Window of Opportunity for Greece and Its Investors

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Window of Opportunity for Greece and Its Investors

Greece has been the markets’ whipping boy for most of the past four years. But in the past few months sentiment has changed and international investors are bottom fishing — in particular for banking assets.
This gives the country a double opportunity: Lenders can use it to clean up their balance sheets by selling nonperforming loans — loans overdue for more than 90 days — and the state can privatize its stakes in the banks. Both should grab the chance while it lasts.
Greece’s banks have been in a terrible mess as a result of the crisis. Not only were they loaded up with government bonds, which eventually paid less than face value, but even the big four that survived are weighed down by about 65 billion euros, or about $88 billion, of nonperforming loans, equivalent to about a third of gross domestic product.
But a €40 billion recapitalization and restructuring of the sector, financed mainly by bailout money, has helped change investor perceptions. Several hedge funds — including Paulson — have invested in the banks.
Last month Piraeus Bank placed €494 million worth of its shares and warrants with investors after BCP, the Portuguese lender, decided to sell out. Meanwhile, investors are heading to Athens looking to buy packages of nonperforming loans on the cheap.
Investors believe Greece is close to turning the corner after years of recession. There are also few opportunities for high returns in the rest of the world, given that the love affair with emerging markets has soured. This is why Athens now has an excellent chance to clean up its banks and privatize them.
Although the banks have been recapitalized, their nonperforming loans are clogging up both their balance sheets and the economy. Zombie companies, which have borrowed too much, are dying a slow death. Even healthy companies struggle to get credit because the banks are preoccupied with managing their existing bad loans.
The classic answer to this problem — adopted recently in both Spain and Ireland — is to create a “bad” bank. Nonperforming loans are sold to a separate institution at a discount. The bad bank then restructures the loans. In an ideal world, it divides the sheep from the goats: Companies with viable business models but excessive debt get their borrowings cut, maybe by converting them into equity; those that are not get liquidated. Meanwhile, the good banks focus on lending to both healthy businesses and restructured ones.
Creating a bad bank may be part of the answer for Greece. But the investor interest means there are other options. One is for the banks to sell packages of loans to vulture funds. A second is to set up special purpose vehicles with investors, allowing the banks to share in any upside. A third is for the Hellenic Financial Stability Fund, the organization established to manage the state’s stakes in the banks, to create a bad bank and get international investors to provide most of the equity funding for it.
One problem is that the banks would have to sell their bad loans at a deep discount to face value — perhaps at only a quarter of it, according to various estimates doing the rounds in Athens. Given that they have only taken provisions for about half face value, they would have to take further big write-downs of maybe €15 billion.
This, in turn, raises the question of where they will get the capital. There are two main answers: Get another capital injection from the stability fund, which still has an unused pot of €11.3 billion; or sell shares in the market, the route chosen by Eurobank, which plans to issue €2 billion worth of stock in the new year.
Meanwhile, Athens should continue with selling its stakes in the big four banks, Alpha Bank, Eurobank, National Bank of Greece and Piraeus, the value of which is now more than €20 billion.
This would have two benefits. First, it would increase the free float, allowing the banks to operate as commercial institutions with international shareholders. This would be an improvement on the bad old days when they were controlled by a coterie of local business interests.
Second, the funds from privatization could close the funding gap in Athens’ bailout program, which the International Monetary Fund puts at €10.9 billion. At the moment, there is no plan for filling this hole, which will emerge in the middle of next year, and Greece’s European partners are reluctant to lend it more money.
It would be better if Athens raised the money itself, as it would then gain credibility with its lenders who have been berating it for the slow progress it has made privatizing assets. Instead of being seen as a laggard, it would exceed expectations — reinforcing the view that it was turning the corner.
Before Greece can privatize its banks, it needs to neutralize some warrants outside investors received when they bought shares this year. This is because it would be foolish to sell its bank stakes only to find it has to buy them back at an exorbitant price if and when the warrants are exercised. But this is something a bit of corporate finance ingenuity could solve.

Greece knows a lot about vicious cycles. Athens and its international rescuers should capitalize on positive market sentiment while it lasts to give a positive twist to what could hopefully become a virtuous one.

Source: The New York Times 17/11/13