It’s not like Fitch was ahead of the curve when it declared on Friday that the “four largest Greek banks have failed…” two days after downgrading them to “RD” (Restricted Default) because they’d defaulted on their depositors.
But Fitch shed a gloomy light on just how tough – or rather impossible – it will be to move forward so that these banks can re-open their doors, even if negotiations between Greece and its creditors can be brought back to life.
The four banks – National Bank of Greece, Piraeus Bank, Alpha Bank, and Eurobank Ergasias – account for 91% of Greek banking assets. Already bailed out twice since the Financial Crisis, their shares were penny stocks while they were still trading on the Athens Stock Exchange, now also shut down.
They have two toxic problems: they’re illiquid and insolvent. Either one would have been enough to topple them.
They’re illiquid because the Greeks have zero trust in them and have been desperately yanking their euros out while they still could.
These banks would have toppled long ago if it hadn’t been for the €40 billion the ECB injected into them directly and for another €89 billion in Emergency Liquidity Assistance (ELA) through the Bank of Greece. The money was then passed on to the Greeks via cash withdrawals. But last weekend, the ECB shut off the spigot.
And they’re insolvent because the quality of their assets – mostly loans extended to Greek businesses and individuals – has collapsed at a blinding speed and has wiped out their capital. According to Fitch, by the end of March, 36% of the outstanding loans were 90 days or more past due. These “arrears may since have risen significantly.”
Stories have been circulating how Greeks are “strategically defaulting” on their debts. From their point of view, banks were black holes. Why pay them? They were proven right. But it hastened the collapse of the banks.
If these past-due loans have grown over the past three months to 40% of all loans, and if the recovery rate of these bad loans is 50%, in the most optimistic case given the disastrous state of the Greek economy, banks would suffer a loss equal to 20% of their loans outstanding. It would more than wipe out their regulatory capital.
Even much smaller losses would do the job. Fitch figures that “an aggregated total regulatory capital erosion” equivalent to about “5% of domestic gross loans” would “render them non-compliant with the EU minimum total capital requirement…” and therefore insolvent.
So what’s next?
A “resolution” of the banks, Fitch says. The four big banks would be “resolved” by the ECB, the smaller banks by the Bank of Greece. When banks get “resolved” someone is going to pay for the bank’s sins and corruption of the past. But who?
And that’s why it won’t work:
Recapitalization of Greek banks using domestic resources would be impossible due to the sovereign’s weak financial condition. The remaining €10.9 billion European Financial Stability Facility notes available to cover potential bank recapitalization or resolution in Greece were cancelled by the European Stability Mechanism (ESM) when Greece’s bailout program expired on 30 June.
The Greek deposit insurance fund, which could be used to recapitalize banks, contained only around €3 billion at end-2013. No pan-EU deposit insurance fund yet exists, but under the recast Deposit Guarantee Schemes Directive, EU banks can access other countries’ deposit insurance funds. Other EU member states would be highly unlikely to agree to share due to a lack of confidence in Greece and its banking system.
The ESM could still inject funds directly into the banks, but a precondition would be the bail-in of 8% of liabilities and own funds. This would most likely wipe out much or all equity in a failed bank…. Greek banks have issued limited debt, so ESM rules would theoretically make uninsured deposits vulnerable to bail-in…. But any bail-in of uninsured deposits would be politically unacceptable for a Greek government and would also be unlikely to be palatable for Greece’s international creditors, as they overwhelmingly relate to “real economy” SMEs and retail customers.
In other words, nothing would work to get these banks to re-open their doors.
Fitch suggests that an “alternative, more creative solution” would have to be found, a miracle of some sort, where no one has to pay, while bad loans, past banking sins, and outright corruption are forgiven and forgotten. This would require the very thing that the Syriza government has tried so hard and successfully to destroy: “political goodwill.” And it would depend on the “outcome of negotiations with creditors,” the very negotiations that have drowned in acrimony last weekend.
One heck of a doom-and-gloom mess, as analyzed by a ratings agency.
Oh, one more thing…. “A swift lifting of capital controls is highly unlikely even if there is successful resumption of negotiations,” Fitch says, adding: “Controls on Cypriot banks, lifted in May, lasted two years.”
And the one industry in Greece, the largest and most vibrant one that no government has been able to kill? Read… Greece’s Largest Industry Suddenly Takes a Terrible Hit
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http://www.zerohedge.com/news/2015-07-03/greek-banks-considering-30-haircut-deposits-over-%E2%82%AC8000-ft-reports
8000 Euros. That’s a low bar.
“They have two toxic problems: they’re illiquid and insolvent. Either one would have been enough to topple them.”
Suspect it may be lot worse than Cyprus and geesh what kind of message is being conveyed to the rest of the PIIGS – Portugese, Spanish, Irish and Italian citizens?
Greece caused Cyprus, which had a solid banking system.
Until their greek brother they had so blindly supported in Ethnic loyalty. Broke all his promise, and defaulted, leaving. Cyprus. holding billion of EUR worth of greek toilet paper.
The “haircuts” imposed, on the Cypriot banks in greek bailout 1. Made the implosion of the Cypriot banking system, a when. The Cypriots did extremely well, to keep it running for so long.
The disease, permeated to the farthest corners of the EU, and global banking system, by greek lies.
Has now returned to destroy the originator.
Justice.
Note
The whole EU banking system was rocky.
The Bank problems in: Spain, Portugal, Italy, Cyprus in particular, and others , ALL had their roots in the first greek default, and HAIRCUTS. Those 4 Systems simply could not survive the imposed haircuts, in the first greek bailout.
Those banks in those systems, lent so much to greece for1 reason.
greece lied its way into the EZ. and those banks believed the numbers.
Lehman Bros, Created a problem for the US system. greek lies, turned that US problem, into the biggest global depression since 1929. Simple Fact.
“greece lied its way into the EZ”
And guess who helped GrEEKs like their way into EU? Government Sachs of course. I’m sure Mario’s ex-alum and handlers are busy behind the scene with some kind of new drachma bonds filled with more lies/fantasies of course for hefty underwriting fees.
Deflect, deflect, deflect.
You are saying the bullet manufacture, is responsible for all the deaths, and destruction, in a war. Even when his bullets are illegally obtained.
greece presented the documents, and new they were false, as they paid dodgy Accountant’s, to prepare them. Those dodgy Accountant’s, no longer work for Goldmans.
Has anybody ever proved, or tried, to prove, the top of Goldmans, “authorized”, that illegal activity.
They haven’t, and they can’t, or the EZ, already would have presented its damages claim. To Goldmans, long ago.
This situation is a greek problem, created by greece, and only greece.
Anyone with a simple business education can tell that the IMF are after the Greece gold whats left of it don’t let them get their hands on other countries take note
The IMF doesn’t care one iota about gold. Their purpose in life is to bail out big bondholders, particularly big banks, that own sovereign bonds of other countries that have borrowed in a currency they don’t control and can’t devalue (ie. Mexico borrowing in dollars, or Greece borrowing in euros). The idea is that no such bondholder should be made to lose money.
Countries borrow in currencies they don’t control because it’s a lot cheaper, and they can splurge and spend money they don’t have. For a while.
And so the IMF then tightens the belts around the little guys in that country so that the big-fat bondholders don’t lose money. That’s all the IMF cares about. It’s an international bondholder bailout fund and should be called IBBF.
Little guys can protect themselves from this by not allowing their government to borrow in a currency they don’t control. But then they don’t benefit from that money that would have been borrowed in hard currency, and their own currency would constantly collapse in value … a tradeoff.
Less than 1/3 of greek gold is in greece.
They have less than $ US 5 B Totall.
Its all, already pledged.
So unless the IMF buys out the pledges, nothing happening.
Like Wolf says, the job of the IMF, is to protect the system, by ensuring International Bondholders, dont lose too much in International Defaults. Or international State credit, will freeze, and then, the 2008 crisis, will be a tiny tiny drip in the Pacific, compared to what will happen.
As long as there are Nation State’s, there will be Army’s, a necessary evil of the system.
As long as there are humans in society’s, there will be Policemen, a necessary evil of the system. Even troops of monkeys, have enforcers, of the “alpha males” will (Policemen).
As long as there is a credit based international financial system, there will be defaulters (deliberate or otherwise), and so there must be, an international Policeman of that system, currently the IMF. To avoid “Wars of Enforcement”.
Nobody, likes, or wants, Policemen. Lets see you survive, and retain modern society, without them.
Gold, not much use to IMF, the way it operates.
If assets were marked to market and allowed to freely trade most of the major banks would be insolvent. Some have been insolvent since the 80’s, but allowed to mark to model to protect the big investors, and kept liquid to avoid default.
Greece should close all the banks and start new ones, it’s the only way for them to recover. Sell everything, give back deposits to the extent possible, and start over. The rating agencies are useless. The financiers buy the ratings they want and Greece ran out of money to do so, so now they are finally acknowledged to be in default. What a joke the financial system has become.
Hey Wolf…The ole adage applies…I borrow $10.000 from the bank and it owns me – I borrow $10 million from the bank, and I own the bank.
Unlike Cyprus, the Greeks own the EU-28; and the Germans & The French & the Dutch will pay…the Finns not!!!
Best for Independence!!!…PJS
Pete Stubben
Rockaway, NYC
But there’s a corollary to that adage: Don’t throw good money after bad. Germans know that too.
greece owes less than .4 T Eur.
Less than 3.5% annual GDP the EU.
greece owes the bank, it dosent own it.
I’m reminded of the movie The Money Pit. How long to fix the Greek banks? Two weeks!
World-wide, I suppose this bail-in business is just a preliminary reversion to pre-deposit insurance days, when the bank went broke and if you weren’t quick enough you lost all or most of your money.
All the deposit insurance schemes are 97% insolvent anyway, with the choice of solutions being
1: to take all or some of your money and give you (at least in the near-term) worthless shares in the bank that just went broke,
2: to freeze your funds over the ‘insured’ amount, steal the rest, and allow you to beg to get the remainder of your own money back for worthwhile expenditures to be determined by a bureaucrat, while allowing a spending allowance each day,
3: to print 30 times the money supply and cause hyperinflation, or
4: let the whole rotten mess collapse and start over, with the militarized police in tanks in the street dressed in their Star Wars gear maintaining order to protect the authorities with their inflation-adjusted pensions and safe rooms.
I would bet on 1 or 2, at least initially.
That is why today metal is still a good store of wealth.
Useable metal ingots of , Copper, Lead, Aluminum, Titanium, Brass, even Tin, maybe a little silver. Quietly bury in good quality hardwood boxes, in dry soil, and it will still be there in a 1000 years. (or even hide in plain sight, as dirty old boat keels) as long as you buy in the dip, rarely loose on it.
Gold, over priced, and hyped, with little working demand value. And attracts every thieving jackdaw in a thousand mile radius, as it is too easy to carry away.
Lets see you carry away a seven ton boat keel, without a crane and a big truck.
Let me see you sell a 7 ton boat keel full of those metals.
No problem in my country bud, also have them in smaller sizes.
You want to make simple alloys, to make metal things, you NEED those metals.
Got some nice new 250 gram copper bars as well, worth about 8.00 each as virgin metal. At the moment.
Everybody needs change.
Before the white man, Copper was the money on the US east coast.
Remember all those early American paintings, of native’s wearing copper bracelets, not made by white men.
lets see you pick up that $100,000 item and walk away with it, its a store of wealth, needs some, cut a bit off.
Tsipras & Varoufakis outsmart Troika by enriching the Greeks and maybe even helping these 4 banks to rise up from the ashes.
Now, we know WHO GETS WHAT