S&P quietly lowers assessment on Greek insolvency laws

Greece's sovereign debt rating may be on an upward path but a few months ago, without much noise being made, credit ratings agency S&P lowered its assessment on the country's insolvency laws in an important move, putting the country in the same category with Russian, Kazakhstan, and Vietnam.

The decision was made in October and relates to the regulatory framework concerning insolvencies, which looks at how easily a creditor can recover his money in the country. As described by S&P, it is an index measuring the level of protection laws provide creditors on insolvencies and the way they are applied.

In the review, performed as part of the Jurisdiction Ranking Assessments Of National Insolvency Regimes, S&P had Greece in the second (of three) categories, out of a total of 39 countries. It was alongside countries such as Italy, Turkey, Brazil, and South Africa. But as of October, Greece sits alongside other countries providing little in creditor friendliness, such as Russia, Kazakstan, India, and Indonesia.
 
This decision marks a failure by successive Greek governments, from 2010, to improve the regulatory framework on insolvencies, starting from the Katseli law. Several reforms aimed at improving the justice system, under the pressure from international lenders, led to the situation becoming worse instead of better, and Greece falling further behind other European economies. Attempts to improve Greece's bankruptcy regulations, such as a move to change the Katseli law in order to weed out strategic defaulters, appear to have failed.

But how important is this at a time when Greece is trying to help banks offload bad loans? With the Hercules Asset Protection Scheme, Greece's Finance Ministry has created the impression that the securitization of bad loans with state guarantees will provide a magic solution, wiping mountains of non-performing loans from bank balance sheets.

But in an assessment of the Hercules plan published yesterday by S&P, the credit rating agency warned that the Hercules proposal is not the solution to the problem and highlights the risks that stem from current laws, referring to its October decision.

For example, if banks hold onto securitized loans (with state guarantees) then they will either find a way for them to be repaid or will sell the asset tied to the loan. If delays occur, the cost will be high for both the state and banks. Greece will be called on to make good on the guarantee in a move that will weigh on the budget, while banks will be forced to pay a higher commission the longer the securitized loan remains unpaid. 

Additionally, the state guarantee on the bad loans will not last forever. If it expires without the securitized loan having been repaid, then the banks will be holding onto "toxic debt" that will result in further losses arising.

"The freeing up of large amounts of bad loans with the help of the Hercules plan does not change weaknesses in the insolvency framework and creates challenges for debt management companies in their attempt to recover billions of euros of debt," S&P added.

Greece and European creditors are now scrambling to update the insolvency framework by the end of April so that they are in effect when the current protection of primary residencies expires in May. If this attempt also fails, and Greece remains at the bottom of the S&P's rating, then the Hercules plan will not be enough to solve the country's bad loan problem.