As some readers know, I have a special
place in my stony neoliberal heart for Techie Chan, the Greek Left’s resident statpornographer.
He doesn’t blog in English (by choice probably) but the very few Greek tweeps
who don’t know him had better check him out. He’s even kind enough to humour my
tweeps and me when we joke that Techie and I are actually the same person
arguing both sides of the debate for kicks.
In his post on this subject, Techie
cites Greek
banks’ loan to deposit ratios of 100%-120% (actually an average of 101%) as proof that they got
themselves into the mess they’re in, claiming that 80% is the benchmark for
sustainable leverage. Actually, as the following graph (originally from
Zerohedge here)
demonstrates, Greek banks were not particularly trigger happy by global
standards. They were about average, and Techie's 80% benchmark is about two-thirds of the way down the distribution.
And mind you this is after a wee bit of deposits flight too.
Now, I will happily grant Techie that banks
the world over are over-leveraged (read on as to why, though!) but it is a big
of a stretch to claim that Greek banks deserved to go under on this basis when
not so many of the rest of the world’s banks have. This first part of my
argument is actually quite simple. With lenient markets, such as we had up to
2007, the optimal level of bank leverage is determined by earnings growth, and that was not half bad for Greek banks. With
tight-ass markets, the kind we actually have now, the real issue is the degree of
reliance on short-term wholesale funding. So did Greek banks rely
disproportionately on short-term wholesale funding? Well not until they got into trouble, with exceptions of course.
The second part to my argument is slightly
more technical but much juicier. You see, what Techie forgets (and most people
completely ignore) is that leverage is not fungible. It’s more like Popeye’s spinach
– Popeye eats it and it all ends up in his freaky-looking arms instead of
making him all-round super-buff. Similarly, a bank’s 20x leverage does not finance
all of its assets equally; rather, capital requirements courtesy of Basel
implicitly assign a maximum leverage ratio to each assets class through risk
weighting, and therefore decide where the leverage goes. I know the banks don’t
think this way when they borrow to cover financing needs, but that’s how their
incentives are aligned; they can’t help it. Former World Bank Director Per
Kurowski illustrates this very well in his
most recent paper on how Basel has turned banks into weapons of mass
destruction.
You see, all the way to early 2009, Greece’s
credit rating – an incredible, and, as it turned out, unrealistic, AAA to AAA negative for all agencies,
meant positions on Greek bonds could be financed through UNLIMITED leverage according
to Basel II regulations. Treatment under Basel I, the previous regime, was
similarly lax. So really, it was no surprise that they tanked as soon as the
finances of the Greek state came into question.
[UPDATES TO FOLLOW]
hello my liberal alter ego :)
ReplyDeleteyour defensive line is that the greek banks did what everyone was doing at the time and at that they were quite "conservative" when you compare them to other banks around europe. Well yes you are right, my bank account is at the most leveraged bank of germany and maybe the whole of europe (berliner Sparkasse) :)
but by doing what the other kids in the block were doing, doesnt really lift their own guilt. We all knew that the basel requirements were lax as hell and by baptizing loans and assets as triple A super-secure (with CDS magick or not), doesnt really mean that they were secure (I think we have established that).
So after the lehman "incident" (sep2008), the secondary funding market closed down permanently and ECB had to step up to continue providing wholesale funding.
every banking bond that expired was never refinanced and usually ended up as collateral to ecb with the compliments (and guarantee of the state). At that moment everybody understood that each banking system was relying on the state for that 4 year emergency..
Thats how UBS with huge losses from the USA klotsopatinada didnt go belly up.
and the greek state was admittedly a very weak one, with the 5th biggest public debt in the world. (those sneaky italians were ahead of us by one position, but we beat them to that, didnt we?) . The funding needs of the state were exploding in 2009 (ok 15% was a statistical trick, but a sound 9-10% was a truer daunting deficit)
and at the same time the greek banks relied on the ecb (and the state guaranty) for nearly 40bil euro (20% ofGDP) in maturing bank bonds and commercial paper only in 2009 (because nobody really believed that the underlying collateral was safe and sound)
http://www.techiechan.com/wp-content/uploads/2012/05/loan-assets-ratio.pdf
Of course, if the greek state was in the same condition, the irish state was, 20% of GDP is not a big chunk of liabilities to absorb, while at the same time having a deficit of 10% of GDP.
But the irish's state low public debt figure was in part due to the flood of private debt their banks helped create (260% of gdp, while greece had a more conservative 95% of GDP)
Im not here to defend the policies of the greek state, but the timeline connection is pretty clear to me. The banks turned from diamond of a country's wealth to dust in sep2008, and then, every banking sector that was way bigger than the state could absorb, started dragging the whole country down.
Greek banking sector was not big comparatively but it was too big for the weak greek state to absorb, and thus it became the first domino in the eurozone.
could have the greek state and the banks created an italian deal with the depositors back in early 2009? Well maybe they could have funded the whole gap internally using the sound (and not leveraged) condition of the greek households.
Maybe that way they could dodge the bullet of being the first eurozone state that went belly up, but we know for sure that wasnt the intention of Karamanlis and certainly wasnt the intention of GAP
Nice piece.
ReplyDeleteI would also note the following inaccuracy in @TechieChan's post. He/she claims that the markets closed for the banks 1.5 years before they closed for the Greek state. The argument is that the banks fell victims of their own actions and not of Greece's bancruptcy.
Although it is true that access to wholesale funding was closed to most banks following the eruption of the financial crisis in 2H2008 (indeed, some banks even lost access to the interbank market), it is also true that Greek banks regained access in 2H2009.
Eurobank raised ca Eur 2.8 billion via swaps and direct bond issues while Alpha Bank issued a EUR 1.3 billion bond in 9/2009 AND common stock of EUR 1 billion in 11/2009 through a rights issue. The proceeds of the rights issue were meant to repay the preference shares under the Alogoskoufis scheme but then the Greek sovereign debt crisis erupted and the rest is history.
kalamake check the numbers and dont believe the hype the banks were feeding at the time in order to say they were solvent :)
Deletein 2009 total funding needs of the gr banks were over 30bil euro. They refinanced 4-5-6bil max , I wouldnt call this access to the markets or solvency. If not for the 28bil of the greek state and the ecb emergency operations, in a "true" capitalistic world, they would be belly up :)
Well, it is true that Greek banks had accessed the ECB discount window starting with late 2008. It is also true that a very large number of banks internationally did that as well. Even in the US, all the big names (save JPM) resorted to the Fed.
DeleteThe Fed and ECB are above all lenders of last resort. They are meant to help banks tide over liquidity shortages. The issue is whether the banks (Greek or otherwise) were considered insolvent and therefore lost access to wholesale funding.
It is also true that (at least some of) the Greek banks had reduced funding from ECB over 2009 (2Q & 3Q mostly). They were moving in the right direction. These banks were also considered solvent at that point. How else would, Alpha Bank for example, successfully execute a rights issue, a task materially harder than senior debt financing, in November 2009? The market considered at least some of the banks solvent.
Some of the banks (that I can know of) reduced materially their holdings of GGBs in the summer of 2009 (eg., Alpha Bank). I would like to think that some of the banks' management were prescient enough vis-a-vis the greek sovereign but that was not the case, I am afraid. There were two reasons: increasing liquidity/reduction of balances with ECB and cashing profits following a marked tightening of GGB spreads over 1H2009.
I'd like to end with three points:
1) Greek banks were apparently blind to the unrealistically small spreads between GGBs and Bunds and loaded up on GGBs. But so were so many other banks internationally. As long as Basel rules assigned 0% risk weighting on GGBs and funding was immediately available on a 100% basis (I think @lolgreece has explained this in a post), we should not be so surprised anymore.
2) It is worth our trouble to differentiate among greek banks - their risk appetite and GGB holdings varied materially, a fact demonstrated by the recent post-PSI stress tests.
3) Since a bail-in (as presented by @lolgreece a couple of months ago) was not an option but rather a bailout by the sovereign, we have to admit that in Greece we have the innovation of the insolvent debtor taking over the creditor and not vice-verca as usual! BY itself, this is the prime reason for a bail-in of Greek banks!!!
Cheers and enjoy your weekend!
@Waste That's why I then go on to explain the role of Basel in linking sovereign debt and leverage. I'm trying to find rather more damning evidence of the link.
ReplyDeleteSeems for me its too late! While traveling in asia the citi bank blocked access to my accoung in greece and refuse to reativate my ATM card leaving me stranded,
ReplyDeleteTill now i spent more than 7 hours calling citi bank customer services to no avail,
Every time i get phone contact with customer services or emplyees at the branch where my account is they put me on hold listening to mozart saying they will connect me with the person responcible then the line is cut and i have to make the call again.
Each time i am connected to another person at the bank and have to go through the whole proccess again till i,m cut off.
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