Can Greece Jumpstart Growth Without Bank Credit Expansion?

We find that bank credit has an important impact on economic activity in Greece, implying that a sharp contraction in credit supply from current levels can substantially deepen the economic recession. One necessary condition for a rebound of the Greek economy is, in our view, to ensure that Greek banks continue to have access to ECB liquidity in order to fund their loan portfolios. A “forced deleveraging” of the Greek banking system runs the risk of potentially triggering fire sales of profitable assets and a credit crunch, leading to a negative spiral of lower bank credit, lower bank solvency and a deeper recession.