Kiss of life to local banking system

Cabinet approved on Friday a temporary capital boost for banks, which will see the local credit system through until the recapitalization process is determined and completed.

The government?s decision provides for the creation of a special account at the Bank of Greece to which the bond from the Hellenic Financial Stability Facility (HFSF) destined for each commercial bank will be transferred in order to bolster their capital base. The bonds cannot be sold or transferred to third parties, but they will count as bank capital so as to ensure the stability of the local system.

This is a temporary solution to support the lenders until the final structure of the recapitalization is decided after the May 6 election. What is certain is that the process is now delayed and instead of concluding by end-September it is now estimated it will be completed by end-December. The interest rate with which the bonds will be given to banks will also be decided at a later date.

The bonds will be replaced either by shares or by convertibles as provided for by the terms of the recapitalization.

The HFSF has committed 18 billion euros to cover the losses of the country?s four biggest commercial lenders: National, Alpha, Eurobank and Piraeus. These funds originate from the first installment of 25 billion euros that the eurozone set aside for the recapitalization process.

That amount will secure those banks a capital adequacy (Core Tier I) index level of more than 8 percent, which renders them viable and secures their uninterrupted funding from the Eurosystem. Cabinet also discussed the distribution of capital to smaller banks.

The European Commission, the European Central Bank and the International Monetary Fund — collectively known as the troika — have made plans for 50 billion euros to be used for the recapitalization of Greek credit institutions, but bank officials estimate that less than 30 billion euros will be required after all. The second installment, up to another 25 billion euros, is expected this summer.