Greek Banks’ Nihilistic Network Effects

Greek banks, that will suffer most as the largest group of commercial holders under a proposed 50 percent government debt haircut, reported deposit leakage of almost 15 percent this year as household lending was off 18 months consecutively. They have turned to the official guarantee scheme authorized under the original EU-IMF package to access ECB lines as branches in the main Athens protest areas have been abandoned and defaced. The big three groups in nearby Cyprus were again downgraded several notches by rating agencies on sovereign, retail and corporate exposure. Moody’s commented that with 40 percent of their portfolios at risk, state support could soon be needed despite its own chronic deficit with unchecked salary and pension outlays. Modest reform measures introduced after recent post-election leadership changes will leave a 2 percent of GDP gap, which may again have to be met through Russian bilateral loans as an extension of their longstanding offshore interests on the divided island. Before the banking crisis, authorities had to contend with tepid tourism and property sales off 20 percent, and a gas storage tank explosion that cut energy supply with heavy cleanup costs. Reunification talks with the Turkish side are also at a worsening impasse after the discovery of hydrocarbon deposits in disputed waters. Balkan neighbors Bulgaria and Romania have tried at the same time to offer reassurance about Greek-intensive financial institution health. In the former non-performing loans 3 months overdue are already at 15 percent, and the railway was just forced to shed thousands of workers to avoid bankruptcy relying on World Bank support. The Romanian central bank, with the comfort of a new IMF agreement, resorted to monetary easing on anemic GDP growth and urged further privatization efforts to free funds after a review cited “unsatisfactory” progress.

In Hungary, Greece references have resurfaced after that scenario was posed by Orban administration officials right after they took office with public debt at 75 percent of GDP. In 2012 foreign repayments will jump 50 percent to $6.5 billion as the post-2008 IMF emergency loan comes due, and budget deficit and growth projections have both turned worse. Along with the fixed Swiss franc mortgage conversion program that may draw on reserves and require backing for state-owned top stock exchange listing OTP, municipal foreign-currency debt has also been assumed. The forint has dropped beyond the critical 300/euro level and local bond auctions have been lackluster and occasionally failed with premium demand and non-resident withdrawal from their previous one-third ownership stake. The government has wooed Chinese interest as an alternative, and invited their membership as primary dealers to meager results in a Sisyphean effort.