For months, Greece has been wrangling with its creditors to both complete the current bailout reform review and see the release of the next tranches of bailout loans. And after Monday’s meeting of euro-zone finance ministers, there is no sign of a quick agreement in the negotiations.
The stalemate is a setback for the banks in returning to profitability, as shown by a number of crisis symptoms. First, the clean-up of the credit books is stalling. Meanwhile, dwindling deposits could necessitate capital increases – possibly placing the liability on shareholders and creditors.
Danièle Nouy, chair of the supervisory board at the European Central Bank’s Single Supervisory Mechanism, the SSM, has announced she will be in Athens in mid-March. She wants to gain a picture of the progress being made in consolidating Greek banks’ loan books.
At the close of 2016, the non-performing loans amounted to €108 billion, or about $114 billion. That corresponds to 45 percent of all loans granted. By the end of 2019, they are actually supposed to have worked the defaulting loans down to €68 billion, according to the agreement struck with the European Central Bank (ECB) and the SSM. In a first step, the institutes are to have consolidated €2.5 billion of the credit risks by the end of the first quarter.
“As long as there are no statutory regulations, the debtors are waiting in hopes of better conditions or debt relief.”
But the managers of the four systemic financial institutions, which are subject to ECB’s oversight, don’t have good news for Ms. Nouy. In January, according to unofficial sources within the banks, the total of defaulting loans unexpectedly shot up by around €800 million. They say the trend continued in February. Bankers see a connection with the bogged down negotiations with creditors. Insiders say that due to the blockade in the reform review, in addition to uncertainty over the granting of more bailout loans, and recently repeated speculation over Greece leaving the euro zone, the willingness of defaulters to negotiate over rescheduling their debts has significantly decreased.
Another reason there has been little progress towards reducing problem loans is a lack of legal framework regulating out-of-court agreements with over-indebted companies, which protects the involved managers from recourse claims. The government has been mulling the draft legislation for months. “As long as there are no statutory regulations, the debtors are waiting in hopes of better conditions or debt relief,” an Athens banker says. He ascribes the rise in the non-performing debts since January to the fact that more debtors are no longer servicing their debts, even if they are able, in expectation of a debt relief.
And the rising rate of problem debts isn’t the only alarm bell. Since the beginning of the year, deposits have been draining out of Greek banks. At €131.84 million at the end of December, deposits had dropped down to €129.09 billion by mid-February.
Greece introduced capital controls at the end of June 2015 after the banks lost deposits of around €40 billion in the first half year to capital flight due to Grexit fears. Since then deposits have stabilized. Last year they even grew by €8.44 billion. But the decrease since the start of the year, like the rise in debt risks, most likely has to do with growing uncertainty in the face of the floundering negotiations with creditors. Following the easing of capital controls last summer, bank customers were able to have full access to newly deposited funds. That resulted in a repatriation of deposits from abroad in the second half of the year. Part of these funds are now flowing back out of the country, according to sources in the Greek central bank.
Greek government spokesman Dimitris Tzanakopoulos sees “no need to worry” about shrinking deposits. “Stability will return with the imminent conclusion of negotiations and Greece’s inclusion in the European Central Bank’s bond buying program,” he says. But so far, a quick conclusion to the ongoing bailout review and a settlement of the contention over the future role of the International Monetary Fund (IMF) are not in sight.
Ratings agency Moody’s warns that new delays in the negotiations could have serious consequences for problem debt consolidation, and banks’ profitability and liquidity. The sluggish reduction of credit risks is making additional reserves necessary, diminishing profits and consuming capital. The Greek central bank states the core capital ratio (Tier 1 ratings) of the four major institutions lie at around 18 percent above the European average, but there are question marks.
Like banks in Portugal, Spain, and Italy, Greek financial institutions count government guaranteed tax credits from losses carried forward as equity – a controversial practice. In a paper that was recently leaked to the public, the IMF concludes that the banks, which have already been recapitalized three times in the course of the crisis, could require additional capital infusions of around €10 billion.
The moment of truth is likely to come with the ECB’s stress test in 2018 at the latest. If there is a need for capital and no private investor can be found, according to the E.U. regulations, shareholders and creditors will have to pay the bill. The prospects of this so-called bail-in has already been the source of severe political turmoil in Italy.
Gerd Höhler is a Handelsblatt correspondent based in Athens, Greece. To contact the author: firstname.lastname@example.org