Download Greece & Greek Banks After the Crisis

Η ΕΛΛΑΔΑ ΚΑΙ ΟΙ ΕΛΛΗΝΙΚΕΣ ΤΡΑΠΕΖΕΣ ΜΕΤΑ ΤΗΝ ΚΡΙΣΗ GREECE & GREEK BANKS AFTER THE CRISIS

Γκίκας Α. Χαρδούβελης* Gikas A. Hardouvelis

Athens, January 21, 2010 Conference on THE FUTURE OF BANKING IN GREECE FINANCIAL TIMES – GLOBAL EVENTS GRANDE BRETAGNE HOTEL, ATHENS

* Professor, Department of Banking and Financial Management, Un. of Piraeus Chief Economist, Eurobank EFG Group Gikas A. Hardouvelis, Jan 21, 2010 1 GREECEGREECE && GREEKGREEK BANKSBANKS AFTERAFTER THETHE CRISISCRISIS MAIN THEMES I. IS THE INTERNATIONAL FINANCIAL CRISIS OVER? II. THE SPECIAL GREEK PROBLEMS III. GREEK BANKS: CAN PAST SUCCESS PERSIST? IV. CONCLUSION

Gikas A. Hardouvelis, Jan 21, 2010 2 I.

IS THE INTERNATIONAL FINANCIAL CRISIS OVER?

Yes, but risks remain

Gikas A. Hardouvelis, Jan 21, 2010 3 Ι.1 Output Forecasts for 2010

Real GDP 2008 2009f 2010f 9 Recovery almost USA 0.4 -2.5 2.9 everywhere Euro area 0.6 -3.9 1.4 9 Stronger recovery Japan -1.2 -5.3 1.4 in the US China 9.6 8.6 9.6 9 Sluggish recovery in our region, with Brazil 5.1 0.0 5.0 Turkey showing Russia 5.6 -7.5 4.0 the best prospects India 7.5 6.6 8.2 9 We avoided a Greece 2.0 -1.3 -? repetition of the Bulgaria 6.0 -5.9 -1.1 1930’s by transferring the Poland 5.0 1.3 2.0 associated costs Romania 6.2 -7.5 0.5 in the future Serbia 5.5 -3.5 1.5 Turkey 0.9 -5.5 3.0 Gikas A. Hardouvelis, Jan 21, 2010 Source: Eurobank EFG Research 4 I.1 Is the crisis over? The main risk of early liquidity withdrawal Central bank balance sheets bn € bn $

2500 ECB 2500 FED

2000 2000

1500 1500 15/1/10: € 1,871 bn 13/1/10: $ 2,295 bn 1000 1000

500 500 1/08 3/08 5/08 7/08 9/08 1/09 3/09 5/09 7/09 9/09 1/10 1/08 3/08 5/08 7/08 9/08 1/09 3/09 5/09 7/09 9/09 1/10 11/08 11/09 11/08 11/09 Source: ECB, Federal Reserve 9 Central banks decreased their intervention rates and pioneered new ways to provide liquidity, especially post-Lehman (quantitative & qualitative easing). 9 Recovery depends on the continuing support by central banks and governments 9 ECB is more conservative than the Fed, will likely withdraw liquidity sooner

Gikas A. Hardouvelis, Jan 21, 2010 5 I.2 Is the crisis over? Spreads down but not at pre-crisis levels

Stock market 700 602 Credit volatility 600 Risk 53

500

400

300 232 21 185 18 200 159 16 108 100 51 12 19 0 Citigroup 5-yr CDS Spread JP Morgan 5-yr CDS Spread VIX end-June 07 end-August 08 mid-March 09 19/1/2010 Gikas A. Hardouvelis, Jan 21, 2010 Source: Bloomberg 6 I.2 Is the crisis over in our region?

bps 9 IMF funding reduces spreads around the pre-Lehman levels

1000 Sovereign Spreads (10-yr $ bonds over US bonds) Greek spreads 800 tell a different story

600

367 400 333 267 214 242 197 205 200

0 Emerging Bulgaria Croatia Romania Serbia Turkey Greece Markets

29/6/2007 31/8/2008 31/3/2009 19/1/2010

Gikas A. Hardouvelis, Jan 21, 2010 Source: JP Morgan EMBIG, Bloomberg 7 I.2 Is the crisis over? The rise in NPLs

% 9 NPLs and unemployment typically 22.5 continue to rise even after a recession is over 20.0

17.5 Loans overdue 15.0 more than 90 days 12.5

10.0

7.5

5.0

2.5

0.0 Albania Bosnia & Bulgaria Croatia FYROM Romania Serbia Turkey Greece Herzegovina Sep 08 Sep 09* Source: Central Banks, IMF, Eurobank Research Gikas A. Hardouvelis, Jan 21, 2010 * Croatia: Jun 09 8 II.

THE SPECIAL GREEK PROBLEMS

The crisis put a stop to a long period of growth by uncovering the Greek imbalances, which now threaten the country with a long period of stagnation This does not come as a surprise, as it was predicted much earlier

Gikas A. Hardouvelis, Jan 21, 2010 9 II. First imbalance: Competitiveness 9 The competitiveness deterioration is the deeper problem 9 It also shows up in the post-EMU current account deficits and the subsequent explosion of gross External Debt % ΑΕΠ 162,9169,1 9 The country lives way beyond its means 153,7 160 151,6 146,2 141,0 136,3 140 130,0 133,6 120,2 123,1 117,9 119,2 114,1 120 112,7 112,8 109,6 111,2 103,2 99,799,5 100,1 100 94,6 93,9

60 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 Source: Bank of Greece 9 In order to maintain our standards of living we “sold” the equivalent of a city the size of Thessalonica.

Gikas A. Hardouvelis, Jan 21, 2010 10 II. The fiscal imbalance became evident the moment growth stopped

% GDP 9 I believe the fiscal problem is a lot easier to solve, yet markets focus on this one 250 227.0 39 200 General Government Debt –to –GDP ratio 150 120.4 25 93.6 100 84.0 81.7 32 18 38 50

Japan Greece US Sources:ΕΑ IMF, EuropeanUK 2007 2010 Commission, SGP Gikas A. Hardouvelis, Jan 21, 2010 11 II. Greek government deficits are the worst in EU-27

% GDP General Government deficit -14 2009 Ireland Greece UK -12 Spain

-10 Lithuania

France Latvia Portugal -8 Romania Czech EU-27 Slovenia Poland -6 Belgium Slovakia Netherlands Italy Malta -4 Cyprus Austria Finland Hungary Luxemburg Germany Estonia -2 Denmark Sweden

Bulgaria 2008 0 0246 -2 -4 -6 -8 -10

Gikas A. Hardouvelis, Jan 21, 2010 12 II. Credit Rating Agencies, 21/1/2010

Greece’s sovereign credit rating (foreign currency LT debt) Moody’s S&P Fitch Aaa AAA AAA Aa1 ECB AA+ AA+ Aa2 line as AA AA Aa3 of Jan AA- AA- A1 2011 A+ A+ A2 (outlook: negative) AA A3 A- A- Baa1 BBB+ (outlook: negative) BBB+ (outlook: negative) Baa2 BBB BBB Baa3 BBB- BBB- Ba1 BB+ BB+ Ba2 BB BB Ba3 Current BB- BB- 9 Downgrades by all three rating B1 temporary B+ B+ agencies in 2009 B2 ECB line B B B3 B- 9 S&P and Fitch areB- very harsh, Caa1 CCC+ bringing Greece downCCC by two Caa2 CCC notches, perhapsCC becoming Caa3 CCC- conservative fromC earlier failure to Ca CC D Source: Bloomberg CCforesee the subprime problem WR D Note: Investment grade Gikas A. Hardouvelis, Jan 21, 2010 NR above dotted line 13 II. Greece’s SGP tries to put a stop on run-away debt

Gross Public Debt 9 EU Commission (% GDP) assumes no 140 change in policy 135,4 in its earlier 130 124,9 120,6 120,4 117,7 forecasts 120 113,4 113,4 112,6 9 SGP assumes 110 effective new 100 99,2

100 97,1

policies 95,6

9 A successful 90 SGP would make a big difference 80 in the explosive dynamics of debt 2005 2006 2007 2008 2009 2010 2011 2012 2013 EC SGP

Gikas A. Hardouvelis, Jan 21, 2010 Source: European Commission, SGP 14 II. General Government Revenues and Expenditures % GDP Greece 52.0 55 Average Expenditures 1990 - 2007: 44.6% 51.1 48.3 48.3 49.4 47.6 46.4 46.6 50 45.7 45.5 44.8 44.9 45.3 44.7 44.4 43.7 44.1 44.1 44.3 45.0 42.6 45.5 45 44.1 44.6 44.1 45.6 43.0 40.9 40.6 41.7 42.4 40.5 41.3 39.0 39.7 40.5 40.4 40 37.4 40.3 39.3 39.2 36.3 39.0 38.0 38.5 36.7 35 33.2 34.5 9 Huge expansion in expenses in 2008, 2009 28.9 31.8 SGP 30 30.8 9 Future adjustment mostly from revenue side forecasts 28.4 9 In 2010, Rev Ï 3.1% GDP, exp Ð 0.9% GDP 25 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Revenues Expenditures Gikas A. Hardouvelis, Jan 21, 2010 Source: SGP 15 II. Euro Area expenses also show deterioration in 2008, 2009 % GDP Euro Area 9 The 2007-2009 deterioration was 4.4% 50.5 50.6 52 50.6 of GDP, whereas in Greece 7.9% 49.4 50.4 50.2 51 48.5 48.0 50 48.1 47.6 47.5 49 47.3 47.3 46.6 46.3 46.6 48 46.0 46.8 47 46.4 46.7 46.2 46.2 46 45.6 45.4 44.0 45.045.0 45.345.4 43.7 45 44.6 44.8 44.8 44 9 Unlike Greece, EA countries entered Euro Area by 43.7 43 cutting expenses 42 9 In fact, during 2009 , expenses lower in EA 41 forecasts 9 Revenues were always higher in EA 40 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Revenues Expenditures Gikas A. Hardouvelis, Jan 21, 2010 Source: European Commission 16 II. So, how come everyone points to Greece?

9 Greek deficits were the largest in 2008 and 2009 9 Greek debt is second largest in EU-27 and was explosive 9 Pension system future pressures bigger in Greece 9 Lack of credibility of Greek fiscal statistics Greece 20102020 2035 2060 Pension Expenditure 11.613.2 19.4 24.1 (% GDP) Pension system 56 5978 102 dependency ratio (%)* Euro Area 2010 20202035 2060 Pension Expenditure 11.2 11.613.2 13.9 (% GDP)

* number of pensioners relative to the number of contributors in public pension schemes Source: European Commission 2009 Gikas A. Hardouvelis, Jan 21, 2010 17 II. Greek Stability & Growth Programme

2009 2010 2011 2012 2013 Baseline Scenario Real GDP -1.2 -0.3 1.5 1.9 2.5 Nominal GDP 0.4 1.7 3.5 3.8 4.4 Unemployment (%) 9.0 9.9 10.5 10.5 10.3 General govnt balance (% GDP) -12.7 -8.7 -5.6 -2.8 -2.0 Current account (%GDP) -11.0 -8.1 -7.7 -6.9 -6.0 Private consumption -1.5 -1.0 0.3 0.8 1.0 Public consumption 11.0 -4.4 -5.9 -5.9 0.7 Investment -18.8 -1.6 4.5 5.5 8.4 Exports -16.0 2.5 4.0 6.5 7.2 Imports -24.7 -3.0 2.0 2.8 3.4 Alternative Scenario Real GDP -1.2 -0.8 1.0 1.5 2.0 Nominal GDP 0.4 1.1 2.8 3.3 3.6 Unemployment (%) 9.0 10.2 11.2 11.5 11.5 General govnt balance (% GDP) -12.7 -8.7 -5.6 -2.8 -2.0 Current account (%GDP) -11.0 -8.1 -7.6 -7.1 -6.4 Gikas A. Hardouvelis, Jan 21, 2010 Source: Stability and Growth Programme draft 18 II. Greek Stability & Growth Programme: Strong points 9 Re-designing the budget framework Single Payments Authority will become operational Establishment of "fiscal rules" to ensure budget execution Creation of a 10 percent contingency reserve Ministries required to submit three-year budgets by end-January ‘‘zero-basis’’ for the re-evaluation of all applications for funding Monthly reporting requirements for key ministries Creation of a Parliamentary Budget Office National Statistical Agency becomes independent Use of external auditors in public sector entities 9 Tax reform with tax base broadening and a fight against tax evasion 9 A hiring freeze in 2010, and a 5:1 rule from 2011 in the public sector 9 Pension system reform soon 9 Expenditure switch: More investment and less gov. consumption 9 Privatisation revenues of approximately 2.3 % of GDP per year 9 Willingness to proceed with missed structural reforms and a new export-oriented growth model 9 Greeks do respond when calamity arrives. Gikas A. Hardouvelis, Jan 21, 2010 19 II. Greek Stability & Growth Programme: Risks are high - but strong will exists 9 SGP assumes a relatively benign macroeconomic environment. The balance of risks to the growth outlook skewed to the downside 9 Risks relate to consumer spending and investment, as consumer and business sentiment remains depressed, wage growth in 2010 will broadly stagnate (or even contract in real terms) and public spending is expected to contact after recording double-digit growth in 2009. YET 9 EU policy makers realize the attack on Greece is an attack on EMU and recently – following SGP’s announcement, began providing strong verbal support 9 The expected close EU inspection of Greek finances implies discipline, which increases the probability of the programme’s success 9 It is preposterous to think Greece will ever abandon EMU. The political and economic costs would be way too high, e.g the post-EMU depreciation would not remain at 30%, probably be 80%, which implies the government debt will increase 5 times!

Gikas A. Hardouvelis, Jan 21, 2010 20 III.

GREEK BANKS: CAN PAST SUCCESS PERSIST?

Unlike what happened abroad, Greek banks did not cause the recession Instead, the Greek and regional recession is affecting Greek banks

Gikas A. Hardouvelis, Jan 21, 2010 21 III. Domestic credit expansion has matured

Greece Euro Area (% GDP) (% GDP) 60% 54 60% 53 52 48 50 50 44 40 40 31 40 30 30 20 12 20 10 10

0 0 Households Businesses Households Businesses 2000 2008 2000 2008

Source: BoG, ECB 9 Private sector credit / GDP has almost converged to Euro Area levels 9 Greek growth model seems to have reached its limits

Gikas A. Hardouvelis, Jan 21, 2010 22 III. Still room for credit expansion in the region but for the long-term

% GDP 120 Credit Size and Distribution end-2008 100

0 C F A B B R S T E L L

r Y l o u o e u s a i t o b t R s lg m r r t h a a b k o v u O & t n a a i e n i a a a i M i r n ia a y a H i n a ia i e a r z

Households Corporates

Gikas A. Hardouvelis, Jan 21, 2010 Source: Central Banks, Eurobank Research 23 III. Better domestic profitability relative to EU banking sector

3 Less of a problem in Greece relative to EU-27 Return On Assets Return On Equity

EU-27 EU-27 25 1.6 Greece Greece 1.4 20 1.2 15 1.0 0.8 10 0.6 0.4 5 0.2 0 0.0 -0.2 -5

2007 Source:2008 ECB 2007 2008Bank Groups in Greece 1H 2008 1H 2009 ROA 1.1 0.5 Gikas A. Hardouvelis, Jan 21, 2010 ROE 15.7 7.7 Source: Bank of Greece 24 III. Profitability declines in 1H2009

Financial Results of Greek Banking Groups Change (Amounts in million EUR) Q1 2008 Q1 2009 (%)

Operating income 7347 7686 4.6

- net interest income 5454 5394 -1.1 - net non-interest income 1893 2292 21.1

Operating costs 3893 3989 2.5

Net income 3457 3704 7.2

Provisions 910 2298 152.4

Pre-tax profits 2546 1406 -44.8

Taxes 476 413 -13.2

After tax profits 2071 994 -52.0

Gikas A. Hardouvelis, Jan 21, 2010 Source: Bank of Greece 25 III. Credit growth has declined significantly everywhere

Y-o-Y (%) 30 Total credit growth 26.1 25

20 USA Euro area 15.8 15 13.5 10.0 10 5.9 6.9 4.5 5

0 -2.2 Greece -5 -2.9 Dec 07 Dec 08 Nov 09* * Dec.08-Nov.09

Source: ECB, Fed Gikas A. Hardouvelis, Jan 21, 2010 26 III. SE Europe: Fall in the growth rates of credit expansion annual change (%) 70 Total Credit Growth 60

0 Albania Bosnia & Bulgaria Croatia FYROM Romania Serbia Turkey -10 Herzegovina 2007 2008 ΥTD (Nov 09)* *Albania: Oct 09 – Croatia: Sep 09 Gikas A. Hardouvelis, Jan 21, 2010 Source: Central Banks, Eurobank Research27 III. Yet adequate capitalization

Bank Capital to Assets ratio Capital /Assets (Q2 2009) Austria 6.9 Q2 09 % Belgium 3.1 Q3 09 30 Ireland 4.6 2008 25 Germany 2.5 Q3 09 20 Portugal 6.7 Q2 09 15 Norway 4.7 Q3 09 10 Sweden 4.2 Q3 09

5 UK 3.3 2008

0 Greece 7.2 Q2 09 Albania Bosnia &Bulgaria Croatia FYROM Romania Serbia Turkey Herzegovini Spain 6.2 Q3 09 *FYROM, Romania and Serbia as of Q1 2009 Ratio of all traded banks and Source: Central Banks, Eurobank Research among the 4 largest in the country

9 Capital to assets ratio relatively stronger in SEE

Gikas A. Hardouvelis, Jan 21, 2010 28 III. Liquidity: Less of a problem in Greece relative to Euro Area

Country Loans to Deposits Ratio November 2009 (Total Loans to Total Deposits, MFIs excluding Eurosystem) % 160 139.4 124.1125.8 140 114.7115.9 108.0111.4 120 96.5 101.6102.9 92.6 93.8 100 79.1 81.3 88.588.2 80 62.3 . 60

0 EA Italy Malta Spain France Ireland Greece Austria Cyprus Finland Belgium Slovakia Portugal Slovenia Germany Lux/bourg Netherlands Greek banking group L/D ratio: 105

Gikas A. Hardouvelis, Jan 21, 2010 Source: ECB, BoG 29 III. Liquidity is a major constraint in the SEE region 140 % Loans to Deposits 120

100

0 Albania Bosnia & Bulgaria FYROM Romania Serbia Turkey Herzegovina June 2007 August 2008 November 2009*

*Albania: Jun 09 9 Domestic deposits Baltic States at July 2009 unable to support a Latvia 105.0 large expansion in Lithuania 183.3 credit growth 9 Difficult to bring Estonia 167.9 liquidity from abroad

Gikas A. Hardouvelis, Jan 21, 2010 Source: Central Banks, Eurobank Research 30 III. Greek banks’ reliance on ECB liquidity facilities GR EA ECB funding as % of total assets % Total As of November 2009 Funding 41.3 698.8 8.7 of which: 10 Main 8 refinancing 6 operations 0.2 52.3 2.2 4 Longer-term 2 refinancing 0 operations 41.1 626.1 Other 20.4 Total Assets 485 31,331 Greece AreaEuro 9 When ECB withdraws the liquidity, * numbers in billion € the cost of funds will increase

Source: BoG, ECB Gikas A. Hardouvelis, Jan 21, 2010 31 III. Non performing loans will keep rising in the immediate future 9 This is the experience around the globe with previous recessions

Consumer loans % of total credit Corporate loans NPLs Total Credit

Mortgages

9 Provision coverage has declined as well from 60% in 2005 to 40% nowadays, but not uniformly across banks 9 Provisioning will increase in 2010 H1

Source: Bank of Greece Gikas A. Hardouvelis, Jan 21, 2010 32 IV. Conclusions

9 A weak global recovery in 2010 and lower world growth in the next 5- 7 years with strong pressures on international banking 9 Strength of recovery depends on central bank liquidity 9 The crisis uncovered the two major imbalances of the Greek economy, the lack of competitiveness and the lack of fiscal discipline 9 Greeks do respond to adversity and the expected long stagnation period ahead is likely to trigger the structural reforms the country never dared to undertake before. 9 The possibility of leaving EMU is out of the question but appears in the media as the scenario heralds the breakdown of EMU 9 The Greek SGP puts a credible anchor on economic policies and controls the run-away debt but risks are high 9 Greek banks did not cause the global or local recession, yet they are affected by it 9 Greek banks are strongly capitalized and their liquidity problems are not be as severe as in the rest of Europe 9 Yet Greek banks do depend on the course the country takes, as their cost of funding, their depositor base and their lending opportunities are intimately affected by the future path of the Greek economy 9 A consensus for mutual sacrifices is required among Greek citizens

Gikas A. Hardouvelis, Jan 21, 2010 33 THANK YOU FOR YOUR ATTENTION!!

My thanks to the Research Department of Eurobank EFG for able research assistance and support For more info, please consult the Eurobank website: http://www.eurobank.gr/research

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