Tuesday, January 8, 2013

Greek banks say they need more money for their recapitalization

Ekathimerini (hat tip Zero Hedge) reports that Greek banks say the current funds for their recapitalization are inadequate and that they need more money.

And why do they need more money?

Two reasons:

  • The level of non-performing loans greatly exceeds the level estimated by BlackRock; and
  • Loss of interest income on Greek sovereign debt that was written down as part of the latest Greek sovereign debt restructuring.
Regular readers know that your humble blogger predicted that BlackRock's estimate would not just be wrong, but that nobody outside of the financial regulators would care about it.  As a result, any payments made for this estimate was a waste of Greek taxpayer resources (the same was true in Ireland).

In addition, regular readers know that there is no reason to bailout a bank.  A modern banking system is designed so that banks can operate with low or negative book capital levels.  

Banks can do this because of the combination of deposit insurance and access to central bank funding.  With deposit insurance, taxpayers effectively become the banks' silent equity partner when they have low or negative book capital levels.

So long as banks are able to generate earnings before banker bonuses, they have a franchise that is capable of rebuilding their book capital levels.  This can be done by retaining 100% of pre-banker bonus earnings until the desired level of bank book capital is achieved.

As a result, there is no need to bailout the banks and the Greek government should instead use the funds it has received to support the Greek citizens by implementing programs that support growth in the real economy.
The country’s main banks are considering requesting additional funds for their recapitalization. 
Senior bank officials say that the rapid deterioration in financial conditions caused by the back-to-back elections in mid-2012 has led to a greater increase in nonperforming loans than originally foreseen in the BlackRock report a year ago. 
They add that banks should proceed to greater share capital increases in order to respond to the new reality. 
Ernst & Young estimates that nonperforming loans in Greece approached 24 percent of all loans at the end of 2012.
Who could have guessed that nonperforming loans would skyrocket with the government having adopted austerity measures and the economy plunging into a depression?
The bond buyback dealt another great blow to the credit sector that has made a revision of the capital requirements necessary. 
The Bank of Greece had estimated that operating profits for National, Alpha, Eurobank and Piraeus for the 2012-14 period would amount to 11.09 billion euros, which had been excluded from the calculation of the lenders’ capital needs. 
One of the main sources of those future revenues would have been the interest from the bonds amounting to 16 billion euros that banks had in their portfolios. However, the so-called voluntary sale of the bonds entailed a loss of those revenues for the banks. 
According to estimates for the country’s four main banks, the buyback signifies a revenue reduction of at least 1.5 billion euros, thereby increasing their capital requirements.
Actually, there is no need for more capital.  These banks should generate 9.5 billion euros in operating profits (11.09 - 1.5).

All the loss of revenue on the sovereign debt means for the banks is it will take them longer to rebuild their book capital levels while they retain 100% of their operating profit.
The Bank of Greece has announced that the four systemic banks will need in the region of 27.5 billion euros for their recapitalization, but if that estimate on the buyback is upheld, the bill will reach up to at least 29 billion euros. 
The four lenders’ losses from the credit risk (including loans in Greece and abroad) are estimated at 14.58 billion euros, but if the deepening of the recession is factored in, the losses would grow by about 10 to 20 percent and the capital needs would expand by between 1.5 and 3 billion euros. 
As a result the capital stock of 5 billion euros formed by the Bank of Greece for future needs may have to be used immediately by the big banks, eventually taking the total bill of the recapitalization process to over 30 billion euros.

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