Greece will probably be the proving ground for the European Union’s new rules on resolving failing banks, according to analysts at Barclays Plc.
Greece’s euro-area creditors in July made transposition of the EU’s Bank Recovery and Resolution Directive into national law a precondition for fresh bailout talks. The BRRD gives regulators wide-ranging powers to recapitalize stricken lenders with the aim of maintaining the financial services an economy needs and without recourse to public funds.
“This would be the first chance for creditors to see the new European bank legislation ‘in action’ and it may make for uncomfortable viewing,” analysts led by Christy Hajiloizou wrote in a note published late Thursday. “Specifically, we expect non-preferred creditors to suffer losses as far up the liability stack as senior unsecured bondholders in a resolution.”
The European Central Bank’s supervisory arm will probably attempt to ensure private stakeholders and creditors make as large a contribution as possible to the recapitalization of the lenders, the analysts wrote. The ECB wants to create a precedent for future bank resolutions, meaning the process will “likely have broader implications for European bank credit.”
Senior bonds of the four largest Greek banks are quoted at between 53 cents on the euro for Eurobank Ergasias SA’s 295 million euros ($328 million) of 4.25 percent notes due in June 2018, and about 68 cents for Alpha Bank AE’s 3.375 percent debt maturing in June 2017, data compiled by Bloomberg show. The prices are too high, according to Barclays.
‘Close to Zero’
“We estimate recovery would be close to zero in a bankruptcy given their heavily encumbered balance sheets,” the analysts wrote.
The BRRD’s most widely watched attribute is the ability it gives regulators to convert senior bonds to equity or write down their value. In Greece that tool doesn’t become available until Jan. 1. Barclays expects the resolution of the Greek banks to be addressed before then using different methods.
“This does not preclude the use of other resolution tools, such as transfer of senior bonds to a ‘bad bank,’” the analysts wrote. “We would still expect final recovery to be significantly below current cash prices.”
For bondholders, the best solution would be no resolution, with private capital raisings, or recapitalization under state-aid rules, according to Barclays. While that can’t be ruled out, “it would be would be counter to the political, economic and regulatory incentives of the ECB and euro area.”