People walk outside central building of National Bank of Greece in Athens
Greek banks are facing a liquidity crisis amid political uncertainty, Moody's says REUTERS

Greek banks' liquidity scenario is going to worsen thanks to the political uncertainty in the country as banks' deposit base is not adequately strong and borrowers are not willing to restructure bad loans until normalcy is back to the political system, Moody's said.

Borrowers are likely to halt negotiations with banks over bad loans in the hope that any new government will promote borrower-friendly measures, including debt forgiveness, Moody's said.

"We believe that borrowers will be less willing to restructure nonperforming loans during this period of political uncertainty."

Greek banks' main focus has been to tackle high level of non-performing loans (NPLs) on their books, which were 34.1% of total banking system loans in June 2014.

After three attempts, the Greek parliament failed to elect a new president so the parliament was dissolved and snap national elections were set for 25 January, creating political uncertainty in the country.

This uncertainty is credit negative for Greek banks, including National Bank of Greece, Piraeus Bank, Eurobank Ergasias, Alpha Bank and Attica Bank, the rating agency said.

"The political uncertainty surrounding Greek government and the subsequent re- emergence of speculation around a Greek exit from the Eurozone damages depositor confidence and hinders banks' access to liquidity," Moody's Investors Service said in an 8 January note.

The Eurozone exit speculation is mainly driven by the fact that the main opposition party, which strongly opposes the austerity measures and structural reforms required for financial support from the International Monetary Fund, European Central Bank (ECB) and European Commission, is leading opinion polls, Moody's said.

"We expect the alternative funding that Greek banks have recently obtained through interbank borrowing and loan securitisation to temporarily dry up and exacerbate the system liquidity, at least until the political situation normalises," Moody's said.

Also, the new government has to reach an agreement with the Troika on the support programme, which will end next month.

Greek banks are maintaining their liquidity by increasing their dependence on ECB funding, which is contingent on Greece abiding by the Troika-set conditions and remaining within the European Union support programme, the rating agency noted.

At the end of November, private-sector deposits were €164.3b and that ECB funding was €44.9b in the Greek banking system.

No Greek bank is now using the emergency liquidity assistance the fact that ELA funding during the previous political crisis rose to €124.1b shows that the time is not good for the country's banking system, Moody's said.

The ELA from the Bank of Greece is not unlimited and is subject to ECB governing council approval.