• Chair of "National Bank of Greece": Louka Katseli: "Hope to lift capital controls before end of the year"

Chair of "National Bank of Greece": Louka Katseli : "Hope to lift capital controls before end of the year"

Capital controls, stock market crash, deposit outflow: One of the big unsolved questions in the greek crisis is the future of the greek banks and its recapitalisation. Louka Katseli, chair of the "National Bank of Greece", hopes to lift capital controls at the end of the year and sees chances for the greek economy to grow, by Elisa Simantke.

Louka Katseli, chairwoman of the National Bank of Greece, sees chances for greek economy and its banks after an agreement with the lenders
Louka Katseli, chairwoman of the National Bank of Greece, sees chances for greek economy and its banks after an agreement with the...Foto: REUTERS

Dear Mrs Katseli, which consequences does the new agreement (as far as it is known until now) have for the greek banks?

 The agreement signed today is expected to reduce uncertainty by providing a clear roadmap for policy making over the next couple of years including the recapitalisation process. It is based on realistic  targets for fiscal policy, reasonable reforms, adequate financial provisions and a commitment to address the debt overhang problem. While some of the measures will be costly for particular income groups ,burden sharing appears to be more equitable . It can therefore provide the basis for a return to sustainable growth and financial stability.

Banking shares suffered the biggest losses in the crash of the athens stock market last week. The National bank of greece lost in between about 63 per cent of its worth. How would you describe the current situation of the National Bank of Greece?

This shortselling was no surprise. After five weeks of a bank holiday, we expected heavy  losses. The overall situation will  improve when  the banking system returns to normalcy and financial stability is guaranteed. I am confident that the  losses  will be  reversible once the AQR (Asset Quality Review) process  and the stress tests  , now conducted by the ECB on the four systemic Greek banks  ,are completed and recapitalization needs are duly assessed and fully covered.  The National Bank of Greece is   expected to continue to be  strong  following this process   and play a leading role  in supporting  a Greek recovery.  

Can you make an estimation how high the capital needs in greece might be based on the data of your own bank?

Nobody  can make accurate estimates as yet.   These will be determined through  the AQR tests and the  assumptions behind the stress tests  which will be conducted in September. They will depend on the calibration of  three main shocks.  The  effects on the economy of  political uncertainty  that  prevailed from  November 2014   until  the imposition of capital controls in June 2015 , the  effects of capital controls themselves  and the  expected  medium -term impact  on the real economy of measures included in the  third Memorandum  as well as the expected provision of liquidity and financing by the ECB and EU institutions .   As you can understand,  this is a very complicated exercise  and many parameters remain  unknown.  The estimates provided by EU institutions   that   recapitalisation needs for the whole Greek financial system willl range between 10 and 25 billion Euros are therefore extremely tentative . 

So will it be manageable?

 The success of  the recapitalisation process will  depend  on the degree of trust and confidence that would prevail among  market  participants    regarding the capacity  of the Greek government to implement the agreement  , the will of EU governments and institutions to honour their financing commitments , the readiness of the  ECB  to restore normal liquidity to the system  and the collective capacity of  all stakeholders to address the debt overhang problem in a timely , flexible and realistic manner.  In summary ,the success of the recapitalisation process  will depend on prevailing expectations   in October  as to the prospects of a viable economic recovery ; we all need to assume  our responsibilities to make sure that trust and confidence in our collective capacity to exit this crisis is restored.

 There are fears the capital needs could be even higher than 20 billion Euros.

No, not in my view.

 You said, the process of recapitalisation is not chosen yet. Can a bail-in be ruled out though?

No one wants  or argues in favour of a bail-in. If people or companies expect  a haircut on deposits, even  on uninsured ones  alone ,  they don’t  leave them in the banking system  .  Deposit and capital flight   is the usual  devastating outcome. So  a bail-in is both  inadvisable and ineffective hurting the prospects of a recovery. There have been pronouncements against it by members of  the European Central Bank . I hope we will have a clear statement by the EU-Commission as well  regarding   the process of burden sharing that will be followed in the process of recapitalisation which will clearly exclude a bail-in.

 In the past you have critisised austerity measures quite openly, especially when you were minister of economy. Alexis Tsipras and the greek parliament are now about to accept a compromise which includes even more of these measures. But this time  you - as the chair of the National Bank of greece - also want an agreement as soon as possible. How do these two things go together?

These are not  incompatible positions .   There is an urgent need for  Greece to  implement  regulatory , administrative and structural reforms that would promote a viable technological , economic and social transformation in a highly competitive international environment.  For a sustainable economic recovery, Greece needs to abandon its traditional  growth model that was  based on rising  consumption and construction expenditures,  financed  mainly through transfers and external  borrowing,  and adopt a  model where growth is spurred by investment expenditures and  net export demand.   Policies therefore need to be compatible with and support this regime switch . Many of  the austerity  or structural policies of the past six years were inconsistent with this strategy and vision.

So in your eyes Tsipras didnt give in too early?

 I am convinced and said so publicly on a number of occasions ,that  a „Grexit“   or a disruption of negotiations  offered  no solution and would  have severe costs both for Greece and the Eurozone. A solution  had  to be found within the Eurozone ; for this to happen, compromises had to be made by both parties in the negotiations.

So did you vote „no“ or „yes“ in the referendum in july?

Allow me not to answer this;  voting in democracies   is confidential.

Some say the real reason for Tsipras to sign was the critical situation oft he banks. How critical was it at that point?

It was very critical- and it remains critical. Since  2008 ,  deposit outflows from the banking system have exceeded  111 billion euros  . Between  November 2014 and June 2015, 40 billion euros worth of deposits  have disappeared. The economy   plunged into a recession   once again and  when the second memorandum expired,  liquidity was choked off . The imposition of capital controls  and a bank holiday was  inevitable .  The costs of capital controls  on the real economy are substantial  . The sooner they  are lifted, the better it will be for the real economy and the banking system.

Is there any timeframe when the capital controls might be lifted again?

Capital controls will be lifted when  confidence and trust in the economy  and the banking system will be restored.  I hope this will happen before the end of this year after the conclusion of the recapitalization exercise. In the meantime,  in close consultation with the ECB ,the Greek government and the banking sector, the Bank of Greece is  proceeding to  a gradual liberalisation of terms and conditions    to support the business community , especially  importing and exporting firms, in meeting  their financing needs.

What should be added tot he memorandum in your eyes?

All structural reforms and policy measures  need to be continuously evaluated  as to their effectiveness and impact on growth.  There is no purpose for example in  raising VAT tax rates  if this  leads to lower tax returns or  more tax evasion.  Capacity-building  needs to be enhanced   to promote priority  reforms  in public administration,   tax  collection and  the legal system  .  Investment activity will be spurred if  bureaucratic procedures  for licensing and business operations are simplified , the cost of doing business is drastically reduced.  laws  become more  transparent and business friendly  and the reformed tax system and  regulatory framework remain unchanged for a ten-year period .  Last but not least , Greece  , with  its  unexplored  potential , will become a European  growth pole, if  its  debt overhang  is properly  resolved.