On Thursday evening, Greece’s Parliament passed a bill that will unburden banks of 30 billion euros in non-performing loans. The bill will implement the Securitization Scheme, nicknamed the ‘Hercules’ plan, which will allow banks to sell off bad debt to special investors. Currently, Greek banks are encumbered with around 75 billion euros in non-performing loans, meaning loans that are in or close to default. This amount equates to over 40 per cent of the country’s total bank loans.
The Hercules plan is modelled after the Italian GACS program, which was designed for a similar purpose. The European Commission estimated that the GACS program reduced Italy’s non-performing loans by 51 billion euros between February 2016 and November 2018. If successful, the full implementation of the Hercules plan could decrease Greece’s non-performing loans to 41 billion euros, a reduction of more than 40 per cent.
Under the Hercules plan, banks will divide loans based on their risk – a process known as securitization. Those of higher risk that collect more interest, the mezzanine and junior tranches, will be sold or distributed to investors, while those of lower risk, the senior tranche, will be guaranteed by the Greek government. Similar reform initiatives have already enticed investments in Greek debt. For example, the Financial Times reported that reforms put in place in 2017, which allowed non-bank institutions to secure non-performing loans, were responsible for a 2 billion euros deal with the American company Pimco.
New securitization deals will hopefully ameliorate Greece’s nearly decade-long financial crisis, which has seen a 25 per cent contraction of GDP.
In 2009, Greece announced that its budget deficit had exceeded 15 per cent of national GDP. To avoid default, in 2010, the European Union and International Monetary Fund loaned 110 billion euros to the country. Since then, Greece’s debt has grown to around 290 billion euros, an amount the government does not expect to repay until beyond 2060. Meanwhile, the debt-servicing austerity measures enforced throughout Greece have heightened the humanitarian impacts of the economic crisis.
During the initial cuts, unemployment rose to 25 per cent of the population, and youth unemployment reached a staggering 50 per cent. In 2017, corresponding to the time the third EU-IMF bailout was approved, national statistics showed that around a third of the Greek population was subject to poverty. The pension system was hit hardest during the austerity measures. Even though nearly 50 per cent of Greek households rely on pension funds, pensioners have seen their incomes decrease by up to 40 per cent since the crisis first began.
The Hercules plan is expected to make progress in assuaging Greece’s economic hardship. George Zavvos, a deputy finance minister who spearheaded the Hercules plan, hopes that the scheme will be fully functioning by the second half of 2020. As reported by the Financial Times, Zavvos stated, “The banks are going to face a number of challenges to implement this plan but we’re optimistic that after a long period of stagnation on the issue of bad debt, we’re making progress.” Although effects from austerity measures may continue to devastate the country well into the future, programs like the Hercules plan are the first step towards recovery.
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