ECONOMY

Gov’t insistence on bank bailout package raises control questions

The Greek government and the central bank continue to insist that all banks accept a capital injection from taxpayers’ money to shield the economy from an expected economic downturn in 2009. However, stress tests show most large banks have sufficient flexibility to protect their capital under adverse economic conditions in 2009-2010. This in turn raises questions about other motives on the part of policymakers. The 28-billion-euro plan to protect the economy and credit institutions is aimed at getting banks to reopen their lending taps and smooth out the impact of an expected economic slowdown that will bring gross domestic growth (GDP) to between 2.0 and 2.5 percent. Finance Minister George Alogoskoufis wants banks to expand total lending at a clip of 10 percent next year from an estimated 19 percent or so this year to meet the needs of local households and businesses. The government backed down from its earlier demand to link participation in the plan with state capital injection last week. Instead, it tried to make the plan politically acceptable by demanding that banks wishing to get state guarantees for medium-term bond issuance accept state representatives on their boards, a cap on executive pay, limit dividend payouts to 35 percent of their earnings and accept surveillance by a newly formed state council. It should be noted that the Greek bailout plan comprises three parts. First, the state may boost the capital base of Greek banks by buying preferred shares with voting rights up to a total of 5 billion euros. In return, banks will have to pay an annual interest rate of 10 percent. Second, the Greek state will guarantee 3-to-5 year bonds issued by banks operating in Greece in 2009 for up to 15 billion euros, in return for an annual fee. Third, the state will issue special government bonds worth up to 8 billion euros and deposit them with local banks, which in turn will use them to borrow from the ECB. Banks will also pay an annual fee for using this facility and the bonds will be secured against banks’ assets. One would have expected the matter of the state’s capital injection to have closed after the revision of the plan, but Alogoskoufis has sought to keep it alive by stating repeatedly that the state has the means to force all banks to accept the taxpayers’ money to boost their capital base. Analysts and others think the Finance Minister may be implying that the central bank will raise the core Tier I capital adequacy ratio to a much higher level, forcing all banks to seek state money. Greece’s major banks are well capitalized according to recent estimates by Goldman Sachs. The core Tier I ratio of the National Bank of Greece, whose chairman and CEO, Takis Arapoglou, is known to be opposed to the capital injection scheme, stands at 8.1 percent, Alpha Bank’s at 7.7 percent, Eurobank’s at 7.2 percent and Piraeus Bank’s at 8.3 percent. The core Tier I ratio at state-controlled ATEbank is estimated at 7.7 percent and Postal Savings Bank at 10.3 percent. Their Tier I ratio is even higher if one takes into account hybrid capital such as that injected by France into its largest six banks. France’s capital injection to the largest banks is worth 10.5 billion euros and is granted in return for a «moral pledge» to increase their lending to the economy. No executive pay cap or other restrictions have been imposed so far. The opposite is true in Germany, where state aid to banks comes with strings attached. The argument that all large Greek banks will need a capital injection appears quite weak if Goldman Sachs’s stress testing for more than a doubling of their provisions for loans in arrears turns out to be true. Even if economic conditions deteriorate in 2009 and 2010 and Greek banks are forced to more than double their 2008 provisioning levels, that is, provisions over total average loans, they have enough flexibility to accommodate them without hurting their capital base. So, unless they have other skeletons in their cupboards of which the market is unaware, they can manage without a capital injection by the state. This is especially true in the case of National Bank. These calculations, along with the state’s insistence on getting its foot in the door of private banks, plus the Greek political tradition of state interference, have made some market analysts consider something else. Namely, whether the state’s intention is not just to protect the economy from the expected slowdown, but also to increase its leverage over private banks for certain political purposes. Time will show whether this is the case.