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THE SOVEREIGN DEBT DEBATE
AND GREECE
January 11, 2011
Houghton Street, London, WCA2A 2AE
Gikas A. Hardouvelis
Professor, Department of Finance, University of Piraeus
Chief Economist & Director of Research, Eurobank EFG
THE SOVEREIGN DEBT DEBATE AND GREECE
TABLE OF CONTENTS
I.
The global economic environment
II.
EMU tensions
III.
How Greece reached the point of default
IV.
The Greek stability program
V.
Summary
VI.
Appendix: Can growth come back in Greece?
Gikas A. Hardouvelis
2
I. The evolving financial crisis as revealed
in the history of interbank spreads
3-month annualized spreads
USA: TED spread ≡ 3m Eurodollar – 3m T-bill
Euro Area: 3m Euribor – 3m Euro Area T-bill
%
5
4.5
Source: Bloomberg
4
Collapse of
Lehman Bros.
3.5
3
 Spreads reflect counterparty
risk plus flight to quality
Rescue of Bear
Stearns
2.5
2
1.5
6/1/2011 EA: 0.58
USA: 0.16
1
0.5
0
Dec-10
Oct-10
Aug-10
Jun-10
Apr-10
Feb-10
Dec-09
Oct-09
Aug-09
Jun-09
Gikas A. Hardouvelis
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Eurozone
USA
3
I. The financial crisis turned into an
economic crisis in late 2008
 Trade finance was an early casualty of the slowdown in credit growth
 In 2009, world trade fell a lot more than justified by the drop in output
% annual change of World Trade, $, constant prices
20 %
15
(1970-2009)
1973
10
5
0
-4%
-2
-5
2001
0 1982
2
4
6
8
1975
Source: AMECO
-10
2009
-15
y = -1.47+2.5x
2
R = 0.76
% an n u al ch an g e o f W o rld GD P , $ co n stan t p rices
Gikas A. Hardouvelis
4
I.
The world avoided a deeper recession thanks
to expansionary fiscal & monetary policies
Expansionary monetary policy
by central banks, Aug 2007 - Nov 2010
 Monetary policy
responded with
unusual vigor,
Quantitative Easing
in USA, UK
 Large change in
government
spending as well
 Hence, a repetition
of the experience of
the 1930s was
avoided
 Future growth is
burdened by large
General
Government Debtto-GDP ratios
Gikas A. Hardouvelis
Decline
in policy
rate
250
Increase in
Current
Central Bank C. B.
Assets
Assets
USA
- 5.00 %
169 %
$ 2.35 tn
Euro Area
- 3.00 %
60 %
€ 1.91 tn
UK
- 5.25 %
200 %
£ 0.25 tn
Source: National Central Banks
%GDP
221.7
Δ(Debt/GDP): 2007 2011
Debt/GDP (2011)
200
150.2
150
107
100
82.0
50 34.0
45.2
Source: AMECO
98.4
36.0
88.8
26.1
86.5
20.5
83.5
39.0
69.7
33.6
0
Japan
Greece
Ireland
USA
Portugal
Δ(Debt/GDP) 2007-2011
EA
Debt/GDP 2011
UK
Spain
5
I.
Risk premia rose; likely to remain high,
higher than 2007 pre-crisis levels
5-yr credit
default swap
rates for:
End-June
2007
PRECRISIS
End-August
2008
End-March
2009
End-October
2009
Jan 6, 2011
PRELEHMAN
CRISIS
PEAK
PRE-GREEK
CRISIS
TODAY
JP Morgan
19.3
143.9
201.1
63.2
83.8
Citigroup
11.7
305.5
631.5
179.8
150.2
-
-
-
19.3
39.9
Germany
4.0
11.9
57.5
20.3
56.0
Japan
2.2
19.2
92.0
49.3
72.8
China
12.4
87.1
160.5
79.2
70.6
Turkey
145.8
297.1
401.6
188.7
140.6
Russia
43.2
261.5
501.1
190.2
141.1
Spain
3.4
50.4
111.9
70.3
347.7
Greece
5.5
62.0
196.0
140.2
1034.4
Portugal
4.2
50.9
105.0
56.0
506.8
Italy
7.6
39.4
151.0
72.5
238.9
11.0
264.1
133.2
617.4
USA
Ireland
Gikas A. Hardouvelis
Source: Bloomberg
6
I.
Slower world growth ahead
The Great Recession is likely to leave its permanent marks: A more stable world
financial system with stricter regulation and supervision, yet with lower world
growth in the next decade due to:
1) Higher real interest rates

Risk premia will stay high relative to the pre-crisis period

The cost of financial intermediation will increase due to stricter regulation:
Basel III

Crowding out in the bond market by governments that compete for funding

Central bank interest rates will increase
2) Future deleveraging of the government sector, hence more restrictive fiscal
policy relative to the pre-crisis period

Governments spent their way out of a huge recession, but in the future they
cannot be as expansionary
3) Mediation of global imbalances will reduce world aggregate demand, as the
US consumer will increase its savings rate (perhaps also if yuan appreciates) and,
hence, exports to the US will decline

Gikas A. Hardouvelis
The Chinese, Indian or European consumer cannot fill in the gap left by the
Americans
7
Ι.
210
A two-speed world:
Emerging countries outperform
Index, Jan 2005=100
Industrial Production
190
 China & India grow faster
170
 Recession of 2009 not as
drastic in China & India
150
 The emergence of G-20
reveals the shift in
political power
130
China
India
Turkey
110
90
Japan
70
50
2005
US
Euro Area
2006
Japan
2007
India
2008
Turkey
2009
China
Developed
Countries
2010
Source: Ecowin, Eurobank EFG Research
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8
I.
Inflation: Stabilizing at low levels in the West
Index
Jan 2005=100
160
USD/bbl
Inflation
150
160
140
Turkey
140
120
130
100
India
Oil & Gold
NYMEX, first
maturing futures
contracts
USD/t oz
1500
1371.7
1300
1100
900
120
80
110
60
100
40
500
20
300
US
EA
JAPAN
INDIA
TURKEY
2006
2007
2008
2009
88.4
CHINA
90
2005
700
2010
2005
2006
2007
2008
2009
2010
2011
Source: Bloomberg, Eurobank Research
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9
II
I.
The global economic environment
II.
EMU tensions
III.
How Greece reached the point of default
IV.
The Greek stability program
V.
Summary
VI.
Appendix: Can growth come back in Greece?
Gikas A. Hardouvelis
10
II.
High sovereign debt does not characterize
all countries in EMU Periphery
1200
bps, Jan 7th 2011
EU-27 countries
5-yr
Credit
Default
Swaps
1000
800
EL
Source: Bloomberg, AMECO
IE
600
PT
400
BG
200
LT
LV
CY
MT
EE
SL
0
0
HU
ES
RO
20
AT
CZ
D E FR
SK PL
DK
UK
FI N L
SE
40
60
80
BE
100
IT
120
140
160
2010 Gen. Gov. Debt-to-GDP Ratio (%)
 Current Public Debt/GDP is not the only variable that unsettles markets
 Other variables that shape the size of market risk premia are: (a) Growth
prospects; (b) Size of future deficits (c) Private debt; (d); Banking sector
fragility; (e) Real estate bubbles, etc.
Gikas A. Hardouvelis
11
II.
Euro Area’s Outstanding Sovereign Debt
1800
1600
€bn
Total = € 6,177 bn
1557
1400
(Jan 6, 2011)
1227
1200
1219
1000
75
EA Debt Outstanding
 In 2011, funding needs are
bigger in the US and Japan
 Clearly, sovereign debt is
not the only problem in
EMU
FI
DE
NL
AT
FR
BE
IT
ESP
PT
IE
GR
0
12 58 10
4
7
LU
179
MT
103
200
Source: Bloomberg,
Eurobank EFG Research
300
CY
400
312
140
SK
600
591
325
Sl
800
$bn
$
World sovereign funding
needs in 2011
Source: UBS
 Yet, markets will be
preoccupied with sovereign
funding needs in the EMU
Periphery
Gikas A. Hardouvelis
12
IΙ. Competitiveness gaps within EMU
creates a two-speed Europe
15
Average CA Balance % GDP
2001 - 2008
10
LU
NL
DE
5
TWIN
SURPLUSES
FI
BE
EA
0
IT
FR
AT
Source: AMECO
SI
IE
CY
ES
MT
-5
SK
IE, ES: No fiscal problem but
real estate bubble and
over-extended banks
y = 2.29+1.81 x
PT
-10
GR
-15
-6
R2 = 0.45
TWIN DEFICITS
-4
-2
0
2
4
6
Average General Government Balance % GDP 2001 - 2008
The worry:
Gikas A. Hardouvelis
1) Current account deficits: Not caused by rational expectations of future
higher incomes and an influx of capital seeking investment opportunities,
but rather excessive optimism, leverage & consumption
2) Fiscal deficits: Gov money was not channeled to investment
13
II.
Private sector debt is high in
Ireland, Spain and Portugal
35
2,
6
380%
Private Loans / GDP
8,
1
280%
10 4
7,
10 5
7,
10 4
4,
10 3
4,
10 0
2,
6
92
,6
92
,4
82
,9
75
,3
67
,7
63
,6
53
,2
48
,5
47
,1
38
,8
6
0,
8,
11
130%
11
0,
2
13
8,
180%
5
17
6,
16 4
9,
16 7
7,
16 8
1,
5
0
9,
18
19
8,
0
21
230%
12
% of 2010 GDP
29
1,
3
330%
80%
R o m an ia
S lo v akia
P o lan d
C zec h
H u n g ary
L ith u an ia
B u lg a ria
B elg iu m
S lo ven ia
F in lan d
F ran c e
E sto n ia
G e rm a n y
L atvia
Italy
Greec e
A u stria
S w ed e n
M alta
N eth erla n d s
P o rtu g a l
S p a in
UK
Irelan d
D en m ark
C yp ru s
L u x/b o u rg
EA
30%
Note: ECB data. Loans to non MFIs excl. Gen. Government from MFIs excl. Eurosystem, August 2010,
% of 2010 GDP (EU forecasts). The data include securitizations and are trustworthy for cross
sectional comparisons, but not for time series analyses as individual series contain unexplained
abrupt breaks due to either full or partial inclusion of securitizations over time.
Gikas A. Hardouvelis
14
II. Financial markets unsettled since
Greek crisis erupted in November 2009
, 5-yr Greek
 On January
CDS was 1034.5 bps implying
bp
1200
6th
 a cumulative risk-neutral
probability of 40.1% for a
total capital loss any time
during the 5-year period,
 or a 99.9% cumul prob for
a capital loss of 10%
 Even more worrisome is the
following: On January 6th the 2year Greek Government bond
yield was 13.1%, a spread of
1216 bps over Bunds!!
5-year CDS rates
Greece, Ireland, Portugal & Spain,
Italy, Germany
1000
Source: Bloomberg
800
600
400
200
0
11/2/2009
11/13/2009
11/24/2009
12/5/2009
12/16/2009
12/27/2009
1/7/2010
1/18/2010
1/29/2010
2/9/2010
2/20/2010
3/3/2010
3/14/2010
3/25/2010
4/5/2010
4/16/2010
4/27/2010
5/8/2010
5/19/2010
5/30/2010
6/10/2010
6/21/2010
7/2/2010
7/13/2010
7/24/2010
8/4/2010
8/15/2010
8/26/2010
9/6/2010
9/17/2010
9/28/2010
10/9/2010
10/20/2010
10/31/2010
11/11/2010
11/22/2010
12/3/2010
12/14/2010
12/25/2010
1/5/2011
Market expected to remain
nervous throughout 2011
Greece
Ireland
Spain
Portugal
Italy
Germany
 Yet Greece does not need to go the market to get financed for 2 years! Illiquidity?
Overreaction? The market seems to believe that:
 Either the Greeks are incapable of absorbing the €110 bn rescue funds
 Or the EMU members will not be able to deliver the funds
Gikas A. Hardouvelis
15
II.
CDSs incorporate the possibility of a significant
haircut in Greek & Spanish debt obligations
Haircut
5 yr CDS
(Jan 6, 2011)
Marginal 1-yr
Risk-neutral
Probability
Cumulative 5-yr
Risk-Neutral
Probability
Size
Greece
Spain
Greece
Spain
100%
10.3%
3.5%
40.1%
15.7%
90%
11.5%
3.9%
43.4%
17.3%
80%
12.9%
4.3%
47.4%
19.2%
70%
14.8%
5.0%
52.1%
21.7%
60%
17.2%
5.8%
57.8%
24.8%
50%
20.7%
7.0%
64.8%
29.0%
40%
25.9%
8.7%
73.3%
34.9%
30%
34.5%
11.6%
83.7%
43.7%
20%
51.7%
17.4%
94.9%
58.1%
10%
94.0%
31.6%
99.9%
80.7%
 On January 6, 2011, the 5-yr CDS for Greece was 1034.5 bps
and for Spain 347.7 bps
Gikas A. Hardouvelis
16
II. The evolution of the 10-year Bond Spreads
1000
bp
900
800
Spreads over
10-year Bund yield
Greece
(September 1992 November 2010)
700
600
Ireland
500
Portugal
400
300
Spain
200
Italy
0
Sep-92
Apr-93
Nov-93
Jun-94
Jan-95
Aug-95
Mar-96
Oct-96
May-97
Dec-97
Jul-98
Feb-99
Sep-99
Apr-00
Nov-00
Jun-01
Jan-02
Aug-02
Mar-03
Oct-03
May-04
Dec-04
Jul-05
Feb-06
Sep-06
Apr-07
Nov-07
Jun-08
Jan-09
Aug-09
Mar-10
Oct-10
100
Note:
Monthly Averages; Annualized yields to maturity on fixed coupon bonds.
Eurostat estimates whenever monthly 10-yr yields were not available.
Source: Eurostat
Gikas A. Hardouvelis
17
ΙΙ. Current S&P country ratings
EU-27 Long Term Credit Rating
(S&P Ratings, January 10, 2011)
AAA
LU
AA+
BE
AA
SI
NL
SE
UK
AT
DK
IE (AA)
CY (A+)
FI
FR
DE
ES (AA+)
AAA+
SK
IT
MT
A
CZ
EE
A-
PL
PT (A+)
BBB
BG
LT
BBB-
HU
BB+
RO
BBB+
EL (A-)
LV (BB) 
Junk status
BB
BBNote: In parentheses, different older Ratings as of October 31, 2009
Gikas A. Hardouvelis
18
IΙ. EMU Policy response: Late & ad hoc,
but decisive
1. An MOU on May 3-5 between IMF/EMU on one side and the Greek
government on the other, with conditionalities and €110bn 3-yr loan
package for Greece

€ 80bn EMU funds

€ 30bn IMF funds with lower interest rate
2. Euro Area support program of € 750bn initiated on May 9-10

€ 60bn immediate assistance,
 Extension of EU Commission facility for “circumstances beyond
their control”, Article 122.2

€ 440bn “European Financial Stability Facility”
 loan guarantees from EMU States

€ 250bn IMF funding
 on a “case by case basis”

ECB nuclear option
 Secondary market purchases of sovereign debt
Gikas A. Hardouvelis
19
II. Euro Area Crisis Resolution Mechanisms
Present EFSM
Mechanism
endorsement
procedure
ECOFIN, qualified
majority
Present EFSF
Future ESM
Eurogroup, approval
from member states
national parliaments
European Council, Modification
of the Lisbon Treaty is a
prerequisite (approval of
member states parliaments
and not referendums)
Activation date
From 5/2010
8/2010 - 6/2013
Permanent Mechanism to be
activated by 1/1/2013. The
ESM will replace the two
existing mechanisms.
Size of funding
€ 60 bn
€ 440 bn
Not specified yet
Source of
funding/
guarantees
EU Budget, bilateral
loans
Euro Area countries,
Issuance of EFSF
bonds
Not specified yet
To whom it
applies
All EU members
All Euro Area
members
All Euro Area members
Activation
procedure
ECOFIN, qualified
majority after
recommendation
from the European
Commission and
the ECB
Eurogroup,
unanimous decision
after recommendation
from the European
Commission, the ECB
and the IMF.
Unanimous decision of the
Euro Area countries
Gikas A. Hardouvelis
20
II. The key within EMU
Portugal;
2.5%
Finland; Ireland; 1.6%
1.8%
Other; 2.0%
Austria; 2.8%
Greece;
2.8%
Germany;
27.1%
Belgium;
3.5%
Austria; 3.4%
Belgium;
4.3%
Finland;
2.2%
Other; 2.5%
Germany;
33.4%
Netherlands;
7.0%
Netherlands;
5.7%
Spain; 11.9%
Italy; 22.1%
Italy; 17.9%
France;
20.4%
Initial EFSF Contributions
France;
25.1%
Adjusted EFSF contributions with
Greece, Ireland, Portugal and Spain out
Source: EFSF Framework Agreement, EFG Eurobank Research
 The Initial Contribution to the European Financial Stability Facility reflects
the relative size of each economy
 This contribution increases the moment EFSF is tapped
Gikas A. Hardouvelis
21
IΙ.
EMU Policy response:
The current state of affairs
 A Monetary Union is not a regime of fixed exchange rates, nor a Currency Board.
EMU nations share a central bank and a common currency.
 Greece cannot take a “leave of absence” from EMU, it would have to leave the EU
 Deeper political union is not acceptable by member nations and EMU dissolution
means high economic cost and severe loss of political capital.  Stricter EMU fiscal
mechanism is coming that would enhance EMU stability and be beneficial for
undisciplined countries
Van Rompuy Task Force legislative proposals include:
 Adoption of fiscal rules from all EU countries (regardless of their deficit levels)
 Member States with debt levels above the 60% threshold should follow a faster
adjustment path towards their medium term objectives for debt reduction.
 The Excessive Deficit Procedure can be triggered even with deficit below the 3%
threshold but with an unsustainable (forecasted) deficit path.
 Sanctions in the form of deposits should be imposed – using a reverse voting procedure –
to the member states that fail to take appropriate actions to reduce deficit and/or debt.
 Introduction of a permanent crisis resolution mechanism for the euro area aiming to
address financial distress and contagion.
European Council Decisions (December 16-17, 2010)
 European Stability Mechanism will replace the current mechanisms (EFSM, EFSF).
Changes in the Lisbon Treaty, a prerequisite for implementation.
 Approve Van Rompuy Task Force proposals
Gikas A. Hardouvelis
22
II. Are E-bonds likely?
NOT NOW, BUT THEY MAY BECOME A REALITY IN THE FUTURE
 Proposals for E-bonds were made since early 2010, e.g. Stefan Collignon
 E-bonds ought to be legally formed so as not to trigger CDS calls
 Structured E-bonds (blue-bond, red-bond) with the 60% Debt/GDP separating
mark, proposed by Jacques Delpa & Jacob von Weizsäcker (2010) of Bruegel
 Two weeks before European Council of Dec 16-17, Jean-Claude Junker & Giulio
Tremonti proposed structured E-bonds, up to 40% of Debt/GDP through a new
European Debt Agency
 One day before European Council of Dec 16-17, Frank-Walter Steinmeier & Peer
Steinbrück argued for E-bonds, revealing the idea is being discussed in Germany
WHO BENEFITS FROM E-BONDS?
 They diversify risk, benefiting every country
 It is assumed the EMU Periphery would benefit, as they would be able to finance
their debt at cheaper rates, borrowing credibility from stronger countries. Ricardo
Cabral (2010) argues the opposite, claiming countries that issue E-bonds lose
their option to default as E-bonds are no longer issued in domestic jurisdiction
 For the EMU Periphery, structured E-bonds relieve some market pressures plus
they provide a strong incentive mechanism to quickly bring the debt down to
below 60% of GDP.
Gikas A. Hardouvelis
23
II.
What will the ECB do?
STAY ON THE SIDELINES, ENSURING FINANCIAL SECTOR STABILITY
 ECB is of the opinion that fiscal crises ought be solved via fiscal measures
 It has loosened its collateral requirements and agreed to extend its special
liquidity programs to stabilize market conditions
 Under its nuclear option, the SMP, it has bought around €70 bn of bonds, an
action different from the US or UK Quantitative Easing, as the injection of
liquidity is sterilized by issuing one-week term deposits
 Future debt monetization is unlikely as it risks generating inflation
 Will the liquidity provision continue in case of future rising inflation? This is a
big risk for Ireland and Greece, as the remaining EMU countries have
reduced their ECB dependency
IS THE ECB POSITIVE ON FISCAL COORDINATION?
 Yes, up to a certain degree, as coordinated fiscal measures reduce market
pressures
 But if coordination is pushed tighter, fiscal policy makers my turn out to be
strategic leaders in a game with the ECB, leading the ECB to lose some of
its independence (Roel Beetsma & Massimo Giuliordi (2010))
Gikas A. Hardouvelis
24
II.
Drastic recent changes in the
demand for ECB liquidity
ΕΕ-16
a
Greece
b
c
a
Ireland
b
c
a
Portugal
b
c
a
b
c
Jun-07
465
28,026
1.7
4.3 353
1.2
25.5
1,604
1.6
0.2
416
0.1
Jun-10
870
32,578
2.7
94.3 543
17.4
94.8
1,690
5.6
40.2
549
7.3
Oct-10
534
31,855
1.7
92.5 517
17.9
130.0
1,599
8.1
40.0
555
7.2
Spain
Belgium
Austria
a
b
c
a
b
c
a
b
c
Jun-07
18.2
2,761
0.7
37.5
1,220
3.1
14.8
848
1.7
Jun-10
126.0
3,487
3.6
36.3
1,217
3.0
24.2
1,035
2.3
Oct-10
67.9
3,473
2.0
5.8
1,153
0.5
7.2
1,008
0.7
Germany
France
a
b
c
Jun-07
243.4
7,381
Jun-10
226.0
Oct-10
103.0
a
Italy
b
c
3.3
39.0 6,879
7,641
3.0
7,397
1.4
a
b
c
0.6
20.8 3,092
0.7
133.0 8,190
1.6
36.0 3,991
0.9
41.6 8,059
0.5
33.7 3,967
0.8
Note: (a) Total Funding (€bn), (b) Banking Sector’s Total Assets (€bn), (c) % (a)/(b)
Gikas A. Hardouvelis
25
III
I.
The global economic environment
II.
EMU tensions
III.
How Greece reached the point of default
IV.
The Greek stability program
V.
Summary
VI.
Appendix: Can growth come back in Greece?
Gikas A. Hardouvelis
26
III. Greece: General characteristics
2009
Population (mil.)
Geographical Area (km2)
GDP per capita (€)
Living standards
(UN ranking among 182 countries)
Life expectancy (years)
Cars per 1000 inhabitants (2006)
Suicides / 100 thousand inhabitants
Primary Sector (% GDP)
Secondary Sector (% GDP)
Tertiary Sector (% GDP)
Tourism (% GDP)
Construction (% GDP)
Public Sector (Gen. Gov. Expenditures % GDP)
Exports (Goods & Services, % GDP)
Imports (Goods & Services, % GDP)
Private Consumption (% GDP)
Investment (% GDP)
Gen. Gov. Debt (% GDP)
Gikas A. Hardouvelis
Greece
EA-16
World
11.3
132.0
21,082
25
80
407
2.8
4.0
16.9
79.1
9.8
4.5
50.5
18.8
28.5
328.6
2,578.8
27,271.4
Median 17
80.5
506
8.8
2.2
24.7
73.0
15.2
5.3
50.7
36.3
35.0
6,756.0
510,072
7,704.9
72.6
16.8
115.1
57.6
19.7
78.7
66.1
6.0
30.6
63.4
9.4
27
7.0
5.0
3.0
1.0
-1.0
Forecasts
III. Real growth rates in Greece were higher
than in EU-15 from 1996 through 2009
5.9
4.5
4.4 4.5
4.2
3.6 3.4 3.4
4.3
2.8 2.5
2.9 3.1
3.4
2.3 3.0
2.4
3.9
1.8
2.3
3.1
3.0
1.6
2.8
1.9
2.7
1.3
2.1
1.8 1.2 2.0
1.7
1.2 1.2 1.8
0.7
0.3
0.0
-0.3
-1.6
-3.0
Relative Living Standards
ΕΕ-15=100 in PPS
-2.3
1991 76.5
2009 87.4
-5.0
-4.2
2011
2010
2009
2008
2007
2006
2005
Gikas A. Hardouvelis
2004
2003
Greece:
Answer:
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
EU-15
-4.3
-3.0
Greece Source: EU, Eurobank Research
From boom to bust & market worries, How come?
Not an equilibrium growth
28
III. Over-consumption in Greece
10
Average CA Balance % GDP
2001 - 2008
NL
y = 39.55- 0.55 x
R2 = 0.29
SE
FI
5
DE
BE
AT
DK
Source: AMECO
EA
0
FR
SI
IE
EU27
IT
CZ
-5
ES
MT
SK
CY
HU
-10
UK
PL
RO
LT
PT
EE
BG
LV
GR
-15
60
65
70
75
80
85
90
Average Total Consumption % GDP 2001 - 2008
(Private plus Pubic Consumption)
Gikas A. Hardouvelis
29
III. Lack of competitiveness showed up in
current account and in inflation differential
0
Goods
2009
EA
-30,767.3
12,640.2
Income
-8,984.3
Gikas A. Hardouvelis
0.3
-25,818.7
Services
Current Transfers
1.2 1.4
2010
Source: AMECO, Eurobank Research
Greece
Current Account (€ mil)
2.1
2009
-14.6
2.1 2.2 2.2 2.2
2007
-14.4
% GDP
1.2
2.2 2.4
3.3
2008
1
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-16
2
3.3
3
2.3
3
2006
-14
-10.9
2.9
2.1
3.7
2005
-11.3
-12
3
4.2
3.5
3.4
2004
-10
-7.5
-7.7 -7.2 -6.5
3.9
4
2003
-8
-5.8
4.9
5
2002
-6
Source: Bank of Greece
Inflation
%
2001
-4
-2.8
-3.9 -5.6 -6.5
6
2000
-2
Current Account Balance
1999
0
1,292.6
30
III. Ease of Doing Business rankings reveal
lack of competitiveness
Rank Starting a
business
(days)
Cost of
registering
property
(% p. value)
Protecting
Investors
(0-10)
Exportin
g Goods
(days)
13.8
4.4
6.0
10.9
199.4
9
13
6.3
8.3
7
76
Βulgaria
51
18
3.0
6
23
616
Portugal
47
7
7.4
7
15
218
Romania
56
10
1.3
6
12
222
Spain
49
47
7.1
5
9
197
Τurkey
65
6
3.0
5. 7
14
223
Czech Rep.
63
20
3.0
5
17
557
109
19
12.7
3. 3
20
224
OECD
Ireland
Greece
Paying
Taxes
(hours
per year)
Source: World Bank Ease of doing business 2011


World Bank: In 2010 Greece ranked 109th out of 183 countries
This was due to a) increased cost of registering property (from 1% to 10%) b) Delays
in the implementation of reforms aiming to boost competitiveness
Gikas A. Hardouvelis
31
III. Almost always in fiscal trouble, but fiscal mess
grew prior to the onset of the 2009 recession
55%
50
GDP
Source: European Commission,
Spring 2010 forecasts
53.2
Greece
49.8 49.2
49.1
46.6
49.3
45.7
45.6
45.3
44.9
44.8
44.9
44.4
44.7
46.2
43.0
45.0
41.9
44.1 44.6 44.1 44.3
43.8
40.3
39.7 40.2 41.5
39.1
41.3
40.5 41.7
38.1
40.9
40.5
39.0
39.2
39.0
38.6 39.8
36.3
37.8
37.4
36.7
GAP = 3.1%
31.8
34.5
33.2  Greece increased revenues prior to joining EMU
28.9
30.8
 Expenditure kept below 45% GDP prior to 2008
28.4
 2008 deterioration despite real growth of 1.3%
45
40
35
30
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
25
EU Forecasts
46.4
Revenues
Expenditures
 1999 is examination period for entering EMU: Deficit erroneously revised
to 3.1% of GDP, with ex-post switch in military expenditure accounting
Gikas A. Hardouvelis
32
III. Deterioration was not due just to the recession
as a comparison with EA16 reveals
Euro Area
 The 2007-2009 expenditure deterioration was
4.8% of GDP, whereas in Greece 7.0%
50.6
50.8
 Yet 3.3% Cum. growth in Greece, -1.2% in
EA16
49.3
49
48.4
48.0
48
47
46.6
46
45.3
44.9
45.0
44.5
Revenues
Gikas A. Hardouvelis
45.3
44.8
46.9
44.9
44.4
44.5
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
1999
1995
42
48.7
47.5 47.3
46.6
46.0
 EMU countries reduced public expenditure prior to joining
 Revenues were always higher in EA
1998
43
46.2
45.4
1997
44
48.0
46.2
45.6
1996
45
46.3 46.6 46.1
47.2 47.5
49.4
44.8
44.8
2012
50 50.5
50.8
EU
Forecasts
51
2011
% GDP
2000
52
Expenditures
Source: European Commission, Autumn 2010 forecasts
33
III. Breakdown of Expenditure and Revenues
Total
expenditure
% GDP
Intermediate
consumption
% GDP
Employee
Comp.
% GDP
Social
benefits
% GDP
2007
1995
2007
1995
1995
2007
1995
Greece 45.8 44.7
5.0
5.7
10.0 11.2 11.3
4.5
13.5 17.6
50.6 46.0
4.9
5.0
10.9 10.0
3.0
16.8 15.8
1995
EA16
Total revenues
% GDP
2007
Interest
Rate
% GDP
5.4
2007
Indirect taxes
(VAT) % GDP
Direct taxes
% GDP
Social
Contributions
% GDP
1995
2007
1995
2007
1995
2007
1995
2007
Greece
36.6
39.7
12.1
12.5
6.6
8.0
11.2
13.4
EA16
45.6
45.4
12.2
13.5
11.1
12.4
17.0
15.1
Source: AMECO, data for EA16 go back to 1995
 Expenditure in Greece switched from interest payments to social benefits
 The large interest payments of the past is a strong argument against default today
 A drop in interest payments occurred in all of EA16
 Social contributions increased in Greece but declined in EA16
Gikas A. Hardouvelis
34
ΙΙΙ. The saga of deficit and debt revisions
2009
Budget deficit
Public Debt
€ bn
%GDP
€ bn
%GDP
2009 Budget
(submitted December 2008)
5.2
2.0
237.9
91.4
(January 2009)
9.2
3.7
239.4
96.3
( April 2009)
9.3
3.7
251.2
99.6
EDP notification (October 2nd 2009)
14.4
6.0
257.9
107.2
EDP notification (October 21st 2009)
30.0
12.5
272.3
113.4
(April 2010)
32.3
13.6
273.4
115.1
Eurostat Revision* (November 2011)
36.2
15.4
298.0
126.8
Revised SGP
EDP notification
EDP notification
Source: Ministry of Finance
(*)
The November 2011 Debt numbers include more public utilities and transportation companies
in the definition of General Government. The October 2010 EDP notification is not presented
as it did not include revised estimates for Greek deficit and debt figures, citing the workload of
Eurostat officials who were auditing the Greek data.
Note: Nominal GDP revisions often took place together with deficit & debt revisions, affecting slightly
the reported percentages of GDP.
Gikas A. Hardouvelis
35
IV
I.
The global economic environment
II.
EMU tensions
III.
How Greece reached the point of default
IV.
The Greek stability program
V.
Summary
VI.
Appendix: Can growth come back in Greece?
Gikas A. Hardouvelis
36
IV.
Latest EU/IMF/ECB adjustment program:
Key characteristics

Emphasis on fiscal discipline, structural reforms and competitiveness, but no
explicit growth strategy

Key characteristics:
 Real growth resuming in 2012 but staying well below the 1996-2007
historical norm
 Inflation subdued, never above ECB target of 2%
 Interest rate risk premia vs. Germany forecasted to decline
 Front-loaded reforms and drastic first-year fiscal tightening with a large
subsequent fiscal cushion, and with no zeal to ever zero the deficit
 Privatization Revenues €7 bn in 2011-15 (at least €1 bn in 2011)
 EU/IMF/ECB detailed conditionalities with quarterly targets as a strong
disciplinary device
 Drastic reduction in real wages, but effort to minimize the burden on the poor
 Real pension solution, which controls for hidden future liabilities
Debt-to-GDP ratio declines to 131% by year 2020 in the baseline scenario
Yet, assuming real growth of 1% higher per year, which is closer to historical norm,
EU/IMF forecasts that it would lead to a Debt-to-GDP ratio in 2020 of 91%


Gikas A. Hardouvelis
37
IV.
The latest EU/IMF/ECB adjustment program
Assumptions
2009
2010
2011
2012
2013
2014
2015
2020
GDP Growth (%)
-2.6
-4.2
-3.0
1.1
2.1
2.1
2.7
2.7
GDP deflator (%)
1.8
3.0
1.5
0.4
0.8
1.2
1.3
1.8
Nom. GDP (€ bn)
233
230
227
230
236
244
253
309
Int. Rate (%)
4.9
4.6
5.0
5.4
5.7
5.7
5.7
5.7
Bund Rate
-
225
275
350
350
350
350
350
Spread over Bund
-
550
525
350
300
300
300
250
Sensitivity analysis
Debt-to-GDP
2009
2010
2011
2012
2013
2014
2015
2020
Baseline
127
141
152
158
158
150
134
131
Higher growth
+1% per year
127
139
148
151
147
140
132
91
Lower growth
-1% per year
127
143
157
151
166
169
169
178
2% higher int. rate
on new debt
127
141
152
158
159
155
153
145
Gikas A. Hardouvelis
Source: Revised EU/IMF/ECB adjustment programme
38
ΙV. More on the latest EU/IMF/ECB program
2009
2010
2011
2012
2013
2014
2015
2020
Current Account
(%GDP)
-11.1
-10.4
-7.1
-6.1
-5.2
-4.3
-3.3
---
Gen Gov Rev.
(%GDP)
37.8
39.8
42.4
43.2
44.2
43.4
42.0
40.3
Prim. Expenditure
(%GDP)
47.9
43.1
43.2
42.2
40.7
37.3
36.1
34.4
Interest Expense
(%GDP)
5.3
6.4
6.6
7.5
8.3
8.7
8.5
7.4
12.4
14.7
15.0
17.3
19.6
21.3
21.4
22.9
-15.4
-9.6
-7.4
-6.4
-4.8
-2.6
-2.5
---
(€ bn)
-36.2
-22.3
-17.0
-14.7
-11.5
-6.2
-5.1
---
Primary Balance
(%GDP)
-10.1
-3.3
-0.8
1.1
3.5
6.0
6.0
6.0
Gen Gov Debt
(%GDP)
127
141
152
158
158
154
150
131
295
324
345
363
373
376
380
405
(€ bn)
Gen Gov Deficit
(%GDP)
(€ bn)
Gikas A. Hardouvelis
Source: EU/IMF/ECB adjustment programme, author calculations 39
IV.
a)
Material risks exist
Will the recession end soon? Low European growth may cause Greek economic
growth to stall; EU funds are not sufficiently mobilized yet, while privatizations have
taken the back seat. Drastic initiatives on growth required.
Yet, Greece is a relatively closed economy and over half of its exports are
channeled outside the Euro Area. In addition, core EU still growing. Once
sentiment stabilizes, private investment may stop declining, giving a boost to
domestic output
b)
Risks of the Gargantuan task of grabbing tax evasion without instituting moral
hazard through frequent tax amnesties
Yet, a switch to a stable and transparent tax regime requires time to implement
and in the meantime revenue collection expected to suffer
c)
Risk of silent anger from the population in 2011, with the rise in unemployment and
decline in incomes and if government fails to address the rampant tax evasion
Yet, MOU requirements to push structural reforms– if followed – could avert this
anger
d)
High bond risk premia likely to persist, which could prohibit Greece from tapping the
bond market in two years or so
Yet, Irish precedent helps lengthening the maturity of the EMU €110 bn;
Lengthening the maturity of the remaining debt is a last-resort option.
Gikas A. Hardouvelis
40
IV.
Should Greece default ?
The argument goes that if the EU/IMF/ECB Program succeeds and in 2012-2013 Greece
begins generating the first primary surpluses, then it would be tempted to restructure
its huge debt. However, this event has low probability because:
1. A Greek default would be an EMU decision, not a Greek decision. Stakeholders of
GGBs are primarily Greeks and other EMU members. They do not want a default. It is
unlikely European banks would unload their Greek bonds at a huge loss.
i. Greek banks own approximately €45 bn, pension and other funds another
€25bn, individuals around €15bn. Thus, a haircut would force the government to
bail out its banking sector and its pension system
ii. EMU banks hold a major chunk of GGBs, most of it posted at the ECB as
collateral. EMU members would object to a default. It may create FI
bankruptcies in EA-16.
iii. The ECB holds significant amounts of GGBs both directly (~ €30 bn) and in the
form of collateral. Greece cannot go against its own lender of last resort
iv. EMU countries have given €80 bn in loans (& IMF €30 bn), on which Greece
cannot default
2. Risks of contagion in the European financial sector have flared up
3. Fear of a deposit run during the default/restructuring process, plus inability to tap
the markets for a long time after a default
4. Interest costs will increase for the Greek private sector as well, reducing growth
5. The country needs to install a culture of “honoring one’s debt obligations” for growth
to be reignited
Gikas A. Hardouvelis
41
IV. Factors
which markets may underestimate
1)
Reforms are drastic & on time, particularly the pension, labor and
fiscal ones - Government online with the programmes requirements
2)
Unusually benevolent political environment
3)
Revenue generation remains in question but action is taken
4)
While the biggest current risk factor, an end of the recession by H2
2011 is within reach
5)
In the intermediate-run, growth can come back - making the level of
debt less onerous
Gikas A. Hardouvelis
i.
A strong private sector, which is under-levered with rich citizens,
plus a conservative banking sector
ii.
There is a strong growth potential in Greece, especially if
competitiveness is restored
42
V. Summary: The crisis as an
opportunity for change
 The international crisis is an opportunity for a new global financial system
 Lower future world growth, with developing world leading the way and with stricter
financial regulation
 The EMU crisis is an opportunity for fixing its internal fiscal mechanism
 Van Rompuy Task Force proposals will bring added fiscal discipline, plus ESM could
bring long-run stability; E-bonds could materialize
 Greece is in a transitional stage:
 It either does nothing and gets trapped in a prolonged period of stagnation and huge
unemployment, with contracting living standards
 or uses the 3-year EU/ECB/IMF lending window efficiently to fix itself up, yet carrying
the burden of past sins in the form of both higher unemployment and higher debt
 Indeed, the Greek crisis is an opportunity to fix its long neglected general public
sector and pursue the structural reforms that were avoided for decades.
 Despite huge risks, Greek society is ready and government is in line with MOU with
EU/IMF/ECB
 Pension reform a big plus and can be supplemented; Labor reforms induce flexibility
 Many reforms still pending: Health sector, Public sector enterprises, Local
governments, Educational reform
 State has to capture the underground economy, simplify the tax system and reduce
marginal tax rates
 The stricter the EU supervision, the more likely it is for Greece to succeed
Gikas A. Hardouvelis
43
THANK YOU FOR YOUR ATTENTION !
[email protected]
www.hardouvelis.gr
+30-210-333-7365
Gikas A. Hardouvelis
44
VI.
I.
The global economic environment
II.
EMU tensions
III.
How Greece reached the point of default
IV.
The Greek stability program
V.
Summary
VI.
Appendix: Can growth come back in Greece?
Gikas A. Hardouvelis
45
VI. Appendix: Can growth come back in Greece?
1) Reforms are drastic
2) Boost aggregate demand to end the recession in 2011

Mobilize EU funds

Stabilize consumer and investor sentiment

Mobilize the private sector in common projects, PPPs
3) Follow a clear long-term strategy to boost potential GDP

Greece has a strong private sector but lacks an organized
public sector

Continue on structural reforms and product & service
markets

Boost capital intensity, education, quality of institutions

Minimize corruption and bureaucracy
Gikas A. Hardouvelis
46
VI.1 Pension reform is drastic
 New pension Law
adopted on July 8.
Contains safeguard
clauses for parametric
changes to be triggered
in June 2011, pending
full actuarial report.
 Characteristics:
Old Regime
Pension Exp.
(% GDP) GR
Dependency*
Pension Exp.
(% GDP) EA
2010
2020
2035
2060
11.6
13.2
19.4
24.1
56
59
78
102
11.2
11.6
13.2
13.9
Source: European Commission 2009
* Ratio of pensioners to contributors
 Fix system’s parameters in order to reduce the expected increase in future
annual state pension liabilities (by 2060) from 12.5% of GDP to 2.5% of GDP.
 Retirement age for everyone at 65 by 2015, increasing in line with life
expectancy after 2020 and every 3 years, and including a minimum contributory
period of 40 years by 2015
 Early retirement will be restricted to the age of 60 by 2015, will be penalized
more than before (6% loss per year)
 Size of pension linked to life-time contributions (now: Best 5 years of last 10 of
working life) and is price indexed, upper limit to be reduced
 List of heavy and arduous professions to be reduced drastically, under a ceiling
of 10% of labor force
Gikas A. Hardouvelis
47
VI.1 Labor reforms are drastic and continue …
 Maximum of firings per month more than
doubled to 5% for most large companies
GR
ΕU16
Total (15-64)
60.1
64.4
Men (15-64)
71.5
70.6
 Reduce overtime premia
Women (15-64)
48.7
58.1
 In public sector, wages & pensions bill down
-15% yoy in 2010 (-1.6% of 2009 GDP)
Young (15-24)
20.7
33.8
 In private sector, minimum nominal wages
freeze for 2010, increase in line with Euro
Area inflation for 2011-2012
Total (15-64)
12.0
10.0
9.5
9.9
Women (15-64)
15.4
10.1
Young (15-24)
31.4
20.4
 Minimum wage of new entrants in labor
force expected to be reduced from
€740/month by ca 16% to €621/month
Recent developments:
2010 Q2
Employment
Unemployment
Men (15-64)
 Firm-level agreements prevail over industry-level and country-level
 Symmetry in central arbitration
 Elimination of automatic extension of sectoral agreements to those not
represented in the negotiations
 Local contracts in areas of high unemployment can now contain wages at levels
below minimum
Gikas A. Hardouvelis
48
VI.1
Fiscal reforms are drastic and continue …
 “Kalikrates” Law adopted in June, reforming public administration at the local level,
reducing the number of municipalities from 1034 to 325, plus eliminating one layer of
state bureaucracy (by dissolving 54 prefectures and transferring their powers to the
existing 13 peripheries).
 New Financial Management Law (NFML) adopted on July 29, amending the budget
process:
 3-year fiscal strategy (by end of March 2011 the first three year budget plan for
the 2012-2014 period is expected according with the revised MoU)
 Top-down budgeting with explicit ceilings for state budgets and expenditure
estimates by line ministries
 Standard contingency margins, commitment controls, supplementary budget for
over spending
 Commitment register, publish monthly data on General Government, report all
arrears monthly
 The 2011 Budget was constructed according with the NFML.
 Single Payment Authority becomes gradually operational for Central Government and in
March for General Government.
 Details for general government (including local governments, pension funds, etc)
revealed in the 2011 budget process
 An OMB-equivalent in the Parliament and a revenue rule is adopted already
 Independence of the Statistical Agency established last December and new regulations
for Statistical Action Plan.
Gikas A. Hardouvelis
49
VI.1
More reforms …
Taking place now:
 Reform of the tax legislation (new tax law adopted in April 2010 and effective from
January 1, 2011 on 2010 incomes, new bill on the reform of the tax collection framework
by end of January 2010)
 Competitiveness & Business environment measures (business start-ups, adoption of the
services directive etc.) by end of January
 Simplify public sector remuneration following a Functional review by end of March
 New investment law by mid January 2010
 Liberalization of the road freight transport already voted by the Parliament
 “Fast track” law for investments already voted by the parliament.
 The opening up of the closed professions by mid January 2010
 Outsourcing the auditing of hospitals (currently 10 largest audited by PWC)
 Public sector enterprises: Balance sheets of 10 largest loss-makers on the internet,
restructurings, limits on State guarantees of their borrowing, wage cuts
 Restructuring of railroads, turning them profitable in 2011
Scheduled to be completed by the end of March 2011:
 The actual implementation of the local administration reform
 The actual implementation of the Services Directive
 The actual implementation of the business start-up law (general electronic commercial
registry, one stop shops for start ups etc)
 Measures to facilitate FDI and investment in strategic sectors of the Greek economy
 Strengthening the independence of the Hellenic Competition Committee
 Electronic registering of drug prescriptions, further reduction in drug costs, patient-doctor
benchmarking to avoid unnecessary prescriptions
Gikas A. Hardouvelis
50
VI.1 Privatization revenues for 2011 and beyond

Slow start perhaps due to the bad market environment.

EU/ECB/IMF program assumes €7bn for the 2011-2015 period and at least €1bn in
2011

Privatizations could easily bring more than €10 bn over a 4-year period. Main cash
cows are: Ports (privatization or concession contracts), gambling (new casino
licenses, internet gambling, 34% stake on OPAP), energy sector (natural gas
companies) and real estate

Presently, State claims it wants to retain at least 51% in “strategic” firms (e.g.
PPC). Concession contacts to be used for real estate holdings, ports and airports

The first planned privatizations are mainly soft and include full privatization of
casino’s, stock market listing through SPVs for 10 ports, concession contracts for
the highway system, selling of EYDAP’s 10%, EYATH’s 23%, Hellenic Post’s 39%,
Railways: sell of TRAINOSE’s 49% (passengers and freight services), real estate
development through SPVs, concession contracts for the Athens and Thessalonica
freight terminals

State (Ministry of Finance) owns real estate assets worth over €270 bn. Most of it
could be deployed through long-term leases

The government will enable the effective liberalization of the wholesale electricity
market.
Gikas A. Hardouvelis
51
VI.1
Unusually benevolent political environment
Subdued Social Unrest:

When PM addressed the nation after the February Davos meetings and for the
first time revealed a wage freeze and indirect tax increases, 2/3 of the
population applauded.

Demonstrations are 1/20 the size of earlier ones

Citizens seem aware of the fiscal problem and of the years of public waste and
ballooning debt and are ready for sacrifices, demanding equal distribution of
burdens
Strong government at the right moment in history:

New government elected in October 2009 for four years  Government can
pursue restrictive fiscal and tough structural policies without compromising its
reelection objective, as long as economy recovers in 2012

Strong parliamentary majority and strong leadership by the PM allows
government to pursue its plans undeterred

In contrast to past experience and thanks to the rising bond spreads, it only
took five months for the newly elected government to gain control of the
unraveling crisis  Now it is ahead of the MOU requirements
Gikas A. Hardouvelis
52
VI.1 Budget execution satisfactory thus far
During the 12 months
of 2010:
 Deficit down 36.5% yoy,
which is higher than the
annual target of -33.2%
yoy
 No discrepancy with
numbers provided by
BoG on a cash basis
 Primary expenses down
10.7% yoy vs. annual
target of – 9.0% yoy
 Net revenues up by
only 5.5% yoy vs.
annual target of +6.0%
yoy
 Note that this is the
central budget deficit
and not the ESA 95 gen.
gov. deficit
Gikas A. Hardouvelis
Central Government Budget: January-December 2010
January-December
2010 (€bn)
January-December
2010 (%YoY)
Annual target
(%YoY)
1. Net Revenues (a-b)
51.14
5.5
6.0
a. Gross revenue
b. Tax returns
56.12
4.98
5.0
0.5
5.7
3.0
2. Expenditure (α+β+γ)
65.37
-9.0
-7.5
α. Primary expenses
51.80
-10.7
-9.0
13.22
7.3
7.6
3.06
8.44
50.2
-12.0
41.7
-11.3
19.60
-36.5
-33.2
Ordinary Budget
β. Transfer to hospitals for
the settlement of part of
past debt
γ. Interest costs
0.34
Public Investment Budget
(PIB)
3. Revenue
4. Expenditure
5. Budget deficit (1-2+3-4)
Source: Ministry of Economics
Source: Ministry of Economics
53
VI.1 Government begins to address cracks in an
outdated revenue collection mechanism
Revenue developments are encouraging
 VAT receipts were up by 11.1% yoy in November and by 4.8% yoy in the
January to November period
 VAT receipts are increasing for four successive months (August 10% yoy,
September 16.9% yoy, October 15% yoy), due to:
 Fight against tax evasion
 Second leg of VAT increase effective on July 1st
 Revenues from the settlement of past tax obligations ca € 0.7 bn in
November. Additional revenues of at least € 0.5 bn are expected in
December.
 Custom revenues increased by 33%yoy in November 2010
In order to address the revenue shortfall mentioned above, the government will
implement from January 2011 onwards an anti-tax evasion plan which includes
 Centralization of data collection
 Dedicated task forces focused on high-income individuals (earners) and firms
 Centralized taxpayer service directorate
 Centralization of filing enforcement and other medium term measures (new
legislation on risk based compliance framework etc.).
The respective tax bill is expected to pass from the parliament by end of January
Gikas A. Hardouvelis
54
VI.1 Program contains cushions
Existing cushions help absorb negative shocks
and avoid a derailment of the program
Taxes on Household Income
(% GDP, 2008)
10
 The fiscal adjustment in 2011 smaller than
in 2010
9
 For next year, opportunity to grab tax
evasion through imputed income on selfemployed, who are 36% of labor force but
contribute only 7.5% of total tax revenues.
5
 Receipt revolution and the new tax bill
forces revelation of company revenues
and raises VAT
 Public waste is huge, e.g. annual drug
expenses of €9.2 bn is 3 times bigger per
capita than in Spain – can be cut without
affecting the economy
9.1%
8
7
6
4.7%
4
3
2
1
0
GR
EA-16
VAT receipts
(% Private Consumption, 2008)
14
12
10
9.8%
11.9%
8
6
4
2
0
Source: Eurostat
Gikas A. Hardouvelis
GR
EA-16
55
VI.2 Escaping the recession in 2012:
Investment plus the external sector
 Drastic decline in consumption and
investment thus far. Consumption
expected to continue falling in 2011
 Recovery hinges on economic
climate stabilizing and investment
turning positive later in 2011
20
10
0
2010
2008
2006
2004
2002
Greece
2000
1998
-20
1996
-10
1994
 Real Exports expected to increase in
2011:
30
1992
 Real imports expected to decline
further in 2011
(Exports of Goods, current dollars,
Greece Vs World, y-o-y)
1990
 Imports had a positive impact in
2009 and in 2010 as they fell in both
years.
Export growth
40
World
-30
Source: IMF dots, Eurobank EFG Research

due to correlation with global trade [elasticity of trade w.r.t. regional growth: 2]

Productivity  plus real wage cuts in the private sector  ULCs 

Since an 1% increase in exports increases medium term GDP by 0.23 ppts, the
contribution to GDP from exports can be high
Gikas A. Hardouvelis
56
VI.2 Current Greek Recession: Basic Indicators
10.0%
13000
Industrial Production
(yoy %)
10/2010: -4.3%
5.0%
20/5/2008: 11.793
12000
11000
10000
Baltic Dry Index
9000
8000
Source: Bloomberg
7000
6000
Ja
n07
Ap
r-0
7
Ju
l-0
7
Oc
t-0
7
Ja
n08
Ap
r-0
8
Ju
l-0
8
Oc
t-0
8
Ja
n09
Ap
r-0
9
Ju
l-0
9
Oc
t-0
9
Ja
n10
Ap
r-1
0
Ju
l-1
0
Oc
t-1
0
0.0%
5000
4000
3000
-5.0%
2000
-15.0%
0.15
0.10
1/1/2011
7/1/2010
1/1/2010
7/1/2009
1/1/2009
7/1/2008
1/1/2008
7/1/2007
1/1/2007
7/1/2006
1/1/2006
7/1/2005
7/1/2004
1/1/2004
7/1/2003
Building Permits
Constant prices
40
20
0.00
0
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
(yoy %)
-20
(yoy %, cubic meters)
Jan-06
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
-0.10
1/1/2003
Retail sales
0.05
-0.05
7/1/2002
Source: ECOWIN
1/1/2002
-10.0%
0
1/1/2005
4/1/2011: 1.693
1000
-40
-0.15
-60
Source: ECOWIN
-0.20
Gikas A. Hardouvelis
10/2010: -8%
Source: ECOWIN
-80
8/2010: -24.8%
57
VI.2 Current Greek Recession: Basic Indicators
51
Jan-09
Jan-07
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
-10
Jan-87
12/2010: 43.1
PMI
53
Jan-85
0
55
-20
49
47
-30
45
43
-40
Consumer Confidence
41
39
37
-50
Source: ECOWIN
03/2009: 38.2
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
30
Source: ECOWIN
11/2010: 3.9%
10
5
0
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-04
Mar-04
-10
-15
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Gikas A. Hardouvelis
Sep-03
-5
Mar-03
0
Sep-02
Credit to Households
and Firms
(yoy %)
Mar-02
5
9/2010: -1.1%
15
Sep-01
10
Exports & Imports G&S
20
20
15
Source: ECOWIN
-70
Mar-01
25
11/2010: -69.0
-60
35
-20
9/2010: -17.8%
Exports of G&S
Imports of G&S
Source: ECOWIN
58
VI.3 Long-term strengths:
Greek private sector is rich and under-levered
29
1,
3
330%
21
8,
1
280%
19
8,
0
18
9,
0
17
6,
4
16
9,
7
16
7,
8
16
1,
5
230%
11
8,
6
11
0,
4
10
7,
5
10
7,
4
10
4,
3
10
4,
0
10
2,
6
92
,6
92
,4
82
,9
75
,3
67
,7
63
,6
53
,2
48
,5
47
,1
38
,8
130%
Private Loans / GDP
13
8,
5
180%
12
0,
2
% of 2010 GDP
 Greeks own a large fraction of international shipping
 Greek bank deposits are 1.1 times GDP
 Private leverage low
35
2,
6
380%
80%
Romania
Slovakia
Poland
Czech
Hungary
Lithuania
Bulgaria
Belgium
Slovenia
Finland
France
Estonia
Germany
Latvia
Italy
Greece
Austria
Sweden
Malta
Netherlands
Portugal
Spain
UK
Ireland
Denmark
Cyprus
Lux/bourg
EA
30%
Note: ECB data. Loans to non MFIs excl. Gen. Government from MFIs excl. Eurosystem, August 2010,
% of 2010 GDP (EU forecasts). The data include securitizations and are trustworthy for cross
sectional comparisons, but not for time series analyses as individual series contain unexplained
abrupt breaks due to either full or partial inclusion of securitizations over time.
Gikas A. Hardouvelis
59
VI.3 Greek banks:
Healthy and holding on thus far



Greek banks did not cause the recession in
the country, like it occurred in the US or in
Western Europe
Greek banks strongly capitalized (CAD ratio
at 11.2%, Tier I at 10.1%); Easily passed
recent stress tests except for ATE.
Greek banks borrowed in the repo market to
finance their expansion abroad; Domestic
banking system is deposit rich (L/D 118% for
banking groups); ECB lending of €92bn will
decline once interbank market opens up
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
Return On Assets
1.4
EU-27
Greece
0.7
0.6
0.0
Source: ECB, BoG
2007
-0.1
2008
0.1
2009

Contingent liquidity (now over 20% of deposits) will be further boosted (covered
bonds, government’s liquidity scheme, limited refinancing needs)

Asset quality worries seem overblown (NPLs at 9% in 2010-Q2, experience of two
crisis years, NE countries); Greek private sector is not over-leveraged; Pre-provision
margins 40% wider than EU; absence of toxic assets and no real estate bubble.

Substantial CEE/SEE exposure offsets Greek strain as profits to track regional
economic recovery; Region represents 1/4 of total lending for the 4 large Greek banks
and corresponds to c.40% of total revenues.
Gikas A. Hardouvelis
60
VI.3 Why growth can resume in Greece:
Long-term strategy required
 Past growth in Greece
was mainly demanddriven
Total factor productivity
(2000=100)
120
115
110
105
EU-15
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Source: AMECO
1994
 Yet, it also featured
100
improvements in all three 95
factors of production:
90
Capital (physical &
85
human), labor, and
80
technology which
includes organizational
features:
Greece
 Investment in equipment real growth averaged 11.8% during 1996-2008, against
a 4.5% EA-12 average
 Injection of cheap (unskilled) labor from illegal immigration (boosted the grey
economy mostly)
 Education rates went up (Ratio of students to teachers 1998: 12.3, 2007: 8.6)
 Quality of institutions benefited from Euro Area participation: Monetary and
exchange rate stability, EU law embodied in Greek law, modernization and
internationalization of some Greek businesses, some markets opened up to
competition
Gikas A. Hardouvelis
61
VI.3 Positive news: Capital intensity is low,
good return on capital, labor can grow
200
Gikas A. Hardouvelis
Capital Intensity
190
180
170
160
150
140
130
Net capital stock at 2000 prices per person
employed (1000 €)
120
110
Source: AMECO
Greece
125
120
115
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
100
EA-12
Net Returns on Net Capital Stock
(2000=100)
110
105
100
95
90
85
Source: AMECO
EA-12
Greece
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
80
1994
High productivity growth can
continue in the future, once the
recession is over, as:
 Capital intensity lower than EU
average; Greece is like Switzerland
with islands: infrastructure needed
 Return on capital is growing quickly
suggesting incentives to invest
 Investment can pick up the
moment market conditions
normalize; Funding is currently
available from EU funds
 Labor will also grow
 in quantity (immigration,
increase in the participation
rate to the labor force)
 in quality (the Greek labor
force is already highly
educated, measures will
increase matching of training
with market needs)
62
VI.3 Growth benefits expected from
structural reforms
 Organization of production and the economic
and institutional environment matter:
200
Growth in Unit
Labor Costs
relative to
trading partners
180
 Zonzilos et al ( BoG, 2009): More than 50%
160
of GDP growth in Greece is due to TFP
growth
140
 Sideris ( BoG, 2009): If Greece had the
average EU-15 institutional quality, its
growth rate would have been 22.7% 
 EU-Commission (2009): Structural reforms
 output growth  in the long-run
 IOBE (2010): 17% GDP  from structural
reforms
120
100
80
2000
2001
Industry
2002
2003
2004
2005
Agriculture
2006
2007
2008
Services
 Crowding-in of the shrinking public sector
 Competitiveness losses were not huge and can now be recovered thanks to the
MOU reduction in real wages
 Capturing the underground economy (25-30% of GDP) can improve efficiency,
not only statistics
Gikas A. Hardouvelis
63
THANK YOU AGAIN!
FOR PAYING ATTENTION
EVEN TO THE APPENDIX
[email protected]
www.hardouvelis.gr
+30-210-333-7365
Gikas A. Hardouvelis
64