Proposals

#12 Forgive Covid-19-related debt of people and businesses

As a result of the Covid-19 crisis, many small businesses and households are finding themselves with more debt, as they had to borrow money to keep themselves and their livelihoods afloat.

Governments have already offered a number of support schemes for households and businesses — including "partial unemployment" schemes (where the governments covers part of the salaries of employees who were made redundant during the lockdowns), moratoria on debt payments (a suspension of payments of certains bills and debt reimbursements) and state-guarantees for bank loans, which have made those loans much cheaper and less risky for banks. These measures have certainly reduced the cost of borrowing, and ensured that commercial banks would provide these vital credit lines without discrimination.

But while some companies will be able to repay their debt as the economy recovers, certain economic sectors (such as the services and tourism sectors) will not be able to make up for the sales lost during the lockdowns by increasing future sales. For example, even in the best scenarii, restaurants will not sell twice as many meals in the summer of 2021, because they have a limited number of tables. 

Letting these small and medium-sized businesses go bankrupt would cause long term damage to the economy as it would mean people losing their jobs and incomes. To avoid this, the ECB could provide financial support through a debt-relief programme for citizens and businesses who are facing difficulties to repay the banks.

➕ Pros

• It would avoid a cascade of bankruptcies and help protect millions of jobs.
• It would contribute to reducing inequalities and fighting extreme poverty, as it is those with less money who will face the most difficulties to repay their loans.
• It will facilitate the economic recovery by ensuring that commercial banks do not keep bad loans (loans that will not be repaid) in their accounts. Bad loans would reduce the ability of banks to finance the economy.

➖ Cons

• Debt cancellation would be unfair to the people who used their savings instead of borrowing money from banks.
• No support for companies should be granted without conditions.
• It is not the role of the ECB to support companies or households. Central banks should not pick winners and losers.
• If central banks suffer losses by providing such debt forgiveness, this will reduce the amount of annual profit they transfer to governments.