What prompted the apparent differences between Greece and the troika on this issue?
The general perception ahead of the troika’s arrival was that most bank-related issues had been broadly pre-agreed but a Financial Times article indicating that the International Monetary Fund estimates Greek banks’ capital needs at 20 billion compared to 5-6 billion earlier suggested by the Bank of Greece (BoG) shattered these illusions.
It indicated there was a serious difference in opinions between Greece and its lenders but also within the troika.
What is the BoG’s position on capital needs?
On February 20, the BoG unexpectedly informed the management of the top four Greek banks that their capital needs totalled 5-6 billion.
The figure was leaked in the local press and at that time it was perceived as having been broadly agreed between all official sector parties.
The first question arises from the BoG decision to unveil its own estimates on capital needs just a few days before the troika’s return to Athens and without its approval on the key assumptions for its calculations.
Furthermore, according to the initial timetable, banks’ capital needs were due to be disclosed by the end of 2013, but were delayed due to pending approval by the troika.
Some believe the key assumptions had already been approved by the two counterparties. Hence, the delay in the disclosure was mostly related to the Greek government’s initial decision to use the Hellenic Financial Stability Fund (HFSF) capital buffer for covering the anticipated funding gap, which the troika, particularly the European Central Bank, objected to.
How much money does the troika think Greek banks will need?
The response to the BoG leak came on February 21 through an article on the FT’s website claiming that the IMF has estimated capital needs at 20 billion euros, almost four times larger than the figure the BoG had reportedly arrived at and twice the size of HFSF capital buffer of 10-11 billion. The FT also indicated that the ECB has similar estimates to the IMF and has pushed for Greece to take a closer look at its conclusions.
The FT article, published a few hours before Finance Minister Yannis Stournaras met with troika officials, surprised the market and raised the second key question, which was about the rationale behind the disclosure of that headline figure.
Most market participants perceived it as an exaggerated response to the BoG, also putting pressure on the Greek authorities of the completion of the drawn-out review. Others saw it also as a way for the IMF to justify its withdrawal from the troika.
Is there any clear indication of how much capital lenders need?
The BoG appears to be sticking by its figures, which it believes are in line with the upcoming EU-wide stress tests to be conducted and published by the ECB in the last quarter of the year. The BoG briefed journalists that under the adverse scenario capital needs would rise to 8-9 billion, still less than half the IMF figure.
Another key question lies with the material deviation between BoG and IMF estimates. The BoG figure of 5-6 billion is most likely based on the baseline scenario for the domestic economy and incorporates a larger than initially anticipated haircut on banks’ future profitability projections included in their business plans.
The IMF number is probably based on the adverse scenario, applying a larger haircut on future banks’ earnings than the BoG. It may also incorporate the repayment by banks of the preference shares, which amount to 4.5 billion.
It is clear that a different calculation or methodology than the one used by the BoG could easily result in a figure close of higher than 15 billion euros. This figure was also quoted by National Bank CEO Petros Christodoulou in an interview with Reuters on February 19 as IMF estimate on capital needs.
The overriding factor in these calculations are the assumptions – tougher or softer assumptions result in higher or lower capital needs.
This takes us to the most important issue, and the one that has confused the investment community. First you have to agree on the terms and assumptions and then you end up with the outcome. In the case of the Greek banks, we have quite the opposite: We know the potential outcomes, but we do not know anything about the key assumptions and the methodology behind each calculation.
Wednesday’s meeting between BoG governor George Provopoulos and the heads of the troika mission today is expected to clarify things. In any case, the BoG has indicated it will proceed with the announcement of its own estimates on banks’ capital needs, even without the IMF approval, on February 28 or early March.
*Read the original article at MacroPolis.