It’s all falling into place with the austerity measures taking their toll on the financial equity that supports the credit structure in a euro wide banking system that does not have credible deposit insurance.

Greek banks plead for more aid in debt crisis

By George Georgiopoulos and Harry Papachristou

Apr. 7 (Reuters) — Greek banks, hit by a series of credit rating downgrades linked to the country’s debt crisis, have asked the government for more financial support, Finance Minister George Papaconstantinou said on Wednesday.

“The banks have asked to use the remaining funds of the support plan,” he told reporters, referring to a package first agreed by the previous conservative government in 2008.

About 17 billion euros ($22.72 billion), mainly in state guarantees, remain in the 28 billion euro support scheme, launched to help Greek lenders cope with the global credit crisis.

The Central Bank of Greece said non-performing loans in the banking system rose further in the last quarter of 2009, bringing the full-year ratio to 7.7 percent.

The banks’ plea for extra help highlighted the problems facing the entire Greek economy, which is expected to contract by at least 2 percent this year, partly as a result of austerity measures imposed to slash a huge budget deficit.

IMF officials began talks in Athens on Wednesday on implementing the austerity plan, just as the latest market jitters over Greece’s ability to manage its debt mountain eased slightly, despite uncertainty over a euro zone rescue plan.

9 Responses

  1. Warren, are you saying that if the Greek government or any other eurozone government can’t sell their bonds, then they can’t guarantee the deposits because they don’t have the funds to guarantee them. Is their no entity in Europe to stand behind these deposits. And why has the market not figured this out yet?

    So in a circular way, what you are saying is that the government is selling bonds to the depositors to safeguard the deposits of the people who bought the bonds i.e. the depositors.

  2. After the crisis hit the US and the UK, many saw Euroland in worse shape financially. Now that seems to be unfolding. Is Greece the canary in the mine? Are we about to see a second leg in the GFC as debt deflation strikes Europe? Bets seem to be flowing in that direction.

  3. 80% of Greek public debt is owned by foreign banks. Most Greek banks are in good shape with sufficient capital adequacy without much structured products and diversified extensively outside of Greece. The 17 billion is more than sufficient to cover any contingencies. Furthermore, the ECB has pledged to continue accepting Greek debt as collateral for repurchase agreements for an indefinite period. The Greek private sector has very low debt ratio(Less than 100%) when in other European countries is a multiple of that. The Greek private sector has over 300 billion euros invested abroad and Greek domestic euro deposita are 90% of GNP. Actually, the incompetent government should first restructure the public debt with a haircut and extend it at pre crisis rates. Then it should start a shift towards domestic borrowing. Of course, my favorite policy is to switch back to the drachma and convert all public debt in the local currency and let the Northern European bail out their own greedy banks!!!

  4. if a run on the greek banks caused a funding problem the only guarantee depositors have is from the greek gov.

    i am not saying the banks are insolvent. i am saying that if they do become insolvent the depositors are looking to the greek gov for payment.

    and even if a greek bank has only 5% of assets in greek bonds, a default will put a large dent in that bank’s capital. and any further contraction in the economy can increase bank losses as well. not to mention a govt liquidity crisis spreading to other euro member nations as greek banks hold their securities as well

    and not to mention that with greece facing current borrowing costs the interest costs alone make solvency problematic, which further drives up interest costs, etc.

  5. Not correct.

    1. The greek banks can mantain greek bonds to maturity as long as there is no default. Even with a renegotiation/haircut they are in better shape than many other European banks.
    2. The Greek banks just raised 18 billion euros.
    3. The Greek banks still have the ECB lending facility open to them and the current announcement that they can use Greek bonds as collateral indefinetely will ease their pressure in the interbank market.
    4. Greek deposits are covered by an insurance facility which currently has sufficient funds.
    5. A serious recession is an issue but problematic loans are less than 8% so far, far less than in the US.
    6. I am less concerned about Greek banks that Iam concerned with unemployment and GDP contraction that will affect the Greek people and raise private debt which currently is manageable

  6. One more thing.

    Greek banks have covered most of their exposure in Greek public debt with CDS and some have actually being making money reselling some of their extra coverage (POstbank made nearly 600 billion euros selling CDS products to foreign banks)!

    1. Panay,
      Why doesnt the Greek Government just have the Bank of Greece do larger repo with the Greek Dealer banks so the Dealers can purchase more of the Greek govt bonds while demanding that the Greek Dealers provide better bids for Greek Govt Debt?
      Resp,

  7. Dear Matt,

    There are many issues here that involve the independence of the ECB and the Bank of Greece. However, the bigger problem is that Greek market for public debt is relatively illiquid and shallow with a small number of dealers that play many games. I believe that the huge spreads have a lot to do with it. Notice that Greek banks can buy Greek bonds at 6.5-7% and turn around and refinance them with the ECB at 1% which is safe as long as they are allowed to participate in ECB auctions!

    1. Panayotis,
      Yes, the spreads are probably caused because the banks wont bid high enough. And while they have them repo-ed, the banks dare the ECB/BofG to downgrade the bonds. If they downgrade them, the Dealer banks can then say to the ECB/BofG: “That’s okay, just keep the bonds, we’ll keep the balances”. Then the banks can sue for bad faith to get the haircut back as the ECB/BofG was on the other side of the repo and also caused the collateral to become worth less while the bonds were in their possession. A real mess.

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