We construct a Financial Conditions Index (FCI) for Greece as a surveillance tool to quantify
the degree of the stress in the financial sector. We use principal component analysis to capture
the information content of several financial indicators through a single index. We also construct
an alternative FCI by purging the business cycle and monetary policy effects on the input
variables, and argue that this alternative index is a better indicator of exogenous financial
shocks, and thus could be interpreted as a measure of the efficacy of transmission mechanism.
We replicate the index for the euro area (EA) as a whole and show that although the
developments in the EA were qualitatively in line with those in Greece, they were quantitatively
much milder. Our results confirm that monetary transmission was less effective in Greece
compared to the EA as a whole. Finally, we argue that our index can be a potentially useful
forecasting tool for credit growth.