As lightning struck Athens on Monday and the new Syriza-led government came to power, Greek banks began one of their most turbulent weeks in recent years. Shares in the Greek financial sector fell by almost 44% from Monday to Wednesday before climbing by 13% on Thursday. If a week is a long time in politics, it is a lifetime for Greek banks.
Greece’s four biggest and structurally significant banks are Alpha Bank, Eurobank, National Bank of Greece (NBG) and Piraeus Bank which is the largest by assets. Through the Hellenic Financial Stability Fund, created in 2010, the Greek government owns two thirds of Piraeus and Alpha, 57% of NBG and 35% of Eurobank. Together, these four banks account for about 90% of the market share. Greece’s economic crisis led to banks suffering heavy losses from bad loans and the 2012 sovereign debt restructuring which drastically reduced their equity. The rescue package from the EU and the IMF delivered a €25 billion euro cash injection.
Warnings from the three main credit rating agencies, Fitch, Standard and Poor’s and Moody’s have added to the sense of crisis surrounding the Greek financial markets. Savers have been pulling their deposits from banks in recent weeks with an estimated €5 billion withdrawn in December and an expected €15 billion throughout January. So far this week, it is estimated that up to €1 billion a day has been withdrawn from banks leaving approximately €150 billion. Whilst these withdrawals are not yet at a crisis point, they are contributing to the crunch in bank funding. Furthermore, the approximately €11.5 billion which Greek banks raised last year to boost their capital positions by selling shares has largely been wiped out in lost market capitalisation this week. The Greek banks continue to trade at tiny fractions of their pre-recession prices; Piraeus Bank for example is valued at less than 1% of its 2007 price.
- Why did they suffer such falls this week?
The election victory of the far-left Syriza party which promises to heavily restructure Greek national debt was the primary cause of the collapse in bank share prices this week. The European Central Bank’s stress tests of Greek banks in October found that three were approaching full health and Eurobank was not far behind. However, such tests are largely to measure the strength of their capital positions and are not much help in the context of such heightened political risk. The Greek banks cannot survive without equity investors or savers for long without more funding from the ECB.
Greek banks are dependent on funding from the European Central Bank which in turn is dependent on the Greek government’s agreements on deficit reduction and structural reform. However, Syriza has made its firm opposition to the bail-out conditions very clear. This makes a renewal of the programme when the current agreement with the European Commission expires on the 28th February much less likely. The result could be an end to ECB funding. Bank of Greece data suggests that ECB funding will be approximately €65 billion euros by the end of January, up from €56 billion by the end of December and €45 billion at the end of November.
Furthermore, as Greek banks themselves own Greek government debt, a sovereign debt write-down could see the banks take a severe hit to their capital positions. Whilst bank sovereign debt holdings have fallen, they remain a significant component of the banks’ capital positions. Greek government exposure as a percentage of the banks’ capital is estimated to be around 90% for NBG, 45% for Eurobank and 40% for Alpha. A sovereign default would therefore wipe out much of the capital of these banks.
- Why did they recover on Thursday and today?
Given that bank shares by the close of Wednesday were almost half the price that they were last week, it was always likely that some brave investors would look to buy back some shares at some point. However, the most important driver seems to have been a number of reassuring comments from European and Greek officials on Wednesday evening. For example, Daniele Nouy, the chair of the ECB Supervisory Board stated that the banks were strong enough to weather the crisis as they had in the past. Also, the new Deputy Prime Minister Giannis Dragasakis told journalists that the government was seeking dialogue rather than a dispute and suggested that the government would not allow the banks to collapse.
- What are the risks ahead for these banks?
It seems unlikely that Greek banks will be able to draw much more from the ECB’s emergency reserves given the lack of collateral they have to deposit in exchange. If no new agreement is reached by the end of February, then ECB liquidity could be entirely cut off. The Greek central bank does have an Emergency Liquidity Assistance fund but at 1.55% it is more expensive and still requires ECB approval. This approval is certainly not guaranteed if the Greek government is attempting to write down much of its debt and refuses to enact structural reforms. Piraeus, Eurobank and Alpha are already thought to have applied for ELA funding.
Banks could also face problems if consumers and corporates take a harder line in negotiations with them in the expectation of new policies aimed at helping borrowers. Given that non-performing loans near the end of last year were 34.2% of total loans, this could force fresh losses onto the banks. A further deterioration of the Greek economy would evidently exacerbate this problem.
Deferred Tax Assets, which are essentially a claim on government funding, make up 40% of the banks’ core capital. However, the value of these DTAs and thus the strength of the capital is called into question when the state contemplates default. Moreover, in the medium term it is possible that the Government begins to exert a much more overt control over the banks by vetoing strategic decisions and replacing the leadership of banks. This would ultimately prove destabilising. The closer Syriza pushes Greece to a default or euro exit, the greater the likelihood withdrawals and the more the severe the liquidity crunch will become.
- Is there a contagion risk for other countries?
It is noticeable that there does not yet appear to have been much contagion from Greek banks to other countries. Most other European banks, even in peripheral economies, remain relatively stable. Indeed, financial markets more broadly seem to have outperformed America on the back of the announcement of quantitative easing from the ECB. The QE programme seems to have insulated the rest of the Eurozone from the problems in Greece. The major contagion risk would come if Greece suffers a disorderly default. The introduction of capital controls and the sharp return to the drachma would, at least in the short term, lead to much higher risk premiums for banks and government across the country. The next few weeks of negotiations are therefore crucial.
- What does this mean for Greece’s negotiations with its creditors?
In many ways, this significant volatility has weakened Syriza’s hand in the coming negotiations. Without a new agreement, the government could default and the capital flight so far would seem small by comparison. By punishing Syriza’s initial attempts at rolling back austerity, the outlook for the Greek economy has weakened. This will ultimately force the new Prime Minister to negotiate from a much weaker position. Without a properly functioning banking system, Greece cannot survive as a modern economy. Moreover, the lack of substantial contagion so far will make Brussels, Frankfurt and Berlin more confident about dictating terms to the new Greek government.