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Banks shunned by international lenders

By David Oakley in London, Kerin Hope in Athens and Ralph Atkins in Frankfurt

Published: February 10 2010 20:16 | Last updated: February 10 2010 20:16

Greek banks have been virtually shut out of the international lending markets in the past fortnight as confidence in the country’s economy has collapsed.

In spite of a sharp rally in Greek stocks and bonds, amid hopes of a European rescue plan, the squeeze on lending highlights the scale of the crisis over the country’s public finances.
Some strategists point to the collapse of the Icelandic banks, which simply ran out of money shortly after the fall of Lehman Brothers in September 2008, as a warning of what could happen to Greece.
Gary Jenkins, head of fixed income research at Evolution, said: “The absolute number one core lesson every economist and investor should learn is: cash is king. Without access to cash or liquidity, you are bust. Without European Union support, it is quite possible Greece, as well as its banks, will run out of money.”
Don Smith, economist at Icap, the interdealer broker, added: “Credit worries relating to Greece have grown to the extent that international banks appear to have severely reduced lending to Greek banks.”
Since the middle of January, lending to the country’s four leading banks, National Bank of Greece (NBG), EFG Eurobank, Alpha Bank and Piraeus Bank, in Europe’s interdealer markets, which sees a daily turnover of €330bn ($453bn, £290bn), has been cut to a trickle.
The banks can borrow only in the repurchase markets, which means that they must use government bonds as collateral to raise money. They have been completely frozen out of the unsecured markets.
That has forced the Greek institutions to raise money at punitive interest rates through private deals with international banks, say bankers. NBG, Greece’s largest bank, is suffering less than the three other lenders. NBG’s loan to deposit ratio is under 100 per cent – boosted by its fast-growing Turkish subsidiary Finansbank. The three other banks last year gradually cut their loan to deposit ratio to below 110 per cent.
Until about 10 days ago the liquidity squeeze had appeared manageable, a Greek banker said. But as markets ratcheted up pressure on the country’s bond market, problems mounted. Looking ahead it helps that the Greek banks have a smaller amount of wholesale maturities to cover this year, estimated at €4-5bn, he said.
However, there is also a danger that Greek government bonds might become ineligible for use as collateral for borrowing at the European Central Bank. This would close down another avenue for funding. Greek banks have borrowed more than others from the ECB – 8 per cent of their total assets. German banks, for example, have only borrowed 2.9 per cent of their assets.
Greece has seen its ratings reduced to triple B plus by Standard & Poor’s and Fitch, which takes them below the minimum credit requirement for collateral once the ECB tightens lending rules at the end of this year.
Prior to the global economic crisis, an A minus credit rating was the minimum requirement for collateral. The threshold was reduced to triple B minus after the collapse of Lehman Brothers in September 2008 paralysed markets but the ECB has said that the lower standard will only apply until the end of 2010.
The Athens stock exchange closed 2.37 per cent higher on Wednesday. Greek bond markets saw 10-year yields, which have an inverse relationship with prices, fall nearly half a percentage point to 6 per cent.

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