Greek Credit Guarantee Scheme

Throughout the early 2000s, most Greek banks could access inexpensive capital, which was facilitated by the Greek government’s decision to switch to the Euro in 2001 (Nelson et al. 2011). Beginning in 2008, however, many Greek banks began to face liquidity strains and capital problems as a result of the Global Financial Crisis. On September 15, 2008, Lehman Brothers filed for bankruptcy, accelerating market contractions and heightening uncertainty across European financial markets. Most governments across the Eurozone had responded to the crisis unilaterally prior to September 2008. However, the failure of Lehman Brothers and the near-failure of other systemically significant financial institutions in September prompted Eurozone officials to conclude that the Eurozone required a holistic plan to preserve financial stability (Bank of Greece 2009a).

In October 2008, Eurozone leaders convened for the first-ever Eurozone summit. Greece, the other 14 countries in the European Monetary Union, and Great Britain. On October 12, the Eurozone summit released a declaration requiring all participating nations to adopt several key strategies:

• Ensure adequate liquidity
• Facilitate ease of funding
• Recapitalize deserving banks and provide them with additional capital resources
• Be flexible in applying accounting rules
• Increase cooperation among participating countries (EC Summit Declaration, 10/12/2008)

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 Greek central bank (not to be confused with the National Bank of Greece, a leading Greek financial services company) (Ministry of Economy and Finance 2008). The EC accepted the proposal less than two weeks later.

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, also 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 (tier I capital) from Greek banks using Greek sovereign bonds. Under the Greek Bond program, the BOG lent Greek institutions sovereign bonds with zero coupon rates. The sole purpose was to allow Greek institutions to use these bonds as collateral in transactions with the ECB or other banks (EC SA, 11/19/2008). The focus for this case is pillar II, the credit guarantee program, otherwise known as “the guarantee program” (Ministry of Economy and Finance 2008).

All credit institutions (or branches of foreign banks) licensed by the BOG were eligible to participate in the guarantee scheme. Under the scheme, all senior debt was eligible; subordinated debt and interbank deposits were not eligible (EC SA, 09/18/2009). The scheme guaranteed any debt from three months to three years. The BOG did not establish an explicit minimum or maximum limit for the amount of debt it would guarantee for an individual bank, so the maximum guarantee in theory was all of the remaining commitment. The BOG instead used a publicly available rubric to determine the order of need from each credit institution (Ministry of Economy and Finance 2008).

Greece set the guarantee scheme’s initial commitment limit at €15 billion. Based on the actions that Greece took during the crisis, 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 require the EC’s approval (Ministry of Economy and Finance 2008).

The BOG required a semi-annual fee from participating institutions with the exception of the fee collected during the last period, which became due when the program expired. At the program’s outset, Greece established the fee structure to adhere to guidelines set forth by the European Central Bank (Ministry of Economy and Finance 2008). The fee was calculated on an annual basis and was contingent on three factors: the maturity of the guaranteed securities, the existence of collateral on the guarantee, and the creditworthiness of the institution.

Generally, the guarantee scheme can be understood in three stages: response to the financial crisis of 2008, response to the sovereign debt crisis in 2009, and aftermath of the sovereign debt crisis/wind down. The BOG initially used the guarantee to alleviate liquidity strains as a result of the financial crisis. Beginning in late 2009, however, Greek banks began using the guarantee scheme to counteract the adverse liquidity effects from Greece’s sovereign debt crisis, which quickly escalated. Credit default swap (CDS) and interest rate on Greek sovereign debt rose. By early 2010, most observers concluded that Greece, along with Ireland and Portugal, had reached potentially unsustainable debt levels (Nelson et al. 2011).

On May 6, 2010, Greece passed Law 3845 which, among other stability measures, raised the limit of the guarantee scheme by €15 billion to €30 billion. Greece committed €123 million from the guarantee scheme to the bond scheme (pillar III), lowering 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]). Concurrent with Greece’s initiatives to relieve severe liquidity strains and replenish rapidly diminishing capital, the EU and the IMF devised and implemented a joint €110 billion plan to combat accelerating levels of Greek public debt and to make the Greek economy more competitive (Rehn and Strauss-Khan 05/02/2010). The funds allocated in the plan were not used for the guarantee scheme (Boudghene et al. 2011).

In April 2010, the EC instituted a system-wide mandate for all countries under its jurisdiction with credit guarantee schemes that expired later than July 1, 2010. Greece, which had a guarantee scheme that expired after July, was subject to the mandate. The EC raised the minimum participation fees by 20, 30, or 40 basis points depending on the participant’s credit rating. The EC also required participants with guaranteed debt over a certain threshold to submit a viability review. In addition to these broader measures, the ECB indefinitely suspended the Eurosystem’s quality credit threshold for debt under the Greek guarantee scheme and asserted that it would continue to accept these securities as eligible collateral (European Central Bank 2010).^FNThe ECB Governing Council oversees and applies the Eurosystem credit assessment framework (ECAF) to determine which types of collateral the ECB will accept. The ECAF evaluates the riskiness of collateral by drawing on evaluations of that collateral from four sources: credit assessment institutions, credit assessment systems from central banks, internal ratings systems used by counterparties, and rating tools from third parties. For more information see: https://www.ecb.europa.eu/paym/coll/risk/ecaf/html/index.en.html.

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 via 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. That year, Greece faced a rapidly escalating crisis regarding its sovereign debt, as credit ratings on Greek bonds crashed and CDS on Greek sovereign securities spiked (EC SA, 04/11/2011).

In January 2012, the EC passed a prolongation communication for member states with recapitalization programs and guarantee schemes, which instituted a series of additional guidelines for banks under Greece’s guarantee scheme. Among these guidelines were limits on amount of bonds with maturities greater than one year. The communication also restricted the eligible debt to newly issued senior debt. The EC also required Greece to submit reports on the fees, operations, and restructuring plans of the banks under the guarantee scheme. The communication removed Greece from the EC’s list of marketable risk (EC Communication, 01/01/2012).

In February 2012, the ECB retracted its temporary suspension of the Eurosystem’s quality credit threshold for debt under the Greek guarantee scheme, effectively precluding many Greek banks from using these securities as eligible collateral with the ECB (02/27/2012).

On March 8, 2012, the EC reinstated the temporary suspension of the Eurosystem’s quality credit threshold for debt under the Greek guarantee scheme, provided that the BOG include a clause to buy back the banks’ debt. The following day, Greece announced that it would restructure its sovereign debt, using private sector funding (03/09/2012). Later that month, CDS trading on Greek sovereign bonds was put on hold (Oakley 2012a).

While Greece continued to face a sovereign debt crisis and austerity measures for many years, the structure of the guarantee scheme did not change substantially after 2012. 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 February 2015, the ECB revoked its temporary suspension of the Eurosystem’s quality credit threshold for debt under the Greek guarantee scheme (ECB Decision 02/10/2015). 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).

Banks utilized only 20% percent (€3 billion) of the available commitment during the first year of the guarantee scheme. The BOG attributed the lack of participation under the scheme to its high costs and to its understanding that capital markets seemed to be recovering well (Bank of Greece 2009b). Ultimately, Alpha Bank, Eurobank, Piraeus Bank, and National Bank of Greece—often recognized as Greece’s four systemically important banks—drew from the scheme, along with other regional banks. While the sovereign debt crisis continued for years after 2012, total funds committed under the scheme decreased somewhat beginning near the end of 2012. As of November 2017, no bank had an outstanding debt covered by the guarantee scheme (EC SA, 12/01/2017). See Figure 1 below.

Compiled by Daniel Thompson. Sources: State Aid documents in Key Program Documents.

Per the EC’s Prolongation Communication, Greece was required to submit the fees it charged for participation in the guarantee scheme after 2011. Greece used market data on credit ratings and the EC’s minimum formula to determine the fee. Beginning in 2012, CDS spreads were not used as both Greece and the EC felt that they were not indicative of the Greek firms’ financial positions (EC Prolongation Communication, 01/01/2012).

While the BOG indicated that it instituted the same guarantee fees as the EC’s minimum guarantee fee guidelines, it seems unclear precisely what fees the BOG charged during the first several years of the guarantee scheme’s operation. In the fall of 2012, the BOG began reporting guarantee fees that it charged banks as the result of a directive from the EC. These reports indicated that Greece charged 25 bps above the minimum required fee for loans with maturities from three months up to, but not including, one year.

As of the writing of this case, the Greek credit guarantee scheme is still operational. The peak outstanding commitment utilized was €65.1 billion in late 2011 and early 2012. While this was the greatest amount committed in absolute terms, the €65.1 billion amounted to approximately 76.7% of the commitment. In the spring of 2010, the BOG consistently committed close to 100% of the total available funding of €15 billion (EC SA, 05/12/2010; EC SA, 06/30/2010).