Read the full introductory remarks HERE

Wednesday, March 30th, 2022

Talking points by Mr. Fokion Karavias, Chief Executive Officer

LSE panel discussion: “Weathering the Pandemic: the emerging financial landscape in South East Europe”

Let me thank first of all Professor Barzokas and the LSE for the invitation. We set out to discuss the economic situation after the pandemic, but I think we all agree that the topic has necessarily shifted into “Weathering, not the pandemic only, but successive shocks”.

Never before was the entire world obliged to sail through a global disruption of the scale and scope we faced in Covid-19, only to find itself in the middle of an unthinkable military aggression in Europe. The latter will no doubt have long-term impact not only in geopolitics but also in international trade and?in the structure of the world economy. Therefore, I would like to make a few points to set the ground for our discussion.

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THE WORLD

First, the big picture. The economic landscape of the globalization era is a thing of the past. The world is becoming smaller. The pandemic was the trigger but geopolitics are accelerating the de-globalization. A good part of the industrial production will be repatriated to the West. Governments will regulate investment more heavily on national security grounds. And all major powers will strive to increase the degree of self-sufficiency in the main commodities and energy.

Second, energy will remain for decades the global mega-theme. The geopolitics have made clear that we need to accelerate the end-state toward renewables. Still this will take time. At the same time, the transition to this end-state is becoming more complex. Especially Europe will have to reassess its policies and move swiftly to become less dependent on Russian gas by resorting temporarily to domestic energy sources and nuclear power. But the higher energy cost looks set to persist, at least for the next few years.

The above trends are both inflationary. Inflation is becoming less transitory and more structural. I expect runaway price hikes to cool down, but the low-inflation zero- or subzero- interest rate period is over. It is crucial to find a balance between containing inflation and stifling growth. Stagflation is the main threat at the moment.

There is a third global trend which is very relevant for the financial sector. The massive use of data analytics through artificial intelligence and machine learning. A trend that may reshape the financial industry and would positively impact productivity.

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THE EU BANKING SECTOR

For the banking system, it is a challenging environment. Exiting the pandemic, EU banks were set for a growth trajectory: after more than a decade of de-risking, the focus of business plans shifted to value creation and distribution to shareholders. It appears that the invasion in Ukraine may make less certain such outlook. Personally, I remain optimistic.

On one hand, interest rates increases do favor banks; after all negative rates were an aberration we hardly thought possible in the past, let alone for the long time it lasted.

On the other hand, cost of credit may be negatively affected. In any transition period we should monitor the asset quality dynamics closely. What will the effect of inflation and higher interest rates be for households and businesses? Should we expect an impact on asset quality? Or will we be able to avoid it as we did very successfully during the pandemic thanks to the substantial fiscal boost.

Furthermore, the volatility in equity and debt markets may slowdown the pace of AUM increase and fees and commissions growth.

Finally, as I mentioned inflation is expected to last longer than expected, and may cause a moderate but persistent increase in the operating costs of banks.

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GREECE

Greece is the textbook special case. After a decade of economic crisis and unprecedented recession, leading to a cumulative shrinking of the GDP by a quarter, the pandemic struck. And then comes the invasion in Ukraine. The repercussions through higher energy and raw material prices will be definitely felt in an economy that is mostly dependent on imports for energy and manufacturing.

On the positive side, after fixing major imbalances in its public finances and external balance, after the banking sector achieved an impressive NPE reduction, from close to 50% a few years ago to single digit this year, Greece was on track to achieve high growth rates for several years ahead. A return to investment grade was highly likely in the next 18 months. The fundamentals have not changed, or at least not radically. The country is stable politically and economically. There is ample liquidity –from increased deposits, FDI inflows that have resumed in an impressive pace and EU funds. There is a blueprint for growth in the government’s Greece 2.0 plan.

Overall, there are many serious challenges we are facing but, contrary to the media frenzy we sometimes see, we are not doomed and there is good reason to see the glass half-full, at least over the medium term.?