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June 11, 2020

GREECE: Well positioned to deal with economic recession

BY Wolfango Piccoli

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( 5 mins)
  • Prime Minister Kyriakos Mitsotakis stands in a strong position after he dealt successfully with the coronavirus outbreak. Less than 200 people have died, and the country prepares to open to tourists from 1 July.
  • Economically, things are more challenging for the center-right New Democracy (ND) government as real GDP growth moved into negative territory in Q1 and there are concerns that a decimated tourism season will be the main driver of a deep recession.
  • However, robust economic support from European institutions and, critically, overall political stability provide Greece with a unique opportunity to register a faster-than-expected recovery.


Mitsotakis and his party continue to ride high in the polls. Decisive measures against Covid-19 from mid-March onwards have earned the PM plaudits in the country as well as abroad. Roughly 70% feel the government dealt well with the challenge. Mitsotakis was lauded for letting an expert without any political affiliations coordinate the virus response.

According to a 4 June poll by Pulse for Skai TV, ND stood at 42.5% against 23% for SYRIZA, which has been unable to gain any traction since its heavy election defeat last summer. As the main political battleground in the months ahead is likely to be the economy, SYRIZA will struggle due to its lack of credibility on that front.


The government has set out a three-pillar plan worth EUR 24bn, including EUR 7bn of loan guarantees. EUR 7bn of that have already been spent to help businesses during the lockdown. This includes a wage subsidy scheme co-funded by employers. VAT on a range of goods and services, many linked to the tourism industry, has been temporarily reduced from 24% to 13%.

Nevertheless, the economy is expected to be hit severely this year. The European Commission forecasts a 9.7% contraction of GDP, the largest recession predicted for any economy in the EU. Greece’s finance ministry expects GDP to shrink by up to 8%.

According to 4 June initial GDP data, the economy contracted by 0.9% YoY in Q1, partly driven by a dip of 6.4% in investments. As the lockdown began in mid-March, the impact of restrictions on movement and the downturn in visitors from abroad is not due to be fully visible until Q2 figures are known. However, a range of other H1 data suggest that Greece is in for a challenging year.


The government hopes that plaudits from the international media for the low number of deaths will convince travelers that the country is a safe destination. As the sector officially contributes up to 10% percent of GDP (around 25% is more realistic given the sizeable informal component), salvaging something this summer would make it easier to minimize the economic damage.

Greece has announced a list of 29 countries that from 15 June will be able to have direct flights to Athens and Thessaloniki. Land borders will reopen on the same day. Regional airports are due to start receiving direct flights from abroad on 1 July. However, there is skepticism amongst some hoteliers and other industry participants. Traditionally, Q3 represents almost 60% of total revenues from tourism.

EU funds

Greece would receive around EUR 32bn from the EU’s envisage stimulus package. Combined with the EUR 19bn in EU structural funds, this represents close to 30% of GDP. This would not only cushion the impact of this year’s contraction but might also allow the government to resume at least part of its program of cutting taxes and social security contributions. If so, this would lower the possibility of snap elections in the months ahead. There had been speculation that Mitsotakis might try to capitalize on his party’s strong poll ratings before the recession starts to bite.

Another result is that Athens is reluctant to tap the ESM for around EUR 4bn available via a credit line. Despite the funds being available at an almost negative interest rate, Mitsotakis is hesitant because of the toxic legacy of the previous bailouts. ND wants to avoid fears of painful conditionality and is eager to deny its opponents any chance to criticize the government. Therefore, Athens is unlikely to show interest at least until other countries have tapped ESM credit lines.

ECB support

Greek authorities have found a strong ally in the ECB. Early in the pandemic it waived the minimum requirements and included GGBs in its PEPP, purchasing for close to EUR 5bn. Given PEPP’s extension to June 2021 and an increase by EUR 600bn, Greece has a safety net over the next 12 months.

This has been reflected in the two recent market forays, one in April with a 7-year issue and one on 9 June for a 10-year, EUR 3bn issue that was oversubscribed close to six times and carried a yield of 1.57% – the lowest that Greece has achieved for its internationally placed euro-denominated bonds.

Banks & NPLs

The ECB has also accepted GGBs as collateral in its refinancing operations. This allowed banks to benefit from TLTROs and shift liquidity from interbank repos.

However, the pandemic has thrown banks off track, after a strong start to the year. The launch of the Hercules APS was meant to help lenders reduce their NPE stock by close to EUR 32bn through securitizations, using roughly EUR 12bn of state guarantees. But only Eurobank managed to complete the Cairo securitization of EUR 7.5bn this month. It also included the sale of 80% of its loan management company FPS to doValue.

Concerns over a new wave of NPEs have resurfaced. According to Q1 results, banks have placed more than EUR 15bn of performing loans in payment moratoria until the end of September, with a prospect of a further extension until year-end. Loan loss (pandemic-related) provisions for Q1 totaled roughly EUR 900mn, which affected profitability across the board and chopped off some basis points of capital.

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