The Weekend Ahead——Greek Banks May Go Bump In the Night

There seems to be a growing willingness in the Eurozone to get this over with, to let Greece default and go from there – with all the options that this might entail. But even if a last-minute bailout agreement materializes, one thing stands out in this sea of chaotic uncertainty: Greek banks are toast.

The top four – National Bank of Greece, Piraeus Bank, Alpha Bank, and Eurobank Ergasias – account for 91% of Greek banking assets. They’ve already been bailed out twice. Their shares are penny stocks. They have two toxic problems: liquidity and solvency. Either one can topple them.

Liquidity is a problem because the Greeks have zero trust in their banks and have been yanking their euros out with increasing desperation. They won’t ever forget what happened to depositors in Cyprus. Deposits have plunged about 20% since November, to €130 billion. According to Reuters, “banking sources” said that just during the first three days of this week, Greeks have pulled €2 billion from their accounts – about €667 million a day, compared to prior weeks when they’d withdrawn €200 to €300 million a day.

Meanwhile, funding from central banks has jumped to over €120 billion: €40 billion from the ECB directly; and €83 billion via the Emergency Liquidity Assistance (ELA) through the Bank of Greece. Thus, deposits and central-bank funding are rapidly approaching a dreadful level: parity.

“There’s a real possibility they’ll fold, not just Greece but the banks themselves,” Fitch Managing Director James Longsdon told CNBC.

And ELA, the lifeblood of Greek banks, is conditioned on two things: available collateral and solvency.

As of mid-May, there was only about “€40 billion of potentially monetizeable collateral available,” Longsdon said. Some of which has been used up by now. So this won’t last much longer.

And if the ECB deems Greece itself insolvent, then it would likely deem the banks insolvent as well, and liquidity assistance will be turned off, Longsdon said. It would be over for the banks.

But even if Greece got bailed out at the last minute, the banks would still be insolvent, as the Greeks themselves know better than anyone else. Hence the deposit flight. Only balance-sheet sleight of hand is keeping it from seeping to the surface.

The four banks have €12 billion in “tangible core capital” [which excludes Deferred Tax Assets, balance-sheet shenanigans I covered here]. But this “tangible core capital” will be wiped out by the ballooning loan loss provisions that, according to Bloomberg, should amount to €16 billion or more.

These potential provisions of €16 billion are an estimate of the losses generated by €59 billion in loans that are overdue and have been restructured to help borrowers that can’t pay and to beautify the loans for the 2014 financial statements. Otherwise, the banks would have had to recognize them as impaired.

Worst off is Piraeus with a tangible core capital of €2.6 billion and potential new loan loss provisions of €5.3 billion. National Bank is the least bad off with tangible core capital of €3.7 billion barely exceeding its potential loan loss provisions.

And it’s still getting worse.

“We had expected nonperforming loans to peak in the first quarter, but we now expect this sometime in 2016, subject to some kind of economic stability,” Moody’s analyst Nondas Nicolaides told Bloomberg. “There’s a high risk that restructured loans and others showing signs of trouble will slip back into default.”

What percentage of these €59 billion in overdue and restructured loans will default? No one knows for sure. In India’s booming economy, 40% of restructured loans have curdled for good. In Greece’s disaster economy, probably much more. Perhaps 50%. If so, it would amount to €29.5 billion. Greek banks typically provision 55% of bad loans as loss, hoping optimistically to recover the remainder. This would bring the provisions to over €16 billion.

It would totally wipe out the €12 billion in “tangible core capital” these banks have, and they’d be insolvent. The ECB would throw in the towel. ELA would stop. The insolvent banks would become illiquid. Game over.

A bank holiday would be announced over the weekend. The banks would remain closed on Monday and perhaps a few more days. Once they reopen, strict capital controls would prevent the remaining deposits from fleeing.

And just as I’m writing this, it seems to be happening in real time.

An unnamed “official” leaked to Reuters that the ECB had warned Eurozone finance ministers that it wasn’t sure if Greek banks would open on Monday:

The officials said that during the closed-door meeting of the ministers on Greece, the chairman of the meeting Jeroen Dijsselbloem asked European Central Bank Executive Board member Benoit Coeure if Greek banks would be able to open tomorrow.

Coeure answered: “Tomorrow, yes. Monday, I don’t know”

Brussels bureau chief of the Financial Times Peter Spiegel in no time tweeted that the ECB had denied this rumor, only to confirm it a little while later:

2 sr officials who participated in #eurogroup meeting have confirmed to me @Reuters report @ecb worried #Greece banks may not open Monday.

Game over?

That rumors from an unnamed “official” are flying about, are taken seriously, are then denied, only to be “confirmed” by two unnamed officials – rather than ignored or brushed off – is a sign of just how close to the brink Greek banks and Greek debt have moved. Friday is going to be interesting for Greek banks. And this weekend may be it.

But here is the thing: the Greeks could have solved the crisis on their own, if they’d wanted to. Or did they know something that others didn’t? Read…  If Greeks Did This, the Terrible Crisis Would Be Over