Saturday, December 22, 2012

Greek banks confirm that bailouts are unnecessary

The Wall Street Journal carried an article on how Greek banks need at least $36 billion of new capital in order to meet international capital standards.

Please note two very important facts:

  • Despite low or even negative book capital levels, the banks are continuing to operate and support the Greek economy; and
  • The capital injection by the government simply reduces the amount of time until the banks meet international capital standards.
The fact that the banks can continue to operate while they have low or even negative book capital levels is the result of how a modern banking system is designed.  This occurs because the banks have access to the combination of deposit insurance and access to central bank funding.

With deposit insurance, the Greek taxpayers are the banks "silent" equity partner when they have low or negative book capital levels.

Without the bailout, the banks would have to retain 100% or their pre-banker bonus earnings until such time as they have rebuilt their book capital levels.

Since the banks are already operating, all the bailout does is reduce the amount of time until the banks meet international capital standards and banker bonuses can once more be paid.  The downside of bailing out the banks this way is that it consumes government funds that could be better used to stimulate the real economy.
Greece's four largest banks need a capital boost of €27.4 billion ($36.29) to overcome the impact of the country's sovereign debt write-down as they battle to stem growing losses in the rapidly shrinking domestic economy. 
A mammoth €200 billion debt restructuring completed by the country earlier this year wiped out the capital base of Greece's top lenders—National Bank of Greece SA, Eurobank ErgasiasAlpha Bank AS and Piraeus Bank SA —forcing them to appeal to the government for help.
Note despite the massive losses, the banks continue operating.
On Friday, NBG said it requires a capital boost of €9.7 billion while Alpha needs a capital injection of €4.6 billion. This comes after Eurobank and Piraeus Bank said Thursday they need €5.8 billion and €7.3 billion respectively. 
"The total number seems to be at the high end of expectations," said Panagiotis Kladis, an analyst at investment services company National P+K. 
"This is a lot of money and investor interest in these banks will be determined by economic conditions prevailing in coming months and the economy's broader outlook."
Actually, investor interest in these banks is going to be a function of the ability of investors to assess the risk of each bank.

Investors know that the Greek economy is spiraling down into a Depression.  The question investors have is what exposures do these banks have.

The only way to answer that question is for the banks to provide ultra transparency and disclose their current global asset, liability and off-balance sheet exposure details.

Without this information, investors are being asked to blindly bet on 'black boxes' whose contents are primarily exposed to a depressed economy.  Not exactly an attractive gamble.
As part of Greece's second €173 billion bailout package from international creditors, Athens has earmarked about €50 billion for a bank recapitalization plan. 
Under the terms of the plan, Greece's bank-rescue mechanism, the Hellenic Financial Stability Fund, will underwrite coming rights issues and effectively take control of the four big banks, which combined account for three-quarters of the banking system's assets. 
Greek banks will use a mixture of common shares and convertible bonds in order to meet international capital adequacy requirements....
Standards that neither depositors nor investors care about.  Recall that Dexia went bankrupt with one of the highest Tier 1 capital ratios in the EU.
With the country grinding through its fifth year of recession, NBG and Alpha reported growing losses on rising bad loans and falling income levels. 
NBG showed a nine-month loss of €2.45 billion, versus a €1.34 billion loss last year. Net interest income fell 11% on the year to €2.5 billion while loan provision charges jumped 43% to €1.87 billion. 
"Against this stressed environment, our efforts focused on fortifying our balance sheet by carrying out provisions of circa €1.9 billion in the nine months of the year…defending our key sources of liquidity, and curtailing operating costs," said NBG Chief Executive Alexandros Tourkolias in a statement. 
Alpha Bank said its loss for January to September hit €711.8 million, up from €566.7 million last year. Its net interest income dropped 16.4% on the year to €1.1 billion while loan loss provisions hit €1.17 billion, up 41.5% on the year.

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