Bank of Greece governor sees problems with Hercules plan, calls for bad bank solution

"If we really want to tackle the problem of bad debt at a high speed, the only way is a bad bank," Bank of Greece (BoG) Governor Yannis Stournaras told a parliamentary committee on Monday. The hearing was held as part of a process to approve the renewal of Stournaras' term at the helm of the central bank.

Soured debt is a huge burden on the banking system, Stournaras said, adding that a bad bank would probably be needed to help Greek lenders offload bad debt faster.

As the BoG governor explained, the "Hercules" program that reduces problem loans through securitizations with government guarantees is progressing, but with problems, as the coronavirus pandemic affects securitization markets and the value of collateral.

However, as Stournaras pointed out, even with the full implementation of the "Hercules" plan, not all non-performing loans will be covered, but only about 32 billion euros out of the 70 billion euro total.

This leads to a need to activate other plans, he said. "The next day there should be other parallel and complementary plans on the table and we are in a dialogue with the government on what kind of parallel tools they could be," he said. At the same time, Stournaras was in favor of Greece turning to the European Support Mechanism (ESM) for cheap finance.

"Turning to the ESM is not a memorandum. We must take advantage of every drop of zero interest rate given to us", he said, adding that it was wrong to give the impression that (some) wanted to lead the country to a memorandum. 

In regards to Greece's broader macroeconomic conditions, Stournaras said that he sees the economy contracting at a rate of between 4.5 percent to 9.5 percent this year, with his basic scenario being a dip of 6 percent.

He went on to predict a recovery in the Greek economy in 2021 with a 5.5 percent increase in GDP. He said the global pandemic creates uncertainty because "as long as there is no vaccine and no medicine, the fear that nests in our souls create conditions of stagnation, and possibly, if it continues, fears of stagflation. "

Additionally, Stournaras noted that this year Greece will have significant credit expansion, estimated at 15 billion euros, at least. He stressed that in terms of liquidity and capital, banks are fully covered to help support production in the economy. Of course, he added, banks must lend to creditworthy borrowers.Bank of Greece governor sees problems with Hercules plan, calls for bad bank solution