Fitch: Greek Tensions Have Pushed Up Mortgage Arrears

Greek mortgage arrears have risen during the prolonged negotiations between the country's government and its official creditors, Fitch Ratings says. A deteriorating economy and almost total absence of bank credit may have combined with retail borrowers withholding loan repayments during the extended period of uncertainty.

Some mortgage borrowers may already be strategically entering early-stage arrears as the crisis damages the banking sector. They may also be choosing to make payments on other debts rather than mortgages as they are aware that banks are unlikely to enforce against their property collateral.

Greek mortgage performance appeared to be stabilising before the January elections. Loans with at least one monthly instalment overdue represented around 16% of total loan balance. But they climbed to 16.9% in February in the aftermath of the elections, and continued to rise even after a temporary bailout programme extension was secured at the end of that month, reaching 17.3% in May. We expect early-stage arrears to have increased further during June.

We believe RMBS arrears could rise further. The failure to agree an extension of the existing bailout programme, the announcement of a referendum and capital controls over the weekend, and popular opposition to austerity in Greece suggest that negotiating a third bailout programme (or equivalent) will be challenging. The consequent uncertainty about Greece's relationship with its official creditors, and what this means for sovereign and bank liquidity and solvency, will therefore persist, potentially affecting borrower behaviour.

Fitch rates 22 Greek RMBS tranches; 18 are rated at the Country Ceiling of 'B-sf'/Negative. Further actions on the Greek sovereign would lead to the revision of the structured finance cap and subsequent rating actions on Greek structured finance programmes.

Fitch yesterday downgraded Greece-based National Bank of Greece, Piraeus Bank, , Eurobank Ergasias and Alpha Bank's Long- and Short-Term Issuer Default Ratings to 'RD' from 'CCC' and 'C', respectively, following the announcement of bank holidays and capital controls, mainly restrictions on deposit withdrawals in Greece. Fitch has also downgraded these banks' Viability Ratings to 'f' from 'ccc'.