The state sale of Ionian Bank was supposed to be a landmark for
the Greek privatisation programme - marking the first majority sale
of a major government asset and ridding its owner, the Commercial
Bank of Greece, of a troublesome and underperforming
In the event, its failure was an embarrassing flop - throwing into
doubt the continuation of the privatisation programme and the
structural reforms necessary to accelerate Greece's progress
towards Emu membership.
What went wrong? What happens now? And what impact will the sale's
failure have on the perception of a Greek banking sector that has
improved out of all recognition in recent years?
If March 13 was Fabulous Friday for the Greek economy and its
capital market, then August 24 was Miserable Monday. This was the
day which local bankers and brokers had been looking forward to as
a major landmark in the modernisation of the Greek banking
industry, the development of the privatisation programme and, in
turn, the progress which Greece was making towards Emu
On Miserable Monday, on all three counts, Greece scored nought out of ten. August 24 had been earmarked as the day on which the state-controlled Commercial Bank of Greece would sell its 58% stake in the country's oldest bank, Ionian, to a private sector bidder. As a result, the sale would have heralded an entirely new dimension in the privatisation programme.
"It's really the first genuine large-scale privatisation we would have seen in Greece," says Evricos Sarsentis, banking analyst at Telesis Securities in Athens, "because in the case of the OTE flotation the government has still only sold minority stakes."
But the significance of the Ionian Bank sale would have stretched far beyond this. The government's preparedness to offload a majority stake in a bank which had become the enfant terrible of the sector was also seen as an important political statement, confirming its determination to press ahead with monetary convergence irrespective of the potentially combustible social ramifications.
Ionian had been plagued throughout the summer by industrial action which had more or less closed the bank down and denied its customers access to the most basic banking services.
This was at least partially to blame for the awful first half figures reported by Ionian Bank in the week leading up to its scheduled sale: although lending and deposits both rose over the first six months of the year, profits slumped by 36.5% from Dra6.3bn to Dra4bn.
By signalling its willingness to sell Ionian to a private sector bidder which would presumably have had little if any sympathy with the bank's fractious workers, the Greek government would have notched up a major triumph in its apparently ceaseless battle with the unions.
George Michelis, general manager at the Commercial Bank of Greece, says: "Although the sale of Ionian Bank is a business transaction, it has been elevated into a major political development and one which will have benefits accruing to the entire Greek economy."
A final important by-product of the Ionian sale would have been the fillip it would have given to the Commercial Bank itself. Far from being a value-enhancing asset, Ionian had become an underperforming liability for its parent and a millstone around its neck.
The Commercial Bank remarked in its most recent annual report: "The average annual returns in the participation in the Ionian Bank in the last five years amounted to 3.3% on the basis of average stock exchange price per year. Indicatively, we note that the returns of interest bearing notes in the same period amounted to 14.98%."
Others couch their description of the performance of the Ionian Bank in rather less diplomatic language. As one local analyst expresses it, "Ionian has always been one of the most ludicrously over-protected institutions in this country. Staff were given huge fringe benefits and nobody seemed remotely interested in the bank's performance."
Says another: "If you looked at Ionian Bank in isolation you would think that Greece is a hopeless place, although to be fair to the unions Ionian is not really representative."
Aside from removing the Ionian burden from the shoulders of the Commercial Bank, its sale would have provided it with the much needed capital injection the bank requires if it is to improve its capital base, upgrade its technological capacity and expand geographically.
An update on the local banking industry published by Contalexis Financial Services notes: "The divestiture of Ionian Bank would have proved financially attractive for the Commercial Bank. A price of 3.0 times 1997 NAV would yield revenues of Dra155bn for Commercial Bank's 51% stake, resulting in a net gain of Dra100bn [40% of 1997 consolidated income]."
In spite of its woeful profitability in the first half of 1998, Ionian Bank would have represented an attractive enough asset for a private sector bidder ready and able to curb the power of its unions.
Aside from being Greece's fifth largest bank with a nationwide network of 225 branches, its portfolio of securities and other fixed assets is estimated by Contalexis to have a net asset value of Dra101bn versus a reported NAV of Dra88bn.
This is why, in the weeks leading up to August 24, most analysts were convinced that the bank would ultimately be acquired by the acquisitive private sector Eurobank, or by Alpha Credit Bank, which is Greece's largest private banking group.
Although one Athens analyst reports that no foreign banks had made enquiries about acquiring Ionian - largely because of the difficulties involved in conducting a comprehensive due diligence examination of its assets - the Athens rumour mill suggested that Deutsche Bank had expressed an interest in the bank.
On the morning of August 24, market expectations were that following an increase in Ionian's share price of more than 200% since the start of the year, a fair price for the stake to be sold by Commercial Bank would have been in the range of between Dra200bn and Dra220bn.
In the event the three bids which were opened on the Monday provided an extraordinary range of valuations, none of which were acceptable to the Greek government.
The highest of these came from the US law firm, Jan Morton Heger, with an offer of Dra337bn, followed by another US company, Exchange Finance Overseas, which offered Dra300bn, both of which were reportedly rejected after an investigation into the bidders' solvency.
The only offer from a Greek bank to acquire Ionian was made by Eurobank, which made a surprisingly low bid of Dra135.67bn. Most surprising of all, however, was the failure of Alpha Credit Bank to make any kind of bid at all for Ionian - which was all the more astonishing in light of the fact that when he addressed a extraordinary shareholders' meeting in June, Alpha's chairman and managing director Yannis Costoupolus had outlined a number of reasons explaining why the bank was interested in acquiring Ionian.
One of these was that it would increase the size of Alpha's consolidated balance sheet to almost $20bn, which Costopoulos described as being "the minimum required for a bank to be an appreciable force in the European market". He added: "Without the Ionian Bank, we would need three to five years to reach such a size."
Alpha's eventual decision not to present a bid in any shape or form for Ionian, say some outside analysts, amounted to an exquisite exercise in calling the government's bluff.
"Alpha comes out of the whole episode looking very clever," says one banker. "The government was saying that Ionian was worth Dra220bn, which is seven times its book value and most manifestly an overvaluation. On that basis there was no reason at all why Alpha should have revealed its hand by bidding Dra150bn or Dra170bn which clearly would not have been enough."
The government - via the Commercial Bank - responded to the three bids with a hastily released statement saying that "the bids were deemed unsatisfactory and [a] repeat of the sale will take place within three months".
While this implied insistence that the failure of the sale was no more than a temporary problem was presumably designed to reassure financial markets about Greece's long term prospects, financial assets fell across the board.
The Athens stockmarket opened more than 6% down on Tuesday August 25 (although it recovered to post a 3.62% loss on the day) and an auction of five year 8.9% government bonds fell flat on its face.
There are several ways of interpreting the sad episode of the Ionian non-sale. The most cynical would be to infer that the government simply did not have the courage to sanction a privatisation which would have done nothing to appease the unions, and that it deliberately talked the price of the bank up to such a degree as to make its sale a non-starter.
The most generous would be to see the failed divestment as nothing more than a temporary setback within the framework of a long term programme of reform and deregulation which is heading in the right direction and taking one step backwards for every two steps it takes forwards.
In fairness to those presenting this side of the argument, the Greek banking industry has already seen profound changes in recent years in terms of consolidation and efficiency gains which would have been unimaginable three or four years ago.
EFG Eurobank, for example, which is owned by the London-based Latsis Group, had shaken up the Greek banking sector long before the terms of the Ionian sale were finally hammered out.
The institution astonished most local bank analysts in June when it made a successful Dra93bn bid for the 90-branch state-owned Cretabank - almost double the price which was offered by the second highest bidder, Piraeus Bank.
In July, EFG followed up on this when it acquired an 11.4% stake in the privately-held Ergobank. Piraeus Bank itself, meanwhile, acquired a 37% stake in Macedonia-Thrace Bank in April.
This consolidation, say local analysts, can be expected to continue and even to accelerate as Greek banks prepare for the intensified competition which Emu will inevitably bring with it.
As for the state-owned banks, the metamorphosis at Greece's largest bank, the National Bank of Greece (NBG) is probably the clearest example of what can and should be done in the Greek banking sector.
"Two years ago the NBG was a dinosaur," says one banker. "It was loaded with rubbishy assets and rubbishy loans and was basically being killed by its competitors. The likes of Ergobank and Alpha Credit Bank were growing purely because they were picking off the NBG's client base."
Today, says the same banker, the installation of a new management team at NBG with the full backing of the government - but very little political interference - has transformed NBG into what he describes as a "formidable competitor".
The proof of the pudding, adds the same banker, has been in the response of debt and equity investors to offerings made by the bank over the last year or so.
The first of these came in 1997 when the NBG successfully launched a subordinated debt issue in the international capital market, which would have been unimaginable two years before.
This was the first of its kind from a Greek borrower, raising $200m in a 10 year floating rate issue appetisingly priced at the equivalent of 35bp over the outstanding five year Hellenic Republic bond which was virtually the only available benchmark at the time.
The second well received international offering from NBG came in this year's equity placement, a $380m offering via Merrill Lynch and Warburg Dillon Read in May that was 3-1/2 times oversubscribed. EW