Determinants of non-performing loans in Greece:the intricate role of fiscal expansion

Following the financial and debt crises in the euro area and the delays in formulating a cohesive policy response, Greek banks faced serious problems with the increase in nonperforming loans (NPLs) being the most threatening. In this study, we attempt to empirically investigate the determinants of NPLs in the Greek banking sector, using quarterly aggregate data for the period 2003Q1-2020Q2 and the autoregressive distributed lag (ARDL) bounds testing approach. We find that NPLs are determined mostly by factors related to macroeconomic conditions in Greece during the period under investigation, rather than by bank-related factors. Of particular interest is the case of government debt, which is found to exert a significant and positive long-term impact on NPLs irrespective of some short-term dynamics that appear to provide a temporary relief. The fiscal balance is also found to exert a negative long-term effect, justifying the quest for surpluses post-crisis. As debt accumulation is a policy followed by most countries in order to stabilize economies hit by the COVID-19 crisis, its long-term effects on the financial system should be taken into account and institutional measures introduced to face the new risk.