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ViewpointJanuary 25 2016

A more positive picture for Greece and its banks

There is a real chance that the Greek economy could recover significantly in 2016 following the successful recapitalisation of its main banks late last year, but first the country must take some important steps, not least regaining the trust of foreign investors, according to John (Iannis) Mourmouras, the senior deputy governor of the Bank of Greece.
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Following October 2015’s thorough asset quality review test by the European Central Bank (ECB) through the single supervisory mechanism, which estimated the capital shortfall of Greece’s four systemic banks under the ‘baseline’ scenario at €4.4bn and under the ‘adverse’ scenario at €14.4bn, all four banks were successfully recapitalised by December.

In fact, two of them managed to cover not only baseline, but also adverse scenario capital needs entirely through private sector participation, while for the other two the baseline scenario needs were covered through the private sector and the adverse scenario needs by public funds of €5.4bn out of the €86bn in loans under the European Stability Mechanism (ESM) associated with Greece’s third memorandum of understanding (MoU) programme. As a result, the minimum average core equity Tier 1 capital ratio for Greece’s four systemic banks is close to 18%, one of the highest in the eurozone.

As regards to the ‘post-recap’ environment for the Greek banks, there are two main challenges that are inextricably linked: first, the treatment of non-performing loans (NPLs), which has been described as the Achilles' heel of the Greek banking sector, and second, the provision of adequate liquidity to the real economy.

The figures are quite alarming: NPLs as a percentage of total loans following the great recession in Greece went up from 10% in 2010 (€20bn) to more than 43% in 2015 (€107bn), compared with a eurozone average of 8%.

Debt restructure

A credible NPL-resolution strategy, especially for corporate loans (amounting to €40bn), should also be seen as a unique opportunity for, first, restructuring not only business bank debt, but also rebalancing the Greek economy towards export-oriented sectors and, second, increasing the average size of Greek enterprises – particularly in those sectors in which the country can claim a strong trade presence worldwide – by incentivising the participation of new foreign shareholders bringing in fresh capital as strategic investors to high value-added sectors (such as aquaculture, foodstuffs, logistics and tourism).

It is clear that improvements in NPL management, for instance, by means of outsourcing to specialised servicing platforms (and even a possible sale of corporate NPLs) will reduce interest-rate spreads and free up resources (from the huge pile of provisions the banks were forced to make). This can be used to inject much-needed liquidity into the real economy.

Indeed, since January 2011 Greece’s credit growth has moved into negative territory. In November 2015, the annual growth rate of total credit extended to the domestic private sector was -2.2%, compared with 1.4% in the eurozone.

Greece's to-do list

The country’s next important steps include a successful outcome to the public debt relief negotiations, based on ESM proposals, subsequent credit rating upgrades and a reinstatement of a waiver for Greek bonds (which ECB president Mario Draghi hinted at in September 2015, as long as the country is in a programme and complies with it), which will reduce the banks’ current dependence on emergency liquidity assistance (ELA) provided by the Bank of Greece (the ELA ceiling for Greek banks is €75.8bn as of December 17).

But above all a commitment to stick to the agenda of labour and product market reforms, as laid out in the third MoU, is needed and the implementation of the mother of all reforms: privatisation. The main benefit of this is neither higher government revenues nor a slim and efficient public sector, but rather the confidence boost that the country badly needs through attracting foreign direct investment and a repositioning on the world investment map that would signal a return to normality.

If all the above are put in place promptly, the recovery and jump-start of the Greek economy in the second half of 2016 would then be a realistic scenario. Ultimately, as confidence is restored, there will be a gradual return of deposits back to the banking system, which will boost banks’ loans to the private sector and also be a pivotal factor in lifting the capital controls imposed last July in response to the €40bn deposits outflow registered in the first half of last year that were caused by political uncertainty and the directionless economic governance at the time.

The third MoU’s implementation is not an option; it is an imperative. Given the country’s poor credibility record over most of 2015, Greece will have to comply with the pacta sunt servanda ('agreements must be kept') principle, which is a prerequisite of membership of a rule-based monetary union.

Hence, a timely and successful completion of the first review under way is a real test for the Greek authorities to demonstrate ownership of the reforms and programme in general. This will restore the trust of our partners and market confidence. For my part, I see the glass half-full within the eurozone.

John (Iannis) Mourmouras is senior deputy governor of the Bank of Greece and former deputy finance minister of Greece as well as professor of macroeconomics at the University of Macedonia, Thessaloniki.

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