After the seemingly impossible deal to pull Greece out of the economic collapse was achieved, things are slowly returning to normalcy. For starters some Greek banks have reopened albeit in a limited form. This is a massive step forward, considering the country was facing a total economic collapse a couple weeks back. However one of the key question remains – how bad is the damage caused by the weeks of closure and stock market shutdown?
The Greek stock market is still shut down and the capital controls are still in place. There is a huge amount of uncertainty whether Greek banks can survive when both those are lifted.
The other crucial factor that is expected to hurt the banks more is the non-performing loans. The average non-performing loan ratio across major Greek banks is more than 36%, according to latest research by USB. And the worst part is that the ratio is going to increase in the coming months because of the severe economic conditions the country had to undergo since February.
If the losses continue, the private investment holdings will require a public bailout. Given the fact that Greece already owns massive portions of the Greek banking sector courtesy of the recapitalization program in 2013 (Hellenic Financial Stability Fund). The HFSF basically recapitalized the major banks by ordinary shares and very restricted voting rights. Private investors provided 10% of the capital.
It is highly unlikely that the banks will be able to convince investors to provide funding again, especially since the bondholders and shareholders are already in loss from their investments.
The problem of Greek’s deferred tax assets (DTA), which comprises for more than 50% of Greek banks’ capital buffers, is poised to come back and bite the country, according to experts.
The European regulations do not have the provision to recognize DTA as capital. However Greek regulators have converted DTAs to an instrument named deferred tax credit (DTC). Since the Greek government acts as the guarantor on these instruments it gets equity in return, diluting current shareholders.
However this can change since the country is under severe pressure, according to UBS. And if the local authorities actually change their policies it will put further strain on banks’ capital buffers.
Benzamin H
