Greek Bank Restructuring May Be Unavoidable Even With Bailout

Greece’s last-minute efforts to secure a 53.5 billion euro ($60 billion) bailout may have come too late to save the nation’s banks and their bondholders.

“Even with an agreement between the government and Europe, bank senior debt may need to be bailed in,” said Michael Doran, a partner at law firm White & Case in London. “Additional recapitalization tools may also be required given the scale of the problems.” Doran worked on the restructuring of Cypriot banks in 2013, which included seizing nearly half of all deposits over 100,000 euros.

Bonds of Greece’s four largest lenders remained below 40 cents on the euro on Friday, according to data complied by Bloomberg. Traders were offering 33 cents on the euro for National Bank of Greece SA’s 750 million euros of notes due April 2019.

The prices suggest investors still expect banks to restructure debt after the country’s economic crisis spurred depositors to withdraw about 40 billion euros between December and June. Greek Prime Minister Alexis Tsipras late Thursday offered to meet most of the demands made by international creditors in exchange for new support.

“The Greek banks have been badly damaged,’ said Thibault Colle, a Geneva-based portfolio manager at Union Bancaire Privee, which oversees $105 billion of assets. ‘‘All the money that’s left Greece won’t flow back in the near term. In fact, you might see further outflows.”

Capital Controls

Bank branches have been shut for two weeks and ATM withdrawals limited to 60 euros a day to help preserve cash. The country will introduce a new capital-controls decree by Monday aimed at gradually normalizing the banking system, Alternate Finance Minister Dimitris Mardas told reporters in Athens on Friday in comments broadcast by Mega TV.

Greece may protect two or three lenders in an industry restructuring, while shifting retail operations into a good bank and liabilities into a bad bank, said Doran, who also advised creditors during Greece’s 2012 debt restructuring. That would mirror programs in Cyprus and Iceland following financial crises.

A depositor bail-in for Greece is “inevitable,” Exotix Partners economist Jakob Christensen and analyst Nashwa Saleh wrote in a July 9 note to clients.

The country may merge Alpha Bank AE, Eurobank Ergasias SA, Piraeus Bank SA and National Bank of Greece, Reuters reported on Wednesday, citing unnamed officials. Mardas said Thursday he wasn’t aware of any such plans.

“Greek banks had restored capital adequacy to sensible levels,” Doran said. “The problem is that capital adequacy rules are designed to deal with isolated credit problems, not to withstand a tsunami of deposit flight.”