BoG released on December 3 its interim report on Monetary Policy. We summarize below the key highlights:

• The latest developments in Greece and the EU send out positive signals. Greece is mobilising both at home and abroad to make up for the delays and has achieved a constructive agreement with the troika that ensures continued funding. Domestic effort must now be focused on containing the recession, speeding up the onset of recovery and establishing the conditions for sustainable growth.

• Despite the delays, the progress that has been achieved in key sectors is tangible. Despite the risks and the ongoing recession, the economy is changing. As soon as the first clear indications emerge that past practices are being broken with and a new strategy for the future is being drawn up, the sentiment can rapidly turn around and the conviction take hold that the end of the recession is at hand. This would be the first step towards a new course of growth.

• Based on plausible assumptions about the implementation of the adjustment programme, BoG projects that GDP will decrease by slightly more than 6% in 2012 and by 4-4.5% in 2013. Positive growth will be witnessed in the course of 2014. This means that the cumulative decline in GDP over the past five years (2008-2012) will have reached 20% and may come close to 24% in the six-year period 2008-2013.

• Unemployment rate is seen slightly above 23.5% in 2012 and is estimated it may rise further and exceed 26% in 2013 and 2014.

• C/A deficit (as % of GDP) is expected to drop further from 9.9% in 2011 to 4.5-4.7% in 2012 and 2013 and to below 3.5% in 2014. Note that C/A deficit had dropped 76.5% in 9M’12 to €11.3bn, with a surplus of €0.8bn in September for third consecutive month.

• It is estimated that, in the three-year period 2010-2012, a large part (72%) of the loss in international cost competitiveness incurred during the nine years 2001-2009 has been recouped. This is already an important positive development. It is furthermore estimated that, in the course of 2013, all of the loss incurred in 2001-2009 will have been recouped.

• On Greek banks, BoG notes that when the consolidation process is completed, it is estimated that three large and well-capitalised banks will remain, alongside a few smaller ones. The completion of the recapitalisation process and the restructuring of the Greek banking system are reforms of pivotal importance, as the existence of well-capitalised banks will boost the confidence of domestic savers and international financial markets in Greek banks. Such a development would help relieve the liquidity constraints faced by banks, by favourably affecting the inflow of deposits and banks’ ability to regain access to international money and capital markets.

• NPL ratio in the domestic banking market rose to 18.7% in Q1’12 from 16% at YE’11.