Banks recapitalised as part of Greece's bailout may be forced to overhaul their management and governance, the European Commission said, in response to questions raised by Reuters about alleged malpractice at Greece's fourth-largest bank.
In a statement, the European Union's executive arm said Greek banks would face due-diligence audits and possible management shake-ups in return for their share of billions of euros from the region's taxpayers and the International Monetary Fund.
"The recapitalisation process will entail a significant revamp of corporate governance structures and management practices in banks where malpractice has occurred," said Antoine Colombani, the Commission's spokesman on competition and antitrust issues.
The Commission was responding to a Reuters article of July 16 which reported that the chairman of Piraeus Bank, Michael Sallas, and his children had taken out loans of more than 100 million euros to secretly buy shares representing an undeclared family stake in the bank of more than 6%.
The purchases, conducted as part of an 800-million-euro Piraeus rights issue in January 2011 designed to strengthen the bank's capital base, were made via offshore companies owned by Sallas and his two children, according to audit documents seen by Reuters. The transactions were not declared to the Athens Stock Exchange by the bank.
The evidence of secretive self-purchasing of bank stock with borrowed money has raised questions about corporate oversight, especially at a time when European taxpayers and the IMF have committed 48 bln euros to bailing out Greece's banks, including Piraeus.
In a series of articles about alleged mismanagement at three Greek banks, Reuters also reported in April that Piraeus had not disclosed it had rented properties from private companies run by the Sallas family. The bank has sued Reuters for defamation over the story, claiming 50 million euros in damages.
Sallas, who stepped down as executive chairman of Piraeus last month but remains its non-executive chairman, has declined to respond to questions from Reuters about the share loans.
In a written response to questions, the European Commission, the EU's executive and a party to Greece's 130-billion-euro ($156 billion) bailout, said it was following the issue in conjunction with Greek authorities.
The competition authority is one of several Commission departments involved in monitoring Greece's bailout obligations, including whether EU rules on state aid are being met. Under those rules, EU regulators can force an institution such as a bank to make management changes or even be wound up.
Colombani said the recapitalisation of Greek banks, which involves funds from the euro zone's bailout fund being transferred to a Greek-administered facility called the Hellenic Financial Stability Fund, would be tightly monitored, a process that could include demands for management changes.
"COSY HABITS"
But Greek economists, academics and politicians have been outspoken about the apparent lack of oversight in the banking sector, which was forced to the point of collapse after the restructuring of Greek government debt in February.
"A vital part of the Herculean task of the reform project in Greece should be governance reform," said Michael Jacobides, an associate professor at the London Business School.
"Resistance is rife as change would require, among other things, unsettling cosy habits of Greece's business elite, or severing mutually beneficial ties between business leaders and politicians," said Jacobides.
As well as demands for tighter regulation, questions have been raised about the actions of inspectors from the EU, IMF and the European Central Bank, together known as the troika, who are responsible for on-the-ground monitoring of the bailout.
With a staff of only around 80-100 people in Athens, the troika has tended to focus on the strict economic targets the Greek government must meet under the terms of the bailout, rather than nitty-gritty banking sector reform. But that may have to change for effective policing of the rescue.
"Much external pressure will be needed to identify governance problems and potential business scandals across the board," said Jacobides. "The troika will have its hands full. But if it succeeds, it will massively benefit the Greek economy."
For the European Commission, the first priority is the recapitalisation of Greece's banking sector, which had to write down the value of its holdings of Greek government bonds by nearly 70% as part of the debt restructuring – a move that wiped out a significant portion of the capital base.
"The recovery of the Greek economy will not be possible without a strong and well-capitalised banking sector," said Colombani, the Commission's competition spokesman.
"Mostly as a result of the deterioration in the economy and the impact of PSI (private sector involvement in the debt restructuring), most Greek banks have seen a large share of their capital base eroded."
But officials say recapitalisation is unlikely to be sufficient without much more intense monitoring of how Greek banks operate and manage their finances.
