President Iohannis signs into law controversial debt discharge bill

Newsroom 28/04/2016 | 13:09

The controversial debt discharge bill, which has angered the Romanian banking community, was signed into law by president Klaus Iohannis on Thursday.

The law will be published in the Official Gazette today.

Iohannis said his move was underpinned by the fact that MPs had changed the bill after he had rejected it the finest time.

“I appreciated the fact that the Parliament took account the observations I made and I think the current form of the bill is good to be signed into law,” said Iohannis in a press conference.

Read our feature on the implications of the debt discharge bill for the property market

The bill has been heavily criticized by bankers and central bank officials, primarily due to the fact that it will be enforced for all mortgage loans contracts up to EUR 250,000.

Only end-users can benefit from the law and the mortgage must be on a residential property, and not just any type of building. The law will also apply to borrowers currently going through foreclosure or whose properties have already been foreclosed on.

As the law applies retroactively and is seen as affecting private property rights, domestic banks can challenge it to the Constitutional Court. If proven right, banks can then turn to the state to recover potential losses, with a negative impact on public finances (which are already stretched). Moreover, if the bill adversely impacts the stability of the domestic banking system, it could be rating negative for Romania (as S&P highlighted early April). This also implies negative price action for the RON sovereign debt. Nevertheless, as the 10Y mid-yield is already up c.32bp up since the parliament passed the bill, most of the negative news might be already priced-in,” said analysts at ING Romania.

What has made the law so unpalatable for lenders is that once it comes into force, it will give debtors the upper hand by enabling them to discharge their mortgage-backed debts by transferring the property to the bank. This would be a considerable game-changer given that, under the current legislation, a home owner is expected to pay back their mortgage under almost any circumstances.

The Romanian Banks’ Association (ARB) had asked Iohannis to challenge the recently passed by Parliament debt-discharge bill at the Consitutional Court, arguing that it “impairs the constitutional rights of all ARB members”.

Central bank governor Mugur Isarescu had warned in early April that initiatives such as the debt discharge bill in the financial sector would pose a “systemic risk” for the economy.

Ovidiu Posirca

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