Lower wages and price decreases

The BoG recommends that the government intensify its efforts for fiscal consolidation, warning that the total solution to the debt put forth by the EU does not justify complacency. In terms of the developments in the banking sector, it predicts a further deterioration of bank loan portfolios and a zero or negative rate of credit expansion. The report concludes by pointing out that the country's efforts may have positive results.

However, it sees risks in implementing the many changes as they run against preconceptions and reactions that make the efforts significantly more difficult.  

The BoG underlines the need for society to digest that the changes are not implemented by the memorandum but are part of a wider course of restructuring the Greek economy.

More specifically, the Central Bank estimates that this year the country's GDP will fall by around 3% but does not exclude the possibilty of greater reduction. It appears that the recession has hurt consumption, while investments, which have fallen by 18% since last year, suffer more, resulting in significantly reduced productive potential for the country. The recession has led to a surge in unemployment to 12,5% since last year, as more than 100,000 jobs were lost. The BoG states that the unemployment trend is clearly upward in 2011. But incomes present a reduction as well. As the real average earnings fell by 9% in 2010, they are also projected to decrease by 5% in 2011 and might be stabilized in 2012. The BoG expects a significant deceleration in inflation this year, down to 2,2% from 4,7% last year.

To halt the momentum of the debt, the BoG suggests interventions on two fronts.

The first relates to a rapid fiscal adjustment, with emphasis on combating fraud and reducing governmental expenditure. The Bank of Greece considers that the structural changes in the state should proceed with determination and have to be supported by a broad social consensus. Within this framework, the bank suggests an even faster adjustment that will be provided for in the medium-term action plan to be presented in March by the government, which allows for deficit reduction to 2,6% of the GDP in 2014.

At the same time, the bank is proposing expenditure restriction in general government entities by restructuring and structural changes. It also recommends the adoption of numerical fiscal rules on the amount and rate of change of key financial indicators. Finally, it considers that the acceleration of privatization and the use of public property is a decisive contribution to debt reduction.

However, the Bank of Greece considers that all the above are not sufficient to reduce the debt dynamics. Therefore, they are necessary for growth acceleration. It believes that the quicker and more efficiently the structural reforms are promoted, the sooner the economy will return onto a growth path. In this context, it proposes the implementation of sweeping structural reforms that will overturn outdated structures.

As for the developments in the banking system, the Bank of Greece estimates that 2011 will be the year of great and complex challenges. This is because banks will have to deal with the consequences of further expansion of non-performing loans, and will gradually begin backing off from the funding provided by the European Central Bank. The funding of the private sector based on existing data is expected to show a zero or negative rate of change.