When the Debt Bubble wave hit in 2007-08, first on the shores of America and then expanding quickly all over the world, most Greeks - politicians in particular - thought that Greece was going to avoid the tsunami. They were awesomely wrong, and the Depression which followed is still keeping the country scraping the bottom of the barrel ten years later.
We saw how the debt party ended in Greece. What followed, however, was a textbook case in crisis mismanagement. For at least two years the government attempted to alleviate the deepening recession by borrowing even more and - incredibly, criminally even - hid real budget deficit numbers by manipulating data published by the Greek Statistical Authority. When the truth eventually came out major foreign investors in Greek Government Bonds (GGBs) were appalled and stopped buying. Trust went out of the window and resorting to the IMF became the only option for the country. The rest is, as they say, history.
Greek banks suffered mightily, not only because their loan portfolios started showing large blots of red ink, but also because their substantial holdings of GGBs were quickly subject to a mandatory haircut, adding further to their losses. The bond haircut was a prerequisite of the Greek bailout program put together by the EU, IMF and ECB.
Hit by massive losses, banks' regulatory capital shrunk substantially so they had to go through successive re-capitalizations, each one driving their share prices ever lower. Greek banks saw their share prices collapse over 99% on the Athens Exchange. Several "shotgun marriage" mergers were arranged, forcing "better" banks to accept "bad" banks onto their books.
Where do we stand right now?
Bad loans (NPLs) and other non performing exposures (NPEs) currently stand at 50% of the lending portfolio, and loss provisions take huge chunks out of operating results. The major problem here is that banks have thus far been severely restricted by politicians from liquidating collateral to recoup loan losses, even partially. Laws protected mortgaged homeowners from auctions, and even large business debtors have avoided them by using more nefarious methods. Auctions are routinely cancelled when "action groups" crash into courtrooms demanding "justice". It is estimated that up to 25% of all bad loan amounts are owed by such "strategic" bad faith defaulters.
The banking business is now highly concentrated. The number of domestic banks has shrunk to a mere four large "systemic" institutions, plus one very small one. These five banks currently control 97% of all bank assets, up from 70% in 2008. Several foreign banks have sold or outright shut down their activities. The number of bank branches, which once seemed to occupy every corner of Athens and other major towns, is down from 4.100 in 2008 to approx. 2500 today. There is now one branch per 4.600 residents versus 2.650 in 2008. These numbers are way ahead of Eurozone averages - See Chart 1.
Unquestionably, the major issue for Greek banks is how they will handle their NPL and NPE portfolios. I will look at this issue vs. underlying core profitability, plus some more recent developments in the next post...
We saw how the debt party ended in Greece. What followed, however, was a textbook case in crisis mismanagement. For at least two years the government attempted to alleviate the deepening recession by borrowing even more and - incredibly, criminally even - hid real budget deficit numbers by manipulating data published by the Greek Statistical Authority. When the truth eventually came out major foreign investors in Greek Government Bonds (GGBs) were appalled and stopped buying. Trust went out of the window and resorting to the IMF became the only option for the country. The rest is, as they say, history.
Greek banks suffered mightily, not only because their loan portfolios started showing large blots of red ink, but also because their substantial holdings of GGBs were quickly subject to a mandatory haircut, adding further to their losses. The bond haircut was a prerequisite of the Greek bailout program put together by the EU, IMF and ECB.
Hit by massive losses, banks' regulatory capital shrunk substantially so they had to go through successive re-capitalizations, each one driving their share prices ever lower. Greek banks saw their share prices collapse over 99% on the Athens Exchange. Several "shotgun marriage" mergers were arranged, forcing "better" banks to accept "bad" banks onto their books.
Where do we stand right now?
Bad loans (NPLs) and other non performing exposures (NPEs) currently stand at 50% of the lending portfolio, and loss provisions take huge chunks out of operating results. The major problem here is that banks have thus far been severely restricted by politicians from liquidating collateral to recoup loan losses, even partially. Laws protected mortgaged homeowners from auctions, and even large business debtors have avoided them by using more nefarious methods. Auctions are routinely cancelled when "action groups" crash into courtrooms demanding "justice". It is estimated that up to 25% of all bad loan amounts are owed by such "strategic" bad faith defaulters.
The banking business is now highly concentrated. The number of domestic banks has shrunk to a mere four large "systemic" institutions, plus one very small one. These five banks currently control 97% of all bank assets, up from 70% in 2008. Several foreign banks have sold or outright shut down their activities. The number of bank branches, which once seemed to occupy every corner of Athens and other major towns, is down from 4.100 in 2008 to approx. 2500 today. There is now one branch per 4.600 residents versus 2.650 in 2008. These numbers are way ahead of Eurozone averages - See Chart 1.
Chart 1
Unquestionably, the major issue for Greek banks is how they will handle their NPL and NPE portfolios. I will look at this issue vs. underlying core profitability, plus some more recent developments in the next post...
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