Econ 0309

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Foundation for Economic and Industrial Research

The Greek Economy

3/09

Quarterly Bulletin

No 57, October 2009

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The Greek Economy vol. 03/09

2

Editorial Policy

This analysis of the Greek Economy is the joint product of the research staff of the Foundation. The

views presented here form the consensus reached, and no individual bears sole responsibility for all or

part of it. Furthermore, the views expressed do not necessarily reflect those of other organisations

that may support, finance or cooperate with the Foundation. The analysis in the current report is

based on data available until 9/10/2009.

IOBE

The Foundation of Economic and Industrial Research is a private, non - profit, public benefit research

organisation. Its purpose is to promote research on current problems and prospects of the Greek

Economy and its sectors and to generate reliable information, analysis and proposals for action that

can be of value to policy makers.

Copyright 2009 Foundation for Economic & Industrial Research

ISSN 1106 - 4315

This study may not be reproduced in any form or for any purpose without the prior knowledge and

consent of the publisher.

Foundation for Economic and Industrial Research (IOBE)11, Tsami Karatasou Str, 117 42 Athens, Tel. (+30210 9211200-10), Fax:(+30210 9233977)http://www.iobe.gr

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3

Index

FOREWORD.............................................................................................................................. 5

1. OVERVIEW CONCLUSIONS ............................................................................................. 7

Greek Economy at a crucial point ..........................................................................................7

1. International crisis has serious impacts on real economy......................................................7

2. Fiscal imbalances growing significantly ...............................................................................7

3. Difficulties in private sector financing .................................................................................7

4. Worsening of longstanding structural problems and decline of competitiveness.......................8

5. Economic policy possibilities..............................................................................................8

6. Priorities .........................................................................................................................9

7. IOBEs proposals............................................................................................................10

2. ECONOMIC ENVIRONMENT ............................................................................................. 11

2.1 Trends and Prospects in the International Economy................................................. 11

The Global Economic Environment.......................................................................................11

The Economies of the EU and Eurozone...............................................................................172.2 The Economic Background in Greece......................................................................... 22

A) Economic sentiment....................................................................................................... 22

B) Liquidity Conditions .......................................................................................................28

C) Fiscal Developments ......................................................................................................32

D) Competitiveness............................................................................................................36

3. PERFORMANCE AND PROSPECTS ................................................................................... 39

3.1 Macroeconomic Developments .................................................................................. 39

Developments in the first half of 2009..................................................................................39

3.2 Developments and Prospects in key sectors of the economy.................................... 46

3.3 Export Performance of the Greek Economy............................................................... 57

3.4 Employment Unemployment .................................................................................. 59

3.5 Consumer Prices ........................................................................................................ 65

Developments in 2009 .......................................................................................................65

Medium-term outlook.........................................................................................................67

3.6 Balance of Payments.................................................................................................. 70

Current Account Balance ....................................................................................................70

Capital Transfers Balance ...................................................................................................71

Financial Account Balance................................................................................................... 71

4. APPENDIX: STRUCTURAL INDICATORS .......................................................................... 75

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FOREWORD

This report is the third issued by IOBE for 2009 in the framework of its periodic reviews of

the Greek economy. Its publication coincides with the announcement of the new govern-

ments policy program, a key event for the economic policy that will be implemented in thecoming years, at a time when Greece will endeavor to overcome the impacts from the

spread of the international economic crisis, while simultaneously remedying the particularly

large imbalances in its public finances. This report by IOBE is divided into three sections

and as always is accompanied by an Appendix of structural indicators, used to track

quantitative progress toward attainment of the Lisbon Strategy objectives. More specifically:

At the methodological level, the report refers to and is supported by data which were avail-

able up to 09/10/2009. The first section contains a summary overview of developments

regarding the key indicators of the Greek economy, the impacts on them from the spread of

global economic crisis, the priorities and challenges of the new governments economic pol-

icy in view of the situation that has been shaped, as well as the relevant proposals of IOBE.

The second section focuses on specific factors, with particular emphasis on the course of

the Greek economy over time but especially in the current period. Looking at purely extra-

neous factors, an analysis is presented of the situation in the global economic environ-

ment based on the most recent reports of the European Commission, the OECD and the

IMF. As for factors that have an impact on the domestic economic environment which are

shaped also by conditions prevailing within the country, the report presents a) the eco-

nomic climate in Greece, based on IOBEs business and consumer surveys, b) the situa-

tion regarding liquidity in the domestic financial system, in the private and public sectors ofthe economy, c) the latest data pertaining to public finances and their interpretation, and d)

trends relating to the competitiveness of the Greek economy, which is a key factor for how

quickly it will exit the considerably weakened position it is currently in.

The third section focuses on the performance of the Greek economy. The macroeco-

nomic environment and medium-term prospects for the second half of the year are out-

lined, developments in key sectors of the economy are described, the export perform-

ance of the Greek economy in the first half of 2009 is summarized, while developments in

terms ofemployment and unemployment are also recorded. Lastly, an analysis is pre-

sented ofinflation and the factors which shaped its course in the nine-month period Janu-ary-September, while this section concludes with a presentation of trends in the balance of

payments.

IOBEs next quarterly report on the Greek economy is expected to be published in late De-

cember 2009.

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1. OVERVIEW CONCLUSIONS

Greek Economy at a crucial point

1. International crisis has serious im-

pacts on real economy

According to all indications, the Greek

economy has entered a trajectory marked

by the decline of all key indicators.

GDP, which in 2008 had risen by2%, is projected to decline at a rate of

approximately 0.5%. This decline is

due to the reduced consumption of

households, a drop in exports and a

significant decrease in private invest-

ment. In contrast, public investment

and the considerable reduction of im-

ports constitute a contrary trend.

All near-term indicators also showa significant decline. Examples include

the sharp drop in industrial production,

the contraction of retail sales and the

reduction of tourism receipts.

Unemployment is growing, havingexceeded 9% of the labor force. The

worsening of unemployment has

mainly hit young people aged 15-24,

but also the 30-44 age group and of

course women.

2. Fiscal imbalances growing sig-

nificantly

Following the fiscal derailment of 2008,

when the general government deficit ex-

ceeded 5% of GDP, the situation wors-

ened considerably in 2009. In the first

nine months: revenue was significantly

down, while expenditure grew at a rate of

over 12%. Unless this course is dramati-

cally reversed in the last quarter of the

year, everything points to the general

government deficit in 2009 eventually sur-

passing 10% of GDP. It should be noted

that the initial target for the 2009 deficit

was 3.7% of GDP.

At the same time, the government debt is

also on a trajectory of rapid expansion. In

the first quarter of the year, the latest pe-

riod for which official data are available,

the debt is estimated at 251 billion.

Since then it is projected to have risen fur-

ther and by the end of the year is ex-

pected to total 270 billion. Moreover,

this amount will be further burdened with

the outstanding obligations of the Greekstate which, if they are settled, will add a

further 5-7 percentage points to the gov-

ernment debt as a percentage of GDP.

3. Difficulties in private sector financ-

ing

Although reasonable conditions of liquidity

have to a great extent been restored

in the banking system, the rates of creditexpansion to businesses and households

have fallen: 6% in August, compared to

approximately 16% in December 2008, a

fact that creates the sense of a credit

squeeze in the private sector. On the other

hand however, it should be noted that the

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rate of change of credit expansion to the

public sector stands at around 30%, due

to the significant widening of fiscal defi-

cits, with the result that liquidity in the

economy as a whole is changing at a rate

of approximately 9.5%, which is much

higher than in the rest of the Eurozone.

4. Worsening of longstanding struc-

tural problems and decline of com-

petitiveness

One of the most important aspects of the

crisis is that it has highlighted the long-

standing problems of the current growth

model of the Greek economy, not only in

terms of the main causes, which are

chiefly low competitiveness, low competi-

tion intensity in markets, the inefficient

operation of the public sector, the nonvi-

able social security system, along with the

consequences of the above, which include

the persistent fiscal deficits, high govern-

ment debt, high current account deficit,

low rate of employment and the adversebusiness environment.

The worsening of the countrys interna-

tional position, which is due to the above,

is clearly shown by Greeces drop in rele-

vant international rankings: According to

the International Institute for Management

Development (IMD), which ranks the

competitive position of 57 countries, the

Greek economy fell to 52nd place in 2009from 42nd one year previously. In the cor-

responding ranking of the Global Competi-

tiveness Report, Greece lies in 67th place,

compared to 65th last year. Lastly, in the

Doing Business report of the World Bank,

which tracks the ease of doing business,

Greece is now ranked 109th after dropping

10 places since 2008.

5. Economic policy possibilities

The formation of a new government fol-

lowing parliamentary elections on October

4 enables the implementation of an eco-

nomic policy based on decisions of a per-

manent nature, minimizing extraordinary

interventions that are necessitated by the

conditions prevailing at any time. The

fresh popular mandate creates possibilities

for the exercise of an economic policy with

medium-term targets and with a greater

degree of freedom from so-called political

cost.

Economic policy must today deal with the

huge and thorny problems described in

this report: Recession in the real economy,

derailment of fiscal positions, reduced

competitiveness. On the other hand how-

ever, there are a number of factors which,

if utilized effectively, can give strong impe-

tus to the Greek economy. These include

the following:

The now apparent collective beliefthat the time has come to resolve the

problems and there is no margin for

further procrastination. This realization

considerably limits the intensity of op-

position from groups that may be ad-

versely affected in the short term andfacilitates the social acceptance of

measures that are seen as benefiting

society as a whole.

The lesser degree of pessimismamong consumers and businesses and

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their more optimistic expectations for

the future.

The more moderate relative tothe Eurozone decline in economic ac-

tivity which, at least so far, has notgiven rise to social repercussions of

the magnitude seen in other countries.

The ability to immediately imple-ment structural changes especially

regarding the operation of markets

and institutions which, while they do

not place any burden on public fi-

nances, could have impressive, posi-

tive impacts on competitiveness in the

near term.

Resources from the National Stra-tegic Reference Framework, which

quantitatively constitute an important

injection of demand and liquidity in

the Greek economy, provided of

course that they are mobilized at much

faster rates than those attained by

public administration to date.

The apparent recovery of theglobal economy, which will have a

positive impact on the Greek economy

also.

6. Priorities

The economic policy that will be exercised

initially will express the political choices ofthe new government, but at the same

time it must tackle the problems noted

above, which, if not quickly resolved, will

limit the chances of success of the afore-

said choices.

Consequently, there are two absolute pri-

orities for economic policy: reducing the

massive deficits of the public sector,

within a reasonable and set time-

frame, while at the same time con-

tributing to the restoration of the

trend in economic growth rates.

The balancing of interventions between

these two equally important priorities

is of course a difficult task, since at first

glance the solutions appear to be moving

in opposite directions: On the one hand, a

program to restore fiscal balance is neces-

sary with a minimum duration of three

years, whilst at the same time fiscal policy

should not be overly restrictive, for this

would lead to an even greater contraction

of economic activity. However, under cer-

tain conditions of rational economic policy,

the combination of fiscal rehabilitation and

the boosting of economic activity contin-

ues to be feasible for the following rea-

sons:

First, fiscal policy is already decidedly ex-

pansionary, indeed far more so than in

other Eurozone countries. The government

deficit may be just as high in other coun-

tries, e.g. the United Kingdom, but there

the decline in economic activity is much

greater than in Greece. For this reason,

the further widening of the fiscal deficit in

order to boost demand entails very serious

risks for fiscal stability and economic activ-

ity.

Second, it should not always be consid-

ered given a priori that fiscal adjustment

goes contrary to efforts to boost economic

activity. On the contrary, as shown by the

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experience of adjustment in the 1990s,

prudent fiscal adjustment can be accom-

panied by a recovery of economic activity.

In the present conditions, a reliable pro-

gram to reduce fiscal imbalances will helplower the interest rate for public sector

borrowing and therefore save considerable

amounts that are spent on servicing the

debt. In addition, the reduction of the in-

terest rate for public sector borrowing has

significant beneficial impacts also on pri-

vate sector borrowing. Indeed, with the

prospect of an increase in interest rates,

after 2010 and/or 2011, provided there is

a recovery of economic activity in the Euro

zone, it becomes clear that without fiscal

adjustment the risk of the Greek public

sectors borrowing cost rising significantly

is extremely high. Greeces experience in

the 1990s, as well as that of other coun-

tries, has shown that a restrictive fiscal

policy, within the framework of a compre-

hensive economic growth program, can

have positive impacts on increasing eco-nomic activity, even in the near term. To-

day, fiscal rehabilitation in conjunction

with structural reforms proposed by IOBE,

could very possibly put the Greek econ-

omy back on a growth trajectory.

7. IOBEs proposals

In June 2009, IOBE presented its propos-

als to deal with the crisis and restart theGreek economy, which today are even

more urgent, as economic activity slows

and the fiscal deficits expand. The propos-

als relate to fiscal adjustment, the consoli-

dation of a healthy financial system, as

well as structural changes to boost com-

petitiveness and the production of goods

and services. These include:

Immediate measures to counter the

visible repercussions of the crisis and con-

vince not only international markets but

also agencies of the Greek economy that

economic policy is rising to the challenges,

abandoning the inconsistencies of the

past, disregarding the political cost and

embarking on a new, steady course based

on the needs of the economy and society.

Structural reforms which may have

been set out in detail, but have not been

advanced.

Radical changes in the mechanisms

used to implement the measures,

mainly in the modus operandi of public

administration, which will provide tangible

safeguards that the policies to be decided

will be implemented with consistency. This

objective is equally important as the pre-

ceding ones, since experience shows that

correct measures which are announced

are eventually not implemented because

the mechanisms entrusted with their im-

plementation are inadequate.

IOBEs proposals are set out in detail inthe publication IOBEs POSITIONS ON

ECONOMIC POLICY, which accompanies

this report1.

1 The full text of these positions is available onIOBEs website (www.iobe.gr).

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2. ECONOMIC ENVIRONMENT

2.1 Trends and Prospects in the

International Economy

The Global Economic Environment

The downward trends prevailing in the

global economy up to an including the first

quarter of 2009 were halted in the second

quarter in the most advanced economies,

while many developing economies of

Southeast Asia, as well as emerging

economies, registered growth, albeit at

clearly lower rates relative to the recent

past. However, a decisive contribution to

the reflation observed has been made by

the fiscal stimulus packages and monetary

policy measures that have been imple-

mented since the collapse of Lehman

Brothers by international organizations,

national governments and central banks.

Nevertheless, recovery from the repercus-

sions of the economic recession is ex-

pected to come at a slow pace and there-fore after some time. Meanwhile, despite

the various indications of a reversal of

trends, unemployment continues to rise,

while the boosting of production activity

relative to the levels of the first quarter of

2009 has increased demand for oil, raw

materials and key commodities, which has

put a brake on the decline in inflation. It

should be noted however that negative

rates of inflation (deflation) had already

been recorded in many regions.

Responding to the changes seen in recent

months, international organizations are

revising upward their estimates regarding

the depth of recession of the global econ-

omy, as well as of some of the biggest

economies for the current year, while a

return to growth is anticipated for 2010.

In a recent report, the International

Monetary Fund2 sees global GDP declining

by 1.1% (against -1.4% in its updated

Spring report) and growth of the order of

3.1% in 2010. The weaken-

ing/deceleration of GDP in the major

economies of the Eurozone is now ex-

pected to be less than initially estimated,

according to the OECD3 and IMF, as well

as in China, and with estimates for theUSA and United Kingdom having deterio-

rated, but only marginally. The OECD

however, with respect to its member

countries plus Brazil, Russia, India and

China, which represent approximately 4/5

of global GDP, has not revised its projec-

tion for recession of -2.2% this year4.

In greater detail, the state assistance to

credit institutions, the boosting of their

liquidity, the provision of guarantees for

deposits and the successive interventions

regarding key interest rates have begun to

improve the confidence in interbank and

stock markets. The interest rate spreads

in interbank markets have narrowed con-

siderably relative to the previous winter

and some investors are shifting from state

bonds to investments that entail a greaterrisk but also possibly higher returns. In

addition, the reduction of key interest

rates, to which a large proportion of home

2 IMF, World Economic Outlook, October 2009 IMF , World Economic Outlook Update, July 2009.3 OECD, What is the economic outlook for OECDcountries? An interim assessment, September 2009.4 OECD, Economic Outlook No. 85, June 2009.

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mortgage loans are linked, has made it

easier to service the latter. Despite the

boosting of liquidity, however, the rate of

credit expansion has slowed markedly or

the granting of credit has even dropped in

the USA, the Eurozone and the United

Kingdom. The difficulty in accessing liquid-

ity has mainly hit households and small-

and medium-size enterprises, exerting

pressures on private consumption and pri-

vate investment. In every case, with the

values of certain structural indicators re-

lating to the capital adequacy of credit

institutions remaining at low levels, the

fear of a new cycle of turbulence in theinternational financial system has not

completely vanished.

However, although the fiscal measures

gave impetus to the global economy, they

also placed a considerable burden on pub-

lic finances. In the seven most advanced

economies, the general government deficit

is expected on average to exceed 10% of

GDP in the current year, while in 2010 it isprojected to decline by just one percent-

age point5. Apart from the expansion of

the deficit, public debt is also set to

worsen, as the credit squeeze makes its

servicing more difficult. In the USA, Ger-

many and the United Kingdom, govern-

ment debt is projected to grow by more

than 10% of GDP, and by 20% in Japan.

On the other hand, the beneficial impacts

on the global economy from the fiscal in-

terventions and monetary policy being ex-

ercised are leading to a reversal of its

downward course. Industrial production,

which due to the sharp decline in eco-

5 IMF, World Economic Outlook, October 2009.

nomic activity in the developed and devel-

oping economies and as a consequence

the weakening of world trade, has come

under the greatest pressure, is moving

slightly upward in the industrial countries

of East Asia. Consumer confidence is

gradually recovering, a development that

is reflected in the stabilization observed in

retail sales. The course of the latter is re-

ducing the excessive build-up of stocks

which took place as the crisis impacted on

the real economy and caused the sudden

slowing of production between the end of

2008 and early 2009.

The recovery of economic activity has,

however, affected inflation. The decline in

prices of oil and basic commodities has

been halted since early April, due in part

not only to higher demand from develop-

ing countries and China in particular, but

also the stricter control of oil production

cuts by the Organization of Petroleum Ex-

porting Countries (OPEC) in its member

states and the improved climate in inter-national markets in general. Nevertheless,

according to the IMF the gap between av-

erage oil price levels this year and last

year was maintained during the summer,

which helped keep global inflation in July

this year down at 1.0%, against 6.0% one

year previously. The fact that production

in 2009 as a whole will stand at much

lower levels relative to those recorded be-

fore the economic crisis will not allow any

significant further strengthening of prices

up to the end of the year. One indication

of this is that the IMF in its recent report

did not revise its forecast of virtually no

change (+0.1%) in prices in the devel-

oped economies, compared to an increase

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of 3.4% in 2008, while it revised margin-

ally upward its corresponding projection

for emerging economies to 5.5%

(+0.2%).

However, despite the moderation of thedecline in production and a clear drop in

pessimism with respect to economic sen-

timent, data from the labor market con-

tinue to deteriorate. In August, the unem-

ployment rate reached 9.7% in the USA

(the highest of the past 26 years), while in

the second half of the year in EU-27 and

the Eurozone it stood at 8.8% and 9.3%

respectively. The USA is also the G-7

country that is expected to show the big-

gest rise in unemployment, from 5.8% in

2008 to 9.3% in the current year, since in

contrast with the EU, the reduction of

working hours and wages which limits

the extent of dismissals is not one of the

preferred options for dealing with the

weakening of demand. Other countries

seen facing a comparatively greater un-

employment problem are Italy and theUnited Kingdom, where the respective

jobless rates will reach 9.1% and 7.6% in

2009, up from 6.8% in the previous year.

The impact of the international economic

crisis on the output of the USA continues

to be relatively moderate, with GDP show-

ing the third smallest decline relative to

the previous year among the G7 coun-

tries: in the second quarter it stood at -

3.956, against 2.1% one year previously.

Successive state interventions have re-

duced interbank interest rate spreads to

pre-crisis levels, at the same time signifi-

6 News Release Euro Indicators, EUROSTAT,125/2009, 02/09/09.

cantly narrowing corporate bond and

mortgage spreads. The financial results of

banks reported in the second quarter out-

performed expectations and bolstered in-

vestor confidence. However, credit re-

mains difficult to obtain for many house-

holds and businesses, with the Federal

Reserve keeping its short-term interest

rates near zero, due to the fact that bank

loan standards continue to tighten. The

significant weakening of credit expansion

has hit investment and household con-

sumption in particular, with the latter be-

ing further dampened by the growth of

unemployment.

The magnitude of the repercussions from

markedly weaker private demand on ef-

forts toward economic recovery in the USA

may outweigh the positive effects from

the improvement in activity in the econo-

mies of most of the USs trading partners,

and it will certainly moderate it. The new

depreciation of the dollar against the ma-

jor currencies will have a positive impacton US exports. For 2009 as a whole, the

decline in GDP will not exceed 2.7%-

2.8%, according to the IMF and OECD.

The sharp drop in exports by 50% in the

final quarter of 2008 and first quarter of

the current year was the main blow to the

Japanese economy, due to its strong ex-

port orientation. In its effort to check the

impacts of the recession, the Japanese

government prepared and is now imple-

menting an extraordinary fiscal policy pro-

gram for the current and coming year,

which will reach 5% of GDP annually, with

Japanese banks supplying ample liquidity.

The gradual monthly growth of industrial

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production since March and of retail sales

since April provided the first signs of a re-

versal of the declining trends in the global

economy. In the second quarter, the rate

of decline of GDP slowed to 6.5% from

8.3% in the previous quarter. However,

the drop in GDP for the second straight

year, after falling by 0.7% in 2008, has

significantly weakened domestic demand,

especially from households and busi-

nesses, which has resulted in strong defla-

tionary pressures prevailing. The drop in

prices reached 2.4% in August and no re-

versal is expected before 2012. Under

these endogenous pressures, the contrac-tion of GDP in 2009 may exceed projec-

tions made to date which range from

5.4% to 5.6%.

The exercise of an expansionary fiscal pol-

icy by the government of China resulted

in significant growth of public invest-

ments, which strengthened industrial pro-

duction in particular and checked the de-

celeration of the growth rate on an annualbasis, which had fallen to 6.1% in the first

quarter. In the second quarter it stood at

7.9% and overall for the first half 7.1%.

The relaxation of credit limits and the re-

duction of interest rates increased the rate

of credit expansion to 24% in the first

half, providing a significant boost to do-

mestic demand, which offset the decline in

exports. In fact, as this demand extends

to products and services from countries of

the wider region, the growth of Chinese

imports provides a major prop for their

economies. However, this strong credit

growth carries the risk of a deterioration

in credit quality and a sharp rise in prices

of capital goods. Regarding the course of

GDP for 2009 as a whole, the above de-

velopments have led to an upward revi-

sion of projections of its growth rate, to

8.5%, which is just 0.5 percentage points

lower than last year.

The taking of fiscal and monetary policy

measures led to a reversal of the decline

in total demand in the economy ofIndia.

On the other hand, these interventions

constitute a source of additional burdens

on the already high central government

deficit, which in 2008 reached 6.2%. The

introduction of moderate tax reliefs in

2009 and the imposition of new measures

to protect domestic production are ex-

pected to keep the GDP rate of change at

5.4-6.0%, about one percentage point

lower than last year (6.5%).

The countries of the former Soviet Un-

ion (CIS) continue to strongly feel the

effects of the international economic cri-

sis, directly as well as indirectly, via the

crisis that has hit the Russian economy,especially those countries that have a high

volume of trade with Russia and/or re-

ceive sizeable remittances from workers in

Russia. The growth rates of energy ex-

porters, such as Azerbaijan and Uzbeki-

stan, will show a moderate slowing on ac-

count of the adverse economic environ-

ment, as energy prices have begun to

rise, while use was also made of extensive

fiscal support. In contrast, lower income

countries, such as Armenia, have suffered

a slump in economic activity and took the

step of devaluing their national currency.

Overall, due to the unfavorable situation

in which the weakest economies have

found themselves, the IMF estimates that

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GDP will decline by 6.7% in the wider re-

gion in 2009, which is 0.9% more than

had been projected earlier this year. The

contraction of the Russian economy is

expected to exceed this average. Already,

in the first half of 2009, GDP declined by

10.1%. However, from the second quarter

the rate of growth of industrial production

recovered markedly, whilst there was a

considerable easing of the pressures that

had appeared in the previous months on

the capital account and exchange rate,

thanks to the aggressive monetary policy

measures of the central bank and the

growth of public spending. Moreover, therecovery of oil prices will provide addi-

tional support to the economy through the

trade balance. Despite the various positive

developments in the second quarter how-

ever, the Russian government in July pro-

jected a 8.0-8.5% contraction of GDP in

2009, while a subsequent forecast of the

IMF points to a smaller decline of around

7.5%.

The magnitude of the improvement in ex-pectations, which have contributed to an

increase in transactions on international

capital and stock markets, as well as to

the upturn in production activity, is re-

flected in the latest assessments of the

economic climate indicators of the 'World

Economic Survey' conducted by the Mu-

nich-based IFO Institute. These indicators

are constructed on the basis of data col-

lected in a survey carried out on a quar-

terly basis in 91 countries [Tables 2.2 and

2.3].

Table 2.1

International Environment International Monetary Fund (real annual % change)

2008 2009 2010

USA 1,1 -2,7 1,5Japan -0,7 -5,4 1,7

Developing Asia 7,6 6,2 7,3China 9,0 8,5 9,0

ASEAN5 4,8 0,7 4Euro area 0,8 -4,2 0,3Commonwealth of Independent States (CIS) 5,5 -6,7 2,1

of which Russia 5,6 -7,5 1,5Middle East 5,2 2,0 4,2

Africa 5,2 1,7 4,0

Sub-Saharan Africa 5,5 1,3 4,1World 3,1 -1,1 3,1

Developing Asia: India, Indonesia, Philippines, China etc.ASEAN5: Indonesia, Malaysia, Philippines, Thailand, Vietnam.Middle East: Egypt, United Arab Emirates, Jordan, Iran, Qatar, Kuwait, Lebanon, Libya, Bahrain, Oman, Saudi Ara-bia, Syria, YemenSub-Saharan Africa: Algeria, Morocco, Tunisia.Source: International Monetary Fund, World Economic Outlook, October 2009.

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Table 2.2

IFO - Economic Climate Index for global economy (Index, 1995=100)

Quarter/Year I/07 IV/07 I/08 II/08 III/08 IV/08 I/09 I/09 I/09

Economic Climate 113,6 99,3 90,4 81,4 73,4 60,0 50,1 64,4 78,7

Current Situation 127,9 118,7 109,6 96,8 85,8 67,6 45,7 38,4 42,0Expectations 100,0 80,7 71,9 66,7 61,4 52,6 54,4 89,5 114,0

Source: IFO, World Economic Survey, WES 8/2009.

Table 2.3

IFO Economic Climate Index in economic zones (Index, 1995=100)

Quarter/Year I/07 IV/07 I/08 II/08 III/08 IV/08 I/09 I/09 I/09

North America 108,6 85,7 72,4 60,9 62,7 53,9 48,6 70,6 83,0

Western Europe 110,9 93,0 81,9 75,9 63,1 51,2 45,2 55,4 65,7

Asia 115,7 105,6 100,9 88,0 75,9 61,1 50,0 73,1 94,4

Source: IFO, World Economic Survey, WES 8/2009.

More specifically, the world economic cli-

mate indicator continued to rise in the

third quarter this year, coming close to

the level recorded in the first quarter of

2008, i.e. before the collapse of Lehman

Brothers and the spread of the financial

crisis in the EU. The improvement of the

climate indicator was primarily due to theconsiderably more favorable economic ex-

pectations for the coming six months. As-

sessments of the current economic situa-

tion were also more optimistic but to a

lesser degree although this was the first

improvement for two years, a qualitative

characteristic that may be more important

than the widespread but more volatile op-

timism for the coming six months.

The rise of positive expectations seen in

the second quarter, mainly in the eco-

nomic regions of North America and

Asia, continued in the next quarter, push-

ing up the relevant indicator globally. Ex-

pectations in Western Europe, Russia and

Latin America again showed a quite posi-

tive change, while a smaller improvement

was recorded in Eastern and Central

Europe. However, assessments of the cur-

rent economic situation remained below

the satisfactory level in all regions, espe-

cially in the Eurozone, Eastern and Cen-

tral Europe and Russia, where they wors-ened.

Inflation rate expectations on a worldwide

scale in 2009 deteriorated further in the

latest IFO report, falling to 2.5% from

2.7%. However, no further decrease in

prices is expected in the coming months,

but nor a rise. The more favorable outlook

for the world economy appears to rule out

a further decline of short-term interestrates. At the same time, it is expected to

lead to an increase in long-term rates in

the coming six months.

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The Economies of the EU and Euro-

zone

The economy of the EU in the second

quarter showed some signs of resistance

to the economic recession, which contin-ues for the third quarter. The decline of

GDP on an annual basis in EU-16 and EU-

27 in the second quarter of 2009 reached

4.7% and 4.8% respectively, compared to

4.9% and 4.8% in the immediately pre-

ceding quarter. However, the decline be-

tween successive quarters, a magnitude

that constitutes the measure for the con-

tinuation of the recession, was only mar-

ginal, of the order of 0.1% in the Euro-

zone and 0.2% in EU-27. Nevertheless, on

an annual basis the weakening of GDP in

both economic regions in this quarter too

remained higher than that recorded in the

USA (-3.9%).

The fact that the bulk of financing needs

of businesses were met by the banking

sector, especially in the Eurozone (70% oftheir total funding in the period 2004-

2008), does not allow a quick recovery of

their production and investment, since un-

certainty about the asset quality of credit

institutions, despite the complete return to

normality in credit markets following the

turbulence of last autumn, which is con-

siderably reducing the margins for new

loans and, as a consequence, liquidity too.

The credit squeeze in combination with

the growth of unemployment due to the

significant weakening of production, are

exerting pressures on household spend-

ing. A number of factors however continue

to offset these forces, in particular fiscal

interventions, not only by the EU with its

European Economic Recovery Plan, but

also via the packages of measures taken

at a national level. However, these ex-

traordinary policies significantly increase

the burdens on public finances, the reper-

cussions from which will become evident

later on. Economies that are more export-

orientated, e.g. Germanys, have recently

had an additional boost from the increase

in global trade, especially with respect to

the countries of Southeast Asia.

Reflecting the combination of the above

effects, industrial production declined by

15.9% and 14.7%7 in July relative to the

same month of 2008 in the Eurozone and

EU-27 respectively, though this was

smaller than the drop recorded in April (-

21.3% and -19.4%). The rate of decline

of the retail trade volume also slowed in

June, and in July it did not exceed -1.8%

in the Eurozone and -0.9% in EU-278.

However, the unemployment rate contin-

ued to rise in the two-month period July-

August (+0.1 percentage point permonth), but at a slower pace relative to

late 2008 and the first quarter of 2009. On

the other hand, one sign that the econo-

mies of the EU will exit the recession ear-

lier than originally expected, thanks also

to the assistance of the policy measures

taken, is the continuing improvement

since March in the economic climate indi-

cators for the Eurozone and EU-27, as

well as the constant recovery since April in

the indexes of the main European stock

7 News Release Euro Indicators, EUROSTAT,129/2009, 14/09/09.8 News Release Euro Indicators, EUROSTAT,126/2009, 03/09/09.

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18

markets, with the exception of the correc-

tion seen in July.

The gradual support from the external

sector, particularly of the strong econo-

mies of the Eurozone and EU-27, is ap-parent in the narrowing of the difference

between the decrease in imports and the

drop in exports. Exports of goods and ser-

vices fell by 17.1% in the Eurozone in the

April-June quarter of the current year,

while the drop in imports during the same

period stood at 14.4%. However, in the

January-March quarter, the gap between

the weakening of exports and imports was

wider, with the former standing at -16.6%

and the latter at -12.9%. Similar changes

of a slightly greater magnitude were also

seen in EU-27. As a result, the effect of

net imports on GDP fell to -1.4% in the

second quarter in the Eurozone from -

1.8% in the first quarter, a value that is

lower than the OECDs forecast of a nega-

tive contribution of 1.7% for the year as a

whole.

The continuing difficulties in accessing li-

quidity is reflected in the steady decline of

fixed capital formation, which in the sec-

ond quarter of 2009 was 10.9% and

11.6% lower than last years level in the

Eurozone and EU-27 respectively, roughly

the same as in the first three months of

the year also9. The persistence of the ad-

verse investment climate is creating con-

cern about the course of investments

when the impacts of the fiscal stimulus

interventions begin to fade. In its recent

report, the IMF forecast a decline in fixed


capital formation of 10.7% in the Euro-

zone, when last year it had remained un-

changed at the level of 2007. The OECD

expects a slightly greater decline of the

order of 11.1%. According to the OECD,

the contraction of fixed capital formation

will derive exclusively from private in-

vestment, with residential investment fal-

ling by 11.2% and non-residential con-

struction dropping by 13.7%.

Household consumption continues to lag

relative to 2008, despite the decline in in-

flation also during the second quarter of

2009, affected by the rise in unemploy-

ment and reduced credit expansion. More

specifically, it fell by 0.8% in the Eurozone

and 1.7% in EU-27. However, in the first

quarter the drop was even greater, 1.4%

and 1.9% respectively. Government con-

sumption continued to grow (2.2% in the

Eurozone, 1.2% in EU-27), but at a slower

pace, on the one hand reflecting the lower

level of Community and national assis-

tance in this period and, on the other,neutralizing the less adverse course of

household consumption. According to data

for the first half of the year, the weaken-

ing of private consumption in the Euro-

zone will probably be less than that fore-

cast by the IMF (-0.9%) and the OECD (-

1.3%), while in contrast the expansion of

that component of consumption deriving

from the public sector will be somewhere

between the relevant projections (OECD:

1.3%, IMF: 2.4%).

The resultant of the above changes is re-

cession of 4.8% in both economic zones

of the European Union. However, the in-

crease in global trade transactions, which

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19

favors its member states with the strong-

est, more outward-looking economies, as

well as the resistance to its further weak-

ening put up by private consumption will

probably offset during the rest of the year

the contraction of investment by the same

and possibly even a greater degree than

seen so far. Consequently, a lower decline

of GDP is more likely in the Eurozone,

closer to the relevant forecast of the IMF

(-4.2%) and the European Commission (-

4.0%).

Nevertheless, despite the fact that the re-

cession remained at more or less the

same level in the first two quarters of

2009, the differences in the extent to

which it hits the member states are grow-

ing, with some of the new member states

facing more severe problems in their

economies as 2009 progresses. The de-

cline of GDP in Lithuania and Latvia re-

mained the highest in EU-27 also in the

second quarter, at the same time exceed-

ing the decrease recorded in the firstquarter. Only Germany, France and Portu-

gal showed a smaller decline in GDP rela-

tive to the first quarter.

On the labor market front, lower produc-

tion and meager demand continue to push

up the jobless rate. In any case unem-

ployment and reduced household spend-

ing feed each other: a decline in house-

hold demand leads partly to new dismiss-

als, while subsequently the growth of un-

employment reduces household demand.

Unemployment has grown continuously

since early autumn last year, albeit at a

declining rate since the beginning of the

second quarter onward. In the second

quarter of 2009 the jobless rate stood at

9.3% in the Eurozone and 8.8% in EU-27,

up from 7.3% and 6.8% in the same

quarter of 2008, while in the first quarter

of the current year it reached 8.8% and

8.3% respectively. Data for the two-

month period July-August show a con-

tinuation of the uptrend, with unemploy-

ment reaching 9.6% in the Eurozone in

August and 9.1% in EU-2710. As for em-

ployment, in the first two quarters of 2009

it moved downward in both economic re-

gions, with its decline accelerating during

the year to reach 1.8% in the Eurozone

and 1.9% in the EU. The forecasts of theOECD and the European Commission point

to unemployment of around 10% for 2009

in the Eurozone, which appears to be

quite a high percentage that will probably

not be confirmed.

The slowing of inflation since the 3rd quar-

ter of 2008, which since last June had

turned into a decline in the Eurozone, was

halted in August. This development wasmainly due to the smaller decrease in

transport prices, which also include fuel,

although prices in most categories of

goods and services calculated in the har-

monized price index either fell less or rose

more on an annual basis relative to July.

Consequently, the increase in travel on

account of the summer vacation and the

slight recovery of economic activity mod-

erated the impact of the significantly

lower price of oil in summer this year rela-

tive to the previous year.


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20

Table 2.4

Main Economic Index, U-27, Euro area (annual % changes)

U-27 Euro area

2008 2009 2010 2008 2009 2010

GDP 0,9 -4,0 -0,1 0,8 -4,0 -0,1

Private Consumption 0,9 -1,5 -0,4 0,5 -0,9 -0,3

Public Consumption 2,2 1,9 1,7 2,0 2,0 1,7

Investment 0,1 -10,5 -2,9 0,0 -10,4 -2,7

Employment 0,7 -2,6 -1,4 0,7 -2,6 -1,5

Unemployment 7,0 9,4 10,9 7,5 9,9 11,5

Inflation 3,7 0,9 1,3 3,3 0,4 1,2

Exports 1,6 -12,6 -0,2 1,2 -13,2 -0,3

General Govern. Balance (% of GDP) -2,3 -6,0 -7,3 -1,9 -5,3 -6,5

General Govern. Dept (% of GDP) 61,5 72,6 79,4 69,3 77,7 83,8

Current account balance -1,5 -1,9 -2,0 -0,7 -1,2 -1,3

Source: European Commission, Spring Forecasts, May 2009

Figure 2.1

EuroC Index (CEPR)

Source: CEPR (www.cepr.org)

Table 2.5

European Commission Economic sentiment indicator U-27 & Euro Area (1990-2008=100)

Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09

-27 73,2 66,4 63,2 60,8 60,4 64,0 67,9 71,1 75,0 81,0 82,6

76,6 68,7 67,2 65,3 64,6 67,3 70,2 73,2 76,0 80,8 82,8

Source: European Commission (DG ECFIN), September 2009

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21

In the second quarter, inflation did not

exceed 0.1% in the Eurozone and 0.9% in

EU-27, compared to 3.7% and 3.9% one

year previously. Despite the reversal of its

declining trend in August, it stood at -

0.2% in the Eurozone and 0.6% in EU-

2711. The gradual abatement of the effect

of low oil prices from autumn onward and

the strengthening of production, especially

in the advanced economies of the EU will

prevent any further reduction of inflation,

despite weaker consumer demand. This

result will stave off the threat of deflation,

which could cause adverse feedback loops

for profitability, production, employment

and income. Even if this assessment is

confirmed, inflation in the Eurozone for

the year as a whole will not exceed an av-

erage of 1.0% in 2009, a forecast shared

by the OECD (0.4%) and the IMF (0.3%).

As noted previously, irrespective of the

support provided to European economies

by the initiatives of the European Commis-

sion and national governments, these in-

terventions entail a heavy burden on pub-

lic finances. The IMF expects the central

government deficit to reach 6.2% of GDP

in the Eurozone in 2009, up from 1.8% in

2008. The forecast of the OECD is more

moderate, at 5.6%. The public debt is also

projected to grow considerably, since as a

percentage of GDP it is expected to reach

68.6% in the Eurozone in the current

year, according to the IMF, compared to59.0% last year, or even higher 77% -

as forecast by the European Commission.

The consolidation of less pessimistic ex-

pectations in the Eurozone and the EU not


only among businesses, regarding the

course of economic activity, but also

among consumers, is apparent in the rise

of leading indicators, such as the indicator

of economic activity calculated by the

CEPR (Centre for Economic Policy Re-

search)12, as well as in the economic sen-

timent indicators of the European Com-

mission (DG ECFIN). More specifically, the

value of the CEPR indicator rose in Sep-

tember 2009 for the seventh straight

month and reverted to positive territory

for the first time since June 2008. This

latter development means that after more

than a year, GDP is expected to grow in

the coming (final) quarter in the Euro-

zone, relative to the immediately preced-

ing quarter. The rise of the indicator was

primarily due to the improvement in busi-

ness expectations and consumer confi-

dence but also stock market indexes.

The fact that activity in key branches of

the economy has not deteriorated further

in recent months, coupled with less pes-

simistic assessments of the current situa-

tion and expectations for the near future,

is reflected in the improvement seen in

the European Commissions economic sen-

timent indicator, which in Greece is com-

piled by IOBE. In both the Eurozone and

EU-27 the indicator moved upward in Sep-

tember for the sixth consecutive month,

remaining in both economic regions above

80 (82.8 and 82.6 respectively). Neverthe-less, this rise was in both cases the small-

est recorded since April, when the indica-

12 The CEPR in cooperation with the Bank of Italyeach month calculates the -COIN leading indicatorof economic activity for the Eurozone. The indicatorprovides a forecast of GDP growth and is con-structed from a range of different data, such as thecourse of industrial production and of prices, as wellas labor market and financial data.

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22

tor began to move up, and it continues to

be some distance from its long-term aver-

age in each zone. The improvement in

consumer confidence was the main factor

behind the new rise, followed by the slight

increase in the index that tracks expecta-

tions in industry in EU-27 and in services

in the Eurozone. The index for construc-

tion remained unchanged, and in retail

trade the corresponding index rose mar-

ginally in EU-27, while the respective

change in the Eurozone was exactly the

opposite

2.2 The Economic Background in

Greece

A) Economic sentiment

The third quarter of 2009 was character-

ized by a continuation of the improvement

in economic sentiment, albeit with a de-

gree of asymmetry vis--vis the intensity

of the upward trends in each sector. Thus,

the relevant indices of business expecta-

tions, which fell to historically low levels at

the beginning of the year, began to re-

cover in April and the majority have now

entered a trajectory of moderate but

steady improvement. In the period July-

September 2009, the economic sentiment

indicator stood at an average level of

60.1, which is a marked improved relative

to the immediately preceding quarter (52

in the period April-June) and even greater

compared to the first quarter of the year

(48). On the other hand of course, relative

to the corresponding period of 2008 the

relevant indicator lags considerably, since

it had then stood much higher, at 93.3.

Figure 2.2

Economic Sentiment Indicator, EU27 and Greece (seasonally adjusted data, 1990-2008=100)

40

50

60

70

80

90

100

110

120

130

140

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

EU Greece Average U27 (2001-2008)

Source: European Commission, DG ECFIN

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23

Table 2.6

Economic Sentiment Short-Term Indices

Economic

Sentiment

Indicator1

Business Confidence Indicators2

(Greece)

EU-27 Greece Industry Constructions Retail Trade Services

Consumer

Confidence

Indicator1

(Greece)

2001 101,0 107,6 101,9 114,0 92,2 105,8 -26

2002 94,9 98,9 101,2 114,0 93,3 82,8 -28

2003 93,2 93,2 97,9 115,0 102,0 85,5 -39

2004 102,5 102,9 99,1 81,5 104,8 94,6 -26

2005 99,4 89,3 92,6 63,0 96,8 93,6 -34

2006 108,4 103,1 101,5 91,1 110,8 103,7 -33

2007 110,8 108,0 102,8 92,5 120,8 106,6 -29

2008 90,67 89,01 91,9 95,2 102,5 97,8 -46

Jul-08 90,7 93,3 93,7 105,2 101,3 99,4 -46

Aug-08 88,6 92,6 93,9 110,5 96,9 96,2 -46

Sep-08 86,9 86,0 92,2 90,0 95,3 96,7 -50

Oct-08 79,6 75,9 83,9 90,9 88,7 92,4 -57

Nov-08 73,2 69,6 76,8 78,7 77,1 84,6 -55

Dec- 08 66,4 57,9 69,4 73,0 66,5 65,7 -56

Jan-09 63,2 55,4 68,2 65,0 65,3 62,6 -48

Feb-09 60,8 46,8 62,8 68,3 61,9 64,5 -55

Mar-09 60,4 42,9 63,8 59,1 60,2 66,0 -56

Apr-09 64,0 46,3 68,9 63,0 64,5 66,7 -51

May-09 67,9 49,5 71,0 52,8 80,7 73,2 -50

Jun-09 71,1 59,0 76,0 69,0 90,4 75,3 -45

Jul-09 75,0 57,2 73,8 67,4 91,4 73,7 -49

Aug-09 81,0 59,2 75,5 61,4 88,5 75,8 -45

Sep-09 82,6 63,8 80,4 67,6 91,4 68,4 -39

Source:1 European Commission, DG ECFIN, 2

The fact that economic sentiment, as a

leading indicator of real economic activity,

has steadily improved from April onward

suggests that the strong pessimism has

now moderated and more sober assess-

ments are being made, even cautious ex-

pectations of recovery. It is also important

that the more positive assessment of the

economic climate is being made not only

by productive forces of the economy but

also by households. It should be noted

however that as observed in all the cor-

responding surveys conducted by IOBE

since 1985 election years are character-

ized by a systematic improvement in eco-

nomic sentiment and a rise in consumer

confidence, since in the period prior to

elections there is an improvement in the

expectations of consumers in particular.

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24

That is, the recovery seen in the past six

months is to some extent connected with

the pre-election period that began with

European elections and continued with the

calling of parliamentary elections in Octo-

ber. On the other hand, however, it

should be noted that the course of the

indicator in Greece is in line with the more

general European trend toward an im-

provement in expectations which, more-

over, began in exactly the same period

(April 2009).

Indeed, the corresponding European indi-

cators also showed an improvement in the

period July-September, with the relevant

indicator for EU-27 standing at an average

of 80 (up from 70 in the previous quarter

and 89 in the same period of 2008), which

is 20 points higher than the corresponding

Greek value. The improvement can now

be seen in most European countries, with

a rise in expectations in most economic

sectors, as well as among consumers,

with the result that corresponding expec-tations are being expressed regarding re-

covery and a slow but steady exit from

the crisis.

Overall, in the period July-September,

business expectations in Greece stood at

lower levels relative to the corresponding

period of last year, especially in Construc-

tion and Services, with the exception of

consumer confidence which, compared to

the previous year, showed a slight im-

provement. However, relative to the sec-

ond quarter of 2009, expectations rose in

all sectors in the third quarter, although

less markedly in Services, while there was

also a significant recovery of consumer

confidence. In greater detail:

Consumer Confidence recovered fur-

ther in the July-September quarter, with

the index for this period standing at an

average of -44, compared to -49 in the

April-June quarter. The corresponding av-

erage values of European indices for the

same period are much higher, at -19 and -

21 for the EU and Eurozone respectively,

as Greek consumers continue to express

greater pessimism relative to the majority

of European citizens. The recovery of ex-

pectations is important despite the fact

that to some extent it is explained by the

pre-election period, since it peaked in

September to register the highest valuefor consumer confidence since April 2008.

Of the separate components that make up

the relevant index, the most positive con-

tribution in the three-month period July-

September came from consumers fore-

casts concerning the financial situation of

their households over the next 12 months,

as well as their expectations regarding the

course of unemployment in the country,

which since the beginning of the year had

contributed to the sharp deterioration of

consumer confidence. From July onward,

the very negative expectations regarding

the economic situation in the country also

moderated, while a further interesting de-

velopment is the weakening of propensity

to save during the coming 12 months.

Nevertheless, it should be noted that the

aforementioned improvements do not

change the direction of expectations,

which remain negative but less pessimis-

tic.

Also of interest are the monthly data of

the survey of consumers with respect to

their assessments of the current financial

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25

situation of their own household. More

specifically, from the available data for the

period January-September 2009, it

emerges that the proportion of consumers

reporting that they were indebted in the

period in question was between 9.5%-

13%, whilst for the same period, the per-

centage of those stating that they were

saving small or large amounts was double

on average, reaching 28%, without falling

below 25% in any one month. In addition,

according to the same survey, the major-

ity of consumers (52% on average in the

period January-September 2009) reported

that they were just making ends meet,whilst lastly 8% said they were dip-

ping into their savings.

In Industry, the Confidence Indicator in

the period July-September reached almost

77, compared to 72 in the period April-

June, but was lower relative to the corre-

sponding performance of the previous

year (93). However, with the exception of

July, when the indicator fell slightly, its

course since March has been steadily up-

ward. Compared to the immediately pre-

ceding quarter, most sub-indices of busi-

ness activity in the period July-September

2009 showed an improvement. More spe-

cifically, the negative expectations regard-

ing levels of demand and orders from the

domestic market moderated, resulting in a

slight improvement in forecasts for pro-

duction and 54 percent of businesses an-

ticipating stabilization. Inventories appear

to be less inflated in this period, with 64%

of businesses estimating them to be at

normal levels for the time of year. On theother hand however, the number of

months of assured production has not

changed, remaining at around four, whilst

the capacity utilization rate remains at an

average of 71%, i.e. at the relatively low

levels at which it has stayed since the be-

ginning of the year.

Figure 2.3

Consumer survey data on their households financial situation

(January September 2009)

We save a lot

3%

Dipping into

savings

8%

Indebted

11%

Do not know

1%

Making ends

meet

52%

We save a little

25%

Source:

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26

Despite the considerable improvement,

projections regarding the course of em-

ployment remained negative (with the

relevant balance at -13), which reflects

the loss of jobs in the sector. Deflationary

expectations were maintained in the pre-

vious quarter but have normalized some-

what, with the relevant balance standing

at -5 on average.

Business expectations in Retail Trade

also rose in the third quarter of 2009, with

their recovery from April onward being

constant, following their sharp deteriora-

tion at the beginning of the year. In the

three-month period July-September, the

Confidence Indicator stood at 90 on aver-

age, up from 79 in the second quarter,

which is slightly lower relative to the cor-

responding period of the previous year

(98). With the exception of the outlook for

orders and sales, where the relevant indi-

ces showed a deterioration relative to the

second quarter, the individual components

of business activity registered a rise.Thus, the balance of estimates of current

sales rose sharply, by 38 points, to stand

at +12, whilst inventory levels dropped

markedly following their liquidation in the

sales period. In terms of prices, the

strongly downward trend normalized, al-

though expectations of price reductions

continued to significantly outweigh expec-

tations of price increases. Lastly, in terms

of employment, the relevant balance of

expectations almost doubled in the period

July-September to reach +14, which

means there is a supply of new jobs,

whilst the other sectors of the economy

have been hit by job losses.

In Construction too,an improvement in

expectations was seen in the third quarter

of 2009 relative to the previous period.

Despite this, the recovery is more con-

strained compared to Industry and Retail

Trade, since the relevant index rose by

just 3 points to stand at 65. It is worth

noting that in the corresponding period of

the previous year it stood much higher, at

102. The improvement was the result of

more favorable expectations mainly in Pri-

vate Sector Construction, since the rele-

vant index for Public Sector Construction

remained unchanged in the third quarter

relative to the second. The sharp fluctua-tions have constituted a basic feature of

the sector for the past two years. Never-

theless, in the third quarter the changes in

all the sub-indices of activity were posi-

tive. Assessments regarding the current

work schedule of companies showed a

marked improvement, with negative esti-

mates changing from -21 to -5, whilst the

very negative forecasts regarding their

upcoming projects also moderated. The

number of months of assured activity thus

rose to 17, the same level as in the corre-

sponding quarter of 2008 (and up from 15

in the second quarter). On the other

hand, however, the stabilization of senti-

ment has not affected employment, where

the negative expectations improved by

only 4 points (to -31), which means that

job losses are continuing at the samepace. Against this background, the per-

centage of companies reporting that they

were not facing any obstacles to their

construction activities remains very low at

12% (21% in the third quarter of 2008),

with those having a different view citing

insufficient demand (34%), lack of financ-

ing (23%) and factors connected with the

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27

recent economic crisis (30%) as the main

obstacles to their operation. Meanwhile,

the low demand continues to keep prices

down, with 36% of companies expecting

further decreases (against 40% in the

previous quarter).

Figure 2.4

Business Confidence Indicators1

Industry(1996-2006=100)

60

70

80

90

100

110

120

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Total Industry

Average (2001-2008)

Construction(1996-2006=100)

50

60

70

80

90

100

110

120

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Total Construction

Average (2001-2008) Retail TrRetail TrRetail TrRetail Tradeadeadeade (1996-2006=100)

50

60

70

80

90

100

110

120

130

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Total Retail Trade

Average (2001-2008)

ServicesServicesServicesServices (1998-2006=100)

60

70

80

90

100

110

120

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Total Services

Average (2001-2008)

1. In the calculation of Business Confidence Indicators a period - base is used, instead of a year- base. Thus the Confidence Indicators

of Industry, Construction and Retail Trade sectors are calculated under a common period - base(1996-2006=100) and the Indicator

of the Services sector under the period base 1998-2006=100, as there are no available data before 1998. This change allows a

more precise imprinting of fluctuations of expectations in a long-term period, while at the same time it allows the construction of

comparable sub sector confidence Indexes.

Source:

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28

In contrast with the other sectors, in Ser-

vices the Confidence Indicator in the third

quarter of the year remained at roughly

the same levels (marginally higher) as in

the second quarter, compared to 97 in the

corresponding period of the previous year.

Regarding the various sub-indices that

track business activity, estimates of the

course of demand in the third quarter de-

teriorated relative to the previous quarter,

with the value of relevant negative bal-

ance doubling to -14 points. Forecasts for

employment in the sector also remain

firmly in negative territory, while expecta-

tions regarding a reduction in price levelsnormalized somewhat. On the other hand,

the changes recorded in assessments by

businesses of their present situation were

positive, while estimates of current de-

mand also improved, with 20% of firms

reporting that it has risen and 51% antici-

pating no change (against 48% in the

second quarter). Lastly, the proportion of

companies reporting that their business

activity is being conducted without obsta-

cles remains at 32%, as in the previous

quarter (against 47% in the correspond-

ing period of 2008), with insufficient de-

mand cited as the biggest obstacle to

their operation (32%). Consequently, Ser-

vices is the sector where in contrast

with the others no improvement has

been recorded, since although assess-

ments of the current situation appear tobe more favorable, expectations for the

coming quarter are more pessimistic rela-

tive to the April-May period.

B) Liquidity Conditions

According to the latest available data of

the Bank of Greece, credit expansion to

households and businesses in August this

year stood at 6%, compared to a rate ofapproximately 16% in December 2008

(See Table X). Despite the fact that this

rate of credit expansion is much higher

than the corresponding rate in the Euro-

zone, the comparison with the high rates

of the past and particularly bearing in

mind the more general conditions of stag-

nation prevailing in the Greek economy

has created the sense of a credit crunch in

the private sector.

In view of this, the following question may

be asked: given that liquidity conditions

have to a great extent been restored in

the banking system, not only through the

provision of liquidity to banks from the

European Central Bank (ECB) but also the

renewed ability of banks to raise funds on

the market through bank bonds, why arethe rates of credit expansion to busi-

nesses and households on the decline?

The answer to this question has two

parts, one on the demand side and one on

the supply side. First, because demand for

credit from parties in the economy has

fallen. This has happened not because

lending rates have risen (as can be seen

in Tables 2.8 and 2.9, lending rates havedeclined to pre-crisis levels, with the ex-

ception of consumer loan interest rates),

but due to the stagnation of economic ac-

tivity. That is, since the rates of change of

consumption, investment and exports

have decreased, and expectations for the

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29

future are still more or less unfavorable, it

is only logical that demand for the financ-

ing of these activities has declined too.

Second, the supply of credit from banks to

the private sector of the economy has

been negatively affected because (a) risk

premiums have increased on account of

the crisis (e.g. rise in doubtful debts due

to the stagnation of economic activity)

and (b) it is considered relatively safer to

invest in Greek government bonds, the

return on which has also risen due to the

financial crisis.

The liquidity conditions in the economy as

a whole differ markedly from those pre-

vailing in the private sector: As can be

seen in Table 2.10, according to the latest

available data of the Bank of Greece for

the month of July of the current year, the

annual rate of change of credit expansion

to the economy as a whole was 9.4%

(against 6.6% to the private sector). This

is due, as also emerges from Table 2.10,

to the large increase in the rate of changeof credit expansion to the public sector of

the economy, which has stood at around

30% for the greater part of the current

year, as a result of the widening of fiscal

deficits.

The yield curve as shaped today, which

has been affected by the expansionary

monetary policy of the ECB in conjunction

with the more general economic condi-

tions, favors the placement of bank liquid-

ity in Greek government bonds. Such an

investment facilitates the operating result

of banks and improves their capital ade-

quacy indicators, which have been nega-

tively affected by the recent adverse eco-

nomic developments. Moreover, the more

general trend being shaped internationally

toward the assumption of smaller risks on

the part of banks and higher capital

(lower leverage) is negatively affecting

the supply of credit to a number of sec-

tors of the economy.

On the other hand, of course, the high

public deficit contributes to the growth of

total demand in the economy, although in

small open economies such as Greeces, a

significant proportion of this demand is

lost abroad in the form of imports. One

factor that contributes to this phenome-

non is the low competitiveness of domes-

tically produced goods and services.

In conclusion, current conditions cannot

be considered normal. The economic sys-

tem, including the financial, is in a period

of adjustment, in which all player are try-

ing to improve their capital adequacy andemerge from the crisis unscathed. Eco-

nomic policy must contribute in a con-

structive way to this adjustment and the

restoration of balance. Fiscal adjustment

can, and must, facilitate structural ad-

justment, which constitutes the only re-

maining catalytic element for the creation

of conditions of healthy economic growth.

Conditions are difficult, but not unprece-

dented. The Greek economy adjusted in

the 90s and key targets were achieved,

from a starting point that was perhaps

more unfavorable than todays.

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30

Table 2.7

FINANCING TO DOMESTIC ENTERPRISES AND HOUSEHOLDS (1),(2),(3)

(Outstanding balance and net flow in mil.)DEC.2008

JUNE2009

JULY2009

AUG.2009

. AGGREGATES

Outstanding balance 249.661 249.676 250.473 250.707Monthly net flow 1.951 1.062 847 912

% 12-month change 15,9% 7,4% 6,6% 6,0%

. ENTERPRISES

Outstanding balance 132.458 131.690 132.140 132.234

Monthly net flow 1.277 602 464 804

% 12-month change 18,7% 8,6% 7,9% 7,3%

1. Agriculture


% 12-month change 20,3% 6,9% 7,0% 3,5%

2. Industry


% 12-month change 15,8% 2,5% 0,9% 0,2%

3. Trade


% 12-month change 19,5% 10,9% 10,0% 7,8%

4. Tourism


% 12-month change 19,7% 9,4% 8,3% 6,4%

5. Shipping


% 12-month change 17,2% 10,3% 9,4% 7,1%

6. Other MFIs*


% 12-month change -8,7% -8,4% -10,4% 5,0%

7. Construction


% 12-month change 35,2% 10,8% 9,4% 5,1%

8. Electricity - Gas Water Supply


% 12-month change 29,8% 16,0% 14,3% 14,2%9. Communication and Transport (excl.

water transport)


% 12-month change 26,8% 12,8% 21,6% 21,2%

10. Other branches


% 12-month change 23,4% 15,0% 15,2% 12,7%

. HOUSEHOLDSOutstanding balance 117.203 117.986 118.334 118.472

Monthly net flow 674 460 383 108

% 12-month change 12,8% 6,2% 5,2% 4,7%

1. Housing



% 12-month change 11,5% 6,0% 5,2% 4,8%

2. Consumer

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31



% 12-month change 16,0% 7,1% 5,8% 4,8%

3. Other


Monthly net flow 24 1 -63 -25

% 12-month change 9,5% 0,9% -1,2% -1,3%

*Monetary Financial Institutions(1) Outstanding balances include loans, corporate bonds, security loans and security corporate bonds.(2) For the calculation of the financing net flow and rate of change at a certain (monthly or 12-month) period, loan write-offsand upward (downward) currency changes from euro appreciations (depreciations) are added to the outstanding balancechanges of the same period. On 2009, domestic MFIs transferred corporate bonds and loans of 4 bil. worth to their subsi-dies outside Greece. Because of the fact that these transactions have a lowering impact on outstanding balances, as they ap-pear at the MFIs balance sheets, the calculation of financing net flows and rates of change was made after subtracting theaforementioned sum, although these transfers do not influence domestic enterprises financing.(3) Revised dataSource: Balance of Payments Bulletin, Bank of Greece, August 2009

Table 2.8

Interest rates on new euro-denominated loans by Greek MFIs*to non-financial corporations

Loans up to eur. 1 mil. Loans over eur. 1 mil.

Floating rate or fixed

up to 1 year

Floating rate or fixed

up to 1 year

2007 6,57 5,32

2008

January 6,66 5,48

February 6,62 5,32

March 6,65 5,68

April 6,79 5,66

May 6,83 5,64

June 6,91 5,82

July 7,03 6,05

August 7,11 5,82

September 7,24 6,04

October 7,40 6,31

November 6,40 5,60

December 6,18 5,07

2009

January 5,45 4,24

February 4,99 4,12March 4,71 4,10

April 4,36 3,79

May 4,56 3,59

June 4,59 3,33

July 4,33 3,44

*Monetary Financial InstitutionsSource: Bank of Greece, Bulletin of Conjunctural Indicators, August 2009

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32

Table 2.9

Aggregate rates on new euro-denominated loans by domestic MFIs to households, 2008

Housing Loans(aggregate of loans)

Consumer Loans(aggregate of loans)

With charges(APRC*)

Withoutcharges

Withoutcharges

With charges(APRC*)

2007 4,93 4,46 8,46 10,392008

January 4,87 4,39 8,49 10,48

February 4,93 4,40 8,60 10,59

March 4,91 4,47 8,59 10,41

April 5,07 4,50 8,72 10,95

May 5,14 4,57 8,88 11,29

June 5,30 4,68 8,78 10,89

July 5,39 4,83 9,01 11,04

August 5,48 4,98 8,99 11,11

September 5,63 5,03 9,08 10,96

October 5,73 5,35 9,38 11,63

November 5,76 5,30 9,50 11,61

December 5,54 5,21 9,46 11,59

2009

January 5,21 4,97 9,82 11,70

February 4,76 4,65 9,81 11,89

March 4,36 4,32 9,71 11,87

April 4,25 4,11 9,72 11,73

May 4,10 3,97 9,14 11,44

June 4,00 3,86 8,93 11,44

July 3,83 3,68 9,09 11,40

*Annual Percentage Rate of ChargeSource: Bank of Greece, Bulletin of Conjunctural Indicators, January-February 2008 and August 2009

C) Fiscal Developments

As stressed in IOBEs previous quarterly

report, the Greek economy is running the

risk of a severe fiscal crisis. Although the

available official data relating to fiscal de-

velopments cover the first half of 2009,

current indications lead to the conclusion

that the countrys fiscal position is deterio-

rating.

On the basis of these available data and

present indications concerning the course

of economic activity, it is possible to pro-

ject the likely outcome of revenue and

expenditure of the general government

budget up to the end of the year.

More specifically, on the basis of official

data, the revenue of the regular budget in

the first half of 2009 showed a decline of

7% relative to the corresponding six-

month period of 2008. This development

is particularly worrying if one takes into

account that the rate of change in eco-

nomic activity in this period was positive,

although close to zero. Moreover, in the

first half of 2009 the tax collection mecha-

nism could operate effectively, since there

was no likelihood of elections at the time.

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In the second half of 2009, developments

appear to be less favorable, at least up to

the present time. On the basis of all the

estimates of international organizations,

as well as announcements made by the

National Statistical Service of Greece, the

rate of change in economic activity in the

second half of the year will be negative.

In addition, one must also take into con-

sideration that once elections are called,

the tax collection mechanism slackens and

it will be difficult for it to revert to normal

operation before the end of the year. It is

therefore reasonable to assume that the

performance of the tax collection mecha-nism will not be better in the second half

of the year, unless the new government is

able to reverse the trend in the last two

months. On the other hand, sizeable reve-

nue is expected to be collected around the

end of the year from the flat-rate property

tax (ETAK) and higher road tax. Conse-

quently, one may assume that a decrease

in revenue of around 5% in the second

half will not be far from reality. This

means that on an annual basis, regular

budget revenue will fall by about 6% rela-

tive to th

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