Not enough of this stuff in Greece's banks.

Photographer: Milos Bicanski/Getty Images

Greek Banks Are Ticking Time Bombs

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Investors are trashing Greek stocks and bonds in the aftermath of Alexis Tsipras's election. It's the country's banks, however, that are bearing the brunt of the backlash to the new prime minister's anti-austerity promises, and that spells trouble for a government that can't afford to rescue its financial system.

Greece's Fiscal Odyssey

This week, the benchmark Athens equity index is down about 12 percent, as the incoming administration says it will push forcefully to renegotiate the nation's debt obligations. Greek banks, however, are getting hammered much harder:

The danger of a run on the banks is clear and present. Depositors withdrew 11 billion euros ($12.5 billion) as the election approached. While we won't get official December figures until the start of next month, total deposits look to be as low as 150 billion euros -- even less than the last time Greece was in crisis, in June 2012.

Daniele Nouy, head of the European Central Bank’s supervisory board says she's relaxed about Greek banks' ability to weather the storm. "They are pretty strong,” she told Bloomberg TV. "A lot of good work has been done to strengthen their balance sheets during the last years. They will go through this crisis like they went through the previous ones.”

I'm not so sure. As my Bloomberg News colleagues Sofia Horta e Costa and Fabio Benedetti-Valentini point out today, the $11.5 billion that Greek banks raised by selling shares last year just about matches the losses they've suffered this week as their market capitalizations plunged.

Imagine a situation where the government is still fighting with its creditors at the European Union, the International Monetary Fund and the European Central Bank when its banks blow up. In that scenario it's not clear where the government would find money to keep the financial system afloat. Greece doesn't have it, and its lenders might well view a rescue as throwing good money after bad.

The cost of buying a five-year credit-default swap suggests there's a 75 percent chance that Greece will default. No wonder the yield on Greek three-year bonds  has surged to 18 percent, from 10 percent at the end of last week.

There is at least one bright spot in this picture. Investors are in a funk because the new Greek government continues to play to its domestic gallery, giving no signal that it will ty to find common ground with the rest of the EU. If investors continue to punish that political intransigence, though, Tsipras may be forced to negotiate from a position of weakness. As is often the case, financial markets will have done the work that politics and diplomacy cannot.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net