Greek Prime Minister Lucas Papademos arrives for a cabinet meeting at parliament, in Athens. Photographer: Louisa Gouliamaki/AFP/Getty Images
Bloomberg News
Greek Election Makes Saving Banks Swansong for Papademos
As Greeks prepare for an election that’s unlikely to produce a clear winner, interim Prime Minister Lucas Papademos is struggling to complete his final major task: stopping banks from falling into state hands.
The government approved a law last week setting the framework for the Hellenic Financial Stability Fund, the state’s recapitalization fund. It included the authorization to give banks capital upfront and a possible plan to enable them to book smaller losses on the bonds issued in last month’s debt swap.
“The state will do what they can to keep the banks operating as living entities and avoid nationalizations where possible,” said Alex Tsirigotis, an analyst at Mediobanca SpA (MB) in London. “Functioning banks will be important to support any domestic economic revival.”
Greece’s 2 percent bond due in February 2023, among the new securities offered March 12, trades at 25 cents on the euro, while the yield has risen 243 basis points to 20.37 percent. Elections scheduled for May 6 promise a hung parliament based on opinion polls, raising questions about the nation’s ability to push through the austerity measures needed to keep bailout money flowing from the European Union and International Monetary Fund.
Private creditors had to take a 53.5 percent loss on the nominal value of sovereign securities in the debt swap. The country’s financial institutions, including National Bank of Greece SA, were among the biggest casualties of the 206 billion- euro debt restructuring, the largest in history.
Rescue Package
“Many issues can’t wait until after the elections to be addressed,” Papademos told his cabinet on April 11 when he announced the date of the vote. “We have to specify the conditions for the bank recapitalization, which is essential for enhancing the economy’s liquidity.”
The IMF, which is helping finance Greece’s second rescue package, estimates the debt restructuring will mean impairments of about 22 billion euros for the country’s banks. That compares with the industry’s tier 1 capital, a key measure of a bank’s strength, of 23.8 billion euros as of September. In addition, banks had non-performing loans equal to 14.7 percent of total lending at the end of September, the IMF said.
“Bank solvency has become an acute problem” in Greece, the IMF said in a report released March 16. “Regulatory capital will be wiped out for four banks representing 44 percent of system assets, while the remaining banks would end up significantly undercapitalized.”
Tier 1
The IMF, EU and European Central Bank, the troika of agencies overseeing the Greek financing, plan to help capitalize banks with incentives for private investors. The goal is to bring core tier 1 capital to 9 percent of assets by the end of September.
National Bank shares advanced 13 percent since the start of the year in Athens trading on optimism about a recapitalization. Alpha Bank SA (ALPHA), the nation’s third-largest lender, more than doubled after scrapping a plan to team up with bigger rival EFG Eurobank Ergasias SA (EUROB) because the additional capital required for a combined entity would outweigh the benefits. Eurobank shares have added 80 percent.
Standard & Poor’s affirmed its CCC long-term ratings on March 2 for the country’s four biggest banks, which includes Piraeus Bank SA. (TPEIR)
Earnings Reports
Capital-raising plans are due this month. Banks are set to report full-year earnings on April 20, when they reveal the scale of their losses from the debt swap.
Inspectors from the so-called troika have to sign off on the recapitalization plans before they can be implemented. Greece is due to receive a 25 billion-euro first tranche of funds from the European Financial Stability Facility for the recapitalization, half of the total public funds earmarked.
It will take more than that to get the Greek economy going, said Lefteris Farmakis, a rates strategist at Nomura International Plc in London. Bank deposits by businesses and households fell for a second month in February, down 19 percent from a year earlier, the Bank of Greece said on March 29.
“Obviously recapitalized banks are a necessary condition for revival, but not a sufficient one,” Farmakis said. “Assuming they are this does not mean that credit will flow into the economy immediately. For this to happen, deposit trends need to stabilize and the government needs to show that they are somehow on track in executing the program.”
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