Debt forgiveness & Writedowns, one in the same?

Below is a comment made by the Regulator at UCC while talking to a group of compliance officers.

“Reform of the bankruptcy regime could allow borrowers to earn a fresh start by discharging their debt over a reasonable period of time, Mr Elderfield said. However, he cautioned against debt forgiveness for the thousands of mortgage holders currently behind with payments on their loans.

Addressing compliance officers in Cork, he said it was understandable that some people wanted to go beyond rescheduling debt to consider some form of debt forgiveness.

“However, the cost of any support will need to be borne by the taxpayers or by the banks and therefore, in many cases, effectively the taxpayer as well, and this raises questions of fairness for taxpayers who are not in debt and, at a time of immense budgetary pressure, affordability for government finances.

“There is also the risk that any scheme would create perverse incentives and in fact make the arrears problem worse by encouraging some borrowers to stop making payments”

The unusual thing about this is that both scenarios are ultimately the same, this is a circular argument.

If you create a situation where people can walk away from debt they cannot service – and then in turn somebody else takes up the balance (we are in favour of this), then the net result doesn’t change. You have a mark to market valuation and somebody somewhere buys the asset.

The differences with debt forgiveness is that there is no mark to market – it is normally a certain amount but not a percentage based upon prices drops or valuation- and that the person occupying the asset doesn’t change.

From a banking system perspective it is disingenuous to say that on one hand ‘debt forgiveness’ will be a cost imposed on other people who are paying their loans, when writedowns on unpaid loans does precisely the same thing. They are one in the same, the costs become embedded in the financial system.

It doesn’t matter what method you use to clear the weight of debt, the fact remains that somebody’s balance sheet has to record the loss and then take a writedown, will it be the individual, the bank, the state or the taxpayer? ‘Take your pick’ is the answer.


  1. Richard Eberle

    The banking system is unable to recycle property assets both commercial and residential due to the presence of personal guarantees given by borrowers to the banks. While this represents another layer of security (at least on paper) I would imagine in reality they contribute very little to improving loan quality in the current environment. Property prices must be marked down and recycled as quickly as possible and if the government were to ban personal guarantees on existing loans immediately it would encourage the banks to take the necessary commercial steps more expeditiously. Wishing you can get blood out of stone will not make it so. The presence of personal guarantees has done nothing to stop us getting into this mess and their presence is only delaying our ability to exit this mess.

  2. Hi Richard!

    Delighted to see you stopping by & for the comment – it makes a lot of sense actually (getting rid of personal guarantees), and it isn’t in the debate (yet – I’ll be raising this issue asap) so far and should be.

    How are things going state-side? Does the same avoidance of reality prevail or are banks getting through the trash and moving on?

    Come back soon! And if you pass this way let me know I’d love to see you in person.

  3. o This conversation is going no where. It’s lacking the place of a good leader to head the things to come out on conclusion.


    Debt Help

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