Monday, 22 February 2010 23:00

The Beginning of the Endgame is Coming???

So, Fitch finally get's around to downgrading the Greek banks. The sovereign debt short is probably a bit crowded right now, and may be due for a squeeze, but the fundamentals and the macro situation still stands. As a matter of fact, I really believe that most investors, speculators, pundits and regulators are actually looking at the wrong sets of risks - hence may truly be surprised when the choco-pudding hits the fan blades.

From Fitch:

Fitch Ratings-Barcelona/London-23 February 2010: Fitch Ratings has today downgraded the Long-term and Short-term Issuer Default Ratings (IDR) of Greece's four largest banks, National Bank of Greece (NBG), Alpha Bank (Alpha), Efg Eurobank Ergasias (Eurobank) and Piraeus Bank (Piraeus) to 'BBB' from 'BBB+' and 'F3' from 'F2' respectively. The Outlook on the Long-term IDRs is Negative.

  • Alpha Bank warned about in subscriber reports last week - Check!
  • National Bank of Greece warned about in subscriber report last week - Check!
  • Efg Eurobank Ergasias (Eurobank) warned about in subscriber report last week -Check!
  • Piraeus Bank (Piraeus) warned about in subscriber report last week -Check!

All subscribers can download the Greek Bank Tear Sheet here:

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Greek Banking Fundamental Tear Sheet

Pro subscribers can click below for the extended download

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Banks exposed to high sovereign risks

There is only one bank in the analysis that was not downgraded, most likely for political issues. It is really only a matter of time, and when that one goes, so goes Greece...

At the same time, the agency has downgraded the banks' Individual Ratings to 'C' from 'B/C', whilst the ratings of the banks' senior, subordinated and hybrid capital instruments have all been downgraded by one notch. The Support Ratings and Support Rating Floors (SRF) of all four banks have been affirmed.

A full rating breakdown is provided at the end of this comment. Separately, Fitch has also affirmed Agricultural Bank of Greece's (ATEbank) Long-term IDR at 'BBB-', which is on its SRF, and Short-term IDR at 'F3'. The Outlook on the Long-term IDR is Negative. ATEbank's IDRs, Support Rating and SRF are based on sovereign support as the bank is majority-owned by the Greek state (rated 'BBB+'/Negative Outlook).

The rating actions reflect Fitch's view that the banks' already weakening asset quality and profitability will come under further pressure due to anticipated considerable fiscal adjustments in Greece. In particular, Fitch believes the required fiscal tightening that needs to be made by the Greek government will have a significant effect on the real economy, affecting loan demand and putting additional pressure on asset quality. The latter could result in higher credit costs, ultimately weakening underlying profitability.

While the banks' operations in South Eastern Europe (SEE) and Turkey add revenue diversification, such revenues are derived from more volatile economies - some of which have themselves experienced recessionary pressures.

BoomBustBloggers are ahead of you Fitch :-)

The banks' profitability is also likely to be affected by higher funding costs derived from increased funding and liquidity pressures on Greek banks which mostly resulted from the ongoing market perception of elevated risk surrounding the Greek sovereign. The uncertainties surrounding the Greek public finances have to a large extent constrained Greek banks' access to wholesale markets and, to a lesser degree, interbank markets at reasonable prices. As a result, Greek banks continue to rely to some degree on European Central bank (ECB) funding. While unhindered access to ECB facilities provides short-term liquidity, Fitch would welcome a rebalancing of the banks' funding and liquidity profiles towards more traditional funding sources. However, on a positive note, Fitch highlights that Greek banks continue to be primarily funded by customer deposits (86% of gross loans on average for the five largest Greek banks at end-Q309), highlighting limited reliance on non-bank wholesale funding. Additionally, wholesale funding maturities for 2010 are manageable and funding needs for the year should be limited.

Excluding ATEbank, the other four banks' Long-term IDRs remain based on their individual financial strength, as expressed by Fitch's Individual Rating. This takes into account their well-established domestic banking franchises, which support revenue generation and good deposit bases, sound and in most cases recently strengthened capitalisation and also some degree of geographical diversification.

The Negative Outlook on all the banks' IDRs could be revised to Stable should Greek banks be successful in reducing ECB funding and be able to rebalance their funding and liquidity position without impairing their profitability, and if their underlying earnings capacity proves to be more resilient than currently anticipated to the expected prolonged recessionary environment in Greece and to a lesser extent in SEE.

The real question of the day is when will the rating agencies get serious and start downgrading Bank Greece. Bank Greece is an interesting entity, for it is the publicly traded Central Bank of Greece. Hey, why don't we float an offering of Bernanke Bank, the Federal Reserve - ticker BBFRB:-). Bank Greece's liabilities are backed directly by the Greek Government. I think it is fair to say that the Greek government's explicit backing doesn't necessarily mean that an entity is truly economically indemnified against loss. Who's backing the Greek government? As of the time of this writing, not one!

As we go over the responsibilities of Bank Greece, just keep in mind its financial condition in relation to the other banks, despite being backed by an entity that currently cannot pay its bills, has more debt than annual GDP and is facing civil unrest in trying to adjust its budget in attempt to resolve the issue, Bank Greece has the highest valuation multiple of 1.2x book, and has the highest adjusted leverage - by far - of the group at nearly 90x. Normally, the explicit backing of the Greek government should mean something, but again since it is obvious that the Greek government needs backing, this is sort of an increasingly empty promise - in appearance at least.

The next question is since the Bank of Greece is a member of the European System of Central Banks (ESCB) which is composed of the European Central Bank (ECB) and the national central banks (NCBs) of all 27 European Union (EU) Member States, do they get backstopped somehow by forces from the EU? Inquiring minds want to know. I mean, it is quite feasible that the Greek banks can get in trouble once austerity measures take place and the civil unrest picks up. Even if unrest doesn't pick up, there is still a nearly guaranteed deepening of the recession. Then there is CEE exposure, which can help push banks over the edge. If the Greek Central Bank has to come to the aid of the banks, who will come to the Greek Central Banks aid? It is obvious that Greece doesn't have the budget for it.

The Bank of Greece, a short summary taken from their website...

The Bank of Greece

The Bank of Greece is the central bank of the country. It was established in 1927 by an Annex to the Geneva Protocol and started operations in May 1928. It was incorporated as a société anonyme. According to its Statute, its head office is in Athens. It has a nationwide network of 19 branches, 38 agencies and 7 outlets.

As from January 2001, the Bank of Greece is an integral part of the Eurosystem, which consists of theEuropean Central Bank (ECB) and the national central banks (NCBs) of the European Union (EU) Member States participating in the euro area. This implies that the Bank of Greece contributes through its activities to the achievement of the objectives and the performance of the tasks of the Eurosystem, which defines and implements monetary policy in the euro area.

The Bank of Greece is responsible for implementing the Eurosystem’s monetary policy in Greece and safeguarding the stability of the Greek financial system. According to its Statute, its primary objective is to ensure the stability of the general price level. Without prejudice to its primary objective, the Bank supports the general economic policy of the government. In the performance of its tasks, the Bank enjoys institutional, personal and operational independence, and is accountable to the Greek Parliament.

...

Eurosystem-Related Tasks

Monetary policy

The Bank of Greece participates in the formulation of the single monetary policy in the euro area and implements it in Greece, in line with the guidelines and instructions of the European Central Bank (ECB). The Bank conducts monetary policy operations whereby it provides liquidity to domestic credit institutions (main and long-term refinancing operations). It also provides marginal lending and deposit facilities to credit institutions, in order to grant and absorb liquidity, respectively. Finally, it holds the minimum reserve accounts of domestic banks.

Financial stability

The Bank of Greece is responsible for monitoring financial stability, with a view to identifying vulnerabilities in Greece’s financial system, and assesses its resilience.

  • It promotes arrangements for the maintenance of financial stability and effective management of financial crises, in cooperation with other competent authorities in Greece.
  • It monitors banking risks, analyses developments affecting them and presents proposals for ensuring financial stability. It also monitors developments in insurance and investment firms, as well as in undertakings in collective investments not supervised by the Bank of Greece.

I think it is fair to say they are not doing a very good job of excelling at the financial stability task right now.

Statistics

Collecting statistical data from monetary financial institutions (MFIs) (i.e. banks and money market funds) is also a very important task of the Bank. The Bank of Greece collects data on bank rates, as well as data that make up monetary statistics (loans, deposits and other assets and liabilities of MFIs). These statistics are sent to the ECB and taken into account for the calculation of average interest rates in the euro area and the compilation of euro area monetary and credit aggregates. These aggregates are monitored in the context of the Eurosystem’s monetary analysis and their outcomes directly affect monetary policy decisions.

The statistics task appears to have succumbed to manipulation at worst, and quite liberal interpretation at best. From finding information that significantly increases the deficit over the weekend to private sector swaps with banks that mask debt obligations, I feel there is a reason to truly audit this bank and its past tasks and procedures as a condition of remaining an EMU member. Then again, that's just my opinion.

Treasurer and fiscal agent of the government

The Bank of Greece keeps current and time deposit accounts of the government and legal persons in public law in euro and foreign exchange, on the one hand for meeting domestic requirements and, on the other hand, for servicing the external debt. It also carries out payment and collection orders of the government and legal persons in public law in connection with foreign counterparties and provides intermediation services for their international financial activities.

Hmmm!!!

Statistics

The Bank of Greece also compiles and publishes the monetary and credit aggregates concerning the Greek economy and the average interest rates applied by domestic credit institutions to various categories of deposits and loans. In addition to collecting data for monetary statistics, the Bank of Greece also compiles the balance of payments and the financial accounts of the country and, generally, collects and publishes data concerning the Greek economy in the Bulletin of Conjunctural Indicators. Moreover, it conducts specialised statistical surveys on matters related to its tasks (e.g. household indebtedness surveys).

Collecting statistical data aims at both meeting the Bank’s own statistical information requirements and performing its obligations towards the ECB and other international organisations, as well as informing the public and researchers in Greece and abroad. Specifically, the data – in addition to monetary statistics – collected and compiled by the Bank of Greece concern the following four categories:

i. assets and liabilities of financial corporations and data on the mutual fund market

ii. Greece’s balance of payments and international investment position

iii. the country’s financial accounts, according to the methodology of the European System of Accounts 1995 and

iv. general data on the Greek economy.

Can we really trust these numbers?

See Will Greece Set Off the Pan-European Sovereign Debt Crisis? as well as:

  • The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
  • What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
  • The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can effect even the perceived "stronger" nations.
  • The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  • The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  • Last modified on Monday, 22 February 2010 23:00

    8 comments

    • Comment Link ken09 Tuesday, 23 February 2010 21:34 posted by ken09

      And it's expected to hit 29% soon. I don't know about everyone else, but if I was one of those in that position I'd be feeling very uneasy about EVERYTHING. This country is a ticking time bomb ready to explode. The question is when does the timer go off........

      http://www.calculatedriskblog.com/2010/02/q4-report-113-million-us-properties.html

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    • Comment Link shaunsnoll Tuesday, 23 February 2010 19:17 posted by shaunsnoll

      to anyone who says these sovereign defaults won't have an impact on the broad market, there is zero chance of that....

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    • Comment Link Reggie Middleton Tuesday, 23 February 2010 16:03 posted by Reggie Middleton

      From [url=http://www.zerohedge.com/article/greeks-scramble-pull-out-€8-billion-local-banks-greece-responds-money-control-measures]ZeroHedge[/url]:
      We previously wrote about the possibility of a bank run in Greece following unsubstantiated reports that Greek citizens don't trust the Greek financial system all that much anymore, courtesy of the whole bailout and GDP reporting fraud thing. The rumor was not only just confirmed and also quantified: Dow Jones reports that in the past three months Greeks have moved about €8 billion out of local banks "fearing a possible new tax on bank accounts, increased government scrutiny on assets and a run on the banks if Athens is forced to turn to the International Monetary Fund." This represents over a quarter of the money held by private banks in the country. This also represents about €400 billion in total money leaving the system courtesy of fractional reserve banking and the money multiplier. Yet the worst news for Greeks: money controls are coming.

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    • Comment Link rahul Tuesday, 23 February 2010 15:33 posted by rahul

      Oh, I thought you covered all the Greek banks in the content. Anyways congrats :-)

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    • Comment Link shaunsnoll Tuesday, 23 February 2010 15:20 posted by shaunsnoll

      great Reggie, I will. MTL looks like could have some potential since that $1B commitment wouldn't show up on the balance sheet I believe so it would miss most people's screens. There could easily be some companies that have more leverage though.

      Coking coal is a bull market though due to tightness in supply and steel demand so valuations/stocks likely a bit stronger in this segment. Probably a good place to look.

      I've hear from Chanos that there are some south american companies that supply 90%+ of their production to China too. maybe worth looking into.

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    • Comment Link Reggie Middleton Tuesday, 23 February 2010 15:16 posted by Reggie Middleton

      I've been looking for suppliers to China and haven't found enough that suit my requirements. I will have somebody look into MTL and get back to you. Be sure to follow up.

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    • Comment Link shaunsnoll Tuesday, 23 February 2010 14:59 posted by shaunsnoll

      would be interesting to hear your thoughts. I'm sure there are some trainwreck cement companies out there somewhere too.

      MTL also has a super liquid ADR with options that have solid volume

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    • Comment Link shaunsnoll Tuesday, 23 February 2010 14:54 posted by shaunsnoll

      coal producer heavily levered to Chinese demand, has debt/equity of 100% plus a $1B obligation to build a railroad or lose a key mining license. valuation isn't too high but with leverage like that earnings could absolutely fall apart nearly instantly should china not need so much coking coal for steel production.

      considering china produces 500m tons of steel (more than EU, Japan, US and Russia combined) and has 160M idle capacity (more than capacity of Japan and South Korea combined) with 60m tons more capacity being built.

      China's infra binge has made them an absurd consumer of steel and cement and when it stops some of these steel and cement companies will absolutely implode over night.



      http://seekingalpha.com/article/190073-high-conviction-a-russian-miner-leveraging-massive-china-demand?source=email

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