Department of Economics Democritus University of Thrace, Greece
The year 2018 is a milestone for Greece, as it moves towards to the completion of the third economic adjustment program. That means that after the official end of the program in August 2018, Greece must take fate into its own hands, and try to borrow from the markets to meet its future debt obligations. As the country leaves behind the 8-year long memorandum era, the two main concerns for the Greek government and the banking sector are: a) a decision on the debt relief measures that should follow and b) a solution to the Non-Performing Loans (NPL’s) problem.
The International Monetary Fund openly declares what anyone with basic training in economics can see: Greece requires substantial debt relief from its European partners to restore debt sustainability. The main issue here is that the resolution of this problem mainly depends on political decisions from Greece’s EU partners that are hard to sell to their voters-tax payers. This is of outmost importance for the medium to long term stability of the Greek economy. On the other hand, the NPL’s problem is urgent and imperative.
This may be the only set-back to a full Greek recovery as all other macros are looking impressively good. After one of the longest and deepest modern economic depressions, Greece has started to recover. The Greek GDP growth rate was 1.4% to 1.9% year-on-year for 2017. This was the first major sign of recovery from the deep recession that started in 2008. Consumer sales increased 1.1% for the first time as well. The primary surplus reached 4% when the target was 2.5% for 2017 and it was close to that number in 2016 as well. The general Greek government surplus (the one that includes debt obligations) was +0.8% in 2016, that ranked sixth in the EU and it is expected to be even higher for 2017. Unemployment was down to 20% for 2017 and it is expected to fall below that in the first quarter of 2018, down from 28% in recent years. Aegean Airlines SA, Greece’s largest airway carrier, was confident enough this March to place an order valued at €4 billion ($4.9 billion) for 42 new planes from Airbus SE , the largest investment by a Greek company since the start of the crisis.
On January 18, 2018 the European Commission published its First Progress Report on the reduction of Non-Performing Loans in Europe, which contains two contradictory pieces of information: There is a downward trend of new NPL ratio which reached 4.6%. This is the lowest level since Q4 of 2014.
On the other hand, the total volume of non-performing loans is still at the high level of EUR 950 billion. The magnitude of the problem is asymmetric across member states: 9 countries have ratios above 10% and 10 countries have ratios below 3%.
The following table reveals that countries such as Ireland, Portugal and Cyprus, which recently came out of their fiscal adjustment programs, achieved two-digit NPL’s ratios. Greece, which has the highest ratio among the EU members, shows negligible improvement. Why despite all other good news that follows Greece’s recovery in the last 2 years the Greek NPL’s problem is still persistent? What should be done to get NPLs back to normal levels? Which are the necessary measures that should be taken to reinstate the NPL’s ratio to the pro-crisis level?
The Greek banks in cooperation with the Bank of Greece make a huge and intensive effort, on a daily basis, to reduce the non-performing loans. They have created special units for the efficient management of NPL’s. At the same time, in the whole branch network hundreds of bank employees are in daily contact with troubled borrowers, trying to find viable solutions that will result in debt repayments and debt restructuring. Moreover, bank directors have recently introduced bonuses for those who achieve the NPL’s goals set by banks’ management.
This combined effort has led to an overall reduction of non-performing exposures (NPE’s) by 7.6% or €8.2 billion. Also, there is a strong provision coverage of around 48% and the PPI’s (profits pro provisions) exceed €4 billion. This offers an extra capital buffer for provisions and loans write-offs. Nevertheless, the NPE’s ratio is still at skyrocket levels and reaches 50.6% of total bank loan portfolio. Bank of Greece has set optimistic NPE’s goals for 2019. More specifically, by 2019 the Greek banks must reduce their NPE’s to €64.6 billion, from the current level of €95.9 billion (estimate for the end of 2017). At the same time, the 2019 goals for NPE’s and NPL’s ratios are 35.2% and 21.1% respectively.
The goals are set but one important question still lingers. Which is the optimal path for achieving these ambitious targets? Bank of Greece has set the strategic path in a report issued in December 5th, 2017 with title “Report on the business objectives of non-performing exposures”. The set of relevant rules and instructions are given below:
- Greek Banks can improve the NPL ratio through loan expansion (issuing of new loans). This will increase the denominator of the ratio. Bank liquidity improves due to the slow recovery in bank deposits. Deposits increased by €4 billion in 2017. This upward trend will continue in 2018 if the estimated GDP growth of 2.4% is confirmed and if the country manages to achieve a “clean exit” from the programs on September 2018. Improving the NPL ratio by increasing the banks’ loan portfolio will free up more capital to finance productive sectors of the economy.
- The gradual reduction of income taxes will increase the disposable income for thousands of households and hence increase the ability of many borrowers to serve their loans. A specialized measure that could favor the mortgage part of the NPL’s ratios (42.8% in 2Q of 2017) could be the exemption from property tax of the assets that are used as collateral for mortgage loans.
- The recovery of salary allowances such as the “Christmas bonus” for the public sector employees. This could benefit the repayment of consumer loans and credit cards and hence improve the consumer loans NPL ratio which is at 62.4%. Banks cannot sell the consumer and credit cards portfolio of NPL’s to distress funds since these auction prices start at 3% of face value.
- The aggressive confrontation of strategic “bad payers”. Bank officials estimate that a quarter of non-performing loans are attributed to strategic defaulters. This refers to households or businesses that have the financial ability to repay their loans, but they chose to not do so because they think that bankruptcy may help them avoid repayment. Restarting foreclosure auctions that were halted for political reasons and the simplification of the relevant legal framework can lead to significant recovery os such loans from strategic “bad payers.
Concluding, we must highlight the fact that Greek banks have the ability, not only to achieve but to overcome the NPL’s goals for 2019. A prerequisite for that is that the country will successfully complete the third adjustment program and continue to grow in a stable economic and political environment. The banks have the necessary know-how to improve their liquidity, finance the real economy and solve the lingering NPL’s impediment without significant losses.