Greek fiscal crisis and measures to safeguard financial stability

Author:Spyridon Repousis
Position:Economics, University of Peloponnese, Zarouhleika, Greece

Purpose - The purpose of this paper is to present measures and policies followed during the Greek fiscal crisis to safeguard financial stability. Design/methodology/approach - Greece since 2009 was subjected to the Excessive Deficit Procedure and a government debt crisis due to the arrival of the global economic crisis leading to a major economic and banking crisis. Two huge bailout loans and programs helped Greece avoid default. However the second... (see full summary)

Greek scal crisis and measures
to safeguard nancial stability
Spyridon Repousis
Economics, University of Peloponnese, Zarouhleika, Greece
Purpose – The purpose of this paper is to present measures and policies followed during the Greek
scal crisis to safeguard nancial stability.
Design/methodology/approach Greece, since 2009, was subjected to the Excessive Decit
Procedure and a government debt crisis due to the arrival of the global economic crisis, leading to a
major economic and banking crisis. Two huge bailout loans and programs helped Greece avoid default.
However, the second bailout loan and participation of banks in the Private Sector Involvement caused
losses to the banking system that amounted to €37.7 billion. To deal with the prospect of potential bank
failure, Bank of Greece, the central bank, in cooperation with national and international authorities,
developed many strategies to safeguard nancial stability such as cash management and liquidity
operations, establishment and operation of Greek Financial Stability Fund (GFSF), institutional
framework for recapitalization and resolution of credit institutions.
Findings – The rst step was to support bank liquidity pressures. In the face of these pressures, the
Eurosystem’s monetary policy operations provided lending to euro that ended 2010 and accounted to
€97.6 billion. The second step was to establish a legal and regulatory framework for bank resolution and
assess funds needed to recapitalize banks through stress tests and diagnostic assessments. Results
showed that during 2012–2014, the Greek banking sector would require approximately €40.5 billion for
strengthening its capital base, of which €27.5 billion corresponded to the four “core banks”. Bank of
Greece and GFSF managed to complete a €48.2 billion bank recapitalization in June 2013, of which the
rst €24.4 billion was injected into the four biggest Greek banks. In return, Bank of Greece received a
number of shares in those banks, which it can now sell again during the upcoming years. The third step
of policies was to implement resolution and restructuring measures. From October 2011 to March 2014,
12 banks resolved through the new legal and regulatory framework under either a transfer order (order
to transfer assets and liabilities to a transferee credit institution) or establishment of a bridge bank. All
policies succeeded to safeguard Greek nancial stability and restore bank losses that resulted from
Greek public debt “haircut”.
Originality/value – To the best of the author’s knowledge, this is the rst paper, examining this issue.
Keywords Banks, Regulatory framework
Paper type Research paper
1. Introduction
Many developed countries have had signicant banking crisis and bank failures during
the past 30 years. Central bankers feared widespread bank failures because they
exacerbate cyclical recessions and may trigger a nancial crisis. In addressing
problems, the central banks or governments stepped in early to supply liquidity, which
in most cases helped avert a panic among investors.
The development of nancial markets has increased, not reduced, the demand for
funding liquidity (Borio, 2003). Liquidity crises are the endogenous result of the buildup
in risk taking and associated overextension in balance sheets over a prolonged period
The current issue and full text archive of this journal is available on Emerald Insight at:
Greek scal
Journalof Financial Regulation
Vol.23 No. 4, 2015
©Emerald Group Publishing Limited
DOI 10.1108/JFRC-12-2014-0050
(Borio, 2009). The ease of funding liquidity constraints during the expansion phase
supports risk taking and increases exposure, improving liquidity and boosting asset
prices. Volatility and risk premiums fall, overextending balance sheets. The subsequent
turnaround is sudden.
Large-scale interruptions in bank lending activities can cause negative shocks to the
real sector. Correlation between banks and the structure of the nancial system in
general is an important factor. Greenspan (1999) suggests that countries most
susceptible to banking shocks are those that lack developed capital markets. Countries
with well-developed capital markets insulate borrowers by providing good substitutes
when banks stop lending. Banks are the primary, if not the only, source of funds to
almost all companies in Greece.
According to International Monetary Fund (2009, p. 13), three points are of particular
(1) access to liquidity;
(2) dealing with distressed assets; and
(3) recapitalizing weak but viable institutions and resolving failed institutions.
Banks today have grown not only too big to fail but also too politically powerful to be
constrained. One of the arguments put forward by many for not helping banks who
cannot meet their obligations is that it gives rise to “moral hazard” – that is, incentives
to meet obligations are weakened if banks know that there is some chance of being
helped out, i.e. that there will be massive government intervention and nancial help. So
if the bank won, it kept the returns or if the bank got into trouble by undertaking a risk
and lost, the government-backed deposit insurance, picked up the cost and rescued them
(bailed them out).
The Greek government-debt crisis is one of a number of current European
sovereign-debt crises, which was triggered by the arrival of the global economic
recession in October 2008. Global nancial crisis had a lagged impact on Greek
economy, bringing to the fore pre-existing structural weaknesses and macroeconomic
imbalances of the Greek economy along with a decade-long pre-existence of high
structural decits and debt-to-gross domestic product (GDP) levels on public accounts,
leading the economy to recession.
Since April 2009, Greece had been subject to the Excessive Decit Procedure, as
decits of both 2007 and 2008 exceeded reference value set by the Maastricht Treaty.
In late 2009, fears of a sovereign debt crisis developed among investors concerning
Greece’s ability to meet its debt obligations due to a reported increase in government
debt levels. This led to a crisis of condence, indicated by a widening of bond yield
spreads and the cost of risk insurance on credit default swaps compared with other
countries in the Eurozone, most importantly Germany.
After a decade of positive performance of Greek economy, GDP contracted by 2 per
cent in 2009, mainly because of a sharp fall in investment, as well as due to a decline in
private consumption and exports, and the rate of unemployment rose to 9.5 per cent
(Bank of Greece, Annual Report 2009).
On February 16, 2010, the ECOFIN Council called on Greece to adopt a bold and
comprehensive structural reform package designed to address macroeconomic
imbalances and structural weaknesses of the Greek economy. On March 25, 2010, a

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