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Bank of Greece – University of Oxford (SEESOX) Conference Challenges and Prospects of South East European Economies in the wake of the financial crisis Bank of Greece Friday, 16 October 2009. Resilience of SEEs to the crisis Paul Mylonas

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Bank of Greece – University of Oxford (SEESOX) Conference

Challenges and Prospects of South East European Economies

in the wake of the financial crisis

Bank of Greece

Friday, 16 October 2009

Resilience of SEEs to the crisis

Paul Mylonas

Chief Economist, Chief of Strategy, National Bank of Greece Group

National Bank of Greece Group – Strategy & Economic Research


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What people saw and what they expected

What happened and current prospects

Why a better-than-expected outcome

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What people saw and what they expected

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Booming activity, albeit from a low base … but above potential?

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Evidence of excess demand reinforced by the build-up of a large external imbalance

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Additional indicators of imbalances – real exchange rate appreciation and large credit impulse

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Banking sector imbalances: large share of F/X denominated loans and dependence on foreign funding

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Very large real wage increases (again from a low base), but were they hampering competitiveness? Also a house price bubble had emerged

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With the global economy in turmoil, markets and analysts envisaged a grim end to the boom years

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What happened and current prospects envisaged a grim end to the boom years

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Much larger-than-initially-expected drop in output, similar to more advanced economies, and with a higher “β”…

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… due to openness and manufacturing bias to more advanced economies, and with a higher “

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Further evidence of the important role of the inventory correction in the nascent recovery in exports

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Contraction in activity reflects a sharp slowdown in exports and credit expansion

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External imbalances correcting rapidly, despite drop in exports, reflecting …

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… a cut-off of oxygen to the economy from large capital inflows of the past

-- yet better than expected

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As a result, FX reserves have not suffered greatly, and appear adequate in relation to the external financing gaps

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Overall, leading and coincident indicators suggest that the worst is over, and activity will recover by Q4:2009

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Markets clearly have changed their mind regarding the outlook for SEE, as well

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Why a better-than-expected outcome outlook for SEE, as well

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EU membership (or on path towards) and/or IFI umbrella, combined with solid Governments (in most cases) provided much needed support…

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… allowing monetary policy to be countercyclical (in contrast to other EM crises)

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FP is also countercyclical, with automatic stabilizers allowed free reign, permitted by good initial debt conditions…

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A traditional Achilles’ heel of EM crises -- the health of the banking system -- was in good shape

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Several years of adjustment effort has made these economies very competitive

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Thank you very competitive

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