In this RG F4T we focus on Interest Income from Impaired loans (III); in 2015, 37% of NII and 71% of recurring PPP consists of interest from impaired loans, on our estimates (4 systemic banks);  excluding RG estimated 2010-2015 accumulated III from TBV …

ECB CA 2015 results (AQR + 2.5YRS stress tests) revealed a capital shortfall of E4.4bn (baseline) and E14.4bn (adverse); hardly a surprise given latest speculation in the press and overall expectations; Alpha and Eurobank scored better and theoretically enjoy an easier task accessing private investors; their equity proposition at baseline (2017) 0.39x TBV/2.5x PPP and 0.31x TBV/1.7x PPP (post money) on our calculations compared with 0.66x TBV/3.2x PPP for NBG and 0.62x TBV/4.6x PPP for Piraeus (see details inside our research note); baseline P&Ls imply weak RoTE 2017 < 4% for either bank; next steps: a) banks will submit capital plans by Nov 6; b) GR government will announce CoCo portion and preferred stock treatment in HFSF injections; c) recap will take place by year-end (book-building process).

In this RG F4T we focus on the recapitalization of the Greek banks. Our aim is to outline the most important aspects of this process which authorities aim to complete by year-end and before the bail-in directive kicks in. As per most recent press stories the recap amount will not exceed E15bn – i.e. much lower than the E25bn reserved in the 3^rd bail-out, with banks seeking c. E5bn of private money. We are not happy with such an amount; we believe more funds would be needed to enjoy bigger chances of cleaning up bad loans -> lowering loan rates -> resume lending -> help Greece grow. Deposits would then return into the system. If press reports are right and banks raise E5bn of private money under baseline assumptions and the rest as contingent capital, this would actually turn to be an ‘important privatization’ by the Syriza-Independent Greeks coalition government, against their pre-election rhetoric. In the meantime we expect DTC and preference shares (NBG, Eurobank) will, at some point, backfire. Alpha Bank screens better than its peers, which was also the case in 2014 stress tests. All in, we fail to see how the no.1 problem of NPLs is addressed. We do not rate the banks. More to follow as stress test results are published this Saturday.

Greeks voted NO to creditors’ proposals. Now what? We believe a realistic scenario requires a debt relief of c.E100bn (1/3 of public debt) as per our updated DSA exercise. A new program needs to be realistic or it will not work. Considering the concessions that creditors will have to make (financing, debt restructuring) such a deal is not very likely to happen. Late conciliatory actions by the Greek side (cabinet re-shuffling, coordinating with opposition parties) could prove to be just that – too late…to access this report contact@researchgreece.com

Greek Government Calls for a Referendum – 5 months after national elections and 4 days before the bailout adjustment program expires, the Greek Government announced it will be holding a referendum on July 5 on the measures suggested by the institutions (Troika); the truth is the latter (and the rest of the world) will be reading the referendum as a “Yes” or a “No” to the euro. It turns out we were wrong to assume the government would opt to reach an 11-hour deal with the Troika. We perceive this as a very negative development. We downgrade our 3 OI rated stocks to DOI and remain structurally negative on Greek equities.

Capital controls? It could be that banks (and perhaps the stock market) could be shut on Monday (and onwards). People have been lining up outside ATMs. We believe capital controls are highly likely especially since the Eurogroup meeting convened today announced that Greece’s adjustment program will not extend beyond expiration (June 30) – this renders Greek Banks as non-eligible for Eurosystem funding as per the ECB rulebook – the latter’s Governing Council will convene (reportedly) tomorrow (or Monday).

It turns out Syriza’s left fraction is very powerful indeed – another very negative realization in our view. We think the prime minister is acting dangerously, risking a Grexit; there is no way Greece can avoid pension or labor reforms, regardless the currency.

Trickily framed: assuming the referendum actually takes place, a ‘’No’’ outcome gets Greece into uncharted territory and closer to a Grexit; Pro-euro/opposition parties (ND, Pasok, Topotami) will be framing the referendum question as yes or no to the euro aiming to shift voters’ attention away from the austerity aspect inherent in the question.

What if it is a “Yes” ? It would demonstrate Greek people want to stay in the Euro and the government would have to step down; a different coalition or fresh national elections would follow – one with the mandate to reform the economy inside the euro – still, a bumpy road for Greece but definitely better than a ‘’No’’.

What if it is a “No” ? unchartered territory. Greece’s creditors (EU/IMF) will read this as a “No” to the reforms and measures needed for Greece to stay in the EZ. Therefore, we would expect the chain of events to bring a Grexit closer – the only way for the state to pay for pensions & salaries and prevent chaos.

Referendum Facts: the Greek parliament has been convened today to vote on the government’s call for a referendum. MPs will be voting tonight with 151 votes needed (absolute majority). Based on seats commanded by the coalition government we cannot see anything preventing the referendum from taking place other than the President of the Hellenic Republic resigning (triggering elections) or the Troika making a U-turn and accepting Greece’s proposals. For the referendum to be valid, 40% of registered voters must show up (last elections’ show up was 63%).