Why Greek Banks’ New Loans Are Not Enough for Cratered Economy

(Bloomberg) -- Yiannis, a 51-year-old owner of an online Greek food-delivery company in Athens, is struggling to keep his business going because he can’t find enough funding.

His request for a 50,000-euro ($57,100) bank loan for working capital was met with what he sees as an unreasonable collateral demand, forcing him to abandon plans to expand his platform for delivering everything from souvlaki and gyros to pizzas. He now employs only three people, down from 23 in 2008.

“Without providing enough collateral to banks, they don’t disburse more than 2,000 to 3,000 euros,” said Yiannis, declining to provide his family name for fear of offending lenders. “If I have to lose my house to support my business, I’d rather lose the latter.”

After Greece’s exit from its European bailout on Aug. 20, the country’s banks are facing increasing demands from individuals and companies to help grease the wheels of the real economy. Piraeus Bank SA, Eurobank Ergasias SA, National Bank of Greece SA and Alpha Bank AE are set to inject as much as 11 billion euros into the economy this year in the form of new loans. That’s up from 8.6 billion euros the lenders loaned in 2017.

But it may not be enough for an economy that has lost more than a quarter of its output in the past decade and is struggling to claw its way back up. Prime Minister Alexis Tsipras urged Greek banks in December to play their role and support viable businesses and households with liquidity. Banks, buried under mountains of bad debt, are being cautious and may need more encouragement, while the country needs to lure foreign direct investment.

Funding Gap

“There are opportunities in Greece for investments but there is a lack of finance and even when there is liquidity, the cost of capital is too high,” said Panos Tsakloglou, a professor at the Athens University of Economics and Business, who was a Greek bailout negotiator between 2012 and 2014.

For Greece, 2017 was the best year since 2006 in terms of foreign direct investments, with the total amount reaching 3.6 billion euros. But it’s still too low to help support a sustainable recovery in the economy.

“Real investment is still less than 40 percent of its pre-crisis level and it now accounts for just 13 percent of GDP, half the level before the crisis (25 percent),” HSBC said in a report in July.

Unlock Investments

Greece now has a “great opportunity to show more openness to FDI, which could help lift the country’s growth potential,” the London-based bank said. For 2018, the government expects growth of 2.5 percent, which would be the highest since 2007.

“What can unlock investments is the fact that Greek assets are cheap and a large part of the unemployed labor force is well educated and can be employed at competitive wages,” Tsakloglou said.

Meanwhile, Greek banks are under pressure to reduce bad loans and to ensure that the new loans they make are safe bets. At the end of March, the non-performing exposure of the banking system stood at 92.4 billion euros, equivalent to half the country’s gross domestic product. Banks have committed to cut their exposure to bad loans to 64.6 billion euros by the end of 2019, making them over-cautious about funding any kind of project.

Yiannis points out that his company is servicing all its debt which he says would have been enough in the past to ensure a new loan.

Bigger the Better

Larger companies are faring better. Banks have budgeted more funds for bigger companies that can easily provide collateral for requested new credit lines. Piraeus has channeled half of new loans to large businesses, while Alpha Bank is trying to increase the proportion of loans to retail customers this year.

Eurobank also plans to earmark 1.3 billion euros in corporate loans, or more than half the total amount of 2.2 billion euros of new loans in 2018.

What the Greek economy needs more than anything else is a vote of confidence from outside investors, Tsakloglou said.

“If foreigners invest their money in the country, it will be a strong signal for domestic depositors, both households and companies that the risks have subsided and they can bring their money back to the banking system,” he said. “And a virtuous circle could begin.”

--With assistance from Antonis Galanopoulos and Christos Ziotis.

To contact the reporter on this story: Sotiris Nikas in Athens at snikas@bloomberg.net

To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net, Paul Tugwell

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