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Solution found to Hercules problems but challenges linger

The European Commission’s latest post-memorandum report on Greece points out that the government plans to intervene with legislation in the Hercules plan, in order to extend the recovery period of securitized loans.

The government and the European Commission have reached an agreement to overcome a major threat to the smooth implementation of the Hercules plan, which will allow managers of securitized loans to delay recoveries, without the risk of losing contracts with banks and their fees.

The European Commission’s latest post-memorandum report on Greece points out that the government plans to intervene with legislation in the Hercules plan, in order to extend the recovery period of securitized loans, as the pandemic caused long delays, while auctions have been frozen.

Thus, the government, which has already extended the original 12-month recovery timeframe to 24 months, reportedly plans to further extend the time period to 36 months. The European Commission makes a general reference to this plan in the report, adding that from the point of view of competition and state aid laws, it has already approved the controversial legislative intervention.

It is noted that the issue was discussed by Minister of Finance, Christos Staikouras and Vice President of the Commission, Margrethe Vestager, during her recent visit to Athens. Initially, there were objections from the Directorate-General for Competition, which noted that in Italy, the only other European country to implement a similar program, such long deadlines for repaying loans were not given. Eventually, it seems that these reactions subsided and the government was given the green light from Brussels to legislate.

Problems prevented

In practice, the extension given for the recoveries will restore the smooth operation of Hercules plan, as:

  • For loan management companies, there is no risk of penalties arising in the event that they see low recovery rates, which could lead them to losing their securitization contracts. This, especially if done on a large scale, would have plunged the Hercules plan into chaos, as banks would be forced to look for other loan managers and long delays would have been caused.
  • This, as BusinessDaily reported, would have triggered a dangerous domino effect for the banking system and the economy, as it would delay the consolidation of bank balance sheets, while the state would face the risk of the guarantees being triggered.
  • Borrowers would also have faced pressure, as loan management companies would be forced to speed up enforcement procedures and large-scale auctions if forced to proceed with extraordinarily short recovery times.

However, the extension is not a panacea for all the problems the Hercules plan may face in the future, as the question remains as to whether loan management companies will be able to meet recovery target given the problems faced by the Greek judicial system.

"Domino risk"

These problems and risks were recently mentioned by Tassos Panousis, CEO of doValue and president of the Association of Loan Management Companies. As he stressed:

"The prolonged freezing of enforcement measures has already severely affected the pace at which loan restructurings and consensual arrangements are reached. And that's how a domino of side effects in the economy begin. Bank plans to reduce their NPLs are lagging behind, and with them the full recovery of their ability to finance the economy - now that the recovery needs to be supported.
If there is a further deterioration, the risk factor also increases on securitizations guaranteed by the state, ie the Greek taxpayer, through the Hercules program. Investor plans are also hampered due to an impact on the valuations of new securitizations - that is, the amounts that foreign investors will invest in the country to acquire the respective portfolios."

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