• Bill to be put to a vote in country's parliament on Saturday
  • Eurobank, Alpha announce bond swap offers to boost capital

Greece’s government submitted a bill setting the rules for the recapitalization of the nation’s battered banks on Friday, as lenders sought to address shortfalls from minimum regulatory capital requirements through bond swap offers.

Common shares, preferred shares, as well as other financing instruments, including unsecured senior liabilities, can be bailed in before a financial institution is eligible to use the public backstop of the state-owned recapitalization fund to cover its shortfall, according to the draft bill posted on the Greek parliament’s website.

The European Central Bank is set to announce the results of a so-called comprehensive assessment of the books of Greek lenders on Saturday. This is likely to show a total combined capital hole of about 15 billion euros ($16.5 billion) for the country’s four biggest banks, half of which will have to be covered through public funds, Managing Director of Teneo Intelligence Wolfango Piccoli wrote in note to clients on Thursday.

The ECB’s assessment comprises of an asset quality review of the balance sheets of National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AE, and a “stress test” of the findings under two different macroeconomic scenarios. Lenders will ask their shareholders and bondholders to voluntarily offer to plug any holes identified, before resorting to a 25 billion-euro state backstop. Taxpayers’ funds will come from euro-area emergency loans under Greece’s latest bailout agreement.

The state-owned Hellenic Financial Stability Fund will acquire shares with full voting rights in Greek lenders in exchange for its participation in any capital-raising actions, according to the draft law. The price of the new shares will be set through a book-building process carried out by each financial institution, with no rights offering for existing shareholders. The fund can also cover part of the hole through contingent convertible securities, with the mix between shares and so-called CoCos subject to approval by the Greek Cabinet.

The bill, which will be put to a vote in the Greek parliament on Oct. 31, gives the HFSF’s representative on bank boards the power to call a general shareholders meeting, limit executive pay, or block any other decision which can potentially endanger deposits. Salaries of bank managers can’t exceed the pay of the governor of the Bank of Greece and credit institutions aren’t allowed to distribute bonuses to board members while their banks receive state aid.

Bond Swaps

The capital needs arising from the baseline scenario on the ECB’s stress test will be smaller than anticipated, while supervisors will also take into account banks’ restructuring plans and liability management strategies when determining how much additional funds each lender has to raise, a Greek central bank official told reporters in Athens earlier this week.

Eurobank and Alpha announced plans for a bond swap this week, joining Piraeus in seeking to pare debt and reduce liabilities on their balance sheets before the publication of the stress test results. The tender to exchange bonds for shares or cash is intended “to eliminate or reduce the amount of state aid which may otherwise be needed to cover the capital requirement, mitigate the degree of mandatory burden-sharing that may be imposed and reduce the risk of resolution actions being taken,” Eurobank said in a statement on Thursday.

Greek banks cleared the hurdle of a pan-European review in 2014 thanks to capital increases and restructuring plans approved by the European Commission, only to see their solvency put to the test after six months of wrangling between the anti-austerity government of Alexis Tsipras and its creditors this year. They have bled about 43 billion euros in deposits over the past 12 months amid doubts over Greece’s place in the currency bloc.

Bank deposits held by households and businesses in Greece
Bank deposits held by households and businesses in Greece

Greek bank shares have lost more than 70 percent of their value in 2015, as lenders struggle to contain the fallout from political uncertainty and six years of recession which left them with some 100 billion euros of non-performing loans. The benchmark FTSE/Athex Banks Index dropped 5.6 percent at 1p.m. local time on Friday in Athens.

Banks remained closed throughout July, after a standoff between Tsipras and euro-area members triggered a run by savers, with long lines forming in front of ATMs after the 41-year-old prime minister called a referendum on the bailout terms presented by creditors. Lenders reopened with capital controls and limits on withdrawals in place and rely on more than 80 billion euros of Emergency Liquidity Assistance extended by the central bank to stay afloat.

The government has said restrictions will be eased once the recapitalization process is complete and that it aims to lift capital controls altogether by mid-2016.

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