Greece's biggest banks, their decline in market cap and the loss of deposits since January 2010 (evidently the past several weeks of withdrawals are not yet visible on this chart). |
„Greece's bank stability fund
approved an 18 billion euro ($22.96 billion) injection to rescue its four
largest banks on Tuesday, and an official said they would get the urgently
needed funds as soon Wednesday.
Bankers say the recapitalisation will allow them to again receive funding from the European Central Bank (ECB), which cut off some Greek banks last week because they lacked enough capital to be considered solvent.
Huge losses from a sovereign
debt swap in March nearly wiped out the capital of Greece's systemically
important banks and Greek authorities are scrambling to wrap up a bridge
recapitalisation to help them cope with a cash crunch.
The Hellenic Financial
Stability Fund (HFSF) said it had approved an agreement to release the funds,
which will come in the form of notes issued by the euro zone's financial rescue
fund, the European Financial Stability Fund (EFSF). The HFSF statement said the
deal would be presented to the Greek banks for signing on Wednesday, and an
HFSF official said the funds would be released as soon as it was signed.
Recapitalising Greece's limping banks is a vital part of the 130-billion-euro EU and International Monetary Fund bailout Greece agreed in March to stave off national bankruptcy.
But with Greece lacking an
elected government after an inconclusive vote on May 6, implementation of the
deal is largely on hold. With details of the overall 50-billion euro
recapitalisation plan for the banks still unresolved due to political deadlock,
authorities have come up with an interim solution to keep the four biggest banks
afloat until a new government is formed to finish the framework.
Greece will hold a repeat
election on June 17, and opponents of the March bailout agreement have surged
in opinion polls, alarming European leaders who say that if the bailout is
rejected at the ballot box Greece could face swift bankruptcy and economic
collapse.
Greeks have been withdrawing
their funds from banks for months, and the pace has picked up dramatically
since the May 6 vote. That has forced Greek banks to cover their funding gaps
by tapping liquidity from the ECB and the Greek central bank's more expensive
emergency liquidity assistance (ELA) window against collateral.
They already had borrowed 73.4
billion euros from the ECB and another 54 billion from the Bank of Greece via ELA,
based on the most recent data as of January.
Together, the sums translate
to about 77 percent of the banking system's household and business deposits,
which stood at about 165 billion euros at end-March.
Last week the ECB suspended
some Greek banks from its funding operations because their capital was too low,
forcing them to migrate to higher-cost funding at the Bank of Greece's ELA
facility.“
Evidently the ECB has stopped its open market
operations with Greece's banks due to their lack of acceptable collateral some
time ago already. This has left the ELA ('emergency liquidity assistance')
program as the sole funding tool, which is administered by the national central
banks (NCB's) in the euro system and requires the ECB's placet. As
might be imagined, the collateral eligibility criteria for the ELA program are
significantly below the already quite generous rules employed at the central
ECB level.
For instance, Ireland's central bank last year
famously lent its insolvent banks some €58 billion upon the issuance of 'IOU's'
by the banks. We don't know what kind of collateral the Bank of Greece is
accepting in these operations, but to be safe one should probably assume the
worst. In fact, we think it is almost certain it is getting bank IOU's as well
(see also further below).
The above is highly significant if it is true. As
David Zervos, head of Global Fixed Income Strategies at Jefferies related in a
recent missive, the ECB used its power over the granting of ELA to essentially
blackmail the Irish government into bailing out its banks. Of course this was
all done in a very polite, gentlemanly manner, by pointing out that Ireland's
clearly insolvent banks were coming close to violating the rules. Yes, there
are rules at Europe's money printing central command station! These are
apparently invoked 'as needed'.
The rule violation would have occurred in this
instance if an idea the Irish government was toying with at the time – namely
to let the senior bondholders of the defunct Irish banks eat some of the losses
they so richly deserved – had been put into practice. Then, so the ECB's
argument went, the institutions concerned could no longer be regarded as
'sound'. The rules say that the ECB must object to the extension of ELA if the
recipients can no longer be deemed 'sound'. So there!
Of course the end result of the Irish intervention was
that Ireland's government first had to lie about why it went ahead with the
bank bailout, and then had its lie exposed in the most interesting fashion: the
exact opposite of what it said would happen if it didn't bail out bank
bondholders happened precisely because it bailed them
out.
By bailing out the banks, the Irish government was
eventually forced to seek a bailout itself, although it had asserted that the
main reason why it had to bail out bank bondholders was that this was the only
way to ensure that the government would be able to continue to fund itself in
the markets!
We noticed with some interest that the ECB cut off
direct funding of several more Greek banks a little while ago as they ran out
of eligible collateral. However, recently the first rumblings could be heard
about a potential end to ELA financing as well. As German news magazine 'Der Spiegel' reported a few days ago:
„When the head of Greece's
central bank, George Provopoulos, recently met with his European counterparts,
the session turned into a confession. His fellow Greeks had just withdrawn €800 million ($1.022
billion) from
their bank accounts, within just a few days. Consequently, at a meeting of the
Governing Council of the European Central Bank (ECB) last Tuesday, Provopoulos
had to ask for money — once again.
Most Greek banks are currently
cut off from the usual ECB lines of credit. They no longer have sufficient
collateral. A number of banks are even currently operating without sufficient
capital as a risk buffer for their activities. Indeed, Provopoulos had to
accept last week that yet another crop of Greek banks were branded as unfit for
ECB refinancing.
These zombie banks are being
kept alive with help from the so-called Emergency Liquidity Assistance (ELA) —
a rescue aid program managed by Provopoulos. At every session of the Governing
Council, he has to have these special allocations approved.
For the time being, he has
succeeded. Last Tuesday, the ceiling for the amount of aid that Provopoulos is
allowed to give his banks was even raised again, from roughly €90 billion to
€100 billion. But the Council is harboring increasing doubts about this
permanent subsidy.
The central bankers are caught
in a moral conflict. Cutting off the flow of money would have disastrous
consequences: Greece would quickly run out of money. The population would soon
not even have enough cash to pay for its daily purchases.
The entire country essentially
depends upon life support from the ECB. At the same time, the risks are
mounting on the central banks' balance sheets. Already back in February, Greek
banks had accumulated more than €106 billion of debt alone in the TARGET2
internal payment system of the euro zone's central banks.
But the central bankers are
particularly annoyed as they once again have to play the role of major
bankroller because the political system is failing to address the problem.
Indeed, in the Greek election circus, it looks like the issue of urgent reform
of the country's ailing banks may be given short shrift.
Nevertheless, funds are
available: The most recent bailout package for Greece includes €50 billion to
recapitalize the financial sector. The euro partners have even already
transferred half of this money to Greece.
The legal conditions for the
bailout have not been clarified, though. Originally, private banks were
supposed to raise roughly 10 percent of their recapitalization from private
investors, or run the risk of being nationalized. Investors are, however, hard
to find. So this uncomfortable issue has been sidelined in the election
campaign.
By the end of last week, not
even an initial bridge financing of €18 billion had flowed to the banks — funds
which the interim government under Loukas Papademos had approved in a rush
before the election on May 6.
[…]
„According to an analyst with
the Moody's rating agency, the Greek banks have in the meantime become
"economically insolvent," and thus urgently rely on assistance from
the rescue fund. Even
former model institutions, such as the country's largest lender, the National
Bank of Greece, which posted earnings of €1.6 billion in 2007, are fighting for
their survival.
Greek banks may have never
indulged in high-stakes gambling on the US real estate market, but after they
entered the euro zone, they aggressively expanded their lending operations.
Now, they are threatened with massive defaults. Furthermore, the country's
financial elite is closely linked to the political arena. At the beginning of
the crisis, this prompted the banks to purchase huge amounts of sovereign
bonds. The partial debt waiver by private investors a few weeks ago suddenly
took an enormous bite out of the banks' remaining capital reserves. This
so-called haircut cost the country's four largest banks alone €24 billion.
To make matters worse, nervous
customers have been pillaging their bank accounts since the beginning of the
crisis. The banks have already lost one-third of all their deposits.
Some of Europe's central
bankers are nevertheless no longer willing to allow themselves to be endlessly
tapped for cash. Belgian Luc Coene has already openly warned that even the ELA
payments must "absolutely" be stopped if the Greek banks are actually
hopelessly bankrupt, and not merely illiquid.
(emphasis added)
Gee, do you perhaps think they may no longer be 'sound
institutions'? What part about 'economically insolvent' did the rest of the
ECB's board members not understand? Of course in today's world 'economically
insolvent' banks are quite often still 'politically solvent'.
The above morsels illustrate the perversity of
the modern-day fractionally reserved banking system with its unlimited central
bank backstop like few others we have come across. It is really the ultimate in
'extend and pretend' schemes – nothing else comes even close.
Evidently Lucas Papademos had the wits
to quickly approve the €18 billion in EFSF funds for the banks shortly before
he retired from politics. Presumably he guessed that even more trouble was
looming for the banks after the election.
However, the piece
de resistance is the
final paragraph of the Spiegel article:
The banks have
simply submitted massive quantities of their own bonds to the central bank —
after the government stamped them with a state guarantee.
But what will this guarantee still be
worth if Greece becomes insolvent? The dubious bank bonds along with
Greek government bonds make up roughly 60 percent of the collateral that Greek
banks have supplied to obtain cash injections.
At least the worrisome bank bonds will
be on the agenda of the next ECB Governing Council session. The
fact of the matter is that this bizarre practice was slated to be phased out by
mid-2012 for countries that receive aid from the euro rescue fund. For the time
being, though, nobody is talking about that plan.
(emphasis added)
Well there you have it…'bank bonds' with
a 'state guarantee' – bonds issued by Greek banks and guaranteed by the Greek
State! And they still have €165 billion in deposits? You may think that if
that's true then there must be a lot of 'dumb money' in Greece, but the tax
payers elsewhere in the euro area are really the dumbest of all, because they
and every user of the euro are going to pay for this calamity in the end.
As we often say: you couldn't make this
up.
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