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