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Moody’s downgrades credit conditions in Greece – Suffocating pressure on banks over €77 billion in non-performing loans

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Moody’s downgrades credit conditions in Greece – Suffocating pressure on banks over €77 billion in non-performing loans
Deteriorating balance sheets prevent banks from purchasing cured loans
A faster return of "cured" loans to Greek banks and more transactions to reduce the volume of non-performing loans were called for by Moody’s. The rating agency downgraded credit conditions in Greece by two notches, due to the massive volume of problematic loans located outside bank balance sheets, as well as the real economy. While Greek banks accomplished a "feat" in previous years by reducing non-performing loans from €47 billion (2020) to €6 billion (2026), the audit house notes that the presence of a large volume of loans outside the economy—around €77 billion—ties up assets in multi-year recovery procedures, leaving borrowers excluded from bank financing.

Reluctance over "contamination"

Several foreign investors in Greek banks had been betting in recent years that a portion of non-performing loans would return to banks once restructured, in order to further boost already high credit growth. However, having secured successive positive upgrades, the management teams of Greek banks were reluctant to "contaminate" their balance sheetswith loans that were previously problematic, which is why their responses to analysts were negative and continually deferred the matter for future consideration.

The only Greek bank considering the secondary loan market was National Bank of Greece, though preference was given to prioritizing corporate lending, as occurred across all Greek banks. Now the issue resurfaces via the international rating agency Moody's, which is pressing for the resolution of the huge volume of non-performing loans through the sale of cured loans, which can increase serviced loan volumes in categories where Greek banks lack the growth rates of European banks (consumer, mortgage loans). On the other hand, banks will not risk a deterioration in their balance sheets at a time when the current environment of rising interest rates may begin to affect certain existing loans. That is why, before proceeding with any transaction, they need to be certain about the loan quality (collateral, payment track records) of the assets to be acquired.

No immediate loan sales to banks expected

According to sources from a major loan management company, some transactions from non-performing loan servicers are expected to begin, though not immediately, as noted. It is recalled that servicer firms had examined potential loan sales at the beginning of the year, but determined that managing the loans directly would yield higher returns.

Now, under pressure from rating agencies, certain transactions will likely be considered, provided there is investor interest from either foreign funds or banks. It is recalled that under the current legal framework, each bank can only purchase loans that it did not previously hold on its books.

Dimitris Pafilas
dpafilas@yahoo.com
www.bankingnews.gr

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