by Fotis Kourmousis,
special secretary for private debt management
at the Greek Finance Ministry
Ιn Greece, total private debt in 2019, prior to the pandemic, stood at €234 billion, according to official data from the Bank of Greece, the tax authorities and social security institutions. This debt stems from the 10-year financial crisis and includes €91.7 billion (39.3%) in NPLs belonging to banks and servicers, €105.6 billion (45.2%) toward the tax authorities and €36.3 billion (15.5%) toward social security institutions. Businesses take up about two-thirds of the total debt, while the other third belongs to households.
The financial crisis in Greece was aggravated by the health crisis of the Covid-19 pandemic, which will result in an increase of private debt, estimated at €5–10 billion NPLs, with adverse economic and social impacts. The Greek government, arguing that the only solution to manage private debt is to restructure it in a long-term way, introduced a new insolvency law.The new insolvency law provides the necessary tools to manage debts generated before the pandemic or which have deteriorated due to Covid. It adopts best international practices, as defined by World Bank and the Organization for Economic Cooperation and Development, and harmonizes European Directive 1023/2019, which is obligatory for all European Union Member States, thus the rules are the same.
The law provides debtors with the option of restructuring their dues (through the out-of-court work-out mechanism or court rehabilitation schemes) or a debt discharge (through bankruptcy) and making a fresh start without any debts. The government’s goal is to achieve private debt reduction; however, this has to be accomplished in a rational way – i.e. through debt restructuring, wherever possible, in order to avoid bankruptcies. I estimate that only the resilient companies will survive the pandemic, as well as those with the ability to adapt to the new conditions. The new insolvency law will assist in distinguishing between viable and non-viable firms.
The restructuring procedure
The new out-of-court workout mechanism (OCW) provides an automated debt restructuring solution for households and businesses toward institutional creditors, such as the public sector and banks (including fund servicers). Already, more than 30,000 debtors have started the process. This procedure will provide a quick solution for many debtors. Some debtors will not be satisfied by a standardized solution and will choose a more personalized solution, through financial mediation, in order to negotiate with creditors. Others will seek litigation. The strategic direction at international level is for out-of-court processes, while in the past most cases ended up in courts; thus I believe that the electronic platform of OCW will assist in quickly managing private debt. The data are collected automatically and a debt restructuring proposal is created through a specialized algorithm, thus ensuring speed and transparency and preventing errors and injustices which occurred in the past.
Debt write-offs take place only if a debtor has low financial ability to pay (i.e. their income is not sufficient to cover their inelastic expenses) and at the same time doesn’t possess assets of any significant value (e.g. properties). All debtors must go through a process of controls, through which the preconditions are checked before they can receive a debt haircut.
These checks and balances are applied to debtors, co-debtors as well as their guarantors, which are co-responsible for managing these debts. For example, a debtor with property of insignificant value, who has also been financially impacted by the pandemic and thus has a low income, will receive a debt haircut.
The “second chance”
Alternatively, the debtor may decide to go bankrupt. All his/her property will be liquidated to pay for the duties. If it proves insufficient, unpaid debt will be written-off under a single precondition: it will revive in case the debtor acquires any significant wealth within the next 1 year. After 1 or 3 years (for those not possessing assets before going bankrupt), unpaid debt will be permanently written-off and the debtor will get his full “second chance”.
The new insolvency law foresees special treatment for the primary residence of vulnerable households. In case they cannot restructure their debts (a procedure that halts all enforcement actions) they get the option to rent their primary residence and buy it back in the future. The government will conduct an international public tender through which it will appoint one private investor who will set up a special purpose vehicle (SPV).
That SPV will acquire the primary residences of bankrupt debtors, at a price determined by an independent certified evaluator. The debtors will be allowed to lease back the assets for 12 years, paying an annual rent calculated on the basis of the price paid and the average mortgage rate. The state will provide a monthly rent allowance, in order to effectively contribute to averting evictions of vulnerable households. That will also guarantee the SPV gets some minimum monthly payment, covering annual holding costs.
After 12 years the debtor will have the right of first refusal: only if he is not able or interested to buy back the property, will the SPV be allowed to sell it on the market. I think that will hardly be the case, since most of these properties are troubled and thus do not have significant investor value, and the only ones who wish to have them are the previous owners, due to sentimental value.
Debt write-off: Is it possible?
Private debt at the global level reached $256 trillion at the end of 2019, according to the Institute of International Finance (IIF). During the pandemic –i.e. in 2020– the global debt increased by $24 trillion, which is significantly greater than the respective rise caused by the global financial crisis in 2008–09. Debt write-off is a subject always brought into discussion when large debts arise.
In Greece, this discussion has lasted more than a decade, due to the extensive financial crisis that the country suffered in recent years. Other countries did not face the global crisis to the same severe extent and thus they started this discussion during the pandemic. The supporters’ arguments are that all countries suffered with approximately the same level of severe intensity, that the pandemic is considered a “force majeure” for which no debtor is to blame, as well as that governments caused the financial impact through imposing quarantines and halting business activities. However, recent history shows that a horizontal debt haircut never takes place, as some would wish. And it doesn’t take place for financial reasons, since such a measure would cause a huge financial burden, which someone would have to bear. It has to be noted that debt haircut is possible on a case-by-case basis, i.e. is possible only for those debtors, which fulfil certain financial criteria (e.g. low ability to pay and low-value assets).
This article was published in the July/ August 2021 issue of Greek Business File, available here.