Greek Outlook 2016: Backloaded measures require frontloaded action

June 2016 Ilias Lekkos Lekkosi@piraeusbank.gr Irini Staggel Staggelir@piraeusbank.gr Anastasia Aggelopoulou Aggelopouloua@piraeusbank.gr

Economic Research & Investment Strategy

2

The felling of déjà vu for the Greek economy is growing once again. Similar to what we have seen

time and again over the last 7 years as soon as the Greek economy starts showing some signs of life

there comes a new period of prolonged and intense negotiations between the Government and

the Institutions ultimately resulting in a new and substantial wave of fiscal austerity, which in turn

drags the Greek economy back to recession. With GDP contracting by 1.4%(YoY) in Q1-2016 and

with a new set of fiscal consolidation measures equal to 2.2% of GDP to be introduced in the

second half of the year, urgent action is required by all sides in order to limit the depth and

duration of economic contraction.

Déjà vu all over again

3

In what follows we estimate a number of macroeconomic scenarios starting from the most

pessimistic one where the economy feels the full effect of the austerity measures without any

mitigating actions. In that scenario the economy will contract by -2.8%. We believe that the

prospect of such an adverse outcome should motivate all policy makers to spring into action.

We also estimate a scenario under which Greek households, in an attempt to cushion the impact of

austerity on their living standards, reduce their savings even further, limiting somewhat the size of

economic contraction to -2.5%.

Yet, the only factor with true recession – mitigating potency is the clearance of Government Arrears

which if distributed timely could help limit the level of GDP recession to -1.1%.

Source: European Commission DG ECFIN, Bloomberg, ELSTAT, Piraeus Bank Research

A bird’s - eye view of the Business Cycle

Economic Climate Tracer Piraeus Bank Greek Sovereign & Corporate Bond Index Yields (Weighted Average)

4

Despite the prolonged uncertainty and speculation regarding the progress of the negotiations and

expectations for a new set of substantial fiscal consolidation economic sentiment at 89.7 points

remains in the “recovery” stage of the business cycle.

Financial Markets on the other hand have already priced-in the successful conclusion of the

negotiations and the disbursement of the next tranche.

-2.0

-1.0

0.0

1.0

-0.25 -0.15 -0.05 0.05 0.15

leve

l

mom change

downswing expansion

contraction upswing

May 16'

downswing expansion

contraction upswing

Jan.'05

Nov.14'

0

2

4

6

8

10

12

14

0

5

10

15

20

25

2/1

/13

2/3

/13

2/5

/13

2/7

/13

2/9

/13

2/1

1/1

3

2/1

/14

2/3

/14

2/5

/14

2/7

/14

2/9

/14

2/1

1/1

4

2/1

/15

2/3

/15

2/5

/15

2/7

/15

2/9

/15

2/1

1/1

5

2/1

/16

2/3

/16

2/5

/16

Piraeus Bank Sovereign Bond Index - Yield

Piraeus Bank Corporate Bond Index - Yield

Source: ELSTAT, Piraeus Bank Research

Pre-agreement Real GDP Baseline Scenario

Real GDP growth rate Real GDP over a new base

5

Following the release of Q1-2016 real GDP figures of -0.5% QoQ (-1.4% YoY) contraction we revised

downwards our Q2-2016 estimates from 0% to -0.25% while keeping H2-2016 unrevised.

0.6

-0.3

1.4

-0.8

0.1

0.3

-1.3

0.1

-0.5

0.40.2

1.3

0.9

0.4

0.9

-1.7

-0.9

-1.4

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Q1/

14

Q2/

14

Q3/

14

Q4/

14

Q1/

15

Q2/

15

Q3/

15

Q4/

15

Q1/

16

QoQ %, sa data, 2010 prices YoY %, sa data, 2010 prices

-0.5

-0.25

0.5

1.0

-0.25

0.0

0.5

1.0

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Q1/16 Q2/16 Q3/16 Q4/16

Updated Baseline Scenario Old Baseline Scenario (as of March 2016)

Yet another wave of fiscal consolidation to hit Greek shores

Source: MinFin, European Commission, Hellenic Parliament, Piraeus Bank Research

-0.25% 0.5% 1.75% 3.5%

2015 2016 2017 2018 and beyond…

The new fiscal path based on primary surplus targets (as % of GDP) of:

Total new fiscal measures legislated: 3.0% of GDP, of which 2.2% in 2016

6

2016 2017 2018 2019

VAT reforms 255 437 437 437

Tax reforms 298 382 456 456

Personal income tax reforms 1,700 1,700 1,700 1,700

Excise duty tax reforms 597 597 610 610

Pension reforms 1,206 1,903 2,571 2,708

Other reforms -221 -234 -247 -260

Total Measures Legislated Jan.-May 2016 (€ mn) 3,835 4,784 5,526 5,650

as % of GDP 2.2 2.7 3.0 3.0

Me

asu

res

Legi

slat

ed

Jan

.-M

ay 2

01

6

Source: MinFin, European Commission, Hellenic Parliament, ELSTAT, Piraeus Bank Research

Should Fiscal Multiplier equal 1: Implications for growth

7

The incremental impact of the new agreement on fiscal revenues is estimated at €3.8 bn in H2-2016

and €0.95 bn for the full-2017. The result of this uneven distribution of the phasing in of the new

measures is that the marginal impact of the measures will be extremely severe in Q3 & Q4-2016,

will decline in Q1 & Q2-2017 and will even turn negative in Q3 & Q4-2017.

A full pass-through of the measures to growth (fiscal multiplier=1) with no mitigating actions will

push GDP growth down to -2.8%.

Incremental Impact of the New Measures (€ mn) Real GDP growth rate (YoY % change)

-1000

-500

0

500

1000

1500

2000

2500

Q3/16 Q4/16 Q1/17 Q2/17 Q3/17 Q4/17

-1.4-1.9

-0.2

0.8

-1.4

-1.9

-4.3

-3.4

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

Q1/16 Q2/16 Q3/16 Q4/16

Updated Baseline Scenario Scenario 1(full fiscal impact)

Scenario 2: Savings to cushion the blow

Households Saving Ratio (HSR) Real GDP growth rate (YoY % change)

8

Experience has taught us that Greek households, when buffeted with new austerity measures,

lower their saving ratio as they try to maintain their living standards. For example, in 2014

household saving ratio (HSR) stood at -5.5% (of disposable income) which declined to -6.1% in 2015

thus limiting the extend of the recession.

If we assume that HSR will decline by another 0.6% to -6.7%, this will mitigate the impact of the

fiscal measures limiting GDP contractions to -2.5%.

-1.4-1.9

-0.2

0.8

-1.4

-1.9

-3.7

-2.8

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

Q1/16 Q2/16 Q3/16 Q4/16

Updated Baseline Scenario Scenario 2(lower HSR)

Source: MinFin, European Commission, Hellenic Parliament, ELSTAT, Piraeus Bank Research

1.1

-0.1

-4.1

-5.5-6.1

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

-3000

-2500

-2000

-1500

-1000

-500

0

500

1000

2011 2012 2013 2014 2015 2016(full fiscalimpact)

2016(lowerHSR)

Δ (Gross Disposable Income) Δ(Gross Savings)

Δ(Final Consumption) Gross Saving Ratio, RHS

HSR = -6.1 HSR = -6.7

Scenario 3: Lower HSR & Partial Arrears Clearance

Schedule of Arrears clearance (€ bn) Real GDP growth rate (YoY % change)

Source: MinFin, State Budget 2016, European Commission, Hellenic Parliament, ELSTAT, Piraeus Bank Research

* General Government Arrears are Outstanding arrears to third parties (outside of the general government), not paid within 90 days since the date they were due and Tax Refunds Arrears refer to outstanding refunds data that have been issued and cleared until the last day of each month.

The conclusion of the Programme Review came at a significant fiscal cost but on the positive side brings new

funding of at least €10.3 bn, €3.5 bn of which will be used to repay General Government Arrears.

9

8.7

9.6

4.8

3.8

6.0 6.06.5 6.7

4.9

3.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Jun

-16

Sep-

16

General Government Tax refunds arrears Total Arrears

ExpectedArrears

Clearance -1.4-1.9

-0.2

0.8

-1.4

-1.9

-1.1

-0.1

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

Q1/16 Q2/16 Q3/16 Q4/16Updated Baseline Scenario Scenario 3

(lower HSR & Arrears)

Assuming that 70% of that amount is used for domestic payments to local suppliers, wages etc. (with the

remaining 30% used to pay for imports), then this extra “income” can be used to finance additional

consumption which in turn has the potential to mitigate the impact of austerity even further. Under that

scenario the extent of the recession is contained to -1.1%, slightly worse than the Pre-agreement scenario

of -0.7%.

Scenariology Overview

10

Assumptions

Updated Baseline Scenario

Completion of 1st review based on the measures agreed in August 2015 (i.e. 1.5% of GDP) plus an update of Q1-2016 to -0.5% QoQ (vs previous estimate of -0.25%) and Q2-2016 to -0.25% QoQ (vs previous estimate of 0%)

Scenario 1 (full fiscal impact)

Fiscal multiplier =1 on legislated measures of €3.8 bn evenly distributed in Q3 & Q4-2016.

Scenario 2 (lower HSR)

Fiscal multiplier =1 and Household saving ratio decline to -6.7% from -6.1%.

Scenario 3 (lower HSR & Arrears)

Same as in scenario 2 plus a positive impact from the 70% of cleared government arrears.

Source: MinFin, Hellenic Parliament, ELSTAT, Piraeus Bank Research

Real GDP Outlook: Pick the scenario you like

Real GDP - 2016 Outlook

11

-1.1

-2.5

-2.8

-0.7

-3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0

Scenario 3(lower HSR & Arrears)

Scenario 2(lower HSR)

Scenario 1(full fiscal impact)

Updated Baseline Scenario

Ambitious but achievable Privatizations Programme

Source: European Commission, MinFin, State Budget 2016, Piraeus Bank Research

Based on the 2016 State Budget:

• During 2011-2015 the total amount of assets sold reached €3.0 bn, while privatization revenues reached

€2.86 bn. The remaining amount to be disbursed is €175 mn.

• In 2016 the targeted total value of assets to be sold is €2.3 bn, of which approx. €1.3 bn is from the

privatization of the 14 Greek Regional Airports, which has already been agreed.

Based on the 3rd Economic Adjustment Programme:

• The targeted total value of assets to be sold is €50 bn

• Sale of assets will be used to repay ESM, to decrease debt and to fund investment

• The fund will be managed by Greek authorities under supervision of European institutions

Privatizations (€ bn)

0.0

0.5

1.0

1.5

2.0

2.5

2011-2012 2013 2014 2015 2016

Value of Assets Revenues

12

Tourism & Public Investments will continue to support growth

Source: MinFin, State Budget 2016, BoG, ELSTAT, Piraeus Bank Research

The tourism industry (expected to peak in Q3 -2016) and infrastructure spending (expected to pick at

Q4-2016) continue to provide support to economic activity and the labour market.

Travel Receipts (€ mn) PIP expenditures (cumulative, € bn)

13

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan

Jan-

Feb

Jan-

Mar

Jan-

Apr

il

Jan-

May

Jan-

June

Jan-

July

Jan-

Aug

Jan-

Sep

Jan-

Oct

Jan-

Nov

Jan-

Dec

2015 2016 (Target) 2016 (Estimate)

0

2000

4000

6000

8000

10000

12000

14000

16000

Jan

Jan

-Feb

Jan

-Mar

Jan

-Ap

ril

Jan

-May

Jan

-Ju

ne

Jan

-Ju

ly

Jan

-Au

g

Jan

-Sep

Jan

-Oct

Jan

-No

v

Jan

-Dec

2015 2016

VAT not enough to push Greece out of deflation

Inflation Rate (CPI, YoY % change) HICP & Effect of tax changes

Source: ELSTAT, Piraeus Bank Research 14

The VAT hike from 23% to 24% plus the increase in other indirect and consumption taxes will push

inflation up, while the dropping out of last August’s VAT hike (from 13% to 23%) will have the opposite

effect.

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q1/

10

Q2/

10

Q3/

10

Q4/

10

Q1/

11

Q2/

11

Q3/

11

Q4/

11

Q1/

12

Q2/

12

Q3/

12

Q4/

12

Q1/

13

Q2/

13

Q3/

13

Q4/

13

Q1/

14

Q2/

14

Q3/

14

Q4/

14

Q1/

15

Q2/

15

Q3/

15

Q4/

15

Q1/

16

Q2/

16

Q3/

16

Q4/

16

Tax impact HICP constant tax (YoY % change) HICP (YoY % change)

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Headline Inflation Year average

- 1.7-1.3 - 1.0-0.9

The upshot is that we expect average inflation in 2016 to -1.0%.

Planned disbursements following the 1st Review of the 3rd EAP

At the end of the 3rd EAP in mid 2018, the cumulative total of disbursements of the three

programmes will amount to €281.6 bn.

Note: Οn 27/02/2015, the Hellenic Financial Stability Fund (HFSF) redelivered €10.9 bn in bonds issued by the EFSF for the recapitalisation of Greek banks. This comprised: a full repayment of the €7.2 bn disbursed on 30/05/2013; and a partial repayment of €3.7 bn of the loan tranche disbursed on 19/12/2012)

15

The 3rd EAP Disbursements (Aug. 2015- Aug. 2018, € bn)

13.02.0

1.0

7.5

2.85.4

28.7

226.7

215.8

228.8 230.8237.2

244.7247.5

252.9

281.6

200

220

240

260

280

300

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1st &

2nd

EA

P

Feb-

15*

Aug

-15

Nov

-15

Dec

-15

mid

June

16'

Sept

16'

Oct

-Nov

16'

rem

aini

ng a

mou

nt o

fpr

ogra

mm

e fin

anci

ng(e

xcl.

Reca

p)

ESM: Bank recapitalisation ESM Total (cumulative), RHS

Source: MinFin, Bloomberg, EFSF, ESM, IMF, Piraeus Bank Research

Debt maturities now stretch all the way to 2059 (for now)

*Figures do not include T-bills and approx. €26 bn related to Bank of Greece loans, special and bilateral loans, other internal and external loans, repos and external securitizations. Moreover notes amounting to €5.42 bn that have been disbursed for funding bank recapitalisation are not included. The amount was disbursed pro rata in ESM floating rate notes and the final maturity will be in line with the maximum weighted average loan maturity of 32.5 years.

Debt distribution by holder 83% held by the official sector

16

Bonds & Loans Maturities* (as of 10 May 2016, € mn)

IMF4%

EU billateral16%

ESM7%

EFSF41%

ECB/NCB6%

Other State loans

9%

Bonds (post PSI, new) &

international12%

T-bills5%

Source: MinFin, Bloomberg, EFSF, ESM, IMF, Piraeus Bank Research

Deferred Interest on EFSF creates a hump in 2022-2024, which will continue to grow to the tune of €1 bn per year

Note: Figures do not include short-term securities (T-bills) and approx. €26 bn related to Bank of Greece loans, special and bilateral loans, other internal and external loans, repos and external securitizations.

17

Principal amount and interest payments due (2016-2030, € bn)

0

5

10

15

20

25

30

35

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Bonds Loans interest payments

Source: MinFin, Bloomberg, EFSF, ESM, IMF, Piraeus Bank Research

Half of debt payments in 2016 are interest payments (€ 5.9 bn)

18

Maturities and Interest Payments in 2016 (€ mn)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Bonds Loans Interest Payments

Note: Figures do not include short-term securities (T-bills) and Bank of Greece loans, special and bilateral loans, other internal and external loans, repos and external securitizations.

Source: MinFin, Bloomberg, EFSF, ESM, IMF, Piraeus Bank Research

A bird’s-eye view of the evolution of Greek debt

Despite the widespread belief that interest in Greek debt is at rock-bottom levels, the combination

of GDP recession and entrenched deflation is creating a substantial positive snowball effect that

contributed 6.76% in 2014 and 8.53% in 2015 to Greek Government Debt growth.

Note: ESA 2010 adjustment, primary balance based on MoU methodology since 2009.

19

Driving Factors of Debt (as % of GDP)

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Primary Balance (reverse sign) i.e: "+" is a deficit " -" is a surplus"Snow-ball" effectStock - flow adjustment+Δ (debt)

Source: Ameco Database, DG ECFIN, ELSTAT, IMF, Piraeus Bank Research

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