ECONOMY

Gov’t must avoid populism and modify its bank bailout

The Greek economy is in much better shape than most of its peers in the eurozone at this point, but recent developments show it may fall victim to populist economic policies aimed at short-term political advantage at the expense of medium-term economic benefits. The government shouldn’t fall into this trap. At the same time that other eurozone countries are proceeding with policy measures to boost their banking sectors and protect their economies from the spreading economic crisis, Greek politicians, the media and others have been fighting it out over the national plan to boost the banking sector. The government carries a great deal of the blame for the confusion surrounding the plan. This is because it has set as a precondition that any bank joining in the plan will have to accept a capital injection via the state’s purchase of preferred shares. That total estimated amount is 5 billion euros. In so doing, the government has raised a lot of eyebrows, since many suspect it has three ulterior goals: First, to make sure there are enough loans to finance households and companies and keep the economy running next year. Second, to increase the state’s influence in the sector, which could take the form of government appointments and favors to various people and interests to ensure their votes in 2009, as the prospect of early national elections increases. Third, to offer coverage to a major bank with an inadequate capital base that wishes to hide its problem under a scheme in which all large banks will participate at the same time. Of course, this, in turn, raises questions about the reliability of available public figures published by listed banks and which point to high capital adequacy ratios. Under pressure from the opposition political parties and the media, the government has tried to score political points by tightening the criteria for any bank joining in to a point that seems unacceptable by some large banks. In addition to acquiring an equity stake in local private banks and appointing representatives to their boards, banks will have to accept a cap on executive pay and do away with bonuses. Also, a state committee will oversee whether the money borrowed by banks through the rescue scheme will fund mortgage and small-and-medium-term enterprise loans. At this point, it looks as if the conditions are too stringent for some large private banks, such as Piraeus Bank, to accept. This means the rescue plan may be neutralized at a time everything is pointing toward a sharp rise in non-performing and default loans in the neighboring countries hit by the global crisis – and less so in Greece – next year, which will hit their earnings and eat into their capital bases. It should be noted that the Greek economy looks set to slow to 2-2.5 percent next year, while neighboring countries face the prospect of currency devaluations which will hurt local borrowers with loans in euros or Swiss francs. Moreover, long-term bonds issued by banks in the past expire next year and may be difficult or even impossible to fund in international wholesale markets if the crisis persists. Given the fact that these bonds have financed either loans or investments, some banks may be forced either to call in some loans, liquidate the investments and/or simply not extend new loans, which would further hurt the economy. Since all eurozone countries are adopting similar bank rescue plans, it would be unwise for Greece not to do the same. Yet it is imperative that the plan differentiate between banks joining because they need liquidity and others with capital needs. Still, it is fair that a bank in need of a capital injection proceed with a share capital increase fully underwritten by the state. This way its major shareholders and the rest of the market will have an opportunity to boost its capital and show their commitment to its long-term growth and viability before asking taxpayers to buy any unsold new shares. It is absolutely logical that the state impose some stringent conditions for its participation in the plan in the case of a capital injection by the state. However, it is not rational to expect the same conditions to be imposed when a bank joins because it wants to use government bonds to borrow from the ECB or use state guarantees to borrow by issuing 3-to-5 year bonds. By modifying the existing national bank plan to differentiate between liquidity and capital needs, the government will also shed the impression it is conspiring to hide the weak capital position of any major bank. The last thing Greece needs now is a strong dose of populism. The government has the opportunity to show it does not aspire to populist practices even under pressure.