3 ms·

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 co

by 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.)
- swatow 12y ago
  Where are you getting your claims about the recovery rate on these debts? >Most here also do not note that the balances here are also, by design, small as well. Can you explain how you think that relates to this discussion? If the debt is small, wouldn't that imply that the person was more likely to pay it off, at least in part?
  - JamisonM 12y ago
    My claims on recovery rates of debt are based on my experience in the banking industry. There are many public sources of information on this topic that you can refer to with respect to expected recovery rates of debts based on age. Provisions for these loses are written into regulations (national and international ones like Basel II/III). Small overdue amounts are very expensive to recover, if a letter costs you $1 and a phone call $1.50 you don't need very many contact attempts to make an overdue loan of $80 worth less than the cost to recover it, you certainly can not afford to send a lawyer after someone. (Again, this is from my experience related to debt collection work.)
    - swatow 12y ago
      Ok you're probably right on the cost of the writeoff, and now I see your point on the size of the debts I agree with that too. Given this, the program isn't really that unique. For example, the US has a program to help out people with high mortgage debt or underwater mortgages.

by swatow 12y ago

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.)

swatow 12y ago
Where are you getting your claims about the recovery rate on these debts? >Most here also do not note that the balances here are also, by design, small as well. Can you explain how you think that relates to this discussion? If the debt is small, wouldn't that imply that the person was more likely to pay it off, at least in part?
- JamisonM 12y ago
  My claims on recovery rates of debt are based on my experience in the banking industry. There are many public sources of information on this topic that you can refer to with respect to expected recovery rates of debts based on age. Provisions for these loses are written into regulations (national and international ones like Basel II/III). Small overdue amounts are very expensive to recover, if a letter costs you $1 and a phone call $1.50 you don't need very many contact attempts to make an overdue loan of $80 worth less than the cost to recover it, you certainly can not afford to send a lawyer after someone. (Again, this is from my experience related to debt collection work.)
  - swatow 12y ago
    Ok you're probably right on the cost of the writeoff, and now I see your point on the size of the debts I agree with that too. Given this, the program isn't really that unique. For example, the US has a program to help out people with high mortgage debt or underwater mortgages.