Greece bank bonds drop

Senior bonds of Greek banks tumbled yesterday after euro area finance ministers protected depositors from any losses in the country’s €86bn bailout.

While Greece’s third bailout will spare depositors in any restructuring of the nation’s financial system, senior bank bondholders may not be so lucky, according to comments from Euro Group president and Dutch finance minister Jeroen Dijsselbloem.

The bondholders will be in line for losses if Greek lenders tap into any of the financial stability funds set aside in the new bailout.

“Bondholders were overly optimistic because bail-in of senior bonds was not explicitly mentioned before,” said Robert Montague, a senior analyst at ECM Asset Management in London.

“Today they were brought back down to earth with a bump.”

Under the bailout terms, up to €25bn will be made available in a fund to recapitalise the Greek banks, including €10bn as a first instalment. Greek stocks rose and government bond yields dropped on the deal, though senior unsecured bank bonds fell.

Eurobank Ergasias’s senior unsecured 4.25% June 2018 bonds dropped19c to 35c on the euro at one stage in London yesterday. Piraeus Bank’s senior unsecured 5% March 2017 bonds plunged 15c to 37c, while AlphaBank’s senior unsecured 3.375% notes due June on 2017 dropped 13c to 55c, according to data compiled by Bloomberg.

“The bail-in instrument will apply for senior bondholders, whereas the bail-in of depositors is explicitly excluded,” Mr Dijsselbloem said at a press conference in Brussels last week.

Greece’s eurozone creditors made adoption of the EU’s Bank Resolution and Recovery Directive a precondition of the bailout.

The directive, which makes it easier to impose losses on senior creditors, should rank senior unsecured bondholders and depositors equally, said Olly Burrows, London-based financials’ analyst at brokerage firm CRT Capital.

By protecting deposits, Greece is walking a different path to neighbouring Cyprus, which imposed a levy on uninsured depositors as part of a rescue package in 2013.

“It is not clear how they will make it possible to bail-in bonds while excluding deposits, but as we have seen in other problematic situations, where there is a will there will be a way,” Burrows said.

“We call Dijsselbloem’s solution a bail-up: Part bail-out, part bail-in, and part cock-up.”

Bloomberg