“The spread of coronavirus and the exacerbation of the refugee-migration problem have a catalytic effect on short-term growth prospects and temporarily pose major obstacles in the way of regularity”, the BoG notes in its report.
The Governor’s report describes as “extremely important” the decision taken by the Governing Council of the ECB on 18 March to apply a waiver from the general eligibility rule on Greek government bonds under the new pandemic bond market program (PEPP), worth EUR 750 billion, which will last at least until the end of 2020.
In 2020, the growth of the Greek economy will be largely determined by the impact of the spread of coronavirus on the global and European economy, the central bank admits.
As things stand, according to the Bank of Greece’s baseline scenario, GDP growth is projected to be zero in 2020, instead of the 2.4% that was the most recent forecast, after the integration of National Accounts data for Q4 2019 (6 March 2020). Based on the latest data on the pandemic, the most likely version is that there will be a significant negative impact on the economy in the first two quarters of 2020, which will be partially offset by the last two quarters.
The slowdown in economic growth will mainly stem from disruptions in demand, with a decline in external demand for goods and services and domestic demand, as sectors such as transport, tourism, trade, catering and entertainment are particularly affected.
No one today can accurately predict the evolution of the pandemic, and its impact on national economies will also depend on national and international fiscal and monetary measures taken, the report notes. The Bank of Greece’s baseline scenario incorporates assumptions about the compensatory measures already taken.
The spread of the coronavirus pandemic generates new high costs to tackle the disease, support businesses and preserve employment, and has a significant negative impact on the pace of economic growth and, consequently, on state revenues. Given this, the primary outcome of the general government is expected to be several percentile points of GDP below the original target of 3.5% of GDP, although at this time it is extremely difficult to predict accurately.
But because of the flexibility embodied in the Stability and Growth Pact for exceptional circumstances, lowering the fiscal result can in no case be considered a breach of the target, the BoG notes.
The biggest challenge for fiscal policy today, which changes radically all the data so far, is to use all the available tools to ensure the financing of expenditure for the treatment of the coronavirus disease and minimize the negative effects on the real economy, in such a way as to have the least possible impact on the sustainability of public debt.
Problem with NPLs
According to the BoG’s report, it is expected that the target of a significant reduction in the rate of non-performing loans in the immediate future will be negatively affected, but not the final target that has been set by the end of 2021, based on the plans submitted by the Greek banks to the supervisory authorities.
“But all of this is being revised in light of the extraordinary circumstances and the uncertainties under which the banking system and the real economy are called to operate today”, the report says.
In any case, according to Bank of Greece Governor Yiannis Stournaras, with the implementation of the “Hercules” plan, it will be important to have an assessment of the fundamentals of the Greek banking sector, notably of the organic profitability, the bad debt coverage ratio and the quality of supervisory funds, especially after the passage of the coronavirus pandemic./ibna