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Lucas Papademos demands long-term economic discipline

11 November 2010 / 17:11:04  GRReporter
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The two most famous Greek bankers - the former vice president of the ECB Lucas Papademos, who read a lecture before the Association of Greek Bankers and the Governor of the Bank of Greece George Provopoulos called the government to deepen the economic reforms.

“Greek external debt rescheduling is neither necessaryр nor inevitable.” This is Lucas Papademos’ opinion and according to him neither the Greek government, nor the eurozone countries would like to reschedule external debt payments. The financial expert explicitly stated that the current crisis is impossible to be solved in the short term and requires serious measures to enable Greece to regain its financial stability and economic competitiveness.

"If we do not have real and long-term economic discipline we can not ensure financial stability," snapped the economist. Papademos defined the measures the government of George Papandreou has implemented so far as extremely difficult and politically courageous. However, economic recovery will require government and the people to adopt more difficult decisions and even more severe measures in future. Papademos stressed that all possibilities for reducing salaries and pensions in the country as well as for increasing the tax burden on individuals and businesses have been used. The government should resort to government expenditure cuts, privatization of non-profitable enterprises, better management of public property and eliminating the non-profitable functions of the state.

Lucas Papademos stressed in his speech that the pressure on financial markets has changed in the last 10 years. The crisis we are experiencing today has started three years ago. The main dangers for the financial markets in 2007 were linked to lack of liquidity, in 2008 the capital adequacy of banks jeopardized the world economy, and in 2009 the risk of deepening recession has also put financial stability at risk. This year the direct impact of the financial sector to real economy and state policy have created new risks in many countries that markets account.

"The implementation of fiscal consolidation to stabilize the economy and maintain the banking system along with recession induced by the crisis has resulted in sharp increases in external debt," said the expert.

He reported that the total external debt of the euro area will increase to 90% of GDP in 2011. This is 23% higher than the level of the rate two years ago. The European Union countries that have the highest external debt to GDP are Spain, Ireland, Portugal and Greece. Excessive increases in external debt has put at risk the national economies as well as the financial sector in the area as a whole. In the case of Greece, the problem of external debt is much serious because its volume has seriously exceeded GDP even in 2009 and the expected trend for the coming years is to continue to grow and not to start to decline in the short term.
The external debt and deficit accumulation dynamics is the result of the fiscal policy followed, the funding method of the deficit, the expectations for the level of the future economic growth and the average current cost of the public sector funding. The decline in competitiveness, which has reached 30% for the 1999-2008 period, and the increase of labour cost per unit of production have also contributed to deficit growth in these four countries.

Feeling of uncertainty, especially in the Greek economy, has become stronger due to the prospects for increase in the spending in social security sectors because of the aging nation. Another problem that has affected the Greek external debt through raising the credit price is related to the unclear statistical data of Greece, which made the international markets more cautious. Overall, markets faced reduced liquidity after the last global crisis which also affected the interest rates on Greek government bonds. The simultaneous reduction of the credit ratings of Spain, Portugal and Greece from S & P to different levels at the end of April 2010 has influenced the spreads of the government bonds of those countries.

When a large number of foreign investors (outside the euro area) held government bonds and feel that a country is unstable financially, the prices of guarantees under credit default swaps (CDS) rise. This is what happened in the spring of 2010 - Greek guarantees in credit default swaps reached their highest values in May this year. The price acceleration of the Greek CDS was triggered by the question "How capable is Greece to refund its debt expiring in the coming months?" An important factor for the credit risk of banks to the state ratio was the more rapid adjustment of the credit rating indicators to the macroeconomic environment.

Lucas Papademos is clear that if a strict fiscal reform is not implemented to guarantee the CDS prices, Greece will not be able to substantially reduce the prices of bank and government loans. Lack of commitment to further reform threatens to block the domestic economy funding. The expert assessed the banks’ capital increase as a step in the right direction, which will enable them to meet the needs of the difficult economic environment. However, this will be not sufficient for the development of the internal market if the strict measures imposed by the fiscal consolidation will not continue.

Tags: EconomyExternal debtCrisiLucas PapademosVictoria MindovaGeorge Provopoulos
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