We’re borrowing beyond our means, but there is a way out

Excessive debts are threatening more and more households, which must seek a solution with their banks as soon as possible, according to Christos Vassiliadis, director-general at Citibank Consumer Group. In an interview with Kathimerini he also predicted that competition among banks will soon intensify, to the consumers’ benefit, and believes that this development, if combined with a solution to the social security problem, will provoke a new cycle of market restructuring. Are you worried about the very rapid credit expansion, particularly in consumer and housing credit sectors, over the last few years? The explosive increase in the number of loans in recent years is naturally worrying banks, as historically across the world the explosive rise in loan issues is followed by an explosion of bad debts. The risk in Greece is especially great since the opening up of consumer credit in 1995 and the ensuing full liberalization in 2003 occurred without the necessary infrastructure, both to get banks the data needed to assess credit worthiness and for the «education» of the consuming public. Unfortunately the bulk of consumer loans and card spending was and is aimed at consumption. I therefore fear that we are acquiring goods beyond our economic potential, which bears serious risks. And yet compared with other Europeans, Greeks have borrowed less. Average figures indeed show Greek households are not overborrowed, but these figures do not necessarily reflect reality. In this country the average is formed by two different trends. The higher socio-economic classes show very low borrowing, unlike the middle and lower strata, where the problem appears. Large parts of the population have overborrowed and are facing serious problems in meeting their obligations, which explains the recent delay in payments. Is the situation reversible? What could overborrowed households do? The first step is realizing one’s situation. Hiding from reality helps no one. The second is to understand that banks are on the households’ side in trying to assist them. They must speak to their bank and explain their problem, telling the whole truth. There is increasing interest in programs of concentration and refunding of existing loans. Consumers must find the bank with the best terms for them. Finally, they must be consistent in the solution they choose. The best way for consumers to lift the weight of overborrowing is to switch their debts from short- to long-term ones and turn their loans from unsecured to secured, achieving much better terms this way. Generally, the sooner consumers realize they must scale down their consumption and settle their financial problem in cooperation with the banks, the better the result will be for everyone. There are, however, many problems in corporate credit, too. Many of the problems we see today have their roots in the excessive euphoria we all had in 1998-2000. Nowadays the continuing decline of competitiveness, mainly in small and medium-sized enterprises, combined with the considerable drop in consumption, has brought entrepreneurship to a difficult position. Considering also the current restructuring of our economy, it is obvious that conditions are favoring the strongest, beyond borders and local limitations. The shrinking of profit margins by the intensifying competition will swell the problems of companies close to the overborrowing threshold and will clearly make any rehabilitation effort more difficult. Data show lending interest rates significantly higher in Greece than in Europe. How do you explain this? That is partly right, especially in mortgage loans, where we are still trailing Europe despite the important steps taken recently. Nevertheless, you must also take into account the general situation in the real estate market in Greece and the greater risk banks take. I still believe that the refunding programs for mortgage loans and the forthcoming competition will be to the consumers’ benefit. In consumer loans and credit cards the domestic market is rather low compared with the European one, using similar products for comparison, of course. What about mortgage credit? The low interest rates are leading more and more people to buy houses through bank loans. True, the mortgage market is expanding rapidly, especially because Greeks consider owning their own home a top priority. Today mortgage rates are particularly competitive, being at low levels precisely because they require a property secured on the loan, which diminishes the bank’s risk. There is still scope for a further drop in rates, particularly for the fixed rate as competition increases. For instance, at Citibank we have some of the lowest interest rates on the market, with the most competitive being the fixed 5.3 percent for 15 years, while other banks are at much higher levels. «Old» mortgages with much higher rates are another important matter. I believe that the road will soon open for the refunding of mortgages, becoming another field for banking competition. What are the dangers from floating-rate loans monopolizing the mortgage market? Floating-rate loans are at particularly low levels and I think in the next two to three years we will see a further rate reduction in the eurozone, helping those with a floating rate in this period. The crucial question is for the financial cycle to follow, bringing a rate rise, that is whether people taking out loans will be able to afford this rise, as most of them borrow to their limit. This could trigger a chain reaction, leading even to pressures in property prices. Fixed-rate mortgages are currently at historically low levels, securing a good rate and protection from a possible rise. Consumers should therefore select their mortgage depending on their abilities for repayment within a certain amount of time, and not based on the lowest interest rate of that moment. Will a solution to the social security problem bring on a restructuring process in banks? It is not just that which leads to market restructuring. The ever-increasing competition will lead smaller banks either to merge so as to secure economies of scale and capital solvency, or to their acquisition by bigger banks. At the same time larger banks intend, and rightly so, to expand abroad, starting with the broader Southeastern European region. Yet for such efforts to succeed, greater stakes are needed. Mergers between companies of the same sort, which may be essential, have their success depend on the economies created by the decline in expenses. This, however, is rather difficult in our country in the present labor environment. There remains the possibility of Greek banks cooperating with foreign ones, so a solution to the social security problem and the adoption of the international financial reporting standards are vital conditions. I cannot exactly predict what will happen, but I know it will be very interesting.

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