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Greece is on the verge of a catastrophe, bankers say

08 June 2012 / 13:06:59  GRReporter
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If Greece unilaterally decides to cancel the Memorandum of financial assistance it will have 20 billion euro less to cover basic budgetary needs, Alpha Bank warns. In its weekly report on the economy, the Bank notes that the primary deficit will jump by 20 billion for the period 2012-2014. Bankrupt or not, Greece will face a substantial decline in living standards over the next three years. In the event of termination of the Memorandum for financial assistance, the European Central Bank will stop the funding to local banks, which now reaches 125 billion euro. There will be no funds for the agreed recapitalization to fill in the gaps after the debt haircut (PSI), amounting to 50 billion euro.

"Under the platforms of some political parties fighting for power, banks will be nationalized without an explanation of where the funds for their recapitalization will come from without the aid from the European Financial Stability Facility," Alpha Bank report states. Bank economists warn that the loss of liquidity from the cancellation of the Memorandum will not be compensated even by resorting to the most extreme measure – suspension of all foreign debt payments. The country's needs in the current situation exceed the cost of servicing the debt. An eventual moratorium on payments will not be able to cover the budgetary needs.

The funding from Europe and the International Monetary Fund offsets the primary deficit of Greece in 2012. In addition, it covers outstanding public debt of 6.28 billion euro. Of these, 2.8 billion euro goes to social security and health funds, and another 25% or 1.6 billion euro are allocated to repay the obligations of state hospitals to suppliers and contractors as pharmaceutical companies, pharmaceutical and other unions. The Memorandum for financial assistance provides 50 billion euro for the recapitalization of banks. Of these, 25 billion is already in the Greek Financial Stability Fund and the remaining 25 billion is to be transferred to the Greek account by September this year.

Bankers note that the funding by the European funding mechanisms must continue, because the European Central Bank remains the only major source of funds for local financial institutions. Only through it combined with political stability and determination, could Greece strengthen the confidence of external partners and initiate the return of deposits to the country. According to the latest information from Naftemporiki, deposits in the country have reached the level of 2006 and if the uncertainty continues to grow, capital outflow will continue.

Alpha Bank concludes that the financial aid funds are required for three main activities beyond the repayment of the foreign debt: 1. For the repayment of overdue obligations of hospitals and insurance funds in the country. Many of them would be closed without the financial aid. 2. For the recapitalization of banks in order to prevent a bank from an unexpected bankruptcy, which most likely would trigger the domino effect that will melt down citizens' savings overnight. 3. For stabilization and better utilization of the 14 billion euro from the European funds that is to be invested only in projects contributing to positive economic growth. The report notes that zeroing the budget deficit and that of current spending will be a direct result of the cancellation of the Memorandum, because the government will lose all external funding sources. "This is the first step towards restoring the financial independence of the country because the government will cover public expenditure from domestic revenue rather than by borrowing from abroad as it is at present," the report concludes.

Meanwhile, Brussels is exerting pressure on the Greek government to close the agricultural ΑΤΕΒank, Reuters reported quoted by Imerisia. According to financial experts, Greece must carefully assess which banks should be saved and which one would bring smaller losses in liquidation. "When it comes to maintaining the financial sector stability, the solution is always to save a bank. The majority of countries have overcome this problem. ΑΤΕΒank will have to recover slowly or to be closed," experts say. However, the prevailing opinion according to local analysts is that it makes no sense to keep the corpse of a failed bank.

Tags: MarketsEconomyBanksFundingAidTerminationMemorandum
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