ECONOMY

Banks an easy target but practice of post-dated checks doing harm

Every country has its sacred cows. In Greece, these are a number of groups that command hundreds of thousands and even millions of votes. Small businessmen are among them. This explains why politicians and others have rushed to support their vocal complaints against banks’ credit policies, but also why they have done little to tackle the widespread tax evasion among these same businesses and stop a major credit practice in the banking system. Greek banks have come under attack from the government, other politicians and a large section of the media over the last six months or so for presumably stopping the flow of loans to households and small- and medium-sized businesses. They are not alone. Similar complaints have been heard in other countries. As usual, some local politicians have gone a step further, demanding the «temporary» or «permanent» nationalization of some major banks to facilitate the flow of credit to those who are in greater need due to the economic crisis. To bolster their argument, they point to action taken by even the British and the US governments, long considered the bastions of the free market and capitalism. Of course, any student of Greek economic history knows that the state-appointed managers at companies have done a poor job at best, often compounding existing problems. With demand for consumer and mortgage credit by Greek households in decline, it is not easy to continue to argue that banks bear the responsibility. The fact that a large number of Greek households working in the private sector are feeling less secure about their jobs has more to do with the economic situation and the general climate than the banks’ willingness to extend loans to them. But demand for credit from small- and medium-sized companies has been relatively strong for quite some time. The Greek banks’ more cautious approach in lending to them has raised the ire of small businesses and given good reason to politicians and others to attack banks and their credit policies. In this context, politicians and others seem to be forgetting that banks loan out the money of their depositors, both individuals and companies, and also risk the money of their shareholders. Although criticism of banks has subsided lately as more and more credit in the form of zero-interest, state-guarantee loans flows toward small businesses (as part of the TEMPME fund), this has not stopped some politicians from accusing banks of poor credit policies and threatening them with nationalization. It is easy to understand why this is the case, if one takes into account the fact that a great deal of Greeks do not have a good opinion of banks but most importantly that small businesses represent practically millions of votes. According to data from research group ICAP, there are about 800,000 firms in Greece of which 794,000 are small or very small, about 6,000 are mid-sized firms and only about 400 are large. It is also easy to understand why none of the politicians and others have mentioned the risks behind the widespread use of checks payable in the future as a form of credit among businesses. This form of credit ends up creating liquidity and actually should have been included in the calculation of a broad measure of money supply, according to some economists. These checks change hands a number of times before they are deposited in a bank as collateral for loans. This is a practice that was imported from abroad but continues to work here while, in other countries, such as France, it has long been banned. These post-dated checks play the role of promissory notes and are at the core of the problem. Many small businesses that had no access to the banking system relied on larger ones that borrowed from banks for working capital. However, the large corporations are worried about the credit worthiness of their business partners, given the crisis, so they have cut back their credit lines and have tried to convince the small businesses to borrow directly from the banks. In this way, they have tried to shift the risk from themselves onto the banks. But the latter have been unwilling to lend to these small businesses because they do not meet the minimum criteria and the banks are afraid they will not be able repay the loans. This explains why banks are not happy to lend to these «new business customers,» who may earn lots of money but do not meet the lending criteria, since they report just a small percentage of their real incomes to the tax authorities – evading taxes. It is an oxymoron that politicians are accusing banks of not providing enough credit to many small businesses, many of which are prone to tax evasion, and yet have not demanded an end to the business practice of «Greek promissory notes.»