While the Greek parliament passed the requisite resolutions on the austerity measures insisted on by the EU to ensure the new bailout, other implications are becoming apparent. Shareholders in the country’s beleaguered banks face the possibility of their holdings being severely diluted in terms of the 25 billion euro recapitalization plan.
According to comments by Alberto Gallo, head of macro credit research at Royal Bank of Scotland, shareholders in the Greek banks will likely be “wiped out” to protect depositors and senior bondholders under the European Stability Mechanism recapitalization of the banks.
The essence of the EU Recovery and Resolution Directive is to unify the action to be taken by the member countries in the event of failure at a bank or other financial institution. The Directive preserves systemically important functions when a bank fails so that, on failure, shareholders and creditors, rather than taxpayers bear the losses. This directive came into effect on January 2015 and although the regulation still has to be passed into law by Greek legislators, the vote is set down to take place within the next few days.
Another implication of the directive is that once passed into law in Greece, it places European Central Bank (ECB) authorities in control of identifying and deciding on the necessary course of remedial action to be taken with unhealthy banks. ECB president Mario Draghi confirmed on Thursday that the Greek Emergency Lending Assistance (ELA) had been increased by another 900 million euros.
The Wall Street Journal reports that the directive is not very different to current Greek laws according to a report from law firm Orrick, Herrington & Sutcliffe LLP. During April the Panellinia Bank was liquidated in terms of prevailing laws, with certain assets folded into the Piraeus Bank. Shareholders, which included German cooperative lender DZ Bank, were wiped out.
The Greek banks, which are still closed, have virtually no capacity to absorb losses when they reopen. Markus Allenspach, fixed income research head at Swiss bank Julius Baer, says as a result of the poor quality of the bank's’ capital buffer, shareholder equity will be written down.
All the bad news out of Greece does not seem have deterred investors with reports from the Athens Stock Exchange indicating that blue chip investors such as Canadian investor Fairfax Financial Holdings had invested 400 million euros into Eurobank following a capital raise which equated to an 8.7% stake in the bank. Despite the share having fallen steadily, Fairfax increased its stake to 12.9% in May. The value of its holdings currently stands 265 million euros.
Capital Group invested 550 million euros in last year’s capital raise by Eurobank to hold around 13% of the bank. Conversely, the asset manager began to sell off its stake since the beginning of 2015 to currently hold 5.6%. This is worth around 115 million euros.
Equity brokers based in Athens have reported that mainly U.K. and U.S. hedge funds have been buying stakes in Greek banks while other have been looking to unload their holdings.