Category: Greece

Since the onset of the Greek sovereign debt crisis and in the midst of non-stop negotiations with the European Commission, the European Central Bank, and the IMF, Greece has been instructed to apply tight fiscal consolidation measures and implement a series of structural reforms to improve its competitiveness and boost its growth in return for desperately needed financial assistance and securitization of its bail out.

In this context, Greece has undergone extensive labor market transformations in an attempt to regain a competitive edge, enhance employability, and reverse the dramatic increase in the unemployment rate (now at almost 30%) that has been reported since the outbreak of the crisis. 

Market transformations include, inter alia, reducing the minimum wage 22% to EUR 586 (and 32% to EUR 510 for market entrants under 25 years of age), limiting salary adjustments, and amending the employment protection regulation facilitating layoffs (i.e., by reducing the notice period and drastically cutting severance pay entitlements). Moreover, a series of reforms has been initiated to increase employment flexibility, reduce labor costs, and bend the rigidity of the Greek labor market, primarily by introducing new recruitment facilities for employers, allowing them to transform active employment contracts into part-time employment schemes, extending the maximum duration of fixed-term contracts to three years, and reducing the protections for employees during the one year trial period. Such changes clearly mark the current trend in labor law towards more flexible forms of employment.

According to OECD data, the percentage of part-time employees involuntarily working on a part-time basis has risen from 26% in 2008 to 44% in 2012, while the OECD average in 2012 was 17.8%. On the other hand, the average annual hours worked per employee has also increased during the same period, scaling up to the third highest in the OECD – 15% higher than the OECD average. Vulnerable population groups (young people, long term unemployed, women, etc.) face greater barriers when it comes to finding employment. In fact, in 2013, 58% of men and women under 25 were unemployed, securing for Greece the highest unemployment rate in the EU.

The majority of these reforms, including the introduction of laws reducing and freezing the minimum wage–normally established through collective bargaining agreements – have undoubtedly led to the deregulation of the collective bargaining system. 

These reforms in the Greek labor market have resulted in great controversy among social groups. The reforms have received fierce criticism, on one hand, for being detrimental to both social dialogue (collective bargaining) and human rights and, on the other hand, for generating extremely poor results when it comes to creating new employment opportunities. Such criticisms, though not entirely groundless, fail to take into account the fact that the effects of labor reforms also depend heavily on the so-called “business cycle” which is seriously affected and undermined by the implementation of strict austerity and fiscal consolidation policies as the Greek recession continues. 

Nonetheless, it is a fact that both the European Council and the International Labour Organization (ILO) have called on Greece to observe International Labour Conventions on fundamental human rights, such as the right to work, the freedom of association, and the right to organize, highlighting the absence of social dialogue and the need to strengthen and safeguard such fundamental human rights. Furthermore, it has been stressed that Greek authorities have failed to provide the social support required in order to tackle the sharp rise in unemployment, let alone protect the right to just and favorable conditions of work.

Six years since the first Memorandum was introduced in 2010, and after numerous wage and pension cuts, staggering unemployment rates, and a vicious circle of deficits and recession, a much more pervasive set of measures stemming from the third Memorandum (Law 4336/2015) adopted last August is yet to be implemented. These new reforms are rumored to pertain to mass layoffs, collective bargaining, additional wage and benefit cuts (including further reduction of minimum wage and the elimination of holiday and annual leave bonuses for private sector employees) and the introduction of new forms of employment, in a last effort to further encourage flexibility. The omens so far may not be good for the already traumatized Greek labor market, and it remains to be seen whether it will manage to survive and, after all, head towards its rebirth.   

By Georgia Konstantinidou, Partner, Drakopoulos

This Article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

“Non-performing loans (NPLs) in Greece are of tremendous size,” says Stathis Potamitis, the Managing Partner of Potamitis Vekris in Athens. “Perhaps up to 120 billion euros are tied up in NPLs — maybe as much as 50% of the total loan portfolio, with another 70 to 80 million euros due to the state.” These assets are generating significant international interest, of course, and many funds are coming to Greece to explore the possibility of investing. As a result, the Greek government is working to create a manageable and attractive legislative and regulatory environment for their transfer.

Indeed, Potamitis reports, historically there was essentially no regulation in Greece governing the sale and management of NPLs. In November 2015, Potamitis says, Greece enacted its first law for NPLs … “which was really a terrible law, because instead of facilitating their transfers it created obstacles” in the form of licenses required to purchase them. Potamitis describes it as “really unworkable.”

In May 2016 that law was significantly amended, and Potamitis reports that it’s “much better now.” But there are still many problems, he says, and although special permits are no longer required to buy NPLs, “the only licensing required is for servicing NPLs, which is relatively heavy. It’s like setting up a small bank, not in terms of capital requirements, but in terms of paperwork.”

In terms of the transfer, Potamitis reports, there are two main problems: “One is that the transfer is taxed under the VAT code, so you have 24% tax on the transfer value, and it’s not clear at this point how much of that can be recouped, because it’s not clear what VAT, if any, will be collected by the NPL buyer collections will be made on an ongoing basis by the servicer. And the other thing is that there is a levy on bank loans at .6% on outstanding capital on an annual basis, which is also assessed on NPLs acquired by a third-party buyer, and that can be a lot of money, because it seems to be .6% of the nominal value, rather than the discounted value on which they are acquired. So I think there are significant tax implications, and that’s likely to make it more difficult to find a price at which banks are willing to sell and investors are willing to buy.”

Of course, investors acquire NPLs for the purpose of doing something with them, Potamitis notes, like exercising security interests, restructuring debtors, and maybe taking debtors into a bankruptcy proceeding. “So you have to look in order to assess the suitability of that investment,” he says. “You have to look at the broader insolvency and pre-insolvency and enforcement picture, and there you have quite a lot of movement.” Potamitis says that, “as of January 1, 2016 we have a new Code of Civil Procedure which has introduced some streamlining to enforce individual enforcement provisions, which is supposed to speed things up and limit the opportunities of the debtor to interfere with the enforcement.” Serious questions remain about how those provisions will be implemented, Potamitis says, pointing out that, for instance, “there is some question about the buy-in by judges, especially in shortening the time-frames, so that’s something to watch.” Still, he says, “there have been legislative steps taken that may make things better.”

Potamitis says that, on the subject of pre-insolvency — restructuring — “we have some more experience in passing agreements through the court ratification process, and especially in agreements already concluded, there have been some successes, so that’s looking somewhat better. There are now new amendments in public deliberations. One of them is particularly interesting: it introduces a kind of cramp-down on shareholders, through an obligatory debt-equity conversion for debtors who are at or beyond the point of cessation of payments. To make this simple: If you are a group of debtors that holds a least 60% of the debt of a debtor who is at in cessation of payments, as an alternative to taking that party into bankruptcy, you can decide to recapitalize through a debt-equity conversion, and then take over control through a dilution of the shareholders and go forward the way you think the thing should be managed. That’s something the banks have been pushing for, because in their minds it’s going to make it easier to find investors, because they can focus on what is necessary to restore the debtor to viability as opposed to making concessions to equity holders whose stake has lost its value but who can still frustrate restructuring. That’s now in public deliberation. I expect it’s going to be passed. I don’t know exactly when, but that will make an interesting difference, especially because insolvency liquidation — sort of the piecemeal proceeding — is in terrible shape. It’s just very badly drafted, it’s badly designed, the incentives are all skewed, it’s a proceeding that takes forever, and generates very low recoveries for creditors. So if there’s one area that needs a lot of attention, it’s improving piecemeal liquidation for bankrupt entities.”

“The other thing that’s being discussed,” Potamitis says, “is a potential bill on an out of court workout.” Potamitis explains that, “given the great size of NPLs, you cannot resolve all the NPLs through court proceedings, because we just don’t have the capacity to do that, so you have to create a protective framework for out of court workouts. You need to create some tax incentives. You need to deal with the public debt (debt owed to the state) to leverage the sacrifices of private creditors and enhance the debtors’ viability. So you have to coordinate haircuts provided to private creditors with haircuts provided to public creditors. And also you have to provide some protection from liability to bank executives who agree on haircuts, because we’ve had cases where they’ve been taken to court for breach of fiduciary duty on some far-fetched theory that they’ve given up value where they shouldn’t have. And because all of the banks are capitalized with state funds, when you have breach of duty with state funds, it’s an aggravated felony, and so the potential sanctions are very severe. Sadly, the new draft proposal does not qualify as an efficient framework for out-of-court workouts.”

“This is all about trying to create an environment that is conducive to transactions on NPL portfolios,” Potamitis says. “And that’s particularly important because banks are committed to shedding something like 40% of their NPLs over the next three or four years. So that’s a huge amount of money. We’re talking about over EUR 40 billion. So you have to create a friendly environment to induce transactions of that volume. So there’s a lot of movement, there’s a lot of legislation happening, but it hasn’t all come together into a coherent, friendly system.” But it’s a “space to watch,” he said, “and we’re going to continue seeing more changes, more streamlining, and if we don’t it’s going to be a huge problem, because banks at this point need to consolidate, to start dealing with normal banking business, and at this point the weight of the NPLs on them is so great that they can’t.” 

In “The Buzz” we interview experts on the legal industry living and working in Central and Eastern Europe to find out what’s happening in the region and what legislative/professional/cultural trends and developments they’re following closely.

KLC Law Firm has provided legal advice to the Hellenic Republic Asset Development Fund (HRADF) on an international public tender for the acquisition of real rights and rights of use on real estate properties with development potential as boutique hotels.

The tender process involves selected Xenia Hotels, the former Sanatoria “Mana” in Vytina and “St. Eleoussa” in Rhodes, Villa de Vecchi in Rhodes, as well as three Mansions (Xiradaki, Mousli & Evangelinaki) in Pelion.

According to the firm, these properties “are of high historical and cultural value and are situated in privileged locations in Greece.”