Another ECB interest rate hike?

Greek banks appear unruffled by the prospect of a further rise in interest rates, considered likely to be announced by the European Central Bank (ECB) on September 6. The increase would be 25 basis points, from 4 percent to 4.25 percent, and the chances are it will be passed on in whole to borrowers. However, views are mixed as to whether the ECB will actually go ahead with the rise in its basic rate, with some banking officials arguing that the current global credit crisis will delay it. Nevertheless, they consider that both the overall level and terms of borrowing do not pose a challenge to the ability of Greek households to make repayments. Attica Bank president Tryfon Kollintzas considers that the prospect of an interest rate hike, despite an opposite trend in the US, is supported by the fact that «liquidity in the eurozone is seen as satisfactory, at a time, indeed, when concern about inflation remains strong.» Harry M. Kyrkos, EFG Eurobank’s head of risk management, takes the view that the circumstances facing borrowers differ on the two sides of the Atlantic. «Any move by the US Federal Reserve to cut its basic rate would be based on estimates that the crisis in the US housing market will have a negative impact on consumer demand. This does not appear to be the case in the European economy, to the extent that the lifestyle of the European borrower differs from that of the American.» Panos Tsoupidis, president of Postal Savings Bank, believes there is interaction between the two markets. «A cut in the Fed rate will take the heat off the trend for a rise in Europe,» he says. Piraeus Bank’s general manager of retail banking, Spyros Papaspyrou, says, «A possible new rise will not be absorbed by the banks, which, due to abundant liquidity and strong competition, have managed so far to partly absorb the rise and not pass it on to borrowers.» «The pressures on the system limit the ability of banks to absorb any further rate increases, and any future ones will be more painful,» he adds. Spreads narrowing On the whole, bank officials take the view that, perhaps for the first time, Greek borrowers are borrowing on equal terms with their European counterparts, as competition has led to a sharp drop in spreads. Greek mortgage rates are now competitive with those in the rest of the eurozone. According to June data, the average Greek variable rate was 4.90 percent, against a 4.99 percent eurozone average. The five-year fixed rate, in contrast, stood at 5.14 percent in Greece, against 4.86 percent in the eurozone as a whole. The spread remains substantial in consumer credit, however, as the average Greek rate was 9.53 percent, compared to a eurozone average of 6.66 percent. Kyrkos argues that favorable economic conditions have an impact on interest rates. «The economic environment in this country remains favorable, to the extent that falling unemployment is a basic component in risk management undertaken by banks,» he says. «Unemployment is the most sensitive parameter in the measurements which banks conduct internally, and to the extent that the hike in the cost of money by the ECB is not accompanied by a rise in unemployment in this country, credit expansion does not appear to be creating any dangers,» he says. «However, a potential risk may be posed by the maturation of loans that incorporate low-rate starting periods of one, two or three years. The end of this low-rate period may create difficulties for many borrowers, partly due to the now much higher cost of money following ECB’s successive rate increases since 2006.»