The below statistics (source: Bank of Greece) show the development of the aggregate balance sheet figures of the Greek banking sector (all banks except the Bank of Greece) since the beginning of the financial crisis. Aggregate means that the figures are simply added up and not consolidated, i. e. there may be overstatements in some categories. For the years 2010 and 2015, the figures are as of June. For 2018, the figures are as of September (in BEUR).
In 2018, total assets (291 BEUR) were only a little over half the total assets of 2010 (545 BEUR), i. e. a decline of 47%. Put differently, almost half of a most important sector of the Greek economy evaporated.
When banks' assets decline, one of two things can have happened: cash was received in exchange for those assets or assets were written off (i. e. no value received in exchange; instead, losses incurred). It is safe to assume that the 2018/10 decline in domestic loans (93 BEUR) and domestic securities (31 BEUR) included substantial write-off's. On the other hand, the declines in claims on foreign financial institutions (94 BEUR) and foreign securities (22 BEUR) undoubtedly represents a chase for liquidity.
A key statistic is the 'debt to the Bank of Greece'. In classic theory, a central bank is a lender of last resort, i. e. banks borrow from the Central Bank when they have difficulty obtaining liquidity elsewhere. Until mid-2008, last resort borrowings from the Central Bank had been minimal (below 10 BEUR). In the second half of 2008, foreign banks began reducing their loans to Greek banks and the Greek banks had to revert to the Bank of Greece (and the Bank of Greece, in turn, reverted to the ECB). By June 2010, last resort borrowings had increased to 96 BEUR and at the peak of the drama, in June 2015, they had reached 127 BEUR. Since then, last resort borrowings were reduced by 115 BEUR!
Positive news are that, since 2015, both funding from foreign banks (+16 BEUR) and domestic deposits (+17 BEUR) increased again even though the increases were far less than the declines in the period 2010-15.
An uninformed reader might be very surprised by the fact that aggregate capital & reserves in the Greek banking sector more than doubled since 2010 and now stand at 67 BEUR. One has to point out that these are book values and book values of equity are a direct function of book values of assets. If it is true, as many commentators have pointed out, that half of total loans are non-performing, then the book value of capital & reserves could quickly be wiped out. For reference, the market value of the current 67 BEUR book value of capital & reserves is currently below 1 BEUR.
In summary, these are figures which one probably has not seen ever in an economy of the First World. If the current book value of assets represented the true value of those assets, one could conclude that the Greek banking sector is in rather good shape but one must have reasonable doubt about that. On the other hand, there can be no doubt whatsoever about the fact that the book value of liabilities ALWAYS reflects the true value of liabilities.
| 2018 | 2018 | |||||
| vs | vs | |||||
| 2010 | 2015 | 2018 | 2010 | 2015 | ||
| Claims on domestic financial institutions | 19,1 | 2,1 | 5,6 | -13,5 | 3,5 | |
| Claims on foreign financial institutions | 107,4 | 26,0 | 13,5 | -93,9 | -12,5 | |
| Domestic loans | 273,9 | 217,1 | 181,2 | -92,7 | -35,9 | |
| Foreign loans | 7,0 | 4,8 | 3,1 | -3,9 | -1,7 | |
| Domestic securities | 42,9 | 13,6 | 11,6 | -31,3 | -2,0 | |
| Foreign securities | 35,3 | 56,2 | 13,8 | -21,5 | -42,4 | |
| Domestic equities | 7,0 | 4,8 | 3,6 | -3,4 | -1,2 | |
| Foreign equities | 11,7 | 9,1 | 4,1 | -7,6 | -5,0 | |
| Remaining assets | 40,4 | 52,8 | 54,8 | 14,4 | 2,0 | |
| Total assets | 544,7 | 386,5 | 291,3 | -253,4 | -95,2 | |
| Debt to Bank of Greece | 96,1 | 126,7 | 12,2 | -83,9 | -114,5 | |
| Debt to domestic banks | 7,5 | 0,3 | 1,1 | -6,4 | 0,8 | |
| Debt to foreign banks | 63,8 | 7,6 | 23,2 | -40,6 | 15,6 | |
| Domestic deposits | 223,1 | 130,5 | 147,5 | -75,6 | 17,0 | |
| Foreign deposits | 25,5 | 9,8 | 6,9 | -18,6 | -2,9 | |
| Remaining liabilities | 98,6 | 42,7 | 33,2 | -65,4 | -9,5 | |
| Total liabilities | 514,6 | 317,6 | 224,1 | -290,5 | -93,5 | |
| Capital & Reserves | 30,1 | 68,9 | 67,2 | 37,1 | -1,7 | |
| Total liabilities & equity | 544,7 | 386,5 | 291,3 | -253,4 | -95,2 |
In 2018, total assets (291 BEUR) were only a little over half the total assets of 2010 (545 BEUR), i. e. a decline of 47%. Put differently, almost half of a most important sector of the Greek economy evaporated.
When banks' assets decline, one of two things can have happened: cash was received in exchange for those assets or assets were written off (i. e. no value received in exchange; instead, losses incurred). It is safe to assume that the 2018/10 decline in domestic loans (93 BEUR) and domestic securities (31 BEUR) included substantial write-off's. On the other hand, the declines in claims on foreign financial institutions (94 BEUR) and foreign securities (22 BEUR) undoubtedly represents a chase for liquidity.
A key statistic is the 'debt to the Bank of Greece'. In classic theory, a central bank is a lender of last resort, i. e. banks borrow from the Central Bank when they have difficulty obtaining liquidity elsewhere. Until mid-2008, last resort borrowings from the Central Bank had been minimal (below 10 BEUR). In the second half of 2008, foreign banks began reducing their loans to Greek banks and the Greek banks had to revert to the Bank of Greece (and the Bank of Greece, in turn, reverted to the ECB). By June 2010, last resort borrowings had increased to 96 BEUR and at the peak of the drama, in June 2015, they had reached 127 BEUR. Since then, last resort borrowings were reduced by 115 BEUR!
Positive news are that, since 2015, both funding from foreign banks (+16 BEUR) and domestic deposits (+17 BEUR) increased again even though the increases were far less than the declines in the period 2010-15.
An uninformed reader might be very surprised by the fact that aggregate capital & reserves in the Greek banking sector more than doubled since 2010 and now stand at 67 BEUR. One has to point out that these are book values and book values of equity are a direct function of book values of assets. If it is true, as many commentators have pointed out, that half of total loans are non-performing, then the book value of capital & reserves could quickly be wiped out. For reference, the market value of the current 67 BEUR book value of capital & reserves is currently below 1 BEUR.
In summary, these are figures which one probably has not seen ever in an economy of the First World. If the current book value of assets represented the true value of those assets, one could conclude that the Greek banking sector is in rather good shape but one must have reasonable doubt about that. On the other hand, there can be no doubt whatsoever about the fact that the book value of liabilities ALWAYS reflects the true value of liabilities.
Klaus, first thanks for bringing up the German guilt vs Greek debts here in your last post. Secondly, I do not understand. It will get slightly better if I read it several times. Third, glad you are still around. ;)
ReplyDelete*******
I don't understand banking or more elaborate balances, meaning I don't recall what a teacher at one point in time told us about balances of bigger institutions. ... Apart from being a prof in economics some type post-grad studies, he apparently was privately a passionate speculator and wanted to lure us into his hobby.
But this is about National Economy. Or isn't it?
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Your post made me go to Macroeconomist Paul Krugman, he did mention Greece in brackets recently looking at Brasil.
Would you please explain me just this:
In summary, these are figures which one probably has not seen ever in an economy of the First World.
What are the assets of a bank. I understand that is what strikes much too vaguely what strikes you.
Assets are what you (or a company or a bank) OWN and liabilities are what you OWE. If you own more than you owe, you have a positive net worth. If you own less than you owe, you are bankrupt.
ReplyDeleteSorry, I shouldn't have babbled above. Meanwhile I read your comment again and looked into the Bank of Greece more precisely its data on non-performing loans. And there what you write finds much support.
Deletehttps://www.bankofgreece.gr/Pages/en/Statistics/loans.aspx
The development from 2009 on is pretty bad. In March and June business loans alone are even worse then your 47% of erased/evaporated business.
Time to more seriously look back and reflect on Yanis Varoufakis?
I watched his June speech and discussion in June 2018 in Munich. In some ways it reminds me of his Brisbane Speech in 2010, which irritated me. Just as it irritates me today when the Euro is equated with the DM.
But what you think of his idea how to creatively bend the rules of the Eurozone to deal with the debts of the EU. More precisely how to deal with the debts on the European 'periphery', the states that are in trouble, vs the debts of the economies of the core states of the EU that aren't?
It is obvious such a creative bending of the rules already happened.
https://www.yanisvaroufakis.eu/2018/07/17/why-germany-neither-can-nor-should-pay-more-to-save-the-eurozone-ifo-munich-seminar-11-june-2018/
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I am admittedly still a little irritated that once again he suggested a European introduction of the US food stamp system. More arbitrarily: It reminds me of his fierce critique of German Ordoliberalism. The US of course can theoretically amass as much debts as it wants to. Is that his point? Or do I overestimate its social component? Ordo vs Neoliberalism?
******
Thank you for the BoG link about non-performing loans. That was interesting data!
DeleteMost of the times, I find it difficult to disagree with Yanis Varoufakis. His points are always very persuasive in the intellectual world. However, we live in the real world and we have to take the real world as it is. And in the real world it is very difficult to persuade the tax-payers of one country to pay for social and other benefits in another country, all for the "greater good" which eventually will come back to those tax-payers.
My major point of critique with Varoufakis is - and has always been - that he never makes any suggestions/proposals as to what Greece could/should do on its own. If a Greek national who has been gifted by the Creator with so many talents as Varoufakis has, if such a Greek national never devotes any of his talents to the national cause, then I have no time for him.
At one point in time maybe somewhat related to your critique of Yanis, I secretly, meaning for myself, labeled him a lefty in sheep clothing only. On the other hand? Anyway his ideas reminded me strongly of a US right wing critique of the left. No, not going back to reread it. Ioannis gave up on blogging. Saw you were close to do the same.
DeleteIoannis gave us an idea about what Yanis offered to the EU:
https://iglinavos.wordpress.com/2015/03/08/another-week-another-eurogroup/
It's interesting I choose the link to Paul Robinson's Irrationality blog, mind you before I watched Yanis speech. In the process of testing options here. The Anonymous option anyway offered these really fuzzy images and if you have to click buses, maybe in miniformat?, it gets a bit annoying. They gave up though to now warn me about advantages if I would log in via Google account by now. Marketing is usually more agressive. Did I miss something?
But yes, what I found somehow relating to our friend here, gone now, i called him the Cerberus on Yanis then less polished blog when Yanis still was minister of finances. He surfaced here. I never, ever, made it on that blog. By itself, that is a rare experience. Only had two incidences. And I still know the usenet.
Yanis reference to Russia vs his suggestion of a European Green energy fund somewhat reminded me of Cerberus. Rightly or Wrongly?
But yes, I still think that German repartions and European's decisions financially on how to deal with the Greece or the larger Greek crisis must/should be kept apart. With a dialogue between a Austrian and a German comedian (Kabaretist) in mind, at least we do not struggle among our two countries about who is guilty or should contribute. ;)
First, I went back to Ioannis link above anyway. I cannot remember Iannos focus was on Yanis spy tax recruitment network idea at the time. Ouite the opposite, that wasn't what seemed to bother him. It surely was on on my mind for a multitude of reasons. Next to the somewhat for me too familiar address, and yes, I worked for American firms and admittedly liked the anglosphere prefered the address inside the company a lot. ... I still don't think respect is a matter of a formal address.
DeleteBut that is the standard in Eurogroup communications on such matters? I misunderstand? The "juveniles" vs the "grown ups" use it all the time. And the communications among them would show. Just as it would show Yanis larger now slightly modificated charge that Germany only adopted the Euro to suppress the periphery?
Second: My first inner response to my last response was, wasn't that exactly a comment I might want to delete in hindsight? As nitwit vs the expert on matters?
"For reference, the market value of the current 67 BEUR book value of capital & reserves is currently below 1 BEUR."
ReplyDeleteThe quality of the underlying equity is in question because deferred tax assets (DTA) and CoCos, are not considered tangible capital due to weak credit rating?
DTA's assets and there the questions is whether the assets are worth the book value. If not, equity is overstated.
DeleteCoCo's are part of equity and there the question could be raised whether they are true equity or perhaps liabilities. If liabilities, then equity is overstated.
Correction! It should read "DTA's are assets and there the question is..."
DeleteWhat i recall
ReplyDeletehttps://www.moodys.com/research/Moodys-takes-rating-actions-on-Greek-banks--PR_379602
Moody's does not consider DTAs (for all banks) as tangible common equity, due to the still weak creditworthiness of the sovereign for all banks.
https://www.moodys.com/research/Moodys-Greek-banking-system-outlook-changed-to-positive-on-improving--PR_387198
Seems I must be a costumer with a recognizable business interest to log into the database. Which may help me to understand?
DeleteCould you please help me out? Since on first sight, theoretically vaguely familiar with the idea:
https://www.investopedia.com/terms/d/deferredtaxasset.asp
But how could that be related to Yanis Varoufakis idea about some type of alternative money/payment system. He recently presented once again?
I completely misunderstand? Since DTA's wouldn't show up on Greece's tax institutions?
The link you provided describes very well what DTAs are. They have nothing to do with Varoufakis' proposed money/payment system. A DTA in simple terms: if you have a DTA of 100, the next time you have to pay income taxes, you can deduct the 100 from your tax bill. If you have a DTA of several billion (which the Greek banking systems has), then you have to have enough income in the future which triggers a tax bill of several billion so that you can deduct from that tax bill the several billions of DTAs you have. If you don't have an income in the future which triggers a tax bill of several billion, then your DTA is worthless. I don't know how long the DTAs can be carried forward.
DeleteA DTA is really a contingent assets and not a real one. It only becomes a real asset when certain conditions have happened (i. e. huge taxable income in the future). They show the contingent assets on the assets side so that they can increase net worth on the right hand side of the balance sheet. You won't find anything about DTAs on the books of the Finance Ministry because there it is not even a contingent liability. The Finance Ministry will never have to pay anything. The only thing which they may have to do is accept lower tax income if and when the DTAs are called.
DeleteI stated in my article that the combined market value of all Greek banks was probably less than 1 BEUR. I was greatly mistaken there. As I have learned since then, the market value of only the four large banks is currently just above 4 BEUR. Add to that the market value of all the other banks and one comes to quite a higher figure (unknown to me).
ReplyDeleteThe problem is that the market value of the four large banks, which is now just above 4 BEUR, was almost 9 BEUR at the beginning of the year. There has been a real bloodbath. An article in the Ekathimerini attributes major responsibility for that bloodbath to 3 British hedge funds.
http://www.ekathimerini.com/234811/article/ekathimerini/business/athex-case-of-the-tail-wagging-the-dog
Many commentators interpret this bloodbath to be the forebearer of the next Greek crisis, the assumption being that these banks could fail fairly soon. I cannot follow this logic.
Banks always fail for one of two reasons, or both: illiquidity (i. e. they run out of funding, typically due to deposit flight) or insolvency (their equity falls below the minimum required). Typically, the process starts with illiquidity but once a bank is rumored to have liquidity problems, a closer look at the value of its assets is taken, assets are deemed to require a write-down and that then causes insolvency.
I don't see how any of the four large Greek banks can become illiquid. Deposit flight is reigned in through the capital controls and even if there were a significant run on deposits, there would be sufficient re-financing through the Bank of Greece (in turn through the ECB). Insolvency seems next to impossible barring a major event. The banks are bookkeeping-wise very well capitalized and there seems no way that through regular losses, that capital could fall below the minimum.
But there could be a major event. One such major event would be the decision to significantly write-down the book value of the DTAs. Another one would be to significantly write-down the value of non-performing loans. Both of these major events are under the control of the authorities: the government, the Bank of Greece and, in the final analysis, the ECB. Thus, if a Greek bank were to fail, it would not be due to market forces but, instead, due to a decision by authorities to no longer keep it alive. That's my view regarding the shorter term.
Regarding the longer term, there has been significant pressure from the ECB for quite some time, growing all the time, that banks should reduce their NPL portfolio. The only way that this can be done in a significant way is by selling them to investors and that entails a major discount (i. e. write-down). I have no idea what the going discount rate is for these NPLs. Perhaps someone will pay 20 cents on the Euro, perhaps 50 cents, perhaps even more. If the NPLs are sold at 50% of the total value of about 85 BEUR, then losses to the tune of 43 BEUR will have to be recognized. And in that scenario, there would definitely be a capital shortfall and a new recapitalization would be required. If funds for such a recapitalization were readily available, the NPL problem could be resolved relatively quickly. The reason it is being drawn out so much is that those funds are not readily available.
There is a proposal-plan from BoG which says that a Special Purpose Vehicle (SPV) with 7.5 bn Deferred Tax Credits (DTA) will transfer 40 bn NPEs from banks.
DeleteLoans will be transferred in the balance sheet value after forecasts and the amount of the deferred a tax claim to be transferred, will correspond to add-on coverage damage, so the valuations of those loans to reach market prices.
To cover the transfer price, the Special Purpose Entity will proceed to a securitization where three (senior, mezzanine, junior / equity) classes will be issued.
In June Deferred Tax Credits (DTC) were 16 bn or 57% of banks regulatory capital.
I have read about this proposal. It is financial engineering at its peak! If that proposal flies, it would transfer all potential losses in the current NPLs to investors in the SPV. The DTAs would only be a fictional cushion because the SPV would never incur taxable income, only huge losses. However, if that proposal flies and if the banks can unload all their NPLs at book value, then the banks will be perfectly healthy overnight. My 6th sense tells me that if there is something like a 40 BEUR loss hidden in the NPLs, nobody will volunteer to take that loss.
DeleteYou're right.
ReplyDeleteStournaras before months suggested a precautionary credit line with waiver and possibly reduced cost of borrowing.
http://www.ekathimerini.com/226392/article/ekathimerini/news/stournaras-insists-on-credit-line
That credit line, might give banks time to find a better plan, under different assumptions?
The precautionary credit line was meant for the state as a borrower as an alternative to the cash cushion which Greece opted for instead. The state doesn't fund the banks and I don't think the state could have used that money to recapitalize banks. The state needs to refinance its debt, albeit it a very small amount only in the next couple of years, and in case the state couldn't do that via market, the line would have been available. Also, the line would have served to finance budget deficits resulting from interest payments.
DeleteEurobank’s transformational plan, merger with Grivalia and
ReplyDeleteNPE reduction Acceleration Plan.
https://www.eurobank.gr/-/media/eurobank/omilos/grafeio-tupou/etairikes-anakoinoseis/2018/etairiki-anakoinosi-26-11-18/etairiki-anakoinosi-26-11-18-eng.pdf
https://www.eurobank.gr/-/media/eurobank/omilos/grafeio-tupou/etairikes-anakoinoseis/2018/etairiki-anakoinosi-26-11-18/investor-presentation.pdf
Klaus, you might be interested in something I stumbled across, while checking an echo to news on Telepolis (Heise, C't Computerzeitschrift). Years ago they had some interesting reports by Greek insiders from Greece. Must have had connections to the left over here.
ReplyDeletehttps://www.heise.de/tp/features/Die-Zeitbombe-der-faulen-Kredite-4233038.html
Die Zeitbombe der faulen Kredite