Getting Greece back on the path to growth is a challenging and multidimensional task. A strong financial sector is an important start and would be the best tool to restore investor confidence and kick-start credit growth, especially for small and medium-sized enterprises (SMEs), which in Greece account for 86 percent of jobs and more than 80 percent of the private sector.
To help revive the financial sector and put much needed liquidity back into the system, the International Finance Corporation recently acquired 150 million euros’ worth of shares in Greece’s four main banks. The recapitalization of Greek banks is a key step toward restarting lending and economic activity by supporting smaller businesses.
But the job of restoring financial stability is far from done. The long recession has weakened banks’ assets, eroded capital and limited credit to support the recovery. According to the Organization for Economic Cooperation and Development (OECD), from 2001 to 2008, easy and cheap credit led to high growth in loans to the private sector, which proved difficult to pay back in the subsequent recession.
From 2011 to 2015, the share of nonperforming loans in Greece increased from 14 percent to more than 50 percent, according to the European Central Bank. NPLs account for almost half of all consumer loans in Greece, one-third of commercial loans and close to 30 percent of mortgages. Greece and its partners need to devise and implement a comprehensive NPL resolution plan – and fast.
NPLs have also had a detrimental impact on the private sector. A recent study by PriceWaterhouse Coopers, classifying Greek companies based on criteria such as return on employed capital and ability to service their debts, showed 54 percent could be described as “zombies.” At least a quarter of the outstanding debt is owed by debtors not only incapable of servicing their debt but also beyond restructuring. The study also showed the largest portion of debt is to entities requiring significant debt restructuring to survive.
The NPL problem is clearly complex. What needs to be done for an effective resolution differs from country to country. According to the World Bank Group’s Doing Business Report, Greece’s insolvency proceedings are much slower and result in lower loan recoveries to creditors than other European jurisdictions. New emergency proceedings are trying to address this problem.
The most crucial thing is to act and act now, with a coordinated approach. Fortunately, the Greek government has already shown a willingness to tackle the problem. A new NPL law, which came into force in December, will allow NPLs to be transferred to domestic branches of foreign financial institutions or handed over to be managed by licensed non-bank NPL servicers. The new legislation allows foreign banks or foreign professional asset managers to have a presence in Greece and invest in NPLs.
In February, the NPL law was expanded to include primary residency mortgages, SME loans, and loans guaranteed by the state, in addition to corporate loans and non-primary mortgages. In addition, a 2015 revision to Greece’s bankruptcy code eases company rescue and rehabilitation, and expedites procedures related to NPL resolution.
The latest discussions between the government and its official creditors are a further step in the right direction. Measures will be taken to immediately open up the market for the sale and servicing of performing and nonperforming loans, temporarily excluding small loans secured by primary residences. With these first elements in place, NPL resolution can gain momentum.
IFC has considerable global and regional experience in this area. In 2009, in the wake of the global financial crisis, IFC launched the Distressed Asset Relief Program (DARP), which aims to restore company health and clean up financial systems. So far, it has invested more than 3.27 billion euros, including in a restructuring fund for Central and Eastern Europe, as well as in acquiring NPL portfolios in Bulgaria, Montenegro and Romania among others.
In Greece, IFC can invest debt and equity to support licensed servicers and major investors looking to acquire large portfolios. Working with Greek banks, IFC can also invest in platforms that pool assets to facilitate refinancing, restructuring, and borrower rehabilitation. In the Balkans, IFC has been working with local subsidiaries of Greek banks to remove NPL portfolios from balance sheets.
Investors are looking for stability, transparency, and real progress on reforms. The public sector has a key role to play, but so too do private sector players. The Greek government and private businesses must commit to building a more efficient NPL resolution system, which will mean fewer NPLs, easier resolution, increased returns for creditors, and reduced risk.
As the sale of distressed assets begins in earnest, investors should look out for a lack of reliable data on which to base pricing, variances in underlying asset quality, and protracted sales processes. But investors willing to take some risk can learn a great deal about this market, helping to stabilize the Greek financial sector along the way and nudge the economy toward lasting growth.
* Dimitris Tsitsiragos is vice president of the International Finance Corporation’s global client services, where he leads investment operations and advisory services for IFC and oversees new business development, portfolio and client relationships with key private sector partners worldwide.