What it means in the short term is that Greece should get a new €86bn injection over three years, and will be able to repay the €3.2bn that’s due by 20 August. But will it signal success in the longer term?

One of the key points of contention between Greece and the EU has been the country’s failure to make sufficient headway with its privatisation plans — €50bn was supposed to have been raised from the sell-off of state-owned assets by 2015, but nothing close to that has been achieved. That target has now been reset, to be achieved over the life of the new bailout loan, with the key difference that the sale will now be managed by an independent fund with a degree of EU oversight.

Don’t be fooled

But if you believe this is the turnaround point for the Hellenic Republic and that a rosy future is now assured, think again — at best, it’s only just the start of a very painful road back to economic health.

For one thing, the EU has been revising its economic forecast for Greece, and until the recent crisis it was actually forecasting growth! Now, horrors, the EU admits that Greece might even be back in recession. Of course Greece is in recession, and it’s going to be a hard one — that much is obvious to anyone who can see beyond the stream of deluded gobbledegook that pours out of Brussels.

Greece is now allowed to run a deficit this year (as if it had any alternative), but must target a surplus of 3.5% by 2018 and then sustain it. I’ll repeat that — a sustainable surplus of 3.5%, by 2018. Is there anyone in their right mind reading this who thinks there’s any chance of that happening?

Then there’s the level of Greece’s debt, which is expected to represent around 200% of GDP over the next couple of years. That can simply never be repaid, even though Germany (the country that has benefited from by far the largest amount of debt forgiveness in Europe over the past 100 years) insists on getting every last eurocent back.

Demands like that would condemn generations of Greeks to lives of penury, and it is unreasonable to expect the country to just suck it up while they see their richer Northern neighbours exploiting the eurozone for their own benefits.

More fudge

No, it has been fudged yet again, and unless there are material changes to Greece’s debt (which means writing off a large chunk of it, in whatever face-saving way the EU wants to word it), in another few years we’ll be right back here again with exactly the same crisis unchanged. And that will put yet more pressure on the eurozone — we’ve even started to see divisions between Germany and France over the latest crisis, and they can surely only widen if Germany continues to live its fantasy.

I still reckon it’s only a matter of time before the eurozone is rightfully consigned to history, but the real injustice is that Greece is having to suffer the pain of its death throes.

The post Is It Third-Time Lucky For Greece? appeared first on The Twelfth Magpie.

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How much further have the Greek banks got to go before they hit bottom? Looking at Greece’s four biggest lenders, Piraeus Bank shares have fallen 66% since Monday morning’s reopening, which is less than three days of maximum falls and could suggest we’re already at the bottom. Shares in National Bank of Greece (which, despite the name, is not the country’s central bank) are down 63% in the same period, lending credibility to the theory. Alpha Bank has fallen 66%, with Eurobank down a very similar 64%.

As bad as UK banks?

But how does this compare with the UK banking crisis? Barclays, which suffered badly but managed to find private capital to keep it going and did not need a state bail-out, saw its share price crash by 89% from its pre-crisis high. That was in a market with no limits on daily price movements, yet the full extent of the plunge took nearly two years to work itself out — from a high in February 2007, it took until January 2009 for Barclays shares to get into a sustained recovery.

Over a similar two-year period, the Lloyds Banking Group share price plummeted by 93%, and Royal Bank of Scotland suffered a jarring 99% loss!

It’s perhaps unfair to think of the new Greek banking collapse as really covering only three days, as it’s in effect a five-week fall encompassing the closed period which started just before the government implemented capital controls to prevent an immediate bankruptcy. And this short period does not account for the full extent of the falls to date anyway, as National Bank of Greece shares are actually down a whopping 98% since the start of 2007.

But as the UK’s banks (and those across much of the rest of the world) are now looking forward to much improved liquidity and a return to rising profits, Greece’s equivalents could be facing wipeouts the likes of which have not been seen since the Great Depression. We’re looking at very similar falls in banking shares in the two markets — but with the worst yet to come for Greece.

Diluted to nothing

The big problem is that Greece’s banks are going to need massive recapitalisation, and at this stage it’s impossible to tell where that’s going to come from or when — there’s still a great deal of doubt over Greece’s third EU bailout package and whether it will be sufficient to finally stop the rot, and any serious thoughts of recapitalization are going to have to wait until after that.

If and when it does come, a bank recapitalization programme is surely going to leave existing shareholders diluted to pretty much nothing — no sane institution is going to want to invest in new bank equity unless it’s at a serious discount to today’s prices. The Greek central bank simply does not have the means to fund a bailout as it has no control over the country’s money supply, and it would be a fantasy to think that the ECB would play the same role that the Bank of England played.

What should you do?

What would I do if I held shares in Greek banks? Well, I’d have been queuing up to sell as many as I possibly could the moment the market opened, as I can’t see them being worth anything at all in the long run.

The post The Greek Banking Collapse Continues appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The market had been closed since just before Greece imposed the capital controls that kept its banks shut, and the banking sector was expected to be the hardest hit. And so it came to pass, with all the big banks crashing by 30%. But before you go thinking that a 30% fall for banks operating in such a troubled economy isn’t so bad, that’s the biggest one-day fall allowed in Greece’s controlled stock market — so we should probably expect them to fall further tomorrow.

Government meddling

Imposing a rigid control on daily share price movements is a key feature of that other sick stock market, the Chinese one. But in China the government’s interference is considerably more severe and hamfisted — state enterprises have not only been forbidden from selling shares in order to help prop up falling prices, they have even been ordered to buy more!

But it hasn’t helped, as weak manufacturing data helped push the Shanghai Composite down 1.1% on Monday, while the small cap ChiNext index lost a crunching 5.5%. The country’s factory output levels have slumped to a two-year low, while China’s once-booming property market continues its sluggish phase.

Meanwhile, Chinese authorities are blaming everyone bar themselves for the stock market’s woes — first it was “foreign forces”, then over the weekend the finger has started pointing towards “traders” who are now being blamed for the market’s 30% fall over the past month. Never, it seems, could it be the government’s fault for talking up the bubble in the first place in a horribly over-leveraged market.

Investors wiped out

A distraught Chinese investor with the apposite nickname of Plato was quoted by the BBC as saying “People trusted the government but the government let them down. It encouraged people to buy stocks but it’s turned out to be a joke. The lesson is never trust the government“. And he’s right, certainly when it comes to investing in shares, because that requires a free market in which buyers and sellers set prices, not a bumbling government attempt at a financial Great Leap Forwards.

These two tales of disaster illustrate two of the things you should, in my view, never do as an investor. Firstly, obviously, you should never invest in a government-manipulated stock market of the kind we see in China.

But secondly, do not invest in a country that is not in control of its own economic levers and which does not have its own lender of last resort. Greece has no say over interest rates or money supply, but has to suffer whatever Germany dictates. And it cannot rely on the ECB to provide the credit needed to bolster its banks and save its economy from bankruptcy in times of crisis, the way the UK’s economy and its banks can rely on the Bank of England.

Markets you trust

No, things for investors look set to get a whole lot worse in both Greece and China before they get better. So I’d urge UK investors to stick to the two countries that enjoy market freedom and economic sovereignty — our very own London Stock Exchange, and the stock markets of the US.

The post Investors Beware The Greek And Chinese Stock Markets! appeared first on The Twelfth Magpie.

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You know, I feel sorry for the Greeks. They are a good people. It is not by chance that this was the birthplace of democracy and debate. They have a sense of what is right and what is fair. Instead of bluster, they discuss and reason about everything.

Governments must balance their budgets

Everyday there are more dramatic headlines about what is happening to this country; but this is not really about headlines. What the Greek people have been through over the past five years has been nothing short of horrific. People have lost their businesses, their jobs, their homes and their families.

Yet another bailout looms for Greece. The conditions stipulated are at least impossible. Greece’s debt is now reaching somewhere near a google. I think this is getting silly.

Linear thinking is very common. You try something; it works. You try it again; it still works. So you keep doing the same thing. But at some point it will stop working. So you stop doing it.

It is now Greece’s third bailout. The national debt of Greece is estimated to be 344 billion euros. The population of Greece is 11 million. That’s quite a lot of debt, for a small country without the economic firepower of the major nations.

How could this country be allowed to rack up such a huge credit card bill? Beats me.

And you see, the way to prevent this sort of thing is ridiculously easy: just balance your budget. Governments should not be allowed to produce budgets which are not balanced. Full stop.

Racking up debt is akin to being a drug addict. And Greece has taken so much, it is now in the emergency room. This means it now needs emergency measures. Bailouts just won’t cover it.

Greece must leave the euro

Greece has to leave the euro. It has to default on its debts. This will mean the economy will be frozen out of the debt markets — people won’t be able to take out mortgages or loans or make credit card purchases. But this is preferable to a country’s spiral into what is basically oblivion.

This has to be done as gently as possible so that it doesn’t go into shock. But it has pretty much been expecting this for the past five years. And if Europe and its banks pull together, I am hopeful there won’t be systemic effects on the global financial system, including the FTSE 100.

The country will see itself as destitute; and, to some extent, it will be. But it will get through it. I suspect it may take a decade, but Greece will improve, recover and eventually strengthen, helped by a weak drachma which will draw tourists and companies.

The world is watching this. And it should be. Because Greece must tell the world about the dangers and the horrors of debt.

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To get more cash, what Greece must do by the end of Wednesday is enact legislation that will make pensions savings, raise VAT, increase the flexibility of the jobs market and accelerate the privatisation of state assets.

No haircut

In return, Greece will get another bailout of up to €86bn, which is desperately needed in order to immediately pay some of it back!

But what it won’t get is a reduction in any of its debt, even though everyone from your humble writer up to the IMF itself knows it can’t be repaid. Germany has put its foot down and would rather see Greece booted out of the euro than forgive a single cent of it (despite Germany being the European country that has had by far the most of its own debt written off over the past century).

Now, greater jobs flexibility and faster privatisation make a lot of economic sense and would help bring Greece closer to 21st-century European norms, but squeezing pensions and raising VAT will harden the austerity the Greek people are already facing, and seem to fly squarely in the face of last week’s “No” vote in Greece’s referendum — but it appears the Greek government takes its orders from Germany now, not from the Greek people.

Democracy, what’s that?

And in a further sign of the principles of democracy having been binned, prime minister Alexis Tsipras is set to get rid of opposition in his own cabinet, having already dumped the popular (in Greece, but not liked by the eurocrats) finance minister Yanis Varoufakis.

Many of us who want to see an independent Greece with a brighter future for its young people will want to see this proposal scuppered by Mr Tsipras’s opponents, and there’s still time, but what would an agreement do for European markets?

The past week’s calm is just an illusion, as a new helping of fudge will surely only delay the inevitable — Greece should have dumped the euro in 2010 when the stream of sugary confectionery was turned on. And for a short-term respite from the current turmoil, the markets of the eurozone will be paying the price of longer-term uncertainty.

Bank risk

Those who have lent money to Greece are going to face a so-called haircut sooner or later, that much is for sure. Euro-politicians need to face up to the reality of that, and investors should be careful when they invest in banks that are shouldering any significant part of it — Deutsche Bank shares have picked up in the past week, but they’re still down 11% since April, and our own HSBC and Barclays are on Greece’s list of creditors.

The post FTSE 100 Steadies After Greek Fudge appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Although the small size of Greece’s economy means that a default on its debts will have limited direct consequences on the rest of Europe’s economy; fears of contagion to the other indebted countries in Southern Europe is a very real risk. Europe’s leaders will likely do whatever it takes to prevent this from happening, but the lack of an immediate solution could cause further panic in the financial markets.

HSBC‘s (LSE: HSBA) exposure to Greece was $6 billion at the end of 2014. The bank had cut its Greek assets from $7.3 billion since the end of 2013, but its current exposure is the largest of all European banks outside of Greece itself.

It is of some comfort that the $2 billion in loans to Greece’s shipping industry is denominated in US dollars and has been booked in London. The shipping industry, which is more dependent on global economic conditions, is better insulated to developments happening in Greece. This means that HSBC’s exposure is smaller than what its headline figure suggests.

Even if much of its loans in Greece sour, HSBC’s strong capital position would mean that it could comfortable absorb the losses. But, that would still have a huge impact on earnings; which has already been weak, despite a tapering of loan losses at a low level. Its return on equity in 2014 was just 7.3%; and has been below its 10% target  in every year since 2007, except once in 2011. So although you may not sell shares in HSBC on Greek worries, you probably shouldn’t buy them either.

Of the British banks, RBS (LSE: RBS) is expected to have the second largest exposure to Greece. At the end of 2014, RBS had about £400 million in assets exposed to Greece, which is much less than HSBC. But, because of collateral and guarantees, its net exposure is only about £120 million.

The bank still has a long way to go in its recovery, but it is moving slowly, but surely in the right direction. Analysts expect earnings will be much improved this year, with forecasts for earnings per share (EPS) of 27.2 pence, which implies a forward P/E of 13.5.

Santander’s (LSE: BNC) exposure to Spain is its key drawback. Spain’s weak economic growth, its large fiscal deficit, reliance on foreign borrowings and the rise of left-wing populist party Podemos means that the country’s situation is very comparable to Greece.

On a positive note, Santander’s strong global retail banking franchise is highly efficient and relatively profitable. Its credit quality in Spain and Latin America is steadily improving; and its capital position is strong, having already raised capital earlier this year. So unless, Spain follows in Greece’s footsteps, Santander will continue to deliver on steady earnings growth.

Retail challenger bank, OneSavings Bank (LSE: OSB) has no direct exposure to Greece, and very limited exposure outside of the UK. Its fast growing loan book and low operating cost structure should mean the bank would prove to be resilient even with the uncertainties surrounding the Greece’s future.

Analysts expect EPS will grow by 29% this year, to 31.5 pence, which implies a very attractive forward P/E ratio of 10.1.

The post Should You Sell HSBC Holdings plc, Royal Bank of Scotland Group plc, Banco Santander SA & OneSavings Bank plc On ‘Grexit’ Fears? appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

As a result, the stock market rose by a couple of per cent and investors began to wish that they had taken the opportunity to buy in at a relatively low level. Today, though, it feels as though we are back at square one, with talks between Greece and its creditors apparently stalled.

Inevitable Result

Of course, Eurosceptics will say that the current predicament is inevitable. They will say that the Euro was a disaster waiting to happen, with the ambitious project being undertaken for political, rather than economic, reasons.

And, with the performance of the Eurozone having being so poor in recent years, there may be some truth in this view. Whilst the US and UK have seen their economies come through a challenging recession, the Eurozone has barely been able to register positive growth.

Clearly, the Greek debt predicament is about more than weak economic growth. Greece’s peers have, with hindsight, been too tough with their dose of austerity, with the country’s economy shrinking by 25% since the start of the global financial crisis.

That’s roughly the same as the US economy declined by during the 1930s and, as a result, it is little wonder that Greeks have voted in a party, Syriza, that has promised to put an end to the misery that austerity has brought.

Austerity

However, Greece’s creditors continue to push for further austerity and, as such, Syriza appears to be unable to accept the terms. In other words, they were voted in on an anti-austerity manifesto and so are finding it difficult to agree to the terms being offered. This seems to be a reason for the surprising announcement of a referendum, as Syriza seeks to put the best terms they are able to negotiate to the Greek people for them to decide.

Of course, Syriza is also pressing for policies that are unlikely to help Greece’s economic outlook. Policies such as increasing corporation tax and tax on higher earners are likely to disincentive risk-taking and enterprise in a country where confidence is already in short supply. And, put simply, taxing corporate profits more heavily means less investment, fewer jobs and, in the long run, reduced tax receipts.

Looking Ahead

Clearly, both sides have much to lose from there being no deal. Creditors risk losing €billions and Greece risks yet more economic turmoil. And, if Greece does leave the Euro, then it could act as a stimulus for anti-austerity movements in other countries across Europe to win votes and seek to exit the single currency region, too. As such, and while the outcome of the referendum is impossible to forecast, the outlook for the Euro remains bleak.

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Watching events 

HSBC has told investors that it is “monitoring the developments” in Greece closely, as the country teeters on the edge of a sovereign default and banking crisis.  The bank, which generates 34% of group revenues within Europe, is one of the only major European banking groups that has a strong presence within Greece. 

HSBC has a 12-branch retail and commercial network in Greece. So, the group’s local branch network is already feeling the full effects of the crisis, as capital controls limit the amount clients can withdraw from accounts. 

In total, HSBC’s exposure to Greece currently amounts to $6bn and the bank has been reducing its exposure to the troubled Eurozone country over the past few years. HSBC’s exposure has fallen from $7.3bn as reported at the end of 2013. Around $2bn of this $6bn total is tied up in shipping companies based within Greece. 

Small sum 

For a global banking giant like HSBC, being forced to write off $6bn — around 3.7% of the bank’s total net asset value — won’t be the end of the world.  What’s more, it’s unlikely that HSBC will write off the whole debt. As mentioned above, $2bn is tie up in shipping companies based in Greece and these companies are, to a certain extent insulated from the crisis. 

However, a large portion of the bank’s personal and business loans could turn sour as the economic situation within the struggling Eurozone country deteriorates.

Good for business? 

HSBC’s reputation as one of the largest foreign banks operating within Greece has not gone unnoticed. Indeed, there have been some reports that Greek’s are turning to HSBC to offer security, as local banks struggle to remain solvent. 

It seems that the new customers are attracted to HSBC’s global presence and solvency. As a result, HSBC could stand to benefit or, at least, soften the impact of a full default, as new customers look to the bank to offer security. 

Strong balance sheet

At the end of the first quarter, HSBC reported a common equity tier one ratio — its “financial cushion” — of 11.2%, up by 0.1% from the previous quarter. Moreover, the group’s leverage ratio ticked up to 4.9%.

Both of these figures show that the bank is well capitalized. Also, if the group is forced to take a hit from the Greek crisis, the write down should be mopped up in HSBC’s $15bn quarterly operating profit. 

Overall, investors shouldn’t be worried about HSBC’s exposure to Greece, but it’s certainly something to keep an eye on. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.