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The Tipping Point?

The Huffington Post The Huffington Post 7/11/2015 David C. Wittig

Question ... "When is the tipping point?" Do you recognize it before it happens or only after? Has Greece already tipped over?
The current government will pass 100% of the required legislation to receive money from the EU. The question then is ... how many of these prerequisites will be implemented? The Greeks are daring the Germans to cut them off, and Hollande coming to Athens to lend French support to Greece is counter-productive.
In the meantime, most people (and businesses) are not servicing their debt. Why should they? Houses cannot be foreclosed on in the event of a default, so why bother? If your neighbors are not paying their obligations, why should you?
Strikes and demonstrations, which were non-existent for the last year, are beginning to reappear. First it was the pharmacists, then the ferry operators. Now it is dockworkers and seamen. I would expect this to continue. This is the first time workers are protesting in opposition to this government.
The socialist government and the capitalists at the banks make for very strange bedfellows, but their interests are aligned. The banks do not want to foreclose on loans so as to avoid more write-offs, and the government believes that this is not a problem to be resolved by the Greek people, but rather the Germans should bail them out. To the Germans' credit, they have stopped with the rhetoric and are simply waiting for Greece to implode.
The most recent news in Athens is the bank recapitalization, which is to be completed before year-end. The Greek government announced the need for €14.4 billion in new capital, €8.0 billion to come from private investors and €6.4 billion from the Hellenic Financial Stability Fund ("HFSF"). Piraeus's capital raise is in progress and Eurobank's will commence on November 11. Alpha Bank and NBG are scheduled for late November.
Let us take a look at some of the numbers. The European Central Bank ("ECB") published a report, "Aggregate Report on the Greek Comprehensive Assessment 2015 (the "Report")." The Report states that 75% of the corporate real estate loans are non-performing. That is not a typo. 41% of large corporate loans are non-performing. 66% of small to medium-sized enterprise loans are non-performing. 36% of residential real estate loans and 29% of shipping loans are non-performing. There is no reason to embellish these numbers; they speak for themselves.
It is difficult to reconcile these figures with the €14.4 billion needed for the banks. The ECB states that the banks need a Common Equity Tier 1 ratio of 9.5%. The last updated total of all NPL's in the four systemic banks is €112.3 billion. This is a higher number than previously reported because it includes NPL's outside of Greece and other types of exposures. Using €112.3 billion in NPL's (less €54.8 billion in reserves for losses) means that the banks need to sell the NPL's at no less than 29% of the original loan value. The sale of loans at this level does not allow for healthy banks, but simply the bare minimum to be allowed to operate.
Conversely, if the NPL's are sold for 10% of face value, the amount of money needed by the systemic banks is €35.6 billion, ranging from €5.1 billion to €14.6 billion per bank. The most recent stress test calculates the number for each of the four banks between €2.1 billion to €4.9 million.
As for the recapitalization of the banks, the four systemic banks are quite confident that Wilbur Ross, Fairfax and the other large investors in the banks will be happy to invest good money after bad. I think the investors have better odds going to a roulette table in Las Vegas and putting their €4.4 billion on black. If you are skeptical, remember that the four systemic banks have lost, on average, 84% of their market value in the last 12 months.
The solution is quite simple ... sell the NPL's. Unfortunately, the banks believe there are only six buyers in the world of NPL's and they will easily receive more than 30% of face value for the loans, so why hurry? Conversely, those six buyers think the loans are worth 10% of face value and the price is dropping daily. The reality is that there are thousands of buyers of these loans at prices that will be established by the market. Some of the loans are worth less than zero, while there are others that are worth more than 50%, but how do you know if you don't sell them?
If instead of raising capital today, the banks started selling their NPL's in an orderly process, not only would the banks maximize the value of the NPL's, but investors would then know what they are investing in when the banks are recapitalized, instead of betting on an unknown risk. Rather, the sale of shares is expected to be at a 40% discount, which still does not reflect the underlying risk.
If Greece continues to refuse to deal with the NPL problem, it is only a matter of time before the Europeans simply cut the Greeks off completely. Greece received their first hint this yesterday when the EU leaked it had postponed the Euro Working Group that was to prepare the €2 billion payment Greece was to receive this week. The rumored reason was Greece's unwillingness to deal with NPL's. Does Greece think these NPL's are going to be worth more in a year? The NPL number was €80 billion six months ago, now it is €112.8 billion. In another six months it could be €150 billion, then what? I guess we have bank recapitalization #4.
There is one alternative that no one is currently discussing, which may be back on the table very shortly ... a second currency. Without access to Euros, no one in Greece can be paid. Greece then is forced to create its own currency (the drachma) in order to pay employees and pensioners. Companies in Greece who transact in Greece will also begin conducting business with the drachma. Companies outside of Greece refuse the drachma, but like all "assets" an exchange market develops with the drachma trading at a huge discount.
It is not a Grexit, per se, but it accomplishes the same thing.
As for the tipping point ... Greece passed it. Things only get worse from here.

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