Greek Banks Start Long and Uncertain Journey to Recovery

http://www.nytimes.com/2015/07/21/business/international/greece-banks-reopen.html

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FRANKFURT — Reopening the doors of Greek banks on Monday was just the beginning.

Restoring trust in the banks, so that customers will be willing to deposit their money again, is one of the most important tasks that Greek and eurozone officials will face as they try to get the economy moving again.

But undoing the damage wrought in recent months will take money and time, as well as agreement among quarreling eurozone nations. And even if Greece and its creditors can reach a new bailout deal, it might not be until next year that Greek banks are stable enough that the government can lift restrictions on movements of money abroad, analysts said.

Greeks’ nervousness about keeping their money in the banks is understandable as long as it is only emergency loans from the European Central Bank that are keeping those lenders from collapsing.

And, unlike in the United States, where federal deposit insurance protects individual bank accounts up to $250,000, there is no adequately financed system to insure eurozone depositors against losses if a bank fails.

European leaders could do a lot to bolster confidence if they declared that they would protect deposits up to 100,000 euros, or about $108,000, in line with new European Union rules that are in the process of being phased in, said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels.

“If you had such an announcement, you could imagine the capital controls being lifted very quickly,” Mr. Véron said, referring to the Greek restrictions on money transfers. If there is no such declaration — and so far there has not been — ‘‘there is every likelihood the capital controls will have to be kept in place,” he said.

Some elements of a rescue plan for Greek banks are beginning to take shape. The European Central Bank, in its role as overseer of eurozone banks, will conduct a review of the financial condition of the four largest Greeks banks around the end of the summer. That is the first step in determining what kind of help they need to survive.

Greek banks passed a similar review last year, but that was before they became collateral damage in Greece’s political and economic turmoil. As businesses have suffered from slumping sales and many people have received only portions of their salaries or pensions, borrowers have fallen behind in loan payments. More than one in three outstanding loans in Greece was delinquent at the end of March, and the number has probably grown since then.

At the European Central Bank’s behest, the tentative bailout agreement between eurozone creditors and Athens provides for up to €25 billion that could be used to replenish bank capital depleted by the surge in problem loans.

The agreement also requires the Greek Parliament to pass laws to bring its rules on bank restructuring into line with European directives. The lawmakers are supposed to take up that measure on Wednesday, as part of the next package of creditor demands.

But as the bailout negotiations resume, assuming they do, there are likely to be disagreements among eurozone members about how much help to give Greek banks. Countries like Germany might argue that Greek bankers should be responsible for their own problems. Some countries may balk at guaranteeing deposits in Greece.

For Greeks, the experience of Cyprus, which shares a language and culture, is not reassuring. When Cyprus banks were on the verge of collapse in 2013, eurozone leaders insisted on a “bail-in” that included seizing money from individuals and businesses with large deposits.

Much of the money in Cyprus belonged to wealthy foreigners. But in Greece, wealthier people and many businesses have already taken their money out. The depositors left behind are Greeks of more modest means or businesses that need to have money in local banks to operate. They are rightly suspicious of whether their money is adequately protected.

“The vital fabric of the Greek economy is in those deposits,” Mr. Véron of Bruegel said. “Bailing them in would be economically counterproductive.”

If the Greek banks can be cleaned up by recapitalizing the ones that can be salvaged and closing down any that cannot, they might be able to borrow money at reasonable rates on the open market and begin to operate normally.

But that process is likely to take well into the fall, and perhaps next year. The European Central Bank is wary of moving too quickly, and if restrictions on money movements are removed before confidence has returned, there is a risk of a bank run.

“The awareness that capital controls are hampering the recovery of the Greek economy is there,” Mario Draghi, the European Central Bank’s president, said last week. “The idea is to move as fast as we can, but also with a due degree of caution.”

In the meantime, Greek banks are dependent on the central bank for the cash they need to operate.

Last week the central bank increased its emergency lending to Greek banks by €900 million, allowing the banks to reopen. The central bank’s policy board, the Governing Council, is expected to confer by telephone this week to discuss possible further increases — if the government continues to stick to conditions dictated by creditors.