Greek Credit Guarantee Scheme

The Greek Parliament passed Law 3723 to comply with the Eurozone’s October 2008 directive to enhance liquidity and recapitalize banks, which it then submitted to the European Commission. Law 3723 consisted of three main “pillars:” (I) a recapitalization program, (II) a credit guarantee program, and (III) a program to issue Greek sovereign securities to Greek institutions (otherwise known as the Greek Bond program). While a bank could draw from all three pillars, each pillar operated independently and required separate obligations and fees from participating banks.

Under the recapitalization program, the BOG purchased preferred shares from Greek banks with Greek sovereign bonds. Under the bond program, the BOG lent Greek institutions sovereign bonds with zero coupon rates. While limits on pillars I and III also fluctuated through the crisis, they always remained substantially lower than the guarantee scheme’s limit. Law 3723 also stipulated that funds could be transferred between pillars II and III. Greece used this stipulation twice over the course of the program. Pillars I and III officially ended on December 31, 2012, and December 31, 2016, respectively, while the guarantee scheme is still ongoing (EC SA, 12/19/2016).

On November 7, 2008, the Greek Ministry of Economy and Finance submitted a draft law, Law 3723, to the European Commission (EC) to fulfill the above directives through the Bank of Greece (BOG). The EC accepted the proposal less than two weeks later. While Law 3723 consisted of three main “pillars” including (I) a recapitalization program, (II) a credit guarantee program, and (III) a bond loan program, the focus for this case is pillar II, the credit guarantee scheme.

The European Commission approved the guarantee scheme on November 19, 2008. Any further prolongations or amendments would have to be authorized by the European Commission. As discussed in more detail below, the need to structure the guarantee scheme in such a way as to ensure EC approval significantly influenced the design of certain program features.

Based on the BOG’s actions over the course of the intervention, Greece could change the limit in at least three ways: amending the law itself, passing a new law to alter the limit, or moving funds from pillar III to pillar II (and vice versa). This last option, which was stipulated in Law 3723 itself, did not seem to require the EC’s approval. Greece set the scheme’s commitment limit at €15 billion, which it determined using forecasted estimates in November 2008 about the impact of the financial crisis on Greek Banks (EC SA, 05/12/2010).

By spring 2010, Greece had virtually exhausted all of its commitment. In April 2010, Greece passed Law 3845 which, among other stability measures, raised the limit of the guarantee scheme by €15 billion. Greece committed €123 million from the guarantee scheme to the bond scheme (pillar III), bringing the guarantee scheme’s total limit to approximately €29.9 billion (the law was approved by the EC on May 12; EC SA, 05/12/2010).

Greece quickly committed the additional €15 billion under Law 3845, and by June 2010 had again reached its commitment limit. On June 30, Greece increased the total guarantee limit by €25 billion, bringing the total limit to €54.9 billion (Boudghene et al. 2011).

Greek banks continued to borrow heavily from the guarantee scheme. In April 2011, Greece raised the limit of the guarantee scheme by €30 billion, bringing the total limit to €84.9 billion.

In November 2014, the BOG transferred about €100 million from the Greek bond program (pillar III) to the guarantee scheme, bringing the total limit for the scheme to €85 billion. In December 2015, the BOG decided not to renew its €8 billion bond program (pillar III). Per Law 3723, the funds from the bond program would be transferred into the guarantee scheme. By 2016, the limit on the guarantee scheme had risen to €93 billion (EC SA, 12/18/2015).

In 2020, the BOG reduced the guarantee’s size to €30 billion, noting that banks were “only marginally us[ing] the guarantee scheme” by this point.

All credit institutions (or branches of foreign banks) licensed by the BOG could participate in the guarantee scheme. Enrollment was not automatic. Instead the scheme was made available upon request.

Program documents explicitly excluded subordinated debt.

To be eligible for the guarantee scheme, all maturities had to fall between three months and three years. Initially, neither the BOG nor the EC placed restrictions on the two ranges of maturities—from three months up to, but not including, one year and from one year up to, and including, three years—that the program could guarantee. Beginning in 2013, however, the EC mandated that bonds with maturities between one and three years be limited to one-third of the guarantee scheme’s total limit (EC SA, 01/22/2013).

Program documents did not contain any restrictions on the currencies that would be eligible for the guarantee scheme.

The BOG established an order of need to determine which banks would receive guarantees and how much of the overall budget they would receive. The order of need was based on a set of criteria below (Ministry of Economy and Finance 2008)

1. The bank’s liquidity position and probability that its capital position would be affected (weighted 50% of the whole valuation)
2. Market share and importance to financial stability (30%)
3. Residual maturity of the bank’s liabilities from 11/7/2008 to 12/31/2009 (10%)
4. The bank’s involvement in loans to small and medium enterprises (10%).

The initial fee structure developed by Greece was identical to the minimum fee recommendation for guarantee schemes established by the ECB on October 20, 2008. The fee was adjustable at the Greek Minister of Finance’s discretion, pending the approval of the European commission. Banks were required to pay the fee every six months, except for the last period, as the payment become due on the day that the guarantee scheme expired. (See Figure 2 below.)

ˡSample defined by the Eurosystem; CDS Spreads/Credit ratings. Source: Ministry of Economy and Finance 2008.

In April 2010, the EC determined that the liquidity and stability risks from the 2008 crisis had subsided. It decided to raise the minimum participation fees on all existing credit guarantee schemes to reduce competition distortions in the market. The increase would be determined by the following guidelines:

• 20 basis points for banks with a credit rating of A+ or A8
• 30 basis points for banks with a credit rating of A-9
• 40 basis points banks with a credit rating below A-
• Unrated banks would be treated as if they had a BBB rating

In enacting its decision, the EC also noted that the 2007-08 CDS spreads used to determine participation fees no longer properly reflected many of the banks’ credit ratings, as many of the participating institutions had been downgraded since 2008. The EC changed the spreads to those on July 1, 2010. Noting that the financial system still faced strains, the EC felt that it could raise the additional fees without compromising the financial system even if the market suffered a downturn (EC Working Document 04/30/2010).

Per the initial guidelines of the law, the BOG accepted a range of loans as eligible collateral. The BOG could change the eligible collateral and adjust the haircuts used without requiring the passage of another law. There were three general rules for all accepted collateral. First, the minimum issuance amount was €50,000. Second, participating institutions needed to alert the BOG and replace their existing collateral if the collateral provided faced an increased chance of default, the credit rating for the participating institution was downgraded, or the institution failed to comply with the eligibility criteria. Last, loans in a foreign currency would receive a 15% haircut (Ministry of Economy and Finance 2008). Below is a list of eligible collateral under the guarantee scheme:

• Any collateral that was eligible in the Eurosystem
• Greek sovereign securities denoted in a foreign currency
• Loans collateralized by residential mortgages
  • Mortgages required to be in Greek territory
  • Loan-to-value of less than 95%
  • 20% haircut irrespective of residual maturity or interest rate
• Loans to shipping companies approved by the Bank of Greece
  • 50% haircut
• Loans to companies that are guaranteed by the Greek government or an entity with a similar credit level
• Claims of companies and natural persons
  • Serviced regularly
  • No delinquencies
• Performing loans to private party
  • Must be recognized by Greece
  • Must be rated Moody’s (acceptable range Αaa-Βa3), Standard & Poor's (acceptable range ΑΑΑ-ΒΒ), Fitch (acceptable range ΑΑΑ-ΒΒ), or ICAP group (Greek rating agency; acceptable range AA-C)
• Corporate loans
  • Haircut contingent on credit rating or probability of default (see Figure 3 below) (Ministry of Economy and Finance 2008).

In order to “help ensure that the participating institutions do not misuse the received State support to expand their activities,” participating institutions would commit not to engage in aggressive advertising or to expand their activities for other purposes (EC SA, 06/26/2014).

Greece’s decision to institute a viability review stemmed from an EC mandate in the spring of 2010. Greece instituted verbatim the EC’s mandate (EC SA, 06/30/2010). Prior to July 2010, banks under any scheme within the EC’s jurisdiction were only required to submit viability reviews if the bank defaulted on a guarantee. By the spring of 2010, however, the EC expressed concern about the long-term viability of some of the participating banks. The EC’s concern, along with the fact that the banks participating in EC-mandated capital injections or asset purchase programs had to submit restructuring plans, led the EC to mandate a viability review of every participating bank that exceeded a certain threshold after July 1, 2010 (EC Working Document 04/30/2010).

The threshold was set at both 5% of outstanding guaranteed liabilities out of total liabilities and at €500 million of guaranteed debt. Every bank above this threshold would have to submit a plan to its respective sovereign within three months of receiving a guarantee. The EC would use the viability review (which could also include a liquidity stress test) from each country to determine if the bank required a viability plan or a restructuring plan. The mandate did not apply to banks in restructuring or banks that had submitted plans prior to July 2010 (EC Working Document 04/30/2010).

The EC’s prolongation communication, passed in January 2012, required Greece to comply with additional measures related to increased communication with the EC. The communication required Greece to submit reports on the fees, operations, and restructuring plans of each bank under the guarantee scheme. Greece was required to submit the reports within three months of issuing a guarantee (EC Communication 01/01/2012).

The EC mandated that all credit guarantee programs be limited to six months, with unlimited extensions to the programs contingent on the EC’s approval (Boudghene et al. 2011). As of June 2020, Greece has continually requested and received six-month extensions since the scheme’s inception in November 2008.