Greek Private Debt and Behavioral (Law &) Economics

Human beings are less rational than we assume. Nowadays, abundant laboratory and field experiments show that we systematically fail to behave, decide or act rationally, i.e., to act as maximizers of our own utility; the so-called “homo oeconomicus” does not actually exist. These assumptions have led to the emergence of Behavioral Economics. When the findings of Behavioral Economics are used in the field of Law, we then enter the field of Behavioral Law & Economics (BLE). This is an interdisciplinary meeting point for Law, Economics and Psychology (see recently in Greek legal literature: Karampatzos, Private Autonomy and Consumer Protection – A Contribution to Behavioral Economic Analysis of Law, 2016). BLE flourished in the US especially in the aftermath of the subprime lending crisis. Various public policy instruments have been explored since then with the intent to enhance consumer protection in bank loan agreements. In my presentation I focus on some major BLE findings in relation to the problem of private bank lending, and more specifically of the “Non-Performing-Loans” (NPLs). Inter alia, I discuss the following issues related to a BLE approach: (a) Why resort to excessive borrowing, especially in case you are not in bad need of financing? (→ mainly because of overconfidence bias, present-bias and hyperbolic discounting). (b) Do Borrowers Really Need Protection? What about the So-called “Learning-Effect”? (c) Free-Riders, Strategic Default and Moral Hazard in combination with the twin phenomena of “herding/herd behavior” and “social mimetism”. (d) Possible Proactive Measures for Borrowers’ Protection Pursuant to BLE findings (→ light-touch state interventions, such as properly designed default rules, informational duties and short cooling-off periods after the conclusion of a bank loan agreement). My presentation ends with the following two main conclusions: (a) The BLE approach may offer some valuable insights into the borrower’s behavior at the time they enter into excessive borrowing or they decide to go down the path of “strategic default”. (b) The Greek banks experience great difficulties offloading their NPLs; probably, there is here a need for more active involvement of institutional actors, such as the ECB or the Bank of Greece as well as of debiasing tools offered by the research done in the field of BLE.   

Why Reduction in Taxes is Not a Good Idea for Greece at the Moment

There is a growing number of politicians and academics in Greece, who argue that the solution to the country’s economic problems is a mixture of policies, which entail a reduction in taxes and government spending at the same time. Indeed, if we examine these two policy options separately, or apply them in another context, it would make sense. Reducing taxes would aim to stimulate consumption and investment, which could boost economic growth. A reduction in government spending would save money, improving the country’s public finances. However, in the case of Greece, there are several counter-arguments to these claims, which concern the efficiency of this combination.

A Greek Bank Tragedy

The recent attempt to cover the needs of Greek banks in fresh capital via a mix of a private and public infusion of funds amounts to nothing else than a fire sale. The recent rights issues of Greek banks were fully covered because Greek bank shares were sold for a few pennies with offer prices ranging from 0.02 to 0.04 cent per share. At the same time, the Greek taxpayers’ stake in Greek banks, held via the so-called financial stability fund, is sharply diluted, e.g. in Alpha Bank the state’s stake is reduced to 11% from 66,4% today, in the Eurobank from 35% to 2,4%, in Piraeus Bank, which sold its new shares for 0.03 cent per share, from 67% today to 22%, although the bank will still receive 2.6bn Euros state aid, 2bn in the form of CoCos purchased exclusively by the Greek state, and 0.6bn in shares. Then, for the greatest Greek bank, the National Bank of Greece that didn’t manage to cover even 1/3 of the total amount sought while its shares were offered at 0.03 pence per share, the reduction of the Greek state’s stake will be 24% to 33% from 57% today. This while the state will still inject 2.75bn Euros in fresh funds, 2.06bn of this in CoCos and the rest in shares. At the same time, the state waives its rights on 1.45bn Euros preference shares, which will now be converted to common shares. In addition, the National Bank will have to sell its most valuable asset, its Turkish subsidiary at 2bn Euros while its acquisition in 2006 cost the Greek bank 5bn EUR.