Strong bank opposition has frozen savings bonds scheme

Finance Minister Nikos Christodoulakis’s proposal to offer government bonds with relatively high yields directly to the public stirred up a rumpus in recent days. The government plans were a reaction to the latest interest rate cuts, especially savings rates. The mass media, trade unions and opposition parties have all pounced on the issue, highlighting the losses to savers. However, even before the Finance Ministry unveiled its plans, it was already facing criticism from banks and even within the government itself. Famed for his technocratic bent, the minister came under fire from banks for pandering to the masses and adopting a populist approach. His politically impracticable proposal would reverse the country’s current debt management policy and push up debt servicing costs. It would have had a negative impact on the stock market and could even have led to a bond bubble. Christodoulakis’s proposal entailed the issue of one-year, tax-free bonds with a yield higher than inflation. As could be expected, it drew the ire of banks, that feared investors would withdraw their savings and subsequently create a solvency problem for the banking system. Nevertheless, even if this presupposition came true, it would only have a minimal impact as the ministry was referring to a limited bond issue of 1-1.5 billion euros, which represents only 1-1.5 percent of total bank savings. It is clear then that banking concerns are related to the pressure and the competitive conditions which would have been created. Such was the concern, that for the first time in many years, many bankers were present in Parliament during Christodoulakis’s debate of the budget. The ministry’s retreat has restored calm in the banking sector. He limited himself to exhorting banks to offer more products with returns that would take inflation into account. No one, of course, can prevent the State from using its financial tools to support a populist policy and prop up depositors’ savings. Bankers said that if the government had gone ahead with its plans to issue high-yield bonds to the public, they would be forced to increase interest rates for both savings and loans, thereby creating other problems. They are, however, more receptive to the proposal to issue treasury bills of three months, six months and 12 months in duration, or even index-linked bonds with a yield slightly higher than eurozone inflation as is done in Germany and France. Bankers this year have run into a number of serious problems. One of these is the knock-on effect on their profitability due to endogenous problems in the system. The negative course of both the local and international stock markets has dented their share portfolio and led to losses. Another problem facing the sector is its high operating costs, possibly the highest in Europe. The responsibility for this can be shared between banks and the labor and social security systems. In recent years banks rested on their laurels as a result of the stock market boom, and now that they have decided to cut costs they find themselves up against inflexible labor and social security laws. It is a fact that banking costs as a percentage of revenues are the highest in Europe. A third problem facing banks is interest income and organic revenues, which represent sub-multiples of past-year profits despite a sharp increase. Faced with all these problems, cutting interest rates would have a serious impact on banks’ profitability. The entire system is now focusing on the retail end, even those that have traditionally targeted the corporate and major client segments. While not admitting it, banks continue to follow the easy way of passing on costs to customers. The sharp fall in savings interest rates is based on the belief that depositors have no other choice. Coupled with this, banks are constantly telling customers to take out loans, the costs of which allow them to maintain a profitable spread. Banks say this is because margins are not excessive and are proportionate to the risks in each category of loans. Bankers hide the fact that margins on loans to major companies are symbolic. Nevertheless, there is pressure now to improve margins, and the onus has fallen on good clients. Banks cannot pass on the costs to small depositors or retail clients, as the system cannot manage or monitor the financing risks. The major banks that share a similar policy in savings products are now criticizing the smaller banks for unfair competition, as they target savings by offering interest rates of around 2 percent. After last week’s furore, banks are ready to submit their proposals to the Finance Ministry regarding the issue of T-bills or bonds with better returns than repos in some cases. In other words, their proposals will be adapted to the banking system. The ball is now in the Finance Ministry’s court.

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