By Peter Spiegel and Kerin Hope
Feb 24 2014
The Greek government and its bailout lenders are locked in a new stand-off over the health of Greece’s banking sector, with Athens contending its financial system requires less than €6bn of new capital, while international monitors insist it needs at least three times that amount.
The €6bn estimate was calculated by the Greek central bank after a long-awaited private analysis by BlackRock and was provided to monitors from the so-called “troika” of international lenders, ahead of their arrival in Athens on Monday to resume talks over their latest review of the bailout programme.
The review, the most contentious in more than a year, was to be completed in September, but troika officials say less than half of the economic reform commitments made by the Greek government have been completed. Their return to Athens on Monday is their first visit in two months.
The dispute over banks’ recapitalisation needs risks adding a new, potentially explosive point of contention between the two sides, as it will have a direct effect on whether Athens will require a third international bailout when the remaining €10.1bn in EU funding in the current €172bn rescue runs out later this year.
The Greek government had hoped to tap an estimated €10bn in bailout cash remaining in its bank rescue fund to pay for other government expenses as part of a strategy to avoid a third bailout. The International Monetary Fund last year estimated the current bailout is nearly €15bn short of cash over the next two years.
If Athens must use all remaining cash in the bank rescue fund to recapitalise its financial system, it will be required to fill the financing gap with new bailout money, necessitating a third rescue.
According to senior troika officials, the dispute has become so contentious that the IMF has threatened to publish its own estimates of banking sector needs – which are close to €20bn – if Athens proceeds with the €6bn figure.
The European Central Bank, which officials say has similar estimates to the IMF, has also pushed for Greece to take a closer look at its conclusions. The ECB, which takes over as the EU’s bank supervisor later this year, is concerned Greece’s bank evaluation matches up with its highly anticipated eurozone-wide review before the year is out.
Greece struggles on with drastic austerity as eurozone leaders continue to argue over how to help the country cope with its debt mountain
“The ECB needs a significant number to signal that its comprehensive bank assessment later this year will not be a walkover,” said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy. “But there’s only limited cash left in the [bailout] envelope, and parliaments certainly won’t be committing any new money ahead of May’s European elections.”
One Greek banker briefed on the dispute said the government’s estimate is based on banks returning to profit next year, but troika officials believe that scenario is overly optimistic, particularly given the rapidly increasing rate of non-performing loans.
If prolonged, the dispute will undermine Greece’s chances of turning the economy around this year as banks are stalling on extending new loans to stimulate growth until the recapitalisation is completed. The government has already postponed legislation to privatise Eurobank, the fourth-largest lender, because of the dispute.
Eurobank says it has lined up nearly €2.5bn in funding to cover its capital needs, mainly from foreign investors, in what it hopes will be a flagship deal showing Greece is on the road to recovery. It had hoped to wrap up a deal by April.
The Greek central bank has said the result of the BlackRock stress tests will be announced at the end of the month, a three month delay from its original plan. Part of the delay was due to the central bank’s decision to call in NM Rothschild and Ernst & Young to provide second and third opinions.
If the recap dispute is not resolved during this round of troika negotiations in Athens, the BlackRock exercise may be set aside, leaving it to be resolved by the ECB’s own stress test, a finance ministry official said.
“It makes sense for the European regulator to sort this out,” said another Greek bank executive. “Why should Greek banks be handled any differently from others in Europe?”
Such a scenario is unlikely to be welcomed by the troika, particularly the IMF, which requires a year’s financing to be in place before it can distribute any additional bailout funding. Without a decision on total recapitalisation needs and a third programme, the IMF is likely to be forced to withhold future payments.