Bank of Greece Blames Bank Stocks' Rout on Contagion From Italy

(Bloomberg) -- Greece’s central bank blamed Italy’s populist fiscal policy for a plunge in the stock prices of local banks, in the first official acknowledgment that the country’s plans to widen its budget deficit next year are having effects elsewhere in the euro area.

“The recent stock market developments in respect of the banking sector are not related to the soundness of Greek banks and are due to purely exogenous factors, such as rises in interest rates internationally and in Greece’s neighboring countries in particular,” Bank of Greece Governor Yannis Stournaras said in a statement on Wednesday.

Such contagion effects figured heavily in the euro debt crisis that exploded with Greece’s bailout request in 2010, and have been seen as expressions of systemic flaws in Europe’s currency union. However, they have subsided in recent years, thanks to the European Central Bank’s firefighting, and to euro member states forging a consensus on avoiding excessive budget deficits -- a consensus challenged by Italy’s budget draft.

Greek bank stocks have dropped more than 40 percent this year over doubts among investors over their ability to shed bad debts and strengthen their balance sheets. The rout worsened last week after Bloomberg News reported that the ECB has told Piraeus Bank SA to raise more capital this year, and that it is pressing banks to cut their bad-debt holdings at a pace that some investors find unrealistic.

Stournaras, who’s also a member of the ECB’s Governing Council, had been criticized by the Greek government over the past week for not reassuring investors about the health of the country’s financial system as the sell-off gathered pace.

Capital Concerns

The rout has exposed the degree of investor concern about banks in Europe’s most indebted state, which are burdened by the highest ratio of non-performing loans in the continent. Greek authorities are considering the creation of special purpose vehicles, backed by government guarantees, to help banks unload some of those exposures. A similar plan in Italy has helped banks cut their stock of bad loans by some 20 percent from their peak.

Greek bank stocks rallied on Wednesday, gaining as much as 7.8 percent after Stournaras’s statement.

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