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The Greek finance ministry has announced the conditions for the recapitalization of local banks and collapsed the Athens Stock Exchange on Monday. The Ministerial decision issued stipulates that banks must have a capital adequacy ratio (Core Tier 1) of 9%. 6 of the 9% required to achieve the required capital levels will come from the increase in the share capital of banks. It will involve 90% of the Greek Financial Stability Fund and 10% of private shareholders. Within this framework, the new bank shares will be offered at a 50% discount compared with their average market price in the last 50 days before their sale on the primary market, Imerisia reports.

The difference of 3% in order to reach the target of 9% capital adequacy of financial institutions will be covered by the issuance of contingent convertible bonds (CoCos). Contingent convertible bonds differ from ordinary convertible bonds in that the likelihood of the bonds converting to equity is "contingent" on a specified event, such as the stock price of the company exceeding a particular level for a certain period of time.

Experts say they have a distinct accounting advantage as opposed to other types of convertible bonds - CoCos bonds do not have to be included in the diluted earnings per share of the company until the bonds are eligible for conversion. It is also a form of capital that regulators hope could support the bank's finances in times of stress.

Contingent convertible bonds in the case of bank recapitalization in Greece will have a starting interest rate of 7%, which will increase by half a percentage point per year over a period of five years. Then, the convertible bonds are expected to be converted into shares.

The bank reserves the right not to pay the interest rate on the convertible bonds in case there is a risk for the capital adequacy ratio to fall below 7%. For any new share issued, the shareholders of financial institutions will be entitled to acquire nine warrants - securities giving the right to repurchase the shares within a specified period of time.

The Athens Stock Exchange did not respond well to the way the government has decided to rescue Greek banks. The main index fell by 3.63% and reached 772.9 basis points and turnover of 74.3 million euro.

The index of the banking sector collapsed (-14.4%) as well as that of financial services (-5.01%). Another victim was the construction sector (-5.14%). Eurobank’s shares, which lost about one-sixth of their value in a day (-17.35%) suffered the most among banks.

Recent data suggest that the Athens Stock Exchange has lost 39% of its turnover for the first nine months of 2012 compared to last year's levels for the same period. Capitalization has shrunk by 48% compared to January-September 2011 and the transactions have dropped by half. The earnings after taxes of the stock exchange have reached 8.8 million euro compared with 21.8 million euro in the first nine months of last year.