ECONOMY

Nationalization could win some votes but will hamper interests

Statism is so deeply rooted in Greek politics and society that a signal from abroad is enough to rekindle discussion about the nationalization of a major local lender and the creation of one or more major state financial institutions in the Greek banking system. However, few appear to have thought about the short- and long-term consequences of such a move for the economy. The massive losses suffered by some major foreign banks, such as RBS, led to their being taken over by the government and the apparent unwillingness of some Greek banks to extend loans to households and small companies has provided a number of politicians, bankers and others with an excuse to start thinking about doing something similar in Greece. Of course, Greek banks were either very smart to avoid investments in toxic assets blamed for the woes of major credit institutions in the US and Western Europe or so busy making profits by offering loans in Greece and other Southeast European countries that they did not suffer the devastating blows sustained by some of their peers abroad. However, local banks are not immune to the sharp economic slowdown that is threatening to turn into a recession, nor the malfunctioning of international capital markets. Limited access to world capital markets and intense competition for local savings to finance credit expansion at home and abroad have contributed to a sharp rise in funding costs in the form of high interest rates on time deposits. This has hurt the spread banks earned on deposits and forced them to increase their spreads on new consumer, mortgage and business loans, making it harder for their clients to meet their obligations. But the economic slowdown in Greece and the widespread fears expressed abroad about the economic situation in Southeast European countries, where Greek banks have a strong presence, have also raised concerns about a sharp rise in their nonperforming loans and the possibility of «skeletons» hidden in their loan books. This has brought up the issue of capital adequacy. A number of analysts think the economic situation in Greece and especially in neighboring countries may deteriorate so much that current provisions for bad loans may prove inadequate. In such a case, bank shareholders will be called on to make up for the capital shortfall and the government will step in to shore up their capital and take control if they show unwillingness to do so. This is the soft version of the Greek nationalization plan and Economy and Finance Minister Yiannis Papathanassiou may have no option but to sanction such a move under these circumstances. However, nationalizing a major bank in order to save it from collapse is not exactly what Greek advocates of nationalization have in mind. A major bank falling under full state control can provide the political party in power with the ability to grant political favors to its followers, such as hiring hundreds of them and providing loans to firms and individuals on the basis of political criteria. Thus, the nationalization of a major bank such as National, in which the indirect control of the state amounts to about 16 percent of share capital, has clear political motivations and less economic ones. Nevertheless, it will be in line with a global shift toward greater state control in the public sector. Of course, proponents of such a move argue that the nationalization of a major bank will allow the state to signal policy direction to the rest of the banking sector by opting for smaller spreads on loans to benefit small and medium-size firms and provide relief to households. This may indeed be the case but it might lead to more bad loans even when the economy recovers. Moreover, the government has two major banks, namely ATEbank and the Postal Savings Bank (TT), which are fully controlled by the state and can be used to do the same thing. The state can boost the share capital of these banks, as TT under its chairman Angelos Fillipides plans to do in the next few months to merge or buy another weak bank. At all events, Greece is a country with a large public debt and current account-to-GDP ratio, that is having difficulties borrowing on international capital markets at lower interest spreads compared to Germany. Nationalizing a major bank that is not in dire straits, as some suggest, may provide more votes for the ruling party in the short term but hamper the interests of the country in the medium term.