Financial crisis and non-performing exposures in Greece

The paper provides a brief history of the decade long Greek banking crisis, which reshaped the banking system into essentially four systemic banks, owning 96% of total assets. The crisis also led bank stock prices to a value of almost zero twice in a row, once in early 2012 after the PSI bond haircut, and again in late 2015, after the politically generated recession and the GREXIT fears of the first semester of the year. Today the amount of legacy nonperforming loans (NPLs) or exposures (NPEs) is enormous and by far the highest in Europe. It has to decline fast to non-crisis levels for the banks to be able to provide fresh credit and support the economy. A rapid reduction of NPEs is hampered by two key obstacles: First, the NPE reduction causes a loss in equity capital, which could lead to a violation of the Basel III capital requirements; and second, the NPE reduction can easily lead to negative annual profitability, which could force dilution of private sector stock ownership, caused by the 2014 legislation of Deferred Tax Credit (DTC). The higher the NPEs and the lower the provisions of banks, the higher their need for fresh capital. Banks differ in those characteristics and some may not avoid an eventual recapitalization in 2021. The stricter regulators are in their minimum capital ratio requirements or the more pessimistic private investors are on their valuations of the bank NPEs, the higher the need for fresh capital for the banks. A sensitivity analysis of the bank capital needs to these two exogenous variables (Table 2.2), reveals a fragile situation, in which capital needs can easily sky-rocket. In the medium term, the drive to increase annual profitability remains a strategic one-way street for banks. The challenges Greek banks face are very similar to those of European banks, though with some distinct features. The environment of low interest rates, intense competition with technology companies that are gradually penetrating retail banking, and the constant tightening of the supervisory framework, is putting pressure on their profitability. Additional Greek pressures arise from (i) the negative impact of reduced NPEs on accounting profitability; (ii) the digital transformation of the economy, which entails massive increases in investment in IT projects and in executives’ training; (iii) a switch of traditional bank customers towards alternative sources of financing; (iv) the high operating costs, which are inherited from the earlier prosperous times, and so on.