The Greek Economic Crisis and the Banks

In this paper we review the Greek economic crisis focusing on the banking system. Bank- sovereign linkages were strong during the crisis: banksÕ liquidity problems before the sovereign crisis spilled over to the real economy, and more importantly the sovereignÕs default rendered all Greek banks insolvent because of their positions in government bonds. The Greek banking system was put back on its feet through a series of recapitalizations, following which industry concentration became the highest in Europe. Banks were slow to reduce non-performing loans (NPLs), which peaked at 48.9% of gross loans, because of their limited capital buffers. Government guarantees for securitizations were finally the key for NPLs to decline close to European averages. BanksÕ capital buffers have improved through internal profitability but remain below European averages. Lending to the real economy is low but recovering, and banksÕ exposure to the sovereign is again increasing.