Greece’s economy has been turbulent for some time, and has been in recession for over six years. Taking decisive measures to turn things around, on Oct. 7 the country decided to essentially spin off their mountains of bad loans into a special bank, leaving the National Bank of Greece (NBG) in a much healthier state, in banking executives words, restore customer confidence in their business.
The “good bank/bad bank” strategy is becoming an especially common one in Europe. In March the country of Cyprus did the same thing, killing off the second largest bank, the troubled Laiki, and transferred most deposits to the largest, the Bank of Cyprus. The UK government is also considering taking similar actions with the Royal Bank of Scotland. The concept has its roots in the 80s banking crisis in America, and was famously proposed as a way to save Lehman Brothers before that company collapsed.
By splitting, Greece can sequester the bad loans that account for nearly 29 percent of their books. With the bad loans shed, Greece hopes they can restore faith in an economy that has shrunk for 20 straight quarters.
However, there might be a light at the end of the tunnel for the troubled Grecian economy. While it contracted 4.6 percent in the second quarter of 2013, it was a big improvement over the first quarter, which saw a 5.6 percent shrink.
Greece is hoping to capitalize on the recovery with both National Bank of Greece and Piraeus, two of the country’s four biggest lenders, planning on engaging in the good bank/bad bank strategy.
While the spinoff is still in the planning stages, investors reacted ecstatically. National Bank of Greece shot up 14.38 percent to hit $5.25 a share while trading at six times normal volume.
(image courtesy of Wikimedia Commons)
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