Fitch Gives Muted Welcome to Greek Deal

Greece’s agreement with the Eurogroup for the next aid disbursement, including €23.8bn of new capital for its banks, should strengthen confidence in the fragile Greek banking sector, according to Fitch Ratings. But the credit ratings agency (CRA) adds that questions remain about how the recapitalisation will be implemented.

Fitch notes that one element of the programme is that Greece may buy back its bonds. The size of losses for the banks would depend on their sovereign debt exposure and valuations, which may vary widely for each bank, and the specific terms of the buy-back. An acceleration of asset quality deterioration due to the weak economy could increase the banks’ capital needs. With limited financial details available, the solvency implication is difficult to assess at present.

However, Fitch expects the €50bn support package targeted at Greek bank recapitalisation and resolution and the banks’ own capital raising and restructuring plans, to cover their capital shortfalls, including any additional capital needs arising from a potential sovereign debt buy-back and any further stress in the loan books.

Should add-on capital needs exceed the support package, other measures such as burden sharing for bank subordinated debt holders and initiatives to attract private capital investors as part of banks’ recapitalisation could ultimately help. But the CRA expects these measures to contribute only marginally considering the limited amount of non-senior debt held by private investors and low appetite for Greek risks.

The €23.8bn capital outlay would go a long way towards dealing with the Greek deficits, particularly at the four largest Greek banks, National Bank of Greece (NBG), Eurobank Ergasias (Eurobank), Alpha Bank and Piraeus Bank. The solvency issues arose from losses on Greek sovereign debt and domestic loan portfolios. Fitch believes the banks would have defaulted had they not received external liquidity and capital support from the authorities. This is reflected in the viability ratings (VRs) of the four banks of ‘f’.

The CRA added that it will not reassess the Greek banks’ VRs until it has more clarity. Its analysis will be based on the banks’ financial strength after the recapitalisation and their ability to absorb unexpected losses without putting renewed pressure on capital. Fitch will also assess the banks’ efforts to correct their excessive funding and liquidity imbalances. The CCC long-term issuer default ratings (IDRs) of NBG, Eurobank, Alpha Bank and Piraeus Bank are linked to the sovereign.

According to the 27 November announcement, the Eurogroup expects to be in a position to formally decide on the disbursement by 13 December, subject to the outcome of a possible debt buy-back operation by Greece. Fitch understands that the banks will receive Hellenic Financial Stability Fund (HFSF) bonds in exchange for shares or other forms of capital.

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