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Moodys considers Greeces bank resolution legislation as credit negative for unsecured creditors


The European Bank Recovery and Resolution Directive (BRRD) that was voted into national law by the Greek parliament on July 22 is credit negative for bondholders and uninsured depositors (>€100k), Moodys said in a recent report.

This is because it limits the use of public funds for bank resolutions and, effective 1 January 2016, includes burden-sharing for all types of unsecured creditors.
The rating agency, explains that the Greek law closely mirrors BRRD practices in other EU countries, but deviates in the insolvency ranking it establishes. Whereas elsewhere in the EU state claims rank equally with wholesale deposits in an insolvency or bail-in, Greek law ranks Greek state deposits together with all state claims as senior to uninsured deposits, including small and midsize enterprise and retail deposits greater than €100k. Therefore, state deposits are subject to bail-in only after any losses are imposed on uninsured deposits
According to Moody’s, although the new law establishes a bail-in of unsecured creditors as the policy response to failure from 2016 onward, this timeline could facilitate the carve-out of uninsured deposits if bank recapitalizations occur before end-2015, as Greek FinMin outlined last Wednesday in parliament. That said, the rating agency expects banks’ equity investors to be written down, while the thin cushion of senior unsecured and subordinated bondholders also remains at risk of incurring significant losses.
The rating agency concludes that although the average Q1’15 CET1 ratio of Greek banks was 12.8%, capital is at risk from the need to provision for NPLs, which are likely to increase to well over 40% of gross loans in 2015-16 from c35% at YE’14, and because more than 50% of bank capital is currently in the form of DTA with limited ability to absorb losses.

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