Questions and answers from 3 July

Summary

• The direct impact of the situation in Greece on the Estonian economy is very small
• The Greek economy accounts for less than 2% of euro-area GDP, and for this reason, the problems there will not have a major impact on the economy of the euro area
• The direct exposure of Eesti Pank to Greece is around 50 million euros
• The euro area has made important changes in recent years in order to avoid the risk of contagion through financial markets. The initial reaction of financial markets to the Greek crisis has been fairly mild
• The capital controls in Greece are an extreme but powerful tool for limiting the spread of the crisis. This has meant limits for Greece on the outflows of money as transfers and in cash
• Before the capital controls can be removed, the Greek state has to rebuild trust

Eesti Pank and Greece

How big are the financial risks related to Greece that Eesti Pank is exposed to?

Eesti Pank does not hold any Greek bonds. Eesti Pank holds some Greek sovereign bonds indirectly as the central banks of the euro area share the revenue and risks from monetary policy. These risks and revenues are divided using the capital key of the European Central Bank, which gives Estonia 0.274%. The central banks of the euro area started the Securities Market Programme (SMP) in 2010 and Eesti Pank’s share of the Greek government bonds bought under that programme is around 50 million euros. Any assessment of the indirect risks for Eesti Pank depend largely on which of the many possible scenarios plays out.

In any case it may be noted that Eesti Pank has a reserve built up from the profits of earlier years that should be sufficient to cover any risks stemming from Greece.

Estonia and Greece

How does the situation in Greece affect the Estonian economy?

The direct impact of the situation in Greece on the Estonian economy is very small. Greece takes only a marginal share of less than 1% of Estonian exports in the form of machinery and equipment and mineral products. Any Greek insolvency could also have an impact through the guarantees issued by the state and the participation in the Eurosystem.

The European economy and Greece

How has the Greek government financed itself?

The Greek national debt is worth 320 billion euros, or 175% of GDP, some two thirds of which is owed to the other countries and central banks in the euro area. There are 19.8 billion euros worth of bonds outstanding that were bought by the euro-area central banks under the Securities Market Programme. A large part of the remaining bonds is held by Greek residents, mostly banks.
European countries have lent Greece 52.9 billion euros bilaterally, and 130.9 billion through the EFSF, and the IMF has lent 25 billion euros.

In July and August this year, 6.7 billion euros of Greek bonds held by the European Central Bank will reach maturity. Greek repayments to the IMF should have been 2.5 billion euros in the second quarter of this year, and 1.5-2 billion in the third and fourth quarters.

Can Greece bring the whole of the euro-area economy into a recession and pose a threat to financial stability?

The Greek economy accounts for less than 2% of euro-area GDP. For this reason, the problems there will not have a major impact on the economy of the euro area. The euro area has taken important steps in recent years in order to avoid the risk of contagion through financial markets. The banking union and crisis management mechanisms should help prevent instability in the financial system of one euro-area country posing any significant risk to others. The initial reaction of financial markets to the Greek crisis has been fairly mild.

What does it mean if capital controls have been introduced in Greece? How does it affect the euro area and Estonia?

The capital controls are an extreme but quite powerful tool for limiting the spread of the crisis. They have put limits for Greece on the outflows of money as transfers and in cash, and this helps in stabilising the Greek financial system. Of course the capital controls create problems for companies operating in Greece, because they put limits on consumption and investment. It is understandable that in this case foreign investors will be much less keen to invest money in Greece.

The exposure of the Estonian economy to the risks coming from Greece remains limited as Estonian exports to Greece are on average less than 1% of total Estonian exports, and so the events in Greece do not directly impact Estonian economic activity.

How long will the banks in Greece remain closed? Can the banking industry in Greece survive?

Introducing and removing capital controls is a decision for the Greek government, who have announced that the banks will remain closed until 6 July. It is easier to introduce capital controls than later to ease the restrictions. If there is no improvement in confidence in Greece, a loosening of capital controls could lead to a widespread outflow of capital from the country. For this reason confidence in the country has to pick up before the limits can be removed.

How can the Greek economy get over its problems?

The source of the Greek problems is not the euro, but the inescapable need in the country for structural economic reforms. Unfortunately the Greek governments to date have not been successful enough in agreeing and introducing the necessary reforms, and this has led Greece to where it is today. Membership of the euro area does not grant free lunches and each country has to follow a sensible economic policy in the long term. Long-term economic growth and improved living standards come from economic reforms that encourage them.

The European Central Bank and Greece

What are the implications of the decision of the Governing Council of the European Central Bank to keep Emergency Liquidity Assistance (ELA) to the Greek commercial banks at the same level?

Emergency liquidity assistance is given to euro-area commercial banks under the current rules, and the key principle of those rules is that a bank getting assistance should be solvent and should have sufficient collateral for the loans being granted.

The decision of the Governing Council of the European Central Bank of 28 June not to increase the limit of emergency liquidity assistance for Greek banks meant that those commercial banks have to find ways of covering their additional liquidity needs from other sources. Capital controls and other restrictions on banking activity reduce the banks’ immediate need for liquidity.

Greece broke off negotiations over a financial aid programme that ended on June 30, and this increased the risks to the solvency of the Greek government because the safety net provided by the international programme was lost.

The Governing Council of the European Central Bank is paying close attention to events in Greece and is taking decisions in response to developments.

Questions and answers from 3 July