ThePost.ieECB warns against debt relief for borrowers 16 May 2010 By David Clerkin Markets Correspondent
The ECB has warned that it will not allow individual EU member states to introduce debt forgiveness programmes for over indebted borrowers if they do not include stringent rules to avoid so-called ‘moral hazard’.
The Frankfurt-based institution signalled that any initiatives aimed at providing relief for over-borrowed individuals would have to include ‘‘the right incentives to debtors . . . to service their debts appropriately’’.
In a formal opinion issued on a proposal from the Greek government to seek debt relief for borrowers who could not service their loans, the ECB said any solution to these borrowers’ problems ‘‘should contain sufficient safeguards to avoid moral hazard’’.
The opinion signalled that the ECB would not tolerate setting a precedent that borrowers would be permitted to pass on the bill for their borrowings to their government or fellow taxpayers.
The bank, headed by Jean Claude Trichet, also warned of potential adverse consequences from government moves to allow debtors to seek relief from their debts. It said any suggestion that borrowers would not be held responsible for their previous commitments could result in future borrowers taking on excessive commitments, on the basis that they too could expect a taxpayer bailout if they got into difficulty.
‘‘This could have serious adverse consequences on banks’ capital and liquidity positions, as well as on the overall cost of financing," the ECB said.
