Bank of Greece: Exact energy can trigger interest rate hikes and slow growth

LAST UPDATE: 13:30

By Leonidas Stergiou

The auspicious forecasts for the Greek economy and the banking system are reflected in the Interim Monetary Policy Report of the Bank of Greece, both for 2021 and for the coming years. However, it points to risks that could reverse the positive scenario with a higher inflation rate: “This will lead to a faster tightening of monetary policy, thus increasing the risk of financial market turmoil and a reversal of the upward trend of economies.”

According to the BoG, the growth of 2021 will reach 7.2%, a percentage which, after technical adjustments, will reach 8%. Based on the BoG forecast models, growth in 2022 will be 5% and in 2023 3.9%.

Regarding inflation, the Bank of Greece notes that this is a temporary phenomenon, which persists. This will lead to a jump in the consumer price index to 3% in 2022. The downward trends will start at the end of 2022, leading the Harmonized Consumer Price Index close to its central trend of 2% for Greece. In 2023 it is estimated that this index will fall below 1%.

But there are also risks associated with the pandemic, the acceleration of inflation, the possible increase in non-performing loans (NPLs) after the expiration of government support measures and possibly a low rate of absorption of NextGenerationEU funds. For example, new coronavirus mutations, if proven to be resistant to vaccines, could hurt confidence, limit tourist flows and slow recovery.

The main source for the creation of new red loans is considered to be the stock that remains today under a protection regime (Bridge 1, 2, step up bank programs, etc.) which amounts to 9 billion euros. This risk becomes even greater if, with the withdrawal of support measures, employment does not improve. The rise in inflation is also aggravating.

However, the BoG reiterates that the reduction in red loans from banks’ balance sheets has come almost exclusively from securitizations and not from restructurings, arrangements and refinancing. As a result, private debt remains high, while securitizations have hit profitability and capital adequacy ratios. It also warns that the effects on assets are lagging behind. For these reasons, he calls on the banks to take more intensive steps to strengthen their assets and improve the quality of their capital, while increasing the provisions for pandemic risks that have not yet been recorded.

In addition to the high private debt, the challenge is the high public debt and the strengthening of the budget deficits, due to the support packages. Despite the risks, the public debt remains sustainable, the BoG notes, without downgrading the risks from the cost of money. A precondition is the increase of economic activity, which will come mainly from the Recovery Fund.

There is also still growing uncertainty related to inflationary pressures on raw materials, transport costs and energy. Continued inflationary pressures on imported prices could limit private consumption and growth momentum. At the same time, a faster-than-expected change in the direction of monetary policy in the US could cause strong shocks in the financial markets, negatively affecting the global and Greek economies.

In terms of financing the real economy, credit expansion by banks decreased in 2021 compared to 2020, as there was no demand for loans from businesses. The bank financing of 2020, the support measures of the Ministry of Finance and the financing from the Hellenic Development Bank (EBA) and other organizations contributed to this. The EBA programs have made a significant contribution to strengthening the financing of enterprises, especially small and medium-sized enterprises, as they contributed around € 6.5 billion in 2020 and € 1.3 billion in January-October 2021. International programs organizations, such as the EIB Group, contributed through the banking system an additional € 0.9 billion in 2020, around 2021. It follows that the remaining amount of new financing provided by banks programs) amounted to about 10 billion euros in 2020 and about 6.0 billion euros in the first ten months of 2021.

It is also estimated that € 1.5 billion in 2020 and € 1.0 billion in 2021 were channeled to businesses without the mediation of the banking system, but were provided directly by the EIB and the European Bank for Reconstruction and Development (EBRD). ). Financing for businesses (but not banking) is also the funds provided under the repayable advance, which amounted to 5.5 billion euros in 2020 and 2.8 billion euros in 2021. In total, gross financing to SMEs and freelancers, farmers and sole proprietorships from the above sources (banking and non-banking) is estimated at 24.4 billion euros in 2020 and 12.0 billion euros in January-October 2021.

Finally, regarding the prospects of sectors and sectors, the Bank of Greece refers positively to the Greek real estate market and the capital markets. Real estate prices will continue to rise but at a slower pace, while capital markets will be driven mainly by catalysts the development of the Greek economy and the prospect of upgrading to an investment level.