Greek Banks Inch Toward Bad-Loan Relief With Complex Plans

(Bloomberg) -- Greek authorities are moving forward with two different plans to save their banks from a downward spiral. Some would-be investors think they’re too clever by half.

To reduce non-performing loans, the Greek central bank is proposing a special-purpose vehicle created with the stricken lenders’ tax credits -- themselves an accounting creation of the nation’s past debt restructuring. With those assets, the SPV could effectively become a “bad bank,” selling bonds and acquiring some 42 billion euros ($47 billion) of bad loans.

“It’s a highly complicated structured-finance transaction because it mixes complicated tax, legal and regulatory problems,” said Jerome Legras, head of research at Axiom Alternative Investments and a former veteran of Societe Generale SA’s structured-finance team. “It’s hard to see if there’s a genuine chance of having investors onboard.”

If that’s not enough complexity, one of the people said European regulators could approve both this plan and a parallel one floated last month by the state-owned Hellenic Financial Stability Fund. It envisaged an SPV partly funded by state cash and possibly involving a government guarantee. A similar plan in Italy has helped lenders offload a substantial amount of their soured debt.

“We urgently need something like a bad bank, an asset management company,” Bank of Greece Governor Yannis Stournaras said at an event in Geneva on Tuesday, confirming that his institution was working on a plan involving the tax credits, or “claims of banks vis-a-vis the state.”

The news was initially greeted with enthusiasm in Greece, which needs to unshackle its banks from the bad loan burden to help revive its economy. “It is an interesting proposal,” Eurobank Ergasias SA Chief Executive Officer Fokion Karavias told reporters Tuesday. Bank stocks surged Tuesday -- albeit off a low base, as they have been sinking for months.

However, on Wednesday, the lenders resumed their slide as the influential MSCI index provider kicked Eurobank, Piraeus Bank SA and National Bank of Greece SA out of a “global standard” index, downgrading them to a small-cap measure. Eurobank and National Bank plunged 14 percent and 12 percent respectively as a local brokerage said their exit was unexpected, unlike Piraeus Bank SA, which dropped 4 percent.

Tax Challenges

The SPV faces daunting challenges, according to Legras. The deferred tax credit-fueled entity would probably need to seek a credit rating, and then investors in bonds issued by the SPV would need to study many complex tax implications. And assigning a value to the tax credits, which recognize billions in past losses, is dependent on banks’ future profitability.

“I like complicated structured finance, but it seems weird to mix the two different risk profiles” of the deferred tax credits and the non-performing loans in one entity, he said. “My gut feeling is it’s a bit too clever.”

The Bank of Greece will release a detailed plan on Nov. 22, according to an official familiar with the matter. While the transfer of the tax credits to the SPV will deplete banks of some of their capital for a short period, their ratios will bounce back once the sale of the bad loans is completed.

Another potential problem: It’s unclear if the plan would leave the banks with a sufficient buffer of capital.

“Would I buy those bonds? I undoubtedly would not, even for a hefty new issue premium,” said Timothee Pubellier, a portfolio manager at Financiere de La Cite in Paris who invests in debt linked to financial institutions. “What those banks need is fresh money. Moving imaginary capital will not improve their fundamental situation and won’t be convincing for investors.”

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