Why do Greek banks, found to be ‘healthy’ last year, need another capital injection?

Zero Hedge — It was almost exactly one year ago, on October 26, 2014, when the ECB concluded its latest European Stress Test. As had been pre-leaked, some 25 banks failed it, although the central bank promptly added that just €9.5 billion in net capital shortfall had been identified. What was more surprising is that to the ECB, the Greek banks – Alpha Bank, Eurobank Ergasias, National Bank of Greece, and PiraeusBank had entered Schrodinger bailout territory: they had both failed and passed the test at the same time. To wit:

These banks have a shortfall on a static balance sheet projection, but will have dynamic balance sheet projections (which have been performed alongside the static balance sheet assessment as restructuring plans were agreed with DG-COMP after 1 January 2014) taken into account in determining their final capital requirements. Under the dynamic balance sheet assumption, these banks have no or practically no shortfall taking into account net capital already raised.

Got that? According to the ECB, last October Greek banks may have failed the stress test, but under “dynamic conditions” they passed it. What this meant was unclear at the time, although as we explained this was nothing more than an attempt to boost confidence in Europe’s banking sector. This was the key quote from the ECB’s Vítor Constâncio: “This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”

It didn’t.

Eight months later when it became very clear what the ECB meant in practical terms, when the entire Greek financial system found itself in cardiac arrest as a result of increasing hostilities between the Greek government which was on the verge of severing its ties with Europe and an ECB backstop, and only €90 billion in Emergency Liquidity Assistance from the ECB – which also was this close from being withdrawn forcing Greece to implement draconian capital controls – prevent the total collapse of the Greek financial system which now, it is clear to everyone, has become a hostage of European “goodwill.”

Fast forward to today, when the ECB repeated its annual exercise in confidence-boosting futility, when it released the results of its latest stress test focusing on Greek banks, i.e., the “AGGREGATE REPORT ON THE GREEK COMPREHENSIVE ASSESSMENT 2015”

This is what the ECB said in its executive summary:

The exercise is based on updated macroeconomic data and scenarios that reflect the changed market environment in Greece and has resulted in aggregate AQR-adjustments of €9.2 billion to participating banks’ asset carrying value. Overall, the assessment has identified capital needs totalling, post AQR, €4.4 billion in the base scenario and €14.4 billion in the adverse scenario.

Covering the shortfalls by raising capital would then result in the creation of prudential buffers in the four Greek banks, which will facilitate their capacity to address potential adverse macroeconomic shocks in the short and medium term and their capacity to improve the resilience of their balance sheet, keeping an adequate level of solvency.

Banks have to propose remedial actions (capital plans) in order to cover the entire shortfall (€14.4 billion), out of which a minimum of € 4.4 billion (corresponding to the AQR plus baseline shortfall) is expected to be covered by private means.

The tabulated capital shortfall results for the same 4 banks which a year ago “dynamically” passed the ECB’s “stress test” with flying colors, but failed it in every possible way this time around, were as follows:

Bloomberg’s take:

 Greece’s four main banks must raise 14.4 billion euros ($15.9 billion) in fresh capital, after a review by the European Central Bank, as investors and taxpayers face the cost of repairing the damage resulting from six months of wrangling between the country’s government and its creditors.

The asset-quality review resulted in valuation adjustments of 9.2 billion euros at National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AE, the Frankfurt-based ECB said in a statement Saturday. In the stress tests, the banks’ capital gap amounted to 14.4 billion euros under a simulated crisis, and 4.4 billion euros under the baseline scenario. The four banks will have to submit recapitalization plans to the ECB’s supervisory arm by Nov. 6.


National Bank of Greece, the country’s biggest bank by assets, has a total capital shortfall of 4.6 billion euros, of which 1.6 billion euros arises from the baseline scenario. Piraeus has the biggest shortfall of all the lenders, having to raise 2.2 billion euros under the baseline scenario, and 4.9 billion euros in total. Alpha Bank only needs to raise 263 million euros under the baseline scenario, of a total shortfall of 2.7 billion euros. Eurobank has the lowest aggregate shortfall, totaling 2.2 billion euros, of which 339 million euros corresponds to the baseline scenario.

There was no commentary on the “odd” twist how in the span of one year, the same banks which last October were deemed stable and “dynamically” not needing any bailouts, not only had to implement capital controls to avoid a terminal deposit outflow, but now need to raise at least €14 billion.

None of this contradictory confusion is surprising, and neither was the reason for today’s stress test: it is just the latest desperate attempt to restore confidence in a country’s banking sector, a country which still has and will have capital controls for a long time, and to give depositors the confidence that keeping their cash with the local insolvent banks is safe.

The European Commission said in a statement that it is “encouraged” by the results, while Eurobank said that it targets maximum participation of high quality private funds in its capital increase. Alpha Bank said in a filing to the stock exchange that the result “demonstrates resilience,” despite “higher hurdle rates and the repayment of 940 million euros of state preference shares in 2014, which further improved the quality of capital.”

As Reuters further writes, today’s result was merely another optical exercise in putting lipstick on the Greek bank pig:

The fact, however, that the declared capital hole is smaller than the 25 billion euros earmarked to help banks in the country’s bailout may encourage investors such as hedge funds to buy shares.

Germany’s Deputy Finance Minister Jens Spahn said attracting investors would reduce the support needed from the euro zone’s rescue scheme, the European Stability Mechanism.

The ECM, which is the source of funds for the third Greek bailout, also promptly chimed in: “the comprehensive assessment conducted by European Central Bank on Greek lenders shows that ESM-backed loan program to Greece is adequately funded to accommodate additional capital needs in these banks, a spokesman for ESM says in an e-mail to Bloomberg. He added that the ECB stress test EU14.4b shortfall is “well within” EU25b buffer earmarked by ESM for Greek bank recapitalizations. After approval by euro-area member states, EU10b, which have already been mobilized and sitting in segregated account managed by the ESM, will be made available quickly to Greece.

He ended on a hopeful note: “with sufficient private-sector participation, the remaining EU15b won’t be needed.”

Well, a year ago Greeks were told there was nothing to fear and that no new capital was needed. This was a lie. Today we learn that, as expected, billions are needed… but less than the €25 billion set aside over the summer for the Greek bank bailout, so this is great news: after all it’s “better than expected.”

Alas, this is just the latest lie, and one year from today, we can be certain that tens of billions more in new capital will be required.

The reason: the biggest surprise from today’s stress test results was not in the capital shortfall measures, which will be promptly adjusted once again when the next Greek systemic crisis arrives – as it will because despite all the talk, absolutely nothing has changed either since last October or since the third Greek bailout. The surprise was the ECB’s admissions that the biggest problem not only for Greece, but all of Europe, the relentless surge in bad debt, continues without stopping.

Recall what we said in July, when noting that Greek Non-Performing Loans had risen to €100 billion.

 Data from banks show that repayments declined to between 20 and 50 percent of performing loans, creating the conditions for a major increase in bad loans. This trend is in line with the estimates of the Bank of Greece, according to which NPLs amounted to 40 percent of the total at the end of 2014, with the likelihood they will grow further in the first half of the year.

As a reference point, there is a little over €210 billion in total Greek loans, both performing and non-performing, currently and about €120 billion in deposits. There is also about €90 billion in Emergency Liquidity Assistance from the ECB.

The total amount of bad loans (those which have remained unserviced for at least 90 days) has reached 100 billion euros, and the BoG data show that 70 percent of the loans that have entered payment programs remain nonperforming.

This is a major problem for the Greek Banks but even more so for The ECB as there is not much it can do to ‘control’ NPLs and given provisions for bad loans are a mere EUR40bn – there is a big hole here that no one is accounting for.


And since, this unprecedented and ongoing increase in NPLs is really all that matters, the only relevant data point from today’s ECB exercise was the following as cited by Reuters: “As controls on cash withdrawals have squeezed the economy, loans at risk of non-payment have increased by 7 billion euros to 107 billion euros.

The punchline: following yet another tortured admission of just how ugly Greek balance sheets are, the ECB has confirms what we knew months ago, namely that more than  half of all Greek loans are now nonperforming, and that as much as 57% of the loans made by Piraeus Bank the bank which fared worst, are at risk with the other Greek banks not much better off.

What happens next?

As expected, the Greek parliament did not waste any time to approve legislation outlining the process of recapitalising the country’s banks, which it did earlier today. According to the FT, “the bill states that bank rescue fund HFSF will have full voting rights on any shares it acquires from banks in exchange for providing state aid. Under the bill the bank rescue fund will have a more active role, assessing bank managements.

The exact mix of shares and contingent convertible bonds the HFSF will buy from banks in exchange for any fresh funds it will provide will be decided by the cabinet.

The capital hole has emerged chiefly due to the rising number of Greeks unable or unwilling to repay their debt.

And therein lies the rub, because in the span of three months, Greek NPLs have risen from 47.6% of total to 51%: an increase of just over 1% in bad debt every month.

Which means that whether or not the latest attempt to boost confidence by the ECB, ESM, and the Greek parliament succeeds is moot. Yes, a few hedge funds may invest funds alongside the ESM, but in the end, as the NPLs keep rising and as long as Greek debtors refuse – or simply are unable – to pay their debt or interest, the next Greek crisis is inevitable.

The biggest wildcard is whether or not the Greek population will accept this latest promise of stability in its banking sector at face value: a banking sector which since July is operating under draconian capital controls. Granted, we should point out that in the past two months the deposit outflow from banks has stopped, and even reversed modestly adding about €900 million in deposits in the past two months, although that is mostly due to the inability of households and corporations to withdraw any sizable amount of funds.

The real answer whether Greek banks have been “saved” will wait until the shape of the final bank recapitalization takes place, even as NPLs continue to mount. Remember: Greek lenders are currently kept afloat only by the ECB’s ELA but there is a rush to get the recapitalization finished. If it is not done by the end of the year, new European Union rules mean large depositors such as companies may have to take a hit in their accounts.

If the proposed recap is insufficient – and it will be since under the surface the Greek economy continues to collapse and NPLs continue to mount – and a bank bail-in of depositors takes place (a bail-in which took place immediately in the case of Cyprus back in 2013 when Russian oligarch savings were “sacrificed” to bail out the local insolvent banking system), the next leg in the Greek bank crisis will promptly unveil itself, only this time Greece will have some 200% in debt/GDP to show for its most recent, third, bailout.

Finally, the real question is: having read all of the above, dear Greek readers, will you hand over what little cash you have stuffed in your mattress to your friendly, neighborhood, soon to be recapitalized bank?