Greek Banks Need up to $15.8 Billion to Strengthen Their Capital Base | Business News

Greek Banks Need up to $15.8 Billion to Strengthen Their Capital Base

1 Nov 2015 | Author: | No comments yet »

ECB reveals capital hole in Greek banks as unpaid loans soar.

Greece’s four main banks must raise €14.4 billion in fresh capital, the European Central Bank said, as investors and taxpayers face the cost of repairing the damage from six months of wrangling between the nation’s government and its creditors. An asset-quality review carried out by the ECB resulted in valuation adjustments of €9.2 billion for the National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AE, the Frankfurt-based supervisor said Saturday in a statement.

The capital hole has emerged chiefly due to the rising number of Greeks unable or unwilling to repay their debt, after a dispute over reforms between the leftist government and international lenders almost saw Greece leave the euro. The banks’ capital gap amounted to €14.4 billion under a simulated stress test scenario, and €4.4 billion under baseline macroeconomic assumptions. The four banks will have to submit recapitalization plans to the ECB’s supervisory arm by November 6. “Covering the shortfalls by raising capital would then result in the creation of prudential buffers in the four Greek banks, which will facilitate their capacity to address potential adverse macroeconomic shocks,” the ECB said in the statement, adding that a minimum of €4.4 billion, corresponding to the AQR and baseline shortfall, is expected to be covered by private means.

The capital shortfall is “significantly lower than feared,” German Deputy Finance Minister Jens Spahn said, while US undersecretary for international affairs Nathan Sheets said in an interview before the results that the health of the Greek financial system is now “clearly better” than a few months ago. The fact, however, that the declared capital hole is smaller than the 25 billion euros earmarked to help banks in the country’s bailout may encourage investors such as hedge funds to buy shares. Piraeus reported on Saturday a net loss of €635 million in the first nine months of the year and an accelerating pace in the formation of sour loans. Recapitalizing the country’s lenders, after a month- long forced shutdown in July and record deposit bleeding, is the first step to restart the country’s economy, which is still crippled by restrictions on transfers of capital and ATM withdrawals. But Ramon Quintana, a director general in the ECB’s bank supervision arm, cautioned that Greece’s economy needed to stay on track for the banks to hold steady. “Any deviations from these scenarios means that reality can go beyond what is expected in the exercise,” he told journalists. “This is why it is very important to avoid any deviation from the economic growth expected.” Banks have struggled most amid the months-long stand-off between leftist Prime Minister Alexis Tsipras and his country’s international backers – the International Monetary Fund and European Union.

Common and preferred stock as well as other financing instruments, including unsecured senior liabilities, can be bailed in before a financial institution is eligible to use the public backstop of the state-owned recapitalization fund to cover its shortfall, according to the bill. A spokesman for the European Stability Mechanism– the currency union’s crisis loans fund — said that Greece can “quickly” use €10 billion,which have been mobilized for Greek bank recapitalizations and are currently sitting in a segregated account. To reach its outcome, however, the ECB counts into the calculation billions of euros of future tax rebates that the Greek government could pay its banks. With sufficient private-sector participation, the remaining €15 billion, which have been earmarked for capital injections under the terms of the bailout, will not be needed, the spokesman added, asking not to be named in line with policy. “Capital shortfalls under the baseline scenario, which may be further reduced by the currently ongoing liability management exercises by the Greek banks and the restructuring plans to be submitted to the ECB, are manageable,” analysts at Athens-based Euroxx Securities Vangelis Karanikas and Yiannis Sinapis wrote in a note to clients. The new recapitalization legislation empowers the state- owned Hellenic Financial Stability Fund to regularly evaluate the management and boards of Greek lenders that seek state aid.

But Greece’s future and that of its banks remains uncertain, despite the latest checks. (Reporting By John O’Donnell, Francesco Canepa and George Georgiopoulos; Additional reporting by Gernot Heller in Berlin; Editing by Raissa Kasolowsky) At least one board member should have five years or more experience in bad loans management, and three independent board members, who will be presiding over all committees, mustn’t have worked in a Greece-based bank during the past 10 years. The recapitalization bill which was approved Saturday allows HFSF to participate in capital raising actions of smaller banks and not just the four biggest ones.

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