According to a recent report from Morningstar DBRS, the Greek Non-Performing Loans (NPL) market has made significant strides over the past five years, largely due to the implementation of the Hercules Asset Protection Scheme (HAPS). This initiative, launched in 2019 by the Hellenic Ministry of Economy and Finance, was designed to help Greek banks reduce their massive NPL portfolios. The program’s success has been pivotal in stabilizing the country’s banking sector, bringing down NPL ratios from historically high levels.
The Thirteenth Labour of Hercules: The HAPS Initiative
Drawing inspiration from the labors of the mythological hero Hercules, the Hercules Asset Protection Scheme (HAPS) reflects the immense challenge it was designed to tackle. Much like Hercules, who was tasked with completing twelve seemingly impossible feats, HAPS was introduced to bring order to a financial system plagued by bad debts and an unstable banking environment.
Since its inception in 2019, HAPS has allowed Greek banks to offload billions of euros in NPLs by using state guarantees on senior tranches of securitized bad loans. The report by Morningstar DBRS details how the program’s structure, inspired by Italy’s Garanzia Cartolarizzazione Sofferenze (GACS), provided incentives for banks to sell their junior and mezzanine loan tranches to third-party investors. This strategy reduced the banks’ NPL exposure while providing investors with protection via government-backed guarantees.
HAPS Framework and Success
The first version of the Hercules Asset Protection Scheme ran for 18 months with a budget of €12 billion, enabling banks to securitize and offload bad loans. Following the success of HAPS I, the program was extended twice, and HAPS III is currently underway, with applications being accepted until December 2024. To date, 17 transactions have been executed under the scheme, involving Greece’s four systemic banks: Alpha Bank, Eurobank, National Bank of Greece (NBG), and Piraeus Bank.
According to Morningstar DBRS, the HAPS program has been highly effective, aligning the interests of banks, investors, and regulators. For banks, the ability to securitize bad loans and reduce their NPL ratios has allowed them to focus on financing the real economy. Investors benefit from the state-backed guarantees on senior notes, while regulators have seen NPL ratios drop substantially across the Greek banking sector.
Deleveraging Success
One of the most remarkable outcomes of the HAPS program, as highlighted in the Morningstar DBRS report, is the substantial reduction in Greek NPL ratios. In Q1 2017, the NPL ratio stood at a staggering 49.1%, with over €103 billion in bad loans. By Q4 2019, when HAPS was introduced, the ratio had already dropped to 40.6%. However, since the introduction of the program, NPL ratios have plummeted to single digits, reaching 9.7% by Q3 2022. As of Q1 2024, the ratio stands at 7.5%, signaling a major success in deleveraging the Greek banking sector.
Credit Servicing Firms (CSFs) and the Road Ahead
Although HAPS has allowed banks to offload large portions of their NPLs, these debts remain in the economy and are now being managed by Credit Servicing Firms (CSFs). Under Greek law, CSFs are exclusively responsible for servicing transferred NPLs. According to the Morningstar DBRS report, CSFs managed approximately €70 billion in loans as of Q1 2024, down from a peak of €87.7 billion in Q1 2022. This reduction demonstrates the progress being made in working out these loans, though the task remains ongoing.
The Future of HAPS
As Morningstar DBRS outlines in its report, the Hercules Asset Protection Scheme has been instrumental in helping Greek banks reduce their NPL ratios to sustainable levels. While HAPS III may be the final iteration of the program, its impact on the Greek financial sector will be long-lasting. With the systemic banks now boasting NPL ratios below 5%, the focus has shifted to smaller institutions and Credit Servicing Firms (CSFs) to manage the remaining debt.
In conclusion, the Morningstar DBRS report underscores the importance of HAPS in restoring stability to the Greek banking system. As Greece approaches the end of this crucial program, the challenge now lies in ensuring that the remaining NPLs are resolved effectively. HAPS has been a model for how targeted government intervention can help banks offload bad debt, and its success offers valuable lessons for other European countries facing similar challenges.
