Originally published October 9, 2009
● No mandatory moratorium - Lender's consent will be required.
● Debt subject to moratorium will be guaranteed by the government.
A moratorium on debt repayments by individuals and small
business owners has been advocated by Shizuka Kamei, Japan's
financial services minister, since he took office in mid-September.
Kamei's proposal to exempt debtors from repaying the principal
and accrued interest on loans sent shockwaves through Japan's
financial services sectors. According to the press reports on
October 9, 2009, however, the moratorium will likely be legislated
in a more modest form and will not be mandatory. The debt
moratorium, however, is expected to put additional burden on
Japan's already heavily indebted government and may create
moral hazard problems.
According to the press, on October 8th, the Democratic Party of
Japan and the Hatoyama administration agreed that the government
will guarantee the debt placed in moratorium. Under the terms of
the proposed legislation, the debt of individuals and small
companies may be placed into moratorium during the one-year period
after the legislation's enactment. The moratorium may postpone
debt repayments for up to 3 years. The agreement of the lender
financial institution and the borrower is required and there will
be no mandatory moratoriums. Because the program will require
lender consent, the government's guarantee is essential to
getting lenders to agree to defer loan payments.
Under the proposed program, the lender and the borrower will
refinance the existing debt and the government will guarantee the
new loan utilizing an existing government guarantee program.
However, the guarantee program has already consumed half of its 30
trillion yen (US$340 billion) budget. The government says that it
has no plan to increase the guarantee program's budget. But if
there are significant defaults on the debts in moratorium, the
government will likely be forced to inject more capital into the
guarantee program and worsen the government's financial
condition.
In connection with the moratorium, the Financial Services Agency
will revise its inspection manual for financial institutions and
exclude debts under moratorium from the "bad debts"
category. This rule change may effectively conceal bad debts held
by Japanese financial institutions for the next 3 years until these
bad debts have to be written off after the 3 year moratorium
expires. This is reminiscent of the financial crisis in late
1990's and banks may yet again experience financial difficulty
when they have to write off bad debt. It is likely that public
money will be infused to these struggling banks under the amended
Financial Functions Enhancement Act, and whether or not the
government can afford to these costs may become an issue.
One negative consequence of the moratorium is the moral hazard
problems associated with it. While it will be beneficial to
consumers and small businesses to be released from the stress of
debts for 3 years, many debtors may not be able to or may not make
the effort to successfully restructure their personal finances
businesses. Unless there is a significant economic upturn in the
next the 3 years, the moratorium may only delay the inevitable
reality of failed businesses for another 3 years. Also, it is not
clear how lenders will react to the program and they may not agree
to the moratorium at all. The program may also create confusion on
the part of borrowers as they may not understand the rule and think
that they are exempt from all repayments, regardless of the
lenders' consent.
The status and details of the moratorium legislation are still
fluid, but we expect to see developments in the next few weeks. We
will monitor the situation and keep you informed.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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