Policy change called for
As the credit crisis continues unabated, threatening to rock Wall Street giant Lehman Brothers soon after the Bear Stearns crisis and spill over into European economies, Greek bankers have to make a tough choice to tighten up their credit policies, especially in Southeast Europe, in order to make loan growth compatible with the availability and cost of funding. Greek bankers have been watching their shares fall sharply as foreign hedge funds and other institutional portfolios unload their stocks for various reasons. Leveraged investors are doing so to reduce the risk in their portfolios, others to lock in profits and others because they see worse days ahead. Yet, bankers and analysts at respected international investment houses continue to advertise the advantages of Greek banks. They stress the seeming lack of so-called toxic assets in their portfolios such as collateralized debt obligations (CDOs), U-mortgage-backed securities and other derivatives. These financial instruments have seen their theoretical prices drop nearly 20-40 percent of their face value, forcing large banks to undertake huge writedowns and seek capital injections to keep them afloat. They point out that Greek banks operate in countries where both consumers and corporations are under-leveraged as regards the ration of consumer and corporate credit to gross domestic product (GDP). Greece’s household and corporate debt does not exceed 80 percent of GDP when per capita income is well above $30,000. Also, they argue that the real estate sector is not facing the severe strains seen in other countries, such as the US, UK and Spain to represent a major threat to the local economy. They also point out that total private sector debt is much lower in the Southeastern European countries, where large local banks have a strong presence but per capita income is also much lower. Of course, all Greek banks are not the same. Those banks that can fund their loan growth using their own deposits are better positioned than others that have to resort to other means, including private placements of their bonds or paying very high rates on time deposits, because their loan book far exceeds their savings base. The argument of in-line or even cheaper valuations compared to their European peers has also been stated by the analysts of international banks who issue «buy» recommendations. Still, looking at the beating taken recently by Greek bank shares, sellers have not been buying the arguments, however valid, so far. Although they expect credit growth to further slow down in Greece as the economy grows at a lower clip, they are voicing strong concern about Greek banks’ bastion of growth. By talking to some of the hedge fund managers, one gets the impression that what appears to be making the difference is their perception that some Southeastern European countries, such as Romania, are about to go belly up. This is contrary to what some economists working for large Greek banks, and who cover the region, are claiming. They warn of overheating – namely that fast growth will give rise to inflation. Of course, time will show who is right. In the meantime, Greek bankers are learning that financing even the softer credit growth rates at home and abroad may threaten their profitability. Of course, they can always turn to consumer credit and small and medium-sized companies, where interest rates are much higher but the risk of approving what may be bad loans increases. Since the credit crisis is continuing and the European Central Bank (ECB) is making the borrowing criteria stricter from its repo auctions effective February 1, 2009, Greek banks have no choice but to balance their funding requirements with credit growth rates and profitability targets. Given that profitability is the outcome of the interaction between funding and credit growth, the next logical move is to toughen up lending criteria, especially in their Southeastern European subsidiaries, to guard against an unwelcome rise in loans in arrears, which would threaten the quality of their loan books. It should be noted that there are no historical records to judge the behavior of borrowers in those countries that favor such a move. The fact that credit growth in these countries is not self-funded works against this as well. Usually, Greek depositors fund loans in these countries, although any large private bank also relies on local depositors and international markets to fund its loans. All in all, the top Greek bankers cannot ignore either the message being sent by hedge fund managers nor the effects of the protracted credit crisis on their funding. Stricter credit policies appear to be the necessary answer.
