Belfast Telegraph

IMF urges action on household debt to combat recession risk

The International Monetary Fund, a part paymaster in the €67.5bn (£50bn) loan bailout to Ireland, has recommended the "bold" restructuring of household debt in a bid to prevent prolonged recessions.

Such moves could help avert cycles of household defaults, further house price declines and additional contractions in output, according to the IMF's bi-annual assessment of the world's economy.

It cited the examples of Iceland and the US where this policy has worked in the past.

"Based on case studies, we find that government policies can help prolonged contractions in economic activity by addressing the problem of excessive household debt," according to the report.

"In particular, bold household debt restructuring programmes such as those implemented in the US in the 1930s and in Iceland today can significantly reduce debt repayment burdens and the number of household defaults and foreclosures," the fund reported.

Recent figures show that the number of Irish households not meeting their mortgage repayments is growing and the report states that house prices in Ireland have fallen over 40% since their peak (although some economists believe that the figure is much higher).

According to the report, big declines in economic activity are not simply a reflection of the larger drops in house prices and the associated destruction of household wealth - it is a combination of house price declines and prebust leverage that explains the severity of contraction.

But as is also the case here, the report warned that "strong capital buffers may be insufficient to encourage banks to restructure household debt on a large scale, as is evident in the US today."

And it acknowledges that a State-supported scheme would involve one sector of society subsidising those who need help while the move would depend on the net cost or benefit to the economy as a whole.