Greece politics and economics weakening the banks

The damage inflicted on the Greek economy over the past six months has been remarkable.In addition to a weakening tax base, tax compliance is also expected to have dropped materially in recent weeks. Since the crisis hit Greece more than five years ago, the Greek GDP has been estimated to regress to levels not seen since 1998 and is still falling. 

On the fiscal front, January through May fiscal revenues were already EUR1bn below target. Even worse, in the past few weeks, these precarious conditions have accelerated downwards as confidence has been shattered by the expiration of a programme, political instability and the imposition of capital controls. 

The impact of this has been dramatic on the banking system. The banks have lost nearly 25% of their deposit base since December 2014. Confidence has evaporated on the banking system, leading to the imposition of tight capital controls immediately after the call for a referendum by the Greek government on 26 June, as a fully-fledged bank run hit the banking system.

Profitability and asset quality have also turned for the worst in 2015. Despite the super-capitalisation of Greek banks under the second programme, banks will in all likelihood now require further capital injections to deal with rising nonperforming assets the declining trend in the formation of new NPLs recorded in 2014 was reversed in Q1 15 and has almost certainly accelerated in Q2 15, says Barclays.