Greece’s bumpy road to financial respectability

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TTHESE ARE days of anguish for Kyriakos Mitsotakis, the Greek Prime Minister. The country is expected to welcome tourists from around 35 countries from May 15, but hotel bookings appear slim and covid-19 persists. Unless tourism recovers, the economy will contract for a second year.

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There is still some good news. April 23 S&P, a rating agency, raised the country’s sovereign rating to BB. (This is still below the investment grade, which officials expect to achieve next year.) The agency also revalued the country’s four big banks, though all remain in junk territory due to the high levels of non-performing loans. These represented around 33% of the banking sector’s loan portfolio, before provisions, a legacy of the 2010-18 debt crisis.

Piraeus, the largest and most fragile lender, gained a break with an unexpected fundraiser on the same day. Foreign investors have covered 75% of an offer of 1.4 billion euros ($ 1.7 billion) subscribed more than three times. It was the largest rights issue from a European bank since 2017, according to Piraeus, and will cover more than the new bad debts expected this year.

Not everyone agrees that Greece is on the road to financial respectability. Some observers fear that the government has helped negotiate an alliance of so-called “cornerstone” investors in Piraeus: the family office of John Paulson, a former US hedge fund manager; Telis Mistakidis, former head of copper trading at Glencore, an Anglo-Swiss metals trader; and Helikon Investments, a small fund based in Italy.

Mr Paulson’s office has increased its stake in the bank from just under 5% to 19.2% and hopes to recoup losses from its earlier investments. Together with Helikon and M. Mistakidis, he will be able to prevail over the Hellenic Financial Stability Fund (HFSF), a nominally independent benchmark for government holdings in large banks. The three investors will indeed control the bank, says a seasoned Greek banker. (Alexander Blades, a partner at Mr Paulson’s firm who sits on the Piraeus board of directors, says they intend to provide private sector oversight to help the bank succeed.)

The HFSF reduced its participation from 61% to 25.6% by agreeing to limit its participation in the capital increase, realizing losses of € 2.6 billion. His boss, Martin Czurda, an Austrian banker who tried to protect the HFSF of political interference, was ousted in February. Curiously, the Ministry of Finance then passed a law absolving HFSF staff of any criminal charges that may arise from the raising of capital.

Greek bankers are already right to be grateful to the government. A change made to the penal code last year banned the public prosecutor from conducting criminal investigations for fraud and breach of trust in banks, without a specific request from the lender who allegedly suffered damage. Investigations involving more than 300 bankers have been closed; investigators say none of the banks have called for a prosecution.

Investor enthusiasm for the Piraeus stock offering could at least signal an interest in the authorities’ efforts to clean up bad debts through securitizations. Around € 31 billion of failed securitized loans, some backed by state guarantees, were sold to domestic and foreign asset managers. Another round of sales of a similar size is expected soon.

But it could have been so much easier, says Miranda Xafa of the Center for International Governance Innovation, a think tank. In 2015, the EU allocated 25 billion euros to fully recapitalize banks, as part of Greece’s third bailout package. Only a fifth has been disbursed. “In hindsight, an early recapitalization would have helped consolidate balance sheets earlier, leaving room for new loans to support the recovery.”

This article appeared in the Finance & Economics section of the print edition under the title “Cleanup Operation”

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