Greece’s finance minister insisted on Friday that bond swap negotiations with international creditors could be salvaged, averting the threat of a disorderly default within weeks. Evangelos Venizelos said in an interview with the Financial Times: “I am certain we can bridge the differences.”
“I remain strongly committed and confident. Rationality will prevail because this initiative is of common interest to Greece, its private creditors and for all its institutional partners,” he said.
Mr Venizelos was speaking after a second meeting in two days with the co-chairs of an international creditors’ committee. He said the talks would resume in Athens next week, probably on Wednesday.
The next five days would be used for intensive contacts with creditors and international institutions, and for a fresh evaluation of the financial outline under negotiation.
However, if Greece fails to reach a deal by early February, it could lose access to the first tranche of a new €130bn aid package and would be unable to meet a €14.4bn debt redemption due in mid-March.
Mr Venizelos, a lawyer before he entered politics, brushed off the prospect of a disorderly default. But he admitted that the two-year financial crisis had already taken a heavy toll on the country’s financial system.
Greek banks have seen deposit outflows of about €65bn - about one third of the total - over the past two years, as the country has fallen deeper into recession.
A recapitalisation of the bank sector, due to take place by August, would be critical to persuading Greek depositors to put back their funds.
“We want to see a recovery of confidence, a change of psychology, so that deposits will return and liquidity will increase,” Mr Venizelos said in his first newspaper interview since he took over the finance ministry last June.
While the pace of withdrawals accelerated in the second half of 2011, only about €16bn has been transferred abroad, he said.
But he made clear the banks would need as much as €40bn in fresh capital - the full allocation provided for in Greece’s second €130bn rescue package.
“This amount would be sufficient, in my view, to cover the needs of the banking system,” he said.
This compares with an earlier estimate of €25bn-€30bn for recapitalisation, made six months ago when Greece’s economy was projected to shrink by 3.8 per cent in 2011.
Mr Venizelos said the contraction last year would amount to more than 6 per cent.
Greek savers have run down bank deposits in order to make “safe haven” investments, mainly in German government bonds, and buy gold coins and ingots, according to Athens bankers.
They have also stashed funds in safe deposit boxes at banks and under mattresses. With the jobless rate steadily rising, families are increasingly living off their savings.
The bulk of funds moved abroad has gone to the UK, with smaller amounts deposited in Switzerland, seen as a less attractive destination following the Greek government’s decision to seek assistance from Swiss authorities on pursuing tax evaders.
But Mr Venizelos stressed that the government did not intend to use capital injections provided by the European Union and International Monetary Fund as a means of nationalising insolvent banks.
“We don’t want to take them over - we want to help them.” he said. “They will remain under private management [following recapitalisation], operating under professional criteria and overseen by an independent authority.”
He said consolidation was bound to follow the recapitalisations. “The banks that will remain will be fewer but healthier, with a very high capital adequacy ratio.”
Greek banks will take a further impact from a 50 per cent cut in the face value of their sovereign bondholdings as part of the rescue package.
They will also have to take significantly higher charges for bad loans following an audit by BlackRock Solutions, the international risk analyst, which was officially delivered to the Greek central bank on Friday.
The percentage of bad debt in the system, reported at about 10 per cent last June, could be revised upwards to 15-18 per cent following the audit, according to analysts.
With Greece set for a fifth straight year of recession in 2012 - the economy is projected to shrink by another 3 per cent - the percentage of bad loans is likely to exceed 20 per cent, according to several Athens bankers.