I was wondering what was responsible for yesterdays’ increase of the share price of the National bank of Greece by nearly 20%. As it turns out, this is the news from Bloomberg that’s causing the big increase in the share price.
By Marcus Bensasson on April 10, 2012 — Greece’s banks have proposed a recapitalization plan that would allow them to limit losses arising from Greece’s debt restructuring to 53.5 percent, the size of the nominal cut in value of their government bonds, Euro2day reported, without saying how it got the information.
The plan involves the banks putting new Greek government bonds issued in the exchange into a special-purpose vehicle that would benefit from 8 billion euros ($10.5 billion) of European Financial Stability Facility guarantees, according to the Athens-based news website. The guarantees would divert funds that would otherwise be used to recapitalize the banks directly and allow them to avoid booking losses of 75 percent from the debt swap, Euro2day said.
The plan would need approval from the government, the Bank of Greece (TELL) and the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund, which have yet to agree on the final form of the bank recapitalization, Euro2day reported.
To contact the reporter on this story: Marcus Bensasson in Athens at firstname.lastname@example.org
To contact the editor responsible for this story: Craig Stirling at email@example.com
I believe the Greek government is not keen to nationalize their banks and this is the right thing to do. Already, the government is selling out state/national assets to pay down its debt so I am doubtful the government want another problem on their hands.
What this recent move by the banks suggests to me that the banks themselves are not keen to be nationalized as well too.
As it stands now, Greek banks (i.e. National Bank of Greece, Piraeus, Alpha Bank, Eurobank) have to take a huge loss of about 75% of the Greek debt that they own. This kind of haircut essentially means that they have insufficient capital and are in danger of being nationalized to the detriment of shareholders who would face massive dilution.
However, if we look closely at the Greek debt restructuring, about 53.5% constitutes the actual capital loss on their Greek debt. The other loss is due to mark to market losses that come from holding the new debt that they now own from exchanging their old defaulted debt. This mark to market loss is the one that Greek banks are trying now to dodge.
There is this entity called the Hellenic Financial Stability fund that helps banks which are otherwise unable to raise capital privately to recapitalize. If this fund can somehow “guarantee” these new Greek bonds will be paid at par, the banks would not need to have this mark to market loss and hence reduce the capital hole that these banks now have to fill. At least that’s the idea.
Of course, this is an extremely unusual arrangement and there is no certainty that it will go through.
The day everything will be revealed will be on 20 Apr 2012 when Greece will outline what their plans for the recapitalization of the banks will be.
Disclosure: As mentioned in a previous post, I have a position in the preferred shares of the National Bank of Greece.