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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