European banking authorities have yet to rule on whether the bonds to be issued as part of the Hercules Asset Protection Scheme will have a zero-risk weighting in a crucial detail for the proposal aimed at helping Greek lenders manage bad loans.
The Greek government and the Bank of Greece have submitted detailed technical proposals to the Single Supervisory Mechanism (SSM), supporting the need for the bonds to carry zero risks and a response is expected.
As reported previously by Business Daily, the European Central Bank (ECB ) and SSM have objected to this part of the plan. They argue that Greece needs to commit cash from its buffer, that exceeds 30 billion euros, for the state-backed bonds to be considered risk free.
Officials in Frankfurt highlight that this is necessary because the country's debt rating is below investment grade. Some at the ECB, however, are more supportive of Greece's position. Regardless of the outcome, the issue must be solved immediately so that Greek lenders can start taking advantage of the Hercules program.
In a meeting between Greek Prime Minister Kyriakos Mitsotakis and ECB head Christine Lagarde in December, the two looked at how the central bank could allow Greek lenders to offload non-performing loans (NPLs) without the Greek state pitching in with extra money.
If the ECB stands firms on the issue, then Greek banks will have to up provisions for bad loans, in a move that will require further capital. This issue has been left unresolved as the Hercules plan had been submitted and approved to European competitions watchdog DG Comp without the necessary talks being held with the ECB.
In initial comments on the Hercules plan, the ECB hinted to communications being poor in the relevant process, stressing the need for essential and timely negotiations with all relevant parties, including supervisory authorities.
Banking officials highlight to Business Daily that plans for large bad loan securitizations to be done via Hercules hinge on the assumption that the risk attached to the state-backed bonds will be zero.
If the SSM insists that the state-backed bonds, reaching 12 billion euros, carry risk then the impact on the balance sheets of lenders will be significant. This scenario also basically means that the Hercules will not be used, bank officials add.
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