Financial Development and the Credit Cycle in Greece1

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.