Greek Banks Face Contingency Plans as Crisis Threatens

Schaeuble Suggests Possible Greek Parallel Currency

The European Commission is preparing contingency plans for the Greek banking system in the event government leaders fail to agree to a deal to help the indebted nation, according to two people familiar with the talks.

Officials are looking at how to manage the failure of financial firms in Greece and other events that may cause widespread investor losses, said one of the people, who asked not to be identified as the discussions are private.

The four largest banks in Greece, including the National Bank of Greece SA and Alpha Bank AE, all received notifications from independent auditors questioning whether they can continue as so-called going concerns, according to earnings reports. The financial firms have suffered after the economy in Greece contracted for six straight years, a 2012 debt exchange forced the institutions to take large losses and the prolonged recession led to an increase in non-performing loans.

“You cannot truly break the vicious circle of the bank-sovereign link if the sovereign is not ready to play ball,” said Nicolas Veron, a senior fellow at the Peterson Institute for International Economics in Washington. “You can mitigate it, but you cannot break it entirely.”

Spokespeople for the European Commission and the National Bank of Greece declined to comment. A spokesman at Alpha Bank didn’t immediately return a telephone call seeking comment.

Market Access

The FTSE/Athens Banks Index, which measures the performance of the bank sector of the Greek Stock Exchange, fell 0.7 percent to 682.6 at 3:48 p.m. in Athens. That’s down 96.5 percent since 2010.

Optimism that Greece could reach an accord with its creditors to unlock the remaining 7.2 billion euros ($8 billion) of its bailout funds waned Friday after German Chancellor Angela Merkel said greater efforts were needed. German Finance Minster Wolfgang Schaeuble mentioned the possibility that Greece may need a parallel currency alongside the euro if talks fail, according to people familiar with his views.

The banks themselves are warning investors, with the National Bank of Greece signaling that it faces restrictions in accessing the capital markets and is dependent on the European Central Bank and the Bank of Greece for funding, according to a May 18 filing with the U.S. Securities and Exchange Commission. National Bank and Alpha Bank both report first-quarter earnings on May 28.

A Bank of Greece spokesman declined to comment when contacted by telephone.

‘Going Concern’

The National Bank of Greece’s “ability to continue to access sufficient liquidity through emergency liquidity assistance facility as well as the significant deposits outflow between Jan. 1, 2015, and April 30, 2015, raise substantial doubt about its ability to continue as a going concern,” the firm’s auditors wrote in the filing.

Greece’s shaky finances have put the banks in the spotlight while euro-area nations tussle over when and how to extend further bailout aid. Without bond market access, the government of Greece has been kept afloat through the banks and the emergency aid they get from the European Central Bank.

The euro area’s top bank supervisor, ECB Supervisory Board chair Daniele Nouy, has said as recently as May 13 that Greece’s banks are solvent. “They’ve never been better equipped to go through this kind of stressful situation,” in an interview with the Wall Street Journal.

ECB Test

Greece’s bailout program does have money set aside to help the banks if creditors are willing to release the funds. The Mediterranean nation has 10.9 billion euros in bonds parked at the European Financial Stability Facility, returned from Greece’s bank-rescue fund as a condition of its February bailout extension. This money can only be used for the recapitalizations of financial firms and only if the ECB requests it before the bailout program expires at the end of June.

Greece’s banking conundrum marks a big test for the ECB in its new role as euro-area bank supervisor, which has sought to create a firewall between the banks and the government’s finances, said Guntram Wolff, director of the Brussels-based Bruegel research group.

“This is actually the best way for allowing for a default and somehow being able to manage the default onto the banking system,” Wolff said. “We may be able to save one or two banks from the mess of a Greek default in Greece and those banks could continue to get funding from the ECB.”

Capital Controls

If Greece defaults or faces a similar turning point, the Greek government might introduce capital controls right away, said Diego Valiante, a research fellow at the Centre for European Policy Studies. At the same time, he said, there might not be a rush of deposits because so many funds already have left the country.

“Most of the liquidity impact has already happened,” Valiante said. “Greek banks are already on a thin credit line with ELA, so they are already raising the minimum of what is indispensable for them to continue their operation.”

The Bank of Greece remains the country’s bank resolution authority during the transition to the euro-area’s single system for handling failing banks. The European Commission’s competition department would also be involved, as it enforces limits on government assistance that have been put in place as a result of the euro crisis.