Greek banks redux: System reboot – Recapitalisation approaches the finishing line

FOR the past three years, foreign money has been flooding out of Greece. But the tide may be turning. This week senior managers from Alpha, the country’s third-largest bank, were in London and New York to raise private capital for a rights issue. Their roadshow is part of a much grander enterprise:

That became necessary once European rescuers decided in late 2011 that a second bail-out of Greece would require a big write-down of its public debt. The write-down brought the Greek banks low, because they held much of the debt. The bail-out package included €50 billion ($65 billion) for the Hellenic Financial Stability Fund (HFSF) in order to rebuild the banking system. Of this, €17 billion is covering losses in defunct banks. Another €5 billion is a reserve, in case more holes open up. Most of it, €27.5 billion, has been earmarked to recapitalise Greece’s four biggest banks—Alpha, National Bank of Greece (NBG), Piraeus and Eurobank.

If all that money were used, the four banks would end up being wholly owned by the Greek state, an undesirable outcome. But if a bank can independently raise at least 10% of its capital requirement, it can remain under private control. The four have until June 14th to come up with the money, which means that prospectuses must be approved and issued by the end of May. Eurobank has already fallen by the wayside and will be fully capitalised by the HFSF. Piraeus has said it will reach the 10% hurdle while NBG, whose chances looked negligible as recently as April, may also succeed.

Alpha is leading the quest. A consortium of international banks led by J.P. Morgan has underwritten its rights issue of €457m (the amount needed to reach the 10% threshold). Altogether, it is raising €550m, 12% of its capital requirement. Investing in what will be a predominantly state-owned bank might seem unappetising. But with each share that investors acquire they get a warrant to buy several more—in Alpha’s case 7.3—at the price of the rights issue (adjusted upwards by interest rates) within the next four and a half years. The lure seems to be working. Vassilios Psaltis, the bank’s chief financial officer, says that Alpha has received strong interest from foreign investors, including hedge funds, sovereign-wealth funds and rich families.

For long-term investors, the banking system which will emerge from the recapitalisation has its attractions: it will be much more concentrated than before the crisis. Then the four big banks held about 70% of banking assets in Greece, but some foreign-owned firms provided competition. Now that these have packed their bags, the four will command close to 95% of the country’s banking system.

Even so, these investments are not for the faint-hearted. One reason is that political risk abounds. Given half a chance, Greek politicians will meddle in the banks’ affairs. Much depends on the HFSF fulfilling its pledge to privatise its holdings according to a strict schedule.

But the main risk is that losses turn out to be heavier than expected. The capital requirements were based on an “adverse” scenario envisaged in late 2011. Last year Greece redefined what “adverse” meant as it came close to an exit from the euro. The resulting economic and financial damage leaves little room for manoeuvre. According to the IMF, the recapitalisation is sufficient to cope with non-performing loans reaching 40% of total lending. Worryingly, the ratio (including restructured loans) has already risen to 29.5%.

Investors taking stakes in Greek banks are making a leveraged bet on an eventual economic recovery. Though a return to growth next year looks increasingly plausible, it could be delayed, not least if sentiment sours again. However, completing the recapitalisation will in itself help to restore confidence. In this, as in many other ways, Greece’s economic prospects remain finely balanced.

Πηγή: The Economist