Earlier today, tucked away from the public's eyes, there was another round of drama involving Greek securities this time focused on Greek senior bank bonds which promptly tumbled back to post-referendum/pre-bailout #3 levels.
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The catalyst was Friday's pronouncement by Jeroen Dijsselbloem who said depositors will be shielded from any losses resulting from the restructuring of the nation’s financial system, but that senior bondholders would certainly be impaired and probably wiped out. In other words, once again the superpriority of various classes has been flipped on its head with general unsecured liabilities ending up senior to, well, senior bank claims.
As Bloomberg reported earlier today [8], while "Greece’s third bailout will spare depositors in any restructuring of the nation’s financial system, senior bank bondholders may not be so lucky, according to comments from Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem. The bondholders will be in line for losses if Greek lenders tap into any of the financial stability funds set aside in the new bailout."
“Bondholders were overly optimistic because bail-in of senior bonds was not explicitly mentioned before,” said Robert Montague, a senior analyst at ECM Asset Management in London. “Today they were brought back down to earth with a bump."
Which is bad news for bondholders, but the biggest losers will once again be depositors who represent the vast bulk of unsecured Greek bank liabilities.
Going back to Friday's statement by the Eurogroup president, he specifically said that "the bail-in instrument will apply for senior bondholders, whereas the bail-in of depositors is explicitly excluded." Which is confusing considering that bank stocks were broadly unchanged and in some cases rose. Of course, this makes no sense because as even a first year restructuring associate will tell you, according to traditional waterfall analysis, even the lowliest bond impairment means an equity wipeout. And yet, Greek bank equities are still trading at far more than just tip/nuisance value. Which, to repeat, makes no sense.
But that is not surprising: little of what Europe is doing with Greece makes any sense. Other agree:
"It is not clear how they will make it possible to bail-in bonds while excluding deposits, but as we have seen in other problematic situations, where there is a will there will be a way,” said Olly Burrows, London-based financials analyst at brokerage firm CRT Capital. "We call Dijsselbloem’s solution a bail-up: part bail-out, part bail-in and part cock-up."
And yet, it appears that following the weekend, Europe realized that it is now openly flaunting the conventional restructuring protocol.
As a reminder, Greece’s euro-area creditors made adoption of the European Union’s Bank Resolution and Recovery Directive, or BRRD, a precondition of the bailout. The directive, which makes it easier to impose losses on senior creditors, should rank senior unsecured bondholders and depositors equally, said Olly Burrows, London-based financials analyst at brokerage firm CRT Capital.
This is something which Dijsselbloem may not have been aware of when he said that one senior class would be impaired while another pari passu group of liabilities, i.e., depositors, would be protected. As noted above, that makes no sense.
Which is probably why earlier today, Bloomberg followed up with a report that a recapitalization of Greek banks will exclude all depositors from losses until the EU’s Bank Recovery and Resolution Directive rules go into effect on Jan. 1, citing an EU official.
Needless to say this was vastly different to Dijsselbloem's blanket guarantee statement, and suggests that depositors will indeed be bailed-in (if mostly those above the €100,000 insured limit, although as European history has shown, rules will be made up on the spot and we would not at all be surprised if deposits under the insured limit are also confiscated), but not right now: only after BRRD rules come in place on the first day of 2016.
Europe's eagerness to promise depositor stability is transparent: the finmins will do everything in their power to halt the bank run from banks which will likely be grappling with capital controls for months if not years. Still, absent some assurance, there is no way that the depositors would be precluded from withdrawing all the money they had access to, which in turn would assure that the €86 billion bailout of which billions are set aside for bank recapitalization, would be insufficient long before the funds are even transfered.
According to an Aug. 14 Eurogroup statement an asset quality review of Greek banks will take place before the end of the year,
"We expect a comprehensive assessment of the banks – so-called Asset Quality Review and Stress Tests - by the ECB/SSM to take place first," European Commission spokeswoman Annika Breidthardt tells reporters in Brussels. “And this naturally takes a few weeks."
In other words Europe is stalling for time: time to get more Greeks to deposit their cash in the bank now, when deposits are "safe" and while everyone is shocked with confusion at the nonsensical financial acrobatics Europe is engaging in.
But once Jan.1, 2016 rolls around, it will be a vastly different story. This was confirmed by the very next statement: "I must also stress that, depositors will not be hit” in this year’s review, she says.
In this year's, no. But the second the limitations from verbal promises of deposit immunity expire next year, everyone who is above the European deposit insurance limit becomes fair game for bail-in.
Dijsselbloem concluded on Friday that "Depositors have been excluded from the bail-in because in the first place it’s concerning SMEs and private persons. But it is only concerning depositors with more than 100,000 euros and those are mainly SMEs. That would again lead to a blow to the Greek economy. So the ministers said we will exclude them explicitly, it would bring damage the Greek economy."
Right, exclude them... until January 1, 2016. And only then impair them because Greece will never again be allowed to escape a state of permanent "damage" fo the economy.
As for Greeks and local corporations whose funds are parked in a bank and who are wondering what all this means for their deposits, here is the answer: for the next 4.5 months, your deposits are safe, which under the current capital control regime doesn't much matter: it's not as if the money can be withdrawn in cash and moved offshore.
However, once January 1, 2016 hits and Greece becomes subject to a bank resolution process supervised and enforced by the BRRD, all bets are off. Which likely means that as the Greek bank balance sheet is finally "rationalized", any outsized deposits will be promptly Cyprused.
For our part, we tried to warn our Greek readers about the endgame of this farcical process since January of this year: we will warn them again - capital controls or not, pull whatever money you can in the next few months because once 2016 rolls around, all the rules change, and those unsecured bank liabilities yielding precisely nothing, and which some call "deposits" will be promptly restructured to make the Greek financial balance sheet at least somewhat remotely viable.
