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THE RESTRUCTURING OF THE GREEK ECONOMY 2010-2014 January 2014 Panos Tsakloglou (Athens University of Economics and Business) Marianthi Anastasatou (Council of Economic Advisors) THE RESTRUCTURING OF THE GREEK ECONOMY 2010-(MID)2014 January 2014 Panos Tsakloglou (Athens University of Economics and Business) Marianthi Anastasatou (Council of Economic Advisors) * •Getting into the debt crisis •Fiscal consolidation •External rebalancing •Developments in 2013 and 2014 •Structural reforms • Socioeconomic costs of adjustment •Growth prospects and challenges High growth rates * From the mid-90’s to the beginning of the crisis, the Greek economy was growing at a faster rate than the EU average (3.9% vs 2.4%) Growth model based on consumption and borrowing GDP growth rate 7% 5.9% 6% 5.5% 5% 4.5% 3.6% 4% 3.4% 4.4% 4.2% 3.5% 3.4% 3.4% 3.9% 3% 2% 2.1% 2.5% 2.4% 2.7% 2.9% 2.3% 3.0% 3.0% 2006 2007 2.4% 2.1% 1.9% 1.7% 1% 3.1% 1.2% 1.3% 2002 2003 0% 1995 1996 1997 1998 1999 2000 EU15 Source: Eurostat 2001 Greece 2004 2005 Twin deficits * • • External deficit trended upwards in the period 1995-2008 General Government Deficit, although contained before Euro accession, increased afterwards General Government Balance (% GDP) Current Accout (% GDP) 2.2 3.9 3.4 4.4 4.3 3.7 2.0 0.7 0 -0.7 -2.6 -2 -4 -2.2 -3.3 -3.5 -2.7 -3.6 -3.9 -7.7 -7.2 -6.5 -6.5 -5.8 -6.7 -3.1-3.7 -5.9 -4.5-4.8 -5.5-5.7 -5.7 -7.6 -9.1 -7.6 Source: Eurostat, Ameco -10.5 -11.4 -14 -16 -6.5 -9.8 -10 -12 -2.0 -4.8 -6 -8 -1.0-1.6 GG balance -14.6-14.9 GG primary balance -15.6 Public debt * In 1990-2009, public debt rose by 60 p.p. of GDP Public Debt (% GDP) 140.0 129.7 120.0 99.2 97.2 97.0 99.4 96.6 94.5 94.0 100.0 80.0 71.7 74.0 60.0 40.0 20.0 0.0 Source: Eurostat, Ameco 79.1 103.4 103.7 101.7 107.5 107.2 101.2 97.4 98.9 112.9 Getting into the debt crisis * In 2010 Greece could not tap the international markets anymore Forced to seek borrowing from our European partners and the IMF Two Programs: 2010 & 2012 Loans in exchange of Fiscal Consolidation and Structural Reforms Different Approaches First Program: Liquidity Second Program: Solvency Getting into the debt crisis * Largest loan in history 245* bn Euro (221 bn Euro already disbursed) 198 from Euro Area countries 47 from the IMF* Private sector Involvement (PSI) to reduce the public debt by 107 billion EUR via bond swapping 53.5% haircut; Net write-down 54 bn; Real effects of PSI December 2012: Debt buy-back (21 bn) The global financial crisis revealed the chronic problems of the Greek economy Structural rigidities Growth model based on consumption and borrowing *Approx. 18 bn refer to IMF’s rollover and thus don’t add up to the public debt * •Getting into the debt crisis •Fiscal consolidation •External rebalancing •Recent developments •Structural reforms • Socioeconomic costs of adjustment •Growth prospects and challenges Fiscal adjustment * In 2009-2014, • • General Government Deficit shrank by 12.4 p.p. of GDP General Government Primary Deficit shrank by 11.2 p.p. of GDP, over-performing the Program targets for 2013 and 2014 General Government Fiscal Accounts 2009-2016 (% of GDP) 2009 2010 2011 2012 2013 2014* 2015* 2016* 10 5 1.6 0.8 4.5 3.0 0 -1.3 -2.3 -5 -4.9 -10 -10.4 -10.8 -3.2 -2.9 -2.1 -0.7 -6.4 -9.4 -15 -15.6 -20 General Government Balance Source: European Commission, 4th Review, 4/2014 General Government Primary Balance * Economic Program Targets The biggest cumulative fiscal consolidation in the EA * In 2009-2014 Greece achieved the biggest cumulative change in the structural primary fiscal balance in the Euro area Cumulative change in the structural primary fiscal balance 2014 over 2009 (% of GDP) Source: European Commission, Berenberg calculations Fiscal consolidation was carried out in strong pro-cyclical conditions * Structural balance improved by almost 17 p.p. of GDP in 2009-2014 • substantially higher than the EA average • one of the three EU countries with structural surplus (together with Germany and Luxemburg) Structural budget balance, General Government (% GDP) 3.1 4 2 2 1.6 -1.2 -1.1 -1.1 2013 2014 2015 0.1 0 -2 -4.2 -3.6 -2.1 -4 -6 -5.7 -8 -10 -12 -14 -9.5 -14.7 -16 2009 2010 2011 EA Source: Ameco. ESA2010 2012 Greece The biggest and fastest fiscal consolidation among OECD countries * Scores of cyclically adjusted primary balance improvement (% GDP) 18 Rate of average annual cyclically adjusted primary balance improvement (% GDP per year) 17.9 16 14 11.4 12 9.9 9.6 10 8 6 9.0 8.8 7.6 7.4 6.5 6.5 3.6 3.6 3.3 3.1 4 2 0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 3.6 3.3 2.8 2.5 1.9 1.8 1.8 1.6 1.6 1.5 1.5 1.3 1.2 1.0 In 2009-2014 Greece achieved the highest and fastest cumulative fiscal consolidation in the developed world in recent years: of 17.9 p.p. of GDP at an annual rate of 3.6 p.p. of GDP on average Note: Fiscal consolidation episodes as defined in OECD Economic Outlook 81 Source: AMECO, * excludes financial sector support Measures amounting to over 30% of GDP * …equally split between expenditure cuts and revenue increases Source: General Accounting Office, European Commission * •Getting into the debt crisis •Fiscal consolidation •External rebalancing •Recent developments •Structural reforms • Socioeconomic costs of adjustment •Growth prospects and challenges Labour cost competitiveness is recovering * Between 2010 and 2013 Greece managed to regain the labour cost competitiveness lost during 2000-09 Nominal unit labour cost (relative to 37 industrial countries, 2001=100) 125 120 115 110 105 100 95 90 85 Recovery 80 2000 2001 2002 2003 2004 Ireland Source: Ameco 2005 2006 Greece 2007 Spain 2008 2009 Portugal 2010 2011 EA18 (18 countries) 2012 2013 2014 2015 Current account deficit is eliminated * Current Account Deficit fell by 15.5 p.p. of GDP between 2008 and 2014 Current Account (% GDP) 10 5.5 5 % GDP 0 -5 5.5 4.8 -0.5 -1.9 -3.2 -4.0 -6.3 Current Account in surplus in 2013 for the first time after many decades 8.0 7.3 -1.2 -2.1 -6.8 2013 2014 -6.1 -7.7 -10.0 -9.4 -10.9 -10.9 -15 1.2 -4.6 -2.4 -5.8 -6.9 -7.4 0.6 -3.9 -4.0 -4.1 -5.6 -10 2.9 0.2 -14.0 -14.4 2007 2008 -9.9 -9.9 2010 2011 -20 2003 2004 2005 2006 Current Account Balance (excl. oil) Current Account Balance (excl. oil & GG net interests) Source: Bank of Greece 2009 Current Account Balance 2012 * •Getting into the debt crisis •Fiscal consolidation •External rebalancing •Recent developments •Structural reforms • Socioeconomic costs of adjustment •Growth prospects and challenges Developments in 2013 and 2014 * Performance in 2013 better than expected: • -3.9% GDP growth compared to expected -4.2% • Unemployment rate started to decline in the last quarter of the year after more than three years of constant increases • General Government balance -3.2% of GDP compared to a target of -4.1% • General Government primary surplus 0.8% of GDP compared to a target of 0% • 0.7% GDP surplus in the Current Account compared to expected -0.8% • €5.8 billion of public sector expenditure and tax refund arrears to private enterprises and % households cleared. 50 •10-year bond yields declined by 298 bps 45 Germany Greece Ireland Italy Portugal 40 35 30 25 20 15 10 5 0 1/1/07 1/1/08 1/1/09 Source: Bloomberg 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15 Developments in 2013 and 2014 * Performance in 2014 also promising: • 0.7% GDP growth in Q3 2014 compared to -0.3% in Q3 2013. (nine month data suggest that annual growth rate of 0.6% is conservative) • 3.8 bn Current Account surplus in Jan-Sep 2014 compared to 2.4 bn in Jan-Sep 2013 • Unemployment rate remained on a decreasing path (2.3 p.p. cumulative decline since peak) • General Government balance -2.8% of GDP compared to a target of -3.2% • General Government primary surplus 1.8% of GDP compared to a target of 1.5% • 10-year bond yields declined further by 250 bps (but started increasing sharply at the last quarter as a result of political uncertainties) • In April and after four years with no access to the international capital markets, the Greek sovereign raised €3 billion at a coupon rate of 4.75% through the sale of 5-year bonds that was almost seven times oversubscribed. Further issuance of €1.5 bn in 3-yr paper in July (3.38% coupon), plus another €1.7 bn (5-yr and 3-yr) in exchange of T-bills in September • In Q1 2014, the four systemic banks raised additional capital of 8.5 bn €, comfortably in excess of the needs identified by the supervisor (6.4 bn €), and placed medium-term bonds for the first time since 2009 to boost their liquidity (2.25 bn €), . Economic sentiment is improving Economic Sentiment Indicator 120 110 101,2 100 95,3 90 80 70 60 Euro area (19 countries) Source: Eurostat Greece * •Getting into the debt crisis •Fiscal consolidation •External rebalancing •Recent developments •Structural reforms • Socioeconomic costs of adjustment •Growth prospects and challenges Overview of structural reforms (1/5) * Important reforms undertaken in all sectors of economic activity Indicatively: Pension system • Radical reform with pension benefits tightly linked to lifetime contributions • Increase in statutory retirement age by 2 years (from 65 to 67) • Pension fund consolidations • Clear separation of social insurance and social assistance functions • Among the most viable pension systems in EU according to EC peer review • Introduction of strict budget neutrality rules for supplementary pensions and lump sum pensions Social protection • Increased use of means-testing for the provision of benefits • Pilot scheme for the introduction of a minimum income guarantee scheme • Redesigning of activation policies focused especially on long-term unemployed Overview of structural reforms (2/5) * Health system • Incorporation of eight social insurance funds into a single organization, covering almost the entire population • Introduction of automatic claw-back mechanisms for pharmaceuticals, diagnostics and private clinics to ensure compliance with spending ceilings • Wider use of generics/off-patent pharmaceuticals (with benchmarking to EU) • Establishment of e-prescription system for pharmaceuticals and diagnostic tests and increase in co-payments • Labour market • Average public sector salary cut by 23% between 2010-2012 • 22% reduction in minimum wage (32% for young workers) • 11% cut in social security contribution rates • Facilitation of collective bargaining at the firm level • Significant cut in severance payments • Complete overhaul of the mediation-arbitration system • Facilitation of flexible forms of employment (fixed term, part time, rotation etc). Overview of structural reforms (3/5) * Public administration • Drastic reduction in public sector employment from over 900,000 in 2009 to about 650.000 in 2014 •Introduction of unified wage grid, staffing and evaluation plans for the entire public sector •Establishment of mobility scheme, including mandatory exits • Rapid expansion of e-government 1,000 30% reduction of civil servants 907 900 835 747 800 726 700 671 652 2013 2014 600 500 400 300 200 100 0 2009 2010 2011 2012 Fiscal Structural • A complete new fiscal framework in line with the new EU governance framework, envisaging multiannual planning, binding expenditure ceilings, numerical fiscal rules and strong expenditure monitoring mechanisms. •Introduction of automatic corrective mechanisms when targets are missed for Central Government, State-owned Enterprises and Local Government. •Establishment of an independent Fiscal Council Overview of structural reforms (4/5) * Tax system • Establishment of a semi-autonomous post of General Secretary for Tax Administration with sweeping powers to tackle tax evasion legacy • Tax code simplification and repeal of the Code of Books and Records • New IT system interconnecting all tax offices and compulsory electronic submission of tax declarations • Full scope audits according to risk-based criteria. • Consolidation of tax offices into larger units and compulsory rotation of the heads of local tax offices • Creation of 23 tax-related court units Overview of structural reforms (5/5) Competition • Sweeping market liberalization with particular emphasis on retail trade, tourism, construction materials, food processing, road haulage and energy markets • Opening up of “closed” or regulated professions • Elimination of minimum fees for services • Abolition of cabotage rules related to cruise vessels Business environment • “One-stop-shop“ to set up a business in 1 day • Removal of the 30 most important barriers to entrepreneurship • Fast track process for investments. • Simplification and modernization of the customs procedures • New insolvency framework Privatizations * Portfolio Structure of HRADF (Privatization Agency), September 2014 Asset Category Number Corporate Assets Infrastructure Assets Real Estate 10 22* 1000 Project execution Privatization tenders September 2013 December 2014 Competed 7 21 In progress 11 15 Under preparation 22 13 Total transaction value €7.7bn, of which €3.1 bn already received * Numerous marinas and regional airports are considered as single assets ** Not Including 28,5% EBITDA Sharing from Regional Airports The international ranking of the Greek economy regarding structural reforms is improving quickly * “Product Market Regulation” indicator (OECD) from 2008 to 2013 5 positions improvement Greece is the country with the biggest improvement “Doing Business” (World Bank) from 2009 to 2013 improvement by 97 positions in “starting a business” 70 positions in “protecting investors” 24 positions in the “ease of doing business” 9 positions in “paying taxes” “Adjustment Progress Indicator” (Lisbon Council & Berenberg Bank) Greece ranks 1st in 2012, 2013 and 2014 “Strictness of Employment Protection indicator” (OECD) 10 positions improvement (from 2008 to 2013) Recovery Greece is changing fast Percentage points * 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 Change in responsiveness to OECD growth recommendations , 2008-11 Responsiveness to Going for Growth recommendations across OECD countries, 2011-12 Responsiveness rate 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Source: OECD, Economic Policy Reforms: Going for Growth Responsiveness rate adjusted for the difficulty to undertake reform Greece is changing fast (cont.) Similar picture in latest “Going for growth report”, but no country rankings Best performance in 2012-2013 by “Group 1” countries (Greece, Italy, Portugal, Slovenia & Spain) Implicitly, main driving force in sub-indicators: Greece Source: OECD, Economic Policy Reforms: Going for Growth Interim Report 2014 Structural reforms continue * Further reforms planned for many areas with emphasis placed primarily on: • Further market liberalization with emphasis on wholesale trade, manufacturing, telecommunications and e-commerce (new OECD “toolkit”) • Further reforms to reduce the administrative costs to the firms • Business environment improvement including simplification of investment licensing, upgrading logistics, streamlining rules for land use, liberalizing residential rentals, opening up regulated professions • Key steps in network industries: transport liberalization, ambitious reform of energy markets • Public Administration modernization • FDI attraction * •Getting into the debt crisis •Fiscal consolidation •External rebalancing •Recent developments •Structural reforms • Socioeconomic costs of adjustment •Growth prospects and challenges Adjustment has come at a very high socio-economic cost * Between 2008 and 2013 the Greek GDP declined by almost a quarter, but started growing again in 2014 Source: Ameco Contribution of GDP components to growth 10 5 4.5 5.9 4.2 5.5 4.4 3.4 3.5 2.3 2.9 0.6 0 -0.2 -3.1 -5 -3.9 -4.9 -10 -7.1 -7 2011 2012 -15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2013 Gross fixed capital formation Total consumption Change in inventories and net aqcuisition of valuables External balance of goods and services GDP growth rate 2014 2015 One of the largest declines in GDP ever recorded Unemployment has skyrocketed… * • Unemployment in 2013 above 27% of the labour force • Youth unemployment the highest in the Euro-area (58%) • Long-term unemployed 18% of the active population or 65% of all unemployed Long term unemployment rate (% of active population) Unemployment rate 20 30 10 25 0 2008 20 2009 2010 EU28 2011 2012 2013 Greece Youth unemployment 15 80 10 60 40 5 20 0 2016 2015 2014 2013 2012 2011 2010 2009 2008 0 2008 2009 2010 EU28 Greece EU28 Source: European Commission, Winter Forecast 2014 2011 Greece 2012 2013 Sharp worsening of social indicators * Between 2009 - 2013: • Average disposable income declined by over 35% (due to sharp decline in economic activity and part reliance on tax increase for fiscal consolidation) • Share of population at risk of poverty or social exclusion rose from 27.0% to 34.8% • Gini index of inequality rose by 4% (despite relatively well-targeted measures) Source: Eurostat, EU-SILC Deposits were depleted and Non-Performing loans increased * The deposit base has been eroded with a peak-to-trough decline of almost EUR 84 billion One out of three loans is non-performing (domestic residents, mil. Euros) 300 250 Loans Bn € bn. Total Deposits & Repos 45% 39.9% 400 40% 33.3 350 35% 300 30% 250 25% 200 20% 150 15% 100 10% 50 5% 200 150 100 50 0 Source: Bank of Greece 0 0% 2006 2007 2008 2009 2010 2011 2012 Non Performing Loans (lhs) Restructured loans (lhs) Performing Loans (lhs) NPLs as % of Total Loans (rhs) NPLs incl. Restructured as a % of Total Loans (rhs) Source: European Commission 2013 * •Getting into the debt crisis •Fiscal consolidation •External rebalancing •Recent developments •Structural reforms • Socioeconomic costs of adjustment •Growth prospects and challenges Growth prospects 1/2 * The whole effort aims to shift resources from consumption to investment and increase substantially the share of exports in GDP Independent studies commissioned by the (former) government suggest excellent growth prospects • Tourism • Pharmaceuticals • Primary sector and agro-food industry • Research, technology and innovation • Logistics and interoperability • Energy • Metal and construction materials industries • Shipping-related activities • Tradable services Not all sub-sectors exhibit the same comparative advantage Sub-sectors outside the below periphery might exhibit comparative advantage Well educated human capital is the real comparative advantage * Source: KEPE, IOVE, McKinsey Growth prospects 2/2 * To shift the resources of the Greek economy to higher value added production, the studies suggest further reforms Horizontal reforms • Creation of favourable investment climate and facilitation of business activities • Elimination of barriers to entry- reinforcement of competition and competitiveness • Valorization of public property-privatizations • Facilitation of international trade-extroversion • Improvement of tax policy • Increase labour market flexibility and security • Emphasis on innovation • Reorganization of public administration and improvement of the services to the citizens • Investment in human capital • Fight against corruption and enhancement of reliability and transparency • Acceleration and improvement in the justice system • Reinforcement of social cohesion * Source: KEPE, IOVE, McKinsey Challenges Short term: Liquidity constraints Interest rates on loans to NonFinancial corporations- May 2014 (new business, 1 to 5 yrs, over 1 mil) 6 5 4 3 2 1 0 Credit growth 15 10 5 5.38 4.25 3.35 0 2.74 2.19 -5 -10 Greece Italy Spain Euro area Germany Source: ECB Sharp decline in sovereign risk (recently reversed) Decline in savings reversed (recently reversed) Credit to private sector Housing Loans Consumer Loans Loans to sole proprietors Credit to corporations Source: Bank of Greece Large Greek firms started tapping international markets (recently reversed) Increased EIB lending, particularly for SMEs Banks were fully recapitalized, restructured or resolved; have already re-accessed capital markets Creation of specialized Development Fund (IfG) in cooperation with EIB, KfW and private sector institutions, targeting SMEs and infrastructure projects Challenges Medium term: Deflation Improvement in competitiveness Increases purchasing power of consumers But, ceteris paribus, deteriorates Debt/GDP ratio Inflation rates (HICP) 4.7 5 3.7 4 4.2 3.9 3.5 3.4 3 2.9 3.2 3.1 2.9 3 2.5 3.3 2 2.2 2.4 2.3 2.1 2.2 2.2 2.2 2.7 1.3 2.2 1 1.3 1.2 0.8 1.6 1 0 0.3 0.3 -0.9 -0.8 2013 2014 -1 Greece Source: Eurostat EA-18 2015 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 -2 Challenges Long term: Debt sustainability & brain drain Debt sustainability 180 Public Debt (% GDP) 160 Manageable in the medium term Long average maturity (17 yrs) Low average interest rate (2%) Only 29 bn held by the private sector Approx. 80% of the public debt with the official sector Source: European Commission Low debt servicing costs for the next 8 years (approx. €6 billion per annum or 3% of 140 120 100 80 60 2012 2014 2016 2018 2020 2022 2024 2026 2028 GDP vs 4.6% on average for Euro Area periphery peers) EU commitment to help Greece reduce debt to substantially below 110% of GDP in 2022 if needed Brain drain Several structural fund supported programs targeted to young scientists with high qualifications Establishment of R&D centres by a number of multinational firms in Greece 2030 Concluding * • Greece made an enormous adjustment in restoring internal and external balances in a short period of time • The economy is in a far healthier state than it has been for a long time • The whole effort aims to shift resources from consumption to investment and increase substantially the share of exports in GDP • Bold structural reforms have already been implemented and further reforms are planned for the near future • But, will the process continue? • Political uncertainty, discontinuity and growth prospects Thank you for your attention Total debt in Greece is relatively low Fiscal effects of pension reform(s) 25% 20% 15% Before the reform 10% 5% 0% 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 25% 20% 15% After the reform 10% (no account for 65/67) 5% 0% 2010 2015 2020 2025 Pension Expenditure/GDP 2030 2035 2040 2045 2050 Social Insurance Contributions / GDP 2055 2060 Deficit / GDP