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Playing against type

2011-09-22 04:02:35

THE idea of banks as villains is pretty well absorbed in Europe and America. In

this, as much else, Greece is an outlier. It's hard to talk to the banks there

and not come away feeling sorry for them.

The banks did pretty well through the financial crisis of 2007-08. Rather than

relying on the state for hand-outs, if anything, the traffic has been the other

way, as banks' purchases of government debt have turned into the Greek

government's surest way of funding itself. According to one banker these

purchases are now somewhat coerced: the government wields the threat of

withdrawing deposits held by all public-sector entities if the banks do not

play ball.

Whatever the motivations, the risk of sovereign default makes the banks'

balance-sheets highly inflammable. They have already taken write-downs as a

result of the PSI initiative to make private-sector creditors bear some of the

burden of keeping Greece afloat. But the risk of further restructuring still

looms.

Funding is an enormous and related problem. Deposits are flowing out of the

system Credit Suisse reckons that private-sector deposits were down by 10%

between January and July as people run down their savings and worry about the

risk of collapse. "We are psychotherapists to our depositors," says one banker

of the efforts his institution makes to persuade people not to take money out

of their accounts and stuff it under the mattress.

The ECB is keeping the banks alive, but it is also squeezing the oxygen supply

by regularly revaluing the collateral that the banks are pledging. With

collateral values shifting downward and funding terms shortened, the banks do

not want to tie up the money they get in medium-term lending of the sort that

the economy needs to grow.

Instead, the economy shrinks, increasing the problem of non-performing loans. A

team from the ubiquitous Blackrock Solutions has been charged with going

through the banks' loan books, which may leave them facing demands for more

capital later in the year.

The bankers themselves do not want Greece to default (beyond the hit already

entailed by the PSI). That would wipe out their capital, of course. Executives

also argue that the threat of default is the best way to keep the country on

the hook to carry out further reforms. The moral hazard that people should

worry about is not letting private creditors off too lightly, but letting the

Greeks off the hook, says one.

If they get their wish, that still leaves the banks facing a highly constrained

future. Two Eurobank and Alpha have already merged, in a bid to generate more

capital through cost savings. International assets are being disposed of.

Operations are being managed with a limited goal in mind: to ensure enough

income to cover provisions against losses. It's enough to induce sympathy.