Greek scal crisis and measures
to safeguard nancial stability
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 Decit
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
Many developed countries have had signicant 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
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Journalof Financial Regulation
Vol.23 No. 4, 2015
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