Primary surplus vs the liquidity of the greek banking system

Piraeus Bank Economic Research & Investment Strategy

Ilias Lekkos

[email protected]

Irini Staggel

[email protected]

Anastasia Aggelopoulou [email protected]

Piraeus Bank

94, Vas. Sofias Ave. & 1, Kerassountos str.,

115 28 Athens

tel: (+30) 210 328 8187

fax: (+30) 210 373 9580

Primary surplus vs liquidity of the Greekbanking system

Already during the first years of the bail-out programme, we

had highlighted to several of our interlocutors (including the

technical staff of the institutions) that an unintended but

serious side-effect of forcing Greece to achieve high primary

surpluses, which were to be used exclusively for the

repayment of the Greek state’s external debt, would be

reducing bank deposits and depriving the Greek banking

system of an equivalent amount of liquidity. The front-loaded

achievement of a substantial primary surplus in 2016 offers a

first-class opportunity to prove the validity of our arguments,

the credibility of which was questioned by almost everyone.

Before setting forth we would like to clarify that the liquidity

outflow is attributed neither to the obligation of the Greek

state to achieve high primary surpluses nor to its obligation

to use said surpluses for the repayment of its debt. It is

attributed to using said surpluses to repay external debt.

But let's take things from the beginning. Under a capital

controls regime the liquidity of the Greek economy can be

compared to a closed and fully controlled system, in which

the change of deposits over the year should be equal to the

algebraic sum of new inflows minus new outflows. Taking as

a starting point the deposits of December 2015 amounting to

€133.8bn, in 2016 the total inflows amounted to €15.9bn

compared to just €2.5bn of outflows due to the deleveraging

of the Greek economy. Still, deposits increased by just €5.5bn

(before the adjustments for the reclassification of deposits of

the Hellenic Deposit and Investment Guarantee Fund “TEKE”

and the Consignment Deposits and Loans Fund). Until a few

days ago, i.e. until the publication of the primary surplus

outcome by the Hellenic Statistical Authority, the gap of € 7-

8bn had been challenging our calculations. Following the

publication of the General Government fiscal accounts,

however, the data fully agree with just a small deviation of

approximately €1bn.

1

ECONOMIC RESEARCH & INVESTMENT STRATEGY

May 2017

Liquidity Changes (in € bn)

Sources: Bank of Greece, ELSTAT, MinFin, Piraeus bank research

An alternative and very easy way to double check whether using surpluses to serve the external debt

leads to a decrease in deposits is by comparing the composition as well as the level of funding needs of

the Greek state to the relevant sources that provide said financing. Under the memorandum of 2015, the

Greek state had to repay in 2016 obligations amounting to a total of €17bn in view of which the state had

planned receiving €16.4bn from the programme and further EUR 1.3bn from privatisations. Yet the total

financing was eventually limited to EUR 10.3bn as the last tranche of the programme amounting to €6.1bn

was not disbursed and the revenues from the privatisations were also not collected. Still, the Greek state

was able to pay all its obligations as the amount of €7.4bn (€6.1bn +€1.3bn) that was not disbursed was

finally covered to its largest part by the primary surplus. The result of this was a liquidity outflow

amounting to approximately €7bn.

Last but not least, we would like to stress out that despite the fact that the aforementioned analysis

focuses on the development of deposits in 2016, its conclusions are not limited to 2016 but have a

general validity and provide a guide to future developments. In brief, the core of our arguments can be

summarised as follows: For each year from now on, the starting point for the calculation of deposits and

liquidity should be the deposits of the previous year reduced by the amount of the target for the primary

surplus. The fact that from 2018 on the surplus target shall amount to 3.5% of GDP translates into an

annual deposit outflow of approximately €6.5bn. Whether or not the banking system can, year after year,

come up with sufficient alternative sources of funding to counterbalance its negative starting point and

improve its liquidity remains one of the biggest challenges for all parties involved.

2

Tables & Charts

3

Greece: Economic Activity

1. Real GDP (% change) 2. Nominal GDP (% change)

3. Contribution of the main GDP components to the economic growth

4. Contribution of the domestic demand components to the economic growth

5. Gross Saving Ratio (households, % of disposable income)

6. Households’ Gross disposable income & Consumption

Source: ELSTAT, Economic Research & Investment Strategy

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

4

Greece: GDP components

1. Real GDP (€ bn)2. Gross Fixed Capital Formation

(2010 prices, € bn)

3. Private Consumption (2010 prices, € bn) 4. Public Consumption (2010 prices, € bn)

5. Imports of goods & services (2010 prices, € bn)

6. Exports of goods & services (2010 prices, € bn)


5

Greece: Prices

1. Real vs Nominal GDP (annual % change) 2. GDP deflator vs CPI (annual % change)

3. Effect of tax changes 4. Inflation (CPI & HICP, annual % change)

Source: ELSTAT, Eurostat, Economic Research & Investment Strategy

6

Greece: Labour Market

1. Unemployment Rate (nsa data) 2. Unemployment Rate

3. Employment (nsa data)4. “ New” & Long – term unemployed*

(nsa data, thousands of persons)

* “new” unemployed: first time entering the labour market** long –term unemployed: seeking a job for >= 12 months


7

Greece: Short - term indicators

1. Industrial Production Index(sa data, annual % change)

2. Volume Indices in Retail Trade (annual % change)

3. Contribution of the main components to the Production Index in Construction (PIC)

4. Number of Building Permits (nsa data, annual % change)

5. Turnover Index in Wholesale Trade (sa data, annual % change)

6. Turnover Index in Services, excl. trade & vehicles (sa data, annual % change)

Source: ELSTAT, Eurostat, Economic Research & Investment Strategy 8

Greece: State Budget Execution

Source: Ministry of Finance, Economic Research & Investment Strategy

1/ Budget targets, according to the total estimates as depicted in the 2017 Budget introductory report. 2/ The total revenue and expenditure outcome is preliminary and will be finalized after the vote of 2016 annual budget report (for both revenue and expenditure). 3/ Annual estimates as depicted in 2017 Budget introductory report, without the settlement program of previous years arrears.4/ Line "Revenue before Tax Refunds" includes Interest Revenue from guarantees called, for comparability purposes. 5/ Privatization proceeds includes only non financial transactions.6/According to the 2017 Budget Introductory Report, subsidies to entities for wages in Ordinary Budget are accounted in "Operational and other expenditures" and expenditure on ESY doctors on-call duty and EKAB doctors on-call duty, are accounted in "Grants to Social Security Sector" and in "Operational and other expenditures" respectively. 7/ Amounts on a gross basis, for comparability purposes.8/Elements are fiscally neutral on a General Government basis.

2016 2017 2016 2017

Jan.- Mar. Jan.-Mar.Budget

Estimates 2017 1/ Difference Outcome /2 Budget Estimates

2017 /3

1 Ordinary Budget (a) (b) (c)=(b-a) (d) (e)=(b-d) (f) (g)

2 Net Revenue (1+2-3) 10,944 10,766 -178 11,629 -863 49,982 50,374

3 1.Total Revenue before Tax Refunds /4

(Recurring & Non-Recurring)11,665 11,717 54 11,037 680 53,140 51,619

4 Recurring Revenue 11,181 11,269 88 10,635 633 52,336 51,001

5 Direct Taxes 3,874 3,509 -365 3,212 296 21,839 20,4156 Indirect Taxes 5,691 6,007 316 6,076 -69 25,680 26,4437 Total Non-Tax Revenue 1,617 1,753 136 1,347 406 4,816 4,143

8 Non-Recurring Revenue 483 449 -34 402 47 804 618

9Revenue of incorporated off-budget

accounts63 69 6 57 12 304 273

10 Liquidity Support Plan Proceeds 18 0 -18 0 0 96 0

11 NATO income 28 35 7 0 35 30 0

12 ANFA & SMP Revenue 375 345 -30 345 0 375 345

13 2. Privatization proceeds /5 41 63 22 1,354 -1,291 106 2,044

14 3. Tax Refunds 762 1,014 252 762 251 3,263 3,289

15 Expenditure (1+2) 12,513 12,416 -97 13,172 -756 50,683 49,536

16 1. Primary expenditure 10,056 9,982 -73 10,772 -790 45,106 43,98617 (a) Salaries & Pensions /6 4,482 2,982 -1,500 3,081 -99 18,065 12,337

18 (b) Grants to Social Security Sector /6 3,029 4,472 1,443 4,738 -266 15,630 20,210

19(c) Operational and Other Expenditures

& Earmarked Revenues /6 1,691 1,778 87 2,340 -562 8,557 8,873

20 Sub-total (a+ b+c) /6 9,202 9,232 30 10,159 -927 42,253 41,420

21 Contingency Reserve 0 0 0 75 -75 0 1,000

22Payments for military equipment

procurement (cash basis)15 86 71 10 76 584 475

23 Guarantees Called to bodies 293 471 178 508 -37 1,651 1,017

24classified inside the General Government

(gross basis)/7 290 468 178 474 -6 1,619 876

25 classified outside the General Government 3 3 0 34 -31 32 141

26Debt assumptions of General

Government bodies /8 544 192 -352 0 192 553 0

27Disbursement fee to banks, EFSF and

other government debt expenses1 1 0 20 -19 65 75

28 2. Net interest payments 2,457 2,434 -23 2,400 34 5,577 5,550

29 Ordinary Budget Balance -1,569 -1,650 -1,543 -701 838

30 Public Investment Budget31 Net Revenues 1,554 651 -903 786 -135 4,178 4,15532 Expenditure 580 366 -214 651 -285 6,288 6,750

33 Public Investment Budget Balance 974 285 135 -2,110 -2,595

34 State Budget Net Revenue 12,498 11,417 -1,081 12,415 -998 54,161 54,529

35 State Budget Expenditure 13,093 12,782 -311 13,823 -1,041 56,970 56,286

36 State Budget Balance -595 -1,364 -1,408 -2,810 -1,757

37 State Budget Primary Balance 1,863 1,070 992 2,767 3,793

State Budget Execution 2017

million € Difference

Jan.-17

9

Greece: Bonds & Loans Maturities (as of May. ‘17)

Source: MinFin, Bloomberg, EFSF, ESM, IMF, Economic Research & Investment Strategy

*Figures do not include T-bills and approx. €26 bn related to Bank of Greece loans, special and bilateral loans, other internal and external loans, repos and external securitizations. Moreover notes amounting to €5.4 bn that have been disbursed for funding bank recapitalisation are not included. The amount was disbursed pro rata in ESM floating rate notes and the final maturity will be in line with the maximum weighted average loan maturity of 32.5 years.

10

Greece: Balance of Payments

Source: Bank of Greece, Economic Research & Investment Strategy

*(+) increase ( - ) decrease According to the new BPM6, an increase /decrease of assets receives a positive/negative sign and an increase/decrease of liabilities

receives a positive/negative sign. **(+) increase ( - ) decrease According to the new BPM6, an increase /decrease of reserve assets receives a positive/negative sign.

*** Reserve assets, as defined by the ECB, only include monetary gold, the reserve position at the IMF, special drawing rights and the Bank of Greece's claims in foreign

currency on residents of countries outside the euro area. Conversely, reserve assets do not include claims in euro on residents of countries outside the euro area, claims

in foreign currency and in euro on residents of euro area countries and the Bank of Greece's participation in the capital and the reserve assets of the ECB.

1 mn €

2 2015 2016 2017 2015 2016 2017

3 I CURRENT ACCOUNT (I.A + I.B + I.C + Ι.D) -1,688 -1,599 -1,208 -1,431 -828 -937

4 GOODS AND SERVICES (I.A + I.B) -2,189 -2,184 -2,442 -1,204 -1,282 -1,313

5 I.A GOODS ( I.Α.1 - I.Α.2) -3,019 -2,587 -3,099 -1,586 -1,448 -1,638

6 OIL balance -602 -371 -724 -332 -223 -444

7 Ships' Balance -156 -9 -19 -97 -2 -27

8 BALANCE OF GOODS excl. oil & ships -2,261 -2,208 -2,355 -1,157 -1,223 -1,167

9 I.A.1 Exports 3,814 3,501 4,134 1,972 1,833 2,047

10 Oil 1,000 747 1,242 555 383 583

11 Ships 54 13 54 17 5 5

12 Goods excl.oil & ships 2,759 2,740 2,837 1,400 1,444 1,459

13 I.A.2 Imports 6,832 6,088 7,232 3,558 3,281 3,685

14 Oil 1,602 1,118 1,966 887 606 1,028

15 Ships 210 22 73 114 8 31

16 Goods excl. oil & ships 5,020 4,948 5,193 2,557 2,667 2,626

17 I.B SERVICES ( I.Β.1 - I.Β.2) 830 403 656 382 166 325

18 I.B.1 Receipts 3,080 1,886 2,288 1,482 994 1,108

19 Travel 312 319 310 143 150 145

20 Transportation 2,047 1,077 1,279 995 598 625

21 Other services 720 490 699 344 246 338

22 I.B.2 Payments 2,250 1,482 1,632 1,100 827 783

23 Travel 297 273 246 139 143 97

24 Transportation 1,113 668 766 521 351 387

25 Other services 840 541 619 440 333 300

26 I.C PRIMARY INCOME (I.C.1 - I.C.2) 531 548 911 -117 407 261

27 I.C.1 Receipts 2,267 1,697 1,957 1,123 1,326 1,049

28 Compensation of employees 30 17 21 16 9 9

29 Investment income 769 608 563 386 291 282

30 Other primary income 1,469 1,073 1,373 722 1,027 757

31 I.C.2 Payments 1,736 1,149 1,046 1,240 919 788

32 Compensation of employees 108 33 43 48 16 22

33 Investment income 1,538 1,056 961 1,128 850 739

34 Other primary income 90 60 43 63 53 27

35 I.D SECONDARY INCOME (I.D.1 - I.D.2) -30 36 323 -110 46 115

36 I.D.1 Receipts 657 465 673 318 393 323

37 General government 490 358 458 241 342 252

38 Other sectors 167 107 216 77 51 70

39 I.D.2 Payments 687 429 350 428 347 207


41 Other sectors 178 91 108 69 47 54

42 II CAPITAL ACCOUNT (II.1 - II.2) 159 632 253 109 244 212

43 II.1 Receipts 199 674 275 127 264 218


45 Other sectors 10 7 8 5 3 3

46 II.2 Payments 40 42 23 18 20 6


48 Other sectors 39 42 22 17 20 6

49 CURRENT ACCOUNT AND CAPITAL ACCOUNT (I + II) -1,529 -968 -955 -1,322 -584 -725

50 III FINANCIAL ACCOUNT * (IIΙ.Α + ΙII.Β + ΙII.C + ΙII.D)-1,628 -519 -470 -623 -340 -224

51 III.A DIRECT INVESTMENT* 187 77 -66 89 35 91

52 Assets 345 260 283 169 121 170

53 Liabilities 157 182 349 80 86 79

54 III.B PORTFOLIO INVESTMENT* -5,296 2,282 -1,199 -8,817 1,189 -1,307

55 Assets -7,457 1,888 -946 -9,547 1,210 -1,272

56 Liabilities -2,161 -395 254 -730 21 35

57 III.C OTHER INVESTMENT* 3,172 -3,237 1,079 8,105 -1,967 1,081

58 Assets 12,216 -345 -805 2,779 -50 155

59 Liabilities 9,043 2,892 -1,883 -5,325 1,917 -926

60 ( Loans of general goverment ) -1,201 -467 -1,987 -760 -6 -1,981

61 III.D CHANGE IN RESERVE ASSETS ** 308 358 -283 0 403 -89

62 IV BALANCING ITEM ( Ι + ΙΙ - III + IV = 0 ) -99 448 485 699 244 501

63 RESERVE ASSETS (STOCK)* * * 5,723 6,442 6,561

BALANCE OF PAYMENTS (million euro)

(provisional data)

January-February February

11

Greece: Credit to the domestic Private Sector

(1) The outstanding amounts include loans and holdings of corporate bonds, irrespectively of whether they have been securitised.(2) As of December 2016, loans of the Consignment Deposits and Loan Fund are excluded from the domestic credit as the institution has been

reclassified from the financial sector to the general government sector.(3) Net flows and growth rates are calculated taking into account reclassifications and transfers of loans/corporate bonds, write-offs and exchange rate

variations.


1 JAN 2017 FEB 2017 MAR 2017

2 Ι. TOTAL

3 Outstanding amount of credit 193,986 194,048 193,033

4 Monthly net flow -885 -101 307

5 (%) 12-month change -1.6% -1.6% -1.3%

6 ΙΙ. CORPORATIONS


8 Monthly net flow -643 82 487

9 (%) 12-month change -0.5% -0.3% -0.1%

10 ΙΙΑ. NON-FINANCIAL CORPORATIONS



13 (%) 12-month change -0.5% -0.4% -0.2%

14 1. Agriculture


16 (%) 12-month change -0.4% -2.4% -3.4%

17 2. Industry


19 (%) 12-month change -2.6% -2.7% -2.1%

20 3. Trade


22 (%) 12-month change 1.0% 0.8% 2.5%

23 4. Tourism


25 (%) 12-month change 2.6% 2.5% 2.1%

26 5. Shipping


28 (%) 12-month change -1.2% -0.1% -1.7%

29 6. Construction


31 (%) 12-month change -1.5% -1.3% -2.9%

32 7. Electricity - Gas - Water


34 (%) 12-month change 1.8% 1.1% 2.0%

35 8. Storage and Transport services excl. Shipping


37 (%) 12-month change 4.7% 8.4% 8.8%

38 9. Remaining sectors


40 (%) 12-month change -1.2% -0.7% -0.4%

41 ΙΙΒ. INSURANCE CORPORATIONS & OTHER FINANCIAL INTERMEDIARIES



44 (%) 12-month change 0.1% 1.0% 1.8%

45 ΙΙI. SOLE PROPRIETORS & UNINCORPORATED PARTNERSHIPS



48 (%) 12-month change -2.0% -2.1% -1.4%

49 ΙV. INDIVIDUALS & PRIVATE NON-PROFIT INSTITUTIONS


51 Monthly net flow -221 -153 -257

52 (%) 12-month change -2.8% -2.7% -2.6%

53 1. Housing loans



56 (%) 12-month change -3.4% -3.3% -3.3%

57 2. Consumer credit



60 (%) 12-month change -0.7% -0.7% -0.7%

61 3. Other loans


63 Monthly net flow -4 2 -34

64 (%) 12-month change -9.7% -9.4% -5.3%

CREDIT (1),(2) TO THE DOMESTIC PRIVATE SECTOR

(Outstanding amounts and net flows (3) in EUR millions)

12

Greece: Deposits of Non MFIs in MFIs (excl. BoG)


(1) Excluding the Bank of Greece.As of December 2016, loans of the Consignment Deposits and Loan Fund are excluded from the domestic deposits as the institution has been reclassified from the financial sector to the general government sector.

(2) Net flows and growth rates are calculated taking into account reclassifications and transfers of loans/corporate bonds, write-offs and exchange rate variations.

1 JAN 2017 FEB 2017 MAR 2017

2 DOMESTIC RESIDENTS


4 Monthly net flow -1,567 -600 -398

5 (%) 12-month change 4.1% 4.0% 3.9%

6 1. General Government


8 Monthly net flow -34 150 -677

9 (%) 12-month change 16.3% 17.3% 13.1%

10 2. Corporations and Households (private sector)


12 Monthly net flow -1,534 -750 278

13 (%) 12-month change 3.1% 2.9% 3.1%

14 2.I. Corporations



17 (%) 12-month change 11.8% 10.3% 12.7%

18 2.I.Α. Non-financial corporations


20 Monthly net flow -760 -535 1,284

21 (%) 12-month change 16.3% 13.7% 18.4%

22 of which

23 1. Sight deposits

24 Outstanding amount 13,967 13,360 14,127


26 2. Time



29 2.I.Β. Insurance corporations, Pension Funds and other financial institutions


31 Monthly net flow 199 422 -695

32 (%) 12-month change -1.5% 1.2% -4.8%

33 of which




37 2. Time



40 2.II. Households and Non-profit institutions



43 (%) 12-month change 1.4% 1.5% 1.2%

44 of which




48 2. Savings



51 3. Time


53 Monthly net flow 199 -445 23

DEPOSITS & REPOS OF NON MFIs IN MFIs IN GREECE(1)

(Outstanding amounts and net flows (2) in EUR millions)

13

Greece: Piraeus Bank Corporate & Fixed Income Indices

1. Bond Indices Performance 2. PrB Government Bond Index

3. Interest Rate Curve 4. PrB Corporate Bond Index

Source: Bloomberg, Economic Research & Investment Strategy

-2 0 2 4 6 8 10

Piraeus Bank Corporate ex FinancialsBond Index

Piraeus Bank Government Bond Index

Bloomberg Corporate High Yield BondIndex

Bloomberg Government Bond Index

MoM YtD

-250

-200

-150

-100

-50

0

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

8.50

9.00

3Y

R

5Y

R

9Y

R

10

YR

11

YR

12

YR

13

YR

14

YR

15

YR

16

YR

17

YR

18

YR

19

YR

20

YR

21

YR

22

YR

23

YR

24

YR

25

YR

26

YR

27

YR

28

YR

bpspercentage

points

Maturity (in years)

Change (RHS) 31/03/17 30/04/17

0

2

4

6

8

10

12

14

16

90

95

100

105

110

115

120

125

130

135

Jan

-13

Fe

b-1

3

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct-1

3

No

v-1

3

Jan

-14

Ma

r-1

4

Ma

y-1

4

Jul-

14

Au

g-1

4

Oct-1

4

De

c-1

4

Fe

b-1

5

Ap

r-1

5

Jun

-15

Jul-

15

Se

p-1

5

No

v-1

5

Jan

-16

Ma

r-1

6

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct-1

6

De

c-1

6

Jan

-17

Ma

r-1

7

Price (LHS) Yield (RHS)

0

5

10

15

20

25

30

0

50

100

150

200

250

300

350

400

450

500

Ma

r-1

2

Ma

y-1

2

Jul-

12

Se

p-1

2

No

v-1

2

Jan

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct-1

3

De

c-1

3

Fe

b-1

4

Ap

r-1

4

Jul-

14

Se

p-1

4

No

v-1

4

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-

15

Se

p-1

5

De

c-1

5

Fe

b-1

6

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct-1

6

De

c-1

6

Ma

r-1

7

Price (LHS) Yield (RHS)

14

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The return on investments might be positively or negatively affected as a result of currency fluctuations, in case the figures are

denominated in a foreign currency (other than Euro).

Any forecasts in relation to future performance, may not be a reliable indicator of future performance.

The tax treatment of the information as well as transactions pertained in this document, depends on each investor's individual

circumstances and may be subject to change in the future. As a result, the recipient should seek for independent advice in

relation to the applicable tax legislation.

The distribution of the present document outside Greece and/or to persons governed by foreign law may be subject to restrictions

or prohibitions according to the applicable legislation. Therefore, the recipient of the present should seek for independent advice

in relation to the applicable legislation, in order to look into such restrictions and/or prohibitions.

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Primary surplus vs the liquidity of the greek banking system

Economy & Finance

Transcript of Primary surplus vs the liquidity of the greek banking system