ATHENS—Greece's government is likely to push back final decisions on a much-awaited plan to recapitalize the nation's banks until after May 6 elections, senior government officials said Wednesday, as it wrestles with the thorny issue of how to rescue the country's mortally wounded lenders.
Although still uncertain, the cabinet may meet in the next few days to consider elements of the plan, but isn't expected to signoff on key financial details relating to the terms of a government bailout and the rights of private shareholders in a future capital increase.
"The issue of the bank recap is moving slowly. The trick with the plan is to incentivize private investors," one senior government said. "We have to design the right incentive structure…I expect a decision to come after the elections."
The shifting deadline marks a further delay in the government's bank recapitalization plan, which was originally expected by the end of March but has been pushed back twice since then. In recent remarks, Prime Minister Lucas Papademos promised that a final plan would be ready by April 20.
Mr. Papademos—a former vice president of the European Central Bank—has been heavily involved in the details of the plan, while a technical delegation of European and International Monetary Fund officials has been in Athens since last week for consultations.
Last month, Greece completed much of a planned €206 billion ($270.4 billion) debt restructuring aimed at cutting the stock of debt it owes private creditors in half, thereby lowering the country's projected ratio of debt to gross domestic product to a more sustainable 120.5% by 2020, down from about 165% currently.
The debt write-down is part of a new €130 billion bailout for Greece agreed by its European partners and the IMF.
According to estimates, Greece's banks are facing a combined €40 billion in losses—equal to a fifth of the country's gross domestic product—from the debt restructuring as well as rising nonperforming loans.
To restore their solvency, the four biggest lenders—National Bank of Greece SA, EFG Eurobank Ergasias SA, Alpha Bank AS and Piraeus Bank SA—will have fresh capital needs of €10 billion to €15 billion combined. They are expected to report fourth-quarter earnings after the close of trade on the Athens bourse Friday.
But with a combined market value of just under €3.3 billion, the lion's share of that capital will come from the Greek government, not from private investors.
On Thursday, Greece will receive a first €25 billion tranche of aid from Europe's temporary bailout fund—the European Financial Stability Facility—to help plug the holes in the banks' balance sheets.
"The decisions we expect to see in the next few days will add to the process of restructuring of the Greek banking system," said Nick Koskoletos, a banks analyst at Eurobank EFG Equities. "It won't be groundbreaking, but it will be a building block towards the changes that are coming. There is still a long road ahead."
According to the terms of Greece's latest bailout, the banks will have until September to raise the capital they need, as well as detail other plans to boost their capital, such as asset sales, cost-cutting or restructuring their loan books.
But the key issue is how to reduce government meddling in the banks that the state will majority own—and what to do with those state-controlled shares in the future.
In the 1990s, Greece privatized most of its banks after a decade of government control that was widely criticized for misdirecting lending and leading to huge losses and write-offs for the state.
Privately, Greek bankers warn that government control will effectively wipe out their shareholders and lead to interference in lending policies—turning back the clock on two successful decades of liberalizing the country's banking sector.
To minimize state control, Greece's troika of international inspectors—from the European Commission, the ECB and the IMF—have insisted that the banks remain under private management and have given the government between two and five years to unload their shares in the banks.
And with the consent of the troika, the government has already approved a plan for, effectively, a two-tier capital increase. Under its terms, private shareholders will be asked to stump up at least 10% of the fresh capital, while the state's bank bailout fund, the Hellenic Financial Stability Fund, will underwrite the rest.
If the fund's participation in the capital increase is 90% or less, the state's voting rights will be restricted, meaning the government will only be able to intervene in major strategic decisions.
As a further incentive to private investors to take part in the capital increase, the government is expected to give shareholders—and maybe the banks themselves—the right to buy back the government shares over a period.
One option being considered is to issue some of the new shares with detachable call options that will allow private investors to buy back as many as four of the government's shares for every one share they subscribe to.
Other ideas being floated include a complicated government-backed special purpose vehicle that, bolstered through state guarantees, would allow the Greek banks to book lower losses from the debt-restructuring plan than their European peers—an idea that may [be] frowned upon by the troika—and more favorable tax treatment of those losses.
Both those schemes would have the indirect effect of reducing the banks' capital needs but have not yet been decided.
But the central issue for investors will be the details of the upcoming share capital increase, the stake the government finally holds in the banks, and the number and strike price of any future call options—the government is likely to insist on at least a 5% return on the latter.
"The success of the recap plan will largely depend on the terms setting out how banks will be able to pay back the government and when," said Panagiotis Kladis, an analyst at investment services company National P+K.
"A crucial issue for shareholders is what the government will do with the shares it acquires in each lender. If it sells these stocks to the market, then this will heavily dilute earnings, making the whole deal less attractive to investors," he added.
"On the other hand, if the government allows the banks to buy back the shares, giving them the opportunity to cancel them out, this will be a better proposition for shareholders."
wsj.com
Although still uncertain, the cabinet may meet in the next few days to consider elements of the plan, but isn't expected to signoff on key financial details relating to the terms of a government bailout and the rights of private shareholders in a future capital increase.
"The issue of the bank recap is moving slowly. The trick with the plan is to incentivize private investors," one senior government said. "We have to design the right incentive structure…I expect a decision to come after the elections."
The shifting deadline marks a further delay in the government's bank recapitalization plan, which was originally expected by the end of March but has been pushed back twice since then. In recent remarks, Prime Minister Lucas Papademos promised that a final plan would be ready by April 20.
Mr. Papademos—a former vice president of the European Central Bank—has been heavily involved in the details of the plan, while a technical delegation of European and International Monetary Fund officials has been in Athens since last week for consultations.
Last month, Greece completed much of a planned €206 billion ($270.4 billion) debt restructuring aimed at cutting the stock of debt it owes private creditors in half, thereby lowering the country's projected ratio of debt to gross domestic product to a more sustainable 120.5% by 2020, down from about 165% currently.
The debt write-down is part of a new €130 billion bailout for Greece agreed by its European partners and the IMF.
According to estimates, Greece's banks are facing a combined €40 billion in losses—equal to a fifth of the country's gross domestic product—from the debt restructuring as well as rising nonperforming loans.
To restore their solvency, the four biggest lenders—National Bank of Greece SA, EFG Eurobank Ergasias SA, Alpha Bank AS and Piraeus Bank SA—will have fresh capital needs of €10 billion to €15 billion combined. They are expected to report fourth-quarter earnings after the close of trade on the Athens bourse Friday.
But with a combined market value of just under €3.3 billion, the lion's share of that capital will come from the Greek government, not from private investors.
On Thursday, Greece will receive a first €25 billion tranche of aid from Europe's temporary bailout fund—the European Financial Stability Facility—to help plug the holes in the banks' balance sheets.
"The decisions we expect to see in the next few days will add to the process of restructuring of the Greek banking system," said Nick Koskoletos, a banks analyst at Eurobank EFG Equities. "It won't be groundbreaking, but it will be a building block towards the changes that are coming. There is still a long road ahead."
According to the terms of Greece's latest bailout, the banks will have until September to raise the capital they need, as well as detail other plans to boost their capital, such as asset sales, cost-cutting or restructuring their loan books.
But the key issue is how to reduce government meddling in the banks that the state will majority own—and what to do with those state-controlled shares in the future.
In the 1990s, Greece privatized most of its banks after a decade of government control that was widely criticized for misdirecting lending and leading to huge losses and write-offs for the state.
Privately, Greek bankers warn that government control will effectively wipe out their shareholders and lead to interference in lending policies—turning back the clock on two successful decades of liberalizing the country's banking sector.
To minimize state control, Greece's troika of international inspectors—from the European Commission, the ECB and the IMF—have insisted that the banks remain under private management and have given the government between two and five years to unload their shares in the banks.
And with the consent of the troika, the government has already approved a plan for, effectively, a two-tier capital increase. Under its terms, private shareholders will be asked to stump up at least 10% of the fresh capital, while the state's bank bailout fund, the Hellenic Financial Stability Fund, will underwrite the rest.
If the fund's participation in the capital increase is 90% or less, the state's voting rights will be restricted, meaning the government will only be able to intervene in major strategic decisions.
As a further incentive to private investors to take part in the capital increase, the government is expected to give shareholders—and maybe the banks themselves—the right to buy back the government shares over a period.
One option being considered is to issue some of the new shares with detachable call options that will allow private investors to buy back as many as four of the government's shares for every one share they subscribe to.
Other ideas being floated include a complicated government-backed special purpose vehicle that, bolstered through state guarantees, would allow the Greek banks to book lower losses from the debt-restructuring plan than their European peers—an idea that may [be] frowned upon by the troika—and more favorable tax treatment of those losses.
Both those schemes would have the indirect effect of reducing the banks' capital needs but have not yet been decided.
But the central issue for investors will be the details of the upcoming share capital increase, the stake the government finally holds in the banks, and the number and strike price of any future call options—the government is likely to insist on at least a 5% return on the latter.
"The success of the recap plan will largely depend on the terms setting out how banks will be able to pay back the government and when," said Panagiotis Kladis, an analyst at investment services company National P+K.
"A crucial issue for shareholders is what the government will do with the shares it acquires in each lender. If it sells these stocks to the market, then this will heavily dilute earnings, making the whole deal less attractive to investors," he added.
"On the other hand, if the government allows the banks to buy back the shares, giving them the opportunity to cancel them out, this will be a better proposition for shareholders."
wsj.com
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