Private sector deposits in Greek banks registered the sharpest decline among euro area countries in 2010, contracting by almost €40 bn. This decline comes from the elevated levels of previous years when deposits increased by about 40 percentage points during the past decade, peaking at 118 per cent of GDP in Q2:2009, including an increase by 17 per cent of GDP from non-residents, a development which distinguishes it from most other euro area countries.
The sharp reduction in bank deposits during 2010 mainly reflects:
- A flight of resident and non-resident deposits of €18½ bn against a backdrop of mounting uncertainty about the prospects of the Greek economy
- The private sector’s coverage of its widening financing gap (cash burn), due to the sharp decline in disposable income and operational profitability, including the self-reinforcing liquidity constraints of the Greek banking system.
Regarding 2011, the empirical findings suggest that cash burn related to the recession will continue to weigh negatively on domestic deposit formation.