The Banking System in Greece.
Effects of world and Greek crisis
University of Ioannina, Department of Economics
English for Academic Purposes IV
Δαβτυαν Τριανταφυλλια 2370
Δημας Χρηστος 2373
Δημος Παναγιωτης 2374
Πολυχρονιαδου Μαγδα 2502
Χατζηλαζαρου Λαζαρος-Αντωνιος (G.L) 2557
10/04/2014
Contents
1. Introduction
2. Greek and Worldwide Economic Crisis
2.1 Greek crisis
2.2 Effects of Greek crisis on Greek economy
3. Greek crisis and banking system
3.1 Importance of banking sector for Greek economy
3.2 Effects of Greek crisis on banking system
3.3 Stress Tests
4. The structure of the banking sector
4.1 The bail in
4.2 The Hellenic Financial Stability Fund
5. Future Prospects
6. Conclusion
7. References
1.
Introduction
The global financial crisis broke out in September 2008. It started in
the U.S.A‘s insecurity and specifically the banking weakness
servicing mortgage loans. Of course, many economies were
affected and submitted in recession globally, including Greece
(2009). The ongoing financial crisis is an immense challenge for the
economic systems and governments around the world, which
trigged off an immediate reaction regarding the measures to be
taken for its confrontation.
2.
Greek and Worldwide Economic Crisis
The international financial crisis of 2007 was just the beginning.
Lack of capitals has highlighted the credit crisis in many brokerage
indicators of several developed countries. At the same time, the
lack of willing investors led many stock markets (including bond
markets) to go under which caused chain reactions that led many
important economic sectors to unprecented downfall. The
production in the international car industry reduced, several banks
counted several losses of their assets and some even had to shut
down. This cause and effect had an impact on the rising of the
unemployment, currency devaluation and new inflationary
pressures along with other factors. No wonder many economic
analysts draw a parallel between the current economic crisis and
the great global recession of 1929 along with the “Black Friday”
(The Economist, 11.10.08). Of course, this decrease in growth rate
and this deviation of financial premises of the countries could not
have left Greece unscathed either.
2.1 Greek crisis
In 2010, it was revealed that Greece's public debt for 2009 was at
levels far above than what could be considered viable. After the
exclusion of the country from the international markets, the
inability to catch up with the deficit forced the country to turn to
the IMF (International Monetary Fund), the EC (European
Commission) and the ECB (European Central Bank) too. Thus, was
created the European mechanism of stability, EFSF (European
Financial Stability Fund), which later changed into ESM (European
Stability Mechanism).This mechanism helped many economic
sectors in some European countries to revive such as Spain,
Portugal, Ireland. It was inevitably used in Greece too in order to
turn the Greek economic sectors around.
2.2 Effects of Greek crisis on Greek economy
Major sectors were affected, such as the banking system, the
insurance industry, the real estate, the international trade and
many others with direct effects on the economic size of the
country. Unemployment skyrocketed bringing Greece to the top in
November of 2013 among European countries. According to
Eurostat data, the ratio reached at 27.6% with young people out of
work reaching at 58.3%. The shortage of funds changed banking
dramatically too. According to the HBA (Hellenic Bank Association),
the number of banks in Greece fell by 17%, due to shutting downs
or mergers. Also, internal devaluation was inevitable. According to
Mr. Gatsios, Professor of Economics University of Athens, the
irresponsible internal appreciation from EMU (Economic and
Monetary Union) led to the depreciation of the Euro. This was
irresponsible because it was not caused by an increase in
productivity but from trying to "capture" the inflation and to
maintain the workers standard of living
(naftemporiki.gr/finance/story, 15 March, 2014). Apart from the
economic side effects, psychological consequences made their
appearance in the lives of citizens as well. Continuous marches and
demonstrations against the measures of the Troika and the
Government made their first appeal as well as protests about
signing the Memoranda 1 & 2 (Wikibooks, January 2014). The
consequences though were and are inevitable as the road to
recovery of the country is difficult and involves a lot of sacrifices.
Of course, one of the most important sectors that must be
stabilized is that of the banking.
3. Greek crisis and banking system
3.1 Importance of banking sector for Greek economy
The importance of the banking sector in Greek economy is
obvious and its contribution to the smooth function of the
economy is a must. An efficient banking system eliminates two
main problems that mostly occur in Greece: reverse selection
and moral hazard. The reverse option is an asymmetric
information problem that arises before conducting a transaction
and it exists due to the fact that non-creditworthy units act
effectively in an unexpected way to be financed with a loan
(Mishkin, 1996, Moskofoglou Valantis, 2012). The moral hazard
problem is when someone who is fully protected from all kind of
risks behaves differently than when he faces them (Moskofoglou
Valantis, 2012). Thus banks are necessary for the Greek financial
system because they are constructed in a way to prevent both of
the above mentioned. Mostly they approve loans on reliable
businesses and at the same time they make a profit from the
information they obtain from them. Furthermore, they prevent
moral hazard problems by overseeing the actions and the
operations of the companies in which they have provided these
loans. Besides these, banks have some specific capabilities for
ensuring the right function of the country. They are capable of
engaging in long-term transactions with their customers to
monitor their borrowing units. That way they can classify them
into economical scales and this leads to a significant reduction of
the functioning cost. Additionally, they can prevent their
borrowers from taking risky decisions that might lead them to
the end of their funding. So it seems that the existence of an
effective banking system is necessary for the stabilization and
strength of the financial system.
3.2 Effects of Greek crisis on banking system
The credit crisis did not have such painful repercussions in the
financial sectors of
Greece as it did in the
banking sector. More
specifically, the
further reduction of
growth, the increase
in lending rates, the
dwindling of
economic activities,
the possibility of the
steadily increasing a
payment delays of
loans and the scarcity
of cash in capital markets have led to the weakness of the
banking sector. These in turn, affected negatively SMEs (SmallMedium Enterprises), depositors, shareholders and bondholders
as well (graph 4).
3.3 Stress Tests
The greater implication of the financial crisis was the significant
reduction of liquidity which led to shortage of loaning capitals
for Greek banks. According to the stress test results carried out
by the Bank of Greece (BoG) in collaboration with the top
advisory and evaluating companies BlackRock Solutions and
Rothchild ("BlackRock Reports Fourth Quarter Earnings", January
19, 2011) in all Greek commercial banks, capital needs were
estimated at 6.4 billion Euros. Of course, the BoG announced
that with the limitation capital needs (private sector
participation in future capital increases, the recognition of
deferred tax, the sale of assets, etc.) security stocks that are
created, are more than enough to cover the estimated capital
needs. More specifically the capital needs of Peireos Bank come
up to 425 million, Alpha Bank’s to 262 million, and Ethniki Bank’s
to 2.183 billion. Eurobank needs 2.95 billion Euros in capital
needs and at the same time is planning recapitalization while the
tests showed that ABB (Asea Brown Boveri), Credicom and
Investment Bank of Greece (IBG) do not require additional
funds. The banks promised that they would succeed in finding
the required funds, to pay miscellaneous debts and increase
their capital funds. Some of them claimed that they would find
the required capitals through their creditors, bond-holders and
shareholders as well.
4. The structure of the banking sector
4.1 The bail in.
The way the banks seek capital adequacy is specific (bail in).
Once certified by the supervisory authorities that the bank has
indeed failed, it starts seeking a regulatory entity
(capital.gr/jArticle, George Kaisarios, 7 March, 2014). If the
problem focuses on the Bank’s own funds that is that the Bank
doesn't have enough funds to maintain its own existence, then
the first theoretically to lose are the shareholders. If the damage
goes beyond that, then its creditors cover the gap and if it is still
beyond its own funds and creditors, then the supervisory
authority will make use of the uninsured deposits to cover it.
More specifically, deposits that are above 100,000 Euros will be
forced to a haircut. Eventually, if the lack of capitals still remains,
then the supervisory vector gets the responsibility of finding the
required funds and giving the money back from any losses
occurred from deposits below 100,000 Euros.
4.2 The Hellenic Financial Stability Fund
As it analyzed above, when a bank seeks to increase its capital, first
deals with its creditors, bond and share holders and if they are
lacking capital, then the bank requests the support of HFSF. The
purpose of Financial Growth Fund is to maintain the stability of the
Greek banking system, through the strengthening of capital
adequacy of credit institutions. Also the subsidiaries of foreign
credit institutions are included, provided that they exist legally in
Greece under the authorization of the Bank of Greece. Not even
one Greek Bank ever required help from the HFSF, which right now
contains 11 billion Euros. ‘As a matter of fact the capital raising
from private investors, exceeds the capital requirements
announced by the Bank of Greece; in addition it strengthens the
capital adequacy of banks, contributing significantly to the stability
of the financial system and their potentials of returning to the
international markets’. (Anastasia Sakellariou, CEO HFSF,
6/04/2014).
5. Future Prospects
Concerning the future prospects of the banking system in Greece,
there are many plans and economic activities that have to be made
in order to correct some of the mistakes and to allow the banks to
function more effectively. Bureaucracy must be contained so the
money and capital transactions will be faster between the Greek
and other European banks. The most important change though, is
that all Greek banks must become independent and function like
private businesses. This can happen if various private vectors fund
the banks. This is very important because through this the banks
will no longer need the help and support of the HFSF and will not be
linked to the state. Thus, they will be able to participate again in the
global market, as they were before the crisis, and will regain the
ability to borrow capitals and achieve their increasing through
investments and not through the involvement of the public sector.
6. Conclusion
Finally it is been made clear from the above arguments and facts
that the banking system in Greece is a critical economic sector that
influences the economy in Greece and can sometimes change it. Of
course there are some defects in its structure but none of them are
not fixable. Banks in Greece have made and still are making a great
effort to confront the problems the crisis causes. As it seems until
now, they are managing them pretty well. There is much hope that
every problem will be faced, each Greek economic sector will revive
and Greece will come back to the days when it was considered a
powerful and highly promising market.
7.
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