BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/17
This week, three IMF economists released a technical note on the debt-equity conversion and NPL securitisation programme. In their view, the programme needs to be carefully designed due to the real danger that debt restructuring will simply give non-viable “zombie” firms extended time to fail and increase the overall cost to the state. This insight specifically concerns the restructuring of inefficient state-owned enterprises. The authors further note that banks generally lack the competence to turn around money-losing businesses and that bank involvement in non-bank businesses involves moral hazard issues. The IMF economists propose that firms be carefully vetted before admission to the programme, banks retain the right to replace corporate managers and directors as necessary, debt-equity conversions be based on actual market price of the shares, and that the percentage of a bank’s stake in a participating firm be limited and temporary. In addition, the regulatory framework should be geared to improving bank risk management and require banks to report their problem loans in greater detail.