Debt: to forgive and forget

TALLINN - Estonia should seek the European Central Bank’s opinion before approving a bill designed to protect people who are behind on debt payments to their creditors, the country’s central bank said, reports Bloomberg.
European Union rules require Estonia to consult with the ECB on any legislation in its competency, including rules governing financial institutions, according to an October 19 letter from the central bank posted on parliament’s Web site. Estonia’s banks and employers have opposed the debt-restructuring bill, saying it will increase borrowing costs and reduce lending.

“Considering that the implementation of the present draft could have a serious effect on the financial institutions and financial stability, it would be proper, in Eesti Pank’s assessment, to carry out consultation,” the central bank said.
Estonia’s two ruling parties reached an agreement on the principles of the legislation that would allow courts to override creditors in restructuring debts of people who have temporary payment difficulties, Ken-Marti Vaher, a co-author of the draft, said in a phone interview.

The bill, mainly directed at those who are behind on mortgage payments, may be passed within a month and take effect in March or April, Vaher said. The measure, which applies to current as well as future loans, would limit borrowers’ liability to the value of their collateral.

The bill “may motivate banks to discontinue the lowering of interest margins and to curb lending,” the central bank said in its letter. “If this threat becomes reality, economic growth and reduction in unemployment will be slower than expected in coming years.”

Competition Will Help

Vaher said the risks of higher interest rates and reduced lending would be offset by competition between lenders, led by Stockholm-based Swedbank AB, SEB AB, Nordea AB and Copenhagen- based Danske Bank A/S.
“Competition worked very well when the banks were pushing out loans in 2005 and 2006, and I think it will work as well in future,” Vaher said. “To say that the debt restructuring bill will cause some major changes would go against the experience of many EU countries that have such laws.”
About 7,000 of 158,000 mortgage borrowers were behind on their payments at the end of February, Vaher said. The bill wouldn’t affect all of those people because it applies only to borrowers deemed to have temporary solvency problems, he said.

Swedbank, the biggest lender in Estonia, has asked for the forced sales of about 300 homes this year, Priit Perens, the bank’s country head, said in an interview with the Postimees newspaper on October 22.
Neighboring Latvia in July adopted a law requiring lenders to forgive the debt of private borrowers 3.5 years after they are declared bankrupt. The bill won’t hurt Nordic lenders because provisions set aside for bad loans will cover the impact of the bill, Nordea Bank AB said.