The number of defaulting debtors in Greece is growing, and experts are warning that the situation could blow up and smash hopes the country can finally emerge from a crippling six-year recession this year.
Greece’s central bank says that non-performing loans — loans for which debtors have failed to make payments for more than 90 days — are currently at €77 billion.
“Dimitris Pikrodimitris took out a mortgage four years ago when he was drawing an annual income of €27,000 ($36,720). But the economy quickly sank into a debt crisis, forcing Greeks to tighten their belts and driving the insurance agent’s wages down to just €6,500 last year,” says an AFP report. “I have difficulty even covering basic expenses. I haven’t made a payment on the loan for two years,” Pikrodimitris told AFP.
The number of defaulting debtors like Pikrodimitris is growing in Greece. “Managing non-performing loans is a key challenge for banks,” Yiannis Stournaras, former finance minister who is now the Bank of Greece chief, told Parliament last month.
Loan payment has stalled on around 30 per cent of mortgages and business loans, and around 50 per cent of consumer loans, says Victor Tsiafoutis, a lawyer offering guidance to debtors at Athens-based consumer group Ekpizo. These so-called ‘red’ loans were mostly responsible for some €600 million in combined bank losses in the first quarter of the year.
“This is a bomb that is going to blow (and cause) a breakdown in the bank system,” Tsiafoutis said. “Imagine a default of €70 billion. Who is going to pay this money?”
“The large number of non-performing loans is suppressing the process of economic recovery (and) represents a significant risk for banks,” added George Pagoulatos, a professor of European politics and economy at the Athens university of economics.
To protect homeowners from total ruin, Greece has restricted forced auctions of a debtor’s primary residence. But a related backlog of court appeals for bankruptcy protection — 100,000 according to some estimates — could take a decade to resolve. The Bank of Greece recently issued a set of recommendations to banks on how to deal with the issue that included partial debt write downs, extended loan terms and the acceptance of additional forms of collateral.
But those are only recommendations, and banks have until December to apply them if they agree to.
In the meantime, hard-pressed debtors like 39-year-old Pikrodimitris have received little relief.
When he asked his bank to re-finance his mortgage, he was asked to pay €3,600 just to secure a settlement — a sum that is now more than half his annual income.
“I’m trying to avoid foreclosure,” he told AFP. “When I took the loan, I took a risk and the bank took a risk. Eventually I will lose my home (while) the bank will never lose,” he said. “Banks promoted these type of loans… to people unable to understand what they were signing up to,” he adds.
Even today, commercial lending rates remain exorbitant even though the European Central Bank’s benchmark rate is at a record low of 0.15 percent.
The ECB’s reference rate has an indirect impact on consumer rates charged by commercial banks.
“(Banks charge) almost 20 percent for credit cards and an average of 15 percent on consumer loans. This should be lowered to five-seven per cent,” the lawyer argued.
Greek bankers insist they see no immediate threat to the credit system from bad loans. “This is an exceptionally serious issue, but I think it is manageable,” Michalis Sallas, head of Piraeus Bank, one of the four main lenders, said after a top-level government meeting on Wednesday.