Summary
- Wipeout of NBG investors likely as Greek government seeks to protect depositors.
- Greek banking stocks continue to lose value in spite of Greek parliamentary approval of the bailout, emergency ECB funds and €7bn loan from the EFSN.
- European stocks rise as Athens approves bailout.
Despite the approval of the bailout terms by Greece's Parliament on Thursday, investors in National Bank of Greece (NYSE:NBG) have yet to reap the rewards enjoyed by investors in other Greek stocks.
Though many Greek stocks, such as Euroseas (NASDAQ:ESEA), a shipping company that has increased 10% since July 10th, have increased, ADR prices of Greek banks remain depressed. The National Bank of Greece fell to $0.99 on Friday, a five day low.
Although the likelihood of a Greek exit from the Euro has been reduced, investors speculate that the Greek recovery will involve a recapitalization of Greek banks. According to the Bank Recovery and Resolution Directive (BRRD)- a European regulation enacted at the beginning of this year - the Greek government has the ability to wipeout shareholders and bondholders in order to protect banks from default.
According to the BRRD, shareholders, "should be severely diluted or wiped out," by a 'bail in' that protects both Greece's public funds and depositor's capital. Investors in the National Bank of Greece worry that this type of recpitalization will be the only way that the Greek government can achieve its promise of protecting depositors.
The Greek government needs to find a solution to protect the banks. A wipeout of shareholder capital may be the most politically viable.
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This worry is supported by the upcoming vote in Greece's Parliamentquestioning whether to alter Greek law to allow such a recapitalization.
Though it is argued that a recapitalization is not inevitable, the Greek government pursued the exact same strategy in 2011, a time when the situation was much less desperate. In 2011, bondholders were forced to agree to a 50% write off, contributing to the stock of Alpha Bank (OTC:ALBKY) falling from just below $2 in early 2011 to $0.07 as of July 29th.
For this reason, National Bank of Greece, along with other Greek banks, should be avoided at all costs. It is clear that NBG's price doesn't correlate positively with a Greek bailout. On the contrary, a bailout deal involving a dilution/wipeout of bank shareholders, though improving the value of other Greek stocks and the Euro, could make investors lucky to sell their Greek bank shares at any price.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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