The Greek government is
running a sprint to meet the prerequisites (milestones) by passing bills
necessary to receive 2 billion euros due from the summer, so that it can meet
its payments due in the last two months of the year. These payments have to do
with interest payments on bonds, payments due to the IMF, etc.
Suddenly the Greek government
is caught in several dilemmas: non service loans and the probability of housing
auctions, value added tax on private schools from 0 to 23%, and bank
recapitalization due by December. On the value added tax from 0 to 23% on private
education proposed by the Greek government (as opposed to beef, since they
consider it is a widely consumed good), the EU opposed it claiming that it is
not in line with EU directives, even though it was voted by Parliament. The law
remains but the government is looking for alternative measures of equivalent
fiscal measures so as not to maintain budget requirements.
On the non-performing
(red) loans (NPL), thus far the law in Greece protects house owners from home
auctions of their first home. However, the Troika has set some prerequisites
for home owners not to lose their homes. They initially set a 60,000 euros fair
value, and income of 25,000 annually. At the governments’ objections, they
raised the fair value to 120,000, with the government saying no, and counter offering
at least 300,000 euros. NPL are in jeopardy of default and are characterized as
such when a borrower has failed to make interest or principal payments. They
are problems for the banks since they depend on interest payments for income.
Once upon a time lenders had no such problem since they had jobs and were paid
well. Among the depreciation of household income for the Greek population,
other traditional assets have also depreciated like stocks, bonds, and real
estate.
The last issue is that of
bank recapitalization due by the end of the year, with the Troika behaving as a
conqueror, saying that if they are not completed by year end, then bail in will
be considered. And in order for the recapitalization to occur, a review of the
progress of the program must be completed. And what must be completed as a
prerequisite for the review, the milestones. From the look of things, the most likely
scenario is a political (honorable) compromise, just like the one in the summer
of 2015, which averted Greece from a Grexit.
It is interesting to
point out that non service loans are worth 100 billion euros, with consumer
loans accounting for 51%, home loans at 36%, and business loans at 40%. During
the “good” economic times Greek bankers gave out loans indiscriminately, with
virtually no criteria, no collateral, to their political friends, accommodated their
greedy political and other clientele. And why not when during those cow days,
access to money (supply) was easy, and made it accessible even to those that
were more cautious.
This policy was of course
eulogized by all finance ministers and bankers of course. The reason was that
when bank balance sheets were published, those listed in the Athens Stock
Exchange, profits were soaring. Increase in loans brought about high profits
from interest payments, high dividend payments to shareholders, and stock
prices of the listed banks were skyrocketing, as did their capitalizations
(number of shares outstanding * stock price). Of course bankers received their
portion of success in the form of bonuses. Easy policy in distributing money
that it is not yours. And now the second round of bank recapitalization is just
this.
The new share increase
will be asked to be paid by the shareholders and tax payers. The banks
liabilities (bondholders, stockholders, depositors) will be asked to pay for
the bank’s assets. Amid all these legal changes, since they must be voted in
the Greek parliament, hedge funds have made their appearance in the Greek
market. They consider that amid the housing crisis and the non-service loans,
there are chances to invest. They consider to have the flexibility and the
recovery requirements of non – service loans, as well as buying and selling
these bad loans.
A hedge fund is an investment
partnership with investors, or limited partners and the general partner. The
limited partners contribute the money in the fund, and the general partner
decides the fund’s strategy. The purpose of the hedge fund is to maximize
returns and eliminate risk. Some key characteristics of hedge funds are that
they are open to qualified investors, that is their net worth must be at least
$1 million, it can invest to anything, as opposed to a mutual fund, they use
borrowed money (on margin). This entails danger since leverage (borrowed
capital) rather that equity, can wipe them out as in the financial crisis of
2008. Leverage is most widely used in real estate transactions through the use
of mortgages.
According to the Greek financial
daily, Kathimerini, those non service loans are made up of the following
business sectors: textile 71%, paper and wood industry 63%, farming 61%, trade –
commerce 54%, construction 49%, processing 48%. Hedge funds wish to enter these
sectors and invest money, in return for banks to accept a write off or haircut
of those non – service loans.
Bill T. Alexandratos, MSc., Finance