Tuesday 30 August 2011

Markets update - "My slim fast Greek wedding..."



Quick post on the Greek merger as a follow up:

The ink wasn't even dry when I posted last Friday on the strong possibility of consolidation in the Greek Financial sector (Markets - Liquidity? The IV Greek Credit Therapy)that on Saturday there were some rumours about number 2 and number 3 Greek banks in a shotgun wedding, namely Eurobank and Alpha Bank, which was announced on Monday. Eurobank received 3 billion euros in emergency funding, courtesy of ELA (see previous post), when Piraeus receive 2 billion euros (number 4, next candidate in the consolidation process...).

Consequences, the rally monkey was unleashed and both shares rised quickly to the limit up of 30% and Athen's ASE index to rise the most since 1990 on Monday.

Much ado about nothing given the strong correlation between Greece and its banks. The fate of Greek Banks is sealed with the fate of their country, as I previously posted, given Greece is a major creditor to its banks.

In the process of the merger both banks will take a 1.2 billion euros haircut on their holdings of sovereign bonds (only a 21% haircut, with two year Greek notes trading at 46% yield...). I call this the "slim fast" Greek wedding.

Eurobank was one of the eight banks that failed the EBA "stress" test of the 15th of July and there wasn't much stress in these tests as we all know buy now (for example Tier one threshold was 5% this year, versus 6% in 2010...).

So what do you get when you merge two weak banks together? Easy, a larger weaker bank.

And the chief executive of Eurobank looking to raise 1.2 billion euros through a right issue next January as part of a 3.9 billion euros capital strengthening programme, so that the new pro forma core tier one would be around 14%. Good luck in raising this amount.

Alpha Bank reported a first half-net profit of 14 million euros before impairment losses of 532 million euros and Eurobank reported 76 million euros before taking a 660 million euros loss on their Greek bonds...

So loans are turning sour, we learn from my previous post, with rising NPL (Nonperforming loans) and Deposits are falling, thanks to Greek tax evaders shifting their assets to Cyprus, Switzerland, United Kingdom and Luxembourg.

And the icing on the cake, Euro zone is considering providing donor members including Finland with collateral in the form of Greek banking shares to secure the next aid package decided on the 21st of July according to Germany's Handelsblatt. Of the 109 billion expected from the plan, 20 billion euros are earmarked for Greek banks.

With one year government bills yielding 60%, we can only imply that the default will come sooner than expected. Was that what Christine Lagarde at the IMF was implying when she urged for urgent recapitalization of European banks?

So what is going to be the recovery rate on Greek debt? 50%?

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