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Greek household insolvency reform–Troika style

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Iain Ramsay

http://www.kent.ac.uk/law/people/academic/Ramsay,_Iain.html

One aspect of the memorandum of understanding between the EU and Greece in mid-August  2015 concerns reform of  Greek household insolvency law with Greece being required to modify its existing law and administration.

Greece introduced a personal insolvency law in 2010. This  included a mandatory pre-judicial settlement procedure and a repayment period of  4 years before a discharge.  It also permitted under certain circumstances an individual to remain in her primary residence provided she repaid 80% of the value of the home over 20 years. The law was hardly a debtor’s charter and was based on the defective German personal insolvency law (see e.g. criticisms by Backert et al here) .

It was predictable therefore that the Greek law would face initial problems in implementation. The pre-judicial settlement phase rarely resulted in an agreement. Consumer groups attributed this to the intransigence of the banks but it is also possible that limited specialist advice existed for consumers and no guidelines existed for negotiations. Courts were ill equipped to address bankruptcy issues, free legal advice was not available and the courts became overloaded.  Individuals might have to wait years–even in extreme cases until 2024!– for a hearing.  These failures on a smaller scale were experienced by France and Germany when they initially introduced individual insolvency laws without thinking through the proper infrastructure for administering large numbers of cases of individuals with few assets.

Greece also introduced in substance a moratorium on foreclosures of primary residences under a certain value.

In face of  increasing levels  of non-performing loans (not surprising in the light of the austerity measures) the IMF concluded in 2012 that the Greek law was a failure. They claimed that the blanket protection of the moratorium resulted in ‘strategic default’ and moral hazard. Greece duly agreed to change its law, substituting targeted relief for ‘vulnerable debtors’ so as to minimize moral hazard and modernize the Act in line with ‘best practices in the EU’.  When the Syriza government was elected it proposed to reintroduce the moratorium while at the same time pursuing strategic defaulters.

The agreement of August 2015 imposes a battery of  reform obligations on Greece with a demanding timetable. The obligations  include:  establishing a stricter screening process to deter ‘strategic defaulters’, tightening the eligibility criteria for protection of the primary residence, introducing measures to address the backlog of cases, short form procedures for debtors with no income or assets, developing specialised court chambers for individual and corporate insolvency and training additional judges, establishing a regulated insolvency profession in line with ‘good cross-country experience’, reactivating the government council of private debt, amending the out of court procedure to encourage debtors to participate while ensuring fairness among creditors. Debt to public agencies will now  be dischargeable and the discharge period for entrepreneurs reduced to three years in line with the EU recommendation of 2014. This process of reform will draw on ‘independent expertise’, external consultants and ‘cross country experience’. Greece commits to review the process of reform by mid 2016.

The policies are a mixture of  potentially progressive ideas and less well thought out reforms. The introduction of a swift no-income-no-assets procedure and the inclusion of public creditors in the discharge are welcome. Stricter screening criteria are likely to be problematic in implementation and deter those in genuine need. It is not a simple matter to distinguish ‘strategic’ from ‘good faith debtors’.  Such measures taken in a crisis may not be dismantled after the crisis, having a long-term detrimental impact on access to insolvency.

This imposition of reforms by the EU raises concerns (for a trenchant critique of the provisions see  Yanis Varoufakis here) .  Technocratic knowledge substitutes for democratic decision-making. One might feel less unhappy  if the technical expertise was based on sound empirical studies and well-tested theories of insolvency administration. However, data were never presented on the level of ‘strategic defaulting’ taking place or the extent of ‘moral hazard’ in Greece.  Increases in non-performing loans do not necessarily equate with large increases in strategic default. The abstract economic categories  of strategic behaviour and moral hazard may not be helpful for understanding  the situation of a country in crisis.  I do not doubt that some strategic default existed but the Troika and IMF never provided data on its extent. Given the absence of a  ‘scientific’ basis for the EU requirements what is  the source of legitimacy for the insolvency norms being imposed? Unlike business insolvency where the UNCITRAL guidelines are used to measure a country’s insolvency law,  no international standards exist for individual insolvency. The IMF recognised this fact in 2013. Yet by 2015 the EU is appealing to ‘best practices’ and ‘cross-country experience’ (without identifying countries or why they represent best practice) in justifying its imposition on Greece of particular insolvency norms. In truth, given the absence of international norms, the IMF in their work on personal insolvency reform in Europe have been ‘making it up’ as they go, with changing scripts depending on the ability of the country to resist IMF pressure.   It is unlikely that Greece will be able to meet the demanding time line for  introducing insolvency reforms, such as the creation of an effective infrastructure of courts.  Creating a well-functioning bankruptcy infrastructure is not a short-term task. It is as if Greece has been set up to fail.

 

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