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Explaining Non-Performing Loans in Greece: A Comparative Study on the Effects of Recession and Banking Practices

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  • Platon Monokroussos
  • Dimitrios D. Thomakos
  • Thomas A. Alexopoulos

Abstract

Using a new dataset of macroeconomic and banking-related variables we attempt to explain the evolution of “bad” loans in Greece over the period 2005-2015. Our findings suggest that the primary cause of the sharp increase in non-performing loans (NPLs) following the outbreak of the sovereign debt crisis can be mainly attributed to the unprecedented contraction of domestic economic activity and the subsequent rise in unemployment. Furthermore, our results offer no empirical evidence in support of a range of examined hypotheses assuming overly aggressive lending practices by major Greek credit institutions or any systematic efforts to boost current earnings by extending credit to lower credit quality clients. We find that the transmission of macroeconomic shocks to NPLs takes place relatively fast, with the estimated magnitude of the respective responses being broadly comparable with that documented in some earlier studies for other euro area periphery economies. Overall, our results support a swift implementation of reforms agreed with official lenders in the context of the new (3rd) bailout programme. These envisage the modernization the county’s private sector insolvency framework and the creation of a more efficient model for the management of NPLs. A vigorous implementation of these reforms is key for allowing a resumption of positive credit creation, by freeing up valuable resources that are currently trapped in unproductive sectors of the domestic economy. This, in turn, would facilitate a speedier return to positive economic growth and a gradual reduction in unemployment.

Suggested Citation

  • Platon Monokroussos & Dimitrios D. Thomakos & Thomas A. Alexopoulos, 2016. "Explaining Non-Performing Loans in Greece: A Comparative Study on the Effects of Recession and Banking Practices," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 101, Hellenic Observatory, LSE.
  • Handle: RePEc:hel:greese:101
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    File URL: http://www.lse.ac.uk/europeanInstitute/research/hellenicObservatory/CMS%20pdf/Publications/GreeSE/GreeSE%20No.101.pdf
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    Cited by:

    1. Athanasia Chalari & Clive Sealey & Mike Webb, 2016. "A Comparison of Subjective Experiences and Responses to Austerity of UK and Greek Youth," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 102, Hellenic Observatory, LSE.
    2. Jacob A. Jordaan & Vassilis Monastiriotis, 2016. "The domestic productivity effects of FDI in Greece: loca(lisa)tion matters!," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 105, Hellenic Observatory, LSE.
    3. Konstantinos Kougias, 2017. "‘Real’ Flexicurity Worlds in action: Evidence from Denmark and Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 106, Hellenic Observatory, LSE.
    4. Monokroussos, Platon & Thomakos, Dimitrios, D. & Alexopoulos, Thomas A., 2016. "The determinants of loan loss provisions:an analysis of the Greek banking systemin light of the sovereign debt crisis," LSE Research Online Documents on Economics 68586, London School of Economics and Political Science, LSE Library.
    5. Chalari, Athanasia & Sealey, Clive & Webb, Mike, 2016. "A comparison of subjective experiencesand responses to austerity of UK andGreek youth," LSE Research Online Documents on Economics 68585, London School of Economics and Political Science, LSE Library.
    6. Kougias, Konstantinos, 2017. "‘Real’ flexicurity worlds in action: evidence from Denmark and Greece," LSE Research Online Documents on Economics 69576, London School of Economics and Political Science, LSE Library.

    More about this item

    JEL classification:

    • N0 - Economic History - - General

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