Δημοσιεύτηκε στο Greek Economists for Reform
Summary
It is argued that the
creation of an Asset Management Company or bad bank that would acquire most if
not all of the 100bln NPL would be advantageous to the Greek economy the Greek
banking system and the society, provided, it is structured so as to minimise
political influences and hazards. The AMC would operate for 15-20 years,
allowing for a smooth work out of the loans and maximizing recovery rates. The
cleaned banks would be recapitalised from the private sector. The proposal would
cost less to European and Greek taxpayers and can be an engine of economic
growth. Similar solutions have been applied to many countries the most recent
in Italy[1]
and can be adapted to Greece.
Περίληψη
Η δημιουργία μιας «κακής
τράπεζας» (εταιρεία διαχείρισης
ενεργητικού ή δεινοτράπεζα) η οποία θα αποκτήσει την πλειονότητα των Μη
Εξυπηρετούμενων Δανείων (ΜΕΔ) των τραπεζών που ανέρχονται σε πλέον των 100δις
θα έχει σημαντικά πλεονεκτήματα για την Ελληνική οικονομία, αρκεί να
ελαχιστοποιηθεί η πολιτική επιρροή και κίνδυνοι. Η δεινοτράπεζα θα έχει
διάρκεια ζωής 15-20 χρόνια, επιτρέποντας την ομαλή αναδιάρθρωση αλλά και την
μεγιστοποίηση των ποσοστών ανάκτησης. Οι καθαρές από ΜΕΔ τράπεζες θα
ανακεφαλαιοποιηθούν από τον ιδιωτικό τομέα. Η πρόταση αυτή θα κοστίσει λιγότερα
χρήματα στον Ευρωπαίο αλλά και Έλληνα φορολογούμενο και μπορεί να γίνει η
ατμομηχανή της ανάπτυξης στην Ελλάδα. Παρόμοια λύσεις έχουν επιτραπεί να
εφαρμοστούν και σε άλλες χώρες με πρόσφατο παράδειγμα την Ιταλία.
Introduction
The greatest challenge that Greece and the Greek
economy is facing is not the debt but the current state of the Banking system.
Although the total government debt is excessive, the cash flow maturity profile
is favourable for Greece. A further re-profiling of the Greek debt although
desirable will not have any big immediate impact on the economy of Greece
unless there is a functioning banking system.
The government debt is a long term problem contrary
to the Banking problem which is current and urgent. The four systemic banks in
Greece have mostly stopped functioning as credit institutions and operate, for
all practical purposes, as payment systems. There is no credit into the economy
and the balance sheet is mired with Non-Performing-Loans (NPL).
In this note, we describe the nature of the Greek
NPL issue and lay down the principles that need to be adhered to, in order to
have a successful resolution for the Greek economy, the banking system and the
tax payers of Greece and Europe.
Finally, a sketch of a possible resolution path is
given. Given the size of the NPLs one can easily understand that resolving the
banking NPL and recapitalization crisis would define whether Greece goes back
on the path of growth and prosperity or stagnate for many decades.
Facts
and Figures
Greek banks have accumulated
over the years an unprecedented high number of Non-Performing-Loans
(NPL). The last official figure of Dec 2014 had placed the number
close to 39% of all loans, but since then, the situation has deteriorated.
Already the Bank of Greece report[2] on
Monetary Policy talks of a total of 100bln. The situation is even worse if one
tries to estimate the total Non-Performing-Exposure (NPE) which is probably
well over the 100bln mark with no sign of abetting.
This is a staggering amount, in
percentage terms, the highest in the world. It represents 55% of GDP. For
comparison, Cyprus is second with NPL’s accounting for 45% of GDP[3].
A
further complication comes from the high degree of recidivism or relapse of
loans that have been already restructured. According to data[4] becoming
non-performing again, approaches 70% for the first 12 months after
restructuring the loan. This is due to the practice of restructuring loans for window-dressing
the balance sheet or for funding reasons.
Clearly, the different types of loans
have different delinquency/default rates and recovery rates, with Consumer
loans having the lowest recovery, highest delinquency and default rate and
expected loss given default. Details can be found in the Blackrock reports
(project Solar, project Aura and associated AQR tests). For example out of the
64bln of residential mortgages 20% has defaulted (360+DPD, Denounced) but when
you include the restructured the percentage doubles to 39.9% or 25.5bln.
The majority of the loans are indeed
collateralised. Most of the consumer loans come with personal guarantees and
the same goes for Small Business Loans or for loans to professionals.
Effectively, all these guarantees boil down to real estate. Most of the wealth
of the Greek household is in the form of real estate which for years was the main
savings and pension alternative (also tax efficient, legal and illegal).
This means that dealing with the Greek
NPL problem is a huge exercise in the real estate markets.
System Nature of
Crisis
Looking at the magnitude of the NPL it
is clear that this is a systemic and a
national problem and not just a bank with a bad loan book. All four
systemic banks in Greece are more or less in the same position. They are
exposed to the same economic environment and the same customers.
Moreover, any attempt to implement a partial
solution affects the totality of NPL and the recovery rates. For example,
imagine that Bank X, attempts to recover some of the losses by repossessing the
collateral and selling it. In the current market this would depress the value
of real estate even more and Bank X would be forced to mark the rest of the
portfolio at even lower prices forcing them to raise more capital. This may
force other banks to do the same, creating a down spiral.
In addition, the large numbers of
borrowers that have defaulted infect the rest of the loan book. Namely, the
large number of defaults is encouraging strategic defaulters. It is interesting
to note that according to Blackrock, in the case of residential mortgages,
unemployment was the third explanatory variable with LTV and Coupon being first
and second. There was also a much higher default rate for high value loans.
Strategic defaulters also pose a huge
threat to the incentives of the economy. A company that continues to service
its debts find itself at a market disadvantage and survival forces it to become
a strategic defaulter too.
Perhaps the biggest problem is the
cultivation of a non-payment culture, which was championed by political parties
and politicians. Many borrowers are hoping to enter into increasingly good
restructuring terms, even total write down and thus procrastinate or chose to
default even if they can service the loan.
A final problem comes from the possibility
of using the NPL’s for clientelistic reasons. Removing the loans from the banks
strips away levers of influence and in some cases the temptation of personal
favours or enrichment.
Roots
of the problem.
The roots of all credit crises are the same. It comes down to cheap and abundant credit that makes banks and borrowers complacent. All of the Greek loans are of the same “vintage” 2003-2009. These are the bubble years of the Greek economy fuelled mainly by rampant state borrowing.
The roots of all credit crises are the same. It comes down to cheap and abundant credit that makes banks and borrowers complacent. All of the Greek loans are of the same “vintage” 2003-2009. These are the bubble years of the Greek economy fuelled mainly by rampant state borrowing.
When markets stopped
refinancing the state, the rapid and forceful fiscal adjustment of the program gave
rise to a deep recession, wiping out more than 25% of GDP in five years. Real
wages and salaries suffered and real estate prices collapsed (40% drop between
2007-2015[5])
pushing most mortgage holders into negative equity position and encouraging
strategic default.
Thus the high degree of
NPL can be attributed to three factors:
a. Bad
bank policies. Imprudent lending with high leverage (high debt to income
ratios) and dubious if not illegal practices of lending on undeclared income
(Blackrock report), high LTV ratios or political influences. The Bank of Greece
supervision on these practices and also on credit growth seems to have been
very soft.
b. Severity
of recession that wiped out 25% of GDP
c. Over
borrowing by consumers and businesses
d. Culture
of non-payment encouraged by certain political parties. Laws that were meant to
protect (foreclosure moratorium) the most vulnerable members of the society
were abused by many. Also cumbersome and time-consuming legal procedures that
allowed many strategic defaulters to escape or postpone payment.
Principles of resolution
1)
It is clear from the above that any
solution must be holistic and not piecemeal fudge. In other words, most if not
all of the loans, despite their inhomogeneity must be dealt at once.
2)
NPL’s cannot remain inside the banks as
they infect good ones, encourage strategic defaults and most importantly of
all, makes recapitalization through private means extremely difficult due to
the non-transparency of losses. New shareholders must be responsible and
accountable for new NPL not old ones. Many investors are under the false
impression that owning a Greek bank would allow them to cherry pick certain
high real estate assets and thus propose solutions that are not optimal.
3)
In order to increase the recovery rates
one must have time to work them out. The sheer number and systemic importance
of the loan portfolio means that at least 15 to 20 years will be needed for a
total wind down.
4)
In order to have a just resolution,
political interference must be avoided at all costs.
5)
Recapitalizing banks with no NPLs would
much easier. Experience has shown that prospective investors require a backstop
on NPLs in order to invest. If the banks are clean this is not an issue.
Structure
of Solution
The proposed solution
is based on the bad bank model. At the last count, around 12 countries in
Europe have used a variant of the Bad Bank or Asset Management Company (AMC).
The main differences are on the ownership structure and the loss allocation.
Some are funded totally by the state (e.g. German FMS) others have a
private-public mix (Spain’s SAREB).
The nature of the Greek
banking NPL problem begs for a similar solution. In the following we give an
outline of how bad bank might be structured, adapted on the Greek
idiosyncrasies.
1)
Creation of an Asset Management Company
(AMC) otherwise known as bad bank that is going to acquire most if not all of
the 100bln NPL from the four systemic banks. Needs work on legal framework.
2)
The majority of the shareholders (>55-60%)
of this AMC must come from the private sector (including Banks) and if
possible, ESM should participate. The total equity needed is no more than
5-7bln. Having private majority is one of the key demands of Eurostat in order
to avoid consolidation with national accounts.
3)
The AMC receives around 60bln in total
of guarantees from the Greek State (AMC leverage 8-9). These should be
structured in an appropriate way as to minimise losses to the taxpayer. More
importantly these guarantees if structured efficiently would not count towards the
Greek debt (like in Spain’s Sareb)
4)
Currently, Greek banks have accumulated
provisions of around 40bln against the 100bln of NPLs. Part of the state
guarantees would be used as payment for the 100bln worth of loan notional. Thus,
the AMC would buy the loans at a discount of minimizing the future losses to
the equity holders and the guarantor.
Again, this is another key prerequisite of Eurostat.
5)
There is a cut-off date for bad loans
(say 31-12-14). Only loans that were “red” before that date would be
transferred to the AMC. This is to avoid acceleration of defaults.
6)
The AMC would have a life span of 15-20
years. This is adequate time to work out without market disruption the volume
of loans and increase the recovery value.
7)
The profit and loss and credit structure
of the AMC can be adjusted to reflect the risk sharing.
8)
The charter and governance structure and
principles of the AMC must ensure no political influences and the just
application of the social principles that would govern any restructuring. An
international board of directors along with the Greek one should ensure this.
Advantages
of the scheme
·
Much
needed time is given to work out the NPL’s minimizing market disruption and
maximizing recovery rates and losses to the taxpayer.
·
AMC can
be used as an engine for growth by involving private equity firms for companies
that are in trouble but have sound prospects.
·
Banks are
clean of NPLs and can be easily raise capital from the markets. Moreover, they
can now be the engines of growth for the Greek economy rather than chasing
defaulters.
·
Concentration
in one vehicle of all loans that a borrower might have at different banks. This
would facilitate restructuring and reveal any strategic defaulters as
everything would be consolidated.
·
The
structure of the AMC guarantees independence and transparency.
·
The
social criteria are applied with no political interference.
·
Avoid the
need for a wide bail-in of shareholders and creditors
·
Recapitalising
the Banks using funds from the private sector would be much easier as the
balance sheet would be more transparent. Also the reduced size of the balance
sheet would require much less equity capital.
Possible
hurdles of the Scheme
·
Needs a
whole new legal framework urgently.
·
Many
classes of loans make the scheme tedious.
·
Resistance
from vested interests both political and banking since they would lose
leverage.
Conclusion
AMC
vehicles have been used with success in many countries. The nature and
magnitude of the Greek NPL problem can be addressed successfully only if Banks
are cleaned of all bad Loans in one go and are allowed to function as banks.
This can be achieved by an AMC that has transparency and independence.
Addendum
Greek Loan Composition and
approximate Non-Performance-Exposure as of June 2013 (Blackrock)
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[1] 6
Sep 2015, http://www.bloomberg.com/news/articles/2015-09-06/italy-in-final-talks-with-eu-commission-on-bad-bank-padoan-says
[2]
Bank of Greece report on Monetary
Policy, June 2015 (in Greek)
[3]
Data from World
Bank, 2014.Greece has gone up since the reported 34%
[4]
Blackrock report, Project Solar
