Wall Street Journal
June 14, 2011
Even if Greece gets its second bailout and avoids default, its problems are far from over.
The key vulnerability is the banking system. For all the inevitable focus on possible capital shortfalls, the bigger immediate challenge is liquidity and whether the banks have sufficient funding to support a recovery. This will depend on more European support.
Sure, bank capital is a worry. The average core Tier 1 capital ratio for the five major lenders is about 9%. That may not be adequate to absorb a future reduction in value, or haircut, to Greek government bonds. Gross exposure to government bonds varies between 72% of equity at Marfin Popular Bank and 218% at National Bank of Greece. If the value of all outstanding government bonds was cut by 40% in 2013, Greek banks will need a combined €8.4 billion ($12.1 billion) to hit an 8% core Tier 1 ratio on a Basel III basis, according to UBS.
But these remain theoretical concerns for the time being. The euro zone appears to have no appetite to impose haircuts at this stage. The more immediate concern is bank funding. The Greek banking system has a relatively low loan-to-deposit ratio of about 120%, well below Irish and Portuguese levels. But over the last year, deposits have fallen by €44 billion, and Greek banks have been shut out of the repo market, the interbank market and bond markets. That has left a €135 billion funding gap, mostly filled by the European Central Bank.
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