How Bad Is the Situation for Greek Banks?

How Bad Is the Situation for Greek Banks?

Greece’s four biggest banks—National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AE—were downgraded on April 1 by credit-ratings agency Fitch. This follows the downgrade of Greece’s sovereign rating the week before. The downgrade, from B to CCC, reflects liquidity constraints that banks continue to face in the wake of ongoing deposit outflows, as well as issues pertaining to declining solvency and asset quality, according to Fitch.


Greek banks are facing a potentially disastrous liquidity crisis. According to recent Bank of Greece data, Greek bank deposits plunged to a 10-year low of €140.5 billion in February. Between early December and the end of February, moreover, it is estimated that both individual and business customers withdrew €23.8 billion from banks on fears of the new left-wing government defaulting on its debt obligations—equivalent to approximately 15 percent of the total value of deposits held in Greek banks.


To compound matters, interbank funding to Greek banks in February fell to its lowest amount since the advent of Greece’s Eurozone membership. Despite more than €100 billion of funds being provided by central banks, Greek lenders are, therefore, in increasingly desperate need of liquidity.
Bank and state interdependence
A modicum of relief was provided to banks on April 1 when the ECB increased the Emergency Liquidity Assistance (ELA) ceiling by €700 million to a maximum total of €71.8 billion, following a smaller increase the previous week of €400 million from €69.8 billion. Under the ELA, Greece’s central bank lends money to the country’s financial institutions and charges a rate higher than the one the ECB charges, while all credit risk remains within Greece, on the books of the central bank. Liquidity provision through the ELA has so far made up for the shortfall in deposit and interbank funding. Since the ECB’s decision to prohibit the use of government bonds as collateral, however, the sore reality for banks is that they have effectively been forced into depending on the comparatively expensive ELA as their sole source of funding.
DTAs and DTCs
Joseph Moss – International Banker


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