Greece’s meteoric rebound paves the way for continued ECB support – POLITICO


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FRANKFURT – Greece’s pandemic-stricken economy will rebound even faster than its government plans and could return to pre-crisis levels this year, according to Bank of Greece Governor Yannis Stournaras.

The strong rebound, coupled with Athens’ commitment to structural reforms, should allow the European Central Bank to continue buying Greek debt as part of its asset purchases even after the end of its investment program. emergency pandemic purchasing, or PEPP, Stournaras told POLITICO.

His comments follow the government’s recent decision to improve 2021 growth projections of 3.6% to 5.9% in what is expected to be the strongest growth in two decades. But Stournaras is actually more bullish than that, soon seeing an “even higher” estimate from the central bank.

“I expect our forecast to be above 6%,” he said, while declining to give details. “By the end of 2021, we will likely have a higher GDP than before the pandemic.”

As a top tourist destination, Greece has been hit particularly hard by the pandemic. Last year, economic return fell 8.2%, with only Spain, Italy and Malta recording steeper declines in the euro area.

But an increase in consumer spending and investment boosted second-quarter GDP by 16.2 percent from the second quarter of 2020. The third quarter, meanwhile, is expected to benefit from the influx of foreign guests to the islands. Greek during the summer months.

Stournaras also expressed confidence that the country will maintain high growth rates going forward, around “3.5% on average for the next 10 years”.

Such solid growth would provide some breathing space for the country after going through a brutal recession and rising debt levels that precipitated the eurozone crisis. Even once GDP hits pre-pandemic levels, it will still be a quarter below what it was before the global financial crisis.

In addition, Greece will benefit in the coming years from around 40 billion euros from the European structural funds, as well as from 32 billion euros from the EU recovery fund, and from an increase in direct foreign investment. and indirect, Stournaras said. But he still sees that the main drivers of growth come from ongoing structural reforms – including market liberalization, privatization and more investment in education – as well as digital and green transformation.

Ongoing help

Given stronger-than-expected growth, Stournaras praised the support measures recently announced by the Greek government, which will see an additional € 4.4 billion injected into the economy in the second half of this year thanks to the increased tax revenue.

Overall, he said, robust growth is expected to help push the country’s debt-to-GDP ratio down from just under 200% this year to 187% in 2022.

In 2019, he noted, Greece had succeeded in accompaniement its debt / GDP ratio at around 180%, and its debt “would already be investment grade if it had not been for the pandemic”.

Earlier this month, the Scope rating agency improved Greek sovereign debt from BB to BB +, a notch below the investment grade but still above the ratings of the main rating agencies. Last week, DBRS Morningstar also survey its rating.

This low credit rating prevented the ECB from including Greek bonds in its long-standing asset purchase program, the APP. But Stournaras said he “expected” the ECB to continue sucking up Greek debt even after setting up the PEPP by including it in the APP.

“It is not a question of Greece’s ability to service the debt, but a question of uniform transmission of monetary policy,” he said, referring to the ECB’s objective of keep borrowing costs low across the region through continued bond purchases. “The Governing Council of the ECB will ensure that there is no further fragmentation.”

The ECB holds approximately 4.4 trillion euros debt under all its programs, of which only about 30 billion euros these are Greek government bonds.

The ECB needs “patience and perseverance”

Looking at the broader monetary union, Stournaras cautioned against overconfidence.

“It would be really arrogant of us to declare victory over the pandemic at this time,” Stournaras said. “This is why it is too early to draw conclusions on whether or not the PEPP will be extended beyond March 2022.”

This is the question that the Board of Governors will address at its meeting in December, according to to the President of the ECB Christine Lagarde.

Stournaras stressed that whatever the outcome of the deliberations, the ECB will need to continue to provide strong support even after the crisis is over, given that its inflation projections are still below its target of 2%, an indicator key to the outcome of the support.

“The APP, for example, may need to be recalibrated,” he said. “To avoid any cliff-edge effect, the APP would benefit from higher purchasing volumes and certain important flexibility characteristics of the PEPP. Our experience with PEPP has shown that by being flexible … we have achieved significant results when it comes to inflation and production at lower purchase volumes.

Stournaras also acknowledged that inflation may persist longer than expected and that the ECB may need to revise its inflation outlook. But that should not force the ECB to change course with regard to its ultra relaxed policy, in its eyes.

“We have accepted that there is an upside risk to inflation,” Stournaras said. “In the past, however, we overestimated inflation [on the higher side], expecting it to evolve towards 2% in the medium term. “

Either way, the current inflation forecast shows inflation to be well below target and is based on the assumption that monetary policy will remain accommodative in the years to come, he said. Even with inflation slightly faster than currently expected, it would still fall short of the central bank’s target.

The accommodation of monetary policy must show “patience and perseverance”, as long as markets and consumer sentiment remain fragile and uncertainty is still high, he argued. “There is, in my opinion, still some way to go before price increases raise inflationary concerns,” he said.

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