Panagiota Kalapotharakou says she’s never seen such distress in her 25 years as a lawyer at the consumer-advocacy organization she helped to set up in Athens.
“If you look outside, the people are in despair,” Kalapotharakou said of the line of visitors outside her office in the rundown neighborhood of Exarchia, where most of her time is spent helping people with debts they can’t pay from Greece’s boom years. “They can’t survive. What they can pay is much smaller than what the banks are asking for.”
While the country’s lenders are on firmer footing after getting capital from euro-area and International Monetary Fund bailout funds, they still need to reduce the non-performing loans that have tripled to 29 percent of the total in three years and threaten their new-found solvency.
One obstacle is a five-year ban on foreclosures that prevented thousands of Greeks from losing their homes after the economy went into free-fall. The government is now considering a plan to ease the restrictions by the end of this year to satisfy its creditors’ demands. Finance Minister Yannis Stournaras said last month that banks face serious problems if they’re not allowed to repossess and auction homes of people who don’t pay their mortgages.
“At the moment, even people who can afford to pay the mortgages do not,” National Bank of Greece SA (ETE) Deputy Chief Executive Petros Christodoulou said in a Bloomberg Television interview on Sept. 6. “When the new law is passed and officially foreclosures are allowed over a certain benchmark, we will see that the credit ethos will return.”
Lifting the restriction threatens to intensify the strain on Greek society, which is buckling under a sixth year of recession and unemployment of almost 28 percent, the highest in the 28-member European Union and more than four times the rate in Germany. A regular feature of Greece’s economic crisis has been knife-edge austerity votes in parliament, with protests turning violent outside.
In Spain, which has the second-highest jobless rate after its own property crash, foreclosures have been linked to protests and even suicides. In both countries, governments have tried to balance concerns over their neediest citizens with satisfying the terms of bailouts from international creditors.
Mission heads of Greece’s troika of creditors -- the European Commission, European Central Bank and IMF -- are back in Athens today to review the country’s progress in satisfying conditions for the release of the latest installment of its bailout loans. Previous reviews have often delayed payments because the inspectors have found the government’s efforts to overhaul the economy were lagging behind targets.
One item on the agenda is a review of lenders’ non-performing loans and fresh stress tests by the end of the year of banks’ capital adequacy to see if they can withstand adverse macro-economic scenarios. The troika has criticized the moratorium for hampering the banks’ ability to deal with troubled assets.
“All the banks are making operating losses, so anything that helps them return to profitability is good,” said Maria Kanellopoulou, an analyst at Euroxx Securities in Athens. “The stress tests will focus on the methodology the banks use to define and manage NPLs.” This, she said, is one of the biggest issues affecting banking earnings.
Investors have shown more confidence in Greek banks. The Athex Exchange Banks Index of the five publicly traded lenders, rose 0.5 percent in Athens today and has climbed about 32 percent since July 4, outpacing the 21 percent gain by the benchmark Athens Stock Exchange Index and the 11 advance for European finance stocks.
Greece initially introduced a blanket ban on foreclosing all residences with mortgage debt of up to 200,000 euros in 2008, widening the ban two years later for some primary residences worth more. The rate of delinquencies on mortgages was 19.1 percent in 2012, an increase from 4.9 percent six years earlier, according to the IMF.
Prime Minister Antonis Samaras said on Aug. 22 that the government will completely protect the main residences of poor Greeks affected by the crisis as it tries to put in place a system that prevents abuses. His assurances came five days after Stournaras’s comments, published in Greek weekly paper Real News, prompted opposition from lawmakers in parties within his coalition, which has a majority of just five in Greece’s 300-seat parliament.
“Anxiety has been created over this issue for no reason,” Deputy Development Minister Thanasis Skordas said in an interview. “No one sets out to create new problems, nor are we too insensitive to understand the difficulties people face today. On the contrary, our concern is how to not allow such problems to undermine social cohesion.”
Kalapotharakou, 55, is concerned that it may not be possible to introduce safeguards that will protect Greeks who are unable to repay their debts. Ekpizo, her organization, is pushing for the ban to be extended for three years and for improved mechanisms to help over-indebted Greeks restructure their debts out of court.
Ekpizo’s offices are on the second floor of an apartment building on a graffiti-filled street next to Athens Polytechnic, the scene of an uprising against Greece’s military dictatorship 40 years ago. In 2008, the city erupted into rioting following the shooting nearby of 15-year-old Alexis Grigoropoulos by a police officer. The area has since been the scene of frequent clashes between police and anti-austerity protestors.
The organization, created in 1988, once organized seminars on issues such as environmental awareness. The crisis means Kalapotharakou now spends about 90 percent of her time discussing household debt.
Home loans in Greece expanded to 81.1 billion euros at the mortgage market’s peak in August 2010, more than seven times the amount at the start of 2001, when Greece joined the single European currency, as first-time buyers took advantage of easier financing and interest-rate reductions.
Now that credit has tightened, Kalapotharakou says the banks would gain little from seizing homes from borrowers, which would fetch a fraction of the outstanding debt in an auction. Meanwhile, those losing their properties will still owe the money that’s not covered by the sale proceeds, she says.
“Not all circumstances are right for liberalizing markets,” she said. “If you free up houses, you will see a collapse in the housing market. Who’s going to buy?”
Greek home prices dropped 11.6 percent in the second quarter from a year earlier, according to Bank of Greece (TELL) data. Values have dropped 31 percent since peaking in 2008, with Greece’s two biggest cities, Athens and Thessoloniki, both faring worse than the national average.
Fitch Ratings increased its forecast for the peak-to-trough decline in average house prices to 42 percent from 33 percent in July. Easing the ban on foreclosures would help increase recoveries for mortgages packaged into bonds, according to an Aug. 30 report. Recovery rates have dropped to as low as 1 percent from 13 percent in 2010 and arrears have increased significantly since the ban, suggesting “moral hazard concerns are legitimate.”
Greece’s economic output has shrunk by more than a fifth since the start of its recession, which has been amplified by successive rounds of spending cuts and tax increases. They were instituted to tackle a fiscal deficit that had spiraled to 15.6 percent of GDP in 2009, triggering Europe’s debt crisis.
Against this economic backdrop and facing political opposition, the government might yet extend the ban if the troika doesn’t push too hard on the issue, according to Lefteris Farmakis, an analyst at Nomura International in London.
“You have a political problem here, and if they insist on this it’s not going to be easy,” he said. “Maybe there are some benefits for the housing market and the economy overall, but clearly this comes at a consequence in the real world.”
To contact the reporter on this story: Marcus Bensasson in Athens at firstname.lastname@example.org