On Friday in "Don’t Tell Merkel, Greek Banks Need Another €10-14 Billion Bailout, [9]" we warned that the €53 billion aid request from Greece was likely only part of the story. The country’s banks, which were (and still are) on the verge of collapse would need to be recapitalized and according to one banking official who spoke to Reuters, that cost of that recap would be somewhere in the neighborhood of €14 billion.
Fast forward 24 hours and that €14 billion had turned into €25 billion, bringing the total estimated cost of the proposed ESM program for Greece to some €76 billion. EU finance ministers balked at the figure and by Sunday it was clear that creditors intended to extract the harshest set of concessions yet out of Athens in return for a new program. After 13 hours of negotiations in Brussels, EU leaders reached an agreement in principle which will require PM Alexis Tsipras to push a draconian set of reforms through parliament by Wednesday. But even if Greece does manage to secure a new bailout this week which includes the €25 billion in recap funding via the agreed upon escrow fund, the banks are by no means out of the woods. Here’s what we said on Friday:
Indeed, even if a deal is reached this weekend and the ECB raises the ELA cap on Monday, it’s difficult to imagine that the deposit outflows will cease (would you trust your deposits in a Greek bank even with a "deal"?) and as suggested above, if capital controls are lifted, the situation will be even worse because Greeks will simply take the opportunity to withdraw all of their money at once. With the liquidity "cushion" down to just €750 million (according to same official who spoke to Reuters about the recap needs), deposit flight will clearly have to be funded via more ELA, which means whatever is left in terms of pledgable collateral will soon disappear even under the rather optimistic assumption that outflows are kept at between €80-100 million per day (the current run rate). At that point (unless the ECB decides to buy the banks more time by substantially lowering haircuts), it's recap time and then ... well, see above.
In the final analysis, no one is going to trust Greek banks for a very, very long time and talk of a depositor bail-in won't do anything to help the situation. The acute lack of confidence means that any capital injected from EU bailout funds will promptly disappear as depositors continue to pull their funds, while the county's rapidly deteriorating economic situation simultaneously drives up NPLs.
Now, Barclays is out reinforcing virtually all of the above on the way to explaining why the banking system is and will continue to be Greece’s "Achilles heel":
As of the end of 2014, Greek banks’ total borrowing at the ECB’s regular operations amounted to €56bn, with negligible usage of ELA. Their usage of the ECB liquidity has increased to about €118bn as of the end of May and we estimate to €125.4bn currently, of which €38.8bn at the MRO and LTRO, while the ELA funding via the Central Bank of Greece should be close to the current limit of €89bn.
The capital controls introduced on 29 June after the announcement of the referendum have reduced significantly the pace of deposit outflows. However, with depositors continuing to withdraw from ATM machines at a limit of €60 per day, Greek banks’ liquidity needs have reached a level very close to the current ELA ceiling. Therefore, for some of them the risk of running out of liquidity in the very near term is high, especially if the ECB keeps freezing the ELA provision at the current level of €89bn.
[10]
Based on some unconfirmed figures reported on Bloomberg (stating that the adjustments regard mainly securities issued or guaranteed by the Greek government for which the haircuts were brought to 45%), we estimate that the average haircut has been increased to about 54% from our previous estimate of 48%. This would imply a reduction in the ELA-eligible collateral buffer (net of haircuts) from our initial estimate of €28bn as of the end of June to about €15bn currently.
[11]
While the current collateral buffer (which we estimate at around €15bn) should allow Greek banks to keep operating if the ECB’s Governing Council approves a further increase in the ELA, we think it will not be enough to absorb any significant increase in deposit outflows in the event that capital controls are eased and banks are reopened. A tiny collateral buffer limits the banks’ capacity to borrow ELA liquidity. Also we suspect that the remaining spare collateral is not evenly distributed among the four largest banks, and therefore some of them are likely to be in more of a stressed liquidity situation than the others, making them more vulnerable to any further bank run. Therefore, we believe that capital controls should remain in place for a long period even if there are positive developments in the negotiations and the ECB eventually increases the ELA ceiling. We believe also that further tightening of the daily cash withdrawal limit from the current €60 might be needed, just to reduce the outflow of banknotes.
On Monday 13 July, the ECB’s Governing Council is expected to meet to decide on ELA support for Greek banks. Following the outcome of the 11-12 July meetings, paving the way for a continuation of the negotiations, we think the ECB is likely to keep the ELA ceiling at the current level of €89bn and to moderately increase it only after approval of reforms by the Greek Parliament on Wednesday 15 July. However, even if the ELA is increased, we expect the ECB to maintain its cautious approach with a very gradual step up of the limit depending on the evolution of negotiations.
But even if Greece averts an EMU exit and its banks continue to receive liquidity through the ELA, the country’s entry into a new programme will still likely require banks to raise capital in order to bolster solvency and cushion them against asset quality deterioration associated with a weakened economy. The average non-performing exposure ratio (NPE) is 41%, already very high but now also at risk of continually increasing over the coming quarters. Ultimately, however, a strengthened capital system is needed to help restore confidence and therefore deposits. A fresh balance sheet assessment and stress test reflecting the revised macro-economic climate cannot be ruled out as a pre-requisite of a new programme and could be the catalyst for identifying fresh capital needs.
[12]
So just as we said, the solvency of the banking system is still very much an issue and far from alleviating the need for capital controls, the days and weeks (and perhaps months) ahead will likely see capital controls get tougher in order to stem the deposit outflow and prevent the weakest of the four large banks from running out of pledgable collateral.
Furthermore, the rapid deterioration in the Greek economy could well mean further asset impairment, necessitating the need for still more capital injections going forward.
As we noted last Monday, a crisis of confidence is nearly impossible to reverse in the short-term and if there is any place on earth where confidence is in short supply, it's at Greek banks.
And just moments ago:
- GREECE TO EXTEND BANK HOLIDAY, CAPITAL CONTROLS TODAY: OFFICIAL
- ECB SAID TO KEEP GREEK EMERGENCY LIQUIDITY CEILING UNCHANGED
