Greece's Latest Drama Imperils Banks' Baby Steps Toward Recovery

(Bloomberg) -- Since the last eruption of Greece’s long-running crisis in 2015, banks in Europe’s most troubled economy have shored up capital, staunched losses and set up a plan to reduce their mountains of bad debt.

Now, fresh tensions over the country’s bailout are putting that progress at risk. About 1.3 percent of deposits were pulled from the banks in January, while bad loans crept higher, an increase Bank of Greece Governor Yannis Stournaras blamed on borrowers using the deadlock with creditors as an excuse to avoid making their payments.

Greek officials are meeting in Athens this week with representatives of the euro area and International Monetary Fund to set out the policies Greece must undertake to unlock more loans. The government foresees an accord in March or early April, but the scale of pending issues raises concerns they may be politically hard to sell at home.

“The longer it takes for the impasse to be concluded, the more damaging it will be for the banks,” said Federico Santi, an analyst with Eurasia Group.

The biggest lenders -- Piraeus Bank SA, National Bank of Greece SA, Eurobank Ergasias SA, and Alpha Bank SA -- made headway since 2015, when 26 percent of total deposits fled on concern Greece might abandon the single currency. That run was only halted when the banks were shut for three weeks, controls were placed on withdrawals and the movement of money abroad and Greece agreed to an 86 billion-euro ($91 billion) bailout, its third since 2010.  

A 14.4 billion-euro recapitalization in November 2015 by the government-owned Hellenic Financial Stability Fund and private investors strengthened the banks’ balance sheets. The HFSF -- funded through euro-area loans -- remains the largest investor in all but one of the banks.

For the first time since 2010, three of the four are expected to report an annual profit when they announce results starting next week. Crucially, the banks are embarking on a three-year plan, overseen by regulators, to shrink their bad loans.

Paulson, Diamond

The potential for a recovery has attracted investors like New York hedge fund manager John Paulson, the largest private shareholder in both Piraeus and Alpha Bank. Last week, Bob Diamond, the former chief executive officer of Barclays Plc, jumped into the fray. His investment firm, Atlas Merchant Capital, snapped up consumer finance firm Credicom and named Anthimos Thomopoulos, a former CEO of Piraeus, as its chief. The purchase gives Atlas a banking license that could allow it to buy up bad loans.

Until the banks begin offloading this bad debt, there’s scant chance they’ll be able to provide businesses with the credit they need to grow.

“These NPLs are clogging the wheels of the entire economy,” said Paris Mantzarvas, an analyst at Athens-based Pantelakis Securities.

Under the workout plan, Greece’s four big banks intend to reduce non-performing exposures -- loans that are more than three months in arrears or assessed unlikely to pay in full -- to 38 percent from 50 percent. This will mean restructuring, selling, and writing down bad debt over three years. With a ban on repossessions now eased, the banks can liquidate collateral to offset losses. And the government has pushed through legislation to set up a secondary market for soured loans.

In a February report, the IMF expressed hope these developments will help banks achieve better prices for distressed assets from investors.

Grexit Memories

That said, the plan hinges on a robust economy, said Mantzarvas. Almost half the reductions in non-performing mortgages and bad business loans are slated to come in the second half of 2019. The structure is designed to provide enough time for a recovery to lift the country’s fortunes. That could be a gamble given the fundamental weaknesses in Greece’s economy, which has shrunk by a quarter since 2008.

Moreover, if European officials and the IMF can’t reach an agreement with Athens, Greece may not receive a vital payment from the rescue package. That would be a severe blow for a country that still can’t borrow from bond markets at affordable rates. And the clock is ticking: Greece must pay about 6 billion euros in sovereign bond principal by July.

The memories of the brush with “Grexit” in 2015 are still fresh, and a new crisis could fan populist anger across Europe just as French voters are going to the polls in April and May, and before German elections in September.

For all their efforts, the Greek banks don’t control their own fate. The politics around the country’s bailout are what’s shaping their immediate future. As negotiations take place in Athens, veteran bankers are hoping for the best.

“The review has to close soon because delays will hold back the spending and investment activity that the economy needs,” said Michalis Sallas, the former executive chairman of Piraeus. “We won’t get the sense that we’re out of the crisis until the review is done.”

--With assistance from Christos Ziotis

To contact the reporters on this story: Edward Robinson in London at edrobinson@bloomberg.net, Marcus Bensasson in Athens at mbensasson@bloomberg.net.

To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net, Frank Connelly, James Hertling