A s the Greek debt crisis reaches a crescendo, questions remain as to how the country found itself in its current dilemma.
Last week, Greece became the first developed country to default on an International Monetary Fund loan. After the country’s citizens voted to reject the terms of a new bailout by their creditors, Greece risks having to leave the 19-nation eurozone and abandoning the shared euro currency.
The situation is particularly dire for the country’s banks. Greek banks will end up bankrupt by Monday if they do not receive any bailout fund from the European Central Bank and cash withdrawals are at a high rate despite capital controls imposed by the Greek government.
One may wonder what lessens could be learned from Greece’s ongoing disaster by other nations, including Iran, whose banking and financial systems are by no means in a good shape. Although Iranian banks may consider themselves so distant from the debt woes of a faraway country’s banks, their situations share some uncanny resemblances.
Bad Debt
The Greek crisis and the sorry state of affairs of Iranian banks are fundamentally of different nature since the Greek crisis partly came about because the country no longer had its own currency when it was forced into drastic fiscal retrenchment, but the common denominator for quandaries in both countries is non-performing loans or NPLs.
According to the IMF, Greek banks’ NPLs, which are defined as the loans past due date for more than 90 days, remain the Achilles’ heel of the country’s banking system.
In its interim Monetary Policy report, the Bank of Greece revealed that the NPL ratio rose to 31.9% at the end of December 2013 from 24.5% at the end of 2012. The breakdown per sector showed consumer credit NPLs remain at the top with their ratio at 47.3% (from 38.8% in 2012), followed by corporate loan NPLs at 31.8% (from 23.4%) and housing loans at 26.1% (from 21.4%).
In absolute figures, Greek NPLs amounted to €69.4 billion for the four systemic banks, which cumulatively control around 95% of the Greek market loans. Their group NPLs, including more than €410 billion of NPLs generated outside Greece from their foreign subsidiaries in southeastern Europe stood at €79.7 billion at the end of 2013.
Similarly, Iranian banks have been hit hard by NPLs and other forms of bad debts that burst into the open in 2012 when banking sanctions against Iran gained unprecedented momentum. Ever since, Iranian lenders have struggled to make loans to businesses—something that has put the solvency of some of these banks into question.
Based on recent estimates, the total non-performing loans in Iran are over $30 billion, but the economy minister and other officials estimate the loans to be near $60 billion.
If we account for loans whose maturity dates are rescheduled by banks to show healthier record, which is not an uncommon practice by banks, the figure will rise even higher. The figure, however, does not include foreclosed businesses and non-banking assets of Iranian commercial lenders, an anomaly widely practiced by local banks.
One reason for the rise in NPLs is due to a decision during the previous administration to force lenders to provide cheap loans, regardless of customers’ credit ratings.
Topping it all off is the government’s debt to banks, which amounts to $30 billion, further exacerbating banks’ lack of liquidity.
Rising From the Ashes
An analyst recently likened the threat of NPLs to a “ticking time bomb” for the Iranian economy. He indicated that reclaiming the huge amount of funds, which have been squandered by top lenders, would be a lengthy and thorny legal process.
Complacency and resigning to the status quo, however, would be the quickest path to a financial meltdown. The three branches of the government should rise up to the task in concerted action to navigate the country out of the insidious peril of NPLs.
The will to act has already been mustered by the Rouhani administration. In a decree issued last week, President Hassan Rouhani ordered his first deputy Es’haq Jahangiri to help implement a series of long overdue reforms in the financial system.
In his directive, the president emphasized that reforms are needed to help promote the economy in accordance with advancements in foreign policy.
Reforms, he wrote, are necessary to remove obstacles in the way of having competitive industrial output and enhancing the efficiency of the overall financial structure.
The Iranian president further called on Jahangiri to devise a comprehensive financial reform plan that could help banks prevent a crisis, develop the capital market and organize the government’s debt.
The president’s decree would be an important step toward salvaging the beleaguered banking system. The prospect of sanctions relief as the final stage of nuclear talks concludes in Vienna on Monday would be another boon for the banking system to get access to frozen funds overseas and rejoining the SWIFT global interbank messaging network.
The Central Bank of Iran also needs to write off the bad debts of many of these banks as losses and come up with bailout funds for lenders in exchange for substantial, verifiable reforms. If they do not comply with reforms, the only option for banks should be to go bankrupt.
Big problems require big solution; Greece’s Parliament and its leftist government have already appeared less reluctant to accept tougher reforms to avert potential disaster. Be it Greek or Persian, the time to embrace reforms and end inefficiency is here and now.
