The Kolliopoulos (2020) paper discusses the determinants of the conditions surrounding the first (2013), second (2014), and third (2016) Greek bank recapitalizations (bailouts) on the back of the Greek economic crisis. In doing that, the paper argues that the first two recapitalizations occurred in line with the conventional ‘Varieties of Capitalism’ institutional framework, whereas the last one did not, as its conditions were dictated by external (instead of domestic) institutions.
What is the ‘Varieties of Capitalism’ framework?
The ‘Varieties of Capitalism’ framework is based on the premise that capitalist countries can be grouped in distinct types of ‘varieties’ which share common institutional characteristics and behaviors. Kolliopoulos (2020) refers to the work of Hall and Soskice (2001)[1] and Moline and Rhodes (2005)[2] to group countries in the following three categories:
Liberal market economies (LMEs): firm interactions are characterized by low levels of collective action and ‘arm’s length’ relationships. Examples of such countries are the USA, Canada, UK, Ireland, Australia, and New Zealand.
Coordinated market economies (CMEs): firms rely on collaborative relationships to resolve their coordination problems. Some examples are Germany, Japan, Denmark, and Sweden.
Mixed market economies (MMEs): the hybrid form of LMEs and CMEs, which are characterized by weaker coordination than CMEs but stronger collective structures than LMEs. Greece, as well as France, Spain, Portugal, and Turkey are classified in this category.
How do the first two Greek bank recapitalizations support other ‘Varieties of Capitalism’ literature?
According to previous research, bank-based CMEs and MMEs offer more generous banking bailouts than LMEs, due to 1) the banking sector’s higher collective bargaining power and 2) strong bank-industry links which support continuous bank lending (in LMEs banks would more easily become reluctant to support struggling businesses). According to Kolliopoulos (2020), Greece’s first two bank recapitalizations supported the above hypothesis in three ways:
Bank support was facilitative instead of mandatory.
State support had very lenient conditions, resulting in significant governmental losses: the IMF estimates that from the €57 billion spent on capital support, only €7 billion was recovered.
There were high levels of collective action by systemic banks (National Bank of Greece, Alpha Bank, Eurobank, Piraeus Bank).
How and why is the third recapitalization different?
The third (2016) recapitalization was different in that it 1) involved the extensive buyout of systemic Greek banks by foreign investors (de-Hellenization); 2) involved the forced replacement of a big part of systemic bank’s executive and non-executive director boards. In other words, it incorporated strict and highly unpopular to the banking sector conditions, contrasting with the previous more accommodating approach.
Greece’s dire economic situation in 2015 and the ECB’s role as a lender of last resort were instrumental in preventing the Greek government and banking sector to set their own bailout conditions. As a result, the conventional ‘Varieties of Capitalism’ framework breaks as domestic institutions were unable to dictate the bailout conditions, which were mainly chosen by the EU-led third ‘Memorandum of Understanding’ program. More specifically, on the back of the banking sector’s deterioration and the Greek referendum announcement in 2015, the ECB’s Governing Council refused to recapitalize Greek banks via the emergency liquidity assistance provision (ELA) until a third memorandum program was approved. Furthermore, being a Eurozone member, Greece was unable to refinance its banking sectors effectively as it does not have its own central bank to act as a lender of last resort. As a result, the Greek government was forced to accept the make-or-break August 2015 memorandum deal, with its much stricter recapitalization conditions.
Conclusion
Overall, the key message of the paper is that domestic institutions do affect banking bailout conditions. However, in the case of Greece’s third recapitalization program, the Greek government and banking sector were unable to set their own rescue conditions. As a result, external institutions were the determining factor of the recapitalization program.
[1] Hall, P. A. and Soskice, D. (2001). Varieties of capitalism and institutional foundations of comparative advantage. Cambridge, UK: Cambridge University Press.
[2] Molina, O. and Rhodes, M. (2005). ‘Varieties of Capitalism and Mixed Market Economics’. APSA-EPS Newsletter.
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