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Watsa few billion

14 July 2015 By George Hay

Last year, foreign investors that had backed Greek banks were feeling smart. Luminaries like Canadian investor Fairfax and U.S hedge fund Paulson & Co stood to make handsome gains from the rebounding share prices of Alpha Bank, Eurobank, National Bank of Greece and Piraeus, after they helped contribute billions of euros in new capital from foreign private sources. A 25 billion euro emergency recapitalisation from the European Stability Mechanism on July 13 stops all that in its tracks.

Even before the recent immolation of the Greek banking sector via capital controls and spiralling bad debts, bank investments had lost their lustre. Fairfax boss Prem Watsa, who along with Wilbur Ross last year invested $1.3 billion in Eurobank via his Fairfax holding company, noted in March that the bank’s shares were worth less than half what they had paid. Monday’s bailout ratchets up the pain.

The European Commission changed state aid rules in July 2013. Taxpayer injections of cash into the banking sector – and especially from the ESM, Europe’s bailout fund – have to be accompanied by burden-sharing from shareholders and junior creditors. Fairfax et al could put more cash in, but doing so even on hugely discounted terms would be a tough call given the current and likely future travails of Greece. Although the exact size of the capital hole to be filled won’t be clear for a few months, they face heavy dilution or wipeout.

It’s quite a reversal. With global returns at historic lows, investing in recovering euro zone states that imploded in the 2010-13 crisis made perfect sense. Foreign investors like Fairfax did well. Fairfax and Ross tripled their money by selling down their 35 percent stake in Bank of Ireland in 2014 and this year. Wilbur Ross’ Bank of Cyprus punt should work out, too.

Greece might have given more of the same. A year ago, it had a recovering economy, banks whose earning power had been expanded by mergers, and a government that was offering the opportunity to buy these banks on generous terms. Unfortunately, investors reckoned without Greece’s anti-austerity turn.

Periodic screw-ups have a purpose: they remind everyone else that investing in the banking sectors of volatile states is not for the faint-hearted. But EU periphery bulls will still be feeling raw.

 

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