Massive strides are being taken to cut down remaining debt from bad loans – a major deterrent in Greek banks’ ability to lend money and become more solidly profitable. Restoring financial stability is a key goal of the new conservative administration. Deputy Finance Minister George Zavvos sees the restoration of banks as a vital component of the country’s ongoing recovery – so much so, that the government plans to provide as much as 9 billion euros in state guarantees towards this latest project.
Reducing Non-Performing Loans
Greece has a new initiative that will assist banks in offloading approximately 30 billion euros in non-performing loans. The plan is similar to the one implemented in Italy, GACS, which helped lenders get rid of bad debt by folding it into asset-backed securities. In this case, the Hercules Asset Protection Scheme (HAPS) will set up special purpose vehicles (SPVs) to issue bonds with a government guarantee for senior tranches (a term denoting a portion of the total loan).
“It is a scheme that is expected to clean up around 30 billion euros of bad loans from bank balance sheets. It is voluntary but banks have committed to take part”, one of the bankers said.
“The guarantee feature on the less risky senior tranche will be a contingent liability for the state and fiscally neutral”, the banker added, which means that it will have no impact on taxpayers or the 32 billion euro cash buffer that Greece has successfully built up from unused bailout funds and successful bond sales.
Even still, HAPS won’t eliminate all bad loans – amounting to about 80 billion euros – and is a weighty legacy of the financial crisis that reduced Greece’s economy by 25 percent. Despite being a priority, off-loading NPLs has been a slow process. The bad credit to total loan ratio sat at a staggering 45.2 percent by the end of the first quarter, and Greek banks have an ambitious goal of knocking that ratio down to below 20 percent by 2021.
Greek Prime Minister Kyriakos Mitsotakis hopes to get a formal go-ahead on HAPS from the European Central Bank before the new European Commission takes office in November. It also needs approval from the EU’s competition watchdog that its proposed 9 billion euros in state aid does not pose a breach to the rules. For this plan to work, banks will need to sell a little more than 50 percent of the mezzanine and junior tranches of the asset-backed securities in the market – the precondition for the guarantee feature offered on the senior tranches. However, even if the EU approves the programme quickly it may still take Greek banks anywhere from 6 to 12 months before they can begin making use of the scheme at all.
Since the initiative was announced, the benchmark Athens bank index rose and ended trading 1 percent higher, with the National Bank of Greece SA and Alpha Bank AE also rising. The index has climbed a total of 83 percent this year – great news for the country, but still leaving them far below the levels they were at prior to the financial crisis.
Long-Term Financial Goals
This isn’t the first time Greece has trimmed their bad debts, with a few million shaved off in 2018. And the Hercules Asset Protection Scheme is only one of a series of tools Prime Minister Mitsotakis plans to use to increase Greek prosperity. His new administration is keen to cut taxes, slash bureaucracy, and reduce procedures in a bid to jump-start foreign and domestic business investment. Already, the government has reduced property and business income taxes, as well as simplified the licensing process.
Greece also hopes to complete an early repayment of 3 billion euros of its IMF bailout funds, which is another strong sign of recovery. This number represents almost 33 percent of its remaining debt. Mitsotakis estimates the early repayment will save Greece approximately 75 million euros annually. Some of the remaining crisis-era loans Greece has to pay off have interest rates of over 5 percent. Now that the country’s economy is turning around, it is actively seeking more affordable options while courting foreign investment and moving forward with privitisation projects like Hellinikon.
“Greece has become a hit destination”, said Alexandros Malamas, a sales trader at Piraeus Securities in Athens. “Demand for Greek assets from foreign investors remains elevated as the government seems to be off to a good start.”
“There will be an increased appetite for high-quality Greek assets across various secors including in energy and infrastructure”, said Antonios Timplalexis, managing director at Nomura, noting “further economy-friendly reforms and yields trending lower”.
The government has also hired the US investment bank Lazard to replace Rothschild and be the new financial advisor to the Greek Public Debt Management Authority. Lazard will support the authority in managing debts, with a promise to return bonds to investment grade within the next two years.
Mitsotakis aims to boost Greece’s growth rate, which could break 3 percent if certain conditions are met, although most predict growth will be at 1.9 percent this year, and exceed 2 percent in 2021. Bank of Greece Governor Yannis Stournaras insists that 3 plus percent growth after 2020 can only be achieved if the government acts quickly to implement reforms that will minimise future risks and address the lingering effects from the debt crisis.
Continued reform is a condition for Greece to be able to receive further debt relief from the EU and will speed up privatisation and boost trust in Greek’s growth prospects – which in turn would give a much-needed boost to foreign investment inflows. However, Greece must also be cautious of overshooting the primary budget surplus, mainly because it was achieved by slashing public investments and raising taxes. This combination is a recipe that could hamper long-term growth and competitiveness, and is an opinion Mitsotakis explicitly agrees with.
Although Greece is required to achieve a primary surplus of 3.5 percent GDP every year until 2022, Mitsotakis wants to bring the target down to around 2 percent starting in 2020. Achieving this, however, will require the new administration to convince creditors it has the right ideas and is pushing the economy in an upward direction.
In what is deemed a vote of confidence, and after completing a mission visit in Athens, the International Monetary Fund on Friday voiced its support of building consensus “around a lower primary balance path” as of 2020, to further enable Greece’s economic and social recovery.