Banks give thumbs-up to plan, but why?

This is a response to your article of November 11 in the Finance and Business section («Banks give thumbs-up to plan»). The speed of the about-face of the Greek banks on the issue of available government support funds is indeed remarkable. The question only remains as to why this has taken place. We were told only a matter of a few weeks ago that Greek banks were relatively immune to the global financial crisis stemming from the US financial meltdown. Apparently, Greek banks have not dirtied their financial fingers in the mire of US mortgage-backed securities nor in the murky field of collateralized debt obligations. We are told that the capital-to-loan ratio of Greek banks is relatively high compared with other European banks, and especially the banks in the USA. However, we do know that Greek banks are heavily invested in the Balkans – in Serbia, Bulgaria and Romania especially. They have fueled a property price explosion in Bulgaria for example – which may indeed be an area of current losses as those markets start to implode. We also know that a number of Greek investors lost a considerable amount of money through the collapse of the Lehman Brothers investment bank. It is this collapse of Lehman which caused the US financial crisis to transform from an investment crisis linked to the US housing bubble into a general global credit crunch – with global interbank lending grinding to a halt. It is this transformation that explains the rapid change in policy of the US Treasury when it coat-tailed the European finance ministers in taking an equity share in the banking system in order to free up interbank lending. The Greek government’s policy was devised under the guise of this objective. There are tell-tale signs of losses by Greek banks, whatever the causes. As with other European banks, cuts in central bank rates are not translating into a reduction in the rates offered to borrowers, but are translating into increased margins (credit spreads – the difference in the rate at which a bank borrows and the rate at which it lends). Changes in the European base rate are not translating into reductions in mortgage rates, for example. Clearly, banks are seeking to rebuild their capital within a context of losses – although the net effect of large margins is to reduce the uptake of bank loans and thus of the economic activity linked to such loans, i.e. businesses go bust and mortgage foreclosures increase. In addition, we know that a number of Greek banks are planning to cut costs with job cuts in the very near future. Finally, there is an expectation that some Greek banks will merge in order to survive the emerging competitive financial and business environment. This is the main content of the recent statement made by the head of National Bank, Mr Arapoglou, at a conference in New York. It is within this context that we should perhaps understand the about-face of the Greek banks. The availability of government money is perhaps seen as an additional means of rebuilding capital within a context of losses. But the government should surely be more careful about the terms on which this money is made available. To return to the point of the European finance ministers’ initiative, the objective of making available government money to the banks is to boost lending in the economy so that the financial crisis does not translate into an economic depression. At the very least, the government should seek as a condition of their investment in the banks a reduction in the banks’ operational credit spreads with respect to consumer and business loans to somewhere near what they were just a few months ago. This would then help to avoid the decrease in loan uptake – which is precisely the objective of the so-called European bailout package. KEVIN WILLIAMSON, Aghia Paraskevi.