To reduce non-performing loans, the Greek central bank is proposing a special-purpose vehicle created with the stricken lenders’ tax credits — themselves an accounting creation of the nation’s past debt restructuring. With those assets, the SPV could effectively become a “bad bank,” selling bonds and acquiring some 42 billion euros ($47 billion) of bad loans, according to people with knowledge of the plan.
“We’re developing a plan in the Bank of Greece to use the deferred tax credit or claims of banks vis-a-vis the state,” Bank of Greece Governor Yannis Stournaras said at an event in Geneva, adding that Greece urgently needs a bad bank.
“It’s a highly complicated structured-finance transaction because it mixes complicated tax, legal and regulatory problems,” said Jerome Legras, head of research at Axiom Alternative Investments, a former veteran of Societe Generale SA’s structured-finance team. “It’s hard to see if there’s a genuine chance of having investors onboard.”
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If that’s not enough complexity, one of the people said European regulators could approve both this plan and a parallel one floated last month by the state-owned Hellenic Financial Stability Fund. It envisaged an SPV partly funded by state cash and possibly involving a government guarantee. A similar plan in Italy has helped lenders offload a substantial amount of their soured debt.
Tax Challenges
The news was initially greeted with enthusiasm in Greece, which needs to unshackle its banks from the bad loan burden to help revive its economy. Bank stocks surged Tuesday — albeit off a low base, as they have been sinking for months.
“It is an interesting proposal,” Eurobank Chief Executive Officer Fokion Karavias told reporters Tuesday. “It would be another weapon in our armory.”
Piraeus Bank SA, down more than 60 percent this year, jumped as much as 7 percent before closing 1.8 percent higher. Eurobank Ergasias SA held its gains, closing 9 percent higher, but has still lost 28 percent in 2017.
“There are still missing parts to this initiative,” said Nick Koskoletos, head of research at Eurobank Equities. Still, “the mere fact that there are additional efforts to help jump-start the balance-sheet repair process could well be celebrated by the market,” he said.
However, the SPV faces daunting challenges, according to Legras. The deferred tax credit-fueled entity would probably need to seek a credit rating, and then investors in bonds issued by the SPV would need to study many complex tax implications.
‘Too Clever’
“I like complicated structured finance, but it seems weird to mix the two different risk profiles” of the deferred tax credits and the non-performing loans in one entity, he said. “My gut feeling is it’s a bit too clever.”
The Bank of Greece will release a detailed plan on Nov. 22, according to an official familiar with the matter. While the transfer of the tax credits to the SPV will deplete banks of some of their capital for a short period, their ratios will bounce back once the sale of the bad loans is completed, one of the officials said.
Another potential problem: It’s unclear if the plan would leave the banks with a sufficient buffer of capital, according to a person with knowledge of the matter.
“Would I buy those bonds? I undoubtedly would not, even for a hefty new issue premium,” said Timothee Pubellier, a portfolio manager at Financiere de La Cite in Paris who invests in debt linked to financial institutions. “What those banks need is fresh money. Moving imaginary capital will not improve their fundamental situation and won’t be convincing for investors.”
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