By Dimitris Kontogiannis

The tendency of politicians, bankers and others to kick the can further down the road and avoid tackling problems in a thorough manner has resulted in a deeper and more protracted recession for Greece. The recapitalization of the country’s banks, an important aspect of the economic recovery plan, is one such example and may well lead to extra funding needs in the years ahead.

In the European Union / European Financial Stability Facility financing of the second Greek bailout package, total funds of 145 billion euros were supposed to be disbursed over the 2012-14 period. About 48 billion euros in EFSF bonds were destined for the recapitalization of local banks.

It is noted the International Monetary Fund under the Extended Fund Facility (EFF) is scheduled to provide 28 billion euros to Greece over a four-year period, that is 2012-15. About 19.8 billion euros were to be disbursed in 12 equal quarterly installments until the end of 2014 and 8.2 billion in 2015.

As it is usually the case in the so-called IMF program countries, the Greek banking sector is set for an overhaul, which entails mergers, privatizations and the recapitalization of major banks with public funds. The goal is to make the remaining banks more financially sound, shore up depositors’ confidence and provide credit to viable companies and the economy in general.

However, the important restructuring of the Greek banking sector has fallen victim to political calculations, public relations matters and vested interests. As a result, the process has been delayed, depriving the economy of a lifeline.

Nothing exposes the mishandling of the bank recapitalization process more than the following, which very few have noticed in Greece.

The amount of 23.5 billion euros in EFSF bonds for the recapitalization of banks has become part of the next tranche, which is subject to the troika’s review, i.e. the report by the inspectors of the IMF, the European Commission and the European Central Bank in Athens.

This should not have been the case since the bank recapitalization was linked to the completion of the PSI (private sector involvement plan), the biggest ever sovereign debt restructuring in history, according to a number of analysts and investment bankers.

Through the Hellenic Financial Stability Fund (HFSF), Greece was supposed to get 25 billion euros in EFSF bonds for bank recapitalization to be disbursed around April, with the additional 23.5 billion to be made available in June.

The recapitalization of banks should have been completed by sometime this month so the capital adequacy ratio (core Tier I) of the remaining credit institutions would become satisfactory, namely above 9.0.

However, the failure of the previous government under Lucas Papademos to outline the specific terms of the bank recapitalization and have the relevant legislation voted through Parliament deprived the country of much needed funds and delayed the process.

It is noted that banks could use the EFSF bonds to get cheap liquidity from the ECB and pass it on to cash-thirsty local households and companies.

Of course, the previous government has the excuse of the early general elections in May and the repeat polls in June. However, it had the opportunity to pass the legislation on time but it balked. In one case, the draft was ready but did not reach Parliament.

Although no official explanation has been provided, pundits think the previous government decided against it for political reasons. According to them, the politicians who were responsible with the task acted as they did due to the risk of finding themselves in the political crossfire.

If the terms of the recapitalization favored the existing private shareholders of major banks, the politicians could have been criticized by the main opposition leftist SYRIZA party and others for putting private interests before the public interest and taxpayers.

On the other hand, the politicians could have felt the ire of the top management and the major shareholders of lenders if the terms made it more difficult for them to retain control of their banks. This would have been the case if shareholders were asked to put more money in the planned share capital increases of their banks than the 10 percent of the total amount required, according to various local press reports.

Still, what counts is what has happened. We are in early September and the banks have not yet been fully recapitalized, depriving the country’s economy of precious credit for months. Moreover, the delay has put 23.5 billion euros at risk since disbursement is subject to the EU/IMF review of the Greek adjustment program instead of being made available in the first half of the year according to the initial schedule following the successful execution of the PSI.

It is not the first time political considerations and personal calculations have cost the Greek economy output, jobs and credibility. However, the delay, the chosen bank restructuring process and the protracted recession may make it certain that local credit institutions will need more capital in coming years, increasing the total cost of recapitalization to Greek taxpayers.