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Greece considering special vehicle to help banks shift billions in toxic debt

The Greek bank rescue fund is understood to be making plans for special purpose vehicles to which lenders would be able to transfer billions of euros of toxic loans off their balance sheets, but industry insiders and academics are skeptical about the plan, which they say is unlikely to become a reality anytime soon.

Reuters reported Oct. 4 that the Hellenic Financial Stability Fund, or HFSF, created in 2010 to help guide banks through the financial crisis, is preparing a plan for an asset protection scheme as part of a wider strategy for cutting the country's bad loan burden. The plan would involve creating special purpose vehicles, or SPVs, into which nonperforming loans could be transferred. The SPVs would be turned into bonds, some of which the Greek state would guarantee under a mechanism similar to Italy's GACS scheme, which has paved the way for bad-loan securitizations there.

The solution has similarities with the "bad bank" model that countries including Ireland and Spain used to clear up toxic debts in the years following the global and eurozone financial crises, in which soured loans were separated from banks' functioning exposures to help lenders recover.

Greek banks are swamped with €88.6 billion of nonperforming loans, which accounted for 47.6% of all loans in the Greek banking system as of end-June. Lenders in the country face growing pressure from both the national and European regulators to cut their debt burden to a more manageable level.

A European official, speaking to S&P Global Market Intelligence on condition of anonymity, said they were aware that the HFSF was working on a proposal for an asset protection scheme, but said such a project would have to get the green light from the European Commission under state-aid rules.

The HFSF had not responded to a request for comment at the time of publication, while the European Stability Mechanism, the eurozone's bailout vehicle, issued a statement saying it was following the developments in Greece closely, but that reports about its involvement in preparing a "possible intervention plan in favor of Greek banks are wrong."

For Eleni Panagiotarea, a research fellow at the Hellenic Foundation for European and Foreign Policy, the asset protection plan is unlikely to pass muster with Europe unless Greek banks can prove that they have used all the tools already at their disposal to deal with their bad debt problems. This is something that they may struggle to do, based on recent performance, she said.

These tools include property auctions; sales of NPL portfolios; and out-of-court settlements, a workout mechanism introduced by the Greek government in mid-2017 that allows debtors to open up their assets to creditors via an online platform in order to agree to a repayment plan.

"We won't see any progress on this plan until the banks can make a good show that they are actively managing their NPLs," Panagiotarea said in an interview. Official data shows that Greek banks have not made much progress in selling off foreclosed properties at auction, she pointed out.

Between Nov. 29, 2017, and the end of July 2018, 10,160 properties were put up for auction, but only 4,345 were successfully sold, while the rest were postponed or terminated, a success rate of just 35%, she said, citing data from the Association of Notaries of the Courts of Appeal Athens-Piraeus-Aegean and Dodecanese.

Progress via the out-of-court workout mechanism has also been glacial. Between the launch of the platform and May 2018, only 52 applications from debtors via an online platform had resulted in an agreement, according to data Panagiotarea cited from the Special Secretariat for Private Debt, a Greek government department.

At the heart of the NPL issue is the fact that Greece still has a lot of strategic defaulters, those who purposely stop paying back loans, Panagiotarea said.

"There has been a lot of social backlash against auctions, and some of that has been orchestrated by strategic defaulters," she said, adding that addressing the culture of strategic defaulting and the weakness of Greek institutions is a prerequisite for Greece to properly tackle its bad debt problem, and that this will take time.

Others were likewise doubtful that the HFSF asset protection plan would come to fruition anytime soon.

"The Reuters report is too good to be true. There might be some plans or thoughts of a special vehicle, but I don't think that it is a mature solution," Paris Tsogkarlidis, wealth manager and owner of Athens-based Proteas Consulting and Investment Intermediation Services, said in an email.

An asset protection scheme could help banks off-load some €15 billion of nonperforming exposures in one go — equivalent to a whole year of targeted bad debt reduction, according to an internal note shared by an Athens-based equity analyst on condition of anonymity. But the International Monetary Fund warned in August that Greece should avoid using any resolution plans that create new "fiscal risks," such as the public guarantee that would back bonds issued by the asset protection scheme, the note said.

The country's four largest banks, Piraeus Bank SA, Eurobank Ergasias SA, National Bank of Greece SA and Alpha Bank AE, are in the process of agreeing on bad debt reduction targets for 2019 to 2021.