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Saving Greek banks with funds from the Greek Financial Stability Fund has positive as well as negative consequences. Banks suffered severe losses on the Athens Stock Exchange due to the firm refusal of the government to compensate, by issuing guarantees, the losses from the decline in the market value of Greek government bonds, which are recorded in the balance sheets of the financial institutions.

If the supervisors from the International Monetary Fund, the European Central Bank and the European Commission had allowed the issuance of new guarantee bonds, the shareholders would have saved around nine billion euro, which they will have to obtain now through an increase of the share capital.

Banks have to meet the supervisors’ requirements for capital adequacy, which is fixed at 9% in Core Tier 1 ratio. Shareholders of financial institutions will cover two-thirds of it and one-third will be covered by the issuance of Contingent Convertible Bonds (Cocos). The Greek Financial Stability Fund, which maintains its capital from the aid programme to Greece, is expected to buy them.

Shareholders should retain 10% of the new shares issued because otherwise, the main equity will fall into the hands of the fund and banks will be actually nationalized. Some financial experts in the country claim that on the dried-up financial market, there is a significant risk for the shareholders to fail to increase the share capital.

In this atmosphere of general uncertainty, it is very difficult to attract new strategic investors, especially given the macroeconomic instability that still exists in the country.

The advantages the terms of the recapitalization provide are related to the right of tax deferral because of the losses suffered by the banks due to the reduction of the face value of Greek government bonds (PSI). If banks report negative results, the payment of taxes can be deferred for up to 30 years, which will cover their current working capital needs.

The price of new shares, which the Financial Stability Fund as well as private shareholders will allocate, will be determined on the basis of their market value in recent months and not in accordance with their evaluation by supervisors. According to local media, this will provide interested new investors with a discount of between 50% -60% and make it easier to attract fresh capital.

Recent information suggests that Greek banks will trigger the increase of their share capital in April 2013, after the completion of the process of merger and restructuring of the financial sector. One option under consideration is to allow banks to issue warrants, which will entitle the holders (the new investors) to participate in the capital increase of the bank by a certain date. In other words, it will give the holder of warrants the right to buy a pro rata amount of shares at a fixed price within a specified period.