Commission: ‘Yes’ to installment of bond profits and draft Budget 2022

By Tasos Dasopoulos

The positive opinion for the 12th evaluation and the disbursement of the 6th installment from the bonds’ profits, the priorities of the draft budget for 2022 but also the highlighting of the chronic extreme macroeconomic imbalances of the economy are included in the reports published today for Greece.

In particular, with regard to the report on the 12th enhanced surveillance assessment, the Commission notes that Greece has made further progress towards achieving the agreed commitments, despite delays in some areas partly related to the difficult circumstances from the COVID-19 pandemic and catastrophic fires in August 2021.

The report concludes that the result of the assessment “could serve as a basis for the Eurogroup to decide on the release of the next conditional debt package” ie the payment of the next tranche of bond profits (ANFAs, SNP’s ) held by the ECB and other central banks.

Preliminary Draft Budget 2022

In its second report on the draft Budget for 2022, the European Commission notes that fiscal policy supporting growth with the help of the Recovery Fund and high public investment will continue, as recommended by the European Council.

It is stressed, however, that given the level of public debt and high sustainability challenges in the medium term before the outbreak of the COVID-19 pandemic, it is important to maintain prudent fiscal policy in order to ensure sustainable public finances in the medium term. In this regard, it is emphasized that Greece is called upon to regularly review the use, effectiveness and adequacy of support measures and to be ready to adapt them to changing circumstances as required.

The Commission recalls the importance of the composition of public finances and the quality of fiscal measures, including through growth-enhancing investments, in particular by supporting the green and digital transition. It is also noted that most of the support measures will be phased out in 2021 while those included in the draft budget for 2022 aim to stimulate aggregate demand and employment, which will support a sustainable and inclusive recovery.

In addition, the investments and reforms funded by the Recovery and Resilience Facility will make a significant contribution to the green and digital transition.

Finally, fiscal structural reforms, such as expenditure revisions, performance budget reform, the completion of the functional classification and the development of a green budget framework, are expected to improve the efficiency of public finances.

Macroeconomic imbalances

In this third report of the macroeconomic imbalances issued in the framework of the European Semester recorded for Greece (high debt, unemployment, high rate of red loans, low export performance and international investment position), these have worsened due to the pandemic, but from 2021 will begin to show improvement

As pointed out, after a sharp contraction of GDP by 9% in 2020, real GDP is projected to recover, with growth reaching 7.1% in 2021, to 5.2% in 2022. The nominal level of GDP in 2022 is projected be 2.4% higher than 2019. A number of relevant developments can be summarized as follows:

• External sustainability deteriorated in 2020 as the negative NIIP index declined further due to shrinking GDP and a significant worsening of the current account deficit to 6.6% of GDP. With the return of tourism, the current account deficit is projected to decline in 2021 and 2022. A large share of the NIIP is due to public debt on favorable terms and long maturities

• The ratio of public debt to GDP increased by 26% of GDP. in 2020, to 206.3% of GDP, reflecting the depth of the recession and the impact of measures to reduce the economic and social costs of the COVID-19 crisis. More than half of that growth was due to the recession. The public debt ratio is projected to begin to decline in 2021. Long-term gross financing needs have not changed significantly since the beginning of the pandemic, mainly due to the favorable debt profile.

Banking profitability turned negative in 2020 and the Tier 1 equity ratio is one of the lowest in the EU, in part due to the ongoing clearing of banks’ balance sheets. Although still high at 26.1% in March 2021, the non-performing loan ratio declined significantly in 2020 and is expected to continue to decline slowly in 2021. Following the moratorium, an initial estimate shows moderate adverse impact on asset quality, but negative risks remain.

• The unemployment rate continued to decline even during the pandemic, mainly due to government support measures, but remained high at 16.3% in 2020. A further decline is projected in the forecast horizon.

Overall, the Commission considers it appropriate, also taking into account the detection of excessive imbalances in June, to further examine the maintenance of macroeconomic risks and to monitor progress in removing excessive imbalances.