Greek Business File, November-December 2019, No 123

By Dimitris Kontogiannis


Hercules asset protection scheme, a long-discussed project, has received clearance from the relevant European authorities to proceed, helping Greek banks to migrate non-performing exposures (NPEs) up to 30 billion euro off their balance sheets.

The scheme, which was deemed free of state aid by the European Commission, is considered an important step in the resolution of the NPE issue. The scheme is expected to strengthen Greek banks and may even turn out to be a game changer.

The Greek Parliament is expected to approve the systemic asset protection scheme, entitled Hercules, before the end of the year after the multiple securitization plan with a state guarantee got the green light from the European Commission’s DG Comp. The plan may not transform the Greek economic landscape in the short run but could help recovery by boosting bank credit growth.

Greek banks have been deleveraging for many years to help shore up their capital adequacy ratios while they deal with the largest NPE stock in the Eurozone. This has led to the contraction of loans to the private sector, hurting economic activity. According to company data and HSBC estimates, lending by all major banks contracted by 10 percent or more in 2018 and eased to low single digits in the fi rst half of 2019. At the same time, their deposits grew and their capital positions strengthened.

Hercules is expected to speed up bank eff orts to reduce their sizeable stock of NPEs, improving their asset quality and enhancing their capacity to provide new loans which in turn will bring in more revenues and support their profitability. On the other hand, the implementation of the plan will force banks to take some additional credit losses which will somewhat hurt their capital. The asset protection scheme modeled after Italy’s GACS has been greeted by credit rating agencies as an important step for the resolution of the NPE issue. Italy’s GACS has helped dispose of more than 60 billion of bad loans since 2016 while Greece envisages up to 30 billion euro at this point with a state guarantee of up to 9.0 billion euro. However, Deputy Finance Minister George Zavvos has left open the possibility that the scheme be enlarged since Greece can off er higher state guarantees.

No state aid

In the Greek asset protections scheme, each bank will place pools of NPEs into a special purpose vehicle (SPV) which will issue tranched notes to investors to raise the money to buy the bad loans. The Hellenic Republic will then provide a public guarantee for the senior notes of the securitization and in exchange will receive a market-based fee, which will increase over time, from participating banks. In this way the scheme will not actually be state aid. Hercules is supposed to be voluntary although SSM is known to have asked the four systemic banks to join. The scheme will reportedly run for 18 months. The local banks held 75 billion of NPEs on their balance sheet as of June 2019. Business loans accounted for about 42.7 billion euro or 57 percent, mortgage loans about 25 billion or 33 percent of total NPEs and consumer loans about 8 billion euro or 10 percent.

Cutting the NPE stock

It is noted the systemically important banks in Greece have committed to cutting their aggregate NPE stock by more than 70 percent in 2021 compared to the end of 2016. More specifi cally, the Single Supervisory Mechanism (SSM) and the Bank of Greece have approved NPE reduction targets of 7.4 billion euro at the end of 2021 for Alpha Bank from 27.6 billion in December 2016. The target for the end of 2019 is 16.2 billion euro of NPEs.

Similarly, Eurobank Ergasias Bank has committed to cut its NPE stock to 16.2 billion euro this year from 27.6 billion in 2016 en route to a target of 7.4 billion in 2021. National Bank of Greece aims at 11.12 billion euro in 2019 from 18.7 billion in 2016 with the 2021 target set at 4.3 billion. Piraeus Bank faces the biggest challenge since it started with 33.8 billion euro in NPEs at the end of 2016 and has to bring them down to 22.9 billion at the end of this year on its way to a target of 11.3 billion euro in 2021.

Protecting primary residences

To meet the above NPE targets, the local credit institutions have employed a number of tools in recent years, including NPE write off s, sales of NPE portfolios, the restructuring of NPEs and securitizations. To facilitate the reduction of NPEs, the country has also passed law 4605/2019 protecting primary residences.

The goal is to help vulnerable households that face problems repaying mortgages on their primary residence and to isolate strategic defaulters. The new law sets stricter eligibility criteria than its predecessor, the so called Katseli Law. The budgeted interest rate subsidy is 132 million euro annually. Eligible households will receive a grant equal to 20-50 percent of their monthly loan payment on certain conditions.

Greece’s creditors and others have repeatedly stressed the importance of dealing with the Greek banking sector’s large stock of NPEs, the highest in the euro area, to restart growth.

“Despite improvements, bank balance sheets remain significantly impaired and net credit growth remains negative,” said the IMF in a recent report, urging the acceleration of eff orts as “at the current pace, the recovery of banks’ lending support for investment and growth will take many years.”

Bank of Greece

Bank of Greece Governor Yannis Stournaras told a conference held in Thessaloniki in November that Finance Minister Christos Staikouras had agreed to push forward with the central bank’s systemic scheme to tackle bad loans. According to sketchy information provided by the Bank of Greece, banks will transfer non performing exposures (NPEs) net of provisions up to 40 billion euro along with deferred tax credits (DTCs) into a Special Purpose Vehicle (SPV).

In this way the banks will further reduce the NPEs on their books and bring down their DTCs. The latter are estimated at around 16 billion euro, making up a large part of Greek banks’ regulatory capital. According to the relevant Greek law, the deferred tax credits will allow local banks not to pay future taxes on corporate profi ts for decades. However, people who are close to the deliberations with the European Commission have said in private that the DG Comp is skeptical about the central bank’s plan.

Although bad loans is not the only problem facing Greek banks, it is widely regarded the most important and the key to resuming their intermediary role. This is more so as new competitors, i.e. fintechs, emerge in niche markets such as payments and cards and it is just a matter of time before alternative investment funds provide direct lending to small-and-medium sized companies.