Greece to Offer $10 Billion to Help Banks Cut Down Bad Debt

(Bloomberg) -- Greece plans to provide as much as 9 billion euros ($10 billion) in state guarantees to help its banks reduce a mountain of soured debt weighing on their balance sheets, according to two people with knowledge of the matter.

The initiative, similar to a successful program used in Italy, depends on antitrust officials in Europe ruling that it doesn’t constitute illegal state aid. A decision by the European Commission is expected over the next few weeks, the people said, asking not to be identified because the discussions are private.

Banks in Greece, Europe’s most indebted country, hold some 75 billion euros in soured debt, boosting costs for provisions and restricting their ability to generate new loans. The guarantee program, known as an asset protection scheme, could cut that down by at least 20 billion euros, the government estimated when the plan was first floated about a year ago.

Now it’s forecast that through the APS, which will be known as Project Hercules, lenders could reduce their bad loans by 30 billion euros, a person familiar with the matter said.

The program will allow lenders to use government guarantees to back the securitization of bad-loan portfolios, according to the people. The soured debt will be transferred to a special purpose vehicle that will issue senior, mezzanine and junior bonds. The senior debt will be guaranteed by the government and will remain on the banks’ books.

Greece to Offer $10 Billion to Help Banks Cut Down Bad Debt

The benchmark Athens bank index rose on the report and ended trading 1% higher, with the National Bank of Greece SA and Alpha Bank AE leading gains. While the index has climbed 83% this year, it’s still far below the levels reached before the financial crisis.

The EU Commission is in contact with Greek authorities on an asset protection scheme, a commission spokesman said without elaborating. A Greek government official declined to comment.

Italy’s bad-debt program, known as GACS, caused securitizations to surge, reaching a record of more than 65 billion euros last year. That figure is expected to decline in 2019 as fewer loans are classified as non-performing. Greek banks managed to trim their bad loans from 81.8 billion euros at the end of 2018.

While the Greek proposal was initiated by the previous government, Kyriakos Mitsotakis, who took over as prime minister two months ago, has made it a priority to finalize negotiations before a new European Commission assumes office in November.

Greek banks will have at least 18 months to use the program, according to the people. Among the details yet to be clarified is the total amount of bad debt that will be subject to the scheme, a person said.

It’s not clear yet how long it would take for the banks to start using the new scheme if it’s approved. If banks don’t already have a securitization plan ready, they may need from six to 12 months before the transactions via the APS can begin. One official said the fees that banks must pay for the scheme may reduce the incentive to actually use it.

Greece to Offer $10 Billion to Help Banks Cut Down Bad Debt

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