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Greece’s Big Challenge: Fix Bad Loans Without Destroying Banks
By JACK EWING
ATHENS — Apostolis Paliouras was proud of the bookstore he ran on the ground
floor of an apartment building in a middle-class neighborhood here. Greek authors
came to give readings and sign their works. People gathered to debate matters literary
and political.
But his sales plummeted in 2011 after the Greek government, bowing to demands
from its international creditors, imposed a new property tax and added it to utility bills
in an attempt to stem the country’s notorious tax evasion. People who did not pay
risked having their power shut off. The tax crackdown crippled consumer spending.
“People were buying books, and then they stopped,” Mr. Paliouras, 63, recalled
recently. “They just stopped.”
The tax problem quickly bled into another of Greece’s economic afflictions. In 2012,
Mr. Paliouras was forced to close the bookstore and, with his main source of income
gone, he was no longer able to meet mortgage payments on the home he shares with
his wife. And so he joined a group that has lately grown to catastrophic proportions in
Greece: loan delinquents.
Tens of thousands of Greek people and businesses are unable to make their loan
payments. So far, the bank has not started foreclosure proceedings, but Mr. Paliouras
worries that that could change under modifications the government is considering to
meet the terms of its new international bailout package.
Although dealing with delinquent loans is one of the biggest challenges facing the
government of Prime Minister Alexis Tsipras and the country’s creditors, the issue is
so knotty that it was not included in the bundle of economic reforms the Greek
Parliament was debating this week. Instead, it will be taken up later.
Officially, more than 40 percent of loans issued by Greek banks are seriously in
arrears. By some estimates, the rate tops 50 percent, if loans that have gone sour in
recent months are included. That is one of the highest rates in the world, and it has so
weakened the Greek banking system that it raises doubts about the country’s ability to
mount an economic recovery. (The comparable figure in the United States is only
2 percent.)
Despite Greece’s latest international bailout, worth as much as 86 billion euros –or
about $98 billion – the country cannot rebound if its banks are flailing. The effects
could be felt throughout the eurozone financial system and all the way to Wall Street.
A big challenge for Greece is how to address the bad-loan problem in a way that
offers some hope to debtors like Mr. Paliouras, yet does not destroy the banking
system. That is why the government has deferred action on the issue for now.
In any case, longer-term solutions for resolving the bad loans will lie largely with the
European Central Bank, which is expected to complete an assessment of the health of
Greek banks by the end of October, then devise a recovery plan in conjunction with
the Greek authorities. Representatives of the largest Greek banks were in Frankfurt
this week to discuss the problem with central bank officials.
Big American investors who are sharing the pain include the billionaires Wilbur Ross
and John Paulson, whose investment funds have made big bets on Greek banks, along
with Fidelity Investments and Capital Group. Those investors have already suffered
paper losses because of steep declines in the value of Greek bank shares, and they
could lose more if bad loans wipe out more bank capital.
The latest international aid package for Greece includes up to €25 billion to replenish
the capital of Greek banks. According to rough estimates circulating in Athens, banks
might need only €10 billion to €15 billion in new capital –essentially the banks’
cushion against losses. But senior bankers in Athens acknowledge that no one yet
knows for sure how bad the loan losses will prove.
In any country, the number of bad loans will rise when recession causes businesses to
close and people to lose their jobs. But in Greece the effect has been extreme, given
the depth and duration of the economic slump.