Eurobank’s Greek problem felt all the way to Toronto

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The chief executive officer of Eurobank, Christos Megalou, doesn't like looking at his bank's share price on the Athens stock exchange. In Toronto, Prem Watsa no doubt cringes too, when he checks it.

Mr. Watsa, chairman and CEO of Fairfax Financial Holdings, last year led a high-profile investor group that pumped €1.3-billion ($1.83-billion) of capital into the bank, nearly half of the €2.9-billion raised. The landmark deal made Eurobank the first Greek bank to return largely to private ownership after a crisis that nearly proved fatal to the entire banking sector only two years earlier.

That was in May. The shares have gradually lost value since then and fell off a cliff Monday and Tuesday, after the resounding election victory of Syriza, the radical left anti-austerity party whose threat to overhaul Greece's bailout agreements has rattled Greek investors, none more so than those who own Greek banks. Eurobank has lost more than 20 per cent since Monday, taking the shares to 14 euro cents. "We of course have been talking to Prem in the last few days," Mr. Megalou, 55, said from his elegant office overlooking the National Garden in central Athens. "Notwithstanding recent market volatility, he is still positive on Greece."

The good news? In spite of the massive dose of political and economic uncertainty unleashed by the Syriza victory, local bankers say the outflow of deposits has been relatively minor – a deposit walk, not a run.

To protect themselves, Eurobank and the other Greek banks have applied for, but not yet taken, emergency liquidity assistance (ELA) from the European Central Bank. The cheap loans are designed to prop up any euro zone bank suffering from a short-term liquidity crunch. "We are in close contact with the ECB," Mr. Megalou said.

But investors in Greek banks, the overall stock market, and Greek bonds are clearly worried that Syriza's apparent willingness to rumble with its paymasters in Brussels, Berlin and Frankfurt could lead to disaster. Suddenly "Grexit" – Greece's exit from the euro zone – is being bandied about as the possible outcome of any failed negotiations.

Syriza, led by former communist Alexis Tsipras, 40, moved fast this week to get his government in place so his new team could make good on its promises to fight austerity, bring down debt payments and restore social spending to a country gutted by recession, poverty and unemployment. On Tuesday, he named his cabinet, whose fresh and untried faces include Yanis Varoufakis, 53, a Greek-Australian University of Athens economics professor who has a reputation for combative language, describes himself as a "libertarian Marxist" and recently suggested in a French newspaper interview that former ECB president Jean-Claude Trichet would burn in hell for his austerity demands.

He has condemned the austerity measures demanded by Greece's international creditors in exchange for €240-billion in bailout loans as "fiscal waterboarding." It is an open secret that the Bank of Greece's senior team is worried that his blunt style will win him little sympathy at the ECB, the European Union and the International Monetary Fund – the so-called Troika that bailed out Greece after the start of the debt crisis in 2009.

The other key figure in the Syriza cabinet is Giannis Dragasakis, 67, who was named deputy prime minister with responsibility for overseeing negotiations with the Troika. He is a former member of the Greek communist party and served as deputy finance minister in the short-lived national unity government in 1989.

Eurobank is the youngest of the four Greek banks that survived the crisis, but only because they were bailed out by the Greek arm of the European Financial Stability Fund, the EU's first crisis-fighting fund. Eurobank was in especially bad shape because it had launched two merger attempts and a takeover attempt between 2010 and 2012, all of which had failed. The rescue saw the bailout fund take 95-per-cent ownership of the bank, which has lost €5.5-billion in 2011.

Born in Athens and equipped with an MBA from Aston University in Britain, Mr. Megalou has spent most of his career in banking and investment banking. When headhunters approached Mr. Megalou in the spring of 2013 to see whether he was interested in running the wounded Eurobank, his instinct was to turn it down. He had a high-paying career in London as co-head of investment banking for Southern Europe for Credit Suisse, and had just ended successful treatments in New York for throat cancer. "At first I thought, 'forget it,'" he said. "'Why should I stray from my comfort zone?'"

He eventually changed his mind. "I realized I needed a new challenge and a lot of my international friends were asking me why don't I go back to Greece and help the country."

Mr. Megalou's job was to stabilize the bank, cut costs – more than 1,070 employees were let go – manage the big portfolio of dud loans and improve the loan-to-deposit ratio, which he did through the purchase of an old savings bank, Hellenic Postbank, in 2013.

The big move was rounding up adventurous investors to recapitalize the bank. In came Mr. Watsa and a team that included Canada's Brookfield Asset Management, Capital Group of Los Angeles and Wilbur Ross, the New York investor whose specialty is overhauling failed companies. Mr. Watsa's €400-million investment, through Fairfax, gave the Canadian ample influence over Eurobank, with the right to appoint two board members. About 65 per cent of the bank is now owned by private investors.

Investors have treated the election of Syriza as a blow to the banks. But Mr. Megalou doesn't expect a renewed banking crisis because the banks have been pumped up with fresh capital and he thinks it's almost certain the new government will avoid a war that could force it out of the euro zone.

Of course, investors will probably face a roller coaster ride over the next few months as the new government tries to work out a deal with the Troika. "Naturally, investors hate uncertainty and until we see how this situation evolves, in particular around Greece's debt, there will be some volatility," he said. "But I don't believe Syriza is on a collision course with Europe."

Still, he admits "I don't want to see the trading screen every day."