Greek Banks Not Facing Deposit Outflow; Will Eventually Pass Through Rate Hikes to Depositors, Says Official

31 October 2022

By David Barwick – ATHENS (Econostream) – Greek banks faces no particular threat of a substantial outflow of deposits and are expected to eventually pass along to their depositors the interest rate hikes of the European Central Bank, a high-level Greek official assured Econostream.

According to data released earlier this month by the ECB, the average euro area interest rate on new household deposits with an agreed maturity of up to one year rose most recently by 0.9 point to 0.35%, while in Greece, the corresponding figure remained almost unchanged from the previous month at a mere 0.11%.

The disparity has led some domestic observers to fear that, as Greek daily I Kathimerini wrote earlier this month, ‘the risk of a deposits exodus is real.’

The official who spoke to Econostream called such a development however ‘highly unlikely’.

‘In general, we don’t think that liquidity conditions either in Greece or in the rest of the euro area support very aggressive deposit rate increases’, the person said. ‘We expect the increase in interest rates to pass through to deposits here, but gradually.’

The domestic banking system was widely considered to have grown far more resilient, with all systemic banks showing a significantly lower ratio of NPLs, the official noted. Whilst there remained much to do to shore up the sector, the effort was continuing apace, she said.

High inflation, the ability of which to affect Greek banking sector NPL ratios via real incomes is well established, was of some concern in this regard, she said. ‘We don’t know if inflation in the long run will create an extra bulge in NPLs, but inflation is clearly a burden on real incomes’, she said. ‘If the debt servicing ability of households and firms were undermined by higher interest rates and higher prices, this is something we would need to monitor very closely.’

Still, independent observers confirm the considerable progress made by the Greek banking sector, where the government's Hercules Asset Protection Scheme has helped bring about a dramatic decline in the NPL ratio. Fitch Ratings earlier this month predicted Greek banks’ NPL ratio would subside to ‘mid-single digits’ in 2023, albeit with some risk linked to macroeconomic developments.

But even if the euro area as a whole is mired in recession next year, Greek economic growth should hold up at ‘around 2%’, though risks are naturally to the downside, the official said. The forecast, which she called the fruit of Greece’s comprehensive structural reforms, is consistent with that of the government and the central bank, though Greek research institution IOBE sees a somewhat less optimistic 1.6%.

Any rough sledding early next year should quickly give way to renewed improvement as the weather warms and as alternative sources of energy are gradually phased in, the official suggested,

‘We also shouldn’t underestimate the growth prospects of Greece through the RRF [European Recovery and Resilience Fund], which is going pretty smoothly’, she added. ‘Timely and full implementation will support growth in an important way.’

As for higher borrowing costs in the wake of ECB rate hikes, this was not a problem, at least not ‘for the time being’, and there were many compensating ‘positive factors’, the official said.

‘Of course, it depends on how things go, but let’s not forget that the profile of Greek government debt has unique characteristics such that even the higher percentage of borrowing costs is not a burden for us’, she elaborated. ‘Our current profile reflects positive decisions made from 2011 onwards and lets us look with reasonable confidence at the next decade or so.’

‘So, debt sustainability is ensured for a sufficient period of time and that gives us more room to deal with the current headwinds and remain optimistic – cautiously optimistic, but still optimistic’, she said.

Greece is committed to a primary surplus target of 0.7%, the official noted: ‘The draft budget makes very clear that this target has been taken into consideration and will be fully respected.’

The scarcity of liquidity lately in some segments of euro area financial markets ‘needs to be monitored closely and taken into account’, she said. ‘But we should continue doing what needs to be done.’

All in all, the idea that another sovereign debt crisis could erupt is not realistic, the official maintained. ‘On the contrary, I would say that what happens in other countries, like the UK recently, shows exactly how important it is to make the system even stronger.’

In this context, she urged striving for a deeper banking, capital and fiscal union at the level of Europe.