Greece

World Eye Reports met with the governor of the Greek central bank, and talked about the challenges facing the country on the way to real convergence within the Euro-zone. Nicholas Garganas spoke about the need to further liberalization while stressing Greece's remarkable performance in the face of the global slowdown.

WER: What are your personal views on Greece's economy and financial position, where is it headed and how are you enhancing the market infrastructure?

Garganas: Since the mid-1990s, the Greek economy has undergone a remarkable adjustment effort. At that time inflation and the fiscal-deficit-to-GDP ratios were near double-digit levels and, to many observers, EMU seemed a long way off. In the mid-1990s the government set a goal to join the euro area in early 2001 and that goal was achieved as the Greek economy fulfilled the Maastricht criteria. An impressive feature of Greece's transformation is that inflation fell sharply while real growth accelerated to well above the average rate of the euro area.
Nicholas Garganas, governor of the Greek central bank

Impressive as Greece's transformation has been, it has so far involved mainly nominal convergence. Greece's per capita GDP stands at around 70 per cent of the EU average. Therefore, a very strong effort will be required to attain real convergence. Many factors are now in place so that Greece can attain that goal. The adoption of the euro provides a stable financial environment, which is a major break from the past when inflation was very high and there were a number of attacks on the currency. The financial system is very sound.

Although private credit growth has been high, household debt is low relative to the EU average. Meanwhile, the Bank of Greece recently increased its provisioning rates for various categories of loans. A number of very large infrastructure projects are near completion, which will make Greece an even more attractive location for foreign investment. The 2004 Athens Olympic Games will provide enormous exposure worldwide, which will have a significant impact on tourism for years to come.

Yet, additional efforts will be required in other areas. While measures have been taken in recent years to lessen structural rigidities, there is a need to move forward with the structural reform agenda, including the labor and product markets. There is also a need to strengthen the funded component of the social security system. Fiscal discipline should be reinforced and the debt level brought down. Efforts in these and other areas will reduce price pressures and improve competitiveness, enabling full, real convergence to take place.

WER: How is the global economic slowdown affecting Greece and what strategies do you have to keep a productive and stable environment?

Garganas: The Greek economy has been relatively immune from the global economic slowdown. The main source of Greek economic growth in recent years has been investment spending. Much of this investment has been associated with large infrastructure projects and with the 2004 Athens Olympic Games, which has been supported, in part, with EU structural funds. As a result of the strong investment spending real GDP growth in 2002 was about 3.75 percent, well above the euro-area average. The Bank's preliminary projections indicate that growth could well accelerate this year.

Monetary policy is providing price stability and a stable, credible currency. The Bank of Greece is providing a sound financial system through its supervisory oversight. The debt level needs to be reduced to lower risk premia; this will require further fiscal consolidation. Structural adjustment will help boost productive capacity.

WER: What opportunities exist for cooperation and exchange with the Bank of Japan?

Garganas: The Bank of Greece has pursued opportunities for cooperation with a number of central banks, on both a professional and cultural level. We strongly support the exchange of information on policies and experiences with other central banks. In 2001 and 2002, the Bank of Greece held the Presidency of the Governor's Club, which is comprised of Governors from central banks of 16 Balkan and Black Sea countries and is aimed at fostering cooperation. I would be delighted to increase our cooperation with the Bank of Japan, including the exchange of visiting scholars.

WER: How do you view the overall condition of Greece's banking sector, and in what ways are you strengthening the soundness of the banking system? Do you feel a trend of consolidation will continue?

Garganas: The Greek banking system is very sound. In this connection, it is worth pointing out the following. (1) Although profitability in the banking sector fell last year in line with the situation in the global banking environment, the profitability of Greek banks has remained at relatively high levels. (2) The capital adequacy ratio of Greek banks, at around 12 per cent on average, is well above the Basle benchmark of 8 per cent. (3) Non-performing loans are relatively low and declining. While the condition of the banking system is sound, as I noted the Bank of Greece has been monitoring developments in credit expansion and recently revised upward the loan provisions against certain categories of bank loans.

Regarding the trend in consolidation, I believe that it will continue. The introduction of the euro and legislative measures at the EU level have reduced the scope for fragmentation and increased competition among banks. There has been a move among banks to adopt and achieve economies of scale. Still, considerable fragmentation exists at the retail level.

WER: What can be done to reduce market segmentation in the retail banking market?

Garganas: The challenge is to remove institutional and economic factors that raise the cost of cross-border financial operations. In particular, further integration will require harmonization of accounting rules, tax regimes, and legal frameworks, and the acquisition of the necessary technical infrastructure for handling cross-border holdings and settling securities. The costs of these regulatory obstacles are identified in the Financial Services Action Plan, issued by the European Commission. The Action Plan lists priorities and time-scales for legislative and other measure to tackle three strategic objectives: (1) completing a single wholesale market; (2) developing open and secure markets for retail services; and (3) ensuring the continued stability of EU financial markets. It also addresses the importance of eliminating tax obstacles and distortions for the creation of an optimal single financial market. To date, most of 42 measures contained in the Action Plan have been completed. I hope the remaining obstacles identified in the Action Plan will be removed within the scheduled deadlines.

WER: What role are Greek banks playing in the global and regional economy?

Garganas: Although a process of consolidation has been taking place in Greek banking in recent years, reflecting a process of mergers and takeovers, Greek banks, by and large, remain small in comparison with EU standards. In this circumstance, Greek banks have concentrated in solidifying their positions in the Balkan region. The Greek presence in the Balkan Region has been very strong either through the take-over of local banks or through the establishment of subsidiaries and opening of new branches. The Greek banking industry plays a significant role in helping to strengthen the banking sector in the Balkan countries through the transfer of technology and know-how and by improving financial intermediation and the much needed expansion of credit facilities. In this respect, it contributes to the creation of a foundation for future economic development and welfare.

I believe that this trend will continue. With the further expansion of Greek banks in the Balkan area, the evolution of Greece as a regional financial center and a regional source of financial intermediation will likely become important elements in the country's future economic development.

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