ECB warns against debt relief for borrowers

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.


Will NAMA be regulated by the ECB like a normal bank? I mean, the actual loans are still dealt with by the financial institutions, so will it be impossible, for example, to give debt forgiveness to developers under ECB rules without a bankruptscy (after all, whatever about bankruptscy for the average joe, anyone who fails in business and can’t pay their debts must go the bankruptscy / creditors agreement route).

Uh,-oh, if your supposition is correct, johnnyskeleton, and NAMA is included, another part of the grand bailout has been dismantled. Without a write-off of their existing NAMA debt, the great and the good won’t be able to refinance to buy back their loans at lower levels, or at least will not make money on it…

Does the ECB regulate banks?

More evidence of how Europe has sapped the Irish nation of its traditional values. Contraception. Abortion. And now the impoverishment of oligarchs.


They seem to be saying that they will from the piece in the OP, if they will not allow member states to introduce debt forgiveness measures. Otherwise it is completely pointless as Irish state will say "we are not forgiving debt, we are just giving more money to the banks and if they are forgiving debt its not our problem (aside: but we’ll take credit for it come election time).