Nonperforming loans held by eurozone banks are close to a trillion euros, according to recent data, and Greek lenders are struggling with just over a tenth of that amount, or more than 100 billion euros of nonperforming exposures.
Germany, which is not exactly doing perfectly in its credit sector, has almost half of that to contend with at around 58 billion euros of bad loans. On the other hand, the Germans have ways of doing what needs to be done so that their banking system can meet its targets at the end of the day.
Crucially, German banks are operating normally, without capital controls, as is also the case with all the lenders in all the other eurozone member-states. This means that they are participating in the investment of businesses, they have convinced their depositors to trust them with their savings and they are managing their disposable capital through international positions. After all, this is why the level of bad loans is going down in all eurozone countries but Greece.
Practically none of the above factors are at play when it comes to Greece’s systemic banks, which are unable to take any of the initiatives that the country’s economy needs. For starters, nothing is being done so that enterprises can invest at a speedier rate. But nor for convincing depositors to bring back savings they sent abroad – originally in the 2010-2011 period, but more so in 2015, when they were protecting their money from the disastrous policies of Prime Minister Alexis Tsipras and then finance minister Yanis Varoufakis, inflating Target2, the eurozone’s payment system, with more than 100 billion euros.
With the Greek state sucking over 20 billion euros of the domestically available cash liquidity through repos in order to boost the cash buffer of the investment-averse government, the Greek system does not appear capitalistic at all and is not interested in growth whatsoever.
Fully backed by European bureaucracy, Greece will emerge from the bailout program to wind up hostage to a controlled bureaucratic system of protection of the state against private individuals. Everything is being done so that the prime minister and his cousin, his key adviser, can rest easy: the markets will have no chance to pass a judgment on the government’s economic policy.
The fact that you cannot have a modern economy without banks does not seem to concern the current government in the least. It will be up to the next government to sort out the mess. Are we expected to believe that local banks will manage to pull through at the end of the day, when the rate of bad loans stands at 40 percent of all credit issued and the average eurozone rate is just 5 percent, as was also the case with Greek banks in the first few years of the crisis?
On the upside, the selection of Pavlos Mylonas at the helm of the National Bank of Greece – a person with experience, knowledge and all it takes to pass the “fit and proper” test that new banking officials are put through by monitoring authorities – shows that banks will push themselves to complete the restructuring of their loans earlier. This is good because it is the correct thing to do. After all, the “very bad” mortgages – that is properties that are being rapidly auctioned off – are ending up back in bankers’ hands almost in their entirety.
Domestic lenders are spending funds loaned to them by taxpayers and the handful of private shareholders they have in order to expand their assets because they believe – and quite rightly so – that property prices will increase along with the economy. Such favorable forecasts are fine, as long as they are proven right before too long.
Even so, something needs to be done in regards with the domestic banks. The recently honored former head of Pisteos-Alpha Bank, Yiannis Costopoulos, once said that Greece does not need more than two-and-a-half banks. It looks like the time has come for him to be vindicated.
National Bank, which is notorious for fostering something of a civil service mentality, has the necessary funds but does not have the human capital of Eurobank, which in turn suffers from the behavior of its borrowers. Together they could form the one bank. Piraeus Bank would not have passed the recent stress test had it not been transformed into the system’s “dinosaur.” Its management, however, will need to start quietly advising sundry businessmen that they must cut down on yacht holidays and start showing the money that is correctly thought to be deposited in bank accounts elsewhere. This would be the second bank.
If you wonder why a purported left-wing government is not looking into this particular subject, consider the following: When the conservative government of former prime minister Antonis Samaras was defeated in 2015 the stock value of the Greece’s systemic banks was very close to the value of the loans that the taxpayers issued to the banks. The current administration, as well as the – originating from abroad and of unknown banking skills – leadership of the Hellenic Financial Stability Fund (HFSF), which operates above the law, have a very serious share of the blame for the fact that the Greek banking system has practically lost its value: The capitalization of the four systemic lenders (Alpha, National, Eurobank and Piraeus) barely comes to 8 billion euros in total, while investors and taxpayers have spent 10 times that amount on them.
The only way to avert a new fiscal and financial crisis in 2020 is for Greece to achieve growth rates that would be more than twice as high as those the government is targeting. But that would not just require a change in policy; it would also require a change in mentality. And for that to happen, only early elections present an opportunity.