To be sure, Germany has dug its heels in on Greece over the two weeks since PM Alexis Tsipras decided to put creditors’ proposals to a popular vote.
Even before the referendum hardened Chancellor Angela Merkel’s position, German FinMin Wolfgang Schaeuble and a whole host of Berlin lawmakers were up in arms at what they viewed as excessive accommodation of an increasingly belligerent beggar state. Even Bundesbank chief Jens Weidmann spoke out, deploring the ECB’s permissive attitude towards Greek banks and accusing Mario Draghi of monetary financing.
Regardless of whether Greece comes away with a third bailout after Saturday’s Eurogroup meeting, no one can say Germany didn’t drive a hard bargain and indeed, Berlin has stood firm in the face of IMF calls for Greek debt writedowns even as Christine Lagarde’s haircut demands were bolstered this week by the US Treasury itself.
Germany’s position was summed up nicely on Friday by Hans Michelbach, a German lawmaker from Chancellor Angela Merkel’s Christian Social Union Bavarian sister party who told Bloomberg that “there must be no consent to a ponzi scheme, where old debts are settled only through new debt and the Eurogroup faces the same problem of Greece’s debt sustainability again in 2018.” “I’m not sure that the creditors won’t be fooled again because so far all implementations have been questioned again repeatedly,” he added.
We’re sorry to break it to Mr. Michelbach, Frau Merkel, and the German taxpayer, but that €53 billion Greece is asking for will be just the start of things and we don’t mean in the sense that Athens will one day in the not-so-distant future be back in Brussels looking for a fourth bailout (which they probably will), we mean in the sense that Greece’s beleaguered banking sector is insolvent and will need to be recapitalized one way or another with some (or all) of the funds coming directly out of the pockets of the very same EU taxpayers that are now set to fund the third Greek sovereign bailout. As Reuters reports, the recap could well run into the tens of billions of euros:
Greece's banks will need an estimated 10 to 14 billion euros of fresh capital to keep them afloat and more time before they reopen even if a deal is reached with European creditors on Sunday, a senior Greek banker told Reuters on Friday.
Despite their having bled more than 34 billion euros of deposits since December and Greece's worsening economic outlook, banks are optimistic that branches can be reopened by the end of next week, the banker said.
National Bank, Piraeus, Eurobank and Alpha, which account for about 95 percent of the industry, will likely need to be recapitalised after an assessment by regulators and are not likely to return to a semblance of normalcy for months.
"There is an estimated need of about 10 to 14 billion euros in new capital," the banker said. "Given the magnitude of the shock we have been through, regulators will take stock of the situation and the impact on non-performing loans. A stress test by September would allow time for things to normalise."
And as for where the money come from, one “suggestion” is the as yet unused ESM direct recap fund (so, from the German taxpayer, essentially).
Banks may get a capital injection from the European Support Mechanism's Direct Recapitalisation Instrument (DRI), a new facility which has so far been unused.
It is unclear yet what conditions would be imposed by the ESM in return for such capital, although it is expected to involve a commitment to major restructuring of the Greek financial sector.
As a reminder, the DRI was created in order to avoid situations wherein countries borrowed from the ESM and used the money to recapitalize their banking sector. The problem with that arrangement was that it meant increasing the receiving government’s debt load, which in some cases had contributed to the banking sector’s problems in the first place, meaning governments were essentially borrowing money to recapitalize institutions whose insolvency was partly attributable to fiscal mismanagement. In other words, the DRI was created to help break the “pernicious” link between banks and their sovereigns.
The problem for Greek depositors is spelled out very clearly in the official DRI rule book:
More specifically, the bail-in of private investors (in accordance with the Bank Recovery and Resolution Directive), and the contribution of a national resolution fund (or Single Resolution Fund from 2016) as a precondition for the DRI to be used has shifted the bulk of potential financing from the ESM to the institutions themselves, along with their investors and creditors.
The beneficiary institution would have to be (or likely to be in the near future) unable to meet the capital requirements established by the ECB in its capacity as supervisor. It would also have to be unable to obtain sufficient capital from private sources and the foreseen bail-in would not be sufficient to address the anticipated capital shortfall.
As you can see, if Greek banks need to be recapitalized (and they will), a depositor bail-in will in all likelihood be part of the “solution.” Of course unlike Cyrpus, it won’t be the Russian oligarch crowd who takes the hit, it will be regular Greeks as suggested last week by FT. As we noted in “As A Reminder, This Is What Capital Controls In Cyprus Looked Like,” we hope that Greeks have not placed too much faith in the idea that things will return to normal in the banking sector anytime soon. 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.
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.
So get ready Germany; once your taxpayers have committed another €53 billion to help the Greek government pay back its existing loans, your next project is to figure out how to recapitalize the country's insolvent banking sector.