Study on the financial sector in Greece during the economic adjustment programmes: 2010-2018 Final Report Written by Oskar Andruszkiewicz and Juliette Mathis (ICF), Charu Wilkinson (ICF Associate), Michalis Vassiliadis, Peppas Konstantinos and George Gatopoulos (IOBE) June 2020 EUROPEAN COMMISSION Directorate-General for Economic and Financial Affairs Directorate L — Treasury and financial operations Unit L.2 — Treasury and Asset Management Contact: Ludmila Nola E-mail: [email protected] European Commission Europe Direct is a service to help you find answers to your questions about the European Union. Freephone number (*): 00 800 6 7 8 9 10 11 (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). LEGAL NOTICE The information and views set out in this study are those of the authors and do not necessarily reflect the official opinion of the European Commission. The European Commission does not guarantee the accuracy of the data included in this study. Neither the European Commission nor any person acting on the European Commission’s behalf may be held responsible for the use which may be made of the information contained therein. More information on the European Union is available on the Internet (http://www.europa.eu). Luxembourg: Publications Office of the European Union, 2020. PDF ISBN 978-92-76-22204-0 doi: 10.2765/403158 KC-02-20-737-EN-N © European Union, 2020 Reproduction is authorised provided the source is acknowledged. For any use or reproduction of material that is not under the EU copyright, permission must be sought directly from the copyright holders. Study on "The financial sector in Greece during the economic adjustment programmes: 2010-2018 Table of Contents List of abbreviations ........................................................................................... 1 Abstract ........................................................................................................... 4 Executive summary ........................................................................................... 5 1 Introduction ...............................................................................................12 1.1 Context, scope and purpose of the study .................................................12 1.2 Structure of this Report .........................................................................14 2 Greek banking sector prior to and at the outset of the crisis .............................15 3 Main findings ..............................................................................................20 3.1 Diagnosis of the financial sector at the outset of the crisis .........................20 3.2 Liquidity of Greek banks and measures to maintain it ...............................28 3.3 Solvency of the Greek financial sector .....................................................36 3.4 Non-Performing Loans (NPLs) ................................................................72 3.5 Governance aspects of the Greek banking sector ......................................85 4 Conclusions .............................................................................................. 108 4.1 Study question 1 ................................................................................ 109 4.2 Study question 2 ................................................................................ 110 4.3 Study question 3a .............................................................................. 110 4.4 Study question 3b .............................................................................. 112 4.5 Study question 4a .............................................................................. 113 4.6 Study question 4b .............................................................................. 113 4.7 Study question 5a .............................................................................. 113 4.8 Study question Q5b ............................................................................ 114 Annex 1 Methodological approach .................................................................. 116 Annex 2 List of completed interviews ............................................................. 123 Annex 3 List of reviewed documentation ......................................................... 125 Annex 4 Summary of desk review on diagnostic work conducted by the BoG, EC, ECB and the IMF ............................................................................................. 131 June, 2020 Study on "The financial sector in Greece during the economic adjustment programmes: 2010-2018 List of abbreviations AMC Asset Management Company AQR Asset Quality Review BIS Bank of International Settlement BoD Board of Directors BoG Bank of Greece BoP Balance of Payments bps Basis Points BRRD Bank Recovery and Resolution Directive CAC Collective Action Clause CAR Capital Adequacy Ratio CEPS Centre for European Policy Studies CET Common Equity Tier CFM Capital Flow Management CPI Consumer Price Index DG ECFIN Directorate-General for Economic and Financial Affairs DG FISMA Directorate-General for Financial Stability, Financial Services and Capital Markets Union DSA Debt Sustainability Analysis EA Euro Area EAP Economic Adjustment Programme EBA European Banking Authority EBRD European Bank for Reconstruction and Development EC European Commission ECA European Court of Auditors ECB European Central Bank EEF European Economic Forecast EFF Extended Fund Facility EFSF European Financial Stability Facility EFSM European Financial Stabilisation Mechanism EIB European Investment Bank EIU Economic Intelligence Unit ELA Emergency Liquidity Assistance ELSTAT Hellenic Statistical Authority EPU Economic Policy Uncertainty index ESM European Stability Mechanism EU European Union EUI Economic Uncertainty Index 1 June 2020 Study on "The financial sector in Greece during the economic adjustment programmes: 2010-2018 EUR Euro Area Currency EZ Eurozone FBB First Business Bank FSR Financial Stability Review FT Financial Times FTSE Financial Times Stock Exchange GGB Greek Government Bond GLF Greek Loan Facility GDP Gross Domestic Product HAIC Hellenic Association of Insurance Companies HBA Hellenic Bank Association HDIGF Hellenic Deposit and Investment Guarantee Fund HFSF Hellenic Financial Stability Fund HKKS Hardouvelis, Karalas, Karanastasis and Samartzis IEO Independent Evaluation Office IIF International Institute of Finance IMF International Monetary Fund LAMC Loan Asset Management Company MFS MacroFinancial Stability MoU Memorandum of Understanding MPIR Monetary Policy Interim Report MPR Monetary Policy Report NBG National Bank of Greece NPE Non-Performing Exposure NPL Non-Performing Loan OECD Organisation for Economic Co-operation and Development OMO Open Market Operation PIIE Peterson Institute for International Economics PIICS Portugal, Ireland, Italy, Cyprus, Spain PSI Private Sector Involvement QREA Quarterly Report on the Euro-Area RFA Relationship Framework Agreement RoE Return on Equity SBA Stand By Agreement SDW Statistical Data Warehouse SEE South Eastern European SME Small or Medium-sized Enterprise 2 June 2020 Study on "The financial sector in Greece during the economic adjustment programmes: 2010-2018 SMP Securities Markets Programme SSI Systemic Support Indicator SSM Single Supervisory Mechanism TA Technical Assistance USD United States Dollar WB World Bank WEO World Economic Outlook 3 June 2020 Study on "The financial sector in Greece during the economic adjustment programmes: 2010-2018 Abstract The three Economic Adjustment Programmes (EAPs) implemented in Greece over the period 2010-2018 aimed at stabilising the financial sector on the short-term and restore the growth prospects and the country’s capacity to finance itself fully on the financial markets (fiscal sustainability) in the medium and long run. During this time, the financial sector in the country saw a major restructuring including three rounds of recapitalisations and resolutions for which the total of EUR 75 billion were assigned and extensive conditionality designed. This study provides an independent assessment of number of aspects addressed under the three programs including the risk diagnostics of the Greek banking sector that underpinned the design of the first program, issues surrounding liquidity of the Greek banks, the design and implication of the Private Sector Involvement (PSI) for the Greek financial sector and subsequent recapitalisations and resolutions of Greek banks, as well as reasons for persistently high NPLs and the reforms of the corporate governance of the Greek banks brought by the programs. The study draws on evidence gathered through a mixed-methods approach, comprising both quantitative and qualitative research techniques. 4 June 2020 Study on "The financial sector in Greece during the economic adjustment programmes: 2010-2018 Executive summary European Adjustment Programs (EAPs) and the financial sector in Greece Three Economic Adjustment Programmes (EAPs) were implemented in Greece over the period 2010-2018. The three programmes consisted of providing loans to Greece in light of the financial difficulties it was facing, conditionally on the implementation of policy measures. The basic underlying implicit ideas behind the programmes were: (i) to avoid the default of a Euro-Area member in light of the perceived contagion risks to other euro- area countries and systemic risks to the financial system; and (ii) to temporarily finance budgetary