Although the Greek, Irish and many of the Portuguese and Italian banks are trading around 0.2-0.3 Price-to-book, i.e. investors’ reckon that 70-80% of the shareholders’ equity will be lost, there is more bad news ahead for the PIIGs based banking sector. Of these banks Banco Popolare, UBI Banca, Piraeus Bank and Dexia are currently those with the lowest valuations and the highest risk of default (see chart for their earnings revisions and share price performance).
In the last two weeks things have gone from bad to worse for these PIIGs banks and an outright takeover by their respective states may not be far off. In a previous theme Which European banks will get hurt this time? we also highlight the non-PIIGs European banks’ vulnerability to a Greek collapse, with even a “voluntary” restructuring of sovereign debt expected to significantly hurt some of these too.
Is Greece bankrupt?
It’s necessary to take a step back to understand the overall picture. Creditors should be able to throw more money at Greece if the conditions for repayment are acceptable. So, if the International Monetary Fund fails to come to the party, is that due to the fact that it believes that Greece is insolvent?
It’s necessary to take a step back to understand the overall picture. Creditors should be able to throw more money at Greece if the conditions for repayment are acceptable. So, if the International Monetary Fund fails to come to the party, is that due to the fact that it believes that Greece is insolvent?
The current plan to save Greece, or at least handle its Euro 60-70bn refinancing until the end of 2013, is now a mix of Greek privatisation efforts, incentives for private investors to extend the maturity of outstanding bonds, additional European Central Bank credits and European Union involvement in the tax collection process. The last measure is pretty extreme as it means international creditors are actually looking to directly manage Greek cash flow. In other words, disbelief in Greece’s own ability to solve its problems is at an all-time low.
Privatisation is highly unpopular in Greece and likewise increased credit is equally unpopular among taxpayers in the creditor nations. The question is whether this is not the least unattractive solution to “protect” German and other EMU taxpayers’ money? If Greece defaults on its debt, the European Central Bank with its Euro 45bn exposure will have to engage the central banks of the European Monetary Union to pay up, i.e. the taxpayers will have to foot the bill.
Lehman déjà vu?
The destabilising effects of a failed rescue operation in Greece will no doubt have consequences as severe, if not worse, than the Lehman crash in September 2008, according to Lorenzo Bini Smaghi, executive board member of the European Central Bank (ECB). Mr. Smaghi is not alone with this view of the situation in Greece. Even more concerning is the IMF’s reluctance to participate with additional funding, as Greece appears unable to finance itself from March 2012, which was the plan in the Euro 110bn rescue package launched earlier this year. All in all there’s no doubt the situation is getting worse as this Greek economic crisis turns into a political high-stake game.
Given the eventuation of a fully-fledged crisis - in line with what Mr. Smaghi of the ECB fears - resulting from a Greek default, there will be nowhere for European banks to hide. In this phase of the sovereign debt crisis perhaps Greece, Ireland and Portugal have to be treated as one. But until the European Union Finance Ministers’ meeting on 20 June, it is all about the PIGs!The destabilising effects of a failed rescue operation in Greece will no doubt have consequences as severe, if not worse, than the Lehman crash in September 2008, according to Lorenzo Bini Smaghi, executive board member of the European Central Bank (ECB). Mr. Smaghi is not alone with this view of the situation in Greece. Even more concerning is the IMF’s reluctance to participate with additional funding, as Greece appears unable to finance itself from March 2012, which was the plan in the Euro 110bn rescue package launched earlier this year. All in all there’s no doubt the situation is getting worse as this Greek economic crisis turns into a political high-stake game.
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