Τετάρτη 28 Οκτωβρίου 2015

Greece’s Milestones Obligations Delays Payment Schedule


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