The selling of bad debt by Greek banks to loan servicing companies, also commonly referred to as funds, is creating a new playing field in the economy.
More than 30 billion euros of bad loans have already been passed onto funds by lenders in an amount that is seen exceeding the 70 billion euro mark by the end of the year. This is creating the conditions for Greece to handle the biggest challenge faced by the financial sector after years of delays.
However, passing on non-performing loans (NPLs) to funds does not solve the problem itself as the task of recovering the money remains difficult. On the one hand, there are expectations that funds will have more leeway than banks in offering favorable repayment terms with the use of haircuts. But on the other hand, concerns are growing that funds will turn to home sales as a way of getting their money back.
In recent weeks, the government has picked up efforts on this front, as a very small number of loans (tied to primary residencies) have qualified for favorable treatment, indicating that a wave of forced home sales is coming up, in what may trigger significant opposition at a community level.
Banking officials have told Business Daily that there is no intention, nor plan, to conduct large scale home auctions given that it is a time consuming and costly procedure.
For there to be an essential solution to this problem, in favor of loan holders, the banks, the loan servicing companies, and the broader economy must successfully coordinate.
According to market sources, a solution to Greece's bad loan woes, that will allow banks to move ahead, rests on five points:
Loan servicing companies. The companies that buy NPLs must realize that the Greek market is a special case when compared with other European countries. Bad debt reaches 50 percent of total loans, in figures that have not been seen in Europe before. The sheer size of the problem demands that a specific management strategy be put in place for it to be handled responsibly. Plans for an excessively high number of auctions cannot be implemented and will create hard to solve problems.
Banks. Banks must realize that selling a bad loan to a fund neither solves automatically the problem nor does it make it just go away. Lenders must play a role in handling problems created by the economic crisis by supporting with finance solutions put forth by loan servicing companies. In order to reduce the risk of a large number of foreclosures taking place, banks must review the changes to loan terms being offered to determine whether they are sustainable and provide the necessary finance with realism and flexibility. Given that 50 percent of loans have been in the red in recent years, the inclusion of this debt into regular loans is a necessary prerequisite to solving Greece's NPL problem. Banks must finance changes to avoid other scenarios from arising that may have multiple negative consequences on the economy.
Loan holders with NPLs. They must realize that delays are not in their interest as they remain trapped in an exceptionally difficult situation that they can't get out of, keeping them locked out of the banking system. They need to stop hiding behind regulations, such as the Katseli law, or keep maintaining unrealistic beliefs that they can avoid facing any consequences. Loan holders must come forth with honesty to funds and seek sustainable solutions, based on their real financial situation, ending their own non-sustainable situation.
Government-loans. The state must be flexible and efficient to boost households that have a real need for assistance and not create more obstacles that will support strategic defaulters who harm the country's payments culture. The government must also offer loans to those who need it and intend to restructure their debt but are unable to meet current obligations.
Government. Regulatory framework. In order for the bad debt to be efficiently restructured on time, rules regarding the voluntary handing over of properties to avoid the asset being repossessed must be reviewed.