Fitch Ratings said in a statement on Tuesday that the Greek government’s intention to create a “bad bank” is a positive step toward achieving reform because it recognized that high volumes of nonperforming loans (NPLs) are impeding new lending.
Nevertheless, banking sector reform proposals included in a broader package presented to eurozone partners last Wednesday appear insufficient compared to the scale of the problems faced by Greek banks, despite potential benefits for banks’ asset quality and liquidity.
“The package describes banking sector deficiencies as ‘critical.’ We agree with this and believe failure of the banks is a real possibility, as indicated by the ‘CCC’ ratings assigned to the country’s largest banks. NPLs have reached staggeringly high levels.”
Fitch estimated that domestic NPLs at National Bank, Piraeus, Eurobank and Alpha Bank (which together account for around 95 percent of sector assets) reached 72 billion euros at end-2014, equivalent to 35 percent of combined domestic loans.
Net of reserves, Greek NPLs reached a high 30 billion euros and still exceeded the banks’ combined equity.
“The proposal to create an asset management company, or bad bank, using remaining funds from the Hellenic Financial Stability Fund (HFSF), to deal with NPLs is potentially positive for the banks’ asset quality,” concluded Fitch.