The third post-programme surveillance mission to Greece took place from 2 to 5 October 2023. The mission involved European Commission staff in liaison with European Central Bank (ECB) staff.
European Stability Mechanism (ESM) staff participate on aspects relating to the ESM’s Early Warning System, and staff from the International Monetary Fund also participated.
Following a strong output expansion in 2022, economic activity is expected to moderate, with GDP growth exceeding the long-term growth potential. The Greek economy proved resilient in the face of external shocks and expanded by 5.6% in 2022. Real GDP is expected to grow by 2.4% in 2023, 2.3% in 2024 and 2.2% in 2025, according to the Commission 2023 autumn forecast.
Beside consumption, gross fixed capital formation is expected to be a key driver of growth as the implementation of the Recovery and Resilience Plan supports investments.
The recent natural disasters are expected to have a relatively small impact on GDP growth in 2023, since the affected areas account for a limited share of total value added.
Following the sharp decline in the first half of 2023, inflation is expected to continue decreasing, albeit at a slower pace, due to the waning negative base effect of past energy price shocks and solid wage growth amid tightening labour market conditions. Employment is projected to increase further, although at a more moderate pace in line with economic activity. The current account deficit has narrowed in 2023 and is expected to drop in the next years. Still, the external balance is likely to remain in a sizeable deficit.
The budget balance is forecast to record a solid primary surplus as of 2023. The primary balance is expected to improve further compared to 2022 and to reach a surplus of 1.1% of GDP in 2023, on the back of the considerable decrease in the cost of fiscal support measures addressing the energy crisis.
To address the emergencies related to the recent natural disasters, the government provided immediate support to households and businesses, thereby increasing fiscal expenditure.
The primary surplus is expected to increase further in 2024-2025 on the back of muted expenditure growth and consistent revenue increase. The stock of arrears has decreased, but the reduction has been uneven: while progress was satisfactory in the pension sector, the persistently high stock of arrears in hospitals and extra budgetary funds calls for structural improvements.
Bank profitability remains strong, but the workout of non-performing loans particularly by servicers continues to face challenges. In 2022 and in the first half of 2023, banks benefitted from the increase in interest margins which enhanced banks’ profitability, allowing them to strengthen their capital ratios. However, interest margins are set to narrow due to rising funding costs, including higher deposit rates.
The reduction in the stock of nonperforming loans (NPLs) has stalled in the first half of 2023, following significant improvement down to single digits in recent years. This indicates banks’ possible difficulties to sustain NPL reduction through organic workouts.
The planned relaunch of the Hellenic Asset Protection Scheme (HAPS) is expected to contribute to further NPL reduction. A number of portfolios securitised under the original HAPS are still underperforming original business plans, as the workout of non-performing debt by servicers continues to face challenges.
These challenges include delays in judicial proceedings, a still high share of barren auctions, and, to a lesser extent, a relatively low – albeit increasing – take-up of the iv ‘out-of-court workout’ procedure. The effective debt restructuring by credit servicers and the efficient functioning of debt enforcement, coupled with the functioning of the secondary market for NPLs, will be key to further NPL reduction and thereby to support economic performance.
Pending the introduction of planned improvements, financial sector policies to clear various obstacles in tackling legacy non-performing debt perform steadily despite delays in the implementation of scheduled initiatives. The pace of the clearance of the backlog of household insolvency cases has been steady. By September 2023, 96.5 % of the household insolvency court cases are expected to have been heard, and final court decisions issued for 75% of the cases.
Out-of-court workout restructurings have gained traction and the authorities intend to introduce new features to the platform. However, there is room to further facilitate the use of the other tools of the new insolvency code, such as the second chance platform. The process for setting up the sale-and-lease back organisation (SLBO) is not expected to be completed before September 2024. The interim support scheme for the protection of primary residences of vulnerable households is therefore set to be extended for another 15 months or until the establishment of the SLBO, even though the take-up of this scheme has been very limited so far.
Most claims related to called state guarantees have been processed but payments remain significantly below targets. Depending on court decisions, a significant part of the called state guarantees may be delayed or not be paid at all, particularly in the corporate loans segment.
Public asset management is becoming more efficient thanks to the new law on the governance of state-owned enterprises. In the first half of 2023, the Hellenic Corporation of Assets and Participations achieved the highest-ever income received from its portfolio companies’ dividends. Privatisation transactions are progressing broadly according to plan.
By the end of October 2023, Greece has been upgraded to investment grade by two of the four credit rating agencies recognised by the ECB within its monetary policy implementation framework. The main reasons for the upgrades were sustained commitment to fiscal responsibility, a resilient economy, and the implementation of economic reforms.
Greece is one notch below investment grade at the other two rating agencies.
Greece retains the capacity to service its debt. Despite several challenges, the Greek economic, fiscal, and financial situation continues to be resilient. According to the debt sustainability analysis, Greece is assessed to face low risks in the short and long term, while medium-term risks appear to be high on the back of the still high debt to-GDP ratio.
Government gross financing needs for the period 2023 to 2025 are low, due to projected significant primary surpluses and moderate debt amortisation. Greece requested to early repay EUR 5.3 billion of the Greek Loan Facility in 2023.
Repayments of the principal on EFSF loans started this year, while the repayment of the ESM loans will only start in 2034.
Greece has a very large cash buffer and has continued market access and regular successful bond auctions.
