World Economy

$400b Greece Banks’ Ripoff Could Destroy Bailout

$400b Greece Banks’ Ripoff Could Destroy Bailout$400b Greece Banks’ Ripoff Could Destroy Bailout

As if Greece didn't have enough economic woes, last week foreign investment funds managed to take control of four of the country's largest banks—Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank—through $6.42 billion worth of capital increases and a complex set of legal manipulations. As a result, bank shares sold like penny stocks, diluting state ownership in these important institutions that have assets totaling $358 billion.

The country's stake in the National Bank of Greece dropped to 24% from 57%, in Eurobank it fell to 2.4% from 35%, while in Alpha Bank it was reduced to 11% from 64% and in Piraeus Bank it dropped to 22% from 67%. This translates to a loss of almost $44 billion that Greek taxpayers gave to bail out the banks over the past three years, CNBC reported.

Greek stock market and legal experts believe that the maneuvers were engineered after a statutory legal provision was amended by the Greek Parliament that allowed private investors to price bank shares using a so-called "book-building method." Under this method, the share price in capital increases is not predetermined, and investors set the price at which they want to buy the shares.

It also made it mandatory for the country's regulatory body, the Hellenic Financial Stability Fund, to accept book-building prices, even if they were not properly reflecting share values.

Asset Looting

According to Greek banking sources, Capital Group, Pimco, WLR Recovery Fund, Wellington, Fairfax, Brookfield Capital Partners and Highfields Capital Management are among those who jumped at the opportunity to invest in Greek banks at below-market value this month. The foreign investors valued the four banks at about $800 million, which is more than three times less than their current market value of $3 billion. Moreover, from Nov. 4 to Nov. 20, when the book building took place, the index of bank shares on the Greek stock market fell nearly 70%.

This has hit the banks hard, according to Nikos Chryssochoidis, an Athens-based stockbroker. "In just 13 trading sessions, Alpha Bank's stock dropped to €.055 from its €0.125 closing on Nov. 4, losing 56%".

"These are horrendous figures," Emilios Avgouleas, a professor of banking law at the University of Edinburgh, told CNBC. "What is so disturbing is that this fire sale is going on with the blessings of European creditors. That makes it hard to brand it an asset looting. The loss for Greek taxpayers is enormous."

Blame Game

As the dust settles, the blame game is in full swing. The HFSF argues that its decisions are lawful and in line with the legislation passed by the Greek Parliament. The country's creditors and eurozone officials have waived their responsibilities.

In the meantime, there are worries about how this could affect overall trading on the Hellenic Stock Exchange.

On Monday, Eurozone member states agreed to disperse €10 billion for the recapitalization of Greek banks after the nation completed the first set of milestones that included the overhaul of bank governance rules, eased restrictions on home foreclosures and raised road and other taxes. These funds will be released to the Hellenic Financial Stability Fund on a case-by-case basis, as required by the European Commission.

At the same time, Greek creditors want the country's authorities to tackle the remaining vulnerabilities in the banking system, notably those arising from $114 billion worth of nonperforming loans.

Meanwhile, the leaders of five of the seven parties represented in Greece's Parliament on Saturday failed to agree on pension reforms after a six-hour meeting, prompting the Prime Minister Alexis Tsipras to criticize the opposition for being "irresponsible" and "unserious".