Moody’s: Personal Default Bill Might Hurt Romanian Banks

The bill allows individuals who have lost their jobs or who have suffered other erosion of their financial status to benefit from a 25% principal write-down of their bank loans.

„Conservatively assuming that only consumer loans delinquent as of December 2009 will be written down, we estimate the banking system would take around a 10% capital hit,” Moody’s said in its report.

„Because consumer loans amount to 36% of Romanian banks’ total loans, the figure would be much higher if additional individuals in no real financial distress also take advantage of the bill,” it noted.

Moody’s believes the personal default law appears to have very punitive norms for commercial banks, which in turn could take an even more cautious approach regarding household loans.

Moreover, Moody’s negative outlook on Romanian banking system might be exacerbated by the bill, given that „it could promote moral hazard among individual borrowers who may choose to avoid paying their loans in order to benefit from the legislation.”

Apart from the aforementioned facilities, individuals eligible to benefit from the personal law would not be publicly listed as defaulters by banks, which may encourage excessive indebtedness and default, Moody’s said.

„Romanian banks will face difficulties absorbing the shock of this bill, and its implementation could undermine their financial standing. Both Romanian banks and the regulators (National Bank of Romania) have criticized and expressed concern about the bill,” the ratings agency noted.

The personal default bill is pending final vote in the Chamber of Deputies.