The Greek Economy and Banking System: Recent Developments and the Way Forward

Abstract

This paper describes the origins of the Greek financial crisis and discusses the progress that Greece has made in adjusting its economy. The main causes of the crisis were the large and growing external and fiscal imbalances. The primary factors accounting for the growing current-account deficit were declines in competitiveness and in public-sector saving. Moreover, prior to the outbreak of the crisis, the Greek banking sector had sound fundamentals. Also, in contrast to the situation in other countries, in Greece the sovereign crisis led to a banking crisis. The paper then (i) takes stock of the considerable progress that Greece has made in addressing its external and fiscal imbalances, and (ii) describes the strategy developed by Bank of Greece to transform the banking system. It is shown that implementation of the Bank’s strategy has led to a major restructuring of the banking system, allowing it to become efficient and competitive. These improvements are leading to a positive assessment of the future prospects of the Greek economy by the financial markets.