Economist: Recapitalising Greek banks

The damage

BANKS have been at the centre of Greece’s economic and financial misfortunes this year, as the radical-left Syriza party won an election and then became embroiled in a bitter struggle with the country’s international creditors. Deposits drained out of them on fears that the country would leave the euro and revert to the drachma, inflicting huge losses on depositors. Banks’ woes multiplied when the European Central Bank (ECB) refused to provide them with further liquidity, forcing the government to close them for three weeks during the summer and to impose capital controls. In the end, Greece managed to secure a third bail-out and stay in the euro. But the injuries the banks had sustained along the way seemed ruinous.

As a result, the €86 billion ($94 billion) bail-out from the European Stability Mechanism (ESM), the euro zone’s rescue fund, included a buffer of up to €25 billion, or 14% of GDP, to rebuild the banks. The exact amount would be specified once the supervisors had combed through their books. The ECB, which has directly supervised big banks in the euro zone for the past year, was to examine the four main Greek banks—Alpha, Eurobank, National Bank of Greece (NBG) and Piraeus. Greece’s central bank was to review Attica, a smaller lender.

The supervisors appraised the banks’ assets as of the end of June 2015 to see how many loans had soured owing to the economy’s travails under Syriza. They also gauged the banks’ resilience through a stress test, which simulated the effects of an even worse recession in 2015-17 than the European Commission was already projecting. The commission envisaged GDP declining by 2.3% this year and 1.3% in 2016 before growing by 2.7% in 2017. Under the supervisors’ “adverse scenario”, GDP would be 5.9% lower in 2017 than in the commission’s “baseline” forecast.

The supervisors’ findings, published on October 31st, were sobering, but less dire than expected in the summer. To maintain a capital ratio of 8% of risk-weighted assets at the end of 2017 under the adverse scenario, the big banks will require an injection of €14.4 billion, ranging from €2.1 billion for Eurobank to €4.9 billion for Piraeus. Attica will need €1 billion. That means the total necessary to put the banking system on a sound footing is €15.4 billion rather than the €25 billion originally assumed.

Moreover, the call upon bail-out money from the ESM, which will be made available in Greece via the Hellenic Financial Stability Fund (HFSF), should be even less than that. The ECB is expecting private sources to provide at least €4.4 billion for the four main banks—the capital shortfall under the baseline scenario. In fact, the four should be able to raise more than that. NBG, for example, is planning to sell Finansbank, its subsidiary in Turkey, which could raise around €3 billion. That compares to a total shortfall for NBG under the adverse scenario of €4.6 billion.

Moreover, any recourse to the HFSF will trigger a “bail-in” of some creditors, meaning that they would be obliged to contribute to the recapitalisation. Depositors will be excluded but banks currently have around €6 billion of preference shares and debt that could be bailed in, according to Nondas Nicolaides of Moody’s, a credit-rating agency. The threat hanging over such creditors, which include senior bondholders, will allow banks to drive a hard bargain with them when offering to exchange bonds for shares. Alpha, for instance, could get around €1 billion through such a deal out of the total of €2.7 billion in capital that it needs to raise.

Investors in Greek banks have had a torrid year (see chart). But for the adventurous there is a case for taking a punt. Political risk may have trumped financial calculations earlier this year, but it looms less now. Alexis Tsipras, the prime minister, has learnt the hard way that Greece’s creditors hold the cards. The hard-left faction of Syriza peeled away before a second election, in September, and Mr Tsipras won a new mandate on a more moderate platform.

As for the banks, they have been more sinned against than sinners all along. Before the euro crisis they were one of the better functioning elements of the Greek economy, which succumbed to fiscal mismanagement and political miscalculation. Indeed, the banks may find it easier to regain the trust of international investors than of domestic depositors, who are likely to remain wary of them until they feel more confident about Greece’s long-term future within the euro area.

The Economist