Greece wants its international lenders to agree to a lower capital ratio for its big banks so there is money left over in its bank rescue fund to help to plug the country's funding gap, bankers said on Tuesday.
Greece is in talks with the International Monetary Fund, the European Commission and the European Central Bank, the so-called "troika" of international lenders, to cut the amount of capital the country's four main banks have to set aside to cover potential loan losses.
"There are talks between Greek authorities and the troika on whether the required capital adequacy ratio (known as Core Tier 1) can be reduced to 8 from 9 percent," a banker close to the discussions told Reuters, declining to be named.
"Athens wants the required Core Tier 1 ratio lowered to 8 percent as is the case with European banks," the banker said.
A lower capital ratio would mean the banks need less cash, saving Greece money now, but potentially making it harder for them to attract new private owners.
But the government wants to be able to tap part of the money left over in the Greek bank bailout fund (HFSF) to reduce its sovereign funding gap this year and next, which the IMF estimated at about 11 billion euros.
"In a best-case scenario, we want to use the remaining HFSF funds (for the sovereign) and to roll over 4.5 billion euros ($6.10 billion) of bonds given to banks," a senior Finance Ministry official told Reuters. "If we do this, we will minimize or eliminate the funding gap."
The 4.5 billion euros worth of bonds, due in May this year, were given to support the banks at the height of the financial crisis in 2008-2009.
The four banks, all majority-owned by Greece's bank bailout fund, are currently being stress tested by the Greek central bank and independent consultants to check if a 28 billion euro ($37.98 billion) recapitalization last summer was sufficient to absorb future shocks as bad loans keep rising.
National Bank (NBGr.AT), Piraeus Bank (BOPr.AT), Eurobank (EURBr.AT) and Alpha Bank (ACBr.AT) control about 90 percent of the country's banking market and are majority owned by the HFSF bank rescue vehicle.
The HFSF, funded by Greece's EU bailout package, covered 25 billion out of last year's 28-billion-euro recapitalization in return for shares in the banks. The HFSF has a remaining cushion of 8 to 9 billion euros, seen by the Bank of Greece as sufficient to cover any additional needs.
Last week, the country's central bank said the banks were likely to need more capital after the latest stress test. The results of the test are expected by the end of January.
The IMF and EU could resist any attempt to remove the banking sector's safety net.
A person familiar with the international talks said while some in the troika saw was no theoretical problem with using the HFSF's money to fund Greece, it was not clear that there would be much money, or any money at all, left after thorough stress tests and recapitalization.
The source also said Greek banks could need further funds under EU-wide stress tests due to be completed in November.
The ECB and EC both declined to comment, while the IMF could not immediately be reached for comment.
The Bank of Greece hired BlackRock (BLK.N) to conduct an asset quality review at the banks and determine potential credit losses up to 2016. Its findings will help authorities determine whether the banks have enough capital to withstand another two years of recession under the stress test's "adverse" scenario.
Non-performing loans now account for about 30 percent of Greek bank loan books due to recession that has shrunk the economy by a quarter and driven unemployment near 28 percent.
In a previous health check in 2012, the central bank had set a 9 percent Core Tier 1 ratio for a base scenario and 7 percent for an adverse scenario.
The European Central Bank reportedly favors a 6 percent threshold for the European-wide tests, though those tests will also interrogate the value of banks' assets, so they could prove tougher than tests run by national authorities.
"It is unclear whether the capital needs will be based on the baseline scenario or the adverse one, there are discussions on this as well," the banker said.
"As regards the methodology used in the test and on the resulting capital needs, a little more discussion is needed with the troika. I expect the matter will be closed during their next visit," said another banker close to the talks.
Another senior banker close to the talks said authorities were not only looking at banks' projected credit losses but also at the pre-provision income that could offset them.
"I don't think the stress test results will be worse than expected. The base case assumption is that Alpha and Piraeus will not need additional capital. National has Finansbank, meaning it can raise capital without having to resort to the HFSF," the banker said. [Reuters}