From Peter Tchir of TF Market Advisors
If Greece Default Would Wreak Havoc On European Banks Then CEO’s Should Be Fired
Every day there is at least one headline about how catastrophic a Greek default would be. These headlines aren’t coming from the doom and gloom crowd, they are coming from senior government officials throughout Europe. There is great concern that a Greek default would hurt European banks. The potential domino effect to other countries scares these senior officials. If these fears are valid, then some senior bankers should be fired immediately because they have wasted the opportunity to reduce their exposures with reasonable losses.
Banks have had ample opportunity to cut their exposure to Greece. The original bailout and the announcement of EFSF gave these banks an incredible chance to get out of their Greek debt with manageable losses.
Hellenic Republic 6.1% of Aug 2015 bond price history with bank CEO thought process.
There is about 175 billion Euro of Greek government debt that matures prior to 2017. The bulk of bank bond holdings are likely to fall in this maturity range. Let’s look at what happened to the Hellenic Republic 6.1% bond maturing on August 20th, 2015. This bond was issued at just below par on January 26th, 2010. It traded well for awhile, but as the problems in Greece mounted, it traded down to the low 70’s in early May. After the May bailout, the bonds spiked back to above 90 where they remained for about a month. Then they started to drift down, and were trading in the high 70’s in the late summer as the sovereign debt crisis spread. With the announcement of EFSF, the bonds rallied and got as high as 90 in October at the peak of complacency. They are currently trading just above 60. How many banks kept their entire position throughout this wild ride? They had a warning of how bad it could get in April and got a 23 point bounce from low to high. They got another warning in the summer, followed by a 13 point bounce. Banks had two opportunities to sell these bonds and lose less than 10% including interest earned. Now banks would face an almost 40% loss. It is similar for other bonds in this maturity range: August 2013 bonds traded down to 70, back to 90, down to 80, back to 88 and are now at 67. The 5.9% of 2017 are even more interesting. They were issued on March 30, 2010 and closed just above 98. In less than a month they were trading at 76. Which banks played in that new issue? And yes, play is a more accurate word than invested. The problems were becoming apparent and that particular bond was a disaster for anyone who bought it. But like the other Greek bonds, it bounced back to above 90 after the May bailout, and again to the mid 80’s in October after EFSF. They now languish at 58.
There were two warnings that all was not good. Two big sell-offs that must have scared banks. These were followed by two massive relief rallies after government bailouts that gave the banks the time to get out of their positions with reasonable losses. Without being a perfect trader and catching the top, it is easy to see that banks could have sold their exposure, partly in May and again in October at say a 15% loss. If banks held 100 billion Euro of debt, that would have been a 15 billion loss to the banking system. That same 100 billion now has a loss of about 40 billion euro!
If banks didn’t massively reduce exposure when they had these windows of opportunity, and the EU is busy negotiating to save these same banks, someone needs to be fired. It is mind boggling that banks were either so afraid of taking a reasonable loss or so greedy that they thought they could do better that they kept these exposures. It had to have been clear to everyone at the banks how bad it could get, the only prudent, not even smart, just prudent, action was to cut exposures. Even if you missed the May rally which was the best opportunity to get out, how could you sit through the summer fear and not sell heavily into the October rally? Any explanation involves either stupidity, negligence, or complete faith in the government to bail you out. Sadly it is likely the latter, and that bank CEO’s were so comfortable that the governments would take care of them that they did not feel the need to cut dramatically. Or maybe the banks did cut their exposure and it is the EU and ECB who is lying to us, and the renegotiating with Greece to save themselves and not the banks.
What about the contagion effect? Even if the banks had sold down their Greek debt, wouldn’t they have been stuck with Ireland? NO!! The Irish 10 year bond barely got below 95 in May, and quickly bounced back to above par. It faded to 95 over the summer with contagion risk, but once again got to about par as EFSF was talked about. It is currently trading at 68. Shorter dated Irish bonds aren’t trading as low as in Greece, but on the other hand, there were many more opportunities to sell out of Irish risk without a loss. So again, the banks chose to hold their positions. If Europe is facing fears that banks will be wiped out due to losses on sovereign debt, the banks themselves are to blame.