Greece Has a Deal ... of Sorts

Greece finally passed its long awaited package of reforms, which follows the usual pattern. The Parliament was all too happy to raise taxes and social security contributions, but pension reform and the sale of NPLs is much less clear.

In addition, Greece formed a super group for privatizations, but since the government does not want to sell anything, it is more likely for the Beatles to get back together.

Having said that, the mood in Athens is euphoric. It is as if the crisis has ended and the streets are flowing with money. One senior banker told me everything was done; they hired someone to manage their NPLs and there was nothing else to do except wait for the money to start rolling in. That is a slight exaggeration, but not by much.

In reality, Greece's parliament passed what they "thought" the EU wanted in order to free up another €10 billion. It was not exactly what the EU wanted and negotiations are ongoing for the dozen (or so) amendments needed to release the funds. Of course, the €10 billion to be paid to Greece is less than the €17 billion in payments due to the EU between now and the end of the year. In reality, this settlement simply gets Greece through the summer.

My biggest fear in all of this is that this current euphoria will lead to the banks doing nothing, but waiting for the value of their NPL portfolios to rise before they start to sell loans. One senior banker said just that, he sees no sales of NPLs until prices improve. How does that work?

This means that we are headed for yet another major crisis. One skeptical regulator suggested to me that if the banks do not take this (the sale of NPLs) seriously, the next step is a "bail-in" whereby bank deposits are seized by the government, as was the case in Cyprus.

In the midst of all this euphoria is that Greece reported that GDP in Q1 2016 was reported at €45.8 billion, down 1.4% year-over-year. The GDP is at its lowest level since Q3 1999. The crisis is still at its pinnacle. If you want proof, just look at the Athens Stock Exchange Index, which was at 6,350 in Q3 1999 and is now at 645.

The obvious problem with this new settlement are several fold:

First, the agreement unlocks €10.0 billion of cash for Greece. Greece has payments of €17.0 billion between now and the end of the year.

Second, taxes are skyrocketing (and despite rumors to the contrary, Greeks do pay their taxes). Greece now has one of the highest VAT taxes in Europe; 24% tax on every item in the country, income tax rates have been increased to 33-45%, social security contributions are now 27-44% (in the U.S. they are 12.5%, split 50/50 between the employee and the employer) and a 90% tax on bonuses.

Third, further cash payments are tied to GDP growth. Where is this growth going to come from? You do not tax people out of business and then hope your economy grows.

Fourth, the IMF and EU still have very different views and approaches on the sustainability of the Greek debt and although the IMF has not abandoned the Greek program, they certainly have not signed on; their on-going role will be discussed in December.

Now on to my favorite topic ... NPLs. Here is a number to think about ... one of the banks has divided up their NPLs into two groups: "workout" and "beyond hope." Less than 5% of the total loans are in the workout category, 95% are beyond hope (these are total number of loans, not €, so the real number is probably closer to 35% in workout and 65% beyond hope, which is a number we discussed in prior dispatches). Nothing changes our mind that the banks will be lucky to recover 10% of the value of NPLs. Eurobank and Alpha Bank announced they hired KKR to manage part of their NPL portfolio. I am not sure what KKR plans to manage.

The most recent disaster story in Greece is the sugar industry. At one point, sugar production was one of the largest food industries in Greece. The business was based upon sugar beet production. When the crisis came the sugar beet production stopped, the plants were idle and over 700 people lost their jobs.

A group came along with a proposal to reopen the plant using a lower grade cane from Brazil that is not used in normal sugar production. The quality of sugar in Eastern Europe is of lower standards to that in the west. In the end the Greek government concluded it was wiser to simply shut the entire operation down and not hire 700 people because the government was concerned the new owner of the plant was going to make too much money. See Rule #1 ... Stay away from the Greek government.

Haley's Comet is passing through the Greek bank stocks; the four systemic banks are up 204% since mid-February. Of course, let us not forget the same four banks are down 94% in the last twelve months.

The IMF stated last week the Greek banks need another €20 billion in equity. They are about half right; we said in April the banks need €38 billion. Nothing has changed that improves that number.

Now let us return to the bill that just passed. For starters, it is 4,000 pages, so it is safe to say no one has read it or has any idea what is in it.

However, a few highlights are:

A significant increase in taxes on company owned real estate. If you were thinking about buying the Athens Hilton or a nice hotel in Mykonos, you might want to think twice. Real estate prices are heading lower. Also, the land development law that facilitated large tourism investments has been cancelled (this does not apply to already approved developments).

COSCO, the Chinese company that purchased the Port of Piraeus, now has a new boss, the Ministry of Transportation, which will oversee all dealings with the port.

Increased taxes on personal income and real estate ownership. New (or increased) taxes have been imposed on consumption of electronic cigarettes, alcohol, coffee, cable television and the internet. The good news is that the luxury tax on alligator or other reptile skins remained stable at 10%.

In the end, when you cut through all of the rhetoric about NPLs, pensions, taxes and the like, you are left asking the same old question, "Where is new capital going to come from?" The government succeeded in making that answer even more complicated.

My friends tell me that I am far too negative, so I will acknowledge there may be a silver lining in all of this. A roadmap (of sorts) has been put forth. Even though it is not a straight line between two points at least it is a start. Now we just have to find the gas (capital) and someone to drive (government). Oh, I forgot, where is the car?