Nothing Has Happened

No, you did not miss my last article; I have not written since January 24, 2016. And no, nothing has happened in Greece since then ... no pension reform, no sales of NPLs, nothing. And, nothing is likely to happen for the foreseeable future.

Life in Greece is the opposite of the weather in Kansas. In Kansas if you do not like the weather, wait five minutes and it will change. In Greece if you do not like it, come back in five years and nothing will have changed.

The biggest "crisis" last month was the Greece's Migration Policy Minister referring to FYROM (The Former Yugoslavian Republic of Macedonia) as Macedonia. The headline in Business Insider read "Greece's migration minister has reported resigned for calling Macedonia 'Macedonia.'" The Defense Minister demanded the Migration Policy Minister resign and threated to do so himself if Tsipras did not accept the Policy Minister's resignation. I realize this is a touchy issue and I do not want to minimize it in any way, but with everything going to hell, is this really the most important issue? Maybe Greece needs a wall? The postscript is that two weeks later the Defense Minister made peace with the Prime Minister and pledged his allegiance forever.

The Institutions (formerly the Troika) returned to Greece on April 4th to give their progress report. The report will likely be ... "Greece is trying, they need to do more, blah, blah, blah." The next "big" event is the €3.7 billion payment due from Greece to the EU in July. If it is paid, it will be done with smoke and mirrors, or the EU will simply give Greece the €3.7 billion so Greece can give it back to them.

The facts surrounding the refugee crisis are as confusing in Greece as they are to the outside world. As of today, there are an estimated 52,000 refugees in Greece. The EU has decided Greece is going to send refugees back to Turkey. 200 people were returned the first day of the program and then the process was halted as refugees began demanding political asylum. Certain islands have a serious problem and the Port of Piraeus is teeming with refugees, but so far there is no significant unrest in Athens. It does not appear the crisis is having a detrimental impact on tourism for the summer.

Well now, for the banks ... we have analyzed the year-end 2015 financials for the four systemic banks, which reflect the €14.4 billion capital increase in the fourth quarter. The banks took €10 billion of the €14.4 billion and applied it against reserves.

The average of the four systemic bank stocks is down 28.7 percent year-to-date.

The reason for the pessimism is simple ... the banks need more capital.

The official position of the banks is the following:

There are €234 billion in loans on the books of the four systemic banks.

Of this €234 billion, €113 billion are non-performing (48 percent).

The banks have taken €58 billion of reserves against the NPLs.

The banks claim that if loans are sold for 80 percent of the collateral value (39 cents on the Euro for each NPL), there is no need for any capital.

Rather than editorialize about the collateral value, let us look at several data points. For starters, the Cypriot banks, which are much farther along in the NPL process than their Greek counterparts, estimate that NPLs make up 62 percent of total loans. This is a more realistic number for the Greek banks, since we have personally seen a number of "performing" loans that will require 60-plus percent write-offs.

The Hellenic Stability Fund has estimated that of the NPLs, 60 percent of them are "unmanageable," which is code for "they are worthless."

So the question then becomes, what will the recovery be for NPLs that can be managed? For our purposes, let us assume the number is 39 percent (the banks current assumption for all NPLs).

So if the NPLs are 62 percent (€145 billion) and the recovery is 39 percent on the 40 percent of NPLs that can be managed, the total recovery will be 15.6 percent.

Therefore, the additional recap needed for the banks is €38 billion. The current market value of the banks is €9 billion. The current holders of the banks will be diluted to 20 percent, best case.

Here are three incremental stories. The alarming thing about the three loans, is that they are all "performing."

Company A had €14 million of loans against a business doing €45 million in sales. The company was running short of cash and their base business was suffering along with the worldwide economy. Company A was able to convince the bank to loan them another €14 million unsecured, which they proceeded to invest in quasi-related businesses. Company A lost their entire investment and at the same time saw sales drop from €45 to €25 million and EBITDA dropped to -€1 million. Equity is now -€15 million. Without an immediate solution, Company A will go from a performing loan to closing the operation and be liquidated. Assuming the property, plant and equipment is sold for 50 percent of stated value, the bank will recover €3 million on a €28 million exposure. Remember, this is a "performing" loan.

Company B has €20 million of loans (non-performing) and €1 million of EBITDA. The banks can either lend €3 million more to Company B and convert the €20 million loan to a €23 million (€20 + €3) loan, with a reduced coupon for ten years or convert 75 percent of the loan to equity and reduce the loan to €5 million, which can be serviced and paid in five years.

Company C has €5 million of a sale and lease back on its headquarter building. The lease payments are over three times current market rent. Should Company C default on the payment? Should the bank renegotiate the lease to reflect current market?

These are three real world examples. There are literally thousands more. The NPL situation in Greece is reaching (if it has not already) a "death spiral." The amount of equity being raised by the banks cannot keep pace with the potential growth of NPLs.

The only solution is for the banks to begin to sell NPLs now. Prices will initially be low, but as NPLs are sold and new capital comes into the system the self-fulfilling nature of new capital will lead to higher prices for the NPLs.

If NPLs are not sold, the banking system will collapse and the cost of a bailout will be added to Greece's €347 billion of debt (

A postscript is the WikiLeaks report that the IMF was considering a Greek default? This is news? Greece is "in" default. We can all pretend that it is not, but who in their right mind thinks Greece can recover given the current structure of sovereign debt and the banks?

Other than some rhetoric, including the leader of New Democracy calling for snap elections, it is unlikely Greece will face elections in 2016. While Syriza is happy to stall any reform, New Democracy is not in position to assume power and if they did, they would only inherit the responsibility to pass and implement unfavorable reforms. New Democracy has been unable to articulate a platform that resonates with the Greek people and until they do, they will not come to power.

I continue to vacillate on my opinion of Syriza. However, it is hard to argue with their success. If their job is to squeeze more money out of the IMF and the EU and refuse to cut pensions or allow the foreclosure on loans, then they get an A+.

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