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GRReporter presents the analysis on the state of Greek banks and the future of the Athens Stock Exchange by Konstantinos Vergos, Professor of Finance at Plymouth University, which was published in the Greek online edition liberal.gr.

The sharp drop in prices of bank shares in recent days and the most typical example of the share of the National Bank of Greece, which lost 80% of its value in four weeks alone, has raised concerns among Greek investors. Investor concern in turn is leading to embarrassment about how much the prices ​​on the Athens Stock Exchange could fall.

The conversion of bank bonds into shares inevitably leads to distribution of earnings per share and therefore to a corresponding decline in its price. Obviously, if a bank had earnings of 100 euro that should be distributed among 10 shares, i.e. 100/10 = 10 euro per share, the conversion of bonds into shares would result in 30 shares in addition for example. This would lead to a new calculation of earnings per share as follows: 100/(10 + 30) = 100/40 = 2.5 euro. This means that the earnings per share (EPS) would fall from 10 to 2.5 euro. Similarly, the price would drop by about 75% in order to achieve a logical price-to-earnings ratio per share. If the share price was 50 euro for example, i.e. the price-to-earnings ratio was P/E = 50/10 = 5, with earnings per share amounting to 2.5 euro, the price would adjust to the level of 2.5 x 5 = 12.5 euro, i.e. it would be 75% lower.

But if the decline that is due to reduced earnings resulting from the distribution of earnings applies to bank shares, the same does not apply to the remaining shares on the stock exchange. Therefore, any loss in the prices ​​of the other shares is due to quite different reasons. Prices ​​are falling either because some customers want to keep the liquidity for the increase of bank capital, which can be achieved through the sale of shares in other companies, or for purely speculative reasons.

In all cases, because the Greek stock exchange has been a "shallow" stock market for many years, it would not be correct to define it as "a bottomless barrel." Even in other shallower markets where the problems are much more serious, prices are balanced at some point and start to increase.

Whether prices ​​of Greek shares will increase again depends on factors related to the fear of investors and prospects of companies. As for the "fear" factor, CDS prices are at the lowest level since the beginning of the year and, therefore, any price decline would difficultly turn into a constant avalanche. Consequently, the factor that can predict the future more effectively and give ground for conclusions is the prospects for profits of existing companies, and within the context of the conditions that are created in Greece and worldwide.

It is clear that Greece has gone through 6 years of budget cuts, collapse in consumer income of working people, bankruptcies of companies and recent restrictions on bank transactions. It would be difficult to find a period in human history in which a similar crisis might continue with the same rhythm. The signs known so far indicate recovery of the domestic market, albeit at a very small rate of about 1-2%. Unemployment in Greece has also declined in recent months. Therefore, the country may not be recovering in a dynamic way but it is gradually entering a phase of stabilization and of limited rhythm of development. At this stage, the apparent danger is concentrated more in the situation of foreign economies and stock markets, which is expected to be difficult in 2016.

A possible collapse of foreign stock markets in 2016 will affect the Greek market, but no such a possibility is so far apparent. We can say that the basic data are bad, but not enough to cause another collapse. The technical data in the market, however, are different. The sharp price collapse of the Greek stock exchange in the coming months is quite possible because of the technical analysis/psyche, if the index falls below 610 basis points. Such a perspective has not yet emerged.

In conclusion, the technical and basic data currently available in the Greek stock market are not creating preconditions for panic, without this meaning that the economy is heading towards great recovery since it would require significant recovery prospects of the Greek economy and companies, which however are not yet visible.