Reported by: banking|Updated: March 21, 2017
Greece’s banking sector is reviving but the outcome will depend on several factors – most important being the political tussle with Eurozone:
Greece is again in the news. Very recently, the International Monetary Fund has warned that the country’s debts are on an ‘explosive path’, which is once again bringing the EU on to a crisis. This would also mean all the professed austerity and economic reform measures that Greece was advised to implement and had tried to implement had come to a naught.
There is an element of unwillingness among international financiers like IMF and even countries in the EU to extend any more funds to Greece. They feel it is turning out to be a bottomless pit and nothing tangible had come out of the massive fund infusion that had happened.
The reform measures that Greek government enacted included 12 rounds of tax hikes, cuts in spending etc from 2010 to 2016. In spite of these measures, the country needed fund infusion by way of loans in 2010, 2012, and 2015 from the Troika – International Monetary Fund, Eurogroup, and European Central Bank. Even the government had to negotiate and implement a 50% ‘haircut’ on debt owed to private banks in 2011. Greece also had the distinction of becoming the first developed country to fail to make an IMF loan repayment. It had at one time debts amounting to €323 billion, which is estimated to be around €30,000 per capita. In February 2017, the Greek finance ministry had said the government’s debt load is now €226.36 billion after increasing by €7 billion in July this year to its creditors and many global analysts feel the country is most likely to default unless there is fresh cash bailout.
There are records proving that when Greece became the 10th member of the European Community on 1 January 1981, its economy and finances were in good shape. The debt-to-GDP ratio was 28% and the budget deficit below 3% of GDP. However, the next 30 years saw the country spiraling down mainly on account of lavish welfare policies benefiting the people and by creating an inefficient and protectionist economy. Being a member of Eurozone made it easy for the government to borrow and borrow it did in a reckless manner. At one point of time the country’s debt-to-GDP ratio was at 118%, well above the Eurozone’s maximum permitted level of 60% and its fiscal deficit as a proportion of GDP was 12.7%, above the Eurozone’s limit of 3%.
Greece’s central bank, Bank of Greece, has publicly said new and strong measures are needed to get the country out of the debt burden, including extension of the maturity date of the long-term loans the country had availed by over 20 years.
The crisis, essentially involving the Greece’s economy and Eurozone has actually escalated as depositors in the country fled banks in fear not only of the consequences of sovereign default but also of Greece abandoning the Euro. Unfortunately, this development makes the crisis much deeper and more difficult to manage.
The four banks have now created a plan under which they will work to cut down non-performing loans significantly through a process of restructuring, write-downs and sale of assets. The central bank has lifted the ban on repossessions and banks can liquidate collaterals. The government is also setting up a secondary market for stressed assets.
This, however, does not paint a rosy picture. It is estimated that almost half the reductions in NPLs and bad loans would come in the second half of 2019. This was designed to provide enough time for a recovery in the economy, but it could be a gamble as there are known fundamental weaknesses in the country’s economy. There are again uncertainties over the write-offs sought from EU and IMF as there can be a standstill where the country would not be able to borrow more. And there is the repayment schedule by July.
All these lead to the thought that the country’s banks do not control their future. It will invariably be decided by the