The sordid relationship between the owners of the Bank of Pireus and MIG (a holding company that used to own one of the two failed Cypriot banks, as well as a swathe of Greek companies) is well documented. Recently we witnessed a new chapter in this saga, one that went almost unnoticed and which was quietly condoned (like all recent scandals) by the Athens government and the troika. Klaus Kastner blogged on this deal in a highly informative recent post, entitled MIG: A great place to invest €250 million?, and also sent me an email with the following question/point: “It baffles my mind how a bank like Piraeus where the state has part-ownership would buy €250 million convertibles of the holding company of a group which is as shaky as the MIG Group (unless, of course, the 250 MEUR were used to repay loans to Piraeus). MIG may have operating companies of operational worth and market prominence but the whole group is built on hot air and, at least for the time being, the operating companies are incurring horrendous losses.” My answer to Klaus follows…

Dear Klaus,

You are, of course, spot on. This deal makes no sense except in the context of the tangled web of accumulated debt binding Pireus and MIG. To be more precise, of MIG’s €1.37 billion debt something between €700 to €780 million are owed to… Pireus. Of those debts some are due to past Pireus loans to companies in MIG’s portfolio and others due to the complex deal by which the branches of the Cypriot banks were ‘transferred’ to Pireus ownership.

In this context, from quasi-insolvent MIG’s perspective, the deal represents a badly needed capital infusion (as opposed to a refinancing deal). And from the perspective of Pireus, it reduces its… exposure to loans extended to MIG.

When last year the Cypriot banks folded, Pireus rushed in to buy MIG’s Marfin-Laiki Bank and the greek branches of the Bank of Cyprus. It paid next to nothing for these. In the process, together with the Cypriot banks’ Greek branches, Pireus acquired, at a 50% discount, loans worth (at least on paper) €325 million, netting a paper gain for Pireus of around €160 million.

You should not be be surprised that last year’s purchase of the folded cypriot banks was underpinned by a promise such as: “You hand over to me now the Cypriot bank branches, including the discounted loan portfolio, and I shall repay you next year with a capital infusion which reduces your exposure to me and my exposure to you.”

If, lastly, you place this new deal in the context of the sordid past relationship between the ‘brains’ behind these two organisations, the picture becomes astonishingly clear. And the Greek government’s (as well as the troika’s) connivance in it astoundingly repulsive.

Klaus Kastner added the following remark:

Dear Yanis,

It’s the numbers which are staggering! If this is not a refinancing deal and if Piraeus had an exposure of, say, €750 million before, they now have an exposure of €1 billion. Surprises me that this even fits the bank’s legal limit to one borrower. The group isn’t really all that large. Seems more like a conglomerate of medium-sized companies. Is the ‘quasi-insolvent perspective’ your perspective or is this view shared in the market? Would Piraeus have made loan loss provisions for this exposure or would they carry the loans as performing? Seems to me that the ECB will have a lot of fun with this exposure when they do the stress tests…

Postscript

Following these exchanges, Dean Plassaras offered a justification for the MIG-Pireus deal (see comments below) to which Klaus replied with this (splendid in my eyes) missive.

Regards