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JP Morgan: What are Greece’s plans for NPEs, bad bank and funds

The quality of the Greek banking sector’s assets, a bad bank scenario, deferred tax claims (DTC) and the chances of dilution were at the forefront of JP Morgan’s teleconference with investors and Spyros Pantelias, head of financial stability at the Bank of Greece.

With the key scenario for the economy now being the significant shrinking GDP and the uncertainty likely to remain for the immediate future, it is not surprising that the Greek banks are facing the risk of a new wave of NPEs. However, the main conclusion from the conference call is that this period, no matter how great the challenges, may be an opportunity to address the issues of the industry more quickly, provided that those interested can work out the required solutions.

The creation of a bad bank is at the heart of these discussions, along with the possible amendment of Greek law on deferred tax claims (DTC).

The main points that emerged from the conference call are:

The NPEs are expected to rise from 2019 levels: the transfer of payments is only a temporary relief. With a significant reduction in GDP for 2020, it is not surprising that the remaining NPEs of Greek banks may rise from the level of €69 bn in 2019.

Discussions about the bad bank are in the midst of concerns about Covid-19. BoG insists that the problem of the quality of assets of Greek banks must be addressed as soon as possible. While the introduction of the Hercules Program (HAPS) was an important first step, it may not be enough to address the magnitude of the problem in the current environment. Capital structure is a key question for the bad bank proposal: the main feature of a bad bank is that it is a central entity in which banks transfer their NPEs and therefore see immediate relief. This is a key difference with the current HAPS model, which is based on multiple SPVs (one for each NPEs title), with shipping rates ultimately determined by private investors. JP Morgan also notes that previous examples of bad banks (the Spanish Sareb and the Irish Nama) involved state involvement which allowed for profound price cuts.

Amendment of the law on deferred taxation (DTC) is desirable: from 2018, the initial proposal of the BoG also highlighted the need to address the issue of deferred tax claim which is an important part of banks’ core CET1 funds and involves risks of impairment of the participation of existing shareholders (dilution), in case of accounting losses.

Original Source: Euro2day

Adaptation/Summary: Kiki Athanasiadis

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