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New tax law boosts Greek banks, as bailout talks edge close to breakthrough

A new law allowing the conversion of some loan losses into regulatory capital for 20 years instead of five will help Greek banks hit their ambitious cleanup targets. It coincides with a tentative breakthrough in the country's bailout talks that could further aid the sector's fragile recovery.

Debt forgiveness and nonperforming loan disposals are set to accelerate as a result of an amendment approved by the Greek parliament March 29, which allows banks to label losses arising from bad assets as regulatory capital in the form of deferred tax credits for a period of 20 years, up from the current five years.

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About 3,000 pensioners marched through Athens on April 4 to protest years of cuts to their pensions under the country's bailout commitments.


Source: Associated Press

"The banks will more easily be more aggressive in loan write-offs as the losses arising could now be amortized in 20 years," said a Greek bank analyst who asked not to be named. "The extension of the deferred tax period safeguards banks from recording extended losses [in] their financial statements that would require another recapitalization process, as the longer the offsetting period, the higher the chances of Greek lenders [achieving] the necessary profits in order to match their losses with the taxes due," he added.

The amendment to the law dealing with taxes and other bailout-related measures covers debt forgiveness and toxic loan disposals made after Jan. 1, 2016.

The increased leeway the state has given banks should help the sector meet toxic asset reduction targets set in conjunction with the European Central Bank.

Alpha Bank AE aims to reduce its nonperforming exposures to €17.5 billion in 2019. It had €3.4 billion in tax credits as of Dec. 30, 2016. National Bank of Greece SA, which booked tax credits of €4.8 billion at 2016-end, is targeting an NPE reduction of 29.95% by 2019, to €13.10 billion from €18.7 billion. Piraeus Bank SA wants to reduce its NPE level from €33.8 billion to €20.3 billion.

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NPEs include restructured loans.

"The amendment would facilitate the banks' efforts to meet the committed NPE reduction targets without potential losses harming their capital," said Manos Giakoumis, head analyst at MacroPolis, an Athens research house.

An additional benefit of the extended tax credits is that it will contribute to calming civil unrest, said the anonymous analyst.

Protests, often accompanied by violence, have grown more frequent as property foreclosures have risen and a series of tax hikes kicked in. Between 2007 and end-2016, GDP per capita fell by nearly a third, unemployment skyrocketed and social services were cut. Over the past five years, the proportion of Greek households earning below €1,000 a month has gone from 49% to 64.11% out of a total of 5.68 million, according to the Greek daily newspaper Kathimerini.

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Politicians announced an in-principle agreement on the next chapter of Greece's bailout after a meeting April 7 in Malta. "We have an agreement on those overarching elements of policy, in terms of size, timing and sequencing of the reforms, and on that basis, further work will continue in the coming days, with a view for the mission to return as soon as possible to Athens to complete the work," said Eurogroup President Jeroen Dijsselbloem?. "The big blocks have now been sorted out and that should allow us to speed up and go for the final stretch."

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Eurozone Chairman Jeroen Dijsselbloem addresses journalists after a meeting of European finance ministers in Malta where Greece struck a tentative deal with its creditors on a bailout package.

Source: Associated Press

Final approval of the accord is required before creditors release a further tranche of the €86 billion promised to Greece in 2015. Most of this is earmarked for debt repayments.

Disagreement in the negotiations has stemmed from creditor requests to increase taxes and cut public spending, including pensions, and Greek insistence on relief for its most vulnerable citizens. Months of delays in the bailout negotiations hit the recovery of the banks, with deposits dwindling and nonperforming loans rising since the start of 2017.

"In the first quarter of this year, due to the prolongation of the uncertainty pertaining to the completion of the second review, the resulting tightening of liquidity conditions in the market and the decline of customer confidence, we have witnessed less engagement of our customers in restructuring discussions and therefore an increase in re-defaults," Alpha Bank CFO Vassilios Psaltis said March 30.

The sentiment was echoed by Eurobank's CEO Fokion Karavias, who said an agreement on the next phase of the bailout "no later than in May is necessary for the Greek economy to unleash its growth potential and the Greek banking system to meet its objectives." Executives from Piraeus voiced similar concerns.

"We believe the negative trend seen in the first months will be reversed," the unnamed analyst said. "A deal will be a catalyst for the Greek economy."

In March, S&P Global Ratings ranked Greece's banking sector as one of the riskiest in the world, alongside those in Ukraine, Egypt, Nigeria, Jamaica, Mongolia and Belarus.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.

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