Home' Trinidad and Tobago Guardian : July 23rd 2015 Contents JULY 23 • 2015 www.guardian.co.tt BUSINESS GUARDIAN
INTERNATIONAL | BG21
Just because the doors of Greek
banks are open today, don t be
fooled into thinking they and the
Greek economy are anywhere near
back to recovery.
There are still major restrictions on the
ability of their customers to obtain their cash
or move it around:
a) withdrawals per week are capped at €420;
b) there is a ban on using deposits to repay
loans early (because many Greeks would rather
repay debts than risk seeing their savings
wiped out in a bank crash or in a so-called
bail-in which would see savings converted to
bank shares of dubious value);
c) it is still incredibly difficult for small-
and medium-size businesses to purchase vital
raw materials or other goods from abroad,
because banks won t make new loans and
there are severe restrictions on foreign pay-
ments. The symbolic importance of the Euro-
pean Central Bank turning on the emergency
lending tap again was important, but it has
only been turned on a fraction.
It has given enough additional Emergency
Liquidity Assistance, €900m, to keep the
banks alive in a technical sense.
There is no possibility of them thriving for
months and even possibly years. To put it in
a Hellenic nutshell, the banks and the Greek
economy remain in intensive care.
The transmission of money is being facil-
itated in the most basic way, but there is no
creation of new credit; and this credit freeze
is a major impediment to consumer spending,
and---perhaps more importantly---will lead to
many businesses going bust in the coming
weeks and months.
Which gives a certain frisson to a statement
made only in May by Europe s top banking
supervisor, Daniele Nouy, chair of the so-
called single supervisory mechanism, the bank
supervisory arm of the European Central Bank.
She said of Greek banks, in an interview
with the Wall Street Journal, that "these banks
have gone through important restructuring,
important recapitalisations and a redefinition
of their business models. They have never
been better equipped to go through this kind
of stressful situation."
Just a few days ago, eurozone leaders and
the International Monetary Fund more or less
pronounced the entire Greek banking system
kaput, with their declaration that the banks
need additional capital of €25bn euros which,
relative to the size of the Greek economy, rep-
resents one of the biggest banking black holes
in the history of capitalism.
So what has gone wrong? Have the Greek
banks been taking mad credit risks? Have they
been lending recklessly as though there were
no tomorrow; in the way that sank the banks
of most rich developed countries in 2008?
If only. Credit has been almost impossible
for businesses and individuals to obtain for
months. The banks have been sunk by the
collision of Greek democracy and dysfunctional
To remind you, the Greeks elected a party
into power, Syriza, whose economic plans col-
lided with the eurozone consensus, which in
turn led to the eurozone and IMF creditors
initially refusing to renew the bailout of the
financially stretched state, which in turn meant
that the country faced insolvency.
And when a country faces insolvency, so
too do its banks, since banks face huge losses
on their massive loans to government, and
can t turn for support to the place they would
normally turn, viz the state (because, in case
you forgot, the state is bust).
So Greece s banking crisis is---in its current
form---a crisis created by Greek and eurozone
politicians. What is more, and perhaps deeply
troubling, the fate of the banks is still in their
For example, the more that austerity leads
to economic slowdown and repayment diffi-
culties for bank customers, the more that
losses for banks will escalate; which will erode
existing capital and will prompt the conversion
of the banks tax credits into new bank shares
held by the state.
What is more, as the Greek economy goes
into reverse there will be renewed determi-
nation of Athens and the International Mon-
etary Fund to secure huge write-offs of the
Greek government s unsustainable debts, in
the teeth of fervent opposition from Germany.
But the more that the intrinsic value of
these debts is reduced, the bigger the losses
for Greek banks on their loans to Athens.
So it is reasonable to assume that a stress
test and asset quality review of Greek banks
ordered by the European Central Bank---which
as it happens has started today---will confirm
in a couple of months that more-or-less all
the capital held by Greek banks will be wiped
out by future losses.
That would mean the wipe out of an invest-
ment of €16bn made by the Greek state and
€10bn made by private investors as recently
Those private investors include some of the
deepest-pocketed global funds, such as Fairfax
Financial Holdings (which owns a big chunk
of Eurobank) and the Qatar Investment
Authority (with a stake in Alpha).
Here is the surrealism of eurozone "banke-
nomics" in a time of financial catastrophe.
The more conservative is the evaluation of
the health of banks, the bigger the write-off
of public sector and private sector investment
in the banks.
But that has the perverse outcome of
increasing the debt burden on the overstretched
Greek state; because it will seen to be on the
hook to repay whatever huge investment in
the banks is deemed necessary to be made by
the eurozone s European Stability Mechanism
(and that is likely to be true whether the ESM
invests directly in the banks or via a loan to
Frankfurt or Athens?
Most would say it would be far better if the
private sector would bail out the banks. But
that is inconceivable if the €10bn it injected
into them just two years ago is consumed in
In fact if the global investors in Greek banks
don t immediately sue any regulator and central
banker which treated the banks as going con-
cerns over the past year ---which is every reg-
ulator---then Wall Street and City lawyers have
all become tree-hugging softies.
Beijing may have averted a crisis in its stock
markets with heavy-handed intervention, but
the world s biggest corporate debt pile---US$16.1
trillion and rising---is a much greater threat
to its slowing economy and will not be so
Corporate China s debts, at 160 per cent of GDP, are twice
that of the United States, having sharply deteriorated in the
past five years, a Thomson Reuters study of over 1,400 com-
And the debt mountain is set to climb 77 per cent to US$28.8
trillion over the next five years, credit rating agency Standard
& Poor s estimates.
Beijing s policy interventions affecting corporate credit have
so far been mostly designed to address a different goal; sup-
porting economic growth, which is set to fall to a 25-year low
It has cut interest rates four times since November, reduced
the level of reserves banks must hold and removed limits on
how much of their deposits they can lend.
Though it wants more of that credit going to smaller com-
panies and innovative areas of the economy, such measures
are blunt instruments.
"When the credit taps are opened, risks rise that the money
is going to problematic companies or entities," said Louis
Kuijs, RBS chief economist for Greater China.
China s banks made 1.28 trillion yuan (US$206 billion) in
new loans in June, well up on May s 900.8 billion yuan.
The effect of policy easing has been to reduce short-term
interest costs, so lending for stock speculation has boomed,
but there is little evidence loans are being used for profitable
investment in the real economy, where long-term borrowing
costs remain high, and banks are reluctant to take risks.
Manufacturers debts are increasingly dwarfing their profits.
The Thomson Reuters study found that in 2010, materials
companies debts were 2.8 times their core profit. At end-
2014 they were 5.3 times. For energy companies, indebtedness
has risen from 1.1 to 4.4 times core profit. For industrials,
from 2.5 to 4.2.
Gao Hong, investor relationship principal at railway equip-
ment maker Jinxi Axle Co, which has seen its debt-to-core
profit multiple triple to 10.25 between 2010 and 2014, said
the company struggled to find profitable capital projects to
invest in, so put money into short-term bank products that
"The risk for these (capital) programmes is so high and the
rate of return so low that we have to make the best decision
for our investors (by) purchasing bank products. Last year, we
made profits thanks to the sale of CNR shares," said Gao.
Much of the new lending is going to China s notoriously
inefficient state-owned enterprises (SOEs) as part of the gov-
ernment s fiscal stimulus.
"They are lending more to fund infrastructure projects, and
some may be done by SOEs where leverage is increasing as
a result," said Tao Wang, UBS head of China research.
"Prices are declining and revenue is slowing, and in this
environment you cannot force too quick a deleverage; that
would lead to a hard landing," said Wang.
S&P expects China s companies to account for 40 per cent
of the world s new corporate lending in the period through
But quantity is not the only problem.
Getting credit to the most efficient companies, where it has
the most impact on the economy, would be easier if inefficient
companies were allowed to fail, so markets can price debt
Policymakers have said they want market mechanisms to
play a bigger role in credit pricing, but in practice have baulked
at the consequences, effectively bailing out companies in
trouble, as it did last year when state-backed Shanghai Chaori
Solar Energy Science and Technology Co Ltd defaulted on a
bond coupon payment.
Rapid debt growth, opacity of risk and pricing and very
high debt to GDP are a hazardous combination, Standard &
Poor s says.
It took an unprecedented series of measures to arrest the
plunge in China s stock markets, which are worth just over
US$8 trillion and are a minority pursuit for the relatively
Tackling corporate debt might make that seem like child s
"Managing the debt market is probably more dangerous
than the stock market because the scale of the debt market
is bigger, and without any high-profile default, the moral
hazard is a significant issue," said David Cui, BofA Merrill
(US$1 = 6.2084 Chinese yuan renminbi)
Greek banks face
Manage, meddle or magnify?
China's corporate debt threat
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