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What Explains the Rise in Non-Performing Loans (NPLs) in the Euro Area following the Outbreak of the Global Financial Crisis: Greece Case Study

Eurobank (2014) “What Explains the Rise in Non-Performing Loans (NPLs) in the Euro Area following the Outbreak of the Global Financial Crisis: Greece Case Study“, Eurobank Global Markets Research, Greece Macro-Monitor, 14 February.

 

Preface

The present study utilizes a number of empirical methodologies to explain the evolution of NPLs in a large group of advanced and emerging market economies in the period before and after the global financial crisis, placing particular focus on a number of Eurozone economies (including Greece) that have been severely hit by the euro area debt crisis. The main results from the examination of our fixed-effects, dynamic and VAR (vector autoregressive) panel models can be summarized as follows: we document a negative (and strongly significant) relationship between NPLs and economic growth, which in line with other studies in the literature, confirms the countercyclical behavior of non-performing loans. Our empirical findings also document the significance of a range of other macro- and bank-related variables in driving NPLs, including, the unemployment rate, loan interest rates, the nominal effective exchange rate, property prices, stock market performance as well as the ratio of loans-to-deposits and private sector credit-to-GDP. Overall, the most important result of our study is the negative relationship between NPLs and economic growth, which remains robust across model specifications. In the case of Greece, our baseline specification of fixed-effects panel model estimated for the EU countries suggests that, over the period 2008-2013, as much as 90% of the cumulative increase in the NPLs ration (that can be explained by the particular model_ may be attributed to the effects of the economic recession. Furthermore, an out-of-sample forecasting exercise using the latest (July 2013) IMF predictions for the Greek economy points to a likely peak in Greece’s NPL ration in 2015, at levels around 35%.

 

 

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