Alas, it is not a liquidity problem, it is a solvency problem. After delaying this realization for over two years, Greece, and Europe, are about to understand just how flawed "bailout" strategies that address the symptoms and not the cause, have been since the beginning of 2010. And while the world is engaged with the latest victim of the Bernanke-inspired, food-price inflation political upheaval better known as the Arab Spring, whose final stop is nothing less than Times Square, Greece quietly avoided the failure of smallish Proton bank (there is no FDIC backstop of failed banks in Greece), which would have resulted in a market wide panic, and a terminal bank run that would have toppled the Greek financial sector. Luckily, this was prevented in the last second courtesy of a capital injection in the last minute by the big 4 Greek banks. From the FT: "Greece’s four largest banks agreed to take up a €50m convertible bond to help recapitalise Proton Bank, a small lender, the central bank announced this weekend, in what is being seen as an attempt to avert a run on the country’s fragile banking system...“In this environment, it was essential to prevent Proton from collapsing and creating a mood of fear with unpredictable consequences,” said one banker, explaining the rationale for the take-up of the Proton bond." In summary, Greece was lucky... this time around, they had enough cash to save the smallish lender. The next time around they will not be so lucky.
Greek banks no longer have sufficient high-quality collateral to seek funding from the European Central Bank after recent sovereign downgrades. But they are eligible for liquidity allocated by the Bank of Greece in agreement with the Frankfurt-based ECB and are expected to seek it this week.
All four big lenders – National Bank of Greece, Alpha Bank, EFG Eurobank and Piraeus Bank – face a looming liquidity crunch as about €10bn of government deposits are set to be withdrawn from local banks to pay off debt maturing in the next few weeks.
“In this environment, it was essential to prevent Proton from collapsing and creating a mood of fear with unpredictable consequences,” said one banker, explaining the rationale for the take-up of the Proton bond.
Proton, which has just 31 branches, has emerged as the first Greek bank to reach the brink of collapse since the country’s sovereign debt crisis erupted 18 months ago. “It is the small banks like Proton that are most at risk . . . they have been hit by irregular practices as well as the credit crunch,” a Greek financial expert said.
The central bank this month replaced Proton’s board of directors and senior managers, and appointed a special commissioner to oversee operations after discovering a €51m hole in the bank’s balance sheet.
The government also made a €100m emergency transfer to Proton. The bank was however unable to pay back €70m of this amount, after depositors removed funds amid reports that Lavrentis Lavrentiadis, its largest shareholder, was being investigated for alleged embezzlement and money-laundering.
Also it appears that the recent substitution of Greek FinMin G-Pap with Venizelos will not be successful as there, unlike here, bailing out banks at any and all costs s generally frowned up.
Evangelos Venizelos, the finance minister, has faced criticism from opposition politicians for approving the €100m transfer to Proton in defiance of a law banning the government from depositing funds with banks that face financial problems.
For now it appears that contrary to some expectations of a new ECB announcement tonight, which would provide so much needed USD-denominated liquidity to local banks, one is not coming, which means that the same old Risk Off scramble will prevail as soon as Europe opens in a few hours. And one of these days the Greek bank that blows up will be just large enough to where even its bigger cousins will be unable to bail it out.