Greek banks are lending to one another in order to use the borrowed money as bank capital, says Reuters.
Greek banks have routinely used special offshore companies, funded by these banks, to use the cash as capital injection in the mother bank – a scheme some describe as “imaginary capital”.
“You can produce as much equity as you like and make banks as big as you like,” says Hans-Peter Burghof, professor of banking and finance at the University of Hohenheim, Germany.
“These are loans from one bankrupt bank to another bankrupt bank,” notes a professor of economics at the University of Athens.
France says that such ponzi scheme is a crime provided, of course, that it is discovered in the first place.
“If it is an undeclared carried equity stake, then there is a presentation of false accounts and an offense has been committed. It’s a crime,” spokeswoman from Bank of France is quoted.
Places like Spain, Luxembourg and Slovakia, however, think that practice of imaginary capital funding is legal and the fact that these places had something to say maybe indicative that if it is happening there it may not be as egregious as in places that have no comment on such practice.
For example, Italy, Belgium, and Cyprus are mute on the issue although it maybe coincidental that some banks from these places operate in environments that are – shall we say – less hospitable to standard finance rules.
Just to note, some Italian banks are heavily involved in eastern Europe where acceptable rules on finances are yet to emerge while Belgium is the home of Bankia, famously involved in all sorts of – shall we say – inaccurate accounting.
As for Cyprus and its banks, it is worth noting that it is conveniently located off the Mediterranean shore for an easy access to regional countries whose dictators are perennially engaged in violent conflict with thugs that want the regime replaced, a chronic circumstance that requires facilitation of payment services for things like sanction busting, drug running and weapons.
Then again, some qualm that our own bank rescue, the TARP, is a ponzi but just less transparent: the government had to borrow the TARP funds before it injected it as bank capital and now some banks keep borrowing from other TARP lending vehicles to pay off another.