Four Biggest Greek Banks Downgraded
FEBRUARY 23, 2010, 8:18 P.M. ET | http://online.wsj.com
Greece's financial instability is spreading to its private-sector banks, the latest indication that the country's credit woes are worsening.
Fitch Ratings, citing concerns about Greek banks' funding costs and profitability, downgraded the country's four major banks to triple-B, or two notches above "junk" status. Fitch characterized its outlook for Greek banks as "negative."
The main worry is that Greece's efforts to lower its deficit through austerity measures will quickly spread deep into the Greek economy, lowering demand for loans and cutting into bank profits. In addition, as long as investors are worried about Greece's ability to issue new debt and pay off maturing bonds, Greek banks will have to pay more to fund themselves.
The cost of funding for the four banks in question—National Bank of Greece, Alpha Bank, Efg Eurobank Ergasias and Piraeus Bank—has gone up in recent weeks, according to a Morgan Stanley funding report and a person familiar with the matter. The price of insurance to protect against a default by Greek banks has also has increased, according to data firm Markit Group Ltd.
A significant sign of increased funding costs is the so-called repo market, where firms post securities as collateral in return for short-term loans. The repo market is one of the main ways banks ensure they have enough liquidity to meet their obligations.
In the past month, said a person familiar with London repo markets, Greek banks have had to pay about 0.4 percentage point more for loans than other European banks, a notable premium.
Despite such pressures, Greek banks aren't facing a liquidity crunch. The banks, widely thought to be on solid ground before the crisis hit Greece, are fortified with deposits. They also have no immediate refinancing needs and aren't expected to turn to the credit markets to raise substantial funds anytime soon.
Still, banking analysts are raising questions about the repercussions of Greece's crisis on the sector.
"As a result of the market perception of risk surrounding Greece, banks are living through an emergency situation," Morgan Stanley banking analyst Huw van Steenis wrote on Feb. 16. "The wholesale market for long-term funding is closed and short-term repo markets are open only partially and at a high costs. In this context, all the focus is on liquidity."
All told, the four big banks have total deposits of about €265 billion ($360 billion), according to Morgan Stanley. For now, Fitch said in its report that Greek banks are helped by the fact that they are primarily funded by customer deposits and not credit markets that can dry up.
Shares of the four banks fell, with Piraeus down most sharply at 5.5% in Athens trading. Alpha and Efg fell 2.4% and 2.7%, respectively, while National Bank of Greece decreased 3.5%. The Athens Stock Exchange's benchmark index dropped 1.8%.
Fitch said 86% of gross loans on average are covered by deposits at Greece's five largest banks as of the third quarter. The Greek banks also could be helped by the fact that they have diversified their revenue sources by expanding into southeastern European countries.
But Fitch said that also could have a downside because of the volatility in that region. The latest concerns over Greece's banks came as Athens held talks with a delegation of European Union and International Monetary Fund officials over how to tame its growing deficit.
Greece has been under intense pressure from Germany and other euro-zone members to make deep budget cuts. Greece's partners have signaled they would be willing to bail out the country if such a step becomes necessary but have insisted that Athens first implement radical spending cuts.
"The delegation will strongly urge the government to adopt additional measures worth €2 billion to €2.5 billion," said a person familiar with the matter.
A new package of austerity measures being discussed is likely to include an increase in the current value-added tax rate of 19%, more cuts in civil-service entitlements and higher duties on luxury items such as boats and expensive cars, people familiar with the matter say. Greece is also weighing a further increase in fuel taxes.
The EU in these talks has also asked Athens to cut one of two extra months of pay that public-sector workers now get over and above their normal 12-month salary—a move the government is resisting, according to these people.
Greece has already said it plans a freeze on civil-service wages, cuts in public-sector entitlements by 10% on average, a fuel-tax increase and the closure of dozens of tax loopholes for certain professions—including some civil servants—who now pay less than their fair share in taxes.
It says the spending cuts and tax increases will produce some €8 billion to €10 billion in savings and additional revenue. Such measures are likely to stoke further resistance from Greece's unions. Two major unions announced plans for a 24-hour general strike Wednesday. The strike is seen as the first major test of the government's commitment to push through its harsh austerity program.
Separately, Spain's central-bank governor Tuesdayurged the government to proceed with budget-deficit cuts and labor-market reform efforts, and told ailing Spanish banks to push ahead with restructuring plans.
The government, grappling with one of Europe's deepest recessions and a budget deficit that reached 11.4% of gross domestic product in 2009, last month announced cost-cutting and revenue-raising measures worth €50 billion. It aims to bring the deficit within the 3%-of-GDP limit for European Union countries by 2013.
"It's essential that these measures be carried out because if they are not, the credibility of Spain could be very negatively affected," Bank of Spain Governor Miguel Ángel Fernández Ordóñez said at a conference.
The central banker, who is also a member of the European Central Bank's Governing Council, said these measures, as well as the broad outlines of a labor-market reform presented earlier this month were "steps in the right direction."
But he urged the government to follow through with "concrete and ambitious measures that bring profound changes in our labor market."
Following the collapse of its labor-intensive construction industry, Spain's unemployment rate has shot up to nearly 20% and the government has earmarked €30 billion for unemployment-benefit payments alone this year.
But even when the Spanish economy was booming, it had one of the region's highest unemployment rates, the result, many economists say, of rigid regulation and high costs associated with hiring and firing.
"If we don't adopt an ambitious labor-market reform, the Spanish economy will enter a tough and complex period," Mr. Fernandez Ordonez said, adding nondecisive measures could also endanger deficit-reduction plans.
Though Spanish banks have so far weathered the global financial and economic crisis relatively well, a failure to take measures to boost economic recovery and lower unemployment would put them under greater stress. "Credit institutions will be harmed and won't be able to support [economic] recovery," Mr. Fernandez Ordonez said.
Early last year, the Bank of Spain bailed out Caja Castilla La Mancha, a small savings bank, and the government then created the FROB, a bailout fund designed to encourage takeovers of ailing institutions by stronger ones.
More than 30 unlisted savings banks are currently in merger talks but Mr. Fernandez Ordonez warned that "some of these [merger] processes are taking longer than what would be desirable."
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