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The Greek government and the supervisory authorities in the country have a secret plan to cut the loans given by banks to companies and households. Through a plan like this, the authorities in the country may try to prepare for the big crash, which is expected to bring a huge recession in the loans.

The plan was sent some time ago by the American company "Bain" to the Ministry of Finance and to the management of the Bank of Greece in an attempt to find ways and plans for the credit institutions to cope with the recapitalization and the bad loans which will inevitably increase.

The main parameter is the deepening of the recession also in 2012, which will be much greater than initial estimates, on which basis the scenarios of Black Rock were prepared. They predicted that the additional bad loans of banks would amount to 10 billion euro.

The scenario

Now this scenario is already outdated, because the greater the recession (4.4% of the GDP instead of 2.8% in the initial estimates), the greater the expected bad loans will also be as more and more firms and households will find themselves unable to pay instalments on their loans. As noted in the secret report of the foreign agencies offering the scenario, "the banks and the government should look at the recapitalization from a new perspective, which means a controlled reduction of the indebtedness of firms through writing off debts so that businesses, freed from the burden of their debts would be able to undertake new investment plans to increase their profitability."

It is recalled that in Iceland a "cut" of liabilities on loans of households of a record volume amounting to 16% of the GDP took place.

Such a plan was also implemented in the U.S., where a few days ago the federal government and 49 out of the total of 50 states agreed with the five largest banks to write off part of the obligations of people who had taken mortgage loans.

The key question for Greece is whether the supervisory authorities and the Greek government have such a strategic plan that will help to stabilize banks, but also to what extent businesses and households can benefit from it.

Of course, as noted by sources from the Bank of Greece, in the first place, of major importance to the development are the companies, and therefore the plan provides that they be supported in order to start the recovery of the economy. Subsequently, the plan will be applied to consumers, i.e. the mortgage and consumer loans.

This means that banks will be asked to review the loans they have granted, but they will also have to review the "serviced" ones, not just those that are "bad", precisely in order to prevent an avalanche of new bad loans. This regulation, which is expected to begin in 2012 for the businesses and later for the households, will initially include the reduction of the monthly payments by extending the time for repayment and a grace period of certain groups from the population and later it will also include "cutting" of the principal and the interest rates.

The example

If the proposed plan, based on the experience of Iceland, does pass, "cuts" will be of around 30% of the principal in the corporate, mortgage and consumer loans, which means that it is possible to cut debt to the amount of 70 billion euro.

According to the plan this will be started first by large companies in certain sectors that are facing huge problems, but which are considered as viable. In addition to "cutting" of the principal the plan will also provide for a new loan and for the appointment of an "observer" from the bank next to the Executive Director of the company. This officer will have the same duties and responsibilities as the observers, who will be sent by the European Commission to the Greek ministries. He will participate in the decisions to be taken to rescue the company as well as for new investment plans.

For the households the proposal is to start the programme with those groups of society which the bank considers able to repay the loan under the new conditions, and not with the unemployed and other vulnerable groups who will be able to settle their debts through the recently adopted law on over indebted households.

"Rehearsal" in the public sector

A first step towards cutting the debts of borrowers is the decision of the Deputy Prime Minister and Finance Minister Evangelos Venizelos for the "cutting" of the mortgage loans received by state employees.

Suspension of payments has already broken all records

"Bad" loans have already reached the size of an avalanche and the bankers are afraid of the next period of a "boom" of non-performing loans - mortgage, corporate and consumer ones.

Within three years the bad loans have tripled (from 5.8% in 2008 to 15% last year), taking into account that a deterioration of the situation has been registered also for the first months of 2012, where it has been estimated that loans amounting to nearly 40 billion euro are in the "red" zone.

In the annual report of the Bank of Greece it has been noted that now "the capacity of households and businesses to repay their loans has been affected, resulting in an increased number of loans late in repayment".

The fear now is that a "time bomb" may be set in the foundations of the banking system, as loans to households and businesses in which there is a delay are added to the reduced deposits, depriving banks of valuable liquidity.

According to the estimates of the banks, over 500,000 households are late by one to three months in payment of their instalments, and a further 50,000 households have permanently stopped servicing their loans.

The worst thing is that every month, the number of those who cannot pay their instalments on the loans is increasing, and this is happening despite the actions taken by the banks or by the borrowers themselves, based on the recently adopted law. This situation affects 750,000 loans.

This exceeds the initial negative outlook for the development even of the mortgage portfolios of the banks, which are considered to be the most stable ones, since one in every ten loans is already not serviced properly, as compared to 3% - 4%, which was the normal level of bad loans in this category before the crisis.

Current estimates of bank employees talk about bad mortgage loans exceeding 15% at the end of 2011, a rate which would have been much greater if it wasn’t for the restructured loans.

With business loans, the bad credits have reached 13-14%, and in the consumer loans they exceeded 25%.

Bankers expect that over the next three years delays in repayment of loans and unpaid loans will further increase. They believe that the first half of 2012 will be the most critical period during which the durability of society against the fiscal measures, increasing unemployment and decreasing wages will be established. Their worst fears are associated with a doubling of bad loans, which will mean 60 billion euro in bad loans. There is particular concern expressed in relation to loans for small and medium-sized companies where assessments are talking about losses that could reach 10 billion euro over the next three years. And vice versa, they define as "manageable" the situation with loans granted to large companies.

In total in 2011 loans amounting to nearly 35 billion euro, out of which the business loans are worth 15 billion euro, have reached the "red" zone.

Banks are already proceeding to massive restructuring of the loans, while applying very strict criteria for the granting of new loans. These new more stringent criteria do not permit lending to most of the prospective borrowers, and even when banks do grant a credit it is for a much smaller amount than the one requested.

As a result of the continued reduction in the rates of granting new loans, at the end of 2011 business loans amounted to a total of 120 billion euro, mortgage loans - 78 billion euro and consumer ones - 32.9 billion euro.

Example 1

For a mortgage loan of 150,000 euro, with a maturity period of 25 years and a 4% interest rate, the monthly payment today is 791 euro. If banks implement the plan to alleviate the situation of the borrowers, the same loan would be serviced with a monthly fee of 554 euro, and the instalment may be further reduced if at the same time the repayment period is extended to 30 or 35 years.

Example 2

"Cutting" by 30% in the case of a business loan of 1 million euro will bring immediate benefit to the company amounting to 300,000 euro of the total allocation, which will reduce the monthly payments by the appropriate rate. For example, if the loan was granted with a maturity period of 15 years, the monthly payment would be 8,988 euro, and after the principal has been cut, it will decrease to 6,290 euro.