Greek Lenders Told to Raise $15.9 Billion to Cover Bad Loans | Business News

Greek Lenders Told to Raise $15.9 Billion to Cover Bad Loans

31 Oct 2015 | Author: | No comments yet »

A cheaper bill for recapitalising Greek banks.

Greece’s four biggest banks, which suffered severe losses when they were shuttered this summer as the country veered toward economic collapse, must raise nearly $16 billion in new money to withstand any new crisis, the European Central Bank said on Saturday.Following months of “stress testing” supervisors at the ECB have calculated that under its worst case scenario, where the economy deteriorates and loans turn bad, the country’s four biggest lenders will need recapitalising to the tune of €14.4bn.WHEN the third Greek bail-out was outlined in principle on July 13th after an extraordinarily fraught summit of euro-zone leaders, between €10 billion ($11 billion) and €25 billion out of the total sum of up to €86 billion of help was set aside for bank recapitalisation. Greek banks had been undermined for over half a year as deposits drained out of them, on worries about a possible exit from the euro once Syriza, a radical left party, won the election held in January 2015, culminating in their closure for three weeks in late June and July.

The capital hole has emerged chiefly due to the rising number of Greeks unable or unwilling to repay their debt, after a dispute over reforms between the leftist government and international lenders almost saw Greece leave the euro. One of the biggest problems for the Greek banks is the high number of loans to businesses and consumers that are at risk of not being repaid — nearly 50 percent of the loans outstanding. The lenders – Alpha, Piraeus, National Bank of Greece, and Eurobank – have until November 6 to inform the ECB how they plan to cover the capital shortfall. They had been further hurt by the harm done to the economy and thus to their loans arising from Syriza’s ill-judged attempt to outbluff its official creditors.

Repairing the financial industry is a central element of the country’s 86 billion-euro bailout, signed in August to keep Greece in the common currency. The final deadline to resolve the banks has been set for the end of the year to avoid private sector shareholders and depositors from being hit under new EU-wide “bail-in” laws that could see them foot the bill for part of the recapitalisation. Greece is working to tap a 2 billion-euro disbursement in coming days, and a further 1 billion is slated to be paid out in November if Prime Minister Alexis Tsipras can enact the required reforms. “The situation with the banks is clearly better than it was a few months ago, and I’m hopeful that in the months to come we’ll see further improvements and signs of strength,” he said.

The fact, however, that the declared capital hole is smaller than the 25 billion euros earmarked to help banks in the country’s bailout may encourage investors such as hedge funds to buy shares. Instead, the money is expected to be raised from bank investors in some combination with funds from the €86 billion package of bailout loans that Greece agreed to this summer with eurozone creditors. The financial system has been kept alive through emergency cash injections from the ECB since February, as ordinary Greeks have rushed to pull their money out in record numbers. Under a “baseline” forecast in which GDP declines by 2.3% this year and by 1.3% in 2016 and then grows by 2.7% in 2017, the four banks will require €4.4 billion.

Additional funding needs could also be covered by Greece’s existing bank bail-out fund – the Hellenic Financial Stability Fund – through a mixture of share and bond issuance. Because the bailout package is money that the Greek government would eventually have to repay, though, the government is wary of relying solely on that money. The call on bail-out funding will be less than €15.4 billion since at least €4.4 billion—the shortfall in the baseline case for the four big banks—is expected to come from private sources. The government has proposed a plan that would require bank shareholders and bondholders to make up at least some of the shortfall before the banks could request public funds.

The Greek people and businesses have been directly feeling the effects of the banks’ problems since the Tsipras government moved to help prop up the banks in July by imposing capital controls. But Greece’s future and that of its banks remains uncertain, despite the latest checks. (Reporting By John O’Donnell, Francesco Canepa and George Georgiopoulos; Additional reporting by Gernot Heller in Berlin; Editing by Raissa Kasolowsky) As part of those controls, banks capped withdrawals at A.T.M.s at €60 a day, creating hardship for many Greeks already hit by pension cuts, tax increases and other austerity requirements of Greece’s international bailouts. After six years of recession, tens of thousands of Greeks and businesses are unable to make payments on loans taken out for their companies, homes and cars. The central bank’s assessment found that at least €7 billion more in loans fell into arrears as the economy slumped this summer, on top of the existing amount of bad loans.

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