Whenever we speak of capitalism, boom, bust, bankruptcy invariably we think of corporations. I am also guilty of spreading this type of thinking as in my posts about bankruptcy I specifically referred to companies, banks, and states. Never once did I mention personal bankruptcy. It is only fair, in my view, that individuals should have available to them the same instruments available to corporations. This is one more law that we need to implement in Romania if we ever want to become a developed country with a small state: personal bankruptcy law.
I came to this idea after talking with a lawyer friend last week over couple of beers. We were discussing ways to free up resources. It was easy when we talked about capital. When we talk about a corporation everyone agrees that sometimes it is better to default and start over. There is no stigma attached to it. No threatening calls from collection agencies, no credit bureau, no feeling that you are being a criminal. In fact even in Romania throughout 2009 and 2011 we heard of well known companies that filed for bankruptcy and most of the time analysts and bankers applauded the solution. Moreover, the owners of those companies did not suffer any social stigma. They were still among the most present people in TV and still had access to financing or to start over other companies or restructure the old ones.
But if we allow this for our companies why don’t we allow it for our individuals? If it is ok and even recommended for corporations to go bankrupt why don’t we allow people that have mortgages worth much more than the actual asset to declare bankruptcy? Why don’t we allow the individuals to do the smart thing?
I do not see a reason not to. In the case of corporations the economic thinking is that by allowing it to go bankrupt it frees up resources and those can be employed better by other sectors in the economy. In the case of states going bankrupt is a solution to stop the waste of public money to pay debts that it is impossible mathematically to ever be paid off.
The problem I see is once again the double standard. We treat our corporations better than our individuals when dealing with the same problem: debt. Even today when real incomes of Romanians are falling, it is much easier for corporations to restructure their debt than for an individual. Not to mention the threats and humiliation an individual in Romania has to go through for missing one or two payments. Indeed, at times the double standard is quite ugly and offensive.
Here is the problem: it is not in the interest of the banking sector to allow personal bankruptcy. As much as it is not in the interest of the banking sector to provide hedging instruments for individuals to protect them from the FX risk. For the latter it is cheaper to have a tacit deal with the NBR which will keep the exchange rate depreciating at a pace that is not alarming. But for the former I do not see why there is no political will to implement such a law, personal bankruptcy law.
I understand that many borrowers made mistakes and borrowed too much money and thus acted irresponsibly. But they did so enticed by deals that at that time looked to be too good to be passed. It turned out, as it usually does, that those deals offered by banks were in fact too good to be true.
As in the case of sovereign debt and banks problem we need to find a solution to the impoverished Romanian borrower and banks problem. Allowing personal bankruptcy together with easier restructuring terms and hedging instruments will most definitely jump start the lending market. Otherwise we will still get people backing out of their mortgage contracts, I.e. bankruptcy, only that the emotional and monetary costs will undermine Romanian growth for some time to come.
Effect of the restructuring event on the number of employees
Overall outcome of restructuring