Greek bank debt plummets as investors head for the exit

The price of Greek bank debt hit all-time lows this week, shutting off their access to wholesale funding and increasing their reliance on central bank funding.

Greek lenders that enjoyed something of a renaissance last year, allowing them to raise 2.25bn in the bond market saw prices collapse and yields spike after anti-austerity party Syriza won last Sunday’s elections, stocking fears of a potential Greece exit from the eurozone.

A 500m March 2017 bond for Piraeus Bank was quoted just below 22% on Friday, a jump from the 5.125% yield at which it priced in March last year.

A similar picture could be seen across the sector, with Eurobank’s 4.25% 2018 bond hitting 17.35%, Alpha Bank 3.375% 2017s hitting 18.29% and National Bank of Greece’s 4.375% 2019s hitting 16.29%.

“Before the Grexit worries, banks were looking actually quite descent. And assuming there is a liquidity backstop, it was an interesting long position and one of these «recovery stories»,» said one investor.

“Until there is a strong and credible commitment from the EU/Greek government that ensures emergency liquidity for banks, these remain un-investable to me.”

His view was echoed by other real money investors and bond syndicate bankers.

“I don’t think they will be able to access the market anytime soon,» one banker said. «I would say that they are shut out of the market for at least six months, if not longer.”

Another investor said that the price moves had been exacerbated by investment banks’ reluctance to provide liquidity in the bonds, adding fuel to the fire and making the situation worst than it already was.

Fears of deposit outflows from the banks have increased in recent weeks.

“Several banks noted the numbers discussed in the media of a deposit outflow of about 10bn or more since mid-December 2014, with 3bn in December and about 8bn in January,» Citigroup analysts, who met the four major banks this week, said in a note.

They added that the outflows had been much smaller on Monday January 26, the day after the Greek general election, compared to the prior week.”

“We will have to wait and see the policies that the government announces in the coming days on this. If they can arrest the outflows, then everybody can move on,» said Darren Ruare, head of fixed interest at Investec Asset Management.

Greek banks have been heavily dependent on the ECB for funding, but this is contingent on Greece remaining within the EU support programme.

Also, that the ECB is set to withdraw eligibility of retained government-guaranteed senior unsecured bonds as collateral for repo purposes from March 1 2015 will likely add further strain, according to Barclays.

Banks could also resort to the Emergency Liquidity Assistance (ELA) from the Bank of Greece, but this has the potential to be capped, is more costly (at 1.55%) and is subject to ECB governing council approval.

Barclays believes that ELA funding for Greek banks is likely to become crucial, along with the ECB’s decision to keep credit lines open.

Reports are circulating that Piraeus Bank, Eurobank and Alpha Bank have already applied for ELA funding as a precautionary measure.

Restructuring risk

Immediate access to liquidity is not the only risk faced by Greek banks. Barclays analysts warned in a note that a potential sovereign debt renegotiation could have an impact on their solvency.

“While bank sovereign debt holdings are significantly lower post the Public Sector Involvement (PSI), they remain significant relative to the size of the banks’ capital bases for all banks except Piraeus,» they wrote.

According to Barclays, direct Greek government exposure as a percentage of Common Equity Tier 1 is just below 90% for NBG, around 45% for Eurobank, 40% for Alpha and under 10% for Piraeus.

There is also the prospect of Syriza seeking debt forgiveness of some of the banks’ non-performing loans, which could hit solvency further.

An additional worry for investors is the scarcity of Tier 1 or Tier 2 bonds that would act as a loss-absorbing cushion for senior unsecured debt should a bank run into trouble.

While reported CET1 ratios are robust, averaging 15%, this lack of loss-absorbing capacity has contributed to the weak performance of the senior bonds, Barclays analysts wrote in their note.

Silver lining

While the picture looks grim for Greek banks, other European banks have not been impacted and spreads, even in the periphery, have remained tight.

“To be honest, we feel quite removed from Greek bank funding nowadays. Even if Greek banks couldn’t fund, I just don’t really see it making much difference to financials as a sector,» said a third investor.

And should the election outcome eventually lead to Greece’s exit from the euro, many peripherals would be in a similar boat, he added.

“If there were actually a Greek exit, we’d expect risk premiums to rise generally for non-German continental Europe, but I wouldn’t expect it to be material nor prolonged, with the ECB technical factor supporting the market.”