Greek banks are inching away from the precipice. Piraeus, National Bank of Greece, Alpha and Eurobank are still in danger. But a draft version of a new deal for Athens at least suggests their depositors may not be.
Banks' biggest fear has been a Cypriot-style bail-in, where customer deposits are forcibly converted into bank equity. A memorandum of understanding dated August 11 between Greece and its creditors suggests that drastic step can be avoided. It commits Greeks to completing any recapitalisation by year-end, using Euro 10-25 billion of European funds.
The year-end deadline is important. Any later and European laws might have applied, requiring eight per cent of the sector's liabilities to be turned into equity before any taxpayer cash can be used. If Greek bank equity, junior and senior debt didn't amount to that level of around Euro 24 billion, uninsured depositors, who rank above them in the capital structure, could have faced losses.
Without bail-in laws to fret about, the need for depositor burden-sharing will hinge on how much new money Greek banks are deemed to need in an autumn stress test undertaken by the European Central Bank. If bad debts mushroomed from their current 40 per cent of loans to 60 per cent, and were 60 per cent covered by provisions, banks could need Euro 30 billion to cover losses, plus perhaps Euro 10 billion to boost their capital to a more healthy level.
This now looks reachable. The total stock of equity, junior and senior debt, along with Euro 25 billion of European bailout money, exceeds Euro 55 billion. This should be enough even if Euro 10-15 billion of Greek banks' so-called deferred tax assets are removed on the basis that they are not real capital, which is implied in the memorandum.
No one yet knows how big Greek bad debts really are, and capital controls are putting borrowers under increased strain. But other reforms envisaged by the new deal, such as tightening insolvency laws for both corporates and households, could slow the buildup of non-performing loans if implemented.
This probably isn't enough to entice foreign investors to help with the recap. But increasing confidence in the banking sector is an important step towards clearing up the Greek mess.
