Millions of bad loans hobble Greece's economic recovery, IMF official says

By Lefteris Papadimas and Edward McAllister

ATHENS, March 31 (Reuters) - Millions of unprocessed bad loans from last decade's debt crisis are slowing Greece's economic growth and stymying the rebound for families and businesses still locked out of lending markets, an International Monetary Fund official told Reuters.

The IMF estimates that nearly 3 million non-performing loans are impacting 2.4 million people, said Charles Cohen, an IMF advisor specialising in financial markets. The sheer number has overwhelmed the Greek lending system, and without servicing the old loans many ordinary Greeks will be unable to borrow further.

"This is a massive number for the Greek economy," said Cohen, who is the mission chief for the IMF's Greek FSAP, which is an assessment of the country's financial sector. "The system has been a bit overwhelmed by them. And so we think that there needs to be reforms."

The Greek banking sector was bailed out during the 2009-2018 crisis after suffering catastrophic losses on government bonds and a surge in defaults as the economy went into freefall and Greece nearly fell out of the euro zone.

The economy has since rebounded: banks have been re-privatised and have returned to profitability, and the country is paying its bailout loans ahead of schedule.

In a report last week, the IMF said that financial conditions in Greece were improving and that the banking sector performed well under stress tests.

A Greek finance ministry official said that bad loans were a "legacy issue" that was not curtailing growth.

Still, absolute recovery is being slowed as ordinary Greeks, who suffered wage and pension cuts during years of austerity, are still locked out of the lending system.

"The big thing is the repair of household balance sheets," said Cohen. "You need to create a situation where the average Greek is again an active participant," in the market for mortgages and small business loans.

Non-performing loans (NPL) reached almost 50% of the banks' loan portfolios during the crisis. In 2019, Greece created a secondary bad loan market and an asset protection scheme, helping banks to securitise and transfer about 60 billion euros of non-performing loans to servicers.

However, the system has not responded as swiftly as lenders like the IMF would like. Court disputes between banks, servicers and mortgage borrowers can take years.

"The dockets are somewhat overwhelmed because you don't necessarily have judges who are specialized in these kinds of issues. So they take a long time to get through the system," Cohen said.

The fact that many small businesses remain outside the banking system since the financial crisis has led banks to concentrate their credit on a few large Greek corporates, making them more vulnerable to international turbulence.

"Lending to small and medium (businesses) remains at low levels," Cohen said. "I think for us the critical factor there is to try to re-diversify the banks into lending into these sectors. That's not an easy thing to do."