Moody’s: Full abolition of capital controls on cash withdrawal credit-positive for Greek banks

The full abolition of limitations in cash withdrawal is credit-positive for Greek banks, Moody’s said in a report released on Thursday.

The credit rating agency said that an improvement of economic outlook in Greece and an increase in private deposits in the last few months allowed the loosening of capital controls “which will probably enhance depositors’ confidence and help banks to further improve their financing profile, which is credit-positive”.

Moody’s said that a gradual return of deposits in the banking system in the last seven months and greater optimism after the successful exit from an economic adjustment program were the main reasons behind the decision to significantly loosen capital controls. “Additionally, a bigger reduction of banks’ dependence from the ELA mechanism showed the improvement of Greek banks in the last quarter,” it said.

The credit rating agency noted that a loosening of capital controls will probably encourage households and enterprises to return to domestic banks any cash they have kept outside the Greek banking system.

“An increase in client deposits in the last few years helped Greek banks to reduce their borrowing from the ELA mechanism, which totaled 4.5 billion euros or 2.0 pct of their accumulated assets at the end of August 2018, from 22 pct in August 2015. This reduction contributed in the increase of transactions in the interbank market as international investors were more interested in Greek assets accepting a wider range of Greek assets as collateral for repos,” Moody’s said.

It added that three Greek banks have already fully repaid their borrowing from the ELA mechanism: National Bank, Piraeus Bank and Pancreta Cooperative Bank. “We expect also that Eurobank and Alpha Bank will repay their loans to the ELA in the next few months, while Attica Bank possibly will take a little longer to fully repay its ELA,” Moody’s said.

Private deposits grew by 4.1 pct or 5.2 billion euros in the first eight months of 2018, the credit rating agency said, adding that “the current government managed to legislate a large number of reform measures, despite its thin parliamentary majority and without provoking large scale protests, as happened during the first two adjustment programmes”.

However, it noted that the domestic political and social uncertainty remained the main risks for the implementation of policy and economic recovery. “Any protracted political uncertainty, combined with loosened capital controls could lead to significant outflow of deposits as it happened in the first half of 2015,” Moody’s said.