I have read a translation of this article by Prof. Yanis Varoufakis in the German language Griechenland-Blog. It is a summary of all the support actions which the Greek banks have received from the state so far, namely:
1) A 41 BEUR recapitalization after the PSI.
2) Another 41 BEUR in state guarantees for ELA funding from the ECB.
3) Recognition of the 37,7 BEUR losses from the PSI as tax-effective losses.
At issue is point (3) which means that future profits (during the next 30 years) up to 37,7 BEUR will be tax-free. Obviously, if there are no future profits, there will be no benefit from saving taxes on them. If, however, there are future profits, the potential tax saving will be roughly 10 BEUR. In accordance with IFRS accounting rules, the banks record those 10 BEUR as 'deferred taxes' on the asset side. Put differently, a rather substantial portion of the banks' assets are future claims which will only be worth something if there is sufficient future profitability.
The risk that there might not be sufficient future profitability and that those claims might not be worth all that much was apparently too much for the bankers to sleep well. So, the government and parliament passed a law that, regardless whether or not there is future profitability, the banks will have that claim against the state. The side effect of this measure is that the banks can now count those 'deferred taxes' towards their capital base (subject to ECB approval).
What is to be made of all that?
First, there is no question that a state - if it wants to avoid total collapse of its economy - needs to bail out its large banks if and when they get in trouble. The cost to society of not doing that would be so much higher. So the question is not whether the state should have supported its banks. Instead, the only question is whether that support was commensurate and what the state got in exchange for the support it provided.
The logical answer would appear to be that if a bank gets into trouble and needs to be bailed out by the state, the state should get full ownership and the right to replace the board of directors and the management of the bank. That would be too simple a logic. If a bank has a temporary liquidity crisis (a bank run) but is otherwise relatively sound, the state should get less in exchange than from a bank which has essentially become insolvent.
The PSI essentially wiped out the entire aggregate equity of Greek banks. Put differently: even without the 'normal' problems like non-performing loans, etc., the Greek banks had lost their equity. That certainly was a situation where the state could have applied the above simple logic. Did it? No, it certainly didn't! Instead, judging from everything I have read about the recapitalizations, they were EXTREMELY shareholder-friendly! Far from full ownership! Why? No outsider will find the answer to that question.
The 41 BEUR guarantee for the ELA funding is a moot point, as far as I am concerned. Greek banks would have survived without this funding because they could draw on the ECBs target-2. ELA funding was less expensive, as far as I know, and - most importantly - it enabled the banks to buy government bonds. So here I think the benefit was rather mutual.
Recognizing the 37,7 BEUR losses from the PSI as tax-effective losses to be applied against future profits would also appear within the limits of normality. After all, the banks did incur these losses. What is totally out of the ordinary is that the state would guarantee the banks that they will get their future benefit regardless of whether they make profits or not. So that is quite a present for the banks, indeed. What did the state get in exchange? Allegedly, the state will get bank shares as collateral but I have not been able to find details about this collateral arrangement anywhere.
By and large, it seems that the Greek state has been extremely generous to its banks, particularly to the owners of its banks. Will the state need to be generous again in the future?
According to Bank of Greece statistics, the aggregate capital & reserves of all Greek banks is around 70 BEUR. That number is easy to remember because it is identical to the amount of non-performing loans in the Greek banking system. So, if all those non-performing loans were to be repaid in full, the Greek banking system would be in good shape. If they are repaid in half, the banks will again need equity and they will look to the state for support. And if the non-perfomers turn out be complete losses, then the banks' equity is - once again - wiped out. The only thing which is certain at this time is that the requirement on the part of banks of future state support can definitely not yet be ruled out.
Back in 2008, AIG needed to be bailed-out by the US government. AIG was the world's largest insurer at the time and no one really thought that the company was anywhere close to insolvency. However, they needed money in a hurry; a lot of money. It started with 85 BUSD and ended up with 185 BUSD. Given those dimensions, the US government struck a tough bargain (these days, lawyers are arguing in court that it was a 'punitative' bargain). Existing shareholders had to watch how what used to be 100% ownership eventually ended up being only 8% ownership and how the US government took a hefty 22 BUSD profit when it finally exited from AIG. Maurice R. Greenberg, the legendary former CEO of AIG and formerly one of its major shareholders, says he lost 90% of his multi-billion USD net worth in the process and he is now suing the US government for 40 BUSD in damages.
The way the US government bailed-out AIG was anything but shareholder-friendly. If the Greek government had done the same with its banks, all those banks would now have new owners, new boards of directors and new managements. Perhaps the Greek government should read up a bit on the AIG bail-out as it prepares for the next bank support program.
1) A 41 BEUR recapitalization after the PSI.
2) Another 41 BEUR in state guarantees for ELA funding from the ECB.
3) Recognition of the 37,7 BEUR losses from the PSI as tax-effective losses.
At issue is point (3) which means that future profits (during the next 30 years) up to 37,7 BEUR will be tax-free. Obviously, if there are no future profits, there will be no benefit from saving taxes on them. If, however, there are future profits, the potential tax saving will be roughly 10 BEUR. In accordance with IFRS accounting rules, the banks record those 10 BEUR as 'deferred taxes' on the asset side. Put differently, a rather substantial portion of the banks' assets are future claims which will only be worth something if there is sufficient future profitability.
The risk that there might not be sufficient future profitability and that those claims might not be worth all that much was apparently too much for the bankers to sleep well. So, the government and parliament passed a law that, regardless whether or not there is future profitability, the banks will have that claim against the state. The side effect of this measure is that the banks can now count those 'deferred taxes' towards their capital base (subject to ECB approval).
What is to be made of all that?
First, there is no question that a state - if it wants to avoid total collapse of its economy - needs to bail out its large banks if and when they get in trouble. The cost to society of not doing that would be so much higher. So the question is not whether the state should have supported its banks. Instead, the only question is whether that support was commensurate and what the state got in exchange for the support it provided.
The logical answer would appear to be that if a bank gets into trouble and needs to be bailed out by the state, the state should get full ownership and the right to replace the board of directors and the management of the bank. That would be too simple a logic. If a bank has a temporary liquidity crisis (a bank run) but is otherwise relatively sound, the state should get less in exchange than from a bank which has essentially become insolvent.
The PSI essentially wiped out the entire aggregate equity of Greek banks. Put differently: even without the 'normal' problems like non-performing loans, etc., the Greek banks had lost their equity. That certainly was a situation where the state could have applied the above simple logic. Did it? No, it certainly didn't! Instead, judging from everything I have read about the recapitalizations, they were EXTREMELY shareholder-friendly! Far from full ownership! Why? No outsider will find the answer to that question.
The 41 BEUR guarantee for the ELA funding is a moot point, as far as I am concerned. Greek banks would have survived without this funding because they could draw on the ECBs target-2. ELA funding was less expensive, as far as I know, and - most importantly - it enabled the banks to buy government bonds. So here I think the benefit was rather mutual.
Recognizing the 37,7 BEUR losses from the PSI as tax-effective losses to be applied against future profits would also appear within the limits of normality. After all, the banks did incur these losses. What is totally out of the ordinary is that the state would guarantee the banks that they will get their future benefit regardless of whether they make profits or not. So that is quite a present for the banks, indeed. What did the state get in exchange? Allegedly, the state will get bank shares as collateral but I have not been able to find details about this collateral arrangement anywhere.
By and large, it seems that the Greek state has been extremely generous to its banks, particularly to the owners of its banks. Will the state need to be generous again in the future?
According to Bank of Greece statistics, the aggregate capital & reserves of all Greek banks is around 70 BEUR. That number is easy to remember because it is identical to the amount of non-performing loans in the Greek banking system. So, if all those non-performing loans were to be repaid in full, the Greek banking system would be in good shape. If they are repaid in half, the banks will again need equity and they will look to the state for support. And if the non-perfomers turn out be complete losses, then the banks' equity is - once again - wiped out. The only thing which is certain at this time is that the requirement on the part of banks of future state support can definitely not yet be ruled out.
Back in 2008, AIG needed to be bailed-out by the US government. AIG was the world's largest insurer at the time and no one really thought that the company was anywhere close to insolvency. However, they needed money in a hurry; a lot of money. It started with 85 BUSD and ended up with 185 BUSD. Given those dimensions, the US government struck a tough bargain (these days, lawyers are arguing in court that it was a 'punitative' bargain). Existing shareholders had to watch how what used to be 100% ownership eventually ended up being only 8% ownership and how the US government took a hefty 22 BUSD profit when it finally exited from AIG. Maurice R. Greenberg, the legendary former CEO of AIG and formerly one of its major shareholders, says he lost 90% of his multi-billion USD net worth in the process and he is now suing the US government for 40 BUSD in damages.
The way the US government bailed-out AIG was anything but shareholder-friendly. If the Greek government had done the same with its banks, all those banks would now have new owners, new boards of directors and new managements. Perhaps the Greek government should read up a bit on the AIG bail-out as it prepares for the next bank support program.
"Perhaps the Greek government should read up a bit on the AIG bail-out as it prepares for the next bank support program."
ReplyDeleteOne can only hope so but to do that would go against the cronyism that lies at the heat of Greek society.
"Perhaps the Greek government should read up a bit on the AIG bail-out as it prepares for the next bank support program."
ReplyDeleteMaybe AIG Board was not a part of the "gang"?
The above article is another article which makes everyones hair stand up and skin crawl. It is another example in the big pot of global examples of bankers and governements working together, to enslave society. And of course your answer is that without the banks, things would be much worse if they were not bail out in, whatever. True. But, it is the bankers of the whole world "shady" way of business and creating an irresponsible manner of lending for the last 20 - 30 years which has lead us here. The uncoupling of the gold standard, as to churn out growth was the 1st ponzy scheme to start with. Then the creation elegent ways of creating money from air at an exponential value.
In a nut shell the whole crisis started in the USA, with their failed balloned TBTFB (To Big To Fail Banks) and insruance system. This flowed immediately in the EU and any country exposed to the various ponzy schemes which I will not go into. Then the creation of the economical crisis was blow out of proportion picking weak economies like Greece, to foot a disproportionate bill to pay.
The way i see it, the societies of western countries bailed out the whole banking system and countries, like Greece who were the weakest in leadership got the worst of it. (Change was needed in Greece, but not like this. And is why i hold A. Papandreou as traitor equivalent to Efialtis at Thermopoli.) Furthermore, the banks, governments and IMF's etc have put a lean against society for the next 100 years. Meanwhile the banks and insurers have not been hurt at all.
The above is what our new Greek president should say out loud.
To be honest as a banker (retired), what do you of all of this foul play at such a large level and at such large sums? How on earth do politicians and bankers think ordinary people will ever trust in this banking system ever again?
I certianly do not contribute to this system anymore. Money in the bank is of no value or equity, nor will i help contribute to support any bank who, in the overall outcome gets bailed out from losses by the goverment, who in turn comes and taxes me.
You may be the only banker whom i may like a little because you have some objective points....
After proof reading the above, the only politicians i can say i like and admire are those of Iceland. They are the only people with "Ballz" to stand up to the whole of the system regardless of how small a country they are. Their ponzy bankers are now in jail. Lets see future Icelander bankers try such a scheme again.
Changing the managment of a the greek bank will do nothing to improve the system. Locking up crooked banker and politicians will.
Maybe the link below answers a bit your question as to how I feel about this.
DeleteYes, Iceland acted properly (and this has been confirmed by courts). And yes, they acted wisely as well. And, yes, they set a great precedent! Austrian banks lost a few billion EUR there. All I can say is: serves them right! What business did they have lending so much money to an island which, possibly, they might not even be able to place properly on a map of the Atlantic Ocean.
http://kleingut-reflections.blogspot.gr/2011/08/two-views-on-america-george-f-will.html
Nice read and although i have not followed this blog from back then, your sound views mentioned in the specific article are evident in the recent articles. It confirms you are a man of good character and judgement.
DeleteI grew up in the USA and it all started to go wrong at the the time of the early 80's. (The greatness of the USA constitution and the Bill of rights is a great wok for society. Its the ammendments after 1950's that start to dissolve the original work.) I may have been a toddler but many things did not make sense to me. Many things in Greece did make sense to me even though Greece has a "chaotic gleem" to it. But the value and respect you mention existed. I think from the 90's and after there was a great shift of common sense character values of what is right and what is wrong, to selfishness.
When you were banking back in the 70's it must have been a constructive time. A period when bankers involved themselves in what their borrowers where doing, almost a checks and balnces of business is successful.
Am i mistaken or not, that the Islamic banks work in such a way? More or less the bank is a partner with the borrower who shares profits and losses and can not make profit off interest or money making schemes due to their religion? Do you think that this form of banking was a threat to western banking and ergo the Arab Spring.
You have a wisdom about you that unfortunately i do not believe people hear you. Or at least people who will make the right decisions.
This deal isn't concerning only Greek banks. The Portuguese goverment invented it and was followed by Italy, Greece, Spain. The ECB expressed her "concern" that it may have consequences to the tax payers.
ReplyDeletehttp://www.capital.gr/NewsTheme.asp?id=2126222
But shouldn't someone in the ECB or EU do something more than express concern?
It is indeed very surprising that the EU, which is always eager to ban any government subsidies, does not even see the need to comment on what is going on here.
DeleteVaroufakis is right.
ReplyDeleteThe only issue is /was the political environment under which decisions are taken and still taken (who won elections in 2012).
AIG bail out was a perfect example how a logical government should work. But given that greek political elites haven't decided whether Greece would be on euro or not it was a very-very long term issue to choose how banks should bail out from the beggining. Current government solution for banking is what YV describes. Opposition from the other side want to renegotiate -did not accepted (in 2012) loan agreement and subsequently the recapitalisation of banks. Also they supported that banks should be only public and never to become private. Bankers used that views of opposition for their interest and demanded banks to have a private direction (even from ECB).
The best solution was what US made in AIG, but it is difficult for political elites to be rational in Greece (and bankers less demanding)
MS