INTERNATIONAL – Greece is scrambling to figure out how to save its banks — again.
Burdened by bad loans that make up almost half of total lending, crippled banks remain one of the biggest hurdles to Greece’s economic recovery.
There are even worries that the country may face yet another financial crisis if it can’t dislodge its lenders from their downward spiral. With bank shares tumbling, the government and the Bank of Greece are working on plans to help banks speed up efforts to shed soured loans.
1. So what can be done?
The government is said to be weighing a plan to help banks speed up bad-loan disposals, possibly including a state guarantee. Various ideas, including the creation of an Asset Protection Scheme and Special Purpose Vehicles into which bad loans would be unloaded with state guarantees, have been floated. The government could use a post-bailout cash buffer of about 24 billion euros ($27 billion) to shore up the banks, but the use of buffer funds may lead investors to question whether the state’s financing needs are fully covered for the years ahead. And it could breach European Union rules that forbid state aid to banks without private creditors, including those with deposits over 100,000 euros, taking a hit first.
2. Are there other possible solutions?
Yes. The Bank of Greece has crafted its own plan, which is a bit more complicated and involves the transfer of part of the banks’ deferred tax credits -- something that would dent lenders’ capital. Still, the plan would let banks offload about half of their bad loans, or about 40 billion euros. There’s also another idea on the table. The government is workingon a plan under which the state would subsidize a part of borrowers’ smaller loan repayments, sort of what Cyprus did with its “Estia” scheme, a word that means "home" in Greek. This project may be unveiled in December.
3. How big is the problem?
Non-performing exposures constitute almost half of Greek banks’ assets -- more than any other country in the EU. Most of their regulatory capital consists of deferred tax claims against the battered Greek sovereign. The Athens Stock Exchange Banks Index has lost more than half of its value in 2018, and Greece’s second-biggest bank, Piraeus Bank SA, plans to raise more capital -- a task complicated by its junk rating. Lenders are also being pressed by supervisors to hasten the reduction of their mountains of bad loans. Funds with short positions in Greek banks, such as Oceanwood Capital Mgmt LLP, are convinced lenders can’t clean up their books without burning substantial capital.
4. What has Greece done so far?
Greece reached a landmark deal with Europe’s other governments in mid-2018 that gives it a decade or more to start repaying most of its loans (with the understanding it won’t go back to the spending that brought its economy to the brink of collapse in 2009). The nation’s largest banks have been recapitalized three times since the start of its debt crisis -- most recently in 2015. The state, which has chipped in almost 50 billion euros to shore up capital over the past decade, says its banks have enough capital and are poised to gain from a nascent economic rebound. It says banks have new tools at their disposal to resolve the bad loans issue, including easier out-of-court settlement procedures and e-auctions. But those haven’t been enough.
5. How did things get so bad?
The downward spiral for Greek banks started a decade ago, when the country entered the longest and steepest recession in living memory. Borrowers have been defaulting on their loans en masse since 2008. During this period, the state also went bust, meaning banks took write-offs on the Greek bonds they held. Financing lines also dried up. And that was all before Prime Minister Alexis Tsipras was elected in 2015 on a promise to end austerity. His six-month clash with European creditors sparked a run on deposits and pushed Greece to the brink of leaving the euro area. Capital controls were imposed, and the economy went into a double-dip recession.
6. Are the banks blameless?
No. The nation’s financial struggles have exposed a series of failures in corporate governance, including loans to borrowers that couldn’t possibly repay. These practices were kept under wraps, not least because of vast loans extended to political parties and media companies. In fact, one condition attached to Greece’s most recent international bailout was a complete overhaul of banks’ boards. The question is whether new management can change the situation, or whether banks are too deep in the red to be salvaged.
7. Will the rescue plans work?
That remains to be seen. In previous cases where financial stability was at stake (e.g. Italy, Cyprus), European regulators and supervisors took a liberal approach to the EU’s state-aid rules, allowing public backstops to be used in order to avert disaster. But if such solutions are needed, they won’t be easy or cheap: Salvaging Cyprus’s Central Cooperative Bank earlier this year cost Cypriot taxpayers an amount equal to some 13 percent of the country’s economic output. In addition to potentially depleting funds originally intended as a cushion for the Greek state, using public money also raises questions about the credibility of the bloc’s banking rules, and the quality of financial supervision.