NPLs and Foreclosures in Greece: Causes and Proposed Solutions. The Selective Grexit, the Ugly (Auctions), the Bad (Bank) and the Good (White Knight)

According to some reports at the beginning of 2018, a lingering issue of the so-called Greek “bailout”, i.e. the failed EU/IMF/ECB economic restructuring plan that has ravished Greece, is the untangling of its NPL mount. A large part of Greek banks’ loans are non-performing; almost half of them. That doesn’t sound normal isn’t it? It’s either that most of borrowers are irresponsible or banks were spreading money indiscriminately. Both can be true but not to this extent. There’s a saying in Greece: it’s either that the sea is zigzagging or we are steering off course…. Let’s see why and some ways to get over it without further aggravating an impoverished and angry society (Note this is a very long text but wanted to post on its entirety, if you don't have the time to go through but are still interested scroll down to the Epilogue at the end where I summarize its main points)

Greek Non Performing Loans – Market Size and European perspective

Total Non Performing Loans (NPL, NPE) in Greece amount to €107bn, according to the Bank of Greece data in June 2016. Of these, € 63.6 billion are business loans (66% of their total), € 28 billion mortgage (42% of their total) and € 15 billion consumer (57% of their total). Therefore the biggest problem is in business and consumer loans.

?      Out of total corporate NPLs, €18 billion are from large companies and shipping, € 24bn (37%) from small and medium-sized SMEs and € 16bn (25%) from very small. Large loans are concentrated in certain sectors such as tourism, food and beverages, healthcare, pharmaceuticals, transport, textiles and fish farming. Many sectors might be dead or close to that due to the crisis and readjustment of the economy, so loans will probably never be recovered.

?      A large number of NPLs to small businesses (50,000) have been taken with collateral family property which may be the primary residence and is in danger of being foreclosed. This adds to and exacerbates the problem with non performing mortgage loans.

?      Banks have reportedly formed provisions of up to 30-90% of the outstanding balance depending on the type of loan (ie mortgage, consumer) and hold collateral towards the remaining part at a rate of 50-70%. So they seem well covered from a financial standpoint right now.

?      The NPL issue is not only a Greek one. Total NPLs across Europe are estimated at around € 900 billion (about 15% of EU’s GDP compared to 50% for Greece…). The NPL rate is estimated at 5.4% with differences across countries; in Germany it is very low at 2.6% and in countries that are plagued by the debt crisis such as Greece and Cyprus at exorbitant levels, close to 50%. Spain has managed, quite painstakingly, to clear its loan portfolios starting in 2009 and now exhibits a ratio of about 5%. Italy, Portugal and Ireland that were significantly affected by the debt crisis, still have high bad debt ratios of 15-20%.

?      The ECB has been requesting the reduction of the NPL balances in Greece by €40billion (20% of GDP). This reduction will mainly come from sales (€7.4b), foreclosure/auctions (€11.5b), renegotiations and write-offs. 

?      A small amount of NPL sales, compared to other European countries, have taken place in Greece up to now: around €6 billion. A further €7-8 bn of sales are planned for 2018. That included uncollateralized obligations (consumer loans) and some business loans. Banks are reluctant to sell higher quality, collateralized loans (mortgages). Sale prices follow global market trends (3% face value for not collateralized consumer NPL, 20-30% for mortgage and collateralized SME business NPLs).

?      Outside Greece, a record amount of loan sales, of over €103 billion, took place in Europe in 2015 and 2016. It was expected to further increase in 2017. Italy is the largest buy-out market at the moment following a change in laws in 2015 (preferential tax treatment), with a transaction value of €36 billion in 2016 followed by the United Kingdom, Spain and Ireland. In the last three years, loans of € 63 billion have been sold in Italy following a change in the tax treatment there, € 73 billion in the United Kingdom, but only about € 5 billion in Portugal, while in Ireland, which according to the media has recovered well from its crisis, € 37 billion of loans were sold. In Spain, loans worth more than € 100 billion have been sold since 2010 and several subsequent foreclosures and evictions have been causing widespread public unrest.

?      Most activity in NPL sales centers around commercial real estate and residential, followed by consumer and business loans. The most active buyers are large US private equity funds such as Cerberus, Blackstone (owning one of the largest portfolios of Fortress, Loan Star, Oaktree, Goldman Sachs and Deutsche Bank.

?      Even as NPL sales have picked up lately, they are far lower than the pre-crisis sale activity. Loan securitization and portfolio sales were a common practice then. However, European securitizations has decreased by about 75% from over € 400 billion in 2006 to less than € 100 billion in 2016.

The Banks’ Role

Banks and the Greek Sovereign Debt Crisis

Greek and foreign banks fueled the sovereign debt crisis through buying government bonds. According to BIS and Reuters, German and French banks held almost half of Greek Debt when the crisis broke out (much of the French exposure though came through owning local bank subsidiaries). In the third quarter of 2010 German banks had loans to Greece in the amount of € 19.3 billion on their books. However In March 2011, Deutsche Bank’s group wide engagements in Greece had dropped to € 1.6 billion………. (Source: Ramifications of debt restructuring on the euro area – The example of Germany’s exposure to Greece, EU Parliament, Directorate General For Internal Policies, June 2011). As part of the Greek “bailout” government debt was passed over from banks to EU countries (ie European taxpayers).

Private Debt and the Banks’ Role in the crisis and its continuation

Banks domiciled in Greece played a central role in bloating Greece’s private debt in 10 short years after the introduction of the Euro providing any type of loan through lending to the state, to systemic media, political parties, suspiciously failed businesses, private loans for vacations (!), loans for consumption (imported cars and other goods) and for inflated mortgages on inflated salaries. Often checks were lax. That is actually an argument against banks in many Greek courts’ decisions.

So let's refresh our memory or inform those that were not there. A large number of TV commercials were airing encouraging consumers to take more debt. Real estate was promoted as an investment that will offer family happiness and an enduring asset. The emphasis was not on whether a bank would give a loan but on how fast and effortless to the borrower it would do so….

Large part of consumer loans returned to EU countries through exported goods to Greece (Greece has historically a massive trade deficit that was exacerbated during the crisis). For example sales of imported cars tripled after the introduction of the Euro spurred by cheap and abundant lending. That was accompanied by a generous tax treatment too. Wondering whether something like that could be allowed if the Greek state was financing, under preferential terms, a local producer…

Irrespective of whether they are to blame for the leverage bubble, the Greek banks were not able to upload their debt as the European ones did. A 2012 Greek sovereign debt restructuring resulted at a 53% haircut to private investors’ holdings (aka PSI). Even if Greek debt has since remained stable and at a much higher level than before as a percentage of GDP (180% vs 110%) due to the GDP reduction from the imposed austerity. The PSI has decimated the Greek banks holdings, Greek retail bondholders and Greek pension funds reserves. This wiped out the banks’ shareholders capital too. Almost €60 bn of market capitalization, much in small local shareholders was lost throughout the crisis. The Greek public was also called to recapitalize the banks and since it lacked the funds the EU provided them and charged it to the Greek debt. These funds covered much of the bank losses, operational restructuring (downsizing) and heightened provisions.

Despite the restructuring lending to corporations let alone individuals, slowed down if not disappeared… Banks are historically the main source of funding in Greece, in the absence of alternative financing such as strong capital markets or private equity. As a result of the drop in corporate lending; small and medium size companies have been suffocated. A much higher number of loan applications are turned down than in the EU. Further to that the introduction of capital controls in 2015 further exacerbated their problems. Deposits fled or vaporized due to insecurity, increased taxes or higher living expenses. Households had to tap into savings to get by or withdraw for safety. From a high of €235b in 2009 bank deposits have now fallen to around €120bn, or at their pre-Euro levels.

As part of the banking sector restructuring local bank number went down to 5 from more than 20 before the crisis, 40% of branches closed (2.206 from 4.097), 26,000 jobs eliminated (down to 40,000 jobs from 66,000 before). Exit bonuses for those downsized (ranging between 2-4 year salary earnings) were offered. Termination bonuses were covered by public funds as well (ie recapitalizations). Finally presence in Balkans scaled back sparing competition from some respectful players and the numerous Greek companies that are already present there, from a familiar partner.

At least, answering to pressure from Italy and although Germany’s discomfort, ECB has recently stepped back from an earlier request to mandate increased provisions over aging NPLs. This most probably would have called for a fresh round of bank recapitalizations.

Bank Bailouts in the US

There was a significant debt crisis in the US too; however the approach and results are much different. US Treasury had to take over mortgage lenders Fannie Mae and Freddie Mac in 2008 and injected $187.5 billion to them. It has since recovered all of it, taking priority payments over shareholders, plus a $88 bn in profit. The $475 billion TARP fund that was approved after heated debate, went into supporting the US financial and automotive sectors and had been already been paid back within five years, plus a small profit. In the case of AIG (part of the TARP) the treasury took it over, on a Tuesday that will stay in the memory of many, writing a check for $182 billion and getting it back within four years plus a 15 billion profit. AIG had to downsize, bear the public’s despise even changing its name for a period (who would feel safe in a company that almost failed..) and eventually is back. Furthermore US courts/SEC have fined Lehman Brothers ($2.4 b), Deutsche Bank ($7.2 billion) and other US Banks ($160 billion in total) for their role in the crisis through the securitization of problematic RMBS.

You’d have to note here that the US GDP didn’t fell that much as in Greece’s crisis, nor was the unemployment that wide (although I’d add that US couldn’t go through the same kind of unemployment levels as Greece is trying to). The Greek crisis is more reminiscent of the US’s big recession of the 1930’s. Yet seems that nobody is learning from the past or studying at the EU/Troika echelons. The FED’s Chairman though, Ben Bernanke, even not the most celebrated Chairman, had specialized in just that and follows the right actions as shown in retrospect. 

Bank Bailout in Greece

On the other hand, some of the funds contributed by the public for the Greek banks’ bailout are not recoverable. That is because most of the capital inflow, €25billion, was in the form of warrants. As bank stocks tanked through continued losses, warrants became worthless and expired unexercised. How’s about that? Is it that policymakers are incompetent or indifferent in throwing away public funds? Now just try explain to the average Joe how warrants work and why he/she should pay for a debt that he didn’t create. Which pretty much answers the question why the public may have thrown their hands up when it comes to their economic situation and and what has transpired with the public debt, with all this technical jargon. Something like the croupier drawing aces out of his pocket…. You see, it’s much easier to dominate through finance than guns. Especially when nobody is watching over you, or even better you’re sitting on the same table with them… Halleluiah! If there’s a free economy paradise that must be it, isn’t that great? And before you jump into conclusions about the writer’s political beliefs in order to avoid giving any further thought to the argument, I’d say that what has happened here isn’t probably what Adam Smith had in mind or any sense of morality.

The necessity of the 2015 recapitalization, was even criticized by Wilbur Ross, the US Secretary of Trade and legendary restructuring financier that held stakes in the Greek banks. Much of it has been attributed to penalizing Greece for its defiance of the EU mandates and a referendum. In the so called “honorable retreat” or 180 U-turn (ie “kolotoumba”) that ensued the EU got their way, a victim to despise and a victory parade while the Greek politicians bowed and kept their jobs. They made an example to avoid for other rebels (even if as was proven the Greek politicians were only playing a role). The order was reestablished. A controversial and probably comic EU official actually placed the cost of all this mutiny to €200 billion without providing analysis (that was the Greek Statistics tradition?). The Greek banks that have passed the stress tests a year before had to be recapitalized. The Greek state’s interest in the banks was diluted to minority…. The privately held and at last profitable Greek banks now aim to realize all profits from the auctioning-off of written down NPLs and foreclosures and keep it to themselves. Is this socialization of losses and privatization of profits, communism, crony capitalism or simply a scandal?

Furthermore where banks would have been under government control (ie public ownership based on injected funds) with an interest to maximize the benefit to the overall economy, they are now seemingly at arm’s length. The prime minister, in case that he is interested with people’s wellbeing and not on votes and managing his image, requested the banks’ consideration towards the weaker borrowers when otherwise he would have been giving marching orders. And the bankers, most of the times those bred within these failed strategies that brought their banks and the economy to its knees, if not the perpetrators through their lax lending, are just pretending that they practice moderation and technical reasoning over populism. For the writer, who had the chance to observe some of those failed banks’ behavior from a very close distance, their unfounded, in retrospect, arrogance, this hubris seems simple unfathomed. Have even heard a banker claiming that it was not the Greek banks to blame for the crisis but the state! Such weak memory. They simply played along! In some other place bankers were finding refuge in such terms as paradigm shift and market debasement. Poor Greek state; you’re really pitiful; you have fed generations of parasites receiving no gratitude but scorn. And by parasites I’m not referring to the public servants but the corporations that same as this banker ride the wave when things are good and then when things go south just shrug their shoulders.

The Ugly

Change of Circumstances among Greek borrowers

Although the Greek economy has tanked and household income and their net worth was decimated, their outstanding loans’ value remain unscathed. More specifically:

?      Salaries decreased by 22% (even more in practice, let alone that sometimes go unpaid)

?      Disposable income reduced by 34% (on top of salary decreases, taxes increased too)

?      GDP/Capita decreased by 15%

?      32.2% of households expect not to be able to service their debt and 31.1% are already in arrears

Real estate prices are down 41% since 2008 just before the crisis. As much as €2 tr in value is considered lost. That’s attributed to the crisis, tax increases, emigration. There are quite a lot of empty houses but probably not in the places with demand. Greece experienced the biggest drop in real estate prices among European members of OECD between 2010-2015 (-35%) when the drop in Spain was -25% and Portugal -7% at the same time that on average the change was a 10.7% growth. US grew at 18%, UK 22% Germany 30% and Iceland 37%. 

There’s some real estate price increase though in certain areas in Greece. This is not a sign of hope; probably a proof to the contrary. It is due to a jump in income from tourism and AirBnb rents. In the absence of other options, people revert to good old service jobs and tourism. Whole neighborhoods are transformed, local populations pushed further to the side. It was good for a while but now the effects and reactions start to escalate out of hand. More so if this gentrification doesn’t occur in places with empty or derelict buildings but family neighborhoods increasing the housing cost for ordinary people. In Barcelona this led to protests against tourists and eventually administratively set limitations in leased places. Certain limitations are also placed in New York too.

The “Selective Grexit”

For good or for bad Grexit has happened. The whole bailout for some, including the writer was meant to avoid just this. That was back at the onset of the crisis, in 2010, having good awareness of the inefficiencies of the Greek economy albeit not the ones that have been targeted by the “bailout”. A tragic misfiring on its part indeed, by going after symptoms rather than causes… After some time GDP has plummeted to pre-Euro levels and so have household incomes and the real economy. It’s what I call a de-facto “Selective Grexit. Here's another proof for that: Eurobank has calculated the real exchange rate based on the labor cost. So the Grexit has happened for the people.

The society is decimated but can't get a break. Probably the lenders won’t be convinced until they have seen most of the people crawling on the street or jumping out of windows. Even more sadly they wouldn’t care too, even some Greeks wouldn’t too, as long as they are the ones to be spared. Maybe it's the strong case built that the weak or the sinners, based on the various hyped or unfair depictions in the news, should suffer; that's what they deserve. They may be pretending. Maybe it's what you’d call collateral damage. But is it that or it is just myopia, sticking the hand in the sand until everybody is brought down in the end, along with some good old divide and conquer. And that’s without going to such passé, for our times, arguments about higher ideals.

Yet, the only thing that remained the same is loan obligations as well as the ability by ruling elites to exert control over the society through often unconstitutional mandates let alone financially irrational, unfair and catastrophic ones. Furthermore the central monetary planning accommodates political maneuvering within Europe, support the image of a strong administration and provides the safest and easiest way to hoard and transfer funds (at least when capital controls are not in place). That is off course if you have funds to start with… Having their own funds beyond the reach of the state and even outside of it is a standard practice throughout time for the Greek ruling elites. You might say for everybody, but in Greece and in some other countries this is exacerbated.

Quite interestingly the some much despised among the public “foreigners” have allegedly proposed a full Grexit from the Euro. This didn’t happen. The Greek establishment and politicians said that this would be a catastrophe for the country (really suspicious when these people worry about “the country”, better hold your breath). It would have been a destruction but for whom. Most of the society is decimated. It’s not a matter what currency they hold, but holding some currency. They have been barred of any honest public discussion on transition effects; this is a taboo topic. Anybody talking about transition is being bullied. Although there’s at least 20-40% of Greeks that are against the Euro (don’t try to relate that to parliamentary standings as 45% of Greeks didn’t vote in the last elections) there’s no mainstream party in the Greek parliament that advocates Grexit; not even considering it. Anybody discussing it is portrayed as extremist or populist; this is probably a pan-European tactic. The EU establishment even lost their chance to kick out Greece and blame the ensuing depreciation to Grexit so that others are terrorized. Now if the Grexit happens it won’t get much worse for Greece (what else could EU do to prove the point; bomb it?) while EU has proven incapable of saving it.

As have analyzed elsewhere wealth in Greece, at least in recent years, is mainly a product of power, there’s no bourgeois/middle/capitalist class and capital formation of that sort in Greece as the one that brought about the French and British enlightenment and industrial revolution. Wealth creation is simply an issue of allegiances, often international ones. The reasons that avert Grexit as well as an honest public debate on it in Greece is not to elaborate upon here. Having though a de-facto Selective Grexit on its hands, Greece lacks however the ability to enact measures that will spur development (such as monetary flow, interest rates, even tariffs and subsidies to nascent businesses). Such policy making is in the domain of central EU planning, much outside Greece’s ability to influence and within a facade of joint decision-making, ultimately under the prerogatives and interests of the stronger partners.

It also lacks any serious capital investment (in such cases it has to be guided or mandated); anything between €50-100 billion of investment is missing from the economy. Most tragically as the ruling elite and the nepotistic/hereditary political scions and powerbrokers lack any immediate or recent experience in real world business and value creation, other than political gamesmanship and riding the sovereign debt bubble, they are completely incapacitated of autonomous action and planning for the economy’s redevelopment. Would like to add here that a major argument towards proceeding with NPL auctions is to raise capital that the banks will inject to grow the economy. I'm not sure it's sincere. The economy is dried up; anybody promising water will be welcome. But I wouldn't trust a single penny on these banks or any banks to be clear when it comes to designing and growing an economy because that's what Greece needs now (the production base is decimated). The Greek banks' experience and allegiances would most probably be relevant for the yesteryear Greek economy of the 2000's based on leveraged consumption. That's as relevant as hiring a steamboat engineer to run a nuclear submarine, or like giving to an addict a license to dispense the substance they are addicted to. I personally propose the establishment of a technocratic organization same as the Italian Istituto per la Ricostruzione Industriale (IRI) or the Japanese Ministry of Economy, Industry and Trade (METI). I am skeptical towards the idea coined towards the establishment of a Development Bank. Irrespective of the fact that there's no indication of its available funds I'm also not sure about banks or bankers running a development plan of that extent.

In the end, who knows, maybe Grexit is more about geopolitics rather than economy. The Greek public didn’t also want the Grexit or were indoctrinated to be afraid of it and trust the EU more. And so they were kept in the Euro only in name…

Borrowers in Strategic Default….

It is not unlikely that in this dire economic environment, there are many borrowers in default; they are estimated at 1.2 million (ie one in five if we are talking about the active Greek population)? Isn’t this strange?

But apart from those who are in financial distress, some seem not to want to pay. Those are the so-called in “strategic default”, that are estimated at 300,000. But who are they? Are they fraudsters with offshore accounts as some politicians implied? Are they for example those who rather prefer to buy food for their family, heating for the homes or to educate their children instead of paying their loan that may be now beyond their means? And which of the costs are unnecessary and what is necessary and who determines that and under what criteria? Under the same logic, social security funds reduced pensions because their reserves were decimated by their bond holdings’ haircut, real estate devaluation and lower contributions due to higher unemployment. Even if this has been judged as unconstitutional. Under the same logic that has been applied against borrowers in default, pension funds should have been expected to continue paying the same pensions hoping maybe, for a turn of luck elsewhere. The fact that they have reduced their outflows is in violation to what has been agreed with the pensioners and without their consent, which is pretty much what the people in strategic or other default have done, isn’t it?

Furthermore, apart from some say "scammers" or irresponsible borrowers, is somebody in default without a good cause when he has seen the value of his property fall 40% but not of his loan? His disposable income reduced by 20% or more and decides to give up paying? Let's say the mortgage payment is € 1,000 for a property worth € 200,000 before the crisis but now due to the recession it is possible to rent a similar or even better home for € 500! Or they have to move to another city for work and can’t get a satisfactory rent for their home. Should someone come under distress to pay a loan that is based on assumptions of another era and cut back on his expenses? On the other hand, let's assume that it is possible to adjust the loan on the basis of the new economic data. Then if a borrower had taken a 40 year loan towards a € 200,000 property before the crisis with a payment of around €1,000-1,100 then at 30% lower income (ie disposable income after taxes) and 30% lower property value if he could reduce the value of loan by say 30%, the installment would fall to around € 750 (with approximate calculations). However banks wouldn’t offer that; it would be too costly. A 30% reduction in the value of mortgages outstanding would create a hole of about € 10 billion for banks; so probably it won’t happen that easy if at all, and for sure not without demanding it. Banks on the other hand, allegedly to accommodate borrowers in distress, agree to lower payments but increase the repayment period so as the loan amount stays the same. In some cases even the children will undertake to pay it off when time is not sufficient.

Let's not be mistaken here, as trying to defend the crooks or supporting mortgage haircuts across the board. More so when these debts are borne by all taxpayers. If a borrower is a fraudster and does not pay while keeping money in offshore accounts, then the state or the banks should investigate it and try to recover those funds. But, there has been no talk about offshore accounts. The so called Lagarde List (Falciani) produced dismal revenues (same as by Borjan’s list, Panama Papers, Paradise Papers etc). The official reason is that it is not easy to investigate. It is however easier to raid corner shops.. Brave whistleblowers have help disclose at least €100 billion in offshore account of Greeks with the Paradise Papers scandal (which is pretty much as much as the total NPL). These offshore may very well be completely legal (ie generated offshore such as in shipping) or completely illegal (ie not taxable), let’s say from bribes, drug trafficking etc. but they can still be related to NPLs.

Foreclosures: Record and legal framework

Foreclosures and auctions are nothing new. There have been already more than 160,000 since the beginning of the crisis.

There are certain legal protections for homeowners against foreclosures:

?      Prohibition of auctions for primary family residences under the Katseli-Stathakis Law. This applies to properties up to € 180,000 for singles and up to € 280,000 for families. Protection does not cover property used as collateral for business loans. Primary residence auctions of even small value have already been reported stemming from guarantees given on business loans

?      Restrictions on the protection of the first residence expire in 2019. From the beginning of 2018, real estate can be sold to funds that are not subject to auction constraints. There is some talk about extending these protections or adding the right of first refusal clause. It is unclear if would happen but can’t exclude when elections are approaching… On the other hand one have to put into perspective what these funds can do. They as well have to operate under the Greek justice system same as with the original lenders. Their practices and success rates overseas to the extent that involve legal action, might not be relevant at all. So we might just talking about substitution.

?      There are legal proceedings under way where courts are examining the legality of mortgage contracts. They also review the borrower’s financial standing as well as the bank’s handling and in some cases award loan haircuts of up to 90%

?      Additionally, from 2018 onwards auctions for tax owed to the state will also start. There are about a further €100bn outstanding which takes precedence, although it mostly involves small amounts. This is another proof of the “Selective Exit” that has taken place in the Greek economy. It’ll be interesting to see what will happen if there are double-countings…:)(ie the same property targeted for confiscation both by the state and the bank; probably the state has priority, so that would mean more losses for banks?)

?      Greek NPLs represent 50% of GDP and by adding to that a further 50% from overdue tax obligations we come up with 100%. If it was a company that would mean 360 days in debtors turnover (and that doesn’t even include all debtors). The CFO of a company like that wouldn’t have been feeling that comfortable. Would be interested to look at this under a Piketty type of analysis adding debt and deposits in the analysis (but most of the deposits are offshore…). If anybody has done it, please let me know.

?      Auctions are probably easier when involve isolated properties of large borrowers in default, or bankrupt corporations and even that probably in limited numbers.

Public opinion and Activism

Auctions have attracted many protests. Some of the reactions are violent. It is left to be seen where this will lead once widespread evictions start taking place. Police might not have enough resources or even willing to enforce such evictions. Maybe potential collectors and foreclosed property buyers have to hire private security services; this has to be included in their expense calculations.

The public doubts over the urgency to proceed with foreclosures. According to a recent poll (Pulse RC) only 40% believe that foreclosures are to some extent necessary, while the majority don’t. That shouldn’t be coming as a surprise. Banks enjoy very low trust as well, only 25% of the public has trust in them and even less than that that have trust to media. So, not that easy to pass the message. After eight years of fruitless bailout and much pain there’s no doubt that trust to the EU and government is very low too and that comes on the back of years of defamation of the Greek state as inefficient, nepotistic, corrupted and much more. You see, when you open the pandora’s box you never know what will start coming out of it… Almost everybody in Greece (98%) considers the financial situation as bad according to Eurostat while 46% is pessimistic about an exit from the crisis and 64% are feeling angry… Not a very good combination if you put it all together….It’s like an explosion waiting for a spark.

There is a lot of activism with many groups operating and more springing out in Greece that are mainly focusing on blocking auctions in courts up to now. Actually the banks, governments and Troika have decided to throw the white flag and institutionalize online auctions from a distance. Who knows if this law is constitutional, hasn’t been brought a case at Greece’s Supreme Court yet. There are even rumors that some borrowers in strategic default might even arrange to buy their properties in auctions, apparently via a third-party. Indeed it’s easier to bid from a distance; however you can’t even reside in a house from a distance. Eventually somebody will have to get in physically, that’s something different. Wouldn’t advise anybody getting close to contested situations. In any case, imagine reactions once seizures and evictions start to happen in large scale….

Strong activism is evident across Europe too where the NPL crisis and their restructuring have caused pain and unrest among the public. Probably it’s even stronger or developed there; it builds upon a strong tradition in self-organizing too.

?      In Spain an outbreak of auctions and evictions took place as soon as the real estate bubble there burst. It was that much the size of bubble that I remember Spanish getting loans in Spain and investing in the US as they couldn’t get their money back at home. Since 2007, 420,000 eviction orders were issued and 250,000 owners were forcibly forced out of their homes. This has led to large-scale unrest with even firing shots or committing suicide. It was estimated that at some point about 500 families were losing their homes daily even if the government took some protective measures. As a further reaction a strong activist movement against the evictions evolved, building upon strong municipalist tradition as well as frustration with the economic crisis (the indignados 15M movement).

One of the most prominent such organization is the (Plataforma de Afectados por la Hipoteca (PAH)) that was founded in 2009 in Barcelona and soon spread across Spain. The group offers community meetings, peer counselling, vigils in foreclosed homes, demonstrations and squatting of empty buildings that are owned by financial institutions. Such activities has been so successfully disruptive that the Spanish government issued a controversial law to curtail them (“gag law”). PAH only helps borrowers, the weaker of them, that it has previously investigated that they are under sincere distress for no responsibility of their own. It advocates that housing is a human right and the mortgage problem is a political rather than a financial one; more so since both parties are to blame and one of them is disadvantaged in terms of financial knowledge. That is at least based on my understanding. PAH has made certain policy proposals too to help untangle the mess, such as putting into effect the Dación en Pago clause (debt cancelation by property return) where a mortgage holder could agree to return a property if the balance of the loan outstanding was cancelled (contrary to that, returning the property in Greece will only reduce the balance by its amount with the debtholder being liable for the remaining part….). It’s worth looking at PAH’s practices. Beyond their humble and rugged image there’s a noteworthy infrastructure and literature. Probably it’s not accidental, it may have been supported by civic funds to come in and fill a void of public policy where the state lags behind. Even better this image can serve better than some shiny state or private office in persuading people that it is up to them to come together and find a solution rather than expecting it from somebody else. The regional governments of the Basque country and Catalonia have also voted regulations giving them the right of first refusal in auctions. 

?      Portugal: Auctions began aggressively in 2015 causing strong reaction. More than 750,000 properties are in litigation, while 13% of households had loan installments exceeding 40% of their income.

?      Ireland: when the real estate bubble burst real estate prices fell to 15% of the initial value. The banks, in consultation with the government, removed the portion of the loan that exceeded 110% of the property’s real value. Anti-seizure laws are too strict so evictions are practically not happening. About 14% of mortgages are in arrears, which is one of the highest rates in Europe (95,000 mortgage loans of € 4.5bn in total value)

?      Italy, Cyprus: there has been a small number of confiscations. Cyprus has voted a law giving mortgage holders the right of first refusal before a loan is sold. However the banks have the right to refuse. There has been a negligible number of property auctions in Cyprus and most of the cases didn’t even involve residential ones. Probably attributed to protections by law.

The Solutions

Most of efforts to avert foreclosures and auctions so far in Greece have centered among combative activism and legal action. This is the ugly path I would say, the one that is related to the same ugly conditions of the economy and of the borrowers and the ugly vulture-buyers.

Reportedly the banks are also pursuing settlements on an individual basis. Most of the cases involve debt reprofiling and reportedly, in some cases, haircuts. In these cases they follow the Split Balance and Split&Freeze model where settlement for a part of the balance is postponed for later. Presumably banks won’t be offering haircuts with a light heart. More so if that will create imitators in other lenders. Offering a 30% haircut to mortgage and collateralized small business NPLs would probably bear no cost in the banks’ books as I believe that they must have already formed such provisions on average (if you have any other opinion or even better facts, please let me know). However raising this haircut to a 50% level would cost around €10 billion. On the other hand 30% haircut across all performing business loans and mortgages, just to rebase all portfolio to current level of economic activity (similar to what happened to pensions and salaries), would cost the banks around €20billion; that’s quite significant and possible improbable……

Alluding to the famous western I would say that the Greek NPL issue will result in a duel between three solutions: the good, the bad and the ugly. Besides the ugly auctions there are some financial ones that might offer a better way out. The Good and the Bad involve transferring loans to third parties, other than vulture funds (the latter could come under the ugly part along with the borrower’s misery and the combative activism it can spear…). On the contrary the aim of the Good and the Bad would be some kind of amicable resolution to discharge the situation, at least for some time. The Bad solution, is not necessarily a bad one but the name just alludes to the transfer to a “Bad” Bank. The Good refers to a transfer to a White Knight Fund (herein also “WKF”).

The Bad

The Bad Bank at pan-EU level (herein also “EBB”) is a proposal set forward by the EBA and lately EU staff. This is nothing new for Greece as it already operates a sort of bad bank that includes part of the balance sheets of 13 banks that were closed in 2013. Total covered liabilities of this amount to €13.5 billion. Its winding down it is expected to results at a loss of €11 billion for the state that adds to the government debt. Greece however most probably lacks the funds for setting up another domestic bad bank now. Its Financially Stability Fund has been bared of any funds and the Treasury is in dire situation. Under some other reports though €20 billion that were allocated for the banks’ rescue under the "bailout" are still available. Don’t know whether I’d wish these returned to the state in lieu for the €25 billion of the recapitalization lost and used towards debt relief and investment or form a bad bank. A call for other state and pension funds to get involved probably lacks credibility as well. There are not that many with available funds, the scope and capabilities to accommodate such actions.

Proposal for a PanEuropean Bad Bank

In January 2017, EBA (European Banking Authority) Chairperson Andrea Enria publicized his outline of an EU-wide asset management company (or AMC) which is another term used for the bad bank. The main points of this proposal include:

There are some points of concern in EBA’s proposal:

·        The loans could be transferred to the AMC not higher than the book value ie there will be no profit for the bank from this transaction. So, why do it?

·        It can also be carried out above the market value which under normal circumstances should be close or equal to the economic value. If the two differ then we probably have an undervalued asset. Why would a bank transfer undervalued assets and realize a loss? Probably if they have to, and why a regulatory body would force a bank to a loss? That’s not right.

·        Any difference over the market value is considered a state subsidy. Again what if the market value is irrationally low and later recovers? Why realize a loss at this point? Would really refuse to give any more thought to this state subsidy thing; it looks more like some unwanted Brussels red tape that they have a lot of already.

·        The supposed state subsidy refers to the cases that the AMC is state owned? Again this subsidy is not a real one, if it is at all. Remember the bank is selling at an accounting loss.

As seen there are quite a lot of issues here. Seems that the outline only refers to one market scenario. I don’t know whether the EBA personnel have real world experience but if they don’t and are just theoreticians, it shows. Finally I would have personally liked this EBB as an opportunity for a profit that could reduce the Greek public’s loss from recapitalizing the banks. Something like a "masked" government debt haircut as the debt is not sustainable anyway but it seems impossible for the EU governments to cut some slack, some debt relief to Greece. It would be too hard to convince parliaments and taxpayers that have been indoctrinated differently and although it makes sense for financiers (but then again seems this debt is a domination lever than any instrument with finance logic). Let’s say for example that €40 billion of NPLs have a book value of €28bn but are transferred to the EBB at €53 billion based on some hypothetical market price or agreed subsidy. In this case the profit for the selling bank is €25 billion, as much as the lost recapitalization funds. The resulting debt relief is minimal but could offer some window for growth if invested. 

Supposedly based on this outline this sort of profit/debt relief is not possible. There can be a way though if there’s a will. And then off course one would have to find a way to transfer this profit from the selling banks to the state. Won’t say it can’t happen. But somebody needs to do something about it, and nobody seems to be willing to.

One year later, on March 14, 2018, EU Commission staff issued a working paper (AMC Blueprint, Commission Staff Working Document) further elaborating on the Bad Bank proposal. The main points are summarized below.

According to a study by the ECB (Resolving non-performing loans: a role for securitisation and other financial structures, John Fell, Claudiu Moldovan and Edward O’Brien, ECB, Financial Stability Review, May 2017) securitization can yield a 10% higher income than just typical loan sales, and under additional guarantees provided by the buyers can reach up to 40% more. This value potential is amongst the drivers behind the EBB. It is expected that the involvement of such institution will increase returns simply by enhanced signaling and prevention of fire-sales. Loans will be managed either in house or through third party providers. With the indicated €200-250 billion proposed funds the EBB would certainly have more than enough firepower to tackle the Greek NPLs depending on needs elsewhere too.

The EBB hasn’t taken a go ahead yet, if it’ll ever get one. Seems difficult to materialize at this point with EU’s inability to pan out breakthrough policies especially when this involve commitment of funds. Other problems in the case of Greece might arise from the type of loans involved (ie small residential or business loans) that might not be permissible under EBB's outline, as well as the time horizon. Seems that the envisaged workout period of the EBB loans will be relatively short. This, considering the extent of the crisis and “selective Grexit” might be unrealistic for Greece where recovery of assets to pre-crisis levels is projected take a very long time, probably decades.

The Good

Proposal for a White Knight NPL Fund

This proposal calls for the acquisition of NPLs or even performing loans by a fund or an AMC incorporated in Greece with some kind of cooperation or consent by debtors. Under such a plan that is under evaluation by some, loans could be bought by a special purpose vehicle such as a registered association of citizens in a municipality. If a Greek domiciled company is set up (instead of cooperating with one of the ten already licensed) an initial capital of €100,000 would be needed as well as a competent organizational structure (as per Law 4354/2015). The fund could buy and resell loans in auctions on a back-to-back basis, as per my reasoning, in which case it will not need to tie up its capital. It could also buy and then re-lend to the extent that it can commit capital to that. I don’t expect that buying in auctions could be possible at the 20-30% Face Value levels that some envisage based on existing bids. Banks wouldn’t be auctioning such loans and for sure not below market values. Probably something around 50% for mortgages would be more likely in my opinion but it would also depend on the type of collateral and accrued provisions as well.

Under a typical approach the fund would participate in auctions or even better act before them once notified by the borrower that is willing to enter into a back-to-back transaction under certain terms. Just the appearance of a competent bidder and the possibility of a contested auction would turn many vultures away. Even in the absence of cooperation with the borrower the fund could pursue unsolicited action in cases that there’s a good possibility for profit or to serve the public good (for example make sure that a land plot or a building is developed in such a way that doesn’t alter a neighborhood’s character and social fabric bringing inconvenience to the residents such as by the development of large commercial activities, environmental pollution or other such plans that are not welcome). 

Then the discussion of the million Euro, (or million dollar or million drachma) question should pop up: what’s the level of desired capitalization for this company? I believe that to be able to intervene and be able to make a difference such initiative should possess either independently or collectively funds in the order of anything between €10-20billion ($12-24 billion) so that it can cover most of mortgage and small business NPLs. Syndicated efforts with family offices and hedge funds chipping in will enhance WKF’s buying ability. Should note here that alternative financing, such as crowdfunding and P2P lending could be an option too but Greece has no marketplace lending framework in place.

Note as well that the analysis up to here only refers to mortgages loans or business loans that are backed by commercial or other real estate and auctioned off for the later. In case of pure business loans that are expected to continue operate as such the approach should differ. In this case we would be talking about special situations/restructuring funds that necessitate different capabilities in order to analyze and work out the loans on a case by case basis. The writer has been involved in such efforts in the past in Greece and is quite hesitant about it. Most of the times companies end in restructuring there when they’re beyond salvation so they have lost most of their value while the small size of companies is another deterrent. I have also completely excluded from the analysis consumer NPLs as they are of low quality, uncollateralized and hence of limited value. In most of the cases they are sold at 3% of face value to collectors and they don’t in turn stand very good chances to receive much more. Actually one could just buy some of that and forgive them just to save borrowers from the hustle if one feels generous. Something like that happens for medical claims in the US but probably that’s not the same case.

Return

A third party WKF could realize significant returns just by taking advantage of lower interest rates overseas versus those in bankrupt Greece. These returns shouldn’t come with any compromise to the funds’ ability to compete head on with vultures, offering higher bid prices or do good by lowering the lending rates to borrowers in distress. According to market estimates typical NPL sales can return something between 12-20% on investment (Capital Structure: Issuance of GACS-guaranteed NPL ABS unlikely to gain momentum, Amelia Colvin, Linkedin April 26, 2017). This is quite significant in today’s environment of low interest rates. Mind that this refers to the low but contested bid prices mentioned above (20-35% of Face Value) and incur significant expenses for pursuing costly and lengthy legal action for the repayment of loans under Greek legal and judicial system as well as the for the company’s management. However, in cases of pre-agreed transfer terms to the initial or other purchaser the administration cost would drop significantly. Overall single digits returns could be bearable by some investors, especially if risk is kept low. The return issue however should be part of an extensive independent study that will depend on the various operating characteristics of the fund. Everybody interested should make theirs. I’m happy to exchange notes and calculations with anybody that has made serious and sincere homework with a view to sort this out in an equitable for all stakeholders involved and the society.

Epilogue

In conclusion this analysis aimed to show that:

·        The Greek NPL problem is simply the outcome of a “Selective Grexit”. This occurred when the Greek economy went under the IMF/EU/ECB administration, having come to a standstill for whatever reason back in 2010 and not being able to meet its external debt obligations. The resulting program only bailed out the external debtors but decimated the domestic economy that was bankrupted. They bared the economy of sufficient funding and by that by implementing austerity, suffocated it. The result was a 40% depreciation of GDP and of household incomes although private debt remained at Euro levels; hence the “Selective Grexit”. The NPLs represent 50% of the curtailed GDP and tax obligation in arrears a further 50%. In retrospect that was signaled during the “bailout” workgroups but the Greek "negotiators" played along. Probably banks hoped to get 100% back or keep the debt as leverage upon the society? Or they all realized they’ve messed up and put up the reforms as smoke screen and the Troika as enforcers of an unsustainable situation to escape the heat? And that's with resisting the temptation to consider conspiracy theories that flow around. They now revert to pretending that there’s an exit coming to this IMF/EU/ECB administration and the debtcolony status which is not true as almost everybody knows. It's just getting more and more difficult to sell the same story. Here’s more on why this end is just fake: https://www.dhirubhai.net/pulse/greek-miracle-bond-street-fake-success-story-grexit-dream-chatziplis/?published=t. The European parliaments won’t play along with this circus and the Greek people start to get uneasy again too. After the loss of the Troika fig leaf, the heat will be back on the Greek establishment. In a heist guys you got to get in and out quickly, don’t fool around for long…

·        The bankruptcy and subsequent suffocation was justified and is perpetrated by instituting extensive manipulation and psychological conditioning via MSM hinting that the Greek economy and Greeks are to some extent inferior and have to be “reformed”. That's about creating an eternal "mental prison" and cooperative subjects. Have decoded some of these arguments here: https://www.dhirubhai.net/pulse/storytelling-investing-common-fallacies-greek-economy-pete-chatziplis/

·        The Greek NPLs won’t be recovered; that’s almost certain, at least for the consumer and unsecured business loans. It’ll be a long process for the mortgage or real estate collateralized business ones; they may recover after decades based on natural growth of a smaller economy; thirty years is the minimum indication. That is off course in the absence of meaningful investment in the form of capital accumulation (which is different from capital appropriation implemented through privatizations of existing public property). It has been calculated that anything between €50-100 billion is needed to return to pre-crisis levels. This represent around as much as what EU has contributed to Greece since becoming a member over the latest 40 year period (and that was before Brexit..). It’s quite improbable to happen especially in today’s smaller EU budget after the Brexit (around €100 bn or less?) and with a non-conducive political climate. On the other hand it doesn’t look easy to come from private investors, either Greeks or foreign. The Greek establishment doesn’t look interested or able to cooperate.

·        The Greek banks bear responsibility for the explosion of private debt under questionable practices after the introduction of the Euro in the 2000s (and most probably may have responsibility for the Government debt too; they are the finance professionals after all and should have known better before playing along).

·        The bank recapitalization hurt all Greeks as €25billion at least is considered lost and added to the public debt while the profit from now on will stay now with banks as the state has lost control before getting repaid, unlike what happened in the US. That’s socialization of losses and privatization of profits…

·        Auctions and foreclosures face, as expected, significant resistance and activism from the society. They can probably proceed only in isolated cases of large and truly mishandled loans. NPL sales isn’t a panacea as loans stay under Greek law. Greek police, already among the most populous in Europe may not suffice or may be unwilling to cover evictions to the addition of ongoing obligations. In the end the properties are on the ground in Greece, among the people that are angry and mistrustful.

Taking all these into consideration it doesn’t sound strange that the elephant in the room, tackling the NPLs, were left for the end. Maybe this problem was written off as unsalvageable or it was perceived that the strict Troika debtcolony regime would last for thirty or so years, long enough for their prices to recover. Now that supposedly the Troika administration will end, at least explicitly, the Greek establishment will be left on its own to sort it out so they might be rushing to do as much as possible as soon as possible.

However this articles aims to find a solution under current limitations instead of perpetrating the misery and unrest. A solution that offers some financial fairness to borrowers and the public that contributed to the banks’ recapitalization. It would be good if such solutions could include borrowers that are trying to stay current but are struggling to do so as they have seen their incomes and property values drop. This solution may also free up some capital for the country’s economic recovery and growth. It even aims to highlight some descent profit potential for those that come forward. We proposed the following:

·        The Bad Βank can be a solution. Can be used in order to pass over a tax relief to the Greek state if the EU wants to help (doubt that they can or care)

·        The WKF could offer a socially responsible solution and some good return.

Please let me know of any comments and views. The aim is to improve the options here if possible.

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P.S.

The research that went into that and some other versions of this article that have been circulated elsewhere has been undertaken for those that are in distress, those in despair, those that lose their homes and bearings, for those that commit suicide or contemplate that, for those that strive to sustain their families having a non performing loan and those facing foreclosure. It was also undertaken for those often overlooked, that are struggling to stay current with debt payments even if their incomes have plummeted. It is written for those that don’t understand complicated finance, for those that have been told that they are to blame for their country’s distress through their voting or backwardation, for the ill-advised policy, the derivative instruments utilized by the treasury and the mistakes of the Troika’s so called “bailout” and that it is patriotic to turn a blind eye and accept all that. It is prepared for those that have been told that are to blame for their misfortune through past frivolous consumption and excesses, that they deserve a punishment in this world’s hell. It is written for those that are told that they have to be reformed forever because their ways or even they may be inferior. It is written for those that have forgotten what brought us here, to refresh their memory if they now feel safe and blasphemous. For those that were not born back then but will have to live their lives with the results of what happened back then; so that they know why. It is written for those that have to endure when others moved money offshore. It is not written for the latter for sure, especially if they have loans in arrears directly or indirectly through their failed companies and unmet obligations to terminated personnel while they keep on with business as usual. After eight years, it’s time to stop with all of this. This end is off course not the fake exit from the IMF/ECB/EU programs. It has to be something else. It might not be easy to happen though. Until then; keep it up brothers! Never let go..!