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Greece
25 February 2014

Patrick Jenkins: Greece's plight offers clue to future of EU banking system


Establishing the reasons for the range of estimated capital shortfalls at Greek banks is key, writes Jenkins in the FT.

There will of course be a bit of game-playing. Greece itself is keen to avoid, or at least minimise, the size of a third bailout, and had even tried to divert the remaining €9 billion or so of bank-allocated funds from its last bailout package for other purposes. Troika officials, by contrast, are likely to be far more conservative. The bearish argument is supported by the rise in non-performing loans which may not peak for another year.

The ECB finds itself in a tricky middle position that imperils its own reputation. As a result of its new bank supervision powers, it must reconcile the conservative instincts of the troika with its duties in administering the AQR. On this count, it may be reluctant to treat the Greek banks too harshly for fear that it could backfire, not just in Greece but, by extension, to the lenders of other bailed-out countries, too.

In some regions, the only practical option for recapitalising weak banks is a state bailout or bail-in of creditors. Fresh equity from commercial investors is likely to be in short supply. But that in turn risks entrenching the bank-sovereign spiral that has played such economic havoc in the eurozone crisis to date.

Given the delicacy of the situation, it is little wonder that European officials are desperately keen to dispel any idea that the decision on the capital needs of Greece’s banks is some kind of litmus test for the EU health check as a whole.

Straight extrapolation would indeed be misguided. Greece’s economic situation is pretty unique. There are also crucial methodology differences between the troika view of bank capital and the AQR/stress test approach. The first takes a macroeconomic “top-down” approach, incorporating a 30-year view of the likely “lifetime losses” on loans. The second is more micro, with a sharper focus on the next three years.

As troika meetings in Greece continue this week, the noise is already making investors and the general populace nervous about how short of money the banking system really is. A decision is needed – and soon.

For Greece, too harsh an approach would be punishing and could even hurt recovery prospects. But a soft-touch option risks killing the canary altogether – wrecking a fragile faith in Greece, the broader eurozone banking system and the ECB’s oversight of it.

Full article (subscription)



© Financial Times


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