Apart from increasing political risk and the market’s negative reaction to the government’s initial plan for an early bailout exit, the single most important short-term risk lies with banks’ potential additional capital shortfall.
During the summer, market rumours indicated that additional capital needs could reach 5-6 billion euros. Since then, there have been a number of positive developments, most markedly the legislation on the conversion of the banks’ deferred tax asset (DTA) to tax credit. This could trim their capital shortfall by more than 2 billion euros.
Citing banking sources, Ta Nea daily indicated on Saturday, October 18 that Greek banks capital needs could reach 1.5 billion euros. Moreover, the report noted that for two banks the capital shortfall could be zero or in the order of a few million euros.
This 1.5-billion-euro figure was indirectly referred to in reports on Friday, October 17, which outlined the government’s plan for asking for precautionary credit support from the eurozone. The key element of that credit line would involve using whatever remains of the Hellenic Financial Stability Fund (HFSF) capital buffer to reduce debt and then to serve as a backstop facility.
HFSF’s capital buffer currently stands close to 11.5 billion euros and the reports of the government’s plan indicated that the coalition believes more than 10 billion will still remain available after the banks are recapitalised based on the ECB’s findings.
In an interview with Real News on Sunday, October 19 Greek Finance Minister Gikas Hardouvelis appeared quietly confident about the stress tests.
“I am not in a position to be aware of the results, but I do not expect any major (negative) surprises,” he said. “If they [Greek banks] need additional capital, it could be relatively easily raised on the market.”
Given the recent market turmoil, “relatively easily” may refer to the amount of additional capital that will be needed rather than investor appetite.
A similar statement was made by HFSF CEO Anastasia Sakellariou in an interview with Kathimerini in July. At that time, she had stressed her belief that
“if additional capital needs arise for Greek banks from ECB stress tests in October they will be manageable”.
Hardouvelis’s comment in conjunction with the apparent estimates of Greek banks’ capital needs at 1.5 billion euros just one week before the announcement of official results are highly significant and give us a clearer picture than we have had so far.
If the 1.5 billion figure proves accurate when the ECB publishes its results at the end of week, this would create the best-case scenario for the Greek banking system and alleviate one of lenders’ most significant short-term risk factors.
In addition, there would be a positive knock-on effect for Greece’s ongoing troika review and discussions about exiting the bailout at the end of the year.
The ECB is due to publish the results of its comprehensive assessment of 130 banks on October 26 at noon (CET). Following that announcement, banks will have two weeks to submit their capital plans to the ECB, detailing how shortfalls will be covered.
Although the submission of the capital plans does not require their disclosure to the investment community, the market expects that Greek banks will proceed with official announcements on the coverage of capital needs and these would be expected sooner rather than later within that 2-week period.
*Manos Giakoumis is the head analyst at MacroPolis. You can follow him on Twitter: @ManosGiakoumis