ATHENS – While investors are anticipating big gains on the Greek stock exchange, expressing confidence after New Democracy leader Kyriakos Mitsotakis ousted the anti-business Radical Left SYRIZA, a recovery is being impeded by bad loans held by big banks.
While Greek financial institutions got a 50-billion euro ($55.33 billion) injection from three international bailouts of 326 billion euros ($360.77 billion) that began in 2010, they’re being weighed down by 75 billion euros ($83 billion) in bad loans.
That’s because customers couldn’t pay mortgages, credit cards and loans after successive governments hammered residents with repeated pay cuts, tax hikes, slashed pensions and worker firings to meet the demands of creditors putting up the rescue packages.
While they claimed financial difficulties, Greek bank shares have doubled in value over the last year, thanks largely to a scheme called Project Hercules that involves a complicated mix of securitization and state guarantees, modeled after an Italian plan called GACS.
It’s designed to help banks secure a better price as they offload their non-performing loans to vulture collectors who are hounding debtors, apart from the ruling New Democracy and its former coalition partner, the now-defunct PASOK Socialists who owed 250 million euros ($276.66 million) with the bank officials who authorized them getting immunity.
Hercules has a big downside, wrote economics columnist Ferdinando Giugliano for the Bloomberg financial news agency, saying, “It creates a non-trivial risk for taxpayers, who’ll pick up the bill if things don’t go according to plan.”
He said that, “The government also needs to follow up on its idea to reform Greece’s byzantine insolvency laws. Only that will increase the value of the collateral pledged to the banks and allow debtors to move on.”
The bad loans are equivalent to about 40 percent of all loans provided by banks who found it hard to lend more to boost the slow recovery and as the collectors have concentrated on small debtors after a series of bank scandals said business executives get away with taking hundreds of millions of euros and brought down one state bank.
Mitsotakis’s government plans to issue up to 12 billion euros ($13.28 billion) of guarantees that lenders can use as they bundle together their bad loans, and chop them up into portions according to their riskiness — a process called “securitization.”
The Greek state will guarantee the senior tranche, while others will be less protected and sold off cheap to investors while collection companies can rake in giant profits by buying bad loans and forcing debtors to pay back as much as the full amount while some companies were offered up to 90 percent discounts.