Eurogroup to vote on separate funding for credit sector recap

Greece and Cyprus are hoping to reap significant benefits from Thursday’s Eurogroup meeting of eurozone finance ministers as it is likely to discuss and maybe decide on the possibility of the direct recapitalization of eurozone banks from the European Stability Mechanism (ESM) without that money being considered part of their countries’ debt.

This is an instrument that would become available from fall 2014, when the single monitoring mechanism for European banks will be in full operation under the control of the European Central Bank and by which time the complete legislation package on the eurozone banking union will have also been voted on.

What is crucially at stake for Athens and Nicosia is whether the option will also apply retroactively – i.e. for countries that have already entered a streamlining program and have borrowed funds to recapitalize their banks. It is likely, though by no means certain yet, that the Eurogroup will approve that retroactive element in principle.

However, eurozone sources said on Wednesday that this will not have a full retroactive application, which would have wiped 50 billion euros off Greece’s debt. Instead, they say, each bank’s request for the use of that mechanism will be examined separately and, if approved, its home country would be expected to contribute between 10 and 20 percent of the funds required. The rest would be covered by the ESM, which would acquire an equivalent stake in each lender’s share capital, thereby buying it from the state and therefore reducing the state debt accordingly.

The ESM would then appoint a representative to each bank’s board, gaining a decisive role in all strategic decisions, and when market conditions permit, ESM will sell its stake to private investors.

Such requests will be accepted from fall 2014 at the earliest. If the Greek state is still the main shareholder of the systemic banks through the Hellenic Financial Stability Fund (HFSF), it will need to prove that it cannot bear the weight of the recapitalization by itself. The total funds for the direct recapitalization of banks will range between 50 and 70 billion euros, with the most likely amount being 60 billion euros.