Capital Markets and Portfolio Investment
Following EU regulations, Greece is open to foreign portfolio investment. Law 3371/2005 sets an effective legal framework to encourage and facilitate portfolio investment. Law 3283/2004 incorporates the European Council’s Directive 2001/107, setting the legal framework for the operation of mutual funds. Until June 2015, although liquidity in the markets was tight, sizeable positions could enter and exit. With the imposition of capital controls on June 29, 2015, for a period of six months (July 2015 – December 2015) domestic investors could only acquire shares with the injection of “fresh money” and could not use existing funds. Short-selling of banking shares was not allowed. As a result, FTSE downgraded the Athens Stock Exchange from “advanced” to “advanced emerging markets”– in effect since March 2016. The Bank of Greece complies with its IMF Article VIII obligations and does not generally impose restrictions on payments. Transfers for current international transactions are allowed, but are subject to specific conditions for approval. The lack of liquidity in the market along with the challenging economic environment have made the allocation of credit very tight, but is accessible to foreign investors on the local market, who also have access to a variety of credit instruments.
Money and Banking System
The implementation of a broad-based bank recapitalization program in 2012 and 2013, and a rapid consolidation of institutions in the sector, largely stabilized the banking sector by early 2014. However, following the election of the current government in January 2015, bank deposit flight accelerated. By June 2015, total deposits in the Greek banking system had fallen to EUR 134 billion, down from EUR 164 billion in October 2014. Uncertainty caused by the controversial negotiations with Greece’s creditors led to the June 2015 imposition of capital controls and a complete closure of the banks for two weeks, which, though necessary to prevent the banking sector’s collapse, weakened the banks’ capital positions.
In November 2015, following an Asset Quality Review and Stress Test conducted by the ECB as a requirement of the new ESM agreement, a third recapitalization of Greece’s four systemic banks (National Bank of Greece, Piraeus Bank, Alpha Bank, and Eurobank) took place. The recapitalization concluded by the end of November with the banks remaining in private hands, after raising EUR 6.5 billion from foreign investors, mostly hedge funds. The ratio of non-performing exposures (NPEs) reached 43.1 percent at the end of December 2017, down 10 percent compared to December 2016. More broadly, NPEs declined to EUR 95.7 billion from EUR 108.4. Compared to March 2016, when the stock of NPEs reached the peak, the reduction is 12 percent (EUR 13 billion). Similarly, non-performing loans (NPLs) – loans that have not been serviced or paid on for more than 90 days – dropped to EUR 65.9 billion at the end of December 2017. Banks estimate that about 20 percent of these NPEs are owned by so-called “strategic defaulters” – borrowers who refrain from paying their debts to lenders in order to take advantage of the laws enacted during the financial crisis to protect borrowers from foreclosure or creditors collection even though they are able to pay their obligations.
Developing an effective NPL management strategy is among the most difficult components of the government’s negotiations with its creditors. Under the terms of the ESM agreement, Greece must create an NPL market through which the loans could, over time, be sold or transferred for servicing purposes to foreign investors. Much of this work has now been completed, and more than ten servicers have been licensed by the Bank of Greece. The sale and securitization environment for non-performing loans continues to mature, with all of Greece’s systemic banks having conducted portfolio sales of secured and unsecured loan tranches since mid-2017. The potential sale and/or transfer of Greek NPLs continues to receive interest by a large number of Greek and foreign companies and funds, signaling a viable market. After several regulatory and political delays in 2017, the Greek state’s electronic auction platform for collateral and foreclosed assets is functioning, with expectations that auction volumes will continue to expand to more than 20,000 per year by the end of 2018. The government seeks to exclude loans linked with mortgages for primary residencies (at least through the end of 2018 under existing law) and preventing aggressive collection on business as part of the NPL secondary market activity.
Poor asset quality inhibits banks’ ability to provide systemic financing. Deposits stood at EUR 124.7 billion as of January 2018, down from EUR 119.7 billion a year earlier. In the eight -year period from September 2009 (when deposits reached their highest level of EUR 237 billion) to September 2017, overall deposits shrunk by a total of EUR 114.5 billion. According to the latest data, Greece’s systemic banks hold the following assets: Piraeus Bank, EUR 67.4 billion (Q4 2017), National Bank of Greece, EUR 75.5 billion (Q1 2017); Alpha Bank, EUR 64.8 billion (2016); and Eurobank, EUR 60 billion (2017).
Few U.S. financial institutions have a presence in Greece. In September 2014, Alpha Bank acquired the retail operations of Citibank, including Diners Club. Bank of America serves only companies and some special classes of pensioners.
There are a limited number of cross-shareholding arrangements among Greek businesses. To date, the objective of such arrangements has not been to restrict foreign investment. The same applies to hostile takeovers, a practice which has been recently introduced in the Greek market. The government actively encourages foreign portfolio investment.
Greece has a reasonably efficient capital market that offers the private sector a wide variety of credit instruments. Credit is allocated on market terms prevailing in the Eurozone and credit is equally accessible by Greek and foreign investors. An independent regulatory body, the Hellenic Capital Market Commission, supervises brokerage firms, investment firms, mutual fund management companies, portfolio investment companies, real estate investment trusts, financial intermediation firms, clearing houses and their administrators (e.g. the Athens Stock Exchange), and investor indemnity and transaction security schemes (e.g. the Common Guarantee Fund and the Supplementary Fund), and also encourages and facilitates portfolio investments.
Owner-registered bonds and shares are traded on the Athens Stock Exchange (ASE), which has held developed country status since 2001, according to most western investment firms. It is mandatory in Greece for the shares of banking, insurance, and public utility companies to be registered. Greek corporations listed on the ASE that are also state contractors are required to have all their shares registered. In September 2015, during the annual country classification review, FTSE announced that the Greek exchange would be downgraded from “advanced” to “advanced emerging markets.” The decision took effect as of March 2016. In June 2013, equity index provider MSCI downgraded Greece to advanced emerging-market status, a first in the index’s history, citing the ASE’s loss of 90 percent of its value since the start of the financial crisis in October 2007 and after Greece failed to meet criteria regarding securities borrowing and lending facilities, short selling, and transferability.
Greece has not explored or announced that it intends to implement or allow the implementation of blockchain technologies in its banking transactions.
Foreign Exchange and Remittances
Foreign Exchange Policies
Greece’s foreign exchange market adheres to EU rules on the free movement of capital. Until June 2015, receipts from productive investments could be repatriated freely at market exchange rates, and there were no restrictions on, or difficulties with, converting, repatriating, or transferring funds associated with an investment. In late June 2015, the government declared a bank holiday, during which banks were closed for two weeks, and imposed capital controls. Capital controls placed a limit on weekly cash withdrawal amounts and restricted the transfer of capital abroad. Although the government has continued to ease capital controls in 2016 and abolished all capital controls on stock transactions in December 2015, several restrictions still apply. A five-member “Banking Transaction Approval Committee” was established by the Ministry of Finance and is the competent authority to approve transactions abroad, in coordination with the Bank of Greece. Currently, the daily limit for commercial payments abroad stands at EUR 250,000 (with some exceptions).
Remittance of investment returns is also subject to capital controls. Greece is not engaged in currency manipulation for the purpose of gaining a competitive advantage. The country is a member of the Eurozone, which employs a freely floating exchange rate.
The Financial Action Task Force (FATF), in its latest report on Greece (October 2011), recognized that the country had made significant progress in addressing the deficiencies identified in the 2007 Mutual Evaluation Report. All Core and all Key Recommendations are at a level essentially equivalent to compliant (C) or largely compliant (LC) under FATF definitions. In 2011, the FATF removed Greece from its regular follow-up process in recognition of this progress. The fourth round of mutual evaluation of Greece will take place in October 2018.
Sovereign Wealth Funds
There are no sovereign wealth funds in Greece. Public pension funds may invest up to 20 percent of their reserves in state or corporate bonds.