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In a push to tackle Greek’s bad debt exposure, the Greek Parliament has approved a new asset purchase scheme nicknamed ‘Hercules’. The scheme aims to assist Greek banks deleverage their non-performing loans (NPLs) without the need for the government to step in with subsidies.

Under the scheme, banks will sell non-performing loans to a special purpose vehicle, which will use proceeds from the issuance of tranched notes to market investors to purchase the loans. The Greek government will provide a public guarantee for the senior notes in the securitisation vehicle at a market rate.

The Greek government has been working to reduce the level of bad debt held by the country’s banks, which are the highest in the EU. In the last three years, Greek banks have been moderately successful in reducing their exposure, although an estimated €75 billion remains. The approval of Hercules aims to attract market investors to support the banks in their efforts to reduce their exposure to non-performing loans held on their balance sheets by up to €30 billion.

The model is similar to the process underway in Italy under the GACS scheme, which, as with Hercules, wraps up bad loans into a securitisation vehicle, with the government offering a state guarantee over the most senior notes. Since its launch in 2016, the GACS scheme has successfully reduced the level of bad loans that accrued in the Italian market during the years of economic crisis by an estimated €51 billion from February 2016 to November 2018. In 2018 the GACS scheme was extended until 2021.

The risk of a relapse in Greece’s economic recovery is likely to be a key concern for investors purchasing non-performing loans, along with the challenging judicial system in Greece, which is often timely and expensive. However, low interest rates both in the European Union and at a global level are expected to encourage investor appetite to enter the Greek NPL market.

Hercules is set to run for an initial 18 month period from 10 October 2019, the date the scheme received approval from the European Commission, which confirmed that it did not constitute state aid. The scheme was initially planned for €9 billion but has since been increased to €12 billion, and may be increased further subject to approval from the European Commission.

The approval of the scheme is an encouraging step for the Greek banks in tackling the herculean feat of reducing their balance sheet exposure to non-performing loans and strengthening the financial system following years of financial crisis.