Debt restructuring only for viable firms
“Only the resilient companies will survive the pandemic, as well as those with the ability to adapt to the new conditions. The new insolvency law will assist in distinguishing between viable and non-viable firms,” Fotis Kourmousis, special secretary for private debt management at the Greek Finance Ministry, tells Kathimerini in an interview.
Furthermore, Kourmousis notes that “the government’s goal is to achieve private debt reduction, through the new insolvency law; however, this has to be accomplished in a rational way – i.e. through debt restructuring, wherever possible, in order to avoid bankruptcies.”
The initiation of the new insolvency law coincides with the financial crisis caused by the pandemic, which is expected to lead to a rise in private debt. How will the new law work in practice?
The new insolvency law provides the necessary tools to manage debts generated before the pandemic or which have deteriorated due to Covid. It adopts best international practices, as defined by World Bank and the Organization for Economic Cooperation and Development, and harmonizes European Directive 1023/2019, which is obligatory for all European Union member-states, thus the rules are the same.
The law provides debtors with the option of restructuring their dues (through the out-of-court workout mechanism or court rehabilitation schemes) or a debt discharge (through bankruptcy) and making a fresh start without any debts. The government’s goal is to achieve private debt reduction; however, this has to be accomplished in a rational way – i.e. through debt restructuring, wherever possible, in order to avoid bankruptcies. I estimate that only the resilient companies will survive the pandemic, as well as those with the ability to adapt to the new conditions. The new insolvency law will assist in distinguishing between viable and non-viable firms.
The new out-of-court workout mechanism was activated on June 1 and there is already strong interest. What are the safeguards in order to avert a new backlog of applications?
The new out-of-court workout mechanism provides an automated debt restructuring solution for households and businesses toward institutional creditors, such as the public sector and banks (including fund servicers). Already, more than 20,000 debtors have started the process. This procedure will provide a quick solution for many debtors. Some debtors will not be satisfied by a standardized solution and will choose a more personalized solution, through financial mediation, in order to negotiate with creditors. Others will seek litigation. The strategic direction at the international level is for out-of-court processes, while in the past most cases ended up in courts; thus I believe that the electronic platform will assist in quickly managing private debt. The data are collected automatically and a debt restructuring proposal is created through a specialized algorithm, thus ensuring speed and transparency and preventing errors and injustices which occurred in the past.
Who is entitled to a debt haircut?
Debt write-offs take place only if a debtor has low financial ability to pay (i.e. their income is not sufficient to cover their inelastic expenses) and at the same time doesn’t possess assets of any significant value (e.g. properties). All debtors must go through a process of controls, through which the preconditions are checked before they can receive a debt haircut. These checks and balances are applied to debtors, co-debtors as well as their guarantors, which are co-responsible for managing these debts.
For example, a debtor with property of insignificant value, who has also been financially impacted by the pandemic and thus has a low income, will receive a debt haircut. However, if they possess significant properties, the debt haircut will lead to its loss.
What will happen with e-auctions of properties? How are primary residences protected and when will the new scheme for purchasing the homes of vulnerable households begin?
The new insolvency law provides two measures related to the primary residence of vulnerable households. They may restructure their debts or go bankrupt and have the option to buy back the primary residence in the future. Debt restructuring stops all enforcement actions.
The government will conduct an international public tender through which it will appoint one private investor who will set up a special purpose vehicle (SPV) which will acquire the primary residences of bankrupt debtors. After that, the SPV will lease back the asset to the debtor for 12 years. The state will provide a monthly rent allowance, in order to effectively contribute to averting evictions of vulnerable households. The debtor has the right to buy back the primary residence in the future, when they recover financially. An incentive is provided to debtors in order to produce income and acquire assets. The operation of the SPV is beneficial to households as well as to the banking system, since most of these assets do not have significant investor value at the moment, and the only ones who wish to have them are the previous owners, due to sentimental value.
Despite the fact that banks are reducing nonperforming loans, private debt remains high, since these loans are transferred to funds. How do you believe that the vicious cycle of debt will be broken?
It is true that, in Greece, total private debt in 2019, prior to the pandemic, stood at 234 billion euros, according to official data from the Bank of Greece, the tax authorities and social security institutions. This debt stems from the 10-year financial crisis and includes €91.7 billion (39.3%) in NPLs belonging to banks and servicers, €105.6 billion (45.2%) toward the tax authorities and €36.3 billion (15.5%) toward social security institutions. Businesses take up about two-thirds of the total debt, while the other third belongs to households.
The financial crisis in Greece was aggravated by the health crisis of the Covid-19 pandemic, which has resulted in an increase in private debt, with adverse economic and social impacts. After the pandemic, the private debt is expected to rise at a global level. In Greece, NPLs are expected to rise by up to 10%, according to Bank of Greece estimates.
The only solution to manage private debt is to restructure it in a long-term way. If the debt is not viable – i.e. its repayment is impossible even over a 30-35 year horizon – then a debt discharge must be followed with simultaneous asset liquidation.
There is a discussion at an international level about debt haircuts, as far as debts created during the pandemic are concerned. What progress has there been in this regard?
Private debt at the global level reached 256 trillion dollars at the end of 2019, according to the Institute of International Finance (IIF). During the pandemic – i.e. in 2020 – the global debt increased by $24 trillion, which is significantly greater than the respective rise caused by the global financial crisis in 2008-09. Debt write-off is a subject always brought into discussion when large debts arise. In Greece, this discussion has lasted more than a decade, due to the extensive financial crisis that the country suffered in recent years. Other countries did not face the global crisis to the same severe extent and thus they started this discussion during Covid. The supporters’ arguments are that all countries suffered with approximately the same level of severe intensity, that the pandemic is considered a “force majeure” for which no debtor is to blame, as well as that governments caused the financial impact through imposing quarantines and halting business activities. However, recent history shows that a horizontal debt haircut never takes place, as some would wish. And it doesn’t take place for financial reasons, since such a measure would cause a huge burden, which someone would have to bear.
