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Desperate times…

11 April 2012 By George Hay

Greek banks are still lying under their Sword of Damocles. The Greek government and its euro zone rescuers are set to reveal how much capital the state’s lenders need to deal with the recent haircut on Greek sovereign debt, with estimates extending up to 50 billion euros. A 21 percent jump in Greek bank share prices on April 10 reflects hope that financial engineering could yet cut the final bill.

Until now, the four biggest Greek banks – National Bank of Greece, Alpha, Eurobank EFG and Piraeus – have had to assume they will face haircuts of 75 percent on their 32 billion euros of haircut-able Greek debt. But only 53.5 percentage points of this constitutes the actual snip. The rest comes from swapping their old bonds for the new 30-year paper created in Greece’s last bailout, and marking these to market.

One idea doing the rounds is that Greek banks could dodge this extra 22 percent loss, according to two people familiar with the negotiations. Under the existing bailout arrangements, a pot of money called the Hellenic Financial Stability Fund would directly recapitalise any bank unable to raise capital privately. But the latest thinking is that the HFSF could guarantee that the new bonds will be repaid at par. That could limit the haircut to 54 percent, and reduce the eventual capital hole by around 7 billion euros.

The euphoria over this is probably overdone. The Troika – the International Monetary Fund, European Commission and European Central Bank – could still veto this if they deem it a subsidy to Greek bank investors. And while not all the 50 billion euros is for the big four banks – a chunk is needed for the battered Agricultural Bank – the eventual capital shortfall could still be many times their combined 3.3 billion euros market capitalisation.

Still, the capital cunning could make all the difference to individual lenders’ ability to stay independent by garnering outside support. Those that can fill at least 10 percent of their capital holes from private sources will be recapitalised with non-voting equity in the bailout; those that cannot will get normal equity – and a huge dilution. That could make the difference between Damocles’ sword delivering shareholders a flesh wound or a complete beheading.


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