THE CHRONICLE OF THE GREAT CRISIS THE BANK OF GREECE

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1 THE CHRONICLE OF THE GREAT CRISIS THE BANK OF GREECE Public interventions and institutional actions to safeguard financial stability and overcome the crisis BANK OF GREECE EUROSYSTEM CENTRE FOR CULTURE, RESEARCH AND DOCUMENTATION

2 TABLE OF CONTENTS INTRODUCTION 1 PART ONE: FROM ENTRYINTO EMU TO THE CRISIS: : Decision to join EMU, 2001: A new environment for the economy : Strong growth driven by domestic demand Widening of the general government deficit: Initiation of the Excessive Deficit Procedura : The Greek economy stands vulnerable to the crisis : The Bank of Greece calls attention to key economic policyissues Addendum: the main characteristics of the period and the assessments of the Bank of Greece 22 2 THE ONSET OF THE CRISIS: The international dimension Policies for coping with the world financial crisis The policy of the Eurosystem in the period : The crisis in Greece The climate deteriorates, confidence is shaken Questioning of Statistical data The deterioration of the Situation is not dealt with adequately 39 BOX 2.1 Interventions for supporting non-euro area EU countries 28 BOX 2.2 The proposals in the report of the de Larosiere group and their Implementation 29 BOX 2.3 ECB monetary policy and Eurosystem interventions: THE BANK OF GREECE WARNS ABOUT THE SEVERITY OF THE IMMINENT CRISIS: Public interventions, warnings and policy proposals : Government, BoG and Eurosystem actions to Support the banking system Intensified micro-prudential supervision of credit institutions Law 3723/2008 on strengthening liquidity 52

3 xii THE CHRONICLE OF THE GREAT CRISIS: THE BANK OF GREECE Stress tests The Greek banks and the importance of the decisions of the Eurosystem 54 BOX : Studies, publications and analyses - decisions and initiatives aimed at better informing the public 48 BOX 3.2 New elements introduced in the banking supervision framework in PART TWO A NEW EUROPEAN ENVIRONMENT IS BEING BUILT PROM 2010 ONWARDS : Decisions for supporting the Member States - in search of systemic solutions : Developments in Greece heighten uncertainty about the future of the euro : Speeding up the efforts to institutionally restructure the EU - sentiment gradually improves : Towards a new institutional European setup 68 BOX 4.1 EU decisions on the support mechanism for Greece and other Member States, March-April BOX 4.2 Progress towards the establishment of banking union in 2013 and the involvement of the Bank of Greece 69 5 THE EUROSYSTEM TAKES NEW ACTION TO SUPPORT FINANCIAL STABILITY: : The decisions of the ECB's Governing Council on interest rates : The financial crisis and the interventions of the Eurosystem 74 6 THE CRISIS IN GREECE: : The Memorandum of Economic and Financial Policies Provisions and directions of the Memorandum The Implementation of the Programme Results and consequences : Missed targets or delays bring the country to the verge of default October 2011: a new EU/ECB/IMF support programme Soaring uncertainty - formation of a coalition government : Greece faces historic choices Political developments heighten uncertainty Towards restoration of balance in late the Eurogroup decision of November : The economy on a track of stabilisation 108

4 TABLE OF CONTENTS j xiii Easing of the recession - marked weakening of macroeconomic imbalances The year 2013 is a landmark for fiscal consolidation Restructuring of the banking system and prospects of normalisation in credit conditions 113 BOX 6.1 Eurogroup Statement on Greece, 27 November 2012: main points PUBLIC INTERVENTIONS OF THE BANK OF GREECE REGARDING ECONOMIC POLICY AND AN EXIT FROM THE CRISIS: : Recourse to the Support mechanism is deemed necessary : Serious delays in the programmes Implementation make debt restructuring inevitable : The historical stake: whether the country will remain within the euro area : Priorityto growth, focus on financing the economy 134 BOX : Bank of Greece analyses and studies on economic policy issues 119 BOX : Bank of Greece analyses and studies on economic policy issues 127 BOX : Bank of Greece analyses and studies on economic policy issues 134 BOX : Bank of Greece analyses and studies on economic policy issues ACTIONS AIMED AT SAFEGUARDING FINANCIAL STABILITY: Enhanced and broader supervisory tasks for the Bank of Greece Participation of Greek banks in the EU-wide stress testing exercises of the European Banking Authority Cash management and provision of liquidity to the banking system amidst uncertainty Increased demand for cash Surges in the demand for banknotes Meeting increased demand for cash : Provision of liquidity to the Greek banking system by the Eurosystem and the Bank of Greece Establishment and Operation of the Hellenic Financial Stability Fund Institutional framework and bodies for the resolution of credit institutions Law 4021/ Resolution Scheme of the HDIGF Provisions improving the law on resolution Resolution Unit Banking system reform 169

5 Xiv THE CHRONICLE OF THE GREAT CRISIS: THE BANK OF GREECE Diagnostic study ofbanks'loan portfolios Strategie assessment Assessment criteria Bank recapitalisation exercise Implementation ofbank recapitalisation The Implementation of resolution measures and the restrueturing of the banking system Proton Bank The case of T Bank Cooperative banks of Achaia, Lamia and Lesvos-Limnos Implementation of measures on ATEbank Implementation of measures on TT Hellenic Postbank The elimination of the risk of contagion from the Cypriot to the Greek financial system - other cases ofbank resolution The day after for the banking system - designing a sustainable long-term business model Key priorities for action Updated diagnostic study on domestic banks' loan portfolios and stress test 188 BOX 8.1 Provision of Emergency Liquidity Assistance from the Bank of Greece 165 APPENDIX 1 Testimony of Governor George Provopoulos before the Hellenic Parliament's Standing Committee on Economic Affairs regarding the resolution of ATEbank Statement of Governor George Provopoulos regarding the Hellenic Postbank during a meeting of the Hellenic Parliament's Standing Committee on Economic Affairs discussing the Bank of Greece's Monetary Policy Interim Report INDEX 203 TABLES 1 Annual percentage changes in key macroeconomic aggregates, Competitiveness - fiscal aggregates 14 3 Revised general government deficit 17 4 Key decisions of EU institutions and bodies (euro area summits, European Council, ECOFIN) on the financial system in the EU and on the Greek economy, Timeline - Main economic developments in Greece and Europe and actions of the Bank of Greece, Eurosystems main non-standard monetary policy measures 75