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

Yannis Stournaras, central bank governor of Greece, speaks about the euro’s growth and the bank’s involvement in combating climate change.

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

Yannis Stournaras: In 2023, the growth rate is forecast at 2.2%, (from 5.9% in 2022) 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 3.0%. This improved performance can be achieved provided that the implementation of the RRF financed investment plans 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 (from 4.3% in 2023 and 9.3% in 2022) on account of still strong inflationary pressures from food, non-energy industrial goods and services. The recent upgrades of the credit rating of the Greek State are also attesting to the existence of 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 have significantly improved over the past few years. They managed to reduce their legacy loans by about 90% and now their NPL ratio is closer to the EU average. The improvement in asset quality alongside with the rise in interest rates and the 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 the solid depositors’ base and the access to wholesale markets. Having restored the health of their balance sheets, Greek banks were able to resume their intermediatory role in the economy (annual growth rate of total credit extended to the domestic economy stood at 2.7% in June 2023).

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 labour 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 (HICP inflation excluding energy and food) is more persistent, being above its historical average. However, it would also ease as the indirect effects from the past energy and food price shocks gradually fade. While wage growth is catching up to restore the purchasing power of households’ income, profits (that expanded strongly in 21/22) should provide a buffer to the pass-through of higher labour costs to prices. At the same time, the effects of past monetary policy tightening will also help bring underlying inflation down.

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

Stournaras: It is governments and legislators who 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 more or less prominently in the agenda of many central banks around the world, and that includes the Eurosystem.

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 roadmap on incorporating climate change considerations into our monetary policy was first published as a result of the monetary policy strategy review.

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 CSPP. The ECB climate agenda, which includes several distinctive measures, is updated regularly as milestones are met, while new instruments may be called for in the future.

I have strongly supported this agenda at home: the Bank of Greece was one of the first central banks globally to respond to the issue of climate change, having done so beginning in 2009, via a range of activities.

The work of the NGFS, which brings together more than 100 central banks and supervisors from around the world, has been critical in strengthening the global response to climate change.

Let me stress one final issue. There is a large climate financing gap that needs to be bridged. The financing of climate adaptation and mitigation projects requires the 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 overnight change the public sector to the best possible international standards. This implies addressing persistent inherent weaknesses, such as delays in the delivery of justice, red tape and remaining inefficiencies in some areas of public administration (e.g., property transfers, land use planning, completion of the National Cadastre, digitalisation of public services), shortcomings in key infrastructures, insufficient combatting of pervasive tax evasion, shortcomings in the so-called “knowledge triangle” (education, research, innovation) and the insufficient link between university studies and the skills needed by the real economy. These weaknesses impair competitiveness and create disincentives to investment.