Better late than never. The Spanish government has finally taken steps to reduce the country's private debt load. A new law decree introduces debt forgiveness for the first time. It's the right step, although it largely formalises what banks were already doing.
The reform comes after Spain's new political movements, including radical party Podemos, threw the spotlight on the country's corporate and household debt, which has grown to some 180 per cent of gross domestic product. For its part, the rising centrist party Ciudadanos has called for a fresh start law for individual debtors. That echoes suggestions made by the OECD and the International Monetary Fund, among others.
The rationale for delaying this reform was the fragile state of Spain's banks, coupled with fears of a weakening of Spain's traditionally strong payment culture. The government had already made changes to the law to make it easier for companies to reach agreements with creditors ahead of insolvency procedures. But under Spain's current personal insolvency regime, individuals were still beholden to their debt for life even after losing their assets.
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The snag is that debtors are still on the hook if they make enough income to repay the debt within five years. It's not an incentive to recover quickly. The new law also excludes debt owed to public creditors.
Still, some forgiveness should encourage entrepreneurs by making failure less costly. The measure could help 500,000 families and self-employed individuals, says the government. But it comes late. Mortgage delinquencies peaked last year. The new law formalises existing market practices, reckons rating agency Fitch. It points out that 10 per cent of mortgages have been refinanced, an easier option than costly repossessions. And banks still have recourse to all of the debtor's assets. Given the strong pace of the Spanish recovery, an avalanche of personal bankruptcies looks unlikely.
