MACROECONOMIC REFORMS

 

The economy of Greece is the 51st largest in the world with a nominal gross domestic product (GDP) of €179 billion annually. It is also the 55th largest in the world by purchasing power parity, at €270 billion annually. As of 2017, Greece is the seventeenth-largest economy in the 28-member European Union. Greece's GDP per capita was €18,000 at nominal value and $29,123 at purchasing power parity in 2018. For the first time in 10 years, economic activity returned with solid growth at 1.5% in 2017. Indeed, this is the first time Greece has achieved 6 consecutive quarters with positive GDP change since 2006. GDP growth is mainly export-driven, as improved external competitiveness combined with solid external demand has underpinned export growth. GDP growth is estimated at 2.1% and around 2% in 2018 and this year respectively.

 

The unemployment rate declined further to 18.3% in the third quarter of 2018, remaining on a downward path, the lowest level since August 2011. On the fiscal front, the 2018 general government primary surplus target of 3.5% was outperformed by a strong margin (4%) and according to the 2019 budget, it is projected to reach 3.6% of GDP. A set of expansionary fiscal measures amounting to 0.5% of GDP will take effect in 2019, corresponding to the first loosening in fiscal policy since 2009. This expansion will be financed by the recurring part of the fiscal overperformance in the period 2016-2018 (0.5% of GDP, on average) and is expected to provide an analogous impulse to domestic demand. A modest set of expansionary measures will take effect in 2019, being the first loosening in fiscal policy since 2009. The expansion will be financed by the recurring part of the fiscal overperformance in the period 2016-2018 also supporting domestic demand.

 

The government is committed to the implementation of growth-enhancing reforms, including administrative reforms and speeding up of judicial procedures. Reviving domestic and foreign investment is crucial to supporting the country’s economic recovery. The privatisation agenda can play an important role as a major opportunity to attract FDI in key sectors of the economy, such as transport, energy, logistics and tourism. These efforts are expected to enhance the country’s credibility in the eyes of international capital markets and credit rating agencies, making the investment grade within reach. Perhaps the services sector is the ripest opportunity for expansion and growth, not just through M&A, but via less expensive joint ventures and partnerships

 

Recently, Greece has raised €2.5 billion issuing a 5-year government bond at a yield of 3.6% and an annual fixed coupon for investors of 3.45%. This was the country's first attempt to tap the international money markets after the country's exit from the third bailout programme last August. The €10 billion issue was four times oversubscribed with foreign investors’ participation exceeding 85%. As the Greek government yield curve has been rebuilt, its slope has been steepened for the first time since 2015, implying improved investor perceptions about the outlook of the Greek economy. In short, Greece is already in the markets with the only exception of the 10-year benchmark new issue. Since the start of the year the trading volume in the secondary securities market has been raised substantially from €5 million to €20 million on a daily average and the repo transaction volume has reached €22 billion from zero three years ago.

 

As far as the benchmark is concerned, the 10-year GGB is currently trading at a yield of around 3.9%, near pre-crisis levels. The 10-year GGB yield was 7.3% at the beginning of 2017. A new 10-year government bond issue is expected to happen before the end of 2019. Apart from its obvious importance for the Greek economy, it is also of direct interest to the pricing of future NPL securitisation products, since their guarantees are calculated on the basis of a basket of Greece’s sovereign CDS premium on the state guarantor.

 

Greece’ sovereign financing profile remains favourable in the medium term. Greece still benefits from a debt structure with extremely long maturities and favourable interest rates. Medium and long-term amortisations remain moderate. Greece also benefits from a large amount of State deposits, which stood at €26.8 billion at the end of 2018 and which, driven by amortisation and without new issuances, is projected to reach €16.1 billion by the end of 2019.

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BANKING SECTOR

 

For the first time since 2010, and after three rounds of capital injections in the last five years, amounting in total to €64 billion cumulatively, all four systemic banks successfully concluded the 2018 stress test conducted by the ECB, without any need for additional capital increases. In this context, according to their latest announced financial results for the third quarter of 2018, they remained in profitable territory with their capital ratios remaining at comfortable levels near 16% on average. 

 

However, the figures remain weak, as net interest income continues to decrease. Banks’ dependence on the ELA emergency lifeline has been terminated. Another visible improvement in the financial sector was the increase of the total deposits between end-June 2015 and January 2019 by €20 billion (or 13%) to €150 billion. Greece’s four systemic banks’ covered bonds of 3 and 5-years maturity have been upgraded to BBB-. Since last October capital controls on domestic transactions have been fully lifted. They are still in place though for money transfers abroad. 

 

The Government is expected to implement the full lifting of capital controls, probably after the elections take place, providing further signals that Greece is on a steady path towards fully restoring confidence. The government is working towards restoring the health of Greece's banking system, improving the effectiveness of legal framework and finalizing the NPE/NPL resolution efforts. In 2018, Banks has met NPE reduction targets with the support of increasing asset sales. 

 

Greek bank stocks have outperformed the eurozone average recently with the FTSE Athex banks index being up 4.7% since Greece completed its third IMF bailout last summer, compared with a 1.75 rise across the Euro Stoxx banks index. Greece can also develop successful private banking and asset management sectors, both underdeveloped at present when considering that Greece has currently 52 asset management firms compared to over 1,000 for the UK and 120 in Malta, for example.

 

Banks’ private sector deposits have been stable and reliance on central bank funding has decreased. All four systemic banks have repaid their emergency liquidity assistance entirely. Private sector deposits have increased slightly towards the end of 2018, as compared with the immediate aftermath of ESM programme. The improved liquidity situation of Greek banks and increased confidence of depositors gave room for a further loosening of capital controls as of October 2018, which allowed for unlimited cash withdrawals from credit institutions in Greece and further mitigated the adverse impact from capital controls on Greek businesses.

 

Bank lending remains subdued, with a gradual improvement for companies during the second half of 2018. Since 2016, the annual growth rate of loans extended to non-financial corporations had been negative, but close to zero. During the second half of 2018, a gradual recovery in lending to non-financial corporations was observed. The growth rate for loans to households has been very slowly recovering since July 2016, but as of the end of 2018 remained in clearly negative territory. This was mainly driven by subdued mortgage developments, although banks reported improved housing prospects and stronger demand for housing loans. Growth in consumer loans remained close to zero, with a slight shift from credit card and overdraft credit to longer-term loans for consumer durables. Factors that supported new credit to the private sector include the recent moderate recovery in economic activity and a slight reduction in lending rates, notably for companies. 

 

Lending spreads remain elevated. The gradual decline in lending rates to non-financial corporations has continued during 2018, driven by lower credit risk and the favourable effect of the financing instruments available to SMEs, including the Hellenic Fund for Entrepreneurship and Development, the European Bank for Reconstruction and Development and the European Investment Bank Group.