A recent article in Phileleftheros Newspaper has highlighted a very real economic fact – bank foreclosures cannot work in this economy. Just 1.8% of the 350 or so bank-auctioned properties have been sold so far.
Yes, the economy is growing, especially in the tourist sector. But after the deposit haircut, Laiki Bank’s collapse and the draining of billions of Euros from the economy, there are few savings and actual capital to buy big ticket items. The low inflation rate underscores this fact. The inflation rate is pressured because people cannot afford to spend, they simply don’t have the money.
When consumer spending is low, company profits and revenues are low too.
So, what’s the solution? There are different types of mortgage defaulters. One type is the over-extended property developers, some of which are strategic defaulters and went into bankruptcy. Even if these types are deliberately defaulting, it’s because the market is in the dumps. The British property buyer, traditionally the mainstay of the property market, is facing uncertainty over the future and uncertainty is nearly always negative for investment. They have few incentives to buy up property owned by developers.
What the property developers have that is of value is their experience in the market. The banks should be working with this and looking at it more as a partnership than as a hostile takeover of properties. After all, nobody is buying their properties either, so everyone – whether creditor or debtor – is in the same boat.
The other type of defaulter is the private homeowner or business which owns some properties and used them to borrow capital. They may not have gigantic over-exposures but can’t repay because of high interest charges and lower salaries or company revenues in the wake of the financial crisis. But the same rule applies, they cannot sell their properties in this market. In these cases, the banks should be working with them patiently to find other solutions. Does the debtor have other skills that could be used by the bank to raise income in other ways? If the imagination were put to work, the bank could set up a department for human and capital resource development, using the database of debtors as a tool to grow its investments. Are there marketers, business development skills, farmers, designers and other resources in this database? Couldn’t the banks work with the business sector to find creative solutions instead of the same old turnscrew of legal pressure?
It’s so old fashioned to bear down with the weight of the law on cash-poor debtors, so 18th century. These are people, many of them highly educated, who could be working off their debt in other ways than expensive court cases. After all, assets can take forms other than property. The real asset lies between the ears – our brains are what make our lives what they are, not inanimate objects like pieces of land.
Bottom line, the banks need to take responsibility for their role in the financial crisis. The sector’s reckless lack of risk management, slow rate of reaction to their Greek Government Debt exposures and insistence on high interest rates even when the ECB dropped to zero and negative rates all contributed to the current situation.