Greek bank shareholders are under pressure from Athens to contribute billions of euros to recapitalise the lenders so that the government can avoid taking them over.
Investors will find out by April 20 the details of the financial support package on offer from the Greek government, technocrat Prime Minister Lucas Papademos said on Thursday. Athens desperately wants to keep the banks in private hands.
The terms are likely to determine whether shareholders decide to take part. If they balk at the offer, the heavily indebted Greek state could end up owning the banks.
In a worst-case scenario, 50 billion euros ($65.6 billion) or a quarter of Greece's GDP, may be required to shore up the banking system. The money is needed because loan losses and a bond swap that saved Greece from bankruptcy hit its lenders particularly hard.
The government wants at least 10% of the capital to come from banks' shareholders through rights issues, a senior banker close to the talks told Reuters.
Whether investors are willing to pump in the cash depends on the terms and incentives on offer, although if they decide not to "follow their money" they risk having the value of their investment wiped out completely.
"The problem with the banking sector is that the landscape remains foggy, recapitalisation terms have not been spelled out," said fund manager Theodore Krintas at Attica Bank. "Put simply, will the system be nationalised or not?"
Greece's debt restructuring last month inflicted real losses of about 74% on bondholders, wiping out 22 billion of the banking system's 23.8 billion euro Core Tier 1 ratio, according to IMF estimates. Banks held 45-50 billion euros of bonds.
Banks will also need to set aside more cash to cover potential future losses, increasing the size of the capital hole they need to fill to reach a core capital target of 9% by the end of September.
The Bank of Greece has hired investment adviser BlackRock to assess banks' loan books for future losses and is expected to disclose the findings of that study later this month.
With the economy mired in a deep recession and unemployment at a record 21%, asset quality is deteriorating. Banks' non-performing loans are certain to rise from 14.7% of their books at the end of September.
CRISIS HITS SHARES, LOANS
The scale of new capital banks need is many times their market value after their share prices imploded. Greek bank shares have shed more than 77% in the last year, pummeled by the threat of dilution and a bleak economic outlook.
The big four lenders – National, Eurobank , Alpha and Piraeus – together are worth just 2.7 billion euros, a fraction of the value at their prime when they expanded in the Balkans.
A capital backstop has been set up – the Hellenic Financial Stability Fund (HFSF) – to inject most of the financial support, which will most likely be in the form of bonds backed by its international lenders. The fund will do this by buying common shares with restricted voting rights and by buying bonds, known as CoCos, issued by the banks, which would convert into shares if capital falls below certain levels.
Banks want a 3.5% annual interest payment and a long maturity of at least 10 years for the CoCos. The HFSF, which is funded by the euro zone and IMF, aims to eventually resell the shares to private-sector investors.
The more contingent convertible debt (CoCos) is issued, the smaller the rights issue will need to be, meaning shareholders will be asked to stump up less cash.
