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Greek Banks: Stress Tests, Haircuts and Mergers

Hot weather and stress are both known to cause sweating. Currently the majority of Greeks are loosing volumes of sweat due to recession stress and the bankers don’t seem to be  exception to the rule. Eight Greek Banks are waiting the official result of CEBS’s stress tests to be disclosed on July 23rd. At the same time the President of Bank of Greece forecasts the necessity of mergers, saying “‘the years of high profitability” are over. Reason enough for numerous bank employees to start fearing about loss of their working place and this in times when the market stagnates, small and medium enterprises close down one after the other and big enterprises apparently wait for the labor market reforms to proceed in firing people.

According to media reports Greek Banks face a sharp decrease in the profits due to several reasons, which I summarize here: current state of economy, long recession and stagnation, concerns of restructuring debt,  the presence of Greek banks in the Balkans, and their exposure to  Greek government bonds.

Greek Banks to undergo the Stress Test:


Bad Haircut Day or extreme Haircut?

Although the Committee of European Banking Supervisors has not mentioned anything on its Wednesday statement about haircut on Greek bonds, Bloomberg reports of a potential  17% haircut. “European Union banking regulators have told lenders that their planned stress tests may assume a loss of about 17 percent on Greek government debt” writes Bloomberg quoting unnamed sources.

17% loss of Greek bonds seem ‘too modest’ to financial analysts like March Chandler of oldest privately owned US-bank Brown Brothers Harriman & Co. in New York. He says to Bloomberg that “These kind of numbers do not seem particularly robust”.

An opinion shared also by Stephen Pope, at bond trading specialist Cantor Fitzgerald, Mr. Pope regards these figures “like the softest option possible” and advices the European Regulators “should  be applying a haircut of 20 percent on Greek debt“. 

No matter if it is 17% or 20%  … it seems to me that Greek hair has grown too long and  the Haircut is  invevitable…

What’s a financial Haircut anyway?

After having to learn terms like Spreads and CDS times has come to learn what’s in a Haircut now. No, no, you don’t have to visit a hairdresser to loose some percentage of your hair and go outside proud of your new look. No, no! If you get a financial haircut, you loose part of the value of the Bonds you own. I have browsed to many Haircut definitions and I’ve picked up the easiest one to understand:

“A Haircut  is a percentage that is subtracted from the par value (stated value or face value) of the assets that are being used as collateral (In lending agreements, collateral is a borrower’s pledge of specific property to a lender, to secure repayment of a loan). The size of the haircut reflects the perceived risk associated with holding the assets.

For example, Treasury bills (which are seen as fairly safe) might have a haircut of 1%, while for a stock option (which are seen as less safe) the haircut might be as high as 30%. In other words, a $1,000 treasury bond will be accepted as collateral for a $990 loan, while a $1000 stock option might only allow a $700 loan.

A bond selling at par is worth an amount equivalent to its original issue value or its value upon redemption at maturity-typically $1000/bond”

Got it? Not yet? I can’t insist that I fully got it either! But in short I can say that a Haircut is bad, not matter how good the hairdresser is.
Bank of Greece President calls for Bank Mergers

Greek Banks must forget the  years of high profitability and should proceed with alliances, George Provopoulos, President of the Bank of Greece, told Greek television Mega Channel Tuesday.
“In a more difficult macroeconomic environment, there will be pressure and trends to join forces,” he said, according to Reuters.
“I have called banks to think strategically about their future and to proceed, in an amical and pre-arranged way, to moves that will create synergies.”
He also said he expected stress tests to show that Greek banks face no liquidity problems.
Provopoulos noted he is confident that Greece will cut back on its deficit and will reach this year’s target without taking any further austerity measures.

Who with Whom?

The oldest scenario I have been hearing since 2008 is that of National Bank of Greece merging with Piraeus Bank. A couple of months ago , in must have been in February, there were rumors the two banks had almost reached a deal but so far nothing has happened. Another scenario saw a merging of Alpha Bank with Piraeus, EFG-Eurobank with National Bank and TT Hellenic Postbank with Attica. A third scenario speak of the creation of a banking colossus merged by National Bank, Piraeus and Eurobank. At the same time the rumors speak of Eurobank buying the french owned Emboriki Bank from CRÉDIT AGRICOLE Group. 

As the Greece is under the strict control of International Monetary Fond, the Eurppean Union and the European Central Bank, consolidation in banking sector is not a matter of  bankster gentlemen’s agreement. Bank CEOs can dine, golf or sunbath with whoever bank CEOs they like but for an official merging the blessing and approval of Greece’s lenders is needed.  

Bank employees

I left opinions of bank employees at the end. Banks consolidations are anyway issues that go beyond their duties. I spoke with some friends, employed by big banks, who were between 3 and 22 years.

One said, she doesn’t even want to think about bank merging. Another said, he will go to work abroad. A third one said, she might consider early retirement even if she can’t afford it financially.

They all fear that bank consolidations will  end up in making people jobless, not matter how powerful the Bank Employees Unions are.


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