Banks waiting to become useful again
The immediate future of the Greek economy will be decided in the coming days, not least at Monday’s Eurogroup in Brussels. However, as fiscal targets, labor reforms and debt relief dominate the discussion, one issue will go largely under the radar despite it being a crucial element to any recovery.
Greece has been experiencing credit contraction for the last six years and its banks are yet to begin managing the mounting non-performing loans they have accumulated during the crisis. In other words, Greece does not have a properly functioning financial system. Until it is unblocked, the prospects for positive economic developments will be limited.
When you take a step back to see how the fundamentals of the country’s banking sector have evolved since 2010, the picture is startling: When the crisis broke out, banks’ non-performing exposure (NPE) stood at 14.5 billion euros, or 5.5 percent of their total exposure, by June this year that figure had reached 106.9 billion euros, or a staggering 50.5 percent.
In September, the Greek banks submitted to the European Central Bank’s Single Supervisory Mechanism (SSM) their plans for reducing their NPE levels over the next three years. The aim is to cut the amount by 37.6 percent to 66.7 billion, meaning that the NPE rate would be 34 percent in 2019 – still exceptionally high but becoming more manageable.
According to the first quarterly report published last week by the Bank of Greece on the lenders’ operational targets regarding non-performing exposure, the path towards this ambitious goal consists of curing or rehabilitating 29 percent of NPEs so they become performing loans again, 13 percent of bad loans will be written off, 10.8 percent will be liquidated, 6.9 percent will be sold to private funds and banks plan to collect on 5.6 percent.
More than half (58 percent) of the loans in question relate to businesses, 22 percent will be consumer loans and 21 percent mortgages.
Executing this plan will be a mighty challenge and, as highlighted by ECB executive board member Benoit Coeure during his visit to Athens last week, will require robust leadership.
“The banks will face difficult and complex decisions, particularly when resolving the large stock of non-performing loans,” he said during a speech at the American-Hellenic Chamber of Commerce. “Thus, bank boards have to have strong and independent directors with a robust track record who can ensure arm’s length decisions in the best interests of their stakeholders and of the Greek economy.
“Bank management needs to be free of political interference and vested interests,” he added, highlighting one of the key weaknesses of the Greek financial sector in previous years.
The recent signs for the overhaul of the top echelons at local lenders have not been encouraging. The change of management at Greek banks has not gone particularly smoothly. Apart from the battle over the top positions at National Bank (NBG) involving the Hellenic Financial Stability Facility (HFSF), Greece’s bank recapitalisation fund, there has also been a difficulty in attracting the personnel with the appetite and courage to take on the huge task of turning local lenders into properly functioning entities.
Another factor identified by Coeure was the need to adopt an effective out-of-court workout process that will allow distressed, but still viable firms, to settle their debts to banks and the state. The framework was part of recent discussions between Greece and the institutions as part of the second review that Athens hopes to conclude in the coming days.
The ECB official said that the main goal of this newly-designed process will be to “provide sufficient incentives for creditors and debtors to agree on mutually beneficial debt restructuring arrangements.”
It is worth noting that the same businesses that will be seeking to reach an agreement with banks over their non-performing loans will also be trying to settle their debts with the state. Coeure pointed out that at the end of 2015, the Greek state was owed around 110 billion euros in unpaid taxes and social security contributions and that almost 80 billion of this amount was the arrears of corporations, small and medium-sized enterprises and professionals.
Given that this is a completely new and untested process, nobody can be sure of how successful it will be. Clearly, if it works then there is a greater chance of lenders achieving the NPE-reduction targets mentioned earlier. If, though, the burden for settling non-performing loans falls on Greece’s overburdened and slow judicial system, then the challenge will become even bigger.
It is no coincidence that making improvements to the judicial system was the other element mentioned by Coeure in his Athens speech. Enhancing the competence of courts and slashing the time needed for legal proceedings to play out is a vital part of ensuring that the banking system can get back on track.
As the central banker underlined, there is a huge amount of work for Greek authorities to do on this matter.
“These requirements are not specific to Greece; experience has shown that NPL resolution requires strong legal frameworks throughout the euro area,” he said. “In any case, creditors in Greece have to wait longer to obtain a court ruling after an insolvency than in any other EU country except the Slovak Republic. It takes on average about three and a half years, compared with less than six months in Ireland, the EU’s best performer.”
All this means that if or when the debate over the terms of the second review is concluded and Greece’s debt relief issue is settled, for the time being, then the country must start taking the steps towards restoring the lifeblood of the economy. There can be no convincing recovery without a banking system that is in working order.