Greek Business File, April-May 2020, No 125

By A. Dimitris Kontogiannis


COVID-19 poses a major challenge for Greek banks

The pandemic is expected to sink the Greek economy in 2020, undermining the creditworthiness of households and corporations licking their wounds after a decade long crisis

Deposits may also be hit as disposable incomes fall and unemployment rises while the banks’ loan books are expected to continue to shrink as the recession saps demand for credit. Bankers hope the economic slump will be short-lived but the banks’ plans for signifi cantly cutting their large stock of bad loans may be undermined, making it extremely challenging to meet their NPE targets.

Before Covid-19

What a difference a couple of months can make. Just last February, international bank analysts were writing positive to neutral reports about the outlook of Greek credit institutions. They pointed to the positive macroeconomic background in 2020 supported by the government’s growth-reform agenda, the legislated Hercules asset protection scheme, the momentum in the privatization process and steps taken towards improving governance among others.

With Covid-19

A month later, the picture changed completely for the worse as the coronavirus pandemic arrived with force. The outlook of the banks has taken a turn for the worse as the Greek economy is subject to the effects of the coronavirus outbreak with tourism, shipping and transport hit the hardest, and private consumption along with investment feeling the pinch. This comes on top of rising tensions with Turkey on the refugee/migrant crisis and geopolitical issues in the Eastern Mediterranean.

Market participants rushed to discount the worsening outlook by pummeling bank shares. The bank share index on the Athens stock exchange fell 56 percent in the last 30 days to March 25, underperforming the Athens General Stock Index which dropped 32 percent in the same period. The shares of Alpha Bank lost 61 percent, Eurobank’s 47 percent, National Bank’s 61 percent, and the shares of Piraeus Bank fell 55 percent.

Τhe size and the extent of the anticipated economic decline will determine to a large extent the adverse impact on the banks whose role is critical for the economy during this period, and the period for the recovery of the economy after the coronavirus pandemic shock. Unfortunately, the new crisis finds the local credit institutions in a weak position after a protracted period of austerity as well as capital controls imposed in mid-2015. This is the case despite their stepped up eff orts to cut their bad loans in the last couple of years.

“Hercules” put on hold

Non-performing loans (NPLs) reached a peak in March 2016 on the heels of a severe drop in economic activity between 2008 and 2016, accompanied by a sharp increase in unemployment for a good part of the period. NPLs fell to 68 billion euro or 40.3 percent of total loans at end-2019, down 13.8 billion compared to December 2018 and 39.2 billion euro in March 2016. The banks relied mainly on sales and write-off s to reduce the stock of bad loans in 2019.

The banks’ targets aim at driving the ratio of NPLs to total loans down to below 20 percent by end-2021. The pace of NPL reduction could have been sped up by the long-awaited “Hercules” securitization plan. However, it looks as if the scheme will be put on hold for a while, awaiting the return of normalcy in capital markets and the Greek economy.

Bringing the NPL ratio down is critical for the Greek banks’ capacity to make credit available to the economy. According to the S&P, these eff orts are hampered by the Greek legal framework, which is “less predictable and less supportive of creditor rights, compared with those of other Western European countries”. The rating agency said in a research note that “one of the main problems is the delay in recovering collateral in case of foreclosure”.  The IMF has pointed out the average time to foreclose in Greece exceeds five years, versus an average of one to two years in other European countries.

Relief to businesses

On a positive note, the ECB’s Supervisory Board has announced measures to ensure Greek and other eurozone banks will continue to finance the real economy in light of the challenges to their business operations from the COVID-19 crisis. In addition, the EU-wide stress test exercises were postponed to 2021. Greek banks have announced actions to provide relief to businesses and individuals in the sectors affected by the Covid-19 crisis such as the postponement of loan installments for several months.

Expected recession

In addition to the challenge of reducing bad loans in a challenging environment, the local banks may face another hurdle.  The expected recession due to COVID-19 is also expected to hurt their deposits. Households and companies are likely to try to smooth out their consumption and operation needs respectively by using part of their savings in the short term as incomes and sales dip. According to market talk before the lockdown, a number of firms transferred money to their bank accounts abroad but this has not been confirmed.

This is in contrast to 2019 when improved depositor confidence in the banking system boosted deposits despite the full lifting of capital controls in September 2019. According to the Bank of Greece, total deposits increased due to the repatriation of funds invested in securities abroad and the redeposit of banknotes withdrawn during the economic crisis which were hidden in safe boxes, mattresses and elsewhere, according to the Bank of Greece. It is noteworthy that the rise in deposits took place although bank credit to the private sector contracted for yet another year. There is a clear link between deposit growth and credit growth.

The deposits of the private sector rose 8.9 billion euro in 2019, up 6.6 percent, compared to 7.9 billion euro in 2018 and 5.7 billion euro in 2017. Households played a key role in boosting deposits in 2019 with a rise of 6.6 billion compared to 5.8 billion in 2018 and 3.7 billion in 2017. Deposits of households and private companies stood at 76 percent of GDP (Gross Domestic Product) last year compared to 73 percent in 2018 and 70 percent in 2017. Nevertheless, the rise in private sector deposits in the last three years still lags behind their GDP ratios prior to the crisis. The average private deposits-to- GDP ratio stood at 83 percent between 2003 and 2009.

The shock of the Coronavirus pandemic inevitably raises concerns about financial stability and credit availability. There is no question that banks will be tested but everybody hopes they will be able to withstand it on their own with some help from the supervisory authorities. However, no one can rule out some kind of public intervention if the coronavirus pandemic leads to a protracted economic crisis.