Following talks with European Central Bank officials in Frankfurt, Greek banks are quietly optimistic that their capital requirements will be manageable. The final level of those needs will be determined next week, once the parameters and the technical methods of the stress tests are set.
Senior officials from the Single Supervisory Mechanism of the ECB held a meeting with local bank managers on Thursday regarding the progress of the stress tests, but without going into details and specific figures. Crucially, discussions focused on a number of technical aspects of the exercise, allowing Greek banks to form a preliminary impression concerning the course of the test. The general sense is that the figures will not be unmanageable, allowing for some reserved optimism among bank managers.
Analysts note that the current assessment is taking place in a much more adverse environment than that of 2014, as the estimate of the European institutions is for a 2.3 percent economic contraction this year and 1.3 percent next year before a 2.7 percent rebound in 2017. The negative course of the economy, which is the baseline scenario, aggravates the situation in nonperforming loans in banks’ portfolios, resulting in the higher capital needs.
The analysts estimate that the final amount that private investors will be asked to cover will mainly depend on the outcome of the asset quality review (AQR) of loan portfolios, which was completed last month, and on the minimum level of capital adequacy a bank will need to pass the test. On this front the news is not good for Greek banks, as the ECB appears to be examining setting a Core Tier 1 ratio between 9.5 and 10.5 percent for the baseline scenario and 8 percent for the adverse scenario.
In any case, the banks’ recapitalization project is entering its final stage, and on Tuesday, October 20, the government is expected to present the new draft law on the recap process, as the timetable is very tight.