Greece Deal Will Take Time to Reach Banks

By Charles Forelle 

        ATHENS--Greece has a deal. But don't take it to the bank quite yet.
        The country's frozen financial system, battered by bad loans and fleeing depositors, will need major surgery to get back on its feet again. The period of convalescence will be a further drag on an already reeling economy.
        It will take a few days at the least for banks to offer even limited service beyond the small cash withdrawals that account holders and pensioners are permitted. A full lifting of the capital controls that prevent money from flooding out of Greece could take months or more, analysts and bankers say. Meantime, they say, credit to businesses and households is likely to remain severely restricted.
        Greek banks have been closed since the European Central Bank froze their emergency funding on June 28, and the finance ministry said they would be shut at least through Wednesday. Without access to funding from private investors or banks outside Greece, the Greek banks have been running down their small cash piles. They have enough remaining to continue permitting ATM withdrawals at the current rate of EUR60 a day through Wednesday, a banking official said.
        This person said that the banks could be ready to open as soon as Thursday if the ECB agrees to increase the emergency funding, known as ELA. The central bank had stopped granting additional ELA after negotiations over extending Greece's bailout program fell apart and Greek Prime Minister Alexis Tsipras called for a popular referendum.
        Monday morning's deal between eurozone leaders sets the stage for a new bailout program and appears also to clear the way for the ECB to restart ELA. French President Francois Hollande said Monday that he expects the ECB to do so, provided that finance ministers can come up with some kind of bridge loan to Greece quickly while a full bailout package is negotiated over a span of weeks. Greece owes EUR3.5 billion, plus interest, on a bond held by the ECB that falls due next Monday. It needs fast aid to make that payment.
        "That was the indispensable condition, but it will take a few days," Mr. Hollande said. The ECB's governing council has a regular meeting Thursday and will convene for a dinner on Wednesday.
        But, the banking official said, when they open, banks would only be able to offer some services, such access to safe-deposit boxes, and limits on withdrawals would persist. It is difficult to say how long they would last, and the answer will depend on how great is the pressure to pull out cash and how willing is the ECB to replace departing cash with emergency loans.
        In Cyprus, which had a bailout in 2013, capital controls were gradually lifted after the banking sector was shut but remained in some form for two years. Iceland, which had a massive banking crisis in 2008, is preparing only now to lift them.
        Restarting some limited emergency funding helps with one of the banks' key problems--that they can't get cash to give to deposit holders. The other problem is that their loans and other assets have likely slumped in value during the months of turmoil and the weeks of closure. Much of the banks' assets are loans to Greek companies and households, and rates of arrears have been rising alarmingly.
        At least some of the country's four major banks will likely need to be recapitalized to repair their damaged balance sheets. The agreement reached by eurozone leaders provides for as much as EUR25 billion in bank-recapitalization aid.
        It won't arrive instantly: eurozone leaders are insisting that Greece push some reforms through parliament before money is disbursed. "It seems we've taken a big step forward, but they need Greece to materially pass some laws," said Regina Argenio, an analyst at Standard & Poor's.
        The eurozone leaders' statement said the ECB would perform a stress test of the Greek banks "after the summer" and determine how much fresh capital is needed. The creditors also insisted that Greece put in place by next Wednesday a directive that sets protocols for the handling of failed banks.
        The coming stress tests suggest that credit in Greece will remain severely constrained--banks have the incentive to trim their loan books, not expand them. What will ultimately happen to the banks depends strongly on whether the Greek economy can recover and confidence can return, so that losses on loans are moderated.
        Alberto Gallo of Royal Bank of Scotland in London estimates that in a "stressed" scenario, in which losses on loans are high, shareholders and subordinated bondholders of the banks would be wiped out--and to avoid imposing losses on depositors and senior bondholders, the weaker two of the four banks would have to be merged into the stronger.
        "We think EUR25 billion will be enough, just not enough for all banks," Mr. Gallo said. "It's very likely there could be a consolidation here."
        Brian Blackstone and Matthew Dalton contributed to this article.
        Write to Charles Forelle at charles.forelle@wsj.com
        (END) Dow Jones Newswires

        July 13, 2015 14:29 ET (18:29 GMT)

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