Greek banks face full nationalisation

Just because the doors of Greek banks are open today, don't be fooled into thinking they and the Greek economy are anywhere near back to recovery.

There are still major restrictions on the ability of their customers to obtain their cash or move it around:

a) withdrawals per week are capped at €420;

b) there is a ban on using deposits to repay loans early (because many Greeks would rather repay debts than risk seeing their savings wiped out in a bank crash or in a so-called bail-in which would see savings converted to bank shares of dubious value);

c) it is still incredibly difficult for small and medium size businesses to purchase vital raw materials or other goods from abroad, because banks won't make new loans and there are severe restrictions on foreign payments.

The symbolic importance of the European Central Bank turning on the emergency lending tap again was important, but it has only been turned on a fraction.

It has given enough additional Emergency Liquidity Assistance, €900m, to keep the banks alive in a technical sense.

There is no possibility of them thriving for months and even possibly years. To put it in a Hellenic nutshell, the banks and the Greek economy remain in intensive care.

Frisson

The transmission of money is being facilitated in the most basic way, but there is no creation of new credit; and this credit freeze is a major impediment to consumer spending, and - perhaps more importantly - will lead to many businesses going bust in the coming weeks and months.

Which gives a certain frisson to a statement made only in May by Europe's top banking supervisor, Daniele Nouy, chair of the so-called Single Supervisory Mechanism, the bank supervisory arm of the European Central Bank.

She said of Greek banks, in an interview with the Wall Street Journal, that "these banks have gone through important restructuring, important recapitalisations and a redefinition of their business models. They have never been better equipped to go through this kind of stressful situation".

Really?

Just a few days ago, eurozone leaders and the International Monetary Fund more or less pronounced the entire Greek banking system kaput, with their declaration that the banks need additional capital of €25bn euros - which, relative to the size of the Greek economy, represents one of the biggest banking black holes in the history of capitalism.

Collision

So what has gone wrong? Have the Greek banks been taking mad credit risks? Have they been lending recklessly as though there were no tomorrow - in the way that sank the banks of most rich developed countries in 2008?

If only. Credit has been almost impossible for businesses and individuals to obtain for months.

The banks have been sunk by the collision of Greek democracy and dysfunctional eurozone governance.

To remind you, the Greeks elected a party into power, Syriza, whose economic plans collided with the eurozone consensus, which in turn led to the eurozone and IMF creditors initially refusing to renew the bailout of the financially stretched state, which in turn meant that the country faced insolvency.

And when a country faces insolvency, so too do its banks - since banks face huge losses on their massive loans to government, and can't turn for support to the place they would normally turn, viz the state (because, in case you forgot, the state is bust).

Escalation

So Greece's banking crisis is - in its current form - a crisis created by Greek and eurozone politicians.

What is more, and perhaps deeply troubling, the fate of the banks is still in their cumbersome mitts.

For example, the more that austerity leads to economic slowdown and repayment difficulties for bank customers, the more that losses for banks will escalate - which will erode existing capital and will prompt the conversion of the banks' tax credits into new bank shares held by the state.

What is more, as the Greek economy goes into reverse there will be renewed determination of Athens and the International Monetary Fund to secure huge write-offs of the Greek government's unsustainable debts, in the teeth of fervent opposition from Germany.

But the more that the intrinsic value of these debts is reduced, the bigger the losses for Greek banks on their loans to Athens.

Surreal

So it is reasonable to assume that a stress test and asset quality review of Greek banks ordered by the European Central Bank - which as it happens has started today - will confirm in a couple of months that more-or-less all the capital held by Greek banks will be wiped out by future losses.

That would mean the wipe out of an investment of €16bn made by the Greek state and €10bn made by private investors as recently as 2013.

Those private investors include some of the deepest-pocketed global funds, such as Fairfax Financial Holdings (which owns a big chunk of Eurobank) and the Qatar Investment Authority (with a stake in Alpha).

Here is the surrealism of eurozone "bankenomics" in a time of financial catastrophe.

The more conservative is the evaluation of the health of banks, the bigger the write-off of public sector and private sector investment in the banks.

But that has the perverse outcome of increasing the debt burden on the overstretched Greek state - because it will seen to be on the hook to repay whatever huge investment in the banks is deemed necessary to be made by the eurozone's European Stability Mechanism (and that is likely to be true whether the ESM invests directly in the banks or via a loan to Athens).

Frankfurt or Athens?

Most would say it would be far better if the private sector would bail out the banks. But that is inconceivable if the €10bn it injected into them just two years ago is consumed in this inferno.

In fact if the global investors in Greek banks don't immediately sue any regulator and central banker which treated the banks as going concerns over the past year - which is every regulator - then Wall Street and City lawyers have all become tree-hugging softies.

Also, to state the obvious, private sector investors would not invest a penny in Greek banks for years and possibly decades to come.

So Greek banks would go from being partly nationalised to wholly nationalised for the foreseeable future.

Of course, paradoxically, that may be the dream-come-true of the left-wing Syriza government - though in practice Mr Tsipras and his colleagues won't be thrilled that the banks would be run from Frankfurt and Brussels, owners of Greece and its banks via the bailout, not Athens.