Earlier this year there was a subject which occupied the headlines beyond the financial section and it was the Greek banking crisis. We had deposit flight and we also had an interesting redefinition of money as we saw both white goods and cars become ersatz substitutes for it in a rush to find perceived safe assets. Whilst the situation is now much calmer the main Greek banks (Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank) were damaged by this and the European Central Bank (ECB) reported on Saturday as to how much it feels will be needed to undertake repairs.
This assessment comprised an asset quality review (AQR) and a forward-looking stress test, including a baseline and an adverse scenario,
Okay so how much?
Overall, the stress test identified a capital shortfall across the four participating banks of €4.4 billion under the baseline scenario and €14.4 billion under the adverse scenario,
I have to confess that my immediate thought was that as it is hard to think of anywhere where things have been more adverse than Greece in recent times that it had to be the latter which was applicable.
How will the Greek banks respond?
Bloomberg has the details.
The ECB expects the banks to raise at least 4.4 billion euros from shareholders and bondholders…..The state-owned Hellenic Financial Stability Fund is ready to inject the 10 billion euros identified in the ECB’s adverse scenario, offering 25 percent through common shares with full voting rights in the lenders, and the rest via contingent convertible securities,
If we look at the proposed shareholder contribution there is the issue that they put in around 8 billion Euros of new capital last year. This is what they were told then.
The sales represent “a vote of confidence for the Greek banking system,” Maria Kanellopoulou, a financial analyst at Euroxx Securities SA, said in an interview. “Major progress has been achieved, especially for those two banks.”
The only major progress seen in 2015 has been in reverse gear for the Greek banks. Will investors be singing along to The Average White Band?
Let’s Go Round Again
Behind that is the Hellenic Financial Stability Fund or HFSF which according to its accounts published in March was in a marked to market position of having lost some 30 billion Euros of equity. Since then Greek banking shares have fallen heavily so I suppose you could see its involvement as a type of doubling down although I note that some of its new investment will be via what are called Co-Cos or contingent convertible securities. If you are a Greek taxpayer you would prefer to be investing again at a lower price but of course that dilutes existing investors. Awkward.
Also the HFSF is Greek government-owned but of course the funding comes from the Euro area.
How are the banks doing?
If we return to the issue of domestic deposits then they are 122 billion Euros are a long way short of the 160 billion with which 2015 began. A little money has dribbled back in but as you can see the vast majority has not.
As to performance well those who invested in 2014 will not be doing a jig and I will illustrate with Saturday’s numbers from Alpha Bank.
Alpha, about 66 percent owned by the country’s bank rescue fund HFSF, posted a net loss of 838.4 million euros ($922.7 million) in the Jan.-to-Sept. period versus a profit of 129.3 million euros in the same period last year. (Kathimerini).
Not auspicious for a bank which needs another 2.7 billion Euros of capital under the adverse scenario.
What about the Greek economy?
We have an obvious issue here as we consider how likely it is that the Greek banks will be able to supply credit to Greek businesses and consumers.? The answer is no at the moment and the outlook looks rather like the current London fog. Once this is over some 65 billion Euros will have been poured into the Greek banks to provide growth in only one area which is non-performing loans.
If we look at the ECB’s own view then the baseline or optimistic view is for a contraction of 2.3% in the Greek economy this year followed by a further 1.3% in 2016. The adverse view is that -3.3% this year will be followed by -3.9% in 2016. That makes me wonder exactly how 2016 could be worse than 2015 considering the shambles that 2015 has been? Has the ECB lost its faith?
Let us just remind ourselves that under the original IMF/ECB plan Greece would now be into its fourth year of economic expansion with around 3% per annum of growth between now and the end of time.
if we look at the consumer sector it is hard to believe that the numbers could still be falling but last week we discovered that they were.
The volume of retail trade (i.e. turnover in retail trade at constant prices) in August 2015, recorded a decrease of 2.2% compared with the corresponding index of August 2014,
The heaviest falling category was in food,beverages and tobacco (-5.1%) so let’s hope that the Greeks are smoking less. However the theme of economic depression is reinforced by an underlying index which was set at 100 in 2010 being at 76. The economic disaster which was July saw it at 68.3. If we recall the “Grecovery” theme which was being pressed by some well so far in 2015 5 months are worse than 2013 and 3 are better.
if we put it another way we can look at tax revenue which in the second quarter of 2012 was 20.2 billion Euros compared to 21.6 billion in 2012. If we factor in the many tax increases since then we can consider the Laffer curve via Alice In Wonderland.
“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”.
The summary is sadly depressing.
Coming off the back of the worst average quarter for the PMI since the survey’s inception, the downturn at manufacturing companies in Greece eased in October.
In the circumstances of 2015 then a reading of 47.3 may be not so bad but of course we are in yet another depressionary environment and it is still getting worse.We also get a confirmation that the woes of the banking sector have crippled it in terms of aiding the economy.
Overall, the lack of capital circulating through the economy continued to take its toll on operating conditions at Greek manufacturers.
This is a sad sorry tale which has an apparently unending ability to get worse. Not the sort of perpetual motion that we hope for. The banks are about to undergo their third capital raising in the Euro area bailout period and the IMF is again reminding everyone that the overall situation is unsustainable. From Bloomberg.
Pledges to review Greece’s debt servicing won’t be enough unless they’re accompanied by specific terms for paring back the borrowing burden, David Lipton, the IMF’s first deputy managing director, said in an interview in Washington.
As to the ECB Mario Draghi dropped even heavier hints of a further interest-rate cut in the Italian press on Saturday but a cut to -0.3% or -0.4% would do what exactly for Greece?
Unless there are further wrong turns you would think that 2016 has to be a better year but we know that 2015 which should have been a good year due to the lower oil price has been wasted. As Elton John pointed out.
It’s sad, so sad
It’s a sad, sad situation.
And it’s getting more and more absurd.
Speaking about absurdity
Here is a link to lunch with the FT with Sepp Blatter
Also if we continue with the sporting theme but not the absurd bit congratulations to the All Blacks who were worthy winners of the Rugby World Cup.