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 More by this author

Blog Post

The breakdown of the covered interest rate parity condition

A textbook condition of international finance breaks down. Economic research identifies the interplay between divergent monetary policies and new financial regulation as the source of the puzzle, and generates concerns about unintended consequences for financing conditions and financial stability.

By: Konstantinos Efstathiou Topic: Finance & Financial Regulation Date: July 1, 2019
Read about event More on this topic

Past Event

Past Event

Sound at last? Assessing a decade of financial regulation

What has changed since the financial crisis of 2008 that makes the financial system sound at last? Is regulatory reform going in the right direction? Has it run its course? 

Speakers: Patrick Bolton, Rebecca Christie, Maria Demertzis, Mathias Dewatripont and Xavier Vives Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 20, 2019
Read article More on this topic More by this author

Blog Post

GNI-per-head rankings: The sad stories of Greece and Italy

No other country lost as many positions as Greece and Italy in the rankings of European countries by Gross National Income per head, between 1990 and 2017. The tentative conclusion here is that more complex, country-specific stories – beyond the euro, or the specific euro-area fiscal rules – are needed to explain these individual performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 18, 2019
Read about event More on this topic

Upcoming Event

Oct
29
08:30

Bank resolution: its impact in the EU

Closed-door workshop on various aspects of bank resolution.

Speakers: Jon Cunliffe, Martin J. Gruenberg and Elke König Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

L’euro sans l’Europe : un projet incohérent

Jean Pisani-Ferry constate que tous les grands partis ne remettent plus en cause l’euro. Il souligne néanmoins que trois vulnérabilités – économique, politique et internationale – menacent la monnaie unique.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: May 28, 2019
Read article More on this topic More by this author

Opinion

ΕΥΡΩΕΚΛΟΓΕΣ ΚΑΙ ΤΟ ΜΕΛΛΟΝ ΤΗΣ ΕΥΡΩΠΗΣ

Είναι γεγονός ότι οι τωρινές εκλογές λόγω της ανάπτυξης των κομμάτων του λαϊκισμού είναι κάπως διαφορετικές από τις προηγούμενες. Αλλά πιστεύω ότι όλες οι εκλογικές διαδικασίες, εθνικές και ευρωπαϊκές, έχουν πάντα πολύ μεγάλη σημασία γιατί θέτουν μια ατζέντα για τα επόμενα πέντε χρόνια και εμείς ως πολίτες καλούμαστε να επιλέξουμε τις σωστές προτεραιότητες και να δώσουμε την εμπιστοσύνη μας στους κατάλληλους ανθρώπους.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: May 28, 2019
Read article Download PDF More by this author

External Publication

European Parliament

Taking stock of the Single Resolution Board: Banking union scrutiny

The Single Resolution Board (SRB) has had a somewhat difficult start but has been able to learn and adapt, and has gained stature following its first bank resolution decisions in 2017-18. It must continue to build up its capabilities, even as the European Union’s banking union and its policy regime for unviable banks continue to develop.

By: Nicolas Véron Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: April 18, 2019
Read about event More on this topic

Past Event

Past Event

Can the euro area weather the next crisis?

Is the euro area strong enough to make it through another crisis? What reforms are still needed. Klaus Regling will join us for this roundtable event in Washington DC to discuss these questions.

Speakers: Masood Ahmed, Klaus Regling, Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: 2055 L Street NW, Washington DC 20036 Date: April 11, 2019
Read about event More on this topic

Past Event

Past Event

Diverging narratives: European policies and national perceptions

Who tends to get the blame for the Euro crisis in national media? What do national politicians think about the EU and EMU?

Speakers: Pierre Boyer, Juha Pekka Nurvala, Giuseppe Porcaro and Laura Shields Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 27, 2019
Read article More on this topic More by this author

Blog Post

After the ESM programme: Options for Greek bank restructuring

With the end of the Greece support programme, authorities now have scope to focus on the legacy of NPLs and excess private-sector debt. Two wide-ranging schemes are under discussion. They should be assessed in terms of required state support, likely investor appetite for problematic bank assets, and institutional capacity to manage a complex new organisation tasked with debt restructuring.

By: Alexander Lehmann Topic: European Macroeconomics & Governance Date: January 29, 2019
Read article Download PDF More on this topic More by this author

Essay / Lecture

A new statistical system for the European Union

Quality statistics are essential to economic policy. In this essay, Andreas Georgiou demonstrates the existence of fundamental risks inherent in the European Statistical System. He argues that a paradigm shift is necessary and sets out a model that would deliver the quality statistics the European Union needs.

By: Andreas Georgiou Topic: European Macroeconomics & Governance Date: December 12, 2018
Read article More on this topic

Blog Post

Providing funding in resolution: Unfinished business even after Eurogroup agreement on EMU reform

The recent Eurogroup agreement on euro-area reform foresees a greater role for the European Stability Mechanism (ESM) as a backstop to the banking union. This is a welcome step forward but important issues remain. We assess the agreement on how to fund banks after resolution and the best way to organise the fiscal role in liquidity provisioning to banks. We argue that the bank resolution framework will remain incomplete and its gaps could result in important financial instabilities.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 7, 2018
Load more posts