Nationalization Risk Returns in Greek Banks

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The only way to describe the situation around Greece’s ongoing negotiations with creditors would be to call it a Greek tragedy. Investors keep thinking that Greece is going to strike a deal with European creditors for the European Central Bank and International Monetary Fund. There is just one problem here, even outside of Wednesday’s headlines: a deal today only kicks the can down the road to later in 2015 or into 2016, when even larger debt is due.

While the headlines talk about “No Deal” in Greece now, after having seen two hopeful days, now the pressure is back on Greece. Key is that bank nationalization remains a risk. The American depositary shares (ADSs) of National Bank of Greece S.A. (NYSE: NBG) were down about 6.4% at $1.31 in late morning trading in New York on Wednesday.

What matters here is that the Greek banks rose massively this week on hopes of a deal in Greece. Was it all futile hope? After closing at $1.10 on Friday and at $1.40 on Tuesday, this represented a gain of 27%. While NBG is small potatoes by American standards, imagine if you ever saw one of the top four U.S. major money-center banks rise by 27% in two trading sessions.

The news flow on Wednesday is much more cautious than in the prior two days. Perhaps this headline from Barron’s sums it up about as best as anything else you will see elsewhere: “Greek Banks Crumbling: Deposit Flight Of EUR 1.4 Billion Daily.” The outflow of deposits just keeps going.

While the drop in NBG is bad enough, the drop elsewhere in Athens trading was even worse on rival Greek banks. The drop was 7% in Alpha Bank, down almost 10% in Piraeus Bank and down over 10% in local shares of Eurobank Ergasias.

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What you are seeing is a return of the “nationalization risk” in Greece. Do not forget for a second that this would be bad for shareholders, who have already born more than a fair amount of normal shareholder pain. Recall that bank depositors suffered severe losses in the neighboring Cyprus in 2013.

National Bank of Greece likely would see a substantial gain if a Greek debt deal is made. If not, and if Greece is thrown into default and exiting the euro, all those local NBG branches around Greece might be government office storefronts. Greece doesn’t exactly need more government employees, but guess what happens if the banks get nationalized.

The problems in Greece are too many to adequately list. Still, the Greeks need to consider one thing: they have already been given enough restructuring and enough bailout aid that they just do not deserve any more. They are effectively defunct without more aid. And getting the Greeks to pay their taxes and to be forced to work beyond age 55 is proving to yet again be too problematic to be worth the effort.

The country is running the risk that Europe may finally just turn its back on Greece. 24/7 Wall St. recently listed 11 ways the European Union can force Greece’s hand, or how to get even with Greece. Amazingly, the domain name BoycottGreece(dot)com still remains available.

Around 11 a.m. ET, the NBG ADSs had traded more than 12 million shares — more than a full day’s average trading volume. The $1.31 price compares to a 52-week trading range of $0.98 to $3.90.

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