Greek Senior Bank Bondholders Risk Imposed Losses After Aid Deal

NATIONAL BANK OF GREECE RESULTS
Photographer: Kostas Tsironis/Bloomberg

Greece’s bailout puts senior bank bondholders explicitly in line for losses because the deal requires the country to approve reforms as a condition for aid.

International creditors led by Germany are demanding that Greece agree by July 22 to adopt the European Union’s Bank Resolution and Recovery Directive, known as the BRRD, which makes it easier to impose losses on senior creditors and depositors. Greece’s existing insolvency laws exclude a bail-in of the debt, according to Fitch Ratings.

Greek Prime Minister Alexis Tsipras bowed to demands from European creditors on Monday in exchange for a bailout of as much as 86 billion euros ($95 billion) that will keep the country in the euro zone. A 25 billion euro recapitalization of the banks, which have have been shut for two weeks to prevent their collapse, may not be enough.

“The landscape appears to be set for the banks to be restructured and for the potential bail-in of bank debt,” said Michael Doran, a partner at law firm White & Case in London, who advised on the resolution of Cypriot banks in 2013. “The introduction of the BRRD in Greece materially impacts bondholders’ positions. I don’t see how bank bondholders are going to come out of this happy.”

Completely Safe

Banks will be completely safe and won’t require a bail-in after the recapitalization, Economy Minister George Stathakis said in Bloomberg TV interview with Olivia Sterns.

Senior unsecured debt in Alpha Bank AE, National Bank of Greece SA, Eurobank Ergasias SA and Piraeus Bank SA has risen about 10 percent to about 40 cents on the euro since the deal announcement, according to data compiled by Bloomberg. That compares with a 43 percent increase for notes sold by Hellenic Petroleum SA.

Investors face losses or equity conversions ranging from zero to 9.1 percent on 1.9 billion euros of senior bonds sold by the four banks if bailout funds are delivered in full, according to Alberto Gallo, head of macro credit research at Royal Bank of Scotland Group Plc. Write downs rise to as much as 43 percent without the funds, he wrote in a report on Monday.

Damocles’ Sword

“As a bondholder you have the Damocles’ sword of bail-in hanging over your head,” said George Satlas, fund manager at Eurobank Asset Management in Athens. “Bank bonds didn’t pick up as much as corporate bonds because the outlook is still uncertain.”

The EU’s directive was developed after the global financial crisis to protect taxpayers from paying to rescue failed banks. All member states are required to apply the rules by 2016.

The bail-in clauses allow authorities to recapitalize a failing lender by writing down its liabilities or converting them to equity so the bank can continue operating.

Authorities can instead use the rules to split a struggling bank into two -- a good bank and a bad bank -- with one half continuing to operate while the other is wound down. Bank creditors can either remain with the old bank and undergo losses as part of its liquidation or be transferred to the new bank and have their claims reduced or converted into equity.

“What this means for bondholders is still to be discovered,” said Olly Burrows, London-based financials analyst at CRT Capital. “The biggest concern for all of us is still the execution risk, it’s not a done deal.”

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