The Financial Sector of Greece - Example

The Financial Sector of Greece By of [Word Count] Introduction In Greece recorded some of the poorest financial sector performance in the Euro region (Rauch, Göttsche & Stefan, 2011). Notably, the poor performance was observed in the stock and flow components of the financial sector, which stood at -15% and -11% respectively (Bank of Greece, 2009). In the same year, Greece’s public debt was at a staggering 115% of its Gross Domestic Product. Worse still for Greece, its international investment imbalance was -86% of the GDP (Bank of Greece, 2009). Extensive external borrowing by Greece is often cited as the main causes of these financial imbalances. The fiscal expansion, which lifted the income of private citizens as well as their consumption, masked the enormity of the fiscal problems by boosting tax revenues. In 2008, the world financial crisis resulted in the cutback international flows, thereby exposing Greece fiscal and structural imbalances (Lynn, 2011). Greece’s Financial Sector (2011) The overall change achieved in 2010-2012 was a 9% adjustment in the GDP (Bank of Greece, 2009). In 2010, the key strategies for addressing the imbalances were cuts in pensions and public sector salaries. However, in 2011, Greece engaged in tax increase measures, deep expenditure cuts, covering even wages and public pensions. Although perceived as socially unacceptable, these cuts were necessary in redressing the financial imbalances in Greece’s financial sector. It is worth noting that the excessive spending on pensions and wages were among the main causes of the Greek financial crisis in the first place (Story, Landon & Schwartz, 2010). Besides significant changes in the gains of competitive costs of products, Greece reported an improvement in account deficit from 15% of the GDP to 3.5% in 2012 (Bank of Greece, 2009). This improvement started gradually in 2011, characterized by increased public savings, which cancelled poor savings by the private sector. Decreased import demands and reduced or smoothing of consumption by private sector also later increased savings by 2012 (IMF, 2013). Because of reduced consumption and lower import demands, imports contracted significantly in 2011-2012. As a response to these crises and the imbalances, Greece established a multi-year adjustment programme in May 2010. The key objectives of this ambitious program were to ensure the fiscal policies made and the acquired debt position was sustainable and to improve Greece’s financial competitiveness in the Euro zone and worldwide (Chrēstos, Kollias, & Günlük-Şenesen, 2003). Although the financial sector of Greece was expected not to perform well in the 2011-2012 period after the inception of this ambitious program, the performance was worse than expected (IMF, 2013). The factors that contributed to this dismal performance include political instability, little support for reforms from the ruling class, stalled structural reforms and uncertainty by investors (Charter, 2010). In particular, investors were not sure about Greece’s external financing strategy (IMF, 2013). The graph below shows Greece’s debt in comparison to the Euro zone average since 1977 (Manolopoulos, 2011). The other reason Greece’s financial sector’s performance was below par for 2011-2012 was increasing debt sustainability concerns (Manolopoulos, 2011). It was projected that Greece’s public debt: GDP ratio would considerably increase in the 2011-2012 financial year. Because of these factors among others, Greece’s economy contracted by 22% in the 2008-2012 period (Special Data Dissemination Standard, 2015). In 2011. In spite of the 2008 global recession and Greece’s internal financial and economic woes, it made significant progress in its financial sector in 2011 and subsequent years. More specifically, it made progress in addressing its imbalances. In fact, Greece’s fiscal adjustment achievements in the 2010-2012 periods stand out in the euro zone (Wayne, 2012). The table below summarizes the GDP, public debt and debt-to-GDP ratio (source: European Commission) Debt Restructuring Notwithstanding the help that Greece obtained from the international community, especially euro zone, it continued to report high-debt and low-growth figures, which made it mandatory for Greece to restructure its sovereign debt (Manolopoulos, 2011). Since Greece had failed to reinvigorate economic growth, it had to restructure its debt. The main ways of undertaking this restructuring was to involve the private sector and the official sector (Private Sector Involvement and Official Sector Involvement). It is only through OSI and the PSI techniques that the public debt would be placed on a path to sustainability (Manolopoulos, 2011). The PSI technique generated a significant 65% of GDP in the 2011-2012 periods. However, the public debt was still 157% of the GDP at the end of 2012 (Special Data Dissemination Standard, 2015). However, it was projected that the public debt would increase for a few years before finally declining in the medium term. In 2011, the Greek government implemented debt restricting frameworks and policies to redress the problem of private debt, which hugely impacted on domestic and corporate sector balance sheets (Manolopoulos, 2011). For example, in the household sector, disposable income nearly more than doubled the debt: disposable income ratio in the 2009-2011periods. In fact, in 2011, it was 96%. Because of falling property princes, mortgage loans: value ratios increased from about 70% prior to the crisis to 90% after the crisis in 2012 (Special Data Dissemination Standard, 2015). In the private sector, firms’ capacity to services debts dropped just as did their profits. Greece also reported higher Non-Performing Loans (NPL) ratios in 2011, which were related directly to the increasing unemployment rate and the intensification of the Greek labour market crisis. The labour crisis affected Greek borrowers’ capacity to service their loans (Lynn, 2011). Balance of Payments The Banking System Greece’s banking system also suffered significantly in 2011 (Antōnios, Antapasēs & Athanassiou, 2009). Fortunately, the government stepped in to assist the banks, which started on quite low averages. The main aim of the government intervention was to recapitalize the banking system. In 2011, Greek banks could not easily access wholesome funding markets, a situation that started in 2010. Hence, the banks had to use other sources to replace about 60 billion Euros that were maturing liabilities (EUROSTAT, 2012). By 2012, because of the ever-widening funding gap and deposit outflows, funding gap for Greece banks was 83 billion Euros (EUROSTAT, 2012). The pressure on Greek banks would intensify in 2011 and into early 2012. This pressure was occasioned by considerable pulling out of deposits by businesses and households to a tune of about €35 billion in 2011. The collateral that Greek banks could use to secure loans or liquidity also became ineligible because of the downgraded credit rating of Greece and the collateral themselves. To some extent, Greek banks obtained support from EU’s monetary policy operations and emergency liquidity assistance from the Bank of Greece (Rauch, Göttsche & Stefan, 2011). In addition, the banks were assisted by the creation of adequate security for loans and the broadening of the bank bond guarantee scheme (Pasiouras, 2012). In fact, the government developed a package for supporting liquidity in the Greek economy. Greece’s Monitory Report (2011-2012) Greece’s monitory report for 2011-2012 indicated a considerable reduction on loan burden. This fact was attributed to the debt-wire down policy and the maturity lengthening and lowering of interest rates on loans given to Greece post-May 2010. The Greek monitory system also had ensured financial support since its economy lacked market access. In 2011, Greece had a detailed and consistent programme for consolidating its fiscal activities. The basis of these activities and the larger program was to reduce expenditure and broaden Greece’s tax base. The other objectives of this consolidation programme were to develop privatization timetable for different sectors, initiate and implement structural reforms in product and labour markets. The report also indicated the willingness of Greece’s European partners to offer technical assistance to Greece in reform implementation. In essence, as stipulated in the Memorandum of Economic and Financial Policies and in the Memorandum of Understanding on Specific Economic Policy, the programme sought to achieve economic growth for Greece through fiscal consolidation, restoration of competitiveness and the creation of a stronger financial sector (Special Data Dissemination Standard, 2015). Graph of Greek government bonds in the secondary market, showing the markets assessment of investment risk’s interest rates (http://www.bloomberg.com/quote/GGGB2YR:IND) Despite the implementation of different fiscal measures, the state budget deficit for 2011 was 10.6% of the GDP (Special Data Dissemination Standard, 2015). This scenario was recorded despite the numerous upward revisions of the target because of delays and recession. In 2011, the key deficit of the ordinary budget was €18 million higher than it was in 2010 (Special Data Dissemination Standard, 2015). In 2011, there were many budgetary slippages that necessitated the creation of more measures and the revision of fiscal targets for 2012. Projections for the 2012-2013 In 2011, the Greek financial sector had projections for the next financial year, 2012-2012. Top among the projections was the reduction in labour costs and price developments, which would subsequently result in improved cost competitiveness. The improved cost competitiveness would subsequently result in increased exports and substitutes for imports. It was also estimated that by the end of 2012, the economy of Greece would have regained two-thirds to three-quarters of its cumulative competitiveness lost during 2001-2009. It was also projected that the rest of the loss were likely to be regained some time in 2013. It was also projected that the 2011 account deficit would drop from 9.8% of GDP in 2011 to about 7% of GDP in 2012 (Special Data Dissemination Standard, 2015). The decline in the deficit was expected to continue in the subsequent years. It was also postulated that the ability of banks to adequately finance the economy would be improved during 2012-2013 (Pasiouras, 2012). The recession was expected to continue into 2012 with an annual decline in GDP in the order of 4.5% (Special Data Dissemination Standard, 2015). Total employment would decrease by about 3% while the mean annual unemployment was project to exceed 19% in 2012 (Special Data Dissemination Standard, 2015). The recovery of the economy was project to start in 2013 with annual HICP inflation projected to hit 1% or lower levels (Special Data Dissemination Standard, 2015). Core inflation was projected to be slightly negative, averaging about -0.1% annually (Special Data Dissemination Standard, 2015). Conclusion 2011 is a year in which the Greek financial sector recorded rather dismal performance. This poor performance in the Euro region was largely attributed to the recession of 2008. The poor performance was indicated by the stock and flow components of the financial sector, which stood at -15% and -11% respectively. Greece’s monitory report for 2011-2012 indicated a considerable reduction on loan burden. The banking system also performed dismally in 2011, making the government to step and assist the banks, which started the year on quite low averages. The purpose of the government intervention was to recapitalize the banking system. In 2011, the Greek monetary system encountered huge uncertainties than was anticipated, putting Greece’s participation in the euro zone at risk. Because of the poor performance of Greece’s financial sector, a recovery plan containing the following measures was established. (a) Focusing more resources to productive uses (b) Repairing the financial system to support the shift in resource focus (c) Shrinking and flattening credit stocks to promote growth (d) Targeted and properly-structured restructuring programmes to address issues of viable but over-burdened borrowers to encourage investment and consumption (e) Protection against potential bank capital constraints such as insufficiently capitalized banks (f) Reduction of capital consumption besides the restructuring of loans (g) Raising more capital or improved fund availability through EIB and EBRD funding and attraction of deposits References Antōnios, M., Antapasēs, L. I., and Athanassiou, E. R. (2009) Competition and regulation in shipping and shipping related industries. Martinus Nijhoff Publishers. Balzli, B. (2010) "Greek Debt crisis: how Goldman Sachs Helped Greece to mask its true debt." Der Spiegel.  Bank of Greece (2009) “Publication of the Financial Stability Report of the Bank of Greece.” Retrieved on January 9, 2015 from http://www.bankofgreece.gr/Pages/en/Bank/News/PressReleases/DispItem.aspx?Item_ID=2954&List_ID=1af869f3-57fb-4de6-b9ae-bdfd83c66c95&Filter_by=DT Bank of Greece (2011) “Balance of Payments.” Retrieved on January 9, 2015 from http://www.bankofgreece.gr/Pages/en/Bank/News/PressReleases/DispItem.aspx?Item_ID=3809&List_ID=1af869f3-57fb-4de6-b9ae-bdfd83c66c95&Filter_by=DT Charter, D. (2010) “Storm over Bailout of Greece, EUs Most Ailing Economy.” Time Online: Brussels. Chrēstos, G., Kollias., G., Günlük-Şenesen, G. A. (2003) Greece and turkey in the 21st century: conflict or cooperation: a political economy perspective. Nova Publishers. EUROSTAT (2012) “Report by EUROSTAT on the Revision of the Greek Government Deficit and Debt Figures." Retrieved on January 9, 2015 from http://ec.europa.eu/eurostat/help/new-eurostat-website IMF (2013) “Greece: Staff Report for the 2013 Article IV Consultation.” IMF. Lynn, M. (2011) Bust: Greece, the Euro and the sovereign debt crisis. Hobeken, New Jersey: Bloomberg Press. Manolopoulos, J. (2011) Greeces Odious debt: the looting of the Hellenic Republic by the Euro, the political elite and the investment community. London: Anthem Press. Pasiouras, F. (2012) Greek banking: from the pre-Euro reforms to the financial crisis and beyond. Palgrave Macmillan. Rauch, B., Göttsche, M., and Stefan, G. E. (2011) "Fact and Fiction in EU-Governmental Economic Data". German Economic Review, 12(3): 254. Special Data Dissemination Standard (2015) “Economic and Financial Data for Greece.” Retrieved on January 9, 2015 from http://elstat.statistics.gr/sdds/users.asp#FinancialSector Story, L., Landon, T. Jr., and Schwartz, N. D. (2010) "Wall St. Helped to Mask Debt Fueling Europe’s Crisis." New York Times. Wayne, C. T. (2012) Western Europe: 2012. Stryker Post. Read More