The over-indebtedness in Greece
(By INKA Grecia)

Overindebtness

Debt Levels and Burdens Continue to Rise

More and more consumers all over the world are under threat of superendebtment and insolvency. The main factors that could explain this fact are the following: the consumers’ increasing tendency in modern societies to use consumer credit to fund the purchase of goods or services, especially during the last two decades, in combination with crucial issues to be solved in the area of social security, and the rising unemployment, worsen the economic problems of a growing number of consumers, many of whom are not always able to maintain current credit- card and loan payment schedules.

Consumer credit is by far one of the most significant driving forces for the economic growth and the well-being of consumers. Credit increases temporarily the purchasing power of consumers. Simply put, credit provides opportunity! It enables consumers to buy goods or services promptly in order to satisfy their current needs, even when their cash on hand or in banks are limited and normally would not allow them to cover immediately the cost of the goods or services to be purchased.

The concept of “consumer credit” has undergone substantial change in the last 20 years. In the 1960s and ‘70s consumers bought goods and services paying “cash” and credit played a very small role in the economic life of those consumer-societies. The form of credit involved essentially only two products, namely the “hire-purchase” agreement or “installment plan” to fund the purchase of moveable property, and personal loans. Today credit has become a strong driving force of economic life and is available to consumers via different forms and types of financial instruments.

Currently, in Greece many consumers use consumer credit to fund the purchase of a house or a car, for example, or other goods or services and a growing number of consumers enjoy an overdraft facility on their current bank account.

Greek consumers have become far more willing to use consumer credit to fund the purchase of goods or services and banks have become far more willing to let them, as credit to consumers is highly profitable for them.

Although credit for consumption is a key driver to our economy, it nevertheless represents a risk for credit providers and a threat for many consumers of being burdened by debts. In macroeconomic terms the household debt rises rapidly, corresponding to more than 26, 3% of GDP .

Consumers buy on credit mostly by using credit cards. Credit cards were originally designed for convenience: when the consumer didn’t have cash on hand or didn’t want to carry excessive amounts of it, he could buy goods or services by using a credit card, which he pays off at the end of the month. However, credit cards also encourage impulsive buys and consumers with poor spending habits often do misuse debt and soon find themselves running on the minimum balance treadmill. And Greeks do misuse debt, often spending more than they make. It is worth noting that the number of credit cards issued by credit institutes in 2002 exceeded 4, 2 million and the credit balance on credit-cards came to Euro 4, 1 billion .

This problem becomes even worse by the marketing policies followed by the credit institutes. Despite rising debt losses, credit card issuers have solicited even more aggressively. Mainly to try to persuade cardholders to run large balances, credit-card issuers have dramatically increased credit lines. Furthermore, banks and other creditors are consistently rolling out scores of new and tempting loans promoted by aggressive and persistent advertisements’ campaigns. Apart from “traditional” mortgage and consumption loans banks offer “holiday-loans”, “Christmas- loans”, “Easter- loans”, “student-loans”, even “wedding-loans”. One can actually talk about an “industry” of loans.

Greek consumers dealing with this new tempting environment are vulnerable to many threats. These threats can become very dangerous, because all these conditions are new to them and they have not yet developed any effective defense system against them. They are not trained to deal with them and all these ‘offers’ and tempting chances appear to be irresistible. Especially dangerous is the fact that lower middle income households are becoming overburdened by these credit card debts; actually these households are under an unprecedented financial pressure. According to Government data, the consumer debt of lower income groups is far higher than this of higher income ones.

Some banks are especially irresponsible in extending credit to consumers too much up to the levels they could never afford it. Ignoring their social responsibility these banks encourage the superindebtment in order to make as much profit as they are able to. In the attempt to find solutions to the problem the credit institutes policies have to be taken under consideration.

Overindebtment is actually emerging as a very serious problem in Greece, since a large part of the population due to heavy debt-burdens is confronted with a devaluation of its life-quality, an exclusion from the system of consumer-credit, even poverty, thus becoming obliged to limit themselves to extremely cheap and lower quality purchases.

The need for the Greek legal system to adopt the appropriate provisions for guaranteeing consumer protection against overindebtment is more than evident. The seriousness of the problem is so important that the current old-fashioned regulations concerning bankruptcy should be definitely amended. One should acknowledge that some legal progress has been made, but there are still a lot of issues to be regulated. It is an indisputable fact that in Greece there is a need for an organised legal protection against superindebtment: an initiative, which unfortunately has not been yet taken. Our proposals will be made in the last part of this report.

European Legislation

Comparative research in consumer bankruptcy law shows that European consumer bankruptcy laws differ from the Anglo-Saxon laws not only in many respects, but also so fundamentally, that even a different terminology can be justified. The Anglo-Saxon institution refers to the ‘consumer bankruptcy’ and the European Law as ‘consumer debt adjustment’. The European concept prefers terms such as ‘rescheduling of debts’, rather than ‘fresh start’ .

While American consumer bankruptcy law has long been acknowledged as the most generous in the world, the European bankruptcy laws did not include any provisions for discharge until quite recently. However, after the deregulation of credit markets in the 1980s , many west European countries faced a huge increase in consumer debt problems and felt forced to seek solutions. Several countries introduced consumer debt adjustment laws during the late 1980s and 1990s to alleviate the economic crisis caused by the recession.

The first European country to introduce a specific procedure for consumer-debt adjustments and debt discharge was Denmark, in 1984. The Danish law was an important example for the other Scandinavian countries and Finland when they drafted their laws. Laws on judicial debt adjustment for consumers entered into force in Finland and Norway in 1993 and in Sweden in 1994. The French Act, known as Loi Neiertz should also be referred to, enacted in 1989, in order to prevent and regulate overindebtment of individuals and families. Apart from the Scandinavian countries, Finland and France there is the recent Insolvency Law Review Commission (1986) in Germany.

Consequently, the new Insolvency Act 41, adopted in 1994, has a two-track discharge procedure. One track – relevant to this report’s issues - , the small debtor adjustment, is designed for consumers and individuals operating a small business. The other track is available to bankrupts as a means to end bankruptcy proceedings. The conditions of discharge are quite different in each proceeding. The small debtor’s primary obligation is to negotiate with his or her creditors before and during the proceedings. The first stage of the proceedings is called the “small process” (Kleinverfahren). The debt counsellors’ new responsibility will be to guide these negotiations and report about them to the courts. The debtor is likely to need assistance, because he or she is required to attach a complete payment proposal to the application. The court confirms the plan if it is accepted by a majority of the creditors or if there is no creditor opposition.

These proceedings, however, leave the small debtor at the mercy of creditors. If the creditors do not accept the proposal, the debtor may file for bankruptcy. It is unlikely the creditors would accept a more lenient plan than the bankruptcy option provides for .

Although these European legislatures often adopt different measures and provisions, it is a fact they share a lot of common characteristics, so one may talk about a European continental model . First, European legislatures have not adopted open access to consumer bankruptcy. The access is restricted only to those debtors deemed worthy of it. Second, and equally important, common characteristic is the insistence on a mandatory plan for all consumer debtors. The discharge is either conditional or is not granted before the completion of the payment plan, the duration of which varies from five to seven years. Third, the European concept puts special emphasis on debt counseling services aiming at the rehabilitation of the debtor, at economic education and at lifestyle adjustments.

The fundamental difference between Anglo-Saxon consumer bankruptcy laws and European ones concerns the notion of the second chance and the fresh start policy. The basic function of American bankruptcy has the goal to serve the credit markets. While access to the credit market should be easy and open, open access to bankruptcy as an exit from the market is equally important .

So we are dealing with two fundamentally different philosophies with different orientations and priorities. Although Greece belongs traditionally to the continental European legal thought, we suggest that our system should take into serious consideration the American experience with its flexibility and effectiveness- not adopt the Anglo – Saxon philosophy as a whole, but adjust its provisions to the continental environment.

National Legislation

The Greek approach to consumer bankruptcy seems to come closer to the socio-legal view. Subsequent discussions and legislation tend to emphasize the causes of overindebtness, such as economic recessions, unemployment, business failures, personal misfortunes such as illness and inability to manage one’s budget. Consequently, the overindebtness of private households is seen primarily as a social problem involving individuals, rather than as a market failure.

While the Greek bankruptcy law does not have provisions specifically excluding consumer debtors, in the absence of discharge, consumer bankruptcy is meaningless and rare. There is not any special consumer bankruptcy procedure- so consumers’ special needs, interests and characteristics are being ignored .

Effective Strategies for reducing Debt Burdens

An effective strategy for reducing credit card debt burdens and the level of personal bankruptcies could be for banks and other creditors to issue credit more responsibly. For example credit institutes should limit credit lines to 20% of a household’s income.
Many consumers, however, must exercise more discipline in their use of credit cards. They should have only one or two major credit cards and limit total credit lines to no more than 20% of their annual income; they should try hard to pay off all balances in full every month and avoid paying only the required minimum; they should pay by cash, check, or debit card if they have difficulty staying within the limits of their household budget; and if they are in need of help, they should contact their local non-profit consumer credit counselling service.

But at this point we have to mention that all these measures- oriented at the side of the banks- may not be enough to solve the problem and to relieve consumers’ burdens. Our proposal is a mixture of European and Anglo- Saxon models: the European model shall preserve its autonomy and its principals, but it is fair enough for the burdened consumer to be given a second chance. The new Germany law could be a leader for other European countries, especially under the precondition that its provisions will be more flexible and less strict, and under the precondition that it will help much more by the discharging of the consumers .