Lo­cal len­ders will have to un­der­stand they need to change their re­tail bank­ing model

Banks re­quire ma­jor cuts to op­er­at­ing ex­penses; the more they de­lay, the deeper they will have to be

Kathimerini English - - Business and Finance - BY DIM­ITRIS KONTOGIANNIS

AIf things turn out as ex­pected, Greece is likely to se­cure an­other res­cue loan pack­age from its eu­ro­zone part­ners and the In­ter­na­tional Mon­e­tary Fund, cov­er­ing its bor­row­ing needs un­til mid-2014.

How­ever, even this deal may prove in­ad­e­quate to ap­pease mar­kets and re­turn the coun­try to a growth tra­jec­tory if the gov­ern­ment does not de­liver on promised struc­tural changes, the Euro­pean Union does not help in fos­ter­ing growth, and credit sup­ply to the pri­vate sec­tor does not grad­u­ally re­sume. The lat­ter re­quires a ma­jor change in the banks’ cur­rent model.

Some may say the eco­nomic pol­icy pro­gram agreed with the Euro­pean Com­mis­sion, the Euro­pean Cen­tral Bank and the IMF on May 3, 2010, has largely at­tained its goals but oth­ers will dis­agree. As we have made it re­peat­edly clear, we side with the lat­ter.

In ad­di­tion to fail­ing to con­vince the mar­kets about Greece’s sol­vency, which ne­ces­si­tates an ad­di­tional res­cue loan to keep it afloat, the pro­gram did not even come close to meet­ing last year’s bud­get deficit re­duc­tion tar­get even if one did not take into ac­count the in­clu­sion of loss-mak­ing cor­po­ra­tions in the broader pub­lic sec­tor. This is de­spite tak­ing an un­prece­dented amount of more than 23 bil­lion eu­ros in aus­ter­ity mea­sures in 2010.

It is ob­vi­ous a hy­per­bolic dose of aus­ter­ity, mainly in the form of tax-gen­er­at­ing mea­sures, has hit both the pri­vate sec­tor and the econ­omy with­out pro­duc­ing the planned drop in the bud­get deficit. More­over, the out­come from the ex­e­cu­tion of the state bud­get in the first four months of the year is not promis­ing ei­ther.

So, it is of ut­most im­por­tance that the Greek econ­omy sta­bi­lizes and starts grow­ing again while the pri­va­ti­za­tion pro­gram is im­ple­mented to con­vince mar­kets it is not go­ing to de­fault in the fu­ture.

Some do­mes­tic re­forms en­vis­aged by the pro­gram to make the trad­able sec­tor more pro­duc­tive by slash­ing salaries and low­er­ing liv­ing stan­dards will turn out not be enough to boost the econ­omy for var­i­ous rea­sons.

First, Greece’s goods ex­port sec­tor is rel­a­tively small and tourism will not help as much as some think, judg­ing by the all-in­clu­sive pack­ages of­fered.

Sec­ond, they will not re­move lin­ger­ing un­cer­tainty about the fate of the coun­try and the bank­ing sec­tor which has helped with­hold pri­vate in­vest­ments.

We ar­gued last week that the EU could do a great ser­vice to the coun­try by turn­ing its at­ten­tion to mo­bi­liz­ing struc­tural and other funds to help the Greek econ­omy exit the cur­rent vi­cious cy­cle of aus­ter­ity hurt­ing the econ­omy and in turn re­quir­ing more mea­sures to meet the deficit goal while the debt-to-GDP climbs even higher. Front-load­ing the spend­ing of struc­tural funds is im­por­tant to this ef­fect.

How­ever, it is also very im­por­tant for fos­ter­ing growth that sup- ply to the pri­vate sec­tor is be­ing re­stored. It is true that coun­tries that needed to pay back their pub­lic debt in the past went through a pe­riod of delever­ag­ing. Ac­cord­ing to bankers, loans fell by 30 to 50 per­cent from their peak in sim­i­lar episodes in the past and Greece can­not be an ex­emp­tion.

How­ever, if this turns out to be the case here, the re­ces­sion will be more pro­tracted and deeper than many an­a­lysts think. It is there­fore im­por­tant that this does not hap­pen and this re­quires a well­cap­i­tal­ized and liq­uid do­mes­tic bank­ing sec­tor.

It is known that lo­cal banks did not cre­ate Greece’s debt prob­lem. How­ever, they are part of the prob­lem now. So they will have to take ini­tia­tives to ad­dress their three main weak­nesses as soon as pos­si­ble to be able to play their in­ter­me­di­ary role and pro­vide credit to the pri­vate sec­tor since the pub­lic sec­tor will be funded by the new res­cue pack­age, as­sum­ing ev­ery­thing goes well.

The three main is­sues con­fronting Greek banks are their sig­nif­i­cant ex­po­sure to the state, mainly via gov­ern­ment bonds, the ris­ing non­per­form­ing loans and their high op­er­a­tional costs at home.

One dras­tic so­lu­tion would have been for lo­cal banks to rec­og­nize all their losses re­lated to state bonds and loans and re­cap­i­tal­ize. Given per­cep­tions about the sit­u­a­tion in Greece, it is more likely very lit­tle cap­i­tal could have been found and there­fore the banks would have been na­tion­al­ized, end­ing up in the Fi­nan­cial Sta­bi­liza­tion Fund en­dowed with 10 bil­lion eu­ros un­der the ini­tial 110-bil­lion-euro res­cue loan.

An­other so­lu­tion would have been to wait it out, hop­ing the Greek econ­omy will im­prove and the state will re­gain the con­fi­dence of bond mar­kets in the next few years. At this point, this seems to be their strat­egy. This may be com­bined with some large deals aim­ing at ex­tract­ing gains via syn­er­gies.

What­ever hap­pens with their ex­po­sure to Greek bonds, lo­cal banks will have to un­der­stand the en­vi­ron­ment re­quires that they change their re­tail bank­ing model. This means they will have to pro­ceed sooner or later with sub­stan­tial cuts in op­er­at­ing ex­penses and the more they de­lay the deeper they will have to be to sur­vive.

By do­ing so, they will be ready to in­still mar­ket and de­pos­i­tors con­fi­dence in them.

Of course, this will not be easy but the sooner they do it, the faster the delever­ag­ing will end, mak­ing it pos­si­ble to grad­u­ally re­sume pro­vid­ing credit to the Greek econ­omy and the cash-starved pri­vate sec­tor.

It is there­fore im­por­tant for the Greek econ­omy to sta­bi­lize and grow that lo­cal banks change their re­tail bank­ing model to con­form to the new eco­nomic land­scape by re­duc­ing sharply their op­er­at­ing ex­penses re­gard­less of how they treat their bond hold­ings.

This is likely to con­strain the pe­riod of delever­ag­ing and open the way for slowly fund­ing the pri­vate sec­tor, con­tribut­ing to the re­bound of the econ­omy.

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