George Patoulis at EBR: Economy and the ability of Banks to finance Greek Business

As evidenced by the progress achieved over the last eight years and the observed slow recovery in economic activity since 2017, the path of the economy towards a new, extrovert growth model has already begun. However, as a result of the crisis, some medium-term challenges have emerged that need to be tackled in time to strengthen the positive prospects of the Greek economy.

These challenges are: the fiscal mix, the high long-term unemployment, the collapse of investment and the large stock of non-performing loans (NPLs) in the Greek banking system. 

There is no doubt that Greece should adopt a more growth-friendly fiscal mix as high tax rates are a disincentive to jobs and new investment.  Moreover, the level of unemployment in Greece is still too high and in particular the youth unemployment rate. Additionally, it is damn necessary the privatization program to be accelerated accompanied by foreign direct investments. 

Furthermore, the recovery of the Greek economy and the achievement of sustainable economic growth require a healthy, functional and viable banking system. Nowhere in the world could sustainable growth be observed if the financial system did not function properly, its key role being the provision of liquidity from those who have surpluses (depositors and investors) to the real economy that displays a lack of funds (businesses and households) through the channel of credit growth.

Hence, banks should focus on the major issue of non-performing loans in order to achieve the targets set by the Bank of Greece that would lead to their immediate reduction in the forthcoming period. In addition, banks should proceed to a wide-range restructuring of non-performing mortgage loans and NPLs of SME loans through a reduction in interest rates, an increase in the grace period and an extension of the repayment term. On special occasions and if all of the aforementioned measures do not yield the desired outcome, then banks could apply a «haircut» to a portion of the principal amount of these problem loans, rendering them as performing.

At the same time, banks should be “permitted” to undertake real estate auctions as well as auctions of businesses on a limited scale, in cases where there is significant evidence that their owners/holders are “strategic defaulters”. This measure will act as a means of pressure in the latter case and it will withhold the upward trend of the delinquencies, while concurrently freeing up funds that can be diverted to the real economy. 

Hence, Greece is technically out of the recession but we are still need to do a lot of work for attaining a sustainable growth rate in the coming years.  

How important is the Greek banks to be able to provide liquidity to households and small and medium-sized enterprises (SMEs) for achieving a sustainable growth rate? How can we accomplish it?

Given that bank financing is traditionally a major source of funding for Greek businesses (especially for small and medium-sized enterprises), addressing the problem of high non-performing loans will significantly improve the financing conditions of the Greek economy and contribute to sustainable growth through productive investment, which declined significantly during the crisis. 

However, in the new era it is imperative for bank to diversify their clientele to the more dynamic sectors of the Greek economy such as Tourism and more particular the Health Tourism. Moreover, banks should target any new lending to those SMEs that are dynamic in the area of new technologies; they promote growth through the use of qualified staff, which do not require significant investment in fixed assets but rather in working capital. Banks, of course could continue to target the high value-added business segments (i.e. tourism, infrastructure, etc.) whereby the profit margin has been traditionally high. 

Despite the fact that loan growth is impeded by the restructuring of their loan portfolios with an emphasis on tackling NPEs, banks could still magnify lending through co-operation with other European Institutions, i.e. with the European Investment Bank (EIB). 

So far, agreements have been launched already that have provided liquidity to the real economy through the banking lending channel, while much of the use of the agreements with the European Bank for Reconstruction and Development (EBRD) and the “Juncker” package has already been channelled into small and medium-sized businesses. Such initiatives should continue in the future. 

Is Greece ready to attract foreign direct investments? 

Foreign direct investments have been falling since the beginning of the crisis. In order to reverse this, a more aggressive policy of attracting foreign direct investment strategies is needed. This need becomes even more urgent if we consider that domestic private savings have fallen sharply during the crisis from 15.3% of GDP in 2007 to 3.8% in 2017. 

To attract the country foreign direct investment, priority should be given to removing major disincentives such as bureaucracy, ambiguity and instability of the legislative and regulatory framework, unpredictable tax system, incomplete protection of property rights, delays in judicial settlement’s differences and of course restrictions on capital movements (capital controls). Undoubtedly, the restrictions on capital movements significantly hamper the real economy.

Additionally, to the extent that capital controls are maintained (even if the economy is not anymore in the recession), the lack of liquidity that mainly affects SMEs in Greece will continue to exist. At the same time, it will adversely affect the confidence of depositors and investors in the Greek banking system and the growth prospects of the Greek economy. Consequently, capital controls should be fully lifted as soon as possible.

As part of a “transformation of the Greek financial sector,” the government pledged to set up cooperative banks that will operate at a regional level to finance SMEs and local businesses. What progress has been made in regards to this? 

Without a doubt the cooperative banks could have an significant role for financing the local communities and the SMEs; although, cooperative banks cannot have the protagonistic role in Greece, but a supplementary role instead. According to the Central bank of Greece, the Greek banking sector has a very high degree of consolidation, with emphasis (mainly) on urban centres. 

Hence, it is necessary to support the cooperative banking model (which is mainly focusing on customer-based concept). Although, no significant progress has been made regarding the aforementioned plan, even there is increasing willingness from both the Greek Government and the Bank of Greece to support such an initiative.

 In addition, the Greek administration has announced (since summer 2017) that a Hellenic Development Bank would be inaugurated in such a project (with the aim to lend to small and medium-sized enterprises) in order the economic recovery to be accelerated; again, no significant progress made on this issue.  

* George Patoulis is Mayor of Amaroussion, President of Central Union of Municipalities of Greece and President of The Medical Association of Athens. He runs as the candidate for the forthcoming Regional elections in Greece (May 2019).