Greek cenbank urges firms to tap capital markets to cope with credit crunch

ATHENS Wed Jan 15, 2014 10:45am EST

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ATHENS Jan 15 (Reuters) - Greece's banking system will have a limited capacity to expand credit in the short term and businesses must look to capital markets and other sources to make up for the financing gap, the country's central banker said on Wednesday.

Bank credit to the private sector has been in decline since 2011, aggravating Greece's six-year economic slump. The prospects of a mild economic recovery this year will largely depend on new lending.

"The tightness in financing is today one of the most serious problems. It expands the number of firms that are forced to curtail activities, thus intensifying the recession," Bank of Greece Governor George Provopoulos told an economic conference.

"The capacity for credit expansion will remain limited in the short term. This crunch can be offset by raising funding from alternative sources," he added.

Greece's battered economy, about a quarter smaller after a six-year depression which has driven unemployment to almost 28 percent, is expected to grow by 0.5 percent this year according to the central bank.

Provopoulos said Greek firms faced substantially higher borrowing costs compared to peers in the euro zone, and banks were not eager to extend credit until their potential capital needs were clarified after a second round of stress tests.

Greeks' borrowing costs have climbed to their highest level since the country joined the euro area in 2001, despite record low ECB benchmark interest rates. Real interest rates have hit about 8.4 percent in November, according to central bank data.

Greece's economy is the most dependent on bank lending in the euro zone. Bank credit to the private sector made up about 40 percent of total funding in 2000-2008 compared to 33 percent across the single currency club.

The remainder came from capital markets and EU funds.

Provopoulos, also a European Central Bank Governing Council member, said Greek banks' reliance on Eurosystem funding had come down by about half from 140 billion euros at the peak of the debt crisis.

He said banks' lending policies needed to support companies involved in exports and avoid trends followed in the last decade when a big part of credit financed consumption and residential investment. (Reporting by George Georgiopoulos)

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