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If Greek Banks Don’t Expect Any Stress-Test Problems, Why The Need For More Liquidity?

The European Central Bank is planning to release the results of its stress tests for large banks in the Eurozone next week, and this obviously goes hand in hand with the necessary unrest and nervousness on the financial markets. Approximately 130 banks in the Eurozone will be tested to see how well-capitalized they are and how they will be able to cope with a future crisis. The main intent of these tests was to increase the confidence in the Eurozone banking system again as investors still aren’t convinced of the strength of the Euro-banks.

It’s quite obvious the results of the banks of the weaker Eurozone nations such as Italy and Greece will be followed closely, and in light of these events’, it’s interesting to see the Greek minister of Finance publicly stated that he ‘does not expect any problems for the Greek banks’. That’s a bold statement, as the Greek banking sector was (and probably still is) the weakest link in the Eurozone banking system. The main banks in Greece were only kept afloat after a multi-billion euro rescue package provided by the Hellenic Financial Stability Fund, ‘sponsored’ by the European Union.

The Greek central bank has performed its own stress tests and this resulted in the main banks already having raised additional capital to strengthen their buffers. But it goes without saying that everybody expects the ECB tests to be more difficult to pass than the internal Greek stress tests, and even though the Greek minister of finance seems to be convinced ‘his’ banks will pass the test, we aren’t fully convinced yet. Granted, the economy in Greece seems to be on the right track again with a primary surplus, but let’s not forget the Greek citizens hardly notice anything of that.

To be honest, it would be a big surprise for us if none of the Greek banks would pass the test without any remarks. Even though the ‘Big 4’ in the Greek financial world (National Bank of Greece, Piraeus Bank, Alpha Bank and Eurobank) which have a market share of roughly 90% are expected to make a combined net profit of 4.5 billion Euro in the 2014-2016 era, the big question will be whether or not this will be enough to strengthen the cushions even further. It’s not unlikely Greece will have to use the remaining 11B EUR in the Hellenic Financial Stability Fund to back more capital injections in its banks.

The Greek Minister of Finance

Additionally, despite the confidence of the Greek minister of finance, the European Central Bank has announced it has been providing additional liquidity to the Greek banks. Through an inventive trick of reducing the discount rate of the Greek bonds which were pledged as collateral, the credit lines for the Greek banks are increasing. At this moment the banks have to take a 60% discount to the face value of the Greek bonds when they use it as collateral to get a loan from the European Central Bank. This discount will now be lowered to less than 50%, and even though some people say this is caused by an improving economic situation in Greece, it could also be a cheap trick to make sure the market knows that the Greek banks could easily tap the ECB for more funds. The general expectation is that a lower discount rate will make an additional 10-15 Billlion Euro available for Greece’s four largest lenders, which (even though this sounds like an unimpressive amount) is twice the combined net profit of the Big Four over the next three years.

Apart from Greece, we are also very cautious about the situation of the Italian banking sector. Even though most Eurozone banks were holding off on the ECB LTRO financing in September, the Italian banks were extremely interested in the cheap funding. And only the results of the stress tests will tell us whether or not the Italians are seeing opportunities to make some money with cheap loans or if there was a small liquidity crisis which had to be nipped in the bud.

On top of that, it’ll also be interesting to see how the Austrian banks will perform in the test, as both Raiffeissen Bank and Erste Group have been expanding into Eastern Europe in the past, and are exposed to troublesome regions such as Ukraine and Russia. Interesting times are ahead, and we’re looking forward to see how well the Eurozone banks are prepared for another turmoil. Be prepared for a lot of volatility in the financial sector if there would be some negative surprises

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