Eurobank a litmus test for the econ­omy

Greece needs to pro­ceed with the core bank’s share cap­i­tal in­crease re­gard­less of the po­lit­i­cal cost

Kathimerini English - - Front Page - BY DIM­ITRIS KONTOGIANNIS

ANAL­Y­SIS Most pun­dits agree the Greek econ­omy will have to rely more on pri­vate in­vest­ments and ex­ports to re­turn to sus­tain­able growth in the medium term. Pri­va­ti­za­tions have an im­por­tant role to play in this en­deavor, along with a strong, well-cap­i­tal­ized bank­ing sec­tor. How­ever,given the seem­ingly strong for­eign in­ter­est, the re­cent de­lay in Eurobank’s share cap­i­tal in­crease is not a good omen. The par­tial pri­va­ti­za­tion of the core bank should not be al­lowed to fall vic­tim to any ne­go­ti­at­ing tac­tics be­tween the Greek side and its cred­i­tors on the bailout pro­gram and the do­mes­tic po­lit­i­cal cost.

The Greek re­ces­sion would have been less acute, de­spite the huge fis­cal drag, if lo­cal banks could have per­formed their in­ter­me­di­ary role and fi­nanced ex­ports along with some in­vest­ment projects. That did not hap­pen. We ar­gued a few weeks ago that the econ­omy needs well­cap­i­tal­ized banks to help it on the road to re­cov­ery and sus­tain­able growth rates in the medium term. That means lo­cal banks will have to clean up their bal­ance sheets by bear­ing the brunt of fu­ture pro­vi­sion­ing losses and pro­ceed with fresh cap­i­tal in­jec­tions if nec­es­sary.

Eurobank, one of the four pil­lar banks, will have to un­der­take a share cap­i­tal in­crease of about 2 bil­lion eu­ros or more. The bank, which is 95 per­cent-owned by the Hel­lenic Fi­nan­cial Sta­bil­ity Fund (HFSF), was plan­ning to do so in Fe­bru­ary. The cor­po­rate ac­tion would have been pre­ceded by the de­ter­mi­na­tion of its cap­i­tal needs by the Bank of Greece based on Black­Rock So­lu­tions’ di­ag­nos­tic tests on loan books and the ap­proval of the new bank re­cap­i­tal­iza­tion law by Par­lia­ment.

How­ever, the planned share cap-

there is gen­uine in­ter­est from for­eign funds to par­tic­i­pate in the share cap­i­tal in­crease, so it is rea­son­able to ex­pect the HFSF’s ini­tial loss to be cut as soon as the new shares start trad­ing. ital agree­ment has been de­layed un­til March. In­sid­ers at­tribute it pri­mar­ily to dis­agree­ments be­tween Athens and the ECB on some pa­ram­e­ters un­der­pin­ning the stress tests which will af­fect the en­su­ing cap­i­tal short­falls. They also link the de­lay to the cred­i­tors’ dis­sat­is­fac­tion with uni­lat­eral Greek ac­tions on fis­cal mat­ters such as keep­ing the re­duced value-added tax rate for restau­rants, the law on home fore­clo­sures and the 2014 bud­get. What­ever the rea­son, the de­lay means the new bill on bank re­cap­i­tal­iza­tion, which re­port­edly al­lows for the share cap­i­tal in­crease to take place at mar­ket prices, will have to be voted in Par­lia­ment closer to the Euro­pean and lo­cal elec­tions sched­uled for May.

Un­doubt­edly, this is not a pos­i­tive de­vel­op­ment for the part-pri­va­ti­za­tion of Eurobank, the econ­omy or the pri­va­ti­za­tion agenda in gen­eral. This is be­cause the share cap­i­tal in­crease may be­come a point of po­lit­i­cal con­tention, and the ris­ing po­lit­i­cal cost may post­pone the vote on the new draft bill till af­ter the May elec­tions, even lead­ing to its can­cel­la­tion. We don’t think this is in the best in­ter­est of the coun­try and should be avoided.

We think Greece should take ad­van­tage of the mar­ket’s up­beat mood about the Euro pe­riph­ery and grab the money on the ta­ble be­cause it may not be there in a few months from now. This way, the HFSF will not have to pay for Eurobank’s share cap­i­tal in­crease – or if it does, just a small amount – pre­serv­ing the 10to 11-bil­lion-euro buf­fer for other pur­poses. Read­ers are re­minded the bailout pro­gram set aside close to 50 bil­lion eu­ros for the re­struc­tur­ing and the re­cap­i­tal­iza­tion of lo­cal banks. The re­main­ing 10 to 11 bil­lion eu­ros could be used ei­ther for the banks’ fu­ture cap­i­tal needs or/and partly fill­ing the coun­try’s 2014-15 fi­nanc­ing gap, es­ti­mated at around 14 bil­lion eu­ros by the troika, ac­cord­ing to re­cent re­ports.

Crit­ics rightly point out that the HFSF’s 95 per­cent stake in Eurobank will be di­luted if the share price is set at or close to 0.30 eu­ros, a dis­count over the cur­rent mar­ket price. It is true the HFSF’s stake will be di­luted around or be­low 50 per­cent ac­cord­ing to an­a­lysts and it will ini­tial- ly suf­fer a loss of sev­eral hun­dred mil­lion eu­ros since its av­er­age ac­qui­si­tion share price is around 1.25 eu­ros af­ter tak­ing over the “good” Hel­lenic Postbank (TT). How­ever, this is an ac­count­ing loss. The ac­tual loss or gain will be re­al­ized later when the HFSF sells its shares.

The bank’s of­fi­cials in­sists there is gen­uine in­ter­est from for­eign funds, in­clud­ing Fair­fax, to par­tic­i­pate in the share cap­i­tal in­crease. If so, it is rea­son­able to ex­pect the HFSF’s ini­tial loss to be cut as soon as the new shares start trad­ing be­cause they will likely rally on the suc­cess of the cap­i­tal ex­er­cise and the part-pri­va­ti­za­tion. This will likely ben­e­fit other bank­ing stocks in which the HFSF has a ma­jor­ity stake, mean­ing the value of its stakes in the four core banks will rise.

Crit­ics of the share cap­i­tal in­crease at mar­ket price also ar­gue against pri­vate par­tic­i­pa­tion so that the HFSF en­joys the up­side when Eurobank starts pro­duc­ing the kind of prof­its en­vi­sioned and sells later. It is a valid ar­gu­ment but one should also take into ac­count that pro­jected fu­ture prof­its are un­cer­tain and the for­eign money may not be on the ta­ble at the time. Also, one should not un­der­es­ti­mate the im­pact of the fail­ure to par­tially pri­va­tize Eurobank on the Greek stock mar­ket on bonds and in­vestor sen­ti­ment to­ward the coun­try. In ad­di­tion, the HFSF’s buf­fer will be re­duced if it pays for Eurobank’s share cap­i­tal in­crease of 2 bil­lion eu­ros or more and there­fore less money will be avail­able for other pur­poses.

Con­se­quently it is im­por­tant that the pri­va­ti­za­tion agenda is ad­vanced at a time the coun­try needs for­eign cap­i­tal the most and the bank­ing sec­tor is strength­ened by en­hanc­ing its cap­i­tal to re­gain mar­ket con­fi­dence and ac­cess other forms of liq­uid­ity. Greece should pass Eurobank’s litmus test.

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