Bailing out borrowers should come with strings attached, says Shane McGinley
Last week Bloomberg reported Kuwaitis had gone on a splurge, as shoppers went out to buy new cars and mobile phones.
It’s no coincidence the government also announced earlier this year plans to write-off nearly $2.6bn in interest due on loans taken out by residents since 2008. Known as the ‘family support fund’, around 47,000 Kuwaitis were eligible for the plan.
Of course, Kuwait has been here before, its government previously wrote off almost all consumer debt after the 1991 Gulf War. It also wrote off bad loans stemmed from a 1982 stock market crash.
Obviously little has been learned by these moves as consumer lending in the Gulf state has surged to its highest for almost four years.
While debt relief reduces the burden on citizens, if they go out and spend the money building up more credit on luxury goods then it has little impact and simply feeds into a vicious cycle of debt and debt relief.
Shouldn’t the government place some restrictions on debt relief so those getting the bailout benefit from it and don’t see it as an excuse to go out and build up more debt in the belief the government will simply bail them out further down the line? Should those who repeatedly run up debts be restricted in how much they can borrow in the future or be banned from future bailouts if they repeatedly get into the red?
“If loans are restructured as a result of a debt relief scheme, the solution needs to be sustainable for the borrower. Otherwise banks will only store up bad loan problems,” the ratings agency Fitch said.
Kuwait isn’t the only country to offer citizens debt relief, the UAE set up an AED10bn (USD2.7bn) debt settlement fund to clear defaulted debts of its citizens in 2011.
However, the difference is the UAE fund sets monthly repayments that structured to how much the borrower can afford. Therefore, they are been given a lifeline but not a get out clause.
In the Kuwait case, debt relief has become a big issue ahead of the elections later this month. But in the race to win votes, the country should make sure it isn’t just repeating past mistakes and should put in place precautions to make sure in a few years it won’t simply be back where it started and faced with the prospect of debating another big debt bailout. The cycle has to end somewhere.