Indebted households

Statistics released by the Bank of Greece on bank loans to businesses and consumers reflect the twofold problem that plagues the Greek economy. The volume of loans issued to businesses increased by 4.6 percent in May from last year – a significantly smaller increase than the 6.7 percent rise recorded in April. Meanwhile, the growth rate of consumer loans remained stable at 26 percent, while the increase in consumer credit remained high: 33.4 percent during the first five months of this year and 34.4 percent in the first four months. The reduced demand for business loans reflects a lack of productive activity. And the continuing rise in consumer loans betrays the inability of Greek households to fund even day-to-day expenses. Structural reforms may be fueling hopes for a reinvigoration of loans to the business sector, but consumer loans and mortgages require more caution. We are all familiar with the reassuring comparison that the rate of borrowing among households in Greece is lower than that of their counterparts in most Western countries. Therefore, there is no reason for concern and banks can freely advertise their «one-minute loans.» But this is just one side of the coin. Greek households may have relatively small debts, but they have acquired them over a shorter period of time. The deregulation of credit, along with rate cuts, has made loans very attractive. So consumers rely upon them to buy homes or to ensure they can spend freely. But what will happen if interest rates suddenly rise or if our sickly market fails to pick up? Imagine how many people would be unable to repay their loans. And what about the banks? How much pressure would they be able to shoulder should there be an increase in bad debts? Comparisons with foreign countries cannot yield reliable answers to such questions. And we do not want to reach the situation of the USA, where 40 percent of loans issued are for the repayment of previous loans. Greece has already seen enough increases this year: a 19.4 percent hike in credit cards, a 44 percent increase in consumer loans with proof of purchase and 47 percent more personal loans. If we continue at this rate, things will get out of hand. This is something banks should realize first. However powerful the attraction of short-term gain, they must consider future risks, for their own sake as well as that of their customers. Meanwhile, consumers must realize that loans are an expense and should be taken out for an investment or a necessity, not to fritter away.

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