Yo-Yo Ride for Greek Bank Bonds and Stocks Spooked by ECB Review

General Views Inside The European Central Bank's New Headquarters

The European Central Bank's Headquarters

Photographer: Martin Leissl/Bloomberg
  • Alpha Bank and National Bank of Greece see bonds recovering
  • Greek lenders seen paying the price of political turmoil

As another week of wild speculation about the balance sheet review of Greek banks begins, spare a thought for investors who’ve had to follow the roller-coaster ride of their stocks and bonds.

Senior unsecured notes in Greece’s embattled lenders sank as low as 21 cents on the euro in July. Since then they’ve recovered in spite of explicit warnings from European leaders that creditors must take a hit before as much as 25 billion euros ($28.4 billion) is made available to recapitalize the banks.

Swings in the lenders’ bond prices reflect a year of turmoil that has also wiped out more than three quarters of the banks’ shares, taking them far below their book values.

Political Turmoil

After raising 8.3 billion euros from private investors last year, Greek lenders cleared the hurdles of two balance sheet reviews, only to see their labors spoiled by political turmoil. A standoff between the Greek government and its creditors resulted in the imposition of capital controls on June 29. 

Banks remained closed throughout July, as long queues formed in front of ATMs, following Prime Minister Alexis Tsipras’s decision to hold a referendum over the terms attached to the country’s bailout. While the banks have reopened, capital controls remain in place.

Having lost over 43 billion euros of deposits in the past year amid doubts about Greece’s place in the currency bloc, the banks now stay afloat on almost 90 billion euros in Emergency Liquidity Assistance from the European Central Bank.

Wealth Destruction

“The wealth destruction is just phenomenal,” said George Zois, a director on the distressed debt desk at Exotix Partners LLP in London. “Greek banks right now have been transformed into penny stocks.”

It’s not just hedge funds and private investors, like Fairfax Financial Holdings or Paulson & Co, who’ve been hit by collapsing share prices. Greek taxpayers are the biggest shareholders in the country’s four largest banks. So when prices hit record lows on Oct. 1, the value of their stake fell to 1.9 billion euros from about 17 billion euros a year ago.

The ECB is currently reviewing the damage caused by the political quarrel to the balance sheets of the four banks -- National Bank of Greece SA, Eurobank Ergasias SA, Alpha Bank AE and Piraeus Bank SA. Their capital needs are due to be announced by the end of the month.

"There’s been a noticeable softening of the rhetoric in recent weeks with the new government in place," said Olly Burrows, a London-based financial analyst at brokerage firm CRT Capital. While senior bank bondholders will probably still be expected to shoulder some of the burden, "it would not be surprising if a deep clean of the banks including senior bail-in was put off until another day," he said.

Capital Shortfalls

If shareholders can plug any potential holes that the inspectors identify in their baseline scenario, the senior bondholders won’t be asked to take any losses, Aristides Xenofos, the head of Hellenic Financial Stability Fund, the country’s recapitalization agency, told reporters in Athens on Sept. 30.

The HFSF could cover additional capital shortfalls in the tests’ adverse scenario, without requiring that senior bondholders take a hit first, he said. There are about 4.7 billion euros in outstanding senior bonds issued by Greek banks, according to data compiled by Bloomberg.

Alpha Bank’s 400 million euros of 3.375 percent notes due in June 2017 have risen to 69.6 cents, while National Bank of Greece’s 750 million euros of 4.375 percent notes due in April 2019 have risen to 62.3 cents on the euro, touching highs last seen in early June.

With the outflows of deposits stemmed as a result of a limit on withdrawals, the Bank of Greece announced last week a reduction in the level of life support available for the lenders to 87.9 billion euros from over 90 billion euros in mid-summer. Central bank loans have exceeded domestic household and business deposits since June.

Following the deepest and longest recession since World War II, Greek banks are struggling to manage about 100 billion euros in non-performing loans, about half of their total loan book.

With Bank of Greece data showing just 41 billion euros of provisions for those bad loans, bank shareholders are hanging on the ECB’s assessment of how much can be recovered.

“It’s challenging and at the same time fascinating to follow the new developments every day,” said Gildas Surry, a London-based analyst and portfolio manager at Axiom Alternative Investments. “You can sense some frustration from the analyst community in trying to anticipate the next move. ”

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