Beware of Greeks bearing gifts was the apocryphal advice one ancient skeptic offered upon seeing the Trojan horse. After years of heavy losses, investors in Greek banks have learned to be similarly wary. Lenders have ambitious plans to shed more than a third of their bad and doubtful debts. But without a clearer idea of what buyers might pay, shareholders have little clarity over how much more pain lies ahead.
Almost eight years since the Greek debt crisis, banks are still saddled with gross dodgy loans worth €101 billion equivalent to half their total lending. Under pressure from the European Central Bank, lenders aim to reduce that to €64.6 billion by 2019, helped by selling loans with a face value of €11.6 billion.
That target is optimistic: banks sold loans worth just €1.8 billion in the nine months to the end of September.
Historically, buyers have been put off by costs, legal risks, and political uncertainty. Better economic growth — GDP is expected to expand by 2.7% this year — and falling bond yields should help.
So could a government plan to expand online auctions of repossessed properties. That will help banks recover the collateral, and could also persuade some defaulters to begin servicing their debts again.
The absence of any big loan sales, however, makes it hard to know whether banks have set aside sufficient provisions to avoid further writedowns. Take Piraeus, Greece’s second-largest lender by assets. Cash provisions cover 70% of the value of its €22.1 billion of defaulted loans. However, throw in €11.7 billion of loans that have been restructured in the past or are at risk of going sour, and coverage drops to a less impressive 46%. To raise provisions to 70% of the entire portfolio, Piraeus would have to set aside a hefty €8.1 billion.
Much distress is already priced in: Piraeus has a market value of just €1.6 billion and trades at less than half its book value. A healthier economy has helped shrink outstanding bad debts by 7.6% from their peak in March 2016, according to Bank of Greece data. But banks will need to offload more loans at decent prices before shareholders can be reassured that they will avoid another mauling.
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)