(Telegraph) — The Greek parliament has given the green light to a plan to slash mountains of bad loans on the books of the country’s banks, fuelling market fears they will need to raise more money from investors.
The “Hercules” plan to tackle the burden of non-performing loans (NPLs) left over from the debt crisis will trigger losses for lenders and could mean the weaker banks need more capital, according to Greek sources.
Greece’s parliament approved the plan on Thursday. It will package up the loans and sell them on to investors, a process known as securitisation.
The plan is intended to restore the financial health of the banks but the process will lead to some losses up front.
One banking source said the “numbers don’t add up” for one of the weaker lenders unless it turns to the markets for an injection of fresh capital.
The proportion of non-performing loans – bad debt where the borrower has failed to make scheduled payments for a specified period – at Greek banks is 39pc compared to an EU average of 3pc, a huge drag on the country’s financial sector.
Europe’s banking industry has struggled since the financial crisis and plans to create a region-wide banking union have stalled.
Italy has voiced its opposition to the creation of a bailout fund, a key pillar of the banking union proposal, but The Daily Telegraph understands that Greece is also among the countries resisting the plans. Italy fears that the proposal could make a debt restructuring more likely while there are also worries about the cost.
Greece is dominated by four banks – Alpha Bank, Eurobank, Piraeus Bank and National Bank of Greece.
Yannis Stournaras, governor of the Bank of Greece, the central bank, said on the Hercules plan: “All securitisation schemes burn some capital but the problem now is not capital for Greek banks, it is the very high percentage of NPLs, so this is the priority.”
He said that solving NPLs alongside the problem of deferred tax credits would help “increase the profitability of Greek banks by reducing the cost of credit risk and their attractiveness to private investors”.
Solving the Greek banking industry’s bad debt problem is seen as crucial to helping the country’s economic recovery by the new government .
Banks are a key source of financing for businesses in Greece, meaning that the sector’s weakness can restrict credit from the economy. The Hercules plan, which is based on a successful scheme in Italy, aims to reduce the amount of NPLs at Greek banks by around 40pc by the end of the programme.
Optimism over the Hercules plan and the improving economic outlook under the new centre-Right government has helped Greek banking stocks double in 2019. The gains made have helped Athens become the world’s best performer this year.