Update On Japan's Debt Repayment Moratorium.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 Shizuka Kamei (亀井 静香 Kamei Shizuka , Japan's financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. minister, since he took office in mid-September. Kamei's proposal to exempt debtors from repaying the principal and accrued interest Accrued Interest The interest that has accumulated on a bond since the last interest payment up to but not including the settlement date. There are two methods for calculating accrued interest: 1) 360-day year method, used for corporate and municipal bonds. on loans sent shockwaves through Japan's financial services sectors. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. 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 A debt moratorium is a delay in the payment of debts or obligations. The term is generally used to refer to acts by national governments. A moratory law is usually passed in some special period of political or commercial stress; for instance, on several occasions during the , however, is expected to put additional burden on Japan's already heavily indebted government and may create moral hazard Moral Hazard The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the 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 The Financial Services Agency is a Japanese government organization responsible for overseeing banking, securities and exchange, and insurance in order to ensure the stability of the financial system of Japan. The agency reports to the Minister of Financial Services. 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 Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time 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 LLP - Lower Layer Protocol 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. www.omm.com The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Mr Yoji Maeda O'Melveny & Myers LLP Embarcadero Center The Embarcadero Center is a commercial complex of six towers (four office, two Hyatt hotels) and one office tower on a 9.8 acre (39,655 square meters) site that is located in the San Francisco's financial district close to the Embarcadero. West 275 Battery Street San Francisco San Francisco (săn frănsĭs`kō), city (1990 pop. 723,959), coextensive with San Francisco co., W Calif., on the tip of a peninsula between the Pacific Ocean and San Francisco Bay, which are connected by the strait known as the Golden CA 9411-3305 UNITED STATES E-mail: Sdonnels@omm.com URL URL in full Uniform Resource Locator Address of a resource on the Internet. The resource can be any type of file stored on a server, such as a Web page, a text file, a graphics file, or an application program. : www.omm.com Click Here for related articles (c) Mondaq Ltd, 2009 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com |
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