ECONOMY

Bank of Greece fears rates hike

The Bank of Greece (BoG) is greatly concerned over the possibility of a further hike in interest rates, with officials saying that this could increase the number of households unable to service their debts. And this, in turn, would put extra pressure on the country’s banking system. An additional source of worry for the BoG is the fact that competition among banks, in both consumer and mortgage loans, has led to a significant reduction in profit margins. With banks having absorbed the greatest part of euro interest rate increases at the expense of their profitability, it is currently quite common for certain products to be offered at negative rate spreads. Hence, many banks would be unable to absorb the possible impact of further risks. Risk management in the current conditions of rising interest rates is a burning issue, especially to foreign investors with large positions in Greek banks. According to bank officials taking part in events aimed at briefing foreign investors about the current situation, foreign institutional investors in particular are highly concerned about a number of issues, including portfolio quality, the effects of higher rates and the efficiency of management systems. What is perturbing the BoG and other banks is how domestic households would respond to a prolonged cycle of upward rates, given that Greece’s credit system has minimal experience in risk management under conditions of high rates. In addition, the deregulation of retail banking (i.e. consumer, mortgage) took place in recent years during a cycle of declining interest rates, while the vast majority of households have been spending heavily on borrowed money since 2002, when Euribor and other rates around the globe hit historically low levels. In other words, domestic households discovered borrowing all of a sudden, under ideal circumstances, and most importantly without being familiar with interest rate ups and downs, which would have given them the wisdom to responsibly and effectively handle the vast number of financing tools offered by banks. Warning to banks According to reports, the BoG is determined to take strong action against banks that fail to take measures to adjust to the new circumstances, particularly in cases where the aggressive pricing policy of banks distorts the market. To this end, requiring private banks to make higher provisions against risks would appear to be the central bank’s strongest weapon. Undoubtedly, an increase in interest rates would make it even harder to achieve an upgrading of bank loan quality or reduce the overdue payments index at European levels. Interestingly, the history of overdue payments of domestic banks is twice as high as the EU average, reflecting a rather poor risk management system. Bank officials noted that a share of the blame lies with the BoG’s hitherto flexible policy on private banks.

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