Hedge funds merit part in NPL deal­ing

In­vestors ar­gue they are in a bet­ter po­si­tion to re­struc­ture many Greek com­pa­nies that are go­ing down

Kathimerini English - - Focus -

ANAL­Y­SIS In­ter­na­tional lenders and Greek author­i­ties ap­pear to be at odds over how to best deal with the large stock of bad loans sit­ting in lo­cal banks’ books, just as the ECB is putting the fi­nal touches on the third re­cap­i­tal­iza­tion of the bank­ing sec­tor since 2013.

Mak­ing the re­cap­i­tal­iza­tion a suc­cess and ad­dress­ing the bad loan prob­lem go hand in hand, mean­ing that the two sides will have to find a so­lu­tion that will help kick­start lend­ing in the fu­ture and will not risk any more tax­pay­ers’ money.

The op­tion of sell­ing cor­po­rate loans to for­eign funds could be part of the so­lu­tion, al­though the Greek side seems to re­ject this op­tion.

We have al­ways ar­gued that Greek banks will have to be well over­cap­i­tal­ized to be able to cope with bad loans and be in a po­si­tion to pro­vide credit to the pri­vate sec­tor in the next few years. This will also have to be done in or­der to ad­dress mar­ket con­cerns of yet an­other cap­i­tal rais­ing in the fu­ture. Ef­fec­tively tack­ling the prob­lem of loans in ar­rears for more than 90 days, the so called NPLs (non-per­form­ing loans), is im­por­tant be­cause it could lower the bill, at­tract more pri­vate money in the cur­rent re­cap­i­tal­iza­tion and avert the need for an­other in­jec­tion of cap­i­tal into the banks in a year or more.

It is re­minded that the four ma­jor Greek banks re­ceived about 25 bil­lion eu­ros in bailout funds in ex­change for shares in 2013, while pri­vate in­vestors added 3 bil­lion in the same year and an ad­di­tional 8 bil­lion eu­ros or so in 2014 when the sec­ond round of re­cap­i­tal­iza­tion took place. As a re­sult, the Hel­lenic Financial Sta­bil­ity Fund (HFSF) has ended up hold­ing ma­jor­ity stakes in Al­pha Bank, Na­tional and Pi­raeus, as well as a 35 per­cent stake in Eurobank.

Up to 25 bil­lion eu­ros have been al­lo­cated in the third bailout pack­age for bank re­cap­i­tal­iza­tion, though lo­cal bank ex­ec­u­tives and gov­ern­ment of­fi­cials say less than 20 bil­lion will be re­quired. Less bailout money will be needed if pri­vate in­vestors are con­vinced to join once again. Pun­dits ad­mit the size of the bank re­cap­i­tal­iza­tion will play a sig­nif­i­cant role since the smaller the amount pri­vate in­vestors have to cover, the bet­ter the chances they will par­tic­i­pate.

It is gen­er­ally ac­cepted that the banks will re­main in pri­vate hands and the top man­age­ment will re­tain their po­si­tions if pri­vate in­vestors cover the cap­i­tal gap, em­a­nat­ing from the AQR (As­set Qual­ity Re­view) and the base­line sce­nario of the stress tests af­ter cap­i­tal buf­fers – i.e. as­set sales, bond­hold­ers’ bail- in – have been sub­tracted. The ex­tra cap­i­tal needs, stem­ming from the ad­verse sce­nario of the stress tests, are seen cov­ered by HFSF in that case.

The HFSF could get in re­turn a com­bi­na­tion of com­mon shares and con­tin­gent con­vert­ible bonds (Co­Cos) to main­tain a ma­te­rial, mi­nor­ity stake in each bank if every­thing goes well. But Co­Cos are like a dou­ble-edged sword since they are ex­pected to fea­ture a high in­ter­est rate, mean­ing they could hurt the banks’ prof­itabil­ity. So, the anal­ogy be­tween com­mon shares and Co­Cos should be care­fully se­lected.

Un­doubt­edly, the re­turn of the Greek econ­omy to growth and the de­crease in the un­em­ploy­ment rate are nec­es­sary for not adding any new NPLs to the ex­ist­ing huge stock­pile. An­a­lysts, bankers and gov­ern­ment of­fi­cials es­ti­mate that lo­cal banks are ex­posed to bad loans in ex­cess of 100 bil­lion eu­ros, or 47 per­cent of to­tal loans. Yet, even if every­thing goes well, the banks will not be able to play their tra­di­tional in­ter­me­di­ary role and pro­vide fresh credit to the econ­omy un­less they man­age to re­duce the NPL stock­pile sig­nif­i­cantly. If they do not, for what­ever rea­son, they will likely need an­other in­jec­tion of cap­i­tal in a year or two ac­cord­ing to an­a­lysts.

At this time, the au­di­tors of the lenders and the gov­ern­ment ap­pear to dis­agree on the con­di­tions for of­fer­ing le­gal pro­tec­tion from fore­clo­sures to peo­ple who have taken mort­gages to buy their first home. Bankers and an­a­lysts sus­pect some of the NPLs be­long to strate­gic de­fault­ers, that is peo­ple who are able to pay but take ad­van­tage of the sit­u­a­tion not to. There­fore, it would be un­fair to the rest of the bor­row­ers who pay on time and the tax­pay­ers who will be called upon to shoul­der any losses the banks may in­cur by writ­ing down th­ese mort­gages, if the con­di­tions are re­laxed to in­clude strate­gic de­fault­ers. A com­pro­mise on the prop­erty and in­come cri­te­ria is needed.

De­spite all the talk in the lo­cal me­dia, large for­eign hedge funds in the busi­ness of buy­ing loans to make a profit say they are not in­ter­ested in Greek mort­gages. How­ever, their ex­ec­u­tives ad­mit they are in­ter­ested in cor­po­rate loans. Ac­cused of of­fer­ing very low prices to buy the loans, they counter that Greece is a buy­ers’ mar­ket and the price is right. More­over, they go on to ar­gue that they are in a bet­ter po­si­tion to re­struc­ture many Greek com­pa­nies that go down be­cause they pay too much to ser­vice their debts, so­cial se­cu­rity and taxes. They also say that they are bet­ter suited than banks to re­cover part of the loans be­cause they have no ties to lo­cal busi­ness­men. “Only us, the bad guys, can pro­vide a so­lu­tion to the cor­po­rate NPL night­mare,” one ex­ec­u­tive said.

Of course, vul­ture funds are not usu­ally wel­come and the ex­ec­u­tive above is ex­ag­ger­at­ing by claim­ing that they hold the only so­lu­tion. How­ever, this does not mean th­ese funds should be ex­cluded from deal­ing with the huge NPL stock­pile. Af­ter all, if the coun­try fails again, the cur­rent bank re­cap may not be the last one.

It would be un­fair for bor­row­ers who pay on time and the tax­pay­ers who will be called upon to shoul­der any losses the banks may in­cur, if bad-loan set­tle­ment con­di­tions are re­laxed to in­clude strate­gic de­fault­ers.

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