Debt relief ‘still needed’ says Bank of Greece chief

Bank of Greece Governor Yannis Stournaras has called for a compromise between Athens and the troika in an interview with Sunday’s Kathimerini, while also insisting that the eurozone should provide Greece with further debt relief.

“It is in the interests of both the Greek side and the troika for there to be an immediate compromise based on current reality and common sense,” said Stournaras as Athens waits to see if its reform proposals will be accepted by its lenders so inspectors return to complete a review that has been on hold for several weeks.

Stournaras sided with the government over its insistence that there will not be a problem with a fiscal gap next year. The former finance minister pointed out that the troika has miscalculated Greece’s fiscal gap in the past. Instead, he said that the government should focus on strengthening tax collection, speeding up privatizations and promoting more liberalization measures.

However, he also disagreed with some European Union officials who have recently insisted that Greece will not need more debt relief to help its economy. He said that the eurozone should stick by its pledge at the Eurogroup on November 27, 2012 to lighten Greece’s debt load once it has achieved a primary surplus.

“I believe the further debt relief foreseen at that Eurogroup has to be implemented, along with the necessary fiscal adjustment, privatizations and reforms that help the growth prospects of the Greek economy,” he said.

“Firstly, because the sustainability of the current levels of public debt depend on a very high primary surplus (4.5 percent of gross domestic product) from 2016 onward. Secondly, because the lightening of the Greek debt load, according to the discussions at that Eurogroup, was also seen as a reward for Greece after a long and persistent fiscal adjustment.”

Stournaras played down fears that Greek banks would lose access to European Central Bank liquidity if Greece and the troika fail to agree on a new program or conditions for a precautionary credit line by January 1 but said this would not be a welcome option.

“In such a case liquidity will not be stopped but will be provided through Emergency Liquidity Assistance (ELA),” he said, adding that this would be a more expensive form of borrowing that would have an impact on the real economy. “Today Greek banks refinance their loans from the Eurosystem at a cost of about 0.05 percent. In the unwelcome case that they need to turn to ELA the cost will be around 1.55 percent.”

The central bank governor also welcomed the recent law on the settlement of nonperforming corporate loans, saying it is in the “right direction,” but added that for Greek lenders to play an effective role in the local economy, the remaining loans which are not being serviced would also need to be tackled.

“The supply of loans does not just depend on capital adequacy but also on banks’ liquidity as well,” said Stournaras. “Following their recent capital increases, banks have an adequate capital base but the pressure on their liquidity is still strong.

“The large amount of nonperforming loans are an important factor in shaping liquidity. That is why the effective management of these loans, based on best international practices, is vital in order for banks to support the real economy.”

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