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Title :Existing corporate & household insolvency frameworks: characteristics, weaknesses and necessary reforms
Creator :Lolou, Christina K.
Contributor :Pagratis, Spyros (Επιβλέπων καθηγητής)
Athens University of Economics and Business, Department of Economics (Degree granting institution)
Type :Text
Extent :46p.
Language :en
Abstract :Existing legal provisions for dealing with corporate and household insolvencies in Greece are multifaceted, attempting to address a problem of systemic proportions without proper macro-prudential safeguards. They are characterized by a piecemeal approach and a diverse set of policy priorities that often lead to conflict of policy objectives. Such legal pluralism and complexity in the insolvency framework has perpetuated and intensified problems of dealing effectively with NPLs instead of addressing them within a coherent, centralized strategic framework with clear policy priorities. Legal complexity, in conjunction with the inability of the judiciary system to cope effectively with a large volume of cases, has generated legal backlogs and other frictions, sowing the seeds of strategic default and moral hazard in the system.Externalities affecting debt-workouts cast any attempt to deal with the NPL problem captive to socially suboptimal, yet individually rational, responses by both borrowers and creditors. For example, despite the rapid deterioration in NPL figures, Greek banks are showing no signs of writing-off any significant amount of bad debts, postponing “the day of reckoning” till the cycle turns, aiming to minimize potential losses to shareholders. But such a strategy fails to internalize the general macroeconomic implications of bank behavior, creating a negative feedback loop where bank credit policies weigh negatively on the macroeconomy and vice versa. Maintaining high levels of NPL leads banks to divert scarce resources for funding, monitoring and managing relationships with zombie companies, instead of seizing new opportunities and streamlining monitoring capabilities, as well as capital and liquidity towards dynamic, exports-oriented segments of the economy. As a result banks have renounced their maturity-transformation role, which is central to project financing, growth and development, operating instead solely as payment institutions.Therefore, policy response is needed to mitigate the double – sided moral hazard issues and creditor coordination problems in debt-workouts. An overarching principle of such a new policy framework has to be preservation of contractual relationships and debt-servicing culture in the economy. Another is to prevent inefficient liquidation of assets and value destruction, allowing for productive restructurings. Finally, dealing with legacy debts in the economy should be conducted in a standardized fashion, steer clear of concerns about fairness, necessity and transparency of debt workouts that could harm public trust to institutions at a time when social cohesion is critically challenged.
Subject :Greek insolvency framework
Bank incentives
Borrowers incentives
Asset quality
Prudential requirements
Date :29-02-2016
Licence :

File: Lolou_2016.pdf

Type: application/pdf