Greece?s two main political parties, the country?s international lenders — known collectively as the troika — and top bankers want to see the country?s four major lenders recapitalized with private and public funds in order to minimize state influence in the way they are run. However, heavy losses registered in 2011 due to the implementation of the private sector involvement plan (PSI) and the impact of recession, which is evident in deteriorating loan quality trends, suggest all or at least three of the country?s biggest banks will likely face nationalization in the coming months and quarters. This is definitely not good news for their shareholders but should not be allowed to translate into bad news for the Greek economy as well.
The country?s four largest lenders — namely National Bank of Greece, Alpha Bank, Eurobank EFG and Piraeus Bank — reported dismal 2011 financial results last Friday, with group losses after tax exceeding 28 billion euros. Losses from bond and state-guaranteed securities linked to their participation in the biggest ever sovereign debt restructuring surpassed 23 billion euros, accounting for the lion?s share of group losses.
The hit was large enough to leave most of them with negative equity capital. According to bankers, the lenders with negative equity would not have been allowed to operate as ongoing concerns under normal circumstances if the Hellenic Financial Stability Fund (HFSF) had not given assurances it will provide up to 18 billion euros in total for their future share capital increases. Local banks deemed viable by the Bank of Greece will have to be recapitalized by early fall and up their capital adequacy ratio (core Tier I) to 9.0 percent.
It is noted the second Greek bailout package has set aside resources of 50 billion euros for bank recapitalization needs and resolution costs. The HFSF had some 1.5 billion euros in cash and recently received the first tranche of 25 billion euros in the form of EFSF bonds. The second tranche of 23.5 billion euros is to be disbursed in June.
All policymakers and market participants agree that shoring up the banking sector is imperative for providing credit to the private sector and stabilizing the Greek economy. So it is somewhat ironic the Greek authorities did not come up with the much anticipated bank recapitalization plan by April 20, the new deadline for banks to report their 2011 financial results, although they reportedly extended the deadline for this reason. Surprisingly, on April 20, the Finance Ministry again extended the deadline — to end-May — for the two listed state-controlled banks, ATEbank and Hellenic Postbank (TT), widely perceived as heading for resolution.
In our view, the pundits are right in seeing political considerations and insufficient technical expertise behind the authorities? failure to come up with the bank recapitalization plan on April 20 and the subsequent decision about ATE and TT.
To back up their first argument, the pundits point to proposals aimed at providing incentives to private money to participate in the recapitalization of the banks. The proposals ignored EU rules on competition and state aid, they say.
Some of them even suggest the authorities had underestimated the amount of funds needed for recapitalization and resolution costs in the first tranche, but this could not be confirmed by official sources.
The political motive is more evident in the decision regarding ATE and TT since both state-controlled lenders will likely have to lay off thousands of employees following the restructuring. Obviously, this would not have been to the benefit of the two main parties backing the coalition government prior to the May 6 elections.
Whatever the case, it is fair to say the specter of nationalization in the coming months or quarters looms larger than ever for all or most Greek banks, following the release of 2011 results. This is more so if one takes into account the additional capital needs from BlackRock?s diagnostic tests on their loan portfolios, which turned out to be milder than expected initially according to bankers, and other risks.
It is easy to understand why it is very difficult for private investors to participate in such capital-raising exercises. Putting fresh money of, let?s say 8 billion euros, in a bank with a negative equity of 4 billion euros to be back in black to the tune of 4 billion means losing half of the money.
One has to have both great confidence in the ability of the management team to restructure and turn around the bank fast and be very bullish about the prospects of the Greek economy to risk one?s money. Obviously, it is easier for someone to invest in a bank with positive equity, but even then the prospects of the home economy matter a lot.
Of course Greek banks count on asset sales and other initiatives to raise a few billion euros and cover part of the gap. But analysts question whether they will raise the amount of money they hope for in the next few months and quarters, citing various reasons.
Undoubtedly, local banks face an uphill battle in luring private investors to their share capital increases in the next few months to cover heavy bond losses due to PSI and rising nonperforming loans as the recession bites and the unemployment rate hits new highs. Following the release of 2011 financial results, avoiding nationalization amounts to mission impossible for some local banks and this is bad news for their shareholders. It is up to the troika not to let this become bad news for the Greek economy.