Centre for International Governance Innovation
January 3, 2015
After lengthy negotiations that lasted through the summer, Greece’s radical left SYRIZA government and its creditors reached an agreement last August to secure €86 billion in bailout funds. Within this total, €50 billion were set aside to recapitalize the Greek banks, which had suffered massive deposit withdrawals prior to the imposition of capital controls in late June, funding pressures, and a sharp rise in non-performing loans (NPLs) as the payment culture deteriorated in response to Grexit fears. Greece and the troika of program monitors —the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) — went out of their way to speed up the bank recapitalization part of the agreement in order to avoid triggering new "burden sharing" rules on Greek depositors that went into effect on January 1, 2016.
The rush to avoid hitting the new Bank Resolution and Recovery Directive reflects the Single Supervisory Mechanism’s (SSM) reluctance to impose a haircut on uninsured deposits in excess of €100,000 that belong to Greek corporations and would negatively affect economic activity. This aggressive timeline to recapitalize Greek banks risked imposing losses on taxpayers in order to protect Greece's depositors. The Greek taxpayers' existing stake in the four systemic banks, valued at €25.5 billion in May 2013, faced certain dilution, as did €8.3 billion in fresh capital injected by private investors in the spring of 2014, ahead of the ECB’s Comprehensive Assessment of all Euro area bank balance sheets. Asking all four systemic banks to raise funds at the same time in in a risk-off market environment ahead of the Fed’s tightening cycle, and before the Greek government had shown a clear commitment to the program by concluding the first review, including bank-related reforms, appeared to be a hard sell.
This was the third Greek bank recapitalization in as many years, each agreed as part of rescue packages funded by official creditors. The first one, finalized in May 2013, followed the debt exchange of 2012, which recognized the losses incurred by Greek banks in the government bond portfolio. The Greek state, through the Hellenic Financial Stability Fund (HFSF), acquired majority stakes in each systemic bank through direct capital injections of €25.5 billion, funded by the ESM. A second bank recapitalization took place in April 2014, ahead of the SSM’s Comprehensive Assessment of all Euro area banks. It was entirely funded by private investors, who acquired a 27 percent stake in Greek banks by injecting an €8.3 billion of equity.
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