Monday, January 30, 2012

Voluntarily or involuntarily, Greek banks move towards recognizing their losses

It appears that the ability of Greek banks to continue hiding their on and off balance sheet losses is coming to an end.

As reported by Kathimerini (hat/tip ZeroHedge), Greek bank customers with or without jobs may now be able to have their debts written down to what they can afford.

Effectively, this greatly reduces the ability of Greek banks to continue hiding losses.

The question becomes how to retain confidence in a banking system with negative book capital?

Regular readers know the solution proposed on this blog.

  • In the case of Greece, deposit insurance needs to be backstopped not just by the Greek government, but also by the European Financial Stability Fund.  If depositors believe they can get their money out when they want to, they will leave it in the banks even if they have negative book capital (don't take my word for it, this is what US depositors did with Savings and Loans in the late 1980s).
  • The European Central Bank needs to reiterate that it will accept all of the good collateral that the Greek banks might have.  This signals to depositors that the Greek banks have the liquidity necessary to in fact give them their money back.
  • The Greek banks need to provide ultra transparency and disclose their current asset, liability and off-balance sheet exposure details.  This allows market participants to assess their risk and assure themselves that no additional losses are being hidden.
  • The Greek banks need to continue to originate loans to creditworthy customers to support economic growth in Greece.  These loans can be funded in a variety of ways - covered bonds, deposits or sale.
  • Finally, the Greek banks should retain their future earnings to rebuild their book capital base.
In what could turn out to be a significant ruling for Greeks suffering from the economic crisis, a court in Hania, Crete, has become the first in the country to order that the majority of the debt owed to banks by someone still in full employment be wiped out. 
Sunday’s Kathimerini understands that the Justice of the Peace Court in Hania based its decision on a 2010 law that allows judges to give protection to people struggling to meet their financial commitments. Until now, the legislation has only been used to give debt relief to unemployed people or those with no substantial income. 
However, in the Hania case, the court ruled in favor of a full-time civil servant. The divorced woman, who has three children, asked to be given protection after her banks refused to offer her new terms for combined loans of 112,000 euros. The unnamed woman explained that she did not have any assets she could sell to pay off her debt. 
In its ruling, the court deemed that the woman, who has moved in with her parents, needs 350 euros a month to cover her own costs but that the rest of her earnings could be distributed equally among the three banks she owes money to. The judge deemed that this process should last for four years, meaning the woman would pay back some 30,000 euros and the remaining 82,000 would be written off....
[T]he decision in Hania may lead to a new wave of appeals by Greeks who still have jobs but are unable to repay their loans.

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