As the Greek economy slides into its first recession since 1993 and neighboring countries find their economies shrinking, analysts and bankers are expecting the nonperforming loans (NPLs) of Greek banks to rise further, as more households and companies find themselves unable to meet their installment payments. However, it looks as if economics may not be the only factor behind this development: Politics may also have something to do with it, according to senior bankers from different political parties. The Greek banks have, so far, been able to weather much of the storm in the international economic crisis because they had negligible amounts of toxic financial products on their books, enjoyed strong profitability and most had received a liquidity and capital boost with the state’s national rescue plan. The fact that most banks considerably increased provisions for bad loans and took some write-offs since the last quarter of 2008 improved the quality of their loan books, albeit at the expense of lower profits. Still, all pundits agree that the Achilles’ heel of local banks is the rising percentage of NPLs on their books. These are their toxic assets, as some like to call them. This is no surprise. During the economic downturn, a growing number of households and companies have been failing to pay interest and/or principal, even after being given 90 days to do so. At this point, most bankers tend to agree that the peak of NPLs in Greece will come next year, as these loans usually continue to rise even once the economy turns a corner. Some predict that the NPL peak will come to between 9 and 10 percent of all loans, while others see it at between 12 and 13 percent. The implications for the profitability and the financial health of the credit institutions are vast if the number peaks at these levels. One would expect consumer loans and credit cards to have the lions’ share of Greek banks’ NPLs, followed by loans to small and medium-sized companies. Still, the big surprise so far has been coming from an unexpected source, namely, nonperforming mortgage loans. There is no doubt that the local economy has performed better than those of the neighboring economies so far, as evidenced by looking at gross domestic product (GDP) data. Yet, the percentage of mortgage loans that are not serviced after 90 days is higher in Greece than in those countries. This is not what one would expect if one focused on economic factors alone. Indeed, Greek GDP was stable in the first half of the year compared to the same period in 2008, while the Turkish economy shrank by some 7 percent and that of Bulgaria by about 5 percent. However, the percentage of mortgage loans on which no installments were paid in 90 days stood at 5.3 percent of all mortgages at the end of 2008 in Greece, and is estimated to have risen to close to 7 percent at the end of last June. The NPLs of mortgages stood at about 2 percent in Turkey and 5.4 percent in Bulgaria at the end of the first half of the year. It is clear that economics can partly explain this development, since Greeks are known to give high priority to servicing the loans taken out to finance the purchase or building of a house even during hard economic times. Some may argue that Greek banks have been less careful in approving mortgages during the good times, when they had ample liquidity and the local economy was cruising at high growth rates. This is true, given that banks were willing to provide loans even when the loan-to-value (property) ratio exceeded 100 percent but the same can be said about banks, including local ones, that were active in neighboring countries. Top bankers who are known to be loyal to the two major Greek political parties battling for power are quick to provide another explanation for this phenomenon. Politics. When households facing economic difficulties hear politicians indirectly encouraging them not to pay their monthly installments, who wouldn’t take it seriously and stop making good on their payments, they say. In other words, these bankers charge that political statements partly explain why Greece has experienced such a rise in NPLs in what is considered the most secure type of loan compared to neighboring countries, even though the Greek economy has fared better than those. This is a tough charge that cannot be ignored at a time Greek nonperforming mortgage loans show a steep rise compared to those in neighboring countries. The fact that this development cannot be fully explained by economic fundamentals may or may not imply the intrusion of the political factor. It will certainly have been a grave mistake on the part of politicians if it turns out to be true.