European central bank objects to greek foreclosure law

Greek flag ( courtesy of Fdecomite)

The European Central Bank (ECB) expressed concerns about a new Greek law intended to prevent banks from foreclosing on primary residences valued at less than 300,000 euros or about $317,000 US provided that the borrowers meet certain total wealth requirements.

The ECB claimed that the new law went well beyond just protecting low income debtors and could encourage strategic defaults by borrowers.

It could also encourage borrowers to simply stop paying loans unless incentives to make payments were included.

While the Greek government was able to scrape enough funds to make a key payment to the IMF on April 9th it still needs to convince its creditors to release funds from the extended bailout loan in order to make upcoming payments.

So far the Greek government has not presented or begun to implement reforms sufficient to convince creditors to release the funds. Actions such as passing this new law may cause Greek creditors to refuse to release the funds.  

Creditors already have complained about the anti-poverty bill passed by the Greek government. The bill would provide for free electricity and food stamps for low-income families.

The Troika of the European Central Bank, International Monetary Fund, and European Commission complained that they had not been consulted about or approved the bill and that it could very well violate the terms of the bailout agreement. On the new bill, the Greek Economy Ministry had requested an opinion on the legislation from the ECB. Perhaps amendments could be made to satisfy ECB concerns.

The new law put an upper limit of 500,000 euros for the borrowers' total wealth, of which only 30,000 can be bank deposits or other liquid assets. The legislation is more generous than earlier legislation that expired just last year. It applied to homes worth 200,000 euros or less and required the borrowers to have an annual income of 35,000 euros or less with total assets not more than 270,000 euros.

The ECB noted: "The very broad scope of eligible debtors, which goes beyond the protection of vulnerable and low-income debtors, may create moral hazard and could lead to strategic defaults, undermining the payment culture and future credit growth. The draft law sets out significantly broader eligibility criteria in terms of the value of the protected property, the annual household income, the value of immovable and movable assets and the amount of deposits. It is likely that the prohibitions in the draft law will incentivize debtors who are not in real need of protection to stop meeting their obligations or reduce them significantly, even if they have the means to meet them in full."

Greek banks have a huge problem with bad loans which as of the end of the third quarter of last year were a whopping 34.2 percent of loans. Most of these bad loans were for homes. Euro zone officials claim to be shocked at the failure of the Greek government to offer detailed structural reforms that could convince them to release the remaining funds in the bailout which extends only to June.

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Greece says it will not ask for a further bailout but without a new bailout it will not have the funds for payments this summer. The Greek debt crisis is far from over.

The Eurogroup has given the Greek government until April 20th to present to them a final list of reforms. A meeting of the group is scheduled for April 24.

Sources:
http://www.reuters.com/article/2015/04/11/us-ecb-greece-law-idUSKBN0N20BQ20150411
http://jurist.org/paperchase/2015/04/euro-bank-identifies-risks-in-greece-anti-foreclosure-law.php