EU approves Greece’s plan to reduce bad loans by 30 bln euros

The European Commission approved on Thursday a Greek plan to reduce bad loans by up to 30 billion euros ($33.04 billion) at the country's banks, as expected, saying it did not violate state aid rules.

Bankers close to the process told Reuters last month that they expected a green light from the EU executive to put in place the asset protection scheme that will help its banks offload the loans.

The scheme, known as Hercules Asset Protection Scheme, aims to bring down the amount of bad, or non-performing, loans which are weighing on Greek banks, without distorting the market through government subsidies.

“The European Commission has found Greek plans aimed at supporting the reduction of non-performing loans of Greek banks to be free of any state aid,” the Commission said in a statement.

Banks in Greece have been working to reduce a pile of about 80 billion euros in bad loans, the legacy of a financial crisis that shrank the country's economy by a quarter. Shedding the bad loans is crucial for their ability to lend and shore up their profitability.

The plan is similar to Italy's GACS model and crafted to help lenders offload bad debt by wrapping it into asset backed securities.

Hercules will involve setting up special purpose vehicles (SPVs) that will purchase the non-performing loans from the banks. That sale would be financed by notes issued by the SPV with a government guarantee for senior tranches, but state involvement will be limited, the Commission said.

“The risk for the state will be limited since the state guarantee only applies to the senior tranche of the notes sold by the securitization vehicle,” the Commission added.

“The state guarantee on the senior tranche will only become effective if more than half of the non-guaranteed and risk-bearing riskier tranches have been successfully sold to private market participants,” it said. [Reuters]