October 4, 2018 / 7:22 AM / 15 days ago

End of Greek cash withdrawal limits credit positive for its banks- Moody's

ATHENS, Oct 4 (Reuters) - A move by Greece to lift restrictions on cash withdrawals from domestic bank accounts and a further easing of capital controls are credit positive for its banks, ratings agency Moody’s said on Thursday.

The ending of the withdrawal restrictions and an increase in the amount of money that can be transferred abroad - part of measures to ease controls imposed three years ago - went into effect on Oct. 1.

Capital controls were put in place in June 2015 amid political and economic turmoil to stem deposit outflows from Greek banks.

“Improving economic prospects and an increase in private-sector deposits allowed for the easing of capital controls, which will likely strengthen depositors’ confidence and help banks further improve their funding profiles, a credit positive,” Moody’s said in a report.

The gradual return of deposits to the banking system over the past seven months and optimism after Greece’s successful exit from its third bailout programme were the key drivers behind the decision to loosen capital controls, the agency said.

In addition, a material reduction in banks’ dependence on central bank funding through the Bank of Greece’s Emergency Liquidity Assistance (ELA) mechanism points to a liquidity improvement in recent quarters.

“The easing of restrictions will likely encourage households and companies to return to local banks any money held outside of Greece’s banking system,” Moody’s said.

Banks’ Emergency Liquidity Assistance balance fell to about 4.5 billion euros ($5.16 billion), or 2 percent of total assets, at the end of August from 21 percent in August 2015.

Three of six rated Greek banks - Piraeus, National Bank and PanCretan Cooperative Bank - have fully repaid their ELA balances.

But domestic politics and social instability remained risks to the economic recovery. “A potential prolonged political uncertainty, combined with looser capital controls, could cause significant deposit outflows,” Moody’s said.

$1 = 0.8713 euros Reporting by George Georgiopoulos; editing by John Stonestreet

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