An Irish model that forgives part of debts to banks

Local banks have another instrument at their disposal in their efforts to tackle the issue of nonperforming loans, and particularly the mortgages that form the bulk of the problem for Greek households.

The new tool is a model that has already been extensively implemented by Irish banks with absolutely satisfactory results. The Irish model, which is already being employed by domestic lenders, provides for the splitting of each bad loan into two parts: The first, which amounts to the commercial value of the property that the loan is secured on, will have to be paid off; while the second is frozen and then written off when the first part is paid off.

The arrangement can be adjusted on the basis of what each debtor is able to actually pay. A vital condition is that the debtors service their main debts in the first part of the split loan.

Debt arrangements make financial sense right now, as the new programs banks have been working with since the start of the year – and are being promoted to borrowers through their branch networks – provide for the first time for forgiveness of part of the loan, reversing the official line of banks that loans with collateral cannot undergo a haircut.