Greece is in talks with the European Commission to extend its “Hercules” bad loan reduction scheme to help banks further shrink the mountain of impaired credit burdening their balance sheets, the deputy finance minister said on Wednesday.
The Hercules asset protection scheme (HAPS) was put in place in late 2019 to help the country’s banks offload up to 30 billion euros of bad loans.
Similar to Italy’s GACS model, the scheme has helped banks clean up their balance sheets by turning bundles of impaired loans into asset-backed securities that can be sold to investors.
Greek banks can apply for a government guarantee on the senior tranche of a non-performing loan (NPL) securitisation as long as they sell the majority of the mezzanine and junior notes. The state guarantee gives the senior notes a zero risk-weighting.
In a speech to a virtual investor conference on Greek NPLs, George Zavvos, the minister in charge of banks, said the government is seeking an 18-month extension of the scheme from April this year to October 2022.
The aim is to assist banks in further reducing non-performing loans by 32 billion euros ($38.84 billion) and bring NPL ratios down to single digits by the end of 2022, close to EU averages.
Despite the reduction of non-performing loans by about 59 billion euros from a peak of 106 billion in March 2016 — the legacy of a 10-year financial crisis that shrank the country’s economy by a quarter — the banking system’s overall NPL ratio of 36% at the end of September remains far above a euro zone average of 2.9%.
The Hercules scheme will help banks improve their profitability and fund the real economy. The securitisations offer attractive notes to investors at a time of negative interest rates, Zavvos said.