by George Georgiopoulos
September 30, 2011
Some of the biggest of Greece's debt-laden banks may be headed for nationalization, particularly if debt restructuring becomes more aggressive and investors continue to dump their shares.
Hostage to about 40 billion euros of toxic government debt on their books in the form of deeply discounted bonds, their fate is inextricably tied to the outcome of the crisis, which many analysts feel will end with a Greek default.
Private creditors, including Greek banks, have agreed to take a 21 percent "haircut" -- a loss on the face value of the debt they hold -- as part of a second, 109 billion euro bailout deal agreed by Greece and its international lenders in July.
But a consensus is building among economists, politicians, and investors that without a bigger, 50 percent haircut, Greece will still stumble under its 350 billion euro debt load and lose its emergency funding.
"The prospect of a larger haircut has got bigger. Certainly the CDS market sees a larger than 90 percent probability of such an event happening within 5 years," said analyst Niall O'Connor at Credit Suisse in London. "It is possible and could happen within a year, I would not rule it out."
On Tuesday, German and French government advisers joined the debate, arguing that Athens needs to halve its debt burden and calling for more support to recapitalize banks with large exposures to Greek bonds.
Greek media reported on Wednesday that the discussion over the size of bondholder losses has pushed more investors into agreeing to the 21 percent haircut in which they would swap bonds maturing up to 2020 with safer, longer-maturities.
Bankers have also suggested they would be open to another round of write offs later if the first amount is insufficient to stop a default that would trigger much deeper losses.
If that speculation becomes reality, the impact on banks' equity base would be too big to repair in a depressed market and lenders would have to turn to a state Financial Stability Fund -- and nationalization -- or collapse.
"The banks would (need to) be immediately recapitalized and obviously nationalized because the owners would not be able to supplement the capital gap," said Yannis Papantoniou, a former Greek finance minister and the architect of the Mediterranean state's entry into the euro.
"So the state should come in."