You Can't Argue With a Sick Mind ...

BRUSSELS, BELGIUM - DECEMBER 18:  Prime minister of Greece, Alexis Tsipras arrives for The European Council Meeting In Brusse
BRUSSELS, BELGIUM - DECEMBER 18: Prime minister of Greece, Alexis Tsipras arrives for The European Council Meeting In Brussels held at the Justus Lipsius Building on December 18, 2015 in Brussels, Belgium. European leaders are meeting to discuss David Camerons proposed EU reforms, as well as focussing on the migrant crisis, the fight against terrorism and climate change. (Photo by Dean Mouhtaropoulos/Getty Images)

"You can't argue with a sick mind" ... Joe Walsh.

I think I have stepped into a parallel universe. Nothing makes sense. To understand what is going on in Greece, imagine Bernie Sanders fighting to pass a significant reduction in social security payments in the U.S. in order to continue to prop up a host of insolvent banks. What is even crazier is that the average Greek believes this is a good idea.

We have experienced two general strikes in the past three weeks. This is the first time we have seen general strikes in Greece since Tsipras came to power in January. While these strikes have been peaceful and have very little impact on day-to-day living in Athens, it is a reminder of how things were and how they could be.

What is even stranger is that the strikes are being organized by Tsipras's own party ... Syriza, to protest its own government.

Now Greece is starting up the cry for reducing Greece's debt obligation, despite the fact few actual steps have been taken to implement the list of EU demands, except for raising the VAT to 23%, further strangling an economy that is on its last breath. Greece argues that they complying with the EU's demands, but it seems there is no intention of ever implementing the prerequisites.

Tsipras's hold on the parliament is tenuous at best. His own party is beginning to show cracks and he is unable to gather any active support from the opposition. Normally, one would expect new elections in January, but the fact is that there are no credible candidates to run against Tsipras. New Democracy is in a state of complete disarray (they could not even hold elections to elect new leadership in November) and Pasok is a shadow of its former self. New Democracy will hold elections for new leadership on January 10, but at this point the party is approaching irrelevancy.

The banks successfully completed a capital raise of €14.4 billion. The usual casts of characters are still big investors in the banks.

In our piece on October 9, 2015 ("Yet Another Deadline in Athens") the market value of the four systemic banks was €4 billion. The banks raised €14.4 billion, so one would conclude the market value of the banks would be €18.4 billion. The total market value for the same banks is now approximately €11.6 billion; €6.8 billion of market cap has disappeared in the last six weeks. This analysis suffers a bit from an apples and oranges comparison (most of the €5.5billon contribution by European Stability Mechanism was in contingent convertible notes). However, if we simply look at the price performance since the reverse splits (which were 1 for 100, or in the case of Alpha, 1 for 50) the stocks on average are down on average 35% since the offering. The Greek ETF ("GREK") hit an all time low on December 15.

Of course, now that the banks have raised their funds, they are finally being to admit just how bad the NPL problem really is.

The Hellenic Stability Fund announced that they think one-third of the NPLs are "unmanageable" and should be sold immediately. I assume this is code for, "These loans are worthless." Who is going to buy this junk? That leaves 67% of the NPLs, which the HFSF thinks should be managed and then sold. That begs the question ... What have the banks been doing for the past five years with these loans?

If the remaining NPLs are worth 20 cents on the Euro, the total recovery of the NPLs would be expected to be 13%; the total reserve for the NPLs at the banks is €54 billion. As a reminder, the banks have identified €113 billion of NPLs as of September 30, 2015, and HFSF has stated the total amount of NPLs could reach as much as 60% of total loans, putting the number at €135 billion. Forgetting tax benefits, potential loan revivals, and other financial gymnastics, the current shortfall (after the last round of financing) could reach €64 billion (€135 billion - 54 million of reserves = €81 billion of total exposure - €17.5 billion of recovery (€135 billion x 13%) = €63.5 billion).

Another troubling data point is Alpha Bank has leaked that they believe 60+% of their business loans are unmanageable. One has to wonder if they told their investors this before the equity offering or are they just now waking up to reality. In any event, our calculations, while seemingly absurd, are likely in the ballpark of reality.

I like real life examples, so here is another one ... one of the banks has a €160 million loan on seven buildings. The tenants are all household names (several of them are multi-nationals). The rents on the building is €6 million annually (the rates are slightly above market on average). The leases expire and the loans come due in seven years (the bonds do not amortize). The interest payments on the loans is €2 million. The loans are performing (so these loans are not included in the NPL total), but there is zero chance the loans will be repaid. What would be a fair price to pay for this performing loan? €20 million? Remember, these are performing loans (although they could be included in the broader "non-performing exposure" definition, due to collateral value deterioration).

The one bright spot in our continuing analysis is our view on primary residences. The government is continuing to scare the average Greek, claiming that there will be massive foreclosures if the home mortgages are sold. Nothing could be further from the truth.

For starters, there are 4.1 million residences in Greece; 3.1 million homes in Greece are owned (76% of Greeks own their own homes). Of these 3.1 million homes, only 550,000 are mortgaged (18%) (Note: these numbers come from Eurostat). 220,000 of these loans are expected to be non-performing. Even if 20% of these loans are foreclosed, this represents 1.4% of primary residences.

Greece is careening toward a complete meltdown. Yet the government steadfastly refuses to sell NPLs. The big announcement on December 18 that Greece is going to allow the sale of NPLs was just another fairytale. As it turns out, this only applies to non-primary residences and companies above €50 million in revenues (approximately 95 corporate loans). Of course, "selling" NPLs means the banks can now inform these particular delinquent loans and the borrowers have 12 months to come up with a plan, after which they can be sold.

Greece also wants to throw the IMF out of the group negotiating for the never-ending Greek bailout. Ironically, the IMF has been the only outside party who has publicly stated that Greece's sovereign debt should be reduced. However, the IMF is pushing for Greece to sell the non-performing loans, which the government adamantly objects. The government will say they have no problem selling business loans, but most of the business loans are either for insolvent entities or involve real estate loans that the government is desperately trying to protect.

The Greeks did not even get coal in the Christmas stocking this year.

I am getting tired of writing the same depressing pieces over and over. However, ignoring the plight of Greece is irresponsible. It is also irresponsible for the investors in the last round of financing for the banks to claim the banks are healthy (as they were doing at Greek investing conference in New York in December). These investors are encouraging Greece not to sell NPLs until the prices rebound to the area of 70 cents on the Euro. Promoting such an idea is dangerous. If Greece waits another year, we will not be talking about NPLs of €135 billion, we will be talking about €200 billion.

Here is hoping for a New Year with a sane mind and a real plan.