The protracted fall of the Athens stock market has undermined, more than anything else, the confidence of the average Greek citizen in stock investments and has increased risk aversion. This has created a vicious cycle with index heavyweight banks caught in the middle. But rather than endure the pain inflicted by it, banks should strike back and boost their earnings by aggressively marketing capital guarantee products. As of last Friday, the MSCI (Morgan Stanley Capital International) Greece index was down 33.60 percent year-to-date but up 5.44 percent month-to-date while the benchmark MSCI-EAFE index was down 22.68 percent year-to-date and up 3.42 percent month-to-date. In other words, the Athens bourse continues to underperform year-to-date the benchmark index used by foreign passive institutional investors, although it outperformed it in the last month. This underperformance, which comes on top of a previous year of heavy losses, coupled with other events, such a deteriorating economic and earnings outlook, has shaken many local investors’ confidence in the stock market. This, in turn, has turned net inflows into net outflows, depriving the cash-strapped bourse from badly needed cash. The poor performance of the Athens bourse is known to have hurt local banks’ earnings last year and in the first half of 2001. Nine-month financial results to be announced in the next few weeks are expected to show the same pattern. Part of the problem arises from local banks’ dependence on equity-related income which takes the form of trading and asset-gathering revenues as well as investment banking revenues. Although investment banking revenues constitute a small portion of total operating revenues, ranging from a high of 14.5 percent for the Bank of Piraeus in 2000 to a low of 2.6 percent for the National Bank of Greece last year with a sector average of 5 percent for the largest five banks and an estimated less than 3 percent this year, trading income is a different story. It ranged from a high of 16 percent of total operating revenues for Commercial Bank last year to a low 2 percent for EFG Eurobank Ergasias. Asset-gathering income, which made up 5 percent of total income for Alpha Bank and EFG Eurobank Ergasias versus 2 percent for the Bank of Piraeus in 2000, is also expected to drop this year but is not negligible. The five large banks’ reliance on equity related income is fully or partially offset by the growing interest income as net interest margins widen and loan volume growth is strong. Nevertheless, banks know they have to diversify their income base and rely less on interest income. To that extent, they should treat clients’ high risk aversion as a challenge not as a threat. They could do so by aggressively marketing different forms of capital-guarantee financial products. Faced with clients’ money earning a mere 2 percent to 3 percent return in bank deposits and repos but unwilling to commit them to the Athens bourse partly due to severe losses sustained in their stock portfolios, banks have no option but to push hard to get these capital guarantee products out to them. Capital guarantee products usually protect one’s initial investment 100 percent or less, depending on the structure of the product, and also offer either unlimited or clearly defined upside potential. These products, which may be linked to a well-known stock index, domestic or foreign, or to a foreign exchange rate such as euro/dollar, or to the price of a commodity such as oil, or a bond, can make the difference. To the extent that options on domestic stock indexes such as FTSE/ASE-20 and FTSE/ASE-40 are currently available, banks can easily roll out products on these two indexes and help break the ice in clients’ relationship with stock investing by offering them capital protection. In such a typical product, the banks get the money and invest a good deal of it in time deposits so that the initial capital is available at expiration. At the same time, banks invest a small portion of the proceeds in derivatives, usually European-style call options. If the index or the stock is above the options’ specified strike price at expiry, the bank exercises the option, and gets the difference between the market price and the strike price. The advantage of capital guarantee products, that a number of large banks already offer without much fanfare, is they can help boost banks income and earnings which is the gauge for the future performance of their stocks and bring some reluctant investors closer to the bourse. Given the importance of bank shares in shaping the Athens bourse’s course, this may come back to help them lift their equity-related income and create a virtue cycle. Capital guarantee products are not a panacea for bank profits. However, they, especially domestic equity-linked products, can turn out to be the right recipe in the present times of financial stress. They can boost banks’ income if marketed aggressively and indirectly prepare the return of local investors to the Athens bourse. What can Greece do to attract more foreign investment? According to Bakouris, there are things that can be done immediately, others that can be done in the medium term and, still others, act as constraints that have to be overcome through skillful advertising.