Eurobank is an apt example of Greek ingenuity. Its name is a coup in itself.[1] Beyond semantics, however, and coming to recent developments, Eurobank is a wonderful example of the Greek establishment’s ingenious efforts to defraud Greek and European taxpayers, and then to proclaim a glorious Greek Success Story, weeks before the European Parliament elections. (You have already seen, here, the other plank of this campaign, also known as the Greek primary ‘surplus’…)
Let us begin with a grim account [2] of the public contributions to keeping Eurobank’s doors open and their ATMs functioning, following the bank’s complete and utter insolvency. As its owners contributed not one euro to its salvation, and no other private investor dared participate in the bank’s recapitalisation, the insolvent Greek state entered the fray lavishing Eurobank with money that the Greek taxpayers borrowed from Europe’s original bailout fund, the European Financial Stability Facility (EFSF). In brief,
- In 2013 alone the Greek state was the sole buyer of Eurobank’s emergency share issue. Through the Greek branch of the EFSF (the so-called Greek Financial Stability Fund), the state invested €5.8 billion, paying €1.54 per share, thus acquiring 95% of the bank’s equity.
- The state purchased another €1.25 billion worth of preferred shares.
- The state handed over Postbank to Eurobank after it had injected €4.06 billion into Postbank to cover its ‘funding gap’ and another €550 million of fresh capital to recapitalise it.
- To ‘assist’ Eurobank absorb a small, corrupt failed bank (Proton Bank), the state gifted Eurobank €760 million to cover Proton’s ‘funding gap’ and another €550 million as fresh capital for it.
- Another €760 million was gifted, again by the state, to Eurobank for the purpose of covering the funding gap of another small bank (Aspis) that Eurobank took over.
All in all, the bankrupt Greek state handed over to Eurobank the grand total of €13.3 billion, or 7.3% of GDP. A few months later, in the new share issue that took place a couple of weeks ago, the following transpired, with the approval of the government and the troika:
- The state was not allowed to participate (through the Greek Financial Stability Fund) in the new share issue.
- Private investors were allowed to purchase the new shares at an 80% discount from the price the state had paid for shares only a few months before – they paid a measly 31 cents per share whereas the state had forked out 154 cents per share.
- The price paid per share by the private investors (of 31 cents per share) was not only much lower than the price the state had paid a few months before, but also lower even than the share price quoted in the Athens Stock Exchange at the time of the share issue.
- To cover their metaphorical posterior, the government passed a piece of legislation through Parliament that, shamelessly, granted perpetual immunity from prosecution on this matter to the board of the Greek Financial Stability Fund – for having agreed, against its interests, not to participate in the new share issue.
As a result of the new share issue, private investors (including the usual hedge funds) paid €2.86 billion and acquired 65% of a bank toward which the Greek state had so recently contributed €13.3 billion. Given that the state’s stake in Eurobank has now been diluted to 35% of the stock, which has been devalued as a result of this fire sale, the state’s remaining equity has dropped to a mere €2 billion.
To recap, the state rescued Eurobank at a cost to the Greek and European taxpayer of at least €13.3 billion. A few months later it handed over the bank’s keys to a consortium made up of its existing owners and foreign (primarily hedge) funds, keeping equity of €2 billion.
Could the state have acted differently, without jeopardising the bank and without unloading more than €10 billion of extra debt on the hapless Greek taxpayer, who will now have no alternative (due to her/his insolvency) but to transfer some of these losses to other European taxpayers (through the inevitably debt restructure that is due very, very soon)?
One solution, that is even consistent with Greece’s bailout commitments, would be for the state to invest itself the €2.86 billion that came from the new (2014) share issue, taking it out of the residual bailout loans that the Greek state still has stashed in the GFSF. That way the state would have retained control of the bank and the taxpayer would benefit fully from any recovery in the medium term. Once the government had pumped €13.3 billion in Eurobank, and given the government’s own projection of an improvement in the share price of banks, paying another €2.86 billion to retain control and to recoup its huge investment would be a priority for a virtuous government that puts its citizens’ interests above those of the bankers.
It is interesting to take a look at the argument used by the government for not doing this and for, instead, taking such a deep haircut, and with such indecent haste, on its investment in Eurobank. Their argument was that, because Pireus and Alpha banks were returning to private ownership, “keeping Eurobank under public ownership for a little while longer would damage its reputation in the market place!” Can you imagine RBS being unloaded, by the British government, onto hedge funds, at a huge cost to the British taxpayer, so as to avoid the stigma of public ownership? Frankly, I cannot.
Another fascinating, in its audacity, argument in support of the Eurobank fire sale is that the state’s loss (of more than €10 billion) is of the same order as Eurobank’s loss in the 2012 PSI, from which the bank lost €9.4 billion. Clearly, the Greek government does not understand the concept of sunk costs and has no sense that its primary responsibility is toward its citizens – not to bankers (who, after all, had chosen to stock up in Greek government bonds prior to 2012).
On a final note, addressed to my Irish readers, you may be interested to note that the investors that have been handed the keys to Eurobank by Greece’s government include Fairfax, WLR (Wilbur Ross’ concern), Fidelity etc. In other words, the major shareholders in the Bank of Ireland, from which they made a neat return of 280%. In this sense, the Irish and Greek bailout success stories are beginning to join up…
[1] Having predicted before anyone else in Europe that Europe’s common currency would be called the ‘euro’, its cunning Greek ship-owning family registered their fledgling bank’s name before the European Union could block naming a private bank after the official currency.
[2] This article is based on research by Elias Karavolias.
