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Last Saturday the positive stress tests for the banks removed the key short-term risk of a painful equity dilution for shareholders. Such a result is reason for cautious optimism. However we expect the share price recovery to be gradual, highly volatile and non-linear across the systemic banks. Our constructive outlook is underlined by the implementation of long-awaited legislation for the resolution of circa €96 billion of non-performing exposures (NPEs) in the last quarter of 2017. This has rightfully intensified pressure on strategic defaulters, with banks conveying a significant increase in borrowers willing to reach a settlement since its enforcement. Furthermore, Greek banks have recently increased their provisioning levels, post the implementation of the new IFRS 9 accounting standard, to a level that provides more flexibility to pursue a cohesive solution for both their balance sheets and borrowers.

Banks in the coming months will continue with the Herculean challenge of reducing NPEs by €33 billion by the end of next year, of which €11.6 billion will be achieved by the sale of loans. The outcome of the tenders for the sale of NPE portfolios in the next few months will be considered a litmus test for similar disposals in the future.

The banks are only one corner in the maze that Greece has to negotiate its way out of this year. Exiting the labyrinth will involve the conclusion of the fourth review, debt relief discussions that should intensify in June and July, government bond issuance as the country builds a €19bn buffer and the upcoming exit from the bailout program in August. Cautious optimism is justified; complacency is not.

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(Reporting by Petros Mylonas, Head of Southern Europe)