ECONOMY

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 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.

?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.?

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, the nation?s third-largest lender, more than doubled after scrapping a plan to team up with bigger rival EFG Eurobank Ergasias SA because the additional capital required for a combined entity would outweigh the benefits. Eurobank shares have added 80 percent.

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