The investment by Fairfax Financial CEO Prem Watsa in Greece's Eurobank has been a loser and could get worse if it is diluted by the financial overhaul of the country's banking system.
If that were not bad enough, the effort to repair the Greek banks, whose capital controls have left them partly closed since July, could be thrown into turmoil by Sunday's snap election, the third national vote since the start of the year. The polls suggest the result will be inconclusive. Were that to happen, the banks' recapitalization exercise could be delayed, which would risk their end-of-the-year repair deadline.
The polls have Syriza, the radical left party that won the January election, and New Democracy, the centre-right party swept away by Syriza, running neck-and-neck. A coalition government seems inevitable and the negotiations to form a government could be messy, as they typically are in Greece's fractious parliamentary system.
"We need political stability," said Sotirios Issaias, 48, a Greek-Canadian sales and marketing executive who is running for New Democracy in an Athens constituency. "An unstable coalition would be chaos for the economy and for the banks."
The election in January of Syriza, which vowed to shred the harsh austerity measures imposed on Greece by its creditors – the European Union and the International Monetary Fund – triggered a run on deposits that came close to snuffing out the banks. By July, the deposit base withered away to about €120-billion ($179-billion) from €165-billion while non-performing loans soared.
The equity value of Greece's four main commercial banks got crunched – bad news for Mr. Watsa, whose Toronto-based Fairfax led a group of investors who pumped €1.3-billion into the bank in 2014. The group included Canada's Brookfield Asset Management, Capital Group of Los Angeles and Wilbur Ross, the New York investor whose specialty is overhauling failing companies. Fairfax's share was €400-million. The company made an additional investment in early 2015, though the value was not disclosed.
Shares of Greece's Eurobank traded Thursday at four euro cents a share, for a one-year loss of 88 per cent. In 2012, two years before the Fairfax-led recapitalization, Eurobank was trading at about €10 a share. Mr. Watsa, Mr. Ross and their colleagues were betting on a turnaround that has not happened. Their hopes had been high because they had made winning bets on the turnarounds of crisis-hit banks in Ireland and Cyprus.
The Greek banks are to be recapitalized yet again. Greece's new bailout, its third since 2010, sets aside €25-billion to bolster their capital bases. But there's a catch. The new rescue mission must be completed by the end of December if the deposit base is to be protected. Beyond that date, new European Union bank bailout regulations would come into effect that would insist on a creditors' "bail-in" worth 8 per cent of the liabilities of any bank that accepts financial assistance.
In effect, the bail-in would wipe out shareholders, bondholders and impose a "haircut" on deposits over €100,000. The regulations are designed to insulate taxpayers from the high cost of bank bailouts.
With the end-of-year deadline looming, an election under way and a potentially chaotic effort to form a government to follow – no one knows who the Greek finance minister will be next week – the odds of missing the deadline are rising by the day.
Mr. Watsa hasn't talked publicly about the new bank rescue plan, but Mr. Ross has and he is worried that the rescue would wipe out the banks' shareholders and damage Greece's ability to raise foreign capital. In a recent interview with the Financial Times, he said: "Diluting the few international investors who [invested in] the capital of the Greek banks last year is not the way to restore market confidence in Greece," he said. "It would take very long time before outsiders came back to Greece."
His idea, which may not fly with the European Central Bank, which regulates the euro zone lenders, would avoid an immediate and massive injection of bailout capital into the banks. Instead, the bailout funds would be made available as an "unconditional commitment" that could be drawn down if required by banks, according to the FT.
Mr. Issaias, the New Democracy candidate, said fixing the Greek banks was essential no matter what way it is done. "With the banks, we're back to where we were at the height of the crisis in 2012," he said. "The Greek people are tired enough of this."
Eric Reguly