Banks unlikely to face added risk from expected rises in interest rates

The projected ascent of interest rates as of 2005, in combination with the expected slowdown in the growth rate of the Greek economy after the Olympic Games, has recently given rise to debate regarding the disposable income of households and their ability to repay consumer and mortgage loans a year from now. Is there any real danger? Bank officials take the view that consumer loan rates in Greece can fall still further in the next two years, and that it is premature to attempt any forecast about what will happen if, for instance, the European Central Bank decides to raise the basic euro rate by half a percentage point in January or February. The consumer loan rates of Greek banks today vary between 9 and 11 percent – about 2-3 percentage points higher than elsewhere in the eurozone – but are expected to fully converge with them as the recently introduced bank customer credit rating system Teiresias continues to be enriched with new data; the use of Teiresias will reduce credit risks and interest rates will fall accordingly. At the same time, consumer loans, most of which are of short durations today (two to three years), will gradually be converted into five- and seven-year loans, as in the other mature European markets, reducing the cost of monthly repayment installments and the direct financial burden on households, irrespective of any increase in the ECB’s basic rate. Besides, no one expects such an increase to be sudden or sharp. In the worst of cases, economic analysts say, the euro rate will go up by around two percentage points in the next three to four years. «So what?» one may ask. Mortgage rates, which now concern a significant section of the economically active population, will go up to 6.0-6.5 percent in such a worst-case scenario. But is this not the rate already offered by most banks for fixed rate loans of 10 or 15 years’ duration today? Having strengthened its position in recent years, the Greek banking system now offers very low rates indeed in the highly competitive mortgage market. They are now around 4.5 percent, compared to a eurozone average of 4.2 percent and Germany’s 5 percent. There is, therefore, no prospect of serious risk either for banks or households. Besides, an elongation by five years of the loan repayment period can neutralize any additional financial burden resulting from a rate rise. The question, nevertheless, remains what will be the actual effect on households’ ability to repay loans due to possible significant pressure on incomes, resulting from a slowdown in the economy’s growth rate. In all likelihood, pundits say, the completion of large projects and the reduction in EU investment subsidy inflows will cause some creaks in the economy but nothing threatening. No one is saying the economy will enter into a recession, which would cause serious problems. International economic organizations forecast that incomes will go on rising, but at slower rates than in the last eight to 10 years. Besides, only one in four Greek households has a mortgage, and this quarter is unlikely to be the poorest.