Greek banks’ profitability will be fragile into 2019

Abstract

Subject The recent plunge in bank stocks. Significance The stocks of the four systemic banks suffered a week-long dive on the Athens Stock exchange in early October. Investors are concerned with the ability of the sector to absorb losses from sales of portfolios of non-performing exposures (NPEs -- NPLs as defined by the European Banking Authority) and whether high losses will erode capital buffers, requiring banks to recapitalise. Pressure from the regulator to speed up the reduction of NPE stocks is creating additional operational difficulties for the sector. Impacts The government can withstand adverse market conditions for about 18 months due to the financial buffer accumulated as its bailouts end. It could support the sector and facilitate the NPL reduction process by guaranteeing bonds issued by a special-purpose ‘bad loan’ vehicle. Stock exchange turbulence will feed New Democracy’s anti-government agitation prior to local and European parliament elections in 2019.