Greek economy is on steady upward trajectory but no room for complacency, says central banker

The Greek economy is on a steady upward trajectory, but there is no room for complacency or a relaxation of efforts, Bank of Greece Governor Yannis Stournaras said on Thursday evening at an event organized by the British Hellenic Chamber of Commerce.

“This was made possible thanks to the completion of the second review and its positive effect mainly on confidence and liquidity. The fact that the economy’s growth dynamics has gained traction is primarily reflected in the positive path of GDP as well as in the improvement of short-term indicators,” he said, adding that there is still a way to go before the positive prospects of the Greek economy for the period 2017-2019 can be confirmed and before Greece can gain the full confidence of markets after the end of the program in August 2018.

“This will be achieved if the country obtains a credit rating enabling it to refinance its debt at rates that are in line with its sustainability and if banks have sufficient collateral to be fully funded from the ECB’s refinancing mechanism and not only from the costlier Emergency Liquidity Assistance (ELA),” he said.

Stournaras forecast that economic activity will continue to pick up at a stronger pace in the near term. In 2017 as a whole, the Bank of Greece estimates that GDP will increase by about 1.7 percent, while in 2018 and 2019, growth is projected to gather pace and quicken to 2.4 percent and 2.7 percent respectively, driven by rising investment, consumption and exports of goods and services, he said.

The forecasts of the central bank are based on the assumption that the reform and privatisation program will be implemented consistently and according to schedule. The biggest risk to the outlook of the Greek economy would be a delay in the completion of the third program review, as was the case with the first and second reviews, the central banker said.

“This should be avoided, as it would trigger a new cycle of uncertainty leading to the suspension of investment plans, undermine the growth dynamics of the economy and weaken the prospects for sustainable access of the Greek sovereign to international capital markets after the end of the program in August 201,” he told attendees.

He said there are also external risks associated with a stronger euro and a possible slowdown in the euro area economy.

“A further rise in the euro exchange rate from its current levels could negatively affect goods exports as well as tourism receipts, dampening the economic growth outlook and slowing the pace of the exit from the crisis,” he explained.

There are also significant geopolitical risks that could increase the risk aversion of international investors, such as a possible exacerbation of the refugee crisis.

Concernng the Greek banking sector, Stournaras said they have achieved significant improvements in their corporate governance and liquidity and solvency ratios in recent years and “there is absolutely no reason for concern about their performance”.

He said however that addressing the large volume of non-performing loans is a priority, in particular the problem of “strategic defaulters”, which is detrimental not only to the soundness of the banking system but also to the growth of the Greek economy.

“It is worth noting that all the necessary measures have now been legislated and that the regulatory framework has been put in place to tackle the problem of NPLs in an efficient and fast manner,” he added.