The future of the banking system

One of the most crucial issues in the coming weeks will be the fate of Greek banks. A lot of what you read and hear these days has to do with banks and who will control them, not officially of course. We are all aware of the fact that following the Greek debt haircut and the BlackRock report due to be released next week, all Greek banks will, in essence, become completely dependent on state (read European) funds.

The question then is who will manage the banks and what criteria and methods will be used to do so. George Papandreou, along with a large part of PASOK MPs, were in favor of the state obtaining common stock and essentially running the banks. While on the face of it this appears to be a sensible solution that may benefit the people, it could prove problematic for the country?s future. There is no doubt that certain banks went well over any limit regarding non-transparent practices and mismanagement. According to international analysts, Greece?s economy will not improve unless this part of the local banking system — which for years maintained non-viable businesses in various sectors and serviced political and other vested interests — is restored to health.

This particular part of the system needs to be punished because the state it is in today is not due to bad luck or Greek bonds purchases. In any case, when BlackRock?s findings are published, it will become all too clear which banks belong to what category.

The problem is the scenario of complete nationalization of the banking system. This would not only raise all sorts of difficulties; it would be a complete nightmare.

First of all, who could entrust the existing batch of politicians with the management of the country?s banks? Are we supposed to hand complete control of the real economy over to a political system and the political parties that managed to lead the country to bankruptcy? Think of how politicians could turn into local versions of Vladimir Putin by controlling media companies that are in trouble, or managing loans given to other companies? Are we supposed to go back to the good old days of ministers being the ones to sign off on loans to themselves? I think this would be a catastrophe, ending in not just another, but several more cases of like that of the Agricultural Bank of Greece. This is why it sounds suspicious, if not ludicrous, to hear certain politicians talking about the new public character of the banking system again.

The fact that politicians are flirting with the idea of complete nationalization makes sense. They are no longer in a position to hire the people the want and it?s getting harder to grant ?special favors,? so the only way left for the next government to dish out money where it wants will be through banks and gaming company OPAP.

You may ask how the Greek state is supposed to safeguard the capital it will inject, and has already injected, for the recapitalization of banks. The good news is that Europeans are also interested in reaching the same goal, because, at the end of the day, they are the ones actually putting up the cash. There are solutions that have been successfully put to the test in other countries. There are, for instance, common stocks for special purposes that give the state veto power over major decisions and the possibility of selling its stock at considerable profit in the short run. This is the kind of solution that could be chosen for banks whose stockholders inject money to boost them, that are able to find extra capital from other sources and that present a credible business plan with cost-cutting measures.

Like them or hate them, banks will be around until the fall of capitalism. The Greek economy?s day after, meanwhile, will require banks with a certain level of liquidity, willing to take risks and operate according to banking criteria alone. In order for any serious intermediary solution to be credible as far as the state?s involvement goes, inspectors, politicians and the healthy banking sector all need to contribute toward the system?s restoration. If not, the over-ambition of some will eventually bring down the rest of the sector as well, undermining the real economy?s much-desired reboot.

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