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Monday, November 23, 2015

Buy Greek Banks! Velly, velly cheep!

Macropolis published 2 very informative articles about what's happening in the current phase of recapitalizing the four large Greek banks (here and here). What really stands out is how cheap these banks really are!

One caveat: market capitalization (i. e. the total value a bank according to its share price in the stock market) does not mean that one can buy a bank at that price. On the contrary, a bank or company normally achieves a hefty premium over the stock price whan a large portion and/or majority is sold. On the other hand, there are cases where investors are only prepared to buy if a hefty discount is offered. The Greek banks are one such example; and an extreme example, at that!

Get this: the new private investors offered prices for the Greek banks with discounts over stock market ranging from 34% (Alpha) to 94% (NBG). These discounts are so unbelievable that I would consider them erroneous if the source of this information were not Manos Giakoumis of Macropolis.

Wonna buy a bank with over 80 BEUR in assets, almost 20.000 employees in over 1.000 branches and 5,7 million customers? Well, withdraw 177 MEUR (millions, not billions!) from your savings account and buy Piraeus Bank. Its market capitalization is 177 MEUR.

Correction! If you have more confidence in orderly bookkeeping and certified financial statements than in the Greek stock market, then you would have to come up with 6,7 BEUR (billions this time, not millions!) to buy Piraeus because that is what the bank is worth according to its financial statements per September 30, 2015.

Many banks 'sell below book' (i. e. their market capitalization is below equity book value) but to sell 97% below book is a rather unique situation. Particularly when it is a bank where bankruptcy can essentially be ruled out unless the entire state goes bankrupt and/or leaves the Euro. Hard to imagine a situation where investors won't make a good return on their investment: if you pay virtually nothing for an investment, even a small profit is a huge return!

In defence of the private investors: they deserve to make some good profits on Greek banks because they have taken enormous losses in the last 5 years. Life is unfair because the Greek state and European tax payers won't be so lucky: their original 25 BEUR (again billions, not millions!) capital investment in the Greek banks has been all but wiped out and they are only participating minimally in the current recapitalization. In short: the state got all the downside in exchange for very little of the upside potential.

I guess the moral of the story is: the all-important thing is to subsidize private investors because they can generate market confidence. But they will leave as soon as the next hurricane appears on the horizon whereas the state which foots their profits will stay around forever, with or without market confidence.

Wednesday, November 18, 2015

In Defence Of Greek Banks

As of today, the four large Greek banks are bankrupt. A bank is not bankrupt when it is solvent and liquid. Solvency means that the bank has sufficient equity (capital) and liquidity means that it can exist without last-resort funding. The ECB has ascertained that the Greek banks have a capital shortfall of about 4 BEUR as of now, which shortfall might increase to 14,4 BEUR if macroeconomic conditions deteriorate. And as regards liquidity, the Greek banks would cease to exist if they could not rely on emergency funding from the ECB. Thus, bankrupt on both counts.

When a bank is bankrupt but not closed down, i. e. when it is bailed out, the standard procedure of the new owners, i. e. the 'bail-out'ers' (typically an official body), is to replace the management and supervisory boards. After all, if they ran the bank into the ground, how could they be allowed to stay on. That assessment, however, depends on whether the bank was literally run into the ground or whether it failed for other reasons. Perhaps force majeure reasons.

Let me take Deutsche Bank to illustrate my point. Not too many decades ago, Deutsche was viewed as Germany, Inc. A bank which not only due to its name was mistaken by many as Germany's Central Bank but which in reality was probably as solid as the Bundesbank itself. In the last couple of decades, Deutsche had managements which perverted the bank, to a large extent, into a sophisticated gambling house, possibly the riskiest bank in the world. Their policy decisions perverted the bank's culture and the bank essentially became an instrument for the top echelons of management and trading to personally become enormously wealthy. In 2012, a scheduled top management change took place and it was recognized that the new management would have to radically return the bank to its traditional solidity. However, the new management which was installed with the mission to return the bank on a solid course was a management which had been part of the previous management team. How would they change a culture which they themselves had helped forming?

A more radical management change took place earlier this year and there is a chance that they might accomplish what their predecessors could not. However, the change was not radical enough, in my opinion. What would have been necessary would have been to replace Deutsche's entire management and supervisory boards in order to show the world that they meant business.

It seems to me that Greek banks never went down that road which Deutsche (and many other TBTF banks) had embarked on. The classic business of a bank is to be intermediary between those who have money and those who need it; i. e. to transform risks and tenors. Deutsche & Co. had dramatically departed from this classic business. It seems to me that the Greek banks never did.

It is not known to me that the Greek banks ever got involved much with toxic assets (sub-prime, etc.). I have not heard that the Greek banks ever formed SPVs (special purpose vehicles) in order to house toxic assets off-balance sheet. It is not known to me that the Greek banks ever got involved much in hugely speculative trading. In short: make a list of all the things which Deutsche & Co. had done wrong and ask yourself if the Greek banks had done the same. My guess is that they had not, at least not in a major way.

It seems to me that the Greek banks, by and large, had stuck to the classic business of taking in deposits and making loans. And today, half of their loans are non-performing and half of their deposits have disappeared since 2010. What does that tell us? Is that enough of a reason to replace all management and supervisory boards?

The behavior of bankers has historically been pro-cyclical; some would call that the 'herd instinct of bankers'. When the economy booms, bankers lend money like there was no tomorrow and they convince each other that there will not be a tomorrow. When the economy busts, they all run for the exit door. I had an unforgettable experience as a trainee when I was assigned to assist a senior banker in working out one of his problem loans. I asked him how he felt about having made a bad loan. His answer: "It was a good loan when I made it!" Unless crooks are involved, all loans are good loans when they are made. They only turn into bad loans when they are made payable but can't be paid.

When the economy collapses to the tune of 25% or more and when half of your retail borrowers lose the income to service their loans, it is only natural that a very large portion of formerly 'good loans' turns into 'non-performing loans'. And when the economy is in depression, it is only natural that collateral values collapse and that many formerly 'fully secured loans' turn into virtually 'unsecured loans'. That is force majeure.

Before I give the managements of the Greek banks my absolution, I need to state that I am well aware that all of them did get involved in some reckless, if not illegal, lending. By reckless lending, I mean deals which would not have passed the test of a responsible credit controller if he had been allowed to be responsible. Piraeus' lending to the Marfin Group, about which I have written quite a bit, is just one example thereof. The common thread running through such deals is that there is a close connection between bank owners/managers and the beneficiaries of their lending. But, frankly, as deplorable as such lending is, that alone could not have caused the bankruptcy of the four large Greek banks.

In short: the list of all the reckless, irresponsible, unethical and/or illegal deals which Deutsche & Co. got involved in is very long. My sense is that the corresponding list for Greek banks would be rather short. My sense is that the four large Greek banks would do very well today if the capital markets had continued to fund Greece after 2010 in the same manner as they had done from 2001-09. They didn't.

Which reminds me of my first employer, the Continental Bank of Chicago. A handful of lending officers (only three out of hundreds, to be exact) had made small to medium-size loans to oil entrepreneurs in Oklahoma. They were all 'good loans' because the price of oil could only go up (high inflation) and because the loans were fully secured with valuable oil rigs. And they were very profitable because of the high margins. Most importantly: there was no self-enrichment on the part of the lending officers. The sum of those small and medium-size loans exceeded one-third of the bank's equity/capital. When it turned out that all those loans had practically lost their value (the oil price collapsed and oil rigs had become worthless), the bank was out of one-third of its equity/capital and, within 2 years, a formerly triple-A rated bank was bankrupt. And I experienced a sudden stop to my employment with my first employer to whom I had devoted the first 17 years of my professional life.

One day, over drinks, I lamented the situation with a senior manager who had also lost his job. We both expressed fury about those few who had caused misery for so many. But then the senior manager said to me: "Bear one thing in mind. If Volcker (Paul Volcker, then the Chairman of the Fed) had not wrung inflation out of the US economy, those guys who made those loans would be heroes now!"

If capital markets had continued to lend Greece the same gigantic amounts after 2009/10 as they had lent before, the managements of the four large Greek banks would be heroes now. And they would continue to be heroes until capital markets realized that the loans to Greece had turned from 'good loans' to 'bad loans'.

I guess the moral of the story is: if you are a band leader on the Titanic and you go out of business after the ship sinks, it's not because your music was bad.

Tuesday, November 10, 2015

Greek Seamen - Please Extend Your Strike!

Friedrich Nietzsche had created the philosophical concept of the "Revaluation of Values". In his book "The Antichrist", Nietzsche demolished the values of Christianity and called for their complete reversal, their complete revaluation. Which brings me, believe it or not, to Greece.

Of all the many things which Greeks have been critized for by Central Europeans, Greeks' tendency to strike a lot undoubtedly ranks near the top. Greeks should not strike, so the logic, but they should work. No wonder that the country is in such an economic mess if the people strike all the time.

Greece's seamen are currently on strike. My understanding is that the strike will last from Monday through Wednesday. You would expect uproar in Central Europe about this effrontery to go on strike while asking for money from Central Europe.

Well, on Austrian TV, the news reporting took a different view last evening. The flow of refugees entering Austria from the South had ebbed down. In fact, they even showed empty halls. But they immediately cautioned that this was only a temporary relief. It was due to the Greek seamen's strike which would be over in a couple of days (regrettably, they seemed to suggest).

And the unspoken moral of the story from non-striking Austria? Greek seamen - please extend your strike!

Saturday, November 7, 2015

Greek Banks - A Good Way To Burn Money!

The Hellenic Financial Stability Fund (HFSF) is the entity which makes recapitalizations of Greek banks when necessary. It does so with funds which it borrows from the European Stability Mechanism (ESM).

The interim financial statement of the HFSF as per March 31, 2015 is something one doesn't see every day: against the 39 BEUR originally lent to the HFSF by the ESM and invested by the HSFS in all Greek banks, there were only 9 BEUR of value left at this date. The rest was 30 BEUR 'accumulated losses'. Accumulated losses represent the decline in the value of the bank investments which the HFSF made. Mind you: this was as per March 31, 2015, i. e. long before the Greek banks really went South.

Below are the numbers for the 4 large Greek banks as of now. The numbers are in BEUR.

HFSF Privates

Cash capital injections since 2010 25,0 11,9
Current value 2,4 1,1

% change -90% -90%

The good news is that the funds which European tax payers invested in the 4 large Greek banks via the HFSF are currently still worth 10% of the original value. It could have come worse if these banks had collapsed when the ECB cut its funding in late June.

The bad news is that those remaining 10% of value will be heaviliy diluted through the recapitalizations which are currently in process. Those recaps could actually become a rather good deal given the fact that the entry price is rather low. In that scenario, current investors could recap some of the losses which they have taken on previous investments.

If, however, these new recaps will not return the 4 banks to prime quality overnight (the possiblity of which I personally exclude), then there is a high chance that we will be looking at similar declines in value in a couple of years when the next recap of these banks becomes necessary.

Tuesday, November 3, 2015

Best (And Worst) Countries For Doing Business

This article leads to a list of the alleged 10 best and worst countries to do business. The good news for Greece: Greece does not show up among the 10 worst countries. The annoying news for Greece: its Northern neighbor FYROM made it to the 10 best countries (as #10). I am not really familiar with FYROM but I am sure that this ranking will trigger some conversation in Greece.

ECB Stress Test - A Tale For Laymen

Two detailed analyses of the recent ECB stress test of the 4 large Greek banks were published in Macropolis and Forbes. I will try to make them understandable for laymen.

The ECB assumed an adverse macroeconomic scenario for the period 2015-17 and checked its impact on the health of the 4 large Greek banks. The adverse macroeconomic scenario assumed a cumulative GDP decline of 7% and a cumulative decline in housing prices of 22%. One would think rather pessimistic assumptions! In that scenario, the 4 banks would require additional equity (capital) of 14,4 BEUR (which will bring the total equity of the 4 banks to about 30 BEUR) in order to remain sound. One remembers that the Eurogroup had originally 'reserved' 25 BEUR for the bank recapitalizations. 14,4 BEUR is a lot less than that. So everything is very fine? Absolutely not!

Picture yourself as the personally liable sole owner of your own private bank. Your bank has assets, liabilities and equity. 'Assets' are what you own (loans, securities, etc.); 'liabilities' are what you owe (deposits, other funding) and 'equity' is what you are worth if you could liquidate assets and liabilities at their book values. Assume that you have assets of 100 and liabilities of 90, which leaves you with a worth of 10 (equity). One day you discover that some of your loans are about to go sour and you calculate that your total assets are now only worth 90 and not 100. You calculate that your assets of 90 will serve to pay back your liabilities of 90 but - your own worth has been wiped out.

The above 14,4 BEUR equity requirement means that the 4 banks need an additional 14,4 BEUR of  equity to withstand the 2015-17 storm (i. e. losses) and still have satisfactory equity at the end of the period.

A bank is as healthy as the quality of its loans. If the loans are good quality, they are called 'performing'. If they are not, they are called 'non-performing'. 'Non-performing' means that the loans are not being serviced according to the original contract (a restructuring of maturities may have become necessary due to financial problems of the borrower, etc.). 'Non-performing' does not mean that the bank will lose money on the loans. It can, however, mean that the bank will end up with a total loss.

Take an oil company which calculates that it will be hugely profitable when the price of oil is 100 USD, that it will only break-even when that price goes down to 50 USD and that it will survive only another 3 months if that price goes to 30 USD. Today, oil trades at 50 USD and the company is breaking even. It had to restructure its bank loans and is now classified as non-performing. Tomorrow, oil shoots up to 100 USD and the loan becomes one of the best the bank has. Day-after-tomorrow, oil collapses to 30 USD and stays there, and 3 months later the bank will have a total loss.

Why a total loss when the bank is well secured with oil rigs as collateral? Well, ask yourself how much someone will pay for an oil rig when the entire industry is collapsing!

The 4 banks now have 107 BEUR of non-perfoming loans. To put this into perspective: that is almost half of all the loans they have (48,6% to be exact)! Where are the days when I read that non-performing loans were about 70 BEUR or about 35% of total loans? Not too long ago, I am afraid!

It's not only the sheer magnitude of non-performing loans which is frightening. Non-perfoming loans require intensive care on the part of the banks. When almost half of their loans require intensive care, one wonders when they have time and spirits to think about making good new loans!

The layman may wonder how a bank can stay in business when half of its loans are non-perfoming, i. e. do not earn any interest. The layman is naive! Many of these non-performers do earn interest, interest which the borrower pays with new money which the bank lends him. Think about that! (Sounds a bit like the 'rescue loans for Greece', doesn't it?).

The ECB reviewed the value of collateral which the banks have and they investigated 11.826 cases with a total collateral value of 21,4 BEUR. Wait! Only 21,4 BEUR? Compared with non-performing loans of 107 BEUR? Compared with total loans nearly twice that amount? My sense is that those non-performing loans will create huge losses not yet accounted for should the banks ever have to liqudidate collateral. Thus, one is basically condemned to viewing all these non-performing borrowers as ongoing concerns because if one didn't, the banks themselves would soon cease to be ongoing concerns.

Finally, I cannot save the layman from learning about an item called Deferred Tax Asset (DTA). As the name implies, that is an asset; something which the bank owns. To refer to the above private banker: DTAs are part of the 100 of assets which have 90 liabilities against them and which create a worth for the owner of 10.

What is a DTA? The above private banker might explain it as follows: "Look, I just took a huge one-time loss on a deal. The good news is that I can carry forward, for tax purposes, that loss into future years and deduct it from future taxable income. That way, I won't have to pay income taxes for several years and the DTA is today's calculated value of future income taxes which don't have to be paid. What if I do not have taxable income in the future, you may ask? Well, then the DTA is worthless"

The 4 banks have combined DTAs of about 15 BEUR. Hold tight and do the numbers: that is almost half of the combined equity of those banks! If those DTAs became worthless, the entire current recapitalization of 14,4 BEUR would go out the window, and more!

The Greek government, taking a cue from Italy, recognized this problem and copied Italy's (and other countries') creative solution: the Greek state simply guaranteed 82% of those DTAs, or almost 13 BEUR, to make it count against equity. To return to the above private banker: the owner could easily increase his equity by 100 BEUR. All he would have to do is have his bank lend him 100 BEUR so that he can put this money back into the bank as equity (regulations would not allow this to happen!).

This is conceptually similar to what's happening with the DTAs: the Greek state puts equity into the bank so that the bank can make it a loan to finance the equity increase. Well, only conceptually. In practice, the sequence is in reserve: it began with the DTAs which turned into a claim against the state when the state guaranteed them.

So what are these guaranteed DTAs of almost 13 BEUR really worth? Well, they are worth 100% according to Basel-3 and confirmed by the ECB. However, should they one day become worthless because the Greek state fails, then the banks will follow right behind the state!

And that is probably the key conclusion of the ECB stress tests: the Greek state and the 4 banks are now more linked with one another than ever before. Letting the state fail would lead to a collapse of the banks, and vice versa if one were to let the banks fail. The Greek banks will survive as long as the Eurogroup supports the Greek state. Understanding that is probably the most important outcome from the ECB stress test.

PS: 'Greek banks surving' does not necessarily rule out a future bail-in for depositors. If the recapitalization were not to take place before year-end, for whatever reason, the likelihood of such a bail-in would increase dramatically.

Monday, November 2, 2015

When Will They Fire Yiannis Stournaras?

If the greatest problem of the Greek judicial system was/is one of secretarial support, that problem has now been relieved by the decision to promote 28 former Finance Ministry cleaners to secretarial posts in the Greek judicial system.

I am not trying to be cute here. There may be very good reasons for promoting the above 28 former cleaners. There are always two sides to everything and, regrettably, I don't know the other side.

However, there is an issue of personnel decisions or rather: on what grounds are people moved into public positions and/or removed from them. I have been reading that SYRIZA is making appointments on the same old crony basis as previous governments had done. Meritocracy does not seem to be a priority of theirs.

The most worrisome aspect is not the people they hire but, instead, the people they fire. Katerina Savvaidou, head of the General Secretariat of Public Revenue, was fired for the simple reason that she refused to resign. She should have resigned, in the eyes of the government, because of a breach of duty. She may well have committed a breach of duty but, in order to determine that, there would have to be a court's judgment instead of a politician's decision.

Costas Botopoulos, Greece's Chief Securities Regulator, was asked by the government to resign. Again, there may be very justified reasons for doing that except that they are not apparent, not to mention transparent.

As I observe such developments, there is only one question which goes through my mind, namely:

When will they fire Yiannis Stournaras?

Sunday, November 1, 2015

The Mysteries Of Greek Land Registration

Wim Louwman, Former President of the European Land Registry Association, made the following most interesting comment on my earlier article on Greek land registry: 

"The existing land registration in Greece is described at It illustrates that Greece has to fulfill two projects. Improve the existing Land registry and implement a registration of taxes of landowners. Most EU Member States have different registrations for these purposes with different legal meaning. A Land register (civil law) provides decisive evidence about titles to plots of land. A Cadastre (public law) provides names of the presumed landowners who have to pay property taxes. In Land Registries the boundaries of plots of land are described generally. In Cadastres the boundaries are surveyed exactly because this information is needed to calculate the number of acres and determine the value of the plot of land. However in a boundary dispute the court can decide that the location of the civil law boundary differs from the Cadastre boundary. Also in most EU Member States, pursuant to existing civil law on property rights, a boundary of a plot of land can change after adverse possession. Of course landowner has the right to claim that an adverse possessor leaves his land, but when he does not do so he loses that right after a certain period because of prescription. In that case the possessor acquires the property rights. The interference of the existing property rights was considered human-rights compliant by the Grand Chamber of the European Court of Human Rights in the case J.A. Pye (Oxford) Ltd and Another v United Kingdom (2007) 46 EHRR 1083. The limited legal meaning of a Cadastre opens the possibility to use a simple process. The registration of taxes payers can be based on presumptions of ownership and for establishing the value of the land aerial imageries can be used. It allows a taxes inspector to sent provisional tax assessments. A receiver will raise objections when he uses the land because of rent or lease. But when the prescription period of adverse possession is still underway he will prefer to "let the sleeping dogs lie" and pay the taxes.

Unfortunately Greek law demands that both the perfecting of the land register and the introduction of a taxes registration takes place at the same time. This causes enormous delay because for the perfecting of the registration of property rights (fundamental human rights) asks for a more careful process then is needed for implementing a Cadastre. For the perfecting of the Land register all landowners have to present evidence of their property rights and of the location of boundaries. The Cadastre annex Land register verifies whether the claims are in accordance with previous registration and whether neighbors have objections against the boundaries. This causes many boundary disputes that have to be solved by the courts and cause delay. However this does not have to delay to involve the collecting of taxes, In this case delay can be prevented by changing the law in so far that the two projects are completed at different times. A first step could be introducing a Cadastre of presumed owners. This approach is in accordance with the “Fit-For-Purpose” method that recently advocated by Danish professor Stig Enemark at a recent congress organized by the World bank ( It means that perfecting of the Land registry can no longer be used as an alibi to postpone the collecting of property taxes." 

"The present landscape of land registration in Greece"