ECB’s Provopoulos Says the Worst of Europe’s Debt Crisis Is Over

European Central Bank Governing Council member George Provopoulos comments on the debt crisis, the ECB’s bond-buying plan, Cyprus and the Greek economy.

Provopoulos, who also heads Greece’s central bank, made the remarks in an interview in Athens yesterday.

On the debt crisis:

“I think the worst of the debt crisis is behind us. This does not mean that all weaknesses have been dealt with or that the road ahead will be without bumps. But I think the worst is over.

“We need to continue to improve the architecture. A number of things were decided last year regarding governance, but also in other fields such as banking union which in my view have been a quite positive step forward. How soon growth will return will depend entirely on how soon Europe, especially the peripheral countries, are able to rebalance their economies. And we have made good progress in that area, with Greece being a prime example.

“The decision which we have taken regarding OMT has helped enormously, even though it has not been used. Given that in the last few months we have had a kind of stabilization, normalization of financial markets, perhaps it will never be used. It is a good thing that we have decided to go ahead with that, just in case it would be needed.”

On Cyprus:

“Last month, there were concerns of a potentially systemic problem coming from Cyprus. Especially in Greece, there was quite a lot of concern, given that there are close economic and financial links between the countries. Nevertheless, things are calm now in Greece.

“At the Bank of Greece, we have been able to protect the deposits of branches of Cypriot banks in Greece, after the decision about ring-fencing that was taken by the Eurogroup. We have moved in a very swift way to make sure that the transfer of the operations of the businesses of the Cypriot branches to a Greek systemic bank was done in a smooth and fast way, so that we averted the potential of adverse results.

“The trade flows between the two countries are such that, on the basis of certain assumptions about what will happen in Cyprus in terms of growth, one could have envisaged that the effect on Greek GDP would be around 0.35 percentage point. But the total influence is shaped not just by trade flows but by what happens in the banking sector, on the stock exchanges, etc. If something bad had happened in the banking sector, if we were unable to ring-fence for instance, the total effect could have been much larger.

“The original idea of taxing all deposits in Cyprus had two weaknesses. First, all depositors, regardless of the amount of deposit, would have been affected. This idea would have been contrary to the established principle under which small depositors were fully protected. Thus, the idea violated this principle. The second reason had to do with the fact that while there were two weak banks in Cyprus, all banks would have been affected. These two elements, which fortunately did not remain in the final agreement, I considered negative.

“It was a political decision to use the bail-in tool in the case of Cyprus. The European bail-in directive was almost finalized at that point, according to which bail-in is one of the instruments that could be used in the future in case there was a possibility of individual banking failures. There are useful elements in the principle of a bail-in, especially from the point of view of fairness. But this is something that refers, if at all, to the future. It certainly has nothing to do with Greece.

“We don’t have final data, but April was a difficult month, because we had two major incidents. First, the Cypriot crisis, which affected psychology, and, second, we had the discussion about bail-ins.

“This was unfortunate because this debate followed within days after the Cypriot crisis, a fact which made them appear inter-related; this created problems.

“There was some concern about Greek deposits in April. There may have been outflows. But I’m expecting a resumption of the steady improvement that we have seen since June. Given that there is an overall climate of improved psychology, with the government delivering, deposits will continue coming back.

“There’s no reversal in the general trend, although, as I mentioned, April appears to have been a difficult month which was affected by these two factors. Let me also remind you in this connection that since the June elections we had deposit inflows of some 20 billion, while the pace of credit contraction has been kept moderate, at 4 percent. In fact, we have recently seen some improvement in credit flows.”

On Austerity:

“Given that the sovereign was out of the market, there was no alternative but to follow a very strong fiscal consolidation effort. If you are cut off from the markets, there is no other way. A theoretical discussion about milder austerity in a country like Greece was not on the agenda. If at the time when the first adjustment programme was agreed upon in May 2010, the Greeks had followed a milder path, that would have meant that other European countries would have had to put much more money on the table. I doubt whether they would have been willing to pay more, in order for us to have a milder, smoother path.

“Within Greece, the fast pace of fiscal consolidation is having painful costs, because it means higher unemployment, lower incomes, lower salaries, higher taxes. But, given our deep initial fiscal imbalances, there was no other alternative.

“I think the discussion about the fiscal multiplier misses the main point. Let’s assume for a moment that the fiscal multiplier was double than what the Troika calculated. What would that mean? It would mean that we should go more slowly. It would also mean that the other Europeans would have to increase the amount of financial support, and again, I doubt whether such a willingness would have been there.

On the Greek economy:

“I expect to see a return to positive growth in the near future. The growth rate next year will be influenced by this year’s outcome, as there will be the usual carry-over effect.

“But what is important is that at some point in the near future, certainly by mid-2014 and probably sooner, we will see the economy picking up. I expect to see definite signs of a turn-around by that time. We could expect some positive signs even earlier, as the government continues to implement reforms. The government is determined to carry out the needed structural reforms that will lead the Greek economy to a sustainable growth path.”