An analysis of the recapitalization of Greek banks in the context of the third Memorandum of Understanding

19 February by Daniel Munevar

CC - Flickr - William Murphy - Ireland 2013

At the core of the ongoing economic crisis in Greece is the link between the insolvency of the Greek Government and the banks of the country. Behind this lies a story of financial recklessness, protection of vested interests and adoption of failed policies in the name of the sacrosanctity of debt in the Euro area. Indeed, the adoption of the common currency led to the complete disregard of sovereign and bank risks associated to the massive increase of capital flows to the periphery of the Euro zone. In the case of Greece, German and French banks, and to a lesser extent other Euro area financial institutions were happy to accommodate a significant increase on their exposure to their Greek counterparts. The inflow of capital created an illusion of prosperity on the back of strong, but ultimately unsustainable, credit growth.

The tide changed in 2008 and markets woke up to the risks of intra Euro area lending. In this context, the deterioration in the funding conditions for both Greek government and banks went hand in hand reinforcing each other. As in a domino game with 2 tiles, it was assumed that the fall of one would undoubtedly top the other: if Greek banks went bankrupt, it would be up to the public sector to fund their recapitalization Recapitalization Reconstituting or increasing a company’s share capital to reinforce its equity after losses. When the banks were bailed out by the European States, they were most often recapitalized with no conditions attached and without the States having the decision-making power their participation in the banks’ capital should have given them. in a situation in which the government itself was facing high levels of debt and funding pressures; if the government declared itself insolvent, the exposure of banks to Greek Government Bonds (GGBs) would render them bankrupt. A mix of rising Non Performing Loans (NPLs), credit downgrades and a bank run from scared, and well off, depositors further compounded the extremely fragile position of the Greek banking system. |1|

In this complex scenario, Euro area institutions, and specially the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
, decided to base their policy response to the crisis on the ill fated notion that all debts in Euros should and shall be repaid. For Greece, this meant embarking on a ruinous bailout designed with the explicit goal of protecting the private creditors of both Greek government and banks at the expense of the Greek and European taxpayers. The attempt to hide the insolvency of government and banks through the provision of €110 billion in bailout funds eventually failed and led to a late and incomplete process of debt restructuring in 2012. |2| In turn, the entanglement between government and banks triggered a process of consolidation and recapitalization of the latter. For this purpose, the Greek Government allocated between 2009 and 2014 a total of €48.2 billion for recapitalization of the banks, plus an additional €84.4 billion in guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). . |3| Despite this massive injection of public resources, credit has failed to recover and banks continue to represent a drag on growth. Furthermore, in the context of the Third Memorandum of Understanding (MoU), the Greek Government was initially expected to allocate an additional €25 billion for recapitalization purposes. |4|

As the previous round of recapitalization proved a failure is questionable whether a further increase in public resources devoted for this purpose without a change in the overall policy approach will be enough to restore financial stability. In order to offer a background for this discussion, this document provides a brief description of the problems of the Greek banking sector that predate the sovereign debt Sovereign debt Government debts or debts guaranteed by the government. crisis, the complications associated to the first process of recapitalization and an analysis of the current proposals for a second process of recapitalization. Given the findings of the Preliminary Report of the Debt Truth Committee regarding the illegality, illegitimacy and odious character of the public debt acquired as part of the previous MoUs, this document aims to rise further objections regarding the bailout funds that have been allocated to bank recapitalization.

1. The problems of the Greek Banking system precede the debt restructuring

The period that preceded the crisis was characterized by rapid credit growth in Greece fueled by lending from financial institutions in the rest of the Euro zone. Banks in core Euro zone countries were hard-pressed during the first years of the common currency to find domestic costumers in a context of sluggish economic growth and weak domestic demand. As risk spreads across the Euro zone vanished, banks duly channeled savings to periphery countries establishing what it was initially identified as a virtuous cycle of recycling of capital flows. First, banks in countries like Germany channeled idle resources to Greek banks; second, the latter used those resources to support credit and economic growth, funding what in theory should have been profitable ventures; third, strong economic growth in Greece allowed for an increase in exports of German companies; fourth, those companies were then able to deposit back the ensuing profits on their bank accounts, thus completing the cycle.

It is no surprise then that the European authorities saw this process as a positive step in the process of continental convergence. Both the EU Commission and the ECB praised the role of financial integration as a tool to support economic growth, and therefore as “a key component of general economic policy of the EU”. |5| In the specific case of banks, the ECB identified in 2007 the reduction of barriers to further cross-border banking integration as one of the policy priorities of the EU. |6| This explains why the steady increase of claims of Euro zone banks on Greek counterparties, be it the government or banks, until it reached a peak of €150 billion at the end of 2009 didn’t raise any significant warning signs from European authorities until it was already too late. |7|

Flushed with foreign cash, Greek banks proceeded to fund a lending boom to domestic actors, both public and private. Between 2001 and 2007, consumer credit by domestic banks as a share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
increased at an annual average rate of 17.8%, while credit to non-financial corporations Non-financial corporations All economic agents that produce non-financial goods and services. They represent the greatest share of productive activity. increased at an annual rate of 6.5%. |8| As a result the debt levels of the private sector increased significantly. Household debts, including both mortgages and consumer debt, went from €23.8 billion (16.3% of GDP) in 2001 to €104.1 billion (46.7% of GDP) 2007. |9| During this same period, non-financial corporations debt increased from €49.1 billion (33.6% of GDP) to €102.1 billion (45.8% of GDP). |10| In the case of the public sector, debt increased in nominal terms, but decreased as a share of GDP, from €162.5 billion (106.8% of GDP) to €239.8 billion (103.1% of GDP). |11|

An important part of these loans not only ended funding financially unsound projects, but directly greasing the wheels of corruption and cronyism in Greece. The common thread in these cases of corruption was the use of banks to provide loans without any type collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. to political allies, associates or companies of minority stakeholders. For example, in the case of the now defunct Hellenic Post Bank it is estimated that between 2006 and 2012 it lent around €500 million to prominent businessman without securing any type of guarantees. |12| Eventually once they became NPLs, the losses associated to them were directly passed on to taxpayers. At the time, Alexis Tsipras denounced the bank scandal as a triangle of corruption involving leading companies, banks and political parties that exchange favors. |13| In the case of another defunct bank, the Agricultural Bank of Greece, it is now estimated that between 2000 and 2012 it extended 1300 loans for a value close to €5 billion. |14| These loans were extended without any type of guarantees and were provided to government supporters in what amounted to a patron-client relationship. |15|

As scandalous as they might be, probably the most iconic case of the corruption and excesses that characterized the Greek banking system before the crisis was that of the Marfin Popular Bank (MPB). MPB was established in 2006 as a result of the purchase of a minority stake at Laiki Bank in Cyprus by Marfin Investment Group (MIG). In turn, MIG was a Greek based investment group led by Andreas Vgenepoulos. After the merger had been completed, Vgenepoulos, who was a member of the boards of both companies, used more than €700 millions in loans provided by MPB to support the price of the initial share offering of MIG in 2007. |16| By 2010, its estimated that MPB had provided €1.8 billion in loans to entities related to MIG in Greece in what amounted to a clear conflict of interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. . |17| Even though the Bank of Greece conducted an audit in 2009 that identified these problems and raised further questions regarding the management of the bank, the regulators did nothing to address these issues. By the time Cypriot authorities took over the bank in 2011 it was estimated that MPB had a loan portfolio in Greece of 12 billion euros, most of it of dubious quality. |18| According to the appointed chairman by the Cypriot authorities, Michael Sarris, the “single most important factor” dissuading investors from helping recapitalize the bank were not sovereign bonds but concern that further losses in the loan portfolio in Greece could materialize. |19|

This rampant cocktail of debt and corruption eventually proved itself unsustainable. As a consequence, bad loans, the so called NPLs, in the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheet of the banks began to steadily increase. Because of their impact on the behavior of the banks is important to understand what NPLs are. The most common definition used to categorize NPLs is all loans that are 90 days overdue. That is, the debtor has not completed any overdue payments during that period of time. From the perspective of the bank this indicates that the payment in full on the loan is unlikely to occur without recourse to seizing the underlying collateral on the loan (if held). |20| From a broader perspective, as NPLs tie the capital of banks, reducing profitability and increasing their funding costs, they reduce lending even to profitable activities. |21| On a large scale, NPLs can bring entire credit systems, and by extension economies, to a stand still as banks withhold fresh lending and instead often simply re-finance insolvent creditors in an attempt to delay the recognition of the underlying credit losses.

In the case of Greece, this is exactly what happened. From a share of 4.5% of total loans in 2007, NPLs reached 24.5% in 2012. |22| By 2011 it was clear that NPLs represented the major problem of the financial system of the country. Based on the target level of Core Tier 1 Capital (CT1) |23| that the main 4 banks of the country were supposed to achieve by 2014, the credit loss projection on their loan portfolio, net of loan loss reserves, |24| represented on average 158% of CT1. |25| In other words, even before taking into account the exposure to GGBs, the main banks of the country were already on the brink of insolvency given the rapid pace of deterioration of their domestic loan portfolio.

The impairment of the assets side of the banks balance sheet, both because of NPLs and the banks exposure to sovereign debt, translated in turn into a steady process of credit downgrades that started in March of 2009. |26| As fears regarding the stability of the system started to spread, deposit flight eroded the liability side of the banks. Outstanding deposits from households and non-financial corporations decreased from €237 billion in June of 2009 to €150 billion in June 2012, a reduction equivalent to more than a third of the deposits of the system. |27| Out of these outflows, €25.5 billion (29.3% of the total) |28| were withdrawn and transformed into banknotes in circulation, while an additional €16 billion (18.3% of the total) |29| were transferred to bank accounts abroad, with the rest being shifted into property, gold and European money market funds MMF
Money Market Funds
Mutual investment funds that invest in securities, including money funds.
. These developments placed the banks in an impossible situation where their cost of funding steadily increased precisely at the moment where they begun to need more of it. As a consequence, banks lost wholesale market access to fund their operations by the end of 2009. Since, they became increasingly reliant on support by the Bank of Greece and the Eurosystem. |30|

As a response to the deteriorating environment, Greek banks brought credit to a sudden stop. Inter-annual rates of change of consumer, mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
and corporate credit sharply dropped in the second half of 2009 and by end of 2010 they were close to 0. |31| The ensuing credit crunch was especially severe with SMEs given their above average loss rates. |32| Thus, the lack of access to credit by the productive sector of the economy started a vicious circle of which the Greek economy is still captive to this day: lack of credit translates into weak economic activity and increased NPLs which in turn further weaken the balance sheets of the banks. Nonetheless, despite the central character of this problem, alongside the corruption of the system, little attention was actually devoted to these issues in the process of bank recapitalization that took place in 2012. As it will be shown, this helps to explain its failure.

2. Evolution of Greek banking system after the first process of recapitalization

At the onset of the debt restructuring process that took place in 2012, one of the priorities of the second MoU was to ensure financial stability. For this purpose, the MoU set strict goals in terms of CET1 ratios in order to ensure the proper capitalization of the banks so as to allow them, in theory, to simultaneously cope with NPLs as well as the credit needs of the economy. Banks were asked to present a plan in order to reach a CET1 ratio of 10% by 2013 and a minimum of 7% under a three-year stress test scenario. |33| In this regard, the challenge was to deal with the impact of the Private Sector Involvement (PSI), the name given to the debt restructuring operation, on the government bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. holdings of the Greek banks. The gross loss expected in May of 2012, net of PSI loss provisions, was €31.9 billion. |34| This amount was enough to wipe out the regulatory capital of the main four banks of the system, as well as the undercapitalization of the rest of the banks. |35| In the end, once provisions, credit loss projections and capital generation capacities of the banks were taken into account, an initial amount of €40.5 billion was set aside to ensure that their capital needs were met. |36|

In this context, it is important to note that the recapitalization scheme did not contemplate any sort of bail in mechanism in order to reduce the commitment of public resources. |37| This type of bank resolution implies recognizing the losses incurred by the financial institution by writing down equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. and/or converting into common equity certain liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). based on their seniority, before recurring to the use of public funds. |38| Two examples can serve to illustrate how this mechanism works in practice. In one instance, if losses are equal to the capital base of the bank, authorities could wipe out existing shareholders and convert into new shareholders the junior and senior bondholders of the bank. In this way, if new losses materialize, the former bondholders/new shareholders stand first in line to absorb them. In a more extreme scenario, if losses are on a ruinous scale, they can be allocated by writing down not only shareholders but also all of bondholders and un-secured depositors with holdings above €100.000. The clear advantage of this approach is that it reduces the need of public funds to recapitalize insolvent financial institutions by allocating most of the losses to private shareholders, creditors and depositors. In this way, it helps to weaken the sovereign-bank domino dynamic alluded earlier. Nonetheless, precisely because it spreads the losses through the system, potentially making other private agents insolvent, it might spark a financial panic.
It was precisely for this later reason that the ECB and the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
argued in 2010 against a debt restructuring and resolution of the Greek banking system. In their assessment, the danger of burdening Greece with an unsustainable debt load was far outweighed by the risk of a European wide financial panic caused by losses on exposure to GGBs and Greek banks. |39| To delay the debt restructuring, in order to protect private shareholders and bondholders of banks and government alike, effectively increased the cost of the bailout from around €40 billion to the actual €226 billion bill of the first two rescue packages. |40| In the specific case of the Greek banks, if the sovereign debt restructuring would have been held at the end of 2009, there was enough equity and bond debt on their balance sheets to absorb a complete write-down of their sovereign debt holdings through a bail-in resolution mechanism. |41| In this alternative timeline, French and German banks would have to face the ensuing losses on their own balance sheets, which would have required interventions from their respective governments. This was precisely the type of situation that those governments wanted to avoid and which led to the decision of bailing out government and bank creditors alike, while extending the bill to the Greek taxpayer, in order to contain a potential European wide financial panic. Whether those fears were justified is questionable. |42|

Furthermore, the issue of NPLs was mostly ignored. The MoU limited itself to mention future changes in the legal framework so as to facilitate, among others, maximization of asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). recovery, while excluding discussions regarding changes in management personnel or bailing in the remaining unsecured creditors. |43| This attitude is explained by the explicit assumption used by Blackrock, the external consultant brought in to perform the stress tests, regarding the overall macroeconomic performance of the country. In its analysis, Blackrock assumed the economic recovery of Greece in line with the macroeconomic assumptions of the MoU. In theory, the recovery would allow for the stabilization and eventual decline of NPLs. |44| As these projections de facto dismissed the multiplier effects of the fiscal retrenchment included in the program, they were off by a significant margin. In effect, whereas the IMF in May of 2012 projected real GDP growth of -4.8% for 2012, 0% in 2013 and 2.5% in 2014, the actual growth was -7%, -3.9% and 0.8%. |45| In this adverse economic context, NPLs continued increasing unabated reaching 40% of the total loan portfolio by the end of 2013. |46| Thus, even though the bank recapitalization exercise had been completed less than 18 months before, NPLs, net of loss provisions, represented 138% of the banks capital by Q4 of 2013. |47|

To make matters worse, the recapitalization of the Greek banks led to a dangerous increase in the level of concentration of the financial system of the country. Between 2008 and 2013, Greece registered the largest decrease in credit institutions within the Eurozone. |48| An important part of this process was the almost complete disappearance of foreign subsidiaries and branches that were acquired, with the support and encouragement of European authorities, by two of the largest banks of the country. |49| This, alongside the delayed process of restructuring, helped to reduce the exposure of foreign banks from losses deriving from the de facto insolvency of the Greek financial sector. As a result, Greece ended with the most concentrated banking system in the Eurozone: once the first wave of consolidation was completed in 2013, the five biggest credit institutions of the country controlled close to 95% of the total assets of the system. |50| This degree of concentration further raises questions regarding the ability of the banks to avoid collusion and protection of vested interests, as well as the capacity of the government to protect itself and the public from the risks associated with the insolvency of said institutions.

Overseeing this muddled policy response was the Hellenic Financial Stability Fund (HFSF). The HFSF was setup in 2010 as a capital backstop for viable banks. As part of the process of bank resolution that started in 2012, its independence from public control was strengthened. Despite the fact that the HFSF was to acquire a significant participation in banks as a result of the recapitalization process, |51| the MoU placed strict limitations on the voting rights associated with the shares of the banks in its possession. The objective of such measures was to ensure the business autonomy of the banks both dejure and defacto. |52| Thus even though the process of recapitalization was mostly funded through public funds, the actual control by the Greek Government over the resources and the benefited institutions was severely limited. The MoU implicitly excluded the possibility of public or cooperative ownership of the recapitalized institutions, as it was successfully used, for example, in the cases of Norway and Sweden in the early nineties. |53|

As the independence of the General Council of the HFSF was strengthened, some serious questions were raised regarding the professional background of several of its members. For example, the Council counts among its members with Pierre Mariani and Wouter Devriendt. Both people were involved in the badly managed process of resolution of the Dexia Group in Belgium. Even worse is the case of Anastasia Sakellariou, Chief Executive Director of the HFSF between 2013 and 2015. Sakellariou had to be asked by the Greek government to step down from its position in May of 2015 as she was charged, alongside other 25 former executives of the Hellenic Post Bank, with committing fraud and money laundering. |54| The specific charges against Ms. Sakellariou relate to the approval in 2012 of a loan to refinance two credit lines of the bank to a well-known local magnate. |55| Instead of asking for her removal until the investigation had concluded, both the head of the Bank of Greece, Yannis Stournaras, as well as the board of the HFSF, supported Ms. Sakellariou. |56| This story helps to understand why it has been so difficult to tackle NPLs in the system: its not possible to expect a positive outcome when the authorities in charge of regulating banks and forcing the recognition of losses have been themselves involved in the carrousel of banking corruption.

These issues with the management of the HFSF manifest themselves in its handling of the problems faced by two other Greek banks, Proton and Piraeus. In the case of Proton, the management of the bank was changed in 2010 after Mr. Lavrentis Lavrentiadis bought a minority stake in the bank. The director of the Bank of Greece, George Provopolous, personally approved the operation even though an audit had recommended against it. |57| The sale was officially ratified just a month before the signing of the first bailout package. With Proton bank under its control, Mr. Lavrentadis loaned himself and his associates €600 million with little to no collateral, channeling €51 million directly onto his own accounts. |58| This lending spree was financed with recourse to the Emergency Liquidity Assistance Emergency Liquidity Assistance
Emergency funds loaned to the private banks by the Eurozone central banks.
(ELA) provided by the ECB. |59| Even though it was the responsibility of the Bank of Greece and the HFSF to supervise the operations of Proton Bank they sat idly by while it took the intervention of a special investigation unit of the Greek Supreme Court to expose the fraud. |60| Eventually the HFSF stepped in 2011 to bail out Proton Bank with €1.3 billion of public resources. |61|

The story of corruption at Piraeus bank follows a similar tune. In 2011, Piraeus issued shares to the public as part of the process of strengthening its capital base. Once this process was completed, the family of Michael Sallas, then executive chairman of the bank, emerged as the largest shareholder group of the bank. To accomplish this feat, the Sallas family took out loans totaling €100 million from MPB using the acquired shares as collateral. |62| The auditors of MPB highlighted that the loans were given when the financial prospects of the bank were “deeply negative” and “dire”. |63| It is estimated that nearly one-fifth of the new capital raised by Piraeus was trough loans from other Greek banks. From the perspective of both the Bank of Greece and the HFSF to allow this type of operation represents a major failure in their role of guardians of financial stability. In practical terms, the use of loans from one bank to buy shares in another is nothing short of a Ponzi scheme: as losses materialize in one bank, capital is depleted and shareholders are wiped out, those same losses would extend to the bank providing the loans. This is the reason why, under international rules, banks that engage this type of behavior must both treat the loans as a direct purchase of shares of the other bank and deduct this amount from its own capital base. In the case of the Bank of Greece and the HFSF, they decided to look the other way. |64|

To cap this grim picture, the ECB simply decided to ignore the accumulation of warning signs regarding the overall fragility of the Greek banking system. In October of 2014, the ECB conducted a Comprehensive Assessment in order to examine the situation of banks across Europe and determine if additional measures were required to ensure their proper capitalization and operation. As a result of this exercise, the ECB gave a pass in its stress test to three of the 4 main banks of the country. |65| In the case of the fourth, Eurobank, the shortfall was considered to be marginal, with an adjusted CET I ratio of 5.45%, just 5 basis points under the minimum required in the adverse scenario. |66| However, as was the case with the exercise undertaken in 2012, the projections were based on favorable assumptions. The ECB assumed in its scenarios positive inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. rates ranging from 0.3% to 1.3% between 2014 and 2016. |67| In the case of Greece, the country was already experiencing deflation since 2013. As this dynamic gathered pace, the fall in prices reached 1.4% in 2014. |68| Given the negative impact of deflation on loan portfolios, the use of more realistic assumptions would have led the ECB to recognize a capital shortfall in all of the major banking institutions. By definition, this would have meant acknowledging the failure of the bank recapitalization scheme that was set up in 2012 and the need to trigger a bank resolution process. This became an issue that came back and haunt the ECB in its response to the deadlock in the negotiations between the Greek government and the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

in June of 2015.

3. Current situation and new recapitalization scheme

As this analysis makes clear, the problems of the banking system of the country clearly predate the events of 2015. In the context of the contentious negotiations between the Greek Government and the Troika, NPLs continued the trend established since 2008. It is estimated that by Q2 2015 they were close to reach €100 billion or 45% of the total loan portfolio. |69| As expected, NPLs have clogged the credit system of the country, which explains the unrelenting credit crunch experienced by Greece: the balance of total loans has steadily contracted, on a year-to-year basis, since 2011. |70|

To compound the problems, a deposit flight was fostered by both the uncertain outcome of the negotiations, as well as the lack of a clear commitment from the ECB to provide unlimited supports to banks deemed solvent in its recent stress test. Between December 2014 and July 2015, deposits by domestic private residents went down by €39.4 billion, a reduction equivalent to nearly a quarter of the total deposits. |71| Of these outflows, €17.8 billion (45.1% of the total) were transformed into banknotes in circulation. |72| As the funding pressures increased, the ECB steadily increased the provision of ELA to Greek banks making it conditional to a successful conclusion of the negotiations. Thus, ELA increased from €59.5 billion in February of 2015 to €89 billion at the moment that capital controls were introduced in late June. |73|

In this regard it’s important to highlight that the decision of the ECB of limiting the provision of additional liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. to the Greek banking system, which effectively brought the imposition of capital controls, contravened the principles of central banking as well as its mandate and core responsibilities. |74| Regarding such principles, one of the main tasks of a central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

is to stem a bank run. To do so, the central bank ought to provide unlimited liquidity against good collateral, so as to ensure that a liquidity issue doesn’t translate into a solvency one. As part of its institutional framework guidelines, the ECB recognizes that this type of liquidity provision its one of its main tools in crisis management: “The institutional framework for financial stability in the EU is based on two components: (i) crisis prevention; and (ii) crisis management and resolution. The ECB, together with the NCBs of the euro area, contributes to both…Authorities can take various steps to manage a crisis and tackle disruption. For instance:… central banks can seek to restore normal liquidity conditions in money markets or take steps to ensure the smooth operation of market infrastructures such as payment systems”. |75| Given that the ECB had deemed Greek banks solvent in the stress tests conducted in 2014, it had the obligation to provide ELA to stem the bank run as long those banks could post collateral in line with its regulations. At the moment the ECB capped the ELA, against the logic of its crisis management tool kit, it is estimated that banks in the country could have accessed up to an additional €28 billion in emergency funding. |76| Therefore is possible to say that with its actions the ECB placed further strains upon the liquidity conditions of the Greek economy as well as caused the disruption of its payments system.

In addition, the actions of the ECB were in breach of two of its explicit responsibilities as set by EU treaties. |77| First, the aforementioned disruption imposed upon the payments system of Greece is in clear violation of ensuring the smooth operation of said system as set for the ECB in Article 127 of the Treaty. Second, the ECB has the mandate to “support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union". |78| One of those economic policies is the “imperative to break the vicious circle between banks and sovereigns”. |79| By forcing the closure of the banks, imposing capital controls and pushing the country close to a de facto and illegal exit from the Euro, the ECB created a situation in which the Greek sovereign and its banks became ever more intertwined. This was done, as was the case in Cyprus in 2013, to force a determined outcome on the ongoing negotiations between the EU and a sovereign nation.

The overall attitude of the ECB in the process of negotiations, violating its mandate and overstepping its authority, was portrayed in the declarations given on June 29th of 2015 by Benoît Coeuré, a member of the ECB executive board. Instead of doing his job as central banker of reassuring markets and depositors alike, Coeuré fueled uncertainty by declaring that “A Greek exit from the euro zone, so far a theoretical issue, can unfortunately not be excluded any more“. |80| In regards to the referendum of July 5th, Coeuré said that if people in Greece were to vote”Yes“for the aid package, he had”no doubt“euro zone authorities will find ways to meet commitments toward Greece. If the”No“vote would have won,”it would be very difficult to resume political dialogue," he said. |81| Suffice to say that such blatant intervention on the internal affairs of a country member is well beyond the purview of a member of the executive board of the ECB.

Furthermore, the problems of Greek banks extend beyond the ECB. In the current context one of the most sensitive issues has to do with the accounting treatment provided to Deferred Tax Assets (DTA) and Deferred Tax Credits (DTC). These are instruments that may be used to reduce future tax obligations and which, according to Basel III rules, may count towards CET1 of banks. |82| In practical terms, the reason these instruments are allowed to be included in the capital base of the bank is because they represent, as their name indicates, an asset: in a future period of time they can be used to offset a tax liability, thus increasing profits. Furthermore, the key difference between both instruments is that whereas the DTAs can only be realized when the banks posts a profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. , the DTCs are not contingent on future profits to be included in the capital ratio. In the case of Greece, it’s estimated that DTC eligible DTA represent on average 44.9% of CET1 for the main 4 banks of the country. |83| This is problematic as DTC represents a form of low quality capital in terms of its ability to absorb losses. In the case of the DTAs is contingent on profits. In the case of DTCs in Greece, they are contingent on the ability of the government to directly provide cash, in lieu of GGBs, if banks fail to produce profits. |84| Given the precarious situation of public finances is clearly unrealistic to expect that if further losses materialize in the banking sector, the government could make these guarantees effective. In this regard, the EU Commission is currently investigating DTAs/DTCs as a source of illegal stated aid, which actually reinforces the sovereign-bank link. Taken together with the use of other bank loans to shore up their capital base, it highlights the extreme fragility of the financial institutions of the country.

Despite this long list of problems, the Troika has supported a new round of bank recapitalization in the Third MoU following the same logic of previous schemes. The latest agreement explicitly limits the ability of the government to implement measures of any kind that may have an impact on bank operations without previous consultation with the members of the Troika. |85| The agreement also sets the need for an assessment of the capital needs of the banks in order to conduct their recapitalization before the end of 2015, setting aside €25 billion for this purpose. Regarding the resolution of NPLs, the MoU mainly relies on legal measures to accelerate the process of liquidation of loans. Given the weak state of the economy this might translate into increasing tensions between debtor households and SMEs with creditor banks.

The document also contemplates the process of segmentation of the banks balance sheets so as to separate specific segments of NPLs. Nonetheless, the proposal stops short of proposing the establishment of a bad bank, as there is opposition from local banks to set up this type of instrument as it implies a loss of control over their loan portfolio. |86| The proposed mechanism of allowing each bank to manage its own portfolio of segmented NPLs is problematic on at least two grounds. First, as banks will be able to access new funding this may reduce the incentives to undertake the necessary operational restructuring. For example in the case of Japan, as banks were able to carry non performing loans at low costs this translated into little inclination from their part to undertake corporate restructuring. |87| In the case of Greece, with it’s long and documented history of cronyism, it would simply allow for the same patron-clientele relationships to continue unabated as the banks could choose which loans to keep. Second, the establishment of a centralized asset management company would provide it with economies of scale, in terms of management, operative capacity and low cost funding, which would increase the recovery rates of NPLs.

After the signing of the third MoU, it was unclear which type of mechanism would be used to recapitalize the banks pending the completion of the assessment performed by the ECB. What was clear was that the process of recapitalization had to be completed before the end of 2015 so as avoid the full implementation of the EU Bank Recovery and Resolution Directive (BRRD) that was set to come into effect on January 1st of 2016. The BRRD would have required to bail in 8% of bank liabilities before the disbursement of resources by the ESM ESM
European Stability Mechanism
The European Stability Mechanism is a European entity for managing the financial crisis in the Eurozone. In 2012, it replaced the European Financial Stability Facility and the European Financial Stabilisation Mechanism, which had been implemented in response to the public-debt crisis in the Eurozone. It concerns only EU member States that are part of the Eurozone. If there is a threat to the stability of the Eurozone, this European financial institution is supposed to grant financial ‘assistance’ (loans) to a country or countries in difficulty. There are strict conditions to this assistance.
. In practical terms this would have meant, besides wiping out unsecured creditors, a partial haircut on unsecured deposits over €100.000. |88| Even though the use of a bail in mechanism would have been an adequate solution at the beginning of the crisis, as it would have allowed for a more equitable distribution of the losses, currently it could do more harm than good, especially in the case of the depositors. Given the characteristics of the ESM recapitalization tool, it would be expected that between 13 to 39% of unsecured depositors would have been subject to a haircut. As most of the large depositors have already transferred their money abroad, the haircuts would have disproportionally affected the working capital of Greek businesses |89|.

The ECB eventually concluded its assessment of the financial system of the country at the end of October of 2015. The assessment identified a CET1 shortfall in Greek banks of €4.4 billion in the baseline scenario and €14.4 billion in the adverse scenario. |90| To arrive at this numbers, the ECB first assumed a CET1 base of €25.8 billion for the main 4 Greek banks. Then it proceeded to conduct an Asset Quality Review (AQR) followed by a baseline and adverse scenario stress test. In the case of the AQR, its purpose is to evaluate the accuracy of the valuation of assets in the banks balance sheet. The idea behind this is to force banks to recognize losses on loans whose market or recovery value is well below of that reflected on the books of the bank. As a result of this part of the exercise, the ECB identified a capital depletion originated from an adjustment of the value of the assets of Greek banks of €9.2 billion. |91| In the case of the stress tests, the impact of the macroeconomic assumptions used was expected to have an additional negative impact on the balance sheet of the banks of €1 billion, in the baseline scenario, and €16 billion, in the adverse scenario. |92| The assessment highlights that the two banks in the most precarious position, in terms of capital needs, were NBG and Piraeus with CET1 shortfalls of €1.5 and €2.2 billion in the baseline scenario and €4.6 and €4.9 billion in the adverse scenario. |93|

Furthermore, one of the most interesting aspects about this exercise was the use of significantly higher requirements in terms of CET1 ratio for Greek banks when compared to the previous review conducted less than 12 months before. Whereas in 2014 the ECB required banks to achieve a CET1 ratio of 8% in the baseline scenario and 5.5% in the adverse scenario, in the new assessment it required a CET1 ratio of 9.5% and 8%, respectively. |94| This conservative approach also extends to the use of macroeconomic assumptions. As has been explained, previous assessments were characterized by the use of rosy projections. In contrast, the latest stress test included in its adverse scenario a prolonged recession and sustained deflation for the 2015-2017 period. |95| Under the light of the events that transpired in 2015, one has to be forced to question the reasons why the ECB didn’t apply the same conservative approach at the end of 2014. Given the thin margins with which Greek banks passed that test, it’s clear that the use of more conservative assumptions would have triggered a wide scale resolution process of those banks as early as November of 2014. Questionably enough, the ECB fails to provide in its latest assessment any explanation for the change in its approach. |96|

Nonetheless, the results of the assessment were greeted with optimism from European officials as the maximum capital shortfall identified by the ECB of €14 billion was well bellow the amount of €25 billion allocated for the purpose of bank recapitalization in the third MoU. |97| Furthermore, based on these results, Greek banks had a week to present to the ECB their recapitalization plans and over a month to execute them before the BRDD came into effect. By December, banks were able to obtain €8.3 billion from private sources through the use bond swaps, book building and bail in tools. The remaining €5.4 billion were provided by the HFSF with bailout funds. |98| In this regard, is worth noting at least 2 things. First, all the bailout funds were allocated to NBG and Piraeus banks as, unlike Alpha and Eurobank, they were unable to cover the capital shortfall for the adverse scenario attracting private funds.

Second, the process of recapitalization led to a dramatic change in the structure of bank shareholders. The new shares that were issued had a discount on the last quoted price ranging from 34.4% in the case Alpha, to 80 and 93% in the cases of Piraeus and NBG. |99| As a result the participation of the HFSF in the banks capital, bought with more than €40 billion of bailout funds, was heavily diluted: it went from 66.2% to 11% in the case of Alpha; from 35.4% to 2.3% in the case of Eurobank; from 57.4% to 40.3% in the case of NBG and from 66.9% to 26.4% in the case of Piraeus. |100| This extreme dilution of the public participation in local banks came as a result of another trade-off assessment by European authorities. The priority was to reduce the use of bailout funds for bank recapitalization provided in the context of the third MoU by attracting private funds. In this regard, given the need to protect unsecured depositors, mainly the working capital of SMEs, additional recapitalization funds without dilution would have meant complete control by the HFSF of the banking system of the country. In order to avoid this outcome, which is an anathema to the ECB, the only possible option was to effectively write down the shares in possession of the HFSF and sell them for a fraction of their price to private investors. Furthermore, even though these shares came with strict restrictions regarding the degree of control and influence the Greek government could exert over the bailed out banks, their dilution still represents a material patrimonial loss to the Greek public sector. After all, their sale was expected to be a central part of the €50 billion privatization fund that was established as part of the third MoU. |101|

Finally, the most recent development in the saga has to do with the agreement between the Greece and Troika regarding the specific treatment of NPLs. As part of the system of fulfillment of prior actions by the government of Greece in order to unlock bailout money, the Greek government established early on a tight schedule to satisfy the conditions established in the MoU. This involved making, by November of 2015, changes to the legal framework for individual and corporate insolvency as well as out of court settlements. By December the government was scheduled to establish coordination mechanisms to address large state of bank debtors. In Feburary-March of 2016 the government is expected to complete the overhaul of the management of NPLs in Greece. |102|

The negotiations on these issues proved to be more problematic than initially expected. In November of 2015, the government reached an agreement regarding the imposition of a new set of rules for foreclosures. The point of contention was the degree of protection to be offered to homeowners. Whereas the Greek government proposed a more generous scheme in order to protect owners, based on social concerns, the Troika pushed for a more strict definition in order to minimize losses of banks associated with strategic defaults. |103| In the end it was decided that the initial agreement would only refer to non-primary residence mortgages, leaving the more contentious issue of primary home mortgages for a later date. In addition, it was established a two tier protection system for owners from foreclosures. The first tier would include around 25% of households with property values below €120.000 and annual incomes of €8180 for single people and property values below €200.000 and annual incomes of €20.639 for a couple with two children. |104| The second tier would protect 35% of households with property values below €180.000 and annual incomes of €13.906 for single people and property values below €260.000 and annual incomes of €35.087 for a couple with two children. |105| Even with these protections in place, it’s estimated that around 260.000 properties with mortgages on arrears is expected to be left at risk of foreclosure. |106|

Furthermore, the Greek government, in December of 2015, adopted legislation regarding the licensing and regulation for non-bank NPL service providers in order to create a secondary market Secondary market The market where institutional investors resell and purchase financial assets. Thus the secondary market is the market where already existing financial assets are traded. for this type of loans. The regulation envisages that the sale of NPLs for large corporate loans and non-primary residences are allowed until February 2016. Furthermore, the bill established that the NPL service providers must be based in Greece, or if based elsewhere in the EU, have a subsidiary in the country to be regulated by the Bank of Greece. |107| In addition, banks can only sell an NPL if in the preceding 12 months the debtor did not agree to an out of court settlement with the bank. Once authorized, banks are also allowed to include in the sale of the NPLs, other performing loans owed by the same client as long as its position is not worsened due to the transfer of the NPL. |108| In this regard, the lack of a centralized bad bank to deal with the NPLs may translate into a race to the bottom by the service providers. As they compete with each other to maximize short-term returns, this may exert additional downward pressure on real state values as properties get foreclosed. Thus, the underlying situation of borrowers, and by extension that of the economy, might worsen as a result of the implementation of this scheme.

In the end is clear that the fate of banks and the resolution of the NPL problems are closely intertwined with the recovery of the economy. Unfortunately, given the negative impact of the additional fiscal consolidation that the country is expected to achieve over the next 3 years, the recovery of the economy would be too slow to gather momentum or to make a dent on unemployment. |109| Thus, it’s unlikely that the new round of recapitalization will be enough on its own to restore the stability of the Greek banking system without the inclusion of additional measures to deal with NPLs in a coordinated way, alongside with dramatic changes in bank management alongside a transparent system of public control over the recapitalized institutions. As bizarre as it may sound, we have not seen the last of the Greek banking crisis.

Daniel Munevar |110|


|1| Bank of Greece. (2014). The Chronicle of the Great Crisis, The Bank of Greece 2008 - 2013. Retrieved from Chronicle Of The Great Crisis.pdf

|2| The amount of €110 billion refers to the approved amount for the first bailout package. Nonetheless, out of these resources, only 73.2 billion were actually disbursed. Sinn, H.-W. (2015). The Greek Tragedy. CES Ifo. Retrieved January 25, 2016, from

|3| Debt Truth Committee Hellenic Parliament. (2015). Truth Committee on Public Debt. Retrieved from

|4| As it will be discussed in this document, the actual figure was significantly smaller but the recapitalization scheme no less problematic. European Commission. (2015). Greece Memorandum of Understanding for a three-year ESM programme. Retrieved from

|5| ECB. (2007). Financial Integration in Europe. Pp. 4. Retrieved January 26, 2016, from

|6| Ibid. pp 33.

|7| Bortz, P. G. (2015). The Greek “Rescue”: Where Did the Money Go? An Analysis. SSRN Electronic Journal. doi:10.2139/ssrn.2692653

|8| Op. Cit. 2

|9| Athanassiou, E. (2012). Household Debt and Domestic Demand: Greece versus other Euro zone Economies. International Journal of Business and Social Science, Vol. 3(No. 10). Retrieved from

|10| Bank of Greece. (2015). Credit Aggregates Statistical Database. Retrieved September 24, 2015, from

|11| Eurostat database.

|12| GreekReporter. (2015). Hellenic Postbank Scandal will Cost Greek State About 500 mln Euros. Retrieved February 1, 2016, from

|13| DW. (2014). Greek bankers embroiled in corruption scandal. Retrieved February 1, 2016, from

|14| Ekathimerini. (2015). Minister says ATE bank scandal is biggest of its type. Retrieved February 1, 2016, from

|15| Ibid.

|16| Reuters. (2012). Special Report: How a Greek bank infected Cyprus. Retrieved February 1, 2016, from

|17| ThePressProject. (2014). George Provopoulos: The most powerful man in Greece a few months ago, now a suspect in a bank probe. Retrieved February 1, 2016, from

|18| Ibid.

|19| Op. Cit.17.

|20| Beck, R., Jakubik, P., & Piloui, A. (2013). Non-Performing Loans: What Matters in Addition to the Economic Cycle. ECB Working Paper Series No.1515. Retrieved January 26, 2016, from

|21| Aiyar, S. (2015). A Strategy for Resolving Europe’s Problem Loans. IMF Staff Discussion Note SDN/15/19. Retrieved January 26, 2016, from

|22| Bank of Greece. (2009). Executive Summary Financial Stability Report 2009. Retrieved from ; IMF. (2014). GREECE FIFTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, IMF Country Report No. 14/151. IMF Country Report No. 14/151. Retrieved October 16, 2014, from

|23| “CT1 is the best form of bank capital - the money that the bank has in its coffers to support all the risks it takes: lending, trading and so on. In order to calculate this ratio, the bank’s capital is measured against its risk-weighted assets – essentially a bank’s total assets recalculated to a smaller number to reflect the relatively low-risk nature of some.” Financial Times. (2015). Core Tier One Capital Definition from Financial Times Lexicon. Retrieved from

|24| The loan loss provision refers to “The money a bank sets aside to cover potential losses on loans.” Financial Times. (2015). Loan-Loss Provision Definition from Financial Times Lexicon. Retrieved September 24, 2015, from

|25| This refers NBG, Eurobank, Alpha and Piraeus. In December of 2011 they had set aside €14.5 billion for loan loss reserves to cover potential losses for €31.3 billion, while trying to achieve a CT1 level of €15.6 billion. Bank of Greece. (2012). Report on the recapitalisation and restructuring of the Greek banking sector. Retrieved from

|26| Bank of Greece. (2014). The Chronicle of the Great Crisis, The Bank of Greece 2008 - 2013. Retrieved from Chronicle Of The Great Crisis.pdf

|27| Bank of Greece (2015) Statistical Database Online. Retrieved from

|28| Bank of Greece. (2015). Financial Statements. Retrieved from

|29| Reuters. (2012). Analysis: Greeks not alone in bank savings exodus. Retrieved from

|30| IMF. (2010). Greece: Request for Stand-By Arrangement, IMF Country Report No. 10/111. Retrieved from

|31| Hugh, E. (2010). Greece Is Almost Certainly “On Track” – But Towards Which Destination Is It Headed? Retrieved from

|32| Under the baseline scenario of a study conducted by Blackrock, small business loans, defined as loans to companies with an annual turnover of less than €2 million, had a loss rate of 27.7%. This compares with an average business loan loss ratio of 16.5%. Given that the priority of the banks was to protect their capital, they had incentives to reduce to a minimum this type of lending. Bank of Greece. (2012). Report on the recapitalisation and restructuring of the Greek banking sector. Retrieved from

|33| IMF. (2012). Greece: Request for Extended Arrangement Under the Extended Fund Facility, IMF Country Report No. 12/57. Retrieved September 21, 2015, from

|34| Bank of Greece. (2012). Report on the recapitalisation and restructuring of the Greek banking sector. Retrieved from

|35| IMF. (2012). Greece: Request for Extended Arrangement Under the Extended Fund Facility, IMF Country Report No. 12/57. Retrieved September 21, 2015, from

|36| Bank of Greece. (2012). Report on the recapitalisation and restructuring of the Greek banking sector. Retrieved from

|37| Bershidsky, L. (2015). How Greece’s Bank Bailout Benefited Greeks - Bloomberg View. Retrieved from

|38| CEPS. (2016). European Bank Resolution: Making it work! Retrieved February 19, 2016, from

|39| IMF. (2013). Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement June 2013 IMF Country Report No. 13/156. Retrieved February 19, 2016, from

|40| Sandbu, M. (2015). Europe’s Orphan: The Future of the Euro and the Politics of Debt. Pp, 68. Princeton University Press.

|41| Ibid. Pp, 174.

|42| Ibid.

|43| IMF. (2012). Greece: Request for Extended Arrangement Under the Extended Fund Facility, IMF Country Report No. 12/57. Retrieved September 21, 2015, from

|44| Bank of Greece. (2012). Report on the recapitalisation and restructuring of the Greek banking sector. Retrieved from

|45| IMF. (2012). Greece: Request for Extended Arrangement Under the Extended Fund Facility, IMF Country Report No. 12/57. Retrieved September 21, 2015, from; IMF. (2014). GREECE FIFTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, IMF Country Report No. 14/151. IMF Country Report No. 14/151. Retrieved October 16, 2014, from

|46| IMF. (2014). GREECE FIFTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, IMF Country Report No. 14/151. IMF Country Report No. 14/151. Retrieved October 16, 2014, from

|47| Ibid.

|48| ECB. (2014). Banking Structures Report 2014. Retrieved January 29, 2016, from

|49| Ibid.

|50| Ibid.

|51| As of June of 2015, the HFSF retains 57.2% of the shares of NBG, 35.4% of Eurobank, 66.2% of Alpha and 66.9% of Piraeus with an estimated market value of €7.5 billion. As will be discussed later on in this text, these participations were diluted as a result of the bank recapitalizacion process that took place in November of 2015. Data provided to the Debt Truth Committee by the Bank of Greece.

|52| IMF. (2012). Greece: Request for Extended Arrangement Under the Extended Fund Facility, IMF Country Report No. 12/57. Retrieved September 21, 2015, from

|53| Mayes, D. (2009). Banking crisis resolution policy - different country experiences. Central Bank of Norway. Retrieved from

|54| Reuters. (2015). Greek bank bailout fund CEO asked to resign -government official. Retrieved February 1, 2016, from

|55| ThePressProject. (2014). Head of Greek bank rescue fund to face charges over crony loans in Hellenic Postbank scandal - UPDATE. Retrieved February 1, 2016, from

|56| Ibid.

|57| Op. Cit. 18.

|58| Reuters. (2012). Special report: Greece claims magnate stole from his own bank. Retrieved February 1, 2016, from

|59| Ibid. The ELA refers to funding provided, in this case by the Bank of Greece, to a solvent financial institution, or group of solvent financial institutions that is facing temporary liquidity restrictions. Op. Cit. 2.

|60| Ibid.

|61| Reuters. (2011). Greece activates rescue fund to save Proton Bank. Retrieved February 1, 2016, from

|62| Reuters. (2012). Special Report: Clandestine loans were used to fortify Greek bank. Retrieved February 1, 2016, from

|63| Ibid.

|64| Ibid.

|65| ECB. (2014). Aggregate Report on the Comprehensive Assessment. Retrieved from

|66| Ibid.

|67| Ibid.

|68| European Commission. (2015). European Economic Forecast Spring 2015. Retrieved from

|69| Ekathimerini. (2015). Banks fear NPL sum will reach 100 bln euros. Retrieved from

|70| Macropolis. (2016). Credit contraction slows to 2 pct in Dec on net loan additions of 210 mln. Retrieved January 29, 2016, from

|71| Bank of Greece. (2015). Deposits Statistics. Retrieved from

|72| Bank of Greece. (2015). Financial Statements. Retrieved from

|73| Barclays Research. (2015). Greece: Capital controls imminent without breakthrough.

|74| Wyplosz, C. (2015). Grexit: The staggering cost of central bank dependence. Retrieved September from

|75| ECB. (2015). Macroprudential policy and financial stability. Retrieved from ; Klein, M. (2015). Greece shows ECB’s stress tests were nonsense. Financial Times. Retrieved from

|76| Barclays Research. (2015). Greece’s Achilles heel.

|77| Sandbu, M. (2015). ECB, enemy of the euro? Financial Times. Retrieved from

|78| European Commission. (2012). Consolidated version of the Treaty on European Union, 2012/C 326/01. Retrieved from

|79| Council of the European Union. (2012). Euro Area Summit Statement 29 June 2012. Retrieved from

|80| Reuters. (2015). ECB’s Coeure says Grexit now a possibility. Retrieved January 27, 2016, from

|81| Ibid.

|82| Merler, S. (2015). Deferred tax credits may soon become deferred troubles for some European banks. Retrieved from

|83| Giakoumis, M. (2015). DTA may spell new trouble for Greek banks. Macropolis. Retrieved from

|84| Merler, S. (2015). Deferred tax credits may soon become deferred troubles for some European banks. Retrieved from

|85| European Commission. (2015). Greece Memorandum of Understanding for a three-year ESM programme. Retrieved from

|86| Reuters. (2015). “Bad bank” path worn by Ireland and Spain looks steep for Greece | Reuters. Retrieved September 22, 2015, from

|87| Claessens, S. (2000). Experiences of resolution of banking crises. BIS. Retrieved from

|88| Merler, S. (2015). Preserving the Greek financial sector: options for recap and assistance. Bruegel. Retrieved September 22, 2015, from

|89| Coppola, F. (2015). The coming Greek bank nationalization, bail-in and privatization | Credit Writedowns. Retrieved from

|90| ECB. (2015). AGGREGATE REPORT ON THE GREEK COMPREHENSIVE ASSESMENT. Retrieved February 2, 2016, from

|91| Ibid.

|92| Ibid.

|93| Ibid.

|94| Op. cit. 91

|95| Ibid.

|96| Merler, S. (2015). Greek bank recap. Bruegel. Retrieved February 2, 2016, from

|97| Zero Hedge. (2015). Greek Bad Debt Rises Above 50% For The First Time, ECB Admits. Retrieved February 2, 2016, from

|98| Macropolis. (2015). Greek banks complete book building: A recap of where we stand. Retrieved from

|99| Ibid.

|100| Macropolis. (2016). Last round of Greek banks’ recapitalisation drastically shifts shareholder structures. Retrieved from

|101| WSJ. (2015). How Will The Greek Privatization Fund Work? Retrieved February 2, 2016, from

|102| Macropolis. (2015). This is the government’s strategy on banks and NPLs as part of third bailout. Retrieved February 3, 2016, from

|103| This refers to borrowers who are in a position to service their debts but refuse to do so as they don’t expect to be exposed or legally prosecuted. See, FT. (2015). Greece stand-off with EU lenders delays €2bn bailout payment. Retrieved February 3, 2016, from

|104| Macropolis. (2015). Deadline for liberalisation of household and SME NPLs looms closer. Retrieved February 3, 2016, from

|105| In the case of the second category, households are expected to be cooperative with bank and pay monthly installment. Ibid.

|106| Ibid.

|107| Macropolis. (2015). Multi-bill tabled in Parliament, paves way for sale of NPLs. Retrieved from

|108| Ibid.

|109| Papadimitriou, D., Nikiforos, M., & Zezza, G. (2016). HOW LONG BEFORE GROWTH AND EMPLOYMENT ARE RESTORED IN GREECE? Levy Economics Institute of Bard College Strategic Analysis. Retrieved February 3, 2016, from

|110| MPAff. LBJ School of Public Affairs at the University of Texas at Austin. Member of CADTM. The author would like to thank comments made by Eric Toussaint, Michel Husson, Patrick Saurin and Gilles Grégoire.


Daniel Munevar

is a 30-year-old post-Keynesian economist from Bogotá, Colombia. MPAff. LBJ School of Public Affairs at the University of Texas at Austin. From March to July 2015 he worked as a close aide to former Greek finance minister Yanis Varoufakis, advising him on issues of fiscal policy and debt sustainability. He was previously fiscal advisor to the Ministry of Finance of Colombia and special advisor on Foreign Direct Investment for the Ministry of Foreign Affairs of Ecuador. He is considered to be one of the foremost figures in the study of Latin American public debt. He is member of CADTM AYNA.



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