Debt relief

Debt relief is a contract between the creditor and debtor, which leads to the partial or complete termination of the affected debt. When debt relief is the most radical reorganization measure for debtors in the crisis; the intended effect is, however, highly controversial and not always occurred. Colloquially the debt is also called " haircut ".

General

In Germany and all other countries, the law assumes that debts are repaid to the creditors according to the contract. It combines in § 488 paragraph 1 BGB obtaining a loan with a repayment obligation that represents the principal obligation of the debtor. But not only the contractual repayment brings debt void, but also the adoption contract ( § 397 para 1 BGB). It means that the debt be waived in whole or in part, no longer have to be repaid. The claim ( debt ratio in the narrow sense ) goes through this contract. The whole debt ratio ( debt ratio in the broad sense ) can only be lifted by a termination agreement.

Adoption reasons

Creditors reluctant to renounce their rightful property rights. Even in the crisis of their borrowers creditors have different ways to collect their debt from the debtor. The most frequently used form is the enforcement against the movable or immovable property of the debtor that is available to creditors as recoverable assets available. The enforcement of claims for money is regulated in § § 803 ff ZPO. However, if the financial situation of the debtor so hopeless, that is not to be expected proceeds from foreclosure in the assets of the debtor - the debtor may be referred to as penniless consequently - to offer a deferral, rescheduling or as a radical form of debt relief. As a contract presupposes the adoption that both parties agree on the adoption; a unilateral waiver by the creditor takes, however, the debt ratio will not void.

Types of borrowers

If adopted in Germany of a natural person a debt, this can be done by adopting contractual agreement or statutory way of remaining debts within the personal bankruptcy under § § 286 et seq Insolvency Act. After a period of good conduct of 6 years, the competent insolvency court shall adopt the existing debt by a decision if the debtor has acted in good faith. He is thus exempt from all claims that have existed at the time of opening of insolvency proceedings against him ( § 301 Insolvency Act ).

If a private legal adoption contract is closed, ie without taking the legal route through the personal bankruptcy, then the debtors often ( against payment of a debt component ), only one contract with the clause offered in the practice of banks: "We will not proceed against the debtor ". This formulation also means a permanent waiver ( pactum de non permanent petendo ) against the debtor. However, this decree is only to have the consequence that the creditor can not proceed by way of individual enforcement against the debtor, but very well could still participate in a possible bankruptcy (according to § § 88, § 89 Insolvency Act ). Consequence of this attempt by the banks analogy must then be that all consequences of a completed bankruptcy proceedings occur when there no longer is a bank failure: The remaining liabilities may no longer be required by the creditors, and not only by the debtor, but also by his successors, such as the heirs. Otherwise, it would only this namely the renunciation of inheritance in überschuldetem estate in spite of renunciation. This Court does not yet exist. From the literature, especially on the Roman law, however, shows that an indefinite pactum de non petendo as a waiver of time may also be considered for the benefit of third parties and the heirs with effect.

If a company adopt ( incorrectly called debt waiver ) in its corporate crisis debt so incurred extraordinary book income ( " restructuring gains " ), reduce its loss. This is accompanied by an improvement in equity. A direct impact on liquidity is thus initially not connected; liquidity will continue until relieved by the lack of interest and repayment rates. For the waiving such companies, however, occurs a corresponding destruction of wealth, because it has to write off the debt on the balance sheet adopted. The depreciation in turn reduces as extraordinary expenses, the profits or increased losses, so that a corresponding decrease in equity occurs.

On a state level of debt is the last resort to avert an impending moratorium or even national bankruptcy. Highly indebted countries, especially in the context of developing countries, but also in the case of Greece, are no longer in a position to meet their debt service from central bank balances, tax revenues or current export earnings. Greece had to pay a total of 8.5 billion euros in interest and principal repayments, for which no cash was available on May 19, 2010. The scenario for this was foreshadowed: Greek banks held 40 billion euros of Greek government bonds (and only 25 billion euros of equity capital ), which would have been no longer operated by the state. This would result in a wave of bankruptcies in the Greek banking system been, which would have taken as a contagion effect, the Greek, and possibly the European economy massively. Ultimately, thereby the stability of the euro and the existence of the Eurosystem would have been questioned. Debt relief will the world - especially in developing countries - often before. An overview of the debt against the so-called 18 graduate HIPC (Heavily Indebted Poor Countries) is published by the Federal Ministry of Finance.

Types of debt relief

Legally, a distinction is made between an unconditional and a conditional immunity. The unconditional decree is not subject to any conditions. The conditional adoption usually involves the dissolving conditions of a debtor warrant. Frequently used condition is with a company in crisis, that its debts only then remain off if it can not generate profit for a certain duration. However, emergence of profits or the company becomes healthy economically otherwise, the debt issued live according to the conditions again and to be repaid.

Particularly in the area of the bonds the debtor can force a partial or total debt against the will of the individual creditor, provided in the Conditions corresponding Collective Action Clause is deposited and a majority of creditors agree to debt relief.

Trade and tax issues

Debt cancellation for operational reasons is for the creditor to the Federal Fiscal Court (BFH ), according to an expense and thus a reduction in assets. For operational reasons, the liability is waived if the adoption of the restructuring of the company is to serve the debtor. Suffice the idea of the creditor, that the adoption of the further existence of the business of the debtor is necessary.

If the creditor is a shareholder of the company in need of rehabilitation, comes as the legal basis of the debt and the corporate relationship to this into consideration. A social cause lasster adoption does not lead to a restoration profit in the company or to an appropriate rehabilitation effort when shareholder, but is - in the amount of the valuable part of the exposure - to be regarded as hidden contribution of the shareholder in the assets of the debtor company.

Effects

The decree is from the perspective of the debtor the best type of restoration, because canceled debt extinguished. Debt relief is widely regarded by the public as a rescue measure of debtors and thus as advantageous for this. The harmful consequences for creditors, Economics, and are often not considered for debtors. Creditors who give up their demands, destroy private property. The decree requires a depreciation (debt remission ), which reduces the profit as an expense item or increases the loss. This in turn leads to a reduction of shareholders' equity and thus to a weakening of their own creditworthiness. If the debt of credit institutions opposed to companies in any collateral to be transferred back. Accessory collateral as the guarantee and mortgage rights automatically, non-accessory collateral as security transfer, assignment or land charges must be retransmitted.

Also creditor nations reduce their state assets because expected revenue from the repayment of debts remain from that adopted due to lack of revenue may need to be offset by tax increases or own borrowings.

Follow

By debt relief on private expectations is connected to damage the debtor economically rehabilitated and developed a lasting debt sustainability (see also debt service capability). It is doubtful, however, whether the adoption of debtor always has only favorable developments mean. Debt affects the future creditworthiness because it is an indication of mismanagement and / or structural problems that can not be eliminated by a mere decree.

Refurbish companies reduce their debt in the medium term by the interest expenses and thus strengthen their earnings. They also improve the derecognition of liabilities issued its equity ratio. Here again, any structural deficiencies that led to the crisis are resolved.

For countries likely a general debt lead to a reduction in future capital assistance and the debtor countries do not encourage them to eliminate their structural problems, so that developing countries benefit less than expected it. Debt relief is a signal that such a moral hazard to affected debtors States acts ( " grievances are not solved - we will be helped "). Because of the moral hazard and the lack of structural changes associated not lead a debt to the expected long -term economic stabilization. Moral hazard in this context means that a state is run by a debt relief expected again excessive debt policy because he can expect to get even adopt again debt. To avoid false incentives through debt relief, debt relief should be connected with the agreement that it will no longer provide further debt relief.

The debt relief can be a credit event, if he - or upon that debt reduction - in a credit agreement, bond, or a credit default swap is mentioned. Then he where it triggers an Event of Default on the part of the creditor or the liability of the guarantor when credit default swap. Specifically, the debt of credit institutions was in the case of Greece, the subject of investigations, whether on credit default swaps, the protection seller would pay it. This has been denied by the relevant ISDA Determinations Committee in July 2011 because it is a voluntary waiver of a single group of creditors - had acted and also not a global debt - the banks.

Crisis scenario in between state debt

Frequently in the past has led to falling export earnings in developing countries, the fall in commodity prices. Marked with a variable interest rate debt of developing countries resulted in an increase in interest rates higher spending on interest rates, which could no longer be covered by export earnings in whole or in part. In addition, the debt in dollars were denominated, so in local currency due to exchange rate an increasingly higher repayment burden was required. The funds borrowed were frequently not compliant development used (high percolation through corruption, investments in economically nonsensical prestige projects, defense spending ) so that the debt burden represented an increasingly heavy burden. Excessive government spending and an expansionary monetary policy led to a loss of confidence of the citizens of the developing countries in their own currencies, resulting in a capital flight.

A current account burdensome intervention and exchange rate policies in many developing countries has often exacerbated the crisis. Your high foreign debt caused a decreasing creditworthiness, so that creditors be held back with further loans. The growth process of many developing countries was thus interrupted, so that investments are no longer amortized.

Experience with the debt relief

Experience with debt relief measures in the last 30 years give rise to skepticism. Despite various measures adoption in the 1970s, the debt of HIPC countries have increased from 47 billion U.S. $ in 1980 to 159 billion U.S. $ in 1990 to grow to 169 billion U.S. $ in 1999 on. Were issued during the heavily indebted poor countries from 1987 to 1997 debt of U.S. $ 33 billion, its debt rose in the same period to U.S. $ 41 billion. Often, new loans were taken out in order to maintain the debt service on the old loans can not be adopted. A study by the World Bank, have current of the 26 countries that have so far received debt relief, 12 countries poor prospects in the medium term to keep their debt sustainability at a sustainable level. A debt relief really aims at aims to reduce poverty in HIPC countries and improve economic growth; none of the targets has ever been achieved.

The debt burden of a country is considered to be sustainable if the ratio of foreign debt to annual export income does not exceed 150%. To export earnings have a major impact on achieving and maintaining debt sustainability. The ratio of debt / exports refers to debt in the numerator and denominator in export revenues. When export revenues fall and the debt remains the same, the debt sustainability decreases. The economic growth of some developing countries, in particular their export proceeds are not sufficient to generate sufficient foreign exchange for the maintenance of debt service ( interest and loan repayment). The main reasons are the unfavorable external economic structure with often only one or two dominant exports, further bad macroeconomic policies, a lack of transparency and accountability in the public sector, low productivity development, and counter-productive seepage.

The HIPC countries have an extremely narrow export base - most of them bear more than half of their export earnings from one to three primary goods ( raw materials ) and thus have a low degree of diversification with high revenue risks. For example, Benin generates 84% of its export revenue from the export of cotton. The world market prices of these goods have for some years on a downward trend. Other factors that led to the deterioration of the external position of the HIPC countries, were the increase in the cost of important imported goods (such as oil) and the devaluation of the currencies of HIPC countries against the U.S. dollar. The dependence on a few commodities for export is a problem for most HIPCs. In April 2002, reported by 24 HIPC countries 20 countries only three goods with over 45 % share of exports from. Trade barriers of developed countries, especially for agricultural products, make it difficult for developing countries to diversify their exports and expand. In some cases, loaded level of public investment with substantial import needs in addition the current account deficit. As a result of lower revenues and higher government spending and a lack of efficient financial planning could not work as intended to reduce its budget deficit to about half of the HIPCs. Corruption and lack of democratic control of public finances contribute significantly to the fact that it is many HIPC countries have so far failed to reduce their indebtedness sustainable.

Long-term solutions

Debtor countries must revise their particular intervention and exchange rate policy aimed at creating improved conditions for foreign direct investment, by monetary policy measures to improve domestic savings and reduce the deficits of its national budget. On the other hand, developed countries should increasingly provide technical and financial assistance and their markets open by appropriate deregulation for exports of developing countries ( Baker Plan, Brady initiative).

In order to improve their economic development, developing countries need new loans to expand their industrial capacities and for infrastructure investment and social policies.

Steps to becoming debt at States

Debt sustainability for a state, just still present when

• A debt ratio of less than 200-250 % (at present value calculation ( Net Present Value, NPV) ) of government revenue,
• A debt service coverage ratio below 20-25 % of government revenues,
• A ratio of debt (NPV) to government revenue of 280 % and high levels of control application efforts ( tax revenue / GDP > 20%)

Can be detected and the ratio

• Debt / export revenue 150%

Is not exceeded.

In order to participate in the HIPC Initiative, a country must meet certain requirements and go through three stages.

• Step 1: First of the country by the IMF and the World Bank must as "poor " and are classified as " highly indebted ". In poor is assumed that the gross national product per capita must be less than 925 U.S. dollars, requires high levels of debt that the foreign debt must be higher must be 150 % of annual export earnings, or more than 250% of government revenues.
• Level 2: have Insert countries that stage 1 is reached, in addition of the IMF / World Bank accepted concepts of good governance ( engl. good governance ) and to eradicate poverty, achieve them the so-called decision point at which them a debt service relief (removal of interest and redemptions) will be granted.
• Level 3: Can a State for a non- temporary probation its concepts to good governance and poverty reduction actually implemented successfully, it reaches the so-called completion point at the then part of its debt is actually issued.

History

Debt in Ancient Greece

Seisachtheia ( ancient Greek σεισάχθεια, debt relief ) is a term from ancient Greek law. It is mainly used in connection with the legislative reforms that BC performed Solon in Athens since 594. When Seisachtheia it came to large parts of the population who had borrowed heavily and charged her property to keep from sliding into impoverishment and slavery. The economic reforms of Solon met with the aristocracy Athens resistance. It is not exactly known to what extent he could actually prevail, as they were designed in detail and how long they were.

Mention in the Bible

Add 5 Numbers 15, 1-2 it is demanded that every seventh year shall proclaimed a so-called debt relief in Israel. Every Israelite is to " let go" of the loans that he has given.

With this concept of debt relief is strongly associated with the idea that the field can not be edited after seven years, but to lie fallow ( sabbatical ). To God be glorified as he is honored on the Sabbath.

Thus the Sabbath year and the debt is a service, it happens for God ( Moses 5 15.2 ). The social purpose was that the worst debt should be reduced. The concept of the Jubilee Year was but only within the people of Israel. Loans to foreigners remained valid.

Even in Jesus' time were known this concept. Rabbi Hillel criticized, however, that the poor did not get any more loans before the adoption year.

Debt relief as a means of policy

In the past, some states have adopted the debt. It is not just that the debtor country is freed from his debt, but also that to improve political and economic relations between the states and enters a stabilization of the overall economic situation.

Thus Germany was in February 1953 at the so-called " London Agreement " debt relief granted; DM 29.7 billion of the Federal Republic were adopted at that time. This debt was one of the causes for the subsequent economic miracle in the Federal Republic. Of historical dimension was also the debt, the G8 countries had voted in June 2005. After that was specifically intended to adopt within the next 10 years some debtor countries 700-950 million euros by the World Bank, International Monetary Fund ( IMF) and the African Development Bank. The debt relief was conditional on "good governance ", as for the fight against corruption and the sensible use of resources, such as education and healthcare. The information linked to debt relief political conditions in the highly indebted countries, the basic prerequisite to initiate structural changes that help reduce the risk of future debt.