Coordination Problems, Perverse Incentives and the Key to Greek Recovery: The Greek Banking System

by Spyros Pagratis

Greek Economists for Reform.com
October 30, 2010

Greek banks, like their international peers, have not simply faced the unfortunate consequences of an externally imposed crisis. Coordination problems and perverse incentives in the banking sector, often exacerbated by short-termism in government policies and objectives, led to perpetuation of macroeconomic imbalances and higher overall risk in the economy. Greece is currently in an inefficient, self-reinforcing cycle of tightening credit conditions and economywide recession. Policy initiatives to improve credit conditions and increase the lending capacity of the Greek banking system should complement government efforts to restore its fiscal position. Catalyzing new lending in the economy would require policy initiatives along three dimensions: (1) Maintaining support to the banking system, but with an explicit mechanism for sharing the benefits of such support with the real economy, (2) Promoting more efficient risk-sharing between the public and the banking sector, in the spirit of public-private partnerships (PPPs) and revolving financing facilities, and (3) Sponsoring the creation of a market mechanism to enhance the credit quality and ratings of bank-issued paper, such as asset backed securities (ABS). That would facilitate banks accessing market funding and gradually weaning off the ECB window.


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