European Central Bank President Christine Lagarde is backing the creation of national bad banks to absorb bad debt amid growing concerns about a new generation of troubled loans in the eurozone due to the coronavirus crisis, as the Bank of Greece submits to the government its proposal for the creation of a bad bank.
Although the plan for a bad bank in the eurozone, as being examined by the ECB, remains frozen due to objections from Germany and other northern countries, from what Christine Lagarde said on Monday in comments to the European Parliament's Economic and Monetary Affairs Committee, it can be seen that there has been significant progress in discussions between the ECB and the Commission to facilitate the establishment of bad banks at a national level, ie in those countries with serious problem with non-performing loans, such as Greece.
As the head of the ECB pointed out, discussions have progressed significantly in both the European Commission and the ECB on the establishment of Asset Management Companies (AMCs) at national level, but also on the strengthening of AMCs in countries where they already exist. Asked about the Bank of Greece’s, Lagarde referred the issue to BoG Governor, Yiannis Stournaras.
The ECB's Single Supervisory Mechanism (SSM) provides strong support for national bad banks for eurozone countries facing the most serious NPL problems. Asked in early June, SSM head Andrea Enria said it was too early to talk about a bad bank at the eurozone level, as it was unclear how many troubled loans the coronavirus crisis would leave with banks. He stressed, however, that he finds the bad banks that have already operated nationally to be very useful, noting the example of Spain and stressing that, in many cases, these schemes have ended up making profits from the management of bad loans.
The positive mood at the European level for bad banks is not unrelated to growing concerns about the negative scenarios concerning fresh bad debt that may result from the coronavirus crisis amidst rising cases and increasingly stringent restrictive measures being introduced by governments, with serious negative consequences for the economy.
In an unfavorable scenario, where the European economy will not be able to recover in 2021, the ECB forecasts see NPLs rising to 1.4 trillion. euros, ie much higher than the level of 1 trillion. euros, which they had reached in 2014, after the financial crisis. For this scenario, which seems far away at the moment, the ECB has considered plans for a bad bank in the eurozone, with support from the European Stability Mechanism (ESM), as revealed by Reuters. But before considering this scenario, which will require a very difficult political debate by governments, it seems that the solution of national bad banks may be approved, even from Germany.
The dynamics that are developing in European circles in favor of the national bad banks support the Bank of Greece plan, which is expected today to be sent to the Prime Minister’s office ahead of expected talks between the government and the country’s systemic banks.
Up until recently, there were objections to the BoG plan amidst concerns that the proposal would clash with the Commission's Directorate-General for Competition and that the issue of state aid to lenders could not be overcome.
The positive climate in the European institutions seems to dispel such objections, while the Bank of Greece, as it appears from recent statements by Stournaras, took these concerns very seriously during the preparation of its plan and came up with a proposal that ensures that all losses will eventually remain with banks and not have to be borne by the state.
In particular, the BoG favors the gradual recognition of the losses arising from bad loans (the difference between the loan value on their books and the lower value it will have when transferred to the bad bank), while the deferred tax claims from the state will be activated when losses occur. This way, an attempt is made to find a point of equilibrium, where the banks avoid booking large losses, which would lead to a need for capital hikes, while the state would also avoid offering state aid to the banks.