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“The International Financial Crisis and Greece” Gikas A. Hardouvelis* Athens, November 18, 2008 ECONOMIA CONFERENCE Athens, Karantzas Megaron * Chief Economist, Eurobank EFG Group Professor, Department of Banking and Financial Management, Un. of Piraeus G. Hardouvelis, 18/11/2008 1 I. Will Greece keep converging to the EU-15 average despite the crisis? Real growth rates, 1990–2009 6% Greece 5 4.5 4.5 4 3.4 2.5 2.6 2.6 2 1.4 2.8 3.0 1.5 1 0.9 0.7 -0.8 0.1 2009 2008 2007 2006 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 Source: European Commission 2005 EU forecasts for 2009 -1.6 1992 EA 0.8 -1 -2 1.3 1.6 1.9 2.5 2.6 2.1 2.0 2.1 3.3 4.0 3.8 3.8 2.8 4.2 4.6 3.9 3.4 3.6 2.4 5.0 2004 3 0 GDP per capita PPS, EU-15=100 95 90 85 80 75 70 65 60 55 50 91.3 71.0 1995 2009 Investment: the main driver of growth, with growth rates higher than those of consumption Until 2005, investment in equipment higher than investment in residential construction Is the party over now? G. Hardouvelis, 18/11/2008 2 I. Greece at a crossroads • Greece’s problems are long-term, with competitiveness carrying a large blame • Surprisingly, Greece can withstand the crisis better than its European counterparts, thanks to its relatively strong banking system, with a projected 2009 rate of growth slightly above 2% • Yet, if officials remain sluggish to the elevated demands for active policy, the crisis may also bring a nightmare scenario of negative growth • If the recession scenario prevails, then subsequently the lack of policy tools and the long-run problems are bound to depress the economy for a long time G. Hardouvelis, 18/11/2008 3 II. Competitiveness: The Greek Economy’s Deepest Problem G. Hardouvelis, 18/11/2008 4 II. Competitiveness and Ease of Doing Business Competitiveness is the deepest thorn in the Greek economy World Bank - Doing Business 2009 report: Greece ranks 96th in 2008 among 181 economies in the ease of doing business, rising 10 places from the 106th in 2007. Greece remains last among EU-27 countries Doing Change Business in rank Ease of Doing Business Rankings 2007 – 2008 Ease of... 2008 from (rankings in reverse order) +10 133 +17 45 +1 Employing Workers 133 +10 Registering Property 101 -5 Getting Credit 109 -7 Protecting Investors 150 +11 Doing Business 180 Starting a Business Improvement Dealing with Construction Permits 140 No 1: Singapore Greece (+10) 120 100 80 60 No. 181: Congo Deterioration 2007 96 200 160 2008 rank 40 Paying Taxes 62 +32 20 Trading Across Borders 70 -4 Enforcing Contracts 85 -1 Closing a Business 41 0 0 0 20 40 G. Hardouvelis, 18/11/2008 60 80 100 2007 120 140 160 Source: WEF 180 200 5 Competitiveness Rankings, (reversed order) ΙI. Competitiveness is way below Greece’s level of development Based on its standard of living, Greece should have ranked 42nd instead of 96th 200 180 Georgia New Zealand Thailand Singapore Norway 160 140 120 100 Gap: 54 places Brunei 80 Greece 60 y = 31,13Ln(x) - 180,36 40 2 R = 0,5871 20 0 0 10.000 20.000 30.000 40.000 50.000 GDP per capita, in $ PPP G. Hardouvelis, 18/11/2008 Source: WEF, IMF 6 ΙI. Greece is expensive relative to its trading partners … 1994 = 100 REERULC 01/2008 01/2007 01/2006 01/2005 01/2004 01/2003 01/2002 01/2001 01/2000 01/1999 01/1998 01/1997 01/1996 01/1995 REERCPI 01/1994 160 150 140 130 120 110 100 90 Real Effective Exchange Rates have worsened since 2000 The higher CPI inflation in Greece points to lack of competition in product & service markets. Unit labor costs are increasing faster in Greece Source: IMF G. Hardouvelis, 18/11/2008 7 II. … hence, Greece’s current account is getting worse CA deficit has tripled relative to the pre-EMU period, while the growth in aggregate demand is the same as before CA deficit can lead to an abrupt future recession % GDP % GDP 14 14 9 9 4 4 -1 -3.9 -2.8 -6 -3.8 -1 -7.8 -7.3 -6.8 -6.6 -5.8 -7.4 -6 -11.1 -11 -11 -16 -14.1 -16 -21 -21 -26 -26 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Income Services Goods Transfers Source: Bank of Greece Current Account Balance G. Hardouvelis, 18/11/2008 8 III. The global financial crisis and the relative position of the Greek financial system G. Hardouvelis, 18/11/2008 9 III. How large is the short-run correction? The two problems of the global crisis The next 15 months will provide a stress test of the Greek economy Two problems underpin the global financial crisis: 1) 2) Insolvency Lack of liquidity Which may lead to de-leveraging, i.e. the transmission of the crisis to the real economy Fortunately, structural reforms did occur in the Greek banking sector and Greek banks are very strong and healthy relative to their European peers, i.e., are well-capitalized Yet, Greek banks are affected by the second factor, lack of liquidity G. Hardouvelis, 18/11/2008 10 III. Insolvency: Getting better The gap between total write-downs and capital increases has declined sharply in recent weeks due to governments’ recapitalizations IMF: Estimates write-downs for all FIs to reach $1.4 trillion Banking sector only Total Write-downs: Total Capital Raised: Total Gap: bn USD 390 $ 708.5 $ 713.7 $ -5.2 Total Writedowns: $ 590.2 Total Capital Raised: $ 433.7 Total Gap: $ 156.5 bn USD 426 350 Nov.18, 2008 377 Sept. 30, 2008 300 296 310 250 255 230 200 150 150 49 70 334 28 235 176 99 100 41 232 56 50 -10 -13 -41 -90 US Writedowns G. Hardouvelis, 18/11/2008 Europe Capital Raised 24 22 2 0 Asia Gap Source: Bloomberg US Writedowns Europe Capital Raised Asia Gap 11 III. Insolvency: Greek banks better capitalized than most European banks Capital / Asset Ratio Ranking of individual banks Best: EFG Intern/al 13.52% in Switzerland Worst: DEXIA 1.67% in Belgium G Sw e r it m a ze n rl y Fr an Sw a n d c D ed e en e m n ar k B el U g K Ic iu el m an Po Sp d rt ain N ug or a Ir wa l el y Fi a n n d A lan us d tr I t ia G al re y ec e U S 9 8 7 6 5 4 3 2 1 0 % G. Hardouvelis, 18/11/2008 30/6/2008 12 III. Liquidity: Worsening not yet solved in Europe Euro Area U.S.A. Uncovered minus covered 1-month inter-bank rates 400 180 10/10/2008: 337.8 10/10/2008: 162.1 160 140 350 1m Euribor - EONIA 120 300 17/11/2008: 92.1 100 1m Libor - OIS 250 17/11/2008: 99.6 200 80 Sep-08 Oct-08 Nov-08 Sep-08 Oct-08 Nov-08 Jul-08 Aug-08 Jun-08 May-08 Apr-08 Mar-08 Jan-08 Feb-08 Dec-07 Nov-07 Oct-07 Sep-07 Jul-07 Aug-07 May-07 Oct-08 Nov-08 Sep-08 Jul-08 Aug-08 Jun-08 May-08 Apr-08 Mar-08 Jan-08 Feb-08 Dec-07 Nov-07 Oct-07 0 Sep-07 0 Aug-07 50 Jul-07 20 Jun-07 100 May-07 40 Jun-07 150 60 Uncovered minus covered 1-week inter-bank rates 400 8/10/2008: 105.1 1w Euribor - EONIA 300 1w Libor - OIS 250 17/11/2008: 22.0 200 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Dec-07 Oct-07 0 Jun-07 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 17/11/2008: 47.0 Nov-07 G. Hardouvelis, 18/11/2008 Dec-07 Nov-07 Oct-07 50 Sep-07 0 Aug-07 100 Jul-07 20 Jun-07 150 May-07 40 May-07 60 Sep-07 80 13/10/2008: 346.4 350 Aug-07 100 Jul-07 120 13 III. Liquidity: European banks are hoarding cash Deposit Facility EUR Billion 300 250 7/11/2008: € 225.5 bn 200 150 19/9/2008: € 1.8 bn 100 50 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07 0 Source: ECB G. Hardouvelis, 18/11/2008 14 ΙII. Liquidity: Less of a problem in Greece relative to Euro Area Loans to Deposits Ratio August 2008 160 % (Total Loans to Total Deposits, MFIs excluding Eurosystem) 139.8 128.2 122.7 121.2122.5 116.5 112.8 113.6 140 120 100 108.9 102.1 99.5 92.4 92.8 94.8 97.2 80 60 40 54.6 20 G. Hardouvelis, 18/11/2008 Finland Italy Netherlands Portugal France Spain Ireland EA Austria Germany Cyprus Belgium Lux/rg Slovenia Greece Malta 0 Source: ECB, Balance Sheet Items data 15 III. Rescue measures … Package Amount % of 2009 GDP Partial Adoption Italy € 40 bn 2.5% Belgium € 9.7 bn 2.7% US $ 700 bn 4.8% Greece € 28 bn 10.8% NO Portugal € 20 bn 11.6% Spain € 150 bn 13.4% France € 360 bn 18.0% Germany € 500 bn 19.5% UK £ 500 bn 33.8% Austria € 100 bn 34.2% NO Netherlands € 220 bn 36.3% Sweden SEK 1,500 bn 47.7% Ireland € 400 bn 214.8% Total EU-27 € 2,580 bn 20.0% G. Hardouvelis, 18/11/2008 Greece has offered half the EU-27 package Measures have to be voted into Laws to be operational. Laggards as of 17/11/2008: Greece & Austria Then, we hope to see renewed liquidity in the inter-bank market 16 Ranking of rescue measures/GDP* III. … related to the size of the problem 14 LOW PROBLEM LOW PACKAGE Italy 13 Belgium 12 US 11 Greece 10 Portugal 9 Spain 8 France 7 y = 2.28 + 0.88x R2 = 20% Germany 6 UK 5 4 Netherlands 3 2 1 HIGH PROBLEM HIGH PACKAGE Austria Sweden Ireland 0 0 2 4 6 8 10 Capital / Asset Ratio (%) * Sorted from largest (=1) to smallest (=13) G. Hardouvelis, 18/11/2008 17 IV. How much will Greece be affected by the crisis in 2009? Growth slowdown A nightmare scenario can be avoided only through active policy intervention G. Hardouvelis, 18/11/2008 18 1) Lower economic activity abroad → less exports, lower tourist receipts, less foreign buying of property, lower shipping rates Billions ΙV. Greece: Channels of negative influence € bn 12,00 Jan 2008 - Aug 2008: 5% yoy 11,50 11,00 10,50 Tourist receipts 10,00 G. Hardouvelis, 18/11/2008 Μ αϊ -0 4 Αυ γ04 Ν οε -0 Φ 4 εβ -0 5 Μ αϊ -0 Αυ 5 γ05 Ν οε -0 5 Φ εβ -0 Μ 6 αϊ -0 6 Αυ γ06 Ν οε -0 6 Φ εβ -0 7 Μ αϊ -0 Αυ 7 γ07 Ν οε -0 7 Φ εβ -0 Μ 8 αϊ -0 8 Αυ γ08 20/5/2008: 11793 Baltic Dry Index Νοε-08 Ιουλ-08 Νοε-07 Μαρ-08 Ιουλ-07 Μαρ-07 Νοε-06 Ιουλ-06 Νοε-05 Μαρ-06 Ιουλ-05 Νοε-04 Μαρ-05 Ιουλ-04 Νοε-03 Μαρ-04 Ιουλ-03 Νοε-02 Μαρ-03 Ιουλ-02 Νοε-01 Μαρ-02 Ιουλ-01 17/11/2008: 856 Νοε-00 Large bank failures and abrupt restriction of credit due to solvency reasons to the same degree observed abroad 13000 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Μαρ-01 9,00 Ιουλ-00 Greece will avoid: 9,50 Μαρ-00 Higher interest rates due to liquidity considerations → less credit expansion, lower consumption & investment Νοε-99 2) 19 IV. Bearish markets are harsh on Greece 10-y Gov. Bond Spread: Greece-Germany b.p. 180 17/11/2008: 148.1 b.p. 160 140 17/3/2008: 71.0 b.p. 120 100 80 29/6/2007: 25.0 b.p. 60 40 120 Nov-08 Sep-08 Jul-08 May-08 Mar-08 Jan-08 Nov-07 Sep-07 Jul-07 0 May-07 20 Banking Stock indices since 29/6/2007 110 100 90 Recent increase in gov. bond spread is consistent with historical behavior (thus not due to the package): It is explained by similar increases in other EA spreads plus EMBI+ Markets do not see the better position of Greek banks: Banking stocks hard hit 80 Nov 17: GR 33.04 EA 32.97 USA 38.44 70 60 50 40 G. Hardouvelis, 18/11/2008 29/9/2008 29/7/2008 29/8/2008 USA 29/10/2008 EuroArea 29/6/2008 29/5/2008 29/4/2008 29/3/2008 29/2/2008 29/1/2008 29/12/2007 Greece 29/11/2007 29/10/2007 29/9/2007 29/8/2007 29/7/2007 29/6/2007 30 20 IV. Greece: Will the good scenario prevail? YES, if: 1. Loan expansion resumes by year-end 2. Investment growth fills in the slack 3. Consumption growth declines and imports decline for a longer period than the current global recession THE GOOD SCENARIO: yoy growth in constant prices Weights (2007) EU 2008 EU 2009 GH 2009 100.0% 3.1 2.5 2.1 Pr. Consumption 71.2% 2.6 2.2 2.0 Pub. Consumption 16.7% 2.9 2.7 2.4 Investment 22.5% 3.2 2.8 2.1 Exports 23.0% 4.2 3.1 2.6 Imports 33.5% 2.6 2.5 2.1 4.4 3.5 3.3 -2.5 -2.2 -2.9 93.4 92.2 93.0 9.0 9.2 8.7 -14.3 -15.0 -14.0 GDP HCPI Budget deficit Public debt (% GDP) (% GDP) Unemployment rate Current account G. Hardouvelis, 18/11/2008 (% GDP) 21 V. Conclusions The current crisis has delayed affecting Greece because of the health of its financial sector. Is the worst in front of us? Two possibilities for 2009: I. Good scenario of growth slightly > 2%, II. Nightmare scenario of growth < 0, as past experience shows that Greek recessions are the worst ones in the OECD, with a total mean output loss of -6.45% of GDP (2 times bigger the mean OECD country loss and 3 times the median loss) Two main risk drivers will determine which scenario will unfold: I. The liquidity issue, as Greece & Austria remain the two countries with no government measures that have become Law II. The need for aggressive fiscal expansion, mainly though investment projects co-financed with the EU In a future environment of low growth, it may be more difficult to carry on with those structural reforms needed to improve competitiveness. In a possible nightmare scenario, our limited macro-economic tools and the long-run imbalances imply that once in a recession A long period of stagnation may follow G. Hardouvelis, 18/11/2008 22 THANK YOU FOR YOUR ATTENTION!! My thanks to the Research department of Eurobank EFG for able research assistance and support For more info, please consult the Eurobank website: http://www.eurobank.gr/research New Europe: A quarterly analysis of the countries of New Europe Οικονομία & Αγορές: Μηνιαία έκδοση με θέματα για την ελληνική και παγκόσμια οικονομία Global Economic & Market Outlook: A quarterly in-depth analysis of major market and economic trends across the globe with our detailed forecasts G. Hardouvelis, 18/11/2008 23