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Regulator hints at debt-forgiveness U-turn

CENTRAL Bank deputy governor Matthew Elderfield yesterday gave his strongest endorsement to the concept of 'debt forgiveness' by bailed-out banks, saying it was "perfectly possible" that schemes could be launched.

The comments came six months after Mr Elderfield all but ruled out debt forgiveness schemes on the grounds that they would be unfair and unaffordable.

Since then, AIB's newcomer executive chairman David Hodgkinson has publicly said the bank was "actively considering" using some of the bank's latest bailout to run a debt-forgiveness scheme.

Other banks are believed to be considering similar moves that would be largely targeted at struggling mortgage holders who owe more than their homes are worth.

"I've spoken to the executive chairman [of AIB], he says he's working on some ideas and he'll share those with us," Mr Elderfield said yesterday. "It's perfectly possible that individual banks might take initiatives on debt forgiveness."

Mr Elderfield added that he previously had concerns about debt forgiveness on three grounds: the availability of money to fund a scheme, the lack of international precedent, and the difficulties in creating a system that didn't encourage people to stop paying their mortgages.

"Clearly there is more capital in the banks [in light of the planned €24bn recapitalisation]," he said. "The hope is that there's overcapitalisation and you'll get some of that capital back rather than spending it writing off [debt].

"That said, I think there is more capacity in the system now for the banks to work through a rescheduling process and take individual decisions."

Mr Elderfield added that the key thing would be "creating a programme that included incentives for people who were paying [their mortgages] to keep paying". Asked whether he was now more favourably disposed to debt-restructuring proposals, Mr Elderfield said he was "open-minded to see what emerges from the banks".

"The top priority is to get personal bankruptcy law amended, so there's an ability for people to get a fresh start," he added.

"If they're in negative equity [and they have to sell], they're going to crystallise this big debt . . . having to carry that debt for 12 years in my mind doesn't make sense."

The Government has committed to moving swiftly to reform bankruptcy laws, and the measure is included in the recovery programme drawn up with the EU, IMF and ECB.

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