A Shifting Landscape
In October 2014, the European Central Bank concluded a year-long assessment of the balance sheets for Europe’s 130 largest banks, known formally as the ‘Comprehensive Assessment’. It revealed a cumulative capital shortfall of €24.6 billion euros among 25 of the euro areas’ largest lenders under ‘adverse’ circumstances. Three out of four of Greece’s largest banks failed to meet the capital requirements imposed by the ECB. While this did not come as a surprise considering the country’s financial troubles, the outcome was in fact less alarming than it would at first seem. Taking capital accretion and projected future earnings into account, only one of the three failed Greek banks were actually expected to fall short in such a scenario – and even then only by a small margin.
However, neither the banks nor the ECB could have anticipated the drastic shift in the political climate signalled by the rise to power of the anti-austerity Syriza party. Its uncompromising stance on the bailout programme coupled with the promise to halve Greece’s debt has frightened many investors. Over 20 billion euros (12 percent of Greek GDP) has already left the country since December. In mid-January, Eurobank and Alpha Bank, Greece’s third and fourth largest banks, sought access to emergency funds from the national central bank. This type of funding, known as emergency liquidity assistance (ELA), is made available to borrowers at a much higher interest rate: 1.55 percent compared to 0.05 percent for ordinary lending. As such, this type of financing is only meant to act as a short-term liquidity bridge, rather than address persistent structural problems such as those facing the Greek banking system.