U.S. Says Greece Must Lift Bank Governance to Build on Progress

1 Nov 2015 | Author: | No comments yet »

A cheaper bill for recapitalising Greek banks.

Greece must improve financial-sector governance now that its biggest banks are moving to sounder footing, the U.S. 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.

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. 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.

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. 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. 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.

Instead, the money is expected to be raised from bank investors in some combination with funds from the 86 billion euro package of bailout loans that Greece agreed to this summer with eurozone creditors. 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. The report by the central bank was the result of its monthslong assessment of the health of the four major Greek banks: Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank. 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. As part of those controls, banks capped withdrawals at ATMs at 60 euros 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 euros 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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