Greece has not yet reached the lowest point of the present economic downturn and all pundits expect local banks to show a significant rise in nonperforming loans (NPLs) this year. It is a rational assumption shared also by government and central bank officials, although no one wants to predict how high NPLs can go. However, senior bankers say they detect an encouraging improvement in NPLs during the last two months, which creates a better picture for the Greek banking sector. Whether this improvement is just a temporary phenomenon or a sustainable trend remains to be seen. It is clear though that it will have implications for the banks, their shares, the Athens bourse and the Greek economy in general. Greek bank shares have rallied lately and most analysts attribute this to the rebound of financial stocks around the globe, following positive statements by the heads of Citigroup and JP Morgan about their banks’ operating performance in the first few months of the year. National Bank shares gained 13.92 percent in the last seven days but are still down 1.38 percent for the last three months. Eurobank shares rose 9.31 percent but continue to be down by 19.41 percent in the last three months, while Alpha Bank shares gained 4.57 percent but are down 21.48 percent over the same period. Piraeus Bank shares recorded gains of 13 percent, cutting their losses to 14.55 percent compared to three months earlier, while Hellenic Postbank shares gained just 2.21 percent to cut their three-month losses to 24.18 percent. Although stock markets are factoring in the impacts of future economic events and/or trends, very few dare say the rebound in financial shares is anything more than a technical rebound following a protracted period of huge losses. This is particularly so in the eurozone and Greece in particular, where more signs of economic weakness are evident, as well as in neighboring countries where Greece’s large banking groups have an insignificant presence. Against this background, it is only to be expected that a growing number of households and companies will fail to pay interest and/or principal even after 90 days have passed. Banks ought to categorize these loans as nonperforming and form extra provisions, though this will hurt their profits and capital. Given the fact that Greek banks have had almost no toxic assets in their books, the attention of the investment community has turned to the credit quality of loan books. Several of the large banking groups tried to appease analysts and create a stronger buffer against a possible sharp rise in NPLs by acting proactively, that is, putting aside more money in the form of provisions for bad loans than warranted in the fourth quarter of 2008. Greek bankers admit they have no clue how high the NPL ratio, that is the percentage of bad loans to total average loans, will go during this economic downturn, but do not agree with some of the worst or even baseline scenarios about NPLs seen in the analyst reports of foreign investment banks, especially about Southeastern Europe. However, they are pleased to point out that the worrying trend of fast rising bad loans seen in Greece in the last few months of 2008 has improved in February and March. NPLs have either stabilized or risen at a declining rate, according to these bankers. They attribute this partly to an improvement in household psychology, dented by a barrage of negative news, especially last December with riots in the streets of Athens and elsewhere and the easing of interest payments following the sharp drop in the main refinancing rate of the ECB and Euribor. As far as the corporate sector is concerned, they say most large corporations did not have difficulties making their loan payments and banks provided refinancing of existing loans where necessary. As far as small and very small firms are concerned, they point out credit has become more readily available, following the government’s program to subsidize loans (TEMPME) and the banks’ own initiatives to ease their loan payments by refinancing existing debt for a longer period of time. It is difficult to argue with these top bankers about the improving trend of bad loans, but it is equally logical to say that it will be strange for loans in arrears not to rise if the Greek economy falls into recession later this year. So, one may say the improvement seen may indeed reflect all of the above reasons cited by the top bankers but also the policy of all banks to refinance the loans of their customers who face difficulties early on. In this way, the NPL ratio is being kept relatively low for now but its future course depends on the performance of the Greek economy. It is anybody’s guess at this point what is going to happen, but it is safe to say tourism will play an important role in determining the outcome.