Greek fiscal crisis and measures to safeguard financial stability

Abstract

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 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 financial 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 first 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 first €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 financial 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 first paper examining this issue.