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Alpha Bank Lecture SEESOX St. Antony’s College Oxford Monday 9 May, 2011

Alpha Bank Lecture SEESOX St. Antony’s College Oxford Monday 9 May, 2011. Greece 2020: Unlocking The Potential Of The Greek Economy. Michael Masourakis Chief Economist Alpha Bank. Ageing Population. Old age dependency ratio ( 65+ / ( 15-64) ). 24.3. 24.3. 21.1. 21.1. > 80. > 80.

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Alpha Bank Lecture SEESOX St. Antony’s College Oxford Monday 9 May, 2011

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  1. Alpha Bank Lecture SEESOX St. Antony’s College Oxford Monday 9 May, 2011 Greece 2020: Unlocking The Potential Of The Greek Economy Michael Masourakis Chief Economist Alpha Bank

  2. Ageing Population Old age dependency ratio (65+ / (15-64)) 24.3 24.3 21.1 21.1 > 80 > 80 7.5 7.5 6.8 > 80 > 80 Ageing And Unsustainability: Crime And Punishment! A pre-crisis long-run fiscal scenario 2010-2060 Retirement and Health Expenditure (as % of GDP) FDI & Exports (2007) FDI & Exports (2007) FDI & Exports (2007) as % of GDP as % of GDP Greece 24.1% Reduction of expenditure due to the overhaul of the social security system Without measures 11.7% 14.2% 6.4% 5.0% ΕU-12 2007 2060 Retirement Health Source: IMF, August 2009 Source: European Commission, The 2009 Ageing Report Deficit, Debt as % of GDP Time Deposits 63% 2009 2009 2010 2011 2012 2013 2014 Source: European Commission, Feb.2011 Source: European Commission, The 2009 Ageing Report

  3. Budgetary Derailment: Spending Other Peoples’ Money! Primary Deficit (General Government) FDI & Exports (2007) FDI & Exports (2007) Wages and Benefits / Taxes and Soc. Sec. Contributions in € bn State Budget Revenues 85.3% State Budget Primary Current Spending State Budget Investment Spending Other 2009 2010 2011B 2008 Source: Government Finance Statistics, Eurostat, European Commission, Feb.2011 Source: Budget 2011, Ministry of Finance Public Sector Employees by Economic Sector (2010) • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) Tax Revenue (2008) FDI & Exports (2007) FDI & Exports (2007) • Investment Driven Growth (%∆ YoY) % of GDP 374.4 th. 8.4 th. Personal Income 7.2 th. 19.4 th. 4.7 Corporate Income 23.1 th. 243.4 th. 13.5 th. Property 15.3 th. 16.5 th. Goods And Services 5.1 th. 130.4 th. 14.6 th. 6.1 th. 22 out of 100 employees in the public sector Social Security Contributions 31.9 th. 4.7 th. 5.2 th. 8.3 th. 16.9 th. Out of the total number of employees of each sector Source: Hellenic Statistical Authority Source: Revenue Statistics, OECD

  4. Revenue • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) FDI & Exports (2007) FDI & Exports (2007) Fiscal Consolidation: Seven Lean Years! The Fiscal Consolidation Effort, 2011-2015 Primary Deficit in € bn 5 0 Primary Deficit (General Gov.) -24 2008 2009 2011B 2010 Source: Hellenic Republic, Ministry of Finance, The Medium-Term Fiscal Strategy, 2012-15, 15 April 2011, http://www.minfin.gr/portal/en/resource/contentObject/id/44f0e4b9-5589-4778-bac0-296bf8ad4856 Source: Budget 2011, Ministry of Finance Expenditures Other 53.2% 50.2% as % of GDP 50.3% as % of GDP 49.2% Interest Other 42.7% Intermediate Consumption 40.6% 39.7% 37.8% Direct Taxes Compensation Of Employees Indirect Taxes Social Transfers Social Security Contribution 2008 2009 2010 2011 2010 2011 2008 2009 Source: The economic Adjustment Programme for Greece, Third Review, Government Finance Statistics Source: The economic Adjustment Programme for Greece, Third Review, Government Finance Statistics

  5. Privatization Strengthens Debt Sustainability Public Debt Sustainability Analysis Debt Dynamics: Skating On Thin Ice! Μακροχρόνιες Προοπτικές 2010-2060 Χωρίς Μεταρρυθμίσεις General Government Financing Requirements and Sources (without € 110 bn maturity extension) Εισροές Ξένων Άμεσων Επενδύσεων • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) Refinancing Needs FDI & Exports (2007) FDI & Exports (2007) FDI & Exports (2007) ΔΝΤ: Έλλειμμα, Χρέος και Ονομαστικό ΑΕΠ € bn With € 110 bn 3 ½ years maturity Troika Amortization Market Access 24.3 Interest 21.1 Primary Deficit Other Other 7.5 With €110 bn 7 ½ years maturity 2012 2010 2014 2011 2009 2013 2010 2011 2014 2009 2013 2012 Source: IMF, March 2011 Source: The economic Adjustment Programme for Greece, Third Review Public Debt Sustainability Scenarios as % of GDP as % of GDP 1 p.p lower primary deficit No privatizations € 11,8 δις Baseline Scenario Privatizations € 50 bn in 2011-2015 1 p.p. higher growth * Nominal growth rate: 3,5% * Primary surplus: 5,5% Source: The economic Adjustment Programme for Greece, IMF Source: IMF, March 2011

  6. ECB Funding Banking: Good Banks, Wrong Place, Wrong Time! Public and Private Debt Private sector loans and deposits FDI & Exports (2007) as % of GDP Loans/ Deposits- 125% Loans/ GDP- 112% Source: Thomson Datastream, Credit Suisse, Capital Economics, Alpha Bank Research Source: Bank of Greece Capital adequacy Core Tier 1 capital ratio Source: Financial reports and presentations of banks Source: National Central Banks, ECB, IIF calculations

  7. Structural Rigidities: Atlas Overwhelmed! Doing Business Rankings Competitiveness Index Scores Best score: 7 Source: The Global Competitiveness Report 2010-2011, World Economic Forum Source: Doing Business 2011, World Bank, International Finance Corporation Governance Corruption 2009-2010 1.94 1.91 1.87 1.71 1.04 0.64 72. Greece 0.39 0.12 0.05 -0.05 -0.41 -0.35 -0.52 -0.77 -0.93 -2.53 Source: The Global Competitiveness Report 2010-2011, World Economic Forum. Source: Governanance Indicators, World Bank

  8. Structural Reform: Greece In The Reformatory! • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) Labour market Pension reform Future Supply of New Homes Slows FDI & Exports (2007) FDI & Exports (2007) • Minimum wage down by 16% • Extension of probation period for new jobs to 1 yr. • Arbitration system: symmetric access & independence • Firm-level agreements over sectoral/occupational • Elimination of the possibility of the MoL to extend sectoral __& occupational collective agreements • Reduction in over-time payment for part-time jobs • Increase in temporal limits in use of temporary working __agencies • Tackle undeclared work • Containment of the long-run increase in pension costs __from 12.5 to under 2.5 pps of GDP • Retirement age for males and females at 65 yrs by 2015 – __increasing in line with life expectancy after 2020 • Pensions freeze for 2010-2013 • Pension funds will be merged in three by 2018 • Updated long term projections for pension expenditure by __March 2011 • Reform of the functioning of supplementary pension funds Source: Economic Reviews, European Commission Source: Economic Reviews, European Commission Liberalization of professions Future Supply of New Homes Slows State Owned Enterprises – Local Authorities • SOEs will be audited on a quarterly basis • The MoF’s special secretariat for SOEs is charged with the __overview of the restructuring • The MoF will revise Law 3429/05 on SOEs to ensure sound __corporate governance • Horizontal wage cut by 10% (+ wage ceiling) • Ceiling for extra payments at 10% of wage expenditure • Number of municipalities reduced to 325 from 1,034; __54 prefectures dissolved (their powers transferred to the __existing 13 peripheries) • Impacts 160 services sectors • General prohibition of unjustified restrictions • Special legislative action for the liberalisation of the __profession of notaries, lawyers, architects, mechanics and __actuaries • Legislative action by the MoH for the liberalisation of the __profession of pharmacists • Expected positive effects amounting to gains in GDP of __over 10% in the long run and a downward effect on prices __of around 7.2%. Source: Economic Reviews, European Commission Source: Economic Reviews, European Commission

  9. Key Privatization Initiatives: Ambitious Greece! Development of real estate assets Airports – Ports – Roads • Extension of the duration of the concession agreement for Athens __International Airport ( AIA) and gradual sale of government stake. • Corporatization of all (29) regional airports to attract private capital / __know-how to upgrade operations (similar structure to AIA_concession). • Public Private Partnership structures to develop the Attica Port __System (Peiraieus-Rafinia-Lavrio) and 12 other regional ports to __upgrade facilities. • Private investment structures to equip marinas with modern tourist __infrastructure. • Operation, maintenance and toll rights for existing motorways to be __assigned to private investors on a concession basis (Egnatia Odos __Motorway by end-2011). • A special Purpose Vehicle with the rights to future toll revenues from __motorways will be set up and sold to private investors. • Registration and evaluation in a Single Land Registry. • Surface rights and long-term leaseholds legally established. • Conditions for holiday and tourist accommodation and property __development defined. • Zoning and building conditions for large properties expedited __(fast track procedures). • Individual specialized portfolios of large properties to be established in __a National Sovereign Fund of Public Land. • Portfolios to be structured as Special Purpose Vehicles for sale in __global markets. • Four portfolios to be delivered (one every six months from June 2011) Source: Greek medium term fiscal strategy (2012-201), Ministry of Finance Source: Greek medium term fiscal strategy (2012-201), Ministry of Finance Energy – Gaming Telecommunications – Broadband • Reduction of state’s equity holding in Public Power Corporation __(DEH) and in Public Gas Company (DEPA) to 34% in 2011-2012). • Development of undersea gas storage facilities through foreign __investment in 2011-2012. • Sale of nickel mining company (LARCO) in 2011. • Regulation of the gaming market (including e-gaming) in 2011. • Extension of the concession agreement for gaming/football __prognostics and issue of new licenses for e-gaming to OPAP. • Full privatization of OPAP (2012), Parnitha Casino (2011), State __lotteries (2011), Horse Racing (2012). • Creation of a modern and wide fiber optic cable network • Development of a modern telecoms broadband and digital __infrastructure utilizing the frequency spectrum and digital dividend __(starting in 2012). • Extension of mobile telecommunications licenses (in 2011). • Selection of a strategic investor in Hellenic Post to take operational __control of nationwide services (starting in 2012). • Reduction of state’s participation in the Hellenic __Telecommunication Organization. Source: Greek medium term fiscal strategy (2012-201), Ministry of Finance Source: Greek medium term fiscal strategy (2012-201), Ministry of Finance

  10. Privatisation: The Triumph of Hope Over Experience? Trade Sales to Strategic Investors Sale of Concessions SPV Source: Greek medium term fiscal strategy (2012-201), Ministry of Finance Source: Greek medium term fiscal strategy (2012-201), Ministry of Finance Estimated Revenue: € 12-17 bn in 2011-2013 Other Initiatives • Potential up to 2015 • € 10 - 15 bn from enterprises and infrastructure • € 25 - 35 bn from strategic management of rights and real estate asset development • Timing • 2011 € 2 - 4 bn • 2012 € 5.5 - 7.5 bn • 2013 € 4.5 - 5.5 bn Source: Greek medium term fiscal strategy (2012-201), Ministry of Finance Source: Greek medium term fiscal strategy (2012-201), Ministry of Finance

  11. Infrastructure Investment: Pork Barrel with An EU Twist! Public Investment Budget (2011) National Strategic Reference Framework, 2007-2013 Future Supply of New Homes Slows FDI & Exports (2007) € 2.3 bn 41% From EU € 3.8 bn 24.3 21.1 59% 7.5 Source: State Budget 2011 Source: Ministry of Finance Private Public Partnership Projects Big Projects • Five Major National Highways - € 8.7 bn • 750 kms of new road – 530 kms upgrading of existing road • € 2.3 bn from state budget + EU funds • € 2.3 from tolls • € 3.3 bn from bank loans • € 0.8 bn from own funds • Toll distribution: 65% to the State reaching 95% after 30 years • State revenues: € 20 bn over 20 years • Social infrastructure projects • € 600 mn in schools, court houses, police stations • € 465 mn in waste management and disposal projects • € 140 mn in urban transport (automation, e-tickets)

  12. Foreign Direct Investment: The SSR of Greece in Transition! • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) Net FDI Inflows Net FDI inflows (% composition) Future Supply of New Homes Slows FDI & Exports (2007) FDI & Exports (2007) in € bn 4.3 3.1 1.8 1.5 1.7 1.7 1.1 0.5 Source: Bank of Greece Source: Bank of Greece Source: Bank of Greece FDI Inflows in 2004-2009 Future Supply of New Homes Slows Fast-track Implementation of Strategic Investments as % of 2004 GDP • Investments must meet at least one of the following criteria: • Value of project must exceed € 200 mn or € 75 mn and it must create 200 new jobs • Project must generate at least € 3 mn of investment outlays every 3 yrs in areas • a) of advanced technology and innovation, or • b) of environmental protection, or • c) of education or R&D promotion • Project must create over 250 viable & sustainable new jobs. 32.5 32.8 22.3 18.9 17.5 4.4 Source: Eurostat Source: www.investingreece.gr

  13. Exports: Globalization And Its Discontents! Goods: Top 10 Exports (2010) Goods: Top 10 destinations In € mn Steel € 10 bn Copper Cotton Military Equipment Fuels Vegetables UK UK Pharmaceuticals Fish Aluminum Fruits Total Exports: € 16.2 bn Top Ten: € 6.6 bn Source: Hellenic Board of Exporters, The Greek Economy in Figures (2003), Viohalco Source: Hellenic Board of Exporters, The Greek Economy in Figures (2003), Viohalco Ελλάδα: Δαπάνες και Έσοδα Γενικής Κυβέρνησης Ελλάδα: Δαπάνες και Έσοδα Γενικής Κυβέρνησης Exports of Goods Tourism and Shipping (YoY %) In € bn Tourism Shipping Source: Bank of Greece Source: Bank of Greece

  14. Shipping: Greeks At Their Best! Shipping Greek-owned ships In € bn World Trade Volume capacity No. of ships Source: IMF, Bank of Greece Source: Review of maritime transport reports, UNCTAD Greek-owned fleet by ship type Ranking by capacity • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) Παραγωγή Ηλεκτρισμού (σε ΜW) FDI & Exports (2007) In dwt (end-2009) (end-2009) * Ships greater than 1,000 gt Source: Review of maritime transport reports, UNCTAD Source: Lloyd’s Register – Fairplay, January 2010

  15. Tourism: So Much Potential, So Little To Show For! Arrivals and Receipts Tourist arrivals in Greece: Top 10 markets in € bn In mn (2009) Tourist Arrivals Source: Greek Tourism 2020, Association of Greek Tourism Enterprises (SETE) Source: Bank of Greece, Civil Aviation Authority Competition (2009) Seasonality (distribution of arrivals by month) • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) Παραγωγή Ηλεκτρισμού (σε ΜW) FDI & Exports (2007) Source: Association of Greek Tourism Enterprises (SETE) Source: Association of Greek Tourism Enterprises (SETE)

  16. Construction: The King Is Dead! Long Live The King! Investment (2000 market prices) House Price and Mortgage Growth Future Supply of New Homes Slows FDI & Exports (2007) in € bn Mortgage Growth 41.5 39.3 37.8 37.9 38.3 35.5 34.0 33.8 30.9 29.5 28.4 24.3 Disposable Income Growth 21.1 House Price Growth 7.5 Source: Hellenic Statistical Authority Source: Bank of Greece Residential Investment (2000 market prices) Net FDI Inflows Future Supply of New Homes Slows in € bn 200,000 Residential Investment % of GDP 4.27 Supply of New Homes 150,000 3.07 Long-Run Average 100,000 1.75 1.54 1.69 1.65 50,000 1.13 0.50 0 Source: Bank of Greece Source: Hellenic Statistical Authority

  17. Green Development Program, 2010-2030 Green Initiatives Under Implementation Green Business: If Only Money Was Not Scarce! Electricity Production(installed power in MW) • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) Wind Energy Παραγωγή Ηλεκτρισμού (σε ΜW) FDI & Exports (2007) Photovoltaic Renewable Energy Sources Hydrocarbons 1,268 Petrol Hydroelectric 2,146 4,486 Natural Gas 7,610 Photovoltaic 700 3,456 Wind 6,250 3,237 4,826 Lignite 184 3,362 1.327 Biomass 60 50 2010 2020 2010 2020 % of national electricity demand from wind Source: Ministry of environment, energy and climate change Source: 2009 IEA Wind Annual Report • Subsidized program for improving energy efficiency of old __residential buildings. • New standards of energy efficiency for all building structures. • Green infrastructure – Green Business investment incentives __schemes • Subsidized electricity tariffs for renewables

  18. Common Agricultural Policy: a disaster Agrobusiness: Back To The Future! In € mn Exports - Imports Aquaculture production In € mn +46% +39% 2008 2000 2000 2008 Imports Exports Source: Hellenic Statistical Service., Hellenic Exporters Board Source: Eurostat Lambda at ₤ 130 / lt at Harrods • Since 2003 there has been a moving away from subsidies based _on production to income support. • This support is based on acres owned, cultivated or not, _multiplied by a per-acre subsidy received over a reference past _period (with special regimes applying for specific products _cultivated). • Most kinds of direct income support will be abolished from 2013 _onwards. • The result: most farmers are unable or unwilling to extricate _themselves from traditional surplus cultivations. Source: http://tastelaboratory.wordpress.com (April 2011)

  19. FDI & Exports (2007) FDI & Exports (2007) Greece’s Got Talent: We Shall Overcome… Per capita GDP Investment and Fiscal Consolidation as % of GDP 2010 Greece/Spain: 89.3 2000 Greece/Spain: 86.3 Spain Greece Portugal 2000 Greece/Portugal: 103.9 2010 Greece/Portugal: 118.4 Source: “Statistical Annex of European Economy, European Commission, Autumn 2010,European Source: European Commission, Hellenic Statistical Authority FDI & Exports (2007) Index of health and social problems • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) FDI & Exports (2007) FDI & Exports (2007) Human Development Index • Investment Driven Growth (%∆ YoY) • Investment Driven Growth (%∆ YoY) FDI & Exports (2007) Norway 1 Worse • USA Australia 2 N. Zealand 3 USA 4 Ireland 5 Netherlands 7 Portugal Canada 8 UK Sweden 9 Germany 10 Greece Japan 11 • New Zealand Iceland Index of Health and social problems Switzerland13 Austria France Australia France14 Germany Canada Denmark • Italy Finland 16 • Spain Per capita GDP (2009) Belgium Belgium18 Finland • Switzerland Denmark19 Norway Netherlands Greece$ 28,630 Spain 20 • Sweden Greece 22 Spain $ 31,870 • Japan Italy 23 Italy$ 35,080 Austria 25 UK 26 Germany$ 42,560 Cyprus 35 Better Portugal 40 Poland 41 Low High Income Inequality 0.78 0.80 0.82 0.84 0.86 0.88 0.90 0.92 0.94 Source: Wlkinson and Pickett (2010), The Spirit Level: Why Equality is Better for Everyone. Source: “Human Development Report”, United Nations, 2009

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