Greek Lawmakers Approve Bad Loans Bill in Breather for Tsipras

  • Bill approval paves way for disbursement of bailout tranche
  • Law allows transfer of bad loans to distressed debt funds

Greece’s parliament passed legislation allowing lenders of Europe’s most indebted state to sell non-performing loans and pave the way for the release of bailout funds.

All 153 lawmakers in Prime Minister Alexis Tsipras’s governing coalition voted in favor of the legislation, which enables distressed-debt firms based in the European Economic Area to manage or buy corporate loans from local banks.

The vote signals a brief political respite for the 41-year-old Tsipras, as he tries to keep his government intact in the face of new negotiations with creditors next year on an even tougher set of unpopular economic overhauls, including pension and income tax reform. Two of his lawmakers defected last month, leaving him with a three-seat parliamentary majority.

“More unpopular measures, the IMF’s demands, and Tsipras’ thin majority risk a return to greater political instability early next year,” Wolfango Piccoli, managing director at Teneo Intelligence, wrote in a note to clients on Tuesday.

Greek bank stocks have lost more than 94 percent of their value this year, amid a standoff between the government and its creditors that brought the country on the verge of leaving the euro area and led to the imposition of capital controls. Greek bonds are the worst performing of all sovereign securities tracked by Bloomberg’s World Bond Index in the past month as defections eroded Tsipras’s parliamentary majority.

Distressed Debt

The legislation approved Tuesday eases restrictions on how Greece’s lenders manage their exposure to more than $100 billion of non-performing assets. Its approval will free up much needed liquidity and boost economic activity, Deputy Finance Minister George Chouliarakis told parliament ahead of the vote. More than 45 percent of Greek banks’ loans are non-performing, he said.

The application of the law for primary residency mortgages and small business loans won’t go into effect until Feb. 15, according to the legislation.

The bill also streamlines salary structures for civil servants and was one of main conditions imposed by euro area states for the disbursement of 1 billion euros ($1.1 billion) in emergency loans from the currency bloc’s crisis fund this week.

Not Enough

The vote may not be enough to ensure a functioning market in non-performing loans, according to an international official familiar with the position of the country’s creditors. Such a market isn’t likely to emerge as long as uncertainty exists over Tsipras’ ability to secure parliamentary approval for the next round of bailout conditions in January, the person said.

Macroeconomic and political doubts over Greece’s prospects means distressed debt funds will seek deep discounts that banks may be unwilling to accept, the official said on condition he not be identified because he isn’t authorized to speak publicly on the matter.

“We can’t call them banks if they run loan portfolios where almost half are non-performing,” said Jonas Floriani, a London-based analyst at Keefe, Bruyette & Woods. “Bringing the NPL ratio of the Greek banks to normal European levels of 10-15% would enable management to focus on properly running a bank like they should.”