The European Central Bank said that four major Greek banks must find up to €14.4 billion to survive potential negative shocks. What does it mean for the global economy and the gold market?
On Halloween, the ECB published an unsurprising press release: Greek banks need more money. The recent ECB asset quality review (AQR) and stress test of the four largest Greek banks found that they would need an additional €4.4bn under a baseline scenario and €14.4bn under an adverse scenario. The capital shortfall is significantly lower than feared. The assessment also revealed that – what a surprise! – Greek banks overvalued their assets by €9.2 billion (a slight mistake that may happen to everyone).
What is important is that non-performing loans were €7bn higher than expected. According to Reuters, the total amount of toxic loans is €107 billion, which accounts for 48.6 percent of all loans in Greece’s largest banks. So they turned into zombie banks, like in Japan after the economic bubble burst in 1989/1990. Of course, more debt and a more accommodative monetary policy will not solve the problem of non-performing loans. Toxic loans may be disposed only through liquidation (or cession). This is a more general issue: ultra-low interest rates and easy monetary policy cannot spur economic growth when banks have weak capital and borrowers are too indebted to take more loans.
Moreover, the conducted stress tests are not very credible as they ignore deferred tax assets, i.e. assets that are used to reduce the amount of tax that a company will have to pay in a later tax period, often associated with a loss carryover, used as a future write-off if the next tax period is expected to produce positive earnings. However, in Greece they are claims on the state rather than assets linked to future profits. At the end of March 2015, Greek banks held €12.8 billion in these instruments, which means that €12.8 billion of Greek banks’ capital relies effectively on state guarantees. Therefore, the problems of the Greek government and banks are strictly intertwined.
Summing up, four major Greek banks must raise €14.4 billion after stress tests and the Asset Quality Review. This is bad news for the gold market (if investors still care about Greece, which is unlikely) as €14.4 billion is much less that the €25 billion earmarked for the recapitalization in the €86-billion-worth bailout package agreed between Greece and its creditors this summer. However, we believe that we will hear more in the future about the Greek banks as they hide different Trojan horses in their balance sheets.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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