Deal banishes haircut worries


The new recapitalization procedure for Greek banks will follow the model used successfully in 2012, with the separation and liquidation of unsustainable lenders and assets, thereby putting an end to households’ and enterprises’ fears of an across-the-board haircut on deposits.

Monday’s preliminary agreement for a third bailout provides for the investment of up to 25 billion euros in the second recapitalization of Greek banks in three years, while the government must immediately incorporate the European Union’s 2014 directive regarding the streamlining of banks in national legislation. The directive provides for 8 percent of the banks’ needs to be covered by the banks themselves: first by their shareholders, then by bondholders and if that is not enough, by those with deposits of over 100,000 euros.

Therefore, while the directive does introduce a bail-in process, deposits up to 100,000 euros per depositor per bank will be shielded from a haircut – i.e. the vast majority of households’ accounts.

Senior bank officials estimate that even deposits of more than 100,000 euros will not be affected. Although this cannot be ruled out yet, officials agree this is not the most likely of developments now.

The eurozone summit decided on Monday that, in association with the Single Supervisory Mechanism (SSM), the European Central Bank will proceed to fresh stress tests on Greek banks in the fall to determine their capital requirements. Then the options for the coverage of their needs (sale of subsidiaries, cuts in spending, departure from foreign markets etc) will be discussed with the bank administrations, with the rest to be covered by private shareholders.

If banks fail to attract enough private capital, this will trigger the bail-in process and the lenders deemed sustainable will be recapitalized through the 25-billion-euro package, with the rest broken down into good and bad parts. The good parts (deposits and performing loans) will be passed on to other banks while the bad parts will be liquidated.