Opinion – Vinicius Torres Freire: Can a plan to refinance household debt work?

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Perhaps it is possible to create a way to renegotiate debts, as proposed by Ciro Gomes (PDT) and Lula da Silva (PT), not necessarily in the terms suggested by these candidates. It is a complicated subject for financiers, microeconomists and experts in income redistribution programs.

Yes, redistribution, income transfer, “social program”. It’s hard to imagine such a plan without subsidies. That is, without the government paying part of the bill.

If tax money or extra public debt will fund the account, what is the criterion for choosing the beneficiary? Just having overdue bank debts? Are there people worse off than being in default? It almost certainly is.

That said, it’s easy to remember corporate tax debt relief programs (on average, one Refis or something similar every two years, this century). It is easy to remember loans from public banks at subsidized interest rates to also immense companies, some of which directly or indirectly financed mergers and acquisitions, formation of oligopolies and worse.

Still, it’s hard to do.

The government can create incentives for banks to renegotiate more arrears. In the epidemic, there were examples and ideas to help companies. The government can allow banks to use money they have to leave sitting at the Central Bank (compulsory deposits) or lower capital requirements or provisions, as long as they refinance debts. It’s kind of PT’s idea.

Problems. Banks already refinance and write off debts, at the limit of their interest. The customers that remain in default are almost “total loss”. Why would banks refinance these “bad debts”, the remaining debts (even with incentives), if the risk of default is enormous?

The government can pay for the banks’ possible losses in these cases — it’s a subsidy. However, if the banks do not also run some risk of loss, what quality of credit will they grant? Will you lend to anyone? For whom, with what socially relevant criteria? At what interest rate and term?

Another idea is for public banks to buy this bad credit portfolio from private banks. That is, that they pay some to the private banks to keep the loan (and the possible future payment of arrears).

These loans would be sold at auction, as in the PDT idea. Whoever sold it cheaper would do business. The public bank would then refinance its new customer, the defaulter, with generous interest and terms (compensated by the government). Would there be a structure to provide loans to tens of millions of people in difficulty?

Would that government money go to those who need it most (debt overdue or not)? In part, no: the banks could make some money with “total loss” credits they sold to the government.

It may also be that state-owned banks create a low-interest line of credit. The person decides if he wants to take the loan, as long as he uses the money to pay late, on the wholesale credit card and overdraft. Banks earn some; financially savvy people, already users of the banking system, may come out of despair. It is difficult to say that they are the poorest.

How much would the total money spent on subsidy be? Would it have a better, socially fairer alternative use? Wouldn’t an agile and broad microcredit system be better?

There is still some risk of adverse selection (benefiting persistent bad debtors), encouraging default.

Doing nothing is easy. But things are complicated and can lead to bullshit and iniquity, an easy bet in Brazil.

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