ECONOMY

Bank rescue plan puts all Greek lenders in same boat

Greece’s national plan to shore up the banking sector and protect the economy from a severe downturn has many similarities with other plans in Europe and elsewhere but it is quite unusual to mandate that well-capitalized banks looking for cheaper liquidity accept capital injections from a highly indebted state. As the international financial and economic crisis unravels, more and more clouds gather over the until recently blue skies of Greece, threatening to derail the economy from its path of growth next year and beyond. Under these circumstances, it would have been imprudent if the country had not taken additional measures to soften the adverse impact from the steep stock market decline, the expected much lower growth in key export markets abroad and wounded consumer and business confidence. Greece was among the first European countries to guarantee bank deposits. This helped large private and small banks facing customer withdrawals to breathe easier at a time that global wholesale markets are shutting down. The interbank market, where banks lend each other euros, dollars and other major currencies, is not functioning properly and the only sources of liquidity are customer deposits and borrowing short-term funds from the European Central Bank (ECB) with collateral. There is no question that Greece and the other eurozone countries also did the right thing by coming up with a set of measures to help their banking sectors and to boost their respective economies. The Greek rescue plan comprises three parts: First, the state will guarantee three- to five-year bonds issued by banks operating in Greece in 2009 for up to 15 billion euros. Second, the state will issue special government bonds worth up to 8 billion euros and deposit them with local banks, which, in turn, can use them to borrow from the ECB. The third part of the plan wants the state to boost the capital of Greek banks by buying preferred shares with voting rights. The maximum amount of the capital injection is 5 billion euros and the banks receiving it will have to cap executive pay and accept a state representative on their boards. The total amount of the Greek rescue package, which aims at helping banks to keep credit growing at 10 percent next year, is 28 billion euros, assuming it is exhausted by banks. In reality, the potential additional burden in terms of an increase in state bond supply is 20 billion euros, that is, 5 billion in capital injections and 15 billion in debt guarantees. Greece’s rescue package is estimated at 12.3 percent of GDP compared to 20 percent for Germany, whose banks are in much more dire straits, 37 percent in Austria, whose large banks have major exposure in Romania, Ukraine and other southeastern European countries, 19 percent in France, 14.2 percent for Spain and 2.6 percent for Italy, whose bank sector is considered, generally speaking, strong. The size of the Greek and Portuguese bank plans are similar in terms of GDP. But Greece has done something that makes it stand out. Any bank willing to participate in the rescue plan will have to accept a capital injection from the heavily indebted state. So, even banks that have liquidity needs but a strong capital base will have to accept capital injections if they want to have access to debt guarantees by the state and deposits of state bonds to borrow from the ECB. Since all large private banks have loaned out more money than they have accepted in the form of deposits, this means they will have to accept the state’s condition. This may be thought by some as a prudent move, given the deteriorating situation in the local economy and neighboring economies where Greek banks have a presence and whose currencies are under pressure, increasing the likelihood of bad loans. However, it is generally accepted that each bank is different and therefore has different capital needs. In so doing, the state gives the impression that it wants all banks to be in the same boat, raising speculation about its motives, while simultaneously increasing public debt. Greece’s total funding needs may exceed 17 percent of GDP next year, including deficit financing, debt redemptions and the bank capital injection and this is a good reason for Greece to pay a hefty spread over similar German government bonds, hurting its public finances.