Since the Greek stock market reopened this week after five weeks of closure, it’s been in freefall — well, as free as it can fall in Athens, with one-day losses pegged at a maximum of 30%. The banking sector accounts for around a fifth of the value of the Athens index, and it fell by the maximum 30% on Monday and by the same again on Tuesday, and so far today some of the banks in the sector are again close to the 30% daily limit.
How much further have the Greek banks got to go before they hit bottom? Looking at Greece’s four biggest lenders, Piraeus Bank shares have fallen 66% since Monday morning’s reopening, which is less than three days of maximum falls and could suggest we’re already at the bottom. Shares in National Bank of Greece (which, despite the name, is not the country’s central bank) are down 63% in the same period, lending credibility to the theory. Alpha Bank has fallen 66%, with Eurobank down a very similar 64%.
As bad as UK banks?
But how does this compare with the UK banking crisis? Barclays, which suffered badly but managed to find private capital to keep it going and did not need a state bail-out, saw its share price crash by 89% from its pre-crisis high. That was in a market with no limits on daily price movements, yet the full extent of the plunge took nearly two years to work itself out — from a high in February 2007, it took until January 2009 for Barclays shares to get into a sustained recovery.
Over a similar two-year period, the Lloyds Banking Group share price plummeted by 93%, and Royal Bank of Scotland suffered a jarring 99% loss!
It’s perhaps unfair to think of the new Greek banking collapse as really covering only three days, as it’s in effect a five-week fall encompassing the closed period which started just before the government implemented capital controls to prevent an immediate bankruptcy. And this short period does not account for the full extent of the falls to date anyway, as National Bank of Greece shares are actually down a whopping 98% since the start of 2007.
But as the UK’s banks (and those across much of the rest of the world) are now looking forward to much improved liquidity and a return to rising profits, Greece’s equivalents could be facing wipeouts the likes of which have not been seen since the Great Depression. We’re looking at very similar falls in banking shares in the two markets — but with the worst yet to come for Greece.
Diluted to nothing
The big problem is that Greece’s banks are going to need massive recapitalisation, and at this stage it’s impossible to tell where that’s going to come from or when — there’s still a great deal of doubt over Greece’s third EU bailout package and whether it will be sufficient to finally stop the rot, and any serious thoughts of recapitalization are going to have to wait until after that.
If and when it does come, a bank recapitalization programme is surely going to leave existing shareholders diluted to pretty much nothing — no sane institution is going to want to invest in new bank equity unless it’s at a serious discount to today’s prices. The Greek central bank simply does not have the means to fund a bailout as it has no control over the country’s money supply, and it would be a fantasy to think that the ECB would play the same role that the Bank of England played.
What should you do?
What would I do if I held shares in Greek banks? Well, I’d have been queuing up to sell as many as I possibly could the moment the market opened, as I can’t see them being worth anything at all in the long run.