Bankers haunted by their illusions
A year or so ago, Greek bankers were in favor of the debt buyback solution instead of the proposed private sector involvement (PSI) as a means of cutting the debt burden, thinking that they could escape huge losses from writing down their bond portfolios in the hope of keeping control of their banks. Just a few days ago, they came out against the bond buyback agreed by the Eurogroup, arguing that it will force them to forgo future gains – proof that even sophisticated people can have illusions.
In the last Eurogroup statement on Greece, it is mentioned that the country will consider “certain debt reduction measures in the near future, which may involve public tender purchases of the various categories of sovereign obligations.”
Assuming a positive outcome of the possible debt buyback scheme, the euro area member states would consider a number of initiatives such as interest rate reductions, an extension on loan maturities and a deferral of interest payments on EFSF loans.
It is clear by crunching the numbers that the debt buyback should result in a net debt reduction of some 20 billion euros or 10-11 percent of gross domestic product (GDP), for the Greek public debt ratio to drop to 124 percent in 2020 from an estimated 175 percent in 2016. With the average price of the Greek strip – as the new, post-PSI Greek bonds are known – at around 28 at the close on Friday, November 23, it would require some 10 billion euros to buy back and retire 30 billion euros of bonds so the resulting net debt reduction would come to around 20 billion.
Since local credit institutions held around 15 billion euros of post-PSI bonds and the debt reduction initiatives to be taken by the eurozone member states as well as the International Monetary Fund’s continuing funding of the Greek program hinge on the success of the debt buyback, their participation in the operation is a no-brainer.
Even if they do not want it, it is inevitable that participation would be imposed on them “by the authorities who can pull their ears,” as one analyst put it.
This does not mean bankers are wrong when they argue the debt buyback will force them to forgo potential future gains. Banks have marked the bonds at between 25 and 35 percent of their nominal value in their books and would have been paid coupons in coming years and get back 100 at maturity.
However, holding onto the Greek bonds would not have made the difference in attracting private investment interest in our view.
Of course, top bankers hoped that enough private investors would have signalled their intention to participate in the planned share capital increases to keep banks in private hands if the international creditors agreed to a credit enhancement scheme of these bonds, including exchanging them with European Financial Stability Facility (EFSF) bonds at par. Still, even this argument is disputed by others who see a better trade for their foreign shareholders. According to them, it is better to outright buy Greek bonds at a heavy discount from their face value rather than purchase bank shares to benefit from bond appreciation after the proposed EFSF bond swap for Greek bonds at par.
One should take notice that the shares of major local banks have sustained sharp losses in the last month or so after recording a big rally since last June on expectations Greece will remain in the eurozone and that lenders will be able to attract enough money from private investors to be run privately.
The sharp losses have landed the market value of the National Bank of Greece at 1.26 billion euros and Alpha Bank’s at 822 million at the close of Friday’s session on the Athens stock exchange. The market capitalization of Piraeus Bank stood at 400 million euros and Eurobank’s at 382 million. It is reminded that Eurobank is to be absorbed by National Bank while Alpha Bank is to absorb Emporiki Bank.
It is generally accepted that Greek retail investors, who account for more than 60 percent in the daily turnover of bank stocks on the Athens bourse, have been behind the rally in the last few months. A number of experts believe that these investors are actually poorly informed by the local media about the real prospects of each bank for various reasons.
To make their point, they say that foreign institutional investors have been on the other side for awhile but very few in the market are aware of this. These investors have been selectively shorting Greek banks – that is selling their shares without actually buying them – for a while via the derivatives market, i.e. futures, put options, etc. They have done so despite incurring high rolling costs and wide bid-ask price spreads. It is obvious that these sophisticated players would not have acted this way if they believed in the prospects of local banks, according to experts.
All-in-all, Greek bankers should never have had any illusions about their banks’ participation in the upcoming debt buyback operation. Nevertheless, their unofficial objection to the current buyback also highlights how wrong they were last year when they sought a bond buyback instead of the PSI in the hope of escaping a large-scale recapitalization by state funds and the prospect of nationalization down the road.
