Of rivers and streams, of the ESM and the HFSF

by Antonis D. Papagiannidis

At the confluence of rivers, or of streams, or even of rivers and streams, one finds turbulence. Such turbulence may look picturesque from some distance; it may bring just trouble or give birth to new set-ups. So it goes with the changes promised through the December 10-11 EU Summit that will host a Euro-Summit segment – that is, if the Eurogroup of November 30 does not clear the slate on all pending Banking Union issues. If, this time around, the ESM reforms already launched one year ago (on December 4, 2019, by Eurogroup decision) and including a central role for the ESM in promoting debt sustainability, plus bringing forward up a common backstop for the Single Resolution Fund/SRM (now set for 2024), if such reforms, are expedited under the pressure of the Covid-19 pandemic, a new pillar may be well under construction in the EU/the Euro-area.

The first pillar was provided by the fast-track expansion of monetary support by the ECB to keep the Euro-area economies afloat (actually: awash in liquidity) when the extent of the pandemic shock became evident to the Bank; this went in parallel with the freeze of Stability Pact ceilings/constraints for fiscal deficits and the reining-in of DGComp witch-hunting of state aids.  The second pillar, constructed under far more laborious conditions and now threatened by Hungarian/Polish/Slovene procedural trickiness, was the budding debt mutualisation agreed through the creation of the Next Generation EU instrument, so as to alleviate the economic impact of the pandemic.

Now, for the third pillar: meaning the decision to make easier salvage operations on a banking system already reeling under earlier systemic shocks – a situation differing of course in Germany or Italy, in Spain or Greece, but omnipresent in one form or another – and much aggravated as the pandemic wreaks havoc in business (and bank…) balance sheets. To let the ESM play a more active role in this configuration, to provide an effective backstop to the SRF would be quite a step in the perspective of a more convincing Banking Union. Of course, Germany /the Bundesbank will exact serious pressure for legacy issues/the NPL burdens to be cleared beforehand; still, progress in this direction would be quite important for “Europe” to creep ahead.

This serves as an interesting background for the moves undertaken – or planned – for HFSF, the Hellenic Financial Stability Fund which has in its portfolio major stakes of two out of four Greek systemic banks after their third successive recapitalization – Piraeus Bank where the HFSF will soon hold something more than 61% of the common stock pursuant to non-payment of CoCos, and National Bank of Greece with 40% of its share capital. The remaining two systemics, Alpha Bank with some 11% and (Fairfax-controlled) Eurobank with less than 2.5%, seem to be in a different league.

With the consequences of the current pandemic on Greek banks looming heavy over their already-fragile status, with their capital base heavily reliant of deferred tax (DTCs constitute around 55% of regulatory capital), the way forward brings anew an increased role for the HFSF in the not-so-distant future. True enough, the largely successful off-loading of Greek bank NPLs through the “Hercules scheme” – a scheme feared close to being derailed in the first corona-pandemic wave, but that kept going and seems set to reduce the NPL mountain by half within the year – worked through the market. But the very existence of a public-sector lifeline in the background is always comforting.

The two environments – the ESM/European level and the HFSF/Greek level – are only indirectly connected; still, positively changing dynamics can prove useful.