Greek Election Makes Saving Banks Swansong for Papademos
As Greeks prepare for an election that’s unlikely to produce a clear winner, interim Prime Minister Lucas Papademos is struggling to complete his final major task: stopping banks from falling into state hands.
The government approved a law last week setting the framework for the Hellenic Financial Stability Fund, the state’s recapitalization fund. It included the authorization to give banks capital upfront and a possible plan to enable them to book smaller losses on the bonds issued in last month’s debt swap.
“The state will do what they can to keep the banks operating as living entities and avoid nationalizations where possible,” said Alex Tsirigotis, an analyst at Mediobanca SpA (MB) in London. “Functioning banks will be important to support any domestic economic revival.”
Greece’s 2 percent bond due in February 2023, among the new securities offered March 12, trades at 25 cents on the euro, while the yield has risen 243 basis points to 20.37 percent. Elections scheduled for May 6 promise a hung parliament based on opinion polls, raising questions about the nation’s ability to push through the austerity measures needed to keep bailout money flowing from the European Union and International Monetary Fund.
Private creditors had to take a 53.5 percent loss on the nominal value of sovereign securities in the debt swap. The country’s financial institutions, including National Bank of Greece SA, were among the biggest casualties of the 206 billion- euro debt restructuring, the largest in history.
“Many issues can’t wait until after the elections to be addressed,” Papademos told his cabinet on April 11 when he announced the date of the vote. “We have to specify the conditions for the bank recapitalization, which is essential for enhancing the economy’s liquidity.”
The IMF, which is helping finance Greece’s second rescue package, estimates the debt restructuring will mean impairments of about 22 billion euros for the country’s banks. That compares with the industry’s tier 1 capital, a key measure of a bank’s strength, of 23.8 billion euros as of September. In addition, banks had non-performing loans equal to 14.7 percent of total lending at the end of September, the IMF said.
“Bank solvency has become an acute problem” in Greece, the IMF said in a report released March 16. “Regulatory capital will be wiped out for four banks representing 44 percent of system assets, while the remaining banks would end up significantly undercapitalized.”
The IMF, EU and European Central Bank, the troika of agencies overseeing the Greek financing, plan to help capitalize banks with incentives for private investors. The goal is to bring core tier 1 capital to 9 percent of assets by the end of September.
National Bank shares advanced 13 percent since the start of the year in Athens trading on optimism about a recapitalization. Alpha Bank SA (ALPHA), the nation’s third-largest lender, more than doubled after scrapping a plan to team up with bigger rival EFG Eurobank Ergasias SA (EUROB) because the additional capital required for a combined entity would outweigh the benefits. Eurobank shares have added 80 percent.
Capital-raising plans are due this month. Banks are set to report full-year earnings on April 20, when they reveal the scale of their losses from the debt swap.
Inspectors from the so-called troika have to sign off on the recapitalization plans before they can be implemented. Greece is due to receive a 25 billion-euro first tranche of funds from the European Financial Stability Facility for the recapitalization, half of the total public funds earmarked.
It will take more than that to get the Greek economy going, said Lefteris Farmakis, a rates strategist at Nomura International Plc in London. Bank deposits by businesses and households fell for a second month in February, down 19 percent from a year earlier, the Bank of Greece said on March 29.
“Obviously recapitalized banks are a necessary condition for revival, but not a sufficient one,” Farmakis said. “Assuming they are this does not mean that credit will flow into the economy immediately. For this to happen, deposit trends need to stabilize and the government needs to show that they are somehow on track in executing the program.”
The plan includes incentives for private investment in the banks such as rights for shareholders to purchase the government’s stake and safeguards for buyers of convertible bonds, according to the IMF report. The Greek stability fund will continue to have voting rights in the event of strategic decisions related to the banks to avert the risk of asset stripping by investment funds, it said.
Outstanding issues include the price at which the state and private investors will buy the shares and the mix of equity and contingent convertible bonds, known as CoCos, according to a note this week from HSBC Pantelakis Securities SA.
Failure to persuade private investors to shore up the banks will mean they will be controlled by the Greek state, which sparked the sovereign debt crisis when the government of then- Prime Minister George Papandreou revealed that the country’s deficit was twice what was previously disclosed.
Pumping funds into the banks may become a campaign issue as parties vie to win votes from an electorate that partly blames banks for tax increases and also for spending cuts the nation is having to endure to keep Greece in the euro.
Before he was ousted in November and replaced with Papademos, Papandreou was adamant that the state control the banks in the event of any recapitalization. The Pasok party, formerly led by Papandreou, has 12.5 percent support among voters, while New Democracy, headed by Antonis Samaras, is on 17 percent, according to the survey of 1,206 eligible voters by Pulse RC for Tipos tis Kiriakis newspaper published on April 14.
“Should the banks be deemed defeasance structures, their assets would then need to be brought onto the nation’s balance sheet, escalating the public debt further,” said Tsirigotis at Mediobanca. That is “something all stakeholders will want to avoid,” he said.
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