It’s hard to imagine the European Central Bank’s addendum to its guidance on non-performing loans piquing the interest of many people outside the corridors of governments and financial institutions. Civil servants and financiers possess thick dictionaries of jargon, terminology and geek-speak, but even in this world, accounting and provisions policy is for the real head-bangers.
There’s nothing wrong with this in itself. Specialists ought to be specialist. But it does make it harder for the ordinary Joe, José and Giuseppe to know what’s going on until they see it before their eyes.
Put in the language of the ordinary voter, European rulemakers would like banks — and particularly small, friendly local banks — to sell off their loans pronto, particularly mortgages and those to small businesses.
These loans will be bought by investors with no links or loyalty to the people who took out the loans or mortgages or the local area.
In the vernacular of the general media, they are vulture funds. After buying the loans, they will then aim to recuperate whatever they can — perhaps through discounted payoffs, but if necessary, through the courts. That means repossessions, and real anger among voters.
The gritty reality of what NPL disposals entail for the defaulting debtor does not invalidate the ECB’s case to push on with disposal. It's not totally proven, but there's a pretty decent case that NPL portfolios weigh down many European banks, restrict credit growth, and hurt the economies that they are present in.
Sorting out NPLs is also a necessary political step towards a greater goal — the creation of the European Deposit Insurance Scheme (EDIS). Northern Europeans are unlikely to agree to risk sharing while southern banks remained burdened by bad assets.
Assets for perfoming populists
But NPL disposal is hardly good PR for the European Union or the financial system. And this topic is particularly relevant to Italy, central to the NPL problem.
Along with pushing banks in the country to offload NPLs, many observers would like Italy to redesign its legal system to make it easier for investors to seize collateral.
Such proposals, regardless of merit, give anti-EU politicians a stick with which to beat their adversaries.
One expert warned GlobalCapital that speeding up the recovery of NPLs backed by real estate could cause a shock to the property market.
This is a country with a home ownership rate of 72% according to Trading Economics (higher than the rate in UK, France and Germany, and the average rate across the EU and the eurozone).
Home owners don’t like property values falling.
This stuff went largely undiscussed in the recent election campaign, which unexpectedly resulted in two anti-establishment, broadly Eurosceptic parties winning more than 50% of the votes.
The outgoing Italian administration strongly believed in Italy’s membership of European institutions, even if it disagreed on aspects of what European institutions did, including the NPL provisioning plans.
Given that no new administration can be formed without the support of either (or both of) the Five Star Movement and the Northern League, Italy’s next government will have a more Eurosceptic bent.
The topic of NPL disposal will not go away as Italian banks press on with NPL reduction plans, and as the ECB tightens the screws on how they account for them.
An influential paper published by the Centre for Economic Policy Research in January recommended that the push to reduce NPL levels should encompass both smaller banks and existing NPLs as part of euro area reform.
The ECB addendum on the topic is expected to be released next week and will determine how quickly banks will have to provision for NPLs. The ECB is expected to look at dealing with legacy NPLs later in the year.
Conveniently, the publication of the addendum, which caused outrage when it was drafted last year, was left until after the Italian vote.
But it will almost certainly come out before the parties have agreed and argued over the composition of the next government.
The topic has already hit public consciousness in Greece. Riot police have had to guard the offices of notaries involved in electronic auctions of repossessed properties. Protesters have been known to storm the courtroom when the auctions have been taken place in real life.
This is not just a question of public image. It also threatens to hinder the reduction of NPL portfolios, as investors don’t like bearing the brunt of public anger. In terms of sheer volume, Greece’s NPLs are less of an issue to Europe than Italy’s.
Italian NPL disposal is much more significant. Look out for anger there too, once the public cut through the jargon.