Greece's "big four" banks put a combined total of €19.2 billion of loans on ice during the pandemic to cushion struggling borrowers from default. Just over a year after the crisis began, many of these clients under debt moratoriums have returned to fully repaying status. Where borrowers have not been able to resume payments as normal, the Greek government has stepped in with a range of subsidies to help them avoid defaulting. This is good news for a banking system that was plagued with defaults — both genuine and strategic — during the last credit cycle.
Even so, an increase in nonperforming loans looks unavoidable. The Bank of Greece, the country's central bank, anticipates that Greek banks could book around €8 billion to €10 billion of new NPLs in 2021.
Light at end of tunnel
Most debt moratoriums finished at the end of March, and lenders have not been bit by a wave of defaults, according to Yiannis Mouzakis, managing director at MacroPolis, a think tank focused on Greek economic and political affairs.
"So far, a combination of initiatives adopted by the banks and the state has cushioned credit institutions from an extensive formation of [nonperforming exposures]," he said in an email.
One of these initiatives is Gefyra, or "bridge" scheme, in which the government subsidizes mortgage repayments on the primary residences of borrowers who have run into difficulties. Gefyra, which came into play in 2020, effectively replaces the Katseli Law, which was introduced in 2010 to help protect heavily indebted homeowners from foreclosure, but which received widespread criticism because of its abuse by strategic defaulters. The Greek government revealed a draft law, dubbed "Gefyra 2," in March, which would offer similar subsidies for corporate borrowers.
The two schemes already appear to be taking the edge off defaults at the major Greek banks.
Piraeus Financial Holdings SA froze a total of €5.0 billion loans since the start of the pandemic, and as of the end of February 2021, around €500 million was covered by Gefyra, having exited moratoriums. The bank calculates a further €1.2 billion will be covered either by Gefyra 2 or by in-house "step-up solutions." Some €200 million of loans have already defaulted, and a further €800 million are expected to do so. Out of the total pile of loans under moratoriums, Piraeus said that 45% are expected to naturally return to repaying status.
At Eurobank Ergasias Services and Holdings SA, 20% of the total €4.9 billion of loans placed under moratoriums are either covered by Gefyra 1 or will be rolled into Gefyra 2, while 42% returned to repaying of the borrower's own volition, according to a full-year 2020 earnings presentation. Out of €5.5 billion of loans put under moratoriums by Alpha Services and Holdings SA, 10% will be covered by Gefyra, and 63% are performing once more, the bank said in its latest earnings presentation.
Repayment culture
Greek banks were plagued by strategic defaults in the years following the 2009 global financial crisis. But history does not appear to be repeating itself with coronavirus moratoriums, according to Nikolaos Artavanis, visiting assistant professor of finance, Pamplin College of Business at Virginia Tech.
A strategic default is a deliberate decision on the part of the borrower to stop repaying loans, even though they have the means to do so.
"We currently observe lower rates of strategic default compared with the past (i.e., Katseli Law). This does not necessarily reflect a change in repayment culture. In my opinion, it is attributed more to the fact that recent credit market interventions in Greece (Gefyra and coronavirus moratoriums) were targeted, featuring specific eligibility criteria and strict conditions on the future behavior of the borrower," he said in an email.
Ioannis Spyridopoulos, assistant professor of finance at the Kogod School of Business atAmerican University in Washington, D.C., also thinks that a change in borrower attitudes is not necessarily the reason for the lower incidence of strategic defaults.
"What has changed a lot is the overall economic environment and sense of political stability," he said in an email.
The threat of a "total collapse" in the Greek economy, especially the looming possibility of "Grexit" in the mid-2010s, had a strong influence over certain borrowers, and may have been an incentive for some to deliberately abandon their loans, he said.
At a "conservative estimate," some 37% of delinquencies recorded in 2013 on Greek residential mortgage loans granted between 2006 and 2010 were strategic, Artavanis and Spyridopoulos argued in a paper published in February.
Greece nearly exited the single currency in 2015 following a tense standoff with Brussels over its national debt and the conditions of its bailout.
Now that Greece is on a steadier footing, the chances are that borrowers are more likely to make good on loan repayments where they are able to, Spyridopoulos said.
S&P Global Ratings said April 23 that it expects Greek GDP to rebound by 4.9% in 2021 before growing to 5.8% in 2022. This compares with an 8.2% contraction in 2020 due to the pandemic. The ratings agency also upgraded the country's long-term sovereign rating to BB from BB- on the back of improved government effectiveness, and confirmed its short-term rating at B.
Adding to bad-debt pile
Although Greek banks are unlikely to face overwhelming NPL inflows thanks to the pandemic, fresh bad debt comes at a time when the country is still contending with a large overhang from the last credit cycle. As of December 2020-end, Greek banks still had a combined €47.4 billion of NPLs, according to the Bank of Greece. The NPL ratio is high at 30.2%, compared with a European average of 2.6%.
The worry is that the combination of NPLs from the last credit cycle plus the coronavirus crisis will leave Greek banks with limited breathing room to write fresh loans to the productive economy, according to Eleni Louri-Dendrinou, professor at Athens University of Economics and Business.
"Financing growth with such high NPLs will be difficult," she said in an email.
