A landmark ruling by the Plenary of the Areios Pagos (Greece’s Supreme Civil and Criminal Court) has triggered both relief and alarm across the country’s financial system.
In a 35–12 vote, the Court ruled that interest on non-performing loans (NPLs) restructured under the Katseli Law will continue to be calculated as part of the monthly installment—rather than on the total outstanding balance, as banks and funds had argued.
The decision benefits roughly 350,000 households who sought protection during Greece’s debt crisis to safeguard their primary residence. But banking sources warn it could have significant financial consequences—potentially reaching €1 billion for securitizations backed by the state under the Hercules Asset Protection Scheme.
The central question now is blunt: Will taxpayers ultimately bear the cost?
The ruling that shifts the balance
The Court reaffirmed the existing method of interest calculation for loans covered by the Katseli framework, rejecting lenders’ claims that standard banking practice required interest to accrue on the total debt.
“It’s a major vindication for households that fought to save their homes,” said a legal expert familiar with the case.
A senior banking executive offered a different view:
— “This is not about banks absorbing losses. The real issue is whether the state guarantee mechanism will be triggered.”
Behind closed doors: concern in Athens
According to market insiders, emergency contacts were made between senior bankers and officials at the Finance Ministry shortly after the ruling.
During a closed-door discussion, a banking representative reportedly warned: — “If even one large securitization is materially affected, the state guarantee could be activated. That becomes a fiscal issue.”
A government official responded cautiously: — “The scenario of zero recoveries is unrealistic. But we need to examine the numbers carefully.”
An assessment by KPMG suggests the negative impact on securitizations under the Hercules framework could approach €1 billion. If recoveries fall short of projections, the burden would shift to the Greek state.
How the “Hercules” safety net works
Launched in December 2019, the Hercules Asset Protection Scheme was the cornerstone of Greece’s effort to clean up its banking system after NPLs peaked at €105 billion—nearly 50% of total loans.
Under the scheme:
- Banks transferred bad loans to Special Purpose Vehicles (SPVs).
- SPVs issued three types of notes: Senior, Mezzanine, and Junior.
- The Greek state guarantees only the Senior tranche, provided private investors take on the riskier mezzanine and junior bonds.
Crucially, the state has not paid out funds so far. The guarantees are contingent liabilities—activated only if loan recoveries fail to cover senior bond payments.
If that happens, the guarantee would be triggered and any shortfall would increase public debt.
While a total collapse in recoveries remains highly unlikely, market participants fear the Supreme Court’s decision could weaken projected cash flows in certain securitizations.
Who actually takes the hit?
Banking estimates suggest:
- Banks could incur losses of roughly €130 million.
- Loan servicers would suffer limited losses, mainly from missed performance fees.
- Senior bond investors remain shielded by the state guarantee.
- The Greek state carries the ultimate contingent risk.
In essence, if a fiscal gap emerges, it would be borne by the public sector—and ultimately taxpayers.
A chilling effect on new mortgages?
Beyond immediate losses, bankers warn of a broader consequence: tighter lending standards.
“When legal risk increases, banks become more conservative,” said an executive at a systemic lender. “That could translate into stricter criteria for new mortgage approvals.”
The debate, therefore, is shifting from legacy crisis loans to the future of Greece’s credit expansion.
Risk of a litigation wave
Another concern is that the ruling could encourage borrowers who restructured loans through out-of-court mechanisms to demand similar interest treatment.
Legal circles suggest the decision may set a precedent in principle, potentially opening the door to new claims.
If such challenges materialize, pressure on loan recoveries could intensify further.
A political balancing act
The government now faces a delicate equilibrium:
- Protecting vulnerable households
- Preserving financial system stability
- Avoiding fiscal slippage
The ruling by the Areios Pagos does not close a chapter. It opens a new one—financially, legally, and politically.
The question echoing through bank boardrooms and government offices alike is stark:
Will Hercules remain a shield—or become a weight on Greece’s public debt?
Source: pagenews.gr