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Borrowing costs for Greek businesses, household well above EU levels

Τhe average borrowing cost for businesses in the eurozone was close to 1.51 percent while the corresponding cost for Greek companies is 2.95 percent.

The European Central Bank may have opened the liquidity tap to an unprecedented degree with the aim of strengthening businesses and households in view of the pandemic, however, in Greece the cost of money remains very high for businesses and households.

According to data published by the ECB for the eurozone and the Bank of Greece for Greece in July, the average borrowing cost for businesses in the eurozone was close to 1.51 percent while the corresponding cost for Greek companies is 2.95 percent.

For large companies, the cost of loans over 1 million euros is close to 1.20 percent in the eurozone compared to an interest rate of 2.65 percent in Greece. The picture is even worse for small businesses, as loans under 250 million euros are charged at a cost of 1.96 percent while in Greece the cost is 4.31 percent.

Indicative of the chaotic distance that separates our country from other European countries is the fact that a large Greek company currently borrows at a higher cost than a small and medium-sized company in the eurozone.

The picture is similar for households. In Greece, the cost of the average floating mortgage stands at 2.53 percent versus 1.4 percent in the euro area.

The high cost of money creates a heavy burden on businesses, erodes competitiveness levels while discouraging investment. In fact, the borrowing cost of Greek companies is even higher as there are additional charges such as that of Law 128. Last month, the interest rate on new loans in our country increased.

Why is the cost of borrowing so high in Greece?

The high borrowing costs for Greek companies is also highlighted in the Pissarides Committee report, which identifies four main reasons for this situation: the large stock of non-performing loans, the inefficiency of the bankruptcy process, the high operating costs of Greek banks and the high lending costs for banks in international markets.

More specifically:

1. Non-performing loans discourage new business lending: either it is not realized at all or it is accompanied by high interest rates. The negative relationship between non-performing loans and new borrowing can be understood as follows: Non-performing loans have a real value much lower than their original carrying amount on bank balance sheets. Their carrying amount decreases to fair value over time (eg through write-offs, sales, or securitizations) and this results in significant losses to banks. Losses in turn create new capital needs. However, raising new capital can be painful for existing old shareholders (debt overhang effect), 30 and so banks try to avoid it. Thus, with a small capital base and without new funds, banks are unable to offer new loans. After all, this is prohibited by the minimum capital adequacy regulations of the SSM and the BoG. New lending is particularly limited towards SMEs because they have the greatest credit risk.

2. Bankruptcy inefficiency not only increases the cost of financing but also perpetuates the problem of over-indebted businesses ("zombies"). Liquidation becomes an unattractive option for creditors, and significant delays arise due to reorganization. The distorted incentives created in banks by the problem loans held contribute to the problem. This is because even if the liquidation brings significant resources, the banks are obliged to record losses on their balance sheets, while they have no such obligation if they leave the business in operation. The percentage of zombie businesses was about 30 percent in 2016, and these companies accounted for about 30 percent of total lending.

3. The relatively high operating costs of Greek banks, which is transferred to companies in the form of higher interest rates or commissions. The high operating costs are due to a number of factors, such as incomplete digitization of procedures, an excessive number and inactive staff, etc.

4. The high cost of lending by the banks themselves in the international markets. The high cost of lending to banks is due in part to the fact that Greece is considered a higher risk country than most other eurozone countries. It is also due to non-performing loans. The amount of these loans (40 percent of the total) combined with the fact that a significant part of bank equity comes from future tax breaks (deferred tax assets are 60 percent of the total), creates uncertainty in international markets as to whether banks have sufficient funds and future income to cover their losses on non-performing loans. The impact of this factor has now been drastically reduced following the recent actions of the ECB, where banks lend at very low interest rates even with low quality collateral.

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