Leadership Perspectives: Yannis Stournaras, Governor of the Central Bank of Greece


Yannis Stournaras, Governor of the Central Bank of the Bank of Greece, speaks with Global finance on the outlook for 2022 and the potential risks.

Global Finance: What is the economic outlook for Greece for the coming year? What is the main risk?

Yannis Stournaras: Economic activity in Greece is expected to rebound strongly in the coming quarters. A milder-than-expected recession in the first quarter of 2021 and incoming data for the second quarter make us even more optimistic than before. The recovery is mainly driven by pent-up demand, the launch of projects under the National Recovery and Resilience Plan and a significant increase in tourism revenues compared to 2020.

On the fiscal front, a large primary deficit is expected in 2021, which will be reversed next year due to the withdrawal of most of the fiscal stimulus plan. The biggest risk for the coming quarters remains the evolution of the pandemic at the national and global level. Although the vaccination program is on track, the spread of mutations in the virus is a source of uncertainty.

GF: How strong is the banking sector and how are loans available to businesses?

Stournaras: In recent years, the financial fundamentals of Greek banks have improved considerably. Compared with March 2016, the stock of bad debts [NPLs] has been reduced by more than 50%, mainly through securitizations via the Hellenic Asset Protection Scheme. Banks have successfully eliminated their reliance on emergency liquidity assistance and regained access to wholesale markets, issuing senior unsecured notes and equity instruments. Two systemic banks have also been successful in exploiting the capital markets and have successfully carried out capital increases in 2021. Currently, banks have adequate liquidity and capital buffers that can enable them to extend loans to investors. real economy.

Nonetheless, the NPL ratio remains the highest in the euro area and is a barrier to credit expansion, especially for small businesses where credit risk is higher. According to the banks’ business plans, the positive macroeconomic outlook and financing opportunities arising from the Stimulus and Resilience Mechanism could significantly boost credit growth in the years to come.

GF: In the aftermath of the health crisis, is there something that should push central banks to change their policy?

Stournaras: The pandemic has caused a temporary slowdown in the potential growth rate of the economy, but supportive measures taken by fiscal and monetary authorities are expected to ease the long-term scar effects. In particular, the NGEU initiative, aimed at financing large-scale investment projects in areas such as greening the economy and digital transformation, is expected to improve the long-term growth potential of the economy.

Regarding monetary policy, I think our position vis-à-vis the ECB is still appropriate. Experience has taught us that it takes patience to avoid premature policy adjustments. Under the current circumstances, continued accommodative monetary policy is needed to meet our medium-term inflation target of 2%. In fact, in our new monetary policy strategy and revised forward guidance, we have made it clear that our commitment to avoid premature tightening could involve temporary periods of above target inflation. Once the economy shifts to a solid recovery and there are sure signs that inflation is moving up to its target on a sustainable basis, then we should make a gradual adjustment, flexibly applying the tools at our disposal.

GF: What are the economic prospects for Europe as a whole?

Stournaras: Growth recovery for the EU and euro area is expected to be strong in 2021 and 2022, due to pent-up demand, substantial additional fiscal stimulus measures partly channeled through the next-generation EU instrument and higher foreign demand supported by the recent package fiscal policy in the United States. GDP is expected to return to its pre-crisis level at the end of 2021 in both the EU and the euro area, however masking a significantly uneven pace of recovery between member states.

The rise in inflation this year is expected to be largely transient due to the bottlenecks associated with the pandemic, and central banks are expected to deal with this temporary surge in inflation. Clear communication on the outlook for monetary policy will be essential in shaping inflation expectations and guarding against premature tightening of financial conditions. The uncertainty and risks surrounding the growth outlook remain high but broadly balanced. The epidemiological situation, geopolitical tensions that can lead to irregular migratory flows, the effects of climate change and the dynamics of private and public debt raise concerns and require continued vigilance.

GF: What keeps you from sleeping at night?

Stournaras: The current crisis was different from the previous one almost 13 years ago, due to the more appropriate stance of monetary policy and, in particular, fiscal policy.

At the same time, Greece overcame many of the problems that led to the sovereign debt crisis of 2010. Nonetheless, two issues may be of concern. First, the final impact of the pandemic on the banking system. Debtors in vulnerable sectors could suffer after the complete removal of support measures, as the growing interconnection between sovereign and banks is worrying. These financial stability risks are in addition to existing ones, such as the effect of the low interest rate environment on banks, and others that are rapidly growing in the heat map of risks. , such as the risks associated with climate change.

Second, the sharp rise in the public debt ratio makes the economy vulnerable to further negative external shocks. Temporary measures should be extended if necessary to avoid cliff edge effects. But there is no room for easing longer-term primary surplus targets, so that financing needs for the coming decade remain manageable.

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