“You want a prediction about the weather? … I'll give you a winter prediction; it's gonna be cold, it's gonna be gray and it's gonna last you for the rest of your life!” … Bill Murray’s character in Groundhog Day.
In the three plus years since I have lived in Greece, nothing has changed. Every day, every month, every year is the same.
Do not get me wrong, Athens has better weather than Punxsutawney, Pennsylvania, but Greece is being held hostage in a strange time warp, caught somewhere between the center of civilization and a dysfunctional European Union (or so we are led to believe by the current government).
Europe has the option of leaving Greece to its own devices for the next 20 years according to Dr. Daniel Gros, the Director of the Centre for European Policy Studies, who spoke at the Harvard Business School lecture series at National Bank of Greece on October 2, 2017 (https://www.youtube.com/watch?v=Op23quffWoU&feature=youtu.be). Dr. Gros’s point was that Greece was no longer operating at a deficit and that the ESM (European Stability Mechanism) should tell Greece that for the next 20 years Greece will pay ½ or 1% interest and the ESM will see you again when you are a different country. According to the panel, which included Dr. Lorenzo Bini Smaghi, the Chairman of the Board of Societe Generale and Jens Ploetner, the German Ambassador to Greece, the country is operating at a surplus, and should only need additional funds to pay interest (currently at lower rates than Portugal, Spain and Italy) on existing debt.
The non-Greek members of the panel were unanimous in the statement that Greece would never receive a haircut on its sovereign debt, while another panelist, Kyriakos Mitsotakis, the President of New Democracy, the major opposition party in Greece, claimed he would secure a haircut. But, Mitsotakis’s constant attacks on the existing government and making promises that he cannot keep are counter-productive. He should avoid becoming the Hillary Clinton of Greece: excellent pedigree, educated at the best schools, brilliant and yet without a message that people want to hear.
The panelists made a compelling argument that Greece is not being held hostage by the EU, but rather by the Greek banks. The Chairman of Societe Generale, held up UniCredit Bank as an example of how to deal with the NPE crisis: fire management, aggressively sell NPEs and raise capital. The Greek banks want to keep management, not sell NPEs and raise capital on a “Greek turnaround.” The Greek banks raised €14.4 billion two years ago. The total market cap of the four systemic Greek banks is now €6.8 billion. According to Poul Thomsen, the head of the IMF’s European Department, the banks need €10 billion to recapitalize based upon €100 billion in NPEs (non-performing exposures). Given our analysis that the NPEs are closer to €160 billion (two-thirds of the loans in Greece), we think the banks need over €50+ billion. Who is going to invest for the fourth time when those who invested in the first three rounds of recapitalizations have been wiped out? Will any of the CEOs be in their jobs this time next year? Dr. Smaghi said the banks cannot raise capital without a plan to sell all of their NPEs.
The only troubling comment from the seminar came from the German ambassador to Greece who brushed aside any concern of the rise of the far right in Germany. He claimed that 60% of the votes that AFD received were in protest to the established parties. The rise in nationalism in a world dependent upon respect for one another is dangerous. It is dangerous in the U.S. and it is dangerous in Germany.
There was a separate conference several days before the Harvard conference. This one was titled, “How to Restart Investment in Greece.” The Minister of Development made a glowing report as to the condition of the economy. I wondered what country he was talking about. With the exception of interest in resort hotels (which the banks insist on selling for 100% of the loan value) and John Calamos’s proposed purchase of NBG’s insurance business, there is little investment in Greek business. It will be interesting how the NBG insurance business performs. Having looked at insurance assets, specifically International Life (which was acquired by NBG), it is difficult to measure the quality of the assets being acquired, much less the real demand for financial products in a country where a mid-level accountant at one of the major accounting firms makes less than $15,000 net per year. Who can afford insurance?
In addition, two of the headline investment projects touted by the Minister of Development, the Hellinikon urban real estate project and the Skouries gold mine, seem to be in jeopardy, which is a testament to the country’s inability to start reinvestment in Greece.
With the banks showing little interest in dealing with NPEs, it raises the question, “When is enough, enough?” Traditionally, business owners and CEOs have personally guaranteed corporate debt and have pledged personal assets to do so. Can you imagine a CEO of a public company in the US personally guaranteeing corporate debt? We have reached the point where the NPE position has overwhelmed the banks. If the banks foreclose on every company and executive, then what?
The CEOs of Greek businesses are beginning to wise up and are looking for ways around the banks. I think you will see new businesses arise unencumbered by bank guarantees. Why not simply hire every employee from a business and start a new company? There is so much capacity in Greece that owning an over-leveraged production facility is not an asset. Many of the suppliers to Greek businesses are not being paid and would gladly sell their product to someone who would pay cash. Let the banks deal with the fallout. And if the banks force production facilities to close, just manufacture the product in Bulgaria. The banks have pushed enough, they better be ready for the pushback.
The Societe Generale Chairman said that forgetting the NPE problem at the Greek banks, the real issue is that the banks are unprofitable. At some point in the near future the banks are going to be faced with massive layoffs. Who is going to manage the NPE process then? There are estimated to be over 60,000 people employed at the four systemic banks. If half are laid off, unemployment in the country would increase by 1%.
Greece is at the end of year one of a three-year plan to reduce NPE’s by 40%. To date, the banks are selling non-performing, unsecured consumer loans, which have been written off. While amount of the loans are large (well over €1 billion) the proceeds are three cents or less. Selling these loans do nothing to solve the NPE problem for the banks. The banks need to face reality and start selling real estate and corporate loans. The problem is that the banks have insufficient reserves to sell these loans in bulk, and therefore selling 40% of the NPE exposure before the end of 2019 simply will not happen. A recent study by HSBC said that given the sales prices of loans reported by UniCredit and the current capital of the Greek banks, the banks can only sell 24% of their NPEs without triggering insolvency. No matter whose numbers you use, the numbers do not work.
The banks will likely reach a crisis point in early-2018 when the ECB begins the stress tests on the banks. After that, without access to investors who are prepared to risk their money for a fourth time, the European Central Bank will be forced to assume control of the banks. The alternative is unacceptable.