Yet Another Deadline in Athens

Tsipras's coalition with Independent Greeks is akin to Bernie Sanders forming a government with Sarah Palin. It should be obvious how this is going to end. Tsipras's refusal to coalesce with the moderate parties is troubling.

And now for the bad news ... the total market capitalization for the four systemic banks is approximately €4.0 billion. The banks have lost 25% of their value since our last update (September 21, 2015). The total equity of the banking system, including the four systemic banks is approximately €29 billion. Of this €29 billion, €13 billion is deferred taxes. As of now the European Central Bank has not challenged this asset. However, the bottom line is that there is €16 billion in tangible equity. As a footnote, the banks will not be able to recognize additional deferred tax assets after July 1, 2015.

Non-performing loans are €82 billion according to the Bank of Greece. The total loans are €205 billion. Based on anecdotal information (reviewing performing loans of a number of Greek businesses), we would not be surprised to see 15% of the €123 billion of performing loans move to non-performing. This is against a backdrop of the hedge funds (who own massive amounts of bank stocks) claiming that the banks do not need as much new capital as the European Central Bank has stated; as much as €25 billion.

The math tells an even bleaker story. €29 billion (the equity of the banking system) - €90 billion (assumes a 10% recovery of the estimated €100 billion of non-performing loans) + €41 billion (reserves for NPL's) = -€20 billion. The banking system needs a minimum of €16 billion in equity to meet minimum capital requirements. The total amount needed in a capital infusion is therefore €36 billion (€20 + €16 billion) (and if the deferred taxes do not count as capital, the number is €49 billion). The €49 billion (or €36 billion) needs to come from the European Central Bank, investors, haircutting deposits (there are €151 billion of deposits in the banks), wiping out the bondholders (€3 billion) or selling the NPL's for more than a 10% recovery. Of course, Greece may adopt their favorite strategy ... extend and pretend, instead of dealing with the issue. No matter how you slice the numbers, they are ugly.

The four systemic banks should report second quarter earnings any day. Rumors are the banks will report an additional €8 billion in reserves for non-performing loans (to take advantage of the last chance to add to deferred tax assets, as mentioned above). The net hit to equity will be €5.5 billion. Certainly the math calculations in the previous paragraph will not improve.

The breakdown of non-performing loans is 30% in home mortgages, 17% in consumer loans, 10% in small businesses and 43% in corporates. For the most part all of the collateral for the loans is real estate.

Greece now must pass over 48 separate laws/prerequisites by next Thursday (the 15th) to receive the next tranche of financing from the EU. These laws deal with, among other things, reducing pensions, taxing farmers and allowing for the foreclosure on real estate (principally primary residences). The last of the issues could result in another drop in real estate prices.

One theory is that Greece will pass the 48 laws/prerequisites, but will not allow the 48 to take effect. One example would be to allow for foreclosure on primary residences, but not allow for the servicing of loans by anyone but a Greek bank, thereby making it difficult to buy mortgage loans. The point being that this settlement with the EU is in doubt.

The situation in Greece is approaching a nuclear meltdown. The economy is in a death spiral. It is hard to imagine how Greece can avoid a haircut for depositors.

One has to wonder: what is Tsipras's strategy? Is he prepared to allow foreclosures in order to satisfy the rights of a lender? How long can capital controls remain in effect? Or does he want the Europeans to throw Greece out of the EU? No one believes the last point, but if this is not the case, then why not simply capitulate to the agreement.

To quote Alfred from The Dark Knight, "Because some men aren't looking for anything logical, like money. They can't be bought, bullied, reasoned, or negotiated with. Some men just want to watch the world burn."