The Greek "Bank Rescue Fund" Goes up in Flames

Mish Shedlock |

Saganaki.jpgNo Bids on Bank Shares

Greek bank shares were down the 30% limit again Wednesday, with some bank stocks not fetching any bids at all.

The Plunge in Bank Shares Drag Down Broader Market

 Greek bank shares sold off sharply for the third day in a row on Wednesday with buyers yet to emerge on a scale large enough to counter continued dumping of the stocks.

The Athens bourse's banking index .FTATBNK ended 27% lower, bringing the three-day plunge since Monday's open to 63 percent. The rout dragged the wider market .ATG down 2.5 percent although non-financials generally outperformed banks.

Alpha (ACBr.AT) and Piraeus Bank (BOPr.AT) both closed 29.6% lower, effectively at the 30% daily loss limit. The former has 1.06 million shares on offer and the latter 2.8 million shares. There were no buyers for either.

Peers Eurobank (EURBr.AT) and National Bank (NBGr.AT), which also fell sharply, attracted buyers towards the close, ending down 26.7 and 24.3%, respectively.

The new price levels mean big losses for bank shareholders, including the Greek bank rescue fund HFSF, which holds majority stakes in three of the four big lenders, hedge funds and other long-term foreign investors.

Diving Into Greek Bank Rescue Fund Details

Inquiring minds may be interested in the HFSF Rescue Fund

 The Hellenic Financial Stability Fund (Greek: Ταμείο Χρηματοπιστωτικής Σταθερότητας), or HFSF is a Greek special purpose vehicle created to help stabilizing the Greek banking sector in midst the Greek government-debt crisis.

Based in Athens, the HFSF was founded in July 2010 under Law 3864/2010 as a state-owned private legal entity with the purpose to "contribute to the maintenance of the stability of the Greek banking system, for the sake of public interest." It began its operation on 30 September 2010 with the appointment of the members of the fund's Board of Directors.

The fund has been seeded by the European Financial Stability Facility (EFSF) with 50 billion euros to recapitalize Greece's banks.

Greek Bailout Math 

The HFSF allegedly "recapitalized" Greek banks by buying bank shares. Those shares are now practically worthless. The HFSF fund could have made a ton by shorting them instead. That €50 billion wasted bailout is a small part of what Greek taxpayers have to pay back. The new grand total is now €326 billion. The €326 billion figure includes a third €86 billion bailout (yet to be negotiated), but does not count any additional funds needed to recapitalize banks.

The €326 billion also does not count €120 billion or so in Target2 liabilities, but let's ignore all of that and assume €326 billion will be the final grand total. Greek GDP in 2014 is about €216 billion. That's going to drop as well, and likely for years to come, but let's also assume that won't decline. Let's further assume an interest rate of zero percent on the €326 billion. And finally, let's assume Greece can magically achieve a surplus of 3% of GDP forever into the future, long enough to pay back the "bailout."

Payback Assumptions

  • €326 billion total bailout

  • No additional money needed to bailout banks

  • Target2 Imbalance of €120 billion and rising does not matter

  • Greek GDP will remain at €216 billion

  • Interest rate on the bailout will be 0%

  • Greece can immediately achieve a surplus of 3% of GDP

  • Greece will hold that 3% surplus for as long as it takes to pay back €326 billion

  • Every penny of Greek debt surplus will go to pay back creditors

Payback Math

3% of €216 billion is €6.48 billion. At €6.48 billion per year, it would take Greece 50 years to pay back €326 billion.

But here's the thing: None of those assumptions is true. The interest rate will be small, but it likely won't be zero. Greece won't come close to 3% surplus, and 100% of the surplus won't go to the creditors.

The only possible favorable condition in the mix is GDP. Greek GDP will eventually rise above €216 billion, but that will take years. In the meantime, interest expense accrues, adding to the total amount that needs to be paid back.

At 2% of GDP rate of payback (€4.32 billion per year), again assuming 0% interest, it would take Greece 75 years to pay back the "bailout".

At 1% of GDP (€2.16 billion per year), it would take 150 years. And rest assured Greece will not hold a surplus for 50 years or 100 years. 

Years to Payback €326 Billion at Zero Percent Interest

  • 3% of GDP - 50 Years 

  • 2% of GDP - 75 Years 

  • 1% of GDP - 150 Years

The Math Shows that the Bailout Will Fail

If Germany insists on the terms they just crammed down Greece's throat, there is zero chance of success even at an interest rate of zero percent.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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