Greece: Hellas banks face new loan defaults

Plato statue and a Greek flag over Athens

The Greek financial institutions have recently reduced the NPE ratio in a remarkable way. But the energy crisis is creating new concerns.

(Foto: Bloomberg)

Athens Greece’s banks have had a long dry spell. After the sovereign debt crisis, the four systemic institutions – Alpha Bank, Eurobank, National Bank of Greece and Piraeusbank – sat on a mountain of bad loans.

Now new turbulences are coming to the industry. The war in Ukraine and the sharp rise in energy costs could mean that many loans will no longer be serviced. New loan defaults would further weaken the already structurally problematic capitalization of the banks.

The eight-year recession, which cost Greece more than a quarter of its economic power between 2008 and 2015, drove many debtors into insolvency. At the height of the crisis, the ratio of non-performing or acutely impaired receivables (NPE) reached more than 50 percent.

With write-downs, restructuring and the sale of non-performing loans, the banks reduced the NPE from 47.2 to 18.4 billion euros last year. It’s a notable achievement. But at 12.8 percent, the share of non-performing loans at the end of 2021 was still six times the European average of 2.1 percent.

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The Greek banks want to reduce the rate to below five percent by the end of 2024 at the latest. That’s what the institutes promise in their most recent three-year business plans, which they recently submitted to the European Central Bank (ECB). However, it has become questionable whether they can comply with this.

Because after the pandemic, which caused Greece’s economy to shrink by nine percent in 2020, the energy crisis is now throwing banks back again when it comes to restructuring their balance sheets. Central Bank Governor Yannis Stournaras warned urgently on the occasion of the presentation of his latest annual report of “significant challenges” that the banks are facing. Stournaras warns in his report that “constant vigilance and more decisive action” are required to counter new credit risks and strengthen the capitalization of banks.

Impressive progress – and new problems

The head of the central bank is particularly concerned about loans totaling 15.3 billion euros that have been restructured in recent years. “A significant proportion of these loans could become non-performing during the course of 2022,” the central bank’s report said.

Even before the start of the Ukraine war, many debtors defaulted on their loans, the central bank noted. Now the enormously increasing energy costs and the weakened economic growth could lead to further payment defaults.

Yannis Stournaras

The central bank governor warns of “significant challenges” for the Greek banking sector.

(Photo: Reuters)

The Greek banks have made impressive progress in reducing problem loans, especially in the past year. Alpha Bank and Piraeusbank have been able to reduce the NPE ratio from around 45 to 13 percent since 2020. Eurobank and National Bank are less than seven percent.

The consolidation successes are also due to the fact that the banks weathered the Covid recession better than expected. The large wave of new loan defaults initially feared did not materialize. According to the latest estimates, claims of around five billion euros have become non-performing as a result of the pandemic, compared to eight to ten billion euros initially expected.

This was mainly thanks to state aid. With the “Gefyra” (bridge) program, the finance minister subsidized private debtors, the self-employed, companies and farmers who were no longer able to service their loans as a result of the pandemic. The banks also accommodated many cash-strapped credit customers with installment breaks and extended repayments.

But these subsidies and moratoria are now ending. In banking circles, it is expected that around ten to 20 percent of the affected loans will default. If the exorbitant energy costs remain, other companies and private households could have difficulties servicing their loans.

The structural problem in the banking sector

A fresh wave of loan defaults is the last thing Greek banks need right now. The four systemic institutes had to be recapitalized three times during the course of the debt crisis, also with public funds. Since then, the consolidation of the loan books through provisions and write-downs has again cost a lot of capital.

Last year, the banks generated cumulative net losses of 4.7 billion euros. The core capital ratio (CET1) of the four systemic banks fell from 15 to 12.6 percent on average in the industry in 2021 compared to the previous year.

They do meet the minimum requirements. But there is a structural problem: 64 percent of equity is attributable to deferred tax credits from loss carryforwards. Should new write-offs of bad loans become due, the share of this “soft” component in banks’ equity would increase further.

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