What are the vulnerabilities of the Greek economy?

High medium-term risks for the debt, deterioration of foreign investments, high index of non-performing loans outside the banking sector, risk for unaffordable housing in an environment of increased uncertainties due to geopolitical tensions, the Commission for Greece finds in a report (in-depth review, IDR ) about the vulnerabilities of the Greek economy.

The public debt ratio declines after 2020 but remains the highest in the EU, with short- and long-term risks assessed as low and medium-term risks high, the report said. Although a large share of public debt is held by official creditors and the maturity structure and interest rates protect it from market volatility, the still-high liability stocks can expose the economy to vulnerabilities that could lead to economic shocks. According to the Commission, the ratio of public debt to GDP will decrease to 152% in 2024, to 148% in 2025, to 131% in 2029 and to 116% in 2034, but it will continue to be high.

For the country’s net international investment position (NIIP), the report says it improved marginally in 2023 after a strong increase in 2022, and remains the lowest in the EU. The large projected current account deficit (over 5% of GDP to 2025) means that NIIP is likely to deteriorate over the medium term.

Loans

Banks’ NPL ratio has fallen significantly to 5.7%, but remains the highest in the EU, the report’s authors say, and suggest organic measures, such as loan restructuring and internal loan arrangements, as a likely major driver of NPL reduction in the banking sector.

But the decline in NPLs outside the banking sector remains slow, standing at €69.5 billion (32% of GDP) in December 2023, and therefore still weighing on the economy, the report said.

The risks of NPLs shifted from the banking to the non-banking financial sector and the government, it is pointed out. At the same time, for banks it says their capital position remains among the lowest in the EU, quality concerns persist due to the high rate of deferred tax credits, while long-term profitability remains a concern.

While the risk to financial stability in the housing market appears limited, other affordability challenges are emerging as increases in house prices are significantly higher than those in incomes, it said. The Greek housing market has seen strong growth in recent years, with prices and demand rising, but in nominal terms and relative to the price-to-household income ratio, they are estimated to be overpriced by around 10% in 2023.

Financing

According to the report, access to finance remains a major barrier to corporate investment, especially for SMEs, competitiveness and low productivity remain a challenge, the strengthening of which is hindered by the persistently low level of productive capital accumulation.

While potential growth is estimated to be increasing, it remains low, estimated at 0.7% in 2023. Significant challenges are also found in the labor market with unemployment remaining among the highest in the EU. Sluggish female and youth employment rates remain a key challenge to maximize domestic labor supply.

According to the report, the main risk factors for the country’s economic outlook include deepening geopolitical tensions, prolonged trade disruptions due to the Red Sea crisis and a possible increase in energy prices. It is emphasized that prudent fiscal policy is expected to continue to support the rebalancing of the Greek economy, while the implementation of existing commitments in the RRP and, where necessary, additional steps, would support the reduction of long-term vulnerabilities.

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