Lend­ing is nec­es­sary for GDP re­bound

Banks’ role in pro­vid­ing credit is key at a time when lo­cal busi­nesses have ex­hausted their own funds

Kathimerini English - - Front Page - BY DIM­ITRIS KONTOGIANNIS

ANAL­Y­SIS Greek gov­ern­ment of­fi­cials have high­lighted the im­por­tance of debt re­lief and in­ter­na­tional cred­i­tors have stressed the sig­nif­i­cance of struc­tural re­forms in en­hanc­ing eco­nomic growth, while fis­cal pol­icy re­mains a con­tro­ver­sial point. Po­lit­i­cal un­cer­tainty and cap­i­tal con­trols have clouded the out­look and pun­dits ex­pect the econ­omy to fall back into re­ces­sion this year; some even ex­pect it to shrink in 2016. In this con­text, the sooner the bank­ing sec­tor as­sumes its role and pro­vides credit to the econ­omy, the bet­ter.

The Euro­pean Com­mis­sion has down­graded its eco­nomic forecast on the Greek econ­omy, now ex­pect­ing it to con­tract be­tween 2 and 4 per­cent this year, from a slug­gish up­turn of 0.5 per­cent back in the spring. Con­tin­u­ing de­fla­tion points in the same di­rec­tion, with av­er­age con­sumer prices drop­ping 2.2 per­cent year-on-year in July for the 29th con­sec­u­tive month. In ad­di­tion, some lead­ing in­di­ca­tors, namely sur­vey data, such as the Pur­chas­ing Man­agers In­dex, are dis­ap­point­ing, record­ing an un­prece­dented drop last month.

On the other hand, of­fi­cials from the tourism in­dus­try sound more cau­tiously op­ti­mistic lately, ar­gu­ing it is fea­si­ble that re­ceipts will equal last year’s record high. This is de­spite a sharp fall in do­mes­tic tourists on the back of po­lit­i­cal un­cer­tainty and cap­i­tal con­trols. As­sum­ing an agree­ment is struck be­tween the gov­ern­ment and the lenders, po­lit­i­cal sta­bil­ity re­turns, fis­cal pol­icy does not be­come overly re­stric­tive, the bank­ing sec­tor is re­cap­i­tal­ized fast and the ex­ter­nal en­vi­ron­ment is sup­port­ing, the econ­omy could dip 2 to 3 per­cent this year and record an ane­mic ad­vance in 2016.

One of the big ifs in this op­ti­mistic sce­nario is the fast re­cap­i­tal­iza­tion of Greek banks and the re­turn of credit growth at some point next year. We have al­ways ar­gued the lo­cal banks should be over­cap­i­tal­ized to be­come anchors of eco­nomic sta­bil­ity in a pe­riod of high po­lit­i­cal un­cer­tainty and eco­nomic strain for which they bear small or no re­spon­si­bil­ity. It is known lo­cal banks will un­dergo As­set Qual­ity Re­view (AQR) tests to be fol­lowed by stress tests in or­der to de­ter­mine their cap­i­tal needs: an im­por­tant step in restor­ing savers and oth­ers’ con­fi­dence in their abil­ity to play their in­ter­me­di­ary role and fi­nance an eco­nomic turn­around.

Even un­der nor­mal cir­cum­stances, the short-term con­se­quences of the AQR tests are that the banks will have to clean up their bal­ance sheets, and this will have a neg­a­tive con­se­quence on credit growth. Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi has ad- mit­ted in the past the AQR tests may have a neg­a­tive ef­fect on the banks’ will­ing­ness to lend.

Of course, the cur­rent Greek case is ex­tra­or­di­nary and goes be­yond that. In gen­eral, credit growth tends to lag GDP growth in re­cov­er­ies and many doubt whether the Greek econ­omy will start re­cov­er­ing in 2016 even if the banks un­dergo the tests and are re­cap­i­tal­ized in the next three to four months.

Sure, some pun­dits ar­gue coun­tries can grow with­out count­ing on credit growth. A re­port by Cit­i­group had ar­gued in the past that Euro­pean Union coun­tries with large for­eign di­rect in­vest­ment (FDI) in­flow,s such as Ire­land or where the pri­vate sec­tor has strong liq­uid­ity po­si­tions such as Ger­many, UK, Spain etc, seem to grow fine with­out credit growth. But this is not the case in other coun­tries that don’t ben­e­fit from strong FDI in­flows and strong liq­uid­ity po­si­tions. In the lat­ter group of coun­tries, where Greece finds it­self, the abil­ity to ac­cess credit mat­ters a lot. In fact, eco­nomic growth has to be credit-fi­nanced to be­come solid and pick up steam.

It is true that credit growth is a func­tion of both credit de­mand and credit sup­ply. In the past in Greece credit de­mand from fi­nan­cially sound com­pa­nies was a more bind­ing con­straint for credit growth than credit sup­ply.

Fol­low­ing the im­po­si­tion of cap­i­tal con­trols in late June – but even be­fore – credit avail­abil­ity has over­taken de­mand in im­por­tance. There­fore, the banks’ role in pro­vid­ing credit is para­mount at a time when lo­cal com­pa­nies have ex­hausted their own funds and can­not raise ex­ter­nal eq­uity or bor­row from debt mar­kets.

This can­not hap­pen overnight. It re­quires a more sta­ble eco­nomic and po­lit­i­cal en­vi­ron­ment and the fast re­cap­i­tal­iza­tion of Greek banks. This way cap­i­tal con­trols can be safely re­laxed and fi­nally re­moved, some de­posits will re­turn and banks will be able to re­struc­ture their non­per­form­ing loan (NPL) port­fo­lios with greater ease. It is es­ti­mated de­posit out­flows have ex­ceeded 40 bil­lion eu­ros in the last six months or so, bring­ing de­posits to less than 120 bil­lion, while NPLs have sur­passed 40 per­cent of to­tal loans to more than 100 bil­lion.

Although the dam­age to the bank­ing sys­tem is se­ri­ous, it does not mean it can­not be re­paired. How­ever, it will take time. As­sum­ing bankers are right, most with­drawals were pre­cau­tion­ary rather than linked to de­plet­ing cash re­serves of the banks’ clients. More­over, about half or more of the with­drawals were in cash, while the rest were equally split be­tween trans­fers to money mar­ket funds and trans­fers abroad. These char­ac­ter­is­tics sug­gest that it is pos­si­ble a por­tion of these out­flows may flock back to the sys­tem once sta­bil­ity re­turns. Still, the amount will likely be lower than would have been the case with­out the im­po­si­tion of cap­i­tal con­trols.

There is no doubt the Greek econ­omy has to grow to ser­vice its debts. This re­quires struc­tural re­forms, debt re­lief and ra­tio­nal fis­cal poli­cies – def­i­nitely not higher taxes that dis­cour­age pro­duc­tiv­ity and pro­mote tax eva­sion masked un­der the term of in­come re­dis­tri­bu­tion. It also re­quires strong banks to re­lax cap­i­tal con­trols and pave the way for a re­turn to pos­i­tive credit growth rates at some point in 2016.

In coun­tries

that don’t have from strong FDI in­flows and liq­uid­ity po­si­tions, such as Greece, credit avail­abil­ity mat­ters.

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