• Central bank plan sees banks’ tax claim assets moving to SPV
• Special vehicle will issue bonds, use proceeds to buy bad debt

(Bloomberg) — 

Under the proposal, Greek lenders would transfer about half of their deferred tax claims to a special purpose vehicle, which will then sell bonds and use the proceeds to buy some 42 billion euros ($47 billion) of bad loans from the lenders, according to the people, who asked not to be named as the plan hasn’t been finalized yet.

The Greek lenders’ tax claims currently account for most of their capital. As claims against the state, they were granted to offset losses suffered during the country’s debt restructuring. It’s unclear whether investors would have an appetite for the bonds backed by these claims.

The Bank of Greece’s plan differs from a proposal floated by the Hellenic Financial Stability Fund earlier this year, which envisaged creating a vehicle partly funded by hard cash chipped in by the sovereign. The central bank has concerns that the HFSF’s proposal may have some drawbacks, while the money available would only suffice to unload some 15 billion euros of bad debt, much less than required.

Greek bank stocks have dropped by more than 40 percent this year amid lingering doubts that they can deal with a mountain of bad debt lingering from the steepest recession in living memory. Adding to their woes, European supervisors have asked them to reduce their non-performing exposures by about 60 percent by the end of 2021, a target that may not be achieved without burning more capital than they currently hold.

The Bank of Greece’s plan has been submitted to the European Central Bank’s Single Supervisory Mechanism and the Greek finance ministry, while any use of public guarantees is subject to approval by European Commission competition authorities. One of the people said that European regulators could approve both the Bank of Greece’s plan and that from the HFSF, giving lenders more tools to clean up their balance sheets.

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. After several recapitalizations in recent years, common equity Tier one ratios at Greek banks currently range from about 14 percent to almost 19 percent.

The SPV would buy the bad loans from the banks at market prices, one of the officials said. While this may mean a further hit to their capital if the provisions the banks have taken are lower than the market prices, the blow would be small and manageable, while lenders would end up with higher quality capital, the person said, adding that supervisors have reviewed the numbers.