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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


What people saw and what they expected

What happened and current prospects

Why a better-than-expected outcome

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 1


What people saw and what they expected

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 2


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 3


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 4


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 5


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 6


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 7


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 8


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 9


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 10


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 11


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 12


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 13


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 14


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

-- yet better than expected

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 15


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 16


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 17


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 18


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 19


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 20


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 21


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 22


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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 23


Several years of adjustment effort has made these economies very competitive

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 24


Thank you very competitive

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 25


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