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16 June 2015 By George Hay Follow @gfhay

If and when Greeks stop draining deposits, the country’s banks still face a big problem: not enough equity to absorb losses on bad loans. Soon 40 pct of assets will be in trouble. Some will recover with the economy, but lenders need lawmakers to amend bank-unfriendly rules too.

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Greek bank non-performing loans could increase to 38-40 percent of gross loans by the end of 2015, Moody’s forecast on May 20.

The ratings agency reported weak economic conditions, increased repayment defaults and loan rescheduling delays, because borrowers hope to benefit from the government’s proposed pro-borrower measures. Moody’s said that while loan-loss reserves had risen in 2014, they remained insufficient to cover expected losses, particularly as banks’ ability to foreclose on residential properties remains constrained.

Moody’s estimates that funding from the European Central Bank and the emergency liquidity assistance from the Bank of Greece increased to about 32 percent of total assets for the system at the end of April 2015 from about 12 percent at the end of September 2014.

These pressures were unlikely to ease over the next 12-18 months, and there was a high likelihood of an imposition of capital controls, Moody’s said.

Moody’s also cautioned that 55 percent of Greek banks’ weighted average 13.7 percent common equity Tier 1 capital ratios were lower-quality deferred tax assets whose eligibility to be converted into more robust deferred tax credits was contingent on the Greek government’s creditworthiness.

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