Greek banks are fully protected from the crisis

The position that the Greek banking system is completely shielded from the financial turmoil that has been raging in Europe in recent weeks, following developments at both Credit Suisse and Deutsche Bank, was coined by Professor Emeritus in the Department of Economic Sciences of the Kapodistrian National University of Athens (EKPA), Panagiotis petrakis. Interview with Christos W. Panagopoulos.

Professor Petrakis calls the comparisons between Credit Suisse and Deutsche Bank exaggerated, while analyzing two important aspects that sent the German banking giant’s stock “down” on Friday.

Below is the full text of the interview with Panagiotis Petrakis on Liberal.gr

Professor, I would like to start our discussion based on the latest developments regarding Deutsche Bank. Do you share the opinion recently heard that Deutsche Bank is the new Credit Suisse bank?

It must be said that the case of Deutsche Bank is very different from that of Credit Suisse. Let’s take things from the beginning.

There are economic analyzes that have been done, but they are not necessarily listened to, followed, or swayed by market forces. The Deutsche Bank case has not come up now. We have known for several years the compliance problems, which you present from time to time. The bank has paid incredible fines to the US authorities and there are persistent hints about its presence in the banking system in Europe.

Deutsche Bank is a “giant” banking giant and this characteristic in itself warrants special attention.

In essence, they exist Two main issuesrelating to the latest developments.

First issue Panic arose around AT1 bonds, which are issued by banks and owned by large capitalists. These bonds aim to strengthen the banks, with the funds that initially yield a high interest rate (7%-8%), but on the other hand carry the risk of “deflation”, in the event that problems arise with the viability of the bank. They are financial tools designed to facilitate the bailout in this situation.

It was activated in the case of Credit Suisse, when the decision was made to buy it, so that the whole scheme makes sense for both UBS and the Swiss authorities. Of course, the “venting” of Credit Suisse’s AT1s was triggered, because there was a clear clause in their issuance, that in the event of such a crisis, they would have seniority in return for the depreciation of the shares.

UBS has the same feature. These two banks had the same advantage. But despite the expectation – which was obvious and so investors knew full well what could happen – when it happened, because seniority reversed with the key point of bonds, and stocks are generally considered to be more vulnerable assets than bonds, this caused a stir. , causing the yield on these bonds to rise across Europe.

This process also “caught” Deutsche Bank bonds. However, in theory, this process has nothing to do with the bank, but with the bondholder, who holds the specific bond. But if these big bondholders – and they are few, and this story doesn’t interest many people – also hold shares in Deutsche Bank, they might try to minimize the losses they suffer, both in book and real terms, by selling the shares at the same time. .

I give you an example of how a simultaneous decline in the value of both AT1 bonds and stocks can occur.

Number two What has emerged, and worries Deutsche Bank, is the bank’s potential exposure to real estate markets, particularly commercial real estate, in the United States. This, in fact, was run by A.J Stady which was recently published by European Systemic Risk Board (ESRB) Who monitors elements of the banking system.

There is likely to be an issue with Deutsche Bank’s higher exposure to the US markets. What is the thinking behind all this study? He characteristically mentioned that we are entering a recession, because interest rates are going up, and there is financial instability. Recession will lower real estate prices. So once that happens, the exposure that is in this type of investment will increase and it will create a problem for the bank itself.

What is written then That is, if Deutsche Bank is the new Credit Suisse, He is Somewhat early And They have a dose of exaggeration. Of course, if we go into a major recession, a lot of things will happen and certainly a lot more than what we’re seeing right now.. my assessment It’s not like we’re going into a major recession, But let’s go to one Declining economic activity.

As everything shows, Europe is facing a banking crisis. What are its characteristics?

I will call her, properly, financial instability, Which probably looks like it will be maintained throughout 2023, with a sub-small and mid-size crisis without seeing, for now at least, the potential for anything much larger than that.

We’re mainly talking about Europe now, because that’s what we’re watching. The main characteristics of this financial volatility are related to the presence of certain risks in certain classes of financial instruments.

Another feature has to do with the potential effects of financial instability on economic activity and whether we have a “downturn” or something deeper like a recession. Perhaps this will create some problems. This is the common background of the entire European Union.

On the one hand, we have a fairly developed system for monitoring financial indicators from the ESRB and SSM. At the same time, there is a deposit insurance system. There is a fairly low percentage – unrelated to US banks – of European banks that invest in bonds in general and not just AT1 bonds.

Therefore, an increase in interest rates leads to a decrease in the value of the bond portfolio. It’s not so important, as it is in Silicon Valley Bank (SVB). Therefore, there is no reason to believe that there are problems inherent, as is the case today, in European banking system.

But let’s see what happens in Greece. How protected do you think Greek banks are, against the backdrop of financial instability raging in Europe?

The four regular Greek banks are regulated by the Single Banking Market, and are subject to specific structures. Moreover, Greece has come out of the post-memorandum process, where many things have been clarified in terms of banks.

Greek banks are far from risk-averse to the rest of the European banking system, which hasn’t experienced memorandum shock like we have here. Therefore, they were and remain very conservative, precisely because we came out of this period.

Monitoring the indicators shows a fairly good organization and shows that the Greek banks are on the way to getting rid of the “red” loans, a process that is more or less successful. There is nothing to think about, although if this financial instability turns into an even larger crisis, then, of course, it will affect the entire planet.

Based on your academic experience and knowledge, how do you think this financial instability can be resolved and markets finally calmed down?

We live in a period of rising interest rates and shrinking liquidity. It’s not just about lowering the interest rate. Central banks around the world are reducing available liquidity and money supply issuers are doing exactly the opposite, depriving markets of liquidity.

Recently, I was looking at a Fitch analysis that talked about a 3 trillion liquidity buildup. dollars in the world for the next two years. Thus the two phenomena are parallel, rising interest rates and accumulation of liquidity. There are two sides to the same coin.

As the world was used to cheap money and plentiful liquidity, now it seems to be caught by surprise.

There is no easy way to calm the turmoil we are witnessing. Of course, there is always the “gun of last resort”, where we will see crises erupt and there will be immediate reactions from the banks, who obviously always remember what happened with Lehman Brothers and have experience.

This situation will continue until the interest rate increase cycle is completed, which will also indicate that we have entered a better normal state. I hope there will be no mistakes in policy, because that is the danger from now on.