In early January, as soon as the holidays are over, the Finance Ministry is expected to submit the Greek proposal for the reduction of local banks’ nonperforming exposures (NPEs), which has been processed by the Hellenic Financial Stability Fund (HFSF) with technical details specified by JP Morgan, to the Directorate-General for Competition (DG Comp) of the European Commission.
The government’s objective is for the proposal to be approved by Brussels within the first couple of months of 2019, a timeframe that is seen preceding a possible snap general election which could take place as early as in March.
The SYRIZA-led coalition is hoping to take the credit for the political initiative to tackle the most important burden on Greek lenders’ shoulders, which is also affecting the economy in general as it has become clear that the problem of the sizable NPEs has led to the market exclusion not only the country’s banks but also the Greek state itself.
The tight timetable that is expected to be required is based on the fact that the securitization of bad loans using state collateral is a model that has been adopted in Italy and has secured the agreement of DG Comp, which had already approved a similar proposal for Italian banks in 2017.
Finance Ministry officials are optimistic that the approval granted to Italy means that the Greek proposal will get the nod from Brussels quite soon, so the government can make the most in political terms of its intention to resolve the problem of bad loans, especially on a communication level in the runup to the general election.
The Directorate-General for Competition’s approval will officially pave the way for the application of the proposal that foresees at least 15 billion euros in nonperforming loans being turned into bonds, which would partly relieve the Greek credit institutions’ troubled financial reports.
Officials who are familiar with developments on the issue explain that the main problem had been the fact that – unlike its Italian counterpart – the Greek state has a low credit rating – junk status to be precise – and therefore is unable to offer up any collateral; however, they say that this is now being sidestepped, even if it is eventually reflected in the price of the bonds that are created.
They also point out that the main advantage of the Hellenic Financial Stability Fund’s proposal is the fact that a significant portion of loans secured on collateral in banks’ portfolios will be priced on market terms, gradually generating a reliable methodology for the assessment of credit risk. This way Greece will be able to gradually create a consistent and reliable curve for the assessment of the country’s private debt that does not presently exist.
In practice, this constitutes the process for the creation of the necessary conditions for a new secondary market that will rekindle the interest of investors – even if they are of the type that only invest in distressed debt – in investing in Greek assets and in domestic lenders.
That solution does not lead to local banks needing any new capital requirements, and constitutes a more beneficial option, in terms of the possible losses it may generate for the lenders’ financial reports, compared to the solution of loan sales, which leads to lower valuations for the the portfolios that are transferred.
In any case though, the solution proposed by the Hellenic Financial Stability Fund is not going to tackle Greek banks’ NPE problem in its entirety, as their nonperforming exposures remain particularly high at over 82 billion euros. It will still constitute one more instrument among the several that the lenders have for containing the problem, which requires multiple interventions both on the loans sales and securitizations front and that of loan management, through efficient debt settlement methods as well as generous writeoffs.
It is worth noting that according to the plans the country’s banks have submitted to the monitoring authorities, their nonperforming exposures will have to decrease from 82 billion euros at the end of September 2018, to just 32.7 billion euros at end-December 2021.
Nevertheless that target is already considered obsolete, as not only does it see Greek lenders’ NPEs at the high level of 20 percent of total loans at the end of the next three-year period – while the corresponding average rate for eurozone banks stands at 3.6 percent – but also the plans that have already been set for implementation by the managements of Greek banks as well as the Economy Ministry target a further reduction which foresees the index of nonperforming loans dropping below 10 percent by the end of the next three-year period.
According to the projections and plans that are currently the object of negotiations between the lenders and the supervising authorities of the sector, the securitizations and sales of loans in the next three years are expected to approach 22 billion euros – this is the baseline scenario with quite moderate assumptions, and the figure is expected to grow if the Hellenic Financial Stability Fund’s proposal with the conversion of loans into bonds is approved and proceeds.
The total amount of the loans to be written off is estimated at about 15 billion euros; revenues from the liquidation of property assets are projected to reach up to 6.7 billion euro; takings from loan repayments by the end of 2021 are expected to reach 3.3 billion euros; collections from debt settlements will come to 6.4 billion euros, while those from restructurings are seen at 14.3 billion euros.