Intervention of the Deputy Minister of Finance responsible for the financial system, Mr. George Zavvos, at Fin Forum 2021

‘During the first year of its operation, the Hercules project, in which all 4 systemic banks have participated, has reduced non-performing loans (NPLs) by EUR 32 billion, i.e. by around 40 %. This constitutes a major success for the Greek government, since within 13 months we achieved what had not been done in the previous five years. Hercules has served as the forerunner of the government’s frontloaded reforms. Therefore, our realistic government policy, in combination with our determination, clear targets and a rational sequencing of actions, gives visibility with regards to our next steps for the banking system. We are sending a unique and clear message to international investors.”

These points were highlighted by the Deputy Minister of Finance responsible for the financial system, Mr. George Zavvos, at the Fin Forum 2021 “Shaping the future of banking & finance” held online today.


Responding to the question of journalist Koukakis on why the Greek banking system is now attractive to the international investment community for the first time since 2011 and what actions were taken by the government that had not been taken by the previous ones, Mr. Zavvos noted that:

“During the past decade, the banking system went through a very difficult period which left significant injuries. Until the government of ND and Kyriakos Mitsotakis took office, there was no plan as to how the Greek banking system would deal with bad loans. Despite the three recapitalisations during the period of the economic adjustment programs, which required EUR 45 billion of State support, banks had not effectively addressed the problem of bad loans or their weak capital structure. Major political failures of the previous government had exacerbated the problem of bad loans. In particular, the 2015 events, in particular imposing capital controls, had a major negative impact on banks’ investment credibility.

When ND took office following the elections of 7 July 2019, almost 1 out of 2 loans were non-performing. According to Bank of Greece data, non-performing loans (NPLs) amounted to EUR 75,4 billion at the end of June 2019, representing 43.6 % of total outstanding loans. Today, after the completion of the first phase of Hercules΄ project, in which all 4 systemic banks participated, total securitisations amount to EUR 32 billion and the stock of non-performing loans has been reduced by around 40 %.

In order to reduce the amount of bad loans, we had to open up the possibility for the banks to raise funds from the capital markets under State guarantees (credit enhancement), without, however, any impact on the Greek taxpayer and without the banks themselves suffering an excessive capital reduction.

The following factors contributed to Hercules' success:

(a) the reduction in borrowing costs, which is mainly a result of the change of government. This is also reflected on the decrease of the fees paid for the granting of the State guarantee.
Despite a relatively limited deterioration in the government bond market during the past few days, the Credit Default Swaps (CDS)   of Greek bonds, on which the insurance premium paid by banks for the senior tranche of the Hercules securitisations is based, trade now at historically low levels (on 3/3/21, the Greek 5-year CDS were trading, for example, at 76.7), approximately at 1/3 of the prices prevailing when we took office and at about half of their price a few months ago). This not only makes it cheaper, and thus more attractive, for banks to participate in Hercules, but it also constitutes a tangible and constant demonstration of the international markets’ confidence in the way we manage our financial system.

(b) The government’s success in ensuring the so-called zero-risk weighting of the senior tranche of the securitisations retained by banks.
This was the key that unlocked the massive participation of all four systemic banks in Hercules already in the first year of its operation. This constitutes a major success for the government, since within 13 months of the scheme’s implementation, we have achieved what had not been done in the previous five years. Hercules served as the forerunner of the government’s frontloaded reforms. Therefore, our realistic government policy, in combination with our determination, clear targets and a rational sequencing of actions, gives visibility with regards to our next steps for the banking system. We are sending a unique and clear message to international investors.

Referring to the positive footprint of Hercules, the Deputy Minister of Finance reiterated that ‘Hercules is a systemic solution for the reduction of bad loans, a market-based solution that does not burden the taxpayer’ and pointed out:

“Hercules is a resilient and successfully tested tool because, despite the acute coronavirus crisis, all four systemic banks have already applied to join the scheme. It strengthens the capital base of Greek banks by reducing their bad loans and allowing them to seek funding from the markets. Greek banks become investable again and gain investment grade, which is also key for the country’s upgrade of credit ratings. The banks have announced that they are already preparing bond issues in order to diversify and strengthen their capital base along the lines of similar moves in other European countries. At the same time, we observe an active relevant participation of international investors, providing a vote of confidence in the government’s frontloaded reforms. Hercules deepens the secondary market for NPLs with a market for loan servicers of around EUR 90 billion, which is followed by significant positive effects on both real estate and capital markets.

Hercules enjoys the full support of the European institutions, as can be confirmed by the 9th Enhanced Surveillance Report issued by the European Commission last Wednesday. This was also noted last November not only by Eurogroup which applauded our efforts, but also by the statements of the SSM Chair Andrea Enria and the reports of international organizations, banks and credit rating agencies. This upgrade facilitates the attraction of investments from abroad, which is reflected in economic growth, boosting employment by creating jobs and increased incomes.”



When asked “at what stage is the government's negotiation for the extension of Hercules?”, Mr. Zavvos reminded that European partners have supported the Hercules scheme from the very beginning and believed in its ability to contribute to the reduction of bad loans.

“After the very successful implementation of “Hercules”, the banks themselves asked us for its extension at the beginning of 2021, in the presence of Prime Minister Kyriakos Mitsotakis. We are currently in the last stage of negotiations with the European Commission and we will soon formally submit the extension request to the European Commission.

We plan an eighteen-month extension of the program, from April 2021 to October 2022. The aim of “Hercules II” is to reduce both old (legacy) bad loans and any new ones that may arise as a result of the pandemic, with the ultimate goal of a further reduction of around EUR 30-32 billion. Overall, with both programs, we aim at single-digit percentage rates of non-performing loans in 2022, approaching the EU average”.


With regards to whether the worsening bond market conditions could affect the Hercules scheme, Mr. Zavvos commented that this is a technical question, but it is worth analyzing it.

‘A first indirect correlation that could be made between Hercules and the developments in the bond markets would relate to the cost of the guarantee paid by the banks to the Greek State. This, as you know, depends on the CDS of the Greek Government Bonds. However, the trends in the prices of CDS do not always follow that of bonds. In many cases, when CDS are used in order to perform their hedging function, the exact opposite may happen.

In particular, there had been an unprecedented rise in bond prices during the previous months due to massive bond purchases by the ECB, to an extent that bond yields became negative and, instead for them to  properly reflect the issuer’s credit risk — something which CDS prices do by construction — they reflected the particularly strong demand from the central bank. Now, instead of a deterioration in the bond market, I would rather say that we have a rationalization of this market and its functional correlation with CDS.

Corroboration of the above comes from the evolution of the relative prices over the past few days, which exhibited a decoupling, i.e. while government bond prices fell, Greek CDS prices remained stable. It is precisely this stability of CDS prices that reflects the constantly-increasing confidence of the markets in our government's actions and in the rapid and effective reduction of bad loans on the balance sheets of systemic banks”.

Moreover, as Mr. Zavvos commented, “at European level, the ECB has already stated through its Vice-President De Guindos that it is closely monitoring the situation and “has the flexibility to deal with any undesirable rise in bond yields”. They will first consider whether the rise in nominal yields will have a negative impact on financing conditions. If this is negative, they will adjust the ECB’s program, including the Pandemic Emergency Bond Purchase Program (PEPP).”

To sum up, Mr. Zavvos recalled that the Greek securitisation market has gone through more difficult times in comparison to where we stand now:

‘First of all, it should not be forgotten that the Hercules scheme started operating in much more difficult circumstances than the current ones, that is to say at significantly higher levels of government and bank bond yields and CDS, so our assessment is that it will continue to function normally even in case of a possible future deterioration, something for which we have anyway no evidence presently and which we cannot predict.

Second, remember where we stood in March and April last year, at the beginning of the crisis — when some, as usual, foresaw the end of this government’s initiative.

Without doubt, the securitisation program was successful in Greece despite this huge crisis, both due to the specific market conditions and due to the key features of the Hercules scheme.

I would just like to remind you that in Italy, the respective securitisation program has been extended twice since its initial adoption, something which also indicates the robustness of such programs as an effective means of reducing bad loans in the euro area. Greece is the last market for relatively large securitisations in Europe and is therefore the center of interest and attraction for investors.

As I have already said, Hercules is strong by construction, as has been hitherto shown, and it has been able to withstand difficulties “by design”, because it achieves the proper valuation, management, assurance and sharing of the various risks by using the most modern financial method available to international markets’.