Greek Business File, January-February-March 2020, No 124
Interview by A.D. Papagianidis and Harry Savvidis
George Zavvos, Deputy Minister of Finance in charge of the financial system presents the“Scheme Hercules” for non-performing loans which is expected to give the boost Greek banks urgently need
Where are we finally - after at least five years of discussions– with the issue of non-performing loans and the eff ort to create (and operate!) the right tools for addressing the issue?
We are at the point of rebooting the Greek banking system. In the last years, despite individual efforts, no systemic solution has been found for addressing the problem of non-performing loans and as a result the Greek banks have the highest percentage of non-performing loans in Europe (43% of total loans). After years of inertia, the government - under the decisive leadership of the Prime Minister and the co-ordination of the Minister of Finance - moved fast, as it prepared and successfully negotiated with the European Commission (DG Competition) the Hercules scheme, which was approved in record time. This scheme constitutes the first systemic solution which aims at reducing the non-performing loans by 30 billion, an amount which corresponds to 40% of the total loans. By purging their balance sheets of a large number of non-performing loans, Greek banks will be able to offer cheap loans to households and small and medium-sized enterprises. Secondly, the Hercules scheme is based on capital markets, because it obtains funding from investors and does not burden the Greek tax payer. The application of the scheme is possible due to the change of Government, which created a favorable environment in the markets, something which can be perceived from the continuous records of Greek bonds and the reduction of the country’s borrowing cost. Secondly, investors “are thirsty” for securities with positive yields, while in Europe 69% of state bonds and half of corporate bonds have negative yields.
The case of Greece
It has been claimed that the Hercules scheme is a simple copy of the Italian model GACS and that it does not take into consideration the special features of the Greek banking system. What do have you to say on this matter?
The Italian model was certainly the initial idea of the securitization on which we based the Hercules scheme - and this has been a strategic choice.
The main innovation of the Hercules scheme however, is that although it has been inspired by the Italy’s GACS scheme, which as you very well know concerned a country which has an investment grade, it will be applied to a country with no investment grade. In fact, in the case of Greece, we achieved - for the first time within the Eurozone - a country where banks have a CCC credit rating and the country itself doesn’t have an investment grade, to guarantee the senior tranches of the banks’ bonds and to resort to the markets to raise 30 billion, supported by the guarantee of the State. Hercules is a funding mechanism supported by the capital markets and which resolves one of the main problems of the banking sector. Besides that, the commission which the banks will pay through their SPVs will be lower than what the Italian banks paid, when they participated in the GACS. As you understand, in order to make this groundbreaking scheme plausible, the change of Government was necessary, as it improved the market conditions and consequently the pricing of the commission for the banks, which is at historic lows as we speak. Thus, by implementing Hercules, the Government solves the problem in order to improve liquidity for the Greek citizen. Whoever talks about copying the Italian model therefore, is ignorant of the basic mechanism on which the Hercules scheme is based.
How important is the SSM burden and the DG Comp dimension?
As you know, the various European institutions undertake various functions. The DG Comp is mainly responsible for the approval of schemes, such as Hercules, because it decides whether they are consistent with the European competition rules and mainly with the state subsidies. The SSM (Single Supervisory Mechanism) supervises the four Greek systemic banks and is responsible for their financial stability. Thus, the European Commission approved, by its decision, the basic proposal of Hercules in the securitizations which will be prepared by the banks which want to participate. The SSM will evaluate the credit risk for the so called senior tranches which will be withheld by the banks and which will be guaranteed by the State. The SSM, by giving, as we hope, zero risk to senior tranches, will contribute decisively to the success of the scheme.
How has Hercules been received up until now?
There is a consensus concerning the Hercules scheme among the various European and International institutions. Top European executives such as the Competition Commissioner and Executive Vice-President of the Commission, Margrethe Vestager, the former President of the European Central Bank, Mario Draghi, the President of the Single Supervisory Mechanism (SSM) Andrea Enria and the President of the Council of the Single Bank Resolution Mechanism, Elke Koenig, have declared that this scheme could play a decisive role in strengthening the banking sector. At the same time, a matter, I believe, which is worthy of our attention is that the European organizations and the international investors agree not only with the scheme of the Greek Government but also with its strategy to start with the reduction of the nonperforming loans, presenting a clear picture to the investors, to whom Hercules will offer a bond guaranteed by the Greek State. The quality of this bond will be confirmed by at least one rating agencies. Thus, we want to make it clear to international investors that after a decade, Greece is coming back to the international investment map.
Dynamic in the market
Today, how urgent is the matter? What does this situation create concerning the stability level of the banking system?
There is no issue of stability of the banking system today. However, the big number of non-performing loans that the Greek banks have today deprives them from funding the real economy and realizing their future plans. The issue of the non-performing loans is today more urgent than ever. The change of government created a positive dynamic in the market, something which showed in the negative yields of the treasury bills and the historic low of the interest of the 10-year bond. This opportunity should not be wasted. For this reason, the Ministry has rapidly processed the Hercules scheme. Thanks to this scheme, the banking system will be strengthened; the banks will rapidly clear their balance sheets from the non-performing loans, they will increase their profitability and they will be able to increase their funds and capital adequacy. In this way, the plan will accelerate the economic growth promised by the Prime Minister, since the banks will free capital which will be used to finance the real economy. In addition to all the above, the Hercules scheme will bring about multiple positive effects at a second phase, since it will deepen the secondary market, creating huge investment opportunities in a world economy which suffers from low returns.
Finally, what are the differences/ similarities of the two versions (HFSF version and Bank of Greece/securitization of loans with guarantees/APS or the transfer to SPV together with the deferred tax) which have been discussed? What was the role of the Government in the final choice ?
The success of the Hercules scheme is due to the crystal clear choice by the Government to move in record time with a realistic proposition of systemic scope which was fully accepted by the competent European institutions, by the investors and principally by the participating banks themselves. The successful function of the Hercules scheme and the creation of a secondary market of non-performing loans depend on its smooth operation. For the next 6-7 months the Greek government will focus on the successful implantation of Hercules, which constitutes the first step of the government’s wider strategy to achieve high growth rates.
After the application of the Hercules scheme, I believe that nothing will remain the same, as the Greek banking system will function within a more competitive environment. We know very well of course, that the problem of the non-performing loans will not have been solved and our experience up to now has shown that every solution has to fulfill the following 4 basic criteria: it has to evaluate the supervisory impact, it must not have fiscal cost, it must be compatible with the rules of state aid and it must constitute an attractive investment product.
The markets are thirsty for Greek bonds
How appetizing for the markets do you think are Greek securities, of the type which will be issued for the securitization of similar demands?
It is now a fact, that due to the increased reliability of Greece, the markets are thirsty for Greek bonds whether state or corporate. The change in government has `increased the demand for Greek titles, a fact which is evident in the return of the 10-year bond, which is lower than 1,5%, from the rally to the Stock Exchange and by the recent negative interests rates of the treasury bills of the Greek State. As you understand, the low return of the Greek bonds reflect the decrease in the riskiness of the country and the investors’ expectations for Greek economy’s growth. Therefore, the high level of trust towards the Greek economy reduces in general the banks’ cost of borrowing and makes easier and less costly for them to boost their capital. Moreover, large investment companies and banks have shown interest in entering the Greek market and the banking system in particular.
What is now the actual horizon for things to move forward? “How much time do we have/does the Government have at its disposal?”
The Prime Minister has given us a clear mandate to move forward with the Hercules scheme and we succeeded. There is no room for complacency, the Government is moving fast and with sequence in order to take advantage from the favorable market conditions. The banks have committed to reduce their nonperforming loans to 35% by the end of the current year and to 20% by the end of 2021. The Prime Minister has asked the banks to achieve single digit ratios for their non-performing loans until 2022. I have to remind you here that the number of non-performing loans in Europe is 3,56%, while in the U.S.A. and Japan it is 1%. There is very little time, therefore.
What is the real size of the non-performing loans today, after the years of the crisis? What are the ones that really burn? The business or the housing ones?
According to the most recent data of the European Central Bank (January 15 2020), the percentage of nonperforming loans went down to 3,41% in the third quarter of 2019 in the Eurozone, while in Greece it stands at 37,4%, a percentage which is the highest in the Eurozone.
How much of its available cash buffer can Greece use? How/by what mechanism? The size of around 10 billion which was rumored to be available for this purpose, how much does it “count” against the intent for an APS rumored to amount to 25 billion?
The Hercules scheme has the great advantage that it does not have any financial impact on the debt, the deficit or the buffer. The guarantee of the State, which will amount to 12 billion, will be given only for the senior tranches, that is the most secure ones, and only after they have been evaluated by at least one rating agency. On the basis of that guarantee, there will be a reduction of around 30 billion, which shall amount to 40% of the total volume of the non-performing loans. These numbers are not arbitrary, they are based on the safe indications we have. With the precedent, of the mass securitization in Italy, we know that in the first three years of the GACS scheme no guarantee was called upon, while the country managed to wipe out 63 billion in non-performing loans, which corresponds to 34% of the total volume of the loans.