The Greek Banking Crisis Part 1: The Doom Loop of a Sovereign and a Banking Crisis
The National Herald
March 30, 2018
Greece suffers a double crisis, a sovereign and a banking one. Each crisis has fed on the other in a vicious doom loop. The sovereign crisis forced the State to strictly tighten its belt and brought a huge recession. The recession/depression deprived many Greek enterprises and households the earnings necessary to pay back their loans to the banks. Households even withdrew their deposits from the banks. As a consequence, banks were deprived of liquidity and capital and were thus forced to cut back their lending, causing the recession to deepen.
Has this doom loop ended? Is the current feeble Greek economic recovery sufficient to turn the earlier doom loop into a virtuous cycle with higher bank profitability, more lending activity and even higher economic growth? The answer is not straightforward. It requires an in depth look into the history of the banking crisis of the last decade as well as the current workings of the banks and the State.
The present essay is partitioned into two independent and self-contained articles. The first article reviews the history of the Greek banking crisis and gives the reader a good grasp of how the banking system evolved into its present shape. The second article assesses its present health and its future prospects.