ECB allowed Greek banks to pay dividends after 16 years ban

ECB allows Greek banks to pay dividends

The European Central Bank (ECB), which controls the eurozone banking system, has lifted a 16-year ban on dividend payments by Greek banks. This is a clear sign that the central bank now considers the four main Greek banks sustainable enough to distribute some of their profits to shareholders. It also suggests that Greece's economic situation is stabilizing after the debt crisis of the past decade.

During the financial crisis, from 2010 to 2018, Greek banks took a €50 billion ($53.17 billion) hit. At the time, they were also overwhelmed by an avalanche of impaired loans that were later sold to collection agencies. Greece was at the epicenter of the crisis, but returned to normal after three bailout plans that included end-of-day recapitalization of banks and drastic economic measures that bankrupted millions of Greeks. Today, Greece's credit rating has been taken out of the speculative category and economic growth this year is expected to be 2.5%, close to pre-crisis levels. And banks' overall bad debt ratio has fallen from a critical 45% in 2016 to less than 6% this year.

Gradual equalization

The country's four largest banks - Eurobank, National Bank of Greece, Alpha Bank and Piraeus Bank - will generate profits of around €3.5 billion in 2023, mainly due to rising interest rates. The four banks are expected to distribute 875 million euros to their shareholders this year, giving an average payout ratio of 25 percent - relatively low compared to the 50 percent average for European banks in the eurozone.

"We expect Greek banks to increase their payout ratio over time in line with the EU average (...) and average yields should rise from 4 to 10% in 2026, in line with the EU average," broker Jefferies said in a note. Thus, Eurobank plans to increase its payout ratio from 30 to 50% in 2026.

Boosting investment

The ECB's decision could have a positive impact on the entire European Union. A healthy Greek banking system that is able to distribute profits could attract new investments. This could benefit not only Greece, but the entire EU by stimulating economic growth and job creation. When Greek banks become more profitable, they may be more willing to lend to businesses and individuals, further spurring economic activity.

The ECB's green light for Greek bank dividends can also be seen as a signal of confidence in the overall health of the eurozone banking system. If Greece, which was at the center of the financial crisis, can successfully return to normalcy, it will demonstrate the resilience of the eurozone's financial architecture. This could improve investor sentiment towards the eurozone as a whole, potentially leading to increased investment and economic stability.

However, potential problems should also be considered. If Greek banks prioritize paying dividends over building capital reserves, this could make them more vulnerable to future economic shocks. In addition, excessively high dividend payments could discourage banks from lending to the domestic market, which could hamper Greece's economic recovery. The ECB is likely to monitor the situation closely to ensure a balance between shareholder returns and financial stability.


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