Estonians work on reducing personal debt

TALLINN - Estonia’s ruling coalition reached an agreement on the main principles of a draft bill on restructuring debts of private citizens, Eesti Paeevaleht reported, citing the chairman of the parliament’s legal affairs’ committee, reports Bloomberg.
The bill could be passed “within a month” and take effect in March or April, Ken-Marti Vaher, a member of the junior coalition party Isamaa ja Res Publica Liit, told the newspaper. An agreement was reached after Prime Minister Andrus Ansip’s Reform Party dropped its requirement that creditors would be allowed to veto any debt restructuring by  the court, the paper said.

The bill “plans to give court judges relatively free hands to decrease debts, which means banks may decide to discontinue the lowering of interest margins and to curb lending,” the central bank said on Sept. 29. In turn, this would slow economic growth and the decline in unemployment, it said then.

At a time when the head of the Estonian government praises the low debt burden of the Estonian state, the relative debt burden of Estonian inhabitants has kept growing, now being considerably more than during the boom years, Aripaev writes. The peak of the volume of loans granted to private individuals arrived at the end of 2008, when private citizens had taken 124 billion kroons (7.9 billion euros) worth of loans and leasing.

At that time the incomes of Estonians were also the highest, 138 billion kroons. In the past two years, unemployment and wage cuts have taken a chunk off the income of private individuals. Although the net debt has also decreased, the debt burden of households as compared to usable income has kept growing. The most recent major surge lasted from spring last year to spring this year and the rush stopped in the second quarter at 94%. This is more than in France, for example.

Six years ago the loan burden in ratio to net income was three times less. Eesti Pank finance sector policy sub-department head Jana Kask said that the debt burden of Estonian private individuals is much smaller than in Scandinavia and similar to the euro area average. Kask said that it is more reasonable to evaluate the growth of debt burden or costs of servicing debt, which has decreased as interest levels have fallen. Once people’s incomes start growing, their loan payment ability will improve. Swedbank’s Institute of Private Finances head Piret Suitsu noted that due to the fall of the Euribor, the interest expenses and monthly loan payment of families who have a loan has decreased.

This has helped many families to cope with the obligations despite their reduction of income. Suitsu said that Estonian people are very diligent. “If need be, bills and loans will be paid at the expense of food or wellbeing of the family,” said Suitsu.