Greece’s blueprint to plug funding gap

Athens will try to persuade creditors on use of excess bank recap funds and on a limited bond issue By Vassilis Ziras

While Greek bond interest rates have dropped below 8 percent, the tug of war between Athens and its creditors is raging over the country’s return to the markets and the use of the excess funds set aside for the bank recapitalization, as the government is trying to avoid a third bailout agreement.

The absence of an agreement on the unused bank recap funds has resulted in the postponement of the announcement of the bank stress test results. That was originally scheduled for end-December, but has now been put off by a month until a deal is reached.

The government expects to cover some of the funding gap for 2014-15 with the money that banks will not need for their recap. This is why it it seeking the best possible terms for the stress tests, including a lowering of the capital adequacy threshold (Core Tier I index) from 9 percent to 8 percent in line with requirements for bank in the rest of the eurozone. That will reduce bank recap needs by 2.5 billion euros, while the inclusion of the whole of the deferred tax in banks’ capital, instead of just 20 percent, would save another 3 billion euros.

Athens is hoping to cover the 2014-15 funding gap of 14-15 billion euros using 3 billion euros from an interest rate reduction for its official sector loans and 4 billion from recycling the bonds given to banks in 2008, and by tapping the unused bank recap funds and the money markets through a limited bond issue. By doing so, the government believes it can avoid signing another memorandum with its creditors.

However, sources close to the negotiations say that creditors, led by the European Central Bank, disagree with the use of the excess recap funds for any other purpose, and are rejecting Greece’s requests concerning the Core Tier I index and the deferred tax. In addition, the ECB is against recycling the 2008 bonds. The country’s creditors are also yet to approve the bill for banks’ new share capital increases.

Government officials interpret the creditors’ attitude not only as their desire to for Greece to retain a safety cushion in the form of the unused recap funds, but also as a reason to prolong the strict monitoring of the country’s streamlining process, as illustrated by recent statements by German Finance Minister Wolfgang Schaeuble and SDP officials on a new bailout for Athens.