Blog Post

Should we worry about Greek banks?

Earlier this month, the IMF and the European institutions clashed over conditions for sustainability of the Greek debt. One of the main disagreements seems to be the evaluation of the Greek banks’ health. Whose assessment should be trusted and are there reasons to worry?

By: Date: February 23, 2017 Topic: European Macroeconomics & Governance

Observers of the euro area crisis are accustomed to the fact that Greece periodically returns to centre stage. And when this happens, it is usually accompanied by a revival of the disagreement between the IMF and the European institutions. This happened earlier this month, as the two sides clashed over conditions for sustainability of the Greek debt and one of the main disagreements seems to lie in the evaluation of the Greek banks’ health.

The banks have undergone three rounds of recapitalisation since 2010 – the last of which in 2015 – for a total of €43 billion. The IMF Debt Sustainability Analysis (DSA), however, maintains the assumption that a buffer of around €10 billion – roughly half the amount of DTAs on Greek banks’ balance sheet – should be set aside to cover potential additional bank support needs. The European DSA instead does not assume any additional costs from future bank recapitalisation needs. The Bank of Greece, on the other hand, argues that Greek banks are set to maintain high capital ratios even in the adverse scenario of a recently published sensitivity analysis.

Non-performing exposures are the banks’ material exposures which are more than 90 days past due or for which the debtor is assessed as unlikely to pay their credit obligations in full, without realisation of collateral, regardless of the existence of any past due amount or the number of days past due. The IFSR NPL definition only includes loans that are more than 90 days past.

The IMF justifies its caution by saying that the balance sheet situation of the Greek banks is still vulnerable. Table 1 shows that the ratio of non-performing exposures (NPE) remains very high, above 40% of total loans for all the four banks considered, and above 50% for two of them. The ratio of NPLs is lower but still close to 40% for those banks that report the measure.

Greek banks have agreed to a plan of NPE reduction over a three-year horizon, with a quarterly target and the objective to reduce system-wide NPEs from 50% to 34% in 2019 and NPLs from 37% to 20%. The reduction is expected to be mainly driven by the curing of loans and write-offs, and to a lesser extent by liquidations, collections and sales. Consistently with the plan, write-offs have accelerated towards the end of 2016, reaching a record €2.5 billion for the year (Figure 1).

Source: Central Bank of Greece

figure 1

However, Kathimerini reports that in January 2017 new NPLs spiked at almost €1 billion, reversing the downward course of late 2016, and apparently continued to grow in February. Research by Asimakopoulos et al. at the Bank of Greece finds that one out of six firms with non-performing loans are strategic defaulters and that strategic default is positively related to outstanding debt and economic uncertainty.

Kathimerini’s sources seem to validate this, attributing the recent spike both to uncertainty related to the second bailout review, and to the fact that a large number of borrowers would not cooperate in reaching a restructuring agreement, in the hope that the government’s introduction of the extrajudicial compromise could lead to better terms and possibly to a debt haircut.

If persistent, these factors could complicate the achievement of the NPE reduction targets. The NPL market has been liberalised in 2015, probably with the objective to attract foreign investors, but that it unlikely to happen if economic uncertainty remains. The current strategy for achieving the target is mostly bank-led. The IMF argues in its Article IV that an alternative could be to set up an Asset Management Company (AMC), but this could be difficult in Greece as there is little demand for a private AMC, and a public AMC would be exposed to governance concerns and carry risks, given stringent European rules that could trigger bail in if additional capital is needed in the short run.

A second concern mentioned in the IMF review is that of deferred tax assets and credits (DTAs/DTCs). I have previously discussed the issue here, but essentially DTCs are instruments that can be counted as capital regardless of whether the bank makes a profit or a loss, and depending on how they have been framed, they may entail a contingent liability for the state. These instruments are still relevant for the Greek banks (Table 1), which may reduce the quality of their capital.

So, whose assessment should be trusted when it comes to the Greek banks? As always, all assessments could be right or wrong, depending on the circumstances. It is very difficult to make a prediction of how things will evolve, particularly because the fate of banks is never separate from that of the country they are in, and for Greece economic uncertainty has by now become the norm. Yet, the two issues discussed here add a source of potential worry.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic

Opinion

Integrity of official statistics under threat

Andreas Georgiou has unwittingly become an international icon for statistical integrity. His continuing politically-motivated persecution is highly damaging for Greece, and more broadly for the credibility and reputation of the euro area.

By: Edwin M. Truman and Nicolas Véron Topic: European Macroeconomics & Governance Date: August 10, 2018
Read article

Blog Post

Germany’s savings banks: uniquely intertwined with local politics

German savings banks, known as Sparkassen, form an important feature of the country's banking assets. Unlike in other European countries, German Sparkassen also hold direct links with local political communities. This post focuses on the Sparkassen's structural links and relationships with elected politicians. Three findings which do not appear to have been specifically documented previously stand out.

By: Jonas Markgraf and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 18, 2018
Read article More on this topic More by this author

Opinion

Griechenland braucht einen Neuanfang

This was first published by Die Zeit. Acht Jahre nach Beginn des ersten Hilfsprogramms für Griechenland ist es soweit – Griechenland soll wieder auf eigenen Füßen stehen. Die Eurogruppe soll heute das Ende des dritten Hilfsprogramms beschließen und die Modalitäten für die Zeit danach definieren. Ziel sollte es jetzt sein, einen tragfähigen Ausstieg aus dieser für alle Seiten […]

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 3, 2018
Read about event More on this topic

Past Event

Past Event

Euro tragedy: a drama in nine acts

This event featured a presentation by Ashoka Mody of his new book, which argues that the Euro is at the root of the problems the European Union faces today.

Speakers: Maria Demertzis, Ashoka Mody and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 27, 2018
Read article More on this topic More by this author

Blog Post

The European Union must defend Andreas Georgiou

Andreas Georgiou’s case raises disturbing questions about the integrity of European statistical processes. Forceful action by EU authorities on Mr Georgiou’s case is long overdue. The European Union also needs to consider reforming its statistical framework to ensure a similar scandal cannot recur.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: June 26, 2018
Read article More on this topic

Blog Post

European bank mergers: domestic or cross-border?

As the European economy recovers from the global financial crisis, bank mergers are back on the agenda. While cross-border mergers have been predicted before, most European bank mergers have been domestic until now. What are the odds of cross-border mergers in the upcoming bank-consolidation wave?

By: Patty Duijm and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: June 21, 2018
Read article More on this topic

Blog Post

Is the ECB collateral framework compromising the safe-asset status of euro-area sovereign bonds?

Central banks’ collateral frameworks play an important role in defining what is considered as a safe asset. However, the ECB’s framework is unsatisfactory because it is overly reliant on pro-cyclical ratings from credit rating agencies, and because the differences in haircuts between the different ECB credit quality steps are not sufficiently gradual. In this note, the authors propose how the ECB could solve these problems and improve its collateral framework to protect its balance sheet without putting at risk the safe status of sovereign bonds of the euro area.

By: Grégory Claeys and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: June 8, 2018
Read about event

Past Event

Past Event

Where is China’s financial system heading? Implications for Europe

How ready is China for the transformation of its financial system and how will this effect Europe?

Speakers: Elena Flores, Alicia García-Herrero, Gene Ma, Hu Yuwei and Guntram B. Wolff Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 25, 2018
Read article More on this topic More by this author

Blog Post

Latvia’s money laundering scandal

Latvia’s third largest bank ABLV sought emergency liquidity from the ECB and eventually voted to start a process of voluntary liquidation, after being accused by US authorities of large-scale money laundering and having failed to produce a survival plan. What does it mean for the ECB?

By: Silvia Merler Topic: Finance & Financial Regulation Date: April 9, 2018
Read article Download PDF More by this author

External Publication

European Parliament

Cash outflows in crisis scenarios: do liquidity requirements and reporting obligations give the SRB sufficient time to react?

Bank failures have multiple causes though they are typically precipitated by a rapidly unfolding funding crisis. The European Union’s new prudential liquidity requirements offer some safeguards against risky funding models, but will not prevent such scenarios. The speed of events seen in the 2017 resolution of a Spanish bank offers a number of lessons for the further strengthening of the resolution framework within the euro area, in particular in terms of inter-agency coordination, the use of payments moratoria and funding of the resolution process.

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: March 28, 2018
Read article More on this topic More by this author

Opinion

Greece must capitalise on its growth momentum

Better-than-expected growth performance reflects the underlying positive changes in the Greek economy – but net investment is in fact negative, while Greece has various institutional weaknesses. Further improvements must be made regarding Greece’s attractiveness to foreign direct investment. A new (at least precautionary) financial assistance programme would improve trust in continued reforms and also address eventual public debt financing difficulties.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: March 26, 2018
Read article More on this topic

Blog Post

Don’t put the blame on me: How different countries blamed different actors for the Eurozone crisis

Why did the eurozone have such difficulties coming to terms with its own shortcomings? The authors believe they have found part of the answer, through an algorithm-based cross-country media analysis.

By: Henrik Müller, Giuseppe Porcaro and Gerret von Nordheim Topic: European Macroeconomics & Governance Date: March 1, 2018
Load more posts