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The lack of liquidity suffocates businesses

08 July 2012 / 14:07:01  GRReporter
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No Greek company has suspended operations due to losses. Companies, which have problems with the availability of cash, close their “shutters”. This simple lesson in economics is known to the new Finance Minister Yannis Stournaras and to the Governor of the Bank of Greece George Provopoulos, who need to find an immediate solution to the problem of financing, which has blocked the Greek economy. The prolonged recession (reaching -14 percent in the period 2008-2011) and the international isolation of Greece, disable all units, forming the credit chain, and threaten to flood the country with thousands of new unemployed.

Banks, squeezed by losses from their participation in the bonds exchange (PSI) and the expiration of deposits, have in practice stopped financing the businesses. Companies with limited cash flow due to contraction of consumption are late to pay their suppliers, and the latter "drag down" the primary production (agriculture, livestock, fishing, etc.), which in turn is unable to supply the production process with raw material.

The situation has deteriorated significantly also after the state terminated all payments. Arrears of the state to individuals have already reached 6.8 billion Euros and if we add the delay in VAT return, the amount reaches 10 billion Euros.

Recapitalization of banks should be completed by late summer, so that the vicious circle - recession-lack of liquidity-even deeper recession - can be stopped. The intervention of the political leadership of the country and supervisors is now a must, because the banks are also facing the increasing of the so-called bad loans (with a delay in serving of more than 90 days).

According to official data, during the second quarter of the year they have reached an average of 18 percent. If to that we add 5 percent restructured loans in the banking system, many of which are also not served, then the percentage of bad loans will exceed 20 percent (nearly 50 billion Euros).

There is a danger that if the recession does not yield (according to the Centre for Economic Research, in the third quarter of 2012 it will reach -9 percent), the percentage of bad loans will reach 30 percent and there will be a need to revise BlackRock’s forecasts. Ultimately the capital necessary to support banks will have to be reviewed.

The environment in which Greek companies have to operate has become hostile. Trust - the fundamental principle of trade - disappears. Everyone wants cash (there isn’t any), so transactions are constrained. Indicative is the fact that sometimes the suspicion of suppliers towards Greek businessmen exceeds all reasoning, because they want them to make a written commitment that orders from 2012 and 2013 will be paid in Euros.

A businessman shares in an interview for “To Vima” newspaper that the lack of liquidity is destroying his profits and creating conditions for credit crisis: "We import almost all raw materials we use to manufacture our products. Our suppliers want to be paid cash. Banks do not give us loans. We, in turn, are making desperate efforts to get our money from the customers within three months. Commodity prices have increased significantly and due to the economic situation we cannot increase our prices. Our profit is disappearing and I'm forced to lay off some of my staff. "

In order not to further aggravate the situation, market analysts believe that the state, banks and businesses have to sit at the negotiating table and find an immediate solution. The state should provide the necessary funds to pay its obligations to individuals, means, which for the most part will go to repay the loans. Banks should lower lending rates, and in order for them not to go bankrupt as well, they need to reduce interest rates on savings, which now exceed 6 percent. Furthermore, an agreement must be reached with the European Central Bank, so that it will open the "faucet" and finance the Greek banks if necessary.

"Do not lend even one Euro for new loans”

Banks change their strategy and stop crediting, in order to save themselves from bad loans

Banks start restructuring loans and this is necessary because it supports viable companies and individuals to overcome temporary liquidity problems. Of course, during difficult times, banks were still tolerant, since when restructuring loans they did not include provisions and were often hiding the true condition of their wallets.

This strategy, however, is changing and now the orders given to the company credit departments are "not a single euro for a new loan". As a famous banker notes, "the myth of the banker, who laid the carpet for the businessman, has already faded. We supported businesses beyond our strength and gave them many chances. Their managers, however, did not take advantage of them, either because of the market situation or due to their own incompetence. 80 billion Euros deposits have been lost from December 2009 until today. During the same period, loans fell by only 8.4 billion Euros. While they were blaming us for sparingly giving loans, rather the opposite was happening."

In recent years funding of many companies has stopped, sometimes this affects good customers, who are only allowed restructuring of their loans. Even in such a case, however, where a loan is approved, the interest rate reaches 10 percent. The latest example is the National Electricity Company, which received a loan with an 8.9 percent interest.

According to recent official Bank of Greece data during the first quarter of 2011 on average 4 percent of loans have been restructured, from a total of 245 billion Euros. Today this percentage has increased. As stated recently by the former CEO of the Bank of Greece Apostolos Tamvakakis, in the last couple of years this bank alone has embarked on a restructuring of loans worth 6.2 billion Euros.

Tags: recession economic crisis lack of liquidity businesses bad loans
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