Special feature: Greece

Interview with Prof. Charoula Apalagaki, Secretary General, Hellenic Bank Association

March, 2018

Perhaps we could begin by gathering the historical significance of the HBA and where it stands today?

Prof. Apalagaki: The association was established in 1928, so we are just about to celebrate our 90th anniversary. It is a non-profit entity and the members, regular or associated ones, are the banks. Currently, we have the four significant banks as well as Attica Bank, a smaller Greek bank, and two foreign banks, Citibank and HSBC. This last one has two offices in Athens and their representatives are also members of the board. Additionally, banks such as Deutsche Bank, BNP Paribas and recently ING are all associate partners of the Hellenic Bank Association (HBA), which means they have access to our material and to our Steering banking committees but are not represented in the board of directors.

We are lucky that the recently elected chairman of HBA, Mr. Karamouzis, who is also the chairman of Eurobank, is very engaged and in close cooperation of all BoD members (e.g. the chairman of the Banks) promotes our profile, our activities and finally, the Greek economy. Recently, Mr. Karamouzis held a speech on Monday Oct. 16th (2017) at the Hellenic Observatory of LSE - London School of Economics. HBA represents the banking sector and member banks without interfering in their business regarding. HBA manages all the institutional matters; new legislation, co-operation with the government, parliament and with all the stakeholders in matters having an institutional impact on the banks. We also have direct access and discussions with the supervisors of the Bank of Greece and the Single Supervisory Mechanism (SSM) from the ECB. We recently met with Christine Lagarde in London as well as with Mr. Thomsen during the annual IMF meeting.

2017 has been a good one for the banks. After almost ten years of recession and losses, we have, for the first time, seen remarkable organic profitability, and a very impressive reduction of the liquidity dependency. This emergency liquidity assistance which was at €87 billion has now been reduced to €28 billion, a promising indicator. Nevertheless, the most challenging issue was, and remains, the non-performing loans (NPLs). I can provide you with the up-to-date figures of the NPLs, but I would also like to deliver my personal assessment for the background of NPLs ratio in Greece.

Share with the readers of The Times how the banking sector is tackling this aspect and what opportunities have arisen since the new legislation?

During the financial breakdown in 2009, the NPL ratio in Greece was approximately 8%, which was considered normal. In 2009, parliament wanted to create an umbrella of protection to consumers, but to business entities as well – the small or medium-sized companies which make up the pillar of the Greek economy –. In the previous eight years, we had an economic boom with the associated growth in lending. At that time (breakdown of the crisis), and for the first 2-3 years, it was necessary to provide some protection for the consumer; therefore the law restricted any enforcement measures against the individuals and the small companies. In doing so, we have created the mentality that lending is lending and, even if it is returned late, or not paid back at all, there is no risk because one shall not lose their asset. Unfortunately at that time a moral hazard started. This protection lasted until the end of 2014. Finally at 2014, the government and parliament were conscious to find the appropriate measures to manage the past NPLs, as well as the current ones. This was the first time that the law provided an establishment of a Special Secretary for Private Debt Management. Thus, in 2017, we have one of the best legal frameworks which includes, also, a new law for the secondary NPL market.

The law was drafted in final form at the end of 2015 and provides, in first place, the sale of assets and loans and, secondly, the services agreement. The competent authority to grant the license and supervise the whole activity is the Bank of Greece which, until now has granted seven licenses. By the end of this year the Bank of Greece will have granted 10 licenses for the services agreements. Europe has now started to discuss a regulation on the secondary NPLs market, and since Greece is already prepared for it, we shall proceed with the implementation. In order to so, we need investors who are interested in either purchasing the loans or undertaking the services. The law is in place and the implementation is ahead.

It is very interesting how NPLs, which were considered a burden for banks, now thanks to the new legislation are transformed into investment opportunities. What else is happening on the regulatory front to help the banks recover their health?

Prof. Apalagaki: Secondly, we have out-of-court settlements of business debts. This law is also new. It came into force on the 3rd of August of this year, 2017.The whole procedure is running through an e-platform that is owned by the state and managed by the respective secretary for the private debt. The target is to enable any business entity to arrange all its debt with the state, with the banks, and its own suppliers. Hence, the debtor has to submit the relevant petition, by e-meanings to provide all the required documentation about his financial status, properties and available assets. Following this, a coordinator acts as the bridge between the debtor and the creditors, whereby both sides are asked to make a proposal or a counterproposal. If a conclusion is reached, a contract is then drafted and afterwards has to approved by the court. The company who submits such a request has to be viable because the law aims to grant a further opportunity only to those companies that are viable and are able to continue their activity.

Finally, the e auctions new legislation (law 4472/2017 as recently amended by law 4512/2018) is also in place. This means that we have no outstanding issue regarding the legislation. Everything is in place: sale of loans servicing agreement, e-auctions and out-of-court settlements. The banks have targets and commitments against their supervisor which is SSM. They have to reduce the volume of their NPLs by the end of 2019 by approximately €40 billion. The targets in 2017 have been achieved, and exceeded so there is no doubt that the banks will accomplish this. However, in order to proceed with the ongoing reduction of NPLs some more economic growth and recovery is required to ensure that businesses and individuals are in better positions.

Clearly the new framework is having a positive impact on NPL reduction, which is probably part of the reason why Mr. Paul Thompson himself said that “the stability of the Greek banks is not a concern.” Greek banks have some of the highest capital adequacy ratios in the whole of the Eurozone. Next year 2018, is marked for the ECB to carry out a set of stress tests across Europe. Would you agree that Greek banks are well poised to pass the stress tests without a problem?

Prof. Apalagaki: This is something that HBAs Chairman, Mr Karamouzis also addressed in his statement earlier this week. The stress tests do not consist in a pass or fail outcome. Taking into account that the average capital adequacy of the Greek banks is righer than the average ration in Europe is 16.5, under stress test conditions and even under the adverse scenarios, the Greek banks even if need to strengthen their balance sheets or their capital, they have a reasonable amount of time to do this. It is not the same as the case was at the previous European stress tests from 2014 that were pass or fail. The upcoming stress test has a different approach than in 2014. After carrying out the tests, depending on the result, the ECB will deliver the necessary recommendations measure and specific time frame that need to be taken to ensure the bank’s health. Again, it is not a pass or fail. SSM is very strict. They supervise 128 significant banks in Europe so they have to keep the balance and also consider each bank’s special market conditions.

[As seen in the statement by Mr Karamouzis] Greek banks have high capital ratios. The average is 17.2, but the highest should be 16.3. Their commitment is approximately 40% lower; capitals, NPLs reductions. All the Greek banks returned to profitability after 10 years and have been submitted to three NPL stress tests. The current picture is very encouraging although we have very low recovery in terms of deposits. We have been under capital control restrictions for over two years now. Three days ago the Governor of the Bank of Greece stated that, upon the completion of the whole Greek financial program -assumed to happen by the end of August 2018-, we shall have a further relaxation of the capital control restrictions. The economy has shown a clear recovery and we now all the new legislation is in place.

The new legislation is what has been progressively and successfully discussed over the last few years and just recently implemented, is that correct?

Prof. Apalagaki: Yes, slightly more than two years because the government has had to consult with all relevant institutions and get feedback from the stakeholders as well as the banks. There are still challenges, however, and the investors have to be absolutely sure that their investments are safe. We have to boost the fast-track proceedings of our privatization process and ensure that the laws are in place. We have a very strong bureaucracy in Greece, which affects the flow of foreign investment. But perhaps the biggest obstacle for this is the enormously high tax rates.

More than the Nordic countries whose tax rates are among the highest in Europe?

Prof. Apalagaki: If you take into account that starting from €40,000 income, one has to pay 50% and, additionally 25% for insurance/social security contributions which is mandatory by the State. Our VAT is at 24% and is one of the highest in the Eurozone.

What would you say is the perception of investors today regarding Greece as a lucrative investment destination and how has it evolved over the last few years?

Prof. Apalagaki: The investor perception is much better now than it was in the past. Firstly, because all the reforms that were needed are now in place and secondly, because the Grexit risk has been diffused. The program is about to be completed and the only outstanding matter is the substainability of the public debt and this is to be arranged in the upcoming months as part of the third review. The debt haircut is a political issue, I can express on view on it.

On a personal level, what outcome are you expecting from this?

Prof. Apalagaki: The German coalition is ahead. The SPD (Social Democratic Party of Germany) stated not to participate at such in the coalition. Looking at a country like Germany which has such high financial status, currently the highest in Europe, one third of the population have voted in a reasonable way.

As part of the bailout conditions, the EU had proposed dramatic cuts in government spending, austerity measures that we are referring to now and a target fiscal surplus of 3.5%. What are your views on the ongoing effects of austerity in Greece?

Prof. Apalagaki: It is true that we have austerity measures in place today but, nevertheless, we shall have no further recession. We are about to complete the current year with 1.7% growth and 2018 will be even better with an estimated 2.2% growth.

Regarding the younger generations of Greece, your students, for example, who continue to face the challenge of an unsustainable unemployment rate, the highest in Europe. In your opinion, what fundamental issues need to be tackled first in order to keep Greece’s youth happy and employed in their home country?

Prof. Apalagaki: Yes, the unemployment rate is still very high. Due to the tourism industry booming this year, the rate has decreased to approximately 21% as a result of the seasonal jobs. The rate still remains very high, which consequently results in the youth leaving the country, the so-called “brain-drain.” Although the infrastructure is not the strongest, the quality of education in Greece is still high. People complete their basic studies in Greece before continuing to other European countries for post-graduate studies. At the university level we are happy with the Greek education system. Our universities are included in the first 500 universities in Europe, so they have a good reputation. The students of today are mature enough to stay in the country. They have grown up in the crisis, so their picture is already negative. Once this picture becomes more positive, they will automatically feel happier and safer.

One way to tackle youth employment if there are no jobs is to provide the means for them to be able to become entrepreneurs and create start-ups. The banking sector has been unable to provide the credit for entrepreneurs, SMEs and corporations for years. Has this now changed?

Prof. Apalagaki: The demand for credit is still limited. As individuals, our people have no interest in borrowing money. All the big, corporate loans are being granted but we are missing interest and demand from individuals and SMEs. One has to take into account the bad experience of the past with NPLs. That means that new loans should be at no risk of becoming bad loans very soon. Secondly, regarding the current market conditions, we still need higher investment interest; and furthermore individuals or other entities interested in lending and, finally, one should take into account the new rules, IFRS 9 which means that the banks have to be in line with strict standards. Thus, we have to harmonize and compile three factors which are sometimes in contradiction: a bad experience, our current financial situation and a new regulation. As a member of the European Banking Federation, HBA’s experience from participating in the ongoing regulation in Europe.

Through the participation in EBF, HBA is also represented in various working groups or the other steering committees. We have in Greece similar challenges but in different volumes. Europe is looking after the funding of their small business. T In investments starting from January 2018, the MiFID II shall be in place and this means increased transparency, investment protection and more funding or less funding. The banking sector is over-regulated. There is another very important issue which I would like to highlight, and a good example is the structure of the boards of directors at the Greek banks. Greek banks now meet the highest corporate governance standards because, except for the general directives and rules in corporate governance, they have a specific law which introduced even stricter standards in the composition of their boards.

All the relevant committees of the board of directors: the risk committee, the audit committee and the nomination committee are chaired by foreign experts and not Greeks. This has been foreseen by the law in 2015 and the composition of the boards of the Greek banks have been assessed twice by a third independent appointed by the SSM, and the Hellenic Financial Stability Fund. Indeed, if you live in Greece and you have real day-to-day contact with the reality of the Greek banking system, you shall see that it has been absolutely restructured.

I would now like to invite you to make some concluding remarks, bearing in mind that, through this interview, you have the attention of Britain’s business and investor community:

Prof. Apalagaki: Trust Greece. We have experienced some difficult times, but I am not too concerned about the future. I know we still have some way to go, but at the end I m optimist.