Saturday Jan 31, 2015 Search
Weather | Athens
16o C
13o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Pros and cons of a national bad bank

 Whether a single entity is chosen or lenders are asked to deal with NPLs individually, action is essential

By Dimitris Kontogiannis

The Greek economy requires years of expansion to reduce its record unemployment rate and raise depressed living standards to pre-crisis levels. Lending to the private sector will have to be normalized to facilitate this process, but this requires that banks deal effectively with their large stock of loan arrears. And the Greek authorities have to think hard about the costs and benefits of tackling the problem via a national bad bank scheme like other countries have done in the past or simply letting banks proceed with dedicated internal wind-down portfolio units.

In addition to the huge public debt overhang, the economy will have to be supplied with sufficient credit to be able to recover from its six-year recession and grow. Banks should have a key role but the large stock of bad loans will continue to hamper this effort unless it is dealt with fast and effectively, according to analysts and others. The large stock reflects the steep rise in the unemployment rate and the distress in the corporate sector due to the protracted cyclical downturn and own structural inefficiencies. An unspecified amount of bad loans comes from retail customers who dont pay although they can, the so-called strategic defaulters. Given the situation, it is therefore not surprising that the issue of bad loans is high up on the agenda of bankers and government officials.

According to the International Monetary Funds fifth review, nonperforming loans (NPLs) i.e. loans for which no interest has been paid for more than 90 days and restructured loans accounted for about 40 percent of total loans at the end of 2013. The stock of bad loans alone rose further in the first quarter of this year and continues to climb according to analysts. The amount of NPLs is estimated at around 77 billion euros in Greece and 88 billion at group level and is likely to climb higher. It is the highest NPL ratio among eurozone countries except for Cyprus. The ratio of NPLs to gross loans is seen peaking in the last quarter of 2014 or the first quarter of next year, assuming the official projections for economic growth of 0.4 percent this year and faster next year materialize.

The idea of creating a national bad bank like Irelands NAMA or Spains Sareb to deal with the problem has come up again lately as arrears continue to rise, climbing to more than 35 percent of total loans at the end of the first quarter, and as the four systemic credit institutions prepare for the European Central Bank stress tests expected to be announced in October. It is known the IMF had objected to a national bad bank scheme in the past on the grounds it would have contributed to an increase in the countrys public debt.

Some high-level Greek officials now appear to share the same view, with both new Central Bank Governor Yannis Stournaras and new Finance Minister Gikas Hardouvelis objecting to the idea, according to credible sources. It is likely they object to the national bad bank scheme because they would like to use the reservoir of 11 billion euros in the Hellenic Financial Stability Fund (HFSF) for other purposes. These may be the reduction of the stock of public debt, filling the financing gap in the 2015-16 period or boosting any major banks core capital, if required, after the ECBs stress tests. If their view prevails in the end, which is the most likely outcome, each bank will be called upon to satisfy any capital needs identified by the ECB stress tests and deal with bad loans individually. Banks have already organized internal recovery units with dedicated staff to deal with NPLs. At this point, given the extent of bad loans, it looks as if the management of NPLs may be a lengthy process, relying more on loan restructurings rather than write-downs.

On the other hand, proponents of the national bad bank scheme argue that a good amount of corporate and mortgage loans, in the order of 30 to 40 billion euros, could be transferred at a discount to valuation to a national bad bank set up for this purpose. They say foreign private funds are interested in participating in the capital of such a national bad bank as long as problematic assets are transferred at a discount from banks and there are other guarantees from the HFSF. According to them, this is a more effective way of dealing with NPLs, with the added benefit it will not dent investor sentiment regarding Greek stocks and bonds. They seem to be concerned that the ECB stress tests may identify large capital needs, forcing some or all the Greek banks to tap the markets for fresh capital for the third time since summer 2013. In this case, private investors who have put money in the banks may be frustrated and decide to flee Greek assets, dealing a blow to the countrys efforts to return to the bond markets since some international investors have put money both in stocks and bonds.

There is no question both sides in the debate have some strong arguments in favor of or against a national bad bank scheme. However, it is more important that an effective way is found to deal with bad loans to enable a normal flow of credit to the private sector, supporting the economys exit from the vicious cycle of the last few years. In this regard, the faster the problem of bad loans is tackled, the better for the economy. Muddling through is definitely not the best approach and in our opinion should be avoided.

ekathimerini.com , Sunday Jul 20, 2014 (21:33)  
ECBs Constancio signals Greek waiver may end if program dropped
Greece starts countdown to cash crunch saying bailout over
How Greece can run out of cash and what ECBs Draghi can do
Varoufakis to meet French counterpart on Sunday
Tsipras says Greece to repay ECB, IMF, reach deal with euro area
Greek Prime Minister Alexis Tsipras sought to repair relations with the countrys creditors after a week- long selloff in bonds and stocks, triggered by his pledge to end the countrys bailo...
Greece seeks EU allies but Germany holds firm
Greeces radical new government on Saturday began a search for European allies forits anti-austerity agenda, but German Chancellor Angela Merkel once again ruled out debt relief for Athens. P...
Inside News
BASKETBALL
Panathinaikos preserves perfect home record
After yet another great performance at home, Panathinaikos defeated Galatasaray 86-77 in Athens on Friday to get to three wins in five games at the Euroleague top-16. The Greek champion shoo...
SOCCER
Gattuso: Unpaid OFI players couldnt buy food
Former coach Gennaro Gattuso has lifted the lid on the plight of crisis-club OFI Crete which has been banned from playing in the Super League until it clears mounting debts with its staff. T...
Inside Sports
INTERVIEW
SYRIZA must come up with pragmatic solutions, Schulz tells Kathimerini
SYRIZA must realize that it is now the Greek government, not a party running an election campaign, European Parliament President Martin Schulz, the first European official to visit Greece ...
COMMENTARY
Strange haste
The members of the new government must have a lot of confidence in themselves. Several days before announcing his program, Prime Minister Alexis Tsipras and his cabinet have opened up a mult...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
RECENT NEWS
1. ECBs Constancio signals Greek waiver may end if program dropped
2. Greece starts countdown to cash crunch saying bailout over
3. How Greece can run out of cash and what ECBs Draghi can do
4. Tsipras says Greece to repay ECB, IMF, reach deal with euro area
5. Varoufakis to meet French counterpart on Sunday
6. No lending to Greek banks if no deal by end of February: ECBs Liikanen
more news
Today
This Week
1. US to work closely with Greece and EU to resolve differences, says White House
2. Greek bank debt plummets as investors head for the exit
3. Merkel rejects debt writedown for Greece
4. Greek markets plunge as SYRIZA digs in on challenge to austerity
5. Greece seeks EU allies but Germany holds firm
6. No lending to Greek banks if no deal by end of February: ECB's Liikanen
Today
This Week
1. Greek Elections 2015 | LIVE
2. SYRIZA heads for historic victory but without majority
3. Greek Elections 2015 | LIVE
4. SYRIZA's win will test institutions
5. Greek Elections 2015: The day after | LIVE
6. EU must accept that Greek debt relief is inevitable
Find us ...
... on
Twitter
... on Facebook
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright 2015, H KAΘHMEPINH All Rights Reserved.