from
(snip)"A very disturbing precedent, for the already frayed domestic financial system, was set in Greece over the past few days, where as the linked story from On-News.gr explains, an unemployed Greek woman who owed a little over 26,000 euros to two banks, Eurobank and National, received a full debt discharge on her outstanding loans.
As the blog logically concludes, this decision will probably be adhered to in thousands of similar cases. Furthermore, it should be noted the woman had a perfect payment record for 18 years, and only fell behind when she lost her job. Imagine the sheer panic that would ensue if a comparable legal decision vis-a-vis ordinary consumer debt were to occur in the US - that would be a supreme court resolution for the ages.
In the meantime in Greece, a one-two punch arrives: deposits being drained and moved overseas, and bad loans being outright erased from the balance sheet by court order. At least both sides of the balance sheet are declining so there will be no way for banks to fudge their capitalization and make it seem that loan writedowns are actually a beneficial thing for book equity.
From On-News, google translated:
Bartzokas George, Attorney-President of the Citizens' Movement - Borrowers, told newsbomb.gr said: "This is a historic decision, as it is the first court decision that removes 100% of the borrower's debt . handled flawlessly Article 8 paragraph 5 of N.3869, whereby the court clears the debt because the borrower is a long-term unemployed and has not even cover the minimum, both for itself and for dependents. Surely others will follow such decisions. "
The Court rejected the claims of the banks that loan, is not determined by "who" finds the amount for the cost of living and that of her family, although included in the notice of application data permanently prevented payment and the necessary documents.
"This decision of the district court Larissa is a victory of borrowers against banks, which, let's not forget, give consumer loans without guarantees. Act 3869 will ultimately vindicate the indebted households and especially those who are truly economically impossible debt repayment, as the unemployed and the economically disadvantaged, "says the newsbomb.gr o President George IKNA Lechouritou.
It should be noted that decisions issued by local courts for citizens who seek legal assistance following the failure of-court settlement increase exponentially. It is, in the overwhelmingly positive and achieves remission in 50-60%. For the first time, but a court decision provides the total debt cancellation."(snip)
The major new precedent, of course, is that this Greek court has officially acknowledged the 'economic reality' that this unemployed Greek woman has no realistic means to EVER pay off the debts she was allowed to rack up, while also attempting to provide for her family. Thus the Greek court officially 'wrote off' 100% of this woman's outstanding debt liability, and officially forced the banks holding this woman's debts to take ( and officially book ) a 100% loss on said debts.
Obviously this was an immensely 'popular' court decision given the number of unemployed Greeks and the relative size of their personal debts ... thus there is an extremely high probability that, with this precedent in place, thousands and thousands of other Greeks in similar situation will also see their outstanding debts 100% 'forgiven'.
However, this is not without economic consequences. As the lender banks must now write off and book 100% losses on such debts, there is justified concern that these banks cannot financially 'survive' due to lowered capital reserve percentages, actual losses etc. This in turn is already prompting the 'smart money' to quietly pull deposits from these lender banks and move them to 'safer' territory ( i.e. US dollars and US Treasury Bonds ). Keep an eye out for 'average' Greeks to also start pulling their own deposits i.e. bank runs.
There is also an obvious 'moral hazard' situation resulting from this court decision. Unemployed Greeks with large debts now stand a very good chance of having those large debts completely 'erased'. But working Greeks with large debts will still be required to allocate a large portion of their paychecks towards servicing their debt. How many will reach a conclusion that they are in fact 'working for the banks', and would in fact be better off from an overall economic standpoint to stop working and file a court petition to have their debt similarly 'erased' ?
This will also undoubtedly affect America via the strengthening of the US dollar exchange rate that must occur as the withdrawn 'smart money' Euros are converted into US dollars. That might be a good thing for average Americans' food and gasoline budgets, but it is a bad thing for US exporting companies, for US banks involved with US$ / Euro derivatives, and for US individuals, companies, and gov't entities who owe large debts denominated in US dollars.
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