ECB: Public debt, disposable income and low growth are the risks for Greece

By Leonidas Stergiou

The effects of the war on energy prices, inflation and lower growth amplify risks to the Eurozone financial system and economy. These risks are greater for countries with high public debt, more expensive borrowing costs and lower disposable income.

This is one of the main conclusions of the Financial Stability Report presented today by the Vice President of the ECB, Mr. Luis de Guindos, which presents interesting data for Greece as well.

Particularly:

1. Public debt.The Greek public debt shows the greatest sensitivity to the increase of interest rates, in terms of its service costs and its increase. In general, the ECB reports that inflation increases the cost of borrowing, on the other hand it reduces the real value of debt. This applies to both public debt and household and corporate debt.

2. The budget deficit entered the red zone, as it shifts higher for 2022, compared to previous forecasts. This is also the case for other countries, with Malta showing the greatest deterioration, followed by Italy, France, Slovenia, Latvia, Spain and Slovakia. Even Austria is approaching the red line. The reasons are the expenditures for supporting the economies during the pandemic, which continue, due to the uncertainty of the war, with higher energy prices (inflation), higher interest rates and lower growth.

3. Financial needs. The increase in interest rates has a significant impact on the financing needs of the heavily indebted countries of the Eurozone. According to the two scenarios run by the ECB, the biggest impact, by almost 5 percentage points on GDP, results from an increase in interest rates by 100 basis points and a decrease in the growth rate by 1 percentage point over three years. On the contrary, much smaller, almost 1-2 percentage points to GDP, is the impact that comes only from the increase in interest rates by 100 basis points, without a slowdown in growth.

4. Purchase of real estate. The Greek real estate market ranks quite far from potential countries where there is an increased risk of a “bubble” and where the ECB has requested increased supervision. .

5. Households. For Greek households, a possible correction in the real estate market, combined with rising interest rates and declining incomes due to inflation, shifts the country to the “deep red”, where Cyprus, the Netherlands, Luxembourg and Finland are located, with Belgium, Portugal and Spain at the border. The cost of debt service in terms of household income in Greece is estimated at 17% and is the third highest in Europe, while household debt to GDP is close to 60%, where countries such as Belgium and Germany are located.

6. Businesses. The highest risks for businesses are found in countries with growing public debt, high rates of red loans and high interconnection between banks and public debt. Nevertheless, the ECB reports that the Z-score remains lower than in the pre-pandemic period. However, in the chart presented by the report, Greece appears with the highest percentage of public debt in relation to GDP, a high percentage of vulnerable companies (including Italy) and the highest percentage of red loans. However, the final risk is also influenced by other factors, such as exposure to public debt and vulnerable sectors of the economy.

7. Banks. Greek banks face lower interest rate risk than other European banks, as new loans with fixed interest rates account for 40% of new loans from 2009 to 2021, when for example, when the corresponding percentage in the EU. is at 80%. That is, fewer loans have been “locked in” at fixed and low interest rates (due to an upcoming interest rate hike).

The largest exposure of Greek banks to the energy crisis comes from the transport sector. The following graph presents the exposure of Greek and other European banks in sectors with high energy dependence. Green means small exposure and red means large. The report is calculated on the basis of business loans granted by industry and whether these companies depend on energy use and price.

8. Dependence on Russia.Greece appears more dependent on imports from Russia, compared to the EU average, while dependence on exports is very small. The percentage of Greek imports from Russia, in relation to the trade balance, is estimated at around 5%, when in the EU. is around 4%.

Eurozone

The eurozone as a whole is exposed to a new environment of dangers that have been significantly exacerbated since the Russian invasion of Ukraine. With the war, there was a new wave of price increases in energy, correction in markets and an increase in yield curves and interbank interest rates.

According to the ECB Report, although the reaction of the markets has moderated, the risks for further corrections remain. In the banking sector, the biggest challenges come from the weak profitability they show, after the strong recovery they showed in 2021.

A major source of risk is associated with energy costs and commodity prices that fluctuate widely and remain high. This also affects the risks associated with the derivatives market. Despite the recent adjustment, the risks remain high in view of the expected slowdown in growth and inflation to levels higher than expected.

Risks are also associated with uncertainty about the course of the war in Ukraine and its duration, as well as the speed with which monetary policy is adapting to developed economies. Other factors linked to the Covid pandemic, weaknesses in emerging economies and possibly a further slowdown in the Chinese economy could increase the risks from the inflation and growth fronts.

Businesses in the Eurozone face challenges related to rising raw material costs and a blurred picture of the course of economies. This could mean an increase in bankruptcies, especially for businesses and industries that have not fully recovered from the pandemic. In addition, indebted companies and companies with low creditworthiness may face lending problems.

Eurozone property prices have continued to rise and mortgage lending has accelerated, but the rise in fixed-rate loans could be a shield for borrowers from higher interest rates in the near future.

European banks’ profitability prospects weaken after a strong 2021. The potential impact of rising energy prices, higher inflation and lower growth could negatively affect the quality of their assets (red loans). On the other hand, there are few banks that have a large and direct exposure in Russia and Ukraine. The ECB estimates that the European banking system will remain strong even in the unfavorable scenario.

Investment funds are exposed to the risk of changes in bond prices, the duration of the war and their exposure to bonds of weak companies. However, these risks do not appear to threaten systemic stability. Also, some investment funds are significantly exposed to derivatives and other high-risk investments such as cryptocurrencies.

For this reason, the ECB reiterates its recommendation to banks to create higher funds (buffers) in order to be able to deal with difficult situations. With regard to the non-banking sector, ie the business sector, the ECB makes a recommendation to pay attention to liquidity and high leverage rates.