Banks and debt management companies have warned the government of risks faced in efforts to reduce bad debts, the possibility of state guarantees on the Hercules plan being triggered and the impact of missing out on goals set in their business plans.
According to Business Daily sources, the Association of Claims Management Companies and the Hellenic Banking Association have sent letters to the Ministry of Finance raising the issue of extending the transitional period to achieve the recovery targets from 24 months today to 36 months, as the prolonged suspension of enforcement operations (auctions) for more than one year makes it impossible to achieve objectives set in business plans.
In addition to the suspension of auctions for a year, more time is expected to be lost due to the delay in the start of the state body that will oversee the acquisition of real estate from vulnerable borrowers – a key role under the new bankruptcy code.
The new institution has not yet been put into operation, about 7 months after the new bankruptcy was voted on, and is expected to operate after the first half of 2022, with the government asking the banks to hold off until the institution is up and running.
This means, according to bank officials, that about 30 percent of the auctions will not be able to take place, as they relate to this category, limiting for many more months the ability of servicers to achieve recovery goals. In addition, they note, there is strong evidence that some of the debtors who are being treated as vulnerable borrowers have been dodging their commitments despite being able to pay them (strategic defaulters).
As bank officials note, the consequences for loan servicers in the event of goals not being achieved are very serious, leading to non-payment of their fees but also to wider consequences:
- risk of state guarantees being triggered (amounting to 12 billion euros for the "Hercules I" project and another 12 billion for the second phase of the project),
- significant losses of foreign investors who acquired problem loans and invested in the Greek secondary market of non-performing loans,
- halting bank plans to consolidate bank balance sheets and sparking negative publicity by questioning the effort to consolidate Greek banks and their ability to carry out business plans, overturning the positive international momentum that has been formed for the country and the prospects of the Greek economy.
- increased pressure on the prices of future NPL securitizations
On this thorny issue, several meetings have been held with the Ministry of Finance last week and with the Bank of Greece, concerning the implications for bank balance sheets in the event that the targets are not met.
The government acknowledges the difficulties posed to service providers and banks by the suspension of auctions and welcomes the prospect of extending the transition period to 36 months from 24. Sources close to the government acknowledge that there is a risk of activating the penalties provided for servicers (non-payment of fees), however, note that there is no issue of state guarantees on the "Hercules" plan being activated.
At the same time, banks have assured the BoG that the extension of the transitional period will not have any impact on the senior securitization bonds on the bank balance sheets. The Ministry of Finance and his deputy minister, George Zavvos, are examining the issue, looking for alternative solutions.
However, according to sources, a legal formula will have to be found to be accepted by the Commission, which is probably quite difficult as no other European country has been given such a long extension. There are concerns that Brussels technocrats may reject the request as there is no precedent considering the horizontal suspension of auctions.
According to Business Daily sources, bank legal teams are suggesting that an extension through European Commission should not be pursued and that the lenders should cite conditions of force majeure from the non-functioning of courts.