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Are Greek banks able to finance Greece’s economic recovery?

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WP_20150523_055ECONOMY & MARKETS

Volume X| Issue 2|2016

The Road to Recovery: Are Greek banks able to finance Greece’s economic recovery?1

1. Introduction
The question dominating the public dialogue in Greece these days is whether the conditions are in place for the economy to return to a path of strong and sustainable economic growth. A year after the country signed its third Adjustment Programme with European partners, many wonder whether the steady and timely implementation of the reforms and fiscal consolidation measures contained in the agreement alone is enough to ensure that happening, or additional initiatives are necessary.

For an economy plagued by a multi-year, double-dip recession, record unemployment, anemic investment and high public debt, a return to growth should be the main priority of economic policy, the targeted cure for the economic malaise. Just as importantly, it is a key prerequisite for the program’s success.

However, the road to recovery hinges on several critical pre-conditions being met. Perhaps the most important of all is the ability of Greek banks to provide the credit needed to support economic growth. Will Greek banks have the financial strength, liquidity, capital and risk appetite to finance the recovery cycle of the Greek economy?

The answer depends on how Greece — and the Greek banks — navigate five key challenges ahead. Namely:

  • Restoring normal liquidity conditions.
  • Successfully managing a large stock of bad and problematic loans.
  • Diminishing official sector interference in banking operations.
  • Tackling the sweeping, transformational changes now gripping the European banking sector as a whole.
  • Restoring positive Credit demand growth.

These challenges critically affect the ability of the Greek banks to deliver sustainable profitability and grow their business, but also seriously complicate strategic decisions, priorities, operating and business models and risk management. This article aims to offer comprehensive answers to those questions, thereby assessing the current shape of Greek banks and, consequently, their ability to fund growth in the immediate and longer-term future; it concludes with policy suggestions.

1 The author wishes to thank Dr. Tassos Anastasatos, Eurobank’s Deputy Chief Economist for his valuable contribution.

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