The international economic crisis shows signs of easing but it may not be so for the eurozone and Greece in particular, which were hit relatively late. So, it is prudent that local banks should further strengthen their capital base. It may not be advertised but the top brass of the Greek banks have another reason to raise money this way. Namely, the likelihood that the country’s next general elections will be held early. National Bank, the country’s largest lender, recently raised about 1.25 billion euros via a rights issue in a bid to beef up its capital base and have more ammunition for new acquisitions outside Greece. According to insiders, the bank was ready to pull the trigger a few times in the last eight months but chose to proceed with the rights issue this time and obviously did the right thing. The issue was oversubscribed more than two times. Hellenic Postbank preceded National’s with its successful 526-million-euro rights issue but it was an easier one because of the smaller free float. Other smaller lenders, such as Attica Bank and Aspis Bank, are in the process of proceeding with or have approved a rights issue. However, the country’s other major lenders, such as Eurobank, Alpha Bank and Piraeus Bank, have either stated or signaled their unwillingness to follow the same path for the time being. One should respect their decision but it is widely expected that they will boost their capital base in a similar fashion in the months ahead or in the first half of 2010. The advocates of this view argue that the rights issue has given National an edge over the competition which the other large banks cannot ignore. In addition to beefing up liquidity and regulatory capital, National Bank’s market capitalization may approach 12 billion euros when the new shares start trading in early August, while the other banks’ capitalization will likely remain in the 3- to 4-billion-euro range. In other words, the capitalization gap will increase or stabilize and this is something the major shareholders of the other large banks would not like at all. Of course, one may argue that, at this point, some of the latter may not want to commit the necessary funds to maintain their current participating interest. However, senior executives at the three large private banks are smart enough to take into account another important factor in making their decision: the political factor and more specifically the next general elections. The main opposition party PASOK has made it clear it would like early general elections to be held next spring, when Parliament elects the new president of the republic. PASOK currently leads the ruling conservatives in the polls and has a good chance of winning the elections. Under normal economic circumstances, private banks may have shown limited interest but this time around things are different. The state holds preference shares of those banks in exchange for the five-year bonds given to them in the framework of state aid. The state is even represented on the board of the banks by people who have the right to veto decisions relating to executive pay, dividend policy etc. Most of the appointed state commissioners have come from the market and have not caused a headache for credit institutions with demands viewed as unrealistic by bankers. However, it is not sure that the new commissioners who will be appointed by the new government will be of the same breed. There is always the possibility that they will want to show that they are tougher on banks than their predecessors, playing the populist card. It is certain that this would irk the top brass of Greek banks, even if some, most notably the chairman of Alpha Bank, Yiannis Costopoulos, nicknamed «the fox» in local banking circles, has successfully dealt with thornier problems in the 1980s. One sure way that these banks can become disentangled from the state is to pay back the amount of aid received and buy back the preference shares. Given the need to further strengthen their capital base in order to more comfortably absorb a stronger hit from nonperforming loans in the second half of 2009, the banks have no choice but to seriously consider proceeding with their own rights issue at some point before the next general elections. Of course, such a decision will be taken more easily if the global stock market rally continues. Ultimately, when weighing the pros and cons of a rights issue following National Bank’s successful move, the large Greek private banks will have to consider the political risk factor associated with the country’s likely early general elections next spring.