Four step plan agreed upon for final solution to bad debt problem

Greece is putting together a series of initiatives aimed at providing a complete solution to a large number of bad loans held by the country's banks and helping the sector return to normal. 

The Finance Ministry, in cooperation with the Bank of Greece, has agreed on an ambitious plan that will lower nonperforming loans (NPLs) to the average European level of 4 percent by 2022, from currently around 43 percent.

Despite steps taken in recent years - progress that picked up with the change of government - the banking sector is faced with enormous challenges preventing it from supporting growth in the economy amidst lingering concerns about capital adequacy levels. Bad debt levels in Greece have retreated from a high of 115 billion euros in 2016 to 75 billion euros, which represents 43 percent of total loans. This improvement though is considered to be unsatisfactory. In the case of Cyprus, a country that had the highest NPL ration in Europe, faster progress has been made in tackling the problem.

As announced by Bank of Greece governor Yannis Stournaras at the Thessaloniki Summit 2019, there has been an agreement made with Finance Minister Christos Staikouras for a complete four-part plan to tackle the problem after weeks of negotiations were held on the topic.

1. Hercules plan. This is a significant step that will help banks offload a large chunk of bad loans. Estimates show that lenders will be able to reduce NPLs via state guarantees by 40 percent. Given that securitizations take up capital, state guarantees allow banks to move ahead with large securitization deals with the smallest possible cost.
2. The strengthening of the insolvency law for households and businesses. As announced by Staikouras, the government will soon legislate on initiatives to create an updated and single insolvency framework for the private sector that will allow households and businesses to regulate debts in one single approach.
3. Bank of Greece plan. The Bank of Greece governor pointed out that immediately after approval has been given for the Hercules plan and the first securitizations have been launched, talks on its proposal will commence. This proposal will target a 60 percent reduction in bad loans, sour debt left behind by the Hercules plan, and tackle the difficult problem relating to deferred tax credits. In cooperation with the Finance Ministry, the plan will take into account EU rules. 
4. More restructured loans. Greece's bad loan problem cannot be solved without lenders picking up the pace of restructuring loans, with an emphasis on particularly late debt, says the Bank of Greece governor. Data shows that lenders have made progress in reducing NPLs via bad debt sales and securitizations but the rate of finance being restructured has dropped off. The central bank has called on lenders to tackle this issue more decisively and efficiently.

Capital levels sufficient

In regards to the capital levels of Greek banks, Stournaras told last week's conference that they are close to the EU average, meaning that they are sufficient.

"If the banks complete a significant reduction in NPLs and meet one more basic problem with the Bank of Greece plan, the problem of deferred tax credits, then we will be saying that investors will be coming to aggressively invest, not to cover gaps, as they will view lenders as  a very big investment opportunity," he said.

YANNIS PAPADOGIANNIS