/anazhthsh-enhmerwsewn/enhmerwseis?announcement=0b23cf67–8c2e-48f2-a6bc0c8615eaddf5 Stournaras, Y. (2020), article in “Tα ΝΕΑ” newspaper, “How to make up for the lost time in the Greek economy”, January, 4. www.bankofgreece.gr/enimerosi/grafeio-typoy/anazhthshenhmerwsewn/enhmerwseis?announcement=2e9f2adc-8ff3-4abc-aa68–74af5e5f42e5 4/5 BIS central bankers' speeches 1 According to December 2019 Eurosystem staff macroeconomic projections, annual real GDP is projected to increase by 1.2% in 2019, 1.1% in 2020 and 1.4% in both 2021 and 2022, while euro area HICP inflation is forecast to reach 1.2%in 2019, 1.1%in 2020, 1.4%in 2021 and 1.6%in 2022. 5/5 BIS central bankers' speeches | bank of greece | 2,020 | 2 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the online discussion in the think tank "Circle of Ideas", 12 May 2020. | Yannis Stournaras: The recent decision of the German Constitutional Court regarding the Public Sector Purchase Programme of the European Central Bank Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the online discussion in the think tank “Circle of Ideas”, 12 May 2020. * * * The decision of the German constitutional court questioning the legality of the ECB’sPublic Sector Purchase Programme — or PSPP — has generated a great deal of confusion and concern. The Court found that, in launching the PSPP in early 2015, the ECB exceeded its mandate; the Court ordered the Deutsche Bundesbank to stop participating in the execution of the PSPP after a transitional period of three months, “unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the ECB are not disproportionate to the economic and fiscal effects resulting from the programme.”1 Two essential principles, both of which underpin European cohesiveness and unity, are at stake here. The first principle is a legal one. The German Court’s ruling effectively challenges a 2018 ruling by the European Court of Justice that the PSPP was legal. Which court — the German Constitutional Court, a national tribunal, or the European Court of Justice — has primacy in matters relating to European institutions? Because the ruling by the German court has created a great deal of uncertainty, the issue of legal primacy needs to be reaffirmed. I will leave it to my very distinguished co-speakers to address this issue from a legal perspective. The second principle concerns the independence of the ECB. It is this principle that I wish to address. In this connection, I will discuss three issues: first, the rationale for central bank independence; second, the ECB’s mandate; and third, the context of the decision to undertake the PSPP. On independence, there are important reasons why the ECB was made an independent central bank on its inception in 1999. Numerous studies in the 1980s and the 1990s that compared central bank performance had found that independent central banks — and a prime example was the Deutsche Bundesbank — performed much better than other central banks. Independent central banks delivered lower unemployment and lower inflation than others because they were free from political pressures. Independence, however, does not mean an absence of accountability. The ECB may be independent, but it is also accountable. For example, the President of the ECB regularly appears before the European Parliament to explain and justify the ECB’s policies. Like other national central bank Governors, I provide testimony on a regular basis before my national parliament. With regard to its mandate, the ECB can freely decide on the design and implementation of the single monetary policy for the euro area. Article 127 of the Maastricht Treaty assigns to the ECB the primary objective of price stability. 1/4 BIS central bankers' speeches An important reason underlying the objective of price stability is the following. In the absence of unforeseen events — the pandemic is an example of an unforeseen event — price stability helps to deliver full employment to a society, that is, it helps ensure that people are working at full capacity without a build-up of inflationary pressures. In other words, although price stability is the ECB’s primary objective, that objective is underpinned by the aim of providing the maximum number of job opportunities to the citizens of the euro area. In this context, monetary policy in the euro area is exercised in a uniform way. Given the single character of monetary policy, it might indeed be the case that monetary policy decisions occasionally are less “fitting / suitable” for some countries than for others. Does this then mean that any national central bank of the euro area can potentially be ordered by its highest national court to abstain from implementing monetary policy decisions? Under such circumstances is an efficient monetary policy implementation possible? What would be the consequences if every high national court in the euro area challenged the decisions of a European institution under the jurisdiction of the European Court of Justice? And what would that imply for the credibility of the monetary authority? I think that the implications to be drawn from my questions are self-evident. I now turn to the context of the 2015 decision to launch the PSPP. The economic backdrop was alarming. Inflation had been in negative territory and the threat of prolonged low inflation — or deflation — was rising. Why was that a concern? For one thing, deflation reduces consumer and investment spending. It also means that individuals who have a fixed amount of debt see their debt rise in real terms. History shows that countries that experienced deflation have undergone prolonged economic hardship. The Great Depression that began in the United States in 1929 was marked by deflation; real output did not recover to its 1929 level until 1941, and only in light of the build-up of military spending for World War II. Not only was deflation in the euro area a threat, but the unemployment rate had increased to 11.5 per cent. And let us not forget another ominous threat on the horizon — the reappearance of signs of strong fragmentation in financial markets across national borders. Monetary policy impulses were not transmitted uniformly across the euro area. The euro area was in deep crisis. Against this background, what could be done at the euro-area level to respond to the crisis? A euro-area fiscal-policy response was hampered by the absence of a fiscal union. Banking union and the European Stability Mechanism were in their initial stages. Monetary policy was the only game in town. Under these circumstances, and after taking into account not only the expected positive impact of the PSPP on inflation and real output, but also potential negative consequences, the programme was initiated. Crucially, after the decision was taken, the euro area unemployment rate steadily dropped, falling to 7.3 per cent earlier this year. The negative consequences considered included, as mentioned in the account of the discussion of the Governing Council in January 2015, “moral hazard implications for euro area governments [which] could weaken their incentives for structural reforms and fiscal consolidation”, as well as 2/4 BIS central bankers' speeches possible “financial stability ramifications” and “spillovers from sovereign bond purchases, not only to corporate bond prices, but also into equity prices [which] could trigger the mispricing of risks…”2 Furthermore, throughout the life of the PSPP, there has been an extensive discussion on every aspect of the programme, in the central bank, in the academia and in the public arena. It is widely acknowledged that unconventional monetary policy measures, including the PSPP, have unintended consequences. In this regard, members of the Executive Board of the ECB have discussed potential negative spillovers. Indicatively, after the start of the programme, Benoît Coeuré3 highlighted potential side effects to equity and real estate markets, as well as risks of emergence of asset price bubbles. In a similar vein, former vice-president Vítor Constâncio4 mentioned financial stability risks, stemming from a search for yield and higher leverage associated with non-standard measures, as well as wealth effects and increased inequality. Against these drawbacks, however, he found that macro-prudential tools are better suited than monetary policy to safeguard financial stability. Moreover, there had been no signs of asset overvaluation in the euro area. Finally, I would like to mention that all major central banks around the globe, including the Federal Reserve Bank and the Bank of England, reacted in a similar way to the economic circumstances prevailing in recent years, although the extent and the timing of their monetary policy interventions differed. Therefore, I believe that the criticism of the German Constitutional Court regarding an unjustified decision on the PSPP does not hold. On the contrary, given the plethora of material available in this regard, I must confess that this criticism was rather unexpected. In light of my foregoing remarks, what conclusions emerge? In the two decades since the inception of the euro area, we have witnessed the exceptional dynamism and strength conveyed by the European unification process, the significant benefits and the considerable successes associated with it. We have also witnessed the dysfunctionalities and imperfections imminent in the institutional architecture of the euro area, which were amplified by the Great Financial crisis, and by the outbreak of the current pandemic-related crisis. The answer to these –existing— problems is in my view the quest for the deepening of European integration – not a flight into nationalism. While criticism in good faith of decisions of European institutions, including the ECB, is indeed valid and useful, decisions which provide fertile grounds for backtracking on European integration are rather harmful. The ECB needs to be able to continue designing and implementing monetary policy for the entire euro area, taking care for the smooth functioning of the transmission mechanism and tackling fragmentation in financial markets. Allow me to conclude by quoting Aristotle, who said «τοὔνομα ἔχει νόμισμα, ὅτι οὐ φύσει ἀλλὰ νόμῳ ἐστί». The currency is based on the Law. The Law needs to be upheld, in order to lend credibility and stability to the currency.And this is exactly what the ECB has been doing – in trying to fulfill its mandate according to the Treaty for the European Union. 1 Bundesverfassungsgericht, Decisions, para.235. 3/4 BIS central bankers' speeches 2 Account of the monetary policy meeting of the Governing Council of the ECB, held on21–22 January 2020. Remarks by Benoît Coeuré, at the SNB-IMF Conference “Monetary Policy Challenges in a Changing World,” Zurich, 12 May 2015. Panel remarks by Vítor Constâncio at the Annual Congress of the European Economic Association, University of Mannheim, 25 August 2015. 4/4 BIS central bankers' speeches | bank of greece | 2,020 | 5 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the online public discussion on "Trends in the European Economy and the prospects for Greece in a post Covid-19 world", organized by the Foundation for Economic and Industrial Research (IOBE ) jointly with the Representation in Greece and Cyprus of the Konrad-Adenauer-Stiftung (KAS), 21 July 2020. | Yannis Stournaras: European and Greek economic developments and prospects Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the online public discussion on “Trends in the European Economy and the prospects for Greece in a post Covid19 world”, organized by the Foundation for Economic and Industrial Research (IOBE ) jointly with the Representation in Greece and Cyprus of the Konrad-Adenauer-Stiftung (KAS), 21 July 2020. * * * Ladies and gentlemen, It is a great pleasure for me to participate in this online discussion. The European and the Greek economy face very important challenges since the last meeting we had in February in the context of the same event. 1. Global and euro area economic developments The COVID-19 pandemic is adversely affecting the global economy. The effort to reduce the cost in human lives has made it necessary to take unprecedented administrative measures of social distancing across the globe and to temporarily suspend part of economic activity. These measures resulted in disruptions in global supply chains; in lower world trade, industrial production and international commodity prices; in a reversal of cross-border capital flows; and, finally, in a dramatic decline in labour demand and a sharp decrease in employment and income worldwide. The pandemic has caused a great deal of uncertainty, making macroeconomic forecasting a particularly difficult exercise. Recently, the IMF and the European Commission revised their forecasts downwards, implying a more negative impact of the pandemic in 2020 and a more gradual recovery in 2021 than previously forecast. In more detail, global GDP, according to the IMF, is estimated to contract by 4.9% in 2020, compared with a decline of 3.0% projected in April. In 2021, global growth is expected to reach 5.4% compared with 5.8% projected in April. As regards the euro area, GDP contracted by 3.6% (q-o-q) in the first quarter this year, while second quarter indicators point to even deeper recession. According to the Eurosystem staff macroeconomic projections (baseline scenario, June 2020), the euro area economy is forecast to contract by 8.7% in 2020 and to recover at an annual rate of 5.2% in 2021. However, despite the fact that the COVID-19 pandemic is a common external shock, it has an asymmetric impact across industries and countries. The final impact on economic activity will depend on the structure of the economy and the value added weight of the tourism and leisure activities, which are affected the most; the scope and effectiveness of policy measures; the success in addressing the health crisis; and the subsequent lifting of containment measures. These forecasts are subject to considerable downside risks and uncertainties. The greatest risk is associated with the possibility of a second wave of the pandemic, which will delay the recovery. Moreover, it could lead to long-lasting effects, such as widespread corporate insolvencies, higher unemployment and a slower recovery, which, in turn, are expected to have a negative impact on banks’ balance sheets. On the upside, the development of an effective treatment/vaccine for tackling the coronavirus would have positive effects on the world economy. Moreover, the adoption of the European Commission’s proposal on the “Next Generation EU” instrument will accelerate the recovery of the European economy. 2. Policy action in the euro area European and national policymakers have acted quickly and decisively with an initial round of 1/6 BIS central bankers' speeches measures that are sharply reducing the effects of the pandemic shock. The Governing Council of the European Central Bank (ECB) adopted in March, April and June 2020 an even more accommodative monetary policy stance. This aims primarily at preventing the disruption of the medium-term path to price stability, averting fragmentation and ensuring a smooth transmission of monetary policy in the euro area, while at the same time supporting households, businesses and banks to absorb the shocks caused by the pandemic. In particular, the interventions aimed at (a) ensuring favourable liquidity conditions for the banking system, (b) ensuring the smooth flow of financing to the real economy and (c) preventing a pro-cyclical tightening of financial conditions for all sectors of the euro area economy. Moreover, the Supervisory Board provided banks with the necessary temporary flexibility regarding capital adequacy and liquidity. The Governing Council of the ECB has announced that it will continue to monitor and analyse the effects of the pandemic on economic developments, the medium-term outlook for inflation and monetary policy transmission. It finally stated that it stands ready to adjust its instruments as appropriate. In addition to monetary policy interventions, there have been immediate and far-reaching initiatives and measures by national governments and European institutions, both to tackle the pandemic and to protect the economic and social fabric, as well as to strengthen the recovery of the European economy once the health crisis has been reined in. These initiatives include making full use of the flexibility of the Stability and Growth Pact and the institutional framework for state aid, as well as extensive fiscal measures to support business and employment, such as the €540 billion aid package approved by the European Council on 23 April 2020. Μore firepower has been provided to contain the impact of the pandemic and to finance the recovery of the European economy, with the European Council’s decision today to adopt the European Commission's proposal for the creation of the new recovery instrument, the “Next Generation EU” with financial firepower of €750 billion.This is a clear indication of European solidarity and an important step towards closer European integration. As in previous crises, the COVID-19 pandemic brought to the fore the remaining flaws in the original design of EMU. The above mentioned measures are a step in the right direction to address the current challenges posed by the pandemic. However, they remain temporary in nature. Looking forward, more durable improvements are needed to improve the EMU architecture. It is necessary to enhance risk sharing by creating a permanent macroeconomic stabilisation mechanism either in the form of a safe asset and/or a central fiscal stabilisation tool. Further efforts should also be made to complete the Capital Market Union and the Banking Union (I will come back to banking sector issues at the end of my presentation). Moreover, the macroeconomic imbalance procedure should operate symmetrically, both for Member States with external deficits and for Member States with external surpluses. Last but not least, it is of utmost importance to boost productivity in the EU by investing more in digital and clean energy technologies. 3. Greece: prospects and challenges The coronavirus pandemic has halted the upward growth trajectory of the Greek economy. In 2019, GDP grew by 1.9%, driven mainly by exports of goods and services, as a result of a significant rise in tourism and shipping receipts. However, in the first quarter of 2020, real GDP declined by 0.9% year-on-year and by 1.6% relative to the fourth quarter of 2019. The negative year-on-year growth outcome for the first quarter of 2020 was mainly due to lower private consumption and investment. By contrast, the contributions of public consumption and net exports were positive. The successful containment of the pandemic in Greece, the gradual lifting of the lockdown measures since early May, the expansionary and significant fiscal measures taken by the government and the extensive actions of EU institutions including fiscal, monetary 2/6 BIS central bankers' speeches and regulatory/supervisory interventions, are expected to mitigate the impact of COVID-19 on the economy in 2020 and lead to a recovery in 2021. According to the Bank of Greece baseline scenario, economic activity in 2020 is expected to contract by 5.8%, and to recover in 2021, posting a growth rate of 5.6%, while the general government primary balance is projected to record a deficit of over 4.0% of GDP in 2020, due to the sharp slowdown of economic activity and the fiscal discretionary measures adopted by the government. Adding the fiscal costs of the Council of State recent decision regarding pensions, the primary deficit of the general government is expected to increase even more. The currently available soft data and conjunctural indicators point to a significant contraction of economic activity in the second quarter and the year as a whole, but are in line with our expectations. The forecasts are subject to considerable downside risks and uncertainties. First of all, the decline in the tourism sector might be sharper than currently expected. A second wave of the pandemic would derail the global and domestic recovery and worsen fiscal performance. Furthermore, a resurgence of the refugee crisis and tensions with Turkey could have negative repercussions on tourism. Upside opportunities are related to the implementation of the Commission’s adopted proposal on the “Next Generation EU” instrument from 2021 onwards. The early discovery of a vaccine for covid-19 is also a strong upside opportunity. Despite the risks and uncertainties in our forecast, we remain more optimistic compared with other institutions regarding the baseline projection for 2020. For example, the European Commission projects a contraction of 9% in 2020 for the Greek economy in its summer forecast (revised downwards from 9.7% in its spring forecasts). The Bank of Greece expects a milder contraction in Greece relative to the euro area for the following reasons: 1. The successful containment of the pandemic in Greece as reflected in the relative health outcomes. Indicatively, the number of deaths per million people is among the lowest in the EU. Academic research has shown that the better a country manages a pandemic the faster the rebound of the economy. 2. The Greek economy had a strong positive momentumbefore the outbreak of the crisis. Indicatively: 1. The projected growth rate before the pandemic was 2.4% and 2.5% for Greece vs. 1.1% and 1.4% for the euro area for 2020 and 2021 respectively (Dec. 2019). The growth rate of 2020 Q1 was -0.9% for Greece and -3.1% for the euro area (year-onyear). 1. The size of tourism is not as large as assumed by many analysts in the past. Research at the Bank of Greece shows that the direct share of tourism in GDP is 6.8%. Adding the indirect contribution to GDP, the share of tourism in GDP is about 10%.1 Past research suggested that the total contribution of tourism is between 10% and 20% of GDP. 2. The industrial sector has performed relatively better compared to the euro area. Industrial production in Greece has been growing faster than in the euro area since mid-2016 on average. Since January 2020, the decline in industrial production in the euro area was three times higher than in Greece. The relative resilience of Greek industry is probably related to the fact that Greece is not strongly integrated into Global Value Chains as a typical euro area economy. In addition, composition matters. For example, foods and pharmaceuticals have outperformed during the pandemic, supported by robust external demand and low income elasticity. 3. Greece had relatively stronger soft indicators compared to the euro area regarding both 3/6 BIS central bankers' speeches their momentum before the outbreak of the pandemic and their performance over the last months: 1. The economic sentiment indicator plunged due to the pandemic but held better than in the euro area; it also started off from a higher level. Consumer sentiment remains relatively strong at start-of-2019 levels. The manufacturing PMI decreased more than in the EA, but has already recovered to near-expansion level. 1. Greece benefited the most from two ECB decisions. Granting a “pandemic” waiver to Greek government bonds to be used as collateral for Eurosystem refinancing operations and the inclusion of GGBs in the Pandemic Emergency Purchase Programme (PEPP) have helped to reduce spreads of Greek government debt to pre-crisis levels, thus improving financing conditions for banks and non-financial corporations. Nevertheless, the coronavirus pandemic is expected to significantly worsen some of the legacy problems (the high public debt, the high rate of unemployment, the high NPL ratio and the large investment gap) from the debt crisis of the 2010s. These problems only add to the challenges already facing the Greek economy, which constrain its long-term prospects: low structural competitiveness; the slow digitalisation of the economy; a high level of tax evasion; the brain drain; climate change and the cost of transition to a lower carbon economy; the migrant-refugee crisis; a projected demographic decline on account of population ageing; and the large negative international investment position. Of the above I will focus in the rest of my speech on the trends and challenges for the banking system in the post COVID-19 world, an issue which concerns directly the Bank of Greece and the ECB/SSM. 4. The banking system post the pandemic: trends and challenges The financial fundamentals of banks in the EU have strengthened over the past few years on the back of favourable macroeconomic conditions and the actions taken to repair the banking system under the supervision of the Single Supervisory Mechanism and the National Competent Authorities. Banks have significantly increased their capital buffers and made progress towards improving their asset quality. In December 2019, the EU average Common Equity Tier 1 (CET1) ratio was 15% [higher by 2 percentage points compared to 2015] whereas the non-performing loans (NPL) ratio was 2.7% compared to 5.7% in 2015.2 However, even before the pandemic, the EU banks faced significant challenges, such as: low profitability on the back of the persistently low interest rate environment and lingering cost inefficiencies; fragmentation in the European banking system; disruptive technological changes; §overcapacity in some banking systems. At the same time and despite the progress at the aggregate level, some banks, especially in Member States of the EU periphery, were still on a recovery mode, trying to address legacy issues, notably the high level of non-performing loans. Greece is one of these Member States. In in the Greek financial system, the developments before the pandemic were positive, with improving capital adequacy ratios, profitability and liquidity. The NPL ratio of Greek banks was the highest in the EU but in the last three years and until December 2019, the NPL volume fell 4/6 BIS central bankers' speeches significantly by about €39 billion from a peak of almost €107 billion in March 2016, mainly through write-offs and sales of loans. The pandemic and the subsequent sharp deterioration of the economic environment was the ‘perfect storm’ for the European banks, affecting them across most business segments and disrupting significantly their operational capacity. The national and European authorities acted swiftly introducing unprecedented measures in order to mitigate the impact from the pandemic. These measures were in the right direction and alleviated the short-term pressure on the liquidity and capital positions of banks. However, according to the experience from past crises, such an acute economic recession is highly probable to impair the asset quality of lenders. Today, just a few months after the lockdown, it is still too early to assess the impact from the pandemic on European banks, for several reasons: 1. First, there is still uncertainty about the medical factor, while there is a wide range of projections for economic activity, a key determinant of banks’ credit losses. 2. Second, there is usually a time lag between worsening macro variables and the emergence of new NPLs. The loan moratoria and the state support measures increase this time lag but at the same time contribute to higher uncertainty in the medium term. For example, the deferral of loan amortisation payments is an effective measure to address borrowers’ shortterm difficulties caused by the pandemic, but could potentially create a ‘cliff effect’ upon the termination of measures. 3. Third, some banks that were already in a fragile position before the pandemic, may have to struggle more than their peers to navigate through the crisis. For Greek banks, even during the pandemic, many indicators develop in a benign way: liquidity deposits, pre-provision income, cost to income ratio etc. However, a potential creation of a ‘new generation’ of non-performing loans could hamper their efforts to clean up their balance sheets. Greek banks are already in the process of making use of the Hellenic Asset Protection Scheme and offloading part of their delinquent loans. Already, one systemic bank completed a securitisation transaction under the ‘Hercules’ scheme and we expect that the other three systemic banks will accelerate their efforts to make use of the scheme by the end of the year or early in 2021. At the same time, banks will benefit from the reforms in the institutional framework for private debt management already made (e.g. acceleration of liquidation of banks’ collateral via electronic auctions, creation of a secondary market for NPLs, etc.) and the reforms that are underway (e.g. modernisation of the insolvency regime for households and firms). Nevertheless, all these actions may not be enough especially amidst the ongoing economic disruption and the possibility of new defaults. To give you some more insight on this: assuming full achievement of the ambitious NPL targets that the four systemic banks have agreed with the ECB/SSM, the average NPL ratio was expected to fall just below 20% by the end of 2021, without considering any new flow of NPLs due to the pandemic. Hence, I believe it is necessary to implement additional systemic solutions, complementary to the efforts of banks, for the rapid improvement of the quality of their assets. In this context, the Bank of Greece is currently working on a proposal to set up an Asset Management Company (AMC), which, along with the NPL problem, will also deal with the issue of capital quality due to the high share of Deferred Tax Credits (DTCs) in Greek banks’ capital. Recently, we selected through an international tender process- three out of the top-tier investment banks and consultants with experience in this field that will assist us in all aspects of the scheme. The experience from other countries that have introduced an AMC shows that in a systemic crisis it is an effective tool to accelerate the reduction of NPLs and, if properly designed, could have the optimal benefit for all stakeholders, including the Greek State. It is a scheme that could 5/6 BIS central bankers' speeches be a meaningful way to address non-performing loans, not only in Greece, but in other EU Member States as well. I would like to conclude my intervention with a tone of optimism. John F. Kennedy once said, "When written in Chinese, the word crisis is composed of two characters -- one represents danger, and the other represents opportunity." I always believed that opportunities may arise out of a crisis and I truly believe that Europe will emerge stronger from the current one. Now it is the perfect time to make bold steps to strengthen as well as to complete the missing parts of the Banking Union. This includes: the introduction of the missing leg of the Banking Union, i.e. the pan-European deposit insurance scheme; the improvement of the EU Recovery, Resolution & State Aid framework (e.g. introduction of a harmonised framework for orderly liquidation in the EU, review of the interplay between state support and bail-in under certain conditions, etc.); the improvement in the macroprudential framework; the reduction in national options and discretions in banks’ supervision. The completion of the Banking Union will allow us to avoid the creation of another bank – sovereign nexus, especially in light of the significant fiscal support provided to the economy and banks by all Member States. References Bank of Greece (2020), Monetary Policy 2019-2020, June. Bank of Greece (2020), Financial Stability Report, 2019-2020, July European Commission (2020), European Economic Forecasts, Summer 2020 (interim), institutional paper 132. IMF (2020), World Economic Outlook Update, June. Stournaras, Y. (2020), European and Greek economic developments and prospects speech at the IOBE-KAS event “Trends in the European Economy and prospects for Greece”, 3 February. www.bankofgreece.gr/en/news-and-media/press-office/news-list/news? announcement=15c57457-d4b9-457c-9ab2-1057e07a6cf7 Stournaras, Y. (2020), On Covid-19 and the necessity for common action in economic policy response article in Handelsblatt, 6 April. www.bankofgreece.gr/en/news-and-media/press- office/news-list/news?announcement=300c4091-abdf-4f77-a325-e92d06c91001 Stournaras, Y. (2020), interview with Frankfurter Allgemeine Zeitung, 9 May. https://www.bankofgreece.gr/en/news-and-media/press-office/news-list/news?announcement 844b-40bc-82b9-051a195bcc98 1 Bank of Greece (2020) Monetary Policy Report 2019–2020, pp. 121–126 (in Greek). eba.europa.eu/sites/default/documents/files/document_library/Risk%20Analysis%20and%20Data/Risk%20dashboard/Q4%20 %20Q4%202019.pdf 6/6 BIS central bankers' speeches | bank of greece | 2,020 | 8 |
Opening speech by Professor John Iannis Mourmouras, Senior Deputy Governor of the Bank of Greece, at the IMN's Greek Banking & NPL Management Virtual Event, 9 September 2020. | John Iannis Mourmouras: The pandemic crisis as a challenge Greece the day after Opening speech by Professor John Iannis Mourmouras, Senior Deputy Governor of the Bank of Greece, at the IMN's Greek Banking & NPL Management Virtual Event, 9 September 2020. * * * Good afternoon everybody in Athens and Europe, Good morning to New York, Let me first thank the IMN, especially Chris and my friend Jade for the kind invitation to offer a few opening remarks at today’s important webinar on “Greek Banking & NPL Management”. I wish to all of you to be healthy and stay safe and next year we all get together in Athens at the IMN’s real event, and not like this year’s virtual event. Although the corona shock hit all countries in the world, both in terms of public health and national economy, its effects are asymmetric on both frontiers. This is because, on the one hand, the speed of governments’ responses in flattening the pandemic curve differed among countries and, on the other hand, because of different initial conditions and timing of the appropriate monetary-fiscal policy mix. In Europe, Southern countries have been hit harder than Northern ones, both in terms of the brunt of the disease and the economic recession. In my country, measures to combat the pandemic were taken by the Government in a timely fashion and the citizens exhibited selfdiscipline and respected the public addresses of the Greek Prime Minister Kyriakos Mitsotakis; the total number of reported cases was equally low. Greece is among the five best performers in the EU in terms of coronavirus deaths per million. The latest forecasts with regards to the Greek economic outlook this year is for a recession around 7-8% and for next year a recovery of around 3-4%, namely not a V-recovery, similar to the rest of the Eurozone. Looking ahead, the economy will benefit in the coming years mainly from two drivers: a) the catching up effect, which will be bigger as a result of a combination of the MoU and pandemic years and b) from the government’s reforms agenda and FDI. More on the positive side, last week Greece held a successful bond auction, it’s fourth in 2020, to raise €2.5 billion and boost state cash reserves. The Public Debt Management Agency said the sale was 7,6 times oversubscribed with offers totaling €18.0 billion, while the yield dropped to 1,2% from 1,5% in June, the lowest ever. The day after of the Greek economy requires medium-term planning, smart interventions on behalf of the government and a common understanding across euro area countries. The adoption of a new production model should become a national priority, in order to transform the crisis into an opportunity for sustainable growth. The pandemic crisis establishes new challenges, where globalization recedes and local production activities are enhanced. Telework and tele-education are on a rise and the same holds true for electronic transactions for consumption and investment purposes. This paradigm shift for my country goes through economic extroversion, energy transformation, the green economy, the digital transformation of the banking sector, the public administration and the economy in general, the upgrading of agricultural production and technological economy can play a big role and become the new reality. This new economy should have the characteristics of a small open dynamic economy, which requires considerable reforms and specific timetables. Omens are positive. The country’s effort is assisted by the favourable monetary environment in the euro area (high liquidity, low borrowing 1/3 BIS central bankers' speeches rates for businesses and the Greek state, etc.) and the collective European response to the corona-crisis, as evidenced by the European Recovery Fund and other initiatives (SURE, EIB, ESM). It goes without saying, that the country should continue with structural reform policies, speed up privatisations, make efficient use of our large public property, and submit integrated investment plans for the full absorption of funds from the above programmes, as well as from the new MultiAnnual Financial Framework 2021–2027. The time has come! Turning now to the Greek banking sector and to the chronic problem of NPLs, despite the measures taken by the government in the context of the pandemic, we fear that since a significant part of the credit portfolio of the 4 systemic banks relates to sectors directly affected from the pandemic (tourism, construction etc.), a new wave of NPL inflows may be imminent which will further deplete the banks’ capital. According to the latest available figures (June 2020) the stock of Greek NPLs is €54 billion and the NPL ratio 33%. Recent projections raise the amount of COVID-19 NPLs in the coming year to around €10 billion. On the EU front, the EC recently adopted “Temporary Framework” allows for the use of state aid through liquidity recapitalization (state guarantees on ELA, guarantees on GGBBs), precautionary recapitalization or impaired asset relief measures (creation of public AMCs) without any burden sharing requirements (bail in). The objective of such aid would be solely to address Covid-19 related losses. The “Greek Asset Protection Scheme (Hercules)” was the first step taken by the Greek government in November 2019 to address the NPL legacy issue, based on the Italian GACS model. The European Commission (EC) approved a state aid guarantee scheme for the securitization of up to €32bn gross NPLs. NPLs and restructured loans would be sold to SPVs through securitizations. Subject to a BB-rating (compared to a BBB for GACS), the government would guarantee then the senior tranche for a total amount of €12bn. The issued senior tranches would have a zero risk weighting. Complementary to Hercules APS a recent proposal by the Bank of Greece with the short cut national bad bank. In the recent past, there were numerous cases whereby the EU provided State aid in the form of equity and guarantees on notes issued by the AMCs: MARK (2016 Hungary), BAMC (2014 Slovenia), SAREB (2012 Spain) and NAMA (2009 Ireland). Lessons learned from these cases can help us design and successfully run a public AMC. Among the key features of the bad bank proposal are the following: a) an attempt to address at the same time the DTC issue on which Greek banks, like NPLs, constitute another outlier in the Eurozone. b) An open issue to be resolved in the near future is the transfer of NPLs, which could take place at Real Economic Value (above market value) following valuation exercise carried out by an independent auditor and instructed by DG Com. c) The national bad bank can outsource the servicing of the loans to existing authorized servicers by the Bank of Greece to leverage from experience and economies of scale. d) Another open issue is the pricing of the senior bonds, receiving a credible rating and foremost attracts investors. e) And last but not least is the funding issue (apart from senior bonds, ESM funds? etc.). In all the above issues and many more, the Bank of Greece soon will have all the answers given Governor Stournaras’s strong commitment for quick results. One last word. Some claim that there is an issue with the Hercules scheme because of the unfavorable market conditions due to the pandemic. The objective should be clear: every effort should be made, “incentivise” is the key word here, to ensure the attractiveness of the scheme to private investors, other things being equal. In addition, the envelope of the Hercules APS could be further increased with COVID-19 NPLs and/or more legacy loans. Time is short and it is a superfluous luxury to waste it. I have no doubt that all relevant stakeholders would like to see a 2/3 BIS central bankers' speeches permanent solution to the Greek NPLs problem. This would let then Greek banks to address the real challenges ahead (financing of dynamic sectors of the economy, banking digitalization, etc.) Thank you very much for your attention. May I wish you a productive discussion on such an important issue for the Greek banking sector and the Greek Economy more general. 3/3 BIS central bankers' speeches | bank of greece | 2,020 | 10 |
Welcome address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 4th ECB Simulation Conference, organised by the "Get Involved" student initiative and supported by the Bank of Greece, the Department of Banking and Financial Management of the University of Piraeus and the General Secretariat for Youth,11 December 2020. | Yannis Stournaras: Welcome address - 4th ECB Simulation Conference Welcome address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 4th ECB Simulation Conference, organised by the “Get Involved” student initiative and supported by the Bank of Greece, the Department of Banking and Financial Management of the University of Piraeus and the General Secretariat for Youth,11 December 2020. * * * It is with great pleasure that I welcome you once again to the ECB Simulation Conference, the fourth one, organised by the “Get Involved” student initiative and supported by the Bank of Greece, the Department of Banking and Financial Management of the University of Piraeus and the General Secretariat for Youth. During the year since the last conference we have all lived in unprecedented circumstances due to the COVID-19 pandemic outbreak around the globe. The pandemic has taken a heavy toll, primarily on human lives, as well as on citizens’ economic welfare. Governments both in Europe and elsewhere in the world had to respond by taking resolute action in order to shore up public healthcare systems and by imposing social distancing measures with a view to containing the spread of the pandemic, which have however further weighed on economic activity. In an effort to mitigate the socioeconomic effects of the pandemic and of the related containment measures, official authorities promptly took crucial decisions. On the fiscal policy front, all European governments have resorted to high public spending to support output and employment, as well as to boost the economic recovery. Furthermore, at a collective level, the EU’s long-term budget (Multiannual Financial Framework) coupled with the establishment of the Next Generation EU recovery instrument constitute the largest ever package of recovery measures (totalling €1.8 trillion) in Europe to support workers, businesses and governments. On the part of the Eurosystem, comprising the national central banks, including the Bank of Greece, which together with the European Central Bank (ECB) conduct monetary policy in the euro area, we have adopted exceptional and bold monetary policy and banking supervision measures aimed at addressing three major challenges: first, stabilise financial markets; second, ensure the continued flow of credit to every economic sector across the euro area; and third, rein in deflationary pressures. At the meetings of the Governing Council of the ECB, as early as last March when the first signs of the new crisis became visible, we made swift and effective decisions in order to preserve favourable financing conditions and facilitate lending, on top of the measures already in place prior to the pandemic, including a zero interest rate on the main refinancing operations and a negative deposit facility rate. Specifically, we decided to promptly introduce the Pandemic Emergency Purchase Programme (PEPP) to play the dual role of stabilising financial markets and providing additional monetary accommodation. In terms of its first role, i.e. smoothing out financial shocks, the design of the PEPP allows a high degree of flexibility in the composition of purchases, thereby ensuring the effective transmission of monetary policy across the euro area. More specifically, the monthly purchase volumes are not fixed but may vary over time depending on the prevailing financial conditions. Also, while the benchmark allocation of public sector securities across jurisdictions is guided by the key for subscription to the ECB’s capital of each national central bank (reflecting the size of its economy), national central banks have been given the discretion to conduct purchases temporarily in deviation from that capital key. This flexibility helps to address impairments in the monetary policy transmission mechanism, as a result of investors’ flight to safety amid 1/4 BIS central bankers' speeches uncertainty, and to counter fragmentation risks in the euro area. Why is flexibility so important for the effectiveness of the PEPP? At the onset of the pandemic, some European countries were severely hit, while for some others the impact was comparatively milder. Given this unevenness, the former group of countries faced heightened uncertainty, high volatility in their financial markets and a surge in their government bond yields. Their yield spreads versus the latter group of countries, which saw milder increases in their yields, thus skyrocketed to high levels. Purchases under the PEPP, which were allocated relatively more towards bonds issued by harder hit countries, succeeded in drastically reducing those countries’ government bond yields and spreads. As far as Greece is concerned, a crucial role in the stabilisation of domestic financial conditions was also played by the waiver of the minimum credit quality requirements, applicable under the existing Public Sector Purchase Programme (PSPP), which was granted for securities issued by the Greek government, making them eligible for PEPP purchases. This decision is a prime example of the efficiency related to the PEPP’s flexibility: as soon as the programme was announced, the Greek government bond yields declined sharply and now stand below their prepandemic levels. Guided by the need to safeguard the singleness of monetary policy throughout the euro area, the eligibility of Greek government bonds both for purchases under the PEPP and for acceptance as collateral by Greek banks in the Eurosystem liquidity providing operations should be maintained, although the credit rating criteria are not met, as decided in April along with a package of temporary collateral easing measures. The second role of the PEPP refers to providing additional monetary stimulus, further to that already achieved through the Asset Purchase Programme (APP) implemented since 2015 in response to the then financial crisis. By purchasing bonds directly from banks, as well as corporations, we provide them with additional funding. This reduces their funding costs and facilitates banks’ capacity to increase credit supply, thus supporting consumption and investment. Hence, we are contributing to economic recovery and to inflation converging to rates consistent with price stability. In particular, the total APP holdings of the Eurosystem currently amount to almost €3 trillion, including the additional envelope decided last March (of €120 billion until the end of 2020). This amount is further augmented by the amount of assets purchased under the PEPP, which reached over €700 billion during 2020. Net asset purchases under the emergency programme will continue flexibly for at least until the end of March 2022 and in any case until it is determined that the pandemic crisis is over, up to a total amount of €1.85 trillion, as we decided at the Governing Council’s meeting on 10 December 2020, taking into account the continued pandemic-related negative effects on inflation and growth. Furthermore, given the need for support over a protracted period, we have decided that the maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2023. With a view to ensuring that banks have sufficient liquidity and access to funding so that they can lend to households and firms at favourable rates, we deemed necessary to conduct additional pandemic emergency longer-term refinancing operations (PELTROs) and to effectively ease the terms for the third series of targeted longer-term refinancing operations (TLTRO-III). The interest rate on these longer-term operations (together providing liquidity of about €1.75 trillion at the current juncture) was set at negative levels, which in the case of TLTRO-III may even reach –1% for banks that maintain a steady growth rate of new loans to the private sector (PELTROs: – 0.25%). Moreover, to facilitate banks’ participation in such operations, which are to be conducted until the end of 2021, we have decided that counterparties should benefit from collateral easing measures and that the range of eligible securities accepted as collateral should be temporarily expanded. In combination with the easing of banking supervision rules, such as allowing banks to operate with a lower capital adequacy ratio during the pandemic period and extending the flexibility towards loan repayments, as well as with the provision of government guarantees to loans, the aforementioned monetary policy measures make a decisive contribution to the protection of borrowers and the support of credit expansion. 2/4 BIS central bankers' speeches Following the adoption of the above measures since the pandemic outbreak, the size of the Eurosystem’s balance sheet has grown from about €4.7 trillion in early 2020 to more than €6.9 trillion in December (over the same period, the balance sheet of the Bank of Greece has increased from around €110 billion to around €175 billion). The effectiveness of our prompt and decisive monetary interventions is evidenced by a normalisation in financial conditions and a strengthening of macroeconomic outcomes. As estimated by the ECB1, the package of these measures could add 1.3 percentage points to euro area GDP growth and 0.8 percentage points to inflation in the period 2020–2022, while it has helped to preserve one million jobs. Without these decisions, we would have faced much lower growth rates and more negative inflation rates than those currently observed. Nevertheless, there is no room for complacency. We are currently amidst the second wave of the pandemic, which creates renewed uncertainty among citizens. We estimate that this uncertainty will remain elevated until an effective vaccine becomes widely available, which is expected in mid-2021. Until then, the necessary social distancing measures exacerbate the economic fallout of the pandemic and hamper the recovery. In light of the above, fiscal and monetary policies need to remain expansionary and mutually reinforcing, continuing to support citizens’ incomes, output and consumption across the euro area. We, the members of the Governing Council, are ready to adjust the instruments available to the ECB as appropriate in order to ensure that inflation moves on a sustained path towards levels consistent with our primary objective of price stability and that the euro area economy will recover. In tandem with our monetary policy decisions, which are based on an assessment of financial conditions and current macroeconomic developments, since the beginning of this year we have been reviewing our monetary policy strategy. The aim of the review is to make sure that our strategy is appropriate for delivering on our mandate to maintain price stability. The strategy was last reviewed in 2003 and since then the world has undergone profound changes which call for a re-definition of our strategy. More specifically, a substantial fall in the natural interest rate (i.e. the interest rate at which the monetary policy stance becomes neutral) has been observed, diminishing the scope for an expansionary monetary policy through the conventional interest rate adjustment, as policy rates have reached historically low levels. Furthermore, developments such as the changing financial environment and the rapid digitalisation (including digital currencies), climate change, globalisation, as well as the slowdown in productivity and the ongoing population ageing, pose new challenges for central banks. One of the issues to be addressed as part of our strategy review is the desirable level of inflation we should be aiming for, in order to ensure price stability in a perfectly symmetric way, thereby reducing downward deviations from the inflation aim. We will also evaluate the appropriate methodology for inflation measurement as well as the methods applied in our economic and monetary analyses. It is very important for our prompt and effective reaction to possible future shocks to fully grasp how inflation expectations are shaped, but also to incorporate the nonstandard monetary policy measures that we have implemented over the past few years into our standard toolkit. Last but not least, we must incorporate the lessons learnt from the recent crises, as well as the need to respond to new challenges, so that our strategy becomes as effective as possible both now and in the future. Our strategy review process is expected to be finalised next year, taking also into account feedback from the general public, as we wish all citizens to understand our mission and our decisions. In this regard, your personal views on the following topics are indeed valuable: What does price stability mean for you? What are your economic expectations and concerns? 3/4 BIS central bankers' speeches What other topics matter to you? How can we best communicate with you? We look forward to receiving your views and opinions through your participation in the Simulation Conference, a synopsis of which will be considered by the Governing Council of the ECB. You may also follow the relevant events currently organised by the Eurosystem. The ECB held on 21 October a virtual event2, bringing together a range of civil society organisations, hosted by President Christine Lagarde and Chief Economist Philip Lane. The event was broadcast live on the internet, while a summary report was published after the listening phase. Furthermore, the ECB offered all citizens the opportunity to express their views via the ‘ECB Listens Portal’ to better understand their perspectives on the economy and what they expect from their central bank. On our part, we have scheduled our own listening event entitled ‘The Bank of Greece Listens’ in early 2021, with the participation of social partners and with the aim of promoting dialogue on the monetary policy strategy. In closing, I would like to congratulate all those who have made this conference possible. 1 See interview by President Christine Lagarde on 19 October 2020. 2 ECB Listens event (europa.eu) 4/4 BIS central bankers' speeches | bank of greece | 2,020 | 12 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 22nd Annual Capital Link Invest in Greece Forum "Greece- Looking Ahead With Confidence", 15 December 2020. | null | bank of greece | 2,020 | 12 |
Intervention by Mr Yannis Stournaras, Governor of the Bank of Greece, Athens, 15 January 2021. | Yannis Stournaras: Intervention Intervention by Mr Yannis Stournaras, Governor of the Bank of Greece, Athens, 15 January 2021. * * * 1. The euro area Banking System: From the Global Financial Crisis to the COVID-19 pandemic. The shape of the next crisis has been a popular topic in public debates about macroeconomics and finance over the past few years. In late 2019, a decade after the Global Financial Crisis, no one could foresee what was coming. The scenario for an acute global economic disruption due to a pandemic was nothing more than a rare tail event. Unfortunately, this scenario materialized and had a tremendous impact on the social and economic activity worldwide. As seen in past crises, banks (along with the State Budget) are usually the first in line to take the hit, taking into consideration their close links with the real economy. However, the banking system in the euro area has entered this new crisis with stronger fundamentals and has been in better position to absorb shocks. In the aftermath of the Global Financial Crisis, policy makers and supervisors had already taken a number of measures –inter alia- to increase the quality and quantity of regulatory capital, to improve governance functions and the measurement of risks in credit institutions, to facilitate the resolvability of failing banks, etc. There is no doubt that at the time when the pandemic hit the Eurozone, the banking system, as a whole, was financially sound with low NPLs, adequate capital levels and ample liquidity. According to EBA data, the average Capital Adequacy Ratio of EU banks was 19,3% in December 2019 – the highest level we have ever seen for years- mostly the result of capital enhancement actions taken by EU banks. At the same time, asset quality metrics had been materially improved with the average NPL ratio declining to 2.7% which is again the best performance seen since the previous crisis. EU banks also enjoyed ample liquidity with the average Liquidity Coverage Ratio being at circa 150%, well above the regulatory minimum of 100%. Of course, not all banks in the Eurozone had managed to fully recover from the previous crisis. Despite the progress made, some banks (especially in the EU periphery) were still struggling to address legacy issues and notably the high stock of non-performing loans. Still, it is safe to conclude that the banking system in the Eurozone emerged safer and stronger from the previous crisis. 2. How European Regulators responded to the crisis This time the response by the regulatory authorities to the crisis was immediate and (so far) effective. There are two reasons behind this prompt reaction: First, the previous crisis was very recent and the lessons learnt had not yet been forgotten, and Second, the pandemic is a symmetric shock and hit hard all member states. This facilitated the decision making process by regulators, amid a period when monetary and fiscal authorities also provided enormous support. In fact, all players in the Eurozone were fully aligned; central bankers, regulators, political authorities. In a nutshell, rapid common action is now the name of the game, unlike in previous crises. The relief measures taken by the regulatory authorities are more or less known. I would like though to comment on two of them which I think are relevant for future policy actions but also for 1/5 BIS central bankers' speeches a potential review of the existing framework: The first has to do with the usability of buffers. Despite the accommodative monetary policy that provided ample liquidity to credit institutions and the clear communication from the supervisory authorities on the timeline for the flexibility granted, we notice that most banks across the globe are reluctant to dive into their buffers. Recall that the essence of macro prudential buffers is to support the real economy during an economic downturn, thus mitigating procyclicality. I can think of several reasons behind this but I believe that the primary reason is the uncertainty about the true impact of the pandemic to the balance sheet of corporates and households. Policy makers should review this issue and the effectiveness of macroprudential buffers after the end of the ongoing crisis. The second has to do with the recognition of credit losses. Here the authorities also acted quickly and clarified the interplay between loan moratoria and loan categorization. However, there is a widespread view that many banks in the euro-area underestimate their credit losses due to the pandemic, especially for the performing customers that are currently benefiting from payment deferrals. The recent letter by the Chair of the SSM regarding the identification and measurement of credit risk in the context of the Covid-19 pandemic communicates clearly the supervisory expectations. Therefore, it seems (correctly in my view) that the asset quality of European lenders will be in the epicenter of the supervisory action this year. 3. Country specific responses The Bank of Greece has acted similarly to other NCAs on the regulatory front and adopted similar measures with that of the SSM for the Less Systemic Institutions that fall under our supervisory competence. In addition, and as we did not have in place countercyclical capital buffer to release, we decided to ‘freeze’ the level of Other Systemically Important Institutions Buffer at the existing levels for a year. Banks also announced in the early stage of the crisis, a system-wide loan moratorium that is compatible with the relevant EBA Guidelines. The initial expiration date of December 2020 will now be extended in line with new EBA Guidelines, within the cap of the 9-month period. At the same time, the Greek government has taken a series of fiscal and labor market measures to support businesses and employment. These measures are similar to the ones taken in other jurisdictions and include the subsidization of loan installements of small and medium sized enterprises hit by the pandemic. The fiscal support measures and the recession have led to a sharp reversal of the general government budget surplus into deficit for 2020 and, combined with deflation, to a significant increase in the debt-to-GDP ratio. However, the inclusion of Greek government bonds in the Pandemic Emergency Purchase Programme (PEPP) of the ECB, their acceptance as collateral in the Eurosystem’s liquidityproviding operations as well as the positive developments in international financial markets, contributed to the uninterrupted access of the Greek State to capital markets and the further decline of the government bond yields. I would like now to say a few words about our proposal to set up an Asset Management Company (AMC) that addresses the top two challenges for Greek banks (the high level of NPLs and the high share of DTCs in bank capital) simultaneously, by introducing a straightforward market-based approach. This proposal is currently under review by the Greek Government and if adopted could be a decisive country response to the crisis and a relevant precedent for other jurisdictions. The proposed AMC could take up the legacy NPLs on top of those envisaged to be taken up by the Hellenic Asset Protection Scheme (HAPS), about €30 billion, as well as the new NPLs resulting from the pandemic (estimated at about 8-10 billion euros). Hence, a total of about €40 billion. In a nutshell, according to the BoG proposal: An NPL transfer at net book value to the AMC creates incentives for banks with higher 2/5 BIS central bankers' speeches coverage ratios and eliminates asymmetries in the cost associated with participation in the proposed scheme. Banks undertake the cost of cleaning their balance sheets, not the taxpayer. Banks will eventually bear costs for implementing a market-based solution. However, banks may benefit from the introduction of a gradual loss recognition mechanism that allows strengthening of capital adequacy reserves, if necessary. Shareholders are not subjected to undue dilution because of loss-triggered DTC conversion. The proposed AMC is not envisaged to perform as a servicer; on the contrary, the scheme will utilize and build upon existing contractual terms of loan servicing companies. As seen in the recent communication published by the European Commission in December 2020, the set-up of AMCs (either at national or at European level) is a policy proposal that is now favored by the European authorities and could lead to a swift cleanup of banks’ loan books. 4. The main challenges facing banks in Europe Euro area banks face a number of challenges; new due to Covid-19 outbreak and existing ones: First, banks are tied-up to macroeconomic and monetary policy developments. Despite the projected recovery of the European economy in 2021, risks to the projections remain elevated. The resurgence of the pandemic and the new round of restrictive measures across Europe could lead to a longer and deeper recession associated with a wave of corporate defaults, rising non-performing loans and job losses. The low interest rate environment, combined with a sluggish economic recovery, remains a big challenge for European banks, with clear implications for their core profitability and capital generation capacity. A large number of banks’ obligors is under loan moratoria, which differ across countries and sectors. As I previously mentioned, even though the relevant EBA Guidelines on moratoria do not eliminate the banks’ obligation to perform the so-called ‘unlikely to pay’ assessment and record the relevant loan loss provisions, there is a widespread feeling that the credit losses from the pandemic are underestimated. The expiration of public support measures, especially those related to fiscal support, could have negative implications to banks’ cost of credit risk. Banks should take action that will facilitate the frontloaded recognition of credit losses as well as the swift clean-up of banks’ balance sheet through systemic solutions. As already said, the Bank of Greece has proposed to the Greek Government such a systemic solution in the form of an AMC to be used along with the HAPS. There are pockets of risk in the non-bank financial sector that is continuously increasing its size. For instance, banks have reduced their NPL’s by transferring a large share of them to funds outside the official banking sector. Climate-related risks that seemed a distant possibility some years ago are rapidly gaining importance in the risk heat map. In addition, at the level of individual banks and jurisdictions, banks face additional challenges that have to do with legacy issues or idiosyncratic characteristics of the domestic banking sector. To give you some more information for Greek banks: Despite the reduction of NPLs by about €50 billion since their peak in March 2016, the NPL ratio at the end of September 2020 remained at exceptionally high levels of 35.8%, far above the EU average. The capital adequacy ratios of Greek banks are above the minimum required, but will be challenged by several factors in the coming years, such as: i) the full impact from IFRS9, ii) the cost of their NPL strategy as seen in recent planned or executed transactions, iii) the fact that more than half of banks’ capital is in the form of Deferred Tax Credits (DTC), 3/5 BIS central bankers' speeches which is perceived by the markets as ‘low quality capital’. Bank profitability is still weak on the back of low business volumes and high cost of credit risk. Finally, banks will need to gradually tap the markets over the next few years to meet their MREL target. I will conclude my intervention for the challenges faced by banks in the Eurozone with the missing parts of the Banking Union and the need to strengthen further the banks’ crisis management framework. I refer to a) the introduction of the European Deposit Insurance Scheme (EDIS), b) the existing deficiencies in the Bank Recovery and Resolution Directive (BRRD) that cannot address systemic crises where financial stability is at risk and offers no clear strategy for dealing with the failure of small and mid-sized banks that are primarily depositfunded, c) the need to harmonize different national liquidation procedures. The recent Eurogroup agreement (November 30, 2020) to establish a common backstop to the Single Resolution Fund (SRF) in the form of a credit line from the ESM, which will enter into force in the beginning of 2021, is an important step towards a more robust banking sector. Still, liquidity needs in resolution may easily surpass what is currently provided for. Drawing from the experience of the Bank of England, the establishment of a special credit line by the ECB could be considered, subject to appropriate safeguards. Similarly, and as already mentioned, the European Commission communication of December 2020 on tackling NPLs through a network of National AMC’s and the further development of the secondary market for loan securitization, as well as the possibility to grant precautionary recapitalization aid to viable banks so as to facilitate the transfer of NPLs under certain conditions, is also an important step in the right direction. 5. Outlook for the European banking system for 2021- 2022 The outlook for the European banking system is closely related to the developments in the economy and the fight against the pandemic. Therefore, I would like first to comment on this before I move on to the outlook of the banking system per se: On the health factor, it seems that the news will be positive especially after the vaccination of a large part of the population within the 1st quarter of the year that will ensure the necessary immunization from the virus. According to the latest baseline scenario of the Eurosystem staff macroeconomic projections, the economic growth will return to positive territory this year. Real GDP is projected to increase by 3.9% in 2021 and 4.2% in 2022, due to the recovery of both domestic and external demand. Fiscal policy is expected to remain expansionary until a very large proportion of the population is vaccinated and, particularly, the European economy returns to a stable growth path. Monetary policy will remain accommodative until inflation converges to the target of 2 percent in a sustainable and robust way. With available data, inflation in 2023 is expected to remain well below 2 percent. The impact from the creation of the EU recovery tool (NGEU) will be visible in 2021. NGEU will finance growth initiatives, in the period 2021-2026, worth €750 billion at constant 2018 prices. The recovery tool will be funded through the issuance of mutual debt at the EU level, which will be repaid between 2028 and 2058. For some small European economies such as Greece, the funds available through the NGEU will provide significant opportunities for the modernization, the green transition and the digital transformation of the economy. 4/5 BIS central bankers' speeches Moving now to the banking system; Even though I remain on the optimistic side about the medium-term prospects, I am afraid that the scars from the pandemic will be more visible in 2021. The loan moratoria and the fiscal support measures averted the massive defaults of borrowers during 2020. Inevitably, new defaults will arise at some point within 2021 and will affect asset quality and profitability of European lenders, particularly so as support measures will be gradually lifted. Note that the burden from new Covid-19 related defaults will be higher for banks that already had a high stock of NPLs such as Greek banks, where a big chunk (if not all) of the existing buffers was meant to be used to address part of their legacy NPLs. Another point I would like to make here is the significant role of the banking system in avoiding the creation of ‘zombie’ companies and permanent (structural) scars to the economy. Banks should act decisively and address new delinquencies at a cost for their capital. NPL servicers will also have an important role here, as moving NPLs outside the banking sector does not imply that credit risk is removed away from the financial system. Only the effective workout of these loans will essentially remove the burden to obligors and reduce the credit risk, eventually allowing a better allocation of resources in the economy. As banks come out from a very tough year and have to cope with the existing and the new challenges we discussed earlier, they need to have a credible plan about the next day and need to boost their resilience. I believe that further consolidation will occur in 2021 and 2022. European banks have currently a gap compared to their US peers, both in terms of efficiency (Return on Equity) and valuation (Price-to-Book). The pandemic may amplify existing vulnerabilities of European banks and widen further this gap. Consolidation (either at national level or crossborder) is not a panacea but could certainly be supportive, especially on the cost effectiveness. Another significant development in 2021 is digitalization. The pandemic has changed not only the way we work and socialize, but also our relationship with banks. It is a catalyst for digitalization and is pushing banks to invest more in digital infrastructure. This trend will shape the competition landscape and will probably drive the laggards off the market in the medium-term. Climate change will gain more importance in 2021 and banks will play a critical role in sustainable finance and in embracing further environmental, social and governance (ESG) commitments. I will stop here. Banks will face a number of challenges in 2021 but also significant opportunities. The pandemic is changing the way they are making business. They also have to adapt as they have an important role to play in providing liquidity to the economy, transmitting the stabilizing stance of monetary policy to all sectors of the economy and facilitating the mobility of resources towards a more optimal allocation. www.bankingsupervision.europa.eu/press/letterstobanks/shared/pdf/2020/ssm.2020_letter_credit_r c839e6212e8a9bf18dc0d26ab0b1cd7f 5/5 BIS central bankers' speeches | bank of greece | 2,021 | 5 |
Keynote speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the COP26 EU side event, 4 November 2021. | Yannis Stournaras: Climate crisis - action in central banking Keynote speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the COP26 EU side event, 4 November 2021. * * * It is a great pleasure to be here with you and share my thoughts on addressing the climate crisis, οne of the world’s top threats to humanity according to the United Nations, while also harnessing the opportunity this presents to the economy. From a central banker’s perspective, this challenge translates into concrete opportunities, such as rebooting the economy, increasing financial integration and stability in the EU through green finance, advancing the creation of the Capital Markets Union (CMU) and fostering a Green CMU. Let me elaborate. Rebooting the economy. The global policy response to the Covid-19 crisis presents an excellent opportunity to adopt a coordinated approach to tackling climate change — to re-design a more inclusive, sustainable and carbon neutral development pathway, aligned with the UN Agenda, the Sustainable Development Goals, the Paris Agreement and our duty towards the next generations. Climate policies toward net zero emissions, climate adaptation and resilient infrastructures can all be pursued as the world recovers from the pandemic, in a manner that supports economic growth, employment and income equality. Over the next years, the world will invest heavily to recover from the fallout of COVID-19. Along these lines, the Next Generation EU programme has already assigned 30% of the funds on fighting climate change, in addition to the resources made available in the framework of EU Cohesion Policy. These initiatives should become sustainable features of our response to climate change. What we decide today will help determine the future of our societies. Strengthening financial integration. Encouraging green finance is an excellent way to strengthen financial integration. The transition to a carbon neutral economy will require adequate green financing. For example, the achievement of European climate and energy targets will require an estimated €330 billion annually by 2030. Financial integration across euro area countries will generate investment opportunities and diversification of financial risks across national borders. Currently, green bonds are more likely to be held cross border than other European bonds; Environmental, Social and Governance (ESG) funds appear more stable, as investors are less likely to withdraw funds following negative performance than investors in other types of funds; and there is evidence to suggest that equity funding could help incentivize green innovation and greener activities. In short, scaling up green finance can be a driver for a carbon neutral economy, financial integration and stability in the euro area. Strengthening the Capital Markets Union (CMU). The strengthening of the CMU is necessary for the completion of European Economic and Monetary Union because it will reduce market fragmentation and encourage diversification of financial resources. The development of a Green CMU can support the move to a CMU by adding depth and diversification to the financial instruments available, also enhancing the risk sharing capacity of the EU financial system. Green capital markets are dynamic and relatively well integrated in Europe. They provide a rapidly growing market and are the location of choice for green bond issuance and ESG investment. Important elements of a Green CMU include corporate sustainability disclosures, green financial products with official EU seals, such as the EU Green Bond Standard, and harmonised regulation and supervision for sustainable finance. A Green CMU would both make the EU economy more resilient and more environmentally sustainable. But what role can central banks play in tackling climate change? 1/3 BIS central bankers' speeches Climate-related risks are a source of instability and financial vulnerability. Physical and transition risks, like more frequent and more extreme weather events or a late and abrupt transition to a low-carbon economy, could affect the transmission of monetary policy and pose risks to price, financial and economic stability. It is therefore within the mandate of central banks to prevent risks to price stability, and, along with bank and insurance companies’ supervisors, to ensure that the financial system is resilient to these risks; this urgently needs to be translated into concrete measures, both on monetary policy and supervisory fronts. Although the main responsibilities remain with the governments, with their tax subsidies and investment policies, central banks can undertake an active role in tackling climate change. Central banks have already started considering how the physical and transition impact of climate change can be included in macroeconomic forecasting and financial-stability monitoring. Also, central banks have been undertaking work to integrate climate-related risks into prudential regulation and supervision, engaging with rating agencies and financial firms to ensure that climate-related risks are understood, disclosed and incorporated in risk assessment and in credit provision decisions. Until recently, most central banks had focused mainly on raising awareness around climate change risks and considering the impact of these issues on their own operations. Yet, central banks can and are committed to do more than that. At the Governing Council of the European Central Bank (ECB), we agreed this summer on a comprehensive action plan, with an ambitious roadmap to further incorporate climate change considerations into our policy framework and to more systematically reflect environmental sustainability considerations in our monetary policy. The roadmap foresees, among others, expanding analytical capacity in macroeconomic modelling, statistics and monetary policy with regard to climate change and assessing the impact, not only to banks and companies across the euro area, but also to our own balance sheet from exposure to climate risks. The ECB supports current EU initiatives to improve climate related data disclosures in order to enhance transparency and promote the market for green financial products. Another milestone in this roadmap includes the further incorporation of climate change considerations in our monetary policy operations, with a view to promoting better climate disclosures and making our asset purchases, and therefore our balance sheet, greener. Climate risks will be assessed when evaluating collateral eligibility and climate-related criteria will be adopted to guide our corporate asset purchases. The design of these measures should take into account that market imperfections related to climate change may pose potential biases in the efficient market allocation of resources. As bank supervisors, central banks also have a responsibility to enforce commercial banks to make the necessary provisions against risks from assets exposed to physical as well as transitional climatic hazards. In the context of the COP26, the Bank of Greece announced yesterday a pledge to contribute, within its field of responsibility, to the global efforts of central banks and supervisors towards greening the financial system and managing climate-related risks. The Bank of Greece is one of the first Central Banks to address climate-related issues. Our journey started in 2009 when we established the interdisciplinary Climate Change Impacts Study Committee, a committee of scientists that has since been involved in the study of the economic, social and environmental impact of climate change for Greece. Of major importance is our contribution in the design of the national strategy for the adaptation to climate change in 2015 and our participation in the Life IP – AdaptInGr programme, alongside a consortium of key national actors, to boost the implementation of adaptation policy across the country, up to 2026. Moreover, a few months ago, the Bank of Greece established the Climate Change and Sustainability Centre, with the additional mandate to coordinate climate-related actions across the Bank and to incorporate sustainability considerations in our operations. 2/3 BIS central bankers' speeches In closing, I would like to reinstate our aspiration, within the remit of our mandate and alongside central banks around the world, to act as a catalyst in the financial system, to accelerate the transition to an environment-friendly, carbon-neutral economy and enhance society’s resilience to climate change risks. Thank you. 3/3 BIS central bankers' speeches | bank of greece | 2,021 | 12 |
Greeting by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 5th Simulation Conference of the European Central Bank, 10 December 2021. | Yannis Stournaras: Greeting - 5th Simulation Conference of the European Central Bank Greeting by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 5th Simulation Conference of the European Central Bank, 10 December 2021. * * * It is a great pleasure for me to be here today to greet the opening of the fifth European Central Bank Simulation Conference. I would like to thank all the participants for their interest in the operation and actions of the central bank, and the student group “Get Involved” for the excellent organization of the conference. I would like to begin by noting that the pandemic, two years after its onset, continues to threaten lives, cause high levels of uncertainty, and affect the social well-being of all citizens worldwide. Of course, progress on vaccinations has been a major impediment to the spread of the pandemic and has helped to lift social isolation and restart the economy. However, we can not yet say for sure that we have turned the page. The risk of serious mutations, such as the “micron” we are currently facing, remains high and could lead to new waves of pandemics, with serious consequences for society and the global economy, including the euro area. Under no circumstances should we be complacent. All relevant bodies need to be vigilant to effectively manage the effects of the pandemic. It is essential that they continue to take steps to restore economic prosperity and promote social cohesion for all euro area citizens. With regard to monetary policy, I would like to emphasize that the Eurosystem is now better prepared, than in the past, to fulfill its primary mandate: to maintain price stability, to ensure the value of the euro and to strengthen it. economic growth and job creation. Last July, we completed the Governing Council review of the ECB’s monetary policy strategy. The review, which began in January 2020, took into account the fundamental changes that have taken place in the international economic environment since the previous review of the strategy in 2003. These include the reduction of the so-called “natural rate” (natural rate of interest rate). ) which limits the scope for the conventional interest rate policy of central banks, as well as the slowdown in productivity and the reduction of the active population due to the continuing aging of the population. Also developments such as climate change, globalization, rapid digital transformation and the flourishing of digital currencies, During the deliberations of the Management Board, we were presented with a number of analyzes and studies prepared by Eurosystem working groups. These papers have been published in a number of ECB Occasional Papers and I urge you to consider them as they address a wide range of monetary policy issues. In addition, the ECB and all the national central banks of the Eurosystem, in an effort to listen to the views and expectations of the general public, held events with the participation of representatives of civil society. At the Bank of Greece we had the opportunity at the Simulation Conference in December 2020 to find out the opinion of the participants in a series of questions about prices, the economy and their expectations from the central bank. Also, in February 2021, we organized the event “The Bank of Greece listens to you", which was attended by representatives of social organizations with the aim of dialogue on issues that concern them and a better understanding of the role of monetary policy. The new strategy sets out the basic principles that guide us in shaping the direction of monetary policy so that we can respond more effectively to various circumstances in order to fulfill our 1/5 BIS central bankers' speeches primary goal of price stability. At the same time, the strategy provides a clear and consistent benchmark for shaping the expectations of consumers and businesses for the future price level, so that they can make the best possible decisions regarding their activity. I will now turn to the most substantial conclusions of the review. Initially, the new strategy stipulates that price stability is best maintained by pursuing an inflation target of 2% in the medium term. Compared to the current wording aimed at lower inflation, but close to 2%, the new approach now makes it clear that 2% is not the maximum level that is considered acceptable for inflation, but our symmetrical target. Inflation deviations from this target, both negative and positive, are equally undesirable. The redefinition of price stability reflects the need to set a fairly large positive margin for the level of inflation that is considered desirable. The lessons learned from the recent crises reinforce the need to set a higher inflation target to provide more room for monetary policy to reduce interest rates in the event of deflationary pressures and to avoid episodes where nominal interest rates are below the effective threshold. lower bound). Additional factors that are taken into account in determining the inflation target are the differences in the level of inflation between the countries, the rigidities in adjusting the nominal wages downwards, Adopting a symmetrical target helps to shape expectations for future levels of policy and inflation rates. The prevailing perception was that the ECB was pursuing a tighter monetary policy on upward deviations of inflation from the target, while, on the contrary, it was reacting with timid steps and delaying downward deviations. In the current strategy, we emphasize that both the continuous rise and the prolonged fall of prices must be limited immediately and as much as possible. We also recognize in the new strategy that when the economy operates close to the nominal interest rate threshold, particularly strong or persistent use of monetary policy measures is required to prevent the consolidation of negative deviations from the inflation target. This may also mean a transitional period in which inflation is moderately above the 2% target. Therefore, although it is confirmed that interest rate policy is still the primary instrument of monetary policy, additional monetary policy tools are used by the ECB when necessary. Such tools are indications of the future direction of monetary policy, asset markets and longer-term refinancing operations. In previous crises, but also during the pandemic period, the ECB resorted to extraordinary, less conventional, measures, as monetary policy interest rates had reached historically low levels. Let me remind you that the current ECB interest rate levels have been zero since March 2016 for major refinancing operations and from June 2014 negative levels for deposits held by credit institutions with national central banks. The combination of measures taken was particularly successful, as they played a key role in increasing inflation and economic growth, from the very low levels that had been formed. These measures continue to be implemented to date in order to boost economic growth and support the stabilization of inflation at levels consistent with the target. In addition, they manage to maintain smooth financial conditions for all euro area economies, secure favorable financing terms and safeguard the flow of credit to every sector of the economy. During the pandemic, Eurosystem securities under the Pandemic Emergency Purchase Program (PEPP) played a key role in alleviating financial turmoil and boosting monetary easing. This program was mobilized immediately after the outbreak of the pandemic and, as announced on December 10, 2020, the net monthly purchases will last at least until March 2022 and in any case until we judge that the crisis of the pandemic is over. It is considered very effective in holding back the rise, due to high uncertainty, government bond yields and 2/5 BIS central bankers' speeches discrepancies between them. The effectiveness of the program is mainly due to the pioneering flexibility in the composition of securities markets by the Eurosystem. The value of securities purchased can fluctuate over time depending on financial conditions. In addition, there is a possibility that the distribution of public sector securities markets may temporarily deviate from the key of each national central bank in the share capital of the ECB (calculated according to the size of its country’s economy). The PEPP emergency program granted Greek government securities a derogation from the minimum credit rating requirements of the Public Sector Purchase Program (PSPP), which helped reduce the impact of the pandemic on financial conditions in Greece. During the pandemic, the measures adopted before the outbreak continue to apply. In particular, the net purchase of securities continues under the regular extended program (Asset Purchase Program – APP), which was adopted in 2015 in response to the then financial crisis. The largest market share consists of government bonds under the PSPP program. According to the decision of 12 th September 2019, the net monthly purchases conducted for as long as necessary to maintain the accommodative policy rates and will close shortly before deciding on the Board that it is necessary to increase the key interest rates ΕΚΤ. At the same time, the Eurosystem provides ample liquidity to banks through monetary policy operations. In particular, the third series of Targeted Long-Term Refinancing Operations (TLTRO III) are conducted on very favorable terms in order to support bank lending to businesses and households and to ensure low borrowing costs for the private sector. In order to facilitate the banks to participate in the refinancing operations, on April 7, 2020 it was decided that the conditions for the eligibility of the securities given by the banks as collateral in the refinancing operations will be less strict, and that the Greek government bonds will be accepted. in monetary policy operations as collateral. In detail, the value of the securities held by the Eurosystem under the APP and PEPP at the end of November 2021 exceeds 4.6 trillion euros. Respectively, the total amount of liquidity provision through refinancing operations is 2.2 trillion euros. As a result, the Eurosystem’s balance sheet has risen from around € 4.7 trillion at the beginning of 2020 to almost € 8.5 trillion in November (during the same period, the Bank of Greece’s balance sheet has increased from around € 110 billion to around EUR 230 billion). To summarize, during the strategy discussions it was considered appropriate to draw on the lessons learned from previous crises and to recognize the effectiveness of immediate and effective monetary intervention through less conventional tools. Therefore, in the recast of the strategy, it is stated that, in recognition of the policy interest rate threshold, the Board will use these tools on a case-by-case basis, continue to respond flexibly to new challenges and consider new policy instruments when dealt with. essential. Monetary policy decisions are based on the assessment of economic and financial developments while using two interdependent analyzes. First, economic analysis, which focuses on macroeconomic projections but is enriched with new types of data and improved macroeconomic models that include the effects of demographic change, climate change, globalization and digital transformation. Secondly, monetary and financial analysis, which emphasizes the functioning of the monetary policy transmission mechanism and gives a special role to financial stability. Following the completion of the review of the strategy, in the updated press release of the decisions of the Board of Directors meeting on July 22, 2021, we reworded the indications regarding the future evolution of the ECB interest rates (forward guidance). In particular, in line with the new strategy, to support the symmetric 2% inflation target, we have decided that key interest rates will remain at current or lower levels until the following conditions are met: Finding 3/5 BIS central bankers' speeches that inflation reaches 2% long before the end of the projection horizon and for the rest of the horizon under consideration, and to judge that the course of the underlying inflation has made sufficient progress that is compatible with the stabilization of inflation at 2% in the medium term. For macroeconomic stabilization to be successful, monetary policy needs to continue to be complemented by targeted and coordinated fiscal measures. The new strategy recognizes the importance of pursuing a counter-cyclical fiscal policy that enhances the effectiveness of monetary policy. It is worth emphasizing at this point the unprecedented joint action of the Member States of the European Union to stem the pandemic and support the economy. The main initiatives include providing the maximum possible fiscal flexibility provided for in the Stability and Growth Pact and the Multiannual Financial Framework Agreement. At the same time, support programs were activated for employees (through the tool Support to mitigate Unemployment Risks in an Emergency – SURE), businesses (with the creation of a panEuropean lending fund, with an emphasis on small and medium-sized enterprises) and Member States (with a dominant measure the creation of the Next Generation EU – NGEU development fund). The funds of the NGEU Recovery Fund can be used for loans and grants to governments for development actions, the most important of which are the transition to green energy, energy saving, Recognizing the need to address the consequences of climate change, the European Union, in addition to the funds provided for in the NGEU program, has set a goal of achieving climate neutrality by 2050. The European Green Agreement sets out policies in 2019 to achieve this goal. objective, such as mitigating global warming and reducing greenhouse gas emissions. The intermediate goal is to undertake a package of proposals to reduce emissions by at least 55% by 2030 (Fit for 55). In the face of the challenge of climate change, central banks could not remain neutral, although climate change is primarily the responsibility of governments. Climate change is a major challenge for price stability through two channels. First, through natural hazards, as the most frequent and extreme weather events affect the production process and the supply of goods, with effects on price formation. Second, due to the necessary adjustments related to the transition policies in a low-emission economy, production costs may increase and there may be structural changes that affect supply and demand, and ultimately prices. In reviewing our strategy, we have included in the Board an ambitious climate-related action plan. With this action plan, the Eurosystem aims, without prejudice to the primary objective of price stability, to ensure that it takes full account of the impact of climate change in the conduct of its monetary policy. In summary, the following milestones are envisaged on our way to integrating the parameters of climate change. First, we gather the data needed to analyze the risks associated with climate change. We are also adapting macroeconomic models to take into account the consequences of climate change. Second, we look at the exposure of our balance sheet, as well as the balance sheet of the supervised banks, to climate risks. We have already conducted a climate change simulation exercise for the economy as a whole, which has shown that the cost to banks and businesses of adapting quickly to green policies is much lower than the cost of inaction and dealing with severe natural disasters. in the future. At the same time, we will introduce data disclosure requirements from banks and securities issuing companies, so that these securities can be used as collateral in monetary policy operations and in the securities markets of the private sector. Still, Third, we will consider taking climate risk into account in the criteria for evaluating securities that are accepted as collateral in bank refinancing operations and in the private sector securities 4/5 BIS central bankers' speeches markets. In addition, we will start publishing climate data regarding the corporate securities markets we conduct (Corporate Sector Purchase Program – CSPP). It is noted that in February 2021 all members of the Eurosystem adopted a common position on the application of principles of sustainable and responsible investment in the management of our portfolios that are not related to monetary policy. I would also like to emphasize that the Bank of Greece is one of the first central banks in the world to deal with climate change and sustainability, having established, as early as 2009, the Climate Change Impact Study Committee (EMEKA). The EMEKA committee contributes substantially to the research with the aim of highlighting the risks and opportunities arising from climate change. In addition, the Bank of Greece established the Center for Climate Change and Sustainability in order to coordinate and implement the Bank’s actions regarding the climate. At the recent United Nations Conference on Climate Change (COP 26) in Glasgow, the Bank of Greece undertook to contribute, within its remit, to the achievement of the Objective contained in Article 2. In fact, this week the new periodical exhibition was inaugurated at the Bank Museum entitled “Economy and Climate: Handle with care". The purpose of this report is to highlight the role of central banks in tackling the effects of climate change and to enhance information and active participation of the public, especially the younger generation like you, in the urgent mobilization needed to meet the challenges. Our goal is a modern, robust and green economy, guided by the social well-being of all citizens. And in this effort, the central banks and the Bank of Greece in particular, contribute with all their might, within the framework of their mandate. In closing, I want to express the belief that with the right coordination of everyone’s efforts, we will be able to contribute to a substantial and sustainable development, for a better and sustainable future. 5/5 BIS central bankers' speeches | bank of greece | 2,021 | 12 |
Opening address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the launch event of the Regulatory Sandbox of the Bank of Greece, Athens, 2 June 2021. | Yannis Stournaras: Launch of the Regulatory Sandbox of the Bank of Greece Opening address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the launch event of the Regulatory Sandbox of the Bank of Greece, Athens, 2 June 2021. * * * It is my great pleasure to welcome you to today’s event launching the Regulatory Sandbox of the Bank of Greece. First of all, I would like to extend warm thanks and welcome Ms Andreea Moraru, ERBD, Director, Regional Head of Greece & Cyprus, and Mr Mario Nava, Director-General, DirectorateGeneral for Structural Reform Support (DG-REFORM), European Commission, who will be taking the floor afterwards. This project would not have been possible without the financing of the EU, continuous support from the European Commission and technical assistance from the EBRD, all of which are gratefully appreciated. I would also like to thank Ernst & Young for their support as consultants on the implementation of the Sandbox, to continue until February 2022, as well as all the colleagues from across the Bank’s Departments who contributed to the project with dedication and commitment and who, as of today, will assume the task of supporting its operation. The Bank of Greece attaches great importance to Innovation, all the more so as it expects that the end of the pandemic will shape a new social and economic reality, primarily digital, in which knowledge, scientific research, technology and innovation will be the main drivers of prosperity. With specific regard to financial services, the integration of technological innovation has become an undeniable reality, closely linked to technological progress and the use of new technologies in numerous business activities and social interactions. The financial system, incumbents and start-ups alike, is undergoing digital transformation at an increasingly faster pace. The pandemic has further accelerated this process, particularly in such areas as e-commerce, contactless transactions through cards or e-wallets and electronic money transfers in general, instant versions of which will soon become possible in Greece as well, once we join TIPS, the Eurosystem’s TARGET Instant Payment Settlement market infrastructure service. Businesses have been transforming both their internal infrastructures and processes and their channels of interaction with customers. This trend towards transformation is reinforced by growing demand for easy and quick access to all kinds of digital applications. Businesses can now enrich and develop their services by tapping into diverse data sources and big data analytics processes, until recently either unavailable or technically unfeasible. Digital transformation can strengthen competition and the supply of innovative products and services, often across borders. This means that businesses in smaller countries like Greece can penetrate international markets and obtain financing for their innovative ideas. Furthermore, the new financial technology ecosystem can function as an incubator for cooperation between incumbents and start-ups, benefiting all participants across financial sectors. Against this background of innovative technologies combined with financial services, regulators and supervisors are responsible for ensuring the smooth functioning of the market within their respective mandates. Innovation can bring about major changes in the way businesses operate and market their services, but with these changes come potential new risks. These risks involve specific aspects of technologies or how they are applied. Also, heavy reliance on technological infrastructures can increase vulnerabilities in terms of information security. The Bank of Greece, as an innovation facilitator through the establishment of the FinTech 1/3 BIS central bankers' speeches Innovation Hub in 2019, the adoption of relevant regulation, including on digital onboarding, outsourcing, PSD2, and now the launching of the Regulatory Sandbox, seeks to understand the various aspects of innovation and to help harness its potential, while limiting any inherent risks. In this context, I would like to focus on the three main reasons for implementing the Regulatory Sandbox. Regulatory Sandboxes are globally seen as mechanisms facilitating financial technology, just as Innovation Hubs are. As you probably know, the Bank of Greece has been operating its own Innovation Hub since 2019 and recently published a report on the second year of its operation. The primary objective of the Regulatory Sandbox is to provide an additional mechanism facilitating the supply of innovative financial services and products, while at the same time safeguarding the efficiency and stability of the financial system. It is important to note that, as is the case with similar initiatives of other authorities mostly in the EU, the Regulatory Sandbox that we are launching today is a regulated environment and should not be perceived as a testing ground where laws and regulations do not apply. Rather, its purpose is to enable market participants and the Bank to engage in a constructive dialogue that will translate into potential regulatory reforms and help to strike the right balance between financial innovation and risk reduction. As already seen from the queries we have received through the Innovation Hub, the integration of innovative technological features into financial services can give rise to uncertainty about the existence of a relevant regulatory framework or the applicability of the existing regulatory framework to a particular innovation. Two typical examples of such innovations are the ones based on distributed ledger technology (DLT) and the ones based on Artificial Intelligence (AI). Regarding the former (DLT), in September 2020 the European Commission adopted a proposal for a Regulation as part of its digital finance strategy. Regarding the latter (artificial intelligence), a proposal for a Regulation was adopted by the European Commission just recently. The second objective of the Sandbox is to enhance legal certainty, i.e. to clearly delineate the scope of the regulatory framework within which an authorised institution may deploy a service, also identifying possible points of friction or needs for additional regulatory initiatives. The third objective of the Regulatory Sandbox is to promote knowledge. In particular, collaboration with Sandbox participants will provide a two-way opportunity to disseminate and build up knowledge around financial technology. This knowledge will give us additional tools in order to inform our regulatory and supervisory approach, as and where appropriate. This can be done either on the initiative of the Bank itself, taking into account the relevant risks and the required risk management mechanisms, or in the context of EU legislation initiatives. By way of illustration, in 2020 the Bank’s Executive Committee adopted an Act on the terms and conditions for remote electronic identification of natural persons as part of a digital onboarding process. I should stress that the operation of the Regulatory Sandbox is an innovation, even for the Bank itself and a different, supplementary and structured approach to the exercise of its supervisory functions. Recognising the challenge that this poses, we will be constantly monitoring and reviewing the procedures that we have put in place, so as to ensure that these objectives are met in the best way possible. In later presentations today, you will have the opportunity to hear details about how to access the Regulatory Sandbox and how it works. I look forward to your feedback on this new innovation facilitation mechanism that we are launching today. Closing remarks 2/3 BIS central bankers' speeches In closing today’s event, I would like to thank all the speakers and participants for their attendance. In summary, the Regulatory Sandbox will enable supervised FinTech firms to test innovative solutions in a protected environment under the auspices of the Bank of Greece. Thus, it will serve as a further driver of FinTech and innovation in Greece, in addition to the Innovation Hub. Moreover, the Regulatory Sandbox will foster the market availability of innovative solutions, while safeguarding financial stability and the efficiency of the financial system. It will enhance legal certainty, particularly with regard to the application of the regulatory framework to innovative proposals. Meanwhile, the Regulatory Sandbox will enable the Bank of Greece to deepen its knowledge of financial innovation and, where appropriate, fine-tune its regulatory and supervisory approach accordingly. This major project would not have been feasible without funding from the European Union, support from the European Commission and the EBRD, as well as the technical support received from Ernst & Young. We owe you a big ‘thank you’ for supporting our vision, and it was a great pleasure to have you with us today. Again, I wish to thank the Bank of Greece staff for their hard work in achieving today’s milestone and for the support that they will continue to provide now that the Regulatory Sandbox has become operational. The Bank of Greece closely monitors developments in the area of innovation in Europe and the rest of the world, and will continue to do so in future. The Regulatory Sandbox was set up drawing on the operational features of similar schemes in other countries, including Lithuania, whose central bank we had the privilege of hosting on today’s panel. At the same time, the Bank of Greece is actively involved in European initiatives monitoring advances in financial innovation and reviewing relevant regulatory and supervisory developments. However, the work of the Bank of Greece in the area of innovation does not end here. As pointed out earlier, in the initial phase the Regulatory Sandbox will be intended for use only by authorised firms and for services authorised by the Bank of Greece. Further down the road, our goal is to expand the scope of the Regulatory Sandbox to enable non-authorised financial firms to test their innovative solutions. A future version of the Regulatory Sandbox could be expanded to institutions established in another EU Member State and operating branches in Greece, in cooperation with the supervisory authority of the home Member State. Furthermore, the current version of the Regulatory Sandbox relies on customised guidance and active dialogue as its primary tools. A future version of the Regulatory Sandbox could also benefit from other, more drastic tools, for instance the lifting of particular requirements, where permitted by law, or the granting of an authorisation under restrictions. In conclusion, as of today, the Bank of Greece will be accepting applications from FinTech firms for participation in the Regulatory Sandbox. We look forward to receiving the innovative ideas to be tested under our close guidance and support before they are put on the market. Once again, thank you for your participation in today’s event. 3/3 BIS central bankers' speeches | bank of greece | 2,021 | 12 |
Keynote speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Athens Circular Forum II, Athens, 31 May 2021. | Keynote speech by Yannis Stournaras, Governor of the Bank of Greece at the Athens Circular Forum II 31/05/2021 - Speeches It is a great pleasure to be here with you today and have the opportunity to share my thoughts on climate neutrality, circularity and sustainable finance. Economic growth has come at a growing cost to the environment. It is telling that humanity’s demand for ecological resources and services in a given year exceeds what Earth can regenerate in that year, in fact we need more than 1.5 planets to support our current consumption patterns.[1] Sustainability is therefore highly relevant for our generation, as well as for generations to come, and redefining the concept of growth in a sustainability context will be crucial for our future path. Under conditions of depletion of natural resources worldwide, a focus on more efficient use and minimisation of waste emerges as the only and urgent option. The model of a “linear” economy prevailing today (sourcing – manufacturing – usage – disposal), on which most economies since the Industrial Revolution have relied, is no longer sustainable. Just like nature, which operates in a “circular” manner, business activities can become sustainable by switching from the “linear” model to a “circular” one. Circular economy means that the value of products, materials and resources is maintained in the economy for as long as possible and waste generation is minimised. In changing the current extractive industrial model, the circular economy model aims to redefine growth and provide society-wide benefits by decoupling economic activity from the consumption of finite resources, by transitioning to renewable energy sources and by reducing the negative impacts of the linear economy. The development of circular business models will require innovation and structural change of production and consumption systems alongside technological change. For example, interventions on the supply side, such as eco-design and longer life cycles of products, as well as on the demand side, through a change in consumption and dietary patterns and a more efficient management of waste. This transition is expected to have a positive effect as the circular model builds economic, natural and social capital and represents a systemic shift that builds long-term resilience by generating business and economic opportunities, with environmental and societal benefits. According to UNEP, the transition to a circular economy could generate USD 4.5 trillion[2] in annual economic output by 2030. Financial institutions have a critical role to play, scaling up financing, accelerating the shift towards circular business models, managing related risks and exploring opportunities, such as the redesign and manufacturing process of products and services, digital solutions, waste management models, etc. At the moment though, financial institutions lack awareness of circularity and still need to develop expertise, products and services to harness opportunities. Of course, there is also an important role for governments and policy makers that need to provide incentives, policies and frameworks in order to integrate circularity into financial products and services alongside current planning for the transition to a carbon neutral economy. There is no question that climate change is today one of the most pressing sustainability challenges we are currently facing. In this context, the process of addressing climate change can undoubtedly be accelerated if established growth models are adjusted in order to ensure long-term sustainability. It is therefore important in tackling climate change to plan for a double transition, to a carbon neutral and circular economy. In this double transition, there are indeed certain risks. For example, transition risks as assets may become stranded or businesses that may incur costs and disruptions. Yet, a careful and timely transition will also open up opportunities, associated with innovation and new technologies, circular and renewable energy products, new processes, new infrastructure and new jobs. Although methodologies for calculating climate-related risks are still being developed, estimates suggest that the impact of these risks is likely to be significant. For example, the ECB has estimated that, on average, 15% of significant institutions’ exposures are to the most carbon-intensive firms and an abrupt transition to a low-carbon economy could have severe impact on climate-sensitive economic sectors.[3] Regarding physical risks, around 30% of the credit exposures of euro area banks are to businesses with high or increasing exposure to at least one source of physical risk. In this context, central banks and supervisors are progressively looking into playing an active role in the debate and working with banks to prepare for and manage climate risks. Indeed, as part of the strategy review the ECB is already exploring ways of taking the risk of climate change into account. It is clear however that since climate change poses risks to price stability, central banks could, within their traditional mandate, advance their efforts to support the transition to a sustainable economy and a resilient future. Central banks can help by considering how the physical and transition impact of climate change can be included in macroeconomic forecasting and financial stability monitoring. Also, central banks can help by integrating climate-related risks into prudential supervision, engaging with financial firms to ensure that climate-related risks are understood and integrated in risk management and investment. And, of course, central banks can help by including sustainability factors into own-portfolio management. Indeed, climate and sustainability have always been high on our agenda and I personally have been addressing those issues on every occasion.[6],[7] It is telling that the BoG, the ECB and the Bank of England, have been named the three most vocal central banks worldwide.[8] Also, recognizing the significant climate and environmental risks that the financial system is facing, we set up in 2009 an interdisciplinary committee of scientists, the Climate Change Impacts Study Committee (CCISC), a workgroup dedicated to the study of climate change in Greece. In tackling the climate crisis, the financial and the insurance sectors have an important role, supporting a sustainable economy and a more inclusive growth. Financial institutions can be drivers of change mobilising capital towards investment that supports societies’ goals. Sustainable finance can help by aiming to integrate environmental, social and governance (ESG) criteria into business and investment decision making. In the context of climate action, sustainable finance should also aim to mobilise capital towards investment for mitigation and adaptation policies. If we are to meet the Sustainable Development Goals of the United Nations and the objectives of the Paris Agreement, the financial sector needs to maximise its contribution and align itself with these goals. To this effect, the Bank of Greece is the 1st central bank worldwide to endorse the Responsible Banking Principles of the United Nations Environment Programme Finance Initiative (UNEP FI). The Principles for Responsible Banking[9] aim to define the role and the responsibilities of the banking sector in a sustainable future, where banks align their business practices with the global community goals and create value for the society. The Principles set out the criteria for responsible and sustainable banking, through a holistic evaluation of risks and opportunities stemming from banks’ activities. Furthermore, they encourage banks to identify and assess the effect of their asset allocation decisions and be transparent on their positive but also their negative impact on society and the environment. The Bank of Greece is also a member of the central banks and regulators' Network for Greening the Financial System (NGFS). The NGFS is a global organization currently consisting of more than 100 members and observers, committed to working together to improve the analysis and management of climate-related and environmental risks. The common objective is the strengthening of the global response required to meet the goals of the Paris Agreement and the enhancement of the role of the financial system in managing risks and mobilising capital for an environmentally sustainable development. At his point, I would also like to stress out the importance of resilience. Towards a sustainable and resilient future, scientific research and current developments confirm the need for a strategy and an action plan, spanning across multiple economic, social and environmental policy areas, to adapt to the changing climate. Climate change adaptation, as a process of adjusting to the climate impact in order to moderate the negative and enhance the potential positive effects of climate change is a crucial issue that promotes the resilience of our societies. On fostering climate change adaptation, we are currently working, under the coordination of the Hellenic Ministry of Environment and Energy and alongside key national actors, on the Life IP AdaptInGR, a programme that aims to guide the implementation of the National Climate Change Adaptation Strategy, with the overarching objective to strengthen the Greece’s resilience to the impact of climate change. The world today has an opportunity to build back better by embracing a greener pathway to COVID-19 recovery. One key structural change is to achieve this is by adopting circular economy approaches. To the question, “Are we building back better?” the answer is: not yet.[11] Over the next months and possibly years, it is estimated that countries will invest over $20 trillion to recover from the fallout of COVID-19.[12] These financial and investment decisions will determine to a great extent the future of our societies and our ability to respond to the environmental challenges that the world is already facing today. The pandemic recovery effort presents an excellent opportunity to reboot the economy, re-think, reskill and re-design a more inclusive, sustainable, circular and carbon neutral development pathway, aligned with the UN Agenda, the SDGs and the Paris Agreement. This is an opportunity we cannot afford to miss. Thank you. [1] https://www.overshootday.org [2] According to UNEP and Accenture, see more at https://www.unepfi.org/publications/generalpublications/financing-circularity/ [3] Keynote speech by Andrea Enria, Chair of the Supervisory Board of the ECB, at the European Central Bank Climate and Environmental Risks Webinar, Frankfurt am Main, 17 June 2020, https://www.bankingsupervision.europa.eu/press/speeches/date/2020/html/ssm.sp200617~74d8539eda.en [4] Keynote speech by Luis de Guindos, Vice-President of the ECB, at the joint ECB and European Commission conference on “European Financial Integration and Stability”, Frankfurt am Main, 27 May 2021, https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210527~6500964615.en.html [5] Interview with Christine Lagarde, conducted by Dominique Lecoq and Marc Aubault on 29 July and published on 31 July, https://www.ecb.europa.eu/press/inter/date/2020/html/ecb.in200731~7df348b85b.en.html [6] Statements by the Governor of the Bank of Greece on the occasion of the World Environment Day on June 5th 2019 https://www.bankofgreece.gr/enimerosi/grafeio-typoy/anazhthshenhmerwsewn/enhmerwseis?announcement=2d9a3a31-a62f-49a0-ab3c-4bfb9acc6267 and June 5th 2020 https://www.bankofgreece.gr/enimerosi/grafeio-typoy/anazhthsh-enhmerwsewn/enhmerwseis? announcement=17fce009-57ce-4a7e-bda6-65145811ec27 [7] OMFIF Special Report: Central banks and climate change, https://www.omfif.org/wpcontent/uploads/2020/02/ESG.pdf [8] OMFIF tweet following the Special Report: Central banks and climate change https://twitter.com/OMFIF/status/1156559680120008704 [9] The Responsible Banking Principles of the United Nations Environment Programme Finance Initiative https://www.unepfi.org/banking/bankingprinciples/ [10] https://www.banque-france.fr/en/financial-stability/international-role/network-greening-financialsystem [11] “Are we building back better?” March 2021, UNEP report https://wedocs.unep.org/bitstream/handle/20.500.11822/35281/AWBBB.pdf [12] https://www.unenvironment.org/news-and-stories/story/learning-green-recovery | bank of greece | 2,021 | 12 |
Talking points by Mr Yannis Stournaras, Governor of the Bank of Greece, at the EUROFI High Level Seminar 2022, Paris, 28 February 2022. | Yannis Stournaras: Normalising monetary policy in the euro area Talking points by Mr Yannis Stournaras, Governor of the Bank of Greece, at the EUROFI High Level Seminar 2022, Paris, 28 February 2022. * * * What we observe today is mostly supply-side inflation. In fact, the acceleration of inflation mainly reflects two interrelated supply-side shocks: One comes from the pandemic. Actually, we had a series of pandemic shocks, then we had an energy shock, and finally we have the invasion of Russia in Ukraine, which, regarding its economic implications, is also a supply-side shock. In the short term, its implications are stagflationary, but, in the medium term, the implications are deflationary, depending of course on the resolution of the uncertainty. We do not know much about the resolution of the Ukrainian crisis at this moment, so we have to be cautious. In light of these supply-side bottlenecks and shocks that we observe and our supportive monetary and fiscal policies, we have witnessed an excess of demand over supply. This has taken place not only in the euro area but also in much of the world, including the US, which has undertaken a much larger fiscal stimulus than we actually have. The excess demand has pushed up the prices of energy products, including oil and natural gas. Natural gas prices have also been affected very much by the invasion of Russia in Ukraine and are likely to increase even more in the future. This is why the above-mentioned supply-side shocks have been interrelated. It is not a coincidence that the oil price shock has occurred at precisely the same time as the COVID shock. Of course, as we are approaching the end of the pandemic, the supply disruptions will diminish – a process that has already started. Combined with the gradual elimination of excess demand, the energy shock is likely to subside. However, the Ukrainian crisis and its resolution is likely to delay this. In light of this situation, the ECB’s projections and the forecasts of all the major financial institutions, of which I am aware of, show that consumer price inflation will converge to 2% in the next two years. Also, forward measures of inflation, such as the 5 year- 5year inflation swap rate, as well as the euro area ten-year benchmark bond yield, are consistent with our 2% medium-term inflation target. Finally, there is yet no evidence of sizable second-round effects in the labour market. Summing up, inflation will remain elevated for longer than we have thought, but is expected to decline to levels compatible with our price stability objective in the medium term. As you know, monetary policy is not well suited to tackle supply-side shocks. It can do it, but at a high cost for output and employment. In my view, we have so far chosen the right monetary policy path. Of course, we are going to continue reviewing the evidence in our next meetings, especially the economic and financial implications of the Ukrainian crisis. If needed, we will not hesitate to decide the next steps regarding the normalisation of monetary policy. On green transition that you mentioned: This is one of the megatrends that we observe. However, we also observe many other megatrends, like the digital transformation and the ageing 1/2 BIS central bankers' speeches of the population. I have no doubt that, in the medium term, green energy will produce lower energy prices than fossil fuels, but in the short term there are transition costs, which have to do with the fact that we have not yet secured storage capacity for electricity produced from green energy. That is why we are so much dependent on natural gas. As a consequence, in the short term the transition to green energy will cause a relative price change, which will elevate the general price level. Let me first reassure you that the Governing Council will do “whatever it takes” to achieve our medium-term price objective. Consequently, if we see prospects of inflation exceeding our target in the medium term, we will act accordingly in March or later. But we will review the evidence carefully, since we do not want to repeat past mistakes of tightening too early, especially in the face of such an important supply shock like the one caused by the Ukrainian crisis. Second, on credibility: Αfter so many years of QE, medium-term inflation expectations are 2% or below. At the same time, wage contracts in the euro area are consistent with our 2% inflation target, taking into account productivity growth. These imply that the credibility of monetary policy and of our 2% inflation target is very high. Third, on real interest rates: Central banks can control only nominal monetary magnitudes, not real ones. We should also not forget the equilibrium real interest rate, which is determined by market forces, especially the balance between savings and investment. Before the pandemic – I need to remind you – we had agreed that the equilibrium real interest rate was zero or even negative. Has this changed? What are the fundamental forces that could have produced such a change? Personally, I am not convinced at all that the deflationary tendency that we witnessed for a number of several years in the euro area before the pandemic has now turned into an inflationary one. As I mentioned earlier, the inflation surprise that we have recently observed has to do with supply-side shocks. Fourth, on the relationship between the growth rate of money supply and inflation: Αs we all know, this relationship is not stable; it has broken down in the past. Have you noticed for instance that, despite the very high growth of money supply recently, inflation expectations have stayed anchored at below 2%? This is extremely important. Having said that, I can also tell you that I do not belong to this school of economists that totally ignore money supply. I actually believe that the economy is being governed by aggregate demand and aggregate supply forces and money is part of the aggregate demand forces. However, under certain circumstances, money does not matter, in the sense that it cannot affect economic variables. Keynes for instance had talked about the “liquidity trap”. In addition, we know from various variations, old or new, of the Mundell–Fleming model, that there are conditions under which money supply does not matter. So let’s not be dogmatic either way. There is no doubt that in the long-term inflation is a monetary phenomenon, but the “long term” might actually be too long! Fifth, we should not forget that monetary tightening in the eurozone will start in June, with the likely repayments of TLTROs. Finally, I want to reassure you once again that we will do “whatever it takes” to safeguard price stability. 2/2 BIS central bankers' speeches | bank of greece | 2,022 | 3 |
Opening remarks (virtual) by Mr Yannis Stournaras, Governor of the Bank of Greece, at the joint seminar of the Bank of Greece and the European Investment Bank, 2 March 2022. | Yannis Stournaras: Investment in Greece post-Covid-19 Opening remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the joint seminar of the Bank of Greece and the European Investment Bank, virtual, 2 March 2022. * * * I am happy to welcome you to the joint seminar of the Bank of Greece and the European Investment Bank. Over the past years, the EIB Group had a crucial contribution in unlocking financing and promoting high-impact investments across Greece. In close cooperation with leading Greek banks and other partners, Greece benefited more than any other country from the EIB’s unique technical expertise, financial strength and environmental best practices. This seminar on investment and financing of the economy takes place at a time where both these elements are of paramount importance for the Greek economy, i.e. after the pandemic crisis and the debt crisis, in order to succeed a swift recovery and sustainable growth over a longer horizon. Economic activity is currently recovering from the recession caused by the pandemic and the lockdown measures adopted in 2020. The Greek economy experienced the second biggest recession in the Eurozone at –9% in 2020 but the pace of recovery is equally impressive. Economic activity is estimated to have recovered in 2021 strongly, up by 8.8%, with the expansion of the vaccination programme and the gradual return of social and economic life to normalcy. For 2022, a growth rate of around 4.7% was envisaged just before the invasion of Russia in Ukraine. Domestic demand will be the key driver of growth, mainly private consumption and investment. The external sector will contribute positively, but to a much lesser extent. The invasion of Russia in Ukraine creates an important supply side shock, which affects output negatively and increases energy prices in particular, but it is still rather early to estimate its impact. This will depend, among others, on the fiscal and monetary policy response at the European level, which is still not determined. The measures taken by the ECB, coupled with the supervisory flexibility provided by the SSM, have led to a significant improvement of liquidity in the banking system. The inclusion of Greek government bonds in the Pandemic Emergency Purchase Programme of the ECB and the easing of collateral standards applied to Eurosystem refinancing operations allow the supportive monetary stance in the euro area to be transmitted more effectively to the real economy. The Bank of Greece projects that the growth rate of potential output ten years from now will be close to 2%. But over the coming years, the Greek economy is expected to grow at rates higher than potential for a number of reasons. First, private sector savings (including net capital transfers) are unusually high, averaging around 15% of GDP in 2021 from 6% of GDP on average in the five years before the covid-19 pandemic. This is the result of higher precautionary savings, a postponement of consumer and other spending, State aid and moratoria on loan/tax obligations. The high savings are reflected in the increase in private sector deposits by 34 billion euros – i.e. 20% of GDP – from March 2020. The gradual de-escalation of the high savings rate will boost domestic demand and especially private consumption. Second, Greece will receive approximately € 30.5 billion from the Resilience and Recovery Fund. NGEU funds are targeted at growth-enhancing high value-added projects in the areas of energy saving, the transition to green energy, the digital transformation of the public and the private sector, employment, social cohesion, and private investment and will be disbursed upon conditionality. Channeling these resources to sustainable investment projects will boost real GDP by 7% by 2026 and will contribute to the increase of employment, private investment, 1/3 BIS central bankers' speeches exports and tax revenue. At the same time, Greece will receive 40 billion euros from the Structural Funds over the coming years and also increased foreign direct and indirect investment is expected to be attracted. It is also noted that, in the medium term, the prospects for high growth rates arise not only from the expected investments but, more importantly, from the increase in productivity that will be caused by the reforms envisaged in the National Recovery and Sustainability Plan “Greece 2.0” – market liberalization, privatizations and increased investment in education – as well as the digital and green transition. Third, the increased ability of the banking system to contribute to the financing of viable investment projects. The stock of deposits in the Greek banking system is currently around 176 billion euros, i.e. at the level of September 2011. Moreover, during the past few years, the financial fundamentals of Greek banks improved significantly. Compared to March 2016, the stock of non-performing loans was reduced by more than 50%, mostly through securitizations with the use of the Hellenic Asset Protection Scheme. Banks managed to eliminate their reliance on the Emergency Liquidity Assistance and regained access to the wholesale markets, issuing senior unsecured notes and capital instruments. Two systemic banks also managed to tap the capital markets and executed successful share capital increases in 2021. Currently, banks enjoy adequate liquidity and capital buffers that can allow them to provide lending to the real economy. Still, the NPL ratio remains the highest in the Eurozone and is an impediment to credit expansion, especially to small businesses where the credit risk is higher. Securing financing for investment in Greece is crucial in order to meet future challenges. Investment has declined dramatically during the global financial and debt crisis and has not recovered significantly since. In 2020, investment in Greece stood at close to 12% of GDP whereas the Euro area average was almost 22% of GDP. Greece obviously needs an investment shock to augment the eroded capital stock, increase productivity and overcome output hysteresis. Investment has recovered sharply in the first three quarters of 2021, supported by a significant increase in bank credit to nonfinancial companies since the start of the pandemic. And the EIB has played an important role to that since, together with the European Investment Fund, provided support for private and public investment of 4.85 bn euros. This is a significant increase from the previous record of 2.8 bn euros delivered in 2020. EIB Group financing in Greece represented 2.7% of national GDP, the largest engagement in any country worldwide. As regards non-financial corporations, in 2021 more than 10% of new bank business loans were supported by financial instruments related to the EIB or the EIF. Looking ahead, the role of the EIB will remain crucial. Following the agreement between EIB and the Ministry of Finance, EIB will manage 5 bn euros in the context of the National Recovery and Resilience Plan. Via this agreement, the EIB will utilize funds of the RRF Loan Facility for onlending to private investments. The RRF loan facility will cover up to 50% of each investment project, while the remaining amount will be covered by EIB’s and beneficiaries’ own funds. Greece will benefit from the technical, economic and financial expertise of the EIB in identifying high-impact projects and effective structures, which will significantly contribute to make the best use of the RRF funds. Greek businesses and entrepreneurs will also benefit from access to financing as a result of the partnership between the country’s systemic banks and the EIB Group under the European Guarantee Fund (EGF). Under the EGF program, a total of 2.7 bn euros of guarantees provided to Greek banks will help companies across the country with sustainable business plans to recover from covid-related challenges. The agreement includes also the first ever EIB intermediated operations to strengthen access to finance by large corporates, broadening the EIB’s support for the real economy in the country. Challenges remain, both in the short and the long run. Of immediate relevance is to maintain credit provision to the real economy, restore fiscal sustainability as the economy rebounds and to further reduce the high stock of non-performing loans. In the medium to long run, the main 2/3 BIS central bankers' speeches challenges are to close the large investment gap, accelerate the pace of the privatisation and reforms programme, continue to improve the management of state assets, attract foreign direct investment, promote innovation, education and knowledge-based capital and make the digital and green transformation a success. A particular challenge is to create new banking products in order to provide credit to viable small and medium sized enterprises which, for various reasons, have difficulties in accessing bank credit. With responsible fiscal policies and commitment to implementing reforms, the Greek economy can ensure sustainable long-term growth. And we are happy that EIB will be our partner in that effort. 3/3 BIS central bankers' speeches | bank of greece | 2,022 | 3 |
Welcome speech by Mr Yannis Stournaras, Governor of the Bank of Greece, to the members of the Supervisory Board (SB) of the Single Supervisory Mechanism (SSM) and their spouses, on the occasion of the SB meeting in the Bank of Greece, Piraeus, 12 May 2022. | Welcome speech to the members of the Supervisory Board (SB) of the Single Supervisory Mechanism (SSM) and their spouses, on the occasion of the SB meeting in the Bank of Greece 12 May 2022, by Yannis Stournaras It’s a great pleasure to welcome you here tonight on the shores of Piraeus, just a few miles from the straits of Salamis, where some 2,500 years ago, in 480 BC, a Greek fleet defeated the much larger naval force of the Persians, in what is considered to be one of the most decisive naval battles in history. Nevertheless, its usual portrayal, as a clash between East and West, overshadows some of the finer details, notably the bitter conflict and dissent between the allied Greek city-states, right up to the eve of the battle. It was only in the face of an existential threat, in the form of King Xerxes’s formidable fleet, that divergent interests gave way before a common objective, but only briefly. Briefly, because not long after the spectacular Greek victory in Salamis, democratic Athens and oligarchic Sparta locked horns in the deadly Peloponnesian War, which lasted from 431 BC to 404 BC, devastated Athens and marked the dramatic end to the 5th century BC and the golden age of ancient Greece. The pattern should be familiar. All of us are proud of the speed and coordination with which the Eurozone responded to the recent pandemic, not least because it was perceived as a symmetric, external shock. Few of us would be proud of the way the fallout from the Great Financial Crisis was addressed in the Eurozone, not least since its impact was asymmetric and conditioned by internal factors. And most of us would admit that – once the urgency of each crisis subsides – momentum is lost and much needed reforms get bogged down by divergent national priorities. Despite formidable progress, key aspects of our banking union remain in limbo; without them, there is little prospect of making headway towards greater integration in the Eurozone. None of this is new. The generals meeting on Salamis to debate strategy on the eve of the battle would probably feel quite at home in some of the meetings in Brussels or Frankfurt – although they would probably complain about the weather! After all, European integration began in common defence against a perceived existential threat, during the Cold War. Ever since, it has been propelled forward in response to a succession of threats and crises. This was certainly the case in both the examples I just mentioned, which produced landmark institutional reforms, including the SSM, which has brought us here this evening. The process may well continue in the face of the war in Ukraine and its geostrategic and energy implications for Europe. Incidentally, if this terrible war continues and sanctions are extended to energy imports, the European Union, which is a large net energy importer from Russia and shares borders with Ukraine, may face acute economic and financial stability risks, which are not yet incorporated into our models. But can we afford to continue moving forward in this pattern of reform-through-crisis? I am not sure we can. The world around us is changing. We have all heard about de-globalisation. Personally, I find the term somewhat misleading since important globalising forces are still at play today. But there is little doubt, concerns over supply chain security and diversification are becoming more dominant, increasing the need to provide a regional counterweight. This is the familiar theme of open strategic autonomy. In a recent speech at the Peterson Institute, President Lagarde argued that the European Union is “well placed to succeed in a world where the global order is more fragmented”, because of its large internal market and experience in arbitrating disputes between countries. True, but much more needs to be done to make the arbitration process and consensus-building more effective. The stakes are not just financial. As popular discontent and reaction to globalisation continue, they challenge some of the foundational principles of the democratic, rules-based order that we have taken for granted in the West. Reform through crises, particularly ones prolonged by squabbles between Member States, not only undermines Europe’s role on the international scene, but also weakens social cohesion, fuelling anti-European sentiment and extremism. In this context, I am not sure we can afford – either financially, socially or politically – to keep relying on the same crisis-reacting propulsion mechanism. A multipolar and partially de-globalised world order, is one where the Eurozone needs to act proactively, not re-actively. No doubt, most of the action required is political and rests with institutions beyond the central banks and supervision authorities. But let’s not underestimate the role these can play. First of all, there are several areas of financial integration where reforms have stalled. It’s never polite to talk shop at dinner, so I won’t go into details, but we are all aware of the missing components of our banking and capital market union. The recent revival of the European Deposit Insurance Scheme (EDIS) is a step in the right direction, but not the only one needed. Both banking crisis management and the bank resolution processes need reforms, not least since the existing schemes impose undue burdens on smaller institutions, while segmentation across multiple decision-makers undermines efficiency. Another area where proactive involvement may be necessary is the ongoing technological revolution that is sweeping so many areas of finance. In this context, again, the MiCA regulation currently under deliberation deserves special attention, not least since this is an area where Europe could aspire to generate the next wave of the “Brussels effect”, i.e. set the standards and rules for other parts of the world. Our potential contributions, however, extend beyond our immediate remit. Inasmuch as institutional independence allows us to take a more long-term view, central bankers are well-placed to push for a more far-sighted approach. Take fiscal federalism and debt mutualisation, both historically contentious issues. Many, including Germany’s current chancellor have described the Next Generation EU decision as Europe’s Hamiltonian moment, an opportunity to combine EU fiscal capacity with common rules and conditionality. There is little doubt the NGEU constitutes a tremendous opportunity, but it is still built as a temporary crisis response. For it to become a landmark reform, it needs to be transformed into a permanent mechanism, combining fiscal centralisation with supervision. That’s bound to cause some friction, within and between Member States, and require major compromises, of the sort that traditionally require the arrival of the Persian fleet – or a global pandemic. My point is that we cannot afford to wait for that. We should be proactive and prompt this discussion early on, starting with our own national audiences and governments, which need stand up to the fiscal challenges posed by the rise in overall debt. These discussions won’t be easy and there will no doubt be moments of tension. But it is our responsibility to make sure they start early. To go back to the eve of the battle of Salamis, one historical source tells of a moment when the Spartan commander-in-chief, Eurybiades, became so enraged with Themistocles, the Athenian general, that he raised his staff to strike him on the head. Themistocles looked at him calmly and said: “ Strike me, if you will, but listen to me.” According to Plutarch, the Spartan commander was so taken aback by Themistocles’s reaction that he backed down and let him persuade the council of his winning strategy. I can’t promise you the outcome of all discussions will be the same. But I think it is increasingly important that central bankers speak up on these matters, even if what we have to say is unpleasant to and opposed by at least some domestic national audiences. Many of us are no strangers to raised staffs – at least metaphorical ones. But tonight we are in friendlier company, and with no Persian fleet in sight, let’s raise our glasses instead, and toast to peace, social prosperity and to the health of our common currency which connects us all, the euro. | bank of greece | 2,022 | 5 |
Welcome address by Mr Yannis Stournaras, Governor of the Bank of Greece, at a formal dinner in honour of Jean-Claude Juncker, former President of the European Commission and former Prime Minister of Luxembourg, on the occasion of his election as honorary member of the Academy of Athens, 18 May 2022. | Welcome address by Bank of Greece Governor Yannis Stournaras at a formal dinner in honour of Jean-Claude Juncker, former President of the European Commission and former Prime Minister of Luxembourg 18/05/2022 - Speeches on the occasion of his election as honorary member of the Academy of Athens. It is a great pleasure and privilege for the Bank of Greece to welcome President Jean-Claude Juncker, on the occasion of his election as honorary member of the Academy of Athens. We welcome a great European statesman and a great friend of Greece. A man who has contributed so much to Greece staying in the Eurozone in 2012 and 2015, as I have witnessed first-hand in these difficult years, first as Minister of Finance and then as Governor of the Bank of Greece. A statesman who, during his long years of service in senior government positions both in Luxembourg and at European institutions, proved to be one of the staunchest champions of European integration and one of the strongest leaders who handled successfully the crises that the Eurozone faced over the last several years. A visionary leader who contributed enormously to the creation of our common currency, the euro, who strongly believed in it since its inception and fought hard to ensure its stability throughout these years. Born in Luxembourg, a country in the heart of Europe, our dearest Jean-Claude realised at a young age that the future of Europe lies in the close cooperation of its member-states and mainly in the gradual integration of national policies and rules. Having left his mark on his country’s politics, he rose to top positions in the European Union and, in this capacity, worked hard on European integration. He is one of the great Europeanists, following in the footsteps of Helmut Kohl and François Mitterrand, with his firm conviction that European integration is the only way forward and that this path is irreversible. President Juncker was one of the most consistent and influential advocates that Greece could solve its fiscal problems within the Eurozone, rather than outside, as some sadly wanted at the time. He strongly resisted the idea that Greece should be sacrificed like Iphigenia to allow the fleet to sail. This was due not only to his expressed love for Greece and its heavy cultural heritage, but mainly to his strong belief in the European values and in the basic principle of keeping the Eurozone together. He fervently defended Greece’s place in the European family, by deeply understanding and recognising the efforts that the Greek people had made to preserve the country’s hard-won place. I believe this is his greatest contribution, as far as we Greeks are concerned. We owe him a lot. Last, but not least, I want to thank Prime Minister Kyriakos Mitsotakis, who came here tonight almost directly from his flight back to Greece from his trip to the United States, in order to honour our guest, President Jean Claude Juncker. Thank you. | bank of greece | 2,022 | 5 |
Opening remarks (virtual) by Mr Yannis Stournaras, Governor of the Bank of Greece, at the "Adaptation Finance in Greece" online workshop "Current challenges and the role of the financial sector", co-hosted by the Climate Change and Sustainability Centre of the Bank of Greece, the Ministry of Environment and Energy and the Green Fund, 24 May 2022. | Speech Opening remarks by Governor Yannis Stournaras at the “Adaptation Finance in Greece” online workshop “Current challenges and the role of the financial sector” 24/05/2022 - Speeches Co-hosted by the Climate Change and Sustainability Centre of the Bank of Greece, the Ministry of Environment and Energy and the Green Fund. It is a great pleasure to be here with you today in this first of our new series of events on adaptation financing. Climate crisis is a rising threat to our wellbeing and a healthy planet – therefore οne of the world’s top challenges. We need to act without further delay, to mitigate climate change, but also to adapt to the increasing climate risks and turn this challenge into an opportunity. A flagship report of the Global Commission on Adaptation estimated that investing 1.8 trillion US dollars from 2020 to 2030 in areas such as climate-resilient infrastructure could generate 7.1 trillion US dollars net benefits. These benefits relate to avoided losses, but also to economic benefits, such as increased productivity and safety, together with social and environmental benefits. our efforts in financing adaptation. Hence, we need to scale up But what role can central banks play in tackling climate change? Governments have the primary responsibility to act on the climate crisis. However, central banks – including the Bank of Greece and the Eurosystem – cannot ignore this threat, as climate change may affect our ability to achieve our mandate for price stability, as well as for safeguarding our financial system. On this basis, at the Governing Council of the European Central Bank, we agreed last summer on a comprehensive action plan, with an ambitious roadmap to further incorporate climate change considerations into our policy framework and to more systematically reflect environmental sustainability considerations in our monetary policy. Turning to our national actions, the Bank of Greece is one of the first central banks to address climaterelated issues. Our journey started in 2009 when we established the interdisciplinary Climate Change Impacts Study Committee, a committee of scientists that has been studying the economic, social and environmental impact of climate change in Greece. A more recent milestone was the establishment of the Climate Change and Sustainability Centre of the Bank of Greece in 2021, in order to coordinate climate-related actions across the Bank and to incorporate sustainability considerations in our operations. Following that, in the context of the COP26 in November 2021, the Bank of Greece announced a pledge with several actions to contribute, within its field of responsibility, to the global efforts of central banks and supervisors towards greening the financial system and managing climate-related risks. On the adaptation front, our contribution in the design of the national strategy on adaptation to climate change in 2015 has been of major importance in paving the way for adaptation measures. Our current participation in the Life-IP programme adaptivgreece, reinstates our commitment. A commitment, within the remit of our mandate and alongside central banks around the world, to act as a catalyst in the financial system, to accelerate the transition to an environment-friendly, carbonneutral economy and to enhance, through adaptation, society’s resilience to climate change risks. I hope we have an insightful and fruitful event. Thank you. [1] Adapt now: a global call for leadership on climate resilience [2] Contribution by Isabel Schnabel, Member of the Executive Board of the ECB, to the International Monetary Fund’s magazine Finance and Development, August 2021 | bank of greece | 2,022 | 6 |
Welcome keynote address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Central Banks Payments Conference "The Payments Landscape (EU - Greece)", Athens, 28 June 2022. | Speeches Welcome – keynote address by Bank of Greece Governor Yannis Stournaras at “The Central Banks Payments Conference”, titled: “The Payments Landscape (EU - Greece)” 28/06/2022 - Speeches It is a great pleasure for me to be here with you today, to welcome this great audience, coming from all continents for this important event. It is an honour for me to address so many different experts, representing the whole spectrum of payments in the international scene, both from the central bank community and the industry. Payments and payment systems constitute a core area of interest for central banks. They constitute the platform for the execution of monetary operations, and they provide the basis of trust and confidence for all citizens, when using the currency in their transactions, every single day and time. Today, more than at any time in the past, we are at a critical point as regards central banks’ policies in payments: -Technology in this area is evolving fast, faster than ever; -innovation and transformation are the norm, not the exception; -the universe of players and actors in the payment industry has become vast and diverse; -and different industries (beyond the financial sector) are striving for a role in the payments landscape. The Eurosystem has demonstrated important work and achievements in both wholesale and retail payments. The cornerstone of its retail payments policy in the last two decades had been to promote cashless payments, especially via the SEPA and other initiatives, harmonization of market practices and a coherent oversight approach. But today we are far beyond that point, as we are facing new challenges: to respond to the need for more innovation, more speed and convenience, and also to ensure broader access of all citizens to innovative payment instruments. At the same time, the challenge is to preserve the crucial role of central bank money across the chain of the payment spectrum and maintain public trust and confidence in the use of the currency. This becomes more and more important as we observe constant contraction in the use of cash, which today constitutes the only form of central bank money from the retail payments perspective. And perhaps even more important in a backdrop of the development of alternative, private instruments and schemes that operate outside the perimeter of monetary sovereignty. Eurosystem’s initiatives to address such new challenges are well known. There are policies in support of instant payments, actions to enhance wholesale payment services, and work in progress related to the potential introduction of a digital euro. It is also taking part in the broader effort of the central bank community to enhance interoperability between different systems and schemes at the international level. The Bank of Greece is a warm supporter of such initiatives. And in what regards the payments environment in Greece, it takes concrete actions, using the full potential of its different institutional roles – as policy maker, as system operator and as fiscal agent of the Government. The Bank of Greece is keen, in that context, to make use of this particular momentum of a broader effort that is now unfolding to digitalize the functions of the Greek public sector. Historically, the Bank of Greece had the role of initiator for critical infrastructure projects in the financial sector, among which was the setting up the Greek retail payment scheme. And today the central bank remains the main actor behind the particular scheme’s constant innovation and integration in the EU payments landscape. An important milestone, in this context, has been the adherence to TARGET Instant Payments scheme (TIPS) at the end of 2021. Another important milestone coming soon is the Bank of Greece’s launch of SEPA-Instant for government-related payments, whereby the central bank will become a TIPS participant on behalf of the government. The plan is to bring instant payments to the citizens’ everyday interactions with public sector entities and will be established very soon. In a broader perspective, the Bank of Greece has recently adopted policies to embrace innovative projects and ideas, through its newly established innovation hub and the activation of a regulatory sandbox. The Bank of Greece has partnered also with other institutions (such as the EBRD) in the context of such initiatives, with the aim to support an ecosystem of new and innovative market players, primarily in payment-related areas and promote new areas of collaboration with the market. As regards the broader payment landscape and payment habits in Greece, it is important to note that changes have taken place in the last 5 years: -a constantly strong move towards cashless payments – with card payments still dominant in that move; -large increase in digitalization of financial transactions, with efficiency gains for all parties involved -introduction of innovative instruments and applications with new players in the market. Greece’s infrastructure of extended point-of-sale networks, already in place for many years, has attracted strong market interest from the merchant acquiring business perspective. In that respect, several acquisitions have recently taken place and new institutions are being licensed and established. Instant payments are also progressing in Greece – though at a slower pace, as observed also elsewhere in Europe. We know there will soon be legislative action from the European Commission, which is expected to help in the expansion of instant payments. We are looking forward to this action, later in summer, as it is to address impediments and enhance public confidence in the instrument. Broader adoption of instant payments is, in my view, crucial for the payments landscape, particularly in Greece where the Instant feature can become a game changer in the effort to reduce the use of cash – which remains significant in the country. Seamless cross-border use of the instrument, now made possible by TIPS, and strengthening of legal certainty (to be addressed by new EU legislation) are of essential importance. The adoption of instant payments in Greece can bring clear benefits: speed and efficiency, facilitation of various commercial transactions, removal of red tape, rationalization of public sector procedures, reduction of tax - evasion. We are therefore supportive of all relevant work done at the level of the Eurosystem and the European fora. Such issues, together with many other topics, will probably be the subject of your proceedings during this conference. In the area of payments, cooperation and interaction of central banks with the private sector is key, and this conference is suitably designed to bring both sides on the stage and set the ground for a fruitful dialogue. I hope the city of Athens will provide the surroundings for productive discussions and interesting conclusions in the following days. Again, a warm welcome to all of you. And my best wishes for success in this year’s conference! | bank of greece | 2,022 | 6 |
Remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 22nd Rencontres Économiques d'Aix-en-Provence, Aix-en-Provence, 10 July 2022. | Home / News and media / Newsroom / News list / News Speeches Remarks by Governor of the Bank of Greece Yannis Stournaras at the 22nd Rencontres Économiques, d’Aix-en-Provence 10/07/2022 - Speeches “Beyond Risk Reduction and Risk Sharing: Remarks on the Transformation of Economic Governance in Europe” The Russian invasion of Ukraine on 24 February 2022 has brought the European Union (EU) and the western developed world as a whole in front of the greatest challenge since the end of the Cold War. The military conflict has unpredictable consequences not only for the global and the European economies, but also for international geopolitical stability, security, peace and cooperation. It triggers tectonic shifts in world politics and urgently calls for an update of the EU’s security architecture, as well as for action to defend European values and institutions. Shoring up the European economy against the effects of this new shock and preventing an interruption of the ongoing recovery are key priorities for the current economic policy at the European level. The magnitude and duration of these effects will depend on how the war unfolds, on the impact of the current sanctions and possible further measures and on the response of fiscal and monetary policies. The rupture in EU-Russia relations will inevitably have lasting and far-reaching impacts on the European economy, particularly in terms of energy, defence and security, while the largest refugee crisis since 2015 is unfolding, this time with flows coming from within the European continent. Russia’s war against Ukraine is heightening the geopolitical tensions between the US and the EU, on the one hand, and Russia, on the other. It is a new, major exogenous supply-side shock to the economies of the EU Member States that also affects, through various channels, aggregate active demand. It occurred at a very critical time, when economies were rebounding globally from the two-year health crisis and the ensuing severe recession. Apart from the incalculable human cost, the conflict has significant adverse effects not only on the economy in the wider region, but also on the global economy. It exacerbates the already strong inflationary pressures through further rises in energy prices and a new wave of medium-term price increases in metal commodities and basic consumer goods, notably in the food supply chain; it erodes investor and consumer confidence and disrupts global trade and the international financial system. Globalisation is in fact reversing. The result is a slowdown in the European and the global economy and rising prices and interest rates. As far as the EU economy is concerned, a direct effect is higher inflationary pressures persisting for much longer than previously expected. The war and the associated economic sanctions have caused energy prices to soar from already high levels, on the back of the EU’s very high energy dependency on Russia, as well as increases in the prices of metal and food commodities. Higher production and transport costs are passed through to final prices and feed into headline inflation, weighing on consumers’ real disposable income. Lower consumer spending by households and declining corporate profitability, combined with heightened investor uncertainty entailing the risk of cancellation or postponement of investment decisions, all result in a slowdown in economic growth. In other words, while European countries are gradually exiting the pandemic, they are faced with a new risk, that of inflation. Soaring energy and other commodity prices, as well as the actions necessary to meet the ambitious green transition targets set by the EU, could give rise to pressures for nominal wage increases in order to protect the purchasing power of household incomes. This could lead to an entrenchment of inflationary pressures and expectations, which, together with heightened uncertainty, are the most important short-term threats to the recovery of the European economy. Against this background, the main challenge for economic policy currently is how to prevent a temporary inflation from becoming structural, which would create stagflationary pressures in the European economy, and how to mitigate the negative effects on households’ purchasing power and on corporate profitability without jeopardising the ongoing economic recovery. There is no doubt that the world around us has changed. Concerns over supply chain security, energy security and diversification have become dominant, increasing the need to provide a regional counterweight. This is the familiar theme of open strategic autonomy. In a recent speech at the Peterson Institute, President Lagarde argued that the European Union is “well placed to succeed in a world where the global order is more fragmented”, because of its large internal market and experience in arbitrating disputes between countries. True, but much more needs to be done to make the arbitration process and consensus-building more effective. The stakes are not just financial. As popular discontent and reaction to globalisation continue, they challenge some of the fundamental principles of the democratic, rules-based order that we have taken for granted in the West. Reform through crises, particularly ones prolonged by squabbles between Member States, not only undermines Europe’s role on the international scene, but also weakens social cohesion, fuelling anti-European sentiment and extremism. In this context, I am not sure we can afford – either financially, socially or politically – to keep relying on the same crisis-reacting propulsion mechanism. A multipolar and partially de-globalised world order, is one where the Eurozone needs to act proactively, not re-actively. First of all, there are several areas of financial integration where reforms have stalled. We are all aware of the missing components of our banking and capital market union. Despite the strong efforts of the Eurogroup Chairman Paschal Donohoe, the Eurogroup has neither been able to agree on the establishment of a European Deposit Insurance Scheme (EDIS) nor to reform both banking crisis management and bank resolution processes, not least since the existing schemes impose undue burdens on smaller institutions, while segmentation across multiple decision-makers undermines efficiency. A number of member-states wish to see risk reduction measures first before agreeing on risk sharing ones. Other member-states wish to see exactly the opposite. But why not agreeing on risk reduction and risk sharing measures simultaneously? Perhaps allowing a specific time horizon for their full implementation? That, after all, would be a win-win solution! Regarding fiscal federalism and debt mutualisation, both historically contentious issues, many, including Germany’s current chancellor, have described the Next Generation EU decision as Europe’s Hamiltonian moment, an opportunity to combine EU fiscal capacity with common rules. There is little doubt the NGEU constitutes an important opportunity, but it is still built as a temporary crisis response. For it to become a landmark reform, it needs to be transformed into a permanent mechanism, combining fiscal centralisation with appropriate rules. That’s bound to cause some friction, within and between Member States, and require major compromises. We cannot afford to wait for that. We should be proactive and prompt this discussion early on, starting with our own national audiences and governments, which need stand up to the fiscal challenges posed by the rise in overall debt. These discussions won’t be easy and there will no doubt be moments of tension. But it is our responsibility to make sure they start early. Ten years ago, to the day, in July 2012, I assumed the duties of the Minister of Finance of Greece. The state of the economy, as many of you remember, was critical. Greece had no access to capital markets, the economy was in its 9th consecutive quarter of negative growth, the cumulative loss of national income was almost 16 percent, 1 million Greeks were jobless – more than half of them for more than a year and we were still grappling with major fiscal and external imbalances. Meanwhile, in that summer of 2012, market and public perceptions of the redenomination risk were revised upwards and there was a growing concern that Greece will not be able to maintain its place in the eurozone. Ten years later, we can say with confidence that the hard work and immense sacrifices of the Greek people, together with the solidarity that Europe exhibited, enabled Greece to come out of the woods, address its flow imbalances, regain market access, and set the foundations for a more resilient and inclusive economy. It would be also fair to say that, in this long and arduous process, Greece – as well as Cyprus, Ireland, Portugal, and Spain – served as catalysts for the onset of a series of institutional innovations whose intention was to render the European economy a good deal more robust. As Winston Churchill once said - never let a good crisis go to waste. Key aspects of the new European institutional framework included: The reform of the Stability and Growth Pact between 2011 and 2013 (the so-called six-pack, fiscal compact, and two-pack reforms) whose objective were to enhance fiscal and macroeconomic surveillance and coordination. The creation of the banking union with the objective to mitigate contagion effects and break up the doom loop between sovereigns and banks - the establishment of the Single Supervisory Mechanism in 2014 and the Single Resolution Mechanism in 2016 were rapid while significant reforms occurred in this direction. The creation of the European Financial Stability Facility in 2010 and its successor, the European Stability Mechanism, in 2012 which provided an important tool for the prevention and management of sovereign debt crises - at least those triggered by adverse country-specific shocks. Indeed, notwithstanding well-known errors in the design and sequencing of policy conditionalities, ESMfinanced economic adjustment programs have undoubtedly played a significant role in stabilizing the euro area after the last sovereign debt crisis. The amendment of the ESM treaty in 2021 which opens the possibility for the institution to provide a backstop to the Single Resolution Fund and to quell future crises before they escalate, through the provision of a more flexible precautionary credit line, for members with sound fundamentals. However, the momentum seems to have run out of steam before ambitious reforms have been completed - often caught in a tug of war between those emphasizing the undoubted importance of risk sharing in currency unions and those stressing that we first need to reduce risks at national level before we share them. The lack of further progress in the banking union reform, and the stalemate in the completion of the European Deposit Insurance Scheme, is a good example at hand. Yet, in other cases, reforms are already outdated and need a major overhaul. The Stability and Growth Pact is such an example. The strong reliance of the Pact on unobserved fiscal variables, although wellintentioned, has rendered fiscal policy co-ordination overly complex and obscure and has dented its credibility. At the same time, compliance with deficit rules proved to be pro-cyclical, leading to selfdefeating fiscal adjustment during “bad times” and lack of sufficient fiscal buffers during “good times”. As Thomas Wieser put it “the present rules-based system of the Stability and Growth Pact has become nearly unmanageable due to its complexity, and the constant addition of exceptions, escape clauses, and other factors”. Importantly, in the uncertain reality of post-Covid Europe, the fiscal anchor of the stock of public debt at 60 percent of GDP should take into account country-specific heterogeneity by adjusting the pace of debt reduction accordingly. Which economic governance framework can render Europe more resilient in face of extraordinary economic uncertainty, large global shocks - such as the pandemic, climate and biodiversity crises, energy supply shortages and inflation - and escalating public debts? How might we improve the tradeoff between the imperative to safeguard fiscal sustainability and the need to accommodate adverse symmetric shocks at a time of monetary policy normalization and rising interest rates? How might our common fiscal policy facilitate and support the European Central Bank’s goal to mitigate financial fragmentation before the latter triggers a new wave of adverse idiosyncratic shocks in high debt states? There is little doubt that we need to do a lot more to improve our economic governance to successfully weather the many challenges that lie ahead. In what follows, I will describe how I see the changes that we need to push forward in the two key areas of economic governance where negative externalities are important: fiscal policy coordination and financial stability. A New Fiscal Framework The deficiencies of the Stability and Growth Pact have been well documented elsewhere. To a large extent, fiscal policy is guided by variables that cannot be observed and cannot be estimated in realtime, with any precision, due to data, sampling, and model uncertainty, many times allowing for procyclical episodes. Indeed, a good deal of research has shown that estimates of key inputs such as the output gap,suffer from substantial measurement problems. In turn, lack of confidence to the measurement of structural fiscal variables has been a constant source of questioning, and often noncompliance with, EU policy recommendations. Despite its emphasis on cyclically adjusted variables (such as the structural balance), the Stability and Growth Pact confers insufficient policy space for economic stabilization in times of large persistent negative shocks, whereas, in times of expansion, it does not offer incentives to strengthen national fiscal buffers. It has therefore led to procyclical fiscal policy, both in good and bad times, with detrimental effects on business cycle amplitude, economic welfare and debt sustainability. Importantly, even if the rule that a country’s debt must decline annually by 1/20th of the gap between its actual debt level and the 60 percent anchor guarantees sustained debt reduction, it cannot serve as a homogeneous guiding principle for fiscal policy across EU member states today, where the dispersion of debt-to-output ratios among countries is very large, and the contribution of the ‘snowball effect’ in debt reduction is very different across Member States. There is no doubt that a common fiscal policy framework is necessary to prevent the externalities that stem from the adverse effects of unsustainable sovereign debt in one member country to other members through the financial market spillovers of fiscal crises. But there is also no doubt that a new fiscal framework is now overdue. In this regard, it is great news that, a few months ago, the European Commission has relaunched the public debate on the review of the economic governance framework and that several constructive proposals have already been put forward by colleagues. In my view, a new sound fiscal framework should serve three key objectives: Sustainability of public debt at national level, to avert the negative debt externalities discussed earlier, safeguard the public goods of policy credibility and creditworthiness and increase resilience to adverse macroeconomic shocks. Counter-cyclicality of fiscal policy, in order to stabilize national output in recessions, and build sufficient fiscal buffers in expansions, thereby maintaining sound public finances over the business cycle, and avoid the destabilizing effects of fiscal policy procyclicality. Creation of a Central Fiscal Capacity of all eurozone member states, by making NGEU a permanent fiscal instrument, in order to meet the high investment needs, which are required to address the challenges of climate change, energy and digital transition of our economies. Such a framework should rest, I think, on three pillars: 1. First, a revised fiscal framework should give priority to strengthening debt sustainability, in line with the spirit of the “6-pack” reform. In the post-pandemic period, the adoption of credible and effective fiscal policies aimed at public debt sustainability is more urgent than ever. High levels of public debt: (i) limit the room for flexibility to address future challenges; (ii) make public finances vulnerable to interest rate increases; and (iii) undermine the ECB’s ability to respond to rising inflationary pressures. Lower public debt also contribute to reducing divergences between Member States, as debt ratio differentials lead to variations in the fiscal space available to each country to stabilize the economy after a shock and to finance growth-enhancing expenditure. Therefore, in such an uncertain economic environment, it is imperative to strengthen fiscal sustainability and increase the resilience of public finances to adverse shocks. 2. The second pillar should reinforce the incentive of national authorities to increase the resilience of their economies by strengthening their fiscal buffers in good times. So, the principle of fiscal policy counter-cyclicality should be promoted in the SGP reform. What is crucial is to safeguard (and even promote) economic recovery and restore fiscal sustainability in a sustainable way. Therefore, in this regard, I believe that three elements should be highlighted: Firstly, country-specific rate of debt reduction. A uniform rate of debt reduction is inappropriate for a monetary union with large dispersion of debt-to-output ratios among member states. Importantly, the key determinants of debt sustainability, such as the implicit interest rate and the natural rate of growth, are primarily country specific. Secondly, a country-specific speed of adjustment is crucial for credible, medium-term, fiscal consolidation plans that account for counter-cyclicality concerns. Thirdly, an expenditure rule which determines a cap of the medium-term growth of nominal expenditure, excluding automatic stabilizers on the expenditure side, and net of interest payments and new permanent taxes, with the objective to sustain the agreed primary surplus and bend down the public debt towards the debt-to-output anchor. There is a growing consensus that expenditure rules relative to other types of fiscal rules – can be a more effective way of fostering fiscal discipline and promoting macroeconomic stabilization objectives. The existence of expenditure rules reduces the pro-cyclicality in fiscal policy by strengthening expenditure control. These types of rules are more robust, transparent, and flexible than what we currently have and should be given a serious consideration. In a nutshell, encouraging policy makers to be Keynesians both on the upswing and the downswing is Pareto optimum. 3. The third pillar should turn the idea behind the Next Generation EU, and the Recovery and Resilience Facility, into a permanent fiscal instrument financing public investment. Sovereign debt will always remain a national responsibility and, unlike the NGEU, there will be no grant component in the disbursement of the agency’s funds. Therefore, there is virtually no moral hazard risk. The benefits of the proposed new framework are clear, especially for the high debt economies of Europe where, in the current economic environment, where financial market fragmentation remains a substantial risk. These three pillars together offer a transparent, robust, and credible framework that has the potential to minimize debt externalities, enhance the countercyclicality of fiscal policy, and contribute towards minimizing financial fragmentation without overburdening monetary policy and without turning the eurozone into a transfer union as some members fear. Banking Union Reforms Let me now turn to the second key area of European economic governance: the banking union. Designed, inter alia, to break the sovereign-bank doom loops at a time when the euro area itself was under threat, banking union became a further – and I would say inevitable – part of the project of European integration and the strengthening of monetary union. It was crucial to the creation of a single financial sector in the euro area. A move away from the fragmentation witnessed in the aftermath of the sovereign debt crisis and some – albeit limited – progress towards ensuring that the euro area monetary policy stance would be transmitted throughout the euro area. That in the euro area the banking system still plays a critical role in monetary policy transmission is why getting banking union right is paramount. So what does that entail? I would suggest that supervision, resolution, and deposit insurance have to become genuinely euro area wide and not so reliant on national perceptions, resources, etc. Let me say a few words about each. The area of micro-prudential supervision is the most advanced following the creation of the Single Supervisory Mechanism. Common rules are being applied to banks throughout the banking union designed to prevent the unsustainable build-up of risk, to ensure risk is treated in a harmonized way and, ultimately, to divorce the assessment of banks from the conditions that happen to prevail in a particular national jurisdiction. That these rules can then be extended to institutions not supervised by the SSM can help create a level playing field within national systems and also upgrade the quality of our Less Significant Institutions, while concurrently recognizing that national specificities remain. However, it is also important to continue to ensure that banks are not primarily judged according to their origin and geographical presence – here the horizontal functions of the SSM have an important role to ensure risk-based approaches to micro-supervision. Addressing the home-host issue is another important issue of concern. Aside from preventative measures there are also the crisis management tools. Here resolution is primary and that is why it is a critical pillar to ensure the smooth functioning of the banking sector. Legacy issues appear to dominate here – too big to fail, moral hazard, a failure to address systemic crises where financial stability is compromised at the national level. Let me suggest three priority areas. I am pleased to see that EU leaders have decided to take action in this respect and in the recent Eurogroup decided to proceed with the review of the crisis management framework. And this brings me to the issue of deposit insurance schemes and their contribution to banking union. Such schemes are largely seen as a simple payout function. That is indeed an important aspect of their operation. And a European scheme is surely crucial in preventing the flight of deposits that we witnessed during the euro area sovereign debt crisis in 2011-12. Depositors fleeing domestic banking systems where the ability of deposit insurance schemes to cover potential systemic crisis brought into question the viability of national fiscal authorities, highlighs an other aspects of the bank-sovereign nexus. But Deposit Guarantee Schemes can contribute far beyond their payout function. They can act as risk minimizers to prevent and promptly manage a crisis: 1. First, the existing framework has to become more usable. It is by far preferable to resolve banks rather than liquidate them, even where the ‘sale of business tool’ is used. This requires a broader interpretation of the Public Interest Assessment from the resolution authorities, thus expanding the pool of banks which could qualify for resolution. Relaxing existing restrictions and preconditions – that allow, inter alia, the Single Resolution Fund to contribute only after 8% of total liabilities and own funds have been written down to absorb losses of failing banks – could also facilitate the use of funds already in place. 2. Second, financial stability concerns must have an equal weight in the management of crises. The potential use of deposits to absorb losses or recapitalize failing banks merely provides incentives for national authorities to avoid intervention or add to the plethora of national exceptions that seek to bypass the framework. Policy makers must ask themselves whether the reluctance of national authorities to implement the European framework is an attempt to avoid short-term political costs or something more fundamental. I think it is the latter. European citizens seek a safe asset – and that is a bank deposit. This is not just crucial for retail depositors but also for SMEs which contribute considerably to the backbone of the real economy. 3. Third, the framework would benefit from a harmonization of national insolvency frameworks to reduce uncertainty and facilitate a level playing field for creditors when conducting the Public Interest Assessment especially for cross-border cases. The recent case of Sberbank where different legal frameworks (Austrian, Croatian and Slovenian) came into the frame when ensuring the orderly closure of banks because of nonbank issues (Russian sanctions) is a case in point. Moreover, the common EU administrative insolvency procedure for medium-sized banks could ensure open-bank transfers in liquidation just as the sale-of-business tool works in resolution or US/FDIC-style purchase and assumption transactions supported by deposit insurance guarantee schemes can preserve banking assets to the benefit of depositors. 1. Before a bank is declared as failing; 2. In the case of resolution; 3. To ensure the orderly exit of the bank from the market. Once again national legislation in this area is fragmented and the deposit guarantee scheme Directive should also aim to put in place a broader and enhanced role for a European Deposit Insurance Scheme, making it fit for purpose for banking union. Impediments for cross-border integration in the Deposit Guarantee Schemes Directive should also be addressed. My focus on banks and the supervisory/regulatory framework that surrounds it does not imply that attention does not need to be paid to capital markets. However, I consider it paramount that we move banking union forward. From when it was first agreed, eight years on, banking union remains incomplete. This circumstance has not contributed positively to financial integration across the euro area – it has encouraged financial fragmentation. Financial fragmentation is positive neither for the operation of a single monetary policy nor for the creation of a financial sector which plays its role as a facilitator of the real economy. Europe has to design an institutional structure that is shaped for its characteristics (it is not the US) and which will prove capable of dealing with the challenges that face us – whether those involve the preservation of our socio-economic values within a democratic tradition, or confronting the need to repair our damaged system of development to preserve our physical environment for future generations through our response to climate change. I have tried to chart a way forward for a realistic overhaul of economic governance in Europe amidst new and unprecedented challenges. With war at its soil, energy supply shortages, rising inflation, and high public debt in several member states, Europe is at a turning point, and we must act now if we want to be ready for the next crisis. The biggest risk we face collectively is doing too little too late. Bold, balanced, and well-designed reforms will not only make us more resilient. They will also lay the foundations for sustained and inclusive prosperity going forward. | bank of greece | 2,022 | 7 |
Statement by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Governors' panel "Inflation - can central banks cope?", European Forum Alpbach (EFA) 2022, Alpbach, Austria, 30 August 2022. | Speeches Statements by Yannis Stournaras, Governor, Bank of Greece Governors’ panel “Inflation: Can Central Banks Cope?”, European Forum Alpbach (EFA) 2022 30/08/2022 - Speeches Drivers of inflation Let me first say that it is a pleasure and an honor to be participating at the European Forum Alpbach. Upon its founding in 1945, the Forum was one of the first post-war initiatives that aimed to establish a unified and democratic European community. We have come a long way since that time but, as the war in Ukraine has shown, we are still some distance away from achieving the goals of Otto Molden and Simon Moser, the founders of this wonderful forum. Robert Holzmann has posed a very important question: what are the drivers of the very high inflation rates that we see today? It has been over a year since the euro area economy has been hit by a sequence of supply shocks -including successive waves of the pandemic-- that have pushed up inflation. We have seen a spike in fuel prices and a series of supply disruptions caused by the pandemic, which raised energy and commodity prices further. While the euro area economy was just recovering from the pandemic earlier this year, it was hit by another major shock stemming from the outbreak of the war in Ukraine and the associated sanctions. The shock exacerbated the supply bottlenecks and intensified the surge in energy, commodity and food prices. These surges in energy prices have hit the euro area much harder than they hit the Unites States, which is not nearly as dependent on imported energy. In parallel, as restrictions imposed to curb the pandemic waves were lifted, pent-up demand, especially in the services sector, strengthened and, as a result, upside pressures on prices broadened and intensified. If all this was not enough, in the years 2020 and 2021 the U.S. government undertook fiscal expansions amounting to 20 per cent of that country’s GDP – an unprecedented amount in peacetime. These fiscal expansions played a role in feeding the rise in inflation in the United States. With almost 50 per cent of global trade denominated in U.S. dollars, there were spillover effects to other countries. To contain the domestic inflationary impact, the Fed has aggressively raised its policy rate, thus contributing to currency depreciations against the dollar, including of the euro, which added to inflationary pressures in the euro area. To sum up, we have been hit with a perfect inflation storm. What, then, is my prognosis about inflation? The answer is not simple. In dealing with inflation, we are dealing with what the ancient Greeks called the Hydra multi-headed monster. It is difficult to tame inflation, because the inflation process, like that monster, is complex, reflecting multiple shocks hitting the economy. As Fed Chair, Jerome Powell, recently stated “we now understand better how little we understand about inflation.” I believe that the succession of ever-increasing inflation numbers is shortly coming to an end. A steady deceleration is about to begin. Among other things, my view is based on an assumed moderation in energy and commodity price increases and a gradual easing of the supply bottlenecks. According to our latest projections at the ECB (published in June), inflation is expected to peak before year-end, to gradually decline in 2023 and converge towards target in 2024. A similar profile is expected for core inflation. This inflation profile is mirrored in measures of expected inflation. Market-based inflation expectations (measured by the 5 year/ 5 year forward inflation-linked swap rate) continue to be well-anchored -- fluctuating slightly above and slightly below 2 per cent for a considerable period. Recent survey measures of longer-term inflation expectations (such as the ECB survey of professional forecasters and survey of monetary analysts) remain close to 2 per cent. Similar forecasts have been released by other economic institutions. Some factors which help explain the sluggish reaction of expectations are the following. Available data on wage growth provide evidence of still moderate pass-through from rising prices. The Russian invasion of Ukraine has put a strain in output growth and has worsened confidence and economic sentiment, adversely impacting investment and consumer spending. Elevated prices are reducing the real disposable income of households, with negative implications on savings and consumption. The fall in stock prices on the past several months suggests that financial wealth has eroded. Risks to euro-area, as well as global, growth are increasingly tilted to the downside. This could mean lower pressures on prices over the medium-term. Against this backdrop, monetary policy faces the dilemma of bringing inflation down to target, while ensuring a soft-landing amid rising fears about economic recession. Instruments & challenges to cope with inflation What has made the inflation storm especially difficult for monetary policy makers in Europe, is that a perfect policy reaction is not possible. The argument that monetary policy should be tightened when inflation rises hinges on inflation being demand driven. That argument may be partly true for the United States, but it clashes with the European reality. In the euro area, inflation has been driven by the supply side. When inflation is driven by supply-side pressures, an undue tightening of monetary policy would aggravate the negative output effects of the supply side shocks. Accordingly, the main challenge is to bring down inflation, while not triggering a sharp decline in output and employment. In this environment, the appropriate monetary policy response has in my view been to ride out the succession of supply-side shocks, proceeding with policy normalization in a gradual but determined manner, incorporating optionality and flexibility. I believe that our approach of gradual normalization has been successful and should continue. In December last year when we embarked on this process, up to June this year, we took a series of decisions in this direction. We have ended net purchases under our two asset programs, removed the easing bias of our forward guidance, did not prolong the very favourable terms – of a rate that could go down to minus 1 per cent - on targeted longer term refinancing operations, and have been phasing out collateral easing measures. In a historic move in July, which marked the end of the eight-year-long era of negative rates in the euro area, with my colleagues on the panel today and the rest of the Governing Council we decided to raise our key policy rates by 50 basis points. The hike was larger than what was signaled on the occasion of our June monetary policy meeting, reflecting our assessment that a materialization of risks to the inflation outlook had, in the meantime, taken place since the June meeting. These risks not only relate to the rise in inflation to very high levels but also to increases in indicators of underlying inflation, which pointed to the need for a re-optimisation of our policy stance. In the forthcoming meetings, a further progressive normalisation of policy rates will be appropriate in order to converge to the estimated equilibrium interest rates, as we transition to a meeting-by-meeting approach. Both the timing and the pace of moves will depend on the evolution of our assessment with respect to inflation risks. Supply-side and war-related disruptions may persist. But slowing demand will act to reduce inflation. The Governing Council will need to remain attentive to all factors. A gradual or a stepby-step approach is appropriate given the surrounding high uncertainty and the supply-side nature of inflation. Let me now turn to a very important pledge we have made at the Governing Council, ever since we first embarked on the gradual process of policy normalization: any resurgent fragmentation risks that would undermine the smooth transmission of the normalisation of our monetary policy across all countries in the euro area must be forcefully confronted. This summer, the Governing Council acted forcefully on this pledge. In June, it applied flexibility in reinvesting redemptions coming due under the Pandemic Emergency Purchase Programme (PEPP), with a view to maintain the functioning of the monetary policy transmission mechanism. This is a first line of defense to counter risks to the transmission mechanism related to the pandemic. In July, the Governing Council introduced the Transmission Protection Instrument (TPI). The TPI is a very powerful tool that will support the effective transmission of the ECB’s single monetary policy across all countries of the euro area as monetary policy is normalised. The euro area has been at the epicenter of strong and successive fragmentation episodes. A major reason for that is in my view that our monetary union is incomplete. In the absence of a complete banking, capital markets and fiscal union, we would have faced a distinct possibility of further fragmentation episodes in the future if we had not adopted the TPI. To conclude, we remain determined at the Governing Council, to eradicate the Hydra-headed monster of high inflation, without leaving unattended risks to the transmission of our single monetary policy, to financial stability and to economic activity. Short concluding remarks Let me conclude with the following remarks. Monetary policy can be a powerful tool to maintain price stability if the shocks hitting the economy are from the demand side. During the past few years, the euro area has been hit by a series of shocks. The Governing Council has determined that the shocks, especially for the euro area, have predominantly come from the supply side of the economy. Like the Hydra monster, these supply-side shocks have been multi-headed. We have navigated the rough seas of high inflation with the needle of our compass on our mediumterm objective – an inflation rate of 2 per cent. To help us navigate these rough seas, we have kept a close eye on inflation expectations. Throughout the storm, inflation expectations have remained close to our 2 per cent objective. We have formulated policy in such a way that will minimize the output and employment costs of bringing down inflation using a policy framework entailing gradualism and flexibility. We remain determined to eradicate the Hydra-headed monster of high inflation, without leaving unattended risks to the transmission of our single monetary policy, to financial stability and to economic activity. We have therefore developed an important new tool, the TPI, which will allow us to both respond to inflation aggressively and to thwart any threat of fragmentation. I am confident that, by the end of 2024, the inflation monster will have been defeated. | bank of greece | 2,022 | 9 |
Introductory remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 6th Annual ESCB Research Cluster 2 workshop "International macroeconomics, fiscal policy, labour economics, competitiveness, and EMU governance", Bank of Greece, Athens, 29 September 2022. | Yannis Stournaras: Introductory remarks – 6th Annual ESCB Research Cluster 2 workshop Introductory remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Sixth Annual Workshop: ESCB Research Cluster 2 "international macroeconomics, fiscal policy, labour economics, competitiveness, and EMU governance", Bank of Greece, Athens, 29 September 2022. *** - On behalf of everyone here at the Bank of Greece, it is a great pleasure to welcome you all to the 6th edition of the Annual ESCB Research Cluster 2 workshop on "International Macroeconomics, Fiscal Policy, Labour Economics, Competitiveness, and EMU Governance". - The Research Clusters were conceived to provide an informal setting for ESCB economists to get together, exchange views and ideas, and foster community bonds so useful for our joint work. This is the second such workshop to be held at the Bank of Greece, and we are delighted to host one of our first events in the post-COVID era. As you know, this event is typically held in late November, but we were so eager to have you all here physically at the Bank that we pushed it earlier in the year, so that we can all take advantage of the Athenian climate! - It is a true testament to how dynamic and interesting our work is that the tone of this workshop is completely different to what it would have been two years ago, and even more different to four years ago. In 2018 central banks were troubled by low inflation and low growth, in 2020 it was all about COVID and its repercussions, whereas now our big concerns emanate from inflation, the Ukraine war, and monetary-fiscal interactions. - Very appropriately, the workshop will be kicked off by a keynote speech from Frank Smets, who spent over a decade at the forefront of monetary policy making at the ECB, as Head of Research, Counsellor to the President, and Director General of Economics. Of course, he was already famous amongst our circles even before he became a policymaker, as one-half of the academic duo that gave us the Smets-Wouters model, the workhorse New Keynesian framework academics and policymakers use to study monetary policy. True to form, Frank will talk about "The monetary and fiscal policy mix in times of high inflation", a most relevant topic in this current juncture. - After Frank's speech, the first session is dedicated to very pressing issues of global trade, namely sanctions and supply bottlenecks. Two papers use the embargo after the first Russian invasion of Ukraine in 2014 to study how firms in France and Latvia adjusted to the shock. The third paper examines how supply bottlenecks due to COVID19 affected the performance of global value chains. This type of research is extremely important now, as we try to adjust to the multiple shocks Europe and the world have suffered over the past three years. While the dampening effects of globalization on low inflation in the pre-COVID era were overall deemed modest, the undoing of globalization, alongside the green transition, may well imply rapid and large level effects on the price level. As such, how we adapt to such persistent trade shocks is clearly of high value to central banks. 1/2 BIS - Central bankers' speeches - Two more sessions look at macro issues of high policy relevance. One is the session on dollar dominance. The dollar is now more important in terms of invoicing and reserves than it was at the end of Breton Woods, a paradox, given that this was a system designed to have the dollar at its core. The papers in the session look at the determinants and effects of dollar dominance, both now and in a historical perspective. In my opinion, the energy transformation of the US in the last several years from a large net energy importer into a net energy exporter, combined with the much higher energy prices worldwide, has played an important role in the recent dollar strength. This is an idea that is perhaps worth exploring, if you have not already done so. The other session looks jointly at fiscal and EMU governance issues, issues that unfortunately are with us again. This session is anchored by the second keynote by Elias Papaioannou, who will talk about "International Unions and International Integration". Elias is a distinguished academic, but in fact he did start his career at the ECB, and so he is, so to speak, a member of our family. - Finally, while this edition of the workshop is especially affected by fast-moving policy problems, we should never forget structural issues. After all, structural issues were our main focus for years before the pandemic hit, and issues like the labour market effects of automation or low productivity growth may well keep us busy even after the war has ended and inflation is at bay. As such, the workshop also contains one session dedicated to labour markets, and another dedicated to productivity and firm dynamics. - I wish you an interesting and fruitful seminar, and a pleasant stay in Athens. 2/2 BIS - Central bankers' speeches | bank of greece | 2,022 | 10 |
Opening remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the panel "Monetary policy fit for today and tomorrow", 13th Limassol Economic Forum, Limassol, 21 October 2022. | Yannis Stournaras: Monetary policy fit for today and tomorrow Opening remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the panel "Monetary policy fit for today and tomorrow", 13th Limassol Economic Forum, Limassol, 21 October 2022. *** Opening remarks It is a pleasure and an honour to be participating in the Limassol Economic Forum and I thank Constantinos Herodotou for inviting me to be here. The forum has established an outstanding reputation for the quality and relevance of its discussions. This year's forum is taking place at a time when the geopolitical and global economic environment is facing unprecedented challenges. In my opening remarks I will focus on the economic challenges facing the community of countries that comprise the euro area. Since 2020, that community has been hit by a sequence of inflationary shocks. To be sure, shocks are a recurring feature of the economic landscape – think about the oil price shocks of the 1970s, the Asian financial crisis of 1996-97, the collapse of the U. S. financial institutions in 2007 and 2008. What has distinguished the past few years from earlier episodes is the succession of shocks that have occurred. The repeated waves of the pandemic led to significant supply bottlenecks which caused an increase in commodity prices. While recovering from the pandemic, the euro area economy was hit by another major shock stemming from the outbreak of the war in Ukraine and the associated sanctions. The trade and energy repercussions of that war exacerbated the supply disruptions and intensified the surge in fuel, commodity and food prices. Related to both the pandemic and the Ukraine war, we have been hit by energy price shocks. What makes the situation more difficult to tackle in the euro area than in the U. S., is that the euro area is a large net energy importer and thus suffers from a large terms-of-trade effect. In parallel, as restrictions imposed to curb the pandemic waves were lifted, pent-up demand, especially in the services sector, strengthened and, as a result, upside pressures on prices broadened and intensified. 1/7 BIS - Central bankers' speeches As if all of this was not enough, the euro area had been subject to imported inflation following the very expansionary fiscal policy in the U.S. in 2020 and 2021. With almost 50 per cent of global trade denominated in U.S. dollars, there were spillover effects to other countries. To contain inflation in the U.S., which, reflecting the expansionary fiscal policy, rose earlier than elsewhere, the Fed has aggressively raised its policy rate, thus contributing to depreciations of other currencies, including the euro, against the dollar, adding to global inflationary pressures. To sum up, the ECB has been facing what the ancient Greeks called the Hydra multiheaded monster. By this I mean that the causes of the present situation are complex, reflecting the multiple supply-side inflationary shocks hitting the economy.Unsurprisingly, the combination of these shocks posed considerable challenges for central banks. First, monetary policy needed to prevent inflation from becoming entrenched by ensuring that the price effects of the shocks were not passed on to inflation expectations and wage increases. Second, there is the essential fact that the euro area inflation has not been caused by demand dynamics as in the U.S., but by a series of supply-side shocks, which monetary policy is not well-suited to deal with. Third, monetary policy needed to be conducted in such a way that it did not reinforce the powerful recessionary impact of these supply-side shocks. Fourth, it had to operate in an environment dominated by geopolitical developments, which have caused unprecedented uncertainty and weakened sentiment. Fifth, there was also a need to avoid triggering financial instability: financial markets are prone to react violently in an environment of heightened uncertainty - as the recent events in the UK have reminded us. Sixth, the transmission of monetary policy had to be safeguarded and any fragmentation-related developments needed to be avoided. Let us not forget what fragmentation did to our economies less than a decade ago. Seventh, our credibility had to be maintained. Monetary policy ought to neither overperform, nor underperform. In dealing with these challenges, history provides some, albeit not full, guidance. Similar to the present situation, the global economy in the 1970s and early 1980s was hit by a supply-side shock in the form of high oil prices. 2/7 BIS - Central bankers' speeches This period was marked by double-digit inflation rates, low or negative output growth, and elevated unemployment. I believe that a contrast between that period and now will shed light on how a central bank can meet the challenges of high inflation. What I will now argue is that the effectiveness of monetary policy was more constrained in the 1970s than it is today. Although I focus on the U.S. experience, my remarks apply to most countries at that time. In the 1970s, the Fed did not have an inflation objective. It believed that there was a permanent trade-off between unemployment and inflation. As difficult as it may be to imagine today, in the early 1970s, Fed Chairman Arthur Burns argued that monetary and fiscal policies could not control inflation. To bring down inflation, Burns advocated compulsory wage and price controls. Those controls were, in fact, adopted but they did not work. It should not be surprising that, in those circumstances, central banks had not established their credibility. Consequently, long-term interest rates, which incorporate inflation expectations, jumped up quickly to double-digit figures. They remained very high into the mid-1980s. Today, the situation is different. During the last several decades, central banks have established credibility, using price stability-oriented monetary policy to do so. The ECB, like most other central banks, has a medium-term inflation objective at 2 per cent. Before the outbreak of the pandemic, the ECB mostly delivered on its objective, a few years slightly above its objective, but most of the time below that objective. The credibility central bankers have earned provides some space for monetary policy to operate to reduce the unemployment and output costs of the inflationary shocks. In other words, we have a single needle on our compass - inflation in the medium term. So long as the needle remains centred on this objective, we have used the flexibility provided by our credibility to minimise the damage to growth and employment caused by these shocks. Question 1: As you mentioned, inflation is now at an exceptionally high level. Some critics say the ECB was slow to react to rising inflation. What is your answer to those critics? 3/7 BIS - Central bankers' speeches The ECB has embarked on policy normalisation, in two distinct phases. The first major phase was initiated in December last year and has entailed the ending of net purchases via our two landmark programmes, the APP and the PEPP, the phasingout of both our collateral easing measures and the very favourable terms of our targeted refinancing operations. In July, we entered a new phase in our policy normalisation that has entailed the adjustment of our rates towards levels that will ensure the timely decline of inflation to our 2 per cent medium-term target. As I highlighted before, there were several inter-related challenges with which our monetary policy was confronted. The pace of normalisation had to be set so that our credibility was not jeopardised, thus walking a fine line – it could be neither too fast, nor too slow. The normalisation had to be undertaken with an eye on inflation expectations. Throughout the past year, inflation expectations remained anchored, which, in my view, provided evidence that our policy was an appropriate response to the combination of shocks we faced. Longer-term inflation expectations, as measured, for instance, by the 5-year forward inflation-linked swap rate 5 years ahead, have stood at an average of 2.1 per cent this year and of 2.2 per cent over the past month. The path of normalisation had to make sure that second-round effects were contained. So far, wage increases had been moderate providing evidence that the price effects of the shocks had not become embedded in expectations. Financial stability was safeguarded. Financial markets have adjusted smoothly to the gradual pace of normalisation. To ensure that our monetary policy is smoothly transmitted across all euro area countries, this past summer the Governing Council established the Transmission Protection Instrument. It was developed to counter any unwarranted market dynamics that could pose a threat to price stability. Risks of fragmentation have not materialised. The gradual policy normalisation aimed to avoid a potentially sharp contraction in output and an unwarranted rise in unemployment. Economic growth and employment have remained resilient despite the unprecedented shocks. In view of these remarks, I firmly believe that the path towards normalisation that we embarked on last December has been properly paced and based on incoming data, following a gradual and meeting-by-meeting approach. 4/7 BIS - Central bankers' speeches Question 2. How concerned is the ECB about other external or internal factors, such as the euro exchange rate or wage-price developments? Let me start with the euro exchange rate, which is something that we obviously monitor carefully, because its developments can have implications for domestic inflation. What is encouraging is that euro area inflation is to some extent shielded from the recent depreciation of the euro, reflecting the sizeable share of trade that takes place among our countries, and is thus invoiced in euro. In fact, 60 per cent of the volume of euro area trade1 is denominated in our single currency. The appreciation of the dollar, however, clearly has an impact on the prices of energy, particularly oil and gas. At this point, I would like to refer to the empirical findings from a recent study2 at the Bank of Greece on the drivers and spillover effects of inflation. The study assesses what factors underpinned inflation in 2020, 2021 and the first four months of 2022 in the euro area, the U.S. and the U.K. The study examined the effects of various demand factors, including fiscal and monetary policies, exchange rates, and supply constraints, on inflation. The results confirm that supply factors were the dominant cause underlying the increase in inflation in the euro area, whereas the exchange rate depreciations had a less significant impact. The global Supply Chain Pressure Index, a recently constructed index by the Federal Reserve Bank of New York, has been found to have caused the price level to rise by 9.5 percentage points. Money supply (M3) growth and oil prices each caused the price level to rise by 0.4 percentage point, the exchange rate depreciation against the dollar caused the price level to rise by a mere 0.14 percentage point. At this point, allow me to remind you that the ECB, similar to most major central banks across the world, takes into consideration, but does not target, the exchange rate of its domestic currency. Still, monetary policy can affect the pass-through of the exchange rate to inflation. This channel works as follows. An exchange rate depreciation operates by impacting wages and other costs, changes which in turn may be passed on to prices. But whether a currency depreciation actually affects wages depends to a large extent on the credibility of the central bank. Which brings me to the second part of the question. 5/7 BIS - Central bankers' speeches If wage earners believe that the central bank will accommodate increases in prices and therefore also in wages, they will press ahead for higher wages, and there will be what economists call cost-push inflation. If, however, the central bank has established a reputation of credibility, such secondround effects are much less likely to occur. This has been the case with the euro area. Second-round effects on wages stemming from both the cost rises due to supply bottlenecks and the depreciation of the euro have been contained. For instance, the growth of negotiated wages (excluding one-off payments) was 2.1% in the second quarter of 2022 compared to 1.5% in the third quarter of 2021. Moreover, despite such modest increases in wages during the past year, the passthrough to prices has been limited, because producers were willing to tolerate lower profit margins. The ECB, having earned its credibility credentials, has succeeded in maintaining the wage-earners' confidence and keeping the medium-term inflation expectations anchored. Question 3: The governments of Europe are now deploying an array of instruments in an attempt to relieve the pressure on their citizens. Could you please specify what kind of fiscal policy would be compatible with the anchoring of inflation expectations and not have the opposite effect to that of monetary policy? In the present environment of high inflation rates, fiscal and monetary authorities are faced with significant challenges. Taming inflation at the current juncture requires monetary and fiscal policies that are compatible and provide a clear path for both the desired inflation rate and debt sustainability. Energy policy should also be partly aligned to the inflation objective at least for the period that energy markets are malfunctioning and natural gas prices are being weaponised. As Bianchi and Melosi3 show in their very interesting paper referring to the pandemic crisis period and presented at the Jackson Hole Economic Symposium this summer, monetary and fiscal policy should work hand in hand, since price stability ultimately requires fiscal backing and debt-stabilisation policies. My point is that fiscal policies should try to limit the risk of adding to inflationary pressures, while enhancing the efficiency of public spending. 6/7 BIS - Central bankers' speeches As an example, fiscal support measures adopted to mitigate the impact of higher energy prices, should be temporary and targeted at the most vulnerable consumers and producers to avoid fuelling inflation. The recent experience in the UK is a very good case study for the necessity of fiscal prudence. Turning to the euro area, let me remind you of a fiscal instrument, namely the NGEU, which could provide significant support for national economies in alleviating the energy price shock. In particular the RRF funds, which have been the centrepiece of the NGEU, played a major role in stabilising our economies during the past few years. Our experience with the NGEU points to the crucial importance of fiscal policy as a shock absorber in our monetary union, which remains an incomplete economic union until we go forward with the fiscal integration and a complete banking union. 1 See ECB President Lagarde's Hearing of the Committee on Economic and Monetary Affairs of 26th September 26, (Débats du Parlement européen (europa.eu)). 2 See Stephen G. Hall & George S. Tavlas & Yongli Wang, 2022. "Drivers and Spillover Effects of Inflation: the United States, the Euro Area, and the United Kingdom," Discussion Papers 22-13, Department of Economics, University of Birmingham ( https://ideas.repec.org/p/bir/birmec/22-13.html ). 3 See Bianchi, Francesco and Melosi, Leonardo, Inflation as a Fiscal Limit (September 21, 2022). FRB of Chicago Working Paper No. 2022-37 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4205158) 7/7 BIS - Central bankers' speeches | bank of greece | 2,022 | 10 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 2022 Conference of Mediterranean Central Banks "Building resilience in uncertain times: safeguarding financial stability, encouraging investments", jointly organised by the Central Bank of the Republic of Turkey, the Organisation for Economic Co-operation and Development (OECD), the European Institute of the Mediterranean (IEMed) and the Bank of Spain, Istanbul, 31 October 2022. | Yannis Stournaras: Assessing the impact of digital finance on financial and economic integration - risks, opportunities and challenges for central banks Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 2022 Conference of Mediterranean Central Banks "Building resilience in uncertain times: safeguarding financial stability, encouraging investments", jointly organised by the Central Bank of the Republic of Turkey, the Organisation for Economic Co-operation and Development (OECD), the European Institute of the Mediterranean (IEMed) and the Bank of Spain, Istanbul, 31 October 2022. *** Ladies and gentlemen, It is a great pleasure and honour to participate in the 7th Annual Conference of Mediterranean Central Banks to discuss the critical topic of building resilience in the financial system. Resilience is key, especially during these uncertain and challenging times, which combine heightened inflation and increased debt levels, market volatility and high energy prices due to the war in Ukraine, as well as intensifying climate related risks. In this demanding environment, we need to encourage financial markets to flourish and support our economies in a way that fosters economic integration and strong cooperation. In this session, I will focus on a topic that has demanded our attention in recent years, that is the evolution of digital finance. How has it impacted the financial system? What are the benefits it has brought alongside risks? What challenges are we facing, or are we soon bound to face? I will share some thoughts on the stance that central banks and regulatory authorities may take to overcome these challenges. Beyond any doubt, almost every aspect of our everyday life is becoming increasingly digital. It is no wonder that financial services follow this global trend. Consumers and businesses access financial services digitally, market participants are deploying new or existing technologies in innovative ways, incumbent firms' business models are being transformed, and data is becoming a key asset for innovation, alongside IT infrastructure. n 2020, acknowledging the importance of these trends, the European Commission published its Digital Finance Strategy. Its key objective is to embrace digital finance for the benefit of consumers and businesses. Digital transformation offers benefits and opportunities that can have a positive impact on financial and economic integration across borders, creating links between economies both at regional and at global level: Economic processes, such as supply chains, benefit from increased efficiency gains. Certain processes which took weeks or even months in the past may now be completed in hours or days. Payments have become faster, acting as a major building block for e-commerce, especially during the pandemic. 1/4 BIS - Central bankers' speeches Digital finance can strengthen competition and the supply of innovative products and services. Businesses in smaller countries can penetrate neighbouring and international markets and obtain financing for their innovative ideas. Financial technology (FinTech) ecosystems can function as incubators for cooperation between incumbents and start-ups, benefiting all participants across financial sectors and facilitating capital flows. The level of remote and ubiquitous access to services is unprecedented, as individuals and businesses use applications to access accounts in financial institutions which may be located in a different country. Application stores of BigTech companies, such as Apple and Google, list financial tools for lending, trading or crowdfunding, often oblivious to where the companies offering the tools are established. Lower demand for physical infrastructure reduces operating costs for financial entities, which may divert funding to new sources of revenue across borders, as well as to attracting talent to work remotely. Remote work has become a norm for certain types of financial institutions, establishing a "digital nomad" culture. Emerging economies may also benefit from digital finance. In certain cases, all it takes to access payments is an account with a mobile operator, serving even unbanked citizens across borders. Stablecoins, crypto-currencies whose price is pegged to a reference asset (such as the US dollar), can offer several benefits such aslower-cost, safe, real-time, and more competitive payments compared to what is on offer today. Finally, as we all know, a number of central banks are investigating the design and implementation of central bank digital currencies, CBDCs, in order to strengthen monetary sovereignty and enhance wholesale and retail payments based on central bank money. On the one hand, wholesale CBDC discussions revolve around upgrading existing central bank infrastructures in the settlement of interbank transfers and related wholesale transactions in central bank reserves, to make them safer and more efficient. On the other hand, retail CBDCs can enable individuals and businesses to hold central bank money and use it for payments, complementary to cash, while enabling traditional intermediaries to offer innovative new products built on CBDCs. In the future, CBDCs may even co-exist with stablecoins, like central bank money co-exists nowadays with commercial bank money. Against this backdrop of innovative technologies combined with financial services to form what we call "digital finance", regulators and supervisors are responsible for ensuring the smooth functioning of the markets within their respective mandates and for safeguarding financial stability. Innovation can bring about major changes in the way businesses operate. However, these changes may create new risks or amplify existing ones. These risks relate to specific aspects of technologies or their application, and in certain cases can effectively be mitigated only with concerted and multi-jurisdictional effort. First and foremost, heavy reliance on technological infrastructures exacerbates cyber security and data protection risks. This year's ESRB report on Mitigating systemic cyber risk, highlighted very accurately that the cyber risk landscape is constantly evolving, attacks become increasingly sophisticated, and potential targets may easily span sectoral and geographical boundaries. Currently, authorities at national and international level, including the ESRB, the FSB and 2/4 BIS - Central bankers' speeches the IMF, are investigating the concept of "systemic cyber risk" as a potential threat to financial stability. Building cyber resilience, cooperative oversight and crisis management frameworks are top priorities for financial authorities worldwide. Cryptoassets and decentralised finance, commonly referred to as DeFi, have also raised concerns among supervisory authorities with respect to financial stability, market integrity, investor and consumer protection and anti-money laundering. Assessing the relevant risk exposure of markets and institutions, as well as potential contagion across borders, is a difficult task that requires extensive enhancement of central banks' monitoring capabilities. Another concern, from a cross-border financial stability perspective, is the overreliance of financial sector entities on a limited number of third-party providers, for outsourcing or technology provision purposes. This is particularly relevant in the context of transition of critical infrastructures and services to the cloud, which may lead to concentration, business continuity and data governance risks. In the case of BigTech providers with global footprint, coordinated oversight becomes crucial. Artificial intelligence, including machine learning, equips financial entities with tools which enhance their capabilities and provide sophisticated mechanisms for decision making and forecasting, fraud and cyber threat detection, risk management, market surveillance and regulatory compliance. Nevertheless, they may introduce risks with respect to the explainability of the output of artificial intelligence models, as well as biases and inaccuracies based on the input data. The need for a common approach to evaluating artificial intelligence - based solutions in integrated markets becomes increasingly prominent. Mitigating these risks is a constant and complex challenge for regulators and central banks. Let me focus on four challenges and how they can be overcome: The first is understanding digital finance fundamentals. In order to formulate policy and fulfil our supervisory and regulatory mandate, we need to fully grasp the intricacies of digital finance and the way it affects business models and risk profiles. This requires knowledge, experience and talent. Innovation facilitators, such as innovation hubs and regulatory sandboxes, help towards building the relevant capacity. It is important to promote collaboration among those facilitators in order to reap greater benefits. Two great examples in this area are the European Forum for Innovation Facilitators and the Global Financial Innovation Network, which have contributed to information sharing on the regulatory treatment of digital finance innovations and set up frameworks for the crossborder testing of such services. Second, we need to address regulatory gaps. Crypto assets and decentralised finance, artificial intelligence, as well as cyber threats, have highlighted the limitations in the existing regulatory framework. In certain cases legislation is fragmented; in other cases there are outright regulatory gaps. For example, stablecoins, which could play an important role in the future of finance, have the potential to be all but "stable" unless appropriate regulation is in place. In order to overcome the above challenges, we need to adapt our supervisory and regulatory stance. The European Commission initiatives for the Digital Operational Resilience Act, and the Market in Crypto Assets Regulation, are prime examples of regulatory reform aiming to tackle this issue. Other jurisdictions have engaged 3/4 BIS - Central bankers' speeches in similar activities. The oversight of cross-border entities will require intensified monitoring and cooperation at international level. Allocating resources to this effort is crucial. Third, we need to alleviate obstacles to financial market growth. We can address this challenge by supporting the smooth integration of digital finance into the economy in sustainable ways. Facilitating the establishment of FinTech ecosystems at national and international level is key. Authorities are already pursuing this objective, especially in Asia. This will create network effects and encourage investments and successful partnerships. Removing obstacles to cross-border payments, as highlighted by the Financial Stability Board, promoting targeted government actions in our jurisdictions and fostering transition to "green" digital services will also be key activities to overcome this challenge. Last but not least, we need to overcome our own efficiency and adaptability limitations, to keep abreast with all the technological advances in the market. To do this, we need to increase our own technological footprint and infrastructure capabilities. Central bank digital currencies (CBDCs) have the potential to enable safe retail and wholesale payments with central bank money. This will affect citizens across borders. Careful design of CBDCs and their distribution models will address disintermediation concerns. Issues such as the cross-currency payments in CBDC and the potential of foreign users gaining access to domestic CBDC merit discussion at international level. Furthermore, as mentioned in a recent BIS report, liquidity bridges for cross-border payments across central banks may improve the efficiency and effectiveness of the global liquidity pool of banking groups operating in several currencies, and reduce the opportunity costs associated with holding liquidity buffers in multiple currencies. Upgrades to central bank operated market infrastructures, potentially in the form of interoperability with distributed ledger solutions, may also enhance the uptake of digital finance in regulated crypto services. Finally, the adoption of supervisory technology, or SupTech, will help us modernise our interaction with supervised entities and revolutionise on-site and off-site auditing capabilities. Let me conclude by saying that the evolution of digital finance is continuous and rapid. Keeping up with this speed in the four aforementioned challenge areas will be very demanding. Joining forces and sharing experience as frequently as possible, as we are doing now in this conference, will help us safeguard financial stability and underpin growth in increasingly integrated financial markets. Thank you. 4/4 BIS - Central bankers' speeches | bank of greece | 2,022 | 11 |
Keynote speech by Ms Christina Papaconstantinou, Deputy Governor of the Bank of Greece, at the 6th European Central Bank Simulation Conference, organised by Get Involved, Bank of Greece, Athens, 9 December 2022. | Christina Papaconstantinou: Keynote speech - 6th European Central Bank Simulation Conference Keynote speech by Ms Christina Papaconstantinou, Deputy Governor of the Bank of Greece, at the 6th European Central Bank Simulation Conference organised by Get Involved, Frankfurt am Main, 9 December 2022. *** Introduction It is a pleasure to be here today at the 6th European Central Bank Simulation Conference. I wish to thank the "Get Involved" student group for the organisation of the conference and all participants for the interest you have shown to join this event. Let me in particular extend a warm welcome to Boris [Vuji], the Governor of the Croatian National Bank, who is with us today, just a few days short of a major achievement for Croatia: joining the euro area on 1 January 2023. The success achieved by Croatia has been impressive. Croatia has managed the transition from a centrally planned economy to a market economy, achieving significant monetary reform and a remarkable degree of sustainable economic convergence. The people of Croatia deserve congratulations for this achievement, but, Boris, you also merit considerable credit. Boris has spent 25 years at the Croatian National Bank, ten of which he has served as Governor. For seven years, he was Croatia's Deputy Chief Negotiator in a process that was concluded successfully, with Croatia becoming the European Union's 28th Member State in 2013. Since then, he has worked in building Croatia's strategy to join the euro area. In 2018 Boris received two important recognitions: he was awarded with the title Central Bank Governor of the Year for Central and Eastern Europe by the publication Global Markets, while The Banker magazine named him the Best European and Global Central Bank Governor. Boris, it is a pleasure to welcome you to the Eurosystem. Today, in its third decade of existence, the euro has grown to become a major global currency next to the US dollar, used by more than 340 million of Europeans. But let me reflect a little bit on its history. During the first decade of our monetary union, economic conditions were benign, enabling the euro area to achieve robust growth and relatively stable price inflation, consistent with the Eurosystem price stability target. However, the Global Financial Crisis and the sovereign debt crisis that followed put pressure on all our economies. The euro area witnessed recession and stubbornly low inflation, which posed serious challenges for monetary policy. In response, the ECB embarked on a negative interest rate policy and introduced a series of unconventional monetary policy measures. These innovative instruments succeeded in reinforcing economic recovery and achieved substantial inflation normalisation.1 At the same time, reforms in regulation and supervision of the financial sector and in EU economic governance strengthened the architecture of our economic and monetary union and its resilience. 1/6 BIS - Central bankers' speeches Coming closer to today, the recent 20-year anniversary of the euro almost coincided with the catastrophic outbreak of the coronavirus pandemic crisis, during which the ECB implemented further monetary policy measures to prevent economic stagnation. And just as the euro area economy was recovering from the pandemic, the invasion of Ukraine by Russia triggered a wave of strong inflation rates and put a drag on economic growth. In the following remarks, I will discuss, first, the recent trends and drivers of inflation in the euro area, second, the Eurosystem's monetary policy response and, third, some key policy considerations going forward. Inflation – underlying forces and trends Inflation in the euro area has been trending upwards since the end of 2020. It rose sharply from a negative figure of -0.3% in December 2020 to an all-time high of 10.6% in October 2022, before receding to 10.0% in November. The highest contribution to this increase has come from energy prices. At the same time, core inflation, as measured by HICP excluding energy and unprocessed food, has risen significantly from 0.4% in December 2020 to 6.6% in November 2022. The strong rise in inflation is attributed to a spike in oil and gas prices, as well as to significant supply bottlenecks generated by the repeated waves of the pandemic, which led to an increase in other commodity prices, namely raw materials used as inputs in the production of other goods and services. The war in Ukraine had significant repercussions for trade and energy, which exacerbated the supply disruptions and intensified the surge in gas, electricity and commodity prices. The surge in fuel prices has hit the euro area much harder than other major economies, because these economies (such as the United States) are not nearly as dependent on imported energy. Prices of consumer goods have also risen, as high input costs have made production more expensive. Moreover, as the restrictions imposed to curb the pandemic were eventually lifted, the recovery in demand strengthened and, as a result, upside pressures on prices broadened and intensified further. Unsurprisingly, the combination of these developments poses significant uncertainties in our prognosis about inflation, its peak value and its persistence. In the near term, inflation is expected to remain elevated. According to the latest ECB estimates, inflation is expected to stand at above 8% on average this year, before subsiding in the following years as the factors pressing it upwards dissipate. According to Eurosystem estimates, inflation is expected to reach levels closer to the target by the end of the policy-relevant horizon. This inflation profile is reflected in inflation expectations, which appear to be wellanchored – currently standing at just above 2%. Well-anchored inflation expectations help contain potential second-round effects, so that high inflation does not become entrenched. Should they become de-anchored and feed into wage negotiations, a wageprice spiral could arise, which in turn would lead in higher inflation over time, necessitating a further tightening in monetary policy. 2/6 BIS - Central bankers' speeches Monetary policy response to safeguard price stability In this context of rising prices and significant risks to the outlook for inflation, the Governing Council of the ECB has taken steps towards normalising monetary policy. To devise its response, a key question was identifying the drivers of the very high inflation rates that we see today. Is the increase in inflation driven by supply- or demand-side dynamics? Different drivers of the inflationary shocks require a different policy response. Contrary to the United States, inflation in the euro area has been mainly driven by the supply side. When inflation is mainly driven by the supply side, an undue tightening of monetary policy would aggravate the negative output effects of the supply-side shocks. Therefore, the main challenge for monetary policy is to bring inflation down, while containing the negative effects on the level of output as much as possible. In view of these considerations, the appropriate monetary policy response is to proceed in a gradual but determined manner, incorporating optionality and flexibility. The Eurosystem's approach of gradual normalisation has been successful in this regard, as it has progressed with an eye on anchored inflation expectations and smooth transmission to financial markets. It was exactly one year ago when the Governing Council made the policy pivot towards a gradual withdrawal of monetary policy accommodation, and a series of decisions has been taken ever since. The first step of the normalisation phase was the announcement of a step-by-step reduction in the pace of net asset purchases from the first quarter of 2022 onwards. Net asset purchases under the pandemic emergency purchase programme (PEPP) were discontinued at the end of March 2022. As of July, net asset purchases under the asset purchase programme (APP) were also discontinued. PEPP reinvestments will last until at least the end of 2024. APP reinvestments are being implemented in full for as long as needed, in order to maintain an appropriate monetary policy stance. Moreover, collateral easing measures were phased out and adjustments were made to the terms of targeted refinancing operations (TLTRO-III) adopted during the pandemic. The second major step of the normalisation phase was the increase of the key ECB interest rates. In a historic move in July, the ECB raised rates by 50 basis points, bringing the eight-year-long period of negative interest rates to an end. Since then, interest rates have been raised twice, by a cumulative 150 basis points, in order to bring inflation down to levels consistent with the price stability mandate of 2% inflation over the medium term in a timely manner, to ensure that inflation expectations remain anchored and to prevent any second-round effects. Against the backdrop of extreme prevailing uncertainty, the Governing Council dropped last summer the forward guidance on interest rates, making a transition to a meeting-bymeeting approach for interest rate decisions. In this regard, the future policy rate path will be data-dependent based on the evolving outlook for inflation and the economy. Let me now turn to some very important decisions by the Governing Council that draw upon the lessons learned during the series of crises: risks of fragmentation could undermine the smooth transmission of the normalisation of our monetary policy across 3/6 BIS - Central bankers' speeches all countries in the euro area and should therefore be addressed. By fragmentation, we mean episodes of deterioration in financing conditions in some euro area countries that are not warranted by country-specific fundamentals. In such cases, the interest rates in the affected countries are higher than in the other euro area countries, making the transmission of monetary policy uneven. With the above in mind and in order to safeguard the orderly transmission of the intended monetary policy stance, the Governing Council announced last December that PEPP reinvestments could be adjusted flexibly across time, asset classes and jurisdictions at any time. This decision has significant repercussions also for our country, since this could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions if necessary, in order to ensure the smooth transmission of monetary policy to the Greek economy while it is still recovering from the pandemic. Given that Greek bonds, due to credit quality requirements, are not included in the APP, which has been the landmark bond buying programme of the Eurosystem, this decision has been pivotal in demonstrating the commitment of the ECB to maintain support to the Greek economy and safeguard the smooth transmission of monetary policy in every corner of the euro area. In addition, the Transmission Protection Instrument (TPI) was established last July, with a view to supporting the effective transmission of monetary policy. Under the TPI, the Eurosystem is able to make secondary market purchases of securities issued in countries experiencing a deterioration in financing conditions not warranted by countryspecific fundamentals. The TPI is a powerful tool and allows the Governing Council to better safeguard the transmission mechanism and to more effectively deliver on its price stability mandate. Policy considerations going forward Let me try to draw some policy considerations for monetary policy going forward. Inflation in the euro area is far too high. The Governing Council has illustrated its commitment to restore price stability by delivering a series of appropriate measures, including three consecutive bold rate increases which have frontloaded the transition from highly accommodative rates towards levels that can ensure the timely achievement of this goal. When deciding on the path of policy normalisation, several factors need to be considered. First, the increasing risk that the euro area may be headed into a recession. Second, the transmission lags of our past decisions into inflation and output, as it will take some time for normalisation measures to reach their full impact on the economy. This means that the effect of our measures may unfold at a time when inflation pressures may have already started to subside. Third, the fact that the dominant part of the shocks driving inflation in the euro area is supply-driven. Fourth, the fact that the current juncture is characterised by a synchronised tightening of monetary policies across the world, potentially leading to spillover effects, which reinforce the aforementioned factors in reducing inflation. 4/6 BIS - Central bankers' speeches Against this background, and for as long as available data do not show that inflation shocks have become embedded in inflation expectations and second-round effects remain contained, "monetary policy should adjust but not overreact", to quote Fabio Panetta,2 Executive Board member of the ECB. However, overcoming the challenges posed by excessively high inflation requires the contribution of other players as well. Fiscal policy has a major role to play in protecting the most vulnerable income groups from excessive inflation, but has to act in a manner that does not amplify current inflationary pressures. Targeted and temporary fiscal measures cushion the energy shock, without persistent implications for aggregate demand. In addition, the deterioration of the macroeconomic situation alongside the uncertainty surrounding the outlook for inflation and interest rates pose risks to financial stability. The ECB needs to be alert to any emergence of fragmentation across euro area financial markets, which could compromise the timely return of inflation to its target. Such phenomena could lead to a tightening in financial conditions over and above the extent warranted to contain inflation. At the same time, an abrupt tightening in monetary policy may lead to sharp increases in sovereign bond yields and a widening of spreads of the vulnerable sovereigns, with severe consequences for financial stability. The above illustrate the complicated situation which the Governing Council has to face. The importance of swift action to control inflation as soon as possible cannot be stressed enough; still, the tightening pace should be well-adjusted, in order to avoid amplifying economic slowdown and posing a threat to financial stability. This is a very narrow path to tread that demands careful navigation. In the present environment, monetary policy needs to remain an anchor of stability and confidence that inflation will return to its target in a timely manner. In navigating this path, it is important to maintain prudence and gradualism. As former ECB President Mario Draghi3 has said, "in a dark room you move with tiny steps. You don't run, but you do move." With these words, let me wish you a very productive and fruitful conference. Thank you for your attention. 1 In the absence of the monetary policy measures, GDP would have been at least 2.7% lower by end-2018, and annual inflation 1.3% weaker. See Rostagno, M., Altavilla, C., Carboni, G., Lemke, W., Motto, R., Saint-Guilhem, A. and Yiangou, J., "A tale of two decades: The ECB's monetary policy at 20", ECB Occasional Paper No 2346, December 2019. 2 See keynote speech by Fabio Panetta, Member of the Executive Board of the ECB, at the CEPR-EABCN conference on "Finding the Gap: Output Gap Measurement in the Euro Area" held at the European University Institute on 14 November 2022, https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp221114~23b213922c.en. html. 5/6 BIS - Central bankers' speeches 3 ECB Press conference on 7 March 2019. See https://www.ecb.europa.eu/press /pressconf/2019/html/ecb.is190307~de1fdbd0b0.en.html. 6/6 BIS - Central bankers' speeches | bank of greece | 2,022 | 12 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, to the staff of the Bank of Greece at the New Year ceremony, Athens, 12 January 2023. | Yannis Stournaras: 2023 - a year of continued uncertainty in the global economy, but also of hope Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, to the staff of the Bank of Greece at the New Year ceremony, Athens, 12 January 2023. *** Dear colleagues, I am delighted that we are all here today to welcome the New Year. The past year was marked by Russia's savage invasion of Ukraine, which revived the nightmare of a great war in Europe. For the global economy, it was a period of great challenges, during which the focus of global attention was on central banks' key mandate: the maintenance of price stability. After remaining very low for a long period, inflation picked up suddenly and escalated sharply, mainly as a result of two unpredictable supply-side shocks that hit the economy in successive waves: the pandemic and the war in Ukraine, leading to rising fuel and other commodity prices. These two shocks are what we call "unknown unknowns", i.e. they cannot be modelled with probability distributions and thus could not have been predicted by central banks, economic and financial organisations, academics or governments. As long as the war in Ukraine continues and keeps shaking the world, along with other geopolitical tensions, uncertainty about economic developments remains heightened. High inflation affects all citizens, but especially the most vulnerable, and can trigger a vicious circle of price increases. As a result, consumption and investment planning becomes difficult for households and businesses alike. Also, trust in the currency weakens, as money gradually loses its value. In such circumstances, as has happened in the past, citizens turn their eyes to central banks, from which they expect effective action to restore the stability of the purchasing value of the currency. In the euro area, businesses, investors, workers and consumers should feel confident that, we, not only at the Governing Council of the ECB but also everyone working in the Eurosystem, will do whatever it takes, within our mandate, to ensure a timely return of inflation to the 2% target in the medium term. Our primary monetary policy instruments remain the policy rates of the European Central Bank, which are expected to rise further until the recent tentative signs of an abatement of inflationary pressures turn into certainty that inflation will fall back to the 2% target over the medium term. It is important, however, to know that a central bank cannot control several factors that drive inflation, as has been the case recently. It cannot correct the pandemic-related supply chain disruptions or reduce the high energy and food prices stemming from the war in Ukraine. In the fight against inflation, sound fiscal and energy policies of governments have also a significant part to play, and so has a responsible wage 1/3 BIS - Central bankers' speeches negotiating behaviour of social partners, which should prevent an exogenous energy shock that has worsened the terms of trade for a large net energy importer, like Europe, from turning into an upward wage-price spiral bringing us back to the stagflation of the 1970s and early 1980s. It is encouraging and promising that, for the time being, there is no such wage-price spiral that would knock us off the 2% target, nor is there any deanchoring of medium-to-long-term inflation expectations from that target. This gives us hope and courage to continue the anti-inflationary policy without raising interest rates so much as to cause a deep recession. And of course we keep hoping and working for a definitive end to this continuing uncertainty with the most effective means available: the end of this devastating war. Central banks certainly recognise that fiscal policy should bear the brunt of supporting vulnerable citizens, with measures that need to be appropriately targeted and temporary, rather than permanent, and to provide incentives for energy saving. In this context, and given that 2023 is a national election year, the Bank of Greece, in its latest Monetary Policy Report, called for an alignment and an understanding among the political forces, in order to implement the key economic policy commitments – most notably a return to sizeable primary surpluses that can ensure long-term public debt sustainability – and to preserve the remarkable achievements of the Greek economy in the past ten years, pursuing as a key –national, I would say – goal an upgrade of Greek government bonds to investment grade this year. In 2022, the Bank of Greece hosted the meeting of the SSM Supervisory Board; in 2023, we will be welcoming the members of the ECB Governing Council in Athens. Hosting the two top meetings of the decision-making bodies of the ECB and the Single Supervisory Mechanism, respectively, is a challenge for the organisational alertness of the Bank of Greece and its staff. I am sure that, this year too, we will all do our best to ensure impeccable organisation and offer our colleagues the hospitality that our country is famous for. In recent years, the Bank of Greece has gradually evolved into an institution that is inspired by what Organisational Psychology defines as "psychological safety", i.e. ensuring a workplace which promotes innovation, coordination and cooperation, while encouraging a creative exchange of views and ideas between employees. It is also worth noting that, in July 2022, the Bank of Greece co-signed the ESCB & SSM Equality, Diversity and Inclusion Charter. The past months saw the completion of the Bank's internal reorganisation project entitled "Mellon" (meaning "future"), aimed to improve the way the Bank is structured and operates in order to effectively respond to the challenges of the new era and of technological developments. The project has produced invaluable tools, which we are now called upon to use in the best possible manner. In addition to its external activities on climate and sustainability, the Bank also implements an internal wide-ranging programme of environmental actions, called "BoGreen". These actions focus on a more efficient use of the natural resources consumed in all its buildings and the optimal management of the waste generated in its facilities, along with environmental awareness activities addressed to all its staff. In the past year, the Bank's Environmental Management System obtained ISO certification. 2/3 BIS - Central bankers' speeches 2022 marked an important milestone: 50 years since the official inauguration of the coin minting section of the National Mint. On this occasion, a commemorative medal was designed and produced, which will be distributed to all colleagues working at the Bank, as a symbolic gesture of gratitude for the services they have offered over time. I would like to thank you, once again, for your diligence and commitment with which you performed your duties in 2022, and I invite you to keep up the very good work this year. I wish you all a happy, healthy and prosperous new year! 3/3 BIS - Central bankers' speeches | bank of greece | 2,023 | 1 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the official dinner of the Bank of Greece on the occasion of the ECB Governing Council meeting, Athens, 25 October 2023. | Yannis Stournaras: The Acropolis of Athens and contemporary Europe Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the official dinner on the occasion of the ECB Governing Council meeting, Athens, 25 October 2023. *** Dear Prime Minister Mitsotakis, Dear President Lagarde, Dear Finance Minister Hatzidakis, Dear colleagues and partners, It is a great pleasure to welcome you, the Governing Council of the ECB, to the Bank of Greece. It's been a long time, 15 years, since we last met here. What has happened since then is well known to all of us. It is now part of our shared history. What is important is that we are all now wiser, stronger, closer to each other, better prepared to tackle difficulties, more European. Ladies and gentlemen, This room was designed to host esteemed guests like you, and is decorated with paintings made by some of the most important modern Greek artists. But the most beautiful sight of this room you can see outside: it's the Acropolis of Athens, with the Parthenon, its central temple. There's hardly an end to the list of things that one can say about the Acropolis. The history, architecture and art of the monuments on this rocky hill have inspired many historians, artists and researchers. The Parthenon was built between 447 and 438 BC, during the so-called "Golden ge of Pericles", the Athenian politician inextricably linked with the heyday of democracy demokratia; literally, the power of the people - as a form of government that was destined to have a profound impact on the development of the western world. The Acropolis is the most accurate reflection of the splendour, power and wealth of 5thcentury Athens, a city-state at the peak of its glory. And it has the Parthenon located at the most conspicuous point. The Parthenon was dedicated to the goddess Athena, who was much more than a patron goddess of Athens. She was the apotheosis or deification of the Athenian city. The Parthenon was built by Ictinus and Callicrates, two famous architects of the time. Its pedimental sculptures, frieze and metopes were the work of a team coordinated by master sculptor Phidias. Phidias also created the gold and ivory statue of Athena inside the temple. 1/4 BIS - Central bankers' speeches The Parthenon was the most decorated monument of its time, celebrated as an important milestone in the history of world art. But looking at it only from the perspective of artistic value misses an important point, namely the deeper meaning of the iconography of the two sets of sculptural reliefs on the outside and the inside of the colonnade adorning the temple. This iconography includes ordinary Athenian citizens, shown in the continuous frieze, juxtaposed with the stories that adorn its 92 metopes, depicting fights against the Gigantes or mythical giants, against the half-human, halfhorse Centaurs, as well as the Amazons and the Trojans. These stories had been very popular in Greece since the archaic period, but they are given a new dimension here. Created only one generation after the sack of Athens by the invading Persian army, followed by the eventual victory of democratic Athens over the might of the Persian king, these images were allegories of the conflict between liberty and democracy on the one hand, and autocracy on the other, and of the victory of the former over the latter. So, you see, the Parthenon is not just a miracle of architectural harmony; it is also a symbol of the resilience and eventual victory of democratic institutions, and of a form of government based on the will of the people, over the absolute power of an authoritarian ruler. The essence of this unity between the spirit of democracy and the flourishing of creativity, manifested in the Parthenon, was revisited again and again in later centuries. The rediscovery of classical civilisation, preserved in the monastic traditions of Eastern and Western Christianity in Medieval times, was rekindled in Italy as early as in the 13th century, with the poetry of Dante and the paintings of Giotto, and culminated in the Renaissance, when an erudition leading to the concept of homo universalis was pursued. The Renaissance, which spanned over the 15th and the 16th centuries, was intellectually based on a version of humanism derived from the Roman concept of humanitas, but also on a rediscovery of classical Greek philosophy, including Protagoras' famous statement that "man is the measure of all things",1 essentially reestablishing the human at the centre of the cosmos. This new way of thinking introduced by the Renaissance affected art, architecture, politics, science and literature, and inspired magnificent progress in all these areas. It was a way of thinking that emanated from a renewed interest in the art and values of classical antiquity, as well as from a drive to understand the world and change it. It was in such a context that there emerged the Scientific Revolution, and the works of Francis Bacon and John Locke, among others. The Renaissance also sowed the seeds for the upcoming movements of Neoclassicism and, of course, the Enlightenment. Neoclassicism was born in Rome in the 18th century, after the discovery of Pompeii and Herculaneum, but its popularity spread all over Europe, as a generation of Europeans, who visited Italy as part of their Grand Tour, returned home with newly refound Greco-Roman ideals. The primary neoclassical belief was that art should express the ideal virtues in life, which were aligned with ancient Greek ideas, such as purity and simplicity of form, decorum, verisimilitude or realism, and should serve a purpose. Art was also seen as 2/4 BIS - Central bankers' speeches capable of improving the viewer by imparting a moralising message that resonated with these ancient ideas. Neoclassicism in its most part coincided with the Enlightenment, which centred around ideas such as the value of human happiness, the pursuit of knowledge obtained by means of reason and the evidence of the senses, and also ideals such as natural law, liberty, progress, tolerance, fraternity, constitutional government, etc. Of course, our world today is very different from that of the Golden Age of Athenian democracy. However, important dimensions of the bond that unites us, as Europeans, harken back to ideas and developments which first emerged, albeit in fledgling form, in the streets, groves and civic meeting places surrounding the Acropolis of Athens. So, as Europeans today, we believe in democracy, we strive for science and knowledge, we have faith in human accomplishment, we admire beauty, we go after excellence. Certainly, our contemporary European values have also been enriched with fresh ideas, new trends and norms. The contemporary world has been shaped by multiple revolutions and long processes of evolution, producing often disruptive, but mostly positive, change which could not have been imaginable in 5th-century Athens. This is not to say that there aren't other aspects, emerging from ancient Greece, that could serve as points of inspiration today. The victory after the naval battle of Salamis against the Persians led to an expansion of the democratic institutions already introduced by Cleisthenes. In democratic Athens, all citizens enjoyed equality before the law, as well as equality of vote and equal opportunity to assume political office. The population doubled during the years of Pericles, with thousands of immigrants contributing to the demographic growth of Athens. Ancient Greeks conducted free trade with almost every part of the then known world, from the Black Sea to Sicily, right up to the Pillars of Hercules, in today's Gibraltar, founding colonies along the way. This commercial activity allowed, at the same time, invaluable cultural exchanges. The Athenians managed available capital according to demand and supply, even initiating large-scale public works when unemployment was high. They turned economic prosperity into a warm place for art, science and culture to bloom. On the antipode, ancient Greece can also teach us lessons to be avoided: in particular, how the lack of unity, or division and rivalry, which was the case between ancient citystates, can bring about a devastating conflict such as the Peloponnesian War, which crippled Greek military strength, bringing the most culturally advanced Greek city-state, Athens, into decline. Luckily, there stand monuments, like the Acropolis you see outside, that remind us of all these and of some core developments in the history of democracy and human creativity, which first emerged at the time of Pericles but remain valid and pertinent to this day. It is a miracle that we are able to behold such iconic monuments and be reminded of the values they represent, which are at the core of our contemporary European identity and shape what it means to be a European citizen today. 3/4 BIS - Central bankers' speeches Speaking of what it means to be a European citizen today, I would like to say farewell to my dear colleague Ignazio Visco, since this is his last Governing Council meeting after twelve years at the helm of Banca d' Italia. With Ignazio, we have travelled together a long journey in the last several years. During this journey, full of storms but also some sunny periods, we have appreciated his integrity, intellectual honesty, wisdom, judgement, common sense, diligence and positive attitude. He has remained a true European citizen, faithful to the euro, supporting it in its most difficult times. A central banker who believes that price stability, financial stability and full employment can coexist if the right mix of policies finds its way in the Member States of the euro area, but, above all, at its centre, with coordination, cooperation, win-win mentality and positive steps towards deeper integration. I found myself in full agreement with most of what he has said and advocated. We will miss him in the meetings of the ECB Governing Council. I am sure, however, that whatever he is going to do from now on, he will have the same influence and gravitas as with what he did up to now, for the benefit of the world, Europe, as well as his country. Thank you! 1 Plato, Theaetetus, 169d-171e. 4/4 BIS - Central bankers' speeches | bank of greece | 2,023 | 10 |
Address by Ms Christina Papaconstantinou, Deputy Governor of the Bank of Greece, to the staff of the Supervisory Departments at the "SSM Integration Project event", Athens, 11 March 2024. | Christina Papaconstantinou: Address - Single Supervisory Mechanism Integration Project event Address by Ms Christina Papaconstantinou, Deputy Governor of the Bank of Greece, to the staff of the Supervisory Departments at the "SSM Integration Project event", Athens, 11 March 2024. *** Good morning. I am very pleased to be here with you on the occasion of the 10th anniversary of the Single Supervisory Mechanism. As we know, the Single Supervisory Mechanism was set up to safeguard confidence in the European banking system, increase its resilience, strengthen financial stability and create a level playing field among European banks. The global financial crisis revealed significant gaps in the supervision of banking institutions in Europe, related to a fragmented supervisory framework, diverse supervisory tools and practices, lack of coordination and consultation. These gaps acted to impair the resilience of banks, hence of economies too. A single European approach to banking supervision which, while taking into account national specificities, creates an environment where all supervisors operate by the same rules and have the same tools, contributes to addressing these weaknesses. European banks are now in a much better position to cope with severe turmoil and shocks (like those we experienced about a year ago) than they were before the global financial crisis. The same holds true for Greek banks, despite the serious challenges of the past. This is why we acknowledge that having the Single Supervisory Mechanism in place was instrumental in providing an effective response to the crisis in the Greek banking system in the aftermath of the sovereign debt crisis. Managing the crisis together with the SSM meant stronger cooperation, exchange and productive interaction from the very start. The experience we have gained so far shows that collaboration and integration between the European Central Bank and the National Supervisory Authorities is key if we are to keep evolving amid rapid change (including a changing climate, technological progress, etc.) and ongoing challenges (such as geopolitical risks), demonstrating the necessary flexibility and adaptability. Collaboration within the Single Supervisory Mechanism has helped us and, as National Supervisory Authority, we have indeed evolved and have significantly upgraded our supervisory function: We have standardised several processes, developed manuals and methodologies for ongoing and on-site supervision, while at the same time becoming more extrovert. Significant emphasis has also been placed on the need for continuous training of our staff. 1/2 BIS - Central bankers' speeches We at the Bank of Greece have been devoting significant resources to the Single Supervisory Mechanism. Our Supervisory Departments have committed more than 75% of their resources to enhance cooperation with the Single Supervisory Mechanism, thereby ensuring that banking supervision is conducted according to high quality standards and consistently across all credit institutions. The Bank of Greece's constant support to the Single Supervisory Mechanism is confirmed by the significant increase in these Departments' staff over the past decade (with headcounts rising by more than 60% in Joint Supervisory Teams (JSTs) and almost doubling in the Inspection Sections since 2014). The Supervisory Board decided in 2021 to launch the "SSM Integration Project", as it became clear that most cooperation initiatives had focused on improving the functioning of JSTs, rather than of horizontal units. The reorganisation of the Single Supervisory Mechanism has highlighted the need to enhance effectiveness and efficiency through the optimal use of available resources and knowledge. In this regard, a number of initiatives have been developed jointly with the National Supervisory Authorities, aimed to foster a common SSM culture and career paths, build a team spirit, coordinate work and further develop common tools and technologies. You will learn more about these actions, which the Bank of Greece actively supports, in the presentations that will follow. Today's event gives us the opportunity to share information, experience and knowledge, and to gain a deeper understanding of the objectives of the Single Supervisory Mechanism. Joint commitment ensures the soundness of supervised credit institutions and enhances the stability of the financial system in Europe. Each one of us, and all of us together in a coordinated manner, can improve the existing collaboration between the European Central Bank and the National Supervisory Authorities and contribute to the further integration of the European supervisory function. Before inviting Mr Tsikripis to speak, let us watch a 3-minute video that explains what the Single Supervisory Mechanism is. Thank you! 2/2 BIS - Central bankers' speeches | bank of greece | 2,024 | 3 |
Talking points by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Session "Low for long again? Central bank balance sheets large forever? What happened to incentives and market discipline?", at the Eurofi High Level Seminar, Ghent, 23 February 2024. | Yannis Stournaras: What happened to incentives and market discipline? Talking points by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Session "Low for long again? Central bank balance sheets large forever? What happened to incentives and market discipline?", at the Eurofi High Level Seminar, Ghent, 23 February 2024. *** General remarks on monetary policy Monetary policy conduct in the euro area has to take several factors into account: First, the European Union institutional architecture is still incomplete in several fields, which importantly include the Banking Union. Second, the lessons learnt from past crises: monetary policy needs to be flexible, in order to ensure the smooth transmission of monetary policy in the euro area. Third, the euro area banking system remains fragmented across and within jurisdictions. Monetary policy can play a significant role in limiting the risk of adverse market dynamics and the associated fragmentation risks, thereby helping to preserve financial stability. Fourth, uncertainty remains extremely high, with significant contribution from adverse international and geopolitical developments. Two principles need to guide our actions: first, realism and, second, gradualism. The response of monetary policy to the new circumstances should be datadependent and state-dependent. In other words, the assessment of the way forward needs to be continuous and meticulous. Furthermore, any adjustments in the conduct of monetary policy have to follow a gradual approach, in order to avoid disorderly movements in the markets. This includes not only the relevant interest rate decisions, but also developments relating to the market footprint of the central bank (i.e. the balance sheet size of the Eurosystem). Are we returning to a world where real interest rates are at zero? What lessons should be drawn from the many years of negative policy rates and easy money? As a result of the disinflationary process, an adjustment in the policy rates is coming due; therefore, real interest rates can be expected to decline again towards lower levels. In this connection, let me reiterate that the monetary policy decisions of the Governing Council, including the decisions on policy rates, are presently data-dependent and take into account the assessment of the inflation outlook. In the medium term, what matters for the economy is the evolution of the natural rate of interest (r*), driven mainly by structural factors. We know that different forces impact on the natural rate of interest, such as demographic changes and the decline of total factor productivity, deglobalisation, artificial intelligence, as well as the green transition and climate change adaptation policies. 1/7 BIS - Central bankers' speeches Given the uncertain overall impact of these effects and the significant unknowns and ambiguity surrounding the computation of natural interest rates, their prospective level and evolution are not easily determined. Turning now to the lessons learnt, experience gained during the past crises has been extremely valuable. First, monetary policy needs to remain flexible so that it can accommodate potential future shocks to price stability, of any nature and direction. Second, financial stability considerations need to be taken into account in the decision making of monetary policymakers, in their pursuit of price stability. The past decade provided us with new insights into what monetary policy can do. We are now better prepared to implement the appropriate monetary policy mix, with standard and non-standard tools, if we were to face new challenges. We have a better understanding of what works and how to reduce possible side effects on the financial system. The provision of ample liquidity through non-standard measures in the context of the low interest rate environment contributed both correctively and preventively on the macroeconomy and the financial system. Specifically: it alleviated impairments in the policy transmission mechanism; it safeguarded the smooth functioning of the financial system and strengthened the bank lending channel; it mitigated the negative impact of the financial sector turmoil on the economy; it helped the euro area emerge from a crisis that threatened the Monetary Union's existence; and it minimised recessionary risks, while ensuring price stability. At the same time, the prominent role of macroprudential and supervisory policies has been brought out during the past few years. By addressing risks to financial stability and increasing the resilience of the financial sector, these policies have supported the smooth transmission of monetary policy impulses and have contributed to price stability over the medium term. All in all, the resilience of the euro area financial sector has improved markedly and provides a cushion to future crisis episodes. Several measures have contributed to this direction, such as, for instance, the establishment of the (still incomplete) Banking Union, with the Single Supervisory Mechanism and the Single Resolution Mechanism at its core. However, let me express my firm belief that we need more Europe; as integration and policy coordination in the monetary union progress – and with the completion of the Banking Union, which I consider of paramount importance – the euro area economy and its financial system will become increasingly resilient to future shocks and adverse geopolitical developments. With the long period of easy money inflating asset prices and fueling the financialization of economies, how serious are the resulting financial stability risks? Overall, I believe that, in the absence of an accommodative monetary policy, financial stability risks during the period under review would have been significantly higher compared with what was actually the case, for the following reasons. 2/7 BIS - Central bankers' speeches First, low interest rates and the non-standard monetary policy measures considerably improved financing conditions, with a positive impact on macroeconomic performance. In this regard, various studies1 provide evidence that the negative interest rate policy had a positive impact on the growth of loans granted to firms. At the same time, the favourable effects of low interest rates on economic activity led to fewer non-performing loans and to a reduction in loan-loss provisions. Second, in the absence of these standard and non-standard measures, that reinforced each other, inflation and growth would have been much lower, while the resilience of the financial system would have been compromised. As Mario Draghi put it in 2016,2 "if we had not acted in recent years, the counterfactual3 would have been a disastrous deflation." All in all, the substantial easing in the ECB's monetary policy has significantly blunted the negative effects on the economy from a series of shocks. It has succeeded in escaping deflation and avoiding a recession and, at the same time, it strengthened the functioning of the financial system. Indeed, the euro area financial system has emerged much stronger than before the crisis. However, such extensive measures do not come without potential costs or side effects for banks. Next, I will refer to some of them: Interest rates close or below zero implied a lower interest margin, decreased profitability and reduced net worth of banks. Subdued prospects about net interest income took their toll on banks' market valuation. The low interest rate environment prompted investors and financial institutions to seek higher yields, resulting in reduced risk premia and more maturity mismatches. Compressed risk premia can, in turn, encourage leverage and funding misallocation, potentially disrupting the process of restructuring in the corporate sector. Improved liquidity conditions, combined with low funding expenses, have facilitated access to lending for firms and households. In the current situation characterised by restrictive monetary policy and weak economic growth, high debt levels could result in new waves of non-performing loans, impacting both the financial health of banks and the quality of their assets. The non-bank financial sector has grown considerably in both size and significance; however, it is not as tightly regulated as the banking sector. Last but not least, the overvaluation of real and financial assets could increase the probability of abrupt and widespread corrections in asset prices and thus transform into a systemic risk. Having said that, it is important to highlight that a number of monetary policy measures implemented by monetary authorities also contributed to alleviating the impact of the low interest rate environment on the banking sector. Examples include the introduction of a two-tier system for remunerating credit institutions' excess reserves, as well as the remuneration on TLTROs linked to the achievement of lending targets. Finally, banks' profitability was underpinned by increased asset values and stronger economic outcomes. As mentioned above, in the counterfactual, the consequences on bank lending and loan servicing would have been severe, with adverse implications for banks' revenues and cost of credit risk. The same applies to the non-bank financial sector. 3/7 BIS - Central bankers' speeches Is it already decided that central bank balance sheets must remain large forever? What are the tradeoffs of a large structural bond portfolio? Let me first say that these issues are part of the review of the ECB's operational framework and are still under discussion at the Governing Council. These issues have to be addressed in a holistic way. We plan to publish the outcome of our deliberations in spring. The views I will express today do not necessarily reflect those of the Governing Council. Starting from the balance sheet, we expect that, in the steady state, the Eurosystem balance sheet will be significantly smaller than it is today, but still larger compared to its pre-crisis levels. Although demand for reserves from banks is volatile and hard to forecast, there are reasons to anticipate that, in the steady state, banks will demand a materially higher level of excess reserves than before the financial crisis, due to the following: First, supervisory regulation, which is likely to translate into increased demand for liquidity. Second, banks, in the wake of the global financial crisis, have maintained a precautionary stance. To guard themselves against liquidity and counterparty risks, they show hesitance about lending each other. This places obstacles to the efficient redistribution of reserves not only across, but also within jurisdictions, giving rise to local reserve scarcity and cross-border segmentation. Therefore, a substantial amount of reserves will need to be provided through a mix of credit operations and a structural portfolio4, which is an option considered in our review of the ECB's operational framework. Turning now to the features of a structural portfolio: It can channel liquidity effectively and efficiently to counterparties across the euro area and smooth disturbances to liquidity conditions, containing interest rate volatility and facilitating the efficient transmission of policy interest rates to the operational target. It allows the Eurosystem discretion in the provision of a given level of reserves deemed necessary to transmit monetary policy impulses. The provision of sufficient liquidity in a cost-efficient manner can prove effective in preventing financial tensions. Reserves offered to banks via purchases could also encourage some liquidity redistribution and thereby improve the functioning of the interbank market. However, a large structural assets portfolio contributes to a stronger financial market footprint for the Eurosystem. To limit this footprint and alleviate potential distortions in market pricing, certain design elements can be considered. To give an example, tilting the portfolio towards shorter maturities (up to 10 years) is an option. Moreover, setting up a securities lending facility may alleviate collateral scarcity. I am confident that at the Governing Council, we can design and implement a structural portfolio of a size, composition and duration that can adequately address banks' high liquidity needs, while catering for the potential side effects. 4/7 BIS - Central bankers' speeches Will central bank loss-making, even if temporary, pose a threat to central bank independence and limit the freedom of policy manoeuvre going forward? Importantly, central banks are public institutions with a specific mandate and are not profit-oriented. Our primary objective is to maintain price stability. The recent losses are a side effect of the policies we have adopted in the previous years to bring inflation back to target. These losses cannot jeopardise our ability to deliver on our mandate. Our independence is not affected by losses, since they were in part covered by profits generated in the past and would be offset in future years. As President Lagarde has said5, central banks could neither go bankrupt nor run out of money. In the case of the ECB and of several other central banks, losses would only be temporary and significantly lower compared to the potential macroeconomic costs that could have emerged if we hadn't addressed decisively challenges to price stability and risks of recession. Is the drying up of the unsecured interbank market a price worth paying for lower interest rate volatility and tighter interest rate control in the money markets? At present, it is difficult to envisage how the unsecured interbank money market could be revived in full in the near future, reaching the pre-global financial crisis levels. This is due both to regulatory reasons and to fragmentation. Post-crisis, banks appear reluctant to lend each other in the unsecured interbank market, pricing such lending at levels that are sufficient to compensate for counterparty credit risk. At the same time, short-term (below 6 months) interbank funding does not contribute towards satisfying the NSFR requirements. As a result, the unsecured segment of the interbank market is unattractive for prospective borrowers and is not expected to regain importance. Furthermore, heterogeneity within and across the banking systems of euro area countries impedes the efficient redistribution of reserves across banks and jurisdictions, giving rise to local reserve scarcity and cross-border segmentation. Although certain choices in terms of the operational framework might be more effective than others in encouraging interbank market activity, my impression is that the unsecured interbank market will not resume the activity evidenced prior to 2008. In any case, the choice of the appropriate set-up of the operational framework should follow a holistic approach, as explained previously. The secured interbank market, on the other hand, could redistribute liquidity to a sufficient degree. However, operational complexity and costs imply that not all banks, particularly smaller ones, can be active in that segment. Ultimately, will the ECB's operational review be used to justify a large structural bond portfolio, the true purpose of which would be to support weaker member states? 5/7 BIS - Central bankers' speeches Let me first highlight that monetary financing is prohibited by the Treaty. The review of the operational framework has been deemed necessary, in order to optimise the efficient transmission of policy rates, thus steering market rates towards intended levels. We are still elaborating on the defining parameters of the operational framework. We plan to publish the outcome of our deliberation on this review in spring. Overall, asset purchases are an important part of our toolkit. By now we have gained extensive experience with the use of this instrument and have, in my view, always used it wisely to meet our price stability objective. As my colleague at the Governing Council, Isabel Schnabel, explained very well in her recent interview with the Financial Times,6 asset purchases serve three objectives. The first is market stabilisation, the second is monetary policy accommodation and the third is monetary policy implementation. A structural assets portfolio provides liquidity to the financial system, thereby serving the third objective. As I mentioned, demand for excess liquidity by banks has increased significantly and is expected to remain elevated, not only due to new regulation, but also due to the diverse and fragmented euro area banking system. A structural asset portfolio can ensure the provision of the required amounts of liquidity to the system, thereby efficiently limiting fluctuations in the markets. The above provide support for having a structural asset portfolio for monetary policy reasons and not for fiscal ones. To contain duration extraction and address possible interference with the monetary policy stance, some tilting towards shorter maturities could be considered. The distribution of holdings according to capital key and other safeguards, such as purchases in the secondary market, and issue and issuer limits, have already been applied in the past. Such measures are intended to ensure that purchases do not undermine incentives for Member States to maintain sound budgetary policies. Although our final decision on the steady state operational framework is still pending, I trust that if a structural bond portfolio is introduced, the Governing Council will take a holistic view, ensuring its appropriate calibration. If this were to be the best choice from a fragmentation perspective, would it be better to acknowledge the moral hazard rather than to shroud the matter in technicalities? As I just said, the ECB strictly adheres to the prohibition on monetary financing. The best choice from a fragmentation perspective is for the ECB to continue using its discretion to conduct monetary policy within its mandate. This enables the effective pursuit of the objective of price stability and ensures the smooth operation of the monetary policy transmission mechanism across jurisdictions. Discretion without limits may of course increase the risk of arbitrariness and contribute to loss of credibility. There are constitutional red lines for our actions. We have self-imposed constraints to our programmes, so as to be able to control this discretion in accordance with the rulings of the European Court of Justice. Such constraints include issue and issuer limits, purchases according to capital key, as well as maturity limits. They can serve as an indication for the safeguards that could be applied to a structural portfolio, should it be eventually decided. 6/7 BIS - Central bankers' speeches We have always used purchases in a measured and proportionate manner, to ensure compliance with the Treaties, while achieving a smooth transmission of monetary policy impulses across the euro area. 1 According to the article entitled "Negative rates and the transmission of monetary policy", ECB, Economic Bulletin, Issue 3/2020, empirical studies suggest a positive impact on loan growth of around 0.7 percentage points each year, attributed to the negative interest rate policy. 2 https://twitter.com/ecb/status/707936983239299073 3 According to ECB estimations under a counterfactual exercise, inflation, in the absence of non-standard measures, would have been between 0.3 and 0.5 percentage points lower per year in the period 2015-2019, while real GDP would have been between 2.5 and 3.0 percentage points lower than the observed level in the end of 2019. 4 See "Central bank liquidity: a macroeconomic perspective", welcome address by Philip R. Lane at the ECB Conference on Money Markets, 9 November 2023. 5 See Monetary dialogue with Christine Lagarde, Committee on Economic and Monetary Affairs, 19 November 2020. 6 See Interview with Isabel Schnabel, conducted by Martin Arnold for the Financial Times on 2 February 2024 and published on 7 February 2024. 7/7 BIS - Central bankers' speeches | bank of greece | 2,024 | 3 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the University of Liverpool, Liverpool, 26 February 2024. | Yannis Stournaras: Lessons learnt from the experience of lasting zero interest rates and non-standard monetary policy measures Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the University of Liverpool, Liverpool, 26 February 2024. *** A. Introductory remarks Central bankers have encountered significant challenges over the past 15 years: a global financial turmoil, the euro area sovereign debt crisis, a prolonged period of very-low inflation, the pandemic, and the outbreak of geopolitical crises along with a series of supply-side shocks. Each of these developments has impacted on inflation and economic activity. Each has done so in a different way. In the following remarks, I argue that the monetary policy measures adopted by the ECB during that period -- including the lowering of the policy rate to negative levels for a period of 8 years -- managed to support a sustained progress towards price stability, ensuring at the same time financial stability, and supporting economic welfare. That said, there were difficult trade-offs to manage. Over time, low rates and nonstandard monetary policy measures may lead to excessive leverage and cause short-term dislocations in financial markets. In addition, as we have recently seen, a pivot in the monetary policy stance to combat higher inflation, can cause losses to central banks because they have to remunerate their liabilities at higher interest rates, while their assets have locked in low yields. Do these losses impair the ability of central banks to apply their preferred monetary policy rules? Do they compromise their independence? I argue they do not. Nevertheless, important lessons have been learnt from the recent experience. Macro- and micro-prudential and bank crisis management policies have strengthened -- notably with measures to create and enhance a Banking Union -rendering the financial system more resilient to future challenges. B. Monetary policy rationale for negative interest rates in the euro area Let me start with some remarks on the aspects that justified adopting an accommodative monetary policy in the euro area for more than a decade – that is, before the recent rise in inflation. The original euro area architecture had not been equipped to manage efficiently deep macro-financial crises as the ones that unfolded in 2008, with the outbreak of the Great Financial Crisis, and in 2010, with the euro-area's sovereign debt crisis. Our monetary union lacked crisis management and resolution tools and was only a nascent banking union, at best. Therefore, the response to the crises involved not only forceful measures, but also the establishment of new mechanisms, in an evolution process which is still ongoing today. In terms of monetary policy, declining prices and growth called for significant easing, in order to address deflationary pressures, prevent a credit crunch and avoid an economic slowdown. 1/8 BIS - Central bankers' speeches The ECB developed bold standard and non-standard measures aiming to guide inflation to the two percent target in the medium term, as well as to safeguard stability in the euro area financial system. Between 2008 and 2019, the Governing Council made sharp cuts in the ECB's key policy rates,1 bringing the main refinancing rate gradually to zero [in March 2016], and even setting a negative interest rate on reserves held by commercial banks with the central bank at the deposit facility [in June 2014]. Lowering interest rates was essential, in order to reduce financing costs, boost spending on investment and consumption goods, bolster economic growth, and contain downward deviations of inflation from the ECB's target. Cutting the deposit facility rate into negative territory has been key in encouraging banks to provide more credit to the economy. At the same time, the increase in the cost for banks of holding excess liquidity with their central banks was mitigated to some extent by the adoption of a two-tier system [in September 2019] through which a portion of banks' reserves were exempted from negative rates. However, with interest rates near the zero lower bound, the available policy space to counter low inflation by further reducing policy interest rates had been essentially exhausted. Therefore, facing the threat of a deflationary spiral, additional bold measures were deemed necessary in the period between 2010 and 2021, in order to influence the financial conditions in the euro area. These measures can be grouped in two broad categories: The first group included the provision of ample liquidity2 to banks (at longer maturities against a broader set of collateral). Targeted refinancing operations3 were specifically designed to support bank lending to businesses and individuals. These operations supported the functioning of the financial markets, amid increased counterparty credit risk and heightened fragmentation. The second group of measures included large-scale purchases4 of securities issued by the public and the private sector in the euro area. Starting late 2014, the ECB embarked on Quantitative Easing (QE) programmes [namely the APP5 and later the PEPP6]. Purchases of securities lowered risk-free interest rates, compressed risk premia across financial assets over the whole range of the yield curve and encouraged portfolio rebalancing towards lending to households and firms. Thus, the purchases supported the smooth functioning of the transmission mechanism, and the progress towards our inflation aim. As a result, financing conditions improved considerably, with a positive impact on macroeconomic performance. In this regard, various studies7 provide evidence that the negative interest rate policy had a positive impact on the growth of loans provided to firms. At the same time, the positive effects of low rates on economic activity have led to fewer non-performing loans, rising property values and to a reduction in loan-loss provisions. In the absence of these standard and non-standard measures, that reinforced each other, inflation and growth would have been much lower, while the resilience of the financial system would have been compromised. As Mario Draghi put it in 20168, "if we had not acted in recent years, the counterfactual would have been a disastrous deflation." According to ECB estimations9 over a counterfactual exercise, inflation, in the absence of non-standard measures, would have been between 0.3 and 0.5 percentage points lower per year in the period 2015-2019, while real GDP would 2/8 BIS - Central bankers' speeches have been between 2.5 and 3.0 percentage points lower than the observed level in the end of 2019. All in all, the substantial easing in the ECB's monetary policy has significantly blunted the negative effects on the economy of a series of shocks. It has succeeded in escaping deflation, avoiding a recession and, at the same time, it has strengthened the functioning of the financial system. Indeed, the euro area financial system has emerged much stronger than before the crisis. C. Implications for the financial system in the euro area Turning now to the impact of the low interest rate environment on the financial system, allow me to highlight some pertinent aspects: A very important contribution of monetary policy measures, including low interest rates during the past years, has been the safeguarding of macroeconomic stability. A stable economic environment is key for the smooth functioning of the financial system. Furthermore, easing measures succeeded in strengthening the bank lending channel and mitigating impairments in the monetary policy transmission mechanism, containing the refinancing risk and debt servicing costs of nonfinancial corporates and households. By pursuing a balancing act to address low inflation and growth, the ECB managed to keep the euro area out of prolonged macroeconomic crisis and, at the same time, prevented an escalation of financial sector turmoil. Ample provision of central bank reserves to the financial system mitigated shortterm funding difficulties, which, if not addressed, could have raised liquidity shortages and imperiled financial stability. However, such extensive measures do not come without potential costs or side effects for banks. In the following, I will refer to some of them: 1. Side effects of monetary stimulus in a low interest rate environment. Given the existence of a zero-lower bound on deposit interest rates10 , a policy rate cut translates into a lower interest rate margin and reduces the net worth of banks. In turn, this reduction in bank net worth may lead to (a) a contraction in lending as banks try to avoid breaching regulatory ratios, (b) lower underwriting standards and (c) a search for yield. 2. Everything else equal, the prolonged low interest rate environment dampened bank profitability and threatened the viability of their business model. The prevailing low interest rate environment of past years has been challenging for banks and resulted in decreased profitability, particularly for smaller institutions. Net interest income constitutes the most important revenue source for banks (especially for those with traditional business models) and its subdued prospects took its toll on their market valuation. European banks traded significantly below book value for a prolonged period, especially in comparison with their US counterparts. 3. Ample liquidity coupled with low funding cost for a prolonged period increased leverage of non-financial corporations and households. Heightened leverage coupled with laxer credit origination standards may amplify the impact of worsening financial conditions for non-financial corporations and households, and of increased financing cost on banks' asset quality, in the current juncture of restrictive monetary policy and weakening growth. 4. 3/8 BIS - Central bankers' speeches 4. The low interest rate environment induced a search for yield by investors and financial institutions alike, resulting in reduced credit risk premia and increased maturity mismatches. Suppressed risk premia could further encourage leverage, thwart efficient allocation of funding and mitigate "creative destruction" (in the form of bankruptcies and restructurings) in the corporate sector. Recent data in many countries show a pickup in insolvencies and several analysts argue that the low interest rate environment, along with the pandemic and energy-related support measures, hindered the resolution of the so-called 'zombie' companies. 5. The size and importance of the non-bank financial sector increased materially. Similarly, ample liquidity and the search for yield of investors contributed to the ascendance of the non-bank financial sector and the increase in its leverage. As a result, contagion risk has increased. Needless to say that the non-bank financial sector is not so tightly regulated as the banking sector allowing for pockets of vulnerability to build-up. 6. Real and financial assets overvaluation morphs into a systemic risk, which, however, might be mitigated by appropriate supervisory and macroprudential measures. Firstly, the likelihood and intensity of abrupt and widespread asset price corrections increases. Secondly, contagion and concentration risk could amplify the transmission of shocks, in particular for residential and commercial real estate exposures. Having said that, it is important to highlight that a number of monetary policy measures implemented by monetary authorities also contributed to alleviating the impact of the low-interest rate environment for the banking sector. Examples are the two-tier system introduced on the remuneration of credit institutions' excess reserves, the negative interest rate on TLTROs linked to the achievement of lending targets, and the significant expansion of the accepted collateral. Moreover, banks' profitability was underpinned by increased asset values and stronger economic outcomes. Without the accommodative monetary policy measures, the counterfactual outcome would have been very different than what occurred. Had economic activity stalled, bank lending and loan servicing would have been significantly affected, with adverse implications on banks' revenues and cost of credit risk. This also holds for the non-bank financial sector. The authorities also took several measures to strengthen the supervision of the euro area financial sector, notably with the creation of the (still incomplete) Banking Union, with the Single Supervisory Mechanism and the Single Resolution Mechanism at its core. As a result, the resilience of the euro area financial sector has improved markedly and provides a cushion to future crisis episodes. D. Implications for central bank profitability During the last two years, central bank profitability took a hit, raising some concerns that the ability of central banks to deliver on their mandate might be compromised. The question is whether central bank loss-making, even if temporary, poses a threat to central bank independence and limits its ability to conduct policy going forward. Importantly, central banks are public institutions with a specific mandate and are not profit-oriented. 4/8 BIS - Central bankers' speeches The primary objective of central banks is to maintain price stability. These recent losses are a side effect of the policies that have been adopted in the previous years to bring inflation back to target. These losses cannot jeopardise the ability of central banks to deliver on their mandate. Therefore, the independence of central banks is not affected by losses, since they were in part covered by profits generated in the past and would be offset in future years. As President Lagarde has said11, central banks could neither go bankrupt nor run out of money. In the case of the ECB and of several other central banks, losses would only be temporary and significantly lower compared to the potential macroeconomic costs that could have emerged if we hadn't addressed decisively challenges to price stability and risks of recession. E. Conclusions and lessons learnt Experience gained during the past crises times has been extremely valuable. Monetary policy needs to remain prudent so that it can accommodate potential future shocks to price stability, of any nature and direction. Monetary policy conduct in the euro area has to take several factors into account: The European Union institutional architecture is still incomplete in several fields, which importantly include the Banking Union and a bank crisis management and deposit insurance framework. The lessons learnt from past crises: monetary policy needs to be flexible, in order to ensure the smooth transmission of monetary policy in the euro area. The euro area banking system remains fragmented across and within jurisdictions. Monetary policy can play a significant role in limiting the risk of adverse market dynamics and the associated fragmentation risks, thereby helping to preserve financial stability. Uncertainty remains extremely high, with significant contribution from adverse international and geopolitical developments. Two principles need to guide our actions: realism and gradualism. The response of monetary policy to the new circumstances should be datadependent and state-dependent. In other words, the assessment of the way forward needs to be continuous and meticulous. Any adjustments in the conduct of monetary policy have to follow a gradual approach, in order to avoid disorderly movements in the markets. This includes not only the relevant interest rate decisions, but also developments relating to the market footprint of the central bank (i.e. the balance sheet size of the Eurosystem). The operational framework of monetary policy, currently under review by the ECB, will support the monetary policy stance and will take into account the experience we have gained so far. There has been substantial progress in reducing inflation in the euro area (October 2022 inflation peaked at 10.6%, while January 2024 inflation rate stood at 2.8%). This progress has been achieved without experiencing a recession or financial instability, suggesting a "soft landing". However, the inflation battle has not been won yet while uncertainty is very high. The ECB will proceed with careful steps in order not to jeopardise the progress 5/8 BIS - Central bankers' speeches achieved so far. It is true that, according to available data, inflation decelerates faster than our December projections and it is very likely that we will closely approach our two percent inflation target in the autumn of the current year. Also, the recent slight deceleration in negotiated wages is encouraging and much will depend on the evolution of profit margins, since overall cost developments, including energy costs, indicate a further easing of price pressures in the near term. In my opinion, the end of the first semester of 2024 could see the optimal timing for our first interest rate cut taking into account that incoming data do not, of course, change the picture that I have just described. Financial stability considerations need to continue to be taken into account in the decision making of monetary policymakers, in their pursuit of price stability. This view is reflected in the 2021 ECB's monetary policy strategy review, stating that financial stability is a precondition for price stability, and vice versa. In fact, as part of our strategy review, we assessed that the ECB's set of conventional and unconventional monetary instruments implemented in the low inflation environment (including negative interest rates, asset purchases and longer-term refinancing operations) had been effective in bringing inflation close to target, while raising output and employment. At the Governing Council, we have implemented the appropriate monetary policy stance following a careful choice, design and calibration of instruments, both individually and in combination. We have been vigilant in managing possible risks to financial stability that may accompany our measures. Notably, we have not seen a significant abrupt repricing in the financial markets during the low interest rates era. In the last two years, where we have proceeded with a gradual and cautious withdrawal of the easing measures and with a considerable increase of our policy rates, the risk of strong asset price corrections has not materialised. At the same time, by addressing risks to financial stability and increasing the resilience of the financial sector, macroprudential and supervisory policies have helped ensure the smooth transmission of the monetary policy and have contributed to price stability over the medium term. Turning now to lessons learnt for banks: Prudent risk management is of utmost importance as a first layer of defence. The seeds of the most recent crisis episodes (e.g.: Silicon Valley Bank, First Republic Bank, Credit Swisse) emanate from risk management failures, in terms of product mix, concentration risk, search for yield, maturity mismatches etc. At the same time, it is essential to point out that the most recent episodes of individual bank failures in the United States and in Switzerland were prevented from morphing into systemic crises by the existence of complete banking unions. In the case of the U.S. banks, comments by senior U.S. economic officials that all deposits on the failed institutions would be guaranteed put a decisive end to the crisis. Short-termism vs. sustainability of banks' business models. Myopic strategies aggravate the impact of risk management shortcomings with devastating effects. Business model assessment should become an integral part of prudential supervision, while early intervention supervisory measures should be encouraged. In retrospect the merits of building-up appropriate macroprudential space in an era of accommodative monetary policy have become evident. The pandemic showed the importance of being able to release macroprudential capital buffers to 6/8 BIS - Central bankers' speeches mitigate the impact of unexpected shocks on the financial sector and the real economy. Moreover, macroprudential capital buffers and borrower-based measures could mitigate the impact of accommodative monetary policy on the credit and financial cycle as well as strengthen financial sector resilience. Last but not least, the strengthening of the crisis management framework in the euro area along with the completion of the Banking Union (namely in the form of the European Deposit Insurance Scheme) will enhance the preparedness to deal with banking crises. So far, the EU banking sector seems to have fared well despite a multitude of challenges. Nonetheless, there is no room for complacency. The authorities should prepare for a rainy day well in advance. The past crises show the importance of enhancing the institutional framework prior to the materialisation of risks. My firm belief is that, as integration and policy coordination in the monetary union progress, and with the establishment of a fully functioning Capital Markets Union and the completion of the Banking Union, which I consider of paramount importance, the euro area economy and its financial sector will become increasingly resilient to future shocks and adverse geopolitical developments. Every step forward might have its difficulties, but the associated gain makes it worth the effort. It is of paramount importance to realize that in a highly uncertain and fragmented world, which is subject to continuous supply-side shocks mostly due to geopolitical tensions, the result is higher producer and consumer prices as well as lower production and employment. The invasion of Russia in Ukraine and the subsequent war, which lasts for two years, has had very serious implications for the euro area economy: Inflation and interest rates have been much higher and GDP growth lower than in the absence of this terrible war, the first major war in Europe since 1945, with hundreds of thousands of innocent victims. This huge supply side shock for a net energy importer such as the euro area, indicates the difficulties that monetary policy is facing. Even if it possesses the above-mentioned desirable properties, it will not fully and satisfactorily achieve its stabilization role, unless it is assisted by appropriate fiscal and structural policies. And since we talk about the euro area, I ought to constantly remind you that the creation of the Capital Markets Union, the completion of the Banking Union and concrete steps towards a Fiscal Union, will greatly increase the efficiency of monetary policy. Finally, the variable that will determine to a large extent the sustainability not only of public debt but also of private debt, is the so called "snowball effect", that is the difference between the nominal effective interest rate of debt refinancing and the nominal growth rate. The "snowball effect" in the last several years has been negative, that is, the nominal effective interest rate of debt refinancing has been smaller than the nominal growth rate, and that contributed to the stability of public and private sector finances. Policy makers should understand the significance of the "snowball effect" and make sure that it has the right sign, if not always, at least for most of the time. A favourable "snowball effect" can contribute to the ability of our economies to remain resilient as we transition to the new normal. 7/8 BIS - Central bankers' speeches 1 The Governing Council adopted in October 2008 a fixed-rate full allotment tender procedure for open market operations. Moreover, the maturity of the refinancing operations was extended, and the range of eligible assets that could be used as collateral in refinancing operations was expanded. 2 Two Very Long-Term Refinancing Operations (VLTROs) with a maturity of three years (December 2011 and February 2012) were carried out. 3 Targeted longer-term refinancing operations (TLTROs) were designed to provide ample liquidity to banks on very favourable terms based on the banks' lending performance. The first series was launched in June 2014, the second in March 2016 and the third in March 2019. 4 The ECB intervened (from May 2010 to September 2012) by purchasing government bonds issued by certain countries via the Securities Markets Programme (SMP) and introduced (in September 2012) the possibility to undertake Outright Monetary Transactions (OMT), i.e. purchases of government bonds subject to strict conditionality. 5 The Asset Purchase Programme (APP) was initiated in October 2014 and was significantly expanded by the Public Sector Purchase Programme (PSPP) in March 2015. 6 By adopting the Pandemic Emergency Purchase Programme (PEPP) in March 2020 and easing its collateral standards and the terms of the TLTROs-III, to enable banks to extend credit to those hardest-hit by the pandemic. 7 According to ECB Monthly Bulletin, Issue 3/2020, Article on "Negative rates and transmission of monetary policy", empirical studies suggest a positive impact on loan growth of around 0.7 pp each year, attributed to the negative interest rate policy. 8 https://twitter.com/ecb/status/707936983239299073 9 See speech by Philip Lane at the 2020 US Monetary Policy Forum, "The monetary policy toolbox: evidence from the euro area", on 21 February 2020. 10 Implying that banks are usually reluctant to pass negative rates onto their depositors, especially households. 11 See Monetary dialogue with Christine Lagarde, Committee on Economic and Monetary Affairs, 19 November 2020. 8/8 BIS - Central bankers' speeches | bank of greece | 2,024 | 3 |
Opening address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Bank of Greece conference "Banking Resolution at Ten: Experiences and Open Issues", Athens, 15 May 2024. | Yannis Stournaras: Banking resolution at ten - experiences and open issues Opening address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Bank of Greece conference "Banking Resolution at Ten: Experiences and Open Issues", Athens, 15 May 2024. *** Distinguished speakers, Ladies and Gentlemen, The Bank of Greece welcomes you to this conference on the state of bank resolution regimes globally and in Europe, the experience of their operation over the past decade and the current debates on necessary reforms. I am delighted to be here with you today, and to share with you some thoughts on this issue, which I consider to be of the utmost importance for the future of banking – and European banking, in particular. Not by chance, this conference is taking place on the tenth anniversary of the adoption of the Bank Recovery and Resolution Directive under the Greek Presidency of the Council of the European Union in 2014, which for the first time established a harmonised pan-European framework for dealing with bank failures raising systemic concerns – a framework consistent with the new ideas and practices developed in the wake of the Global Financial Crisis first at the national level, and soon after at the G20 level, culminating in the Financial Stability Board's development of a globally applicable resolution standard for systemically important banks. Specifically, while the Basel III reforms sought to enhance the resilience of the banking systems by significantly strengthening the prudential standards for credit institutions, the new resolution frameworks were intended to provide a coherent, sophisticated and internationally consistent response to the problem of bank failures, especially those that raise systemic concerns. Banks play an important role in the economy, providing finance to households and businesses, while ensuring that depositors continue to have access to their funds. Any disruption caused by the disorderly failure of a bank could have a severe impact on the economy, and even trigger an economic downturn, as seen during the Global Financial Crisis. This does not mean, however, that we should operate a zero-failure regime, or that failed banks should be bailed out with taxpayers' money. Bad banks should exit the market. And no bank should be allowed to pass on the costs of its own mismanagement to the taxpayer just because it is considered "too big to fail". However, a bank's exit from the market should be orderly, should not disrupt the continuous provision of critical services, should not jeopardise the stability of the banking system as a whole and should avoid unnecessary destruction of value. 1/4 BIS - Central bankers' speeches In view of these considerations, the post-Crisis resolution frameworks seek to combine the preservation of systemic stability and the continuity of financial services with market discipline and the avoidance of taxpayer-funded bailouts of failed banks. This is also the main idea behind the Bank Recovery and Resolution Directive. In Europe, the adoption of the Bank Recovery and Resolution Directive, which introduced a harmonised set of rules for the resolution of banks across the Union, was followed two months later by the adoption of a very closely related instrument specifically aimed at the euro area, namely, a Regulation establishing the second pillar of the euro area Banking Union, the Single Resolution Mechanism. The first pillar of the Banking Union, the Single Supervisory Mechanism, contributes significantly to enhancing bank resilience by applying very high prudential standards in a consistent manner to all supervised institutions operating in the euro area and by reducing risks to the system. However, despite enhanced regulation and supervision, bank failures will inevitably occur. The responsibility for preparing for and dealing with this eventuality lies with the second pillar, the Single Resolution Mechanism. As we all know, this is an integrated, multi-level administrative mechanism, comprising a central component, the Single Resolution Board based in Brussels, and the national resolution authorities of the member states of the Banking Union (including, by the way, the Bank of Greece). The Single Resolution Mechanism is responsible for both resolution planning and the actual implementation of resolution measures once a bank is deemed to be failing or likely to fail. To finance its resolution actions, it has access to a Single Resolution Fund, which is pre-funded with contributions from the banking industry. The creation of the Single Resolution Mechanism was a bold and decisive step towards the integration of European banking markets. Subsequent events, including the handling of the failures of Banco Popular and Sberbank, have confirmed its value. At the same time, through the efforts of the Single Resolution Mechanism, banks in the Union have become more resolvable and thus safer. Not only have they built up their loss-absorbing capacity, but they have also developed their skills in all aspects of resolvability. Moreover, the Single Resolution Fund is now fully funded and mutualised, having reached its target amount. But this does not mean that all is well and that we should rest on our laurels. As last year's unfortunate events in the US, the UK and Switzerland have shown, there is no room for complacency. Instead, authorities should remain vigilant and draw on the lessons learned. As the Financial Stability Board concluded in its review, the bank failures of 2023 underscored the strengths of the international resolution framework. However, several issues were identified on which work needs to be done. Let me highlight a few: First, the US cases in particular showed that the framework should be flexible enough to allow authorities to take resolution actions to deal with the failure of medium-sized or even small banks. The reality is that the Bank Recovery and Resolution Framework was designed primarily to deal with the failure of significant institutions. While the use of insolvency proceedings may be a credible solution for small or medium-sized banks, 2/4 BIS - Central bankers' speeches there may be cases, as seen in the US, where the prospect or experience of depositors bearing losses may lead to runs by unsecured depositors on other banks perceived to be similar to the troubled bank, creating a systemic problem. Second, we need to maintain flexibility in the use of resolution strategies to deal with different scenarios, including liquidity crises. In this context, we may need to consider whether transfer tools or a combination of strategies might be more appropriate than the bail-in tool. Third, liquidity in resolution is of paramount importance. Authorities should be prepared to provide liquidity, as was the case in the US and Switzerland. On the other hand, resolution and competent authorities should work with banks to ensure that the latter can quickly mobilise collateral when needed. I expect that these issues will be analysed in detail today. As far as Europe is concerned, despite the progress made in the field of resolution on the basis of the two innovative instruments adopted ten years ago, the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation, the actual operation of the European resolution framework has revealed certain shortcomings and outstanding issues that need to be addressed. Fortunately, the proposals for reform of the European crisis management and deposit insurance framework tabled by the European Commission in April 2023 point in the right direction. This legislative package, which is currently under discussion in the European Parliament and the Council, promises to introduce many necessary improvements. In particular, the Commission's proposals: extend the resolution framework to medium or small banks, facilitating the financing of the sale of selected assets and liabilities through MREL funds and, in exceptional cases, through the deposit guarantee schemes; propose that all depositors be given the same preferential treatment, or priority, in the hierarchy of banks' liabilities, that is, the order in which a bank's various liabilities are satisfied in the event of insolvency, thereby achieving greater harmonisation of the hierarchy of creditors across the Union, while facilitating the use of deposit guarantee scheme funds to finance resolution actions; harmonise the conditions for the financing by deposit guarantee schemes of preventive and alternative measures aimed at ensuring the continuity of a failing bank's operations, as an alternative to simply allowing the bank to fail and then paying out covered deposits. If the package is adopted as proposed, this will facilitate the use of such preventive and alternative measures, always subject to the least-cost constraint, which prohibits the financing of such measures if their application would expose the deposit guarantee scheme to higher losses than a traditional payout to depositors. safeguards, to a maximum possible degree, level playing field among member states in the issues concerned. 3/4 BIS - Central bankers' speeches Three weeks ago, on April 24th, the European Parliament completed its first reading of the draft legislative texts on crisis management and deposit insurance. The texts adopted by the Parliament indicate its support for the general direction proposed by the Commission. The main difference relates to its preference for a two-tier, rather than a single-tier, depositor preference in the hierarchy of banks' liabilities, that is, their order of redemption in the event of insolvency. We expect the European Council to show ambition and to reach agreement soon on the general approach. It is of the utmost importance that the legislative package progresses quickly and that the current one-size-fits-all approach is replaced by a more flexible one. This will allow authorities to use their toolkit appropriately, to adapt its use to the specificities of real bank failures and to avoid systemic repercussions. Finally, we should bear in mind that the current proposals do not address the most important missing element of the European bank crisis management framework. This is the establishment of the third pillar of the Banking Union, the European Deposit Insurance Scheme (or EDIS), which still face resistance by a few Member States. It is to be hoped, however, that the harmonisation of the role and powers of national deposit insurance schemes as part of the ongoing reform could also serve as a basis for progress on the EDIS file in the near future. This, among others, will be a step in the right direction in eliminating fragmentation in the banking sector in Europe, allowing for more ambitious cross-border transactions among banks (e.g. mergers and acquisitions) and ultimately, achieving economies of scale and higher efficiency. Once again, it is a pleasure to host today's event at the Bank of Greece and I hope that you will enjoy the discussion throughout the day. Thank you for your attention. 4/4 BIS - Central bankers' speeches | bank of greece | 2,024 | 5 |
Opening remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the presentation of the EIB Investment Survey Results 2023 for Greece titled: "The Greek economy: investment gap and the financing of investment needs", Athens, 30 May 2024. | Yannis Stournaras: The Greek economy - investment gap and the financing of investment needs Opening remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the presentation of the EIB Investment Survey Results 2023 for Greece titled: "The Greek economy: investment gap and the financing of investment needs", Athens, 30 May 2024. *** Ladies and gentlemen, I would like to welcome you to the ank of Greece and to the presentation of the results of the 2023 EIB investment survey for the Greek economy. In my opening remarks, I will briefly refer to the growth prospects of the Greek economy and to the particularly important role of investment. 1. The Greek economy: current state and prospects The Greek economy grew by 1.2% in the fourth quarter of 2023, after 2.1% in the previous quarter. This slowdown is attributed to declines in the growth rate of investment and of exports of goods. For 2023 as a whole, the economy continued to grow at a satisfactory rate (2%), but weaker relative to the exceptional growth in 2022 (5.6%). Yet, despite successive international crises and high uncertainty due to geopolitical tensions, the Greek economy has grown faster than the euro area average since 2021. Private consumption, exports of goods and services and gross fixed capital formation remained the main drivers of growth in 2023, although the slowdown in the economies of key trading partners and high inflation exerted a dampening effect on these GDP components. Overall, in the coming years, the Greek economy is projected to outperform the euro area. This development is particularly important, as it reinforces the process of convergence of Greece's real GDP per capita with the average levels of the EU, which was interrupted during the sovereign debt crisis. The main driving forces of economic activity will continue to be investment spending, thanks to the contribution of the European funds, in particular of the RRF, as well as private consumption, due to a rise in real disposable income on account of higher employment and lower inflation. 2. The role of investment spending Given the problems of population ageing, low birth rates and low labour force participation, the role of investment in physical and human capital becomes decisive for the future course of the economy in both the short and the long run. In the short run, investment spending boosts demand and growth. In the long run, it increases the capital stock of the economy and raises the growth rate of potential output. Investment spending can contribute to economic growth, whether it involves improvements in infrastructure, education and health, or investments in productive equipment, machinery as well as intangible assets and cutting-edge technologies. As a 1/4 BIS - Central bankers' speeches result of the increase in the stock of physical and human capital, labour productivity improves, and a sustainable rise in workers' real wages and living standards becomes possible. However, the persistently low level of productive capital accumulation has been a significant obstacle to productivity growth and convergence with the EU average. In particular, Greece has witnessed a sizeable investment gap vis-à-vis the EU since the sovereign debt crisis. Specifically, according to the European Commission,1 investment in real terms was almost 50% lower in 2022 relative to 2008. The investment-to-GDP ratio, which hovered around 24% before 2008 (i.e. at a level comparable to the EU average), collapsed during the crisis and averaged 11.9% in 2010-2020. A recent IMF study estimates that the investment gap, according to certain measures, in Greece reached up to 8% in terms of GDP in 2019. According to the study, structural impediments have constrained corporate investment, while business cycle and balance sheet developments have held back household investment. The investment-to-GDP ratio has increased in recent years, as a result of strong investment growth in 2021-2022. Corporate investment has recently fully recovered to pre-2010 levels, while residential investment is low but growing at a rapid pace due to strong domestic and foreign demand from European and third-country investors in the context of the Golden Visa programme. However, the investment-to-GDP ratio still remains lower than the EU average (14.3% vs. 22.0% in the EU in 2023). However, it should be noted that it is not only the Greek economy that faces an investment gap. Rather, this holds also for the EU as a whole compared to the US. According to a recent EIB study,2 the investment gap between the EU and the US is attributed, among other things, to output dynamics, high cost of capital, financial constraints, corporate leverage and uncertainty. The drivers behind the gap include investment differences in machinery, equipment and innovation. In particular, there is a big gap in investment in ICT equipment (especially in the services sector) and in intellectual property products. In the case of Greece, the gap in productive investment compared to the US is the largest in the EU. 3. What to do next? The timely absorption and disbursement of RRF resources in the private sector is crucial for the achievement of the projected growth rates of gross fixed capital formation in 2024-2026. So far, the absorption rate of RRF funds is satisfactory (41% out of the total envelop of €36 billion), and Greece is fourth in the relevant ranking of countries according to a recent European Commission report. However, disbursements to businesses are progressing at a slower pace (14% of the total), which delays actual investment spending. A wide range of ambitious reforms must be implemented to close the investment gap and accelerate the growth rate of the Greek economy. These reforms should aim to address structural weaknesses such as delays in the administration of justice, red tape in public administration and the digital skills deficit. At the same time, however, it is necessary to eliminate market-restrictive practices by removing barriers to entry and opening goods and services markets to competition. 2/4 BIS - Central bankers' speeches Structural reforms will help attract foreign direct investment3 and facilitate greater participation of Greek businesses in global value chains. This will contribute to the adoption of innovative production methods and new technologies, enabling Greek businesses to produce high value-added and knowledge-intensive products. This, in turn, will lead to an increase in the labour and total factor productivity of the Greek economy. A key driver towards increasing investment and achieving stronger growth is a robust banking sector that can provide financing to businesses and households. Over the past decade, significant progress has been made in strengthening the banking sector. In particular, banks' profitability, liquidity, capital adequacy and asset quality have all improved, while the divestment of the Hellenic Financial Stability Fund (HFSF) from the systemic banks' equity has also progressed. That said, the shock absorption capacity of the banking sector should be further enhanced. This includes a quantitative and qualitative improvement of the capital base of Greek banks and convergence of their NPL ratio to the European average. Moreover, intensifying competition in the domestic banking sector through the creation of the so-called fifth pillar could improve financing conditions. The availability of bank credit to meet business investment needs could be enhanced by utilising all national and European financial instruments, such as those available from the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD), the Hellenic Development Bank (HDB) and the RRF. In addition to bank financing, the use of all available forms of private investment financing, including access to capital markets, should be considered. Venture capital, private equity, crowdfunding, business angels, startup accelerators and microfinance can be used to finance the investment needs of SMEs that do not have sufficient tangible assets to offer as collateral for obtaining bank credit. 4. Concluding remarks In closing, I would like to point out that the progress made in recent years and the positive prospects of the economy are reflected in the upgrading of the credit rating of Greek government bonds to investment grade status. However, continuous efforts are needed to accelerate the growth rate in the coming years. This requires the implementation of structural reforms and the utilisation of all available European funds, which are decisive for the financing of investment. I look forward to hearing the EIB's views and the findings of its investment survey, as well as the insights of all our distinguished speakers into the investment outlook and the financing of the investment needs of the Greek economy. 1European Commission (2024), "In-Depth Review 2024 – Greece", Institutional Paper 281, April. 2 European Investment Bank (2024), "Dynamics of productive investment and gaps between the United States and EU countries", Economics – Working Papers 2024/01. 3/4 BIS - Central bankers' speeches 3 Recent research finds that product and labour market reforms lead to a cumulative rise of about 2% in FDI and of 1% in GDP by the end of a five-year horizon. See Mavrogiannis, C. and A. Tagkalakis (2024), "From policy to capital: assessing the impact of structural reforms on gross capital inflows", Bank of Greece, Working Paper No. 328, April. 4/4 BIS - Central bankers' speeches | bank of greece | 2,024 | 6 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Brussels Hellenic Network, Argo, in honour of new MPEs for Greece and Cyprus, Brussels, 10 July 2024. | Yannis Stournaras: The role of the ECB monetary policy in achieving a soft landing in the euro area Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Brussels Hellenic Network, Argo, in honour of new MPEs for Greece and Cyprus, Brussels, 10 July 2024. *** Introduction I would like to thank my friend Spyros Pappas for inviting me to discuss the role of the monetary policy of the European Central Bank (ECB) in achieving a soft landing in the euro area. As you know, in the past few years, the Governing Council of the ECB has followed a meeting-by-meeting, data dependent approach to monetary policy. Therefore, I will start with a brief overview of recent economic developments that have paved the way for entering the "dialling back" phase of our monetary policy. I will then explain the rationale behind our recent monetary policy decisions. Finally, I will touch upon the challenges faced by the monetary policy of the Eurosystem (which includes the ECB and the national central banks of the euro area). My speech comprises seven sections: 1. Inflation outlook in the euro area Inflation in the euro area has fallen sharply since hitting a peak of 10.6 per cent in October 2022, to stand at 2.5% last June. At the same time, core inflation also decelerated substantially from its March 2023 peak, when it had reached 7.5% as measured by the HICP excluding energy and unprocessed food.1 Since our last rate hike in September 2023, we have seen a stronger-thananticipated decline in inflationary pressures. Consider the following: Inflation declined from 5.2% last August (the month immediately prior to the last rate hike at the September meeting on monetary policy), to 2.5% in June 2024. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened. Core inflation has sharply decreased from 6.2%2 in August 2023 to 2.9% in June 20243. In June, the highest contribution to the inflation rate came from services. Services inflation remains elevated, but it has followed a broadly declining path since last summer (from 5.5% last August to 4.1% in June 2024). 1/7 BIS - Central bankers' speeches Inflation expectations have declined at all horizons. Longer term market-based measures of inflation compensation have come down notably, from an average of 2.7% last August to 2.3% in June 2024. Our June 2024 projections show inflation coming down towards our 2% target over the second half of next year, as inflationary pressures are expected to subside. eadline inflation is projected to average 2.5% in 2024, 2.2% in 2025 and to fall below our target, to 1.9%, in 2026. Over the coming quarters, inflation is expected to fluctuate around current levels, due, inter alia, to energy-related base effects. In fact, excluding these base effects, a decline in inflation would have materialised over the respective period. Base effects are expected to fade out at the beginning of 2025, while, at the same time, fiscal support measures are unwound. Wage developments are also important, as they are a key driver of inflation at the current juncture. The latest data, pointing to an increase in negotiated wage growth to 4.7% in the first quarter of 2024, from 4.5% in the fourth quarter of 2023, have surprised on the upside. Still, one-off payments in the public sector in Germany, have largely affected this outcome, whereas developments in other euro area countries are more encouraging. The German public sector wage increase reflects the fact that negotiated wages in that sector had not been raised since 2021. Wage growth is expected to remain elevated in 2024, and to show a bumpy profile. These developments reflect the staggered nature of the wage adjustment process as workers continue to recoup real wage losses from past price shocks. However, leading indicators suggest that data on wages earlier this year may have been the peak, and that wage growth will ease during the remainder of 2024. According to the ECB wage tracker data for the first few months of the year, when most agreements take place, negotiated wage pressures are moderating. This is supported by other indicators of wage pressures such as the Indeed wage tracker4 based on job postings, which has materially decelerated in recent months (from a peak of 5.4% in October 2022 to 3.7% in June 2024.) The impact of higher wages on price pressures depends on the rate of labour productivity growth. A recovery in productivity growth should support the moderation in labour cost pressures. An ongoing decline in profit margins also reinforces the confidence that domestic inflation will continue to normalise, effectively "buffering" the pass-through of wages to prices. Overall, the disinflation process is proceeding. Our latest projections reinforce our confidence that we are getting consistently closer to our inflation target. Although the process may be slow and bumpy, these fluctuations should not affect the projected disinflation. Economic activity The euro area economy grew by 0.3% in the first quarter of 2024, after five quarters of stagnation. 2/7 BIS - Central bankers' speeches Incoming information suggests continued growth in the short run, at a somewhat higher pace than previously foreseen. Specifically, according to the June projections, economic growth is expected to rise to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026. Nevertheless, the recovery remains fragile. There are several reasons why I am cautious about the growth outlook. First, global developments and geopolitical tensions are weighing on confidence and economic activity. Second, monetary policy affects the economy with long and variable lags. The impact of past policy tightening continues to be transmitted strongly to broader financing conditions and the real economy. The restrictive policy stance at a given point in time continues to affect inflation and output about one to two years after that. In this regard, a significant dampening effect on growth and inflation is still in the pipeline from past monetary policy tightening. This explains why credit dynamics remain weak and will remain so for some time to come. I will now turn to our monetary policy response during the last couple of years. 2. Monetary policy response In the past few years, we faced an unprecedented series of supply-side shocks – the kind of shocks not easily amenable to monetary policy measures – and we succeeded in bringing inflation down to near our objective within 18 months of the peak inflation, while avoiding putting the economy into a contractionary territory. We raised interest rates to sufficiently high levels to tame inflation without inducing a recession – which was the first arm of our policies – while, at the same time, we adopted a gradual approach to reducing the size of our balance sheet – the second arm of our policy toolbox. Our monetary policy response has proved to be pragmatic, flexible and highly effective. As inflation approaches the 2% target, while economic recovery and credit growth remain weak, we decided that some layers of restriction are no longer appropriate. As you know, at last month's Governing Council meeting we took the first step to lowering rates from their all-time highs. We cut the key ECB interest rates for the first time in almost five years (since September 2019). However, our monetary policy remains in restrictive territory, and it will continue to be restrictive for some time into the future. Financing conditions, especially at the long end, have tightened significantly since the beginning of the year, and will remain tight even after several rate cuts. The ongoing decline in our balance sheet, i.e. the aggregate balance sheet of the central banks that comprise the Eurosystem, due to the run-off in our asset purchase programmes and the repayment of TLTROs over the course of this year, will also represent an additional tightening of financing conditions. The challenge ahead is to ensure that inflation continues to fall and approaches our objective in a timely way, while at the same time growth strengthens to reach sustainable levels ensuring full employment. In these circumstances, the Governing Council faces a balancing act: 3/7 BIS - Central bankers' speeches We want to bring inflation to our objective by the end of next year. This will call for policy restraint in the months ahead. But we don't want to undermine the incipient economic recovery and risk bringing inflation to levels below our 2% target. Indeed, according to the June projections, inflation is expected to undershoot our target in every quarter of 2026. I will not comment on possible further rate cuts this year other than to say that, first, we need to wait and see how the data develop and, second, even with additional rate cuts, monetary policy will remain well in restrictive territory. In this journey, maintaining gradualism and flexibility will remain key in mitigating unwarranted economic volatility and financial stability risks, while ensuring the efficiency and proportionality of monetary policy measures and preserving our credibility. We will continue to be data-dependent, assessing all incoming information in each of the forthcoming monetary policy meetings. Amid elevated economic and geopolitical uncertainty, we will remain cautious and vigilant to adjust our policy stance in stepwise cuts of our interest rates as warranted. 3. Global uncertainty challenges and geopolitical developments No one could have predicted the series of supply shocks that struck the euro area economy in the past few years. Therefore, no one could have predicted – and no one did before the fact – the rise in inflation that followed. Some 40 years ago, Nobel Laureate James Tobin said that we know little about predicting inflation. That remains true today. In a world prone to supply disruptions and susceptible to political uncertainties, monetary policy can only try to buffer the effects of external shocks on the real economy and on inflation. The past two years have seen an escalation of violence, with Russia's unjustified war against Ukraine and the unfolding of the Middle East crisis last autumn. 2024 is a year of increased electoral activity. There are five months to go to US elections, the outcome of which could alter the course of the global economy. Nationalist parties made major gains across the euro area in the European Parliament elections, challenging leaders in Germany but also France, where snap elections have been called. Monetary policy has navigated in the turbulent waters of heightened uncertainty in the past several years. It will continue to navigate in those turbulent waters in the period ahead. 4. Climate change challenges At the ECB we have a very clear mandate, which is enshrined in the Treaty and has a focus on price stability. We also have an important role to play in addressing the challenge of climate change, always within the limits of our mandate. Physical and transition risks can threaten price stability, but also become a source of instability and vulnerability for the financial system, thereby also affecting the transmission of monetary policy. At the same time, in addition to the risks created by climate change, adapting to climate change can bring opportunities, as required investment will bring new, 4/7 BIS - Central bankers' speeches more efficient and more sustainable forms of development, towards a more resilient and green economy. The financing of these investments is also an opportunity for the financial system and the more efficient use of the savings of European citizens. At the ECB we have different sets of actions, from risk management to better macroeconomic modelling and to including climate change risks and mitigation measures in many aspects of our work. 5. Policy challenges related to recent political developments Monetary policy has a single anchor in price stability, and that anchor is immune to political influence. As an independent institution, the ECB will continue to conduct its monetary policy to attain its price stability objective. The ECB has earned its credibility by focusing on this objective, and not being diverted by political pressures. It will continue to be led by its mandate in the future. The economic agenda of some of political parties is disconcerting, because it includes such policies as increased protectionism and highly expansionary fiscal policies. We have learned over the years – and sometimes the hard way – that to maximise our citizens' welfare we need free trade policies and a sustainable fiscal stance. 6. Decoupling between the ECB and FED monetary policy decisions The euro area monetary policy stance needs to be differentiated from that in the U. S. The two economies are at divergent positions, with inflation falling faster in the euro area. Two reasons why inflation has fallen faster in the euro area than in the U.S. are: (1) the U.S. inflation cycle was mainly demand driven, whereas the euro area has been hit more severely by supply side shocks (the energy prices surge and Russia's invasion of Ukraine) and (2) the U.S. fiscal stance since 2020 has been highly expansionary. In particular, the U.S. fiscal deficit stood at 8.8% of GDP in 2023, up from 4% in the previous year, after having reached about 14% in 2020 and 11% in 2021. By contrast, in the euro area the fiscal deficit stabilised at around 3.5% of GDP in the previous two years, from 7% in 2020. On the other hand, economic growth in the euro area is more sluggish and fragile than in the U.S. Due to the differing macroeconomic situation, the monetary policy actions of the Fed and the ECB might turn out to be different. The way forward for the Eurosystem should only have to be based on what serves our price stability mandate and our domestic economy. We need to focus firmly on domestic conditions, taking into account any impact from the expected path of U.S. interest rates. Domestic conditions provide the guideposts on our decisions. Furthermore, as Philip Lane, Chief Economist of the ECB, said in a recent interview with the Financial Times,5 delays in the expected timing of Fed 5/7 BIS - Central bankers' speeches rate cuts have pushed up U.S. bond yields and this has also lifted long-term yields of European bonds, creating some extra tightening from the U.S. conditions". Philip indicated that the ECB might have to offset this with extra cuts to its policy rates. Of course, a divergence of interest rate paths of the euro area and the largest economy in the world could impact on the exchange rate and on trade. These effects are difficult to predict. Our gradual and data-driven approach will allow us to respond to any undesirable developments. 7. he forecasting performance of the ECB Although the accuracy of the ECB's economic forecasts diminished in the past few years, forecasting performance worsened to a comparable degree in other central banks and by private sector forecasters. The decline in forecasting performance reflected a series of shocks, including the pandemic, along with the economic and policy consequences of those shocks (e. g. the enormous fiscal expansion in the U.S. beginning in 2020), the sharp rises in oil, gas, and other commodity prices which were exacerbated following Russia's invasion of Ukraine, and the sustained disruption of global supply chains during and after the pandemic. The deficiencies experienced in the forecasting performance of the ECB were characteristic of the central banking community in general and have also been emphasised in Ben Bernanke's report on forecasting at the Bank of England. No forecaster could have foreseen the outbreak of Covid-19 or the war in Ukraine. We appear to have entered a new period of higher uncertainty, with shocks originating from both the demand and supply sides. Our models need to be reviewed and further upgraded to account for this uncertainty. This has also been the finding of the Bernanke Report. We constantly assess the status of our forecasting and modelling infrastructure, and strive to improve on it in close co-operation within the Eurosystem. We will never be able to accurately forecast the outbreak of epidemics and wars, but we should ensure that our models are able to detect those shocks soon after they occur, and to predict their effects as accurately as possible. Our projections are very useful and comprehensive tool that analyses the data that we receive and helps to make decisions. Having said that, it is also important to point out that no central bank is entirely model-dependent. In our projections, the staff always incorporates a good amount of judgement, so that forecasts better guide our assessments of the most recent economic and geopolitical developments. In concluding my speech, I would like to highlight the following factors which, in my view, explain the success of the ECB's monetary policy, so far, in bringing inflation back very close to the 2% target, despite a series of shocks, mainly on the supply side, but also on the demand side, which started with the pandemic and continued with Russia's unjustified and violent invasion of Ukraine. First, the institutional independence of the ECB and the national central banks comprising the Eurosystem. 6/7 BIS - Central bankers' speeches Second, the commitment to the 2% inflation target, using key interest rates as the primary monetary policy tool, together with non-standard measures, when required by macroeconomic and monetary conditions. Third, a pragmatic, flexible and gradual approach, in an environment of heightened uncertainty. Fourth, clear and effective communication from the ECB. Note: The speech was published on July 19, 2024 due to the "quiet period" observed by members of the Governing Council before key meetings. 1 Core inflation as measured by the HICP excluding energy, food, alcohol and tobacco had peaked at 5.7 per cent in March 2023. 2 As measured by the HICP excluding energy and unprocessed food; core inflation as measured by the HICP excluding energy, food, alcohol and tobacco stood at 5.3 per cent in August 2023. 3 Based on the flash estimate by EUROSTAT, released on July 2nd, 2024. 4 The Indeed tracker is a monthly wage growth tracker, developed by the Central Bank of Ireland (CBI) in collaboration with the Indeed online platform, and examines trends in wages posted in online job ads. It is based on data from millions of online job postings on the Indeed platform across France, Germany, Ireland, Italy, the Netherlands, Spain and the U.K. 5 Interview with Financial Times on 24 May 2024. 7/7 BIS - Central bankers' speeches | bank of greece | 2,024 | 8 |
Welcome speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 6th Endless Summer Conference on Financial Intermediation and Corporate Finance, Vouliagmeni, 3 September 2024. | Yannis Stournaras: Welcome speech - 6th Endless Summer Conference Welcome speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 6th Endless Summer Conference on Financial Intermediation and Corporate Finance, Vouliagmeni, 3 September 2024. *** Ladies and Gentlemen, On behalf of everyone here at the Bank of Greece, I am pleased to welcome you all to the second day of the 6th Endless Summer Conference on Financial Intermediation and Corporate Finance. Over the past six years, this conference has established itself as a premier platform to share rigorous research in the fields of financial intermediation and corporate finance. I understand that about thirty papers presented in the last editions have been published in top peer-reviewed journals in finance and economics. This achievement is undoubtedly a reflection of the high quality of the conference's research program. The focus of the conference is directly relevant to the work of a central bank. New (and old) risks loom high. Geopolitical shifts fundamentally reshape the business environment for financial intermediaries. Technological advances and new climaterelated risks also put the current business models to the test. At the same time, corporate finance continues to evolve in response to emerging trends such as the incorporation of environmental, social, and governance (ESG) criteria into investment decisions. In view of the obvious importance of these risks for the transmission of monetary policy and financial stability, I am indeed pleased that so many eminent speakers in the fields of financial intermediation and corporate finance are present to lead the discussions today and I am sure that the conference will provide plenty of food for thought. Today's event is structured into three sessions, each of which includes presentations on cutting-edge topics: In the first session, we will see research about the implicit trade-off between financial stability and economic performance when designing macroprudential policies, a topic clearly of high value to central banks. The discussion will highlight that setting higher bank capital requirements to increase the resilience of the banking sector to domestic financial shocks is, however, associated with a larger reliance on foreign liabilities which make the economy more vulnerable to external financial shocks. We will also see a paper on the far-reaching implications of the shift towards digital banking and the decline in physical bank branches on local economies. All in all, the findings will show, and in my opinion this is how technology works for the real economy, that there are mixed blessings of technological disruption: large gains often come at the expense of some losses. 1/3 BIS - Central bankers' speeches The last paper of this session explores the increasing reliance on bond financing by small, private, and unrated firms in the euro area. I understand that this shift has implications for financial stability and firms' access to credit, especially during economic turmoil. In a more general context, the global rise of bond financing is of course of particular interest in Europe, as its financial sector has always been heavily bank-based relative to the US. The topics on which the second session focus follow naturally from the first. We will first see research on the potential of SupTech, the use of innovative technology by supervisory agencies to support supervision, in enhancing financial stability. This type of research is of high policy relevance since SupTech initiatives have gained momentum around the world, but little is known about how the use of SupTech impacts bank behavior. Next, we will hear about the emergence of two distinct types of banks-high-rate and lowrate banks-each characterized by different deposit rate behaviors and how technological advancements in banking contributed to the divergence between these two types. Understanding this shift is particularly relevant today, as more banks opt to operate online and the allocation of deposits across banks has significant implications for the transmission of monetary policy. The last session of the day features another three interesting papers. The first paper looks on how bankers affect the personal finances of their social connections. This is an idea that it worths examining given that earlier work shows peer effects play an important role in various financial decisions by households. The effect that financial intermediaries have on the macroeconomy, has been central to macroeconomics and has received significant attention from researchers in recent decades. As such, the session also includes a paper on the causal effects of changes in financial intermediaries' net worth in the aggregate economy. Finally, the second day of the conference will end with a paper suggesting a unified model on how firms should optimally manage emissions through production, green investment, and the trading of carbon credit. This type of research is extremely important now since the control of carbon emissions is a pressing issue for both policymakers and firms. At this point, let me say that as you know very well, the last few years have been an incredibly challenging time for monetary policymakers. No one could have predicted the series of supply shocks that struck the euro area economy and therefore, no one could have predicted – and no one did before the fact – the rise in inflation that followed. Nevertheless, we have managed to chart a path through this uncertainty. The challenge ahead is to ensure that inflation continues to fall and approaches our objective in a timely way, while at the same time growth strengthens to reach sustainable levels ensuring full employment. The nature of the risks we are facing is however unusual. Increasingly, volatility in growth and inflation will be driven by a pair of major structural forces such as 2/3 BIS - Central bankers' speeches geopolitical fragmentation and climate change, that we have next to no experience of. These risks are particularly difficult to quantify and forecast. They present a unique challenge for central banks – a challenge that calls for a different type of response. In this new and highly uncertain environment, we look to academics and researchers to guide us through uncharted waters. It is through path-breaking research, that policymakers' knowledge can grow. Furthermore, from my perspective, it has become apparent that aggregate data are not enough, and policy makers need more granular data. Micro data firstly improve our understanding of the transmission mechanism of monetary policy and secondly allow us to better understand the aggregate data and thus better forecast their evolution. The combination of methodological developments and the increased availability of granular data may facilitate much richer analysis and more informative quantitative estimation of the impact of various types of shocks and, crucially, the impact of various types of policy measures. That said, the European System of Central Banks is actively conducting research with the aim to deepen our understanding of how monetary policy transmits to the European economy. The Bank of Greece has an active Research Department which pursues several avenues of economic and financial research, both theoretical and empirical. In addition to its own research, the Bank of Greece is involved in research projects carried out within the wider context of the European System of Central Banks through its participation in various research networks. I would also like to point out that the Bank of Greece is one of the first central banks worldwide to engage in climate change and sustainability issues, having set up as early as in 2009 the Climate Change Impacts Study Committee (CCISC). Concluding, a major task of central bank research is to bridge the possible gap between academics and policy makers and to create occasions for interactions with the academic community. We trust that research is enhanced by exposure to external ideas and latest advances in the field. Once again, it is a pleasure to host today's event at the Bank of Greece and I wish you an interesting and fruitful conference. I hope that you will have a pleasant time in Athens, a city renowned for its enduring warmth and hospitality. Not by chance, the organizers have chosen September for this conference, so that you can all take advantage of the Athenian climate! Thank you for your attention. 3/3 BIS - Central bankers' speeches | bank of greece | 2,024 | 9 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Non-Performing Loan (NPL) Meeting 2024 "Step Forward", organised by Banca Ifis, Cernobbio, 27 September 2024. | Yannis Stournaras: The Greek experience in dealing with NonPerforming Loans and the challenges ahead for EU banks Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the NonPerforming Loan (NPL) Meeting 2024 "Step Forward", organised by Banca Ifis, Cernobbio, 27 September 2024. *** I would like to thank the Chairman of Banca Ifis for inviting me in this very interesting forum. In my short intervention today, I will share with you our experience in dealing with NPLs in Greece and I will then outline the key challenges ahead for the banking system in the euro area. Part A: Dealing with NPLs in Greece As you all know, Greece suffered greatly throughout the previous decade from an acute economic crisis that reduced domestic GDP by ~25%. We experienced an economic contraction that is equivalent to some of the worse post-war crisis episodes in global economic history. Inevitably, the economic recession took a toll on the asset quality of all Greek lenders. Within just a few years, about half of the banks' loan book was non-performing. NPLs became the largest asset class in Greece - for the Small and Medium-Sized Enterprises (SMEs) and the Small Business and Professionals (SBPs), which are the backbone of the Greek economy, about two thirds of the obligors were in default at the peak of the crisis. Today, the picture is completely different, as banks have managed to reduce their NPLs ratio to just north of 5% (which is closer to the EU average) through a combination of measures, notably using an Asset Protection Scheme called 'Hercules' which is similar to the Italian GACS. If I can briefly outline the key takeaways from our experience in dealing with NPLs over the past decade, these are the following: First, it is important to understand that dealing with NPLs in a systemic crisis requires a multi-faceted strategy that includes legal, operational, and financial aspects. he timely recognition of the problem and the need to take policy actions at an early stage are of utmost importance. Having said this, I fully acknowledge the difficulty to address legacy loans in a recessionary environment. NPL reduction is more feasible in a growing economy (e.g. improving financial position of households and non-financial corporates, increasing collateral value, etc.). Strengthening the legal framework for bankruptcy and insolvency procedures is essential. Streamlining processes such as collateral enforcement and speeding up judicial procedures significantly contribute to reducing NPLs. In a nutshell, all 1/4 BIS - Central bankers' speeches kind of impediments to NPL workout should be removed. That was a very important lesson learnt during the past decade. To give you an example: in the early years of the crisis, it became evident that some kind of protection for the primary residence was necessary, to ensure social cohesion and the protection of vulnerable obligors. In 2010, the then government introduced a Law that aimed to protect homeowners from foreclosure by offering protection to primary residences under certain conditions. However, some deficiencies in the design of the measure resulted in the erosion of the payment culture and encouraged the emergence of the so-called 'strategic defaulters'. Since then, Greece has reformed its insolvency laws, making it easier for banks to recover assets. The new insolvency framework aimed to accelerate proceedings, reducing the time it takes for banks to recover funds from insolvent borrowers. In addition, the introduction of electronic auctions for foreclosed properties streamlined the process, allowing banks to recover funds more quickly and efficiently. Banks also need to have an adequate NPL governance function to deal with the problem. They should also have the proper capital and provision cushions to absorb the losses associated with NPL management. The role of the supervisor is important here. Continuous and rigorous supervision by authorities ensures that banks adhere to NPL reduction plans. Supervisors must monitor banks' progress and impose corrective actions when targets are not met. The SSM also played a critical role in pushing banks to offload their NPLs through the application of the so-called 'prudential backstop' as a Pillar 2 measure. Facilitating the development of secondary markets for NPLs, where these assets can be sold to investors, is vital. This includes creating a regulatory environment that attracts investors and ensures transparency and fairness. On transparency, I would like to point out that having publicly available data on recoveries is useful (I understand that such data is available in Italy). Another important lesson is that it is impossible to address quickly the problem without a systemic solution for NPLs (such as an Asset Protection Scheme (APS) or an Asset Management Company (AMC)). The design of the scheme is of equal importance, to ensure minimum impact on taxpayers. The clear benefit in Greece from the introduction of the Hellenic Asset Protection Scheme ('Hercules') was the quick clean-up of banks' balance sheets. Before the introduction of HAPS, banks were unable to deliver a material improvement in their asset quality, and the key driver of NPL reduction was loan write-offs. The introduction of HAPS changed completely the landscape (also for the LSIs, where it is typically even more difficult to deal with NPLs). Banks of course recorded a substantial loss, but this loss was lower compared to an outright sale. At the same time, banks got capital relief, since the senior notes they hold bear the Greek government guarantee and thus have a zero risk weight. Effective coordination among the government and supervisory authorities is crucial. The implementation of reforms and frameworks (like the NPL reduction plans) needs alignment between these entities to be successful. 2/4 BIS - Central bankers' speeches Private debt resolution is also important from a macroeconomic perspective. Even if the NPLs are off the banks' balance sheets, the debt is still there and should be duly addressed. The role of NPL servicers is very important in this respect – debt needs to be restructured and/or forgiven to allow obligors a second chance. If this is not done, the result will be that a significant proportion of economic agents are no longer bankable. Finally, I would like to stress the importance of governance and transparency. As there is no cloud without a silver lining, the crisis forced Greece to implement the most advanced governance and transparency measures in its financial institutions, Systemic as well as Less Significant ones. Among other things, even the smallest cooperative bank in Greece is now applying International Accounting Standards, while there are no exceptions to European directives or SSM rules. Part B: Challenges ahead for EU banks Now, let's move on to the EU banking system and the challenges ahead. EU banks have currently solid fundamentals that were gradually built up after the Global Financial Crisis. To give you some more colour on this, based on the EBA Risk Dashboard1: In December 2009, the Total Capital Ratio (TCR) of EU banks was 13%. Since then, banks executed several capital accretive actions and now enjoy wide capital buffers with an average TCR at 20% in March 2024. The most impressive improvement was in asset quality, as banks lowered the average NPE ratio from levels close to 7% (in 2016) to 1.9% in March 2024. Banks' profitability has also improved lately, as the net interest income of most lenders benefited from the increase in interest rates. Recall that, at some point in time over the previous decade, the average Return on Equity (RoE) for EU banks was barely positive. With March 2024 data, the average RoE for EU banks reached 10.6%. Finally, EU banks enjoy ample liquidity with a solid deposit base and full access to the wholesale and capital markets. In March 2024, the average Liquidity Coverage Ratio (LCR) of EU banks was 161.4%, well above the supervisory minimum of 100%. The positive macroeconomic environment is also supporting the financial fundamentals of EU lenders. However, risks to financial stability have been rising: Geopolitical risk remains high for some time now, since the Russian invasion of Ukraine, and is further fuelled by the tensions in the Middle East. Political developments in the US and the EU are also creating uncertainty. Geopolitical risk is an exogenous risk factor which could potentially have immense repercussions on the banking sector. A reassessment of risk premia following a sudden shift in market sentiment could put asset prices under strain with potential implications for the sector of non-bank financial institutions (NBFI). Past events showed us that the non-bank financial sector can amplify worsening markets conditions through forced asset sales to 3/4 BIS - Central bankers' speeches address margin calls or potential liquidity needs. Risks and vulnerabilities in the non-bank financial sector could essentially create spillovers to banks (via loans, securities, etc.) and to the real economy. The recent rise in interest rates alongside high inflation rates put the balance sheet of some firms and households under strain. Against this backdrop - and despite the recent drop in the interest rates -, a deterioration in asset quality and a rise in loan loss provisions for European lenders with a time lag cannot be ruled out. In addition, weakening economic growth along with high interest rates could weigh heavily on the demand for new loans and the implementation of banks' business plans. Note that the improved profitability following the rise in interest rates masked structural deficiencies in many banks, such as in terms of cost efficiency and digitalisation. The increase in borrowing costs over the past few quarters has led to a cooling of the real estate market in the euro area, notably the commercial real estate segment. A fall in real estate prices could expose some property developers to losses and consequently impact the cost of credit risk for some European lenders. Several new risks have recently emerged in our risks heatmap, such as the climate change risk and the risks stemming from cyber-attacks. The latter is closely linked to the rising geopolitical risk. Concluding, despite the progress so far, there is no room for complacency. As risks to financial stability remain, supervisors should ensure that financial institutions are cautious in their business decisions and preserve ample capital and liquidity buffers, while upholding top governance standards. Macroprudential supervisors should also preserve capital buffers with the aim to increase resilience in the system. Finally, we need to revamp our crisis management framework and complete the Banking Union. The adoption of a common European Deposit Insurance Scheme (EDIS) at the level of the banking union is necessary to strengthen depositors' confidence, especially in case of cross-border turmoil and systemic crisis. The completion of the Banking Union with the adoption of a common framework for Crisis Management and Deposit Insurance (CMDI) will facilitate the integration of the, so far, fragmented banking sector in the European Union along the lines suggested by the Draghi Report and achieve level playing field in European banking regulation and resolution. Thank you. 1 https://www.eba.europa.eu/risk-analysis-and-data/risk-dashboard 4/4 BIS - Central bankers' speeches | bank of greece | 2,024 | 10 |
Opening address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the International Conference on "Public Debt: Past lessons, future challenges", organised by the Bank of Greece, Athens, 7 November 2024. | Yannis Stournaras: Public debt - past lessons, future challenges Opening address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the International Conference on "Public Debt: Past lessons, future challenges", organised by the Bank of Greece, Athens, 7 November 2024. *** Ladies and gentlemen, It is my great pleasure to welcome you to this conference. As we gather today, we aim to address a topic of growing importance, not just for individual Member States, but also for our collective future – particularly for the euro area. Historically, public debt has shaped the economic history of nations because governments have often resorted to borrowing to achieve economic stability and foster growth. While borrowing has at times allowed nations to provide critical support for their economies, it has also raised significant questions about sustainability, fiscal responsibility and intergenerational equity. As we reflect on the lessons of the past, we need to acknowledge the delicate balance between financing today's prosperity, on the one hand, and safeguarding the well-being of future generations, on the other. In Europe, the debt crisis, which unfolded over a decade ago, tested the resilience of our economies, financial systems, as well as the unity – the very fabric – of the European Union. It exposed the vulnerabilities in our fiscal and banking systems, bringing to light critical lessons on fiscal policy, debt sustainability and the health of the banking sector due to the strong sovereign-bank nexus. Indeed, it tested the very existence of the single currency area. In what follows, I will reflect on these lessons in four key areas: (1) fiscal policy, (2) debt sustainability, (3) financial stability and (4) the interaction between monetary and fiscal policy. These interconnected dimensions are not only relevant for understanding the past, but are also crucial for shaping the future of European economic governance. 1. Fiscal policy: The foundation of stability Fiscal sustainability lies at the heart of any stable economy. During the European debt crisis, we were reminded of a fundamental truth: unchecked fiscal deficits, combined with large imbalances in the current account, which themselves were mostly related to the fiscal deficits, can trigger severe economic and financial distress. Several of our economies faced enormous fiscal and external sector imbalances, exposing the fragility of the euro area's architecture. What are the lessons that emerged? Lesson 1: Credible fiscal frameworks. Sound fiscal policies and strong institutional frameworks are the foundation of economic stability, especially in the context of the euro area, which still remains an incomplete economic union, lacking a central fiscal capacity. Before the crisis, the Stability and Growth Pact (SGP) aimed to impose fiscal discipline across the EU. 1/8 BIS - Central bankers' speeches However, its enforcement was weak, and many countries repeatedly breached the Pact's deficit and debt limits. The crisis underscored the importance of stricter fiscal surveillance and the need for credible enforcement mechanisms. To address these issues, the EU introduced the Fiscal Compact in 2012, mandating balanced budgets and stricter oversight. The European Semester aimed to coordinate fiscal and economic policies among Member States. Moreover, post-crisis reforms included the European Stability Mechanism (ESM), which provided financial assistance to countries in distress, tying its support to strict fiscal and structural reforms. The ESM is an essential reform within the European economic architecture, as it acts as a financial backstop by providing a safety net for eurozone Member States during times of economic and financial distress, helping to prevent the contagious effects of crises and ensuring stability across the region. Lesson 2: Countercyclical fiscal policies. Countercyclical fiscal policies are key to stabilising economies and avoiding selfdefeating effects of fiscal consolidation, while also creating fiscal buffers. Many eurozone Member States were forced into procyclical austerity measures during the crisis, including large cuts in public investment, which exacerbated economic contractions and worsened unemployment. Having been Greece's Finance Minister during 2012-2014, I can attest first-hand to the damage Greece had to endure due to the imposition of overly restrictive fiscal measures. Without overlooking the political constraints at the time, since a milder and more gradual fiscal consolidation would have required a larger financing envelope, and the need to enhance market confidence by addressing the country's credibility gap, a more flexible approach to fiscal policy could have mitigated the severity of the crisis. As we move forward, the new EU fiscal rules encourage countercyclical fiscal policies, balancing fiscal responsibility with the ability to support economic growth during crises. This is especially relevant in today's context, where high levels of public debt persist after the COVID-19 pandemic. The new framework accounts for country heterogeneity and provides greater flexibility regarding the medium-term fiscal consolidation plans. Moreover, by focusing on structural fiscal adjustment, the new framework encourages the authorities to differentiate between temporary and permanent fiscal measures, thereby promoting more prudent long-term fiscal planning. The use of the expenditure rule as a single operational indicator used to monitor compliance with the new framework contributes to a more sustainable fiscal environment by encouraging disciplined budgeting and, thus, more effective expenditure-based fiscal consolidation plans. Expenditure rules mitigate fiscal risks and create fiscal buffers, by curbing excessive spending during periods of economic boom. Also, these rules allow flexibility for public investment and enhance predictability and market confidence in fiscal strategies. Lesson 3: National ownership of fiscal consolidation. The experience of the euro area debt crisis has clearly indicated that national ownership of fiscal adjustment efforts is critical for ensuring the success and sustainability of fiscal reforms. Successful fiscal consolidations depend on political 2/8 BIS - Central bankers' speeches consensus and effective social dialogue. When countries take ownership of their fiscal policies, aligning them with domestic economic conditions and political realities, this strengthens their commitment to sound fiscal management. National ownership of fiscal consolidation plans allows governments to design tailored measures that reflect the specific needs of their individual economies, while fostering public support, because citizens are more likely to back homegrown reforms than those that are externally imposed. Within the EU, where fiscal rules are in place, national ownership helps bridge the gap between EU-level requirements and domestic policy priorities. By embracing fiscal responsibility voluntarily, rather than merely complying with EU rules, Member States can promote fiscal discipline, improve credibility with markets and enhance trust in European institutions. This approach supports long-term fiscal sustainability and economic stability, ensuring that fiscal consolidation efforts are both effective and politically feasible. But let me emphasise that trust, or credibility, is not something that can be obtained overnight. We will have to earn it. Our new fiscal framework provides a necessary vehicle for doing so. The rest is up to us. As the old saying goes, "The proof of the pudding is in the eating." 2. Debt sustainability: A multifaceted discipline Debt sustainability was perhaps the most immediate concern during the European debt crisis. The skyrocketing public debt levels in several Member States led to a loss of market confidence, rising borrowing costs and fears of sovereign defaults. In this context, the European debt crisis offered key insights into managing sovereign debt effectively. Lesson 4: A holistic approach to debt sustainability. The crisis revealed that managing public debt is not simply about medium-term solvency, but also about long-term sustainability. The concept of debt sustainability analysis (DSA), which had traditionally focused on the medium-term evolution of the stock of debt, was expanded to include longer-term projections (due to the concessional terms of official sector loans) as well as vulnerabilities of the debt trajectory to various adverse macroeconomic, fiscal and financial sector shocks. The extended analysis reinforced the notion that safeguarding a favourable contribution of the snowball effect to debt reduction is equally important as pursuing a structural fiscal adjustment. Moreover, medium-term projections of Gross Financing Needs (GFNs) are also important in identifying debt sustainability risks, because they reflect the underlying characteristics of the public debt structure. For example, high levels of short-term debt or relatively high shares of floating-rate debt can make a country more vulnerable to interest rate shocks and high liquidity risks. Such projections are particularly important in detecting sustainability risks that would otherwise have gone unnoticed. 3/8 BIS - Central bankers' speeches The European institutions (EC, ESM, ECB) as well as the IMF played a central role in providing assistance based on DSAs, ensuring that fiscal consolidation targets the country's structural fiscal position (thereby promoting structural fiscal reforms, especially in the pension and social security systems), while also advocating for productivityenhancing reforms in the labour and product markets in order to raise long-term potential output growth. Today, we understand that debt sustainability is not solely about reducing debt ratios, but also about ensuring that debt levels remain manageable under varying economic conditions. The new European fiscal framework is centred on a risk-based surveillance framework, which puts debt sustainability at its core and differentiates among countries, taking into account their specific public debt challenges. The incorporation of stochastic debt sustainability analysis in determining the structural fiscal adjustment needs of EU Member States provides significant advantages because it accounts for uncertainty and incorporates a range of potential economic scenarios. Unlike traditional methods, stochastic DSA helps policymakers to assess more realistically the likelihood of various debt outcomes, identify risks earlier and manage debt levels proactively. Lesson 5: Flexibility in debt servicing – Reform of the euro area debt restructuring framework. Flexibility in debt servicing can help alleviate immediate fiscal pressures and prevent defaults. The ESM and the IMF introduced measures such as debt maturity extensions and lower interest rates for countries receiving bailout packages. These measures provided temporary relief and helped restore market confidence. Moreover, the overall debt restructuring framework in the euro area, shaped by the experience of the European debt crisis, has evolved significantly to address more effectively sovereign debt challenges. In particular: - The ESM, which acts as a permanent crisis resolution mechanism, has the legal mandate to restructure sovereign debt if necessary. - Since 2013, all new euro area government bonds with maturities of more than one year must include Collective Action Clauses (CACs). The use of CACs is a core component of the new debt restructuring framework, designed to ensure that restructuring can be carried out in an orderly manner, limiting market disruption. - The ESM and the EC play a central role in conducting DSA before providing financial assistance. The framework is used to guide decisions on the necessity and the scale of any potential debt restructuring. - The experience of the Greek debt restructuring highlighted the significance of the Private Sector Involvement (PSI) in sovereign debt crises. The Greek case revealed the potential benefits and challenges of PSI, where the involvement of private creditors helped reduce Greece's debt burden, but the process also raised concerns about contagion risks. 4/8 BIS - Central bankers' speeches - The euro area crisis underscored the need for orderly and predictable debt restructurings. Past experience has shaped principles to minimise financial market volatility. Timely intervention is crucial, as early restructuring, if needed, is more likely to be successful before debt levels spiral out of control, than long, drawn-out restructurings. - The legal and institutional framework for debt restructuring has been enhanced to prevent moral hazard, ensuring that governments adhere to fiscal rules. The Fiscal Compact and the revised SGP impose stricter fiscal discipline to prevent excessive debt accumulation. The framework also ensures that sovereign debt restructuring is treated as a last resort, after all other policy measures (such as fiscal adjustment, structural reforms, liquidity support) have been exhausted. All in all, following our experience, the eurozone is much better equipped to manage sovereign debt crises in the future. However, the need for continued vigilance, early intervention and fiscal prudence remains essential to ensure that sovereign debt crises can be prevented and, should they arise, be resolved efficiently. 3. Financial stability: A pillar of economic resilience The crisis also exposed vulnerabilities in Europe's financial stability framework. The increase in the sovereign-bank nexus created a vicious circle of contagion, where failing banks weakened sovereigns and vice versa. The euro area's banking system was one of the weakest links during the debt crisis. Several factors accounted for this circumstance. For one thing, euro area banks typically hold relatively large shares of the debts issued by their respective national governments in their portfolios. Related to that, and in contrast to the situation in the US and the UK, the ECB does not have the mandate to act as a lender of last resort to sovereigns. Banks in several countries, especially those exposed to housing bubbles and sovereign bonds, found themselves undercapitalised and struggling with high levels of nonperforming loans (NPLs). The crisis in the banking sector intensified the sovereign debt crisis, as governments were forced to bail out failing banks, adding to their fiscal burdens. Furthermore, the crisis highlighted the importance of a well-functioning financial market infrastructure. This includes payment systems, securities settlement systems and central clearing counterparties. A robust infrastructure can help mitigate systemic risks and ensure the smooth functioning of the financial system. Lesson 6: Strengthening financial oversight. A strong regulatory and supervisory framework is essential to monitor and mitigate systemic risks. Before the crisis, financial regulation in Europe was fragmented, with national authorities being responsible for supervision. This lack of coordination allowed financial imbalances to grow unchecked. 5/8 BIS - Central bankers' speeches In response, the EU took significant steps to enhance financial supervision and regulation. The creation of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) under the Banking Union framework aimed to centralise supervision and resolution at the European level. This ensures that systemic banks across the eurozone are subject to uniform standards and that failing banks can be resolved without burdening taxpayers. Lesson 7: Macroprudential policies. The crisis also highlighted the need for macroprudential policies, which include tools designed to address systemic risks. The ECB and the national authorities have adopted a series of macroprudential measures, such as capital buffers, to enhance the resilience of the banking sector, prevent the build-up of financial bubbles and excessive leverage, and reduce procyclicality. Lesson 8: Bank recapitalisation and resolution frameworks. A key takeaway from the crisis is the importance of ensuring that banks are wellcapitalised and that there are mechanisms in place to resolve failing banks without jeopardising financial stability. The creation of the European Banking Authority (EBA) and the Single Resolution Board (SRB) have helped address this matter. These institutions have improved the regulatory framework and ensured that banks maintain sufficient capital buffers to absorb shocks. Moreover, measures to effectively manage credit risk were essential in order to improve the quality of the loan portfolio. Lesson 9: Reducing the sovereign-bank nexus. Reducing the sovereign-bank nexus is critical to preventing future crises. The European debt crisis has demonstrated how weak banks could exacerbate sovereign debt problems and vice versa. The introduction of bank resolution mechanisms under the Bank Recovery and Resolution Directive (BRRD) ensures that shareholders and creditors bear the losses in the event of bank failures, rather than taxpayers. This has helped weaken the link between banks and sovereigns, thereby decoupling risks in both sectors and enhancing their resilience to economic shocks. 4. Monetary-fiscal policy interactions: Complementarity of policies is critical The interaction between monetary and fiscal policies is central to understanding how Europe can navigate its future debt challenges. The consistency between fiscal and monetary policies is critical in shaping sustainable economic recovery paths, while managing the delicate equilibrium between growth, inflation and fiscal sustainability. Regardless of the near-term budget outlook, the current high levels of public debt complicate the task of monetary policy, limit the room for manoeuvre and worsen the trade-offs faced by central banks. Evidence from the recent crises in the euro area have underscored the need for alignment of monetary and fiscal policy objectives, highlighting the benefits of complementarity between the two policies. Risks of fiscal dominance could emerge if debt dynamics are left unchecked by the fiscal framework, or if fiscal policies lack countercyclicality. 6/8 BIS - Central bankers' speeches Lesson 10: Effective complementarity of monetary and fiscal policies. In the current multi-crisis environment, the complementarity of monetary and fiscal policies is critical for achieving two interrelated goals in the European context: fiscal sustainability and price stability. The ECB has long emphasised the importance of complementarity between these two policy areas, particularly during periods of economic turbulence. Moreover, over the medium-term horizon, the benefit of the negative interest rate-growth differential is expected to gradually fade, highlighting the risks of low growth and the effect of relatively higher interest rates levels (as compared to the pre-Covid period) on debt dynamics going forward. Monetary policy, driven by the ECB's mandate to maintain price stability, operates most effectively when complemented by sound fiscal policies that ensure public debt levels remain sustainable over the long term. This interplay is especially important in the eurozone, where fiscal policy remains the responsibility of national governments, while monetary policy is centralised through the Eurosystem. Therefore, in the short-tomedium-term horizon, the development of a framework to monitor and steer the aggregate euro area fiscal stance, including through a permanent central fiscal capacity of sufficient size, is important for increasing the effectiveness of monetary policy. A failure to align fiscal policies with the ECB's efforts could lead to inflationary pressures and undermine monetary policy effectiveness, as excessive government borrowing risks overheating the economy or raising inflation expectations. Therefore, fiscal policy needs to be disciplined and forward-looking, focusing on long-term sustainability to allow monetary policy to maintain price stability. ***** The European debt crisis was a wake-up call for policymakers, businesses and citizens across the continent. It exposed deep-rooted weaknesses in our fiscal, financial and banking frameworks, but it also instigated a wave of reforms that have made the eurozone more resilient. Further reforms aimed at strengthening the EMU, such as a deeper fiscal union, a complete banking union and a well-functioning capital markets union, can help prevent future crises and make the euro area more robust. Today, Europe stands at a crossroads, grappling with debt burdens that have grown due to a series of recent crises, such as the global financial collapse of 2008, the sovereign debt crisis of 2010-13, the COVID-19 pandemic and the energy shock triggered by the war in Ukraine. Addressing debt sustainability concerns is even more complex within the European framework, with its unique challenges – ranging from the complicated eurozone economic structure and the lack of efficient fiscal coordination to balancing national sovereignty with collective responsibility. How do we ensure that the consequences of today's decisions do not unfairly impact future generations? How do we manage debt levels without stifling growth? How can Europe create a framework for shared prosperity while maintaining fiscal discipline? Over the course of today's discussions, we will try to delve into these issues from both historical and forward-looking perspectives, focusing on how we can learn from history 7/8 BIS - Central bankers' speeches while navigating the challenges of an uncertain future. Our goal is not just to understand how we got to where we are, but to contribute to the overall discussions on charting a responsible path for the future. The challenges we face today – ranging from high debt levels to climate crisis, geopolitical risks posed by conflicts, geoeconomic fragmentation, demographic shifts, low productivity and deglobalisation trends – require us to remain vigilant and adaptive. Should we confront rising debt vulnerabilities, the need for innovative and sustainable fiscal solutions will be more urgent than ever. The decisions we make today will determine not only Europe's financial stability, but also the well-being of future generations. Striking the right balance between fostering growth, ensuring fiscal sustainability and protecting the long-term interests of our societies is no easy task, but it is one we must face together. Thank you all for your participation, and I look forward to the fruitful discussions. 8/8 BIS - Central bankers' speeches | bank of greece | 2,024 | 11 |
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at Birkbeck College, University of London, London, 20 November 2024. | Yannis Stournaras: The role of the European Central Bank's monetary policy in achieving a soft landing in the Euro area Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at Birkbeck College, University of London, London, 20 November 2024. *** In light of the surge in inflation in 2021 and 2022, central banks across the globe faced a common problem: how to bring down inflation in a timely manner without inflicting recessions and high unemployment. In the jargon of the financial press, central banks wanted to achieve a "soft landing". The only previous experience during the past 50 years central banks had to learn from, was the high inflation of the 1970s and early 1980s. That experience was not encouraging. The Federal Reserve System (the Fed) of the United States, for example, had to raise its policy rate to nearly 20 percent and put the US economy through two recessions in the early 1980s before inflation was tamed. The recent inflation surge was compounded by a mixture of supply and demand effects, with the particular combinations differing among economies. In the euro area, the inflation surge was mainly due to supply-side factors. The high inflation episodes of the 1970s and 1980s did, however, teach us an important lesson. Central banks learned that to prevent inflation from becoming entrenched, they needed to react promptly and forcefully -communicating to the markets that there would be a sequence of rate hikes so that inflation expectations would remain near their objectives; in the case of the euro area, the target inflation rate is 2 percent. The European Central Bank (ECB) began raising interest rates in July 2022. In its policy statement at that time, we communicated that there would be a further "normalisation" of interest rates. Our policy was a success. Inflation expectations-measured by the five-year-ahead forward rate-peaked at only slightly above 2.5 percent despite a peak inflation rate of about 10.5 percent. Thus, our policy was credible. Meanwhile, inflation itself has embarked on a declining track-it fell to only 1.7 percent in September. This was the first time since April 2021 that inflation came in below our target of 2 percent. In October, inflation reached 2 per cent. Although the impacts of geopolitical uncertainties remain difficult to predict and inflation may rise above target in the coming months, inflation is now more likely to converge sustainably to the target sooner than earlier expectationsby the beginning of 2025 instead of the last quarter, as was anticipated in the most recent ECB projections. All this has been accomplished while avoiding a recession. That is the good news. But there is also some room for concern. The significant tightening in financing conditions (since the start of the hiking cycle in July 2022) in the context of lingering supply constraints and rising geopolitical uncertainty has weighed on economic activity, investment and consumption. Growth over this period has remained lacklustre, averaging just below 0.2 percent quarter-on-quarter. Although recovery turned out stronger than expected in the third quarter of this year, downside risks remain. Research studies by the Fed1 and the ECB2 have shown that soft 1/7 BIS - Central bankers' speeches landings, in which inflation is contained without inducing recessions, have historically been hard to achieve; it has been difficult to tame inflation without inflicting a recession. In the past few years, we have faced an unprecedented series of supply-side shocksthe kind of shocks that are not easily amenable to monetary-policy measures. These shocks led to a surge in inflation to record-high levels. For central banks, supply shocks are difficult to navigate because they make it more challenging to fight inflation while safeguarding economic and financial stability. In this environment, the ECB has been able to achieve an orderly return of inflation to target while maintaining, as I mentioned, anchored expectations. Beginning in the summer of 2022, we decisively tightened our monetary-policy stance. Through September 2023, we raised interest rates by a total of 450 basis points-an unprecedented pace and scale. The interest-rate hikes were the first arm of our policies. At the same time, we adopted a gradual approach to reducing the size of our balance sheet-the second arm of our policy toolbox. The ECB's policy tightening, alongside improving supply-chain restrictions, contributed to a substantial decline in inflation. After touching an all-time euro-era high of 10.6 percent two years ago, inflation more than halved within the following four quarters to 4.3 percent in September 2023, the month we last raised rates. Since October last year, inflation has fluctuated within one percentage point of our 2-percent target. Despite concerns that the last mile of disinflation would be more arduous than the earlier-rapid-part of the disinflation process, recent developments have enhanced our confidence that inflation is converging to our target in a sustained and timely manner, even if the road ahead may include a few bumps due to base effects. Given the unparalleled speed and scale of the monetary-policy tightening, this outcome is a significant victory. The fact that it has been achieved without compromising employment or financial stability is a testament to our policy's success. This monetary policy also managed to lean heavily against second-round effects on wages and prices, thereby preventing a dangerous wage-price spiral. After holding our policy rate at the cycle peak of 4 percent for nine months, in June 2024 we decided that some layers of restriction were no longer appropriate in light of the progress we had made in nearing our inflation target. We cut the key ECB interest rate by 25 basis points-the first cut in almost five years. As confidence that inflation was moving sustainably towards our objective grew in the context of modest economic growth, weak credit dynamics and persisting uncertainty, we delivered two additional 25basis-point cuts to our policy rate in September and October. However, our policy stance has remained in restrictive territory and will continue to be restrictive for some time into the future. Financing conditions, especially at the long end, have tightened significantly as a result of our past restrictive measures and will remain tight even after several further rate cuts. The ongoing reduction of our balance sheet, due to the run-down of our asset purchase programmes (APPs) and repayments of targeted longer-term refinancing operations (TLTROs), has been reducing excess liquidity, thereby providing additional tightening. 2/7 BIS - Central bankers' speeches The challenge ahead is to ensure that inflation converges to our objective in a sustained manner while, at the same time, growth strengthens to reach sustainable levels compatible with full employment. With inflation moving sustainably close to 2 percent, our policy focus may have to increasingly take account of economic conditions so that we don't undershoot our inflation objective. Let me elaborate. The euro area's economy has expanded by a quarterly average of below 0.2 percent in the past two years. To put this into context, the US economy has expanded by almost 3 percent on a quarterly average over the same period. Developments in labour productivity since the pandemic have also been particularly weak in the euro area compared to the US. Industrial production in the euro area remains subdued, and the weakening in the manufacturing sector has been particularly pronounced, with a rebound being far from certain. At the same time, forward-looking survey indicators, such as the composite PMI (Purchasing Managers' Index), point to rather slow growth, while the manufacturing PMI has been persistently weak, having remained in contractionary territory for more than two years. Business investment is anaemic; firms evidently do not envisage a strong recovery. These data point to a rather sluggish picture for the growth outlook. While the most recent ECB staff macroeconomic projection exercise in September showed growth rising to 0.8 percent in 2024, 1.3 percent in 2025 and 1.5 percent in 2026, the macroeconomic environment will still be surrounded by significant uncertainty. Consumption, projected to undergird the recovery, will also be subdued and may not grow as expected. In my view, the sources of the projected pickup in growth are not clear. I am cautious about the growth outlook for several other reasons. First, global developments and geopolitical tensions are worrying. The escalation of conflicts in the Middle East, combined with the most significant war on European soil since 1945 in Ukraine, has had detrimental effects on both business and consumer confidence. Geopolitical tensions could (temporarily) drive inflation up, while at the same time, economic growth may weaken further. The latter would produce an offsetting effect on inflation. Second, monetary policy affects the economy with long and variable lags. Thus, the impacts of past policy tightening continue to be transmitted to broader financing conditions and the real economy. The restrictive policy stance at any given point in time will continue to affect inflation and output for the following one to two years. Consequently, an additional dampening effect on growth and inflation from our past restrictive monetary policy is still in the pipeline. This explains why credit dynamics remain weak, showing no signs of significant improvement. Third, we are going through a year of high electoral activity. Nationalist parties have made major gains across the euro area, challenging the leadership in Germany, Austria and France. Across the Atlantic, the outcome of the US federal elections in early November could alter the global economy's course. An escalation in trade tensions between major economies through tariffs and retaliation could create chaos in international trade and weigh on confidence and economic activity at the global level. 3/7 BIS - Central bankers' speeches I am also cautious regarding further shocks coming from commodity prices. Commodity price shifts are likely to become larger, more frequent and possibly more persistent amid rising political uncertainty, geoeconomic fragmentation, a possible tariff war and climate change. These driving factors reinforce each other and have non-linear effects on inflation and output. Central bankers need to timely assess whether such supply-side price shocks are transitory or more permanent entailing a risk of de-anchoring inflation expectations. To this end, we need to collect more granular data and develop further our analytical tools to deepen our understanding of both the characteristics of the price shock and the complexities of the environment in which it occurs. The recent high-inflation episode is a good example. First, it has shown that commodities that are critical for production and more upstream along the supply chain are likely to create larger shifts in relative sectoral prices and spill over to core inflation. Second, a combination of different types of supply and demand shocks amid structural transformations of the economies can blur the assessment of the impact of a commodity price shock on inflation and output, complicating monetary policy. One lesson from the recent experience of the post-pandemic surge of inflation is that existing models failed to predict it. Central banks need to develop new tools which are able to identify the nature of the shock (supply vs demand) in real time and assess its implications for inflation. To this end, the Bank of Greece is developing forecasting models of inflation based on textual indicators of supply and demand disturbances in commodity markets from news articles of Reuters and Dow Jones.3 With the help of AI, these indicators can be updated on a daily basis and help predict inflation more accurately. Preliminary findings of this research project, suggest that these indicators provide distinct information about future inflation movements relative to existing predictors, inflation expectations and survey forecasts. Overall, they reduce out-of-sample inflation forecast errors by up to 30 percent. For energy-importing economies, like Greece, the nature of energy price shocks, either supply- or demand-driven, is less relevant when assessing their overall economic impact. In particular, research shows that in European economies both types of global energy price shocks tend to influence wages similarly, with largely short-lived and transitory effects.4 The most pivotal factors in driving inflation sharply upward during the recent inflation episode were the size and persistence of the energy price shock rather than its nature. The large and sustained shock necessitated a forceful monetary policy tightening cycle to curb inflation. Domestic structural factors largely shape the transmission of commodity price changes to the economy. As we have seen, second-round effects can be more pronounced in 4/7 BIS - Central bankers' speeches economies with tight labour markets, rigid wage-setting mechanisms and less competitive product markets. Additional factors, such as credible monetary policy frameworks, well-anchored inflation expectations, lower energy intensity in production and a low-inflation environment, reduce the likelihood of wage-price spirals in light of commodity price shocks. The economic effects of commodity price shifts also vary depending on the type of the commodity hit. Food price changes have stronger second-round effects, driving core inflation and wages higher as these are more salient items in the consumption basket. Oil price shocks lead to a steep decline in durable consumption, particularly in sectors closely linked to energy, like automotives and construction. These asymmetries highlight the need for a careful assessment of the monetary policy response to each type of commodity price shock. Faced with heightened uncertainty and volatile commodity prices, monetary policy must remain agile and flexible. This suggests an approach that balances forward-looking components, like inflation projections, with current data on the dynamics of underlying inflation and the strength of monetary policy transmission. It also calls for a more formal analysis of risks embedded in our monetary policy frameworks and communication. Let's also not forget that commodities are both physical and financial assets. Financial markets are becoming increasingly sensitive to abrupt commodity price shifts partly due to the growing financialisation of commodity markets. This trend can amplify uncertainty, raise risk premia, intensify liquidity pressures and result in sharp exchange rate adjustments, heightening financial stability risks. As we converge to our 2-percent target for inflation in a sustainable way, which I expect will be achieved early next year, our focus may need to turn to addressing sluggish growth. This change in focus will be required to guard against the possibility that lower growth leads to an undershooting of our inflation objective. Although we have not had any indications of a hard landing, the markets are extremely sensitive to disappointing growth readings. If negative surprises for growth come in and we fail to unwind our restrictive monetary-policy stance at the appropriate pace, unnecessary market turbulence could be induced, negatively impacting economic and financial stability. Should some of these risks materialise, thus compromising growth, the disinflation process will be reinforced, likely driving inflation below the 2-percent target in the medium term and endangering the soft-landing scenario. The September reading of inflation at 1.7 percent should be viewed as both a success and a wake-up call. We cannot be complacent. A policy-rate path that remains too restrictive for too long could induce an undershooting of our inflation target over the medium term and impede growth. Should that occur, we would risk damaging our credibility. After all, credibility can be damaged by both overshooting and undershooting inflation objectives. In an environment of high uncertainty, a prolonged period of stagnation and weak investment could have lasting consequences for inflation. Our task going forward is to chart a rate path that removes additional layers of restriction so that the recovery is enhanced. Although I have focused on monetary policy, in my view, the contributions of fiscal and structural policies to macroeconomic stability are equally important. Furthermore, 5/7 BIS - Central bankers' speeches completing the Banking Union and the Capital Markets Union (CMU) is crucial to mobilising the investments needed to promote growth and employment. A single market for capital will enhance the European Union's (EU's) productivity and competitiveness and increase the euro area's supply capacity and autonomy while supporting mediumterm price stability and economic welfare. Finally, I would like to highlight the following factors, which, in my view, explain the success of the ECB's monetary policy so far in bringing inflation towards its 2-percent target amid a series of shocks, which started with the pandemic and continued with the war in Ukraine: First, the institutional independence of the ECB and the national central banks comprising the Eurosystem. Second, a commitment to the 2-percent inflation target, using key interest rates as the primary policy tool, supplemented with non-standard measures when required by macroeconomic and monetary conditions. Third, a pragmatic, flexible and gradual approach in an environment of heightened uncertainty. Fourth, clear and effective communications from the ECB. In a world prone to supply disruptions and susceptible to geopolitical and political uncertainties, monetary policy needs to remain an anchor of stability and confidence. In my view, the ECB has performed efficiently-and credibly-in bringing down inflation in a timely manner while avoiding a recession. We will continue to be data-dependent, assessing all incoming information at each of our forthcoming monetary-policy meetings. We stand ready to proceed with further policy easing in a stepwise approach as warranted in order to safeguard a stable macroeconomic environment conducive to growth, low unemployment and financial stability. 1 Board of Governors of the Federal Reserve System: "Lessons from Past Monetary Easing Cycles," François de Soyres and Zina Saijid, May 31, 2024, FEDS Notes, Washington, D.C. (https://www.federalreserve.gov/econres/notes/feds-notes/lessonsfrom-past-monetary-easing-cycles-20240531.html ) 2 European Central Bank (ECB): "Delivering a soft landing: a historical perspective of monetary policy cycles," Ema Ivanova, Thomas McGregor, Stefano Nardelli and Annukka Ristiniemi, September 25, 2024, the ECB blog. (https://www.ecb.europa.eu /press/blog/date/2024/html/ecb.blog20240925~bec0a9ffbe.en.html) 3 Malliaropulos, D., E. Passari and P. Petroulakis (2024): Unpacking Commodity Price Fluctuations: Reading the News to Understand Inflation (unpublished manuscript, forthcoming in BoG Working Paper series). 4 In Europe, the pass-through from oil price shocks to wages and core inflation peaks in 1-2 years and largely dissipates in 3-4 years. See, Baba, C. and J. Lee (2022), "Second- 6/7 BIS - Central bankers' speeches round effects of oil price shocks – Implications for Europe's inflation outlook", IMF Working Paper WP/22/173. 7/7 BIS - Central bankers' speeches | bank of greece | 2,024 | 11 |
Honoree keynote address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the "2024 Capital Link Hellenic Leadership Award" event, New York City, 9 December 2024. | Yannis Stournaras: Ensuring Greece's European path Honoree keynote address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the "2024 Capital Link Hellenic Leadership Award" event, New York City, 9 December 2024. *** I am deeply moved and grateful for the great honour you bestowed upon me tonight. I was born in Athens, Greece, on 10 December 1956. I graduated from Filothei High School in 1974, and from the Department of Economics, University of Athens. I obtained my post-graduate degrees (M.Phil. in 1980 and D.Phil. in 1982) from the University of Oxford. My doctoral thesis aspired to ground macroeconomic theory in mathematical microeconomic models. I started my academic career at Oxford University, at St. Catherine's College, right after my D.Phil., taught economics as a Lecturer and also conducted research in the field of the oil industry. In fact, I was the first Research Fellow at the then (1982) newly founded Oxford Institute for Energy Studies. This played a pivotal role in shaping my future career path, as you will find out shortly! It seemed as Oxford would become our permanent home, as both my wife, Lina (who also obtained her D.Phil. in Neurophysiology from Oxford University and began her academic career along with me), and I were perfectly happy with our lives in Oxford. My sabbatical leave from the University of Oxford to fulfil my military service in Greece, and above all luck, was what changed my plans! After completing my military service, I was about to return to Oxford when I accidentally came across a friend from Oxford, the now renowned Greek economist Dr. Platon Tinios, who arranged for me an appointment with the then (1986) leadership of the Greek Ministry of National Economy, Minister Costas Simitis and Deputy Minister Yannos Papantoniou. Out of politeness and as Platon wouldn't take no for an answer, I did go and met them. They suggested that – who would have thought? – I should extend my leave from Oxford University, stay a little longer in Greece and help them with the economic stabilisation programme that had been launched in 1985, and more importantly to join, as an energy expert, the team which, led by the late Anastasios Peponis, then Minister of Energy and Industry, negotiated a gas supply contract with the then Soviet corporation Gazprom. To cut a long story short, they convinced me to stay. I went back to Oxford and extended my sabbatical leave for a year. Lina did not agree at the time. "I'm not going back to Greece", she said, "at least not until you return to Oxford for good". We agreed that this would be the best. Deep down, I had always wanted to return to Greece. Unlike Lina. 1/8 BIS - Central bankers' speeches So I returned to Athens without her. As a Special Advisor to the Ministry of National Economy on sabbatical from the University of Oxford. And that was it! I really loved to pair academic work with policymaking. I decided to find a permanent job in Greece, something that didn't take long. Soon, I joined the University of Athens, after a vacancy announcement, at the Department of Economics. Meanwhile, the late Dimitris Halikias, who at the time was Governor of the Bank of Greece, told me that he would engage me as an Advisor to the Bank of Greece once my contract with the Ministry of National Economy ended, if I decided to stay in Greece and leave Oxford for good. I went back to Oxford only to resign. Lina and I had decided to take risk and quited prominent academic jobs in Oxford, London and Bristol to return home to Greece. The words of my superiors at the University of Oxford, the late Sir Partrick Nairne (Provost of St. Catherine's College) and the late Robert Mabro (President of the Oxford Institute for Energy Studies), as they were bidding me farewell, are still ringing in my ears: "You must be mad to leave Oxford". They didn't make me change my mind. I left. Lina and I did not regret leaving, but we both feel a huge debt to Oxford. Especially to the true meritocracy of the system. We worked hard, got top-notch doctorate degrees and found top research posts at a very young age. Greece has honoured me with very important posts, both in the public and the private sector. I was fortunate and privileged to serve at the economic and financial sectors of my country and to cooperate with the governments of six Prime Ministers: Andreas Papandreou, Costas Simitis, Panagiotis Pikrammenos, Antonis Samaras, Alexis Tsipras and Kyriakos Mitsotakis. I have never abandoned my University career, until my retirement last August. During the last years I was mentoring and supervising doctorate candidates and co-authored research papers with them. The years as a Research Fellow in Oxford included, I successfully completed 42 years of academic teaching and research. My esteemed colleagues at the Department of Economics, as well as the Rector of the University of Athens, honoured me a few weeks ago with the title of Emeritus Professor. Being an academic-cum-policymaker thrilled me. This wouldn't have been possible had I stayed in Oxford and has been a huge asset in my professional life, even though it required endless hours of hard work. As an academic, I quickly realised the limitations of academic thought, if not tested in the arena of economic policy. As a policymaker, I soon became aware of the shortcomings of an economic policy that is not grounded in economic fundamentals. Turning to the economic policy arena, my first job in Greece, as an Advisor to the Minister of National Economy Costas Simitis and his Deputy Minister Yannos Papantoniou in the context of the so-called "Simitis Stabilisation Programme 19851987", concerned the restructuring of public enterprises and organisations as well as the design of an incomes policy based on productivity growth. Sadly, this plan was never implemented, as Costas Simitis resigned. Over the same period, I also worked on the gas pipeline project and the import of natural gas to Greece. In my capacity as Advisor to the Bank of Greece (1988-1994), I worked with two Governors, Dimitris Halikias and Efthymios Christodoulou, as well as with the then Economic Advisor Lucas Papademos, on monetary policy issues. 2/8 BIS - Central bankers' speeches As Chairman of the Council of Economic Advisers at the Ministry of National Economy (1994-2000), I was involved in the design and implementation of economic policy measures in preparation for Greece's entry into the euro area and I represented the Greek government in the Monetary Committee of the European Union in the negotiations for Greece' participation in Economic and Monetary Union, first under Prime Minister Andreas Papandreou and subsequently under Prime Minister Costas Simitis and Minister of National Economy and Finance Yannos Papantoniou, who was responsible for the overall coordination of the effort. As Chairman and CEO of Emporiki Bank (2000-2004), I negotiated and implemented the first stage of the strategic partnership with Crédit Agricole and contributed to the establishment of a number of jointly owned subsidiaries. As Managing Director of Kappa Securities (2005-2008), I gained vast experience in investment banking and capital markets, which would later prove very useful in all the public offices I was entrusted with. As Research Director and, later on, Director General of the Foundation for Economic and Industrial Research (IOBE) (2009-2012), I was responsible for the design and implementation of research projects, as well as for managing the Foundation; this experience offered me valuable insights into key industries of the private sector. In my term as Minister of Development in the caretaker government of Panagiotis Pikrammenos in 2012, I signed the approval of several investment projects under the development law. As Minister of Finance in the Samaras government (2012-2014), I contributed to the restoration of the smooth programme refinancing for Greece by the fulfilment of policy commitments; the partial restructuring of Greece's sovereign debt; a public debt buyback on favourable terms; the implementation of reforms; the normalisation of public finances and the economy, a shift to a primary surplus at general government level after years of persistent deficits; a drastic decline in Greek government bond spreads; Greece's return to international bond markets; and the recapitalisation of systemic banks. As Bank of Greece Governor (2014-to date), a post to which I was appointed chosen by Prime Ministers Antonis Samaras in 2014 and, for a second term, Kyriakos Mitsotakis in 2020, I contributed, along with the Bank of Greece staff, in keeping Greece in the euro area during the first half of 2015; in the effective imposition and management of capital controls in 2015 until their full withdrawal in 2019; in ensuring the smooth provision of emergency liquidity assistance (ELA) to banks during the crisis; in the recapitalisation and resolution of systemic and non-systemic banks, while fully protecting bank deposits; in cleaning up ailigning banks and strengthening competition in the banking sector; and in the organisational restructuring of the Bank of Greece itself. In addition, as member of the Governing Council of the European Central Bank (ECB), I have been participating in the formulation and implementation of the single monetary policy, both in times of crisis and in a very low inflation environment, as well as in conditions of high inflation after the Covid-19 pandemic, while also having served as Chair of the ECB's Audit Committee. 3/8 BIS - Central bankers' speeches Looking back, I am immensely gratified to have played my part, to the best of my ability and with the invaluable help of my highly competent associates in all my public engagements, first, in Greece joining the euro area, second, in Greece remaining in the euro area under the extremely adverse circumstances of the debt crisis, and, third, in Greece becoming – without exaggeration – a success story. The Greek economy is beyond any doubt an international success story over the past few years. The recovery of investment grade status confirms this. Government bond spreads compare favourably with those of other Member States. Economic growth is considerably higher than the average euro area growth rate. Major fiscal problems, debt sustainability as well as bank restructuring and recapitalization issues have been successfully resolved, while bank deposits have been fully protected. In the second half of the 2000s, an imprudent fiscal policy and loss of competitiveness created gigantic "twin deficits" and financial stability problems, which brought Greece into the center of the Global Financial Crisis, with markets and analysts predicting Grexit both in 2012 and 2015. So, how did Greece turn itself into a success story? In my opinion, this can be explained by the following six reasons: (a) painful domestic fiscal and structural adjustment during the three adjustment programmes; (b) strong will to stay in the euro area; (c) generous debt refinancing at very favorable terms; (d) ECB waiver when Greece did not have investment grade status; (e) NGEU-RRF generous participation; and (f) Orthodox fiscal, financial and structural policies that are being pursued over the last several years. The Greek economy has continued growing throughout 2024 at a rate considerably higher than the eurozone average. The labor market has maintained its momentum, fiscal figures are improving and the public debt-to-GDP ratio is falling rapidly, while inflation remains well below 2023 levels and is expected to converge to 2% in the medium term. Over the coming years, the Greek economy is expected to continue to grow at higher rates than the rest of the eurozone. This is a particularly significant development, as it will reinforce the convergence of the country's real per capita GDP with the EU average. The primary drivers of economic activity will continue to be investment spending, thanks in part to European funds and particularly the Recovery and Resilience Facility (RRF), and consumer spending, due to the increase in real disposable income resulting from higher employment and lower inflation. However, in spite of the undeniably positive prospects of the Greek economy, we should not lose sight of the economic challenges lying ahead. The most important 4/8 BIS - Central bankers' speeches challenge for Greece is the large current account deficit (6.2% of GDP in 2023), despite the very substantial fiscal adjustment and the improvement in labour cost competitiveness. The main reason is that Greece lags behind most European countries in terms of structural competitiveness, despite significant improvements in recent years. For instance, on the basis of Switzerland's International Management Institute Global Competitiveness Index for 2024, Ireland ranks 4th, Portugal 36th and Greece 47th. (I compare Greece with Ireland and Portugal because in 1974, with the restoration of democracy in Greece and Portugal, these three countries had very similar competitiveness and other economic characteristics). A similar picture arises if one looks at data from the World Bank, which compiles six Worldwide Governance Indicators for more than 200 countries covering the 1996-2022 period. Greece lags behind Portugal and Ireland over the entire period and across all indicators. Accordingly, and despite the progress achieved over the past few years, Greece has still a long way to go in order to catch up with the structural competitiveness levels of most European countries. Greece's persistent shortfall in all the above indicators translates into lower structural competitiveness and explains the major part of the current account deficit. The rest is explained by Greece's higher economic growth compared with its trade partners. Compounded by weaker investment, relatively low structural competitiveness inevitably weighs on productivity and living standards over the long run. Investments play the most decisive role in shaping the future course of the economy, as well as in transforming the growth model with an emphasis on boosting productivity, driving innovation, increasing production of internationally traded goods and services, effectively dealing with climate change and facilitating the green transition. Increased production of internationally traded goods and services leads to higher exports and import substitution and thus to a reduction in the current account deficit. Investment spending can underpin economic growth, particularly through improvements in infrastructure, education and health or investments in manufacturing equipment, machinery, or even intangible assets and cutting-edge technologies, including those that promote the green transition of the energy sector. There are considerable synergies between investments in tangible and intangible capital, and these should be fully utilized. Simultaneously investing in new technologies and in digitally skilled human capital results in the largest possible increase in productivity in the long run. Investments as a percentage of GDP have increased in recent years, owing to particularly strong investment activity in the three years 2021-2023. Business investments have fully recovered to pre-2010 levels. On the other hand, residential investment is low, but rapidly growing in response to strong demand from both domestic and foreign investors, including investors from EU countries as well as countries further afield in the context of the Golden Visa program. Nonetheless, total investments as a percentage of GDP remain below the EU average, at 15.2%, compared to the EU's 22% in 2023. 5/8 BIS - Central bankers' speeches For one, RRF funds must be received and disbursed to the private sector promptly. To date, the receipt rate of RRF funds is satisfactory (51% of a total €36 billion), and Greece is among the top performers in the EU. Satisfactory progress has also been made in terms of signing loan agreements. However, the disbursement of grants to the final beneficiaries is moving at a slower pace. In order to improve structural competitiveness, it is also essential to implement a broad range of ambitious reforms, aiming at addressing structural weaknesses such as delays in the delivery of justice, bureaucracy in public administration and lack of digital skills. At the same time, it is crucial to eliminate any remaining restrictive practices preventing markets from being competitive, by removing barriers to entry and opening up goods and services markets to competition. These reforms will help attract foreign direct investment, as well as facilitate the participation of Greek companies in global value chains, in turn leading to the adoption of new technologies and innovative production methods that will enable Greek companies to offer high-added value products and knowledge-intensive services. A healthy and competitive banking sector capable of financing businesses and households is essential. There has been a marked improvement in banking sector fundamentals over the past decade: Profitability, liquidity, capital adequacy and loan portfolio quality have all improved; new healthy and adequately capitalized banks have been created forming a fifth banking pillar, while divestment of the Hellenic Financial Stability Fund's shareholdings in the four systemic banks has been largely completed. Still, the sector's resilience must be further strengthened, including through quantitative and qualitative improvements in the capital base of Greek banks, by further reducing the non-performing loan (NPL) burden closer to the EU average and by improving the services provided to businesses and households. This will enable the sector to contribute even more to the financing of the real economy. Bank financing of business investment needs can be further bolstered by utilizing the full range of national and European financing mechanisms, such as the RRF, the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the Hellenic Development Bank (HDB). Crucially, financing sources must be diversified. Beyond bank financing, it is important to explore possibilities of tapping private financing, of all kinds, for investments, including access to capital markets. Venture capital, private equity, crowdfunding, business angels, startup accelerators and microfinancing can be used to cover the investment needs of small and medium-sized enterprises that lack sufficient fixed assets to use as collateral for securing bank loans. Implementing the reforms and changes outlined above can improve structural competitiveness and, at the same time, boost the economy's growth rate and support the transition towards a sustainable and competitive growth model, focused on entrepreneurship, competitiveness, innovation and extroversion. The priority must be the timely utilization of available EU funds, particularly RRF funds, to strengthen investments in human capital, green energy and digital technologies, which will in turn facilitate the country's green and digital transformation. 6/8 BIS - Central bankers' speeches In a competitive global environment, the path towards effective and efficient implementation of reforms passes through broader political consensus building. Despite the substantial progress so far achieved, structural reforms should not be a taboo issue for political forces. Broader political consensus can enhance accountability as well as ownership of reforms and provide lasting solutions. A strategy adopting a technocratic approach to political governance, which is based on measurable results, systematic assessment and benchmarking against the rest of Europe, as well as on seeking a genuine consensus in society at large, is key to addressing problems in a number of critical policy areas. Sticking to ideological red lines hampers building consensus around tried and tested answers to problems such as tax evasion, lawlessness and impunity, shortcomings in educational standards vis-à-vis the rest of Europe and delays in the delivery of justice. Only well documented policies can provide sustainable solutions and usher the country to a new era of growth and prosperity. With regard to public finances, which is and should remain our number one priority, given the fiscal challenges ahead and the need to maintain our fiscal credibility, I would like to point out that we are still in the early stages of implementation of the new Stability and Growth Pact (GSP). The revised fiscal framework imposes control on government net expenditure growth, while also implying that any fiscal space created on the revenue side will be used to reduce public debt. These new conditions are opening up scope for rapprochement and synthesis between political parties towards consensus decisions on how to prioritise public spending and investment and improve their efficiency, combat tax evasion (with a view to broadening the tax base) and ensure a fairer distribution of tax burdens. At this point, let me elaborate on the disproportionately heavy burden of defence expenditure borne by Greek taxpayers relative to taxpayers in many other euro area countries, which is linked with the protection of European borders and, in particular, Greek-Turkish relations. The burden of such expenditure, which primarily concerns imported military equipment, falls exclusively on Greek taxpayers. What is lacking today is a coherent and effective European security policy in the area of defence (as also suggested by the Draghi Report), aimed at maximising the benefits of defence investment and minimising the disproportionate costs entailed by defence equipment (e. g. through defence co-production programmes). At the same time, efforts should continue so as to find points of convergence in Greek-Turkish relations, given their bearing on Greece's economic and social performance, stability and security. A very important fact to note is that the dialogue between Greece and Turkey which started in 2023 has already delivered significant results with regard to airspace infringement over the Aegean Sea, managing migration flows and economic cooperation. But above all, it has created an environment of stability and security for citizens: it is no coincidence that, while two years ago Greek-Turkish relations, together with the rising cost of living, were citizens' primary concern, nowadays, as suggested by opinion polls, citizens are still interested but not worried. This has had a strong positive impact on the stability and outlook of the Greek economy. I believe that an agreement 7/8 BIS - Central bankers' speeches on the settlement of our dispute with Turkey, on the delimitation of maritime zones, would be more than welcome, unquestionably paving the way for long and sustainable peace as well as economic growth and welfare in the region and Greece in particular. The complexity of modern societies, characterised by frequent crises, multi-dimensional challenges, heightened uncertainties, globalisation and the ubiquitous presence of social media, has, in my opinion, rendered traditional political ideologies such as the left and the right, inadequate to describe today's political clashes. Therefore, the left-right dichotomy sounds rather outdated. Rather, in modern democracies, the critical divide is between liberal and populist policies, as experienced in Greece after the collapse of the two-party system and the emergence of new political formations in 2012. Citizens must demand from traditional and new parties alike a minimum degree of commitment to dialogue and compromise. Even if this may require institutional reforms in the context of our parliamentary system, potentially involving amendments to the Constitution, such changes should be set in motion in the coming years. The broader the policy agendas the parties manage to agree upon, the brighter the economic outlook will be, thus helping to increase welfare. Besides, the country's European orientation largely entails a convergence of views on the direction to be followed by national economic policies within EMU. Unfortunately, today at the European level, despite a long tradition of political consensus and alliances, anti-systemic populism is on the rise, with public trust in democratically elected governments plummeting. I would like to underline that such a shift towards a polarised and fragmented political landscape in Greece, which has already suffered from a protracted and painful economic crisis, would have disastrous social and economic consequences. However, in light of the hard lessons learned from the recent economic crisis, I believe that the so-called "systemic" Greek political parties have come to realise the country's political and economic stability as well as European path as essential pillars. This realisation creates a unique opportunity for fostering a consensus political culture in Greece, which would facilitate the sharing of political cost, hence the effective implementation of necessary reforms. In my opinion, consensus on economic policy matters should comprise four key elements: First, commitment to fiscal responsibility, with continued achievement of primary cyclically adjusted budget surpluses of 2% of GDP annually. Second, commitment to safeguarding financial stability, i.e. maintaining the robustness of the financial system and protecting deposits. Third, commitment to economic convergence by closing the investment gap as well as to advancing the appropriate reforms and upgrading the institutions. Fourth, bringing Greek-Turkish relations and the associated positive economic potential into the agenda. Thank you for your attention. 8/8 BIS - Central bankers' speeches | bank of greece | 2,024 | 12 |
Welcome remarks by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal, at the 49th SEACEN Governors' Conference/High-Level Seminar and 33rd Meeting of the SEACEN Board of Governors, Kathmandu, 21 November 2013. | Yuba Raj Khatiwada: Emerging global financial issues of common interest Welcome remarks by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal, at the 49th SEACEN Governors’ Conference/High-Level Seminar and 33rd Meeting of the SEACEN Board of Governors, Kathmandu, 21 November 2013. * * * Chief Guest Rt. Honorable President of Federal Democratic Republic of Nepal, Dr. Ram Baran Yadav Honorable Minister of Finance, Mr. Shanker Prasad Koirala Chair of SEACEN Board of Governors and Governor of the Bank of Mongolia Mr. Naidansuren Zoljargal Fellow SEACEN Governors, Distinguished Keynote Speakers, Delegates, Ladies and Gentlemen 1. It gives me a great pleasure to welcome all of you to this 49th SEACEN Governors’ Conference/High-Level Seminar and 33rd Meeting of the SEACEN Board of Governors being held in Kathmandu. I am thankful to the SEACEN Governors for trusting us to host this important event after 26 years. We last had the opportunity to host this important event in 1987 while I was myself a junior officer at the Nepal Rastra Bank. We are immensely delighted and feel highly honored to have the opportunity to host this important event and are overwhelmed by the gracious presence of Rt. Honorable President of Nepal, Honorable Minister of Finance, fellow Governors and other dignitaries. Ladies and Gentlemen 2. Let me take this opportunity to congratulate fellow Governors and collaborators on the occasion of 30th anniversary of the SEACEN Centre whereby our collective efforts along with other non-member contribution have taken the Centre to a greater height of recognition and pride. This is evident from the increased members including Asia’s largest and emerging economies, growing attraction for more membership, and increased capacity of the Centre in research and training. The Centre has also created a platform and an opportunity for all of us to discuss the emerging global financial issues of our common interest. I do expect continued support of my fellow Governors of the SEACEN Board and our collaborators in furthering the SEACEN Centre to the stage of great height and recognition. Ladies and Gentlemen, 3. In changing economic landscape, central banks are growingly entering in their non-conventional roles; and we have been seeing a paradigm shift in our roles and responsibilities. The advent of recent global financial crisis has not only exposed more complex and intricate macro-financial linkages in the transmission mechanism of the monetary policy, this has also shifted our attention towards that of the financial stability and economic growth. Growing global financial integration, financial innovation and evolution of new financial products and massive use of electronic technology in financial services have made our job even more challenging. 4. Emerging Asian market economies are now characterized by rapid financial globalization andintegration which has contributed to increased volatility of capital flows and rapid transmission of financial crises. Deepening and broadening of the financial sector has created more financial risks and vulnerabilities in the financial system of our economies. The presence of informal markets and shadow banking which often leads to a weaker transmission of the monetary policy has made the central banks’ role more challenging. Increasing new financial products triggered by sophisticated information technology, massive BIS central bankers’ speeches cross-border capital flows resulting to volatility in exchange rates and uncertainty of the spillover effect in the domestic economy are added challenges for we central bankers towards making our financial system more stable, inclusive, and economic growth friendly. 5. These challenges call upon the central bank authorities to recast monetary policy objectives and instrument, to strengthen regulation and supervision and exercise macroprudential measures as a complement to monetary policy. Priority has to be accorded in identifying all the sources of risk and imbalance that can have systemic implications for the economy’s growth and stability. Our monetary policy also needs to address how financial resources are better allocated to promote growth and jobs along with ensuring macroeconomic stability. Furthermore, there is a need to effectively integrate or coordinate monetary, regulatory and supervisory functions into coherent frameworks for the maintenance of financial stability and promotion of inclusive economic growth. 6. This 49th Governors’ Conference and High Level Seminar aims to discuss some of these pertinent issues. What we have learnt is that financial system can have robust growth and can be stable only in an environment of real economy growing in a sustainable manner. Thus a strategy to promote economic growth must be an integral part of the financial sector development strategy. Deliberations and discussions on these important subjects have drawn the interest of the global leaders including the central bankers and international financial institutions, particularly after the recent financial crisis. We will have the opportunity to hear thoughts and views on these relevant topics from the distinguished speakers from renowned institutions. I hope that it will be very much rewarding to all of us. 7. For many of you, this may be the first time in Nepal or you may be visiting Nepal after an interval. I hope that your stay in Nepal will be refreshing and memorable one. You will have an opportunity to explore more about our rich culture, nature and the friendly people during your stay and during the social events that would take place following the meetings. 8. Let me close my remarks by once again welcoming Rt. Honorable President, Honorable Finance Minister, fellow Governors and distinguished delegates to this 49th Governors’ Conference/High Level Seminar and the Meeting of Board of Governors in Nepal. I look forward to a rewarding discourse and exchange of views and experiences among fellow Governors which will help better deliver our central banking roles and responsibilities. Thank You BIS central bankers’ speeches | central bank of nepal | 2,013 | 12 |
Remarks by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal, at the programme on "Business ethics for a prosperous Nepal", organized by the World Forum for Ethics in Business, Kathmandu, 17 January 2014. | Yuba Raj Khatiwada: Business ethics for a prosperous Nepal Remarks by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal, at the programme on “Business ethics for a prosperous Nepal”, organized by the World Forum for Ethics in Business, Kathmandu, 17 January 2014. * * * Rt. Hon’ble Chairman of Council of Ministers His Holiness Sri Sri Ravi Shanker jee, Distinguished Participants, Ladies and gentlemen Let me thank the organizers for rendering me the honour to speak on ethics in business amid this high profile gathering in the presence of Sri Sri Ravi Shanker jee. As I stand to speak on this topic, we have a question to ourselves as to whether we can really apply in our practical life the words we speak and hear at this event here, and adhere to the noble principles and values raised in this discourse. We understand that business ethics are moral principles that guide the way a business behaves. Acting in an ethical way involves distinguishing between “right” and “wrong” and then making the “right” choice. While it is relatively easy to identify unethical business practices, it is not always easy to create similar hard- and-fast definitions of good ethical practice. Making money is not unethical, but doing the same in an immoral way is unethical. A business company must make a profit for competitive return to its shareholders’ capital and treat its customers, employees and other stakeholders fairly. Strong returns for shareholders capital should not be achieved at the expense of social, environmental and moral considerations. Indeed a business can thrive in the long-term only if it also takes into account the needs of other stakeholders such as governments, employees, suppliers, communities and customers. Further, any business should minimize any harm to the environment and work in a way that does not damage the communities in which it operates. In the present day world, many companies maximize profits unethically via unhealthy marketing, slashing employee expenses, lowering product quality or impacting the environment negatively. Use of violence, sex, and other unethical means to draw attention to a product or service is an example of unhealthy marketing. Such unethical business practices can lead to smeared public relations and a loss of trust and respect to business people from the consumers. Distinguished Participants, As we have witnessed the birth of new entrepreneurial and so called knowledge based economic age, we have also seen a growing moral and spiritual problem of disconnectedness. While globalization has made the world smaller, and rapid expansion in transportation and communication technology has connected people from around the world, it has also accelerated a detachment of business entities from their community, society, and nation. This is particularly true with the multinational companies where the intense pressure to maximize shareholders’ wealth disconnects the firm from its non-business stakeholders. The dominance of capital over labor has generated an increasing tension and disconnect between labor and capital which has undermined the virtue of justice, loyalty and trust. Practice of using human resource in an inhuman way, lack of safety at work, weak social security, and outsourcing and bogus contract in labour market are some of the examples in this regard. With little loyalty to the company, employees feel disconnected from their own company which damages the relationship between labour and capital. Due to this, industrial relation has worsened and factor productivity has often been adversely affected. BIS central bankers’ speeches We know that business ethics of today has to be broadly viewed from free market approach which is based on the premise that the economy works best when it is left to its own course. For this thought, profit is the invisible hand which best allocates resources and produces most efficient results. But we have observed that while maximizing wealth through profit accumulation, ethical and moral standards are often undermined, and norms are violated. Although the current financial crisis has given a setback to the free market notion and reestablished the role of the state, government regulations are, for the most part, viewed as constraining growth and adding unnecessary costs. This notion has enhanced the disconnection between private sector led economic growth and justice, equality and mass wellbeing. Empirical studies show that companies with better codes of business ethics and conduct produce an above-average performance when measured against a similar group without codes. However, while the link between ethics and performance is certainly found strong, that does not prove that one causes the other. It might be the case that high-performing companies adopt codes of ethics rather than the other way round. Either way, by strongly suggesting that there is no inherent contradiction between being good and doing well, research findings signal to a shift of debate on ethics to more productive terrain i.e. having a code of business ethics might be one hallmark of a well-managed and sustainable company rather than simply a waste of shareholders’ money. Distinguished participants, Let me briefly touch upon the financial industry while talking ethics in business. Financial services are rapidly expanding over years due to the financialization of economic activities, larger global economic integration, extended use of information technology, and liberalization of foreign exchange regimes. Although this industry is highly regulated, ethical lapses do occur, and there are reasons why these misdeeds may happen. First, self-interest sometimes translates into greed and selfishness. This greed becomes a kind of accumulation fever and if accumulation becomes the addiction, there’s no end of it. Second, we too often reduce everything to an economic entity and say that the fundamental purpose of a business is to make money, maximize profit, or “maximize shareholder value”, or something like that. The recent financial crises have revealed that the elements of greed, followed by unethical practices, and excessive risk taking unobserved by the regulators have been instrumental to destabilize the global financial system and a lot of question has been raised on the efficiency, rationality, and morality of those involved in financial services. The professional ethics of the board members, senior executives, supervisors, valuators, surveyors, auditors, rating agencies, brokers, and market makers relating to financial institutions and services has often come to question following the systemic failure of the financial service industry in the recent past. As legal provisions are never enough in order to fully address unethical practices, professional ethics has to be maintained if a socially responsible financial industry is to foster. Distinguished participants, ladies and gentlemen, While we are talking about business ethics for a prosperous Nepal, we have to think of happiness, dignity, wellbeing, and an enlightened citizenry. Prosperity necessitates economic development which comes from economic growth and a fair distribution of income, assets, and opportunities. High economic growth requires investment; and in a country like ours, we need a lot of foreign investment. If there is an unethical practice in the judiciary, in the government, and in the professional jobs like project appraising, accounting, auditing, rating, valuating, surveying or agency functioning, it would be difficult to mobilize foreign resources for higher economic growth. Even international trade can be adversely affected if unethical means are applied to produce goods and services meant for exports. Overall, prosperity earned by unethical means would fall short of happiness and social justice. Let me conclude by saying that doing socially responsible business leads toward ethical business practices. Doing things legally is necessary but not sufficient for such business BIS central bankers’ speeches practice. We often equate moral behavior with legal behavior; but even if an action may not be illegal, it still may not be a moral one. Also, unethical business practice can trigger on the demands of the clients or stakeholders, as sometimes the push to act unethically comes from them. Often clients demand forged bills of payments, overvaluation of their assets for collateral against loansfrom banks, manipulating survey of insurance claim; window dressed balance sheets of companies to borrow from banks, etc. And, service providers are compelled to do the same, or else, financial services executives feel that adhering to ethical standards inhibits career progression at their company. However, this situation arises only when we are marred by unethical business thinking everywhere. Events like this are there to change such an environment. Finally, I thank the organizers for having commenced such a useful discussion. Thank you very much. BIS central bankers’ speeches | central bank of nepal | 2,014 | 2 |
Speech by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal, at the 43rd Asian Clearing Union (ACU) Board of Directors Meeting, Kish Island, Iran, 23 May 2014. | Yuba Raj Khatiwada: Overview of Nepal’s recent macroeconomic performances Speech by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal, at the 43rd Asian Clearing Union (ACU) Board of Directors Meeting, Kish Island, Iran, 23 May 2014. * * * Honorable Chairperson Mr. Valiollah Seif, Fellow Governors and members of the ACU Board of Directors, ACU Secretary General Mrs. Lida Borhan-Azad, Other attending delegates and observers, ladies and gentlemen Let me join fellow governors to express my sincere thanks to Governor Mr. Valiollah Seif and the entire team of Central Bank of Islamic Republic of Iran for the warm hospitality extended to us and also for the excellent arrangements made for the meeting in this beautiful Kish Island. I also thank the Governor of State Bank of Pakistan for successfully handling the chairpersonship of ACU for 2013 and the Secretary General of ACU for efficiently managing the Union’s operation during the same period. Fellow governors and distinguished delegates, We are meeting at this forum to foster regional trade through the promotion of a credible payment system. While talking regional trade, we have our eyes on the global recovery from the crisis, as it has significant bearing on our trade and investment activities. As we know, the global economic growth has shown marginal improvements in the later part of the last year and early part of the current year, impetus coming especially from advanced economies with supportive monetary conditions and fiscal consolidation; but their growth remains uneven. Inflation in these economies, however, has undershot projections reflecting commodity price decline and output gaps. Activities in emerging market economies and developing economies have not shown very encouraging trend, although they continue to contribute more than two-thirds of global growth. The challenges of the emerging market economies and developing economies have increased with financial volatility posed by unexpected normalization of US monetary policy. Despite that low-income countries have succeeded in maintaining strong growth reflecting better macro-economic policies, their external environments remain challenging. In essence, the global recovery is still fragile despite improved prospects and significant downside risks. The challenge to growth has further fueled by recent geo-political risks, a sort of deflation in Euro zone and external environment, which could result in further financial turmoil. Fellow governors and distinguished delegates, I take this opportunity also to shed some lights on Nepal’s recent macroeconomic performances. As an upshot of the economic and financial slowdown of the world economy in recent years and its subsequent repercussion on the Nepalese economy coupled with prevailing political instability, Nepal is grappling with the challenges of low economic growth, inflationary pressure and vulnerable external sector. However, on the basis of recent improvements in the domestic political and economic environment along with improvements in world financial market and prospective outlook of the global economy in the year 2014, a positive impact is expected in some major areas of the economy specially tourism, foreign employment, foreign investments and exports. The outlook for 2014 is a higher growth of around 5.5 percent, compared with less than 4 per cent in 2013, contributed mainly by sound performance of agriculture sector. The consumer price inflation is expected to remain at around 9 percent in 2014. On the external front, exports have increased slower than imports thus further widening the trade deficit to nearly 30 percent of GDP. However, improvements in the service incomes, grants and remittance inflows exceeding 31 per cent of GDP have BIS central bankers’ speeches contributed to a surplus in the current account amounting to 4 per cent of GDP estimated for 2014. The overall balance of payments has registered a surplus for the last several years and is estimated to remain at USD 1.05 billion in 2014. As a result of the balance of payments surplus, gross foreign exchange reserves of the banking system have reached to US$ 6.7 billion at April 2014; and the reserves of the banking system are sufficient for financing merchandise imports of more than 11 months and merchandise and service imports of more than 10 months. Fellow governors and distinguished delegates, In the fiscal sector, a higher rate of growth in resource mobilization relative to government expenditure has resulted in budget surplus. Fiscal prudence over the last several years has helped to confine outstanding domestic debt at 12.9 percent of the GDP. The country remains lowly indebted, as outstanding total public debt, both domestic and foreign together, accounts for little over 31 percent of GDP. Due to strong balance of payments situation mostly contributed by high remittance inflows, liquidity in the banking system has remained high for some time now. Monetary growth has remained at 18 per cent in April 2014 on point to point basis while most interest rates have come down to single digit. Despite high monetary liquidity, growth of credit to the private sector remains within targeted band. Further, the degree of financialization is still low and total credit of banks and financial institutions stands at just 63 per cent of GDP. The financial sector strategy of the Nepal Rastra Bank has now been to consolidate the institutional expansion along with ensuring wider and better access to financial services. Hence, while merger of urban-centered institutions is encouraged, expansion of micro finance institutions in the rural areas establishment of bank branches in the underserved areas is given a priority. On the whole, financial policy comprises of a two-pronged strategy – consolidating the urban financial institutions and expanding the institutional presence in the rural areas. Bank licensing, bank branch expansion, refinance, and credit policies are geared towards this direction. The NRB is of the view that the expansion of the financial sector will be constrained without the growth of the real sector. Thus, priority has been accorded to the productive use of bank credit to the promotion of the real sector through judicious use of credit and macro-prudential policies. As a competitive, efficient and healthy financial system is vital for enhancing economic growth, ensuring economic efficiency and maintaining macroeconomic stability, a reasonable growth of the real economy is equally important to sustain the expansion of the financial services. As financial stability has been a primary concern of Nepal Rastra Bank, it has been addressing pertinent issues such as productive use of credit, enhancing access to financial services, deposit guarantee, exercise of macro-prudential measures, strengthened bank supervision and enforcement of good governance measures. It has introduced some measures such as early warning, prompt corrective actions, know-your customer, stress testing and risk based supervision to ensure resilience of the financial system. We are also embarking on a strong legal framework for anti-money laundering and financial crisis management. Fellow governors and distinguished delegates, While going through the overall ACU transaction, trade routed through ACU in last three years has declined significantly by about 30 percent, 37 percent and 8 percent in 2011, 2012 and 2013 respectively. Similarly, following the trend of preceding years, total transactions have declined by about 12 percent during the first three months of the current year on y-o-y basis compared to the figure of last year. Further, the trade is concentrated, primarily, within a few member countries. All these facts warrant member countries to evaluate the trend; and I urge all the fellow governors to rethink on how we can better serve the enshrined objectives BIS central bankers’ speeches of establishment of the ACU mainly promoting regional trade and monetary co-operation amongst the members. As regards to our activities under ACU, the share of Nepal on total transactions of the ACU member countries routed through ACU mechanism accounts for roughly 0.40 percent, which is fluctuating around same figure over the last few years and its transactions during 2013 has declined by about 30 percent compared to 2012. Similarly, there is a decline of its transactions by about 23 percent over the first three months of the current year compared to the same period of the previous year. Its exports to ACU member countries is hovering around 5 percent of our total exports and the share of imports from ACU member countries has been around half percent of our total imports excluding the trade data with India. As more efforts are needed to promote trade through the ACU mechanism, Nepal Rastra Bank is committed to work together with other member central banks towards creating an enabling environment for the same. In this opportune occasion, I would reiterate Nepal rastra Bank’s commitment and belief in the mission of our Union. I am confident that this meeting would be instrumental in exploring new avenues of co-operation and further simplification in the existing payment mechanism in the pursuit of fostering its effectiveness for facilitating trade amongst member countries and enhancing monetary as well as technical co-operation among us. Before concluding, I would like once again to thank Dr. Seif and the Central Bank of IR of Iran for the kind hospitality and excellent arrangements made in hosting this meeting. Thank you Mr. Chairman. BIS central bankers’ speeches | central bank of nepal | 2,014 | 6 |
Speech by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal and Chairman of the SEACEN Board of Governors, at the 50th SEACEN Governors' Conference, Port Moresby, Papua New Guinea, 20 November 2014. | Yuba Raj Khatiwada: Development of regional capital markets in Asia – issues and challenges Speech by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal and Chairman of the SEACEN Board of Governors, at the 50th SEACEN Governors’ Conference, Port Moresby, Papua New Guinea, 20 November 2014. * * * 1. Asia is the fastest growing economic region of the world and the engine of global economic growth. But its growth is still dependent on (i) external demand from advanced economies and (ii) external capital and direct investment. The region has the highest saving rate and keeps on funding the fiscal deficits of many economies of the advanced world. At the same time, the region lacks sufficient long term fund for promoting investment for high economic growth. Sustaining high economic growth in the Asian region requires huge investment in both public and private sectors. Big infrastructure projects are likely to demand high amount of capital even above the capacity of domestic market; and resorting to international market for the same is not always practical. This is where the development of regional capital markets in Asia is called for. 2. A regional capital market implies that there are no barriers to the movement of capital and the provision of investment services within a geographic region. This implies that domestic savers find suitable instruments for saving in the region and investors/issuers can invest or raise capital in other countries along with domestic markets, all knowing that they will encounter broadly similar regulations, information, trading systems, settlement systems, accounting standards and governance standards throughout the region. While development of regional capital market is necessary to promote investment and economic growth in Asia, it is also instrumental to strengthen domestic capital markets and provide liquidity, scale, and capacity and ultimately put Asia in the position to integrate with global market. However, the development of capital markets in Asia has not kept pace to that of economic growth in the region relative to other regions of the world. This has led to the Asian investors’ continued dependence on the markets of advanced economies for mobilizing long term capital. 3. Developing a regional capital market leads to the convergence of risk adjusted returns on financial assets of similar maturity across the region. Further, it helps the deepening of domestic capital markets, increases competition, and widens the range of instruments available for savings and investments. These changes, in turn, lead to more efficiency and innovation in the provision of services to savers, investors, and issuers. More innovation in such financial services extends the range of products to attract a wider range of participants, leading to greater financial inclusion, which is a big policy challenge at the current state of financial development. 4. There are substantial benefits to be derived from regional integration of capital markets. A regional capital market brings greater portfolio and risk diversification by providing domestic individual and institutional investors and savers a wider range of investment opportunities. As savers can diversify risk by choosing varied instruments, investors can have an optional mix of debt and equity. Besides, retail investors will benefit as costs are reduced and innovative providers compete for their business. Cross border collective investment schemes will be able to reach a wider investor base, leading to economies of scale. Increased competition will bring innovations and ensure that investment products more closely reflect the needs of retail investors. BIS central bankers’ speeches 5. Individual countries will benefit from more efficient, more liquid, broader, and cheaper capital markets. Easier, cheaper capital raisings encourage companies to raise money for investment through public issues. More public issuances reduce reliance on bank borrowing. More equity issuance develops corporate profiles so companies can further diversify their issuance. Overall, integrated capital market means better allocation of capital, enhanced portfolio diversification, more efficient sharing of risks and lower cost of capital. 6. A regional capital market also brings some substantial risks, which should not be ignored. With market integration, institutions and individuals invest in new markets and instruments across different countries. This increases the possibility of faster and multiple contagion of systemic risk. As evidenced in the Asian financial crisis of 1997 and global financial crisis of 2008, in an integrated regional capital market, shocks arising in any one economy could easily and quickly transmit to other economy. Capital market integration can lead to crises even in countries with sound fundamentals and even in the absence of imperfections in their capital markets. If a country becomes dependent on foreign capital, sudden shifts in foreign capital flows can create financing difficulties and economic downturns. 7. The development of the regional capital markets- both debt and equity- is contingent upon many factors. The depth of debt market is determined by the presence and level of transaction of convertible currency denominated long term loans and bonds market while the level of equity market is determined by the nature and volume of issues and secondary markets in convertible equity instruments. While low level of Asian financial market development is contingent on foreign exchange regulations, the low regional market integration is reflected in poor cross border presence of banks and financial institutions. 8. Along with infrastructure development and investment banks, cross border presence of commercial banks is also instrumental in the deepening of the regional capital market. Cross border banking is, of course, determined by trade and investment flows. Trade and foreign direct investment (FDI) in Asia – both intra-regional and international – is growing by more than 10 per cent, almost twice the growth in G-7 countries. But the growth of financial integration is still limited with home country banking business being more than three fourth of their services. Given the intraregional trade flow, trade finance implies greater transaction banking opportunity, but the financial institutions have yet to grab the opportunity. As such, cross border presence and transactions of banks depends upon the size of capital and volume of transaction. Further, regulatory and supervisory issues along with growing compliance requirement on anti-money laundering, know your customer (KYC) and level of home and host authority coordination are important determinants of cross border banking presence particularly when it is the case for branch banking. 9. Asian region is the highest saver in the world and thus a potential source of capital market development from the supply side. The volume and growth of sovereign wealth funds in the public sector, provident and pension funds, insurance and corporate profit allocation funds, and high savings at the household level indicate that there is flush of funds available in the Asian market for investment in long term instruments –both debt and equity related. In the demand side, Asia requires huge investment in infrastructure projects to attain and sustain high economic growth. Such infrastructure projects suffer from both equity and debt financing challenges. Equity financing is linked to risk taking by the savers who want to invest while debt financing related to the limitations of banks and financial institutions to invest for long term. The banks which are flush with funds also often are reluctant to perform their term transformation role – converting short term savings into long term loans. Cross border financing becomes even more difficult by the restrictions on capital account transactions; and this is the reason why domestic banks are sometimes BIS central bankers’ speeches flush with investible fund while at the same time local projects are looking for long term debt financing services. As such banks are worried about two aspects in financial dealings: (i) currency mismatch in transaction and (ii) maturity mismatch in their balance sheets – short term deposits versus long term loans. Addressing the first issue is related to currency convertibility in cross border transactions while the second is related to regulatory and macroprudential norms along with the risk taking capacities of the banks. Policy makers thinking about developing a stronger Asian regional capital market will have to assess this situation in depth. 10. Various potential barriers, which may be related to regulations, taxation, or monopoly, pose serious challenges towards the capital market integration. Regulatory barriers like exchange controls and restriction on foreign listings restrict the movement of capital towards its efficient use. Taxation barriers alter the economic comparison between different activities or participants leading to narrower markets and higher costs. Monopolistic structures like limitations on the total number of stock exchange members prevent access to particular parts of the market, reduce competition, and increase costs for all users. 11. Also important are fairness barriers and information barriers. Fairness barrier such as explicit discrimination against foreigners or a perception that such discrimination exists deter them from entering the market. Likewise information barriers could exist when there are significant differences in accounting standards or disclosure requirements, and lack of transparency of trading, which prevent nonlocals from seeing the state of the market. A multidimensional approach with strong regional cooperation is required to overcome such potential barriers and move towards the regional integration. Efforts should be directed towards harmonizing rules and practices by addressing major differences in laws, regulations, and tax treatments that prevent investors from building regional portfolios. Emphasis should be given to convergence with globally accepted standards and best practices, which will also facilitate easier global integration later. 12. A major challenge faced by Asian nations towards developing a regional capital market is the building of necessary market infrastructures. Establishing links between national clearing and payment systems, creation of regional credit rating agencies and benchmarks should be emphasized to enhance the depth and liquidity of capital markets. 13. One more challenge to the Asian capital market is the limitation of bond market. Currently, more than 80 per cent of the Asian bond market is contributed by government bonds. Corporate bonds issues are still limited and companies are often inclined to bank loan financing than resorting to the issuance of bonds. In future course of time, government bond market is expected to saturate for the reason that (i) public debts are on the rise and such debt levels do not allow governments to incur high deficits and issue bonds to finance the deficit, and (ii) the past fiscal profligacy and subsequent macroeconomic imbalances of some of the Asian countries have taught strong lessons on not incurring high fiscal deficits. Therefore, if the development of the Asian capital market in terms of bonds is concerned, there is a need to look into the corporate bonds market and that also at the cross border level. Again the provisions of currency convertibility in the capital accounts would be instrumental in this regard. 14. So far as equity markets are concerned, many larger economies of this Asian region have already been able to raise capital from the international market. Further liberalization of the foreign exchange regime and developing a regional market for the same would be instrumental to see that such capital could be mobilized at the regional level. BIS central bankers’ speeches 15. While developing the regional capital market, the Asian region would help global financial stability in three ways: (i) by promoting economic growth in the region to support the financial sector growth and eventually avoiding financial crisis as in the recent past, (ii) by retaining the savings of the region within the same region and avoiding a big vulnerability related to global capital outflows, inflows and their reversals, and (iii) by reducing the load of excess financial flows to the European and American markets and preventing the banks and financial institutions in these economies from over-leveraging with the availability of easy funds. 16. Overall, development of regional capital market in Asia has remained slow compared with the pace of economic growth. This is also because of the limited cross border presence of banks and financial institutions. As such, banks which also play a critical role in capital market development in terms of their equity trade and long term credit flows have limited cross border presence. Financial integration and the cross-border equity investment within the Asian region have grown only at a modest degree and domestic bond markets have grown considerably in some countries are dominated by government bonds. Improved macroeconomic conditions, proper credit ratings, stable exchange rates, and gradual capital account liberalization have all helped to attract foreign capital into the Asian region’s domestic bond markets. However, as there are limited secondary market opportunities for the bonds, investment on bonds has been a distraction from liquidity management perspective. On the other hand, as volatile global market conditions can lead to sudden withdrawals of capital during periods of heightened global uncertainty or financial stress as witnessed in 2008 onwards, the region’s policymakers require having at their disposal a broad array of policy instruments for maintaining financial stability, both at the domestic and regional levels. 17. As the global financial crisis of 2008 has shown, greater the financial integration – greater is the risk of cross-border contagion of financial distress. A strong framework for prudential regulation and supervision is thus necessary to ensure that risks arising from integration are being assessed and managed well. Move towards riskbased supervision, and changes in prudential regulation and supervisory oversight to address cross-border activities would be important steps in this regard. 18. For successful integration, economic fundamentals need to be and remain strong. Local markets need to be properly regulated and supervised. If market fundamentals deteriorate, speculative attacks will occur with capital outflows generated by both domestic and foreign investors. The benefits of integration would not be equally spread among the countries of the region. Opportunities and challenges exist for all types countries. It is likely that the more innovative and efficient countries will be most successful in the new environment. The likely impacts, both beneficial and less beneficial, will affect different countries in different ways. 19. Finally, talking about regional capital market, the presence of regional financial institutions is a must. The recent initiative for the establishment of Asian Infrastructure Investment Bank is a welcome step in this regard. Equally important will be the initiatives for higher level of capital account convertibility of the currencies of the larger economies. Besides, further financial liberalization and arrangements for cross border oversight and supervisory functions will be equally important. Harmonization of the regulations regarding AML/CFT, KYC, taxation, use of IT system, and statistical reporting are some other prerequisites for the development of an integrated regional capital market. We, the South East Asian Central Bank (SEACEN) Governors, can collectively take up such initiatives through the platform of SEACEN. Let us work together towards the evolution of the regional financial market that caters the financing need of Asia’s vibrant economic growth. Thank You. BIS central bankers’ speeches | central bank of nepal | 2,014 | 12 |
Response address by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal and Chairman of the SEACEN Board of Governors, at the 50th SEACEN Governors' Conference, Port Moresby, Papua New Guinea, 20 November 2014. | Yuba Raj Khatiwada: SEACEN – enhancing collaboration with other global financial stakeholders Response address by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal and Chairman of the SEACEN Board of Governors, at the 50th SEACEN Governors’ Conference, Port Moresby, Papua New Guinea, 20 November 2014. * * * Mr. Patrick Pruaitch, CMG MP, Minister for Treasury, Papua New Guinea Mr. Loi Bakani, Governor of Bank of Papua New Guinea Mr. Naoyuki Shinohara, Deputy Managing Director of International Monetary Fund My fellow Governors and heads of delegates Delegates and distinguished speakers Ladies and Gentlemen It is my great pleasure to be here and address the 50th SEACEN Governors’ Conference. As the chairperson of the BOG, let me extend warm regards to every one of you. I would also like to extend my sincere gratitude to Mr. Loi Bakani, Governor of Bank of Papua New Guinea for hosting this important SEACEN event. I take this opportunity to express my sincere appreciation to Mr. Bakani and his entire team as well as the SEACEN Centre for the warm hospitality extended to the delegates and also for the excellent arrangements made for this event. The colorful reception we had last evening will be highly memorable to all of us. Ladies and Gentlemen, While addressing this august gathering at the Opening Ceremony amid 20 member central bank Governors and quite a few associate members, I am reminded of the first SEACEN Governors’ Conference which was held in 1966 in Bangkok with the participation of seven heads/representatives of the central banks. Since then, and with each Governor’s Conference, the participation has grown from the small group to this present member of twenty, reflecting the organization’s vibrant and dynamic growth. Today, I am happy to welcome officially the Hong Kong Monetary Authority as the newest member of the SEACEN. Fellow Governors, Each Governor’s Conference is based on a topical theme which is discussed by participating heads/representatives and where important issues are raised, and these discussions have contributed and enriched the policy debate in this region. I am happy to observe that this trend is continuing with this bi-centennial Governors’ Conference on “Regional Initiatives in the Midst of Vulnerabilities”. Ladies and Gentlemen, The theme for this year’s SEACEN Governors’ Conference is indeed timely. The theme acknowledges that in the integrated global economy the strategies of central banks are affected by the external economy where formulation of domestic policies has to be made in an environment of greater cross-border financial linkages. In this context I understand that this conference will focus on three particular areas: (1) reconciling domestic and cross- border considerations in the use of macroprudential and capital-flow-management tools; (2) steps to further the development of regional bond markets and their implication for monetary policy strategies; and (3) issues and challenges associated with increased integration of emerging market banking systems. In this regard SEACEN has an important role in enhancing cooperation and coordination of members for spurting regional initiatives for ameliorating perceived risks. BIS central bankers’ speeches Fellow Governors Ladies and Gentlemen, In the last several years, the dynamism of SEACEN is self evident. It has been successful in discharging its aim by adjusting its strategic goals in the changing environment as well as enhancing collaboration with other global financial stakeholders in general and IMF, BIS, Bank of England, Bundes Bank and CEMLA in particular. In the meantime, while I gather the fresh memory of 49th SEACEN Governor’s Conference and 33rd Board of Governors’ Meeting held in Kathmandu which was successful with fellow Governors’ encouraging participation, I would also like to express my sincere thanks to all BOG members for their kind and constructive support during my tenure as the SEACEN Chair. Finally, allow me to conclude by wishing everyone here a productive and rewarding Conference and a successful Meeting of the Board of Governors. Thank you. BIS central bankers’ speeches | central bank of nepal | 2,014 | 12 |
Keynote address by Dr Chiranjibi Nepal, Governor of the Central Bank of Nepal, at the Regional Forum on "Emerging opportunities and challenges of financial inclusion in Asia-Pacific region", Kathmandu, 9 November 2016. | Regional Forum on "Emerging Opportunities and Challenges of Financial Inclusion in Asia-Pacific Region" Kathmandu, 9 November 2016 Keynote Address by Dr. Chiranjibi Nepal, Governor, Nepal Rastra Bank Chairman of APRACA and Deputy Governor of Bangladesh Bank Mr. Shitangshu Kumar Sur Chowdhury Deputy Governors of Nepal Rastra Bank Mr. Chintamani Siwakoti and Mr. Shiba Raj Shrestha, Chairman of National Bank of Agriculture and Rural Development Dr. Harsh Kumar Bhanwala, Eminent Resource Persons, Executive Directors from Nepal Rastra Bank, Chiefs of Financial Institutions of Nepal, Forum Participants, Friends from the Media, Distinguished Guests, Ladies and Gentlemen, It gives me immense pleasure to address this august gathering at this opening session of this regional forum on "Emerging Opportunities and Challenges of Financial Inclusion in Asia Pacific Region". The theme of this Forum is something that is close to our hearts, and is a very topical issue in recent days. The need to address this issue has never been more significant primarily due to the benefits it will bring to our countries. I am confident that this Forum will help in deepening the understandings on the emerging issues of financial inclusion. Ladies and Gentlemen, Now, let me move on to the main theme of this forum. Financial inclusion has emerged as a key global priority. Governments, international agencies, academics and the private sector have all brought financial inclusion to the top of the agenda. The G20 made the topic one of its pillars at the 2009 Pittsburgh Summit. Financial inclusion has been recognized in the Istanbul Programme of Action and the Sustainable Development Goals as a key enabler for a host of development objectives. Likewise, the World Bank in 2015 also laid out a vision for achieving universal financial access by 2020 which means that basic access to the formal financial system – for example, through debit cards or mobile money – should be possible for everyone. Overall, gaps in access to finance are slowly being lowered, thanks to the implementation of financial inclusion policies in different countries. Between 2011 and 2014, the global unbanked population dropped by 20 percent, from 2.5 billion to 2 billion. Still, more than half of adults in the poorest 40 percent of households in developing countries were still without accounts in 2014. Though some degree of success was achieved by financial institutions in rendering services to millions of excluded people throughout Asia-Pacific, the region is still home to an estimated 1.2 billion people who do not have access to a bank account or formal financial services. About 84 percent of firms in developing Asia possess a checking or savings account, which is lower than Latin America’s 89 percent. Still, in the case of Asia and the Pacific, a recent study by Asian Development Bank of 37 selected developing Asian economies in 2015 revealed that financial inclusion significantly reduces poverty and also reduces income inequality. Ladies and Gentlemen, As most of you are aware, there is no universal definition of financial inclusion. Financial inclusion is about making banking services available and affordable to one and all irrespective of their economic status. In other words it implies access to finance and financial services for all in a fair, transparent and equitable manner at an affordable cost. Similarly, there is also no single measure of financial inclusion as individuals and firms can utilize a host of financial services including savings, borrowings, money transfers and payments. Thus, several indicators are utilized simultaneously including savings accounts at formal financial institutions, the use of Automated Teller Machines (ATMs), mobile banking or the use of debit and credit cards, among others. The benefits of financial inclusion and inclusive growth have been clearly ascertained. Access to financial services opens doors for families, permitting them to smooth out consumption and invest in their futures through education and health. Access to credit enables businesses to expand, creating jobs and reducing inequality. Financial inclusion is the bridge between economic opportunity and outcome. Ladies and Gentlemen, While the responsible factors for lack of financial inclusion vary between countries and regions, there exist a number of common themes. These include, among others, geographical distance, governance problems, restrictive regulations, lack of financial literacy, absence of strong payment system, inappropriate products, low level of technological development and dearth of reliable data. As most of these issues will be discussed in the other sessions, I would just like to limit my focus on two issues, that is, financial literacy and technological advances that hold promise in the expansion of financial inclusion. Financial literacy is one of the major challenges facing countries across the globe and has been receiving significant attention from policy makers worldwide. Financial literacy and inclusion are issues of critical importance as we all strive for a more transparent, robust and sustainable economy, and a fairer society. The financial crisis in 2009 brought the need for increased financial literacy to the world’s attention. The crisis proved that even advanced countries suffer from low levels of financial literacy, which can have a potent impact on both local and global economies. Government authorities can find it hard to reach excluded groups, and many have identified trusted intermediaries with access to the target group to deliver financial education. This approach can be effective, provided that the goals of the intermediary are aligned with the financial education goals, and that the staff are properly trained and incentivized to provide financial education. Countries need to design programs to ensure people can make sound financial decisions, select financial products, which best suit their needs, and know how to use related channels, such as ATMs or mobile banking. However, more research and evaluation is necessary to further explore the relationship between financial literacy and financial inclusion, and to identify the impact of financial education initiatives on financial inclusion. Ladies and Gentlemen, With respect to technological advances, digital technologies are important for inclusion, as they enable innovative and lower-cost business models for providing financial services, making it viable to reach the poor. About 260 million unbanked adults in the developing world receive private sector wage payments in cash. Switching to digital payments could potentially save significant time and resources for businesses and workers alike. Likewise, agricultural payments present another chance to expand access to the formal financial system, as roughly 440 million unbanked adults in the developing world are paid in cash for farm goods. By moving away from cash and using digital payments to distribute social benefits and wages, governments can reduce costs and leakage. In the developing world, about 120 million unbanked adults receive government transfers in cash, according to the World Bank’s Global Findex Database 2014. At the same time, more than 31 million unbanked adults in emerging countries are paid government wages in cash. Digitizing these payments could bring millions of adults into the financial system for the first time. Likewise, 355 million adults in developing countries with an account send or obtain domestic remittances in cash or over the counter. Further, 1.3 billion adults with an account in developing countries pay their trash, water, and electric bills in cash, and over half a billion adults with an account in developing countries pay school fees in cash. Access to digital payments generates opportunities to provide more convenient and affordable payment options. As we continue to adopt innovative financial inclusion models, we need to be positioned at the forefront of these developments in order to identify and manage the associated risks. More importantly, we need to be equipped with thorough knowledge of innovative business models to develop an enabling ecosystem for innovative financial inclusion to flourish in a safe and stable manner. Ladies and Gentlemen, Allow me now to share with you some of the experiences from Nepal. Under Nepal’s financial system, there are four types of financial institutions licensed by the Nepal Rastra Bank (NRB), namely commercial banks (A class), development banks (B class), finance companies (C class) and micro finance institutions (D class). As at mid-July 2016, the number of commercial banks, development banks, finance companies and micro finance institutions (MFIs) stood at 28, 67, 41 and 42 respectively. Likewise, the branch network of commercial banks stood at 1869, followed by 1378 branches of MFIs, 852 branches of development banks and 175 branches of finance companies. The population per branch of financial institution was 6,562 at mid-July 2016. However, the financial institutions are still basically dispersed around the urban or semi-urban areas. Nepal Rastra Bank is presently implementing its second five-year Strategic Plan (2012-2016), in which financial inclusion has been identified as a strategic priority. Likewise, the Monetary Policy of 2016/17 has also accorded emphasis towards deepening financial inclusion through enhancing financial literacy and access to finance. A survey undertaken by the UNCDF in 2014 showed that 61 percent of Nepalese adults have access to formal financial services, while 21 percent resort to informal channels only and 18 percent remain financially excluded. Moreover, 52 percent of adults claim to save and 45 percent claim to borrow money. Likewise, 29 percent of adults borrow from an informal institution and 18 percent borrow from a formal institution. Similarly, 40 percent of adults save with a formal financial provider and 31 percent save in informal savings group. Likewise, 33 percent of transactions are made through digital channels. Ladies and Gentlemen, Nepal Rastra Bank and the Government of Nepal have been according due priority in enhancing financial inclusion. Some policy models were introduced in the past for advancing financial inclusion. These included the Grameen Bank Model, the Wholesale Micro Finance Model, the Directed Lending Model, Project-Based Micro Credit Model, and the FINGOs and the SACCOs Model. Rather than spending time on these models, I shall focus the remainder of my address on the policy measures that were initiated by the NRB and the Government for promoting financial inclusion. These include liberal licensing policy for MFIs, requirements for BFIs (A, B. and C Class) to allocate certain percentage of their credit for investment in the productive sector, special refinance facility to cottage and small industries, interest free loan to extend bank branches in remote and rural areas, directives on consumer protection, and directives on branchless banking and mobile banking services, among others. Let me elaborate on some of these recent policies. First of all, the Government through the Budget for 2016/17 outlined some policy directions related to expansion of banking and financial services in the rural areas, promotion of mobile banking and branchless banking, continuation of government led programs such as Rural Self Reliance Fund (RSRF), Poverty Alleviation Fund (PAF), Youth and Small Entrepreneur Self-employment Fund, and the implementation of subsidized agricultural lending program. Secondly, the NRB has been providing direct financial support to the banks and financial institutions that set up branches in remote areas where the number of banking units is minimal. Three, in its Monetary Policy of 2015/16, the NRB made an arrangement of special refinance facility at 1 percent interest with the objective of encouraging BFIs (A, B, and C class) to extend loans to agriculture and small business-based income generating activities in poverty-stricken areas of the country. Four, as per Monetary Policy of 2016/17, necessary provisions would be made to support the movement of opening ‘at least one bank account for each household’ and the arrangement of distributing social security allowances through the bank account. Five, the final drafts of the National Financial Literacy Policy and the Financial Sector Development Strategy (2015-2020) have been submitted to the Government for approval. Finally, the Nepal Financial Inclusion Roadmap (2017–2022), released on July 2016, is expected to guide future initiatives around the immediate priorities for financial inclusion. Ladies and Gentlemen, Let me conclude. Financial inclusion can empower even the poorest person and bring about a dramatic change in his fate. Financial inclusion is not a one-time effort; it is an ongoing process that demands concerted and team efforts from all the stakeholders including the Government, financial institutions, the regulators, the private sector and the community at large. There is growing urgency in both the public as well as the private sector to promote financial inclusion. Though country reforms are starting to bear fruit and should enable countries to move many steps closer to greater financial inclusion, much still needs to be done. Finally, by providing a platform for high-level dialogue on financial inclusion, this Forum, I expect, would review the current trends, recent achievements, ongoing challenges and opportunities within the region relative to financial inclusion and discuss how these developments are impacting the different countries. At the end of the day, we should be able to pinpoint a number of key priorities for future initiatives to further support financial inclusion. With these words, let me wish you all a productive discussion and deliberation in this important Forum. I would also like to express my best wishes for the successful conclusion of the 67th Executive Committee Meeting and the 20th General Assembly of APRACA. Thank you very much! | central bank of nepal | 2,017 | 3 |
Special address by Dr Chiranjibi Nepal, Governor of the Central Bank of Nepal, at the Nepal Investment Summit 2017, Kathmandu, 3 March 2017. | Nepal Investment Summit 2017 Special address by Dr. Chiranjibi Nepal, Governor, Nepal Rastra Bank 3 March 2017 Mr. Chair of the Session, Distinguished Panelists, Esteemed Guests, Media Persons, Ladies and Gentlemen, 1. It gives me an immense pleasure to be here to address this session on “Financial Institutions/Alternative Investments: Creating Value for Money.” We have organized this Summit at a time when the Nepalese economy is striving for attaining higher growth and tracing the path for sustainable development. The recent data show a rebound in economic activity. All three major sectors of the economy; agriculture, industry and services are on the mode of recovery after the lackluster performance last year. The expected rebound reflects the resilience of the Nepalese economy to major shocks that it had to bear last year. 2. Our macroeconomic fundamentals are sound. This is reflected in a low inflation and balance of payments surplus. The country has adequate level of foreign exchange reserves for meeting country's near and medium-term international obligations. The current macroeconomic and financial situation is supportive for the pursuit of Nepal's huge growth potential going forward. 3. Nepal has an immense potential in its geography and location. It has a wider scope in developing hydropower, ICT, irrigation, health, education, industrial estates, urban development, drinking water and sanitation, electricity transmission lines and agro-processing as well as herbal industries. The Nepalese financial sector has also reached a stage of its potential tapping for major investments in these areas. 4. We have national aspiration and international commitment for upgrading our status from the LDC to the developing country by 2022 and achieving the Sustainable Development Goals and graduating to the middle income country status by 2030. For this, the role of financial institutions and alternative investments could be vital for upgrading country's economic status and creating the value for money through investment. 5. The resource that the Nepalese financial system has at present is sufficient to meet the working capital need of the infrastructure projects. However, we need foreign investments for the execution and completion of the large projects. 6. The ongoing Fourteenth Development Plan has accorded higher priority to the private sector in managing investment requirement. Of the total investment requirement of Rs. 2425 billion in the Fourteenth Plan period, around 55 percent is expected from the private sector. Tapping foreign investors and the Nepalese financial system is crucially important for meeting the targeted investment by the private sector. Ladies and Gentlemen, 7. Nepal has followed a liberal foreign investment policy, and a need for investment-friendly environment is recognized everywhere in Nepal. Recent commitments in the areas of foreign investment show the huge attraction among foreign investors. Currently, the stock of FDI stands around Rs. 114 billion (5.1 percent of GDP), which is mainly in the areas of energy, manufacturing, service, tourism, minerals, and financial services. 8. Nepal has signed the Bilateral Investment Promotion and Protection Agreement (BIPPA) with six countries including France, Germany, UK, Mauritius, Finland and India. Commitment from these counties covers more than half of the total foreign investment. 9. Legal reforms are underway in the areas of investment and exchange regulations. Amendment in the Acts relating to foreign investment and foreign exchange management will pave ways for foreign investors in Nepal. Public Procurement Act has already been amended. New Labor Act is under discussion. We are also in the process of formulating the PPP Act. Further, Nepal Rastra Bank has been facilitating foreign investors through flexible approaches in foreign exchange regulations. These reforms will be instrumental in promoting investment friendly environment in Nepal. Ladies and Gentlemen, 10. The number of financial institutions increased significantly after the adoption of the liberal economic policy in 1980s. Out of 28 commercial banks, we have 7 joint venture banks. This shows the trust among foreign investors on Nepal's institutional and policy framework. 11. Nepal's financial system is sound and well regulated. In addition to a low level of nonperforming loans and a wider bank-branch network, the planned hike in paid-up capital of banks is geared to supporting infrastructure financing. The banking industry, which is in the phase of consolidation, is in its capacity building process for large project financing. 12. Further, we are in the process of laying the ground work for establishing specialized entities for infrastructure development. A legal framework to establish infrastructure development bank has already been crafted. This will move ahead once the BAFIA gets the seal of affirmation from the President. The provision for infrastructure bank will also encourage private sector to participate in nation building. 13. Our financial policies are directed towards creating real economic value, promoting sustainable development and contributing to long term productivity growth. NRB has made mandatory provisions for commercial banks to invest at least one-fifth of their resources in the designated productive sectors. Of which, at least 15 percent of the loan should be extended to agriculture and energy sectors. Similarly, a provision of counting bank loans up to Rs. 1 million to small farmers and micro-enterprises towards deprived sector lending has been made. 14. Nepal has also developed institutional investors to mobilize resources through the channels other than the banking system. Resource mobilized about Rs. 500 billion by the non-bank financial institutions– Employees Provident Fund, Citizens Investment Trust and Insurance Companies – signals the investment capacity of the domestic institutional investors. However, it needs to be complemented by foreign institutional investment. 15. Our capital market is still in the developmental phase. However, an increased interest among small investors shows the sign of the long-run growth prospect. Nevertheless, increased foreign investment will be a catalyst in deepening and widening the market through the participation of institutional investors and diversification of instruments. Ladies and Gentlemen, 16. This is not to repeat that Nepal needs to mobilize additional resources to develop much needed infrastructure for higher sustainable economic growth. The institutional framework and policy measures that we have designed provide business friendly environment and uphold the interest of the investors. I heartily welcome private sector and foreign investors to invest in Nepal. This will contribute to the development of the Nepalese economy and help investors to reap the maximum benefit on their investment. 17. Nepal Rastra Bank is committed to promoting domestic investment as well as to facilitating foreign investors to invest, operate and repatriate through institutional and procedural arrangements. 18. Last but not least, I take this opportunity to extend my sincere thanks to the organizers for organizing and distinguished guests for attending this event. I would like to thank you all for your participation in the summit and wish the foreign participants an enjoyable stay in Kathmandu. Thank you very much. | central bank of nepal | 2,017 | 3 |
Address by Dr Chiranjibi Nepal, Governor of the Central Bank of Nepal, at the 9th Global Alliance for Banking on Values (GABV) Conference, Kathmandu, 7-9 March 2017. | 9th Global Alliance for Banking on Values (GABV) Conference Kathmandu / 7-9 March 2017 Address by Dr. Chiranjibi Nepal, Governor, Nepal Rastra Bank Rt. Honorable Prime Minister Mr. Pushpa Kamal Dahal, Chairman of Global Alliance for Banking on Values and CEO of Triodos Bank Mr. Peter Blom, Executive Director of GABV Dr. Marcos Eguiguren, Chairman of NMB Bank Mr. Pawan Kumar Golyan, CEO of NMB Bank Mr. Upendra Poudyal, My friends from the financial community in Nepal Media friends, Distinguished Guests from Nepal and Abroad Ladies and Gentlemen, It gives me immense pleasure to address this 9th Global Alliance for Banking on Values (GABV) Conference, being held here in Kathmandu. I would like to thank NMB Bank and other members of the GABV for providing me this privilege. I believe the theme of this Conference entitled "Shifting the Financial Paradigm - Courage to Act Together" encompasses the work of the Global Alliance targeted at changing the world of finances to put people before profit. In this respect, I appreciate this laudable effort of the members of GABV who are focusing on strengthening local communities and entrepreneurs to become self-reliant. Ladies and Gentlemen, The challenge of building a sustainable financial system is to develop one which is a servant of the real economy, not its master, and which enables the sustainable intergenerational increase of common welfare and environmental resilience. The ultimate aim of the financial system should be to cater to people’s needs. There may be differences in values with respect to geography and time, but human welfare will always remain the principal value across different cultures. It was in the aftermath of the global financial crisis that a number of sustainability-focused or values-based banks had exhibited the ability to provide steady risk-adjusted financial returns by focusing on the real economy, and acting as financial intermediaries dedicated to supporting economic, social and environmental impact. These banks that put people before profit have gained credibility and recognition and are growing in strength and number. These banking institutions are united by the Principles of Sustainable Banking that are based on certain values including sustainability, transparency, diversity, fairness and inclusion. In this banking model, profit is a result of sustaining and growing value in the real economy and healthy communities, not an end goal. Ladies and Gentlemen, Allow me now to share with you a few words on financial sector development of Nepal which would be of interest especially to our foreign delegates. Nepal’s modern financial system has evolved through 80 years. Up until 1983, the financial sector was highly controlled. In the mid-1980s, the country embarked on a financial liberalization drive with a view to developing a diversified and competitive financial sector. A major structural change in financial sector policies, regulations and institutional developments was witnessed. The Government emphasized the role of the private sector for the investment in the financial sector. Subsequently, the door was opened for foreign banks to open Joint Venture Banks in Nepal. Due to the adoption of financial liberalization policy, a proliferation in number of banks and financial institutions (BFIs) was observed in Nepal in the earlier decades. However, the growth has moderated as NRB imposed moratorium on licensing of BFIs. For the last two years, banking system of Nepal is experiencing an encouraging restructuring and consolidation, particularly through the merger and acquisition. NRB has taken consolidation in the financial sector as an important reform measure for building strong and competitive financial environment. As of mid-January 2017, the number of commercial banks stood at 28 while the number of development banks aggregated 57. Similarly, there were 36 finance companies and 48 microfinance institutions. Moreover, there were 15 cooperatives permitted by NRB to conduct limited banking activities as well as 25 financial NGOs also licensed by NRB to undertake micro finance activities in Nepal. Ladies and Gentlemen, Nepal Rastra Bank and the Government of Nepal have been according due priority to values-based banking as demonstrated by their focus on microfinance which gained momentum in the 1990s as an instrumental tool for social mobilization and poverty reduction. Consequently, some policy models were introduced including the Grameen Bank Model, the Wholesale Micro Finance Model, the Directed Lending Model, Project-Based Micro Credit Model, and the FINGOs and the SACCOs Model. I would now like to take your few minutes to highlight a couple of recent policy provisions which show that both the Government and NRB have given a clear message to banks and financial institutions of the country to focus more on the well-being of the people, especially those residing in the rural areas, and not just on profit. First of all, acknowledging the significance of financial inclusion for Nepal, the Government through the budget for 2016/17 provided some policy directions. These included expansion of banking and financial services in the rural areas, promotion of mobile banking and branchless banking, continuation of government led programs such as Rural Self Reliance Fund (RSRF), Poverty Alleviation Fund (PAF), Youth and Small Entrepreneur Self-employment Fund, and the implementation of subsidized agricultural lending program. Secondly, a policy to extend concessional housing loan to earthquake victims was introduced immediately after the earthquake on 25 April 2015. Regulatory relief measures were also introduced to boost the credit disbursement from the BFIs and bring dynamism in economic activity in the aftermath of the disastrous earthquake. Thirdly, the NRB provides direct financial support to the banks and financial institutions where the number of banking units is low. Fourthly, in its Monetary Policy of 2015/16, the NRB made a provision of special refinance facility at 1 percent interest with the aim of encouraging BFIs (A, B, and C class) to extend loans to agriculture and small business-based income generating activities in poverty stricken areas of the country. Fifthly, under the Deprived Sector Credit Program, presently commercial banks, development banks and finance companies are required to lend at least 5.0 percent, 4.5 percent and 4.0 percent of their outstanding loans respectively to deprived sector. Another provision exists where commercial banks are required to allocate 20 percent of total credit to the specified productive sector such as agriculture, energy, tourism, and small and cottage industries. Likewise, development banks and finance companies need to lend 15 percent and 10 percent respectively to the specified productive sector. Likewise, BFIs are required to allocate at least 1 percent of their profit to activities relating to corporate social responsibility. In a similar way, NRB has instructed the MFIs to develop a separate Client Protection Fund for the institutional development and welfare of the borrowers in which they are required to allocate at least 1 percent of their net profits. Similarly, the Nepal Financial Inclusion Roadmap (2017–2022), released on July 2016, is expected to guide future initiatives around the immediate priorities for financial inclusion. Last, but not the least, the Financial Sector Development Strategy (FSDS), covering the period from 2016/17 to 2020/21, has been recently approved by the Government. The main objective of the strategy is to have a competitive, efficient, stable and inclusive financial sector that contributes to broad based economic growth. The foregoing measures illustrate that NRB has been giving a clear message to the financial institutions of this country to focus on values-based banking; however, this requires a collaborative approach as their successful implementation is governed by the cooperation provided by the relevant stakeholders. Ladies and Gentlemen, Let me conclude. Banks need to move forward on a new, actionable, shared value approach. They have to revamp their role within society by devising financial products and services to address social and environmental needs, extending existing business and capturing new lines of business in areas that are currently considered “unbankable.” I urge the financial institutions to support local communities by investing in projects so that they could become self-reliant. For this, they can team up with a network of trusted partners to foster knowledge, stimulate activity, and catalyze financial innovation. The NRB’s challenge is to build up a financial system that is supportive of growth, and dynamic enough to fulfill the evolving demands of a real economy. In this respect, I believe this Conference would be very fruitful for all of us as we will be able to draw concrete lessons from experiences of values-based banks who are working for the local communities, who are not guided by profit and who are "Banking on Values." With this note, I would like to express my best wishes for the successful conclusion of this Conference! Thank you for your kind attention! | central bank of nepal | 2,017 | 3 |
Closing remarks by Dr Chiranjibi Nepal, Governor of the Central Bank of Nepal (Nepal Rastra Bank), at the UNNATI-Access to Finance (A2F) Partnerships Launch Ceremony with BFIs, Kathmandu, 8 May 2017. | UNNATI-Access to Finance (A2F) Partnerships Launch Ceremony with BFIs Closing Remarks by Dr. Chiranjibi Nepal, Governor, Nepal Rastra Bank 8 May 2017 Hotel Yak and Yeti, Kathmandu Ms. Valerie Julliand, UN Resident Coordinator, Ms. Ingrid Dahl-Madsen, Charge d'Affaires, Embassy of Denmark, Mr. Vincent Weirda, Regional Technical Advisor, UNCDF, Mr. Shiba Raj Shrestha, Deputy Governor of Nepal Rastra Bank, Officials from Government of Nepal and Other Agencies, Officials from Nepal Rastra Bank CEOs and Representatives from banks and financial institutions, Friends from the Media, Distinguished Guests Ladies and Gentlemen It gives me immense pleasure to be here at this Challenge Fund Partnership Launch Ceremony of UNNATI-Access to Finance program with different BFIs. Allow me, at the outset, to extend my sincere appreciation to the Embassy of Denmark and UNCDF for supporting the Government of Nepal by launching this Project that aims at expanding financial access to the rural people and help raise their living standards and ultimately reduce the poverty level in the country. Distinguished Guest, Ladies and Gentlemen, Financial access broadly refers to the reach of financial institutions and their products to the doorsteps of the people throughout the country. This would create opportunities for the people to involve themselves in in-come generating activities and hence improve their wellbeing. As some 80 percent of Nepalese population live in rural areas and about two-thirds of them rely on agriculture, extending financial services to the rural people is especially meaningful for inclusive growth of Nepal. Acknowledging this need, the Government of Nepal and Nepal Rastra Bank have long been undertaking a host of policy measures to increase access of financial services to the rural areas through different modalities. One such modality is project financing under which Government of Nepal and NRB have been working with different bilateral and multilateral donor agencies to implement different projects. UNNATI-Access to Finance is one such project that is supported by Government of Denmark along-with United Nations Capital Development Fund (UNCDF). The 5-year project (2014-18) is being implemented by NRB in the 7 hilly districts of Eastern Development Region (EDR) by supporting BFIs to more effectively serve the agricultural value chain actors with appropriate financial products and services. Consequently, it also aims to enable smallholder farmers and micro small and medium enterprises (MSMEs) to invest into their agriculture value chain activities leading to the sustained improvement in competitiveness of selected value chains, especially 4 agro products including dairy, tea, large cardamom and ginger. This Project has launched a Challenge Fund for BFIs of around 1.7 million US Dollar through a competitive process. In this respect, I would like to offer my congratulations to the selected 10 BFIs with whom the Challenge Fund Partnership Agreements have just been signed today. Distinguished Guest, Ladies and Gentlemen, Let me reiterate that the Challenge Fund is a competitive grant to be provided to BFIs to absorb some of their risks associated with innovative business ideas that better meet the financial needs of the smallholder farmers and micro, small and medium enterprises (MSMEs). It accords special attention to reducing discrimination towards women and traditionally marginalized groups. The 10 partner BFIs will be focusing on a) expanding financial services in rural areas, b) promoting agent banking, mobile banking and branchless banking, and c) developing the process of digitizing banking products and agriculture micro financing. I sincerely request and encourage the partner BFIs to put their utmost efforts to meet the business targets proposed by them in their Challenge Fund Agreements and fully utilize this opportunity to achieve the intended results and hence contribute towards the well-being of the poor people. With this note, let me close my remarks by congratulating the grantees and thanking you all for your gracious presence in this UNNATI-Access to Finance Partnerships Launch Ceremony. | central bank of nepal | 2,017 | 8 |
Address by Dr Chiranjibi Nepal, Governor of the Central Bank of Nepal (Nepal Rastra Bank), at the 46th Asian Clearing Union (ACU) Board of Directors Meeting, Colombo, Sri Lanka, 13 July 2017. | 46th ACU Board of Directors Meeting Colombo, Sri Lanka / 13 July 2017 Address Delivered by Dr. Chiranjibi Nepal, Governor of Nepal Rastra Bank Honorable Chairperson Mr. Indrajit Coomaraswamy, Fellow Governors and Members of the ACU Board of Directors, ACU Secretary General Mrs. Lida Borhan-Azad, Distinguished Delegates and Observers, Ladies and Gentlemen, 1. It gives me immense please to participate and address this 46th Annual Meeting of Board of Directors of the Asian Clearing Union in this beautiful city of Colombo. At the outset, I would like to extend my sincere appreciation to Governor Mr. Indrajit Coomaraswamy and the entire team of Central Bank of Sri Lanka for the warm hospitality extended to us and also for the excellent arrangements made for this Meeting in Colombo. Fellow Governors and distinguished delegates 2. Allow me now to shed some light on some current developments of the Nepalese economy. After almost 20 years, elections for the local governments concluded recently following the promulgation of Constitution of Federal Democratic Republic of Nepal. The provincial and national level elections are to be held within 21 January 2018. The political uncertainty has now vanished and the economy is now ready for high growth trajectory. 3. Most of the macro-financial data of the first ten months of 2016/17 show that the economy is gaining traction. Nepal is the third fastest growing economy in the world in 2017 according to a report of the World Economic Forum. The economy rebounded strongly in 2016/17 following a good monsoon, reconstruction efforts after the 2015 earthquake and normalization of trade with India. The GDP growth estimate of 6.9 percent demonstrates optimistic growth outlook at least in the short term. 4. The government is targeting a growth of 7.2 percent in 2017/18 as economic activities are expected to expand due to increased government expenditure from the elected local governments. Acceleration in reconstruction works will potentially increase trade deficit further at least in the near term. Expected increase in foreign aid and foreign direct investment will, however, be instrumental in keeping the country’s balance of payments in surplus. Decelerated growth in migrant workers' remittances is moderating deposit growth. Going forward, bridging the gap between deposit and credit growth is the key for reducing the financial frictions. 5. The consumer price inflation has been hovering below 4 percent since the last six months. This is attributed to the previous year's base price effect and improved supply situation. 6. On the external sector front, both exports and imports dropped by 17.8 percent and 0.1 percent respectively, leading to a small expansion in trade deficit by 2 percent to USD 6.61 billion in FY 2015/16. However, exports rebounded by 9.8 percent while imports surged by about 34.9 percent during the ten months of the current fiscal year, further widening the trade deficit by 37.5 percent. The export-import ratio has declined to 7.5 percent arising from high growth of imports compared to slower growth of exports in the review period. Still, improvements in the service incomes, grants and remittance inflows have contributed in marginal surplus in current account. 7. The overall balance of payments registered a surplus of USD 1.78 billion in FY 2015/16 and USD 504 million during the ten months of FY 2016/17. Lower current account surplus emanating from increased imports and lower remittance inflows were the principal contributing factors to the current balance of payments situation. Consequently, the gross foreign exchange reserves of the banking system surged by 17 percent to US$ 10.31 billion as on mid-May 2017. Based on the trend of imports of the first ten months of the current fiscal year, the existing level of reserves is sufficient for financing merchandise imports of more than 13.2 months and merchandise and service imports of more than 11.4 months. Fellow Governors and Distinguished Delegates, 8. Monetary aggregates are within the expected level in the current fiscal year. Broad money (M2) increased by 10.4 percent during the ten months of this fiscal year compared to a growth of 12.3 percent in the corresponding period of the previous year. Bank credit to the private sector grew at a rate of 16.6 percent this year. On the other hand, deposit mobilization of depository institutions increased by 9.3 percent during this year compared to a growth of 11.9 percent in the previous year. 9. In the fiscal sector, a higher rate of growth in resource mobilization relative to government expenditure led to a surge in budget surplus during the review period. The country remains low indebted, as outstanding total public debt, both domestic and foreign, accounts for 24.1 percent of GDP. 10. Nepal’s financial sector has grown by leaps and bounds since the economy was liberalized in the 1990s. Yet, financial services have not become much effective till date. Also, the growth of this sector has remained lopsided, as many still do not have access to finance due to low financial literacy rate. 11. Safe, sound and self-regulated BFIs, transparent and consumer friendly banking transactions, adoption of international best prudential norms and best supervisory practices, mitigation of the systemic risks through advanced approach of supervision, and ultimately safeguarding financial stability have always been the prime aims of Nepal Rastra Bank as a regulator and supervisor. 12. NRB has taken a number of initiatives to consolidate the financial system. It introduced Merger and Acquisition Policy a few years ago for preserve financial stability. This policy has encouraged the merger of urban-centered institutions while according priority to the expansion of rural branches in the underserved areas. Till now, 138 BFIs were involved in merger and acquisition. Out of this, the license of 94 BFIs was revoked thereby forming 44 BFIs. 13. In July 2015, NRB quadrupled the minimum capital requirements for BFIs in order to promote financial stability, mobilize the resources needed for the long-term development financing as well as to encourage merger and acquisition of BFIs. 14. The NRB is of the view that the expansion of the financial sector will be constrained without the growth of the real sector. Thus, priority has been accorded to the productive use of bank credit to the promotion of the real sector and this demands the judicious use of credit and macro-prudential policies. As a competitive, efficient and healthy financial system is vital for enhancing growth, ensuring economic efficiency and maintaining macro-economic stability, a reasonable growth of the real economy is equally important to sustain the expansion of the financial services. 15. In order to establish finance-growth nexus, NRB is pursuing the Financial Sector Development Strategy (FSDS) that aims to further consolidate the banking institutions, reduce the interest spread, introduce provisions on credit insurance and raise the banking sector’s contribution to the gross domestic product (GDP) to eight per cent. Fellow Governors and Distinguished Delegates, 16. While going through the overall ACU transaction, trade routed through ACU in 2015 has declined significantly by about 9 percent while in 2016, trade increased by about 21 percent. Similarly, following the trend of preceding years, total transactions have surged by about 19 percent during the first ten months of the current year on y-o-y basis compared to the corresponding figure of last year. Further, trade is concentrated primarily within a few member countries. All these facts warrant member countries to evaluate the trend and I urge all the Fellow Governors to rethink on how we can better serve the enshrined objectives of establishment of the ACU. 17. Since the establishment of ACU, Nepal has always been an active member. With regard to our activities under ACU, the share of Nepal on total transactions of the ACU member countries routed through ACU mechanism accounts for roughly 1 percent, which has remained almost the same over the last few years. 18. In this opportune occasion, I would like to reiterate my firm commitment and belief in the mission of our Union. Apart from improving the existing operational mechanism of ACU to enhance efficiency of the Union, I am optimistic that this Forum would also explore new avenues of co-operation that will further simplify the existing payment mechanism in order to facilitate trade amongst member countries and enhance monetary as well as technical cooperation among us. 19. Before concluding, I would like to once again express my utmost thanks to the Central Bank of Sri Lanka for the kind hospitality and excellent arrangements rendered for this important Meeting. Thank you very much! | central bank of nepal | 2,017 | 8 |
Inaugural address by Dr Chiranjibi Nepal, Governor of the Central Bank of Nepal (Nepal Rastra Bank),at the SAARCFINANCE Seminar on "Macro-prudential Policies in SAARC Countries" Kathmandu, 8-9 June 2017. | null | central bank of nepal | 2,017 | 8 |
Address by Dr Chiranjibi Nepal, Governor of the Central Bank of Nepal (Nepal Rastra Bank), at the opening session of the Centre for International Cooperation and Training in Agricultural Banking (CICTAB) Program on "Development of Rural Financing Institutions and Cooperatives", Bode, Bhaktapur, 10 September 2017. | CICTAB Program on "Development of Rural Financing Institutions and Cooperatives" Bode, Bhaktapur I 10 September 2017 Address Delivered by Dr. Chiranjibi Nepal Governor of Nepal Rastra Bank Mr. Chairman, Program delegates, Ladies and Gentlemen, It gives me immense pleasure to address this august gathering at this opening session of this Training Program on "Development of Rural Financing Institutions and Cooperatives" in Nepal. At the outset, I would like to thank Centre for International Cooperation and Training in Agricultural Banking (CICTAB) for again selecting Nepal to host this topical program and would give my best wishes to the Nepalese organizing member-institutions for success of the program. I would like to extend my warm welcome to all the foreign and national participants at the inauguration of this 5-day program being held in Kathmandu. Being one of the founding members of CICTAB, Nepal Rastra Bank has been actively participating in most of the CICTAB programs held in Nepal as well as other countries. Ladies and Gentlemen, It has been recognized that among the several mechanisms that could be utilized to accelerate economic development and broad based growth, one critical instrument is the development of rural finance– this will contribute to inclusive growth. While the microfinance revolution has been largely successful in expanding financial services to many poor people, there are instances when the very poor and other especially disadvantaged and marginal groups tend to be excluded. Although the number of BFIs has been significantly increased in Nepal during last three decades, most of them are found centric in urban and accessible areas. Some of the survey results show that only 40 percent of Nepalese people are in the net of formal financial access. In this context, the role of rural financial institutions and cooperatives in the country like Nepal has become more important as the economy itself is rural-based. If we look upon the latest available data, some 34 thousand cooperatives has already been in operation in Nepal. Of these, half of them are involved in saving and credit activities while others are engaged in different agro-based production activities like agriculture farming, milk production, fruit and vegetable farming, tea and coffee farming, production of herbs, sericulture, horticulture, etc. More than 6 million people are directly involved in these cooperatives as their members and these institutions have employed some 60 thousand people as their regular staffs. Their savings have already reached nearly 300 billion rupees while they have disbursed some 290 billion rupees as a credit to their members for different income generating activities. In this regard, cooperatives are felt to be an important provider of rural financial services to spurt inclusive growth. Ladies and Gentlemen, Government of Nepal in Financial Sector Development Strategy (FSDS), issued in January 6, 2017 has recognized the importance of the Cooperative Sector to achieve economic development and in this regard, has devoted a separate chapter to its elaboration. This is recognition of importance of cooperative sector in economic development; however Government of Nepal and Nepal Rastra Bank (NRB) have already been involving themselves in the policy formulation and program initiation regarding the rural financing since almost four decades. I would highlight that NRB has also joined hands with the government to establish and manage a wholesale lending fund, that is the Rural Self-Reliance Fund, which lends concessional fund to the cooperatives of rural areas for further lending to the deprived and poor households. The establishment of five rural development banks in five development regions during 1990s decade to do micro financing activities replicating Grameen model is another instance on NRB's commitment on enhancing access to finance for rural poor. Currently, these banks have been merged. We are also exercising to harness the mechanism of technology to enhance its inclusive nature with regard to rural financing. Ladies and Gentlemen, Allow me at this juncture to provide a glimpse of Nepal’s experiences with regard to rural financing. The country is basically a rural economy with more than 80 percent of its population residing in rural areas. It is expected that Nepalese economy will perform very well in 2016/17, registering a growth of 6.9 percent. This trend is expected to continue in the current fiscal year 2017/18, given the series of election are going to be held, which is expected to raise domestic demand. As the agriculture sector presently contributes more than one-third to the country's gross domestic product (GDP) and employs more than two-third of total labor force, economic growth of the country is largely determined by the performance of the agriculture sector. Moreover, a better performing agriculture is instrumental in promoting rural jobs, improving trade imbalance, reducing poverty and fostering equitable distribution of income. Ladies and Gentlemen, CICTAB, set up in 1983, has been providing an effective forum for exchange of experience in agricultural banking and related fields between different developing countries of this region. In this respect, I am delighted to note that some of the innovative financial products and services developed and mainstreamed over the last three decades for the rural economies of this region, have been, to some extent, positively influenced by CICTAB. In this scenario, CICTAB has become very prominent for us as it conducts various training programs with special focus on cooperatives and rural development by providing a common platform to the agricultural and rural development institutions of its member countries. Nepal Rastra Bank, as a member of CICTAB, would like to assure the Centre that it will continue to support the Centre’s objective of providing a common platform to the agricultural and rural development institutions of its member countries by imparting comprehensive and top quality training, seminars and workshops. Ladies and Gentlemen, Looking over the program schedule I am happy to note that many topical and interesting issues are covered. I am confident that there will be a most active participation and exchange of ideas from the participants over the next five days, which will contribute positively to their respective institutions development. I also hope that all the participants, especially our foreign guests, will also have time to enjoy both the beauty and the flavor of Nepalese culture. Thank you very much and my best wishes for the successful conclusion of this program! | central bank of nepal | 2,017 | 10 |
Closing remarks by Dr Chiranjibi Nepal, Governor of the Central Bank of Nepal (Nepal Rastra Bank), at the 21st Asia/Pacific Group on Money Laundering (APG) Plenary Meeting, Kathmandu, 27 July 2018. | Closing Remarks by Dr. Chiranjibi Nepal, Governor, Nepal Rastra Bank, at the 21st APG Plenary Meeting 27th July 2018, Kathmandu Distinguished APG Co‐Chairs, Executive Secretary and Officials of APG FATF Senior Officials, Distinguished Delegates, NCC members and Secretaries Nepalese officials Media representatives, Ladies and Gentlemen, Very good afternoon! 1. I am privileged to speak at conclusion of this 21st APG Plenary Meetings running for a week. I am indeed honored to be with you at this august gathering with a brief closing remarks. 2. It is an immense pleasure for Nepal to host this Meeting and Plenary. I am very much delighted with the APG and its members, FATF, the observers, and international institutions for the opportunity extended to us to host this occasion in Kathmandu. 3. I have been informed that the meetings discussed mutual evaluation reports of Indonesia, Myanmar, Palau, and Cook Islands. Number of follow up reports and status reports were also considered in the course of meetings. Intense discussions were made on Mutual Evaluation Procedures, governance issues, technical as well as other seminars under International Cooperation Review Group have been eyesight for members and observers. 4. The TA & T forum was another great opportunity for members and DAP groups to sit together and find solutions for development of sound AML/CFT systems and make effective global implementation. 5. Managing de‐risking, identification of beneficial ownership and recovery of assets are the common threats facing by countries globally. I hope the conclusion from the seminar and discussion on these topics will certainly guide us to reorient our AML/CFT related strategy toward addressing such problems. Ladies and Gentleman, 6. Financial crime can inflict on the smooth functioning of the financial markets, payment systems and ultimately the financial sector stability goal of central banks. Fin‐Tech and virtual currencies are also posturing challenges to the central banks in dealing with AML issues. 7. The shift of FATF standards toward risk‐based approach, will support our financial system in the direction of inclusive growth and access to better financial services by discouraging the de‐risking. 8. The BASEL 2017 AML Index report shows, during the period from 2012–2017, the Index did not reflected significant change, indicating slow progress, high rates of perceived corruption, lack of judicial strength, lack of resources, and deficiency of financial transparency in the developing world. In addition to this, a large‐scale of tax evasion is being a major challenge while fighting against money laundering. 9. In the present context, countries need to increasingly harness the power of financial technology. While FinTech can be misused, however, be a powerful tool to strengthen our defenses against terrorist financing. Machine Learning and Artificial Intelligence tools could help us in detecting patterns of suspicious financial flows as well as Distributed Ledger Technology which can protect our financial systems against cyber‐ terrorism. 10. I believe this meeting had produced many benefits to ensure integrity, safety, security and stability of our financial system. It will be helpful in identifying several AML and CFT related crime emerging in the region and for initiating coordinating measures among several jurisdictions. In this regard, we are delighted to express our continued commitments towards effective enforcement of AML/CFT measure and further improving the regime with highest level of national & international cooperation. Ladies and Gentleman, 11. Compliance with AML/CFT law and regulations require high level of commitment where non‐compliances will be seriously dealt with. For example, in 2017, financial regulators around the world imposed more than US Dollar 2 billion in fines related to AML compliance failures. 12. At the international level, we have witnessed banks been penalized to the tune of billions of dollars for failure to comply with AML/CFT laws and regulations. There has been a high degree of concern that global banks might cut their correspondent‐ banking business indiscriminately to minimize the risk of breaching AML/CFT rules. This is also one of the biggest challenges to the banking system of developing economies, for example the Caribbean countries are facing this especially after 2012. Ladies and Gentleman, 13. The regulatory authorities of Nepal have revised their AML/CFT regulations as per the amended AML laws and seeking other elements to be included as developed in international AML/CFT regime. They have commenced AML/CFT supervision and are making efforts to make it more risk based. We note that the foundation of AML/CFT rest with regulator /supervisors and their pro‐activeness promotes functional capacity of FIU, law enforcement agencies and nation in totality. 14. We have a common view and commitment that FIUs must retain sufficient independence to accomplish the key role on AML/CFT. NRB is cognizant of the importance of FIU to make the AML/CFT regime more effective and efficient with focus on risk based approach. The automation of reporting by implementing the goAML, developed by UNODC is now at the final stage of go‐live in FIU‐Nepal. 15. Proper coordination and exchange of information among domestic and international authorities is critical for the implementation of AML/CFT regime. We can note down the results of timely exchange of information in the recovery of substantial amount of money hacked from a commercial bank of Nepal through the active use of Egmont Secured Web (ESW) by FIU‐Nepal in October 2017. 16. Nepal does not leave any stone unturned to go together with international communities for combating ML/TF. Hence, Nepal is concentrating on implementation and effectiveness so that we can take maximum benefit from the system. Ladies and Gentleman, 17. APG has been playing a very important role and have done excellent work over the years to foster implementation of the FATF standards in the Asia/Pacific region. Nepal has been benefited a lot from APG’s support and among others in association with Donors and Providers (DAP) groups on AML/CFT area. 18. Let me conclude here by thanking the organizer for giving me this opportunity to share some of thoughts at this august gathering. Above all, I would like to thank you all for making this 2018 APG Plenary a grand success through your valuable contributions and active participation. Thank you so much and I wish you a sweet memory of this event! | central bank of nepal | 2,018 | 8 |
Address by Dr Chiranjibi Nepal, Governor of the Central Bank of Nepal (Nepal Rastra Bank), at the "Anti-Money Laundering Conference - 4th Annual Summit (Nepal) 2019", Kathmandu, 1 February 2019. | Address by Dr. Chiranjibi Nepal, Governor, Nepal Rastra Bank for “Anti‐Money Laundering Conference ‐ 4th Annual Summit (Nepal) 2019” Kathmandu, February 1, 2019 1. It gives me a great pleasure to deliver my address at the opening ceremony of this conference on Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT). I would like to congratulate the National Banking Institute as well as other concerned International Agencies for organizing such an important program on a topical issue. 2. As is well known, the impact of money laundering and terrorism financing to the financial institutions and financial system has serious implications to the overall financial system, which jeopardizes socio-economic development for the country. At the global level, the IMF estimated the extent of money laundering to be around 2% to 5% of global GDP. A country's rating on compliance with standards set by Financial Action Task Force (FATF) on AML/CFT, is often considered as a key measure of the country's AML/CFT regime. An unfavorable rating would mean that the businesses, including financial institutions, would face greater scrutiny, higher costs of doing business, delays and other time consuming including unnecessary barriers when doing business with overseas counterparts. 3. While Nepal had received satisfactory rating in our last mutual evaluation in 2014 by APG, after the various efforts and reforms in respective sectors since the second mutual evaluation 2010, we have to do a lot for upcoming evaluation in 2020 which will be based on a more holistic methodology where greater focus will be on the effectiveness of our implementation. If we do not attain good rating, the consequences could be high and Nepal will be listed in the FATF Public Statement as a country with significant deficiency in AML/CFT. 4. Bank and Financial Institutions (BFIs), being the most important partner for financial transactions, can play an important role of deterring as well as detecting money laundering and activities related to terrorism financing. Compliance with AML/CFT law and regulations in these financial institutions require high commitments with non-compliances being seriously dealt with. At the international level, we have witnessed that banks have been penalized billions of dollars for failure to comply with AML/CFT directives. In Nepal, Nepal Rastra Bank (NRB), the Central Bank of Nepal, has been taking strong actions upon NRB licensed BFIs that have failed to comply and implement such directives related to AML/CFT. (For instance, the financial penalty that normally applies for noncompliance ranges from one to fifty million rupees.) Ladies and Gentlemen, 5. Money laundering can take different forms, and is not limited to tax evasion, cybercrime, identity fraud, phishing, card fraud, skimming, advance fee scams, fund transfer schemes, fake prizes, international lottery fraud, wills and legacies and loan fraud and international transfers etc. The technologies adopted by BFIs are making them increasingly vulnerable to various risks in money laundering. Generally, vulnerability to money laundering is greater when there is inadequate internal control system, poor risk management practices, weak good governance, inadequate board and senior management oversight, inadequate policy, procedure and monitoring the functional activities and breach of contract and trust etc. Although the banking system is stringent in Know Your Customer (KYC), it is not sufficient as expected to identify the beneficial owner and to apply the risk based approach. NRB has observed that money laundering is largely the result of weak internal control and poor risk management and practices of the respective banks. This highlights the need of efficient internal audit, strong internal control system and better risk management practices within the BFIs in addition to compliance to regulation and supervision for prevention, control and detection of financial crime. 6. BFIs must adopt strategic approach and also comply with the KYC regulations based on risk based approach, real time transaction monitoring and transaction analysis for prevention and timely detection of financial crimes. The Board and senior management of BFIs should be proactive in understanding the potential risks and also put in place a crime prevention, control and detection mechanism. They should have a deep understanding of the institution’s strengths and weaknesses and be able to move their respective BFI in right direction. The prevention and corrective measures should also be a key concern to minimize the impact of financial loss that impact our economy. Ladies and Gentlemen, 7. Nepal has established legal and institutional foundation to comply with AML/CFT standards. The whole of the legal and organizational framework of AML/CFT revolves around FATF's 40 recommendations. In that regard, NRB has been extensively working to strengthen its legal and organizational framework. In this regime BFIs can play a very important role, not just because launderers have been abusing the financial system but also because as victim of such crimes, they are always at various risks such as legal, regulatory, concentration and reputational. 8. In the case of Nepal stakeholders including the NRB and FIU-Nepal, have been proactively working to implement the preventive measures of financial crime, so as to investigate and disseminate the cases of money laundering and terrorist financing (ML/TF) to Law Enforcement Agencies (LEAs). FIU-Nepal received 45,93,5817 TTRs' and 887 STR's in FY 2017/18 and out of the total STRs' that has been received; almost 312 were disseminated to the LEAs. I hope that FIU-Nepal and LEAs will continue to coordinate to further investigate the cases for prosecution and convictions. I understand that FIU-Nepal has already installed the goAML system for strengthening the receiving, reporting and dissemination mechanism of information and reports from commercial banks and is now reporting under the test environment. I am confident banks will soon move to live environment of goAML in reporting of STR and TTR to FIUNepal. 9. Hence, leadership of Government of Nepal and joint and coordinate efforts among the regulators, BFIs, LEAs, FIU, civil society and support agencies such as ISP, Telecommunication companies, vendors, etc. including with the public private partnership can play an important role to control the financial crime and help to maintain the financial stability in country. Ladies and Gentlemen, 10. At last, but not least, I would convey my best wishes that the conference will be successful and reach a concrete conclusion about the implementation of robust mechanism of AML compliance. In addition to this, I believe that, this program will able to help improve your knowledge on the risks associated with of ML/TF. It will also help to further continue discussions on plan of action to help prepare for the upcoming mutual evaluation scheduled in 2020. 11. With this note, let me close my remarks by congratulating and thank you all for your gracious presence and attention. Thank you. | central bank of nepal | 2,019 | 2 |
Special address by Mr Maha Prasad Adhikari, Governor of the Central Bank of Nepal (Nepal Rastra Bank), at the 39th Asian Banker's Association Annual General Meeting and Conference "Asian banking: roadmap for recovery and sustained growth", Kathmandu, 9 November 2023. | Maha Prasad Adhikari: Special address - Asian Banker's Association Annual General Meeting and Conference Special address by Mr Maha Prasad Adhikari, Governor of the Central Bank of Nepal (Nepal Rastra Bank), at the 39th Asian Banker's Association Annual General Meeting and Conference "Asian banking: roadmap for recovery and sustained growth", Kathmandu, 9 November 2023. *** Honourable Finance Minister, Government of Nepal, and Chief Guest of the program Dr. Prakash Sharan Mahat Mr. Eugene S Acevedo, Chairman, Asian Bankers Association Mr Sunil KC, President, Nepal Banker's Association Distinguished Speakers, Moderators, and Presenters of the Conference Distinguished foreign delegates, guests, ladies and gentlemen! Warm Good morning and Namaste, It is my great privilege to have the opportunity to address this 39th AGM of the Asian Banker's Association and Conference, organized with the theme of "Asian Banking: Roadmap for Recovery and Sustained Growth". This conference is being organised at a time when the global banking system has been facing immense challenges from a global uncertain environment while recovering from the Covid-19 pandemic. The Nepalese banking system is also no exception. Therefore, this type of event for discussing such issues would be highly beneficial for all of us. My sincere thanks to the Asian Bankers Association for choosing Nepal for its 39th AGM and also to the Nepal Banker's Association for organizing the conference while hosting the annual general meeting of the Asian Banker's Association. Distinguished guests, Ladies and Gentlemen The global financial system remained resilient even during the Covid-19 crisis but is now facing challenges. The symptoms were seen earlier this year when some banks faced turmoil in advanced economies. Data and statistics showed that Asian banks were able to show a high degree of resilience during those periods, though the vulnerabilities still exist. Since the banking business is directly related to the economic conditions, the banking community faces similar challenges as the Global Economy. Presently the global economy is still 'limping along, with growing divergences' as mentioned by the IMF's recent World Economic Outlook. This indicates that the risk of spillover from the global financial to the domestic market is still prevalent. 1/4 BIS - Central bankers' speeches Inflation is now moderated in most of the advanced economies but still well above the central bank's targeted level. Some emerging markets and developing economies are still facing a higher inflation spiral. The growing tension recently emerged in the Middle East from the Israel-Hamas war and the prolonged Russia-Ukraine crisis, which has been creating challenges to maintaining price stability. As a result, many central banks have been continuing their tight monetary policy stance, and this has led to a continuing situation of higher interest rates. When the interest rate remains relatively high for a longer term, naturally the demand for credit goes down, resulting in an economic slowdown; on the other hand, the economic slowdown would result in increased credit defaults in the financial system posing a risk in the financial stability. Therefore, Asian banks need to be vigilant and cautious to observe and manage these risks. This type of discussion forum provides a platform to share the changing banking landscape and discuss the ways forward in this uncertain global environment. Considering the impact on economic activities, Nepal Rastra Bank, has already started lowering its policy rate. Rapid technological changes have also brought many benefits to the banking system. New fintech development has been transforming the banking business, but at the same creating several risks for maintaining stability in the banking system. Thus a very important question to many Asian countries and a crucial question to policymakers is "How to promote and sustain the growth of the banking system along with encouraging economic growth by using latest fintech?". Ladies and gentleman Nepal's growth performance has been sluggish, averaging around 5 percent per annum during the last 10 years.1 The economic growth that was picking up in higher single digits after the post-earthquake recovery and perceived political stability after the state restructuring and new constitution, was severely affected by the outburst of Covid-19 and the subsequent pandemic in 2020. This was immediately followed by the RussiaUkraine war which had adversely affected domestic conditions: the economic growth in FY 2022/23 is estimated to lower to 1.9 percent (at purchaser price) which is below potential growth.2 To uplift such low economic growth, higher investment and hence higher savings, is necessary. But, Nepal's saving remains below 10 percent on average, which is not sufficient to boost economic growth.3 In this regard, the role of banks are key to boosting savings which will contribute to higher capital formation, a necessity for economic growth. Distinguished participants, The Nepalese banking system has witnessed rapid expansion and development in the last three decades in line with the financial liberalization policy. As a result, access to finance and financial deepening has substaintially increased. For instance, the recent deposit-to-GDP ratio remains more than 100 percent, while the credit-to-GDP ratio now hovers around 90 percent; these are number one in South Asia. Financial access has expanded rapidly even to remote areas while financial literacy activities is gaining momentum as it is a top priority of the Nepal Rastra Bank. After the rapid expansion of the banking sector, we are now focusing on the consolidation of the Nepalese banking 2/4 BIS - Central bankers' speeches system and are confident that this will make it stronger, so as to withstand any shocks and uncertainties that emerge in the economy. Nepal's financial system has remained resilient despite the series of shocks faced, which emerged from both domestic and external sources. The global financial crisis of 2008 and the Covid-19 pandemic were the two big external shocks while the 2015 earthquake was one of the largest domestic shocks. Generally speaking, the pandemic exposed a larger risk to the banking sector, when most businesses were closed and unable to generate income to serve the credit. The cautious, prudent and accommodative measures taken by the NRB and highly supported by the banking communities, helped protect businesses and entrepreneurship, ultimately limiting bank and financial institutions' failure while helping the economic recovery after the pandemic. Because of the financial consolidation measures, through mergers and acquisitions, and the adoption of international standard regulation and supervision, the Nepalese banking has remained strong so far. Nevertheless, Nepal's banking sector also faces challenges we must all address together. The banking system has been facing some challenges of recovering loans resulting in a rise in non-performing loans, which have resulted from the impact of Covid 19. From wider economic perspective, despite the rapid expansion of credit, low economic growth indicates a poor contribution of banking credit to the growth of domestic economy. Now, it is an opportune time to fully re-orient the banking sector's resources to the sectors that directly contribute to economic growth. In this regard, I am pleased to observe that the conference theme in this area of re-orienting resources for achieving sustained economic growth. The NRB has already taken some bold steps to re-orient bank lending to the growth-promoting sectors. I am also happy to share with this august gathering that our banking community has supported immensely in this mission and we also expects continued support in the days to come. Taking this opportunity, I would again like to advise the banking institutions to follow selfregulation and ethical banking. This becomes inevitable when we have growing usage of technologies, increasing size of business, and growing banking presence; therefore regulators cannot and should not oversee every activity. The banking community needs to be competitive and focus on sustaining the business in the long run. Distinguished participants, ladies and gentlemen Finally, I wish a grand success of this two-day event, both the conference and the AGM. I hope that the discussion on the key banking issues for Asia will provide key insights to every actor of the banking community, such as regulators, bankers and the government in promoting financial resilience but also equally supporting economic growth. I have seen the program schedule and am therefore confident that this forum will provide a way forward to address banking issues and challenges, which are emerging in Asia in general as well as in a small open economy like Nepal. I again would like to reiterate that the NRB is committed to maintaining financial stability along with macroeconomic stability while also supporting for a sustained economic growth. Last but not least, I request all the foreign delegates to enjoy Nepal's food, culture and beautiful nature. I wish you a pleasant stay and a safe journey back home. 3/4 BIS - Central bankers' speeches Thank you very much ! 1 https://www.undp.org/nepal/inclusive-economic-growth#:~:text=Overview,economic% 20growth%20in%20last%20decade. 2 https://nsonepal.gov.np/en/detail/post/7325 3 https://www.mof.gov.np/uploads/document/file/1674635120_Economic_Survey_2022. pdf (page 7) 4/4 BIS - Central bankers' speeches | central bank of nepal | 2,023 | 12 |
Guest of Honor address by Mr Maha Prasad Adhikari, Governor of the Central Bank of Nepal (Nepal Rastra Bank), at the South Asian BFSI (Banking, financial services and insurance) Tech Summit & Awards, Kathmandu, 29 February 2024. | Maha Prasad Adhikari: The changing face of financial services - plan for the digital future Guest of Honor address by Mr Maha Prasad Adhikari, Governor of the Central Bank of Nepal (Nepal Rastra Bank), at the South Asian BFSI (Banking, financial services and insurance) Tech Summit & Awards, Kathmandu, 29 February 2024. *** Ladies and gentlemen, It is truly an honor to stand before you today representing a nation with a rich history and a promising future. I extend my heartfelt gratitude to the organizers of the South Asian BFSI Tech '24 Summit and Awards, for providing this platform to discuss a topic of paramount importance – "The changing face of financial services: Plan for the Digital Future." In the realm of financial services, Nepal has undergone a paradigm shift in recent years. We have transitioned from traditional, paper-based transactions to a dynamic and technologically driven financial ecosystem. This shift has not only been a response to global trends but also a testament to Nepal's commitment to fostering economic growth, financial inclusion, and innovation. The initiatives taken by Government of Nepal for facilitating and encouraging initiatives of regulators like Nepal Rastra Bank, Securities Board of Nepal etc, development of public and private digital infrastructure by active players and active adoption by citizens have made it possible. The Government of Nepal has put digitization in its top priority and has formulated Digital Nepal Framework, 2019, incorporating eight important sectors with potential for large scale digital adoption. The framework outlines enhancement of digital finance as one of the major sectors. Nepal Rastra Bank established a dedicated payment system department within the bank in 2016. Necessary legal arrangement like payment and settlement act was enacted. The licensing policy, payment and settlement bylaw, oversight manual, payment, unified directive, RTGS rules and guidelines, and other payment-related circulars were formulated to guide licensing, regulatory and supervisory arrangements. The department has presently licensed 27 Payment service Providers (PSPs) and 10 Payment System Operators (PSOs) in addition to granting license to existing Bank and financial institutions (BFIs) of the country. On the Payment Infrastructure, NRB itself operates a large value payment system through Real Time Gross Settlement. Digital wallets and mobile banking, in particular, have emerged as a game-changer, allowing people to access banking services anytime, anywhere. This shift has not only improved the convenience for consumers but has also enabled financial institutions to enhance their operational efficiency and reduce costs. The smartphone penetration all across the country and internet connectivity has provided tremendous support to adoption of digital services. 1/5 BIS - Central bankers' speeches The Covid 19 pandemic has accelerated the adoption of digital financial services in Nepal. The necessity of contactless transactions and remote banking has further highlighted the importance of a robust digital infrastructure. Nepal Rastra Bank has recognized this shift and is actively working towards creating an enabling environment for fintech innovation, ensuring regulatory frameworks that foster growth while safeguarding the interests of consumers and the stability of the financial system. Ladies and Gentlemen, Allow me to substantiate our discussion on the changing face of financial services in Nepal with some compelling data that reflects the robust growth in various payment instruments. In recent years, we have witnessed a remarkable surge in the adoption of digital payment solutions, underscoring the evolving financial landscape in our nation. The used of Real Time Gross Settlement System (RTGS) have facilitated large value transactions of the corporates and governments. I would share with this august gathering that over 95% of government payments in Nepal are conducted digitally which ranges from large value payment to contractors of infrastructure development activities to distribution of social security allowance to the citizens. It has marked a standard shift towards efficiency and transparency in financial transactions of the government. The volume of transactions using innovative platforms such as IPS and ConnectIPS has experienced an exponential rise, with a notable increase of more than 67% in the past 3 years. Similarly, the volume of retail payment initiatives like QR code-based payments have also witnessed a tremendous uptick in popularity, showing an increase of more than 1100% in last 3 years. The simplicity and security offered by QR codes have made them a preferred choice for consumers and merchants alike. We have prioritized the use of these technology in such an extent that even I went to local vegetable markets and groceries to encourage its adoption. The adoption of digital wallets has seen unprecedented growth in volume of more than 92% in last 3 years, with the number of users relying on these platforms for everyday transactions. The versatility of digital wallets in facilitating peer-to-peer transfers, utility bill payments, and even online purchases has made them an integral part of the modern financial ecosystem. Furthermore, the usage of cards, has shown a positive trajectory, showing an increase of almost 50% in volume of transactions in the past 3 years. In addition to these encouraging numbers, we have achieved significant progress in cross border transactions, the Memorandum of Understanding signed between Nepal Clearing House Limited (NCHL) and National Payment Corporation of India (NPCI) in June, 2023 during state visit to India by Right Hon. Prime minister is expected to have paradigms shift on cross border connectivity for digital financial services between both countries. Based on latest updates, NCHL and NPCI are working on the issues regarding network operating rules, joint interface, operating guidelines, selection of settlement bank and developing the testing environment. The first phase of the project i. 2/5 BIS - Central bankers' speeches e., Person to Person (P2P) transfer would be rolling soon. Similarly, some other operators are also expected to come up with arrangements of cross border payments. To further facilitate this arrangements from the central bank's side, recently a regulatory term of reference has been signed between Nepal Rastra Bank and Reserve Bank of India on integrating National Payments Interface (NPI) of Nepal and Unified Payments Interface (UPI) of India. A joint steering committee formed to monitor the progress of the bilateral payment integration is also active. As we rollout the system in full phase, I expect that people traveling to both countries would leave their wallet at home and manage all payments through the smart phones, like we are doing it in our respective country. I would like to reiterate that this is just a beginning, NRB is always open to expand such arrangements with other countries in the region and beyond to make our economy more vibrant and add convenience to the citizens. Ladies and Gentlemen, Now, let me put some light on the theme of today's gathering and allow me to highlight key strategic orientations of Nepal Rastra Bank (NRB) aimed at further modernizing and revolutionizing the country's financial landscape. These initiatives are the result of our comprehensive studies, stakeholder consultations, technological advancements, national needs, and our vision for a less cash society. I've emphasized in numerous forums since assuming my role at NRB, that we should propel the digital landscape to such an extent that Nepalese currency notes bearing Governor's signature would become mere specimen notes. Developing digital public infrastructure (DPI) is another agenda with the central bank. The first phase of the National Payment Switch (NPS) i.e. Retail Payment Switch is in full operation. The second phase of NPS which is related with issuing national card ( NEPALPAY Card), is under progress. One of the major strategic areas Nepal Rastra Bank is rolling out Central Bank Digital Currency (CBDC) in Nepal. The concept of CBDC as a legal tender is not something to substitute physical currency immediately but rather it serves as supplement to existing legal tender form of currency. Hence, based on the country's economic and technological landscape, regulatory environment, and societal preferences, introduction of a CBDC in Nepal has been envisioned in phase manner, with a full rollout in 2026. 1. The First phase of this project is establishment of dedicated unit and a team. NRB has established a Division for CBDC and assigned a team to have focused efforts on CBDC. 2. Second phase would be comprehensive research to come up with appropriate design and technology such as block chain, distributed ledger technology, the level of privacy and security features, scalability etc. 3. Third phase would be partnership and collaboration. NRB collaborates with financial institutions, Payment Service Providers, and FinTech to integrate the CBDC into the existing financial ecosystem. The dedicated team also started engaging with other international projects like Aurum, mBridge, BIS Innovation Hub etc and continues to build capacity on this complex issue. We have also 3/5 BIS - Central bankers' speeches 3. initiated to receive technical assistance support from development partners, to learn from international best practices while finalizing the architecture. 4. Fourth phase would be formulating and making legal arrangements, testing and piloting. Prior to full rollout, NRB shall conduct pilot programs to test the CBDC in real-world scenarios. This will help identify technical issues and allows for adjustments before widespread adoption. At this stage, a strong security measure would be implemented to safeguard transactions and user data. Encryption, authentication, and fraud prevention mechanisms would be the essential components to assure robust security system. 5. Fifth stage would be rollout. Nepal Rastra Bank might choose to introduce the CBDC in a phase manner, starting with limited use cases and gradually expanding its scope based on user feedback and performance evaluation. 6. We understand that CBDC roll out is not an end, it is crucial for continuous monitoring of the CBDC's impact on the economy, financial stability, and payment systems. Feedback from users and stakeholders would guide for further improvements. 7. To ensure a smooth transition, NRB would make necessary legal arrangements, conduct public awareness campaigns and educational programs through media, social media and Videos, collaborate with Financial Institutions, Media agencies, TV channels etc. While CBDC remains Nepal Rastra Bank's important journey, the bank is also engaged in the establishment and operationalization of a full-fledged digital bank to foster digital intermediation. The legal frameworks and institutional modalities requisite for this initiative are currently in progress. In order to encourage innovation in the financial sector and provide a controlled environment for testing new financial products, services, or business models, NRB plans to establish regulatory sandbox and innovation center within NRB. We expect that it will provide a safer place for innovators, especially millennial, generation Z to explore and test their new concepts and innovations in financial landscape. Nepal Rastra Bank is committed to foster financial access, usage and quality of the financial products as well ensure data privacy of each financial consumer. We have prioritized digital financial literacy through frameworks and guidelines, and have directed BFIs to allocate corporate social responsibility funds accordingly. Our initiatives include grassroots literacy programs, training for trainers, and collaboration on educational syllabus of schools. Additionally, we're regulating fees for digital services, promoting low-cost tools, and implementing robust market conduct supervision and grievance handling arrangements for consumer protection. Collaboration is another key element of our strategy for the digital future. We recognize that the challenges and opportunities presented by the changing face of financial services extends beyond national borders. By fostering collaboration with our South Asian neighbors and the global community, we can collectively address common challenges and share best practices, ensuring the resilience and sustainability of our financial systems. Finally, 4/5 BIS - Central bankers' speeches As we reflect on this paradigm shift, we acknowledge that the journey is ongoing, and there are challenges to overcome. With great technological advancements come great responsibilities. However, the resilience and adaptability demonstrated by Nepal in embracing digital transformation of financial services, exemplify our commitment to progress. We stand at the cusp of a digital future, and Nepal is ready to leverage technology to create a more inclusive, efficient, and secure financial landscape for all. In conclusion, the digital future of financial services is both an exciting and challenging frontier. Nepal Rastra Bank is committed to navigating this landscape with prudence, embracing innovation, promoting inclusivity, and safeguarding the integrity of our financial systems. Together, let us embark on this journey with enthusiasm, collaboration, and a shared vision for a more digitally connected and financially inclusive South Asia. Thank you for your attention, and I look forward to fruitful discussions and collaborations during the South Asian BFSI Tech '24 Summit and Awards. Thank you. 5/5 BIS - Central bankers' speeches | central bank of nepal | 2,024 | 3 |
Speech by Mr Umayya Toukan, Governor of the Central Bank of Jordan, at the 34th Jackson Hole Economic Symposium on "Macroeconomic policy: post-crisis", Session 6, Jackson Hole, Wyoming, 28 August 2010. | Umayya Toukan: The international monetary system – too big to fail Speech by Mr Umayya Toukan, Governor of the Central Bank of Jordan, at the 34th Jackson Hole Economic Symposium on “Macroeconomic policy: post-crisis”, Session 6, Jackson Hole, Wyoming, 28 August 2010. * * * The international monetary system: too big to fail I am extremely honored to be asked to speak on such an important topic and before such a distinguished audience and I wish to thank Tom Hoenig for giving me this opportunity. I am also very proud to be on this panel. Some years back, and throughout my dissertation work which was under the able guidance of Frederic Mishkin, Maurice Obstfeld went beyond the call of duty to respond to my many inquiries. I wish, once again, to express to Professor Obstfeld my feelings of gratitude. John Lipsky has been giving me valuable advice on matters of monetary policy and bank supervision in my country and I wish to thank him and his team at the International Monetary Fund. There is no shortage of justifications to the call for the reform of the International Monetary System (IMS). The justifications referred to can be sorted out under two categories: the macro policies of member countries and the imperfections of the Bretton Woods system. Macro policies of member countries include such policies as running massive deficits or intervening in foreign exchange markets. On the other hand, commentators agree that the Bretton Woods system did not function as originally planned. After 1973, the IMS seem to have reverted to a more market oriented, hybrid and voluntary system as opposed to a system characterized by IMF surveillance and supported by IMF facilities. In my remarks today, I will attempt to relate the above mentioned issues to three sets of interrelated but at times conflicting considerations: (i) national vs. international considerations (ii) political vs. economic considerations. (iii) Public policy vs. market considerations. Given that seven countries are currently dollarized or have currency boards using the dollar, and 89 countries have pegged exchange rates using the dollar as an anchor 1, it is clear that the macro policies of the main reserve currency country have a huge impact not only on the countries just mentioned but also on the rest of the developed world. It is equally important to appreciate the perception of vulnerability by the countries whose currencies are pegged to a major reserve currency and the consequent need to accumulate reserves as self insurance 2. The global current account imbalances and the resulting volatility of capital inflows did have several serious consequences, some of which, were blamed for the recent global economic and financial crisis 3. Considerable volatility in capital flows, and the associated “liquidity shocks” can create strong need to accumulate reserves. Commentators generally agree that, in the case of oil exporters and China, reserves holdings exceed conceivable precautionary needs, and reflect more the state of the still developing financial markets in those countries as well as the desire to boost policy credibility 4. The move to a flexible exchange rate regime by advanced economies was expected to help clear global imbalances. That expectation has not been fully met for several reasons. First, public policy choices for some countries continue to put off important structural adjustments. Reinhart and Rogoff 2004. Aizenman and Sun 2009. Kohn, 2010. Obstfeld, Shambaugh and Taylor, 2009. Furthermore, a number of emerging economies did not allow their currencies to float freely, and continued to defend their peg at an undervalued exchange rate. Those modes of behavior beg in the issue of how to deal with protectionist sentiments. We have a light hearted question in our region which asks: why did God choose to send the prophets of all three religions to the Middle East? And the answer is: it was impossible to get them a Schengen visa. Divine wisdom aside, protectionism, in its broadest sense, continues to be a major challenge to global coordination. Anecdotal evidence suggests that, last year alone, 450 “low intensity” protectionist measures were taken by the G20 members 5. With fiscal consolidation in many countries and an almost jobless growth, countries may continue to resort to increasing exports to create jobs. Consequently, the risk of competitive devaluations, through intervention or otherwise, may be growing. The plausible assumption for the persistence of protectionist sentiments is that countries who take protectionist measures do so to protect their “national interest ”. Similarly, one may also assume that the competitive devaluations of the 1930s were intended to protect the national interests of the countries concerned. The outcome of the events of the 1930s and their aftermath clearly do not support the fine objective of this line of reasoning neither do the present imbalances and the present market volatility. And it is not only public policy that tends to overvalue national interest and undervalue international interests but also the market mechanism seems to produce a similar outcome. An interesting argument in support of this view was presented in the Per Jacobson lecture last June in Basle 6 and I quote “...there is a nationalist bias in the pro-market revolution...” unquote. Given the dominance of globalization and the interdependence of financial markets, it may seem paradoxical that there is still that much difficulty in reconciling national and international interests. To sum up on this point: I think the Bretton Woods institutions and indeed the United Nations system were designed to reconcile national interest with global interests and to ensure the mutual consistency of national policies 7. The fixed but adjustable peg and later on the floating or managed exchange rates regime were supposed to take care of imbalances in the current account. The prevailing hybrid system of exchange rates could not clear the current account and imbalances continue to persist. The good news is that IMF surveillance proved to be invaluable in the case of deficit developing countries. Since the late 1980s, we have introduced several key structural reforms in Jordan based on IMF surveillance and IMF consultations. More recently, the FSAP reviews helped us introduce several key reforms in the financial sector. Other developing countries may have gone through the same exercise. In this regard, the IMF can play an important role in the ongoing regulatory and financial reform efforts on both sides of the Atlantic. Furthermore, the call for more legitimacy in representation or quotas may enhance the multilateral role of the IMF and meet the concerns regarding IMF governance. More importantly, I suggest that enabling the IMF to provide international liquidity when needed with schemes that establish a “Global Financial Safety Net” and expanding its mandate in the light of the recent global crisis to include macrofinancial surveillance and spillover analysis should be seriously considered. In general, I would suggest that strengthening the IMF with some enforcement mechanism, such as Keynes original idea of a global clearing bank, would restore to the international monetary system some needed ownership and credibility. I believe it was the late Charles Kindleberger 8 who said that the international financial system will not work unless somebody should take responsibility for it. Finally on this point, it is also essential for the IMF to Saccomanni, 2010. Tommaso, 2010. Carney, 2009. Landau, 2010. enhance its collaboration with the Financial Stability Board (FSB) as well as the Bank for International Settlements (BIS). A major criticism against the Bretton Woods agreement of 1944 is that it separated economics and politics in “water tight ” compartments according to Richard Gardner in his very interesting book “Sterling Dollar Diplomacy 9”. In this regard, political policy choices can continue to put off adjustment in surplus countries. How any reformed international monetary system can bring about the needed consistency between economic and political considerations will be a major challenge for the global community in the coming years. The global crisis and the fact that it started in the US may have led some to believe that the current IMS model of using the dollar as the global key currency has been undermined. Moreover, recent sovereign debt problems in Europe raised doubts about the Euro and whether a single currency, with limited political integration, and little fiscal coordination among member countries, could be sustainable. In this regard, I suggest that most of the concerns are not totally justified. The dollar is backed by trust in the US political and economic system, the liquidity and depth of the US financial markets and the outstanding infrastructure for payments’ settlement. Moreover, and although the Euro has been around for only ten years, it is today associated with price stability. In this regard, I think major credit should go to the European Central Bank (ECB) and to President Trichet also for his consistent stand on the independence and integrity of the ECB. By definition, only currencies that can be freely convertible for trade or investment purposes have the potential to achieve the status of an international currency. Furthermore, the international use of currencies is a market-driven process which is determined by independent decisions of private agents and public policy. The criteria for Central Banks’ decisions on their foreign currency portfolios often differs from the considerations of private savings which may be more related to standard portfolio choice criteria. When the present international monetary system in its original form was agreed upon in 1944, it was expected that the dollar would be the main reserve currency. Over sixty years on, the dollar is still the main reserve currency. Any shift by central banks from holding dollar reserve assets risks large accounting loses. Structural reforms, in particular, in the area of medical care and entitlements as well as addressing what is often described as a savings glut or investment drought, are essential to restore balance to the global economy. Major reserve currency governments are responding to the calls for fiscal balance, higher savings, and more balanced investment spending at home. Other countries could also introduce more flexibility to the exchange rate of their currencies and allow relative prices to change. Fiscal policy in some emerging markets can also stimulate domestic demand away from exports and toward more consumption at home. This is all well known but I think it bears repetition. Before I conclude, I would like to present a quotation from a book about the history of the Bank for International Settlements in Basle 10, when during one cold snowy December night in North Carolina, the author woke up on a power failure which, in his words, took him back to the 19th century and he realized that we take for granted so many things in life and I quote: “…the payments system is yet another example of a highly complex network technology. We take it for granted that our checks clear, ATMs instantly provide cash anywhere in the world, imports are paid for in the required currency, and the desired amount of liquidity is available to us any time at the lowest cost. In fact, we should marvel at the ordinarily smooth working of the international payments system rather than be surprised at its occasional malfunction...” unquote. Gardner, 1980. Toniolo, 2005. Clearly, the global crisis of the past two years is hardly an occasional malfunction. However, I would like to suggest that the Bretton Woods agreement and subsequent reforms did serve the global economy well since World War II. Furthermore, markets do work and even when they become dysfunctional, as we saw during the past 18 months or so, markets were sending a clear message for corrective action. Of course the coordinated non-conventional measures taken by major central banks, in particular the Federal Reserve, the Bank of England and the ECB, as well as action taken by governments, did save the global economy from a meltdown. The managing director of the IMF suggested last spring that 1/3 of the effectiveness of stimulus measures was due to global coordination. Those same measures taken individually may not have produced the same result. A quick review of all statements by ministers at the IMF meetings last spring would reveal that the terms “multilateralism”, “coordination” and “surveillance” were the most frequently used terms. At least one minister called for “compulsory multilateral coordinated surveillance”. The Ministers’ remarks were reflected in the “G-20 Framework for Strong, Sustainable and Balanced Growth” which emphasized the mutual assessment of members’ monetary, exchange rate, fiscal and financial policies with the assistance of the IMF and other international financial institutions. I started my remarks by referring to several inconsistencies which need to be reconciled by the global community and I would like to end my remarks by going back to basics. Central banks should continue to adhere to their medium term objective of price stability and governments should adhere to fiscal consolidation or the unwinding of fiscal deficits. Furthermore, an international agreement on a framework for financial sector reform should be arrived at. Maintaining central bank credibility as well as fiscal and regulatory credibility are essential to restore confidence to the IMS. However, it is still not clear how any reform mechanism can impose adjustment on surplus countries. Furthermore, it is not clear either, under any reformed system, how an international body can impose fiscal discipline on member countries. I would therefore fully subscribe to the view that “achieving a better balance will require lasting shifts in spending, production, saving and borrowing around the world 11”. It would be ideal if the political-economic mix in public policy, especially in major economies, would be consistent in allowing the market to produce those shifts and for the countries concerned to conceive those shifts as being in their national interest. After all, if anything is too big to fail, it should be the International Monetary System. I thank you for your attention. References Aizenman, J., and Y., Sun, 2009. “The Financial Crisis and Sizable International Reserves Depletion: From Fear of Floating to Fear of Losing International Reserves”. NBER Working Paper 15308, October 2009. Bergsten, F., 2009. “The Long-Term International Economic Position of the United States”. Institute for International Economics, Washington D.C., May 2009. Bernanke, Ben S. (2007). “Global Imbalances: Recent developments and Prospects”. Bundesbank lecture, Berlin, September 2007. Bernanke, Ben S. (2009). “Asia and the Global Financial Crisis”. Speech At the Federal Reserve Bank of San Francisco’s Conference on Asia and the Global Financial Crisis, Santa Barbara, California October 2009. Kohn, 2010. Bini Smaghi, L., 2008. “The Internationalization of Currencies: A Central Banking Perspective”. in J. Pisani-Ferry and A. S. Posen, eds., the Euro at Ten: The Next Global Currency? Peterson Institute for International Economics. Blanchard, O., F., Giavazzi and F. Sa (2005). “The U.S. Current Account and the Dollar”. MIT Department of Economics Working Paper, No 05–02 and NBER Working Paper No 11137, February 2005. Carney, M., 2009. “The Evolution of the International Monetary System”. Remarks, Foreign Policy Association, New York, November 2009. Caruana, J. 2010 BIS Annual General Meeting. Basel June 2010. Duttagupta, R. Mateos, Lago, I., & Goyal, R. (2009). “The debate on the International Monetary System”. IMF Staff Position Note, SNP/09/26, November 2009. Eichengreen, B., 2009. “Out of the Box Thoughts about the International Financial Architecture”. IMF Working Paper WP/09/116. Gardner, R., 1980. “Sterling-Dollar Diplomacy in Current Perspective: The Origins and the Prospects of Our International Economic Order”. Goldberg, L. S., 2010. “Is the International Role of the Dollar Changing? Current Issues in Economics and Finance”. Federal Reserve Bank of New York, Vol. 16 (1). Kohn, L. 2010. “High-Level Conference on the International Monetary System”. Sponsored by the Swiss National Bank and the International Monetary Fund, Zurich, Switzerland, May, 2010. Landau, J., 2010. “An International Financial Architecture for the 21st Century: Some Thoughts”. 17th Central Banking Seminar of the Bank of Korea; Seoul, June 2010. Mishkin, F., (2008). “Housing and the Monetary Transmission Mechanism”. Jackson Hole Symposium, Federal Reserve Bank of Kansas City. Obstfeld, M., and K., Rogoff (2009). “Global Imbalances and the Financial Crisis: Products of Common Causes”. Paper presented at the Federal Reserve Bank of San Francisco Asia Economic Policy Conference, October 2009. Obstfeld, M., J. Shambaugh, and A. Taylor, 2009. “Financial Stability, the Trilemma, and International Reserves”. American Economic Journal, 99(2), pp. 480–86. Reinhart, C. and K. Rogoff (2004). “The Modern History of Exchange Rate Arrangements: A Reinterpretation”. Quarterly Journal of Economics 119, 1–48. Saccomanni, F., 2010. “The Global Crisis and the Future of the International Monetary System”. Chinese Academy of Social Sciences, Beijing, April 2010. Strauss-Kahn, D., 2010. “High-Level Conference on the International Monetary System”. Zurich, May 2010. Stiglitz, J.E., 2010. “Freefall: America, Free Markets, and the Sinking of the World Economy”. W.W.Norton & Company, Inc., 2010. Toniolo, G., 2005. “Central Bank Cooperation at the Bank for International Settlements, 1930–1973”. Cambridge: Cambridge University Press, 2005. Tommaso P., 2010. “Markets and Government before, during and after the Crisis”. Per Jacobsson Lecture, Basel, June 2010. Zhou, X. 2009. Statement on Reforming the International Monetary System. Central Bank of China, Beijing March 2009. | central bank of jordan | 2,010 | 9 |
Brief speech by the President of the Netherlands Bank and of the Bank for International Settlements, Dr. W.F. Duisenberg, on receiving the European Banker of the Year award in Frankfurt on 3/3/97. | Dr. Duisenberg responds to being made European Banker of the Year Brief speech by the President of the Netherlands Bank and of the Bank for International Settlements, Dr. W.F. Duisenberg, on receiving the European Banker of the Year award in Frankfurt on 3/3/97. First of all I would like to thank you for presenting me with the European Banker of the Year award. I must confess that apart from feeling highly honoured at having such a prize bestowed on me, I feel slightly surprised as well. It is not until 1st July of this year that I will be taking over the leadership of the EMI to become a veritable European Banker. There is something symbolic about this prize being presented in Frankfurt, which is not just the vibrant financial heart of Germany, but also the city where the monetary policy of the Economic and Monetary Union will be made. And it is about EMU that I wish to speak today. With the moment of deciding which Member States meet the criteria for accession to EMU creeping up on us, the discussion on EMU is increasingly centring on the question of how EMU is to be achieved rather than on whether EMU will be achieved. And rightly so, because the completion of EMU became a certainty when it was laid down in the Maastricht Treaty in 1992. EMU is to start off on 1st January 1999. In the spring of 1998 the Heads of Government of the European Union will decide which Member States meet the criteria for entry. By signing and ratifying the Treaty, Member States opted to join EMU as soon as they fulfil the criteria. Only the United Kingdom and Denmark insisted on an opt-out clause, releasing them from the obligation to introduce the euro upon qualifying for EMU. The completion of EMU is irreversible, the introduction of the euro definitive. When EMU takes off, all Member States participating in the euro area will be confronted with a fundamental change of environment. A proper start is of the utmost importance, with the euro being just as hard as the guilder or, if you will, the Deutsche mark. I need not explain to you the importance of low inflation, and hence of a strong currency. If we want the euro to be strong, there is nothing for it but to comply strictly with the convergence criteria. A weak euro and the attending high interest rate level would be of no benefit to anybody, and that includes the potential derogation countries. Please keep in mind that a monetary union with ill-converging Member States would be incapable of absorbing economic shocks. Ultimately the tensions attending a malfunctioning EMU would jeopardise the achievements of the Single Market. In my view, potential derogation countries should not even wish to take part in an EMU which allows insufficiently converged Member States to join. That brings me to the position of Member States with a derogation. At present many Member States are making desperate attempts to meet the convergence criteria for introduction of the euro. Nevertheless we must make allowance for the fact that a number of them will not be able to participate when EMU takes off on 1st January 1999. We should not make too much of their predicament. After all, a Member State with a derogation is not excommunicated, but will be allowed to join at a later date. If they succeed in meeting the convergence criteria within the near future, some of these countries will be able to join the core group when the euro banknotes and coins are introduced in 2002. Moreover, an exchange rate mechanism is presently being designed which seeks to ensure that the derogation countries retain close links with the core group. The mechanism will support their exchange rate policies. It aims to prevent unduly large exchange rate movements within the European Union which might impede the workings of the Single Market. At the same time, efforts will have to be made to reinforce convergence between the so-called ins and outs in Stage Three in order to promote the accession of the derogation countries. Here the pact for stability and growth can make a major contribution. Under the pact, the EU Member States, whether in or outside the euro area, commit themselves to strive for a near-balanced budget or even a budget surplus. In fact, the pact would bring about a return to the budgetary discipline adhered to before the deficits of many countries began to get out of hand in the 1970s and 1980s. A strong monetary union creates the right climate for low inflation. Low inflation, i.e. price stability, is the overriding objective of the ECB. Internal stability, meaning stable prices, is the principal aim. External stability, though not a primary objective, may ensue. There is after all a clear connection between a strong EMU with low inflation and the external value of the euro; it is in fact a precondition for a strong and stable euro. When the three large trade blocks, the US, Japan and Europe all pursue policies aiming for internal stability, they will not only reap the fruits domestically, but they will also contribute to a global climate of exchange rate stability. One of the main reasons for exchange rate disturbances, viz. an inconsistent and insufficiently confidence-inspiring policy, would thus be removed. The importance of reasonably stable exchange rates all over the world brings me to the international position of the euro. Let me conclude with a few remarks on that score. Obviously an economy stands to benefit materially when its currency evolves into an international key currency. A country whose currency figures in large numbers of transactions elsewhere faces far fewer exchange rate risks, while its financial sector is given a major boost. A currency circulating within private sectors outside its own country brings in income for its issuer, the so-called seigniorage. The euro is well placed to play an important role as an international currency. Such a position is, however, not acquired overnight, but will have to be won gradually. However, several major conditions for such a position in the longer term are already fulfilled. The European single market, encompassing 350 million inhabitants, offers a solid foundation for the euro. Another condition is the existence of sophisticated financial markets. Building up on the position attained by the Deutsche mark, the euro’s prospects are good in this respect. And last but not least, the euro will have to be a strong and stable currency. Only a hard currency will make it in the international financial markets. With the euro’s future role as an international currency in mind, let us make sure that EMU starts off with really converged economies, so that the ECB will be able to realise its objective of price stability without having to resort to overly painful policy measures. That will enable the euro to become a prominent international currency. | netherlands bank | 1,997 | 3 |
Address by the President of the Netherlands Bank and of the Bank for International Settlements, Dr. W.F. Duisenberg, on the occasion of a dinner hosted by the Board of Directors of the 'Association for the Monetary Union of Europe' (AMUE), at Kasteel De Wittenburg, Wassenaar, 4/3/97. | Dr. Duisenberg assesses the future importance of the euro Address by the President of the Netherlands Bank and of the Bank for International Settlements, Dr. W.F. Duisenberg, on the occasion of a dinner hosted by the Board of Directors of the ‘Association for the Monetary Union of Europe’ (AMUE), at Kasteel De Wittenburg, Wassenaar, 4/3/97. 1 It is a great pleasure for me to be able to address you here tonight in Wassenaar. Your Association has always been among the strongest supporters for speeding up European integration, particularly Economic and Monetary Union (EMU). This emphatic support gives the speaker the luxurious feeling of playing before a home audience. 2 Tonight, I would like to ponder two issues related to the future importance of the euro. First, what are the chances of the euro becoming an important reserve and invoicing currency? Second, how should the European Central Bank deal with the external value of the euro? Future role of the euro as a reserve and invoicing currency 3 I know that the first issue - the future role of the euro as a reserve and invoicing currency - has been receiving a lot of attention from your Association over the years. As a matter of fact, you very strongly believe in a powerful role for the euro. I quote from your latest report: “By placing Europe in a much stronger position vis-à-vis the United States of America and other countries, the introduction of the euro improves investor climate and ultimately favours employment. Also, the use of the euro will rapidly develop world-wide, in proportion to the external trade of the European Union which already ranks first in the world”. I very much welcome this positive approach to the euro. The internationalization of the euro is only partly in the hands of European policy-makers. Policy-makers can provide for the right incentives by pursuing sound policies, thereby making their currency attractive. But, at the same time, the success of the euro is also in the hands of the markets. In this respect, I would encourage the European business community to take every opportunity to promote the private use of the euro and increase its role as a vehicle currency and store of value. 4 Let me elaborate a little by discussing three major factors that will determine the future importance of the euro: the stability of the euro, the amount of trade conducted in it, and the depth of euro financial markets. Safeguarding the stability of the euro is the biggest responsibility of the European Central Bank. The safest currency for all investors is the currency of the country with the lowest inflation rate over time. Here, the prospects for the euro are good. Over the years, inflation in European core countries has been constantly lower than in the United States, and there is no reason to believe that this would change with the start of EMU. It is also very important that the euro will be strengthened by the institutional independence of the European Central Bank and its objectives of price stability. Furthermore, safeguards have been put in place, such as the Stability Pact, to prevent EMU countries from pursuing unhealthy fiscal policies. All in all, I firmly believe that the euro will be a strong currency. 5 As regards the other major determinants of the future importance of the euro - trade and financial markets - the role policy-makers can play is more limited. This is not to say that the euro’s starting position is unfavourable. On the contrary, over the last twenty years international private portfolios have been gradually diversified in the direction of European currencies. Also, European currencies have been increasingly used as vehicle and, to a lesser extent, as invoicing currencies. There is every reason to believe that these trends could be strengthened by the introduction of the euro. After all, the euro will eventually cover an economy whose gross domestic product is larger than that of the United States. If intra-EU trade is excluded, the EU and the US both account for around 20 percent of world trade. Furthermore, with 350 million inhabitants the EU is the largest consumer market in the OECD area, consumers whose needs will partly have to be met by trading with the rest of the world. Companies which trade principally with European counterparties may be inclined to invoice and pay in euros. If the euro is going to be widely used in international trade transactions, exporters and importers within the European Union will no longer be exposed to exchange rate risks nor have to hedge against such risks. The European business community thus has ample opportunities to reap the benefits provided by the introduction of the euro. 6 It is more difficult to predict the future role of the euro in international financial markets. Fortunately, at the European level agreement has been reached on legal provisions that guarantee the continuity of ECU contracts. This provides a good starting point for euro capital markets. Ultimately, however, the choice of currency in which to borrow and lend depends on the depth and liquidity of the underlying market. Presumably, some segments of the euro market will become deeper. For instance, government bond markets are likely to become deeper and more liquid, and will offer international investors more instruments than current national markets. It is also important that experience in the last few years has shown that financial markets can put increasing pressure on political authorities to conduct prudent macroeconomic policies. In such an environment, governments can no longer afford to outrun the constable, and credit spreads between different debtors may in practice be rather small. The external value of the euro 7 Let me now briefly discuss the issue of the external value of the euro. Recently, there has been a great deal of attention on this issue. Should the ECB, for instance, set an exchange rate target vis-à-vis the dollar? In my view, this is not the appropriate way to go. The primary task of the ECB is to guarantee internal price stability. As I have mentioned earlier, the euro area will have an economic and commercial weight comparable to that of the United States. This means a huge, but relatively closed economy. With a low import ratio, the effect of exchange rate movements on internal price developments will be limited compared to what currently holds for individual EU countries. Therefore, it is simply wiser for the ECB to focus on euro-wide indicators, such as money growth for the whole euro area. Put differently, the internal value of the euro is the objective of monetary policy and the external value the outcome. 8 This is not to say, of course, that Europe could adopt an attitude of benign neglect with regard to the external value of the euro. As is the case now, exchange rate developments will continue to be informally monitored by the major global players. Indeed, the introduction of the euro may even enhance the opportunity for strengthened policy coordination. With Europe speaking with one voice, the players on the global field are being put on a more equal footing. This could add to globally balanced and stable policies, which is in the interest of the three poles concerned. Furthermore, there is the relationship between the euro and the currencies of those countries which will not participate in EMU from the beginning. A new Exchange Rate Mechanism has been designed which aims to ensure that the EU Member States stay together and that the working of the Internal Market is not frustrated by exchange rate fluctuations between the euro zone and other EU currencies. It will also help those countries which will not join EMU right from the start to orient their policies towards convergence, in order to enable them to qualify for participation as soon as possible. To conclude... ..., there are reasons to believe that over time the euro could develop into an important reserve and invoicing currency. Good opportunities for the euro arise from the fact that the EU economy is even larger than that of the United States. Furthermore, it is the responsibility of European policy-makers to safeguard the attractiveness of the European currency by pursuing sound policies. In this respect, the stability of the euro is in the good hands of the ECB. At the same time, I would like to emphasize that the success of the euro is also in the hands of the markets. It should be borne in mind that it took the dollar half a century and two world wars to replace sterling as the international currency, despite the fact that the United States had been the major economic power since the beginning of this century. All in all, these are challenging times for Europe. Let me, therefore, propose a toast to the future success of the euro. | netherlands bank | 1,997 | 3 |
Address by Dr. W.F. Duisenberg, President of the Netherlands Bank and of the Bank for International Settlements, on the occasion of the Board meeting of the Banking Federation of the European Union held in Maastricht on 20-21/3/97. | Dr. Duisenberg discusses strategies for monetary policy in EMU Address by Dr. W.F. Duisenberg, President of the Netherlands Bank and of the Bank for International Settlements, on the occasion of the Board meeting of the Banking Federation of the European Union held in Maastricht on 20-21/3/97. It is with great pleasure that I am addressing you on the European Economic and Monetary Union here in Maastricht today, the very location where that Union was pieced together. It was here that we made a concerted effort some five years ago to lay the foundations for the economic and monetary stability of Europe in the 21st century. Since then we have been busily building on these foundations with the result that we now have the outlines of the European Central Bank. The framework for monetary policy contains three main elements: its primary objective, strategy and instruments. Where the first is concerned, there can be no misunderstanding: the Maastricht Treaty prescribes that the overriding objective of ECB policy shall be price stability. Knowing you all to be distinguished financial and monetary experts, I need hardly point out to you that to attain this objective, strategy must be transparent and credible. It is not for nothing that in recent months this issue has been figuring prominently on the agenda of the European Monetary Institute, the precursor of the ECB. Let me give you a brief impression of the consultations held there. As soon as it has been decided in early 1998 which countries are to take part in EMU, the ECB will decide what monetary strategy to pursue. Generally speaking, there are two aspects to such a strategy: internal decision-making within the central bank and, equally important, the presentation of its measures to the outside world. In fact both aspects hinge on the question which variables should underlie the central banks interest rate policy and what weight should be assigned to each of these variables. After all, monetary policy is complicated by the fact that inflation reacts to the central bank’s interest rate decisions with long and varied lags. Actual inflation rates are therefore not cut out to be a gauge of monetary conditions. The central bank should focus on information which provides insight into future inflation, and possibly formulate a number of intermediate objectives, the so-termed intermediate target variables: in Europe today the money supply and the exchange rate often figure as such. The exchange rate in particular plays a major role in open economies, where inflation is due largely to external factors. However, EMU will be a large and relatively closed area, where inflation is determined mainly by internal developments. There is therefore no question of the ECB conducting an active exchange rate policy vis-à-vis the dollar or the yen. That is why I will be discussing only two possible strategies for future monetary policy in Europe: monetary targeting, such as that pursued by the Deutsche Bundesbank for years already, and direct inflation targeting, the strategy applied by the Bank of England. Monetary targeting is underlain by the notion that in the medium to long term inflation is invariably caused by excessive money growth. In this line of thinking, the central bank can attain its objective of price stability simply by keeping the expansion of the money supply under control. That does not mean to say that the central bank will focus exclusively on monetary growth. Other aggregates containing information about inflationary prospects, especially in the near future, will be monitored as well. These factors act notably as “qualifiers”, warning policy-makers against relying excessively on their automatic pilot. Apart from rules, this strategy therefore also provides for a certain measure of flexibility. In this context, I wish to dissociate myself emphatically from those who are wont to accuse my colleagues at the Bundesbank of “rigidity” and “monetary dogmatism”. The necessary flexibility is coupled to a high degree of transparency as the central bank explains to the general public how it has determined its monetary target for the coming period, and goes to great lengths retrospectively to set out the reasons for any deviations from that target. By stressing its responsibility for monetary conditions, the central bank subjects itself to a certain discipline. For the central bank to be able to live up to this responsibility, the monetary aggregate to be chosen should meet three requirements. First of all, it should be sufficiently controllable. Generally speaking, an increase in the short-term interest rate will eventually lead to a decrease of the money supply. I deliberately say “generally speaking” because monetary policy-makers remember only too well what happened after German unification, when the reverse effect arose at first. Fortunately we now also know that such episodes may be shortlived. Secondly, there must be a sufficiently stable long-term relationship between the demand for money and its determinants, such as prices, income, interest rates and wealth. I will go into this in more detail later on. In the third place, the monetary aggregate needs to have predictive powers as to future inflation. If it does, money growth can be a useful indicator of future inflation. In the 1980s, monetary targeting was abandoned by several industrialised countries notably on the grounds that national money demand was becoming unstable as a result of financial innovations. It had thus become difficult to assess to what extent changes in monetary growth would be translated into higher prices. The central banks of some of these countries have meanwhile switched to a strategy aimed directly at the attainment of price stability. Their switch was, incidentally, often prompted by the implicit desire of policy-makers to prop up their reputation following years of relatively poor performances in terms of inflation. In 1989, my colleagues from New Zealand were the first to adopt direct inflation targeting. They were followed by Canada, the United Kingdom, Sweden, Finland, Spain and Australia. Although the name suggests otherwise, direct inflation targeting, too, makes use of an intermediate target, viz. expected inflation. As expectations are by definition hard to quantify, information variables are employed to forecast future inflation. If the predicted inflation rate deviates from the target, interest rate adjustment is called for. With a view to forecasting, direct inflation targeting employs, as I have pointed out, several information variables. Such variables are, for instance, changes in wage costs, the exchange rate, commodity prices, equity prices and the money supply. As soon as these indicators point towards rising inflation, the central bank needs to take action. However, the explicit use of a variety of indicators poses a threat to the transparency and credibility of monetary policy, because there is then no immediate way of knowing which information has prompted interest rate decisions. In order to remedy this problem, most countries pursuing inflation targeting have taken to publishing inflation reports setting out the backgrounds to policy measures. Such reports also enable the public to ascertain whether a central bank can be held accountable if the inflation target is not attained. After all, inflation may be caused by factors which are beyond the control of monetary authorities. It is for this reason that most countries cite circumstances under which the inflation target may be ignored or requires adjustment. For example, a number of central banks are not under any obligation to take corrective measures when indirect taxes are raised or when exogenous shocks such as energy price increases arise. As you can see, the two strategies are actually not as different as their names would have us believe. In practice, elements from both strategies are used, the distinction not always being as clear as it is in theory. The two strategies share the following properties: - both seek the attainment of the same ultimate goal, viz. price stability; - both are forward-looking; - and both make use of an extensive set of indicators to be able to assess whether the course pursued is the right one. In fact the different weights assigned to the money supply form the main distinction between the two strategies. If the two strategies differ so little in daily practice, how can we compare their pros and cons? To make comparison possible, it has been agreed within the EMI that the ECB will base its choice of monetary strategy on six general criteria, to wit effectiveness, accountability, transparency, medium-term orientation, continuity and consistency with the independence of the ECB. Obviously the criterion of effectiveness is more general in nature than the other five, which can be said to contribute to effectiveness each in their own way. Let us take a brief look at all of them. Any assessment of monetary targeting has always stressed the criterion of effectiveness. As I pointed out earlier, the effectiveness of this policy is determined by the controllability, the stability and the predictive powers of the monetary aggregate selected. In this context, special attention has always been paid to the stability of money demand. The EMI and other institutions have already extensively studied the stability of money demand for certain groups of EU countries. Though perhaps not quite representative of the situation in Stage Three, the results can be called encouraging so far. It turns out that European money demand functions evince greater stability than comparable relationships for individual countries, Germany included. However, the countries concerned must be sufficiently integrated and converged. Compared to monetary targeting, direct inflation targeting is harder to assess in terms of effectiveness. This is due to the fact that interest rate measures work through to inflation via all sorts of complicated macro-economic processes, with inflation right at the end of the chain. Direct inflation targeting, too, calls for a sufficient measure of stability of these relationships. Obviously effectiveness is in any case highly dependent on the quality of the inflation forecasts. Moreover, the central bank must be free to react pre-emptively and adequately to any deviations between the desired and the predicted rates of inflation. In the second place, it must be possible to hold the central bank accountable for the consequences of its policy. It must account for its decisions and explain them to the public. This enhances the confidence which the public at large has in the central bank and contributes to its credibility. As the ECB will be equipped with an adequate range of instruments, it can be held accountable for developments with regard to the money supply. But inflation is determined by more factors, some of which are less amenable to central bank control. That might let the central bank off the hook in the sense that it feels it cannot be considered wholly responsible for any overshooting of a direct inflation target. Thirdly, policy must be transparent. That means that the public must be informed on both which objectives are being pursued and how decisions have been arrived at. Those in favour of direct inflation targeting like to point out the fact that inflation is a more comprehensible concept than the money supply. On the other hand, transparency is well served when communication with the public at large centres on a single aggregate. In the case of direct inflation targeting, there is the risk that the outside world does not comprehend which indicator has been used this time, a problem which can be solved to some extent by issuing inflation reports. Fourthly, policy should not be tailored to individual developments, but should have a medium-term orientation, providing some breathing space when the target is not met in the short term. Above all this means that policy should be credible, offering a clear anchor for inflation expectations. Irrespective of the strategy chosen, monetary authorities do not react to every news item which comes their way. Wavering monetary policies only create unrest among both the public and financial market operators. In the fifth place, monetary policy should be characterised by sufficient continuity while all too frequent policy changes should be avoided. The continuity of monetary policy in Europe would be best served by monetary targeting, the strategy applied for several decades already by the most successful central bank in Europe, viz. the Bundesbank. Moreover, a large proportion of the other core group countries have attuned their exchange rate policies to Germany. One downside of direct inflation targeting as a policy option for the ECB is that little experience has been gained so far with this strategy in periods of heavy inflationary pressure. At the same time it should be kept in mind that the inflation performance of countries which have switched to direct inflation targeting has clearly improved over time. Finally, the policy strategy selected will need to be consistent with the ECB’s independence. By this I mean to say that the strategy chosen must not inspire outsiders to meddle in the discussions on interest rate policy. The Maastricht Treaty is perfectly clear on this point. It would be undesirable if any inflationary differences within the Union were to lead to politicisation of the interest rate policy within the ECB Governing Council. It seems to me that this risk is greater in the case of direct inflation targeting than if monetary targeting were pursued. I am approaching the end of my address. I have told you which considerations underlie the choice of a monetary policy for the ECB and I have outlined the differences between monetary targeting and direct inflation targeting. The success of either strategy is dependent on largely identical factors. Here a key role is played by vital concepts such as credibility and transparency. It would be recommendable to inform the public regularly and in general terms of the considerations underlying interest rate measures. Furthermore, the ECB will in any case, in the daily implementation of its monetary policy, have to take into account the various indicators which contain information about future price movements. All in all the differences between the two strategies should not be exaggerated. Nevertheless, I profess that the considerations which I have set out lead me so far to have a certain preference for monetary targeting. The success of the Bundesbank shows that this strategy underpins the competence of the central bank, thus offering an optimum safeguard for its independence. Should you have a different view, then I hope that my address has contributed to a dynamic start-up of the discussion ahead. | netherlands bank | 1,997 | 4 |
Address by Dr. W.F. Duisenberg, President of the Netherlands Bank and the Bank for International Settlements, on the occasion of his acceptance of the Business Week Award, awarded by the Business Week Committee of the Economische Faculteitsvereniging of the Erasmus University in Rotterdam on 20/3/97. | Mr. Duisenberg comments on the importance of the European pact for stability and growth Address by Dr. W.F. Duisenberg, President of the Netherlands Bank and the Bank for International Settlements, on the occasion of his acceptance of the Business Week Award, awarded by the Business Week Committee of the Economische Faculteitsvereniging of the Erasmus University in Rotterdam on 20/3/97. It is a great honour for me to accept one of the two Business Week Awards of 1997. I would like to thank the Business Week Committee for awarding me this prestigious prize. Also, I would like to congratulate my fellow award-winner professor Franco Modigliani, whose work has covered many fields in economics in general, and in the theory of monetary policy and finance in particular. As the theme of this year’s Business Week, the organising Committee chose “IMPACT: all things are in a flux and nothing remains”. The first part of the theme, “impact”, is certainly valid for the world of banking and finance. Shifts in international capital flows have important repercussions on economic developments in individual countries and regions. Changes in interest rates influence economic decisions by private companies and households, and consequently have an impact on our daily lives. Furthermore, the establishment of European Economic and Monetary Union will drastically change the institutional setting of money and monetary policy in the member states of the European Union, and will have a strong positive impact on the economic development of Europe in the next century. The second part of this year’s theme, “all things are in flux and nothing remains”, is somewhat more difficult for me to subscribe to. Being a central banker, it is almost against my basic instinct to see all things as being in flux and that nothing remains. By nature, central bankers are strongly in favour of smooth and stable developments. However, this does not imply that we are against change. For example, the movement towards European Economic and Monetary Union is a fundamental change from the past. What is important is that changes which have a significant impact on monetary and economic developments are embedded in structures of stability. The combination of policy impact and stability, that is the crucial issue for central bankers. Therefore, in the European Economic and Monetary Union, the policy impact and stability will be provided by an independent European Central Bank, the primary objective of which is to maintain price stability. To support this objective, the European Economic and Monetary Union will have several institutional features which are aimed at providing an underlying framework of stability for the ECB’s monetary policy. For example, a mechanism for exchange rate stability is presently being designed to ensure that the countries which do not meet the convergence criteria in time can retain close links with the core group. Moreover, a mechanism is presently being developed that aims at realising fiscal stability in EMU as well. This mechanism is the pact for stability and growth, and was agreed upon during the summit of the European Council in Dublin last December. Given the importance of fiscal stability for achieving monetary and price stability in EMU, I would like to touch upon three issues related to the pact for stability and growth. First, why do we need the pact as a fundamental characteristic of EMU? Second, what are the elements of the pact? Third, what are the misunderstandings about the pact? The first issue – the reasons why we need a pact for stability and growth in EMU – may be explained by my fundamental belief that a lack of fiscal discipline would negatively affect the ability of the European Central Bank to achieve its primary objective to maintain price stability. First, if the ECB is to be able to pursue a price stability-oriented monetary policy, loose fiscal policies in Member States must be avoided, as such a situation would endanger the credibility of the ECB and would place a heavy burden on the ECB’s monetary policy. Loose fiscal policies might push up interest rates, with the ECB being blamed for pursuing an overly strict monetary policy. Although a central banker is used to being blamed for all kinds of unsatisfactory economic developments, it is better to prevent this to the extent possible. The pact aims at ensuring that fiscal discipline will be achieved, not only before the start of EMU, but thereafter as well. Member States have agreed to pursue medium-term objectives for a budget close to balance or even in surplus. The likelihood of interference with monetary policy is thus reduced. As a result, the foundation for a stable and sound economic development in Europe is established. Not without reason is the pact referred to as the pact for stability and growth. Second, because of fiscal imbalances, aggregate demand can expand and may directly cause upward pressure on prices. As a result, given its primary objective of price stability, the ECB will be obliged to offset this expansion by implementing a restrictive monetary policy. In the end, the European economy will be confronted with higher fiscal deficits and higher interest rates, similar to the bad experiences of the seventies and early eighties. Third, high and persistent fiscal imbalances indirectly fuel inflationary expectations, because they raise the issue of sustainability. Fourth, an additional reason for the establishment of a pact for stability and growth is the possible danger of “free rider” behaviour by individual Member States. If national fiscal policies would not be governed by certain explicit and clear rules, individual Member States could implement unbalanced fiscal policies and to a large extent pass on the negative consequences to the other Member States. Fifth, the introduction of a stability and growth pact will safeguard the fiscal convergence that has been achieved during recent years, when EU Member States started to bring down fiscal deficits in order to meet the Maastricht criteria. Sixth, against the background of growing government fiscal deficits, both in Europe and the United States the fiscal situation of the government has become an issue of growing academic concern. As a result, a substantial number of important studies on the need for balanced budget rules have been published, establishing the theoretical framework for the necessary change towards fiscal consolidation. It should be noted that fiscal imbalances of the government are a relatively recent phenomenon. As has been stated regarding the United States by Nobel prizewinner professor James Buchanan, who is one of the strongest supporters of balanced budget rules: “Traditionally, before the 1960’s, governments had resorted to debt as a means of financing only extraordinary expenditures, for the most part expenditures that were necessary to finance wars and other short-lived emergencies. Public debt, so created, was always substantially reduced, or paid off, after most wars for most countries”. 1 Also in Europe, during the sixties and the early seventies, budgets close to balance or even in surplus were regarded as normal. It will not be a surprise that I think that we should go back to normal. For example, the average of total government gross debt for the present 15 EU Member States in 1970 was 34.6% of GDP. In 1995, this figure had risen to 71.7% of GDP, a doubling in 25 years. In the case of the Netherlands, the figure for government debt rose from almost 47% of GDP in 1980 to around 80% of GDP in 1995, an increase of 70% in just 15 years. However, the rapid growth of government debt did not result in a significant reduction of unemployment. On the contrary: the doubling of the average EU government debt level in 25 years was accompanied by a more than quadrupling of the average unemployment level. Also in the Netherlands, rapid increases in government debt were attended by increasing unemployment levels. These recent experiences show that accommodative fiscal policies are not a guarantee for reducing unemployment. J.M. Buchanan, “The Deficit and American Democracy, Center for Study of Public Choice”, George Mason University, 1984, Mimeograph, pp.8-9. Let me now briefly discuss the second issue – what are the elements of the pact for stability and growth? The pact for stability and growth will take the form of two regulations, and a political resolution from the European Council. The resulting regulatory framework represents a judicious balance between prevention – via the strengthening of the surveillance of budgetary policies - and deterrence – via the establishment of a dissuasive set of rules. The pact will oblige Member States (or the “ins”) to submit stability programmes. In these programmes, medium-term budgetary targets will be stipulated, which should be set close to balance or even at a small surplus. Non-euro Member States (or the “pre-ins”) will submit convergence programmes. Furthermore, the pact will include a sanction mechanism that will be used when countries fail to meet the 3% reference value. If the Council of Ministers judges that a Member State has an excessive deficit, sanctions would, as a rule, be imposed in the calendar year following the year in which the excessive deficit was recorded or identified. The sanction would consist of a non-interest-bearing deposit between 0.2% and 0.5% of GDP. In the case of the Netherlands, this would imply a maximum fine of somewhat over 3 billion guilders. The third element of the pact, the European Council resolution, will reflect the political commitment to a strict and timely application of all the provisions of the pact. Thus, the resolution will provide firm political guidance to the parties who will implement the pact for stability and growth. Both regulations, together with the resolution, constitute an important framework for stability. If the countries adhere to the provisions of the pact, they will observe a safety margin in respect of the fiscal deficit to make sure that, even in times of cyclical adversity, the deficit will not exceed the 3%-reference value of the Maastricht Treaty. The stability pact aims at ensuring that countries, once they have joined EMU, will continue to abide by the rules for sound public finance. Finally, I would like to address some misunderstandings about the pact. It is often said that the major drawback of the pact for stability and growth is that it takes away all flexibility and sovereignty in the budgetary area. This is not correct. As soon as a structural budgetary position of close to balance is reached, any negative cyclical development is allowed to feed into the deficit, that is, up to the 3% limit, agreed upon in the Maastricht Treaty six years ago. Calculations show that this gives ample room for the so-called automatic stabilisers to do their job. That is to say, if in times of economic fortune Member States establish sound fiscal positions, they will have sufficient budgetary room to react adequately to economic downturns. In this respect, the pact for stability and growth is nothing more than the communal equivalence of the Dutch saying ”Save first, spend later”. Thus, budgetary flexibility is explicitly part of the pact. As regards sovereignty, it has to be recalled that only the level of the deficit will be restricted. No limits or guidelines will apply to the size or composition of government receipts and expenditures. The sovereignty of national parliaments will remain fundamentally intact. In my opinion, it is even of the utmost importance that this sovereignty will remain intact: if the stability and convergence programmes are to be credible, they have to be supported by the national parliaments. Some critics of the pact claim that it allows for too much flexibility. To them, I would like to emphasise that the pact for stability and growth will introduce a high degree of automaticity in the assessment of Member States’ budgetary policies. Only under exceptional circumstances – such as occurred in less than 6% of the cases in the past 35 years – may Member States be allowed a budget deficit above the 3%-reference value of the Maastricht Treaty; even then this excess will need to be temporary and limited. Thus, the pact constitutes a careful balance between flexibility and automaticity, and between prevention and deterrence. As you might know, the details of the pact for stability and growth are now being worked out. I expect that at its June 1997 meeting in Amsterdam, which will be hosted by De Nederlandsche Bank, the European Council will reach full agreement on this most important issue. To conclude, from a central banker’s perspective, the crucial issue for stable and sound economic developments is the impact of stability. More specific, what is important is the impact of price stability, achieved through the interrelated set of monetary stability, exchange rate stability and fiscal stability. That is why the pact for stability and growth is one of the cornerstones of the EMU. It will establish a foundation of fiscal stability under the operations of the European Central Bank, and thereby contribute to the impact of its policies. | netherlands bank | 1,997 | 4 |
Address by A.H.E.M. Wellink, an Executive Director of the Netherlands Bank, on the occasion of AEGEE's EMU campaign 1997, delivered in Rotterdam on 16/4/97. | Mr. Wellink looks at European economic and monetary cooperation from an historical perspective Address by A.H.E.M. Wellink, an Executive Director of the Netherlands Bank ,on the occasion of AEGEE’s EMU campaign 1997, delivered in Rotterdam on 16/4/97. If everything goes according to schedule, the Economic and Monetary Union EMU, in short - will start on 1st January 1999. As of that date, the central banks of countries which are part of EMU at that time will join the European Central Bank (ECB), to be located, as you know, in Frankfurt. From then on, this institution will conduct a monetary policy aimed primarily at stabilising the internal value of the future single European currency, the euro. When the euro is officially initiated on 1st January 1999 - and I have no doubt that it will - a process will have been completed which can be considered unique from various points of view. Firstly, because the euro will become the pre-eminent symbol of economic and monetary union which is taking shape between sovereign states abolishing their national currency in exchange for a single currency. Secondly, because when it is introduced, the euro will not immediately be both a unit of account and means of payment: on 1st January 1999 the euro will become the unit of account, whereas it will not begin to circulate as a concrete, physical means of payment until three years later, on 1st January 2002. Finally, and befitting the age we live in, because the euro will be the first single currency which is available in electronic form right from the start. Hence, the euro marks the completion of a process which is unique from a historical perspective. It is this process which I want to discuss with you this afternoon. Not so much because I was asked to give an outline of economic and monetary cooperation as from the Treaty of Rome to the present day, but particularly to outline the near future. Outlines which are essential to make the euro a lasting success. Travelling from Rome to Amsterdam, where the Maastricht Treaty will shortly be reviewed, we will have to make several stopovers. 1. From Rome to The Hague There is nothing new about the pursuit of a single European currency. Ideas about a single currency are mainly rooted in idealistic-political motives. When a single European currency was propagated in the past, this was usually done in the form of a plea in favour of a politically united Europe. This idea was also expressed shortly after the end of World War II. It was Winston Churchill, who in 1946 in Zürich, argued in favour of “a kind of United States of Europe”. In April of that same year, the need for a single European currency was voiced by the new post-war President of the Nederlandsche Bank, Marius Wilhelm Holtrop, who wanted a strong and sound guilder which in due course would merge into one European currency. The past fifty years have shown, that the advent of a single European currency will certainly not include the “United States of Europe” that Churchill was talking about. Soon after 1946, Europe became politically divided into Eastern and Western hemispheres due to the Cold War. With the foundation of the European Economic Community (EEC) in 1957, Western Europe took the lead by starting economic cooperation. The objective of the Treaty of Rome, on which the EEC was based, was to create a common market between France, West Germany, Italy and the Benelux countries. This objective resulted in a customs union which became effective on 1 July 1968. However, the Treaty remained vague about other aspects of economic cooperation. Economic policy, for example, was considered a matter of common interest. As regards monetary cooperation, coordination was recommended, the exchange rate policy being regarded as a matter of common interest as well. The plan for economic integration designed in Rome was not an objective in itself. It was based on political grounds. After all, the Treaty aimed at achieving an “ever closer union among the European peoples” through economic integration. During the 1969 summit in The Hague, representatives of the six Member States agreed with the idea of the newly elected German Chancellor Willy Brandt that this had to be realised via Economic and Monetary Union (EMU). The then Prime Minister of Luxembourg, Paul Werner, came up with a detailed plan that was named after him. According to this plan, EMU would be materialised in stages. In the final stage, monetary and budgetary competences of the national states were to be transferred to Community bodies established for that purpose. And so, Werner’s ideas were considerably more far-reaching than the agreements reached in Rome thirteen years earlier. Nonetheless, the philosophy of economic integration advocated in Rome remained the moving spirit behind political cooperation: “it is true that we need not achieve a European confederation or federation tomorrow. But to arrive at this ultimate goal, we must first take the step of creating an economic and monetary currency union”, Werner said at a press conference at the time. In the Europe of the Six, France and Germany played a leading role right from the start. Nonetheless, during the preparation of the Werner Report, both countries differed in view about the aim of integration. So there is nothing new under the sun. For the German Minister Karl Schiller, EMU was inextricably connected to the idea of a political union. France, personified by Raymond Barre, considered this idea of political union far too drastic. Fixing the exchange rates was as far as he wished to go for the time being, hoping that this would make economic integration inevitable. Due to political pressure exerted by France, the final date of EMU was left open in the end. On 1 January 1971, the first phase commenced. It was to last three years, and in this period the Member States would aim at narrowing the fluctuation margin of the exchange rate between their currencies. The first phase however started under unfavourable circumstances. In August 1971, turmoil on the international foreign exchange markets forced the US Administration to suspend the convertibility of the dollar. This jeopardised the international exchange rate system of Bretton Woods. At the end of 1971, it was agreed to devalue the dollar and to broaden the exchange rate margins of the currencies participating in the international exchange rate system from 0.75 to 2.25% on either side of the dollar parity. Needless to say that under these circumstances, it became extremely doubtful, whether the first phase of EMU could be heralded. For that reason, the EC Member States agreed in March 1972 to limit the exchange rate fluctuations between their currencies vis-à-vis each other to 2.25%. This is how the “snake in the tunnel” originated, soon to become the “snake in the lake“ when the dollar started to float as from August 1973. This was the final blow to the Bretton Woods System. 2. From The Hague to Maastricht In the 1970s, cooperation in Western Europe was characterised by the priority given to enlarge the Community over deepening. At the beginning of 1973, the United Kingdom, Ireland and Denmark joined the Economic Community. Reviewing policy coordination between the original Six at that time, the European Commission came to the conclusion that it had been insufficient in this first stage. Therefore, “the“ second phase was changed into “a” second stage in early 1974. In the following years, the lack of policy coordination frequently led to new exchange rate crises, although these were fuelled by external circumstances as well, including two oil crises. The most striking reaction came from France, which left the snake in early 1974, returned to it in July 1975, and left again in March 1976. The seriousness of the situation was aptly described by the Frenchman Robert Mariolin, who characterised the integration process as follows: “... if there has been any movement, it has been backward: national economic and monetary policies have never in 25 years been more discordant, more divergent than they are today”. The discussion about how Europe should proceed was set off in early 1978 by Roy Jenkins, chairman of the European Commission at the time. After it appeared that a committee established by Jenkins made little progress, the German Chancellor Helmut Schmidt and the French President Giscard d’Estaing joined forces. These two politicians demonstrated how quickly plans can be turned into action when backed up by political will and determination. In March 1979, only a few months after they had met, the European Monetary System (EMS) entered into force, which aimed at creating a “zone of monetary stability”. The EMS marked the introduction of the European Currency Unit (ECU) as single unit of account and as starting point for the new exchange rate system. Yet it was no more than a technical arrangement. After all, monetary stability has a chance to succeed only if the economies of the participating countries achieve sustainable convergence and the governments of these countries pursue stability-orientated macroeconomic policies. However, that point had not been reached yet. By conducting a policy which gave high priority to fighting unemployment, France opposed the primacy Germany had attached to price stability since 1945. A large number of exchange rate adjustments were required to make France realise in 1983 that a radical turnabout was necessary. France’s adoption of a policy of the “hard” franc was a move in the direction of the German objective of price stability. The calming effect of this turnabout within the EMS, was enhanced when an agreement was reached in the Danish city of Nyborg on monetary policy adjustments which were needed in the event of exchange rate tensions. In the meantime, the expansion of the Community had widened further. Greece joined in 1981, followed by Spain and Portugal in 1986. In the decision-making process regarding the EMS, EMU was not explicitly formulated as the system’s objective. The Delors Report, which was published in April 1989, contained concrete proposals to that end. According to Delors, fixed and unchangeable exchange rates should be the core of EMU. This implied a single monetary policy, to be conducted by a European central bank which had to ensure that domestic price stability would be maintained. The road to EMU was to be completed in three stages which were, however, not subject to expiry dates. As did Werner, Delors thought that EMU could be realised within a period of ten years. An important difference was that Delors did not propose a transfer of national fiscal competences to the Community. Delors’ plan had a sequel in June 1989, when it was agreed that an Intergovernmental Conference would be held to decide about the necessary amendments to the Treaty of Rome. Six months later, the French-German proposal to hold a conference about political cooperation was accepted in Dublin. At both conferences, preparations were made that led to the Treaty on European Union (EU) at the end of 1991, better known as the Maastricht Treaty. From the tensions that characterised the EMS in the early 1990s, it seemed to be clear that the first stage of EMU did not go entirely as planned. The uncertainties in countries such as Denmark and the United Kingdom which hesitated to sign the Maastricht Treaty, the interest-increasing effect of the unification of Germany, and the fact that the exchange rates of some currencies had become overvalued since Nyborg, culminated in August 1993 in the decision to broaden the fluctuation margins of the EMS currencies from ± 2.25% to ± 15%, except for the Deutsche Mark and the guilder which maintained the original margin of ± 2.25%. Despite this setback, the European leaders were determined not to allow further delays on the road to EMU mapped out by Delors. This determination was also prompted by external circumstances which, contrary to the 1970s, now had a positive impact on developments. The collapse of the Berlin Wall in October 1989 ended the political division in Europe. This opened the door to the reunification of East and West Germany, of which the Deutsche Mark had meanwhile become the anchor of stability within the EMS. These changes, which coincided with worldwide deregulation of capital transactions, increased the necessity of forming a front in Western Europe. At rapid pace, the Member States of the Community worked to realise the single market, which was as good as completed on 1st January 1993. A logical complement to this single market was the single currency. However, the acceleration of the integration process was not based on economic motives alone. In political terms, the Maastricht Treaty has sometimes been interpreted as a kind of trade-off: West and East Germany were allowed to unite provided this locomotive would continue to pull European economic and monetary unification at a rapid pace in order to hedge the feared German supremacy in the new Europe. Be this as it may, the Treaty officially entered into effect in November 1993, harbouring the prospect of a single European currency. On 1st January 1994, Europe stepped into the second stage of EMU and the European Monetary Institute (EMI), the forerunner to the ECB, was established in Frankfurt. The EMI’s primary task is to strengthen the coordination of monetary policy between the EU Member States - in early 1995, Finland, Austria and Sweden joined the EU - and to prepare the third stage of EMU. As mentioned, EMU cannot be seen separate from the wish to establish, in the longer term, a politically unified Europe as well. In order to prevent economic reality from being subordinated to this more than honourable wish, stringent entry requirements were set. These so called convergence criteria pertain to permissible values for inflation rates, interest rates, public deficits and public debts. The Maastricht Treaty does not hold the ultimate wisdom. Economic theory has not yet advanced to a level where it can objectively and accurately determine the optimal size of public deficits and debts. It probably never will. The Maastricht budgetary criteria, which are criticised from various sides - some arguing that the entry requirements are too stringent, others believing them to be too lenient - are based on practical experience and, put in a longer historical perspective, are too lenient rather than overly stringent. This is another reason why these criteria must be stringently applied. 3. From Maastricht to Amsterdam The last stage that I want to complete in this introduction, is the journey from Maastricht to Amsterdam. On 16 and 17 June, Amsterdam will host the biannual European summit, where the Maastricht Treaty could well be transformed into the Amsterdam Treaty. It is worth mentioning to foreign guests present here this afternoon that, from a geographical perspective, Maastricht is the last and only real mountain to be conquered on the road to Amsterdam. In other words, the journey from Maastricht to Amsterdam is free of obstacles. I hope that the same applies to the last stage of EMU. The likelihood of obstacles has been reduced considerably because, as I have explained, stringent entry requirements were set in Maastricht. Gradually, a group of countries is emerging in Europe which may be able to meet these criteria. In the spring of 1998, they will be formally appointed as EMU participants. In order to give sufficient weight to this core group, the participation of France and Germany forming as they do the axis of Western European cooperation - is a prerequisite. But with a view to the credibility of EMU, France and Germany, in particular, have to strictly observe the conditions of accession. The creation of a core group gives rise to continuous speculations about the question which countries will join it. In this stage of EMU, such speculations are not productive. Instead of excluding countries in advance, each country should be stimulated to do its utmost to complete the budgetary consolidation process. Of course, this does not call for tricks or nonrecurring measures, but requires, - as stated in the Maastricht Treaty - a sustainable and therefore permanent consolidation, not only in the interest of EMU but also in the interest of the country involved. Apart from the question which EU countries will be in the core group, participation in EMU implies at any rate that the country involved transfers its monetary policy powers to an independent ECB. In that field, we will continue to see rearguard action, because the tradition of central bank independence is not equally rooted across the whole of Europe. On the other hand, one should not worry about these recurring discussions too much, as the Treaty is rock-solid with regard to the prohibition to exert political influence on the ECB Governing Council. Obviously, the independence of the European Central Bank should not be confused with a lack of democratic legitimacy. After all, the democratic legitimacy of the ECB has been safeguarded in many ways. For example, the designated ECB-President can be questioned by the European Parliament and the chairman of the Council of Ministers plus a member of the European Commission may participate in meetings of the ECB Executive Board without, it is true, voting rights. But apart from this, it should be kept in mind that the Masstricht Treaty has been ratified by the national parliaments. In other words, the ECB’s task to achieve price stability is based on a democratic decision of the national parliaments. The fact that the other forms of policy will remain the responsibility of national authorities may make EMU unique, but fragile too, e.g. if no measures are taken to guarantee that national competences are not abused. Fortunately, European leaders have agreed to the stability pact proposed by Germany. This pact will enable EMU to impose sanctions on EMU Member States whose public finance is not in order. The Netherlands has always been a strong proponent of this proposal, because it is an important instrument to guarantee budgetary discipline. After all, the budgetary policies of the participants will have to be aligned in such a way that they may be used to strengthen the European currency. But even then major efforts will have to be made to clear the road to EMU of any remaining obstacles. The Intergovernmental Conference which started a year ago and will be completed in Amsterdam, will have to provide an answer to the question how the EU can remain institutionally manageable when a number. of Eastern European countries accede in the near future. Answers are also required to the questions regarding more effective decision-making and the role which the European Parliament could play in that respect. Of course, these issues do not have to stand in the way of establishing EMU in 1999. Nevertheless, they show that the long-term success of EMU as part of the EU is not guaranteed until, more so than in the past, the widening of the Union runs parallel to a deepening in the direction of an “ever closer union among the European peoples”, as envisaged by the signatories to the Treaty of Rome. Ladies and Gentlemen With Amsterdam as the last station on this trip, I have arrived at the conclusion of my address. In short, it may be argued that the process of European economic and monetary cooperation from 1957 to the present has been one of trial and error or - analogous to our train journey - of stopping and moving on. Nonetheless, the fact remains that the journey, also thanks to visionary, creative and energetic drivers, has always been resumed with greater speed, and that the problems encountered were resolved in an inventive, not always perfect, but workable way. This, I think, is the power underlying the post-war European drive towards integration and it is this power which makes me confident that the euro will arrive in due time. If the Treaty of Amsterdam is realised, the switches are definitively turned and the signal will be at clear for the final stage of EMU, which will lead to Frankfurt and can be completed on a beaten track in the high-speed train. | netherlands bank | 1,997 | 5 |
Address held by the President of the Netherlands Bank and of the Bank for International Settlements, Dr. W.F. Duisenberg, at the Spring Meeting of the Institute of International Finance in Washington on 29/4/97. | Mr. Duisenberg discusses the comparisons between the structures and methods of the European System of Central Banks and the US Federal Reserve System Address held by the President of the Netherlands Bank and of the Bank for International Settlements, Dr. W.F. Duisenberg, at the Spring Meeting of the Institute of International Finance in Washington on 29/4/97. 1. Only twenty months to go before EMU takes off; before then, in the summer of 1998 at the latest, the ESCB will be established. The preparations for this turning-point in the history of Europe are in full swing. Next year it will be decided which Member States are to be in from the outset, a decision to be taken as you know by the Heads of Government on the basis of the measure of sustained convergence achieved. Although the stability-oriented tradition which has grown up over the years is to be continued within EMU, there will be a fundamental change in the way monetary policy will be determined centrally. Here questions arise, such as: how will the centre, i.e. the ECB, and the existing national central banks relate to each other in such a context, and how can the skills and expertise of those national central banks best be used, without impairing the single nature of monetary policy? It is these questions that I would like to focus on today. As the ESCB will have a federal structure comparable to that of the Federal Reserve System, it may be useful to take a look at the experience of the United States, all the more so as the underlying economies will be comparable in size. In particular, what lessons can Europe learn from this experience? 2. Let me emphasize a few points at the outset. On its own, monetary policy is not equipped to counter an unfavourable macro-economic development. That calls for the concerted employment of all available macro-economic policy instruments. In the American situation, the Fed is expected to operate within the framework of the general economic objectives set by the Administration. Coordination is facilitated by the centralized formulation of monetary policy. In a monetary union such as the United States and the future EMU, policy can only be pursued centrally. It is indivisible by its very nature, for one thing because of its official interest rates, subjecting all regions making up the union to uniform financial conditions. As to the question how monetary policy can best be conducted, there is no unequivocal answer. That question relates to issues such as the economic variables on which policy should focus, or in other words, the choice of intermediate objective. In some countries, Germany among them, policy is targeted at a monetary aggregate, while in others a strategy of direct inflation targeting is pursued. Alternatively, monetary authorities may focus on a range of economic indicators, as is done in the United States. I will not go into the pros and cons of these methods here today. In the European context, the EMI has concluded that in practice the differences between the various policy strategies that could be pursued by the ESCB are not as large as in theory. A decision is to be taken by the ECB on this point next year. 3. Looking at the structure of the Fed, we see three components, specifically the Board of Governors, the regional reserve banks and the Federal Open Market Committee (FOMC). The FOMC issues a periodic guideline for monetary policy, while the Board serves as the executive body. It is empowered to adjust policy, within the mandate provided by the FOMC, when necessary in the period between FOMC meetings. Thanks to a rotation system, the reserve banks are involved in FOMC decision-making on an alternating basis. The American legislature obviously meant the Fed to have a decentralized structure, in which the regional reserve banks can each have their say. The aim was to prevent Fed policy-makers from catering unduly to the wishes of either the financial centre, i.e. New York, or the political hub, i.e. Washington. In spite of the decentralized nature of the Federal Reserve System, however, a certain specialization tendency has increasingly developed over the years, due in part to technological innovations and market developments. Take, for instance, the operations ensuing from the Fed’s monetary tasks, such as money and foreign exchange market interventions. These are effected in their entirety in New York. In other areas, too, such as the payments system, the reserve banks have developed their own specializations. 4. In determining monetary policy, the Fed relies on regional input. The reserve banks contribute to policy through their role in the discussions and the number of votes they can cast (five out of a total of twelve) at FOMC meetings. At these meetings no fixed policy proposals are presented in advance, the aim being an open discussion where the various parties reach agreement through mutual persuasion. Any decision should, after all, be endorsed by as many parties as possible. Obviously, in this American context, the chairman must be someone of considerable stature. I believe that involving the reserve banks in policy-making and in the efforts to expound that policy to the folks back home is the right way to go about things, reinforcing as it does the cohesion within the system. 5. In short, the Fed operates what is in my view a well-balanced model of monetary decision-making. Though policy is conducted centrally, the various interests of the separate regions are not overlooked. The System is furthermore capable of reacting adroitly, as evidenced by the United States’ long-term record of strong economic growth and modest inflation. 6. How does everything I have just said translate to the future situation in Europe? As in the United States, policy in Europe will be determined centrally and implemented, where possible and appropriate, decentrally. In Europe, too, an institutional division into three components will be instituted. Specifically, the ESCB will be made up of three elements, the ECB Executive Board, responsible for day-to-day policy, the ESCB Council, made up of this Board and the governors of the national central banks, and the national central banks themselves. There are considerable similarities between this structure and that of the Fed, made up of the Board of Governors, the FOMC and the reserve banks. Yet the emphasis will, on some issues, be placed differently. 7. One difference concerns voting arrangements within the ESCB Council, which are not the same as those within the FOMC. In the ESCB Council the votes of the national central banks, represented by their governors, will predominate over those of the Executive Board. In the FOMC, it is the votes of the centre, i.e. the Board of Governors, which represent the majority. This means that if effective decisions are to be arrived at in Europe, the national central bank governors will have to be like-minded; in other words, policy-makers will have to abandon their purely national outlooks, exchanging them for a “European perspective”. The experience of the FOMC shows that is can be achieved. The ESCB will have the important task of helping to foster such a European perspective, with the centre taking the initiative. The European outlook will furthermore have to be disseminated among the general public. An ESCB making an effort to explain and seek understanding for its policy decisions will generate support for its actions. This is a task for the national central banks, whose historical ties to their own peoples are deeply rooted. In this respect it should also be kept in mind that the Fed’s accountability to Congress has no equivalent in Europe. Although the President of the ESCB is expected to appear periodically before the European Parliament, the latter does not have the same powers as the US Congress, which can in principle amend the Federal Reserve Act. Furthermore, any discussion of the European policy mix will be different in nature because budgetary policy will remain the province of the European Member States. This policy will, however, be subject to the limitations set out in the Stability Pact recently agreed by the Member States, which as you know aims to foster sustained sound public finances in Europe. 8. What I have just said about the need to develop a “European” perspective has implications for monetary and economic analysis. The centre will need to have at its disposal considerable analytical machinery in order to be able to perform this pioneering role successfully. As a system of European statistics and analysis cannot be set up overnight, no time should be lost. Indeed, the preparations being made at the EMI in this area are proceeding at full steam. Of course, these new statistics will take getting used to. But, at the same time, some things will remain unchanged. National analyses will continue to play an important role so long as Europe has not been transformed into a single economy. After all, if we wish to understand what is happening at the European level, we would be well advised also to look at the underlying national economic relationships. With respect to these analytical tasks, the division of labour between the centre and the national central banks is likely to evolve of its own accord. At first glance, this division seems likely to reflect that the national central banks know their own economies best. 9. Contrary to the US situation, the implementation of monetary policy in Europe will not take place at one location away from the centre but, where possible and appropriate, decentrally. That has to do with the fact that Europe’s central banks and financial markets have a rich and extensive history. A decentral approach makes allowance for differences in European practices and market conditions. In this context it should be noted that the formulation chosen for decentralization in Europe in principle allows for the ECB to play a role in policy implementation. There is no knowing in advance how the tasks will be divided among the national central banks themselves, and between them and the centre in the more distant future. The American example shows us that such matters cannot be laid down in a blueprint for eternity. Decentralization is a sound principle to cater to initial national differences in the financial markets, but it must not stand in the way of further integration. In other words, policy must accommodate the disappearance of national financial market characteristics and the emergence of a single integrationa European money and capital market. 10. EMU will remain a union of different countries. This means, among other things, that the differences prevailing among the various central banks regarding their non-monetary tasks can, in principle, continue to exist. I am referring here, for instance, to banking supervision, surveillance of payment systems, and the fiscal agent function for the benefit of the Government. It is interesting to see that in the United States, where such matters have been organized in a uniform manner, some degree of specialization has emerged among the regional reserve banks. Owing to the continuing existence of national responsibilities and practices, this extent of specialization will not be feasible in Europe. 11. I have arrived at the conclusion of my address. Like the Federal Reserve System, the ESCB will be characterized by central and decentral elements. However, the mix will not be the same, due to differences in the starting position, as well as in social and political conditions. Yet the experience of the Federal Reserve System offers instructive insights. It highlights the importance of “homogenous” thinking within the system, and of focusing on the European perspective, without disregarding regional developments. It will be a challenge for us in Europe to ensure that a similar balance is achieved within the ESCB. | netherlands bank | 1,997 | 5 |
Dinner speech held by the President of the Netherlands Bank and of the Bank for International Settlements, Dr. W.F. Duisenberg, at the occasion of the Marshall Plan celebration in Washington on 15/5/97. | Mr. Duisenberg assesses what we have learned from the Marshall Plan Dinner speech held by the President of the Netherlands Bank and of the Bank for International Settlements, Dr. W.F. Duisenberg, at the occasion of the Marshall Plan celebration in Washington on 15/5/97. On 5th June this year it will be exactly 50 years ago since George C. Marshall, in a speech at Harvard University, set out his plans for the economic recovery of Europe. Although I fear that I will not succeed in making as momentous a speech as Marshall did, I am honoured to speak to you here today and commemorate this historic occasion, which I believe marks the starting point of Europe’s post-war economic miracle. Anniversaries such as this present a useful opportunity to reflect on our past successes and to draw lessons from them. This is the challenging task which the organisers of this conference have set out before me today and I will endeavour not to disappoint them. In doing so, I would like to start out by pondering for a moment on what it was exactly that the Marshall Plan contributed to post-war economic recovery. Although the importance of the Marshall Plan is relatively undisputed, the channels through which it boosted economic growth have been the subject of lively debate. Only if the role of the Marshall Plan is put into the proper perspective, can we hope to fruitfully draw on our past experiences. Subsequently, I will attempt to apply what we have learned to the current transformation process in Central and Eastern Europe, which shows some interesting similarities with post-war reconstruction. As I will argue, however, the transformation process in transition economies is, in other respects, uniquely different. In my view this precludes using the Marshall Plan as a blueprint for aid to transition economies, although it harbours some important lessons. Finally, a word of caution is in order. I am a central banker. As such, I will focus on the economic aspects of the Marshall Plan, not the political ones. Such a discussion is necessarily incomplete; but I will leave it to others to comment on the political and diplomatic context in which Marshall aid took place. The contribution of the Marshall Plan – distinguishing fact from fiction Marshall aid was a lifeline from the United States to Europe at a time when, economically, Europe had been brought down to its knees. Between 1948–1951 the program annually transferred roughly 1% of American GDP, or around $ 13 billion in aid, to some 16 European countries. In net present value terms this amounts to roughly $ 80 billion. By 1951, six years after the war and the effective end of the Marshall Plan, national incomes per capita were more than 10 percent above pre-war levels, while the economic growth rate in the next two decades reached levels which were twice as high as for any comparable period before or since. This temporal coincidence between the extension of Marshall aid and the “miraculous” recovery of Europe has induced the inferral of a causal relationship. It should be noted, however, that, even after extensive academic research, the roots of Europe’s economic miracle are not yet adequately understood. Thus, it is difficult to isolate the contribution of the Marshall Plan. Economically, the strong post-war growth performance is in large part explained by the so-called Solow residual – that is, not by traditional factors such as capital and labour. This is an economist’s way of saying we do not fully understand what is going on. A first observation in this regard is that the reconstruction of Europe did not start in 1948 – the year in which the first Marshall aid was disbursed – but in 1945. At that time the US was already channelling large amounts of aid to Europe through the United Nations Relief and Recovery Administration and other programs. This aid, which was in the order of $ 4 billion annually in the first two post-World War II years, was – in flow terms – in the same order of magnitude as the Marshall aid. A second observation is that, given the unprecedented magnitude of aid from the perspective of the donor community, the Marshall Plan in a quantitative sense played a smaller role than one would expect in accelerating the replacement and expansion of the European capital stock. Marshall aid accounted for less than 2.5% of the combined national incomes of recipient countries between 1948 and 1951. While this is indeed a significant sum, this resulted in at most a 1% increase in investment, at a time when domestic investment was running at 15% of GNP. In other words, this does not explain growth rates several percentage points above their historic trend levels. It should be noted, however, that growth may have been stimulated through other channels, for instance, by providing much-needed hard currency reserves which could be used for financing industrial raw materials. Over a third of Marshall aid was used in this way. A third observation is that the Marshall Plan also did not play a large role in financing the reconstruction of devastated infrastructure as this had been largely accomplished before the program got underway. In fact, countries that were major aid recipients saw the government spending share of national income fall relative to other nations, the opposite of what one would expect if there had in fact been a shortage of public investment capital. So how did Marshall aid matter? Recently, there has been a shift among academics to what might be termed as a “revisionist” analysis of the contribution of the Marshall Plan to European recovery. According to this view, the Plan’s main contribution was to alter the environment in which economic policy was made, tilting the balance in a qualitative manner rather than quantitatively. As you will recall, in 1947, two years after the war, Europe was still characterised by macroeconomic instability, inflation and an increasingly tight balance of payments constraint. The initial response by governments had been to counter inflation by retaining controls, thereby prompting the growth of black markets and discouraging transactions at official prices. By distorting the allocative mechanism of the market, saving and initiative were discouraged. The appropriate response as prescribed by economic theory would have been to decontrol prices to induce producers to bring their goods to market. In addition, fiscal discipline and monetary restraint was necessary, in order to reduce inflationary pressures. Such policies, however, require political compromise and sacrifice by everyone which at that time, when the needs of Europe were greatest, were not necessarily forthcoming. The Marshall Plan may have played a critical role by easing decisions over the distribution of scarce resources. Of course, the extended aid did not obviate the need for sacrifice but it increased the size of the distributional pie available to the various interest groups. In my opinion, however, the most important channel through which the Marshall Plan contributed is through its conditionality, with which the US was able to exercise significant influence over the economic policies of Marshall aid recipients. Although over the years the Plan has become synonymous with the substantial aid flows transferred from the US to Europe, it is useful to recall that before receiving that aid each recipient country had to sign a bilateral pact with the US. In that pact, countries agreed to balance their budgets, restore financial stability, stabilise the exchange rate at realistic levels and enhance mutual cooperation. Along with the carrot, thus came the stick. In many ways this is similar to the approach followed in later years by the International Monetary Fund in its macroeconomic adjustment programs. Not only could the Marshall aid itself not be spent freely – it could be spent on external goods only with the approval of the US government – but the recipient was also required to place a matching amount of domestic currency in a counterpart fund to be used only for purposes approved by the Marshall Plan administration. As such, for each dollar of Marshall aid, the US had control over 2 dollars of real resources. In some instances the US insisted that the funds be used to buttress financial stability. Britain used the bulk of its counterpart funds to retire public debt. In the case of France, the US used the counterpart funds as a tool to pressure the new government into reaffirming its willingness to continue policies leading to a balanced budget. West Germany found the release of counterpart funds delayed until the nationalised railway had reduced expenditures to match revenues. Nations undergoing high inflation could not draw on counterpart funds until the Marshall Plan administration was satisfied that they had achieved a workable stabilisation program. As a condition for receiving Marshall Plan aid, each country was required to develop a program for removing trade controls in order to promote intra-European trade. The multilateral manner in which this was achieved – through the OECD in which all Marshall recipients were united – contributed significantly to the European integration process. The most important institutional innovation in this regard was the establishment of the European Payments Union in 1950, a product of the Marshall Plan. The Marshall Plan should thus be thought of as a large and highly successful structural adjustment program. At this stage, I believe it is useful to draw two preliminary lessons: – The first lesson to be drawn from the Marshall Plan is that the central element in post-war Europe’s economic success was sound economic policy. – The second lesson is that even aid flows in the order of magnitude as those under the Marshall Plan are likely to be small compared to resources generated domestically. Nevertheless such aid flows are likely to facilitate the adoption of otherwise painful economic policies. A new Marshall Plan for Eastern Europe? An interesting question is to what extent we can apply these lessons to the current transformation process in Central and Eastern Europe, to which I will refer as Eastern Europe from now on? To some extent, of course, this question is rendered out of date by the fact that the transition process in a number of countries has been underway for over seven years now. The International Monetary Fund has more or less adopted a role similar to that of the Marshall Plan. Through its macroeconomic adjustment programs credits are extended on the basis of countries meeting economic performance criteria. As such, IMF macroeconomic stabilisation programs form a crucial first step in the transformation process, without which the longer lasting structural reforms cannot take hold. Of the early reformers – Hungary, Poland, the Czech Republic, Slovakia, the Baltics, Croatia and Slovenia – only Hungary still has an IMF program, but it is of a precautionary nature; no purchases are made. In fact, since 1995 these countries have been making net payments to the Fund and some have obtained access to international financial markets. Others, however, are less advanced and still in need of the required reforms. The transition process, so far, seems to mirror the circumstances leading to the adoption of the Marshall Plan in two important regards. First, financial instability which was pervasive in the early years of post-World War II Europe is also present in several transition economies. As for Europe 50 years ago, an important precondition for growth to take off is the stabilisation of prices and, after an initial adjustment, the exchange rate. This has been the purview of the IMF in its adjustment programs, which through the extension of credits has somewhat facilitated the adoption of painful economic policies. Second, both Europe in 1948 and Eastern Europe at present have experienced a period of intensive government intervention, albeit for different reasons. This has created a habit of control and regulation along with a certain unease with the workings of the market, similar to the mistrust of the market in post-war Europe following the failure of market mechanisms during the Great Depression. In both periods, the myriad of restrictions needs to be abolished, and structural reform needs to take hold. But there are also important differences between the transformation process and post-war recovery. The Marshall Plan was effective at least in part because Europe had experience with markets. It possessed the institutions needed for their operation. Property rights, bankruptcy codes, court systems to enforce market contracts – not to mention entrepreneurial skills – all were in place. This institutional basis has been lacking in Eastern Europe. Moreover, the physical allocation mechanism and absence of meaningful prices were much more extreme than under wartime rationing. Second, the scale on which enterprises in Eastern Europe need to be restructured finds no comparison in post-war Europe. On the issue, for instance, how fast to close certain factories given the absence of an adequate social safety net, the experience of post-war Europe is of little help simply because there was little to close down. In addition, the post-war experience does not teach us how to implement mass privatisation, nor how to put a huge sector of large state enterprises on a commercial basis, all simultaneously. Third, transition economies have to liberalise their economies in an already highly liberalised international environment and of highly developed international capital markets. In such a context, policy mistakes or a lack of market confidence can easily lead to a large and rapid outflow of capital, thus draining away much-needed savings. These problems are exacerbated by weak financial systems where experience and expertise in, for instance, credit allocation is lacking. So what does Eastern Europe need? This leads me to believe that the needs of Eastern Europe are different from those of post-war Europe under the Marshall Plan. At a conference several years ago, the reform process in Eastern Europe was compared first with post-war reconstruction and then with the reconversion of regions or industries in decline.1 Of the latter, we have plenty of examples, for instance, the shipbuilding industry in Europe or the coal, steel and textile sectors. Generally speaking, the transformation of these industries is a slow and painful process, usually at a high cost. Whereas post-war reconstruction was a process of building upon what existed, reconversion, by its nature, implies changing and perhaps destroying the existing structure, not building upon it. This is much harder to achieve. Which experience is the more relevant for Eastern Europe? In my opinion: reconversion. The discussion in Eastern Europe is not so much Blanchard O. “Panel discussion: Lessons for Eastern Europe today”, Postwar Economic Reconstruction and Lessons for the East Today, MIT Press, Cambridge MA, 1993. about rebuilding existing structures, but rather about replacing them by new ones; similar to the replacement of declining West European industries by new ones. The question is whether we can aid this reconversion process by transferring comparable amounts of money towards Eastern Europe as under the Marshall Plan. Transferring the equivalent of 2.5% of national incomes of the recipient countries, has been estimated to cost roughly $ 20 billion a year. The Bretton Woods institutions have of course been extending credits but on a smaller scale. By comparison, the annual flow of total official financing to Eastern Europe has been around $ 15 billion, some 25% below that which was transferred under the Marshall Plan. Total flows, however, including private financing, reached some $ 36 billion in 1996. From the recipient’s perspective, therefore, the amount of financing transferred to Eastern Europe is quite significant. From a donor’s perspective, on the other hand, the present effort still pales somewhat compared to the tremendous display of solidarity by the US after World War II. In this regard, we should remember that the US financed the entire Marshall Plan by itself. If industrial countries were to make a similar effort and transfer 1% of their GDP to Eastern Europe, aid flows to this region would amount to more than $ 170 billion a year, much more than the current $ 15 billion. This again illustrates the unique nature of the post-war US contribution. It is uncertain whether increasing the amount of official financing to Marshall aid standards would yield significant additional benefits. It could further facilitate support for required reforms, but to measure the marginal benefit of extra aid in these political terms is very difficult. In any case, it is critical that whatever programs are adopted, aid should be provided on the basis of actions taken rather than need. The achievements of the Marshall Plan suggest that the transformation process in Eastern Europe would be significantly enhanced by intensifying mutual cooperation in the area. Cooperation in the fields of trade, financial and monetary matters could become the engine of economic growth just as it was during the post-war boom. Between 1948–1952 trade among European countries increased more than 5 times as fast as European trade with other continents. One of the lessons of the post-war era is that trade can be the engine in a process of economic restructuring. At the same time, the post-war experience evinced the importance of foreign demand in underpinning a supply-side response. In other words, access for the East European countries to the markets of the European Community. The European Union has concluded “Europe Agreements” with ten Eastern European countries. These are important steps and they can be built upon further. Constructive mutual cooperation will be most conducive to a positive perception of the region’s stability, thereby helping attract investment. Cooperation could gain an added dimension in the future. Several Eastern European countries have already joined the OECD as members and are knocking on the door of the European Union. Although eventual EU membership is a process that will require some time, it is a realistic perspective. The European Union is in the process of completing a process of deepening cooperation, which will find its preliminary climax in the establishment of the euro. Subsequent to the creation of full monetary union we may expect the EU to turn its sights eastwards, leading to an ever more integrated Europe. Let me conclude by reaffirming that the Marshall Plan was an important part of the foundation for post-war European recovery. At the same time, Marshall aid was more than the transfer of money alone. The economic policy conditions attached to this aid constituted an essential element in the realisation of the reconstruction process. Like the US after World War II, the IMF has stepped into the transformation process of transition economies, albeit on a smaller scale in financial terms. In part, this may reflect the lower importance attached to the role of finance per se, and, in part, simply the lack of adequate donor funds forthcoming. Despite this, however, Eastern Europe is on the right track. And although EU membership is still some way off, the prospect of such membership and the economic cooperation and integration being pursued to achieve that membership, inspires confidence that the lessons of the Marshall Plan have indeed been taken to heart. | netherlands bank | 1,997 | 6 |
Speech by Mr. de Swaan, an Executive Director of the Netherlands Bank and Chairman of the Basle Committee on Banking Supervision, at the 14th Annual Meeting of the Latin American and Caribbean Banking Supervisory Organisations held in Santiago, Chile on 1/9/97. | Mr. de Swaan discusses the background, advantages and implementation of the core principles for effective banking supervision Speech by Mr. de Swaan, an Executive Director of the Netherlands Bank and Chairman of the Basle Committee on Banking Supervision, at the 14th Annual Meeting of the Latin American and Caribbean Banking Supervisory Organisations held in Santiago, Chile on 1/9/97. The banking system is sometimes compared to traffic. This comparison is justified for at least two reasons: first, the causes of traffic accidents are essentially the same around the world, just like the causes of banking crises. It is therefore not surprising that almost all countries adopt the same type of rules, like speed limits in the case of traffic, or some kind of limitation of risk exposures in the case of banking. A second similarity between banking systems and traffic is that with the increase of cross-border activity, such as air traffic, the need for harmonisation of national regulations has grown. The minimum requirements for banking supervision which the Basle Committee has recently developed in conjunction with supervisors in emerging markets are an important step in this direction. Today, I would like to discuss with you the background, advantages and implementation of these core principles. Background l. Banking crises in countries are no new phenomena at all. In this part of the world a number of countries experienced severe banking problems in the early 1980s. In some western countries, notably in the Scandinavian, the banking community also faced substantial difficulties, albeit of a different nature. Since the Mexico crisis of 1995, awareness among policy-makers of the potential damage that can result from banking problems has grown significantly. In emerging markets, banking problems often result in much deeper recessions than in industrialised countries. Generally, these economies are more vulnerable to banking problems because almost all financial intermediation is carried out by banks. Most industrialised countries are less dependent on banks, because the function of financial intermediation is also performed by institutional investors and well-developed capital markets. Since the Mexico crisis, it has also been recognised that the frequency of banking problems is significantly higher in emerging markets. Recent research has shown that 85% of the severe banking crises which have occurred in the past fifteen years concerned developing and transition economies. My explanation for this striking fact is that the factors which cause banking crises are generally more prevalent, but not essentially different in emerging markets than in industrialised countries. This basic idea is the rationale behind the common set of core principles I would like to discuss with you today. 2. But before that a short word on the way the principles have been developed because it shows an important development in the cooperation between the members of the Basle Committee and other countries. The principles were first drafted by a joint working group consisting of a number of Basle Committee members and representatives from 15 other countries. Subsequently a very lively exchange of views took place in a meeting in Basle in March of this year in which representatives of approximately 40 countries, including the chairmen of all regional groups, participated. To my satisfaction the consultation period following that meeting produced a large number of reactions, nearly all of them favourable. These reactions will be incorporated in the core principles. To endorse the final text of the principles, a similar meeting to the one in March will take place on September 10th in Basle. Two weeks later, in conjunction with the annual meeting in Hong Kong, the IMF and the Basle Committee will co-sponsor a conference to introduce the principles to as wide as possible an audience of Ministries of Finance and central banks. 3. As I said, the main rational behind the core principles has been the increased awareness among policy-makers that banking crises can aggravate recessions. Another reason for the formulation of core principles is the increased globalisation of economic activity. With the strong growth of trade and financial flows between national economies, banking problems in one country have much more potential to spread to other parts of the world. A specific form of globalisation concerns the increasing international activities of large banks. Policy makers generally welcome cross-border banking, because of the beneficial effects on the efficiency, liquidity and depth of financial markets. However, the internationalisation of banking also increases the risk of contagion of banking problems. In order to reduce this risk, the core principles pay special attention to the supervision of cross-border banking. On this subject, the most important message from the core principles is that home country supervisors should practise consolidated supervision over their internationally-active banks. In order to enable home country supervisors to fulfil this task most effectively, host country supervisors must share information with them about the local operations of foreign banks. Finally, the core principles state that banking supervisors must require the local operations of foreign banks to meet the same high standards as are required of domestic institutions. Advantages 4. You may wonder whether the core principles will really be able to reduce the severity and frequency of banking problems around the world. Let me try to answer this question by reviewing the main causes of banking crises and the way in which the core principles deal with these causes. One important cause of banking crises is macro-economic instability. High and variable inflation rates, booms and busts in economic activity and exchange rate volatility complicate credit assessments by banks. Moreover, during the expansion phase of a business cycle, there is often a tendency towards over-optimism and excessive lending by banks, which in turn can result in asset price bubbles. This factor can be regarded as the main cause of the current fragility of the Japanese financial sector. Thus, inadequate risk management by banks is frequently a crucial link between macro-economic instability and banking problems. Macro-economic instability is on average greater in emerging markets, reflecting less diversification and greater structural rigidities. Unsound fiscal and monetary policies can add further to this problem. As a consequence, the risks faced by banks in emerging markets tend to be higher. 5. The core principles formulate prudential regulations and requirements in order to promote a framework to control the risks inherent in banking. The application of this framework can limit the negative influence of macro-economic volatility on the soundness of the financial system. The requirements concerned cover capital adequacy, loan loss reserves, asset concentrations, liquidity, risk management and internal controls. Of this group of principles, I think those regarding risk management and internal controls deserve special attention. For example, core principles 12 and 13 state that banking supervisors must be satisfied that banks have in place risk management systems which accurately identify, measure, monitor and control market risks and all other material risks. Furthermore, banks are required to hold an adequate amount of capital against these risks. These principles reflect the growing recognition that banks bear the principal responsibility for adequate risk management themselves. The main task of supervisors is to set minimum standards and to monitor the policies and procedures through which banks control their risks. 6. I would like to emphasise that adequate risk management by banks can reduce but not eliminate the negative effects of macro-economic instability on the soundness of financial systems. But it is evident that a sound financial sector is an important precondition for macroeconomic stability. For instance, when macro-economic stabilisation calls for monetary tightening, concerns about the effect of higher interest rates on the loan portfolios of weak banks may delay policy action. In Mexico, this delay contributed to a sudden reversal of capital flows and a deep recession in 1995. These so-called feedback effects from financial to macro-economic instability underscore the need for the application of the core principles. 7. The second main cause of financial fragility is premature financial liberalisation. It is widely recognised that financial liberalisation promotes competition among banks, thereby improving the efficient allocation of financial resources in the long run. However, during the transition, bank managers and supervisors often lack the expertise to deal with the higher risks associated with the new activities in which their institutions get involved. This lack of experience increases the probability of banking crises. Moreover, increased competition from foreign banks often encourages domestic banks to finance riskier investments in order to keep up their earnings. This chain of events has unfolded not only in emerging economies, but also in well-developed Nordic countries and the United States. Policy makers have drawn an important lesson from these banking crises, namely that financial liberalisation should be preceded by a strengthening of risk management systems by banks. The core principles regarding risk management and internal controls which I have just discussed can serve as a guide for the supervision of the risk management systems adopted by banks. 8. The third culprit is government involvement in banking. One way in which government policy can undermine the soundness of banks is by means of the tax treatment of financial institutions. For example, tax systems which do not allow the deduction of loan loss provisions from taxable earnings reduce the incentive of banks to recognise these losses on a timely basis. A perhaps more damaging way of government involvement is the use of state banks to finance government expenditures at below market rates. This channel has two apparent advantages to the government; for one thing, it is cheap, at least in the short run. In addition, bank financing does not show up in the official measurements of the budget deficit, which reduces the possibilities for public scrutiny. Although state-owned banks are most prone to this kind of political exploitation, privately-owned banks can also function as quasi-fiscal agents, for example when they are forced to lend to particular sectors or industries. Obviously, these financing practices reduce the viability of banks in the medium and long term. 9. I would point out that, while political involvement in banking tends to occur more frequently in developing countries, it is not restricted to them. In South Korea and France, for example, recent banking problems seem to be linked at least in part to government involvement. However, in less wealthy countries the pressure on government funds is usually larger, which increases the temptation to turn to state banks for funding. The risk of government influence on banks in emerging markets is also larger, because state banks tend to control a much bigger share of banking assets. 10. Core principle l contains a description of the preconditions for effective banking supervision. In the context of problems related to government involvement, the following elements of this first principle seem particularly relevant. First, the explanation of core principle 1 says that each supervisory agency should possess operational independence to pursue a sound banking system free from political pressure. A second important precondition is that each supervisory agency should have adequate resources to meet the objectives set. These resources should be provided on terms that do not undermine the autonomy and independence of the supervisory agency. The emphasis of the first core principle on the independence of supervisory agencies is important, first of all because independent supervisors are in a better position to prevent political exploitation of banks. And secondly because it can limit forbearance in dealing with problems in individual banks. A number of banking crises could have been prevented or alleviated if the supervisory authorities would have had the independence and the instruments to intervene in a timely and adequate way. In addition, the appendix of the core principles explicitly mentions the need for supervisors to apply their supervisory methods in the same manner to government-owned commercial banks as to other commercial banks. The implementation of this advice should also reduce the opportunities for governments to use state banks as a source of cheap funding. ll. A related cause of banking problems is connected lending, which refers to loans extended to banks’ managers, shareholders or to parties connected to them. Just like loans to governments, loans to connected parties are often granted on a non-arm’s length basis and at below market rates. Another similarity with government involvement is that there is reason to believe that connected lending is a more serious problem in emerging than in advanced economies. The risks of connected lending encompass a lack of objectivity in credit assessment and undue concentration of credit risk. Core principle 10 explicitly addresses the problem of connected lending. This principle states that banking supervisors must have in place requirements that banks lend to related companies and individuals on an arm’s length basis, that such extensions of credit are effectively monitored, and that other appropriate steps are taken to control or mitigate the risks. Moreover, core principle 9 calls for prudential limits to restrict bank exposures to single borrowers or groups of related borrowers. If these principles are implemented on a global scale, they will raise a significant barrier against connected lending. 12. I now turn to a fourth set of causes of banking problems, that can be labelled inadequate corporate governance. This term refers to an absence of the right incentive structure for bank owners, managers, depositors and supervisors to show prudent behaviour. Perhaps the best way to throw light on these types of problems is by means of a well-known example, namely the downfall of the US savings and loans institutions. In the early 1980s, the supervisory authorities in the US sought ways to enable savings and loans institutions, which were generally in bad shape, to continue in business. The range of activities in which these institutions were permitted to engage was expanded, capital standards were relaxed and the level of deposit insurance was increased. As a consequence, many savings and loans institutions tried to grow out of their problems by investing in high-risk assets, such as property and so-called ‘junk bonds’. The point is that depositors were content to finance these risky investments, because of the generosity of the US deposit insurance at that time. Moreover, with low capital standards, equity holders or owners had little to lose. Finally, banking regulation in the US did not penalise bank managers for excessive risk-taking and allowed supervisors to delay corrective measures. When the property market started to collapse in the mid-eighties, many savings and loans institutions became insolvent, which eventually resulted in a loss of at least $150 billion for the US taxpayers. In order to prevent similar banking problems, bank regulation in advanced and emerging economies must incorporate the right incentives for all participants in the banking system. 13. If you look at the core principles you will find various sorts of incentives in this field. Firstly, principle 3 requires that the licensing process should consist of, among other things, an assessment of the bank’s ownership structure as well as of its directors and senior management. The explanation of this principle makes clear that if the supervisory agency doubts the integrity and standing of a bank’s owner or manager, it should have the authority to prevent a specific ownership structure or the appointment of a certain bank manager. In this way, past imprudent behaviour of bank owners and managers is penalised by excluding them from responsible functions in the banking sector. 14. Secondly, core principle 6 prescribes that capital requirements for banks should be no less than those established in the so-called Basle Capital Accord. The Basle Accord sets minimum capital requirements of 8% of the risk-adjusted assets of banks. Bank capital essentially serves three functions; it is a base for further growth, it provides a cushion against exceptional losses and it promotes better governance. The governance function relates to the fact that if shareholders have more money at stake, they have stronger incentives to ensure that banks are managed in a safe and sound manner. Regarding the loss-absorption function of capital, it must be stressed that the Basle capital requirements are considered a minimum standard. In emerging economies, higher minimum capital requirements seem appropriate, because banks there usually operate in a more volatile and therefore riskier environment. I therefore welcome the initiatives of the supervisory authorities in Argentina and Colombia, who have already raised their minimum capital requirements to 11.5 and 9% respectively. 15. As the example of the US thrift crisis showed, the design of deposit insurance deserves special attention. The second appendix of the core principles contains a balanced view on this delicate issue, which can be summarised as follows: On the one hand, deposit insurance is desirable because it limits the effect that problems at one bank might have on other banks. This obviously increases the stability of the financial system. However, deposit insurance can also increase the risk of imprudent behaviour by banks, because depositors will be less inclined to withdraw funds even if the bank pursues high-risk strategies. Therefore, governments should incorporate mechanisms in the system of depositor protection that prevent excessive risk-taking by banks. This can for example be achieved by a partial deposit insurance, so that depositors still have funds at risk. Another method is withholding deposit insurance from large, institutional investors. The precise form of such a program should be tailored to the specific circumstances of each country. 16. The last item on my list of crisis factors is a poor market infrastructure. It is widely accepted that imperfect accounting systems, limited disclosure practices and inadequate legal frameworks can hinder effective banking supervision and market discipline. Again, these deficiencies are more pronounced in developing countries, but deserve continuous efforts for improvement in developed countries as well. The first problem concerns the accuracy of accounting systems. In many countries, the accounting standards for classifying bank loans as non-performing are not tight enough to prevent banks from making bad loans look good. If non-performing loans are systematically understated and are not properly provided against, figures about profitability and bank capital become meaningless. On the disclosure side, the ability to distinguish healthy from unhealthy banks is often hampered by the absence of financial statements on a consolidated basis. Differences in accounting standards across countries and the absence of serious penalties for publishing inaccurate information can also obstruct a meaningful assessment of banks. Finally, the legal system sometimes impedes prudent banking, for example when it hinders banks to seize collateral behind delinquent loans. 17. Core principle 21 relates to the information requirements of bank organisations, which is an important part of the market infrastructure. This principle states that banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices. This information should enable supervisors to obtain a true and fair view of the financial condition and profitability of banks. Banks should also publish financial statements that fairly reflect their condition on a regular basis. Moreover. the explanation of this principle prescribes that if a bank provides false or misleading information, supervisory action or criminal prosecution should be taken against the individuals involved and the institution. 18. Having elaborated on the contribution that the core principles can make towards alleviating the main causes of banking problems, I think it is now time for an overall assessment. First of all, it would be an illusion to think that a global application of the core principles can by itself prevent financial crises occurring in the future. As I already mentioned with regard to capital standards, the core principles contain minimum requirements. Individual countries, particularly those in emerging areas, should therefore consider to what extent they need to supplement the core principles with requirements addressing particular risks of their financial systems. Moreover, banking supervision is a dynamic function that needs to respond to changes in the marketplace. Therefore, the principles will need periodic, but not necessarily frequent, refinement and readjustment. Finally, the core principles provide guidelines for bank regulation. I hope my description of the causes of financial crises has made clear that financial stability not only requires prudential behaviour by banks, but also macro-economic stability, a transparent government budget and an adequate legal framework. In these areas, which all have to do with government policy, the World Bank and the International Monetary Fund can make an important contribution to financial stability. Implementation 19. In the near future, the implementation of the core principles should be a top priority. Of course the main burden of this lies with the governments of the individual countries. I don’t underestimate the wide-ranging legal, infrastructural and educational changes the implementation of the principles call for in a large number of countries. Every country should put in place an ambitious program with clear time-frames for the implementation. It is obvious that the IMF and the World Bank should have a leading role with regard to monitoring the implementation of the core principles. The main argument for this structure is that the international financial institutions already send missions to almost all countries in the world. However, it is generally acknowledged that the Basle Committee possesses great expertise in bank regulation. I therefore plead for a model in which the Basle Committee, the IMF and the World Bank each and together assist countries in realising financial stability in their respective fields of competence. In this model, the IMF and the World Bank are primarily responsible for creating a sound environment for banking, which is highly dependent on viable government policies. As part of the assessment of government policies, these institutions will of course also pay attention to the quality of bank supervision. 20. The Basle Committee is primarily responsible for the amendment and interpretation of the principles and will review compliance with the principles at the International Conference of Banking Supervisors in October 1998 and bi-annually thereafter. The Basle Committee can furthermore make a major contribution towards the implementation of the principles by offering technical assistance and courses to supervisors in emerging countries. In this respect, banking and traffic again look alike. It is all a matter of knowing your responsibility; if you do not make a timely agreement about who drives home, you both end up drinking too much. | netherlands bank | 1,997 | 9 |
Speech by the President of the Netherlands Bank, Dr. A.H.E.M. Wellink, on the occasion of the European Summer Institute Conference entitled "The German Economy and the European Union" held in Berlin on 10/9/97. | Mr. Wellink discusses different forms of economic policy co-ordination in EMU Speech by the President of the Netherlands Bank, Dr. A.H.E.M. Wellink, on the occasion of the European Summer Institute Conference entitled ‘The German Economy and the European Union’ held in Berlin on 10/9/97. Introduction After these warm words of welcome, I have the honour to kick off this conference on the German economy and the European Union. The subject of my speech is the implications of Economic and Monetary Union (EMU), and in particular the requirements which EMU imposes on economic policy co-ordination. This topic is not new. The importance of economic policy coordination in a monetary union was already spelled out in 1970 in the Werner Report, which can be considered as the prelude to the first concrete attempt to design an economic and monetary union in Europe. Indeed, the Werner Committee advocated the establishment of a European economic government. History repeats itself, it seems, since the issue of co-ordination has been put anew on the agenda by the European Council, meeting in Amsterdam on 16 and 17 June of this year. I will take the opportunity to express my views on economic policy co-ordination in stage three of EMU. Economic policy co-ordination is a very broad concept and therefore sometimes the cause of much confusion. In the eyes of some people, the mere exchange of views on economic policies can be considered policy co-ordination. To others, co-ordination is equivalent to harmonisation of policies and relinquishing some sovereignty to the supranational level. A scholar in European integration will argue differently. In his opinion, policy co-ordination implies that policy makers take into account the repercussions of their actions on others, but remain responsible. In my view, economic policy co-ordination can be compared with an orchestra: it is difficult enough for a musician to learn how to play an instrument, let alone to play in an orchestra. My speech is structured as follows. I will discuss four different forms of economic policy co-ordination in EMU which all require different intensities of co-ordination: i) fiscal policy co-ordination among EU member countries, ii) the mix of fiscal and monetary policy, iii) the implementation of exchange rate policies, and iv) the co-ordination of labour market policies. The implementation of exchange rate policy in EMU is perhaps the odd one out. In contrast to the other three forms of co-ordination, there is only one single policy, that is the exchange rate policy of the euro area as a whole. But different institutions are responsible for making it work. Before discussing these different forms of policy co-ordination, however, I will provide an intellectual framework for the discussion by briefly outlining the limitations of economic policy-making as such. In other words, one cannot discuss how to play a symphony before knowing how to play the instruments. How to play an instrument? Traditionally, economists distinguish between - at least - two instruments of economic policy-making: fiscal and monetary policy-making. As far as fiscal policy is concerned, three main functions can be distinguished. First, the allocation function or the provision of public goods. Second, the redistribution function, or the adjustment of income and wealth to what society considers a ‘fair’ distribution. Third, the stabilisation function, or the use of fiscal policies to stabilise the business cycle. When discussing policy co-ordination in the context of EMU, the focus is on the latter function of fiscal policy, which does not imply that there is no role for the other functions. In the literature, the restrictions of the stabilisation function have come to the fore. As we have learnt from the experiences in the 1970s, fine-tuning has its difficulties, because of the time lag between the decision of measures and its effects, and - even more important - because of the lack of detailed information necessary for this kind of policy. Apart from the fine-tuning problem, there is the potential problem of time inconsistency, since a government may be tempted to pursue an inconsistent policy for the sake of short-term gains, for example in the run-up to elections. Under these circumstances, it is tempting to increase expenditure or reduce taxes. In other words, playing -2the fiscal violin is not a piece of cake. Indeed, it takes good musicians years to learn to master the vibrato of this instrument. Pursuing monetary policy for the sake of short-term stabilisation is even more complicated than in the case of fiscal policies. Although monetary policy-making is not so much hampered by the lack of detailed and recent information, the time lag problem is even severe than in the field of fiscal policies, especially because in monetary policies time lags may differ substantially from case to case. The time lag problem is linked with the fact that the transmission process of monetary policy in the real economy is very complicated, and in many cases not fully understood. The famous black box monetary economists talk about. Finally, the problem of time inconsistency applies to monetary policy as well. Monetary authorities may be tempted to create unexpected inflation to stimulate the economy in the short run. Eventually, economic agents will revise their expectations and the result will not be a higher growth rate, but a higher rate of inflation instead. Hence, playing the monetary piano is perhaps even more difficult than playing the fiscal violin. Fiscal policy co-ordination Against this background, let’s turn to discussing economic policy co-ordination in the context of EMU, starting with the co-ordination of fiscal policies. As I have already argued, playing the fiscal violin is very difficult. By definition, it is even more difficult to prevent fifteen EU fiscal violinists to play out of tune. Do my critical observations rule out any co-ordination, at any time? No, under certain special circumstances, fiscal policy co-ordination can be welfare-improving. This assertion is based on a conventional game-theoretical model: fiscal policy-makers maximise independently of each other - a welfare function in which the spillovers of their actions to other players are neglected. The joint welfare of the economies involved increases if fiscal policies are subsequently co-ordinated and policy makers take into account the consequences of their actions on the other players of the game. However, given the caveats mentioned, we have to conclude that the scope for active fiscal policy-making is limited. Only in very specific circumstances, the Ecofin Council should consider the possibility of fiscal policy co-ordination. For instance, when there is a risk of overheating or a common recession, or when the euro area is faced with a persistent balance-of-payments deficit. The basis for the co-ordination of fiscal policies is the multilateral surveillance procedure provided for in Article 103 of the EC Treaty. In my view, it is possible to elaborate the so-called broad guidelines of the economic policies of the Member States, which the Ecofin Council adopts in conformity with Article 103, and include fiscal policy co-ordination. So far, these broad guidelines have been very broad indeed. In the future, they should address individual countries more specifically. When a Member State does not comply with the broad guidelines, specific policy recommendations can, and should, be given to the Member State concerned. When appropriate, these recommendations should be published. The multilateral surveillance laid down in Article 103 allows for this. Indeed, this procedure provides sufficient additional scope for fiscal policy co-ordination that has not yet been applied to the extent possible. It should be emphasised that this kind of fiscal policy co-ordination should fit within the limits set by the pact for stability and growth. This pact requires Member States to strive for a budgetary position which is on average in balance or in surplus. It prevents unduly lax fiscal policies and, if they might occur, provides an effective instrument for putting an end to an excessive deficit. In other words, the stability pact prevents spillovers from lax fiscal policies to the interest rate level of the euro area as a whole and to the single monetary policy of the ECB in particular. The policy mix Let’s suppose we have more or less managed to get the fiscal violins to play in tune. Now we want to introduce the monetary piano. We have two possibilities there. The easy option is to instruct the monetary piano player to play always the same notes. Whatever happens. This is equivalent to economic policy co-ordination in an environment of fixed exchange rates. In the case of -3fixed exchange rates, there is no room for monetary fine-tuning, since monetary policies are determined by exchange rate policies. By definition, the burden of adjustment falls on budgetary policies. Let me illustrate this by giving the example of my own country. Monetary conditions in the Netherlands are currently relatively easy, taking into consideration credit expansion, the business cycle, asset prices and the inflation rate. Since Dutch monetary policy is first and foremost directed towards maintaining the guilder-Deutsche Mark peg, other policies should be geared to preventing the economy from overheating. I would hope in particular that the fiscal authorities decide to reduce the budget deficit further, which currently stands at about 2% of GDP, and thereby approach balanced budget within the next four years, that is during the next term of government. Denmark will achieve a budget surplus this year already. The second option is to give our monetary piano player the opportunity to tune in to the fiscal violins. One of my all-time favourites is Tschaikovsky’s violin concerto. A splendid combination of piano and violin, but one of the most difficult concertos to play, I am told. Indeed, this is equivalent to economic policy co-ordination in an environment of flexible exchange rates. In the case of flexible exchange rates, the desired policy mix can be obtained either by adjustment on the fiscal, or on the monetary side. Compared to the fixed exchange rate case, this is a much more complicated situation. And this is the situation which will apply in EMU. Although it is, theoretically speaking, possible to share the burden of adjustment between both fiscal and monetary policies, in the case of EMU it was decided that monetary policies should be first and foremost aimed at achieving price stability. In addition, the European Central Bank is obliged to support the general economic policies of the Community, but this task is clearly of secondary nature, since it is stated in the EC Treaty that the ECB shall do so ‘without prejudice to the objective of price stability’. In practice, therefore, the burden of adjustment will fall on budgetary policies. In my view, this was a correct decision, since for the reasons stated earlier, monetary policy should not be geared to short-term goals, like stabilising the business cycle. Nevertheless, it cannot be denied that monetary and fiscal policy are interdependent. This notion is clearly reflected in the Treaty. For instance, the excessive deficit procedure explicitly aims at preventing spillovers from lax fiscal policies to the single monetary policy of the ECB. The interdependence of monetary and fiscal policies makes a policy dialogue between ECB and Ecofin Council highly desirable. This dialogue should take place in a co-operative atmosphere, respecting different responsibilities and restrictions, of which the independence of the ECB is the most important one. The EC Treaty already offers several routes for this dialogue. The President of the Ecofin Council is entitled to participate in the meetings of the Governing Council of the ECB. Although he has no right to vote, he is allowed to submit motions for deliberation to the Governing Council. A second channel for this policy dialogue is the participation of the President of the ECB in the meetings of the Finance Ministers when the latter discuss issues of relevance to the ECB. Moreover, I expect that the President of the ECB will also take part in the informal sessions of the Ecofin Council. The Dutch model of policy dialogue between the central bank and the Minister of Finance might serve as an example for the co-ordination of the policy mix in the third stage of EMU. The current Dutch Bank Act allows the Minister of Finance to give directions to the central bank, a possibility which has never been used and will be cancelled in the new Bank Act, to become effective in 1998. In other words, the Dutch central bank is de facto fully independent. Nevertheless, there is an intensive dialogue between the Bank and the Ministry of Finance. The President of the Netherlands Bank and the Minister of Finance hold regular, bi-weekly luncheon sessions to discuss informally - topics of relevance for both the central bank and the Ministry of Finance. Moreover, top-level officials of both institutions meet regularly and there are also good day-to-day working relationships between employees of both the central bank and the ministry. In a way, this model of informal policy dialogue has increased the independent position of the Dutch central bank. Indeed, the frankness and openness of the discussions have increased the mutual respect and understanding. -4Exchange rate policy Now let me turn to the exchange rate policy of the euro area. The odd one out, as I mentioned in my introductory remarks. Unlike fiscal policy co-ordination or co-ordination of the policy mix, there is only one single exchange rate policy. However, different institutions have their responsibilities in this area. One can compare it with a piano played by two people: but each should play the same tones at the same time. Therefore, I consider it important to discuss this issue as well. The exchange rate policy more or less constitutes a common responsibility of the Ecofin Council and the ECB. Article 109, paragraph 2 of the Treaty stipulates that the Ecofin Council, acting by a qualified majority either on a recommendation from the Commission after consulting the ECB or on a recommendation from the ECB, may formulate general orientations for the exchange rate policy of the euro area. The latter shall be without prejudice to the primary objective of the ECB to maintain price stability. I firmly believe that the Ecofin should exercise due care in making use of its competence to formulate general orientations. A German saying applies here: In der Beschränkung zeigt sich erst der Meister. The reason for this reservedness, in my opinion, is that the exchange rate of a currency is the consequence of monetary and economic policies. In other words, if monetary policy is directed towards price stability, the public finances of a country are sound, and economic policies are aimed at an efficient functioning of markets, the exchange rate of a currency will not be an issue. However, under exceptional circumstances major misalignments of the nominal exchange rate might occur. In this case, the Ecofin Council might consider the formulation of general orientations for the exchange rate policy. If they are formulated, general orientations should, in my view, not only be directed at the ECB. As exchange rate developments are the result of the full set of economic policies which have been pursued, general orientations should also involve a thorough discussion on fiscal as well as other economic policies. Misalignments may also be the result of policy actions outside the euro area. Hence, the implementation of general orientations should also involve a dialogue with non-EU policy makers. Article 109, paragraph 4 of the Treaty explicitly provides for this possibility: the Ecofin Council shall decide on the position of the Community at the international level as regards issues of particular relevance to EMU and decide on its representation in international meetings. The Treaty stipulates that the general orientations should be without prejudice to the primary objective of the ESCB to maintain price stability. In my view, it is always up to the ECB to decide how to act if the Ecofin Council has formulated general orientations. This is the only justified interpretation taking into consideration the Treaty provisions on central bank independence and the objective of the ESCB. In the exceptional case of a formal exchange rate mechanism involving non-EU countries, the Treaty stipulates that the Council is obliged to take a decision after consulting the ECB in an endeavour to reach a consensus consistent with the objective of price stability. Eventually, the Ecofin Council may impose an exchange rate arrangement on the System. However, it is my reading of the Treaty that the ECB should pursue its primary objective - maintaining price stability - even under these circumstances. In other words, the ECB is allowed to suspend exchange market interventions or to trigger realignment discussions, if the exchange rate arrangement conflicts with its primary objective. This was agreed upon in the context of the exchange rate arrangement between the euro area and the ‘pre-ins’, the ERM-II. Co-ordination of labour market policies A last form of economic policy co-ordination has been given much attention in the Treaty of Amsterdam, the co-ordination of labour market policies. The amended Treaty contains a new chapter on employment. Moreover, the European Council has adopted a Resolution on growth and employment. It has been rightly decided not to come to a harmonisation of national labour market policies. The structure and functioning of labour markets in the EU differ from one country to another and require a decentralised approach. Co-ordination of labour market policies ensures a continuous -5dialogue and exchange of information on policies embarked upon by the Member States. Indeed, policy co-ordination may lead to peer pressure, reinforcing labour market reforms. The latter are of crucial importance for the functioning of EMU. As it will no longer be possible to alter the nominal exchange rate if a country is faced with persistent and structural imbalances, other adjustment mechanisms have to be fostered. Do we need a conductor. or the ‘gouvernement économique’: antinode or dialogue? I can already hear you argue that it is easy to facilitate economic policy co-ordination by hiring a conductor for our orchestra. Indeed, it has been suggested that economic policy co-ordination should be supported by the establishment of a formal Stability Council or ‘gouvernement économique’. This economic government would consist of the Ministers of Finance of the participating Member States only. Unfortunately for the proponents of such an institution, there is no Treaty base for its establishment. In my view, however, there is no reason to complain: we already have our Leonard Bernstein. All in all, the Treaty offers a well-balanced framework for policy co-ordination. The Ecofin Council is the centre piece for this policy co-ordination. The Ministers of Finance of the ‘outs’ are full members of the Ecofin Council and are allowed to participate in the discussions in the Council on policy co-ordination matters. Their participation makes sense, because economic developments in non-participating countries will have a major impact on developments in the euro zone. However, as they are still outside the euro area, they are not allowed to vote in some cases. Nonetheless, the Treaty does not rule out ad hoc, informal meetings for participating countries only. Such meeting could be very useful. But instead of labelling these gatherings as meetings of the Stability Council, I would consider them as meetings of an informal Stability Forum. This would enable members of the euro zone to informally prepare decisions on issues to be decided by the ‘ins’, such as the conversion rates of the ‘second wave’ of participants, or the imposition of sanctions on participating Member States with an excessive deficit. Finally, I would like to emphasise that a Stability Council of participating Member States can only be of a temporary nature, as in the end all EU member countries are to join EMU. Final Remarks To summarise my views, the existing institutional framework laid down in the Treaty is sufficient for this purpose. The multilateral surveillance procedure, laid down in Article 103 of the Treaty, provides an adequate, but at present not fully used, framework for fiscal policy co-ordination. The policy dialogue between ECB and Council of Ministers has also been provided for in the Treaty, for example by the presence of the ECB president and the Ecofin chairman at each other’s meetings. Moreover, the Treaty of Amsterdam has introduced the possibility of co-ordination of labour market policies. Finally, the Treaty also provides for an intensive dialogue between ECB and Ecofin Council on the exchange rate policy of the euro area, without prejudice to the former’s primary objective to maintain price stability. In this context, it is our current challenge to work out effective ways to give form and shape to economic policy co-ordination. The ‘M’ of EMU requires an ‘E’ with real substance. We should, however, not cause E and M to conflict by establishing a formal Stability Council. This would also give rise to the impression of a kind of elite group of ‘ins’, which we should avoid. Wouldn’t it be rather strange to have a British style Members-only club from which the British (for the time being?) are excluded? Economic policy co-ordination is indeed a difficult subject. It should evade both the Scylla of a lack of co-ordination, and the Charibdis of too much of it. A lack of co-ordination would lead to a sub-optimal economic performance. However, too much of a good thing isn’t good either: -6overregulation must be avoided, and the wrong kind of co-ordination could even be dangerous. Or, to return to our orchestra, we can’t just sit back and let our musicians play as they see fit. Judging the quality of the music by waiting for the reaction of the audience, is not a good approach. If we are hooted for our performance, it will be too late. | netherlands bank | 1,997 | 10 |
Speech by Mr. Tom de Swaan, an Executive Director of the Netherlands Bank, at the conference 'Financial Services at the Crossroads: Capital Regulation in the 21st Century' in New York 27/2/98. | Mr. de Swaan addresses capital adequacy regulation and the road ahead Speech by Mr. Tom de Swaan, an Executive Director of the Netherlands Bank, at the conference ‘Financial Services at the Crossroads: Capital Regulation in the 21st Century’ in New York 27/2/98. Introduction 1. Ladies and gentleman, it is a great pleasure for me to be here and to participate in the discussion on the future of capital adequacy regulation. I would like to compliment the organizers of this conference on the programme they have set up, covering many relevant topics, and the range of experts they have been able to bring together. In my address, as I am sure you would expect, I will approach the issues from a supervisory perspective. Most of the questions that arise are quite complicated and many issues will require careful review. So do not at this stage expect me to provide clear answers on specifics. I do hope to be fairly explicit, however, on some of the more general issues at stake, in particular on the level of capital adequacy required for prudential purposes. In other words, my address today should be seen as part of the exploratory process that should precede any potentially major undertaking. Starting point 2. Obviously, our starting point is the Capital Accord of 1988. It is commonly acknowledged that the Accord has made a major contribution to international bank regulation and supervision. The Accord has helped to reverse a prolonged downward tendency in international banks’ capital adequacy into an upward trend in this decade. This development has been supported by the increased attention paid by financial markets to banks’ capital adequacy. Also, the Accord has effectively contributed to enhanced market transparency, to international harmonization of capital standards and thus, importantly, to a level playing field, within the G-10 countries and elsewhere. Indeed, virtually all non-G-10 countries with international banks of significance have introduced, or are in the process of introducing, arrangements similar to those laid down in the Accord. These are achievements that need to be preserved. 3. It is often said that the Accord was designed for a stylized (or simplified) version of the banking industry at the end of the 1980s and also that it tends to be somewhat rigid in nature. Elements, by the way, that have enabled it to be widely applicable and that have contributed to the greater harmonization. Since 1988, on the other hand, banking and financial markets have changed considerably. A fairly recent trend, but one that clearly stands out, is the rapid advances in credit risk measurement and credit risk management techniques, particularly in the United States and some other industrialized countries. Credit scoring, for example, is becoming more common among banks. Some of the largest and most sophisticated banks have developed credit risk models for internal or customer use. Asset securitization, widespread already in US capital markets, is growing markedly elsewhere and the same is true for the credit derivative markets. 4. Against this background, market participants claim that the Basle Accord is no longer up-to-date and needs to be modified. As a general response, let me point out that the Basle Accord is not a static framework, but is being developed and improved continuously. The best example is, of course, the Amendment of January 1996 to introduce capital charges for market risk, including the recognition of proprietary in-house models upon the industry’s request. The Basle Committee neither ignores market participants’ comments on the Accord, nor denies that there may be potential for improvement. More specifically, the Committee is aware that the current treatment of credit risk needs to be revisited so as to modify and improve the Accord, where necessary, in order to maintain its effectiveness. The same may be true for other risks. but let me first go into credit risk. Objectives 5. Before going on our way, we should have a clear idea of what our destination is. One of the objectives for this undertaking is, at least for supervisors, that the capital standards should preferably be resilient to changing needs over time. That is, ideally, they should require less frequent interpretation and adjustments than is the case with the present rules. Equally desirable is that capital standards should accurately reflect the (credit) risks they insure against, without incurring a regulatory burden that would ultimately be unproductive. Substantial differences between the risks underlying the regulatory capital requirements and the actual credit risks would entail the wrong incentives. These would stimulate banks to take on riskier loans within a certain risk category in pursuit of a higher return on regulatory capital. In order to obtain a better insight into these issues, banks’ methods to determine and measure credit risk and their internal capital allocation techniques should be investigated. In doing so, however, we should not lose sight of the functions of capital requirements [as discussed in the preceding session]. 6. Capital requirements foster the safety and soundness of banks by limiting leverage and by providing a buffer against unexpected losses. Sufficient capital also decreases the likelihood of a bank becoming insolvent and limits - via loss absorption and greater public confidence - the adverse effects of bank failures. And by providing an incentive to exercise discipline in risk-taking, capital can mitigate moral hazard and thus protect depositors and deposit insurance. Admittedly, high capital adequacy ratios do not guarantee a bank’s soundness, particularly if the risks being taken are high or the bank is being mismanaged. Therefore, supervisors consider a bank’s capital adequacy in the context of a host of factors. But the bottom line is that capital is an important indicator of a bank’s condition, also for financial markets, and minimum capital requirements are one of the essential supervisory instruments. Guiding principles 7. Therefore, it should be absolutely clear that, when it assesses the treatment of credit risk, the Basle Committee has no intention whatsoever of reducing overall capital adequacy requirements, maybe even the contrary. Higher capital requirements could prove necessary, for example, for bank loans to higher-risk countries. In fact, this has been publicly recognized by bank representatives in view of the recent Asian crisis. More generally, we should be aware of the potential instability that can result from increased competition among banks in the United States and European countries in the longer run. And we should not be misled by the favourable financial results that banks are presently showing, but keep in mind that bad banking times can - and will - at some point return. In those circumstances, credit risk will turn out to be inflexible, difficult to manage and undoubtedly the primary source of banks’ losses. Absorption of such losses will require the availability of capital. A reduction of capital standards would definitely not be the right signal from supervisors to the industry, nor would it be expedient. 8. Of course, I am aware of the effects of capital standards on the competitiveness of banks as compared to largely unregulated non-bank financial institutions, like the mutual funds and finance companies in the United States. Admittedly, this is a difficult issue. On the one hand, too stringent capital requirements for banks would impair their ability to compete in specific lending activities. On the other hand, capital standards should not per se be at the level implicitly allowed for by market forces. Competition by its very nature brings prices down, but, alas, not the risks. If competitive pressures were to erode the spread for specific instruments to the point where no creditor is being fully compensated for the risks involved, prudent banks should consider whether they want to be involved in that particular business in the first place. It is therefore up to supervisors to strike the optimal balance between the safety and soundness of the banking system and the need for a level playing field. In the longer run, efforts should be made to harmonize capital requirements among different institutions conducting the same activities, or at least to bring them into closer alignment. 9. Another principle that the Basle Committee wants to uphold is that the basic framework of the Capital Accord, i.e. minimum capital requirements based on risk-weighted exposures, has not outlived its usefulness. Put differently, it should be maintained as much as possible. The main reason is that this system of capital requirements applies - and will continue to apply - to the large majority of G-10 banks and a fortiori to banks elsewhere. Precisely because the Capital Accord is relatively simple, the framework is useful for banks and their supervisors in emerging market countries, and contributes to market transparency. 10. At the same time, it should be acknowledged that the current standards are not based on precise measures for credit risk, but on proxies for it in the form of broad categories of banking assets. Indeed, banks regularly call for other risk weightings of specific instruments. In order to obtain more precise weightings, the Basle Committee is willing to consider less arbitrary ways to determine credit risks. But it is unrealistic to expect that internationally applicable risk weightings can be established, that accurately reflect banks’ risks at all times and under all conditions. Compromises in this respect are inevitable. Credit risk models 11. In the longer run, a way out may be to refer to banks’ own methods and models to measure credit risk, under strict conditions analogous to the treatment of market risks. At present, I would describe credit risk models as still being in a development stage, although the advances that some banks have made in this area are potentially significant. Ideally, as sound credit risk models bring forward more precise estimates of credit risk, these models will be beneficial for banks. Models can be used in their commercial operations, e.g. in pricing, in portfolio management or performance measurement, and naturally in risk management. The quantification that a model entails implies a greater awareness and transparency of risks within a bank. More precise and concise risk information will enhance internal communication, decision-making and subsequent control of credit risk. Also, models enable banks to allow for the effects of portfolio diversification and of trading of credit risks or hedging by means of credit derivatives. So, it can be assumed that a greater number of banks will introduce credit risk models and start to implement them in their day-to-day credit operations, once the technical challenges involved in modelling have been solved. 12. The more difficult question is whether credit risk models could be used for regulatory capital purposes, similar to the way that banks’ internal models for market risk are already being recognized. As should be clear from what I have just said, credit risk models can have advantages from a prudential point of view. For this reason, the Committee is conscious of the need not to impede their development and introduction in the banking industry. However, there are still serious obstacles on this road. Firstly, credit risk models come with substantial statistical and conceptual difficulties. To mention just a few: credit data are sparse, correlations cannot be easily observed, credit returns are skewed and, due to the statistical problems, back testing in order to assess a model’s output may not be feasible. Clearly, there are model risks here. Secondly, if models were to be used for regulatory capital purposes, competitive equality within the banking industry could be compromised. Because the statistical assumptions and techniques used differ, it is very likely that credit risk models’ results are not comparable across banks. The issue of competitive equality would be complicated even further by the potential differences in terms of required capital between banks using models and banks using the current approach. Thirdly and most importantly, a credit risk model cannot replace a banker’s judgment. Models don’t manage. A model can only contribute to sound risk management and should be embedded in it. This brings me to conclude that if credit risk models were to be used for regulatory capital purposes, it is highly unlikely that they will be judged in isolation. Supervisors will almost certainly also wish to carefully examine the qualitative factors in a bank’s risk management. Market risk - pre-commitment approach 13. Let me now make a short detour and discuss the supervisory treatment of risks other than credit risk. First market risk. Although the internal models approach was introduced only recently, research work is going on and possible alternatives to this approach are being developed. The Federal Reserve, for instance, proposed the pre-commitment approach [discussed yesterday]. Its attractive features are that it incorporates a judgement on the effectiveness of a bank’s risk management, puts greater emphasis on the incentives for a bank to avoid losses exceeding the limit it has pre-determined and reduces the regulatory burden. In my opinion, however, under this approach, too, a bank’s choice of a capital commitment and the quality of its risk management system still need to be subject to supervisory review. And there are a number of other issues that are as yet unsolved, e.g. the comparability across firms as the choice of the pre-commitment is subjective, the role of public disclosure and the supervisory penalties, which are critical to the viability of the approach. For these reasons, international supervisors await with interest the results of the New York Clearing House pilot study. Other risks 14. Now, let me turn to the other risks. If one leaves aside the recent Amendment with respect to market risks, it is true to say that the Capital Accord only deals explicitly with credit risk. Yet, the Accord provides for a capital cushion for banks, which is meant to absorb more losses than just those due to credit risks. Therefore, if the capital standards for credit risk were to be redefined, an issue that cannot be avoided is how to go about the other risks. Interestingly, awareness of, for instance, operational, legal and reputational risks among banks seems to be increasing. Some banks are already putting substantial efforts into data collection and quantification of these risks. Not surprisingly then that the Basle Committee will also be considering the treatment of the risks that are at present implicitly covered by the Accord, such as those just mentioned and possibly including interest rate risk. In this process, it will be important to distinguish between quantifiable and non-quantifiable risks and their respective supervisory treatment. More specifically, the Committee will have to consider whether it should stick to a single all-encompassing capital standard embracing all risks, including market risks, or to a system of capital standards for particular risks, i.e. the quantifiable ones, in combination with a supervisory review of the remaining risk categories. From a theoretical point of view, one capital standard might be preferable, since risks are not additive. Given the present state of knowledge, however, one all-encompassing standard for banking risks that takes account their interdependencies, still seems far away. As the trend thus far has been towards the development of separate models for the major quantifiable risks, a system of capital standards together with a supervisory review of other, non-quantifiable risks, seems more likely. Conclusion 15. Let me conclude. The overall issue of this conference, particularly of this session, is where capital regulation is heading. In my address, I have argued that, as supervisory objectives are unchanged, a reduction in banks’ capital adequacy would not be desirable. Neither is there a cause for fundamental alterations in the basic framework of the Capital Accord. At the same time, the Basle Committee is committed to maintaining the effectiveness of capital regulation and willing to consider improvements, where possible. In this regard, the advances made by market participants in measuring and modelling of credit and other risks are potentially significant and might at some point be incorporated into capital regulation. But before we reach that stage, there are still formidable obstacles to be overcome. | netherlands bank | 1,998 | 3 |
Speech by the President of the Nederlandsche Bank, Dr A.H.E.M. Wellink, at the meeting of the Nederlandse City Lunches in London on 16/6/98. | Mr. Wellink looks at the United Kingdom and EMU Speech by the President of the Nederlandsche Bank, Dr A.H.E.M. Wellink, at the meeting of the Nederlandse City Lunches in London on 16/6/98. Introduction Britain has a love-hate relationship with Europe. Love, because the UK, too, favours a powerful Europe generating peace and free trade relations worldwide. At the same time, however, Britain has always been in two minds about its own role, opposed as it is to a federal Europe, where national sovereignty is curbed. It is not for nothing that Churchill did not envisage his own country as part of a united Europe at that time. The relationship between the United Kingdom and Europe is complicated further by the existence of a third party: the United States. The United States sometimes seems a more attractive partner. It is always easier, in a relationship, be it between states or between husband and wife, to operate with someone from one’s own background, in this case Anglo-Saxon, than with a partner from a totally different culture. All told, however, the British seem to be favouring Europe. Newt Gingrich, the Chairman of the US House of Representatives, is wrong. He has said that Britain would do better to join the North American Free Trade Association than to take up with EMU; but what is the point of that? After all, both economically and politically, the UK has much stronger ties with Europe. Tony Blair is evidencing a greater sense of reality when he holds that his country’s future lies in the heart of Europe. The question is, however: is he talking about the next few years or about the distant future? The British are hesitant about European integration, as they have always been. The UK only joined the EC in 1973, when they were sure of its success. A similar process would seem to be taking place where EMU is concerned. At first, the UK was eager to be in on the process, completely liberalizing its capital movements, but it subsequently demanded an opt-out clause so as not to be forced to take further action. Such an approach is risky. There is always the chance than when jumping onto a moving train, one ends up between the train and the platform. A few years ago, no one was able to foresee that on 1 January 1999 EMU would be setting off with eleven out of the fifteen Member States. Now the UK is the only large Member State which is not joining the monetary union. Today I will be making out a case for the UK’s participation in EMU, and I will discuss a policy which may make it easier for it to join EMU. The desirability of British membership I can be brief about the advantages for Europe of the British taking part in EMU. Obviously, the union is strengthened by the participation of a country accounting for 16% of the EU’s GDP. It would mean a larger zone of exchange rate stability, a larger market, and better chances of the euro becoming an international currency. In these respects, British membership of EMU is just as important as that of, let us say, France. Because EMU is built around French-German cooperation, and it is hence also about politics, it has been suggested that France’s membership is a must. But the UK, too, has a contribution of its own to make to EMU. After all, the UK has the City, the financial centre of Europe. It would be peculiar, to say the least, if the leading financial centre of an economic power such as the EU were to lie outside the euro zone. Another issue of at least the same importance is the considerable contribution which Britain can make to the policy discussions about greater labour and product market flexibility. The reduction of the working week in France and Italy to 35 hours, on the conditions now envisaged, indicates that continental Europe could do with some counterweight on this point. Let me say something about what entry into EMU would mean for the United Kingdom itself. In principle, the British Government is in favour of joining EMU. In October 1997, Gordon Brown -2said in the House of Commons: “If, in the end, a single currency is successful, and the economic case is clear and unambiguous, then the Government believes Britain should be part of it”. The UK could benefit materially from joining EMU. Exchange rate stability, greater comparability of prices, and larger money and capital markets offer the British economy additional opportunities for growth. It must furthermore be remembered that even if the UK does not join, it will be feeling the impact of EMU. Geographically, the UK may be an island, but it is not economically. So much is evidenced by the degree to which the British economy is affected by the exchange rate movements of sterling. That influence being as great as it is, then surely it is better to be seated at the table where the policy affecting your economy is determined. That means joining EMU. After all, so long as the UK remains outside EMU, it will not be permitted to take part in the euro-X group, where the economic policies of the euro area are coordinated by the Ministers of Finance. The City, too, stands to benefit substantially from Britain’s participation, because it will become part of deeper and more liquid financial markets. Obviously, the City’s position as Europe’s financial centre is not yet in peril. As my colleague, Eddie George, neatly pointed out, the number of people working in the financial sector and affiliated industries in Greater London equals the population of Frankfurt: 600,000. But the City is not impregnable. Take, for instance, Liffe, which lost its leading position in the trade in futures of German central government bonds, the most important contract in European government bonds, to the Deutsche Terminbörse in Frankfurt within only a short period of time. If the UK were to remain outside EMU for a long time to come, some City activities could well be gradually shifted to financial centres on the continent. Policy-making for membership From whatever angle you look at it, the UK would do well to enter into EMU. From where we stand, EMU is incomplete without the United Kingdom. The question is not so much whether the UK should join, as when. Research by the Treasury shows it is too early. Of the five economic tests developed by the Treasury, the crucial one assesses whether the British business cycle is sufficiently in line with that in other European countries and is not marked by major outliers, the question being whether the single monetary policy actually fits in with the UK’s economic policy. At present, the interest rate set by the Bank of England is double the monetary policy rate in the core countries of the future euro zone, viz. 7.5% against 3.3%. This is in line with Britain’s cyclical conditions. At this stage, considerable reduction of this short-term interest rate would be at odds with the British inflation target of at most 2.5%. But apart from the question whether this is an economically favourable time to join, there are institutional impediments to the UK’s immediate membership as well. For one thing, the British population have to voice their approval in a referendum and, for another, the UK still needs to meet the exchange rate criterion for joining the monetary union. Let us take a closer look at these obstacles. First of all, the British Government will have to convince the people of the importance of membership. This will be possible if the advantages are presented in a convincing way, since the idea of joining monetary union is no longer an unfamiliar one. But the exchange rate criterion, which applies for countries in search of EMU membership, is another, more complex and more formal, matter. Countries wishing to join EMU on 1 January 1999 are required to have taken part in the exchange rate mechanism of the European Monetary System for the last two years, without the fluctuation margins being exceeded. Countries joining at a later stage are basically subject to the same rules. But the exchange rate mechanism which will take effect as from 1 January 1999 differs from that currently in force. In my opinion, ERM2 will replace ERM1. But legally, it is not that simple, and my view is not shared by everyone. For the time being, the UK is not making any moves to join the new exchange rate mechanism. I understand the UK’s reluctance to join ERM2, considering its unfortunate experience with ERM1. Although the UK only joined ERM1 in 1990, it was already forced to leave in 1992. Naturally they feel that the experience does not bear repetition. But the circumstances prevailing at that time, viz. an excessively high entry rate for sterling and, more importantly, a macroeconomic policy which did not fully support the exchange rate objective, are in no way comparable to those in evidence in the UK and Europe today. -3Now let us take a look at Britain’s cyclical conditions and economic policy. The exchange rate movements of sterling largely reflect the cyclical divergences between the UK and the European continents. I already noted, it is crucial to British participation in EMU that, in the longer term, its economic development does not diverge substantially from those in Europe. The UK’s economy has always been subject to greater turbulence, and its business cycle is invariably ahead of those on the mainland. But the cyclical outliers seem to be decreasing. It is gratifying to note that the political stop-go cycle of interest rate policy has made way for a monetary policy aimed at keeping inflation under control. The Government’s economic policy is now also directed at putting a stop to the well-known British pattern of stop-go, boom-bust. Gordon Brown’s first budget had a moderating effect on the exuberant cyclical conditions. Right now, the first signs of a cyclical slowdown are showing up. Hopefully, they do not portend a bust for the British economy. But we will have to wait and see. Like the business cycles of countries such as the Netherlands and Germany, that of Britain will never run exactly parallel to the European average. This is the consequence of conducting a single monetary policy in an area as large as the euro zone. The differences among the countries will have to be addressed through their budgets, within the confines of the Stability Pact, and especially by flexible labour and product markets. In these respects, the UK is streets ahead of the other major EU countries, and is therefore well placed for EMU. Conclusion Ladies and gentlemen, I have come to the end of my speech. All things considered, the prospects are good for the UK making a successful entry into EMU somewhere in the first few years of the 21st century. The British Government’s commitment to membership of EMU, and their refusal to adopt a wait-and-see attitude can be regarded advantageous. In the meantime, the British should have a say in matters. They are a full-fledged member of the EU, and have been in on the process towards EMU throughout. Outsiders should not become outcasts. From the Dutch perspective in particular, it is desirable that the UK should put its mark on the shape of the European economy and EMU, also during the run-up to its participation. Britain can play an important role in boosting the flexibility of the European labour and product markets. Such a role is needed to stimulate the European economy, and to offer Europe’s 18 million unemployed the prospect of a new job. To quote Helmut Kohl: “To cooperate as closely as possible with Britain ‘in building Europe’, Europe needs the United Kingdom, and vice versa. The European Union needs, above all, that unique British blend of realism and traditionalism, pragmatism and idealism, level-headedness and love of freedom”. With which I could not agree more. * * * NB This BIS Review is available on the BIS World Wide Web site (http://www.bis.org). _____________________________ | netherlands bank | 1,998 | 7 |
Speech by the President of the Netherlands Bank, Dr. A.H.E.M. Wellink, on the Alumni Day of the Tinbergen Instituut in Rotterdam on 23/10/98. | Mr. Wellink gives a central banker’s view of price stability and monetary policy Speech by the President of the Netherlands Bank, Dr. A.H.E.M. Wellink, on the Alumni Day of the Tinbergen Instituut in Rotterdam on 23/10/98. Introduction It was only recently that some predicted that central bankers would soon be finding themselves in never-never land. They alleged that the considerable technological advance made since the Second World War would make for structurally higher growth and low inflation. The world economy had supposedly landed in an age of no inflation. But here the question arises whether this really is a new era, and if it is, how it was brought about. Before we go into these questions, however, we need to look at the definition of price stability, as well as at the concept of prices as such. Price stability in central bank terms It goes without saying that European monetary policy is concerned above all with price stability within the euro area. That is after all the mandate given by the EC Treaty to the European Central Bank. The euro’s exchange rate against, let us say the US dollar or the Japanese yen, is not targeted. The euro zone is a comparatively closed economy where, contrary to what we have been used to in our open European economies, the exchange rate plays a relatively minor role in price determination. The emphasis laid on the internal value of the euro is the greatest contribution which the European System of Central Banks (ESCB) can make to the stability of the international monetary system. In their quest for internal price stability, the monetary authorities base their policies notably on movements in the consumer price index (CPI). They do so for several reasons. To begin with, there are various technical advantages to the CPI, such as its high publication frequency, timely availability and transparency. The latter is reflected in its well-founded weighting scheme, which covers a considerable proportion of final spending, viz. household consumption. This makes the CPI a more attractive gauge than the broadest measure of inflation available, viz. the GDP deflator. The GDP deflator is, however, no match for the CPI when it comes to monetary policy-making, because its figures become available with a considerable lag and not as frequently. Moreover, price movements over time lose some of their comparability because of shifts in the package of total spending. But the CPI is useful for another, more basic reason as well. At the end of the day, central banks are most interested in the ultimate net result of the gamut of price rises within the economy, i.e. the increases in the prices paid by households for goods and services. In this context, the prices of raw materials are, for instance, of a lesser importance. It must be kept in mind that price rises in an earlier stage of the production process need not necessarily bring about tensions within the economy, because they can be compensated for by other factors (such as increasing productivity or competition). However, this does not mean that central banks should not look at other price indices as well. On the contrary. Movements in import prices may be barely relevant to the euro area, but they are of importance to small, open economies. Because import prices in a small and open economy are determined largely by exchange rate developments, the latter may have a considerable influence on the general price level. That even goes for the euro zone, for example, when the exchange rate of the US dollar - in which the prices of numerous commodities are expressed - is subject to heavy fluctuations. Likewise, movements in the prices of non-final goods and services, such as commodities and energy, can be relevant for central bankers because they may be an indication of inflationary tensions. It is becoming harder for central bankers to do their work because doubts have arisen about the traditional gauges of inflation. What is going on? The measurement of inflation has drawn the attention of the academic world, as well as that of the central banks. Take, for instance, the Boskin Report published in the United States, and a comparable report published under the auspices of the Deutsche Bundesbank. These studies indicate that the CPI has been systematically overstated, in the United States by about 1 percentage point, and in Germany by three-quarters of a percentage point. It is worthwhile taking a closer look at this matter, because, from the point of view of monetary policy, the importance of any distortions of the CPI increases in a world where inflation has dropped to low levels. After all, the lower the rate of inflation, the greater the relative significance of any statistical distortion. With inflation in the euro zone coming out at 1.2% over the last twelve months, measurement errors of the magnitude which I mentioned earlier suggest that Europe is currently wavering between inflation and deflation. The errors made in measuring inflation are due, first of all, to the (fortunately) progressing increase in product quality. This is known in academic circles as the quality bias. It is not easy to distinguish between the price rises and quality improvements of sophisticated products such as computers and telecommunications equipment. For marketing reasons, technological innovations may be very highly priced, for one thing because the development costs need to be recovered. Later generations of IT tools, by then mass-produced, are invariably much cheaper than their predecessors. Falling prices and an impressive expansion of investment and profitability then go hand in hand, which is a fairly unusual phenomenon macroeconomically. The variety of products and their ever-shorter life cycle add to the risk that distortions in price indices increase over time. The second cause of statistical distortions in inflation is the growing importance of services; this is known as the services bias. In 1997, more than 65% of the nominal value added within the Dutch economy was accounted for by the services sector. In 1950, it had still been less than 50%. The shares of the agricultural sector and manufacturing industry have shrunk accordingly. Within the services sector, the greatest expansions are accounted for by business services, banking and telecommunications. The problem is that it is not easy to determine the output volume of services, which can usually only be calculated in a roundabout way. Because the growth of output is underestimated, price movements in the services sector are systematically overestimated because of these measurement problems. This (unduly) low estimation of output growth is corroborated by studies made by the Netherlands Bureau for Economic Policy Analysis. According to them, the total productivity of business services in the Netherlands between 1991 and 1995 came out at minus 1.5%. Compared to the increase in productivity in manufacturing industry in the same period, of 1.75%, this figure is implausibly low. The problems inherent in measuring the CPI are compounded further by the fact that services have come to make up an increasingly large share of the national product. The third factor causing measurement problems with regard to inflation may be termed the substitution bias. In practice, the composition of the package of goods and services purchased by consumers changes fairly rapidly. That is especially true in this day and age, with new and improved products being marketed all the time. The package composition underlying the CPI is adjusted for such changes only once every five years. The basket of goods and services used to calculate the CPI has recently been harmonised within the European Union. This harmonised CPI will be used by the ESCB as a measure of inflation in their monetary policy-making. This means that the differences between the national definitions used by statistical agencies have declined. However, the process of harmonisation has not yet been completed. The harmonised CPI in fact covers too narrow an area in terms of goods and services. Several components which are relevant to the general price level are not included. Take, for example, rent increases. Consequences for monetary policy In view of the problems attending the measurement of inflation, people are right to question whether central bankers still have sufficient insight into inflationary developments. And subsequently, whether central bankers are still capable of conducting adequate monetary policies. Such concerns are valid notably in times of low inflation, when the statistical distortions that we are speaking about carry extra weight. In a market economy, any difficulties encountered in the calculation of the index of the general price level need not necessarily give rise to problems right away. An entrepreneur who has decided to purchase new computer hardware will not be swayed by possible statistical distortions in the CPI. Neither will you or I, when we visit the supermarket on Saturdays to stock up our larders. The essential thing is that entrepreneurs, consumers and other economic agents have proper insight into the value of individual goods. But there is a catch. An inflation gauge which is closely monitored by a central bank may influence the behaviour of economic agents. Contracts and labour agreements often refer explicitly to an officially published inflation figure. Via this route, distortions in measured inflation can thus affect functioning of the economy. In other words, it is of the utmost importance, not just for the monetary authorities, that price rises be gauged as accurately as possible. In spite of the uncertainties inherent in measuring inflation, the monetary authorities, in formulating their policies, make use of a gauge that seeks to encompass the general price level. How otherwise can one ascertain whether price stability has been achieved. Moreover, monetary policy should in principle take effect at the macroeconomic level. However, in order to allow for possible measurement errors, price stability - as indicated by the inflation measure used - is defined more broadly by the central bank. The Governing Council of the European Central Bank has recently defined price stability as a rise in the (harmonised) consumer price level of less than 2%. On the one hand, this definition, which is in line with that used in most countries of the euro area, implies that measurement errors occur while, on the other, it stresses that it is one of the tasks of the European System of Central Banks to prevent deflation. Some caution is in order when it comes to using the word “deflation”. In purely technical terms, deflation may be defined as a fall in prices, but it conjures up much more than that, viz. the depression of the 1930s. A slight decrease of the general price level need not of course be attended by an overall collapse of demand. In 1987, for instance, consumer prices in the Netherlands dropped by around 0.5%, a development which had a positive impact on the economy because disposable income in real terms grew more than expected. Returning to our measurement problem, we cannot conclude, on the basis of the information now available, that the distortions in the official price indices have increased substantially over time. That would have landed the monetary authorities with real problems. If, for example, inflation had been increasingly overstated, monetary policy would have been unduly tightened, with negative effects for economic growth and the employment situation. However, we cannot but admit that it has become more difficult over the past few decades to measure output and price developments in the services sector in particular. A brave new world? Now let us take a look at actual inflation. We can see from the various inflation rates in Europe, and even throughout the world, that there are few factors which could make for rising inflation. In the European Union and the United States, inflation has been structurally reduced since the early 1980s, thanks to budgetary consolidation in both these areas, the deregulation of labour and product markets, and a further liberalisation of international trade and capital markets, boosting international competition. In those - large - parts of the world which have been affected by the financial and economic crisis, deflation is in evidence. This brings me back to the question which I posed at the beginning of this address: what indications are there that we now find ourselves in a new era of permanently higher growth and lower inflation, or to cite Alan Greenspan, in a new economy. This question is prompted notably by the developments in the United States where - so far - high growth has been attended by low inflation. But one swallow does not make a summer, as the saying goes. And that is true of the United States, too. Those who feel that high growth and low inflation have come to form a permanent fixture may be suffering under some delusion. After all, viewed over the longer term, neither the duration of the upswing in the United States, nor the increase in productivity nor the rate of inflation are unique. In fact, if the signs are not misleading, the American economy would seem to be over the hill. Since the early 1950s, the expansion phases of the American business cycles have on average lasted five years, two of them lasting longer than the current phase. Though accelerating, the rise in labour productivity over the past few years (of 1-1.5%) still compares unfavourably with the 3% average recorded during the first two decades following the Second World War. And, where inflation is concerned, it may be noted that it was low until the mid-1960s, averaging 1.3%. The current developments in the United States, which are now beginning to tarnish somewhat, therefore have much more in common with the situation in the first half of the post-war period (though there are also quite a few differences), and can hence hardly be called exceptional. It is all the more imperative to exercise caution when averring that inflation has been banned forever, because the current low rate of inflation in the United States and Europe is accounted for largely by a fall in commodity prices, which is temporary in nature. Obviously a role is also played by the collapsing demand in South-East Asia in particular and its repercussions elsewhere. That is why there is no telling what the underlying inflation rate would be if there were greater economic equilibrium worldwide. For example, suppose oil prices in 1998 and 1999 continued to be at their 1997 level ($19.2 per barrel UK Brent). That is 30% more than the current price. Inflation in the European Union would then come out at 1.8% this year, instead of the current estimate of 1.5%. In 1999, inflation would then rise to 2.4% (according to the Netherlands Bank’s EUROMON model). Conclusion Let me conclude. Central bankers will never be at a loss for something to do. Just look at the current financial and economic crisis. And although the inflation genie will not emerge from the bottle for the time being, central banks will need to keep an eye on price movements all the time. Monetary policy is not asymmetrical, as some might feel, in the sense that a central bank only takes action when prices soar. Falling prices, too, may be detrimental to the economy, and call for some reaction from the central bank. It is under these very conditions - low inflation worldwide and even deflation in some areas - that measurement problems with regard to price movements, though not insurmountable, may prove a nuisance. Although the central banks still have at their disposal sufficient monetary and economic beacons by which to steer their course, there is work to do for the statistical agencies, the ESCB and the academic world. If problems with measuring inflation mean that inflationary tensions may be hard to assess reliably, we must do all we can to ensure that the quality of the price indices published is at least maintained and, where possible, improved. | netherlands bank | 1,998 | 11 |
Speech by the President of the Netherlands Bank, Dr A.H.E.M. Wellink, at the European Finance Convention in Vienna on 23/11/98. | Mr Wellink considers monetary relations between the euro zone and new member states Speech by the President of the Netherlands Bank, Dr A.H.E.M. Wellink, at the European Finance Convention in Vienna on 23/11/98. I should start with a warning to those who favour early accession of Central and Eastern European countries to the European Union. Somebody once said the following about the part of Europe I live in: “I do not find Northern Europe an ideal zone for human habitation. It is a fine place for industrial productivity, but its climate breeds puritans and the terrible dictates of the Protestant Work Ethic. The Romans were right to pull out when they did.” So please be well aware of whom you seek to live with in a more institutionalized setting. But, let me add immediately that times have changed. For instance, the Romans have found it attractive to be reunited with us in EMU. Today, I want to discuss the issue of monetary relations between Central and Eastern Europe and the European Union. Accession to the EU is understandably a hot issue in the countries concerned and it rightly guides their medium-term macroeconomic policy orientation. At the same time the turbulence in the global financial markets poses some immediate policy challenges. Two issues are particularly at stake: (1) to what extent is Eastern Europe hit by the consequences of the Asian and Russian financial crises? and (2) what is the best policy approach in the current international environment? I will first discuss these two issues. Later on, I will broaden my horizon and raise some issues related to the future accession of these countries to the EU. Contagion? Economies in transition have not been shielded from contagion effects, which started after the Russian financial crisis. Financial market volatility increased sharply. Headline stock market indices significantly dropped in August and exchange rates were under downward pressure. However, the situation seems to have improved meanwhile. Although it is probably too early for a final assessment, until now the effects on the real economy have been relatively limited, also because trade relations have dramatically changed in the past and their focus is now much more towards the West. The countries that had made significant strides since the beginning of the 1990s in establishing a well-functioning market economy have weathered the financial storms rather well. This is ample proof that they are on the right track. Their main challenge is therefore to ensure that the ongoing stabilization and reform efforts continue even if, or should I say especially if, external conditions deteriorate further. External conditions Let me say a few words about these external conditions. I believe that we should not be overly pessimistic about economic growth in the industrial countries. The euro zone remains an area of stability, even though we have seen some downward adjustments to growth expectations for next year. Growth performance in the United States was quite strong in the third quarter, even stronger than had been expected. Interest rates in a number of countries – the US, the UK and several European countries – have been lowered. Signs are that the economic downturn in Southeast Asia has bottomed out. With the help of the IMF, Brazil has established a strong adjustment package. These are all hopeful signs that we might have reached a turning point and that things should now gradually show a turn for the better. But at the same time, given recent growth expectations, we should not be overly optimistic either. Inside and outside the European Central Bank, there is much discussion about the level of interest rates in Europe. Supporters of interest rate reductions are pointing to the worsening –2– economic conditions in the world and to the lead given by the US central bank, the Federal Reserve System. Let me try to put things in perspective here. In the Governing Council of the ECB we are carefully considering developments in economic and monetary conditions in the euro zone. So far, the internal dynamics of the euro zone are still relatively strong. At the same time, we are certainly not blind to developments in the “outside” world. One should take into account, however, that for the euro area as a whole the average three-month market interest rate has come down from 4.2% early this year to 3.7% now. The current level is about 150 basis points lower than that in the US. In addition, we need to keep in mind that the US and Europe are at different stages of the business cycle. Therefore, monetary conditions seem easier here than in the US. I would stress that aggressive calls for lowering interest rates from politicians – apart from being against the letter and the spirit of the Maastricht Treaty – involve the danger of making the interest rate issue the acid test for the independence of the ECB. Europe and the world are better off with a monetary policy that is consistently oriented at the medium term than with efforts on our side to fine-tune the development of the business cycle. Current monetary policy challenges in Eastern Europe This brings me to the issue of current monetary policy challenges in Eastern Europe. In a general sense, key words are credibility and transparency. These words are used quite often, but they are all the more relevant in turbulent times. The overall aim should be to create “sound money”. This implies (1) price stability and (2) a sound financial and payments system. For a central bank to attain the goal of price stability, it must have not only full power to formulate and implement monetary policy but also the confidence of the general public and financial markets. That is where transparency comes in. Being transparent is essential in order to educate people and make them understand the reasons for policy changes. The current monetary policy approach in most Eastern European countries recognises the importance of the basic principles of credibility and transparency. Through July of this year, we have seen the “costs of success” in several countries. Improved confidence on the part of foreign investors led to capital inflows that were very large compared to the size of the economies of the recipient countries. Coping with the inflationary pressures created by these capital inflows was the main challenge facing monetary policy. Following the aggravation of the crisis in Russia, however, the countries experienced significant capital outflows. Obviously, such sudden shifts in investor behaviour do create severe strains for the day-to-day management of monetary policy. The authorities from these countries have skilfully reacted by adjusting their monetary strategy in a practical manner. In Poland and Hungary, for instance, the central banks have provided clarity about the medium-term development of the exchange rate, thus contributing to anchoring expectations. Most laudably, the countries in Eastern Europe have refrained from imposing new restrictions on capital movements. This is very important indeed and it seems to have been rewarded in financial markets. Accession to the EU Let me now turn to the future relationship between the European regions, more specifically to the intended enlargement of the European Union towards the East. Many years ago, fathers in the United States would tell their sons to go West in search of fortune. Perhaps fathers in Western Europe may in the not too distant future tell their sons: “Go East, young man.” The countries of Central and Eastern Europe are catching up quickly and may one day become the most dynamic economies and societies in Europe. In the meantime, it is clear that Eastern Europe is looking towards the West. –3– The so-called “fast-track” countries of Central and Eastern Europe will hopefully be ready to join the European Union some time from now, although a number of further reforms still need to be implemented. This is especially true for financial markets and the banking sector. There have been many political statements on the most likely year for accession. It is of course, for the politicians to decide on this. In my view, the countries of Central and Eastern Europe should be given enough time to prepare themselves properly for becoming part of the Single Market. Moreover, given the substantial differences among them, the candidate member states should be looked at on a case-by-case basis. Some transitional provisions are likely to be necessary for new member states after joining the European Union. Without such provisions the expansion of the European Union may need to be postponed for many years, which is clearly undesirable. Moreover, in the past such provisions have also been applied to new entrants, including Spain, Portugal and Greece. It is essential to strike a proper balance. The acquis, the body of legislation which applies to all EU member states, must remain the common denominator. Member states can decide to work more closely in some areas, but they cannot detract from the acquis. Member states must satisfy certain requirements in the monetary and financial sphere, even those member states that have a derogation with respect to monetary union. These requirements are essential for the functioning of the single market. Transitional provisions may be required. However, permanent exemptions or lengthy transitional periods would be inappropriate as they could threaten the internal cohesion of the Union. Monetary relations Let me be a bit more specific about monetary relations and let me start with the period before membership. In the run-up to the accession to European Union, prospective member states should take a pragmatic approach to the implementation of monetary policy. It seems only logical that the exchange rate against the euro will gradually be assigned an increasing importance in the monetary policy considerations of candidate member states. An implicit or explicit orientation of monetary policy towards the exchange rate against the euro can also be justified by the relative importance of trade relations between the two regions. Some 50–60% of foreign trade of the countries of Central and Eastern Europe is with the European Union. Where pragmatism is called for, it does not make sense to establish all kind of institutional bells and whistles in the monetary field. Rather than participating in any formal exchange rate mechanism with the euro before EU membership, countries in Central and Eastern Europe should focus on economic reform. During such a period, monetary and exchange rate policies should provide for sufficient flexibility and should take account of the specific circumstances of the country concerned. For instance, given the current levels of inflation, it may be wise for some countries to maintain a crawling currency peg for the time being. For other countries a stronger commitment – a fixed peg or a currency board – may be more appropriate. Before accession, this can only be a unilateral decision. Only after joining the European Union can new member states participate in ERM-II, as indeed they are expected to, assuming that a credible peg against the euro can be established at that time. Preconditions for stable monetary relations Of course, linking the currency to the euro cannot be a substitute for conducting stability-oriented macroeconomic and structural policies. Rather, any formal link to the euro should be preceded by policy measures which make the intended currency link a credible one. Given today’s importance –4– of capital flows to exchange rates, such policy measures should also cover areas that are important to capital flows. Allow me to say a few words on the approach towards capital movements. Undoubtedly, hot money is a hot issue at the moment. Restrictions on capital flows have proven less than effective in times when investor confidence turns sour. Introducing controls to limit capital outflows in the middle of a crisis is doomed to fail. They may afford some temporary relief, but when people want to get their money out of the country, they will succeed in doing so in the end. What remains is long-term damage to investor confidence. Liberalizing the capital account further is the more promising route. Adequate sequencing of short-term capital inflows may be required in order to gain time for adjusting the domestic financial sector to the competitive pressures that follow from capital liberalization. It should be realized, though, that such an approach should go hand in hand with an improvement of supervision and a strengthening of the financial sector. This should be high on the policy agenda in Eastern Europe. There has been considerable progress on capital liberalization in these countries and it is expected that, under OECD rules, capital movements will be free of restrictions pretty soon. The major challenge now is to ensure that the restructuring of the financial sector keeps pace, an area where there is still much to be done. It is well-known that in the communist past many banks used to be a part of, or closely related to, the central bank. In addition, many of the borrowers used to be companies with close ties to the government. As a result, there were few incentives for risk control and return enhancement. Instead, some banks used to generate profits by exploiting certain privileges which no longer exist. What is necessary, and what has been done to some extent in some countries, but not all, is privatizing state-controlled banks and promoting free market entry. This will provide bank managers with the right incentives to make risk/return assessments. Adequate bank supervision and financial markets oversight are required to ensure that sufficient weight is given to risk control. Foreign ownership may help to transfer certain specific banking skills to candidate member states, even though I do not favour a big January sale of financial institutions in the countries concerned. The current problems in certain Asian countries show that a bad loan overhang can severely impede the functioning of the economy. Balance sheet restructuring in countries in Central and Eastern Europe may require intervention by the competent authorities in some cases. It may be necessary to let some banks fail. It may be necessary for governments to take over bad loans inherited from the communist era. This would enable some credit institutions to conduct business more effectively. In order to prevent moral hazard, the rescue of selected credit institutions can only take place under certain conditions, most likely including the lay-off of those responsible for making these loans. Importantly from a macroeconomic point of view, any debt restructuring involving government money should find expression in official figures for government debt. This would provide a better insight into the actual financial situation in the countries of Central and Eastern Europe. Reducing uncertainties in this respect is likely to build up confidence and attract rather than deter foreign investors. –5– Concluding remarks I have spoken on the monetary relations between the euro zone and the countries of Central and Eastern Europe. Let me conclude by presenting some ideas about the relations between the European System of Central Banks (ESCB) and the central banks of the candidate member states. Although candidate member states obviously cannot take part in ESCB meetings before their accession to the European Union, it could be useful to invite the governors of the central banks of the “fast-track” countries once a year to attend a special meeting of the General Council of the ECB. This would be similar to the current practice for the Council of Economics and Finance Ministers (Ecofin). Apart from that, the ECB staff could be asked to make a yearly assessment of the state of progress in applicant countries. Finally, the Governing Council of the ECB will be requested to give its opinion on the expansion of the European Union towards the East. For now, I would like to conclude that the authorities of the candidate member states seem to be very capable of taking the right decisions in providing their people with a stable economic environment. | netherlands bank | 1,998 | 12 |
Subsets and Splits