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No relief yet

2 November 2015 By Hugo Dixon

One stress test is over, but several more are looming. Alexis Tsipras received good news at the weekend when a stress test showed the top Greek banks need to raise a lowish 14.4 billion euros in capital. But the leftist Greek prime minister has to implement more tough measures before he can get the economy growing. Until then, he faces political risks, which could yet tip Greece back into crisis.

An assessment by the European Central Bank found that the four banks – Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank – have a collective capital shortfall of 14.4 billion euros in the so-called “adverse” scenario. This is less than the 25 billion euro maximum earmarked for bank recapitalisation as part of Greece’s latest bailout programme. What’s more, the banks will only need to find perhaps around half that amount in state aid. The rest they can probably get by swapping bondholder debt into equity capital, issuing shares to private investors and selling assets.

What this means is that Greece’s headline debt may be roughly 15 to 20 billion euros lower than earlier projections – peaking at a still eye-popping level of 190 percent of GDP, rather than 200 percent.

The top four banks also all stand a pretty good chance of raising the minimum capital required to avoid being effectively nationalised by the Greek state. They need to raise the entire capital shortfall identified under a base-case stress test – 4.4 billion euros in total – to avoid that fate.

Provided the banks can find the necessary base-case capital themselves, the Greek state will provide whatever capital they can’t raise under the adverse scenario on relatively generous terms. It will use money borrowed from its euro zone partners to buy a mixture of shares and contingent convertible bonds. The latter will not have votes and will only turn into ordinary equity if the banks’ capital buffers fall below a predetermined level in the future.

It is not certain that all four banks will be able to raise base-case capital privately. The biggest question mark hangs over Piraeus Bank, which has the largest base-case shortfall: 2.2 billion euros. After taking account of bond swaps and asset sales, it needs about 1.5 billion euros from private investors.

The main thing that could throw the capital raisings off track would be signs that Athens is bogged down on other parts of the bailout programme. If the banks then have to rely entirely on state aid, that won’t just increase Greek debt. It may push the whole recapitalisation exercise beyond the year-end deadline – something that could result in uninsured depositors seeing part of their savings forcibly converted into bank shares under new rules that would then kick in.

Tsipras needs to keep running to avoid such a blow to confidence. And there are other reasons he can’t afford to relax.

Cash from the latest bailout programme will only flow if Greece passes more milestones. The first 2 billion euro dollop will be used partly to pay money Athens owes the private sector. Such a cash injection will help counteract the tax rises and spending cuts the government is having to implement which will take cash out of the economy.

But to get this money, Tsipras is supposed to implement 49 measures, including liberalisation of closed professions and measures to crack down on tax evasion. So far he is behind schedule and has only done about two-thirds of the work.

The biggest prize, though, is debt relief. The euro zone has agreed to consider lightening the load of Athens’ borrowings – probably by lengthening the period it has to repay what it owes. But it will only start negotiations when Greece receives a pass mark in the first review of the new bailout programme.

To receive such a thumbs-up, Tsipras needs to implement a second raft of reform measures as well as agree budget cuts for the next three years. Although the details haven’t yet been set, these are likely to be politically tough. For example, farmers will need to pay higher taxes and big pension cuts will be required to compensate for a court ruling that declared previous reductions unconstitutional.

Athens is also supposed to strengthen the independence of its tax authority. Last month Tsipras sacked its boss.

The measures the government has pushed through are already causing a backlash. Farmers are threatening to bring their tractors into Athens and pharmacists have been on strike. As the prime minister pushes through even more unpopular measures, some of his parliamentarians may desert him and he could lose his wafer-thin majority. He might then struggle to put together a new coalition because the opposition parties distrust him deeply.

Tsipras’ best bet is to move as fast as he can now. That way, the creditors may reward his actions, providing some relief before he faces yet more stress tests of his own.



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