Lenders are locked in savings interest rate battle

Greek banks are locked in a savings interest rate battle in a bid to improve liquidity, currently at very low levels.

A fresh round of competition is being fueled by local as well as foreign credit institutions that are trying to offset their exclusion from the emergency liquidity assistance (ELA) facility by launching a campaign to attract liquidity with high interest rates.

Greek banks have so far been able to pump some 40 billion euros from the facility, making up some of the losses caused by the drop in savings.

The activation of ELA helped to contain the savings rate competition, which intensified during the crisis as deposits were being withdrawn, depriving Greek banks some 65 billion euros over the past three years.

However, rates have again skyrocketed, up to as high as 7 percent, even for relatively small amounts (around 30,000 euros), upsetting efforts to readjust the cost of money on the part of the banking system, which has been shaken by Greece?s recent debt restructuring (PSI) and bad loans.

Foreign banks have also entered the rates war after their conservative policy of the past few years resulted in a drop in deposits — along with a loss of market share.

The average interest rate is back at 5 percent, even for small amounts of money, but banks? efforts to attract long-term savings are being undermined by the climate of political uncertainty, obstacles to recapitalization and banks going under (although their shareholders do not seem to have been affected).

Although most deals advertised by banks maximize interest revenue for long-term deposits, they usually entail no early withdrawal charges, a fact which undermines attempts to encourage customers to entrust banks with their savings for long periods of time.

This is not the exclusive responsibility of banks, but it is mainly a consequence of the volatile political environment and its effect on the country?s economic stability. Deposits have dropped significantly and it will take years to make up the lost ground.

Another concern is the dramatic drop in the percentage of households that still have some basic savings. According to data provided by banks, the percentage is at 20 percent. The vast majority of Greek households have savings accounts, though the figure went down to 50.6 billion euros at the end of February.

Meanwhile, time deposits have gone down to 80.8 billion euros, but the amount appears to be owned by a very limited number of households, confirming the unequal distribution of savings.

As average household incomes drop, many are turning to the interest they earn on their savings as an alternative form of income. According to bank officials, many people depend on that interest to make up for the fall in their incomes, which in some cases has been as great as 200 to 500 euros a month. Interest is now seen as a monthly income to cover basic needs.

Greek household deposits have declined to 138.5 billion euros — to 2006 levels — though most analysts expect them to return to 2002 levels.