Comparative Study of Solutions to Npls and Its Impact on European Economy

Comparative Study of Solutions to NPLs and its Impact on European Economy

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Comparative Study of Solutions to NPLs and its Impact on European Economy

Introduction

Non- performing loans (NPLs) are an intrinsic part of the financial activities of banks all over the world. For many years now countries have been split, people have lost their hopes for better days, not to mention the fact that people, go crazy due to the unsolved problem which makes them feel unsafe for their future and their families’ future. However, the fluctuations related to such NPLs are not something to worry about during an economic cycle if they are maintained within reasonable proportions. This report will state data and facts of NPLs based on the impacts to the whole economy as part of the economic influences, the reviews shall be done using comparative statistics to show the different techniques used by sampled European countries. In addition to this, most of the countries have suffered at one point in the past from the phenomenon, thus, some solutions will be stated and be compared with others. As it was mentioned before due to the fact that there is a wide range of disparity, a survey of the selected countries had to be done in order to cover the problem deeply.

I am from Cyprus, a country that suffered from this problem not long before the financial crisis and after the financial crisis. The control of the country was lost and the only way for Cyprus to be in a better position was to make a lot of desperate decisions by adopting the order of “troika”, to date the high level of non-performing loans in Cyprus has affected the banking sector despite the thriving economy as reported by IMF (Kauko, 2012; 196-197). Cyprus as a country experiences poor payment discipline from the borrowers, weak enforcement preserves, and poor preserves that calls for ambitious strategies to counteract both the NPLs and increasing private debts. This is the reason why a comparative study of NPLs, its impact and solutions has been chosen to benchmark with the other European nations that have succeeded in mitigating and solving their problems. Despite the fact that I am currently a student in the UK, I lived through this period when the problem was serious and I did not have such knowledge to understand the way things have evolved to be this bad. Greece suffered from the same problem but, in the worst situation since,  in the worst situation since, its people ended up in circumstances, where they did not have food to eat and place to stay. At the moment, the financial sector in Greece is trying to minimize the NPLs through issuing top policy priority for creditors, however it is still hard to restore the loan to deposit ratio to the required level as the country celebrates restoring the capital base for the Greek banks (Louiz et al., 2012; 1013). There is still steady increase of the NPLs in terms of outstanding loans. Italy, however, is a different case altogether. It is an example of a country that has done much to recover from the rise in the NPLs according to the reports of September 2017 (Louiz et al., 2012; 1012). There was a record fall in the stock of bad debts in July the same year showing that the country’s financial sector that has been struggling is beginning to benefit from the efforts to lower the amount of NPLs, great investment rates, and sound economic growth.

The aim of this research is to analyze and present the impact of NPLs on the economy of Cyprus, Greece, and Italy through focusing on the efforts of the countries to solve the increasing case of NPLs as reported by their banking systems. The reason for the selection of the countries is explained later in the research. The objectives of this report are to make a comparison of the GDP growth rate, unemployment rate, price levels, exchange rate depreciation, and the inflation rate of these countries. I choose to research the economy as a whole thus; we have to look at the impact from a macroeconomic view. Afterward, a relationship between the macroeconomic factors and the NPLs will be clearly explained through analysis of the positive and negative impacts of the factors in question. I will not only focus on comparing the many different solutions that have already been used in these countries but also the solutions that have been used in other different countries apart from the three.

Background

           The listless nature of the European economy and its deep distress in some countries is widespread. The current average unemployment rate stands at approximately ten percent in the 19 European nations and twenty percent in Greece. The financial crisis in a particular country grinds all over the continent while taking varied guises. A good example is the sovereign debt crisis in Greece. Bank collapses no longer stop at national borders; this was a realization of Europe after the financial crisis of 2007-2008 in which the Europe zone had a total of 794 billion euro of bad loans by the end of June 2017 (Juncker et al., 2015; 2020). That was the beginning of setting strict priorities, where one of them was to take actions in order to minimize the debt and prevent more banks within Europe from collapsing. If a European country has debt and financial problems, since they cover vast geographical areas, it is inevitable not to influence other countries that fall within the Europe zone. For example, in December 2017, the 10-year German Bund Yield decreased to 0.3 percent for the very first time after many months, this was as a result of the decision that European Central Bank announced to revive the banks interest rates. The decision was to extend the purchases to September 2018 and lower rate to thirty billion euro per month. The US hedge fund through this crisis managed to make money from Italy’s UniCredit where is invested thirteen billion euro in March. It is believed that UniCredit was the largest European bank rights issue since 2009, this was finally a “clean up”.  However, the biggest issue for European banks was how to clear the one trillion euro of non-performing loans.

          Even if the 1 trillion euro of bad loans has proven a profitable job for the region’s debt collectors, it would take many years to work through the total recovery of the countries. The banking union announced that economists will help to reduce the debt as euro zone’s operation efforts would be channeled towards a clean-up of its banks and would not leave a country face a financial storm alone.  The Bank Union through achieves to force banks to start cleaning out their mess with a right strategy. According to Owen Jones of Greece Citibank five year ago companies could expect to restore two to three times what they paid for assets but today it is possibly closer to one point eight times. In the earliest of 2017, higher interest rates in Europe arrived which will allow banks to make more profits, but in the middle of the year, banking stocks have failed to gain any meaningful ground. According to Mr.Dijsselbloem speech within an article in financial times, if there were an economic shock this year, the European countries are not prepared to face it (Juncker et al., 2015; 201). Greece needed a lot of efforts from the European Union as well as other countries since there were five years through divisive bailouts.