| 9.8°C Dublin

IMF backs scheme to let homeowners write off their debt

THE IMF's proposal for Great Depression-style debt relief for struggling homeowners has received support.

The fund hopes it could boost growth in countries such as Ireland where the economy is being hampered by huge levels of personal borrowings.

It cited the examples of Iceland today and the US during the Great Depression of the 1930s where massive amounts of mortgage debt was written off.

The action allowed consumers in both countries to spend again, rather than just focusing on reducing their crippling loans, it pointed out.

The IMF made the case in its latest World Economic Outlook report. It argued recessions become drawn out when relief was not applied to households, leaving them to put all their energy into paying off unsustainable borrowings.

"Because debt is acting as a brake on economic growth, it is important to 'unstick' the brake," author Daniel Leigh said.

While the IMF did not specifically refer to Ireland, the country is widely seen as a prime example of the problem.

Finance Minister Michael Noonan is being called on to take radical steps to help families in debt with 13pc of mortgages here in trouble.

At over 200pc of GDP, Irish household debt is the highest of any advanced economy and the property market is stagnant.

The latest effort to spark it into life has come from Bank of Ireland, which has announced that its new business fixed rates for owner occupiers will be reduced by up to 0.41pc. The lender said new mortgage applications on two, three and five-year fixed rate loan terms could avail of the new rates.

The IMF report stated that restructuring of household debt "can significantly reduce debt repayment burdens and the number of household defaults and foreclosures".

Mr Leigh said that in cases such as in Ireland "government debt cannot be increased". He added that restructuring can be effective, "especially if it is done case-by-case in the courts".

DCU senior economics lecturer Tony Foley said a relief scheme could mean a homeowner's mortgage being written down to be more in line with the value of the property. "The IMF argument is that if we transfer money from people who are better off to people who are worse off with negative equity and such like, we will improve expenditure in the economy."

The IMF report said that in Iceland a scheme was introduced where any household whose debt was more than 110pc of its assets was given a write-down.

It acknowledged the pitfalls in that one section of society would have to subsidise another, potentially causing friction.