Money Drain

In Greece, Big Banks Set to Flunk Stress Test

national bank of greece
People outside a National Bank branch in Athens. The bank is one of four being evaluated.
  • Why it matters

    Why it matters

    Though four major banks have received billions in recapitalization, they may need even more as bad debts continue to rise.

  • Facts


    • Tensions are high in banking offices as the October stress test looms for four key Greek banks.
    • Only €11.5 billion of €50 billion remains in the Hellenic Financial Stability Fund.
    • Interest payments on debts totaling €77 billion, almost one third of all the debt held by the banks, are not being made.
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Greece’s four largest banks are unlikely to pass a key stress test and may require even more cash because of growing credit risks, despite being recently recapitalized.

The European Central Bank will release results of the test in October before it begins supervision of the approximately 130 largest European banks on November 4. The four largest Greek banks –National Bank of Greece, Piraeus Bank, Alpha Bank and Eurobank Ergasia—will likely fail the test.

The banks saw virtually all capital resources wiped out with the 2012 haircut, or reduction in market value of their securities used for loans. The banks were recapitalized last year with European auxiliary funds funneled to the Hellenic Financial Stability Fund (HFSF). Of the €50 billion ($67.1 billion) made available, only €11.5 billion remains.

Based on its own stress test at the beginning of the year, the Bank of Greece determined it would need more capital. The four banks also have attempted to raise more cash through the sale of €8.3 billion in additional stock to investors, but it may not be enough because of the growing number of loan defaults.

Interest payments are no longer being made on debts totaling more than €77 billion, which represents more than one-third of €215 billion in total debt issues. So far, only half the non-performing loans have been cleared from the books through reserves, and credit institutions are hesitant to make further write-offs in order to avoid damage to their balance sheets.

If the institutions must be recapitalized once again, new shareholders, who only months ago invested their money, will face the prospect of seeing their stock watered down.

The banks, the Greek government and economic associations have been working for weeks to create a plan for consolidating the debt. Among the ideas reportedly being considered are to take another haircut on non-performing loans, but no firm action plan has emerged. Word within banking circles is that many debtors are pointing to the recession and no longer servicing their debts, even though they are capable of making the payments. This suggests the debtors see the banks as willing to take another round of write-offs.

The banks are caught in a dilemma. On one hand, they have been reducing the number of loans made to companies because they fear taking on new credit risks. Loans made to businesses fell from €106.8 billion in mid-2013 to €101.7 billion in June 2014. But this makes the liquidity squeeze even more severe, which pushes more firms into bankruptcy, creating more debts that go bad. It’s a vicious circle.

Anastasia Sakellarious, chief executive officer of the HFSF, has sounded a note of optimism. A more stable banking system is emerging from the crisis, she said. “If it should turn out that we need more capital, I believe that this can be easily managed,” she told the Greek newspaper Kathimerini.


greek protestor
Protests have died down, but the banks are still in trouble. Source: Reuters.


In its most recent report, the International Monetary Fund determined an additional €6 billion in capital is needed. The funds still available to the HFSF would be sufficient, but the banks would prefer to generate additional capital through the marketplace, which would make them less dependent on the government. And if the institutions must be recapitalized once again, new shareholders, who only months ago invested their money, will face the prospect of seeing their stock watered down.

Gikas Hardouvelis, Greece’s minister of finance, worries that Greek banks could be at a disadvantage with the stress test. The ECB will take ongoing corporate actions and consolidation steps into account, if the European Commission has approved them. At the most recent meeting of E.U. finance ministers, Mr. Hardouvelis asked ECB President Mario Draghi to give more consideration to restructuring measures that are underway but not yet complete.

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