Croatia just canceled the debts of its poorest citizens

But that would probably cast a VERY different light on the event. The original intent was probably to give the (positive i guess) impression that the greek trend of not paying debts is spreading.

“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” – Alexis de Tocqueville

I'm hardly surprised at WP not taking a more critical stance.

> taxes are very high

Doesn't seem so: Croatia's tax to GDP ratio is 26.6 %. Compare that to 46.8 % in Belgium, 43.4 % in Austria, 40.6 % in Germany, 45.8 % in Sweden. 26.9 % in U.S. which is internationally known as a low-tax regime.

Surely some taxes are high, and taxation is not necessarily fair, but I'd say that Croatia's taxes overall are not high. I would also expect that the "black market" GDP is higher there than in "old" EU countries, say Germany or even France, or the U.S. Though I admit this is mostly based on just prejudice.

(Using Heritage Foundation figures in http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenu... - OECD numbers are slightly different but not that much)

You say "the situation is complicated" and "this is not fair", but how exactly do you think this measure will fail? From a distance it sounds like it would boost the economy by allowing people to prosper, while debt is written off mostly by private entities, not the tax payers directly. Even if it was, it might still be a win.

I think it is fair to say this is now happening along the entire American continent, from Argentina to the USA. I know nothing about Canadian politics so I can't comment.

The framework is the same everywhere: Socialist or socialist-leaning ideology coupled with failing policies. If you truly study history from, say, Evita Peron in Argentina to Obama in the USA the parallels are scary. It's almost like they study each other's techniques and replicate them across time and space.

Of course, this makes sense. Politics responds to evolutionary forces. It is easy to see that "survival of the fittest" converged on a solution that swaps favors to the masses for votes. The only thing that matters is the survival of the organism, in this case a politician and the party they are associated with.

Of course, what happens to the masses and the ecosytem within which they live (the country) is of no importance to the organism aiming to survive (politician and party). Again, Argentina is a perfect example of killing the host or the environment in exchange for the survival of the political species. The country goes to hell but the politicians live it up. Same in the US where not one of our populist politicians has to live by the very rules they push on us. For example, Obama and his daughters will never have to worry about healthcare because they exist on a plane far above ours.

Humanity has to come up with a way to prevent political actors from manipulating the masses for their own gains. Easier said than done.

Well, there's this crazy concept called "saving money" where you don't borrow from a bank but rather put some money aside every month to be able to afford something expensive

I wonder what would happen to property prices if lending was severely restricted, maybe then the value would actually be affordable and not a lifelong debt that becomes unserviceable in the first hiccup

I have the opposite reading of history. Mortgages have been a force of social stagnation in the developed world[1].

What mortgages have done is create lots of middle class property owners. These people have a strong interest in keeping property prices high. Politicians are only too happy to oblige them.

Thus society has bifurcated into the "have houses" and the "have nots". The middle classes throw their weight around to prevent new houses being built, as every new house decreases the price of the houses around it.

Unlike the developing world, the developed world is perfectly capable of building a house for every man, woman and child. If it did, poverty would all but disappear; it's hard to be poor when you have your own house.

But the financial institutions have tied enough of the population into mortgages and home ownership that developed world poverty cannot be eradicated without a serious amount of middle class hurt.

[1] (I can only speak for the UK but I guess Croatia, like all countries, will end up in this situation eventually)

Poor people will repay their debt in trick fees for the banks in no time or just become indebted again.

Consider the analogue of the UK, where the banks have a duty to consider the ability of a persons ability to service a debt before letting them take out the loan.

Failure to do so will let the person who have taken out the loan get the debt stricken off, as the bank will have broken the law...

In that light this doesn't seem terribly shocking to me.

I have to wonder the same about the US banking system about 8 years ago: the aforementioned subprime problem apparently led to top bankers literally being brought into a room and told in no uncertain terms they would agree to the planned solution to the problem; what was actually said remains unknown and rather...intriguing.

Say hello to life outside the US. In most of Europe you don't need loans to get an education, healthcare or to buy a car.

You make a good point and I do not want to undermine it. However, it is worth pointing out that people don't have to take out educational and healthcare loans in most of the civilised world (Croatia included).

We're talking about poor people who are very likely unable to pay off their debt. Why? It only applies to people whose monthly income is $138, try paying your rent, food etc on that, and then pay off a debt whose interest alone would already be a significant chunk of your monthly income.

Interest rates already account for these risks and banks have largely already written off these loans as money that won't be paid back. The notion that these were awesome loans that would get paid back and suddenly get cancelled just isn't true. Which is why interest rates aren't likely to skyrocket and why they don't constitute losses, they have already materialized even if the debt isn't cancelled.

Talks of the poor being burdened by taxes the hardest, come on. First, it's just 0.75% of debt. Second, the revenue on this is minimal. If you borrow $100 at a 10% interest rate that's $10 of interest revenue (the rest is principal paid back), and that $10 interest revenue is then taxed at say 20% capital gains tax. So if 0.75% of the debt is cancelled, that's only 0.015% lost tax revenue from debt, it's not going to cause any national tax disasters for the poor. Especially because, again, these loans weren't going to get paid off anyway, it doesn't change much in extra losses.

On the contrary, cancelling 0.75% of the debt makes 20% of the indebted debt-free. They become economic actors again, who previously had no access to their bank account and no room to make personal investments into education or small enterprise. Things you mentioned like sex slavery are more likely to drop because of this than anything else.

Lastly, your point on smart/stupid borrowing, we're talking about a country which was extremely hard-hit by the crisis, one which the PhDs and CEOs at the top financial institutions didn't see coming any better than the world's dumbest person. We mustn't assume 20% of the indebted people who will become economic actors again were borrowing for gambling, it seems like a lot of these people have been put into economic paralysis due to a crisis just like the large financial institutions, yet the large corporations and banks got bailed out and they weren't. And they're in no position to pull themselves out of this with a blocked off bank account and less than $138 in monthly income.

So what's the solution? Ask corporations to do the right and smart thing: write-off 1% of your debts that you had already written off anyway, turn 20% of your debtors into economic actors again who regain buying power, start businesses and participate in the economy, get good will from the public and government and get your country on the road again.

I fully appreciate that this isn't black and white and there are definite cons, but it seems to me to be a positive decision on aggregate.

I think it helps to see it as an investment. Imagine you take 0.75% of your debt, the bottom 0.75% that was extremely likely to ever get paid off, the part that was already part of your cashflow and solvency modelling and whose likely potential losses have already been accounted for.

Then take that amount, and go to the board and say, we can invest this amount, buy legal good-will from the government, buy good-will/marketing from our national customer base, and we get access to a new market increasing our long-term customers by a substantial percentage (20% of its debtors). The cost? Just forgo 0.75% of the debt that wasn't actually going to make us much money anyway.

That's why corporations chose this themselves, it's not a bad idea for them.

Or, keep bank accounts frozen for 20% of the indebted people who got hit by the financial crisis and make $138 a month, bail out financial institutions, and try to run a country where a significant portion of your population are so paralyzed by debts that they turn to sources of income which won't be taxed or absorbed immediately by debt-payback, the type of jobs paid in cash, the criminal kind, the exploitative kind, the kind that's not taxed, that doesn't create jobs or small to medium sized enterprises, the kind that increases costs of policing and regulations, the kind that increases the class divide and pits people against each other. And do exactly to the poorest (leave them to figure it out by themselves) what we weren't willing to do to our largest companies (who we bailed out because it made more sense than to let things crash and burn out of a fetish for non-interventionism market principles right after an economic crisis.

This means that all of these debts were long-since written off, the risks of these losses already worked into the lending rates and credit qualification cutoffs. It is actually, by most accounting standards, kinda "free".

Having said that, I'm thinking out loud here and not convinced of it myself. Mainly because whenever the government steps in like this it means that someone somewhere is getting screwed.

Agree that the free (black) market will move to fill the gap.

Keep in mind that many countries have laws that allow private individuals to declare bankruptcy and default on their debt. Yet, banks still lend money to poor people in those countries.

Banks will factor the possibility into their costs (and hence interest rates), and it might reduce their willingness to lend slightly, but this is far from the picture you're painting.

All things being equal, people will borrow money smartly or stupidly, but the consequences, good or bad, are faced by the people who borrow.

There is a saying that goes something like this: If somebody owes you 100€, it's their problem. If somebody owes you 100 million €, it's your problem.

A loan is a two-way street, and it makes good (social, moral, economic, game-theoretic) sense that the lenders also face part of the consequence.

> Prime Minister Zoran Milanovic has convinced multiple cities, public and private companies, the country's major telecommunications providers, as well as nine banks to clear some of their citizens of their debt.

This means that the losses happen with consent of the corporations involved.

In theory banks price risk using interest rates. That is to say that high risk individuals have to pay a higher interest rate on their debt than lower risk individuals. This reflects the banks concern that they won't get paid back.

If they (the banks) are doing their jobs right then having their highest risk people default is already covered by the interest rates other less risky clients are paying.

The trick though is actually making the bank take the loss which is something they have worked around with the help of the various governments. And that is where we get a conflict of interest where the bank is pricing the loans with the expected risk but actually taking much less risk due to government back stops. That difference is, as you would expect, profit for the bank.

1 & 2) There will be no "full stop" on lending money to poor people. If you're a bank and you're managing say $1B, some percentage of that is allocated to high risk loans. Your job is to make money from lending money, and there are only so many borrowers. Banks don't lend money to poor people out of altruism, but because they have to make enough money from interest to at least beat inflation. They'll continue to make high risk loans until they have some new pool of borrowers to replace them, albeit at higher interest rates now.

Most of the people relieved by this cancellation didn't have a very good chance of being approved for a loan anyway. Now their chances will be somewhat reduced, but not completely eliminated.

3) The $31MM didn't disappear, it was effectively removed from the balance sheets of the debtors. If some of them eventually get jobs and build assets, that money will reappear in the economy but be distributed to different businesses. Instead of the banks receiving that $31MM from their paychecks, they'll spend it on food or gas or whatever. Probably still a net loss, but not of the whole $31MM and instead some fraction of it.

4) The concept of moral hazard is a real thing, but it's effects on any given economy vary wildly. In general, most people don't think "Well the government bailed us out once, so I'll borrow way more than I can afford and just hope that they do it again.". It's possible and I can understand why someone would believe it to be a problem, but it's far from being a law of physics or even economics.

In short, the Croatian government and their finance ministers/advisers probably aren't stupid. They have actual data and a knowledge of their own people and situation to go on. They aren't just playing armchair economist. And though I couldn't name one of them, I'm willing to bet that they thought this move through. Doesn't mean that there won't be any of the dire consequences that you've predicted here, but they've probably weighed the odds more carefully than you think.

Apparently you're not looking at both side of the ledger. The 31 million didn't disappear, it just stayed with the poor. So the poor have (had) 31m more to spend. And poor people do spend all their money, most likely on products that corporations sell. So this was effectively a stimulus measure supported by a tax on lenders.

I also don't see why you can think of raising taxes on the poor, but not on corporations. In fact, the government could easily raise taxes only on corporations. They may even have considered this, but the whole debt forgiveness thing is actually preferable to corporations since it's a one time thing.

> $31M less in spending, economic growth, job creation...

Wouldn't there also be a corresponding $31M increase in spending from the people who got their debts canceled, making it a wash? They'll spend it quickly I'd imagine, on food or other necessities. Just the money would flow into the economy via a different route.

You think this move is bad for the banks and telco's? I bet it was their idea in the first place, government is too impotent and incompetent for anything. Throwing whole families out on the street is bad PR, for them and the government, and this way they can pay it off with some change money they were never going to see anyway.

I'd like to bet against that prediction. I suggest $100 to the winner's favorite charity at even odds? I predict that one year from now, I'll be able to find an example of a Croatian corporation having loaned money to a Croat with income below 1,250 kuna. My contact details are in my profile.

1 The bussiness of the banks is to lend money to poor people, Rich people don't need to pay interests, they have lots of money yet. The bank can choose to lend to poor and maybe to earn money or to not risk a single dollar, not earn money, and probably dissapear. You can skyrocket the interest rates all that you want and feel like the big bad bank, but if you put the level too high the people simply will stop entering your bank. You are useless now. People will find another way, and now you are just a dead shark.

2 The money was stolen by rich people, not by the poors, and the bankers know this perfectly.

Most importantly, the companies agreed to this, it wasn't forced by the government.

Barring a revolt of some kind (war, revolution, catastrophe, take your pick) or a radical change in the concept of money, more and more wealth will be concentrated in fewer and fewer hands. Increased automation will reduce the number of ways a large part of the population will be able to make even a semblance of a living wage. If there is no system in place to take care of these people - most likely in the form of a base living wage provided by some authority - they'll revolt before they starve. And who are they? Are you one of them? If not now, maybe soon?

So... like Tic-Tac-Toe, the outcome of the money game is known before the game starts. They who make the first move, win. You probably did not make the first move, so you won't. Best not to play, then? This does not mean you should avoid money at all cost, it just means you should not follow it. Don't count on making more tomorrow than you do today. Don't base your plans around the money you'll make or that which you accrued. If you have money, use it to reduce your dependency on future money. Buy land if possible. Use money to become energy-independent. Try to become less dependent on automotive transport. Don't get insurances for anything which you can do without. Learn to produce, not consume. Be creative. Entertain yourself instead of being entertained.

In historical terms, this readjustment of lenders to be more afraid that debts will just be forgiven, thus raising the cost of lending, is a deliberate and desired benefit of the debt holiday. Lending to those who can not pay it back is a millenia-old scheme for enslaving (to various degrees in various cultures) those poor people.

"Credit" is not a monolithic good that is either "good" or "bad"; it must be considered in context. "Credit" for an entity that can easily pay it back can be fairly good, and can grease the wheels of the economy, but "credit" to an entity that has no realistic hope of paying it back is not a virtue and not a help. It may feel good in the short term but it helps nobody in the end.

Historically speaking many cultures have acquired a fear of debt, in a long-running cycle (I italicize the word because it is important, it is not an attitude that just pops out of the normal ebb and flow of culture, it is a thing that was learned), as many other commenters are observing. If the modern world starts to reconsider its love affair with debt, it will merely be the most recent turn of the wheel, and we will hardly be the first culture to discover that easy credit can be far more destructive to everybody, from the bottom to the top, than people initially understand.

I never understood why some people would happily drag down someone else, that's jealousy in disguise. Simply see this as a plus for society because that debt drags everybody down, including you.

I wouldn't sleep any worse if all the debt for people earning minimum wage or nothing at all were forgiven, that's a much better way to spend money than to enrich a small number of already insanely rich people.

Give it another 3 or 4 decades and a few more rounds of automation and who knows, you just might find yourself in the league of the 'slackers', quite a few of them are not slackers by nature but simply grew up in a time when their skills became surplus and their age forced them out of the productive cycle. Very few people consciously choose to be un-employed and this could happen to all of us.

I was taught by my parents, and by the books I read and TV shows I watched, that "paying your debts" made you a good person. If you don't pay your debts you're slacking. We've all heard the parables of the great person who went broke, but managed to pay his debtors later even though he legally didn't have to.

What hogwash. Lenders get paid interest in compensation for the risk that the loan might go bad. They deny credit to people if the risk is too high. That's their business. If you borrow to start a business and the business goes south, that's not a moral issue - it's built into the bank's models. Turning it into a moral issue, rather than "just bizness", is just a way for the lenders to shift the risk - that you're paying for - back to you. It's like buying insurance and then not collecting for your burnt house, because you didn't work hard enough to put out the fire.

OK, sucky analogy, but you can bet that people like Donald Trump don't worry about the morality of debt when one of their companies go broke. It's in the contract.

On a slightly more serious note, I do think that too many people forget how much society invests by allowing limited companies, and (in my opinion) how much those companies "owe" society as a whole.

The money should be spent on debt relief, and work with those who have large unmanageable debt to begin sustainable debt management through education. Yes, lower it, but still ensure that people understand what debt responsibility is. Something that was entirely absent in my upbringing.

Simply paying someones debt clears a slate for more debt. It doesn't fix a problem. Give a man a fish and you feed him for a day, teach a man to fish and you feed him for a lifetime.

This depends entirely on which government.

It's true in the case of California or Greece, but not Australia or the U.S., for example.

Not really, since the law only covers people who have no savings, no propery and earn a third of the minimum wage. You have to be seriously poor to get your 5 phones for free.

But you are morally bankrupt for taking out a mortgage difficult for you to pay. The bank, however, doesn't have such moral failings for they are not people.

Wait...

This is directly translatable to being 35,000 kuna in debt. You can't ignore savings when determining ability to pay debt.

> The government will not refund the companies for their losses.

> The government will not refund the companies for their losses.

Even as recently as the turn of the century (only a decade-and-a-half ago!) there was an international movement[2] calling for the cancellation of a great deal of so-called third world debt as many countries spend more on debt reparations (just paying off the interest) than on building up the infrastructure of their countries or spending on health or education.

[1] http://en.wikipedia.org/wiki/Debt_relief

[2] http://en.wikipedia.org/wiki/Jubilee_2000