My response to David Einhorn’s comments (Part II)

Sorry for the delay.

Same structure as in Part I. Warning: this is a long post.

David Einhorn

  1. Relating to the fall in funding costs:

The 2.04% is the cost of new time deposits in August 2014. This is not the average cost of deposits in the Q2 2014 financial reports, which was 2.62% according to the same presentation (and 2.71% in Greece time deposits). This cost will reduce down to the new cost of deposits over the 1-2 quarter duration of the time deposits. So even without any additional lowering of deposit pricing you would still expect to see a near 60bps improvement. This is obviously very material given there are €29.6bn of time deposits (the rates are also coming down on savings and sight deposits but this is much less relevant). The 60bps is worth close to €200m of additional annualised PPI, compared with the €1.2bn annualised reported PPI in Q2 2014. How low can deposit rates go? Time will tell of course but rates in the other periphery are around 1% and the management teams of the Greek banks are clearly trying to reduce them towards this level. I would suspect another 50bps.


Good point. Time deposits are between 50bp-75bp in Austria, so 1% in the periphery means deposits are priced almost like in the economically stronger parts of Europe – you decide whether that makes sense. If no shocks happen between now and 2017, PPI could indeed get a nice boost from that.

But: how likely is this to happen, if your France thesis proves correct? Do you think that an imploding France will have no repercussions on the periphery (or, indeed the whole Euro zone) countries?

David Einhorn

  1. Relating to the rising cost of long-term Greek Government debt

This is a classic confusion between correlation and causality. Both deposit rates and GGB yields were falling up until recently. Since then there has been a sudden rise in GGB yields. Why? I believe the primary reason is that markets have started to discount political risk in Greece (this has also impacted equities as well, of course) ahead of a likely full election in 2015. These GGB’s total €30bn nominal in debt and have a market value of around €18bn. They are primarily held by hedge funds and other similar investors. There is no obvious reason why the trading of these investors in Greek Government debt should influence the behaviour of the average Greek depositor (particularly since depositors that left the Greek market to deposit elsewhere in Euroland have not returned to Greece). And so far this is what we have seen. Deposits increased at the banks in October and both banks recently confirmed to me that they saw no change in consumer behaviour (as of last week). Deposit rates in November are still going lower.


Sorry, I did not make myself clear enough: there is no such thing as causality (if A then B) in economic phenomena. This is not (Newtonian) physics! What we have instead are complex “relationships” that can run both ways: there could be a bank run on deposits caused by rumors that negatively affects the sovereign as its bailout capacity is doubted. Alternatively, you could have doubts about the sovereign affecting the soundness of banks causing a run. Since there are continuously changing leads, lags and even coincidences between the two variables, it is not possible to make quantitative statements about the relationship whatsoever.

This, however, doesn’t mean they have nothing to do with each other as you seem to think, just because the bulk of the tradable debt is held by non-banks.

First, the exposure is still there and it will roughly double for Piraeus as DTAs are converted into government debt to better comply with Basel III in the future (see below) – I am sure the Greeks will manage to pull-through this stunt without increasing the official deficit. Second, Piraeus is heavily dependent on the interbank market for funding (up to 25% of its BS) and this is definitely more directly linked to GGB yields: lending banks can now lend to the Greek state at higher yields (and no equity requirement whatsoever) than in the summer and the ECB has to ask for more Repo-collateral due to the fall in price. If things stay this way, the treasurer of Piraeus will sooner or later have to start balancing between the increased cost of interbank funding and the deposit rates he offers.

I would state, then, that it is highly unlikely for both variables (yield and deposit rate) to show a diverging trend over a considerable period of time.

And the political risk that is currently discounted won’t go away for a long time in Greece – it is real.

David Einhorn

  1. Relating to lack of loan growth

I do not rely on loan growth in my analysis, but on cost reductions and funding costs. However it is reasonable to suggest that GDP growth and loan growth do tend to correlate quite well and so it is quite possible that some loan growth might return to the market, as the economy recovers.


You might not rely on loan growth for your medium-term earnings forecast, but you implicitly rely on growth assuming a multiple on 1.5 in 2017. According to the modified DDM (bot the worst model for valuing banks I think) shown in the last post, a no growth bank with a cost of equity of 12% (reasonable for Greece) should trade at anywhere between 1.17 – 1.25 x book depending on whether you assume a ROE of 14% or 15%. Without growth, you either need a lower cost of equity or a higher ROE.

David Einhorn

  1. Relating to Table 2.2 (Developed markets debt breakdown)

This table seems to show something quite different to what you think. Whilst the 304% is correct the loan growth, or lack thereof, is likely to come most from the private sector (households and non-financial companies). Here Greece has debt to GDP of 129% (with the Government adding 175% to get to the 304%). This is actually the second lowest figure in the table, with only Italy lower at 125%. The US is higher at 160%. Leverage at non-financial companies is only lower in Germany and household leverage similar to most of the core European nations (France, Germany, Austria, Belgium). So, there is at least some room for private sector loan growth.



First, the distinction between private and government is somewhat arbitrary, as high government debt needs to be serviced by higher taxes which impedes private sector growth. It also leads to crowding out as the government commands more and more resources, i.e. there are links between the two. Note that crowding out in the modern monetary system is not via interest rates, as classic economic theory would suggest – the link between demand for debt and supply of loanable funds (saving) not being direct anymore due to credit-money creation – but via the increase of prices of factors of production (rents, wages of qualified personnel…) which prices the private sector out.

Second, as I argued in the post Greece should not be compared to developed markets, but to EM most of which have significantly lower debt loads. Greece’s institutions are closer to those of, say, Hungary or Serbia than to Germany and the US. And the institutional backdrop matters more in banking, than, say, in retailing. In a country in which a court needs years to enforce a mortgage on a house, it is questionable whether you should offer this product at all. Similarly, countries where most earn a significant part of their income on the black market most customers are not bankable (hence the need for decentralized Microfinance) as incomes are not verifiable. The reason why the banking sector in Greece is so much bigger than in other EMs, is because its banks could hold lover liquidity buffers (and hence create more deposits) as they had direct access to hard currency – this will revert to the mean.

If this doesn’t convince you then ask yourself why there is no loan growth at Piraeus bank. The equity seems to be there (more on that below). Marginal funding at around 2% is low, as we have seen. Loaning out that money at 5-6 percent earns a nice spread of 3-4 percent. These are not usurious levels, but still the loan book is shrinking. Something doesn’t add up here, if you ask me.

David Einhorn

  1. Relating Piraeus’ topline growth potential:

Your analysis also excludes the other major source of gains in PPI, which is cost reduction. They have €152m of additional synergies as part of their restructuring programme. This is to come primarily from branch closures and employee cost reductions through redundancies. Their medium term targets assume they will go further than this and I also think that plausible given how over branched Greece still is given the # of banks.


There is not much I can add here. You have more experience than me judging management synergy estimates. This chart, from the Blackstone study you mentioned arouse my interest.


It shows Piraeus’s acquisition activity over the past two and a half years. As a result of six acquisitions/mergers 58 percent of its current loan exposure was not underwritten in-house and I suppose each institution had its own underwriting standards. Worse, it also probably means that each institution had its own core banking systems that need to be harmonized. This can be very costly and entails a high degree of operational risk. Are these costs already included in their synergy estimates? If not, you can safely deduct a high double-digit million figure from their estimates.

David Einhorn

  1.  We do not contend that the bankruptcy law change has anything to do with business foreclosures. Further, as we stated in the presentation, this will be a much bigger benefit for Alpha Bank than for Piraeus.

Ok. From the Blackrock piece I take away that the foreclosure moratorium is related to primary mortgages, as in Hungary – just as I expected. I want to point out that the end of the foreclosure moratorium has been postponed to the end of the following year every time in the past three years. It would not surprise me if that happens again. This is related to the institutional environment I wrote about above.

David Einhorn

  1. Relating to collateral:

Mortages are only a small part of Piraeus. The collateral is not PP&E. You ask a bunch of questions:

“What type of do they count here? I hope it is not property, plant and equipment. How do they arrive at the figures? Transactions? Hardly possible in a depressionary environment. Estimated values (Appraisals)? If yes, how old are they? Are the values reported nominal values or haircut values? And how much is collateral worth in an environment where enforcement is legally difficult, anyway?

Why don’t you try to answer them?

Blackrock published a 173 page piece of research on all these issues (they also came up with stress test cumulative loss provisions that are very similar to those that the ECB stress test calculated) and it is available online. It describes answers to all of these questions.

Let us take mortgages to start with. Piraeus, as per Blackrock in March 2014, had €17.3bn in mortgage loans. This represents 340k loans with an average balance of €51k, average coupon of 3.4%, average LTV of 71% and a weighted averaging seasoning term of 54 months (either since modification or since origination). 79% of these loans were current, 6% delinquent (90-359 days past due) and 15%. Values are updated on an annual basis through indexation to PropIndex. Blackrock then hired real estate agents to perform “drive-bys” to check to provide independent valuations. These valuations were 13-14% lower than on the books (this had strong correlation with loan size, and here Piraeus is lower than average so it’s possible that their adjustment factor might be lower). Let’s assume you haircut the collateral by 14%, then total mortgage coverage is 99% (cash and collateral). And this would be before ANY impacts from strategic defaulters or any recent modifications of loans ahead of the change in legislation.


EUR 17bn is about 25 percent of the loan exposure – not that small I would say. This exposure is affected by said law and here I ask the general question: What’s a LTV worth if you cannot foreclose?

Since real estate is by far the biggest collateral in the SME (bulk of NPLs) and the CRE segments, conclusions from this section extend to them as well.

But let’s not philosophize and have a look at the data (quality)!

Blackrock, as I understand, used banks’ LTV values and it updated them relying on a property price index. In the case of Piraeus bank most RRE loans have been on the books for about 6 years (54 months seasoning). Now, the first and most important question is this: were the LTVs originally based on purchase transactions or, did they have to be guessed at the origination date as is the case if you take out a loan on a property you already own? If it is the latter, it is very likely that the values were inflated from the start, just as occurred in the US during the subprime crisis (HELOC loans). Unfortunately, Blackrock doesn’t provide us with this important information. The fact that for each borrower there are 1.4 x as many mortgages (page 21) suggest to me that a fair degree of speculative activity was going on. Also the relatively small loan size (50k) hints at home equity withdrawals.

The “drive-by” valuations were done in a non-representative sample size and Blackrock duly warns us to extrapolate the results. So we are stuck with very coarse data (apart from that, “drive-by” valuations are garbage anyway).

Since Blackrock doesn’t really answer any of my questions, we can use some deductive reasoning to get a better feel for the situation.

I start with the apartment price index published by the Greek central bank (PDF here). Not surprisingly, the price of the average apartment in Greece has fallen by some 35% over the past five years. If correct, it doesn’t seem that bad considering the depression in Greece – I have seen worse in other CEE countries. With this additional information, it is now possible to back out the implied LTV at origination. Since most loans are not older than six years, we can assume that not much of the original loan balance has been paid back – mortgages start amortizing later. Starting with Blackrock’s LTV of 71, assuming that 10% of the loan balance has been paid back so far on average and dividing the denominator by 0.65 I get a LTV of 0.51 at origination. Wow!

This means that the average Greek mortgage debtor came up with 50% equity at the origination of the loan – and this at a time when mortgage loan growth in Greece was running at between 20-30 percent per year!

Of course!

From this recent Bank of Greece publication I could get a better feel on the Greek real estate market. There I learn that the home-ownership rate in Greece is 80% – much higher than in the US and similar to the situation in other periphery countries. This means that the market is illiquid and index values are based primarily on surveys of banks and real estate agents, i.e. we can safely assume the RE index data themselves are biased upwards. The chart below tells the whole story:


Turnover has been constantly falling since 2005 hitting 48k transactions in the whole of Greece in 2013. Given that Piraeus has 340k mortgage loans outstanding, of which about 20% are either defaulted or delinquent, means that about 68k apartment units have to be foreclosed (if it were legally possible, that is, and twice as much if you include the modified ones). It would take Piraeus bank alone two years to sell its mortgage collateral – not counting other banks that are even more into mortgages and not counting new (re)defaulters.

What does this tell us?

It tells us that the Greek banks have a “collective action” problem: if one starts liquidating RE prices will collapse and losses increase. It also means that a 14% haircut on this collateral is a joke.

The ECB AQR website is a treasure trove. There you can compare banks on a country by country basis. And it confirms what I suspected: at 14% (that’s end of 2013 figures, now it is about 17%) coverage of RRE NPLs it is among the least conservatively covered banks in the EU. For instance, almost all Italian and Spanish banks whose RRE portfolios were selected had significantly larger coverage than Piraeus. Is this plausible, given that the situation in Greece is by far the most severe?

If even the RRE market is illiquid, you can bet that the CRE market looks even worse.

David Einhorn

  1. Then you ask “If collateral covers the net loans, why is the NPL ratio rising and standing at a record 38% of all loans, why are they not getting rid of these loans?”

I think your question misses the point. Given that most potential purchasers of books of NPL’s do not possess servicing facilities in Greece, and that there was no law for reclaiming collateral in mortgages and an insufficient law for restructuring corporate loans, who would buy these loans and why would you want to sell them at the appropriate risk adjusted return these buyers would demand? In fact Piraeus has just got to setting up its restructuring division (2k employees were trained over the summer) and will take most of the next year from now to attempt to restructure its NPL’s. They can perhaps be criticised for taking too long to have got this far but then there has been bankruptcy, sovereign default, various cost restructuring plans, recapitalisation on the market, Blackrock I and II, the ECB AQR and stress test, running a business etc. Plus you are seeing a new law that will deal with corporate restructurings passing through Parliament now, which will enable rapid restructuring of Corporate NPL’s with agreement from 50% + 1 shares of the debt defaulted. Given that the banks will always hold this much they now have far more control over the process (this should reduce the process from 2 years to under 1 year).

Further, the first signs even in consumer credit are positive. Piraeus offered restructuring to 20k customers who had defaulted and had been threatened with legal action. They offered forgiveness of between 30 and 50% of the loan if they repaid the rest. 10k started paying again. There is evidence everywhere of people who can pay, at least a bit, and are not.

Also note that in areas where collateral is consistent with international peers some transactions have taken place, ie shipping, where Alpha have completed a few transactions in the space.


Well you would like to sell them to improve your liquidity situation and free valuable equity which also costs you money, wouldn’t you?

In order to appropriately provision under IFRS you anyway have to discount expected proceeds, just like a potential buyer would. If properly provisioned (big if) the discrepancy between book and market value should not be that high. Technically speaking there is a difference since under IFRS you discount at the original contract rate and a buyer would discount at the prevailing market rate. I admit that in Greece’s case the difference could be material. So what? Shouldn’t we be interested in getting a good estimate for BV? Under non-market assumptions even Lehmann’s Level-III assets would have been correctly valued at book…

And it is not entirely true that there are no potential buyers for these loans. About 9bn (RRE, SBP, Consumer) of the defaulted 28bn are very small ticket (<50k) loans. Nobody is going to fly in and build servicing facilities for them. After calling and threatening the clients, these loans at the end of the day are sold to guys in black leather jackets with large, barking dogs who then pursue whatever they can get. I know that such “services” exist in countries surrounding Greece. And given the healthy hooligan scene I would be surprised, if Greece were an exception.

The fact that they haven’t had a proper workout department doesn’t surprise me the least. In boom times this is a drag on performance unnecessarily distorting the cost to income ratio. Happened everywhere. But starting to build one six years into a depression is shocking. There is no excuse for that!

Who has talked to the clients over the past six years? Who has made sure that they have paid the annual insurance contract on the pledged collateral? Is the collateral still there, at all? Covenant monitoring? Who has made the modification decisions of which there are many according to Blackrock?

I think I know the answer: the sales guy was in charge, i.e. the one who advocated the loan in the first place. He has been the client’s first point of reference during the depression – not exactly best practice. He is also the one whose job is most likely to be cut due to synergies…

I do not know whether the law as you describe it will change that much. For most of the business NPLs Piraeus will be the only bank in the capital structure anyway, since SMEs are the biggest default segment. More importantly, the biggest impediment to quick restructurings, apart from a shortage of workout professionals, will be the lack of speed of the Greek courts (institutions) – regardless of the law.

Given that they had provisioned 73% on consumer loans they could afford to offer this deal. Note, however, that even if the clients have started paying, this is not your normal performing portfolio as the bank doesn’t have any behavioral score data on the client, i.e. it is impossible to assess the riskiness of the written-off (?) consumer book. It also increases the likelihood of strategic defaults in the future, since clients know that it “pays” not to pay.

The shipping book is due to its international nature not really useful in assessing the riskiness of Greek loans. If I were a Greek bank manager trying to cook the books, this is last segment where I would try. First, values can easily be benchmarked due to independent global pricing. Second, given the small relative size of the shipping NPL (1.2 bn) it doesn’t really pay-off.

David Einhorn

  1.  Relating to your conclusion that NPLs from say 2010 have lost value:

Most corporate customers are “cash and carry” businesses. So what happens when you get consumer spending growth and economic growth? Surely you get a much healthier corporate sector? As can clearly be seen from the Blackrock report companies fell in trouble due to large declines in EBITDA, in many cases leaving margins –ve or net debt to EBITDA of more than 8x. This is obviously why provision levels here are high at 67% in cash. But there could well be a significant change here if the cycle turns and growth returns.


Yes, if you get (substantial) growth, things could change – that’s why I say yours is a growth story. And it’s not just real economic growth you need, but especially nominal EBITDA growth across the economy which is more closely tied to money (loan) growth. And it’s not all “cash and carry”: according to Blackrock a huge percentage of businesses has receivables to the tune of 50% of sales!

And yes, falling EBITDA is how companies usually get into trouble. But: even if growth materializes, it doesn’t affect all sectors equally. Only cyclical companies will come back, but a lot of these loans are malinvestments (that’s the cost of a credit bubble) and supported business models that should never have existed, or at least should not have existed at that size. Think of all the construction companies that must have nicely benefited from the Athens Olympics and the great Greek road construction works of the past two decades, the will not see a return of their business that soon (sovereign debt again).

According to their latest presentation cash coverage of business loans stands around 50% – not 63%. Apart from that I found the following chart from the Blackrock piece interesting.


This chart summarizes Blackrock’s findings for all large Greek banks in the SME segment, the largest default category at Piraeus. About 31% of borrowers could not pay interest, whereas 11% can service interest payments, but could nevertheless be classified as defaulted as the likelihood of a principal repayment is very low (EBITDA 1-1.5x). Adding up these two categories yields 42% which is about the NPL ratio at Piraeus and other Greek banks on their business loans. And now, please have look at the rightmost column: on a whopping 32% of loans there is incomplete information, presumably missing financials such that the respective EBITDA ratio could not be even computed. Needless to say, it is not usually the good clients that stop submitting data to the bank.

Another interesting tidbit: about 42% of loans classified as performing (and not provisioned for) have a median debt/EBITDA multiple of 6.2x – surely limiting things like capex and the like. Economizing on maintenance capex destroys business value over time – that’s why workout speed is crucial!

David Einhorn

  1.  Relating to Figure 8. The AQR adjustment chart:

Modifications were made to Piraeus totaling €2.2bn. This is a downwards adjustment in book value that they apply for the purposes of their analysis in the AQR and stress test. This analysis will not be reflected in the financial reports of the banks, and that probably gives a good sense of whether they are merely prudent or actively punitive (if they were prudent you would expect the banks to immediately adopt them). This largely relates to use of collateral vs cash in dealing with corporate exposures. In the event that a corporate is a “going concern” (defined as net debt to EBITDA of <6x) then only cash flows can be considered, and if the corporate is a “gone concern” then only collateral, with significant haircuts applied (mainly to real estate). This is a sensible measure to take for a stress test, but this is not the reality in which the banks are dealing with day-to-day in an attempt to get paid on their loans.

I think there is a misunderstanding. The AQR is used to get a better estimate of asset value which then forms the basis of the stress test. So first you deduct the AQR results from book value, then the stress test. You do not apply the stress test irrespective of the AQR results as this would lead to double counting.

I have read chapter 4 (describing the AQR) of the ECB manual and must say it is sensible. Its purpose seems to have been to get a better feel for the market value of the loan book – exactly what we are also interested in. Now, a multiple of 6x might sound very harsh, especially in the current (Wall Street) environment. But, is it really? Compared to transaction values on heathy corporates with nice margins yes, but for corporates under stress there is the real risk of losing costumers/vendors, negligence of important maintenance etc. The AQR multiples did not fall from the sky, they apparently were taken by observing transaction multiples for distressed sales in the different segments (that’s what they say on page 134).

The AQR if done properly (big if), it is methodologically a good approximation for the true book value, since through its methodology it evades problems that plague IFRS provisioning such as forbearance etc. Still, it was the local regulator who was in charge of this exercise and there is a conflict of interest – surely no one wants its banks to fail. Those that failed were known to be in trouble. Further, given the desolate data quality at most Greek banks it is questionable whether they could have performed the AQR properly. Missing data should have been fully punished according to the methodology in which case the 2.2bn sound too small.

David Einhorn

  1.  Relating to Figure. EBA Stress test results.

This is the Basel III fully loaded ratio under the adverse scenario in the ECB/EBA stress test. Obviously you would not want to own the Greek banks if you believed in the assumptions backing the adverse scenario, which include:

A cumulative GDP decline of 2% from 2014 through 2016

14% further price hits to real estate, and 38% to investment property

17% more NPL’s (as a % of gross loans) from 2014 through 2016, versus 1.5% in H1 2014

A decline in net interest income (driven by NPL’s and higher deposit costs) to 45% lower than the current run rate (which is more severe given that we have already earned higher rates in 9M 2014)

I don’t believe that any of these things are likely.

But, there are also further problems in this analysis.

The balance sheet date they have used for this is year-end 2013, so of course this ratio does not include the capital that was raised in 2014, for a start

Basel III in principle is a very good thing. The aim was to link capital ratios to capital that is actually loss absorbing and not just accounting book equity. So no more goodwill, or embedded value of life operations, or DTA’s etc etc. This has hit the Greeks, and other periphery banks, who amongst other things have lots of DTA’s as they have had lots of losses. So for Piraeus (and Alpha) the bank capital ratio in the chart above would NOT include the Greek Government Preference shares, nor any DTA’s, nor Pillar I bonds (subsequently sold) nor any capital raised

The ECB has, apparently, informed the banks on how to restructure their DTA’s into DTC’s so they will be loss absorbing capital from a Basle III perspective. Reflect that, and the other changes I talked to, and the Basle III ratio will begin to be very similar to the CET1 ratio. This is still low – but then of course I do not expect the adverse scenario


My argument has nothing to do with your or my expectations. Capital is supposed to be there for the UNEXPECTED losses – expected losses are supposed to be covered by risk costs (remark: you can evaluate yourself whether the average mortgage rate of 3.7% at Piraeus covers the risk of these loans). The stress tests are a way to estimate unexpected losses and asses banks capitalization on this basis. Now, we can have a long debate whether it is theoretically possible for bureaucrats to estimate unexpected losses or not, but that’s what they are doing – and it has implications (see next point).

It seems the measures you mention, were indeed not included which renders the results somewhat worthless. Just want to repeat that a conversion of DTA into DTC raises Sovereign risk for Piraeus substantially.

David Einhorn

  1.  You write “Piraeus bank will have to come up with substantial equity in the next five years – it will be a long time before Piraeus can grow its loan book substantially, let alone pay dividends even if profitable. “

This is simply incorrect. That is not the ramification of the stress test.


Not so sure. While EBA has not yet made it explicitly clear what purpose these stress tests ultimately will have, it is safe to assume they will follow the way of the Fed which uses similar tests to govern capital return at banks. Results of these tests do not necessarily have the same consequences as violating regulatory capital, but they still can limit management’s dividend payout policy by prescribing higher capital buffers (Basel III).

Going forward, there are going to be annual stress tests where these things are evaluated on a regulatory basis and if I interpret these results correctly, it will be a long time before Piraeus will be allowed to pay dividends. Of course, I could be overly harsh if the results do not include measures taken in the meantime, but then again nobody knows how the results would look like if everything is included, at least I could not find it.

David Einhorn

  1. Relating to the margin of safety.

I think you are conflating our guess of future value with margin of safety. Margin of safety has to do with downside protection from current levels. Today, Piraeus trades at significant discount to book value, even with full AQR adjustment.

As for the upside, you still assumes that PPI does not go higher than €1.2bn per annum, whereas there are obvious gains through operating expenses and deposit costs (already achieved at today’s market rates) that easily add over €0.35bn. This is with no recovery in volumes or other revenues or any further reduction in deposit costs (every 10bps is worth another €30m) or any more cost saves.

Time will tell how much upside can be achieved. But, in our experience taking a static analysis of banking results at the end of a six year local depression is hardly reflective of what can happen in a recovery.

Even using your view of the Czech as the proper comparison with a 14% ROE, the recovery value for Piraeus is far above current prices.

Overall, I hope you don’t mind my commenting. I enjoy a thoughtful response and a healthy debate.

Time will tell who is right and we will all see how this plays out.

Best de


Piraeus has BV of equity of EUR 9.2bn as of mid-2014. Deducting the EUR 2.2bn from the AQR gives me EUR 7bn as better indicator of “true” BV. At a market cap of EUR 7.2bn, I do not see much downside protection given the risks that I have described.

The fact that the depression has lasted for six years doesn’t necessarily mean it’s over. There is no magic number after which economic growth mean reverts – think Japan. Economic growth only occurs under specific conditions, in human history it is the exception rather than the rule. It is certainly not as easy as Keynesian eggheads seem to think, i.e. by adding historic productivity to population growth. It is sad to see what passes as science these days.

I personally think that the large (and building) NPLs in Greece (and not just there) are an impediment to strong growth, despite the reforms taken. It tells me creative destruction has not happened yet, but this would be the topic for an entire post or study.

I hope my remarks have been helpful and sincerely hope your thesis plays out and you make money on this investment, despite my scepticism.

Best regards,




  1. Congratulations, well deserved, for having gotten the attention of David Einhorn and thank you for this most sophisticated debate. You know my own assessment of Piraeus Bank. In terms of sophistication, it is lightyears away from yours and, of course, David Einhorn’s. Instead, it is in reminiscence of what my bosses at one of the large American money center banks told me in my first year of training almost 45 years ago: “No matter how good the financials of your borrower, if you don’t have full confidence in the personal integrity of the people involved, stay away from them!”

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