Pace picks up on Greece's bad bank plan

The Bank of Greece (BoG), the country's central bank, is rapidly completing a plan to create a bad bank, which could take on most of the non-performing loans held by lenders.

In the next few days, EPATH (the BoG's Committee on Credit and Insurance Issues) will consider the plan to create a special scheme for the management of non-performing loans. This will be followed by an in-depth examination of the plan's technical aspects with BoG consultants, followed by presentations and discussions with investors and market players to test its operational aspects and the response of markets.

The BoG will then submit the final plan to the government and the SSM, while the government will have to decide whether it is appropriate to proceed with the next step and submit it to the European Commission.

Government stance

There is currently no reaction from the government. According to sources, Deputy Finance Minister George Zavvos, who oversees the country's financial sector, does not view the new plan favorably and considers that the NPL problem can be solved through the Hercules bad loan plan, which will be activated as soon as market conditions allow.

For his part, Finance Minister Christos Staikouras does not see the issue as being urgent, placing as a top priority the dealing of the effects of the pandemic and avoiding any further financial burden for the state that would bring Greece closer to a new bailout.

Banks welcome any tool that will help reduce NPLs faster and recognize that the new crisis brings with it additional challenges and difficulties in implementing bad loan reduction plans. Regarding the BoG's plan to create a bad bank, Greek lenders believe that it could lead to a final solution to the problem, but they note that they will have to look at its structure and impact on their balance sheets.

The plan will include both the current stock of non-performing loans, about 68 billion euros, as well as the new wave of sour debt to be created by the pandemic. According to Business Daily sources, the design of the plan is such that the inclusion of existing non-performing loans in the form of a bad bank does not require the approval of the European Commission and does not fall under the provisions of state aid being provided.

As far as the new NPEs being created is concerned, steps at a pan-European level are expected on how to deal with the problem loans that will be created by the pandemic.

The bad bank plan also addresses the issue of deferred tax credits, with some sources saying that they could go towards the new scheme's capital base. Finally, the BoG aims to utilize all the infrastructure that has been created and the existing loan servicing companies given the large amount of work that needs to be done.

It is noteworthy that the BoG team has examined in detail all the alternatives to address the country's NPL problem (maintaining the existing strategy of securitizations, capital increases, bad bank, etc.) and concluded that the creation of a single bad bank achieves maximum efficiency, as it achieves the largest reduction in bad loans per unit of capital used up in the process.

BoG sources emphasize that it is a plan in which banks can join voluntarily with no restrictions, meaning that banks can use other tools at the same time, such as the Hercules plan. However, they believe that the new recession, the magnitude of which cannot yet be predicted, is creating new risks and, at best, will postpone for several months bank plans to reduce NPLs. Therefore, there should be new tools prepared, to address the possibility of a sharp deterioration in economic conditions.