This article is part of a new joint SPERI-Finance Watch series on “Untold stories of personal debt in Europe” to which different guest authors contributed.
In Europe, growing numbers of indebted households and companies have been unable to keep up with their debt payments, causing the volume of ‘problem loans’ to soar following the 2008 crisis. These distressed debts, known as non-performing loans (NPLs), reached 7% of all loans in Europe in 2012-2013. Although this subsequently decreased to 3,2% of all loans in Q4 2019, NPLs levels in Europe are still higher than in the United States and Japan. In June 2019, European banks held €786 billion of NPLs, with consumer loans making up a third of this amount.
The debt problem hovering over Europe relates closely to the politically engineered crisis of social reproduction in the European ‘periphery’. EU institutions, however, do not seem interested in tackling the root causes of this crisis. Rather, they are attempting to solve the bad debt overload via the creation of financial markets in which these debts can be traded. What we are witnessing, then, is the emerging financialisation of Europe’s social reproduction crisis. This threatens debtors’ rights, raising important ethical and political questions about the EU’s reliance on financial markets to tackle what is in fact a deep social crisis.
Non-performing loans or distressed debtors?
European institutions have all been vocal about non-performing loans. In 2017, the Council agreed on an Action plan to tackle non-performing loans, and the European Commission announced a set of measures to that effect. The European Central Bank (ECB), in its capacity as bank supervisor, considers NPLs to be one of its ‘top three priorities’.
In framing the rise of debt defaults as a non-performing loan issue, the EU is adopting a creditor perspective. Indeed, a loan is only ‘performing’ – from a bank’s point of view – when it continuously produces profitable cash flows in the form of regular payment of principal and interest. When these payments become irregular or non-existent, the loans become ‘non-performing’ – they are no longer profitable to the bank.
NPLs, according to EU institutions, are therefore not so much a problem in and of themselves, as they are a problem for banks. The Commission explains for instance that NPLs ‘generate less income for a bank (…) and thus reduce the bank’s profitability’. This, the ECB claims, ultimately poses risks to ‘financial stability and growth’. The solution to this narrowly defined issue is a host of measures designed to help banks better deal with current and future stocks of NPLs. The Commission, for example, recently proposed a regulation designed to ‘make banks set aside funds to cover the risks associated with future NPLs’. It encourages the creation of NPL markets for banks to offload the bad debts piling up on their books, discussed at more length in this article.
This focus on loan ‘performance’ and bank profitability obscures the social causes of the NPL increase. Unpaid debts, indeed, are not just numbers on a balance sheet. They are the product of distressed individuals, households and companies which are no longer able to make regular payments to their creditors.
Distressed debts and the crisis of social reproduction
In 2013, at its peak, the stock of non-performing loans in Europe approached a staggering €1 trillion. Not all countries, however, have had high levels of NPLs. Seven EU countries were defined as ‘high NPL jurisdictions’ – Greece, Cyprus, Portugal, Slovenia, Ireland, Italy and Spain.
This uneven distribution of debt distress, most prevalent in the so-called periphery of the Euro Area, makes sense when accounting for the economic context, and governments’ implementation of harsh austerity measures. All seven countries were hard-hit by the 2008 crisis, and many recapitalised their banking sectors, paving the way for sovereign debt crises. Sovereign ‘bailouts’, or threats thereof, were then ‘used as a leverage to impose austerity measures and structural reforms’. Greece, Ireland, Portugal and Cyprus were placed under the Troika’s (Commission, ECB and IMF) supervision, which directly oversaw the implementation of far-reaching macroeconomic reforms aligned with the EU’s neoliberal – and increasingly authoritarian – mantra. Austerity reforms, it turns out, were ‘primarily an attack on wages, social services and public ownership’.
Governments slashed welfare benefits and public funding in healthcare, pension, education, transport and culture; and privatised growing numbers of public services, all with devastating effects on public health. Greece, to give just one example, made ‘butcher’s knife’ cuts in health funding, with dramatic consequences: cuts in HIV-prevention budget, combined with spikes in youth unemployment and homelessness, have seen a 200% increase in HIV contamination. Suicide rates – which can be made worse by over-indebtedness and financial distress, as highlighted by Richard Ahlström and Fredrik Tjulander — rose more than 60% in Greece (data: 2013).
The austerity-fuelled economic recession particularly affected households’ ability to meet basic needs and reimburse their credits. In Spain, Portugal and Slovenia, around 10% of household loans could not be repaid on time in 2016, while in Ireland and Italy household NPL rates reached 15-20%. The cases of Greece and Cyprus are startling, with one in two household loans distressed in 2016. By way of comparison, in the EU as a whole 4.3% of household loans were non-performing that year. Loans to non-financial corporations were also affected: up to 30% in Italy, Ireland and Portugal, and again above 50% in Greece and Cyprus (as of end June 2016).
These countries, in fact, have faced a crisis of social reproduction, which has been a cause for alarm for several years now. The indicators above give a snapshot of 2013, a peak year for NPLs in Europe: They show that households in the high NPL group were more likely to be in precarious situations than those in the rest of the Euro Area. A comparison with ‘core’ European countries (Germany, France and the UK) further highlights the wide social gap that exists between these two groups, making the EU a wholly unequal entity.
Although EU institutions do mention this correlation between NPLs and individuals’ and households’ material conditions of existence, they remain silent on the long-lasting social consequences of EU-led austerity. Instead of tackling the deep social crisis at the root of NPL increases, they are advancing a market solution to the NPL problem. The following article describes how European institutions are thereby encouraging the financialisation and marketisation of distressed debts, on which private financial actors are set to capitalise.