BoG’s three scenarios on Greek recession

BoG’s three scenarios on Greek recession

The Bank of Greece has prepared three scenarios for this year’s economic slump due to the coronavirus, with the baseline pointing to a 5.8% fall, the mild one projecting a 4.4% drop and the adverse one, relating to a second wave of the pandemic, seeing a 9.4% contraction.

The forecasts, included in the monetary policy report of the central bank released on Monday, adjust those of Governor Yannis Stournaras in April for a drop of 4%-8%, but remain rather moderate. They do have their worrying aspects, with unemployment in the adverse scenario soaring to 24.3%.

According to the baseline scenario, the contraction this year will come to 5.8%, followed by a V-shaped 5.6% recovery in 2021 and 3.7% growth in 2022. The European Commission has predicted a 9.7% contraction this year in Greece.

The Bank of Greece’s “mild scenario,” referring to a smooth return to normality after this spring’s lockdown, provides for a 4.4% drop in the gross domestic product in 2020 before a 5.8% rebound in 2021 and 3.8% growth the following year. The adverse scenario of the central bank, incorporating a new wave of Covid-19 in Greece, projects a 9.45% decline of GDP in 2020, a 5.7% rise in 2021 and a 4.5% expansion in 2022.

The report also anticipates a fiscal deterioration, with a primary budget deficit of 2.9% of GDP this year.

The BoG further highlights the need for the use of “all European funding instruments available” so as to minimize the fiscal costs. Stournaras is therefore clearly in favor of the use of the precautionary credit line of the European Stability Mechanism, which Finance Minister Christos Staikouras appears to be avoiding for now.

The central bank also puts forward Stournaras’ proposal about the creation of a “bad bank” to contain nonperforming loans and tackle the problem of deferred tax assets, which as the report notes account for more than half of the banks’ capital and are expected to grow further.

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