Thursday, 25 September 2014

Deferred Tax Assets falls on Greek tax payer

If you are missing few hundred Euro most probably the Greek tax authorities would come after you. If on the other hand you are missing few billions the best thing to do is to hire a good accountant and convince the Greek government to guarantee them.
This is what happens with an amendment dealing with the deferred tax assets of the Greek banks that the finance ministry is trying to pass through the parliament. For those who don’t know the story goes as follows.
After the Greek PSI (haircut of Greek bonds) the Greek banks had losses of 37.7 billion Euro. The banks asked, and got, from the government the concession to amortize the losses over the next 30 years and to set them off against any profits, thus avoiding paying taxes. In this way they formed a Deferred Tax Asset (DTA) of 9.8billion (26% tax rate).
We should say here that no such measure was taken with respect to the small Greek bondholders despite repeated promises.
According to the international accounting standards a small proportion of 10% of these DTA can be recognized as capital. This is because no-one can guarantee the profitability of any bank for 30 years.
No-one apart from the Greek state!! The current proposed amendment guarantees that 9.8billion and more. In case the banks have losses they Greek taxpayer would give the money and would receive equity participation. Equity shares of dubious value since they will receive them only if banks are loss-making.
But this is not the whole story. The amendment allows for the banks to set off also the losses from the loan book, not just the PSI one. In other words, the banks would pay no taxes if they have profits, and if they have losses the Greek taxpayer would pay the difference. Nice! Madoff would be lost for words with such a scheme.
The Greek government could still save the amendment if the guarantee given for 30 years was priced accordingly. Every put option and this is a put option that the banks buy has a premium. The Greek government chose instead to give this for free! This would have been no problem if 100% of the banks were state owned. But it is not, and the drive is to remove any state participation.
Many questions are raised with this latest move. For example, why the government chose not to show the same gratitude towards the small Greek bond holders who lost their savings?  Why the government gives the guarantee for free? When the non-performing loans approach 40%, any set off would reduce the tax income of the state drastically. Who and how is going to fund the shortfall. What is the effect of this measure on the debt sustainability analysis of the Greek debt?
Greek banks need for sure to be healthy and to be capitalized adequately in order to help the economy. This however, needs to be done with fresh real money and not with creative accounting or secret and unjust subsidies from the Greek taxpayer. The ECB in a recent case for Portugal expressed similar reservations.