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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
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G. Hardouvelis, 18/11/2008
23