Annexes to COM(2021)97 - Enhanced Surveillance update - Greece, February 2021 - Main contents
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| dossier | COM(2021)97 - Enhanced Surveillance update - Greece, February 2021. |
|---|---|
| document | COM(2021)97  |
| date | February 24, 2021 |
MACROECONOMIC DEVELOPMENTS
The coronavirus pandemic continues to have a strong negative impact on the Greek economy. The economy expanded by 2.3% on a quarter-on-quarter basis in the third quarter of 2020 after a decline of -14.1% in the previous period. The recovery in the third quarter was substantially less dynamic than the sizable rebound in the euro area, largely on account of the sharp fall of value added in the tourism sector. Growth was driven by private consumption, with the exports of goods showing some resilience. Unemployment continued to decline, reaching 16.2% in the third quarter of 2020, which indicates that the support measures in place are successful in protecting jobs. At the same time, employment decreased compared to a year ago, primarily due to the lower number of hires in the tourism sector. Youth unemployment also decreased but remains very high at 34.2% in the third quarter.
Following the tightening of containment measures towards the end of 2020, the economic recovery is expected to remain anaemic in the first half of this year. The containment measures announced in November 2020 remain in place, implying severe restrictions for the services sector, while industrial production continues with limited disruptions albeit facing disrupted supply chains and curtailed demand. These necessary measures to save lives are expected to further delay the economic recovery. The Commission 2021 winter forecast, prepared before the recent regional tightening of containment measures, expects real GDP growth to reach 3.5% in 2021 and 5% in 2022, driven mainly by domestic demand. The projection assumes that vaccination will gradually succeed to protect the most vulnerable by mid-2021, allowing for a lasting, if only step-wise relaxation of the containment measures in the second quarter. The external sector is also projected to provide a positive contribution to growth, albeit less strong than previously expected as tourism may take longer to recover fully. The projection assumes that fiscal policy in 2021 will continue to support the economy with targeted interventions towards businesses and households. The slack in the economy is expected to weigh on price growth, which is expected to remain mildly negative also in 2021, with a subsequent recovery in 2022.
Uncertainty surrounding the outlook remains high. Projections are subject to significant uncertainty predominately linked to the evolution of the pandemic and the success of vaccination campaign. Progress with the fight against the pandemic, both domestically but also internationally, is also critical for the recovery of the tourism industry. Uncertainty also concerns the speed of recovery of the private sector after the expiry of the support measures, which will need to be carefully designed to avoid cliff effects, which could lead to corporate distress, including bankruptcies. Weaknesses in the balance-sheet structure of the Greek corporate sector compound downside risks to the recovery. The geopolitical tensions in the region and the lingering migration crisis add further uncertainty to the macroeconomic outlook. On the upside, the Commission forecast does not incorporate the economic impact of the Recovery and Resilience Plan for Greece, the implementation of which is expected to provide a significant boost to growth.
FISCAL DEVELOPMENTS
Fiscal policy will remain accommodative in 2021 as the authorities maintain targeted support to households and businesses affected by the crisis. In response to the unfavourable evolution of the pandemic, the government decided to tighten the containment measures at the beginning of November 2020 and, more recently, to close schools and retail businesses and to impose personal mobility restrictions in certain regions including Athens and announced the prolongation of earlier fiscal measures. The total envelope of the ‘repayable advance payments’ (public support to companies affected by the pandemic, distributed in the form of loans with a conditional subsidy component) has been increased, the regular and long-term unemployment benefit has been extended and the temporary economic support to suspended wage earners has been prolonged. As the duration of the containment measures turned out to be longer than initially planned, the government also announced a number of new measures in order to support both households and affected businesses. These include a new guarantee scheme and a new loan subsidy programme, both tailored to help small and medium sized enterprises, including in particular very small/micro firms. Furthermore, affected companies will be eligible for compensation on their fixed costs in the form of a tax and social security contribution credit. Greece’s policy response has been swift since the beginning of the coronavirus outbreak, and with the abovementioned measures its overall size is expected to reach about 9.4% of GDP in 2020 and 6.5% of GDP in 2021. Overall, according to the Commission 2020 autumn forecast, the size of support measures (as a percentage of GDP) the Greek government adopted to alleviate the socio-economic impact of the coronavirus outbreak is slightly above the European Union average.
The 2021 budget, voted in early-December 2021, expects the deficit monitored under enhanced surveillance to reach 3.9% of GDP in 2021. This compares with a deficit forecast of 3.4% of GDP in the Commission 2020 autumn forecast ( 6 ). A full update of the fiscal forecast will be prepared in spring in the context of the assessment of the 2021 Stability Programme. To recall, the General Escape Clause will remain active in 2021. This allows for a temporary departure from the budgetary requirements, including Greece’s fiscal targets monitored under enhanced surveillance, provided that this does not endanger fiscal sustainability in the medium term. The Council recommended ( 7 ) that Greece pursues, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and to ensure debt sustainability, while enhancing investment. The 2021 budget expects the general government debt to reach 209% in 2020 before declining to around 200% in 2021, which is broadly in line with the Commission autumn forecast.
The public finance projections are subject to considerable risks. Uncertainty about the evolution of the pandemic remains large, which translates into substantial fiscal risks as a further prolongation of the containment measures and related fiscal support, which should be both of a targeted and temporary nature, could lead to a further increase in fiscal costs. The probability of drawing on the state guarantees will increase with the duration of the crisis. Beyond the pandemic, rulings on retroactive pensions and litigation cases against the Public Real Estate Company (ETAD) continue to pose fiscal risks. On the positive side, Greece is expected to benefit greatly from the Recovery and Resilience Facility, through large-scale financial support to growth-enhancing reforms and investments, which would provide a substantial support to the economy and boost potential growth, which can facilitate achieving prudent fiscal positions.
SOVEREIGN FINANCING
Financing conditions remain favourable and the government continues holding a large cash buffer. The sovereign yield spreads have decreased further and have been hovering around 70 basis points on the 5-year tenure since mid-November 2020. Their volatility has also been subdued. The favourable financing conditions are supported also by the European Central Bank’s accommodative monetary policy stance, including its Pandemic Emergency Purchase Programme. Medium and long-term debt redemption and interest payments will be moderate in 2021, amounting to around €10 billion. Greece is planning to raise €8-12 billion through new bond issuances, which is comparable to the amount raised in 2020. The general government’s cash reserves stood around €31 billion at the end of 2020, which would be sufficient to cover the medium and long-term debt redemptions and interest payments of the general government for the next two years ( 8 ). Since the beginning of the year, the Hellenic Republic raised €3.5 billion through the issuance of a 10-year government bond in January 2021. The achieved yield was 0.81%, a historical low level for this maturity. An additional €2 billion was raised through private placements. The authorities intend to carry out a partial repayment of the loans from the International Monetary Fund, which is a welcome step that helps to reduce the foreign exchange risk and sends the right signal to the markets.
The 2020 Debt Sustainability Monitor presented a debt sustainability analysis for all Member States based on the 2020 autumn forecast ( 9 ). The baseline scenario of that analysis is identical to the one published in the 8th enhanced surveillance report. An updated debt sustainability analysis will be presented in the next enhanced surveillance report.
FINANCIAL SECTOR DEVELOPMENTS
Bank profitability is likely to remain under pressure as favourable liquidity conditions and significant non-recurring revenues on the trading portfolio have only partially offset increased provisioning needs. Banks have maintained ample cash buffers and a low cost of funding due to a steady upward trend in deposits coupled with accommodative monetary policy conditions. In addition, they have benefitted from extraordinary trading gains from their government bonds portfolio. However, the frontloading of provisioning to take into account the expected impact of the pandemic, among other factors, has led the banking system as a whole to post a loss after taxes in the first nine months of 2020. The profit outlook will remain challenging, and thus limiting the internal capital generation capacity. The securitisations of non-performing loans will have a positive impact on the banks’ cost-of-risk and free up space in banks’ balance sheets for new lending, but also entails an initial one-off capital loss and a recurring loss on net interest income. At the same time, the expiry of the moratoria may lead to further impairments due to a deterioration in asset quality.
The stock of non-performing loans has continued to decline, mainly thanks to the Hercules scheme and the temporary impact of moratoria. Non-performing loans at the end of September 2020 amounted to €58.7 billion, down by €9.8 billion from December 2019 but only €1 billion from the previous quarter. As a result, the non-performing loans ratio came down to 35.8%, which remains the highest in the euro area. The continuous improvement in 2020, despite the pandemic and the resulting drop in the number of cured loans, is mainly due to non-performing loan sales of €6.8 billion and a limited inflow of new bad loans (down by 58% year-on-year in the nine months) thanks to the moratoria in place. Loans under moratoria amounted to €20.8 billion as of November 2020, i.e. above 12% of the loan book, roughly evenly split between corporates and households. The deleveraging of non-performing loans by banks has also led to an increased role for non-bank servicers, with €33 billion of loans under management as of end-September 2020, up by 40% since the end of 2019.
As in other Member States, the expiry of the moratoria could be accompanied by a renewed deterioration in asset quality going forward. The large amount of loans under moratoria and the lacklustre track record of banks in viable loan restructurings point to a material risk for asset quality, as moratoria mostly expired at the end of 2020. This could lead to new impairments, in case provisions booked so far not fully capture the eventual impact of the pandemic on the loan book. However, the temporary instalment subsidy scheme set up by the authorities for coronavirus-affected debtors with primary residence loans (the “Gefyra” scheme) will mitigate this risk for this type of loans, which represent a large part of the retail loan portfolio. Subsidy payments under the scheme have been initiated. The authorities are setting up a similar scheme for business loans. The scheme will need to be carefully designed, including appropriate moral hazard safeguards. Moreover, the banks will try to stem any migration of loans currently under moratoria to a category of increased credit risk, that would imply higher provisioning needs, through the offering of intermediate products, allowing for a gradual restoration of payment patterns. The exact supervisory treatment and related capital cost of these products will need to be discussed with the supervisory authorities. Going forward, the planned securitisations under the Hercules scheme remain the main driver of the reduction of non-performing loans.
The support measures adopted by the authorities have further bolstered credit growth to businesses, facilitating access to credit also for smaller firms. The Covid‑19 enterprise guarantee scheme and the interest subsidy scheme (TEPIX-II) operated by the Hellenic Development Bank have resulted in €4.6 billion and 2 billion, respectively, of loan disbursements to corporates and small and medium sized enterprises in 2020, contributing with approximately 40% to the total gross corporate loan flows over the year. This has resulted in the average monthly gross loan flows ( 10 ) more than doubling for large corporates, while increasing substantially also for small and medium-sized enterprises. This credit growth has been used by firms to mostly cover their working capital needs and build up their liquidity buffers. In terms of cost of credit, although nominal lending rates are near their historical lows for corporates, they have been on the rise since September 2020, particularly for smaller loans, reflecting increased credit risk. As for lending growth to households, it remains in negative territory and comes at a steadily higher cost.
The authorities are preparing an amendment of the governing law of the Hellenic Financial Stability Fund. The amendment will allow for the Fund to participate as a private investor in future share capital increases of the banks where it maintains a shareholding.
(1)
() Regulation (EU) No 472/2013 of the European Parliament and the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability, OJ L140, 27.5.2013, p. 1.
(2)
() Commission Implementing Decision (EU) 2021/998 of 17 February 2021 on the prolongation of enhanced surveillance for Greece.
(3)
() https://www.consilium.europa.eu/media/35749/z-councils-council-configurations-ecofin-eurogroup-2018-180621-specific-commitments-to-ensure-the-continuity-and-completion-of-reforms-adopted-under-the-esm-programme_2.pdf
(4)
() ECB staff participated in the review mission in accordance with the ECB’s competences and thus provided expertise on financial sector policies and macro-critical issues, such as headline fiscal targets and sustainability and financing needs. The review mission was preceded by a technical mission, also held remotely, from 13 January to 20 January 2021.
(5)
() The Council has already approved a total of €90.3 billion in financial support to 18 Member States. Member States can still submit requests to receive financial support under temporary Support to mitigate Unemployment Risks in an Emergency (SURE) which has an overall firepower of up to €100 billion.
(6)
() The Commission 2020 autumn forecast did not take into account either the economic impact of the second tightening of containment measures started in November 2020, the prolongation of fiscal measures in response to the second wave or the economic impact or, more recently, the closure of schools and retail businesses and personal mobility restrictions in certain regions including Athens. At the same time, while the budget includes the envisaged macroeconomic impact of investments under the Recovery and Resilience Facility, the Commission will evaluate such an impact only in the coming months, when the plans will be presented in sufficient detail.
(7)
() Council Recommendation of 20 July 2020 on the national Reform Programme of Greece and delivering a Council opinion on the 2020 Stability Programme of Greece, OJ C 282, 26.8.2020, p. 46.
(8)
() The cash buffer account balance remained at €15.7 billion. The cash buffer account was built also through disbursements under the European Stability Mechanism programme and is dedicated to debt service. Greece may use this amount for other purposes as well, following an approval of the European Stability Mechanism’s governing bodies.
(9)
() Debt Sustainability Monitor, European Economy Institutional Paper, No. 143, February 2021.
(10)
() Defined maturity loans. Source: Bank of Greece.