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Will the Rating Agencies Get Serious About Greek Downgrades?
So, Fitch finally get's around to downgrading the Greek banks. The sovereign debt short is probably a bit crowded right now, and may be due for a squeeze, but the fundamentals and the macro situation still stands. As a matter of fact, I really believe that most investors, speculators, pundits and regulators are actually looking at the wrong sets of risks - hence may truly be surprised when the choco-pudding hits the fan blades.
From Fitch:
Fitch Ratings-Barcelona/London-23 February 2010: Fitch Ratings has today downgraded the Long-term and Short-term Issuer Default Ratings (IDR) of Greece's four largest banks, National Bank of Greece (NBG), Alpha Bank (Alpha), Efg Eurobank Ergasias (Eurobank) and Piraeus Bank (Piraeus) to 'BBB' from 'BBB+' and 'F3' from 'F2' respectively. The Outlook on the Long-term IDRs is Negative.
All of the banks mentioned above: Alpha Bank, National Bank of Greece, Efg Eurobank Ergasias (Eurobank) and Piraeus Bank (Piraeus) were warned about in subscriber report last week -Check!
All subscribers can download the Greek Bank Tear Sheet here: Greek Banking Fundamental Tear Sheet. Pro subscribers can click below for the extended download Banks exposed to high sovereign risks.
There is only one bank in the analysis that was not downgraded, most likely for political issues. It is really only a matter of time, and when that one goes, so goes Greece... Back the Fitch press release...
At the same time, the agency has downgraded the banks' Individual Ratings to 'C' from 'B/C', whilst the ratings of the banks' senior, subordinated and hybrid capital instruments have all been downgraded by one notch. The Support Ratings and Support Rating Floors (SRF) of all four banks have been affirmed.
A full rating breakdown is provided at the end of this comment. Separately, Fitch has also affirmed Agricultural Bank of Greece's (ATEbank) Long-term IDR at 'BBB-', which is on its SRF, and Short-term IDR at 'F3'. The Outlook on the Long-term IDR is Negative. ATEbank's IDRs, Support Rating and SRF are based on sovereign support as the bank is majority-owned by the Greek state (rated 'BBB+'/Negative Outlook).
The rating actions reflect Fitch's view that the banks' already weakening asset quality and profitability will come under further pressure due to anticipated considerable fiscal adjustments in Greece. In particular, Fitch believes the required fiscal tightening that needs to be made by the Greek government will have a significant effect on the real economy, affecting loan demand and putting additional pressure on asset quality. The latter could result in higher credit costs, ultimately weakening underlying profitability.
While the banks' operations in South Eastern Europe (SEE) and Turkey add revenue diversification, such revenues are derived from more volatile economies - some of which have themselves experienced recessionary pressures.
BoomBustBloggers are ahead of you Fitch :-)
The banks' profitability is also likely to be affected by higher funding costs derived from increased funding and liquidity pressures on Greek banks which mostly resulted from the ongoing market perception of elevated risk surrounding the Greek sovereign. The uncertainties surrounding the Greek public finances have to a large extent constrained Greek banks' access to wholesale markets and, to a lesser degree, interbank markets at reasonable prices. As a result, Greek banks continue to rely to some degree on European Central bank (ECB) funding. While unhindered access to ECB facilities provides short-term liquidity, Fitch would welcome a rebalancing of the banks' funding and liquidity profiles towards more traditional funding sources. However, on a positive note, Fitch highlights that Greek banks continue to be primarily funded by customer deposits (86% of gross loans on average for the five largest Greek banks at end-Q309), highlighting limited reliance on non-bank wholesale funding. Additionally, wholesale funding maturities for 2010 are manageable and funding needs for the year should be limited.
Excluding ATEbank, the other four banks' Long-term IDRs remain based on their individual financial strength, as expressed by Fitch's Individual Rating. This takes into account their well-established domestic banking franchises, which support revenue generation and good deposit bases, sound and in most cases recently strengthened capitalisation and also some degree of geographical diversification.
The Negative Outlook on all the banks' IDRs could be revised to Stable should Greek banks be successful in reducing ECB funding and be able to rebalance their funding and liquidity position without impairing their profitability, and if their underlying earnings capacity proves to be more resilient than currently anticipated to the expected prolonged recessionary environment in Greece and to a lesser extent in SEE.
The real question of the day is when will the rating agencies get serious and start downgrading Bank Greece. Bank Greece is an interesting entity, for it is the publicly traded Central Bank of Greece. Hey, why don't we float an offering of Bernanke Bank, the Federal Reserve - ticker BBFRB:-). Bank Greece's liabilities are backed directly by the Greek Government. I think it is fair to say that the Greek government's explicit backing doesn't necessarily mean that an entity is truly economically indemnified against loss. Who's backing the Greek government? As of the time of this writing, not one!
As we go over the responsibilities of Bank Greece, just keep in mind its financial condition in relation to the other banks, despite being backed by an entity that currently cannot pay its bills, has more debt than annual GDP and is facing civil unrest in trying to adjust its budget in attempt to resolve the issue, Bank Greece has the highest valuation multiple of 1.2x book, and has the highest adjusted leverage - by far - of the group at nearly 90x. Normally, the explicit backing of the Greek government should mean something, but again since it is obvious that the Greek government needs backing, this is sort of an increasingly empty promise - in appearance at least.
The next question is since the Bank of Greece is a member of the European System of Central Banks (ESCB) which is composed of the European Central Bank (ECB) and the national central banks (NCBs) of all 27 European Union (EU) Member States, do they get backstopped somehow by forces from the EU? Inquiring minds want to know. I mean, it is quite feasible that the Greek banks can get in trouble once austerity measures take place and the civil unrest picks up. Even if unrest doesn't pick up, there is still a nearly guaranteed deepening of the recession. Then there is CEE exposure, which can help push banks over the edge. If the Greek Central Bank has to come to the aid of the banks, who will come to the Greek Central Banks aid? It is obvious that Greece doesn't have the budget for it.
The Bank of Greece, a short summary taken from their website...
The Bank of Greece
The Bank of Greece is the central bank of the country. It was established in 1927 by an Annex to the Geneva Protocol and started operations in May 1928. It was incorporated as a société anonyme. According to its Statute, its head office is in Athens. It has a nationwide network of 19 branches, 38 agencies and 7 outlets.
As from January 2001, the Bank of Greece is an integral part of the Eurosystem, which consists of theEuropean Central Bank (ECB) and the national central banks (NCBs) of the European Union (EU) Member States participating in the euro area. This implies that the Bank of Greece contributes through its activities to the achievement of the objectives and the performance of the tasks of the Eurosystem, which defines and implements monetary policy in the euro area.
The Bank of Greece is responsible for implementing the Eurosystem’s monetary policy in Greece and safeguarding the stability of the Greek financial system. According to its Statute, its primary objective is to ensure the stability of the general price level. Without prejudice to its primary objective, the Bank supports the general economic policy of the government. In the performance of its tasks, the Bank enjoys institutional, personal and operational independence, and is accountable to the Greek Parliament.
...
Eurosystem-Related Tasks
Monetary policy
The Bank of Greece participates in the formulation of the single monetary policy in the euro area and implements it in Greece, in line with the guidelines and instructions of the European Central Bank (ECB). The Bank conducts monetary policy operations whereby it provides liquidity to domestic credit institutions (main and long-term refinancing operations). It also provides marginal lending and deposit facilities to credit institutions, in order to grant and absorb liquidity, respectively. Finally, it holds the minimum reserve accounts of domestic banks.
Financial stability
The Bank of Greece is responsible for monitoring financial stability, with a view to identifying vulnerabilities in Greece’s financial system, and assesses its resilience.
- It promotes arrangements for the maintenance of financial stability and effective management of financial crises, in cooperation with other competent authorities in Greece.
- It monitors banking risks, analyses developments affecting them and presents proposals for ensuring financial stability. It also monitors developments in insurance and investment firms, as well as in undertakings in collective investments not supervised by the Bank of Greece.
I think it is fair to say they are not doing a very good job of excelling at the financial stability task right now.
Statistics
Collecting statistical data from monetary financial institutions (MFIs) (i.e. banks and money market funds) is also a very important task of the Bank. The Bank of Greece collects data on bank rates, as well as data that make up monetary statistics (loans, deposits and other assets and liabilities of MFIs). These statistics are sent to the ECB and taken into account for the calculation of average interest rates in the euro area and the compilation of euro area monetary and credit aggregates. These aggregates are monitored in the context of the Eurosystem’s monetary analysis and their outcomes directly affect monetary policy decisions.
The statistics task appears to have succumbed to manipulation at worst, and quite liberal interpretation at best. From finding information that significantly increases the deficit over the weekend to private sector swaps with banks that mask debt obligations, I feel there is a reason to truly audit this bank and its past tasks and procedures as a condition of remaining an EMU member. Then again, that's just my opinion.
Treasurer and fiscal agent of the government
The Bank of Greece keeps current and time deposit accounts of the government and legal persons in public law in euro and foreign exchange, on the one hand for meeting domestic requirements and, on the other hand, for servicing the external debt. It also carries out payment and collection orders of the government and legal persons in public law in connection with foreign counterparties and provides intermediation services for their international financial activities.
Hmmm!!!
Statistics
The Bank of Greece also compiles and publishes the monetary and credit aggregates concerning the Greek economy and the average interest rates applied by domestic credit institutions to various categories of deposits and loans. In addition to collecting data for monetary statistics, the Bank of Greece also compiles the balance of payments and the financial accounts of the country and, generally, collects and publishes data concerning the Greek economy in the Bulletin of Conjunctural Indicators. Moreover, it conducts specialised statistical surveys on matters related to its tasks (e.g. household indebtedness surveys).
Collecting statistical data aims at both meeting the Bank’s own statistical information requirements and performing its obligations towards the ECB and other international organisations, as well as informing the public and researchers in Greece and abroad. Specifically, the data – in addition to monetary statistics – collected and compiled by the Bank of Greece concern the following four categories:
i. assets and liabilities of financial corporations and data on the mutual fund market
ii. Greece’s balance of payments and international investment position
iii. the country’s financial accounts, according to the methodology of the European System of Accounts 1995 and
iv. general data on the Greek economy.
Can we really trust these numbers?
See Will Greece Set Off the Pan-European Sovereign Debt Crisis? as well as:
Interested parties can feel free to contact me by phone or email.
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Leo, I am not doubting whether Greece will survive this or not. I doubt that they will accomplish their stated austerity goals without plunging the country into a deep recession, or worse. I also doubt that they will be able to avoid the reflexive spiral of deep debt causing spiking financing costs which will create deeper debt which will cause spiking financing costs which will create deeper debt...
IIf it makes things seem more empirical, much of Europe is cued up to go next.
Vassilis Vassilikos wrote an op-ed piece in the NYT, Crisis in a Stoic Land. I suggest you all read it before making grand proclaimations on Greece.
February 14, 2010 Op-Ed Contributor Crisis in a Stoic LandBy VASSILIS VASSILIKOS
Greece has entered the third millennium having survived many foreign occupations. The most trying was that of the Ottoman Empire, starting in 1453 when Constantinople was renamed Istanbul, from the Greek phrase meaning “going to the city.” Since our liberation from the Turks in 1821, we have suffered many dictatorships, the most recent following the coup d’état of 1967 and lasting seven years. But since then, Greece has entered its longest period of peace and democracy since it was constituted as an independent state.
Excuse me for this prologue, but it is indispensable in order to explain the present “crisis” over Greece’s exploding debt. This mess is actually a small problem by historic standards. Over the last two centuries my compatriots have survived much worse.
Historically, Greece has had three patrons: Britain, France and Russia. In the early days of the reborn Hellenic state, Germany was usually an unfriendly country; it became an ally of Kemal Ataturk’s Turkey and a foe in both world wars. Now we are facing the delicate situation of accepting the protection of a Germany that, along with France, dominates the euro zone. (Britain’s role as a patron was handed off to the United States with the Truman doctrine of 1947.)
Yet the vast majority of Greeks do not consider the European Monetary Union a threat to national sovereignty. On the contrary, we feel that the common currency offers valuable protection from the headwinds of the international economic crisis, and is thus an extra guarantee to national sovereignty.
A neighbor of mine, Yiannis, recalls the days of nonstop devaluations of the drachma, our national currency before the euro. If you wished to go to, say, Delphi by car, you would take a suitcase of drachmas to pay for fuel.
The first signs of our current fiscal derailment appeared in 2007 with the crashing of our own real estate bubble. Last October, Prime Minister George Papandreou was elected with a strong mandate to fight corruption and navigate the country through the fiscal storm.
The political and economic morass that our journalists call the “Greek tragedy” became an opportunity to push forward an unprecedented agenda of regulatory reform and policy initiatives to support a new model of sustainable, environmentally friendly development. And the Greek people gradually have come to understand that they themselves must help in creating a new model of economic development.
Therefore, we are for the most part reacting with stoicism to the government’s proposed austerity measures. The demonstrations by civil servants over the last few days got a lot of press coverage, but they were relatively modest, without the infamous “pulse” of earlier eras. They were much tamer than the December 2008 riots that followed the police shooting of a 15-year-old student.
I sense that the majority of Greek people seem to understand the urgency of the economic situation and are willing to accept sacrifices. They demand deep and radical change right now. Our politicians also appear united, a demonstration of cohesiveness in Greek society that may be without precedent, at least in the 35-year history of the Republic.
My cousin Stella, for example, was telling me she would be willing to sacrifice a part of her monthly income if that would help the country. But she thinks that burden-sharing needs to be fair and just for the measures to get broad social support. This is a major challenge for our top economic officials: to use the existing labyrinth of obsolete and inefficient bureaucracies and procedures to come up with a proposal for financial restoration that the public will accept.
The man in the street also feels more positively about the United States than ever before. Most Greeks think that on issues from foreign policy to restoring the social safety net, the Obama administration’s goals are in sync with their own. The Greek people also share President Obama’s anger and frustration over the behavior of bankers.
While the European Union last week promised “determined and coordinated action” on Greece’s debt problem, none of us is quite sure what that will amount to. The one thing I am certain of, however, is that my country will overcome the financial crisis with national pride and international dignity intact.
None of your "Pan-European Sovereign Debt Crisis" links are working...
They should work now.