March 9, 2021

News Analysis: In Greek Debt Deal, Clear Benefits for the Banks

FRANKFURT — Europe’s latest plan to prop up Greece looks suspiciously like a plan to bolster European banks.

By agreeing to contribute a relatively modest amount to the rescue, the banking industry is getting something more valuable in return, analysts say. The industry is unloading much of its Greek risk onto the European Union and helping to quash fears that the sovereign debt crisis could become a second financial crisis.

The agreement reached in Brussels last week may anger anyone who thinks that banks have already gotten enough taxpayer favors. But the debt crisis has always been as much about banks as it has been about Greece. If the deal helps restore confidence, weaker institutions will be able to borrow on money markets again, so they no longer will be dependent on the European Central Bank for financing.

“I think this is a good use of resources,” said Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y. “This prevents the hit from becoming so large that it paralyzes the banking system.”

The oddity, of course, is that Chancellor Angela Merkel of Germany went to Brussels last week vowing to make banks pay their share of the cost of aiding Greece. She inadvertently seems to have done them a favor instead.

The plan agreed to by Mrs. Merkel and other leaders calls for banks to voluntarily swap some of their Greek bonds for more solid paper backed by collateral. Though the swap is technically voluntary, Moody’s Investors Service warned on Monday that such action would be considered a default by Greece. Moody’s also downgraded Greece another three notches to just one level above a default grade.

But Moody’s also said that the plan would benefit Europe “by containing the contagion risk that would likely have followed a disorderly payment default on existing Greek debt.”

The debt swap endorsed by European leaders last Thursday will cost banks and other investors 54 billion euros, or nearly $78 billion, according to estimates by the Institute of International Finance, the industry group that represented banks and insurance companies in negotiations with European governments.

That sounds like a lot of money, but, as Mr. Weinberg said, a week ago banks were staring at the possibility that Greece would slide into a disorderly default, with losses in the range of 200 billion euros.

“Compared to a 200-billion-euro hit, this looks to me like a really good deal,” Mr. Weinberg said. In any case, he said, the cost to banks could turn out to be much lower than 54 billion euros.

Financial institutions still have substantial exposure to Greece, said Charles H. Dallara, managing director of the Institute of International Finance, who played an important role in the negotiations. The organization estimates that private sector bond investors still have 200 billion euros at risk in the form of future interest payments by Greece. In addition, only about one-third of the new paper that Greece creditors will get is backed by collateral, Mr. Dallara said.

Still, he agreed that the deal would help keep Greece’s problems from infecting banks.

“This has really injected a new stability into the European financial landscape, which had certainly been lacking in the past week,” Mr. Dallara said. He noted that the Brussels agreement came only a week after European regulators compelled banks to detail their exposure to Greek bonds, an event that also helped clear up doubts about where the risk was buried.

European bank shares rallied late last week as investors appeared to agree that institutions emerged stronger from the Brussels talks. Bank shares fell Monday, but the decline seemed to be driven more by worries about political deadlock in the United States budget negotiations than about Europe.

A crucial test will come on Tuesday when the European Central Bank discloses demand for one-week loans from banks in the euro zone. The amount spiked last week, a sign that many banks were having trouble borrowing money from other banks.

If demand falls Tuesday and in coming weeks, it would be a sign that tensions are easing.

“Banks are suspicious of each other, because they don’t know who is holding the bag,” Mr. Weinberg said.

The impact of the debt agreement will also start to become clear in banks’ quarterly earnings reports. Institutions will begin subtracting the decline in the value of their Greek bonds from profit, perhaps as soon as this week, though most banks will probably wait until the bond swap has occurred. The date for the swap remains uncertain, but it could begin at the end of August, Reuters reported.

Bankers said details of the debt swap and other features of the rescue package remained foggy, and therefore it was tricky to assess the true impact. Many analysts remain skeptical.

“A deeper approach will prove requisite for restoring growth in Greece and thwarting the risk of contagion,” Lawrence Goodman, president of the Center for Financial Stability in New York, said in a statement.

Some bankers remain wary of the agreement to roll over Greek debt.

Carlos Santos Ferreira, chief executive of Millennium BCP, the biggest private bank in Portugal, said during an interview Monday that he had “mixed feelings” about whether his bank and others in countries that had also needed rescuing should join in the debt swap.

Millennium BCP is the largest Portuguese holder of Greek sovereign debt, with about 700 million euros, and its board is set to discuss the issue later this week.

“I believe the situation is different for banks and insurance companies in countries that are also getting a bailout,” he said.

Another big question is how the deal will affect hard-pressed Greek banks, which are among the largest holders of their country’s debt.

But as surges in the prices of Greek bonds last week showed, the deal restores some value to Greek debt. That means banks in Athens might be able to use their Greek bonds as collateral to borrow from other banks, reducing dependence on the E.C.B. and bolstering lending to the credit-starved Greek private sector.

Raphael Minder contributed reporting from Lisbon.

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