The government's economic staff is seeking to speed up debt settlements through the Extra-Judicial Mechanism with three corrective measures that favour vulnerable borrowers and those with debts of large amounts in relation to the value of collateral, as well as those who have inherited debts from companies that have "closed down".
A large number of debt settlements that have so far been "stumbled upon" due to imperfections or shortcomings in the institutional framework are expected to be able to proceed. The Extra-Judicial Mechanism, which is the main tool for settling accumulated debts to the public sector and financial institutions, has made progress in recent months. However, in more than a year of its operation, the number of successful settlements is 8,804, involving debts with an initial amount of €3.26 billion, which means that an acceleration of the pace is necessary to start ... moving the mountain of private debt.
To achieve this goal, the bill presented yesterday by the Minister of Economy and Finance, Kostis Hatzidakis to the Council of Ministers makes "surgical" corrections to the institutional framework, which will unblock many regulations. Beneficiaries are vulnerable borrowers (with very low incomes) who until now have met the refusal of financial institutions to settle their debts, but also those who have debts that far exceed the value of the properties pledged as collateral for their loans.
Automatic adjustment for the vulnerable
In particular, the first important regulation concerns vulnerable debtors, i.e. those who declare an income of up to 7,000 euros per year plus 3,500 euros for each minor child, with a maximum of 21,000 euros, and whose real estate is worth up to 120,000 euros plus 15,000 euros for each child, with a maximum of 180,000 euros.
For this category of debtors, the algorithm for calculating the amount to be serviced reasonably resulted in large "haircuts" and, as a rule, the financial institutions put a "stop" to the proposed debt arrangement. Under the new provision included in the Ministry's draft bill, such arrangements will be compulsorily and automatically accepted by all creditors (financing institutions and the State), i.e. the debtor will secure a "haircut" that is large and in line with his financial capabilities in order to be able to service the arrangement.
The new provision does, however, leave a small "window" for creditors to challenge the arrangement in court if they consider that the debtor does not have the financial and asset situation that the debtor has displayed. However, as clarified by Mr Hatzidakis and Theoni Alambasi, Secretary General for Financial Sector and Private Debt Management, the debtor will not be charged with court costs in this case, since the appeal will be against the State. In addition, the appealing financial institution will have to present to the court the necessary evidence to prove that the borrower is not vulnerable, otherwise the appeal will be dismissed as indefinite.
In this way, as Mr Hatzidakis has argued, it will be possible to distinguish between truly vulnerable debtors and the "tricksters", i.e. those who hide income and property and are, in fact, strategic defaulters.
An end to the "haircut" restriction
The other major category of debtors who have been unable to settle their debts and are now made easier by the new provisions are those with debts that far exceed the value of their property. This was because the legislation imposed limits on the minimum amounts they would have to pay, which were calculated in relation to the value of the property. Essentially, the low value of the property acted as a 'cutter' of the rate of 'haircut' of the debt, with the result that the figures did not ... add up.
For example, if someone owed 100,000 euros and the property was only worth 50,000 euros, they could not pay less than 45,220 euros to settle the debt. With the abolition of the minimum recovery rate, however, the minimum amount of the arrangement will be reduced to 32,500 euros, i.e. there will be a 28% improvement in the proposal based on the algorithm. The haircut rate, in this case, would increase from 55% to 67%. As shown in the table, with the abolition of the minimum recovery rate, the benefits of improving the proposal decrease progressively as the value of the property increases in relation to the amount of the liability.
Settlement also for debts of companies that have been closed down
The third category of beneficiaries, who will be able to pass through the door of the Extra-Judicial System, while they have been excluded until now, are those who have been engaged in business activity and are burdened with tax debts, contributions and loans of companies that have now permanently ceased their operation. This is also a fairly large category of debtors, who until now have had to go through difficult and lengthy procedures under bankruptcy law, but who will now be able to settle their debts with a single application to the Extra-Judicial Mechanism.
Generous interest rate reduction
The economic staff is moving forward with another intervention that will benefit all debtors who join the Extra-Judicial Mechanism, as it will protect them from the record high interest rates of the European Central Bank.
The interest rate for the arrangements is reduced to 3%, fixed for three years, while it is currently 2.5% above Euribor for secured debts and 3% above Euribor for unsecured debts. That is, from 6.5% or 7% today (Euribor is around 4%), the interest rate will be halved and will be fixed, i.e. it will not change in the event of any new ECB interest rate increase.
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