Greece’s new government has a long list of urgent tasks.
One of the most pressing, and at the same time most difficult projects, is the recapitalization of the four banks that are the pillars of the Greek banking system.
It remains to be seen whether and to what extent private investors will become involved. The consolidation of the battered financial institutions is considered to be the most essential prerequisite for the country to return to sustainable growth.
The four big banks – Piraeus Bank, National Bank of Greece, Eurobank and Alpha Bank – had passed the stress tests in late 2014, with the need for just small improvements.
Then the election victory of the radical left-wing coalition Syriza in January plunged the financial sector into turmoil that threatened their very existence. Many bank customers started plundering their bank accounts last November in anticipation of the impending change of government.
Then, Prime Minister Alexis Tsipras triggered a frantic rush on the ATMs at the end of June with his announcement of a referendum on the austerity program.
Only a three-week bank closure and the introduction of capital controls, which are still in force, saved the Greek financial system from collapse.
Bank customers are still limited to withdrawing no more than €420 a week, while international cash transfers are banned.
These restrictions make it difficult for many businesses to operate.
Between November 2014 and July 2015, the banks lost deposits amounting to €43.5 billion ($48.42 billion) – a quarter of their deposits. All that was left on deposit in July was barely €121 billion to offset €206.5 billion in outstanding loans.
This crass disparity is exacerbated by the constantly increasing ratio of non-performing loans. According to the National Bank of Greece, the ratio in June was already at 35 percent and, according to bank insiders, has swelled up to 45 percent in September.
This development is not only owing to the country returning to a recession, but there are also many debtors who no longer service their debts out of “strategic” reasons, namely in the hope that Mr. Tsipras can secure some form of debt relief.
Above all, what is eating into the capital base of the institutions is the growing loan loss provisions that accumulatively amounted to €41.1 billion in July.
A prerequisite for recapitalization is a set of rules for consolidating bad loans, which the new government must now work out as quickly as possible – a particularly hot issue for Mr. Tsipras because it is often a matter of things like foreclosures and forced sales of private homes and residential properties.
Up to €25 billion is earmarked for recapitalization in the third Greek bailout package. The funds are supposed to be paid back later to the European Stability Mechanism, the E.U.’s bailout fund, from the proceeds of privatizations.
Between November 2014 and July 2015, the banks lost deposits amounting to €43.5 billion ($48.42 billion) – a quarter of their deposits.
Whether and to what extent private creditors will also be asked to help pay, such as through the cancellation of debts, has yet to be decided.
The finance ministers of the euro zone have made it clear that it is out of the question that savings account holders with non-insured deposits be held liable, as in 2013 in Cyprus. But to ensure that happens, the recapitalization has to be done quickly because a new European regulation will be in force at the turn of the year that provides for depositors participating in the costs of bank bailouts.
A stress test by the European Central Bank by the end of October is supposed to determine the banks’ capital needs. The investment bank Morgan Stanley estimates it at €15 billion, €4 billion of which could be raised from private investors.
The recapitalization is planned to be completed by mid-December. How much capital is required essentially depends on an evaluation of the political conditions after last Sunday’s election, which saw the left-wing Syriza return to power, as well as economic forecasts.
According to insiders, the ECB is leaning toward preferring to provide more money for the recapitalization now to put the institutions on a solid footing, rather than having to go back and fill the gaps again soon.
Private investors, who had already given the Greek banks an €8.5 billion capital injection in March 2014, are balking at this.
Among them is the Canadian financial investor Fairfax, which holds just under 13 percent of Eurobank.
The more capital that is shoveled in through the bank bailout fund, the Hellenic Financial Stability Fund, the greater the shares of private investors will be diluted.
The American billionaire investor Wilbur Ross, who also owns a big stake in Eurobank, has already appealed to the ECB not to set too strict capital requirements in the stress test.