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Victoria Mindova

The PSI process (Private Sector Involvement) and the full involvement of banks in the bonds buyback, which is currently underway in the financial system, has cost around 30 billion euro, states Paul Milonas, who is a general strategist at the National Bank of Greece. He also stresses that this amount corresponds to the level of aid that banks will receive to recapitalize. "The need for recapitalization of banks is due only to the blow struck by the restructuring of the external debt," the banker is adamant.

Milonas says that after the last two and a half years, the Greek banking system has lost over 30% of its deposits. He explains that the amount of deposits transferred abroad is approaching 100 billion euro. "So far, there is no other advanced country that has lost such a large volume of deposits in such a short space of time as Greece." However, Milonas insists that the outflow of deposits is a manageable consequence of the crisis. The haircut of the nominal value of government bonds has created the most severe problem for financial institutions.

Milonas states that an additional factor that has put banks in a difficult position is the lack of access to international capital markets. They have lost around 30 billion euro due to the lack of access to free borrowing. In addition to the problems created by the crisis, Milonas stresses that the European system is further hampering the survival of the Greek banking system by pressing it to reduce its dependence on it.

The difficulties continue with the problems posed by the loans "in the red." 20% of the banks' loan portfolio is not served and this trend will continue for at least a year and a half or two, if there is growth in the second half of 2013. "A bank cannot exist when it has no capital."

Paul Milonas expresses concerns associated with the method by which the banks will be saved. "Given that we take state aid, we are no longer independent banks." The positive side of the new system of supervision of the banking system is that Greek banks must submit a viability plan, which they must defend in Brussels every three months.

Each Greek bank receiving financial aid from European Union funds will have an appointed supervisor to monitor the proper execution of work. "This could be very beneficial for us, because the presence of external control can relieve us from various pressures," Milonas said in connection with the informal fears of some bankers that after the partial nationalization of banks, political parties will not allocate the funds on the basis of market economy principles.

Bankers in Greece deliver clearly the message that the recapitalization of the financial system is as needed as artificial respiration in the resuscitation of a man. In this regard, Theodoros Kridas of Attica Wealth Management states that the recapitalization funds cannot be expected to provide liquidity to the real economy, or at least not to the extent securing sustainable levels of funding in the market. "Currently, banks are trying to ensure the stability of the system and not to finance the loan policy of the financial sector."

Alpha Bank’s chief economist Michalis Mazourakis shares the same opinion as Kridas and states, "The recapitalization does not offer opportunities for new lending. What can help restore lending is deposits." He believes that the solution to the Greek problem lies in three words - confidence, liquidity and growth. These three words according to Mazourakis interact in the following way: "There is no way to reach economic growth if there is no market liquidity. Liquidity, in turn, cannot come until Greece restores the confidence of the capital markets and the international investment community."

He stresses that many investments have not been made in the country because of the fear that the drachma would return. The proper fulfilment of the obligations under the bailout agreement can help Greece restore the lost confidence. However, it is crucial for the country to find free access to international financing and to start producing primary budget surpluses as quickly as possible.

Mazourakis is clear that international lenders should stop focusing on debt sustainability. Instead, they have to provide incentives for the government to reset its budget deficit as soon as possible. "You know that the statement of 120% of GDP sustainable debt in itself is absolutely ungrounded." He said that the current actions to reduce the debt were only increasing unemployment. His estimates suggest that if the economic policies pursued so far continue to be implemented, unemployment in 2014 will exceed 28%. "It does not matter how low the debt will be when unemployment reaches similar levels," said Mazourakis.

The key step the government must take along with the fiscal consolidation in order to restore the country's economic growth is to trigger the privatization and the large public projects that have been in the state development plan for years. The government should ensure more effective use of European Union funds, return at least part of the VAT due and make payments to the private sector.