On Friday in “Don’t Tell Merkel, Greek Banks Need Another €10-14 Billion Bailout,” we warned that the €53 billion aid request from Greece was likely only part of the story. The country’s banks, which were (and still are) on the verge of collapse would need to be recapitalized and according to one banking official who spoke to Reuters, that cost of that recap would be somewhere in the neighborhood of €14 billion.
Fast forward 24 hours and that €14 billion had turned into €25 billion, bringing the total estimated cost of the proposed ESM program for Greece to some €76 billion. EU finance ministers balked at the figure and by Sunday it was clear that creditors intended to extract the harshest set of concessions yet out of Athens in return for a new program. After 13 hours of negotiations in Brussels, EU leaders reached an agreement in principle which will require PM Alexis Tsipras to push a draconian set of reforms through parliament by Wednesday. But even if Greece does manage to secure a new bailout this week which includes the €25 billion in recap funding via the agreed upon escrow fund, the banks are by no means out of the woods. Here’s what we said on Friday:
Indeed, even if a deal is reached this weekend and the ECB raises the ELA cap on Monday, it’s difficult to imagine that the deposit outflows will cease (would you trust your deposits in a Greek bank even with a “deal”?) and as suggested above, if capital controls are lifted, the situation will be even worse because Greeks will simply take the opportunity to withdraw all of their money at once.
With the liquidity “cushion” down to just €750 million (according to same official who spoke to Reuters about the recap needs), deposit flight will clearly have to be funded via more ELA, which means whatever is left in terms of pledgable collateral will soon disappear even under the rather optimistic assumption that outflows are kept at between €80-100 million per day (the current run rate). At that point (unless the ECB decides to buy the banks more time by substantially lowering haircuts), it’s recap time and then … well, see above.
In the final analysis, no one is going to trust Greek banks for a very, very long time and talk of a depositor bail-in won’t do anything to help the situation. The acute lack of confidence means that any capital injected from EU bailout funds will promptly disappear as depositors continue to pull their funds, while the county’s rapidly deteriorating economic situation simultaneously drives up NPLs.
