March 9, 2016 / 3:40 PM / 2 years ago

Central bank warns against plan to let Romanians ditch mortgages

BUCHAREST, March 9 (Reuters) - Draft legislation that would allow Romanians to simply give up mortgaged properties with no obligation to repay debts is a threat to the economy’s strong growth, deputy central bank governor Liviu Voinea said on Wednesday.

The European Union member state has shrunk its budget and current account deficits and posted some of the bloc’s highest growth rates under a series of aid deals from the International Monetary Fund and European Commission in 2009-2015.

But the mortgage relief bill, combined with public sector wage hikes and tax cuts before two elections this year, has heightened uncertainties, the Commission said in an annual report on Romania.

Parliament approved the bill, aimed at helping troubled borrowers, in late 2015, but President Klaus Iohannis urged parliament to reconsider it after the central bank, the European Central Bank and the IMF all said it posed a major risk to the banking sector and wider economy.

Yet earlier this month, the senate approved the bill once more, rejecting most of the central bank’s recommendations.

Voinea said the bill could drive banks to raise the required downpayment for mortgage loans to unsustainable levels, trigger a ratings downgrade, raise funding costs for sovereign debt and lead to lower economic growth.

He also said it could drive housing prices lower. A 10 percent drop in house prices could reduce households’ net worth by 6.3 percent, or 57.8 billion lei ($14.2 billion), Voinea said.

The bill, which still needs to clear parliament’s lower house, would apply retroactively, contravening EU legislation. While it caps the value of the loans at 150,000 euros, it applies to both residential and commercial properties, meaning affluent people could also make use of it without penalty. ($1 = 4.0696 lei) (Reporting by Luiza Ilie; Editing by Ruth Pitchford)

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