Tricky balance to be struck on debt forgiveness, says Central Bank official

Fri, Aug 31, 2012, 01:00

THE NEW chief economist at the Central Bank has said that there was a “tricky balance” to be struck on debt forgiveness but that it had a role in the country’s recovery from the economic crisis.

In his first public speech since joining the Central Bank in June, Swedish economist Lars Frisell said it was “a sad fact” that the only way to tackle the country’s budgetary deficit was through “austerity, austerity, austerity”.

But there was a “more interesting balance to strike” on debt forgiveness for households, said Mr Frisell, who was previously chief economist of the Swedish Financial Supervisory Authority.

To tackle mortgage arrears and households in negative equity, there should be debt forgiveness through the new personal insolvency legislation, but he conceded it “a tricky balance”.

“It should be there and I think the new personal insolvency law and all that has a big part to play,” he told a meeting of the Institute of Certified Public Accountants.

Mr Frisell supports plans for a property tax, saying that basing the tax on property market values “makes a lot of sense” and was “reasonable,” though he accepted the current uncertainty made market prices more difficult to establish.

“It would have made a lot of sense if it was done 10 years ago to stem the bubble,” he said.

There was “no way around” cutting the budget as the country attempts to climb out of crisis, he said, but added that European measures would help Ireland.

“Any measures by the ECB that would help the confidence crisis of course would be beneficial to Ireland too,” he said.

Signs that house prices were “flattening” showed that the country was close to kick-starting confidence among consumers.

“It takes very little to tip Ireland into the virtuous circle from the vicious circle [it is in],” he said.

While exports were driving economic growth, the country can “quickly get out of this [crisis] if consumer confidence recovers”, he said. All it took was “one more nudge” to start the “virtuous circle” of growth in the economy.

Mr Frisell said there needed to an efficient way of burning bondholders to deal with failed banks and that if this worked credibly, it would make higher capital requirements at banks redundant.

Banking regulators need more powers – including “macroprudential” powers – to cap excessive growth by any one bank.

Regulators must “able to take away the punch bowl in the middle of the party”, he added.

Mr Frisell that it was perhaps time to move to a stronger super-national regulatory system and to move banking supervision “up one level” from national regulators.

Prior to the crisis, high-profile accountancy firms were paid too much for auditing banks and “the incentives were clearly stacked in the wrong way”, he said.