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The upcoming elections have yet again shaken the confidence in Greek banks

23 August 2015 / 19:08:18  GRReporter
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The stress tests and recapitalisation of Greek banks are taking place in anticipation of the election results. According to banking sector professionals, the normal financing of the country based on the new agreement, and the first €10 billion tranche earmarked for the recapitalisation, depend on the successful implementation of a number of requisite measures.

Unless after the September elections such a government is formed quickly so as to embark on speedy reforms, which would lead to positive results from the new programme's first vetting in October, things could grind to a halt, including recapitalisation. This is a crucial issue as the Bank of Greece's plan, elaborated with the European institutions, foresees finishing the recapitalisation process by the end of 2015. And on 1 January 2016, a new legal framework should come into force envisaging the participation of depositors in bank rescues (bail-in).

A new round of uncertainty

Bank sector pundits argue that the new elections will lead to another round of political uncertainty. Yet they admit that, once the government has chosen this path, they are better dealt with sooner rather than later. And the hope is that the results lead to the formation of a strong pro-European government, which will resolutely implement the reforms. The banks emphasize that, unlike other times, now society enjoys a fair degree of consensus and the country is not 'up in the air'.

There is an on-going diagnostic survey of banks and experts believe that by late September there will be a clear picture of their capital needs. This is an issue of vital importance as the latter's size will determine the opportunities for private sector participation in the recapitalisation process. If capital needs are very high, then private investors will struggle to take part, and the bill for capital injections will be footed by the public aid package. If, conversely, more moderate funds are needed, then private capital might be incentivised (as did the warrant issuance back in 2013) to chip in on the deal.

The Bank of Greece, along with the European institutions, is already exploring options for the provision of incentives to private investors. They include the prolonged use of an alternative form of capital, the so called contingent convertible bonds (CoCos).

The agreement between the government and its partners provides for up to €25 billion for the recapitalisation of Greek banks. €10 billion will initially be transferred to a special account. The size of the second tranche will depend on capital needs, which will become clear after the stress tests.

A blow on shares

In anticipation of the new recapitalisation, Greek bank equity has plummeted to historical lows. The losses of the four systemic banks against pre-crisis levels have reached nearly 100%. Before the crisis, the Eurobank equity stood at €87.5, and today it only fetches €0.044 (-99.95%). Piraeus Bank has seen a drop from €53 to €0.096 (-99.81%), the National Bank of Greece – from €125 to €0.498 (-99.60%); Alpha Bank's slump amounts to 97.5%. These prices accommodate an accidental equity reduction. Bank bonds have also been through a substantial decline.

Tags: Greek banks recapitalization stress tests capital needs equity plummet
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