Greek banks did much better than expected in the latest ECB stress test (undoubtedly stress-free). The ECB’s adverse scenario shows Greek banks only underfunded to the tune of €14 Billion.

A scramble is now underway to raise that amount and Stabilize the Greek Banking Sector.

Greece’s four big banks will this week finalise recapitalisation plans to raise €14bn the European Central Bank says they require, in the latest move to stabilise the Greek economy.

After a weekend in which the ECB announced the result of stress tests for the banks and the Greek parliament passed legislation paving the way for the state to inject more funds into the sector, a senior Greek banker said the banks’ needs were manageable, but stressed that time was short.

Much attention has focused on whether the recapitalisation of the four banks — Piraeus Bank, National Bank of Greece, Alpha Bank and Eurobank — will dilute international investors’ equity stakes.

“So far, so good . . . the outcome of the stress tests could have been much worse,” the banker said. He was referring to the ECB’s finding that the banks would be short of €14.4bn of capital under the so-called “adverse scenario”, where lenders must be able to withstand a worsening of economic and financial conditions. “But there’s still a lot of work to be done in a very short time.”

The banks have until Friday to present their recapitalisation plans for approval by the European Central Bank’s single supervisory mechanism.

One person with knowledge of the discussions added that the government would steer clear of heavily diluting international investors’ equity.

“We’re looking at a 25 per cent direct equity stake for the Greek state and 75 per cent in the form of cocos [hybrid bonds that convert into equity only if a bank’s capital falls below a certain level],” this person said.

In addition, the senior banker also suggested that it would be counter-productive to “bail-in” senior bondholders to any recapitalisation by imposing losses on them, even though such a course of action might be possible under the new framework legislation.

“It is clear that if adopted [a bail-in] would become a legal minefield that could affect the sector’s overall stability,” the banker said.

Stress-Free Results

Heaven forbid bondholders take any losses. And of course the €14 Billion stress-free result was better than anyone expected: nudge-nudge, wink-wink.

As we all know, bondholders generally don’t lose (except to bail out public unions and public pension plans as in GM, Detroit, and various California cities). 

Mike “Mish” Shedlock