European Union finance ministers were surprised to hear their Greek counterpart, Gikas Hardouvelis, speak in unusually strong terms about the impact of planned ECB stress tests on Greek banks at the July 8 ECOFIN council meeting. Hardouvelis said he believes Frankfurt is adopting extremely adverse scenarios for the tests and that if major capital requirements arise, liquidity problems will become aggravated and recovery prospects undermined.
“The Greek economy and its banking system have been under constant stress for the past four years to an unprecedented degree, and the European Central Bank intends to increase the pressure even further. If it insists, the risk is that it could bury the economy just when it appears to be stabilizing,” Hardouvelis told ECOFIN.
The finance minister believes that what is at stake from the outcome of the stress tests is not whether there will be any funds left over from the 50 billion euros originally set aside for the credit sector’s recapitalization, but the very stabilization and recovery of Greek economy.
Hardouvelis deems two of the elements of the stress tests the ECB is preparing particularly dangerous if adopted. The first concerns the reduction of the value of Greek bonds – held mostly by foreign banks and investors – by 10 percent according to the baseline scenario and by 16 percent by the extreme one. The second regards the refusal to take into account restructuring plans drafted by Greek banks and approved by the European Commission, including measures for bolstering capital.
When ECB chief Mario Draghi insisted on not factoring in the restructuring plans, Hardouvelis countered that the Bank of Greece, a member of the ECB-led Eurosystem, has already conducted its own stress tests, leading to banks increasing their capital base by 8 billion euros. A different result by the ECB would harm the system’s credibility, he argued.