Huge losses – potentially as high as €1.5 billion – threaten to blow up bankers’ plans following the Supreme Court’s ruling on how interest rates on loans under Katseli’s Law are calculated. The blow is not just logistical but threatens to open a new cycle of claims, retroactive claims and fierce legal battles.

And the hovering question is simple: would all this have been avoided if the calculations of bankers and servicershad been done from the start as the court rulings stipulated? The same sources admit that if the spirit of the court rulings had been followed to the letter, the “bombshell” might not even have been detonated.

Moreover, a question of political and moral order also arises. The Greek Republic gave the banks and their managements – in order to help them get rid of “red” loans – guarantees that today, after so many years of auctions and red loan liquidations, amount to 17.3 billion euros. Now the Supreme Court’s ruling risks forfeiting some of the guarantees because the banks, according to the Supreme Court, did not properly calculate the interest on these loans. Is this a financial burden on the citizens or on the banks?

It may be recalled that the State, after intense pressure from the credit system, proceeded to sort out the real from the fictitious cases in the Act, forcing borrowers to update data immediately. The “dry” was separated from the “pale” and the number of beneficiaries was significantly reduced.

However, despite the clean-up, these loans – which targeted vulnerable households – did not receive the attention one would expect. And now, the price of negligence may prove particularly heavy.

New court battles – Retroactivity key

Despite the fact that the Supreme Court’s decision has not been published and therefore it is rather difficult to accurately reflect the amount of damages suffered by banks and servicers, things could get much worse as in order to avoid taking financial responsibility they will attempt to turn this decision into a field for new litigation.

This decision is expected to act as a catalyst for developments, as it is not only a technical legal interpretation but may result in substantial economic consequences for the parties involved. The Supreme Court’s verdict creates a new landscape in which responsibilities, obligations and claims will have to be redefined.

Indeed, some believe that banks in particular, but not only them, will enter into a legal battle over new claims arising from this ruling

It doesn’t matter, say those in the know, how many loans banks now have in their portfolios, since retroactivity is the most critical factor in terms of losses, as it can shift the burden to either the original lenders or the current holders of the claims, or both, complicating the legal and financial balance.

– Who will ultimately pay the compensation?
– What are the chances that borrowers whose homes went to auction will want to recover them, claiming that interest unfairly compounded the payments they were unable to make, and what will this mean for those who acquired the homes at auction?

Unnecessary complications

As agents with knowledge of the bankruptcy process say, things for banks and servicers will be far from straightforward from now on.

Remarkably, it took years of litigation to finally get the state to come around and enforce a Swiss franc arrangement creating viability for at least 50,000 borrowers who were living under the debt state. And despite strong opposition from the banking system, in the end the regulation now seems to be walking and has been a significant success.

But the state’s intervention was required billions.. and for the high fees charged by credit institutions to individuals and businesses, which were reduced to the minimum possible, providing significant relief and a sense of fairness.

It is also noteworthy that despite the previous period of rising interest rates, the country’s credit institutions gave disproportionate returns to their depositors, maintaining some of the highest spreads (interest rate margins) in Europe.

And all this while the country’s credit system has been seriously helped by the way in which the “red” loans have been cleared (through government guarantees) while adding to its capital the finding of deferred tax element which has allowed it a strong profitable recovery.

What the Supreme Court’s decision provides

The decision of the Plenary of the Supreme Court on how to calculate interest on loan arrangements subject to the Katseli Law (Law 3869/2010) has settled a critical legal point that has been of concern to banks, borrowers and “red” loan management companies for years.

According to this decision, interest will no longer be calculated on the total outstanding principal of the loan – as it was recorded when the borrower joined the Katseli Law – but on the respective monthly instalment determined by the court decision and regulation that brought the borrower into Law 3869. The decision, although not finalized, seems to provide for retroactive effect from the moment a loan was included in this institutional framework.

So let’s assume a loan of 100,000 euros with an interest rate of 3%. This for each year promotes 3000 euros of interest divided by 12 and creates an interest cost of 250 euros on each instalment if it were a normal loan and not a loan included in the Katseli Law.

Assuming that this is a 20-year loan, the principal payment is about 500 euros per month plus 250 euros interest, i.e. 750 euros total payment.

With the Supreme Court’s decision, the interest rate, i.e. 3%, is imposed on the 500 euros and forms an interest of 15 euros per month and therefore the instalment is formed to 515 euros per month.

This interpretation substantially reduces the total cost of interest to the borrower, compared to the way banks and servicers calculate it.