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What should be done with Greek banks to help the country return to a path of growth

Avgouleas, Emilios, Papadimitriou, Dimitri B., (2015), “What should be done with Greek banks to help the country return to a path of growth”, Levy Economics Institute of Bard College, 2015/6, October

The battered Greek banks will soon face another round of recapitalization, yet the prospects for a return to their precrisis role as liquidity providers to the economy are unlikely. In this context, it is imperative to remind the country’s creditors and the officials at the European Central Bank’s Single Supervisory Mechanism, which assumed oversight of Greek banks at the beginning of the year, of the pitfalls of previous recapitalizations. Greek banks began receiving direct aid from the state as far back as 2008. The aid, however, especially in terms of cash injections, was miniscule compared to the levels that capital infusion and extension of guarantees reached in the brief period before and after the private sector involvement (PSI) debt restructuring in late 2011. Greek banks had rather imprudently become significant holders of Greek bonds in the post–2008 period and suffered serious losses due to the PSI haircut. Despite direct cash infusions to Greek banks that have so far exceeded €45 billion, with corresponding guarantees of around €130 billion, credit expansion in Greece has failed to pick up.

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