Feature: Greek banking sector enters final stretch of third recapitalization in three years

Greece's ailing banking sector entered this week the final stretch of its third critical recapitalization in three years to heal wounds caused by a prolonged seven year austerity that fueled capital flight, non-performing loans and climaxed to the introduction of capital controls this summer.

After the Eurogroup's green light on Monday evening to the disbursement of an extra up to 10 billion euros to Athens for the completion of the new recapitalization process that started a few weeks ago, local analysts were optimist that 2016 will find Greek lenders ready to support the return to growth.

"Policy conditions, necessary to support the transfer of funds to the Hellenic Financial Stability Fund (HFSF) out of the 10 billion euros earmarked for bank recapitalization and resolution purposes, have been met by the Greek authorities," said a Eurogroup statement issued at the end of the meeting.

A few hours earlier Greece's four largest banks had successfully wrapped up the first stage of share capital increases with the help of private investors, exceeding initial targets in many cases.

Under the European Central Bank's stress test baseline scenario unveiled in October, the National Bank, Eurobank, Piraeus Bank and Alpha bank needed jointly about 4.4 billion euros. Under the adverse scenario the amount totaled 14.4 billion euros.

The Greek lenders opened and closed their books and came up covering a large part of the capital gap indicated by the stress tests. The remaining of their capital needs will be covered with state aid.

As of Monday, Greek banks -- and the numbers indicated that it will be only the National Bank and Piraeus after all -- can formally submit requests for aid to Greece's bank rescue fund HFSF which will forward them to the European Stability Mechanism (ESM) to release the financing.

Under the third bailout, Greece sealed with its international creditors this summer to avert default, up to 25 billion euros of the overall 86-billion-euro three year aid package had been put aside for the banking system's recapitalization.

These funds would add up to approximately 40 billion euros invested so far since 2012 for the Greek banks recapitalization.

Eventually, it seems that Greek lenders will need about 6 billion euros in coming weeks. Greece's third bailout could be much smaller than initially estimated, financial analyst Yannis Papadoyannis noted.

"The amount drawn from the ESM will not exceed the 6 billion euros. A major increase on the Greek debt load was averted, as well as the risk of a "haircut" on deposits," government sources commented on Monday night.

Not all were happy on Monday with the ongoing recapitalization. Some bond holders suffered new losses by swapping their older bonds with new ones at dramatically lower prices over the past few days.

Bank shares have lost on average 80 percent of their value since January due to the turbulence of stormy marathon negotiations with lenders, three electoral battles in nine months that have fueled uncertainty and the introduction of capital controls.

Nonetheless, the alternative would be far more destructive, analysts and government officials noted, appearing confident that the recapitalization will now be fully completed by the end of 2015 so that Athens can put an end to "haircut" scenarios.

Under the new EU directive coming into force on New Year's Eve, only deposits under 100,000 euros will be fully protected.

The restoration of the soundness of Greece's banking sector will safeguard also higher deposits (in case a lender is unable to collect funds from the market to cover its capital requirements) as well as financial stability in Greece.

All four major banks in the country will be in private hands, will emerge from the new recapitalization stronger, with boosted liquidity and the HFSF's control reduced.

The state was expected to soon hold about 33 percent of shares down from 57 percent it holds today in the National Bank and approximately 22 percent down from the current 67 percent in Piraeus.

HFSF's command in Alpha Bank will shrink from 66 percent to 11 percent and in Eurobank from 35 percent to less than 3 percent of shares.

"The successful attraction of private capital shows that confidence in the Greek banking system and the prospects of Greek economy is restored. This fact combined with the final resolution of the non-performing loans issue create the right conditions so that this will be the final recapitalization for the Greek banking sector," government sources said on Monday.

With confidence in the local banking system restored after the third recapitalization, lenders will be able to support again the real economy and overall efforts to exit the Greek debt crisis. Enditem