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Interview of the Bank of Greece Governor Yannis Stournaras with Efi Karageorgou for

26/03/2024 - Articles & Interviews

- Mr. Stournaras, there is concentration in the banking system; so one wonders, does competition work?

There are some industries that clearly have an oligopolistic structure, as evidenced by profit margins. Greece needs more competition, because, as shown by Bank of Greece studies, there are oligopolies in the markets for food, fuels, banking and private hospital care.

Thus, we need more competition in the banking sector as well. We should empower smaller banks to become competitive, including, where possible, by merging into new, stronger players that can intensify competition in the banking system. We need the so-called fifth pillar of banking.

And this fifth pillar is not about just Attica Bank and Pancreta Bank. There is also Optima, Viva; there is an ecosystem encompassing cooperative banks as well, which have played a key role: currently, for example, the cooperative banks of Karditsa and of Epirus perform well and support the local economies.

There is room for other players to enter the banking market, such as fintech and microfinance companies or smaller banks that will extend credit to small entrepreneurs. Today, many small firms, not necessarily non-bankable, remain unbanked. Large lenders focus on large corporations and are often unwilling to deal with smaller businesses.

In my view, Greece needs more banks than it currently has. And I am glad that we share a common understanding with the government and the Ministry of Economy and Finance on this, i.e. that we need more competition in the banking system.

- When will the merger of Attica Bank with Pancreta Bank be finalised? Where do we stand at present?

Both banks have sent their loan data to DBRS, and we are waiting for its report on the two banks’ capital needs. Then, they will each apply for inclusion of the relevant securitisations in the Hellenic Asset Protection Scheme (HAPS), better known as “Hercules 3”.

The draft merger agreement will then have to obtain approval from the Bank of Greece before a capital increase can take place in September.

It should be noted that, once this process is over, Attica Bank will have been cleaned up from troubled assets and DTCs.

- Does this mean that disinvestment of the remaining 18% stake of the HFSF in the National Bank of Greece (NBG) is pushed back?

It will surely have to wait until the Attica-Pancreta merger is finalised. We had a meeting on this issue with the HFSF CEO, Ilias Xirouhakis. Our goal is to strengthen competition, and this involves ensuring that non-systemic banks will face the same terms and conditions as so far applied to systemic banks, including with regard to access to the HAPS.

Moreover, the Minister of Economy and Finance, Kostis Hatzidakis, has also indicated that the disinvestment of the HFSF from the systemic banks will have been completed by the end of this year, via the disposal of its 18% capital holding in NBG. I can safely say that the Attica Bank capital increase will take place in early September and disinvestment from NBG will follow in the last quarter of this year.

- Are the guarantees of the HAPS sufficient to cover the securitisations of both the systemic banks and of Attica-Pancreta?

An increase might become be necessary; perhaps EUR 2 billion in guarantees will not be enough. This amount could be raised to EUR 2.5-2.6 billion, but surely in no way to EUR 4 billion.

- What about credit servicers, the borrowers’ information platform, the relicensing of credit servicers? What is the state of affairs?

We are well on track and the new law helps us in this. There is clearly room for improvement in terms of judicial processes, auctions, etc. On the other hand, the new framework provides for a fee structure whereby credit servicers will get paid no matter what, i.e. even if they do not do their job, so we should perhaps consider an incentive mechanism.

- Will there be concentration in the credit servicers sector? How many licences will be renewed?

The number of servicers’ will definitely decrease; there will be more concentration, with only a few of them remaining in the market. Still, they have an important role to play, they are an integral part of the financial ecosystem and they are now governed by the Code of Conduct for financial institutions as established by the Bank of Greece. Furthermore, the new law has brought about improvements in terms of supervision and, where necessary, sanctions.

- Does the Bank of Greece carry out investigations?

Yes, it does. Last year, we audited all credit servicers, in fact twice. We plan to do the same this year too.

- Have these investigations resulted in findings? Have there any irregularities  been identified?

I will not comment on supervisory issues.

- In a recent study, the Centre of Planning and Economic Research (KEPE) referred to “bankflation”. What is the Bank of Greece’s view on this subject?

There are large banking spreads; Greek banks have a heavier NPL burden and higher associated risks, which has an impact on interest rates. Furthermore, in Greece, business loans predominantly carry variable rates, implying a faster pass-through of interest rate hikes, rather than fixed rates that prevail in other countries’ banking systems. To be sure, we have seen an immediate increase in lending rates, while deposit rates have been less responsive.

- Could the Bank of Greece intervene in interest rate setting?

This is out of the question, it is a matter of competition.

- But why do banks, which reported  profits of EUR 3.6 billion in 2023, pay out dividends instead of using the money to reduce their DTCs?

A sense of measure is necessary. Between 0 and 100, there is 50. You cannot give nothing, but you cannot give 100 either. This is so because the systemic banks have a high DTC share in their own funds and they need to build resilience to the future. According to Moody’s, interest rate cuts are set to limit bank profits, which calls for caution. This is no time for complacency.

- What do you mean exactly by saying this is no time for complacency?

We are facing an international environment that is way more challenging and more uncertain, no-one knows what tomorrow will bring.

One major challenge is climate change, which also affects banks. Therefore, they have to build up buffers. This is what we at the ECB and the SSM tell banks: that we now live in an environment of higher risks, of higher uncertainties. Governments, banks and insurance undertakings need to build up buffers.

- Is there any possibility that the SSM could veto banks’ dividend policies?

No, there is not; you cannot just leave shareholders without a pay-off on their investment. That’s why I said earlier that between 0 and 100, there is 50.

- I mean, could the SSM require banks to pay out less than 20%-30% of profits as they have announced?

The SSM will seek reassurance that everything is taken into account, including the need to whittle down DTCs, uncertainty for the future and the need to create buffers.

- What is the biggest systemic risk today?

It is exogenous, it has to do with the international environment. Greece does not face domestic risks; we have solved our big problems of the past. Last year the country achieved a growth rate of 2%, while the forecast is 2.3% for this year and 2.5% for 2025. GDP growth in the euro area was 0.4% last year, and is projected at 0.6% for this year and 1.5% for 2025.

We have therefore overcome the big problems of the past, but there are still a number of smaller, yet significant problems, such as the speed of justice, red tape, etc.

We still need to do a lot to make Greece resilient. No major things like debt restructuring or bank recapitalisation, but issues that are holding the country back. So, we cannot afford to be complacent.

- What are the exogenous risks?

Wars. We have war in our neighbourhood, in Ukraine and the Middle East, and there are also frictions between the US and China. These tensions have a cost, estimated by the IMF at USD7 trillion, i.e. 7% of global GDP.

This is only the cost stemming from geopolitics and from the trade war that started several years ago, unfortunately; this situation leads to weaker growth and higher prices, i.e. stagflationary pressures.

Meanwhile, the world is moving towards de-globalisation, which is detrimental to global prosperity.

- What are the implications for national governments?

It shows that we need stability, determination and structural policies. The EU took a very good step amid the pandemic, by adopting the NGEU/RRF, with a budget of EUR 800 billion. This should serve as a model. Today we need an RRF for defence and an RRF for climate change.

If the US pulls back from NATO, as Trump threatens, this would entail more defence spending for Europe. This would be overwhelming for any individual country, even more so for countries with little fiscal space or with already large defence spending.

So we are amid an international environment that is much more precarious, much more uncertain, and much more strongly affecting national economies.

- And we also have the US presidential election coming up...

Europe needs to consider all possible scenarios. In my view, that we need is more Europe and a more federal Europe. Currently, there are some EU Member States that want to see risk reduction first and others that instead are in favour of risk sharing first.

My view is: why not do both? Why should each EU Council be a zero-sum game and not a win-win game? In other words, while taking risk reduction measures, also take risk sharing measures.

- Are you referring to the Prime Minister’s proposal for a new Eurobond?

Absolutely. We have the precedent of the EUR 800 billion of NGEU. And this policy must continue, otherwise Europe will fall behind the US and China. When others progress by leaps and bounds, you can’t be slow-paced.

But above all we need more Europe. The Capital Markets Union remains incomplete, and so does the Banking Union, we still lack a common deposit insurance scheme. This is why there has been no cross-border bank consolidation in the EU.

- You have talked in the past about the shadow economy, you estimated it at EUR 60 billion...

I did mention this amount of about EUR 60 billion, and there was a response from the government. The government, the Ministry of Economy and Finance and the Independent Authority of Public Revenue (AADE) have set addressing tax evasion as their no. 1 priority. Combatting it can create fiscal space for more public investment and for targeted social expenditure.

- How do you comment on the JP Morgan report and unwillingness to upgrade the Athens Stock Exchange?

We look ahead. Why should this unwillingness matter? The Athens Exchange is one of the best performers.

On our part, we need to do three things: ensure permanent primary fiscal surpluses of 2% of GDP; push ahead with structural reforms; and make the banking system more competitive and more robust. That is, fiscal stability, structural reforms and financial stability. Once we achieve these, the rest will follow, including upgrades.

- So we should not worry about Moody’s report either?

I’m not worried about Moody’s, nor about JP Morgan. We have a goal and a compass. Greece is a success story, the first-order problems have been resolved, now we need to address a number of smaller, yet significant problems.

When this happens, the upgrades will come, there is no need to worry. Four rating agencies have given us investment grade rating, the fact that a fifth one hasn’t doesn’t mean anything, it’s a matter of time before Moody’s does the same.

- And what about interest rate cuts? You have talked about four cuts by the end of this year.

Our decisions are data-dependent; if incoming data confirm our projections, we will definitely start cutting policy rates in June. The Swiss National Bank has already started. I can tell you that in the US, the Fed’s dot plot suggests that FOMC members, on average, expect three cuts within this year. At the ECB we do not have a similar process.

I talked about four interest rate cuts, I think this would be reasonable, provided that inflation continues to fall. Let’s not forget that our decisions depend on developments in inflation as well as in growth. Inflation is falling in Europe, but so is the rate of economic growth – not into negative territory overall, although this is the case in Germany and France; in the euro area as a whole, growth is about 0.4%, or 0.3%.

- When do you expect that we will we see interest rate cuts?

The consensus is that we will start cutting rates in June.

- Will the ECB start cutting rates before the Fed does?

It is not unlikely. We have no reason to wait until the US moves first; the drivers of inflation in Europe are different from those in the US. The US had implemented a huge fiscal stimulus package to boost its economy, we don’t have something like that. So I think there is currently a stronger case for lowering interest rates in Europe than in the US.

- And one last question: What will happen with the Viva-JP Morgan deal?

This is a business matter, we cannot take sides. For us, these are not matters to be resolved by courts, but rather through win-win negotiations, and we trust that this is what will eventually happen. If it doesn’t, then the courts and the contract will hold the answer.

- A capital increase of EUR 400 million is planned for the end of this month.

For a capital increase to take place, all shareholders must agree. Viva is innovative and we want it to remain so. While maintaining neutrality, we would be willing to broker an agreement, i.e. bringing them to the negotiating table. And it should be noted that there are no supervisory issues involved here, it’s purely a business dispute that of course also reflects on the country, so we have every reason to want to see an amicable settlement.

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