The recession caused by the Covid-19 pandemic will lead to an increase in bad loans through the rise in unemployment, according to the Center for Planning and Economic Research (KEPE).
In its analysis titled “The Effects of Covid-19 on Greek Banks’ Nonperforming Loans,” KEPE explains that the blow from the economic slump will have a stronger effect on mortgage loans, as each percentage point that the gross domestic product falls will lead to a 3 percent increase in bad mortgages. The acceleration of the jobless rate by one percentage point could also lead to a rise in bad loans ranging between 0.33 and 0.96 percent for corporate and consumer credit.
In any case the rise in unemployment is the main parameter that affects households’ ability to service their loans, so KEPE attributes great significance to the effort to contain the steep rise in bad loans, as well as the increase in state expenditure and the support of the real economy.
In Greece’s case, KEPE noted, that could mean a reduction in the primary budget surplus required for as long as is needed in order to support the economy under the extraordinary conditions comparable to post-war reconstruction. The relatively small impact of the public debt level on NPLs is an encouraging message to those responsible for drafting a more interventionary policy of support for households and corporations, according to KEPE. However, given that the support of incomes and GDP is the main factor affecting NPLs, the role of the fiscal balance should be assessed in combination with the expected favorable effect of public spending.
The financial health of banks, as reflected in the maintenance of strong capital adequacy, is for KEPE an important second line of defense to prevent new NPLs of all categories in the future, as it contributes toward safeguarding confidence in the credit system and in financial stability in general.
The KEPE analysts estimate that the negative impact on bad loans from a possible shift in property prices is expected but should be small, while increasing the incentives offered to banks for strengthening the economy’s funding will provide a small short-term support to the effort to reduce or contain the rise of bad loans.