A view of Greece from the Outside - Commentaries and Opinions
Wednesday, September 3, 2014
ECB Stress Tests --- Piraeus Bank et. al.
Wonderful times are approaching for all those who
have been worried about the stability of the financial system: by late October
2014, so I understand, the ECB will announce the results of their multi-month
examination of the roughly 120 “too-big-to-fail-banks” in the Eurozone. When
all is said and done, we will know – so we are lead to believe – which banks
are zombies and need to be resolved in an orderly manner and which banks have
capital insufficiencies which need to be replenished within a short period of
time. All other banks, in all likelihood the great majority of them, will pass
the stress test successfully. They can be considered as ‘safe’ going forward. No more
worries to be had about the stability of the financial system of the Eurozone!
I predict that the most interesting section of the
ECBs report will be the one outlining the ‘qualifications’, the ‘provisos’,
the ‘subject-to’s’, etc. Obviously, the ECB will not make any outright
statement as to which banks are definitely ‘safe’ for the simple reason that
one can never make such an across-the-board judgment about any bank.
Particularly the 4 large Greek banks will be
interesting cases to watch. They have all published their financials for the
first 6 months of 2014 recently. The common denominator is that roughly
one-third of their loans are non-performing. I would argue that any bank (or
any group of banks) which has about one-third of its loans in the non-performing
category cannot be objectively judged as to its financial stability. Period!
In its examination, the ECB has to start with
official financial statements and question those wherever appropriate and/or
necessary. An uninitiated outsider might wonder why official financial
statements need to be questioned when they are audited by reputable auditing
firms. The disappointing answer is that one can do a lot of things with numbers
even within the strict rules of International Financial Reporting Standards.
Here is a case in point involving Piraeus Bank.
Piraeus Bank reported total net revenue (before
operating expenses) of 1,374 MEUR for the first 6 months of 2014. Included in
that net revenue is a 144 MEUR ‘gain resulting from the replacement of one the
two acquired loans of Marfin Investment Group (MIG) companies with a
convertible bond inssued by MIG’. Now that really sounds impressive because it
suggests that MIG was able to raise fresh money via a convertible bond to pay
back bank loans which had already been written-down by the lending bank. Quite
Unless, of course, the lending bank receiving
repayment of its previously written-down loans and the bank buying the new
convertible bond are one and the same bank --- Piraeus Bank. Then, the above-mentioned
144 MEUR gain is nothing other than a gain manufactured by fancy business practices
and fancy (though not incorrect) accounting.
I have described in previous articles why, in my
opinion, MIG – the holding company of the Marfin Investment Group – is a
classic case of a financial zombie (here and here). If the P+L statement of a bank is heavily
influenced by gains from a fancy deal with a financial zombie, one wonders how
many other fancy deals are recorded in the official financial statements of the
4 large Greek banks.
And one really wonders how the ECB will deal with such issues!
PS: these issues obviously apply to all banks and not only to the Greek ones.