Almost interest-free installments on already reduced loans that thousands of borrowers are required to service are expected to result from the landmark decision of the Plenary Session of the Supreme Court, which concerns those who have been included in the Katseli Law.

Although the decision has not yet been officially issued, in practice the outcome of the presidents’ conference changes the very nature of the debt, as it radically alters the way interest is calculated, the size of the monthly installment, and the total amount to be repaid.

The scope of beneficiaries is large: it is estimated to concern around 120,000 borrowers (or at least 250,000–300,000 including guarantors) with an average loan of €70,000, who in previous years saw their restructuring plans burdened by interest charged on the principal.

The Supreme Court’s ruling, however, overturns the established practice for Katseli Law restructurings: interest will be applied only to each installment; the debt itself will not accrue interest, nor will compound interest apply. As a result, installments do not increase over time and the debt is effectively frozen.

What the debtor gains

The decision affects approximately 120,000 borrowers, but together with loan guarantors this number roughly doubles. An average Katseli Law loan is estimated at about €70,000.

See also: What the Supreme Court decision on the Katseli Law means for borrowers, banks, and servicers

To understand the difference in calculation before and after the Supreme Court’s decision, consider the following simple example:

Assume a debt of €500,000 that the court, under the Katseli Law, reduced to €120,000, payable in 300 installments—i.e., over 25 years. The court thus set a monthly installment of €400. Under the law, it also had to impose an interest rate roughly equivalent to that of a standard mortgage loan, for example 3%. Under the old method of calculation, the borrower would have had to pay an additional €300 per month in interest calculated on the outstanding balance of €120,000—i.e., €3,600 per year.

Under the new ruling, the borrower will pay only €12 per month in interest (3% on the €400 installment, not on the €120,000), i.e., €144 per year. This results in an immediate gain of €3,456 in the first year alone—a 96% reduction in interest. In other cases, lawyers representing borrowers have stated that the benefit can be even greater: for example, where banks demanded €700 for a €400 installment, or €615 for a €264 installment, meaning that for a reduced loan of €90,000 they ended up demanding as much as… €230,000.

What the Supreme Court ruled

At the heart of the issue lies a “structural flaw” and a drafting ambiguity in the Katseli Law. This law (Law 3869/2010) provides that servicing the debt is subject to interest and is not interest-free. However, it does not clarify whether interest is applied to the installment—as is now being ruled—or to the outstanding balance of the debt, as argued by the alternative interpretation. In addition, it requires the judge to determine the interest rate based on “customary” mortgage loan rates, which are designed to be calculated on the outstanding principal.

This ambiguity led in practice to court-set installments being inflated dramatically and to contradictory court rulings.

As a result, as early as last year, the Magistrates’ Court of Ioannina (15 years after the Katseli Law was enacted) submitted a preliminary question to the Supreme Court on how it should proceed in one of the many cases it was hearing:

• Should it set interest on the installment, as a literal reading of Article 9 of the Katseli Law suggests, or
• Should it apply interest to the outstanding balance of the debt, as would align with the financial logic of loan agreements—leading to a more than doubling of the monthly installment?

The position that prevailed in the presidents’ conference (by a reported vote of 35–12) appears to have taken into account that “interest should be calculated on the monthly installment and not on the principal of the debt, because in this way it aligns with the primary purpose of Law 3869/2010, namely addressing the serious economic and social problems caused by the over-indebtedness of natural persons and relieving over-indebted borrowers of their debts.”

In other words, the decision “fills” the gap in the law by interpreting its core purpose—without, however, being able to consider other solutions not provided for in the law, such as applying a haircut after calculating interest.

What happens next

In practical terms, freezing the debt and applying interest only to the installment provides borrowers with greater financial relief, enabling them to repay their obligations under more favorable terms.

However, the decision applies only to restructured loans that have been included under the Katseli Law. The law was temporary from the outset and has expired for years. Any discussion regarding other loans currently has no legal basis—at least for now, and until the final decision is issued and published.

Pending the formal drafting of the ruling, the landscape remains fluid with regard to retroactivity and the potential refund of interest.

Although it concerns contracts between private parties, the decision is also expected to affect the State due to “Hercules” securitizations amounting to €1 billion. Legal circles within the government expressed surprise at this development, commenting that the choice of “interest on the installment instead of on the debt” constitutes a “global novelty.”

Nevertheless, these issues appear minor compared to the broader risks looming over fiscal stability and banking credibility. The main concern relates to the “negative signal” sent to markets and institutions (ESM, European Commission, rating agencies), as a precedent is created for overturning established parameters through judicial decisions.

The worst-case scenario includes the risk of moral hazard: borrowers may be tempted by “sirens” promising generalized debt write-offs and stop making payments, hoping for similar treatment. Such a scenario could undermine payment culture and create significant problems for the investment climate in credit institutions—and beyond. However, it cannot be ruled out that a small number of vulnerable borrowers, who also fall under Bankruptcy Law, may seek—judicially or otherwise—to be included under this Supreme Court ruling.

The banks’ problem

On the other hand, such a development could lead banks to impose stricter lending terms in the future—offering loans only to the wealthiest borrowers, or under onerous terms for others and for shorter durations—so as to avoid these borrowers later becoming “vulnerable” and legally challenging the payment of agreed interest. At the same time, the government, having already broadened the definition of “vulnerable,” may hesitate to provide new relief measures for fear of fiscal consequences.

In practice, the Katseli Law no longer exists. However, this “grey” period until the decision is published could pose the risk that many borrowers may consider suspending loan servicing in order to pay less interest.

For them, however, the judicial outcome would be uncertain. This is because the reasoning of the Supreme Court majority in favor of applying “interest on the installment” rather than on the debt appears to be based on another significant legal parameter highlighted by rapporteurs: restructuring under the Katseli Law is not considered a “loan agreement.” Consequently, the same standards do not apply between those with Katseli Law restructurings and those with outstanding debts under active bank loan contracts.

Specifically, according to the view expressed by the rapporteurs, restructuring a debt under the relevant provisions of the law leads to a redefinition of all terms and constitutes a constitutive-type regulation of the relationship between creditor and debtor.