12 ms·

Let's just look at the predictable consequences of this move: 1) Banks and other corporations will never lend money to poor people again. Full stop. If there i

Let's just look at the predictable consequences of this move: 1) Banks and other corporations will never lend money to poor people again. Full stop. If there is a chance that the government will write off that debt (effectively stealing future earnings from banks) for these loans, banks just won't issue them. Say goodbye to educational loans, healthcare loans, car loans. Say goodbye to home loans and mortgages. If you're poor, you just became a ward of the state. And you thought being in debt was bad... 2) If a legitimate institution do want to lend money to poor people, interest rates will skyrocket to compensate for this additional government-cancellation risk. If they skyrocket above usury laws, then legitimate institutions will no longer be in the market and the job of lending at-risk capital will turn to the black market. Look out for loan sharks and indentured servitude, including sex slavery, on the rise in Croatia in the future. 3) The money has to come from somewhere--it isn't free. By canceling $31M in debt, the government is causing $31M in losses to corporations and institutions that were owed that money. That means $31M less in spending, economic growth, job creation, not to mention taxes, which will have to go up to compensate for the loss. These taxes (or inflation) will hit the poorest people while the rich horde more money or offshore it to prevent it being taken away. 4) Lending is the foundation of economic growth, especially for the poor, by allowing borrowers to leverage their limited assets in exchange for future earnings. All things being equal, people will borrow money smartly or stupidly, but the consequences, good or bad, are faced by the people who borrow. If the government cancels debt, it is incentivizing bad borrowing and making it harder for good borrowers to get the capital they need. It's the worst kind of pandering to the voters with long-term destructive consequences to the people of Croatia. In other words, exactly what you'd expect from politicians. Keep up the good work!

lifeformed 12y ago
Unless I'm reading this wrong, isn't this good for banks? The gov't is paying the debts, not just declaring them gone. The banks get everything back.
- gnoway 12y ago
  No. The article points out that the lenders will not be reimbursed.
  - lifeformed 12y ago
    What's the $31-300M cost going towards then?
stefantalpalaru 12y ago
> Say goodbye to educational loans, healthcare loans, car loans. Say hello to life outside the US. In most of Europe you don't need loans to get an education, healthcare or to buy a car.
- baddox 12y ago
  How do poor people in Europe get cars? Or are you saying they don't need them?
  - hellbanner 12y ago
    Public transportation is quite good in Europe compared to say, the USA, where car companies purchased intranational train tracks, dismantled them for highways http://en.wikipedia.org/wiki/General_Motors_streetcar_conspiracy http://en.wikipedia.org/wiki/General_Motors_streetcar_conspi...
    - baddox 12y ago
      I suspect Europe's population density being 3 times that of the USA doesn't hurt either.
      - WildUtah 12y ago
        National population density is irrelevant. US population is just as urban as Europe. The lower USA average mostly reflects the southwest deserts and Alaska where very little rural population exists. The low density of car-oriented US suburbs was mandated by socialist central land use planning from Washington and the motorcar industry that wanted to require Americans to each own a car. Standards were written centrally and local governments were required to make them law with grants, national bank regulations that required them for lending, and professional standards organizations that made civil engineers agree to them for licensure. The more market driven land use in European cities promotes walking and transit more than personal motoring.
  - _cudgel 12y ago
papaf 12y ago
Say goodbye to educational loans, healthcare loans, car loans You make a good point and I do not want to undermine it. However, it is worth pointing out that people don't have to take out educational and healthcare loans in most of the civilised world (Croatia included).
- WildUtah 12y ago
  And very, very few people in the civilized world outside the US and Canada need cars or car loans because most first world countries have efficient transit systems that work well and go everywhere.
  - toomuchtodo 12y ago
    Not sure why you're downvoted. Its true. And as ride shares like Uber take off, car ownership will continue to decline. Self-driving cars? Even more so.
IkmoIkmo 12y ago
It appears banks and corporations were part of this decision. They decided to wipe the debt on their own, urged by the government. We're talking about poor people who are very likely unable to pay off their debt. Why? It only applies to people whose monthly income is $138, try paying your rent, food etc on that, and then pay off a debt whose interest alone would already be a significant chunk of your monthly income. Interest rates already account for these risks and banks have largely already written off these loans as money that won't be paid back. The notion that these were awesome loans that would get paid back and suddenly get cancelled just isn't true. Which is why interest rates aren't likely to skyrocket and why they don't constitute losses, they have already materialized even if the debt isn't cancelled. Talks of the poor being burdened by taxes the hardest, come on. First, it's just 0.75% of debt. Second, the revenue on this is minimal. If you borrow $100 at a 10% interest rate that's $10 of interest revenue (the rest is principal paid back), and that $10 interest revenue is then taxed at say 20% capital gains tax. So if 0.75% of the debt is cancelled, that's only 0.015% lost tax revenue from debt, it's not going to cause any national tax disasters for the poor. Especially because, again, these loans weren't going to get paid off anyway, it doesn't change much in extra losses. On the contrary, cancelling 0.75% of the debt makes 20% of the indebted debt-free. They become economic actors again, who previously had no access to their bank account and no room to make personal investments into education or small enterprise. Things you mentioned like sex slavery are more likely to drop because of this than anything else. Lastly, your point on smart/stupid borrowing, we're talking about a country which was extremely hard-hit by the crisis, one which the PhDs and CEOs at the top financial institutions didn't see coming any better than the world's dumbest person. We mustn't assume 20% of the indebted people who will become economic actors again were borrowing for gambling, it seems like a lot of these people have been put into economic paralysis due to a crisis just like the large financial institutions, yet the large corporations and banks got bailed out and they weren't. And they're in no position to pull themselves out of this with a blocked off bank account and less than $138 in monthly income. So what's the solution? Ask corporations to do the right and smart thing: write-off 1% of your debts that you had already written off anyway, turn 20% of your debtors into economic actors again who regain buying power, start businesses and participate in the economy, get good will from the public and government and get your country on the road again. I fully appreciate that this isn't black and white and there are definite cons, but it seems to me to be a positive decision on aggregate. I think it helps to see it as an investment. Imagine you take 0.75% of your debt, the bottom 0.75% that was extremely likely to ever get paid off, the part that was already part of your cashflow and solvency modelling and whose likely potential losses have already been accounted for. Then take that amount, and go to the board and say, we can invest this amount, buy legal good-will from the government, buy good-will/marketing from our national customer base, and we get access to a new market increasing our long-term customers by a substantial percentage (20% of its debtors). The cost? Just forgo 0.75% of the debt that wasn't actually going to make us much money anyway. That's why corporations chose this themselves, it's not a bad idea for them. Or, keep bank accounts frozen for 20% of the indebted people who got hit by the financial crisis and make $138 a month, bail out financial institutions, and try to run a country where a significant portion of your population are so paralyzed by debts that they turn to sources of income which won't be taxed or absorbed immediately by debt-payback, the type of jobs paid in cash, the criminal kind, the exploitative kind, the kind that's not taxed, that doesn't create jobs or small to medium sized enterprises, the kind that increases costs of policing and regulations, the kind that increases the class divide and pits people against each other. And do exactly to the poorest (leave them to figure it out by themselves) what we weren't willing to do to our largest companies (who we bailed out because it made more sense than to let things crash and burn out of a fetish for non-interventionism market principles right after an economic crisis.
JamisonM 12y ago
Most of this is fairly incorrect. The risks involved lending money to poor people are largely unchanged by this and the bottom lines of all of the businesses involved are essentially unchanged. All of these outstanding amounts are delinquent as the people being relieved of these debts have to have been in financial trouble for at least 12 months by the conditions set out in the program. This means that all of these debts were long-since written off, the risks of these losses already worked into the lending rates and credit qualification cutoffs. It is actually, by most accounting standards, kinda "free".
- swatow 12y ago
  The economic gain of writing off this kind of debt has to be balanced against the moral hazard effect on future borrowers. Also, it's not clear that you are correct that this debt was largely written off. Certainly the banks didn't expect 100% recovery, but perhaps they expected a nontrivial amount. I'm not an expert in these tradeoffs, but the one economist interviewed in the article said: I am not sure that this is the best way to help low-income people. If lenders think this can happen again they will charge very high interest rates to low-income borrowers
  - JamisonM 12y ago
    The debts have to be over a year old, by any reasonable banking standards (even unreasonable ones) those are NPAs, by any accounting standard they are deemed receivables that will not be recovered. They've been written off. This is why I contend that Mr. Baker's statements are likely incorrect. The fact that these receivables/debt would be written off is essentially written into the law. Most here also do not note that the balances here are also, by design, small as well. One can argue that there might be some fear that next time the income requirements will be higher, the debt threshold increased, to make a future forgiveness a problem for companies that carry these assets. I accept that this has some merit but I think most overstate it. (Offsetting this risk in large part is the fact that Croatia has joined the EU recently, foreign banks and companies will have recourse should such a thing happen in future and if such a measure were to hurt them no doubt they would use it.)
j_lev 12y ago
If it just causes banks to not extend consumer debt to poor people then at the risk of sounding like Daddy Knows Best it might not be such a bad thing. Keep in mind these are small debts. Not like a home loan (ignoring the edge case of the person who paid off 95% of their home loan but can't pay off the last couple of thousand dollars). If it's just credit card debt left over from a plasma TV purchase then once-bitten-twice-shy banks not extending these kind of loans to the poor any more could force the poor to save money required before making a purchase in future. Having said that, I'm thinking out loud here and not convinced of it myself. Mainly because whenever the government steps in like this it means that someone somewhere is getting screwed. Agree that the free (black) market will move to fill the gap.
nhaehnle 12y ago
Banks and other corporations will never lend money to poor people again. Keep in mind that many countries have laws that allow private individuals to declare bankruptcy and default on their debt. Yet, banks still lend money to poor people in those countries. Banks will factor the possibility into their costs (and hence interest rates), and it might reduce their willingness to lend slightly, but this is far from the picture you're painting. All things being equal, people will borrow money smartly or stupidly, but the consequences, good or bad, are faced by the people who borrow. There is a saying that goes something like this: If somebody owes you 100€, it's their problem. If somebody owes you 100 million €, it's your problem. A loan is a two-way street, and it makes good (social, moral, economic, game-theoretic) sense that the lenders also face part of the consequence.
analog31 12y ago
It could be that the loans were unlikely to be repaid anyway, like "sub prime" mortgages in the US. The banks could benefit in the long run by being allowed to write down these loans rather than holding fake assets on their books.
raffomania 12y ago
Did you read the entire article? > Prime Minister Zoran Milanovic has convinced multiple cities, public and private companies, the country's major telecommunications providers, as well as nine banks to clear some of their citizens of their debt. This means that the losses happen with consent of the corporations involved.
- hnnewguy 12y ago
  >convinced I wouldn't put much stake in that. What choice do you have when the government is trying to "convince" you to do something? You play ball.
- ptaipale 12y ago
  There's consent and there's consent. Like as a shop owner I consent to give some money to a don, because it would be such a shame if my business burned down. Not saying that the convincing is necessarily done via threats, or is a bad thing at all, but "convincing" has many meanings.
- mseebach 12y ago
  Well, it's vague at best. If, indeed, the case is that these institutions voluntarily did cancel some debt, first, they have abysmal PR teams, letting the PM run with the credit for it. Second, the headline is just wrong. "Croatia" didn't do anything, a number of creditors did. Third, it's unlikely that all poor debtors had all their debt to these creditors, and any debt to creditors not participating in the scheme would not have been cancelled. Either that, or the somewhat more plausible explanation, that the word "convinced" just doesn't quite describe the process that is taking place.
ChuckMcM 12y ago
I had similar thoughts but then I reconsidered. In theory banks price risk using interest rates. That is to say that high risk individuals have to pay a higher interest rate on their debt than lower risk individuals. This reflects the banks concern that they won't get paid back. If they (the banks) are doing their jobs right then having their highest risk people default is already covered by the interest rates other less risky clients are paying. The trick though is actually making the bank take the loss which is something they have worked around with the help of the various governments. And that is where we get a conflict of interest where the bank is pricing the loans with the expected risk but actually taking much less risk due to government back stops. That difference is, as you would expect, profit for the bank.
- swatow 12y ago
  Banks do take the loss via bankruptcy, or people just not repaying. If the banks had lobbied the government to repay these debts with taxpayer money, I would agree that this was trying to eat their cake and have it. But the government's actions go too far in the other direction. They impose a loss on the banks that the banks would never have expected or priced in.
JetSpiegel 12y ago
$31M is such a drop in the ocean of debt, that overall the effect should be near nil. But individually, if the interest payments make up a significant part of your budget, this is a very helpful.
karmacondon 12y ago
Others have pointed out some of the flaws in this reasoning, but I want go over some of the obvious critiques again: 1 & 2) There will be no "full stop" on lending money to poor people. If you're a bank and you're managing say $1B, some percentage of that is allocated to high risk loans. Your job is to make money from lending money, and there are only so many borrowers. Banks don't lend money to poor people out of altruism, but because they have to make enough money from interest to at least beat inflation. They'll continue to make high risk loans until they have some new pool of borrowers to replace them, albeit at higher interest rates now. Most of the people relieved by this cancellation didn't have a very good chance of being approved for a loan anyway. Now their chances will be somewhat reduced, but not completely eliminated. 3) The $31MM didn't disappear, it was effectively removed from the balance sheets of the debtors. If some of them eventually get jobs and build assets, that money will reappear in the economy but be distributed to different businesses. Instead of the banks receiving that $31MM from their paychecks, they'll spend it on food or gas or whatever. Probably still a net loss, but not of the whole $31MM and instead some fraction of it. 4) The concept of moral hazard is a real thing, but it's effects on any given economy vary wildly. In general, most people don't think "Well the government bailed us out once, so I'll borrow way more than I can afford and just hope that they do it again.". It's possible and I can understand why someone would believe it to be a problem, but it's far from being a law of physics or even economics. In short, the Croatian government and their finance ministers/advisers probably aren't stupid. They have actual data and a knowledge of their own people and situation to go on. They aren't just playing armchair economist. And though I couldn't name one of them, I'm willing to bet that they thought this move through. Doesn't mean that there won't be any of the dire consequences that you've predicted here, but they've probably weighed the odds more carefully than you think.
- ahomescu1 12y ago
  > In short, the Croatian government and their finance ministers/advisers probably aren't stupid. They have actual data and a knowledge of their own people and situation to go on. They aren't just playing armchair economist. And though I couldn't name one of them, I'm willing to bet that they thought this move through. Doesn't mean that there won't be any of the dire consequences that you've predicted here, but they've probably weighed the odds more carefully than you think. Or they're a bunch of politicians trying to score a win in the next election, by any means necessary.
afterburner 12y ago
3) The money has to come from somewhere--it isn't free. By canceling $31M in debt, the government is causing $31M in losses to corporations and institutions that were owed that money. That means $31M less in spending, economic growth, job creation, not to mention taxes, which will have to go up to compensate for the loss. These taxes (or inflation) will hit the poorest people while the rich horde more money or offshore it to prevent it being taken away. Apparently you're not looking at both side of the ledger. The 31 million didn't disappear, it just stayed with the poor. So the poor have (had) 31m more to spend. And poor people do spend all their money, most likely on products that corporations sell. So this was effectively a stimulus measure supported by a tax on lenders. I also don't see why you can think of raising taxes on the poor, but not on corporations. In fact, the government could easily raise taxes only on corporations. They may even have considered this, but the whole debt forgiveness thing is actually preferable to corporations since it's a one time thing.
- shard972 12y ago
  > In fact, the government could easily raise taxes only on corporations. There is no such thing as a tax that will ONLY be paid by corporations. They are either paid by the employee's, the customers or the shareholders. So all you are doing is giving shareholders a chance to distribute that tax amongst the three groups at their own discretion.
_greim_ 12y ago
I'm not an economic expert but all these points seem plausible except I was wondering about this one: > $31M less in spending, economic growth, job creation... Wouldn't there also be a corresponding $31M increase in spending from the people who got their debts canceled, making it a wash? They'll spend it quickly I'd imagine, on food or other necessities. Just the money would flow into the economy via a different route.
puerto 12y ago
Four years ago, Croatian government subsidised loans for buying properties. They used public money to help people without any savings to go in debt, so they can buy houses. Why? Because during the construction bubble, banks invested a lot in buildings that can't be sold (world crisis hit). Under disguise of helping young people getting their first property, they helped banks get rid of the dead capital and earn more money on loans. Subsidies went for interests for the first four years of payment. What about rational hard working people who saved and didn't need a loan? They got nothing. Why this wasn't in Washington Post? Government paying you to go in debt in a country high in debt isn't controversial, but banks cancelling it for people who can't pay it off is? You think this move is bad for the banks and telco's? I bet it was their idea in the first place, government is too impotent and incompetent for anything. Throwing whole families out on the street is bad PR, for them and the government, and this way they can pay it off with some change money they were never going to see anyway.
michaelkeenan 12y ago
> Let's just look at the predictable consequences...Banks and other corporations will never lend money to poor people again. Full stop. I'd like to bet against that prediction. I suggest $100 to the winner's favorite charity at even odds? I predict that one year from now, I'll be able to find an example of a Croatian corporation having loaned money to a Croat with income below 1,250 kuna. My contact details are in my profile.
pvaldes 12y ago
Most poor people pay his debts. 1 The bussiness of the banks is to lend money to poor people, Rich people don't need to pay interests, they have lots of money yet. The bank can choose to lend to poor and maybe to earn money or to not risk a single dollar, not earn money, and probably dissapear. You can skyrocket the interest rates all that you want and feel like the big bad bank, but if you put the level too high the people simply will stop entering your bank. You are useless now. People will find another way, and now you are just a dead shark. 2 The money was stolen by rich people, not by the poors, and the bankers know this perfectly.
rospaya 12y ago
You're wrong on almost all points because you're not seeing the primary reason this measure went through - the banks, telecoms and utility companies would never see the money anyway. This covers only people in crushing poverty and then just a fraction of them. Most importantly, the companies agreed to this, it wasn't forced by the government.

lifeformed 12y ago

Unless I'm reading this wrong, isn't this good for banks? The gov't is paying the debts, not just declaring them gone. The banks get everything back.

gnoway 12y ago
No. The article points out that the lenders will not be reimbursed.
- lifeformed 12y ago
  What's the $31-300M cost going towards then?

stefantalpalaru 12y ago

> Say goodbye to educational loans, healthcare loans, car loans. Say hello to life outside the US. In most of Europe you don't need loans to get an education, healthcare or to buy a car.

baddox 12y ago
How do poor people in Europe get cars? Or are you saying they don't need them?
- hellbanner 12y ago
  Public transportation is quite good in Europe compared to say, the USA, where car companies purchased intranational train tracks, dismantled them for highways http://en.wikipedia.org/wiki/General_Motors_streetcar_conspiracy http://en.wikipedia.org/wiki/General_Motors_streetcar_conspi...
  - baddox 12y ago
    I suspect Europe's population density being 3 times that of the USA doesn't hurt either.
    - WildUtah 12y ago
      National population density is irrelevant. US population is just as urban as Europe. The lower USA average mostly reflects the southwest deserts and Alaska where very little rural population exists. The low density of car-oriented US suburbs was mandated by socialist central land use planning from Washington and the motorcar industry that wanted to require Americans to each own a car. Standards were written centrally and local governments were required to make them law with grants, national bank regulations that required them for lending, and professional standards organizations that made civil engineers agree to them for licensure. The more market driven land use in European cities promotes walking and transit more than personal motoring.
- _cudgel 12y ago

papaf 12y ago

Say goodbye to educational loans, healthcare loans, car loans You make a good point and I do not want to undermine it. However, it is worth pointing out that people don't have to take out educational and healthcare loans in most of the civilised world (Croatia included).

WildUtah 12y ago
And very, very few people in the civilized world outside the US and Canada need cars or car loans because most first world countries have efficient transit systems that work well and go everywhere.
- toomuchtodo 12y ago
  Not sure why you're downvoted. Its true. And as ride shares like Uber take off, car ownership will continue to decline. Self-driving cars? Even more so.

IkmoIkmo 12y ago

It appears banks and corporations were part of this decision. They decided to wipe the debt on their own, urged by the government. We're talking about poor people who are very likely unable to pay off their debt. Why? It only applies to people whose monthly income is $138, try paying your rent, food etc on that, and then pay off a debt whose interest alone would already be a significant chunk of your monthly income. Interest rates already account for these risks and banks have largely already written off these loans as money that won't be paid back. The notion that these were awesome loans that would get paid back and suddenly get cancelled just isn't true. Which is why interest rates aren't likely to skyrocket and why they don't constitute losses, they have already materialized even if the debt isn't cancelled. Talks of the poor being burdened by taxes the hardest, come on. First, it's just 0.75% of debt. Second, the revenue on this is minimal. If you borrow $100 at a 10% interest rate that's $10 of interest revenue (the rest is principal paid back), and that $10 interest revenue is then taxed at say 20% capital gains tax. So if 0.75% of the debt is cancelled, that's only 0.015% lost tax revenue from debt, it's not going to cause any national tax disasters for the poor. Especially because, again, these loans weren't going to get paid off anyway, it doesn't change much in extra losses. On the contrary, cancelling 0.75% of the debt makes 20% of the indebted debt-free. They become economic actors again, who previously had no access to their bank account and no room to make personal investments into education or small enterprise. Things you mentioned like sex slavery are more likely to drop because of this than anything else. Lastly, your point on smart/stupid borrowing, we're talking about a country which was extremely hard-hit by the crisis, one which the PhDs and CEOs at the top financial institutions didn't see coming any better than the world's dumbest person. We mustn't assume 20% of the indebted people who will become economic actors again were borrowing for gambling, it seems like a lot of these people have been put into economic paralysis due to a crisis just like the large financial institutions, yet the large corporations and banks got bailed out and they weren't. And they're in no position to pull themselves out of this with a blocked off bank account and less than $138 in monthly income. So what's the solution? Ask corporations to do the right and smart thing: write-off 1% of your debts that you had already written off anyway, turn 20% of your debtors into economic actors again who regain buying power, start businesses and participate in the economy, get good will from the public and government and get your country on the road again. I fully appreciate that this isn't black and white and there are definite cons, but it seems to me to be a positive decision on aggregate. I think it helps to see it as an investment. Imagine you take 0.75% of your debt, the bottom 0.75% that was extremely likely to ever get paid off, the part that was already part of your cashflow and solvency modelling and whose likely potential losses have already been accounted for. Then take that amount, and go to the board and say, we can invest this amount, buy legal good-will from the government, buy good-will/marketing from our national customer base, and we get access to a new market increasing our long-term customers by a substantial percentage (20% of its debtors). The cost? Just forgo 0.75% of the debt that wasn't actually going to make us much money anyway. That's why corporations chose this themselves, it's not a bad idea for them. Or, keep bank accounts frozen for 20% of the indebted people who got hit by the financial crisis and make $138 a month, bail out financial institutions, and try to run a country where a significant portion of your population are so paralyzed by debts that they turn to sources of income which won't be taxed or absorbed immediately by debt-payback, the type of jobs paid in cash, the criminal kind, the exploitative kind, the kind that's not taxed, that doesn't create jobs or small to medium sized enterprises, the kind that increases costs of policing and regulations, the kind that increases the class divide and pits people against each other. And do exactly to the poorest (leave them to figure it out by themselves) what we weren't willing to do to our largest companies (who we bailed out because it made more sense than to let things crash and burn out of a fetish for non-interventionism market principles right after an economic crisis.

JamisonM 12y ago

Most of this is fairly incorrect. The risks involved lending money to poor people are largely unchanged by this and the bottom lines of all of the businesses involved are essentially unchanged. All of these outstanding amounts are delinquent as the people being relieved of these debts have to have been in financial trouble for at least 12 months by the conditions set out in the program. This means that all of these debts were long-since written off, the risks of these losses already worked into the lending rates and credit qualification cutoffs. It is actually, by most accounting standards, kinda "free".

swatow 12y ago
The economic gain of writing off this kind of debt has to be balanced against the moral hazard effect on future borrowers. Also, it's not clear that you are correct that this debt was largely written off. Certainly the banks didn't expect 100% recovery, but perhaps they expected a nontrivial amount. I'm not an expert in these tradeoffs, but the one economist interviewed in the article said: I am not sure that this is the best way to help low-income people. If lenders think this can happen again they will charge very high interest rates to low-income borrowers
- JamisonM 12y ago
  The debts have to be over a year old, by any reasonable banking standards (even unreasonable ones) those are NPAs, by any accounting standard they are deemed receivables that will not be recovered. They've been written off. This is why I contend that Mr. Baker's statements are likely incorrect. The fact that these receivables/debt would be written off is essentially written into the law. Most here also do not note that the balances here are also, by design, small as well. One can argue that there might be some fear that next time the income requirements will be higher, the debt threshold increased, to make a future forgiveness a problem for companies that carry these assets. I accept that this has some merit but I think most overstate it. (Offsetting this risk in large part is the fact that Croatia has joined the EU recently, foreign banks and companies will have recourse should such a thing happen in future and if such a measure were to hurt them no doubt they would use it.)

j_lev 12y ago

If it just causes banks to not extend consumer debt to poor people then at the risk of sounding like Daddy Knows Best it might not be such a bad thing. Keep in mind these are small debts. Not like a home loan (ignoring the edge case of the person who paid off 95% of their home loan but can't pay off the last couple of thousand dollars). If it's just credit card debt left over from a plasma TV purchase then once-bitten-twice-shy banks not extending these kind of loans to the poor any more could force the poor to save money required before making a purchase in future. Having said that, I'm thinking out loud here and not convinced of it myself. Mainly because whenever the government steps in like this it means that someone somewhere is getting screwed. Agree that the free (black) market will move to fill the gap.

nhaehnle 12y ago

Banks and other corporations will never lend money to poor people again. Keep in mind that many countries have laws that allow private individuals to declare bankruptcy and default on their debt. Yet, banks still lend money to poor people in those countries. Banks will factor the possibility into their costs (and hence interest rates), and it might reduce their willingness to lend slightly, but this is far from the picture you're painting. All things being equal, people will borrow money smartly or stupidly, but the consequences, good or bad, are faced by the people who borrow. There is a saying that goes something like this: If somebody owes you 100€, it's their problem. If somebody owes you 100 million €, it's your problem. A loan is a two-way street, and it makes good (social, moral, economic, game-theoretic) sense that the lenders also face part of the consequence.

analog31 12y ago

It could be that the loans were unlikely to be repaid anyway, like "sub prime" mortgages in the US. The banks could benefit in the long run by being allowed to write down these loans rather than holding fake assets on their books.

raffomania 12y ago

Did you read the entire article? > Prime Minister Zoran Milanovic has convinced multiple cities, public and private companies, the country's major telecommunications providers, as well as nine banks to clear some of their citizens of their debt. This means that the losses happen with consent of the corporations involved.

hnnewguy 12y ago
>convinced I wouldn't put much stake in that. What choice do you have when the government is trying to "convince" you to do something? You play ball.
ptaipale 12y ago
There's consent and there's consent. Like as a shop owner I consent to give some money to a don, because it would be such a shame if my business burned down. Not saying that the convincing is necessarily done via threats, or is a bad thing at all, but "convincing" has many meanings.
mseebach 12y ago
Well, it's vague at best. If, indeed, the case is that these institutions voluntarily did cancel some debt, first, they have abysmal PR teams, letting the PM run with the credit for it. Second, the headline is just wrong. "Croatia" didn't do anything, a number of creditors did. Third, it's unlikely that all poor debtors had all their debt to these creditors, and any debt to creditors not participating in the scheme would not have been cancelled. Either that, or the somewhat more plausible explanation, that the word "convinced" just doesn't quite describe the process that is taking place.

ChuckMcM 12y ago

I had similar thoughts but then I reconsidered. In theory banks price risk using interest rates. That is to say that high risk individuals have to pay a higher interest rate on their debt than lower risk individuals. This reflects the banks concern that they won't get paid back. If they (the banks) are doing their jobs right then having their highest risk people default is already covered by the interest rates other less risky clients are paying. The trick though is actually making the bank take the loss which is something they have worked around with the help of the various governments. And that is where we get a conflict of interest where the bank is pricing the loans with the expected risk but actually taking much less risk due to government back stops. That difference is, as you would expect, profit for the bank.

swatow 12y ago
Banks do take the loss via bankruptcy, or people just not repaying. If the banks had lobbied the government to repay these debts with taxpayer money, I would agree that this was trying to eat their cake and have it. But the government's actions go too far in the other direction. They impose a loss on the banks that the banks would never have expected or priced in.

JetSpiegel 12y ago

$31M is such a drop in the ocean of debt, that overall the effect should be near nil. But individually, if the interest payments make up a significant part of your budget, this is a very helpful.

karmacondon 12y ago

Others have pointed out some of the flaws in this reasoning, but I want go over some of the obvious critiques again: 1 & 2) There will be no "full stop" on lending money to poor people. If you're a bank and you're managing say $1B, some percentage of that is allocated to high risk loans. Your job is to make money from lending money, and there are only so many borrowers. Banks don't lend money to poor people out of altruism, but because they have to make enough money from interest to at least beat inflation. They'll continue to make high risk loans until they have some new pool of borrowers to replace them, albeit at higher interest rates now. Most of the people relieved by this cancellation didn't have a very good chance of being approved for a loan anyway. Now their chances will be somewhat reduced, but not completely eliminated. 3) The $31MM didn't disappear, it was effectively removed from the balance sheets of the debtors. If some of them eventually get jobs and build assets, that money will reappear in the economy but be distributed to different businesses. Instead of the banks receiving that $31MM from their paychecks, they'll spend it on food or gas or whatever. Probably still a net loss, but not of the whole $31MM and instead some fraction of it. 4) The concept of moral hazard is a real thing, but it's effects on any given economy vary wildly. In general, most people don't think "Well the government bailed us out once, so I'll borrow way more than I can afford and just hope that they do it again.". It's possible and I can understand why someone would believe it to be a problem, but it's far from being a law of physics or even economics. In short, the Croatian government and their finance ministers/advisers probably aren't stupid. They have actual data and a knowledge of their own people and situation to go on. They aren't just playing armchair economist. And though I couldn't name one of them, I'm willing to bet that they thought this move through. Doesn't mean that there won't be any of the dire consequences that you've predicted here, but they've probably weighed the odds more carefully than you think.

ahomescu1 12y ago
> In short, the Croatian government and their finance ministers/advisers probably aren't stupid. They have actual data and a knowledge of their own people and situation to go on. They aren't just playing armchair economist. And though I couldn't name one of them, I'm willing to bet that they thought this move through. Doesn't mean that there won't be any of the dire consequences that you've predicted here, but they've probably weighed the odds more carefully than you think. Or they're a bunch of politicians trying to score a win in the next election, by any means necessary.

afterburner 12y ago

3) The money has to come from somewhere--it isn't free. By canceling $31M in debt, the government is causing $31M in losses to corporations and institutions that were owed that money. That means $31M less in spending, economic growth, job creation, not to mention taxes, which will have to go up to compensate for the loss. These taxes (or inflation) will hit the poorest people while the rich horde more money or offshore it to prevent it being taken away. Apparently you're not looking at both side of the ledger. The 31 million didn't disappear, it just stayed with the poor. So the poor have (had) 31m more to spend. And poor people do spend all their money, most likely on products that corporations sell. So this was effectively a stimulus measure supported by a tax on lenders. I also don't see why you can think of raising taxes on the poor, but not on corporations. In fact, the government could easily raise taxes only on corporations. They may even have considered this, but the whole debt forgiveness thing is actually preferable to corporations since it's a one time thing.

shard972 12y ago
> In fact, the government could easily raise taxes only on corporations. There is no such thing as a tax that will ONLY be paid by corporations. They are either paid by the employee's, the customers or the shareholders. So all you are doing is giving shareholders a chance to distribute that tax amongst the three groups at their own discretion.

_greim_ 12y ago

I'm not an economic expert but all these points seem plausible except I was wondering about this one: > $31M less in spending, economic growth, job creation... Wouldn't there also be a corresponding $31M increase in spending from the people who got their debts canceled, making it a wash? They'll spend it quickly I'd imagine, on food or other necessities. Just the money would flow into the economy via a different route.

puerto 12y ago

Four years ago, Croatian government subsidised loans for buying properties. They used public money to help people without any savings to go in debt, so they can buy houses. Why? Because during the construction bubble, banks invested a lot in buildings that can't be sold (world crisis hit). Under disguise of helping young people getting their first property, they helped banks get rid of the dead capital and earn more money on loans. Subsidies went for interests for the first four years of payment. What about rational hard working people who saved and didn't need a loan? They got nothing. Why this wasn't in Washington Post? Government paying you to go in debt in a country high in debt isn't controversial, but banks cancelling it for people who can't pay it off is? You think this move is bad for the banks and telco's? I bet it was their idea in the first place, government is too impotent and incompetent for anything. Throwing whole families out on the street is bad PR, for them and the government, and this way they can pay it off with some change money they were never going to see anyway.

michaelkeenan 12y ago

> Let's just look at the predictable consequences...Banks and other corporations will never lend money to poor people again. Full stop. I'd like to bet against that prediction. I suggest $100 to the winner's favorite charity at even odds? I predict that one year from now, I'll be able to find an example of a Croatian corporation having loaned money to a Croat with income below 1,250 kuna. My contact details are in my profile.

pvaldes 12y ago

Most poor people pay his debts. 1 The bussiness of the banks is to lend money to poor people, Rich people don't need to pay interests, they have lots of money yet. The bank can choose to lend to poor and maybe to earn money or to not risk a single dollar, not earn money, and probably dissapear. You can skyrocket the interest rates all that you want and feel like the big bad bank, but if you put the level too high the people simply will stop entering your bank. You are useless now. People will find another way, and now you are just a dead shark. 2 The money was stolen by rich people, not by the poors, and the bankers know this perfectly.

rospaya 12y ago

You're wrong on almost all points because you're not seeing the primary reason this measure went through - the banks, telecoms and utility companies would never see the money anyway. This covers only people in crushing poverty and then just a fraction of them. Most importantly, the companies agreed to this, it wasn't forced by the government.