NPLs are ‘vulnerability of Greek banking system,’ warns Commission VP

NPLs are ‘vulnerability of Greek banking system,’ warns Commission VP

Greece's return to the markets will be a “very delicate task,” European Commission Vice President Valdis Dombrovskis said on Monday, also warning that nonperforming loans are the “vulnerability of the Greek banking system.”

In an interview with the Athens-Macedonian News Agency (ANA-MPA) just days after the heads of the creditor institutions’ missions completed a round of contacts in Athens, Dombrovskis noted that Greece has implemented a major reform agenda and met its target for 2018 but said that after being excluded from the markets for nine years and still having the highest debt-to-GDP ratio in Europe there is not much room for “manoeuvres” or “mistakes.”

“Things seem to be broadly on track on the fiscal side. Greece has met its target in 2018 and the budget is prepared in a way which will allow to meet also the primary surplus target foreseen of GDP this year,” Dombrovskis, who is responsible for the euro and financial stability, said.

Despite this progress, however, several important measures are still pending Dombrovskis said, stressing the importance of strengthening the independent tax authority, completing the national land register and speeding up privatizations. “Some reforms are more advanced some still need more preparation,” he told the ANA-MPA.

“This time the enhanced surveillance mission concentrated on structural reform implementation, including reform of the banking sector, concerning measures to reduce NPLs,” Dombrovskis said, adding that he expects proposals from the government on this front in the next few weeks.

“Greece has by far the highest rate of NPLs in the EU. Over 40 percent of loans are not performing, against 3.4 percent which is the EU average,” the Commission's vice president said. “The point is that this level of NPLs is the vulnerability of the Greek banking system, so a potential source of instability, and it also hinders proper functioning of the Greek banking system and therefore hinders loans to the real economy, to businesses and households.”

This high level of bad loans,  Dombrovskis said, calls for “systemic structural solution” that will address both a reduction of NPLs but also the “root causes,” while also finding the “right balance between protecting the vulnerable borrowers but at the same time avoiding moral hazard and avoiding incentives for strategic defaulting.”

On Greece's planned return to the international markets, Dombrovskis warned that with “by far the largest debt-to-GDP ratio, more than 180 percent, there is not much room for manoeuvre and there is not much room for mistakes.”

“That's why I emphasize the need for Greece to stay on the agreed course as regards both fiscal targets and the structural reform agenda. This is the factor that provides confidence in the Greek economy and will allow the country to successfully return to the markets. Which then allows to clearly say that Greece stands on its own feet,” Dombrovskis told the ANA-MPA.

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