Wednesday, March 1: Hellenic Financial Stability Fund

The HFSF is an organization established by the EU, European Central Bank, and International Monetary Fund (often referred to together as the “troika”) to help stabilize the Greek banking sector. It performs a number of functions in pursuit of this goal: supporting commercial bank recapitalization (acquiring bank shares and injecting bonds or cash in return), outlining and monitoring corporate governance reforms at the banks, supporting deposit insurance, and helping to resolve non-performing loans (NPLs), which refer to loans that individuals or businesses stop paying back. The HFSF is slated to run until June 2020, when the banking sector will hopefully be transitioned back to full private ownership.

[Note: Understanding the Greek debt crisis involves learning a lot of jargon! Check out this BBC article, “All Greek to you? Greece's debt jargon explained,” for an overview of key terms.]

Our discussion largely centered on how the Greek banking sector has been impacted by the sovereign (government) debt crisis and the role the HFSF has played in maintaining the viability of banks. Mr. Tourret explained that because Greek commercial banks were underwriting a large portion of the government debt, the sovereign debt crisis also quickly became a commercial banking crisis. The banks accepted significant haircuts (debt reductions) to alleviate the dire government debt situation in the early years of the crisis. This led to a huge capital shortfall and threatened financial system collapse.

After this debt reduction, the HFSF managed the first round of recapitalization needed to support the banks, utilizing troika funding. Secondary challenges then emerged, in which Greek NPL ratios rose to >30% and political instability triggered significant capital flight, with Greeks pulling EUR 40 billion out of the banking system in 6 months. The HFSF organized another two rounds of recapitalization in 2014-2015, gathering private sector support and administering emergency liquidity funds provided by the ECB. At the same time, the government introduced restrictive capital controls (limits on how much cash individuals could withdraw from their bank accounts) to stem the flow of money leaving the country. The HFSF also managed banking sector reorganizations, consolidating stable accounts into four large, financially viable banks (in which the HFSF holds minority shares), and closing others that could not be returned to solvency.

Mr. Tourret’s presentation was extremely informative and added to our understanding of the crisis and its effect on specific sectors. Two of the most interesting insights for me were:

• • Political instability led to financial sector instability. Mr. Tourret emphasized the extent to which the uncertainty that accompanied multiple elections and a referendum on austerity has impacted commercial bank viability. This uncertainty has increased the perception of risk among private investors who may want to purchase bank shares. It has also encouraged Greek depositors to continue pulling their money out of the banking system for fear of its collapse.

  • Current capital controls are constraining corporate growth. As restrictive as capital controls can be for individual citizens, they also cause extreme challenges for businesses. All large corporate transactions with overseas counter-parties require approval from the government. This creates an inhospitable environment for starting new businesses or attracting foreign investment. It also discourages Greeks from investing in domestic enterprises. Getting the financial sector on stable enough footing to lift capital controls will be key to jump-starting investment and job growth.