The timing of the stress tests is very important for the Greek systemic banks ahead of the intense debt relief negotiations in June/July and negotiations for the country’s exit from the 3rd bailout programme in August 2018. The Greek government has reiterated its desire for a “clean exit”, whilst EU officials frequently state that a precautionary credit line could be preferable. At the same time, the Public Debt Management Agency aims to create a buffer of €19bn from bond issues, which would facilitate debt repayments of €28bn until the end of next year.
Press reports suggest that the Single Supervisory Mechanism (SSM) has invited Greek banks to meet on 18 April in Frankfurt, where they will reportedly be provided with optimistic stress test results. Recall that the stress test results will be formally released in early May 2018. LXM Group understands that these dates are in line with the schedule that Greek banks had received for the stress tests.
LXM Group recently met with the Greek systemic banks and all remain conservatively optimistic that the stress tests will not result in additional capital needs for Greek banks. This is also the consensus view of most press reports, however some claim that whilst all banks will indeed pass the stress tests, they will be asked to submit capital plans in the first quarter of 2019 and capital raises may follow in late 2019. This may seem contradictory, but the rationale is that the quality of Greek banks’ capital is low given the large level of DTCs, thus banks may be asked to boost capital levels further. Please see below the components of the CET-I ratio, which provide some more details about its quality.
It is also important to note that other newspapers such as Greek daily Kathimerini suggest that Greek and EU officials have been working on a more effective approach to reduce the burden of non-performing loans (NPLs) after the stress test results are published in early May. According to reports, the Bank of Greece, Hellenic Financial Stability Facility (HFSF) and European Central Bank (ECB) have been holding talks with the heads of the four systemic banks on how best to approach the challenge. The Greek press suggests that the HFSF has prepared a study looking at the main tools available to banks so they can make greater inroads into their NPLs. The study reportedly sets out five methods that lenders can turn to, including the creation of a bad bank or an Asset Management Company (“AMC”).
There has been much talk recently regarding the establishment of a bad bank, however without clarity on where the capital needed for its creation would come from. Proposals appear to be focusing on the creation of an Asset Protection Scheme (APS) that would use public money to guarantee part of the NPLs on the banks’ books. Reports note that circa €20bn of unused funds set aside for bank recapitalisations in late 2015 under the third MoU program could be repurposed to set up an APS. Furthermore, according to other press reports, the SSM, ESM and ECB have concluded that €1-2bn from these unused funds should be set aside to cover any possible recapitalisations of the non-systemic banks, given they believe that none of the systemic banks will have any meaningful capital shortfalls.
Finally, we expect further news with regards to the French and ESM debt relief proposal that will link Greece's economic growth until 2050. The proposal includes the extension of loan repayment periods, an interest rate limit and linking debt relief to economic growth. The same proposal reportedly also envisions that Greece will be allowed to forgo some interest payments if the 5 year average GDP growth falls below 2.8%. Partial repayment will be necessary if growth ranges between 2.8-3.4% and full repayment will be required if growth is higher than 3.4%.