Summermay be the time for blockbuster sequels, but for Greece and its beleagueredbanks, this one is likely to have all the appeal of Jaws 2.
Theplot is all too familiar: Greece faces a series of debt repayments and isstruggling to persuade its international creditors to release the funds itneeds to meet them. Prime Minister Alexis Tsipras tried and failed in the weekof April 25 to convince eurozone finance ministers to call a special summit.
Yetalthough the immediate summit request was turned down, the Eurogroup of financeministers will meet to discuss Greece on May 9. Should it agree to release a €5billion payment to Greece, observers also expect the ECB to approve a waiverallowing Greek lenders to post government bonds as collateral for cash loans,which would provide a source of cheaper funding and further liquidity.
Eurozoneleaders have clashed with the IMF over the scale of austerity that is neededand achievable. The fund's head, Christine Lagarde, said April 14 that a 3.5%primary budget surplus target for 2018 could just about be met if "heroicefforts" were made, but she said maintaining the figure over the mediumterm "just will not happen." The fund appears convinced that Greece'sEuropean creditors must agree to debt reductions.
Theeurozone's proposal to resolve the dispute involves a contingency package ofcuts amounting to 2% of GDP that would be put in place should Greece missbudget targets. Greece rejects these, for reasons including that it believes itis unconstitutional to legislate for contingent measures.
YvanMamalet, an economist aSociété Générale, said in an interview that he expected the repayments,which amount to over €3.5 billion by mid-July, to be made, but that the demandfor a 2% contingency package would have to be watered down. Given itsskepticism over the budget targets, Mamaletthought that the IMF might contribute a symbolic amount but continue toparticipate as an observer, not least because of the insistence of Germanpoliticians.
For all the conflict, Mamalet noted that agreement has beenreached on measures amounting to 3% of GDP, including steps to ease sales ofnonperforming loans. He also expected eurozone finance ministers to have nointerest in repeating the brinksmanship of 2015.
"They have almost agreed on everything," he said,with the deal embracing pension reforms, including an upper pension limit andhigher contributions, income tax reforms and a probable VAT raise to 24% from23%. A moratorium on sales of mortgages backed by primary residences has beencut to one year from three.
NPL clean-up remainscrucial
With the four Greek systemic banks reporting NPL ratios atyear-end 2015 of between 33% for NationalBank of Greece SA and 40% for Piraeus Bank SA, cleaning up their balance sheetsremains a critical challenge.
Although banks were recapitalized in 2015 and have raisedbad debt provisions, a bank analyst who spoke to S&P Global MarketIntelligence emphasized the challenges from the wider economic picture. Greeceremains in recession, with Commerzbank predicting a 0.1% GDP decline in 2016followed by a recovery to 2.0% growth in 2017, although this is clearlydependent on the ongoing negotiations and the agreed measures.
"I'm not optimistic," said the analyst, whoobserved that the deal and review have been dragging on for months and that theJune 23 referendum on Britain's EU membership is drawing nearer.
"Greece is on holiday for the next five days, so thingswill just drag and drag," said the analyst, who requested not to be named."The banks have big NPL books and for them to recover these loans, theyneed an economy to be performing well. [The solution] is not just selling NPLsor to have someone else manage them if the economy is trending down. The creditdata is [currently] trending down, deposit data is trending down. I am afraidwe are getting to a point where things become unsustainable and an emergencydecision will be taken on the eve of the repayments."
The analyst pointed out also that the Tsipras government isunder pressure — the coalition has just a three-seat parliamentary majority —and that the opposition was becoming more vociferous.
"I do not see that we are getting closer tosuccess," he said. "If the economy continues to trend down, if thereis no demand for loans, if deposits don't come back to the system, what is thepoint [in reducing NPLs]? A great deal needs to happen before we turn positiveon Greece."
However, the analyst observed that the ECB is alreadyhelping the banks' funding costs by reducing emergency credit lines and buyingsome of their stock of European Financial Stability Facility bonds above bookprices. He also noted that Piraeus Bank SA has redeemed its ,which will also boost its net interest income. This should be stronger thanexpected in the first quarter at all the banks.
"We are seeing the dependency on the eurosystem goingdown, but we are not seeing deposits going up. It's a bit weird reducing theemergency lines if they do not get alternative funding, but it so far has beenpositive," the analyst said. He still expected the four leading Greekbanks to post losses for the full year.