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Beyond AusterityReforming the Greek Economy$
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Costas Meghir, Christopher A. Pissarides, Dimitri Vayanos, and Nikolaos Vettas

Print publication date: 2017

Print ISBN-13: 9780262035835

Published to MIT Press Scholarship Online: May 2018

DOI: 10.7551/mitpress/9780262035835.001.0001

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Financial Development and the Credit Cycle in Greece1

Financial Development and the Credit Cycle in Greece1

Chapter:
(p.251) 7 Financial Development and the Credit Cycle in Greece1
Source:
Beyond Austerity
Author(s):

Michael Haliassos

Gikas Hardouvelis

Margarita Tsoutsoura

Dimitri Vayanos

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262035835.003.0007

This chapter reviews the developments in Greece's financial system since the beginning of the crisis. The chapter places them in a broader context by (i) evaluating the long-term performance of Greece's financial system in comparison to other countries, and (ii) reviewing the credit boom-and-bust cycle that Greece has experienced since Euro entry. Risks in the Greek economy remain overly concentrated to those originating them and are not well diversified. By raising the cost of equity capital for firms, this impedes investment. It also drives up corporate leverage, thus making the economy more vulnerable to shocks. These vulnerabilities manifested themselves even before the sovereign crisis hit. Strengthening investor protection, through improvements in the justice system and financial regulation, is an important part of the solution. In the shorter run, the debt overhang problem in the private sector should be addressed. The chapter discusses policy options to achieve these goals.

Keywords:   Financial development, investor protection, diversification, leverage, banks, credit cycle, debt overhang, bankruptcy laws, financial regulation

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