Greek bank consolidation escapes Catch-22

August 29, 2011

By George Hay
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — The long-awaited consolidation of Greek banks has finally started — and with a bang. The merger of EFG Eurobank and Alpha Bank, announced on Monday, has sent shares in every major Greek bank up around 30 percent: not bad, given IMF chief Christine Lagarde’s confidence-sapping recent remarks that European banks were undercapitalized. But while the deal presents a rare opportunity for investors in the battered nation to cheer, it may not mean the sector as a whole has turned the corner.

Since the first bailout of Greece in May 2010, its banks have been caught in a Catch-22. They all want cost-cutting mergers, but any combination also multiplies the exposure to Greek sovereign debt, which will bring writedowns once the latest bailout, agreed on July 21, is finalized. The EFG/Alpha solution is to create a huge buffer by raising 3.9 billion euros of new capital by selling assets and undertaking a big rights issue, among other means. If successful, the new entity will have a 14 percent core Tier 1 capital ratio, giving it a substantial cushion to absorb the 21 percent haircut on Greek debt envisaged by the July deal.

But all this is really only feasible thanks to a slug of new investment. Qatar’s royal family already owns 4 percent of Alpha, and will now buy 500 million euros of debt that will convert into equity in three years. This vote of confidence gives EFG/Alpha a start with its capital increase, and a much better chance of raising more.

The problem for other potential foreign investors — and Greek banks — is that the Qataris may have nabbed the best deal. If EFG/Alpha hits its targeted 650 million euros of annual synergies, that could boost the merged bank’s market value by 3.4 billion euros. That’s a huge upside given the current combined market capitalization of the two partners is less than 2 billion euros. But a tie-up between, say, Piraeus and National Bank of Greece could create less value and come with more strings attached, because NBG is 18 percent state-owned. Moreover, EFG and Alpha’s respective shareholders will own roughly half each of the new entity. In other putative deals, the spoils might not be so evenly distributed.

Even if foreign investors could be enticed into other mergers, the situation is volatile. The latest bailout deal could yet fall apart. Any replacement deal could demand a bigger haircut on Greece’s debt, hurting its banks even more. That could make foreign interest scarcer still — and return Greek banks to their Catch-22.

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