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Doubts and delays on Hercules plan overshadow bank gains

Although the Hercules proposal has been by cleared by DG Comp, the ECB's Single Supervisory Mechanism (SSM) has raised a series of objections on it, with the most important one being that it cannot place a zero risk weighting on securitizations backed by a state that does not have an investment credit grade.

Greece's bank share index may be at a year high on the back of a positive outlook for the sector but the government's Hercules plan to help lenders reduce bad loans remains an unknown factor.

The market appears to be discounting a successful outcome to the plan, however, a series of technical issues, which can have a drastic effect on the balance sheets of lenders, have not been resolved with final decisions resting with the regulator, the European Central Bank.

Although the Hercules proposal has been by cleared by DG Comp, the ECB's Single Supervisory Mechanism (SSM) has raised a series of objections on it, with the most important one being that it cannot place a zero risk weighting on securitizations backed by a state that does not have an investment credit grade. The problem this causes banks is that if no zero-risk weighting is attached to the securitizations then participation in the plan will be too costly for them. 

As unveiled by Business Daily, the SSM has called on Greece to provide cash to support the zero risk assessment in a demand that is very unlikely to be met by the Greek government. This issue arose after the plan had been approved by DG Comp, as Business Daily unveiled a lack of communication between Deputy Finance Minister George Zavvos, who is overseeing the plan on behalf of the state, with the ECB and the banks affected by the scheme.

Since then, the Bank of Greece has become more involved after having been sidelined initially in the process, in a bid to hammer out a solution and make the Hercules plan work.

Officials indicate that the SSM's demand for cash collateral seems excessive, but add that the bank regulator may not insist on this term, particularly after Greece was recently upgraded by credit rating agency S&P. On the other hand, officials highlight that it is very unlikely the securitizations will carry a zero risk weighting given the country's rating and that extra collateral will be needed.

Banks are seen ultimately participating in the scheme but to a limited degree, meaning that fresh initiatives will be required to reduce nonperforming loans that will not weigh on balance sheets.

Officials are waiting for the final version of the Hercules proposal amidst delays in plans to reduce bad loans. The deal between Eurobank and Pimco has been set back due to complications with the Hercules plans, while a draft bill on the scheme has been pushed back to the end of November, from the initial October date set by the government.

YANNIS PAPADOGIANNIS

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