Just to put some extra pressure on Greece’s finances, Fitch reminded at the beginning of February that a newly proposed Greek draft law was seeking to establish a personal bankruptcy framework for private individuals that could actually increase default rates.
As Structured Finance news reported:
The proposed provisions indemnify eligible borrowers up to 90% of the total amount owed after liquidation of all their assets. This excludes the borrowers’ main residence, where any outstanding mortgage debt could be re-arranged on favorable terms, with debtors remaining liable only for a maximum 85% of the prevailing market value.
As the Greek mortgage market features relatively low LTVs, an 85% loan-to-value (LTV) threshold could prevent losses for the vast majority of mortgage loans, assuming a stable house price environment. However, high-LTV loans are typically more prone to default, the firm said.
In other words, those most likely to default anyway would now have an incentive to do so.
As Barcap noted , there was a danger this would further exacerbate the problem Greek lenders’ already had in assessing credit risk due to the high level of undeclared income in the country:
Under the proposed new initiative, qualifying borrowers would only be liable for up to 85% of the market value of the house, which for most Greek mortgages would not have a significant impact as Greek LTVs are typically low, but would pose a problem for higher LTV mortgages. For borrowers with less severe circumstances, a payment holiday of up to two years may be granted.
The agency then argues that given the weak tax controls existing in Greece and the widespread prevalence of undeclared income sources, the new law may encourage bad payment behaviour among Greek borrowers wishing to benefit from the new provisions, who would not be rightfully entitled to do so.
The introduction of a more lenient form of credit recording standards also mentioned in the press release would only exacerbate the problem in Fitch’s view, and will affect lenders’ ability to properly assess credit risk, thereby eventually triggering a deterioration in the asset quality of Greek banks and reduced credit availability.
Part of the problem, as highlighted above, comes in the country’ weak tax controls.
As a note — purportedly penned by a Greek employee at a major bank (and not Goldman Sachs as previously believed) – highlighted last week:
Don’t quote me on this apocryphal statistic, but I’m reliably informed that exactly six Greeks declared more than a million EUR in income last time anybody counted. And exactly 85 declared more than half a million. So we’re probably a bit better than top 40.
Either that, or this trading floor alone has more rich people than Greece. Hell, our new recruits for this season alone could probably do it. If you have any doubts about Greek wealth, check out on Bloomberg the balance sheet of the National Bank of Greece, Eurobank, Alphabank and Piraeus bank, the top four. The four of them alone command EUR 164 billion in deposits! Slightly misleading, since they all have operations in the Balkans, but that’s almost one GDP, lying in deposits!!! More to the point, how many Greeks do you know who keep their money in Greece? That’s merely our spending money, it’s a small fraction of our savings and assets. Don’t even mention that a square meter costs less in Belgravia than in Psychico, Philothei or Kifissia.
Meaning going cap in hand to Europe for a bailout might be considered a bit rich for a country which is a) probably quite wealthy on a personal level anyway– and b) is instituting laws that will likely encourage bad payment behaviour.