Greek banks have been advised to reduce their nonperforming loans by 50 billion euros in the next seven years, which will be the focus of a meeting on Monday between Bank of Greece Governor Yannis Stournaras and the board of the Hellenic Bank Association.
Officials from the European Central Bank’s Single Supervisory Mechanism (SSM), along with the Bank of Greece and the country’s other creditors, have been in talks with Greek lenders in a bid to set annual targets aimed at reducing the share of bad loans from 36 percent nowadays, or 73.4 billion euros, to below 10 percent by 2022.
Given today’s picture, banks will need to slash their NPLs by 7 billion euros per year, although the final amount will be determined by the course of the Greek economy. If the economy reverts to growth, the rise of bad loans is halted and banks return to positive credit expansion rates, then the major problem of the NPLs will be dealt with faster than otherwise.
However, if the economy remains in recession in 2016 (as is universally projected), bad loans continue to mount up and the recovery is delayed further, then the problem will simply be exacerbated.
Notably, in addition to the nonperforming loans, there is also 20 billion euros’ worth of loans that is likely to end up as NPLs – i.e. to be left unpaid for at least 90 days – unless the economy rebounds and the problem of overindebted households and corporations is dealt with so that they are able to respond to their obligations.
Tackling NPLs is the biggest challenge that banks will face in the coming years. A key factor will be legislative initiatives, such as making legislation regarding corporate and taxpayer bankruptcies more flexible and allowing for the sale of nonperforming loans to specialized companies.
The government is trying to exempt the sale of all bad loans from mortgages on primary residences, of up to 500,000 euros owed by small and medium-sized enterprises and up to 250,000 euros by self-employed professionals, as well as consumer loans and credit card debts of up to 20,000 euros.