Greek banks are reportedly optimistic that the planned new stress tests by BlackRock in the autumn will not require them to replenish their capital bases as extensively as last year, when nonperforming loans were projected at 46.8 billion over three years.
The total additional recapitalization that will be required will be determined by how strict the methodology and macroeconomic assumptions to be agreed with the Bank of Greece turn out to be, and bankers believe that the overall situation is now much better. Beyond the successful, substantial recapitalization, they have several more reasons to be optimistic.
In contrast to last year, any recapitalization will not include any haircut on bond holdings. Under the so-called Private Sector Involvement (PSI), Greek banks had to accept losses of 37.7 billion euros off the face value of Greek bonds in their capital bases. They now have no Greek bonds. Another important difference is the improvement in the macroeconomic environment. The last stress test was largely based on the assumption of a worst-case scenario – a drop in GDP double that which the troika had projected. Now the projection is for 0.4 percent growth in 2014 and even more in 2015. The improved macroeconomic conditions will have a direct positive impact on the banking system, as, on one hand, the stabilization of the economy will slow down the rate of new nonperforming loans, and also improve profitability – making more capital available to deal with problems.
Finally, the spectacular restructuring of the Greek banking system – where more than 10 small banks were absorbed by the four systemic big lenders – creates additional “fat.” The shrinking will lead to cost cutting and additional revenues from the sale of activities and subsidiaries.
Of the 50 billion euros devoted to bank recapitalization last year, 8 billion has yet to be used, while 6 billion more is projected to come from additional restructuring.
European Central Bank executive board member Joerg Asmussen was categorical during contacts in Athens this week that there was no likelihood of a haircut on Greek deposits as happened in Cyprus, and urged Greek officials to use the recapitalization funds remaining to further buttress the banking system.