The 3-rd bail-out: A cheaper bill for recapitalising Greek banks

When the third Greek bail-out was outlined in principle on July 13th after an extraordinarily fraught summit of euro-zone leaders, between €10 billion ($11 billion) and €25 billion out of the total sum of up to €86 billion of help was set aside for bank recapitalisation.



Greek banks had been undermined for over half a year as deposits drained out of them, on worries about a possible exit from the euro once Syriza, a radical left party, won the election held in January 2015, culminating in their closure for three weeks in late June and July. They had been further hurt by the harm done to the economy and thus to their loans arising from Syriza’s ill-judged attempt to outbluff its official creditors. Even so, the notion that they would need as much as €25 billion to offset the damage and put them on a sound footing appeared unduly pessimistic.

However, just how much they actually required would not be known until the European Central Bank (ECB), since late 2014 the supervisor of the four big Greek banks—Alpha, Eurobank, National Bank of Greece and Piraeus—that dominate the economy, conducted a probe into their books together with a stress test examining how they would be affected if the economy turned even sourer than expected in 2015-17. Today the ECB has published the results. They reveal that the extra capital that will be needed is considerably less than had been feared in July.

Under a “baseline” forecast in which GDP declines by 2.3% this year and by 1.3% in 2016 and then grows by 2.7% in 2017, the four banks will require €4.4 billion. In an alternative “adverse” scenario under which GDP would decline by 3.3% and 3.9% in 2015 and 2016 and then grow by just 0.3% in 2017, the capital shortfall would be €14.4 billion.

Separately, the Bank of Greece published the results of a similar assessment of Attica Bank, a smaller lender. These disclosed a shortfall of €860m if the economy conforms to the baseline forecast and of €1.0 billion in the adverse scenario.

Altogether, then, the capital requirements are €5.3 billion under the baseline forecast and €15.4 billion in the adverse scenario. The call on bail-out funding will be less than €15.4 billion since at least €4.4 billion—the shortfall in the baseline case for the four big banks—is expected to come from private sources.

Today’s results are broadly encouraging. They mark an important step towards rebuilding confidence in both the Greek banks and the economy. But a lot more still needs to go right for Greece.