EU signs off on Greek scheme to clean up banks’ bad debts

The EU has approved a Greek government scheme designed to help its banks rid themselves of toxic debts, after ruling that it does not breach rules barring its member states from providing unfair financial assistance.

Greece’s scheme, named after the mythical hero Hercules, will allow the government to guarantee a slice of bad debts that banks sell on to specialist investors. The measure aims to boost efforts to clean up Greece’s still-fragile financial sector, with more than 40 per cent of Greek banks’ overall loans considered “non-performing” after a deep financial crisis.

George Zavvos, Greece’s deputy finance minister, told the Financial Times it would enable the country’s banks to remove up to €30bn of non-performing loans from their balance sheets.

Margrethe Vestager, the European Commission’s competition chief, said on Wednesday that the proposed guarantee would not constitute state aid, describing it as a market solution to “tackle the stock of non-performing loans weighing on the balance sheets of Greek banks”.

“The scheme we approved today is another good example of how member states can help banks clean up their balance sheets without granting aid or distorting competition,” Ms Vestager added.

When the EU created a framework for dealing with stricken financial institutions and beefed up its state aid rules in 2014, it made it harder for its member states to directly take on their banking sector’s bad debts, as Spain was previously able to do in the depths of the financial crisis.

The Greek solution is modelled closely on a guarantee used in Italy to underpin multibillion-euro bad debt deals from the likes of Monte dei Paschi di Siena, the world’s oldest bank.

In these securitisation deals, a bank transfers some of its bad debts into a financing vehicle that then sells different slices of risk to fund managers or other specialist buyers. As debt collectors recover money from consumers and businesses that have fallen behind on their payments, the proceeds flow to these investors, with the safest piece getting repaid first and the riskiest last.

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A number of Greek non-performing loan securitisation deals have already taken place after reforms in 2017 allowed institutions other than banks to collect bad debts. Pimco, the $1.8tn US asset manager, invested in a €2bn deal backed by Greek mortgages from Eurobank this year, for example.

But the new scheme would make the top-ranking slices of these deals even safer, by backing them with a guarantee that the Greek government will step in if they are not covered by the underlying loan repayments. This would make such securitisations even more attractive to investors.

In Italy, the government-guaranteed slices of these securitisations were often held by the banks themselves on their balance sheet and used as collateral to raise further financing. The riskier pieces of these deals in Italy were often sold to US hedge funds or an Italian bank rescue vehicle called Atlante, which was also carefully constructed to comply with EU state aid rules.

The Greek finance ministry said its plan would help banks “clean up their balance sheets more quickly and return to their proper role of financing the real economy”.

“It will be the first securitisation of non-performing loans in a country that lacks an investment-grade debt rating,” the ministry said.

Greece is ranked several notches below investment grade by international rating agencies, and is not expected to be upgraded to investment status before mid-2020, an adviser to the government said.

Mr Zavvos said a law permitting the securitisation would be approved by parliament next month.

Investor appetite for the securitisation, especially the tranche backed by the state guarantee, “should be strong since this issue will carry a positive interest rate at a time when we are seeing bond yields moving deeper into negative territory”, said an Athens-based fund manager.