Analysis: pandemic payment holidays mask a wave of problematic European debt
FRANKFURT (Reuters) – Pandemic interruptions in payments on European loans totaling billions of euros threaten to undermine efforts by the region’s banks to put the coronavirus crisis behind them.
Some of the millions of borrowers who got repayment holidays from banks and governments across Europe shortly after the pandemic struck still need relief as a second wave of lockdowns squeezes the economy and puts people out of work.
But the more their loan repayments are frozen, the worse the potential problem for banks becomes, as debts pile up, making them harder to resolve.
European Central Bank chief supervisor Andrea Enria has warned of a “huge wave” of unpaid loans that could exceed € 1.4 trillion and warned against postponing their cancellation, warning that the ‘waiting for the loan moratoriums to expire could see many borrowers “collapse at once”.
Although the volume of paused loans fell sharply over the summer, a Reuters survey and analysis of the latest available data shows that loans totaling around 320 billion euros ($ 380 billion) were still on leave. payments in 10 of the largest European banks.
In Ireland, banks began phasing out payment holidays in September, a move according to Michelle O’Hara, director of a charity advising people in debt difficulty, sparked a wave of calls.
Pilots, programmers and even horse trainers have joined the lower-paid in asking for advice. “There are people in trouble who never planned to get in trouble,” O’Hara said.
Personal debt in Europe, whether for homes, appliances or cars, is at an all time high, according to data from the European Union. Although some countries have cut back over the past decade, consumers in the UK, France and Germany have borrowed about a fifth more.
So when payment holidays became widespread in the first wave of coronavirus lockdowns in Europe, lenders braced for losses, with financial results showing the 10 set aside some € 45 billion to cover the cost. cost of unpaid loans.
An analysis of loans still in default in ten of the largest European banks, Santander SAN.MC, HSBC HSBA.L, Barclay BARC.L, Societe Generale SOGN.PA, BNP Paribas BNPP.PA, ING INGA.AS, Intesa FAI.MI, UniCredit CRDI.MI, German Bank DBKGn.DE and Crédit Agricole CAGR.PA, show that thousands of people are still delaying the resumption of monthly repayments.
For banks looking to avoid a return to the dark days of the debt crisis a decade ago, there is a delicate balance between meeting government demands to spare borrowers and not putting their loan portfolios at risk. .
“We must ensure that we allow everyone to go through this phase,” said Philippe Brassac, managing director of Crédit Agricole de France, which has around 24 billion euros in loans in the event of payment interruption. committing to support customers affected by confinement.
Calculating default risk is complicated, and banks take into consideration many factors such as the type of loan, the borrower’s situation and the economy in general.
Banks say they are realistic about the assessment of risk, while many point to the large number of borrowers who have resumed their payments after a vacation.
Spain’s Santander, which has € 39 billion in pending loans, has set aside € 9.6 billion in bad debts, while Italy’s Intesa, with € 48 billion in moratorium loans, n ‘provisioned only 2.7 billion euros this year.
A spokesperson for Intesa said customers taking payment holidays were resilient and their exposure to tourism, hit hard by the crisis, was low. Santander declined to comment.
Central banks in Germany, which have asked banks to prepare for a “worst-case scenario” and Portugal, which has warned of the risks of cutbacks in economic support measures, fear that if the problems of personal debt are getting worse, it could suck the banks as well.
“Some banks have more than 20% of their loans on payment leave. When will gravity come into play? At some point you have to get back to normal activity, ”said Jerome Legras of Axiom Alternative Investments.
In Italy, interruptions in payments reached around 10% of mortgages at the height of the pandemic, while in Britain they reached more than 15%, according to calculations by the European Datawarehouse, which collects data. data for investors.
Payment holidays in Portugal reached 12%, he estimated.
The majority of borrowers have since started paying again.
HSBC CFO Ewen Stevenson recently told Reuters he expected gradual economic improvement, while BNP Paribas in France, which has around $ 1 trillion in credit, said the loan losses are expected to decline next year.
But the problems persist.
“There is a significant amount of distressed debt all over Europe,” said Ed Sibley, deputy governor of the Irish Central Bank. “And this distress will increase because of COVID-19. “
A recent study by the Central Bank of Ireland found that although the number of payment interruptions has fallen by more than a quarter since June, 9% of Irish loans remain on hold.
He revealed that hotels and restaurants, among those most affected by the pandemic, were the most likely to still be on hiatus.
“For now, job protection measures are in place. But it will start to end, ”said Ernest Urtasun, a Spanish lawmaker in the European Parliament. “The number of troubled borrowers will explode in the coming months.”
The banks, however, are hopeful that government support, which is spreading across Europe, will help.
“Withdrawing support for businesses and the economy in advance is the time bomb,” said Miguel Maya, CEO of Millenium bcp in Portugal. “We need to give the economy time to breathe.
GRAPHIC – Payment holidays for European banks during the COVID-19 crisis
(1 euro = $ 1.1826)
Additional reporting by Muvija M in Bangalore, Toby Sterling in Amsterdam, Maya Nikolaeva in Paris, Valentina Za in Milan, Jesus Aguado in Madrid, Patricia Rua in Lisbon and Lawrence White in London; Writing by John O’Donnell; Editing by Alexander Smith