Era of cheap money is finished

The European Central Bank’s overnight borrowing rate (euribor) reached historic highs last week, signaling the end of «cheap money.» The resulting liquidity crunch will directly affect Greek banks and borrowers. In fact, senior Greek bank officials warn that the repercussions of the protracted uncertainty have already begun to cast a heavy shadow on the domestic market and prospects for borrowers, particularly those that have taken out loans at euribor-linked rates. A large volume of loans granted by Greek banks are based on either one-month or three-month euribor rates, the level of which reached 5 percent last week. On the other hand, those that have borrowed at rates linked with ECB’s basic rate, which has been at 4 percent for several months now – much below the cost of borrowing for the banks themselves – are the big winners of the crisis. Arguing that the ECB’s basic refinancing rate does not reflect market developments, now almost all banks, including the two largest National and Eurobank, have withdrawn from their price lists this category of products and are promoting euribor-based ones. ATEbank and Postal Savings maintain the ECB basic rate but officials are concerned. The ECB rate’s attractiveness is reflected in promotional moves, such as Geniki’s, which is maintaining it for loan applications that will be submitted by the end of January. National Bank, the market leader, is considering giving its clients the option of converting their old contracts into euribor-linked ones. Another reason why banks are seeking to convert the old ECB rate-based loans into eurobor-linked ones is their effort to offset part of their losses from the narrowing of spreads in the intensely competitive environment. In this way, bank officials say, banks have adapted their rates to market levels and are able to restrict losses due to the cost at which they borrow. Competitive rates Banks’ efforts to retain their customers for the entire duration of loans bolsters the trend toward fixed-rate loans. Bank of Greece data confirm borrowers’ overwhelming preference for medium-term fixed-rate loans of three or five years. Fixed-rate loans of five years totaled -772 million in October, while those for more than five years exceeded -200 million in total. Floating-rate loans now represent one in five new disbursements. Fixed-rate loans appear the best option for consumers. The average fixed market rate for loans up to five years fell further to 4.43 percent in October, against an average of 4.96 percent in fluctuating loans. Bank officials say such fixed rates make Greece among the most competitive in Europe in this particular loan category.