Greece: Piraeus Bank Capital Injection, 2015

On October 31, 2015, the ECB’s SSM carried out a comprehensive assessment of four Greek banks to evaluate whether they were adequately capitalized. This assessment identified a capital shortfall of EUR 4. billion for the Bank. Of this, the Bank covered EUR 1.94 billion through private means, including existing creditors voluntarily exchanging their notes for new shares and acquiring new investors through a share capital increase. The money raised through private means covered the Bank’s capital needs calculated based on the baseline scenario under the SSM’s assessment. The HFSF covered the remaining capital needed for the adverse scenario under the SSM’s comprehensive assessment through a capital injection (EC 2015b).

Greek authorities combined the recapitalization of the Bank with a restructuring plan. This restructuring plan had been approved by the EC in July 2014. The EC then approved a revised version of this plan along with the recapitalization plan in November 2015. By December 1, 2015, the European institutions (European Commission, European Central Bank and European Stability Mechanism) had all approved a Greek plan to further recapitalize and restructure Piraeus Bank (EC 2015b; EC 2015a).  

The Greek Parliament approved two legislative amendments in November 2015, so that the HFSF could recapitalize the Bank as well as three other systemically important banks. The two pieces of legislation amended by the Greek Parliament were the HFSF law and Cabinet Act No. 36. These revised laws established that HFSF capital injections would be 25% ordinary shares and 75% contingent convertible capital instruments (CoCos) except in the case of resolution, in which case all recapitalization would be in ordinary shares (EC 2015a). According to sources at the ESM, the nuanced decision of how many ordinary shares versus CoCos to issue considered that issuing too many ordinary shares could mean the nationalization of the Bank. CoCos act as a buffer but are more expensive as they come with high-interest coupons that can reduce the bank’s profit. If the Bank misses two interest payments a conversion is triggered, and the bonds turn into ordinary shares which can dilute the current shareholders control and can reduce the share value.

In part because of the EU’s State Aid rules, Greece needed approval before injecting capital into the Bank and recapitalization had to be accompanied by restructuring. The EC approved the capital injections on November 29, 2015 (EC 2015b; EC 2015a). In their decision the EC took into account that the Bank’s challenges did not come from excessive risk taking but from overall uncertainty in Greece.

The Greek authorities and the Bank submitted the restructuring and recapitalization plan to the EC who approved a capital injection to the Bank from the HFSF. The HFSF was responsible for monitoring the book building process for raising private capital. To obtain private investments the Bank asked the HFSF to act as a backstop, underwriting a capital increase. Having an underwriter is essential to successful recapitalization and needs to be done on private market terms to be considered legal state aid (EC 2015a). The role of the HFSF is to support the maintenance of the Greek system’s financial stability in the public interest (HFSF n.d.a).

The funding for capital injections came from the HFSF which was established by the Greek government, the EU, the IMF, and the ECB after they signed the Memorandum of Understanding on Specific Economic Policy Conditionality in 2010 (EC 2015a). The HFSF is a private legal entity and does not belong to the public sector, although it is funded by the Greek Government (HFSF n.d.a). As of the second economic adjustment program all HFSF funding came from the ESM. A selection panel selects the members of the Executive Board and the General Council of the HFSF. This panel is made up of a chairman and two additional members appointed by the EC, the ECB, and the ESM, two members appointed by the Minister of Finance, and one member appointed by the Bank of Greece (HFSF n.d.b). The EC and the ESM also had observers on the HFSF’s Executive Board and Governing Council.

A Monitoring Trustee, appointed by the Bank and approved by the Commission was to monitor the commitments made by Greece and the Bank in the corresponding State Aid restructuring plan (EC 2015a).

 The EC issued a press release announcing their approval of the recapitalization and restructuring plan on November 29, 2015 (EC 2015b). However, in the EC’s State Aid report information is omitted “concerning non-disclosure of information covered by professional secrecy” (EC 2015a, 1).   

On November 4, 2015, the Bank released a presentation containing information about their recapitalization plan to cover the capital shortfall identified by the SSM. This presentation included details pertaining to recapitalization, specifically about CoCos that would be issued to the HFSF (Piraeus 2015c). The Bank also issued press releases throughout the month of November with information pertaining to the capital raising process (Piraeus 2015a; Piraeus 2015b).

The Bank provided more information about the capital injection in their 2015 annual report. According to this report, the Bank received an injection of EUR 4.6 billion in December 2015. This value included capital raised through private means and provided by the HFSF. The report said that the “recapitalization created significant additional capital reserves,” that this improved the resilience of the Bank’s balance sheet, and that in December 2015 the Bank recorded a slight deposit inflow (Piraeus 2016, 24, 26).

The HFSF’s 2015 and 2016 annual reports provided information about the aid they provided to the Bank. The 2015 report specified that they injected EUR 2.72 billion into the Bank in December 2015 (HFSF 2016a). The 2016 report included that they had received EUR 165.92 million from the CoCos’ annual coupon (HFSF 2017). 

Existing noteholders agreed to take losses in a vote on November 4, 2015. They had a choice of converting their notes into newly issued ordinary shares or a small amount of cash. New shares were worth 50% of par value for Tier 2 subordinated notes and 100% for Tier 1 and senior notes; the amount of cash was around 9% of par value for subordinated notes and 43% for senior notes. This was mandatory following majority support in a vote of noteholders on November 4, 2015 (EC 2015a).

The HFSF acquired EUR 680 million in ordinary shares and EUR 2 billion in CoCos. It funded its investment by issuing EUR 2.7 billion in ESM notes to the Bank (ESM n.d.; HFSF 2016a).

The Bank specified the characteristics of the CoCos issued to the HFSF during their November 4, 2015, presentation as appears in Figure 2 (Piraeus 2015c).

The EC approved a capital injection of EUR 2.72 billion from the HFSF in November 2015 (EC 2015a). The Bank reports that they received an injection of EUR 4.6 billion in December 2015; this value includes capital from private means and from the HFSF (Piraeus 2016). According to the HFSF, they contributed EUR 2.70 billion in ESM notes to the Bank to fulfill their capital needs and received EUR 680 million in ordinary shares and EUR 2.04 billion in CoCos (HFSF 2016a).

The funding for capital injections came from the HFSF (EC 2015b). The Greek government, the EU, the IMF, and the ECB signed the Memorandum of Understanding on Specific Economic Policy Conditionality in 2010, which led to the establishment of the HFSF (EC 2015a). The HFSF gets its funding from the Greek Government but is a private legal entity and does not belong to the public sector. The objective of the HFSF is to “contribute to the maintenance of the financial stability of the Greek banking system for the sake of public interest” (HFSF n.d.a).

From 2010 to 2018, Greece implemented three Economic Adjustment Programs (Andruszkiewicz et al. 2020). The third program began on August 19, 2015, and ran until August 20, 2018 (European Council n.d.).

The HFSF’s capital injection into the Bank took place during the third Economic Adjustment Program. On October 31, 2015, the ECB identified the capital shortfall. The Bank raised capital privately throughout October and November (Piraeus 2015a; Piraeus 2015b; Piraeus 2015c). On November 29, the EC approved the recapitalization and restructuring plan for the Bank (EC 2015b). In December 2015, the HFSF injected EUR 2.72 billion into the bank (HFSF 2016a).

Following the capital injection, the HFSF was supposed to receive annual coupons for their CoCos from the Bank (Piraeus 2015c). In December 2016, the HFSF received EUR 165.92 million of income from the CoCos’ annual coupon (HFSF 2017). In announcements on October 30, November 12, and November 16, 2020, the Bank informed their investors of a possibility that the ECB would not approve the Bank’s request to pay the CoCos annual coupon of EUR 165 million to the HFSF (Piraeus 2020a). The Bank had previously missed an interest payment in 2018 (Piraeus 2018). On November 23, 2020, the Bank announced that the Governing Council of the ECB had not approved the Bank’s request and the HFSF would become the majority shareholder when their EUR 2.04 billion in CoCos converted to ordinary shares (Piraeus 2020b). On the same day the HFSF announced that as the majority shareholder of Piraeus Bank, they would facilitate the Bank’s return to private sector ownership and continue to support the current board of directors and executive management team (HFSF 2020). On January 15, 2021, the HFSF announced that they had officially become the majority shareholder of the Bank (HFSF 2021). 

The EC approved the capital injection “on the basis of an amended restructuring plan” (EC 2015b). The EC had approved a restructuring plan in July 2014 that was updated, resubmitted, and approved by the EC in tandem with the recapitalization plan in November 2015. A Monitoring Trustee, appointed by the Bank and approved by the EC was to monitor the commitments made by Greece and the Bank in the restructuring plan (EC 2015a). Greek authorities made additional commitments in the Memorandum of Understanding.

Of the capital needs found by the SSM’s comprehensive assessment, the Bank was required to privately raise enough capital to cover the identified baseline scenario to avoid resolution under the Bank Recovery and Resolution Directive (BRRD) provisions. In total, the Bank covered EUR 1.94 billion through private means. This included “existing creditors through voluntary exchange of their notes for new shares, and new investors through share capital increase” (EC 2015b). The EC approved capital injections to cover the identified stressed scenario^FA full account of the restructuring of Piraeus Bank is detailed in Schaefer-Brown (2024)..

The HFSF had a non-executive member representative on the Bank’s Board of Directors. In accordance with the Memorandum of Understanding signed in August 2015, the HFSF introduced a program to review the Boards and Committees of Piraeus Bank which was completed in 2016. This program evaluated the size, operation, organization, structure, and the allocation of powers within the Boards and Committees (HFSF 2016b).

 Of the capital needs found by the SSM’s assessment, the Bank was required to privately raise enough capital to cover the identified baseline scenario. In total, the Bank covered EUR 1.94 billion through private means. This included “existing creditors through voluntary exchange of their notes for new shares, and new investors through share capital increase” (EC 2015b).  

Research has not revealed any examples or evidence of regulatory relief granted to facilitate the injection.

The EC’s approval of a capital injection was based on the intention that this aid was “precautionary and temporary” (EC 2015a, 27). The aid was supposed to improve the resilience of the Bank’s balance sheets to withstand macroeconomic shocks (EC 2015a). The temporary nature of the aid was insured by 75% of aid being granted through the HFSF being CoCos. The EC expected the Greek State to recoup the capital through privatization of the Bank or other means (EC 2015a).

In announcements on October 30, November 12, and November 16, 2020, the Bank informed their investors of a possibility that the ECB would not approve the Bank’s request to pay the HFSF’s CoCos’ annual coupon of EUR 165 million in cash (Piraeus 2020a). In November 2020, the ECB did not make the necessary approval of the Bank’s request to pay the HFSF’s CoCos’ annual coupon in cash due to the recommendation to European banks to “not distribute capital” during the Covid-19 crisis (Davies 2020; Piraeus 2020b). When the ECB denied the Bank’s request the Bank’s Board of Directors cancelled the CoCos’ interest payment. This meant that the HFSF’s EUR 2.04 billion in CoCos would convert to ordinary shares and the HFSF would own 61% of the Bank’s shares. In January 2021, the HFSF became the majority shareholder (HFSF 2021). The HFSF said that as the majority shareholder of Piraeus Bank they would facilitate the Bank’s return to private sector ownership during 2021, while continuing to support the current board of directors and executive management (HFSF 2020). In spring 2021, the Bank’s Board of Directors announced their intent to engage in a share capital increase with the HFSF which ended with the HFSF’s participation in the Bank’s share capital at 27% (HFSF 2022).