The resurgence of capital inflows would have provided critical liquidity to the economy; however, the reduction in Eurosystem dependence has weakened the transmission mechanism
Solid progress in fiscal adjustment, the reversal of a large current account deficit, and a meaningful reduction in uncertainty attracted more than €50 bn of net capital inflows through the financial account of the balance of payments, as well as through the accumulated surplus in current account transactions (c. 27% of 2013 GDP).
This achievement is remarkable, as it occurs only two years after the peak of the crisis, which had been accompanied by massive outflows of private capital from the economy that cumulatively reached €115 bn during the period 2010-June 2012.
These inflows should have boosted the liquidity position of the economy, but it appears that only a small fraction of the capital inflows have actually reached the real economy, as reflected in the increase in private sector deposits by only €16 bn during the past 2 years.
Two interrelated processes are weakening the transmission of external financing to the economy:
- The ongoing deleveraging by healthy borrowers, which has reached €40 bn in net terms (i.e., adjusting for the accumulation of new loan provisions) in the period July 2012-July 2014.
- A sharp reduction in Greek banks' borrowing from the Eurosystem (by €91 bn), broadly equivalent to the sum of net inflows to the private sector through the current and financial accounts (€50 bn) and net deleveraging (€40 bn). This decline also reflects the preemptive adjustment by banks to the March 1 2015 ECB deadline that renders ineligible for use in Eurosystem operations about €26 bn of Greek banks' collateral (cash value) in the form of government guaranteed securities.
Though the repayment of ECB funding is a necessary eventuality, the pace may be too rapid, especially when the economy is recovering. Therefore, the adoption by the ECB of amendments to broaden collateral rules so as to eliminate a further constraint on Greek banks' access to Eurosystem financing would be highly supportive of liquidity generation and economic growth.
Τhe analysis also includes:
Overview of economic and fiscal developments in Greece and key macroeconomic forecasts.