IMF warning on Greek eurozone exit
By Sotiris Nikas
Exiting the euro would entail a dramatic decline in Greece’s gross domestic product, a fearsome increase in prices and a temporary improvement in the country’s competitiveness that would quickly evaporate, a report by the International Monetary Fund warns.
The IMF analysis suggests that a return to the drachma would signal an abrupt change to the lives of ordinary Greeks. Notably, the downward shift for the economy by the end of the decade would be considerably worse than what is expected after the application of the memorandum that Athens has signed with its international creditors.
With the drachma, the country would suffer a crash landing before slowly working its way up in the future. By contrast, Greece will have better results through a gradual fiscal adjustment if it stays in the eurozone, the Fund believes.
The IMF report is an appendix to the new memorandum that Greece has signed with its creditors and estimates that an exit from the euro would reduce the real exchange rate by 50 percent within 2012. It also forecasts that such a scenario would also lead other countries out of the eurozone and inflict a serious blow to the bloc’s banking system.
Leaving the euro would also see the Greek debt swell considerably, as part of it would remain in the strong euro and would have to be served by a weak national currency.
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http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_31219_22/04/2012_438798
Coalition hopes suffer damage
PASOK’s Venizelos chides ND and leftists for rejecting idea of working together after May 6 elections
PASOK leader Evangelos Venizelos struck out Sunday at the parties to his left and right as the possibility of a harmonious coalition after the May 6 elections seems increasingly distant.
A Public Issue opinion poll on Friday indicated that nine parties would make it into Parliament, with no group being the clear winner. This fragmentation was underlined Sunday by the confirmation from the Supreme Court that 36 parties had submitted applications to take part in the upcoming parliamentary elections.
Speaking in Kozani, northern Greece, Venizelos, whose party is trailing New Democracy in the polls, expressed frustration that both the conservatives and the leftist groups seemed opposed to the idea of cooperating to form a government. Venizelos has essentially conceded that PASOK cannot win an outright majority at the ballot box but is still hoping that the Socialists can win more votes than ND.
Samaras insists his party can still get more than 150 seats in Parliament to form a government on his own. He has suggested that if this does not happen, a second round of elections will have to be held.
“Mr Samaras is trapped in the logic of a one-party government and of him becoming prime minister, a role that he believes he is owed by history and the nation,” said Venizelos. “Everybody can see that this is an obsession.”
The PASOK leader, however, also criticized the leftist parties. He accused the Coalition of the Radical Left (SYRIZA) of flip-flopping on the issue of whether Greece should remain in the euro or return to the drachma. He was also critical of the Democratic Left, which several outcast PASOK MPs have joined. Venizelos said he was “taken aback” by party leader Fotis Kouvelis saying that he had no intention of cooperating with ND or PASOK to form a coalition government. Venizelos said that holding a second round of elections would not solve anything.
Potential coalition partners for ND and PASOK are proving hard to come by but the head of the liberal party Drasi, Stefanos Manos, told Sunday’s Kathimerini he would be willing to cooperate. “If our participation is needed, we will help without any reservations,” he said. “I hope that after the elections, everyone will accept we have to find a way to work together so Greece does not collapse.” Drasi polled 2.5 percent last week, just short of the threshold for entering Parliament.
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Banks are heading for nationalization
Political considerations and insufficient technical expertise have led to poor decisions
By Dimitris Kontogiannis
Greece’s two main political parties, the country’s international lenders -- known collectively as the troika -- and top bankers want to see the country’s four major lenders recapitalized with private and public funds in order to minimize state influence in the way they are run. However, heavy losses registered in 2011 due to the implementation of the private sector involvement plan (PSI) and the impact of recession, which is evident in deteriorating loan quality trends, suggest all or at least three of the country’s biggest banks will likely face nationalization in the coming months and quarters. This is definitely not good news for their shareholders but should not be allowed to translate into bad news for the Greek economy as well.
The country’s four largest lenders -- namely National Bank of Greece, Alpha Bank, Eurobank EFG and Piraeus Bank -- reported dismal 2011 financial results last Friday, with group losses after tax exceeding 28 billion euros. Losses from bond and state-guaranteed securities linked to their participation in the biggest ever sovereign debt restructuring surpassed 23 billion euros, accounting for the lion’s share of group losses.
The hit was large enough to leave most of them with negative equity capital. According to bankers, the lenders with negative equity would not have been allowed to operate as ongoing concerns under normal circumstances if the Hellenic Financial Stability Fund (HFSF) had not given assurances it will provide up to 18 billion euros in total for their future share capital increases. Local banks deemed viable by the Bank of Greece will have to be recapitalized by early fall and up their capital adequacy ratio (core Tier I) to 9.0 percent.
It is noted the second Greek bailout package has set aside resources of 50 billion euros for bank recapitalization needs and resolution costs. The HFSF had some 1.5 billion euros in cash and recently received the first tranche of 25 billion euros in the form of EFSF bonds. The second tranche of 23.5 billion euros is to be disbursed in June.
All policymakers and market participants agree that shoring up the banking sector is imperative for providing credit to the private sector and stabilizing the Greek economy. So it is somewhat ironic the Greek authorities did not come up with the much anticipated bank recapitalization plan by April 20, the new deadline for banks to report their 2011 financial results, although they reportedly extended the deadline for this reason. Surprisingly, on April 20, the Finance Ministry again extended the deadline -- to end-May -- for the two listed state-controlled banks, ATEbank and Hellenic Postbank (TT), widely perceived as heading for resolution.
In our view, the pundits are right in seeing political considerations and insufficient technical expertise behind the authorities’ failure to come up with the bank recapitalization plan on April 20 and the subsequent decision about ATE and TT.
To back up their first argument, the pundits point to proposals aimed at providing incentives to private money to participate in the recapitalization of the banks. The proposals ignored EU rules on competition and state aid, they say.
Some of them even suggest the authorities had underestimated the amount of funds needed for recapitalization and resolution costs in the first tranche, but this could not be confirmed by official sources.
The political motive is more evident in the decision regarding ATE and TT since both state-controlled lenders will likely have to lay off thousands of employees following the restructuring. Obviously, this would not have been to the benefit of the two main parties backing the coalition government prior to the May 6 elections.
Whatever the case, it is fair to say the specter of nationalization in the coming months or quarters looms larger than ever for all or most Greek banks, following the release of 2011 results. This is more so if one takes into account the additional capital needs from BlackRock’s diagnostic tests on their loan portfolios, which turned out to be milder than expected initially according to bankers, and other risks.
It is easy to understand why it is very difficult for private investors to participate in such capital-raising exercises. Putting fresh money of, let’s say 8 billion euros, in a bank with a negative equity of 4 billion euros to be back in black to the tune of 4 billion means losing half of the money.
One has to have both great confidence in the ability of the management team to restructure and turn around the bank fast and be very bullish about the prospects of the Greek economy to risk one’s money. Obviously, it is easier for someone to invest in a bank with positive equity, but even then the prospects of the home economy matter a lot.
Of course Greek banks count on asset sales and other initiatives to raise a few billion euros and cover part of the gap. But analysts question whether they will raise the amount of money they hope for in the next few months and quarters, citing various reasons.
Undoubtedly, local banks face an uphill battle in luring private investors to their share capital increases in the next few months to cover heavy bond losses due to PSI and rising nonperforming loans as the recession bites and the unemployment rate hits new highs. Following the release of 2011 financial results, avoiding nationalization amounts to mission impossible for some local banks and this is bad news for their shareholders. It is up to the troika not to let this become bad news for the Greek economy.
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