Rigidities in Greece’s product and labor markets leading to economic imbalances and the significance of reforms to these markets are played out in the first paper. The second paper describes the problems, progress to date, and agenda for work in Greece’s revenue administration and how this effort has been achieved primarily by raising tax rates to high levels and reducing wages, pensions, and other spending. The third paper is on the need for designing and implementing debt restructuring frameworks as well as improving banks’ loan resolution practices so that Greece’s banks are positioned to support the economic recovery.


Rigidities in Greece’s product and labor markets leading to economic imbalances and the significance of reforms to these markets are played out in the first paper. The second paper describes the problems, progress to date, and agenda for work in Greece’s revenue administration and how this effort has been achieved primarily by raising tax rates to high levels and reducing wages, pensions, and other spending. The third paper is on the need for designing and implementing debt restructuring frameworks as well as improving banks’ loan resolution practices so that Greece’s banks are positioned to support the economic recovery.

How Can the Financial Sector Support Recovery?1

Evidence from past financial and economic crises suggests credit growth is likely to take several years to recover. Other countries have achieved growth even as credit shrank, but so called “creditless recoveries” tend to be weak. Based on empirical models from the literature, we find that Greece is likely to go through such an episode. The priority, therefore, should be to minimize its duration. Experience shows that dealing with non-performing loans decisively and promptly is a critical precondition for a resumption of bank lending. Given Greece’s high NPLs, this points to the need for a strong focus on designing and implementing debt restructuring frameworks as well as improving banks’ loan resolution practices. These steps will be necessary to remove doubts about the sufficiency of bank capital and restore balance sheet health so that Greece’s banks are positioned to support the economic recovery.

A. Introduction

1. Unlocking credit is key to financial sector support for growth in Greece. The overall growth strategy relies on shifting resources from less to more productive uses. The financial sector can facilitate this process by financing necessary investment. In this paper, we discuss what international experience suggests about the prospects of credit growth in Greece in the short to medium term. We also focus on one critical aspect of the authorities’ adjustment program in ensuring effective functioning of the financial sector going forward, i.e., the design of a framework for private sector debt restructuring. We discuss some of the legal and institutional obstacles currently in place in Greece that would prevent an effective debt restructuring process, and review international experience and best practices in this area.

B. Creditless Recoveries: Is there a Contradiction?

2. Credit growth is expected to lag the recovery in output by at least two years and grow more slowly than nominal GDP for some time in the medium term (see Figure 1, and Box 1). This raises two important questions: First, is this projection consistent with our output growth assumptions, and second, is it in line with the experience of other countries emerging from crises?

Figure 1.
Figure 1.

Greece: Finacial Sector Projections, 2001–16

Citation: IMF Staff Country Reports 2013, 155; 10.5089/9781484363683.002.A003

Sources: Bank of Greece; ElStat; and IMF staff calculations and projections.1/ Credit (loans + securities) on non-MFIs as a ratio to deposits and repos of non-MFIs.

3. International experience shows that a flat or even falling credit is not inconsistent with output growth. In fact, creditless recoveries, as they are referred to in the literature, are not uncommon. Several studies in recent years have documented the frequency and determinants of creditless recoveries. Abiad et al. (2011) find that one in five recessions is followed by a creditless recovery (based on a sample of advanced, emerging and lower income countries). Bijsterbosch and Dahlhaus (2011) find that one in four recoveries is creditless (in a sample of low to middle income countries).2 Both studies find that this frequency doubles if the recession is preceded by a banking crisis. Examples include Indonesia, Malaysia and Thailand in the aftermath of the Asian crisis, and Argentina and Uruguay in the aftermath of the Argentine sovereign default. More recently, Latvia, Iceland, and Ireland all experienced creditless recoveries. Real credit growth in Latvia and Ireland is still shrinking fast, despite positive GDP growth for both economies since 2010. In Iceland, real credit continued to shrink until early 2012, 6 quarters after GDP growth turned positive, and has slowed down since (see Figure 2).

Figure 2.
Figure 2.

Credit and GDP Evolution in Latvia, Iceland, and Ireland, 2010–12

Citation: IMF Staff Country Reports 2013, 155; 10.5089/9781484363683.002.A003

Sources: Haver; IMF, World Economic Outlook; and IMF staff estimates.

4. There are different ways in which output growth can be supported even in the absence of growth in banking sector credit:

  • First, firms may finance themselves using non-bank resources. For instance, firms can use internal capital generation, FDI or trade credit, or raise funds in capital markets. This substitution may lead to the observation of creditless recoveries when credit is measured as bank credit only. This theory is consistent with the findings of Abiad et al. (2011) that, during creditless recoveries, industries that are more dependent on external finance tend to grow disproportionately less than those that are more self-financed. In Greece, internal capital generation could be an important source for financing investment, at least for the non-SME sector (SMEs make up a large fraction of Greek enterprises). The Greek non-financial corporate sector has a large and positive net international investment position (around 30 of GDP). Greek corporates’ net-savings (after investment) is also very large compared to the stock of credit. Net annual savings of Greek corporates was on average 11 percent of the stock of corporate sector credit, and this shot up to close to 20 percent in 2012, both due to a contraction in the credit stock and due to less investment by the firms. By comparison, Euro area firms were net borrowers in 2012 (Figure 3).

  • Second, creditless recoveries may be associated with a process of reallocation from some sectors to others. If this is the case, gross credit flows will go undetected when looking at net flows (see Claessens, et al., 2008). In Greece, as the economy shifts from non-tradable sectors such as construction to more tradable sectors (such as export sector and services), banks can reduce credit to certain industries and channel it toward others. If there are differences in productivity, this reallocation will be accompanied by growth. Indeed, this process is already underway. The 15 percent reduction in overall outstanding credit since mid-2010 masks sectoral differences in credit allocation. Publicly owned industries such as utilities as well as the mostly privately-owned tourism sector have expanded their balance sheets at the expense of even larger than average deleveraging in the wholesale and retail trade sectors, non-shipping transportation and professional and support activities.3

  • Third, if GDP recovers mainly through absorption of unused capacity as opposed to new investment, the recovery may be creditless (see Calvo et al., 2006a, 2006b). In Greece, capacity utilization has decreased (see Figure 3), indicating that an initial rebound in activity might not require new investment.

Figure 3.
Figure 3.

Greece: Non-Bank Financing and Sectoral Reallocation, 2005–13

Citation: IMF Staff Country Reports 2013, 155; 10.5089/9781484363683.002.A003

Sources: Bank of Greece; Elstat; and IMF staff calculations.1/ Net of following items: direct investment (all sectors), portfolio investment (other sectors only) and other investment (other sectors only).

5. This is not to say that creditless recoveries are desirable or costless. Several studies find that creditless recoveries tend to be weak, with subsequent growth on average a third lower than in normal recoveries. Importantly, Abiad et al. (2011) find that investment—which is more likely to depend on credit than consumption—makes a disproportionately smaller contribution to growth in creditless recoveries relative to other recoveries. This does not bode well if the growth strategy is an investment-based one.

6. Based on established patterns associated with creditless recoveries, it seems very likely that Greece will experience one (see Box 2). Research suggests that creditless recoveries are often preceded by large output losses, banking crises, and high private sector indebtedness. We use two econometric models to forecast the likelihood of a creditless recovery for Greece, based on factors found to be closely correlated with such episodes, and their contribution to the probability of such occurrences. Both of these models indicate that there is a very high probability that the stock of real credit will shrink for the next three years in Greece. Three main factors contribute to the high likelihood that Greece will see a reduction in the stock of real credit going forward. First, and by far the most important, is the concurrence of a banking crisis with the recession; second, is the large reduction in real GDP; and third, is the relatively high credit to GDP ratio. The latter is due to the fact that GDP has shrunk by close to 25 percent since the onset of the crisis, whereas the reduction in credit has been considerably milder so far.

Credit Projections in the Macroframework

Our baseline projections show a negative growth in private sector credit until Q2 of 2016, 8 quarters after GDP growth turns positive (see Figure 1). Our projections are based on the following assumptions:

  • In 2013, the projected fall in deposits (-1.2 percent, y-o-y in December) is significantly lower than the contraction in nominal GDP (-5.4 percent, y-o-y in December), based on our assumptions about a partial return of private sector deposits that left the system in 2011–12, mainly due to confidence reasons. This trend is assumed throughout the year.

  • From 2013 to the end of 2016, private sector deposits are assumed to grow at the same rate as nominal GDP, stabilizing at 92 percent of GDP which is in line with 2008 average.

  • Credit flows are calibrated to achieve two objectives: i) reduction in central bank financing to 15 percent of total liabilities, in line with the stated aim of the old funding plans1; and ii) a reduction in the loan to deposit ratio towards its pre-crisis long-time average of 80. Credit thus is projected to grow more slowly than deposits.

  • In terms of components of credit growth, a reduction in credit for housing and consumer lending is assumed. This is based on our assumptions about a further correction in property prices, and slower improvement in household disposable income compared to nominal GDP.

Credit and Deposit Growth Rates

Sources: Bank of Greece; and IMF staff estimates and projections.
1 The funding plans were developed by the EC/ECB/IMF in coordination with the Greek banks in 2011 as a way to monitor and project the banks’ funding profile going forward. They had to be abandoned in the autumn of 2011 when accelerated deposit outflows and political uncertainty made these projections increasingly difficult.

Estimating the Likelihood of a Creditless Recovery for Greece

To estimate the probability that Greece’s recovery will not be accompanied by a pick-up in credit, we use some of the macro determinants for creditless recoveries identified in two panel probit models estimated by Bijsterbosch and Dahlhaus (2011) (henceforth BD) and Abiad, et al. (2011) (henceforth ADL).

The baseline specification in both models is a static panel probit model, i.e.,


where I(yit*>0) is an indicator function which transforms the latent variable yit* into a binary variable yit, yit indicates whether country i at time t has entered a creditless recovery. BD’s estimation is based on the following definitions. First, they identify a “trough” year when GDP is at its lowest in cyclical terms and at least one standard deviation below zero, where cyclical GDP is defined as deviation from trend. Denoting the year of the trough as t, the onset of a recovery is defined as t+1. Second, they identify creditless recovery as one where the real private credit level in t is higher than in t+3, in other words, creditless recovery is defined as an average reduction in real private credit for the three years after the trough.

Table (1) shows the estimated coefficients of BD’s probit model under different specifications. Their results show that creditless recoveries are typically preceded by large declines in economic activity and financial stress, suggesting that impaired financial intermediation may play a key role in lackluster credit flows that follow.

The ADL model is a simple probit estimate where the dependent variable is a dummy indicating whether the recovery from the downturn was creditless, where such episodes are again defined as average negative growth in real private sector credit for three years. The regressors include two dummies indicating whether the downturn was preceded by a banking crisis and a credit boom, and a measure of the severity of the downturn, the peak-to-trough percent change in real GDP.1

Table (2) shows the estimated coefficients. Based on this, ADL conclude that the likelihood of creditless recoveries increases when the downturn was preceded by a credit boom or a banking crisis. Consistent with financial accelerator models, the more severe the downturn, the greater the likelihood that subsequent credit growth will be weak.


To apply the BD model to Greece, we need to first identify the trough year according to their definition, i.e., when the output gap is at its largest. According to our estimates, this corresponds to 2013, when the output gap reaches -10 percent. Thus, applying the authors’ definition of a creditless recovery, the probit model predicts the probability that real private sector credit in 2016 will be lower than in 2013.

We take the regression coefficients and use Greek data to estimate the probability that the latent variable is greater than zero given a standard normal distribution of the errors. The inputs to both models are shown in the last columns of tables (1) and (2).

Tables (3) and (4) show the resulting probabilities under different specifications for the BD and ADL models, respectively. In the case of the BD model, under the authors’ preferred specification (specification 4, which has the highest Pseudo R2), the probability that Greece will enter into a creditless recovery is 61 percent. Is this a strong result? Under this specification, the authors’ estimated probability of a Type I error for a threshold of 50 percent is 0.4 percent, i.e., based on their sample, the probability of a false alarm—given the model prediction of 61 percent likelihood for a creditless recovery—is negligible.

Using the ADL results, we find that applying their specification (5) with the highest Psuedo-R2 to Greek data implies a creditless recovery probability of 79 percent. Although ADL do not report the probability of Type I error associated with different threshold levels, their chosen threshold for predictive probability is 40 percent, indicating that the 80 percent probability projected for Greece is associated with a very low Type I error.

Note that BD exclude advanced economies from their sample. ADL find that creditless recoveries are more common in low income countries and emerging markets than in advanced economies (25 percent in the former compared to only about 10 percent in the latter). Therefore, it could be argued that using BD coefficients to predict the probability of a creditless recovery for Greece suffers from an upward bias. Even so, advanced economies generally have a large capacity to provide liquidity and capital to their financial institutions since they issue their own hard currency, but Greece’s capacity as a member of a currency union and with no fiscal space is constrained.

The probit model estimated by ADL has the advantage that it is based on data from emerging and advanced countries. However, the disadvantage is that their pseudo-R2 is smaller, indicating a smaller predictive power compared to the BD estimates.

Nevertheless, both models indicate that Greece today looks much more similar to previous crisis cases where a recovery in credit lagged output, than to those that saw a swift return of bank lending.

Table 1.

Bijsterbosch and Dahlhaus (BD) Panel Probit Estimation

Source: IMF staff estimates.
Table 2.

Abiad, et al. (ADL) Panel Probit Estimation

Source: IMF staff estimates.
Table 3.

Estimated Latent Variables and Probabilities for Greece (2013) Using Implied BD Model

Source: IMF staff estimates.
Table 4.

Estimated Latent Variables and Probabilities for Greece Using Implied ADL Model

Source: IMF staff estimates.
1 Credit booms are defined according to the methodology developed in Mendoza and Terrones (2008). Banking crises are as defined by Laeven and Valencia (2008).

C. Policies

7. Research suggests that creditless recoveries are the result of impaired financial intermediation and their lower growth performance is the outcome of constraints on the supply of credit (see Kannan (2009), Abiad et al. (2008) and Claessens et al. (2008)). Creditless recoveries double in frequency after banking crises, suggesting that they are associated with disruptions in credit supply. Firm-level evidence confirms this: firms more reliant on external financing, or those with fewer assets eligible as loan collateral, or industries that are populated by smaller firms, grow more slowly during creditless recoveries compared to firms or industries that rely on other sources of finance. Investment makes a disproportionately lower contribution to growth than in “normal” recoveries and productivity is adversely affected. This result is also consistent with “financial accelerator” models where financial intermediation is disproportionately affected in downturns, reinforcing the slowdown in economic activity.

8. Policies aimed at restoring credit supply should lead to fewer credit constraints and higher growth. Creditless recoveries are significantly weaker than normal recoveries. To the extent that credit supply constraints contribute to slow recovery of credit, and thus output, policy measures that facilitate financial intermediation will help a stronger recovery. In particular, policy measures should aim at removing the obstacles to efficient financial intermediation, which will vary from case to case.

9. Going forward, funding, capital, and an NPL burden will impose constraints on the Greek banking sector’s ability to lend. Greek banks lost access to wholesale funding markets in 2010 and had to replace €65 billion in maturing liabilities through divesting foreign assets. The funding gap became wider with deposit outflows in 2011 and 2012, during which time the banks lost close to a third of their deposits. As a result, they relied heaving on central bank financing. As banks return to normalcy, the speed with which they reduce their reliance on central bank financing may prove to be a constraint on their ability to extend new loans. Banks face uncertainties regarding the adequacy of their capital too. The 2011 stress test was conducted under milder assumptions about macroeconomic developments than those realized. As a result, NPLs have risen more rapidly than anticipated, and banks may be unwilling to take on more risk until they have successfully dealt with their existing NPLs. These problems are inter-related: NPLs affect bank capital directly through provisioning needs, through reduced profits (which when the banks are incurring losses translate directly into more capital needs), and through an increase in risk weighted assets. High NPL ratios also imply higher funding costs for the banks when they return to markets.


NPLs by Category


Citation: IMF Staff Country Reports 2013, 155; 10.5089/9781484363683.002.A003

Source: Bank of Greece

Nonperforming Loans

(Percent oftotal loans)

Citation: IMF Staff Country Reports 2013, 155; 10.5089/9781484363683.002.A003

Source: IMF, Global Financial Stability Report; and IMF staff estimates.

10. In Greece, the priority for restoring a healthy financial sector is dealing with the banks’ balance sheet stresses through restructuring programs. Asset quality is the single most important risk factor for capital adequacy. Implied losses from existing NPLs already exceed the projected 3-year losses assumed by the BlackRock exercise. So unless the banks are able to arrest or significantly slow down the deterioration in their loan portfolio, or limit the losses arising from troubled loans, for instance through effective restructuring programs, they may face capital shortfalls. Restructuring the loans of viable but over-indebted borrowers is critical for easing the private sector’s debt overhang, as well as addressing the large stock of existing and potential NPLs on banks’ balance sheets. Given the important role that debt restructuring and NPL resolution play in the health of financial sector, for the remainder of this paper we focus on the elements of a successful debt restructuring framework and policy lessons learned from international experience.

11. NPLs are a drag on credit growth and normal functioning of the banking system for many reasons. Even if banks have sufficient capital to deal with their NPLs, a high volume of troubled assets on the banks’ books causes problems:

  • Uncertainty. High NPLs cast doubts about the adequacy of bank capital. This uncertainty will translate to a higher risk premium on banks’ funding, as well as a reduced willingness of the banks to lend.

  • Business focus of the banks. Banks being engaged in resolving or restructuring NPLs on a large scale would detract them from a focus on identifying and financing new business opportunities.

  • Misallocation of capital. If NPLs are a result of investment in non-viable projects, the most efficient way forward would be to recognize the sunk-cost and put any resources from recovery of these loans to more efficient uses. The same applies to collateral: asset price adjustments during crises often create disincentives for banks to execute collateral in the hope of a recovery or to avoid fire sales. However, holding on to such assets risks locking resources that could otherwise be deployed for new credit in an asset that is not likely to recover in value soon.

12. In the absence of coordinated action after a systemic crisis, NPL resolution tends to proceed more slowly than desirable. There are externalities associated with NPL resolution which are not accrued to individual banks, such as faster credit growth, removal of debt overhang, and allocation of resources to more productive sectors by deleveraging away from non-viable businesses. Furthermore, there is a coordination failure. From an individual bank’s point of view, it may be optimal to delay recognizing a loss, since loss given default is likely at its highest at the bottom of the cycle. However, from a macroeconomic perspective, unless losses are recognized, resources remain locked in less productive sectors/non-viable projects, dampening the recovery. Moreover, each individual bank may be reluctant to recognize their losses unless their competitors do the same. As a result, the non-cooperative or non-coordinated outcome is likely to be suboptimal.

13. In Greece, several legal and institutional challenges need to be addressed for an effective debt restructuring, some of which are being addressed under the program. Notwithstanding the pending adoption of the recent facilitation program, and the forthcoming modifications to the household insolvency scheme, Greece faces many institutional barriers that may impede NPL resolution efforts or lead to higher losses for banks, prolonged debt overhang for the private sector, and overall slower credit growth going forward. We discuss three main policy areas where particular attention is needed, and offer some international perspective.

Improving banks’ capabilities in dealing with NPLs

14. Under the program, the HFSF will conduct a detailed review of individual banks’ procedures, using the services of a distressed asset specialist. The review will cover all aspects of banks’ NPL resolution policies and procedures in detail, including the adequacy and effectiveness of workout strategies, collateral and business valuation, and the effectiveness of the staff. This section is not meant to pre-judge the outcomes of this asset review, which will take into consideration individual banks’ portfolios as well as legal and institutional factors specific to Greece, but to offer some international experience in this area.

15. Although outsourcing NPL resolution yields better recoveries in mature markets, many banks in smaller markets chose to deal with their NPLs in-house in the aftermath of the global financial crisis. Experience from mature markets points to better recovery when NPLs are outsourced. Several factors can explain this: banks might be reluctant to deal with their NPLs and “evergreen” their bad assets. Outside firms may pursue a risk based approach to restructuring, focusing on those loans with the highest probability of return, whereas banks are more reluctant to admit that a loan has gone bad, expending too many resources on loans with little chance of recovery. Alternatively, the banks and the distressed asset specialists might have different incentives and ultimately methods to deal with bad debts. For instance, offering haircuts on principal of the loan might create a moral hazard for those clients that have on-going business with the bank, but is a powerful restructuring tool. Finally, banks may refrain from aggressive debt-enforcement for reputational reasons. Notwithstanding this fact, the Working Group on NPLs in Central, Eastern and Southeastern Europe (CESE) found that countries in this region chose to deal with their NPLs in-house. The group found that a lack of interest from outside investors or the absence of a market for distressed assets was the main contributor to this decision. The CESE loan portfolios were typically small, and collateral valuation problems meant that prices offered by outside investors were significantly below what the banks thought they could recover themselves. Also, banks often underestimated the value of the time and resources they had to devote to NPL resolution, leading them to quote higher prices for their portfolios.

16. In Greece, prospects for outsourcing NPL resolution seem limited; thus, the banks should focus on enhancing their in-house NPL resolution capabilities. At least some of the factors preventing a wider outsourcing of NPL resolutions in CESE are likely to apply to Greece too. The authorities have emphasized the absence of distressed asset buyers as a potential market failure. As we will discuss in the next section, problems with collateral valuation and enforcement are also likely to discourage potential buyers. For these reasons, banks should focus on strengthening their in-house resolution practices, as large-scale alternatives seem unlikely at this stage.

17. The alternative approach of establishing a state-owned Asset Management Company (AMC) does not seem appropriate for Greece either. In order to deal with their banks’ large stock of NPLs, Ireland and Spain established state-owned AMCs. The advantages are (i) economies of scale in administering workouts, particularly if the loans are similar (as is the case in both Ireland (mortgages) and Spain (Real Estate Development or RED loans)), (ii) benefits from granting special powers to a government agency to expedite loan resolution, and (iii) breaking the bank-client link that could impede an efficient transfer of assets. Yet, a state-owned AMC is less likely to be the right solution for Greece, for several reasons: i) Unlike in Spain and Ireland, the majority of NPLs in Greece are in the SME category, where loans vary significantly in their business type and industry and specific knowledge about each firm or business is crucial; ii) large financing needs for these businesses is not a concern (as is the case for RED loans in Spain or property developers in Ireland); and iii) AMCs could be more expensive upfront, if assets are bought at a price higher than the “market” value implied by collateral and value of the loan; these additional resources were not envisioned in the financial sector envelope.

Improving debt enforcement and collateral recovery

18. A general standstill in the property market, the main source of collateral in the Greek banking sector, impedes the NPL resolution process. Several legal and institutional factors exacerbate the absence of activity in the real estate market, potentially contributing to a further fall in prices or at best a prolonged stagnation of this market (see Box 3). This is a problem: for borrowers who cannot “trade-down” their property even if they have positive equity but are no longer able to service their debt; for the banks who cannot evaluate the value of their collateral or execute it; and for the regulator who cannot evaluate whether provisioning levels are sufficient. Indeed, BlackRock conducted drive-by valuations of a representative sample of mortgages during its asset quality review exercise and concluded that properties valued by the banks using the Bank of Greece Index (PropIndex) were overvalued by approximately 13 percent on average across all residential mortgage loans.

19. In Greece, enforcement of collateral is hampered by many legal obstacles, and improvements in line with international best practices are necessary. Moratoria on auctions of repossessed assets create moral hazard for those borrowers that are able to pay but are unwilling to do so. These are being addressed by the authorities’ program. However, foreclosures still rely on judicial procedures that take too long (BlackRock estimated that it takes, on average, 51 months between the time that a loan becomes non-performing until it is liquidated); executing collateral (once the moratoria are removed) is only possible through auctions and cannot be conducted through a sales agent, imposing significant additional haircuts for the lenders; and there are minimum auction prices based on the objective value of the property that is currently significantly above its market price. All of these practices impose large enforcement costs on the banks, increasing their loss given defaults and ultimately the capital needed to write-off those NPLs secured with property. An overhaul of the debt enforcement possibilities might be necessary to take into account the established best practices in the area, which offer a range of judicial, non-judicial or mixed tools for collection and enforcement methods.

Real Estate Market Reforms

The real estate market in Greece has come to a standstill. According to the BoG, the number of appraisals conducted by banks in 2012 was less than 20 percent of the level observed in 2007; transactions could have fallen even more as some of the appraisals were conducted for loan restructurings or revaluation of residential collateral.

In addition to the drop in activity for cyclical reasons, several problems afflict property markets in Greece which exacerbate the malfunctioning of the real estate market: i) the law puts a minimum price on auctions of foreclosed real estate based on its tax (objective) value; ii) high objective values relative to market values imply that even if a prospective buyer is able to afford a property based on its current market value, he might not be able to afford the associated costs, dampening demand; iii) transaction costs are very high by European standards, at around 20 percent of the property value, and pose an impediment to market transactions, be it executing collateral or sale of a property by a borrower who cannot afford the mortgage payments; iv) the two moratoria on auctions protecting any security on a variety of loans (not only mortgages); and v) high liquidation haircuts, as repossessed property can only be sold in an auction, as opposed to through a real estate agent.

Furthermore, excessive protection for the tenants is prohibitive to rentals, which could potentially allow banks to reduce losses or draw some cash flow from seized collateral before eventual auctioning. For commercial property, the tenant can stay in a property for 16 years by law, even if the contract specifies otherwise. For lawyers and doctors, a 12-year period applies.

Designing an effective out-of-court restructuring mechanism

20. Greece is missing an effective out-of-court debt restructuring mechanism for households. In a systemic crisis like the one afflicting Greece, the capacity of the judicial system to ensure a rapid recovery for distressed borrowers may be limited. Under the current legal framework, there is a provision for household borrowers to negotiate with their creditors before going to court. However, this framework suffers from serious flaws. First, it requires unanimity of creditors, allowing for even small hold-outs to block the process. Second, by making the court procedure extremely debtor friendly (small payments—unrelated to affordability—while debtors wait for a court hearing combined with a slow judicial process, suspension of executory measures if the debtor files for an appeal, and little guidance to judges on affordability criteria), it offers no incentives for the debtors to come to a mutual agreement with the creditors. Some of these aspects are being addressed under the authorities’ program by revisions to the current framework. Under the program, the authorities will introduce an initiative which would, in stages, overhaul the framework for out-of-court restructuring of household debt.

21. A framework for out-of-court debt restructuring for corporate debt will also become necessary. Greece recently enacted reforms to its corporate insolvency framework, which seems broadly in-line with international best practices. However, given the burden of SME debt, a speedy and cost effective alternative to the formal insolvency procedures is necessary. A variety of options are available to the authorities. Informal workouts could be strengthened by contractual or statutory provisions or by different mechanisms that combine the advantages of both formal and informal approaches to indebtedness problems (“hybrid procedures”). There are established international best practices in this area (e.g., the INSOL Principles, London Approach, Jakarta Initiative, and Istanbul Approach, among others), which need to be taken into account when designing the framework in Greece.

22. A successful out-of-court restructuring mechanism requires a set of enabling legislation. Such laws create an environment that encourages participants to engage in the out-of-court restructuring negotiations rather than resort to judicial routes. Examples include non-punitive tax treatment of write-offs or losses, provisions that give creditors reliable recourse to enforcement, regulatory measures on risk management practices to ensure that banks and financial institutions recognize their losses as soon as possible, and requiring timely and detailed financial disclosure of distressed enterprises (see Box 4 for a set of Principles devised by the World Bank as part of the World Bank Insolvency Initiative standards which forms the basis for its comparative studies of insolvency systems and their efficacy and Box 5 for a set of Principles underlying Latvia’s successful out-of-court restructuring mechanism for the corporate sector).

23. Evidence suggests that recent initiatives taken by many European countries to complement their formal insolvency frameworks have been successful. These efforts have included issuing guidelines or establishing a legally binding framework given the limited capacity of the judicial system. For instance, in Iceland and Latvia data suggests tangible progress and wide participation (IMF, 2011, Report of the Working Group on NPLs in Central, Eastern and Southeastern Europe, 2012).

World Bank Principles B3 and B5.2 for Out-of-Court Restructuring Mechanisms

Principle B3

Corporate workouts and restructurings should be supported by an enabling environment, one that encourages participants to engage in consensual arrangements designed to restore an enterprise to financial viability. An environment that enables debt and enterprise restructuring includes laws and procedures that:

B3.1 Require disclosure of or ensure access to timely, reliable, and accurate financial information on the distressed enterprise;

B3.2 Encourage lending to, investment in, or recapitalization of viable financially distressed enterprises;

B3.3 Flexibly accommodate a broad range of restructuring activities, involving asset sales, discounted debt sales, debt write-offs, debt reschedulings, debt and enterprise restructurings, and exchange offerings (debt-to-debt and debt-to-equity exchanges);

B3.4 Provide favorable or neutral tax treatment with respect to losses or write-offs that are necessary to achieve a debt restructuring based on the real market value of the assets subject to the transaction;

B3.5 Address regulatory impediments that may affect enterprise reorganizations; and

B3.6 Give creditors reliable recourse to enforcement, as outlined in Section A, and to liquidation and/or reorganization proceedings, as outlined in Section C.

Principle B5.2 In addition, good risk-management practices should be encouraged by regulators of financial institutions and supported by norms that facilitate effective internal procedures and practices supporting the prompt and efficient recovery and resolution of nonperforming loans and distressed assets.

Latvia: Out of Court Company Debt Restructuring Principles1

Principle 1: Debt restructuring is a compromise, not a right - Out of court debt restructuring must be initiated only if the debtor’s financial problems can be solved and their business can continue in the long term. A debtor should turn to the creditors in order to discuss available options.

Principle 2: Good faith - Negotiations between the debtor and the relevant creditors must take place in good faith in order to create a constructive solution.

Principle 3: Unified approach - The interests of all parties should be observed if a unified approach is taken to solving the issues. Creditors may facilitate coordination of the issues by forming a coordination work group. In more complex situations, the parties should consider the option of inviting professionals who can consult with and advise the parties and the relevant creditors.

Principle 4: Negotiation with the debtor - The creditors must appoint one person (usually it is the creditor which has the largest claim against the debtor, with experience in negotiating debt restructuring, or it may be a neutral third party), who will conduct negotiations with the debtor, and will ensure that the relevant creditors receive the information provided by the debtor. It must be taken into account that if necessary, in the event that there is a dispute between the interested parties, they may turn to an arbitration procedure.

Principle 5: Moratorium period - All relevant creditors must be prepared to cooperate with the debtor as well as with each other in order to provide the debtor with enough time (identifying a deadline) in which to prepare options for solving financial problems (hereinafter – moratorium period). Granting this moratorium period is not the right of the debtor, but is a concession granted by the creditors. The beginning date is called the first date of the moratorium period. It is necessary to identify the length of the moratorium period, providing enough time to prepare the plan as mentioned in Principle 11, or to constitute how much time would be necessary to prepare such a plan.

Principle 6: Priority of new resources - If, during the moratorium period, or in accordance with the suggestions put forth as a part of the restructuring process, additional assets are given to the creditor, then the grantor of this loan shall have the option to request security for the loan.

Principle 7: Creditors do not take action during the moratorium period - All relevant creditors do not take any actions to submit court claims against the debtor or to reduce their claims against the debtor during the moratorium period.

Principle 8: Debtor’s pledge to the creditors during the moratorium period - During the moratorium period, the debtor promises not to take any actions which may negatively affect the proposed debt repayment to the relevant creditors (to all, or either of them individually) in relation to the state at the beginning of the moratorium period.

Principle 9: The debtor’s complete transparency during the moratorium period - During the moratorium period, the debtor shall provide the relevant creditors and advisers with access to all information regarding assets, liabilities, and business transactions and forecasts.

Principle 10: Information confidentiality - Information regarding the debtor’s assets, liabilities, and business transactions and forecasts, as well as proposals for solving the problems must be available to the relevant creditors and must be confidential, unless it is publicly available information.

Principle 11: Debt restructuring plan - It is the obligation of the debtor and his advisers to prepare proposals for debt restructuring which are based on a business plan that contains information regarding the necessary steps that need to be taken to solve the debtor’s financial problems. The business plan must be based on sound and feasible forecasts, which indicate the debtor’s ability to increase cash flow to the point that is necessary to execute the debt restructuring plan (and not delaying the insolvency process).

Principle 12: Settlement proposals correspond with the party’s rights - When creating proposals for solving the debtor’s financial difficulties, the parties must take into account the rights of the creditor and the amount of outstanding obligations at the beginning date of the moratorium period.


D. Conclusions

24. In this paper, we have examined the determinants of “creditless recoveries”—episodes when recovery in output after a recession is not accompanied by a recovery in credit to the private sector—and their relevance for Greece. Using two estimated panel probit models in the literature, we find that Greece is very likely to experience such an episode.

25. Creditless recoveries are generally associated with disruptions in the supply of credit and financial distress. Bottlenecks in credit supply contribute to the weaker recovery that ensues. Therefore, policies aimed at easing such constraints should help recovery in credit, and in turn output.

26. In Greece, the priority for restoring a healthy financial sector is dealing with the banks’ balance sheet stresses through recapitalization and a targeted and well designed restructuring program. A large stock of non-performing assets left unresolved, creates a drag on credit growth and the functioning of banking system, and brings into question the adequacy of bank capital.

27. We offer some international experience in three specific policy areas that are important elements of an effective debt restructuring framework:

  • Ensuring that banks have sufficient resources and expertise to deal with their NPLs in house. The distressed asset review envisaged under the authorities’ program is an important step in ensuring this element.

  • Improving debt recovery and collateral enforcement, in particular, by addressing the constraints in the real estate market.

  • Designing an effective out-of-court restructuring mechanism for the corporate sector and the supporting enabling legislation that would encourage creditors and borrowers to reach settlement outside the court in a speedy and cost-effective manner.


  • Abiad, A., G. DellAriccia, and R. Bin, 2011, “Creditless Recoveries,” IMF Working Papers 11/58, International Monetary Fund.

  • Bijsterbosch, M. and T. Dahlhaus, 2011, “Determinants of credit-less recoveries,” Working Paper Series 1358, European Central Bank.

  • Biggs, M., T. Mayer, and A. Pick, 2009, “Credit and economic recovery,” Working Paper 218, DNB.

  • Calvo, G., A. Izquierdo, and E. Talvi, 2006a, “The economics of sudden stops in emerging economies,” American Economic Review 96(2): 405410.

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  • Calvo, G., A. Izquierdo, and E. Talvi, 2006b, “Phoenix miracles in emerging markets: Recovering without credit from systemic banking crises,” Working Paper 570, InterAmerican Development Bank.

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  • Coricelli, F. and I. Roland, 2011, “How do credit conditions shape economic recoveries?Discussion Paper 8325, CEPR.

  • Claessens, S., A. Kose, and M. Terrones, 2008, “What Happens During Recessions, Crunches and Busts?IMF Working Paper No: 08/274.

  • European Bank Coordination Initiative, 2012, “Report of the Working Group on NPLs in Central, Eastern and Southeastern Europe,” March.

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  • Kannan, P., 2010, “Credit Conditions and Recoveries from Recessions Associated with Financial Crises,” IMF Working Papers 10/83, International Monetary Fund.

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  • Liu, Y. and C. Rosenberg, 2013, “Dealing with Private Debt Distress in the Wake of the European Financial Crisis,” IMF Working Papers 13/44, International Monetary Fund.

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  • World Bank Legal Reviews and Studies, 2011, “Out of Court Debt Restructuring,” Washington, DC.


Prepared by Maral Shamloo.


Also see Calvo et al. (2006a and b), Biggs et al. (2009), Coricelli and Roland (2011), and Claessens et al. (2008).


The stock of credit to shipping industry has also reduced dramatically. But this is due to shipping firms substituting credit from Greek banks for foreign ones, for cost reasons.

Greece: Selected Issues
Author: International Monetary Fund. European Dept.