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December 2019

9
Dec

Greece Is Enjoying a New Feeling of Euphoria

After a decade of gloom, there’s a new sense of euphoria in Athens. The Greek stock exchange is on course to be the world’s best performer this year because investors believe the new prime minister, Kyriakos Mitsotakis, will deliver on his promise to attract foreign investment and boost growth.The star performers are bank shares, which have nearly doubled in value in less than 12 months. Politicians and financiers believe they’ve found the magic cure for the banking system’s plague of bad loans. The scheme — called “Project Hercules” — involves a complicated mix of securitization and state guarantees, modeled after an Italian plan called “GACS.”

Hercules will no doubt help banks secure a better price as they offload their non-performing loans, speeding up an overdue clean-up. But it creates a non-trivial risk for taxpayers, who’ll pick up the bill if things don’t go according to plan. The government also needs to follow up on its idea to reform Greece’s byzantine insolvency laws. Only that will increase the value of the collateral pledged to the banks and allow debtors to move on.

Greek banks are saddled with about 75 billion euros ($83 billion) in non-performing loans, the legacy of the country’s economic crisis. This staggering amount — equivalent to about 40% of the country’s total loans — has weighed on stock valuations and made it harder for lenders to provide credit to businesses and consumers. For years, politicians and bankers have dithered over what to do, as they faced two conflicting problems: European state-aid rules ban governments from sweeping up bad loans at inflated prices; while lenders that dispose of them at excessively low prices risk creating a hole in their balance sheets.

Now Mitsotakis’s government says it will issue up to 12 billion euros of guarantees that lenders can use as they bundle together their bad loans, and chop them up into portions according to their riskiness — a process called “securitization.” The Greek state will guarantee the “senior” tranche, while the “mezzanine” and “junior” tranches will be less protected. Banks plan to retain the senior tranche on their balance sheets. The others will be sold or distributed to investors.

Lenders will have to take a hit on their regulatory capital, since many of these loans were marked at exceedingly high values. But since the senior tranche is considered risk-free, that will release capital to be put to better use. The “GACS” scheme prompted a success in Italy, where it helped shrink the pile of non-performing loans.

It would be wrong, however, to assume that Hercules can solve Greece’s banking alone. One mustn’t forget that it leaves taxpayers on the hook for the senior tranche. How risky this is will depend on banks’ ability to repossess collateral, and on the economy. The faster the rate of Greek growth, the more likely taxpayers will be spared.

Another worry is that Greece’s insolvency regime is extremely messy. There are several bankruptcy avenues for companies and individuals in trouble, giving room for arbitrage between different procedures. The new government plans to simplify things, but the reform might lead to public protests because of the eviction threat to homeowners in arrears on their mortgages. Nevertheless, a more streamlined insolvency regime is essential if banks are to extract a better price for their non-performing loans.

Nor will Hercules get rid of the differences between Greece’s four main banks. Eurobank Ergasias SA and Alpha Bank AE are looking substantially stronger, as they press ahead with ambitious plans to reduce their bad debt piles. National Bank of Greece and Piraeus Bank SA are further behind. For now they don’t need more capital. But as their disposals of non-performing loans get underway, it will become clearer whether they need to beef up their balance sheets again.

In some ways, Greek banks are in a happier place than their European peers. Lending rates there are higher than elsewhere in the euro zone, giving bankers healthier margins to play with. A recovering economy would be an additional boon, if the new government continues to deliver on its reformist pledges.

But Hercules needs some help. It would be a pity if its strength was wasted.

2
Dec

Italy’s Divided Populists Unite Over EU Bailout Fund Reform

By John Follain and Alessandro Speciale
(Bloomberg) — 
A common Euroskeptic cause is bringing Italy’s rival populists closer and threatening the country’s coalition government.

The issue at hand — a relatively minor reform of the European Union’s bailout fund — is usually the preserve of Brussels and treasury bureaucrats. But Matteo Salvini and Luigi Di Maio, who became bitter enemies this summer after their governing alliance fell apart, are both opposed to it.

Caught in the middle are Prime Minister Giuseppe Conte and the pro-EU Democratic Party, partners in the current government with Di Maio’s Five Star Movement. Conte is due to appear in parliament on Monday to respond to suggestions he explicitly violated lawmakers’ demands when he struck a deal on the EU fund at a summit last June.

“Conte has carried out an attack that harms Italians,” Salvini, head of the rightist League, told reporters last week, accusing the premier of agreeing to the changes in secret. “Let Salvini file a suit, and I’ll sue him for slander,” Conte retorted on a visit to Ghana.

Read More: Italy’s Messy Coalition Could Delay EU Bailout Fund Reform

Five Star leader Di Maio, who’s also foreign minister and is trying to reverse his party’s decline in the polls, has fueled tensions with his coalition partner by demanding changes to the European Stability Mechanism reform. Conte so far has stuck by Roberto Gualtieri, his finance minister and a former EU lawmaker for the Democrats who closely followed the negotiations in Brussels.

“Five Star is seeking a constructive approach and aims to find an agreement,” despite our opposition to the reform, the party said in a statement late Saturday. “Let’s get to work, improve this reform and make Europe respect us.”

Amendments in Focus

EU leaders are poised to give a unanimous, final go-ahead to the reform of the ESM in Brussels on Dec. 12-13, but Italian media reported Saturday that Conte may ask to delay the approval and seek to introduce some changes. Gualtieri has prepared proposals for amendments to the reform draft that would allow it to pass without a delay and yet respect Di Maio’s call for changes, La Repubblica reported on Sunday.

Nicola Zingaretti, leader of Italy’s Democrats, called Di Maio’s request to change the reforms a “senseless challenge to Europe,” in comments cited by newspaper La Repubblica. Paolo Gentiloni, Italy’s former premier who is now the European commissioner for economic affairs, said there is no “technical or political reason to define the reform as a risk for Italy,” according to his interview with Corriere della Sera on Sunday.

The changes are set to give the ESM broader powers, including allowing it to serve as the lifeline for the currency bloc’s crisis fund for failing banks. Bureaucrats consider that generally less controversial than other potential tweaks to the framework of the euro area, such as a small common budget and joint insurance for bank deposits.

Leaders of the Democrats agree there is no need to ask the EU for further amendments to the measure and back the finance minister in his efforts to approve the existing deal, Minister of Culture Dario Franceschini said after a meeting on Sunday. PD officials said after the meeting that Italy will request any delay.

Italian opponents of ESM reform have seized upon the apparent coldness toward some parts of it by leading technocrats including Ignazio Visco, governor of the Bank of Italy, and Maria Cannata, the former head of the debt agency.

Debt Crisis Response

Among the items under scrutiny are norms that might make it theoretically easier to restructure Italy’s public debt, Europe’s largest, spooking investors and potentially pushing yields higher. Both Visco and Cannata have clarified that they support the final version of the ESM reform.

The debate has ballooned into all-out criticism of the ESM and of its procedures, set up by euro-area countries in 2012 after the years-long sovereign debt crisis to bail out countries in exchange for strict reforms.

“We have sparked a debate on the ESM. Finally Italians know something about it, and only thanks to the League,” Salvini said on Saturday. “It’s good that Di Maio finally woke up to it; we count on the coherence of Five Star and of some of the Democrats. Conte, on the other hand, has long stopped defending Italy’s national interests.”

 

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