Earlier today we asked "why this is happening" pointing to the stock price of the trading ADRs of the National Bank of Greece which unlike the broader market, are not swept in today's euphoria. We now may have the answer, and the distressed hedge funds that invested in Greek assets in recent months hoping for another "make whole" bailout may not like it.
According to the WSJ, even as Greek banks, severely depleted of cash and eligible collateral they can post with the ECB, stand to fight another day (and potentially face more withdrawals as soon as the Greek banks reopen supposedly on Monday) thanks to another €900 million liquidity infusion, investors in Greek bank shares will be less lucky: "to ensure a new bailout, investors in the country’s banks faced the prospect of their holdings being "wiped out" under the terms of a €25 billion recapitalization plan."
WSJ notes that "major investors including Fairfax Financial Holdings and Wellington Management Group decided to increase their stakes in Greek banks in recent months, according to data from the Athens Stock Exchange." Which may not have been wise, because citing an analysis by Barclays' François Cabau "bank shareholders and creditors are at risk of significant losses."
It goes on to note that "any new recapitalization of the banks is likely to hit shareholders and certain bondholders under a new set of European regulations—the Bank Recovery and Resolution Directive—enacted at the beginning of the year."
And since Greek banks are woefully undercapitalized and there is already a danger of depositor bail-ins, all securities that are below the depositor claim in the cap structure will have to be impaired, as in wiped out:
"To avoid imposing losses on depositors and senior bondholders at the Greek banks, shareholders will likely be “wiped out” under the European Stability Mechanism recapitalization, according to Alberto Gallo, head of macro credit research at Royal Bank of Scotland."
According to the BRRD directive, shareholders "should be severely diluted or wiped out" under a 'bail-in' which aims to stabilize a failing bank without the need for bailout by public funds. However, Greece has yet to pass these regulations into law, although it is set to vote on doing so in the coming days.
Incidentally, this is as reported previously, when we noted that as part of the Third bailout Greece will cede control of its insolvent banks to the ECB, with the existing equity almost certainly wiped out:
Greek banks are currently closed and have little capacity to absorb losses when they reopen. Markus Allenspach, head of fixed income research at Swiss bank Julius Baer, said the banks’ capital buffer is of poor quality, and that shareholder “equity will also be written down.”
This becomes all the more obvious when observing that the ECB itself is now the single biggest stakeholder in the Greek banking system, with some €130 billion in claims, well above the total amount of deposits, suggesting that any other Greek bank liabilities are now almost certainly null and void.
Yet even as Greek banks saw their stock prices tumble over the past several months due to concerns of sovereign default and bank failure, others dipped their toe in Greek bank shares: "Past troubles haven't put all investors off the Greek banking sector. Analysis of data from the Athens Stock Exchange over the past few months reveals some blue-chip investors who raised their stakes..."
In April 2014 Fairfax Financial Holdings, the Canadian investor led by Prem Watsa, invested €400 million into Eurobank following a capital raise, which equated to a 8.7% stake in the bank. The bank’s share price has steadily fallen. Nevertheless, Fairfax upped its stake to 12.9% in early May this year. Today, this stake is worth around €265 million. Fairfax declined to comment.
Capital Group also invested just over €550 million in last year’s capital raise by Eurobank, around 13% in the bank. At the beginning of 2015 the asset manager began to sell down its stake. By June 26, the last day before markets closed, this had fallen to 5.6%, worth around €115 million. A Capital Group spokesman didn’t respond to requests for comment.
At the beginning of the year The Capital Group also held a 3.3% stake in Piraeus Bank, then worth around €200 million. But by the end of the first quarter, the U.S. investor cut its position to below the reporting threshold on the Athens Stock Exchange. Piraeus’s share price had fallen 64% over the first quarter.
Wellington Management Group held a 1.7% stake in Piraeus as of March 23, worth around €40 million. Wellington has held on to the stake. A spokeswoman declined to comment.
Other well-known investors have also chosen to stick it out. Hedge fund Paulson & Co holds a 2.1% stake in Piraeus, a position first taken out in late April 2014, worth €243 million. It is now worth €51 million. A spokesman for Paulson & Co declined to comment.
U.S. asset manager Dimensional Fund Advisors, which holds a small $6 million position in Piraeus Bank, said: “Our fully diversified approach to investing means we have exposure to a wide range of securities across markets and asset classes, including stocks like Piraeus.”
Among the investors we find a familiar name: "The Norwegian sovereign-wealth fund, which holds a combined stake of just over €50 million in Alpha Bank and Eurobank Ergasias, said in a statement that “We’re assessing the most probable outcomes and how to act given different scenarios. Currently we’re observing the situation and waiting to see how this unfolds."
As a reminder it was the Norwegian sovereign-wealth fund that back in 2010 had a few quasi-legendary words of advise to investors in the New Normal:
Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” Johnsen said in an Aug. 27 interview. “It is important when you look at the time scope of the fund and the investments that there should be a portion of active management.”
Back then Norway was talking about its bond investment which was promptly haircut as part of the Second Greek bailout. It may be about to suffer "infinity" for the second time in just 2 years.
Others decided not to wait for "infinity" to arrive and instead opted to sell. "Investors including the Dutch national pension fund, Franklin Templeton, TIAA-CREFF, and emerging market hedge fund Charlemagne Capital, have all ditched their stakes in Greek banks in months before markets froze in late June, according to people familiar with the situation. "
But it's not just US hedge funds that stand to lose on their "Bernanke Put", the state of Greece itself is also facing losses:
The Greek state already owns sizable chunks of the major banks following a recapitalization in 2013. Existing shareholders were given warrants by the government to buy back their stakes; the share prices have, however, continued to collapse following the bailout.
Last but not least, the Greeks themselves, perhaps in an attempt to avoid holding cash in the bank, decided to gamble it all on another ECB bail out:
One trader at Eurobank said speculative investors, including a number of Greek retail investors and high net worth investors, picked up stocks in Greek banks.
They go the "bail" part right, they just were completely wrong on the "out."
Which is why even as an "unsustainable" Greece meanders day to day with yet another capital infusion to avoid a sovereign default, its insolvent banks just became the first casualty of reality.
However, they may not be the only ones: recall that bank depositors are nothing more than unsecured creditors. If and when the reality of the Greek economic collapse is fully tabulated (as the IMF appears to have finally done) it won't be just the equity that is wiped out - depositors themselves face the risk of creeping haircuts to their "liabilities."
Which is why we doubt that Greek savers will rush to put their money in the banks, and why we think Draghi is taking a huge gamble by putting even more ELA into Greek banks just before the same banks will announce at any possible moment they are forced to liquidate existing shareholders. The popular outcry against the banking system once a bail in is confirmed, even if it does not involve depositors initially, will send shock waves through society and rekindle the bank run once more.
Ironically, the one thing that would help preserve confidence in the Greek banking system, is more transparency about the "performing" nature of Greek bank loans: if this amount has hit 50% (or more) on the total €210 billion of loans, then depositor haircuts become virtually inevitable - anything well below that and there would still be a modest cushion before bail-ins have to go up in the cap structure.
Which is also why we fear no transparency will be forthcoming and why we expect that people may be fooled once again into believing their savings are, well, safe only to find out the hard way they are anything but - a hard lesson that investors in insolvent Greek banks are about to learn first hand.