Debt relief

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Debt relief is a contract between a creditor and a debtor that leads to the partial or total cancellation of the debt concerned . Debt relief is the most radical restructuring measure for debtors in crisis; however, the intended effect is highly controversial and has not always occurred. Colloquially, debt relief is also known as the “haircut”.

General

In Germany and all other countries, the law assumes that debts are to be repaid to the obligee in accordance with the contract. In Section 488 (1) of the German Civil Code, it combines the granting of a loan with a repayment obligation, which is the debtor's main obligation. But not only the contractual repayment brings debts to the extinction, but also the waiver contract ( § 397 Abs. 1 BGB). It leads to the debt being wholly or partially canceled, i.e. not having to be repaid. The claim ( obligation in the narrower sense) expires with this contract. The entire contractual relationship ( obligation in the broader sense ) can only be canceled by means of a termination agreement.

The cause of debt relief is excessive borrowing by the debtor or lending by the creditor in the past (excessive debt that is not sustainably covered by income), which can be traced back to structural problems. Debt relief does not work properly and may reward mismanagement and (in the case of states) bad economic policy . Borrowing is excessive when it significantly exceeds the debtor's debt sustainability .

Reasons for remission

Creditors are reluctant to forego property rights to which they are entitled. Even when their borrowers are in crisis , creditors have various options for collecting their claims from the debtor. The most frequently chosen form is foreclosure against the debtor's movable or immovable property, which is available to the creditors as a liability. The enforcement of pecuniary claims is regulated in § § 803 ff. ZPO. However, if the debtor's financial situation is so hopeless that proceeds from foreclosure on the debtor's assets cannot be expected - the debtor can therefore be described as having no assets - deferral , debt rescheduling or the most radical form of debt relief are appropriate. As a contract, the decree requires that both contracting parties agree on the decree; a unilateral waiver by the obligee does not, however, terminate the obligation.

Types of debtors

If a natural person is forgiven a debt in Germany , this can be done contractually by way of the waiver contract or legally by way of the discharge of residual debt within private insolvency according to § § 286 ff. InsO . After a period of good conduct of 6 years, the competent bankruptcy court will release the existing debts by resolution if the debtor has behaved honestly. He is thus released from all claims that existed against him at the time the insolvency proceedings were opened ( Section 301 InsO).

If a private law waiver contract is concluded, i.e. without taking the legal route through personal insolvency, in practice banks often only offer the debtor a contract (against payment of a portion of the debt) with the clause: “We will not proceed against the debtor ". This wording also means an unlimited waiver of claims (unlimited pactum de non petendo ) against the debtor. The only consequence of this decree is that the obligee can no longer proceed by way of individual enforcement against the debtor, but could very well still participate in a conceivable overall enforcement (according to § § 88 , § 89 InsO). The consequence of this analogy attempted by the banks must also be that all the consequences of a completed insolvency procedure occur if such insolvency no longer occurs: The remaining liabilities can no longer be demanded from the creditors, and not only from the debtor himself, but above all from his legal successors, e.g. B. the heir. Otherwise they would only have to waive inheritance in the case of an over-indebted estate despite the waiver. There is no case law on this yet. However, from the literature, especially on Roman law, it emerges that an unlimited pactum de non petendo can be viewed as a permanent waiver with effect also in favor of third parties and the heirs.

Be a company in its corporate crisis debt issued (faulty waiver called) so extraordinary book income ( "restructuring gains"), which reduce the loss incurred. This is accompanied by an improvement in equity . This does not initially have a direct effect on liquidity; Liquidity will only be relieved in the future by the lack of interest and repayment installments. For the waiving company, however, a corresponding destruction of assets occurs because it has to write off the waived claim in the balance sheet. The depreciation, in turn, as an extraordinary expense, reduces the profits or increases the losses, so that a corresponding reduction in equity occurs.

At the state level, debt relief is the last resort to avert an impending moratorium or even national bankruptcy . Highly indebted states, especially in the context of the developing countries , but also in the case of Greece , are no longer in a position to service their debts from central bank balances, tax revenues or current export proceeds. On May 19, 2010, Greece had to pay a total of EUR 8.5 billion in interest and repayments for which there was no liquidity. The scenario for this was mapped out: Greek banks held 40 billion euros in Greek government bonds (and only 25 billion euros in equity) that the state would no longer have serviced. The result would have been a wave of bankruptcies in the Greek banking system , which would have hit the Greek and possibly also the European economy massively as a contagious effect . Ultimately, this would have called into question the stability of the euro and the existence of the Eurosystem. Debt cancellation is common around the world, particularly in developing countries. An overview of the debt relief towards the so-called 18 graduated 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 remission. The unconditional remission is not tied to any conditions. The conditional remission usually contains the subsequent conditions of a debtor warrant . A condition that is often used by a company in a crisis is that its debts can only be finally extinguished if it cannot generate any profits during a certain period of time. If, however, profits arise or the company is economically healthy in another way, the canceled debts are conditionally revived and must be repaid.

Particularly in the area of bonds , the debtor can force partial or total debt relief against the will of the individual creditor, provided that the bond conditions contain a corresponding collective action clause and a majority of the creditors agree to the debt relief.

Commercial and tax law aspects

According to the Federal Fiscal Court (BFH), debt relief for operational reasons means an expense and thus a reduction in assets for the creditor . A debt is waived for operational reasons if the waiver is intended to reorganize the debtor's business. It is sufficient for the creditor to believe that the remission is necessary for the continued existence of the debtor's business.

If the obligee is a partner in the company in need of restructuring, the legal basis for debt relief can also be the relationship with the company. A socially induced decree leads neither to a restructuring profit for the company nor to a corresponding restructuring expense for the shareholder, but is - in the amount of the valuable part of the claim - to be assessed as a hidden contribution of the shareholder in the corporate assets of the debtor company.

Effects

From the debtor's point of view, remission is the best type of restructuring because remitted debts are extinguished. Debt relief is widely seen as a rescue measure for debtors and therefore beneficial for them. The harmful consequences for creditors, the economy and often also for debtors are not considered. Creditors who renounce their claims destroy their own assets. The waiver requires a write-off (debt waiver), which as an expense item reduces the profit or increases the loss . This in turn leads to a reduction in equity and thus to a weakening of one's own creditworthiness . If credit institutions give debt relief to companies, any loan collateral must be transferred back. Accessory loan collateral such as the guarantee and liens expire automatically; non-accessory collateral such as security transfer , assignment or land charges must be transferred back. For the debtor, the debt relief leads to a lack of interest and repayment service in the future and thus to an improvement in his earnings power and liquidity .

Creditor states are also reducing their state assets , because there is no expected income from the repayment of claims or interest income; the missing income due to the waiver may have to be compensated by tax increases or own borrowing. Debt relief benefits the debtor states in the same way as a company.

consequences

With the debt relief in the private sector , it is expected that the debtor will be economically restructured and that debt sustainability will develop (see also debt servicing ability ). However, it is doubtful whether the waiver will always result in favorable developments for debtors. Debt relief affects future creditworthiness because it is an indication of mismanagement and / or structural problems that are not resolved by mere relief.

Companies in need of restructuring will reduce their interest expenses in the medium term through debt relief and thus strengthen their earnings position. You also improve your equity ratio by writing off the waived liabilities. Here, too, the structural deficiencies that led to the crisis must be remedied.

In the case of states , general debt relief is likely to lead to a reduction in future capital aid and not encourage debtor states to resolve their structural problems, so that developing countries benefit less than expected. Debt relief is a signal from which a moral risk arises: In the case of heavily indebted countries there is the risk that they will become highly indebted with the prospect of future debt relief (moral risk of the debtor); Likewise, creditors who do not participate in these debt relief could use the financial leeway created by the debt relief to grant further credit (moral risk for the creditor). Overall, debt relief offers debtors high incentives not to improve their economic performance. Due to the considerable false incentives to moral risk and the associated lack of structural changes, debt relief does not lead to the expected long-term economic stabilization. The moral risk then has the effect that a state is likely to pursue an excessive debt policy again after debt relief, because it can expect to get debt forgiven again. In order to avoid disincentives through debt relief, debt relief should be linked to the agreement that there will be no further debt relief.

Debt relief can constitute a credit event if it - or the debt reduction undertaken - is mentioned in a credit agreement , bond, or credit default swap . Then it triggers a reason for termination on the part of the creditor or the payment obligation of the protection provider in the case of the credit default swap. Specifically, the debt relief of the credit institutions in the case of Greece was the subject of investigations into whether the protection providers would have to pay for credit default swaps. This was denied by the responsible ISDA Determinations Committee in July 2011 because it was a voluntary waiver by a single group of creditors - the banks - and also not a global debt relief.

Crisis scenario with intergovernmental debt relief

In the past, the fall in raw material prices has often led to falling export revenues in developing countries. The floating-rate debts of developing countries resulted in higher interest expenses when interest rates rose, which could no longer be fully or partially covered by export earnings. In addition, the debts were denominated in dollars, so that in the local currency, due to the exchange rate, increasing repayment costs became necessary. The loans taken out were often not used in accordance with the development (high infiltration through corruption , investments in economically nonsensical prestige projects, armaments expenditure), so that the debt burden became an ever greater burden. Excessive government spending and an expansive monetary policy led the citizens of developing countries to lose confidence in their own currency, resulting in capital flight .

The intervention and exchange rate policies of many developing countries, which burden the current account, have often exacerbated their crisis. Their high foreign debt resulted in a deteriorating creditworthiness, so that creditors withheld further loans. The growth process in many developing countries was interrupted, so that investments made no longer paid for themselves.

Experience with debt relief

Experience with debt relief measures over the past 30 years gives rise to skepticism. Despite various waivers in the 1970s, the debts of the HIPC countries rose from US $ 47 billion in 1980 to US $ 159 billion in 1990, only to grow to US $ 169 billion by 1999. While the heavily indebted poor countries had debt relief of US $ 33 billion between 1987 and 1997, their new indebtedness rose to US $ 41 billion in the same period. Often new loans were taken out in order to be able to maintain the debt service for the old loans which had not been canceled. According to a recent study by the World Bank , of the 26 countries that have received debt relief so far, 12 countries have poor prospects of maintaining their debt sustainability at sustainable levels in the medium term. Debt relief is actually aimed at reducing poverty in the HIPC countries and improving economic growth; none of the goals has ever been achieved.

A state's debt burden is considered sustainable if the ratio of external debt to annual export revenues does not exceed 150%. Export revenues therefore have a major impact on achieving and maintaining debt sustainability. The debt / export ratio relates to debt in the numerator and export income in the denominator. If export revenues fall and debt levels remain the same, debt sustainability will decline. The economic growth of some developing countries, especially their export earnings, will not be sufficient to generate enough foreign currency to maintain debt servicing (interest on loans and repayments). The main causes are the unfavorable foreign trade structure with often only one or two dominant export goods, a poor macroeconomic policy, a lack of transparency and accountability in the public sector, a low productivity development and counterproductive seepage .

The HIPC countries have an extremely narrow export base - most of them derive more than half of their export income 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 income from exporting cotton . The world market prices for these goods have been on a downward trend for several years. Other factors that led to the deterioration of the foreign trade position of the HIPC countries were the rise in the price of important imported goods (such as crude oil) and the devaluation of the currencies of HIPC countries against the US dollar. The dependence on few raw materials for export is a problem for most highly indebted poor countries. In April 2002, out of 24 HIPC countries, only three had goods with over 45% export. Trade barriers in industrialized countries, especially for agricultural products, make it difficult for developing countries to diversify and expand their exports. In some cases, large public investments with significant import requirements also weighed on the current account deficit. As a result of lower income and higher government spending and a lack of efficient financial planning, around half of the HIPC countries were unable to reduce their budget deficits as planned. Corruption and a lack of democratic control of public finances contribute significantly to the fact that many HIPC countries have so far failed to reduce their over-indebtedness on a sustainable basis.

Long-term solutions

Debtor countries must in particular revise their intervention and exchange rate policy, create better framework conditions for foreign direct investments, improve domestic savings through monetary policy measures and reduce the deficits of their national budget . On the other hand, industrialized countries should increasingly provide technical and financial assistance and open their markets to exports from developing countries through appropriate deregulation (Baker Plan, Brady Initiative).

In order to improve their economic development, developing countries need new loans to expand their industrial capacities and for infrastructure investments as well as for social policy measures.

Levels of State Debt Relief

Debt sustainability is barely available for a state if

can be demonstrated and the ratio

  • Debt / export earnings 150 percent

is not exceeded.

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

  • Level 1: First, the country must be classified as “poor” and “highly indebted” by the IMF and the World Bank. In the case of poor , it is assumed that the gross national product per capita must be less than 925 US dollars, highly indebted requires that the foreign debt must be greater than 150% of annual export earnings or more than 250% of government revenues.
  • Stage 2: If countries that have reached stage 1 also submit concepts for good governance and poverty reduction that have been accepted by the IMF / World Bank , they reach the so-called decision point at which they receive debt relief (no interest and repayments) is granted.
  • Stage 3: If a state can actually successfully implement its concepts for good governance and poverty reduction during an unlimited probation period, it will reach the so-called completion point at which part of its debts will actually be canceled.

history

Debt Relief 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 Solon began in 594 BC. Performed in Athens . When Seisachtheia it came that a large part of the population making up Hektemoroi preserve the highly indebted and their land had burdened himself from sliding into total poverty and slavery. Solon's economic reforms met resistance from the Athens aristocracy. It is not known exactly to what extent he was actually able to enforce them, what they were in detail and how long they were valid.

Mention in the Bible

In Deuteronomy 15 : 1-2 it is required that every seventh year - the so-called sabbath year - a debt relief should be proclaimed in Israel . Every Israelite should "let go" of the loans they have given. The idea that the field should not be cultivated after seven years, but should lie fallow (sabbatical year) is closely linked to this concept of debt relief. So be honored God as he is honored on the Sabbath . So the sabbath year and debt relief is a divine service, it happens for God (Deuteronomy 15: 2). Every seven years an Israeli believer had to cancel the debt of his compatriots; the debt could only be collected from foreigners (Deuteronomy 15: 7). The social purpose was that the worst indebtedness should be reduced. The concept of the Jubilee was only valid within the people of Israel. Loans to foreigners remained valid.

According to the book of Nehemiah (5th chapter), when Jerusalem was rebuilt, the poor had to borrow from the rich and mortgage their property. The protest of the poor led to debt cancellation by Nehemiah with the result that the poor were allowed to keep their property.

This concept was still known in Jesus' time. Rabbi Hillel criticized, however, that the poor did not get any more loans before the Jubilee year.

Debt Relief as a Policy Tool

Some states have already received debt relief in the past . It is not only a question of the debtor state being freed from its debts, but also that political and economic relations between the states improve and the overall economic situation stabilizes .

In February 1953, Germany was granted debt relief in the London Debt Agreement; Half of the Federal Republic's debts of 29.7 billion DM were waived at that time, the interest payments that had not been made during the Nazi era were canceled and the remaining debt was rescheduled on a long-term basis on favorable terms - the debt service only had to be paid if Germany received income from exports scored. Debt relief and rescheduling were one of the causes of the economic miracle in the Federal Republic. In particular, the largest creditor, the United States , was interested in a favorable agreement for Germany to win it as an ally in the Cold War .

The debt relief promulgated by the G8 states in June 2005 was also of historical dimension. According to this, it was specifically planned to waive certain debtor states between 700 and 950 million euros by the World Bank, the International Monetary Fund (IMF) and the African Development Bank within the next 10 years. Debt relief was tied to the condition of “good governance”, for example for the fight against corruption and the sensible use of funds, for example for education and health care. In highly indebted countries, the political conditions associated with debt relief are the basic prerequisite for introducing structural changes that help to reduce the risk of future debt relief ( conditionality ).

See also

literature

Web links

Wiktionary: Debt Relief  - explanations of meanings, origins of words, synonyms, translations
  • World map showing the greatest debt relief of the 20th century

Individual evidence

  1. ↑ Dirk Piekenbrock: Gabler Compact Lexicon Economics. 2009, p. 389 .
  2. ↑ Rüdiger Friess: The restructuring decision in the restructuring of the corporate sponsor in the event of insolvency. 2003, p. 206 f.
  3. ↑ Ulrich Krystek, Ralf Moldenhauer: Handbook of crisis and restructuring management. 2007, p. 246 .
  4. ↑ Only debt relief can save Greece. In: Welt Online , April 29, 2010.
  5. ↑ International Debt Strategy and Debt Rescheduling. In: BMF.de , February 26, 2016, with PDF German debt relief at the foot of the page.
  6. ↑ Friess: The reorganization decision in the reorganization of the corporate sponsor in the event of insolvency . 2003, p. 207
  7. ↑ § 5 Majority resolutions of the creditors in the Debt Securities Act (SchVG) of July 31, 2009 ( Federal Law Gazette I p. 2512 )
  8. ↑ BFH judgment of January 16, 1975, IV R 180/71, BFHE 115, 202, BStBl. II 1975, p. 526
  9. ↑ BFH judgment of July 31, 1991, VIII R 24/89, BFH / NV 1992, p. 308
  10. ↑ BFH decision of June 9, 1997, GrS 1/94, BFHE 183, 187
  11. ↑ BFH judgment of July 29, 1997, VIII R 57/94 BStBl. 1998 II, p. 652
  12. ^ Richard Keller, corporate restructuring: extrajudicial and judicial restructuring , 1999, p. 177 f.
  13. ↑ Hartmut Ihne, Jürgen Wilhelm: Introduction to Development Policy. 2013, p. 99 .
  14. ^ Enrique Carrasco, Charles McClellan, Jane Ro: Foreign Debt: Forgiveness and Repudiation. April 2007, p. 4.
  15. ^ William Easterly: The Elusive Quest for Growth - Economists' Adventures and Misadventures in the Tropics. 2001, p. 137.
  16. ↑ CDS holders can breathe a sigh of relief. In: Handelsblatt , July 22, 2011.
  17. ↑ Nassir Djafari: Debt relief alone is not enough. ( Memento of August 3, 2012 in the web archive archive.today ) In: Development and Cooperation , No. 12, November 2002, pp. 351–353.
  18. ^ William Easterly: Think Again: Debt Relief. In: Foreign Policy Magazine , Washington DC, November / December 2001.
  19. ↑ Wilfried Herz: The curse of good deeds. In: Die Zeit , October 7, 2004.
  20. ^ IMF and World Bank: Debt Sustainability Analysis for the Heavily Indebted Poor Countries . January 1996, p. 2
  21. ^ G8 finance ministers celebrate historic debt relief , Der Spiegel , June 11, 2005