Will banks’ se­nior cred­i­tors pay cost?

It may prove hard to write down bond­hold­ers as part of lenders’ re­capiliza­tion agreed in third bailout

Kathimerini English - - Front Page - BY JOHN CHRISTIE

Se­nior cred­i­tors, placed firmly on the hook for losses in the eu­roarea plan for re­cap­i­tal­iz­ing Greek banks, may end up wrig­gling free.

Fi­nance min­is­ters sin­gled out se­nior bond­hold­ers for write­downs as part of the third Greek bailout, with as much as 25 bil­lion eu­ros ($29 bil­lion) “avail­able if needed” for bank re­cap­i­tal­iza­tion and res­o­lu­tion. The Euro­pean Cen­tral Bank is as­sess­ing Greek lenders’ bal­ance sheets.

If the ECB finds cap­i­tal gaps, Greece’s cred­i­tors have a num­ber of op­tions.

Only one – putting a bank into res­o­lu­tion – trig­gers bail-in rules that could ex­tend to se­niors.

“I don’t sense now that they are up to clos­ing one of the four big banks,” said Gun­tram Wolff, di­rec­tor of the Brus­sels-based Bruegel re­search group. “I don’t see that re­ally hap­pen­ing at this stage.”

The mar­kets read the fi­nance min­is­ters’ de­ci­sion loud and clear when it came late on Fri­day, Au­gust 14. On the fol­low­ing Mon­day, se­nior notes of Greece’s four big­gest banks plum­meted.

Na­tional Bank of Greece SA’s 750 mil­lion eu­ros of 4.375 per­cent bonds due April 2019 fell al­most 30 per­cent on Au­gust 17 and con­tin­ued to de­cline all week, data com­piled by Bloomberg show.

Dire con­se­quences

Sav­ing the banks is a cen­tral part of the ra­tio­nale be­hind Greece’s new 86-bil­lion-euro bailout, Euro­pean Sta­bil­ity Mech­a­nism chief Klaus Regling told re­porters on Thurs­day in Ber­lin.

The four big Greek lenders are among the euro area’s 130 sys­tem­i­cally rel­e­vant banks and make up as much as 90 per­cent of the Greek bank­ing sys­tem, he said.

“In the case of a Grexit, these four banks would have been broke and the con­se­quences of this are unimag­in­able and wouldn’t have spared banks in other euro-re­gion coun­tries,” Regling said.

He said the bailout was also needed to make clear that join­ing the euro is ir­re­versible.

The path to writ­ing down se­nior bank debt as part of Greece’s bailout isn’t as straight­for­ward as the mar­ket re­ac­tion might sug­gest. Once the ECB’s ver­dict is in, re­cap­i­tal­iza­tion op­tions in­clude pri­vate of­fer­ings, pre­cau­tion­ary aid and a full-scale bailout with write­downs.

The fi­nance min­is­ters em­pha­sized their in­ten­tion to squeeze pri­vate in­vestors as part of re­cap­i­tal­iza­tion. Fol­low­ing the ECB stress test and as­set-qual­ity re­view, “the bail-in in­stru­ment will ap­ply for se­nior debt bond­hold­ers, whereas bail-in of de­pos­i­tors is ex­cluded,” the Eurogroup said.

It’s less clear how euro-area lead­ers will fol­low through on this dec­la­ra­tion.

For starters, Greek law as it stands pro­vides only for write­downs of share­hold­ers and ju­nior bond­hold­ers in line with EU stateaid rules.

The ECB will prob­a­bly find a cap­i­tal short­fall of as much as 15 bil­lion eu­ros for the Greek bank- so-called sys­temic banks, in­clud­ing Al­pha, ac­count for around 90 per­cent of the coun­try’s lend­ing sys­tem. They have about 57 bil­lion eu­ros of se­nior bonds out­stand­ing, of which only 4.2 bil­lion eu­ros aren’t cov­ered by gov­ern­ment guar­an­tees, ac­cord­ing to the Royal Bank of Scot­land. ing sys­tem as a whole un­der an ad­verse stress test sce­nario, Bar­clays Plc an­a­lysts led by Christy Ha­jiloizou said in an Au­gust 14 note.

The ECB as­sess­ment will take “a few weeks,” and re­cap­i­tal­iza­tion should hap­pen be­fore the end of the year, Ex­ec­u­tive Board mem­ber Benoit Coeure said.

If Greece needs to tap aid money to shore up its banks, the case for bail­ing in se­nior cred­i­tors strength­ens.

Un­der the EU’s Bank Re­cov­ery and Res­o­lu­tion Di­rec­tive, “the need for ex­tra­or­di­nary public fi­nan­cial sup­port for an in­sti­tu­tion should be con­sid­ered as an in­di­ca­tor that this in­sti­tu­tion is fail­ing or is likely to fail, and there­fore trig­gers the need for res­o­lu­tion,” ac­cord­ing to the Euro­pean Bank­ing Au­thor­ity.

Yet the law also gives politi­cians an al­ter­na­tive.

When public sup­port is used to ad­dress a cap­i­tal short­fall iden­ti­fied in a stress test or as­set-qual­ity re­view, such as the ECB is con­duct­ing on Greece’s banks, it “may not be con­sid­ered as a trig­ger for res­o­lu­tion when it is pro­vided to rem­edy a se­ri­ous dis­tur­bance in the econ­omy of a mem­ber state and to pre­serve fi­nan­cial sta­bil­ity,” the EBA said.

Euro­pean lee­way

Mak­ing that ar­gu­ment for Greece, whose econ­omy has been on life sup­port for years, shouldn’t be dif­fi­cult if politi­cians want to prop up the banks with such a “pre­cau­tion­ary” cap­i­tal in­jec­tion.

Even if a Greek bank is put into res­o­lu­tion, euro-area author­i­ties will have to con­sider what would be gained by an ag­gres­sive write­down of pri­vate in­vestors. The coun­try’s four main lenders have about 57 bil­lion eu­ros of se­nior bonds out­stand­ing, of which only 4.2 bil­lion eu­ros aren’t cov­ered by gov­ern­ment guar­an­tees, ac­cord­ing to Al­berto Gallo, a credit strate­gist at Royal Bank of Scot­land Group Plc.

And BRRD pro­vides tools other than bail-in for tack­ling a fail­ing bank. For ex­am­ple, se­nior bonds could be trans­ferred to a so-called bad bank, “where we would still ex­pect fi­nal re­cov­ery to be sig­nif­i­cantly be­low cur­rent cash prices,” the Bar­clays an­a­lysts said.

“There are dif­fer­ent ways of do­ing re­cap­i­tal­iza­tion of a bank, and bail-in is only one of these,” said Karel Lan­noo, chief ex­ec­u­tive of­fi­cer of the Cen­ter for Euro­pean Pol­icy Stud­ies in Brus­sels. “They have some lee­way un­der Euro­pean law un­til the end of this year.”

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