Ratings On The Rise: Q&A with Yannis Stournaras, Central Bank Governor Of Greece

Global Finance: What’s the economic outlook for Greece in 2023?

Yannis Stournaras: In 2023, the growth rate is forecast at 2.2%, due to an expected slowdown in economic activity in the euro area and a moderation of private consumption growth. In 2024, the growth rate is projected at 3%. This improved performance can be achieved, provided that the implementation of the RRF-financed investments proceed as planned, the geopolitical crisis does not escalate, and the tightening of monetary policy does not leave a permanent scar on the eurozone economy. Headline inflation is projected at 3.8% for 2024 due to still-strong inflationary pressures from food, non-energy industrial goods and services. The recent upgrades of the credit rating of the Greek state also attest to positive prospects for the Greek economy.

GF: In light of banking crises earlier this year, what is the solidity of the banking system in Greece?

Stournaras: The fundamentals of Greek banks significantly improved over the past few years. The banks managed to reduce their legacy loans by about 90%, and now their nonperforming loan ratio is closer to the EU average. The improvement in asset quality, alongside the rise in interest rates and cost containment, has propelled banks’ earnings and allowed them to post a double-digit return on equity in 2023. Higher profitability and other capital accretive actions have strengthened their capital adequacy. At the same time, Greek banks enjoy ample liquidity that is supported by a solid depositors’ base and access to wholesale markets. Having restored the health of their balance sheets, Greek banks were able to resume their intermediatory role in the economy.

GF: What is your view on the euro area economy?

Stournaras: Euro area growth this and next year is expected to be modest. The moderation in energy prices, the easing of supply bottlenecks and a resilient labor market will support growth. However, the lagged effects of monetary policy tightening over the past 21 months will continue to feed through to the real economy. Together with the gradual withdrawal of fiscal support, these factors will weigh on growth and keep it modest. Regarding headline inflation, there has been a substantial decline in the course of 2023, largely due to declining energy and food inflation. This is good news, as the impact of the shocks that caused inflation to rise steeply in the first place is unwinding. Headline inflation will continue to decrease further towards its target in 2025. Underlying inflation will also ease as the indirect effects from past energy and food price shocks fade. While wage growth is catching up to restore the purchasing power of households, profits should provide a buffer against the pass-through of higher labor costs to prices.

GF: Should the ECB do more to address climate change?

Stournaras: Governments and legislators lead the fight against climate change, yet central banks have an important role to play, as the issue has implications for price stability. As such, climate change is increasingly featuring prominently in the agenda of many central banks around the world. President Lagarde is to be praised for her determination that our monetary policy takes into account climate change considerations. Great progress has been made since 2021 when the road map on incorporating climate change considerations into our monetary policy was first published. The implications of climate change have been factored into our collateral and risk management and our asset purchases, notably with the tilting of the corporate bond holdings under the Corporate Sector Purchase Program. The ECB climate agenda is updated regularly as milestones are met. I strongly supported this agenda at home: the Bank of Greece was one of the first central banks to respond to the issue of climate change, having done so beginning in 2009 via a range of activities. The Network for Greening the Financial System, which brings together more than 100 central banks and supervisors from around the world, has been critical in strengthening the global response.

Let me stress one final issue. There is a large climate-financing gap. The financing of climate adaptation and mitigation projects requires significant upscaling of investment. In this regard, banks and financial institutions need to play their part.

GF: What would you most like to change about Greece’s economy?

Stournaras: I wish we could change the public sector to meet the best possible international standards. This implies addressing persistent, inherent weaknesses such as delays in delivery of justice, red tape and remaining inefficiencies in public administration—for example, property transfers, land-use planning, and the digitalization of public services. I’d also want to address shortcomings in key infrastructure, insufficient combating of pervasive tax evasion, shortcomings in the so-called knowledge triangle of education, research, and innovation, and the insu“cient link between university studies and the skills needed by the real economy. These weaknesses impair competitiveness and create disincentives to investment. Underlying inflation will also ease as the indirect effcts from past energy and food price shocks fade.